Super Group - Q2 2024
August 7, 2024
Transcript
Operator (participant)
Good day, and welcome to the Super Group second quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then 1 on your touchtone phone. To withdraw your question, please press Star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Brett Milotte, ICR. Please go ahead.
Brent Milotte (Head of Investor Relations)
Good morning, everyone, and thank you for joining us today to discuss Super Group's results for the second quarter of 2024. During this call, Super Group may make comments of a forward-looking nature that are subject to risks, uncertainties and other factors discussed further in its SEC filings that could cause its actual results to differ materially from historical results or from the company's forecasts. Super Group assumes no responsibility to update forward-looking statements other than required by law. On today's call, Super Group may refer to certain non-GAAP financial measures. These non-GAAP financial measures are in addition to, and not a substitute for, measures of financial performance prepared in accordance with GAAP. Super Group has provided a reconciliation of the non-GAAP financial measures to the most comparable GAAP measures in the press release issued earlier today and available on the Investor Relations page of Super Group's website.
In addition, Super Group will speak to its financial results and metrics in two parts: highlighting Super Group's profitable and cash-generative global business separately from its investments in the US. This aligns with the annual guidance that Super Group has provided for 2024 and is consistent with both how Super Group views its business internally and how Super Group will report going forward. Super Group recommends that investors refer to its supplementary presentation posted to their website. On this call, we're joined by Neal Menashe, Chief Executive Officer, and during the Q&A session, we will be joined by Alinda van Wyk, Chief Financial Officer, and Richard Hasson, President and Chief Commercial Officer. I will now turn the call over to Neal.
Neal Menashe (CEO)
Thank you. Good morning, everyone, and welcome to Super Group's second quarter 2024 earnings call. Q2 was exceptional, our strongest quarter ever, and one in which we set some new records. Total revenue ex the US hit a quarterly record of EUR 408 million, reflecting 9% year-on-year growth. Adjusted EBITDA, ex the US, also set a record of EUR 98 million, representing growth of 11% year-on-year and a very strong margin of 24%. This year, we have been prioritizing operational efficiencies, including the successful integration of the Apricot sportsbook. During quarter two, we incurred redundancy costs of EUR 3.3 million. Adjusting for these costs and the associated salaries, our margin would have been 26%. Our strategy of being nimble and decisive is paying off, and we are well on our way to consistent EBITDA margins of over 20%.
We continually assess and optimize our footprint, ensuring that capital is deployed into markets that generate the highest returns, and this is leading to further investment into core markets across the globe. We obsessively tailor our offerings to each local market, which includes the continued rollout of our leading casino brand, Jackpot City, into new and existing markets. In markets where we don't see a path forward, we pivot. We weren't happy with the status quo in the U.S., and after an extensive review, we announced last month that we plan to exit the U.S. sports betting market. We aren't, however, totally divesting from the U.S. We are maintaining our iGaming presence in New Jersey and Pennsylvania, where we plan to operate two brands, including Jackpot City from our Spin portfolio.
Our focus on iGaming aligns with our non-US business, in which about 80% of our revenue is from iGaming. Like any other part of the world, we are open to expanding our US footprint for the right opportunities. In terms of costs, we estimate that the cash costs of shutting down our US sportsbook business will not exceed EUR 45 million, the bulk of which comprises existing contract obligations and redundancy costs. This figure is easily manageable within our existing financial resources. We are just beginning this exit process and will provide an updated figure of the shutdown costs in Q3. To date, in 2024, the US business has incurred an Adjusted EBITDA loss of EUR 39 million across both sports and iGaming.
Looking ahead to the rest of the year, we expect to incur an Adjusted EBITDA loss of EUR 20 million for iGaming-only operations. We have recently announced two new and exciting brand marketing deals I'd like to highlight. Betway becoming the official title sponsor for South Africa's Premier Soccer League, which is now known as the Betway Premiership. And in the English Premier League, teaming up with the current champions, Manchester City, to become their official global betting partner. Adding this iconic team to our brand portfolio further solidifies Betway's global recognition across the world's most popular sport. Branding is only one part of our multi-channel marketing strategy, a key driver of growth across the business. This quarter, we spent 23% of our net revenue on marketing, a figure which is higher than industry average and reflects our long-term approach to the business.
However, we are also focused on this number to ensure that we are extracting the appropriate returns from every euro spent. Moving on to the balance sheet, our financial position remains strong. We ended the quarter with unrestricted cash of EUR 307 million and no debt. In June, we announced our first cash dividend of $0.10 per share, paid in July. We intend to maintain this dividend and will consider paying a larger dividend if business conditions allow. Finally, given our strong performance for the first part of the year, we are raising our 2024 ex US adjusted EBITDA guidance to greater than EUR 300 million, representing a margin of over 90%. We feel confident about the remainder of the year and look forward to making 2024 a super year for Super Group.
I'll now turn the call over to the operator to open the call up for questions. Operator?
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. The first question comes from Jed Kelly from Oppenheimer. Please go ahead.
Jed Kelly (Analyst)
Hey, great, great. Thanks for taking my question and good quarter. Couple of things: Can you just talk about where you are globally with sports betting and just interpreting some of the results? I know you exited India, but how is that trending ex-India, and then just with your sport results? And then there is some chatter about Alberta potentially legalizing sports betting. Can you just talk about how we should be thinking about if that market goes legal and you know, just given your experience in Ontario? Thanks.
Neal Menashe (CEO)
Hi, Jed. It's Neal here. Yes, so listen, sports betting is going well across the globe. Obviously, our casino part within our business is still consistent, like, at 80, almost 80% of our business is iGaming. But we've seen sports results have been fair to us, so it's really good there. In Canada, obviously, there is regulation coming in Alberta. We are super ready for it. We've everything we did in Ontario, we've learned. We've learned how to do it even better. So the teams are ready and waiting when Alberta regulates. And across the board, in all these markets, we are optimizing everywhere. So Canada, Alberta would be no different, same as Ontario, same as our business in Africa.
So listen, from this quarter, we are super happy of how our results and how our cost efficiencies are dropping down to the bottom line.
Jed Kelly (Analyst)
Okay. And then just as a follow-up, you're obviously, you know, record EBITDA ex-US. You're, you're, you're generating a decent amount of cash flow, implementing the dividend. Can you just think broadly how we should be thinking about just your capital allocation policies? Do you want to do more acquisitions like Jumpman, target, you know, international markets? Just can you give us just a overall update on your capital allocation strategy? Thank you.
Richard Hasson (President and Chief Commercial Officer)
Hey, Jed, Richard here. So like, like we said previously, we are constantly looking for potential opportunities for acquisitions, and we keep doing that across, you know, potentially new markets and also within existing markets. On the broader capital allocation, as you would have seen, the dividend that was announced and paid, we mentioned there that it would be our intention to maintain at least that dividend going forward. And, you know, that's all part of it. As we generate cash, we'll look for the best uses of that cash. If there is nothing more advantageous, we'll continue to look at ways of returning that to shareholders.
Jed Kelly (Analyst)
Okay, and then just my final question, just as we think about the back half, anything we should be thinking about in terms of comps, in terms of some markets opening, some markets closing? And I think in October last year, maybe it was September, you had unfavorable outcomes in, in European football. So just anything you can talk about there on how we should be thinking about the whole comps? Thanks.
Neal Menashe (CEO)
Yeah. Okay, so I think for the second half, obviously we had, as I mentioned, quite a bit of redundancy costs in quarter two and some in quarter one, so obviously those are one-offs, so we should get good optimization in the second half. Again, the second half just depends on sometimes in some of the months, as we had last year, you can have a bad sports margin, but we're hoping with a bigger customer base, we should be able to even that out. But I think from our point of view is even into July, July continued the momentum of April, May and June. And for us, the very important part that I said is, you know, we have got a large marketing budget of EUR 400 million.
We are optimizing that. We are looking at that. We are turning over every campaign there to make sure that we can make that as effective as possible. And with that, with all the rest of the optimization, we hope to even bring more to the bottom line, hence why we increased our EBITDA focus.
Alinda van Wyk (CFO)
Yeah, Alinda here, and just to add to that on your question on new markets, we're continuously assessing the markets, and investing always back into markets which have high margins on the long run. There is a few movements, extra markets in Africa, but we've also looked at one or two smaller markets that had no profitability for us, that was eliminated. But this is a continuous assessment of marketing spend, like Neal said, and where we will have the highest return on our investments.
Jed Kelly (Analyst)
Thank you.
Operator (participant)
The next question comes from Michael Graham from Canaccord Genuity. Please go ahead.
Michael Graham (Analyst)
Thank you. Couple questions, if I could. The first is on, you know, just talk about the decision that you made to keep your iGaming presence in the U.S., and maybe just frame it out, if you could, in terms of the unit economics that you know, how your cost of acquisition, you know, is different for iGaming compared to, you know, some of the other markets you operated, operate in. And, you know, related to that, do you think we could see your iGaming footprint expand to more states over time, you know, if what you have currently goes well?
Richard Hasson (President and Chief Commercial Officer)
Hi, Michael. Richard here. So yeah, as Neal mentioned, we completed a very extensive review of the full footprint, and ended with the view of remaining with iGaming in New Jersey and Pennsylvania. Like we said before, and like we apply to all markets, we need to obviously see appropriate returns being generated in those markets. And, you know, so far, July running according to what we were expecting in the budget, in the forecast. But of course, we'll track that on a continuous basis going forward. So no different, but just to focus on iGaming, and that's also very much aligned with the rest of the business, where about 80% of the revenue is generated in iGaming.
In terms of the footprint across the rest of the country, for sure, you know, if we see appropriate opportunities to expand the footprint within iGaming within the U.S., then we will look at those as and when other states are given.
Michael Graham (Analyst)
Okay, that sounds good. And then can I just ask, you know, for a comment on the competitive environment in— You know, over the recent quarters, we've seen some of your mature markets, you know, some regulatory changes like U.K., Canada, and the Netherlands. Just wondering if you can comment on, you know, generally how the competitive environment is evolving in some of those markets.
Richard Hasson (President and Chief Commercial Officer)
Okay. So I think the competitive environment's always there, and we have to keep... And that's where it becomes in your marketing and your product, right? And we keep on honing in on it. I think probably in the past we had too many countries that we were honed in on, so we closed a few of them, and that allowed us then to focus on the other ones. And that was the same process we took in the U.S. sportsbook. If we do not see a path to profitability, we'll rather go in other markets where we are seeing returns. Again, in these markets, the regulations make a big part of it, and in the U.K., they seem to be easing up a little bit, where a lot of the Netherlands was far worse.
So the Netherlands, we decided not to go for, right? There's just no point to build your product. I mean, the one that's probably been the worst, and our results would even been better if it hadn't been, would be Germany. You know, there, they've got its regime, we've done all the work, but it's literally so onerous that the black market is just, the customer just goes to the black market, so we can't compete as we could in the past. But I think over time, the regulator will get onto that, understand that they're losing the customers to the black market and be more reasonable with the people who are regulated. And that's always gonna be a battle, and that's gonna be the, and that's been the story of our industry for the last 25 years.
Michael Graham (Analyst)
Okay. Sounds good. Thanks so much for the additional information.
Operator (participant)
The next question comes from Mike Hickey from the Benchmark Company. Please go ahead.
Mike Hickey (Analyst)
Hey, Neal, Richard, Alinda. Great quarter, guys. Thanks for taking our questions. First, just on the U.S. exit, Neal, it looks like just running two states on iGaming, you're saying you're expecting a EUR 20 million loss for the second half of 2024. You compare that to last year with the sportsbook, it looked like you lost EUR 28 million. So you're saying an incremental, maybe EUR 8 million here. Just I guess, one, I thought the savings would be a bit more. And two, with just the incremental EUR 8 million, is it worth losing the optionality, I guess, on the sportsbook side?
Neal Menashe (CEO)
Okay, hi, hi, hi, it's Neal here. No, so a couple of things. The twenty million is only for this next six months, right? But that's for iGaming, including the marketing spend in there. But of course, as I said, we have to be getting the targets in each month. So if we do not get our net win targets, then we have to reassess those two markets. As far as we're concerned, those two markets, New Jersey and Pennsylvania, are larger than Ontario, and we gonna give it a go there and then try and compete because we think our product can compete. We did say last year that overall item would be around EUR 80 million or EUR 90 million for the year. So the investment is coming down.
We just have the redundancy costs now for the sportsbook. And in the US, we've literally halved our workforce. So I think we've got the right number of people to give it a good shot in the next six months. But again, like every other country we in, we treat each one, New Jersey and Pennsylvania, by themselves as a country, and we think, is there a path to profitability or not?
Mike Hickey (Analyst)
Thanks. Just to clarify then, so should we think an annualized investment in the U.S. of $40 million-ish here, moving-
Neal Menashe (CEO)
Yes, for 2025, if we... Yes. Yes.
Mike Hickey (Analyst)
Okay.
Neal Menashe (CEO)
Yes, for 2025, yes.
Mike Hickey (Analyst)
Still feels like a big number. I guess, can you sort of dig in on the path?
Neal Menashe (CEO)
Well, we won't, you know, you won't actually get to that number if you're not hitting your monthly targets. So we've set monthly targets, monthly net win, monthly EBITDA losses, and if it's not, then we would scale back. So 40 would be the maximum.
Richard Hasson (President and Chief Commercial Officer)
Okay, just to add in, Mike, so after 2025, when the forecast is just less than EUR 40 million investment, in 2026, it would be significantly less than that. That would be the max spend-
Neal Menashe (CEO)
Yeah.
Richard Hasson (President and Chief Commercial Officer)
over the next three years.
Mike Hickey (Analyst)
And you said that in the U.S., you're gonna continue to operate two brands on the iGaming side. Can you walk us through the rationale? It seems like running two brands would be more expensive than just sort of focusing on one brand in just two states.
Neal Menashe (CEO)
One. Okay. Well, so no, we've, listen, I mean, we've been in this casino business, iGaming casino business for 25 years. You need more than one brand. So, and also, running the second one isn't really expensive because it's the same teams who run them. It's just the look and feels are slightly different. And in our Spin portfolio, we have Jackpot City, Spin Casino, and a few others. And remember, three or four of the brands make up the bulk of it, so it's that same strategy. So from our point of view, that's how we've always done it, and then you always need two in the race of effectively four to optimize your CPAs, et cetera.
Mike Hickey (Analyst)
Okay.
Neal Menashe (CEO)
But I think something quite clear, if you look at this in the U.S., so Mark, I'll just give you one other point. You know, you say $40 million would be the most we would invest next year. Just to put it in perspective, the month of June, we almost made that profit in our existing business. So, you know, we are optimizing, we are clever, we are looking at the ways to bring this business to profitability, and if it cannot come to profitability, then we will have to pivot away. But we obviously are optimistic that we can make it work.
Mike Hickey (Analyst)
I guess last question on that topic. Pennsylvania and New Jersey, these are not new states here, right, Neal? I mean, they're fairly mature relative to U.S. expansion, which obviously is pretty new. I mean, given the maturity of these states, how do you expect to sort of take share in this environment?
Richard Hasson (President and Chief Commercial Officer)
So, Mike, I think a lot of the revenue that we were seeing from those states while live with sports and gaming was coming from gaming. So that's obviously informed our decision and was part of our full review. The other thing is a lot of our internal forecasts have assumed improvements in a number of KPIs from where we were at the beginning of this year, and we also are. You know, we're reporting, we're seeing those come through at the moment. So we're tracking in line with those forecasts, which are seeing improvements in KPIs, and that's obviously from where we stand today, from the previous operations of sports and gaming, now just focusing on the gaming part of that.
Neal Menashe (CEO)
And Neal, yeah, as I said, you know, we compete in all the markets. UK, we've seen growth in all these markets. They're not new. There's not really any market that's new for us, right? And if it's Canada or Ontario, everywhere, we are competing everywhere. And remember, we just have to take extra revenue from other operators which we see. And then in most of the countries we operate, that extra revenue is bringing operating leverage, and that's why you've seen such good results for April, May, and June.
Mike Hickey (Analyst)
What is your market share in New Jersey, Pennsylvania, and iGaming?
Neal Menashe (CEO)
No, I mean, tiny, because we just started. So like, we haven't looked at the market share. All I care is, are we not 80%-90% of the market? So we just go for, for cap to get to a few million EUR of revenue in each market to start making sure that, that that market's working. But if you're not gonna get to a few million EUR revenue, 5, 6, 8, 10, eventually your targets, then, then you're never gonna get to profitability. But in other markets, if you take Spain, et cetera, you can be at a few million EUR per month, and we are making good margins.
Mike Hickey (Analyst)
A follow-up on the capital allocation topic. Sorry if you said this, Richard. I think you have a buyback authorized. You're obviously driving cash flow, your business is expanding, you're confident on growth. Doesn't it make sense here to be buying back stock given where you're trading today?
Richard Hasson (President and Chief Commercial Officer)
So there is something that we considered as part of the return of capital to shareholders. We leaned away from it, given the relatively low float that we have in the business and ended up proceeding with the dividend route.
Mike Hickey (Analyst)
Yep. Okay, that makes sense. The last question or topic, you expanded the margin guide here to 19%. It sounds like, Neal, you've got some room here to move that higher. Can you give us a maybe more medium-term perspective on your growth opportunity and maybe your progression in margin over the next few years? Thanks, guys.
Alinda van Wyk (CFO)
Hi, it's Alinda here. See, what we've realized in the last couple of months with everything that Neal referred to about the operating leverage coming into full play now, is that we're really seeing that margin consistently, being the EBITDA margin, being consistently over 20% month-over-month. And more than 20%, you know, so larger than. So what we've realized is that even at 90%, our target has been always 20%, and we're reaching that much quicker. We're looking around the, you know, as you note, we also haven't we feel comfortable with the guidance for revenue, so we're just tracking that, in the remainder of H2 as well.
Neal Menashe (CEO)
And out of that, Neal, the point is we've still got 25%-26% marketing ratio, a marketing to net win. So for the year, and that's in there. And our deal there is to make sure that that's efficient and stuff. So of course, if we had to drop that down, then the margin would go up, which I know lots of our competitors do. They come in at 18%, 19% marketing budgets. So we are looking at that, but we feel comfortable that the investment we're making in marketing is returning long term, and that's how you're seeing it. The same investment from last year's marketing is now paying off this year, you know? So we're just trying to balance those two.
But, by the way Alinda said, we're gonna get to about 20%, and that's what we're pushing for. And I think as these cost efficiencies and more efficiencies come through in our business, that then should be a target we can easily exceed.
Jed Kelly (Analyst)
Nice. Thank you, Neal. Good luck, guys.
Neal Menashe (CEO)
Thank you.
Operator (participant)
As a reminder, if you have a question, please press star one. The next question comes from Bernie McTernan from Needham. Please go ahead.
Stefanos Crist (Analyst)
Hi, this is Stefanos Crist calling in for Bernie. Thanks for taking our questions. So recently, we've seen some other players sell their OSB licenses in certain states. Are there any opportunities for that across the U.S. business?
Richard Hasson (President and Chief Commercial Officer)
Hey, Richard here. So we are looking at the possibility of that, again, very much on a state-by-state basis, depending on number of access points, depending on who's active there, but it is something that we are considering. Part of the numbers that Neal mentioned was the sportsbook shutdown costs, and yeah, those are still in early days. And, you know, A, there's contract negotiations going on there, but B, the possibility of recouping some of those investments, and we'll update on that when we report on the Q3 numbers.
Stefanos Crist (Analyst)
Got it. Thanks. And then just wanted to ask, Latin America, can you remind us what markets you participate in and maybe your expectations there?
Richard Hasson (President and Chief Commercial Officer)
So, we don't normally give country-by-country breakdowns. You know, I'll give you Mexico as one example. Of course, Brazil is something which we're looking at, and we're going through the application process. But like any other parts of the world, you know, if there's markets there that we think make commercial sense, we will look to apply for licenses, and launch that. As part of the geographic footprint optimization that we're going through at the moment, you know, we're considering these a lot more carefully and making sure that wherever we do go live, there is a path and a sustainable path to profitability.
Neal Menashe (CEO)
Yeah, so like a market like Buenos Aires, there just was no path to profitability, and the regs were just mad and the onerous way that the software has to work only in the one city as opposed to the province, we decided that's not a market for us, so that's another side. So because we are hoping the regulations come in that are favorable to regulated players, and so we're in that process, but if they turn out that they're not, well, then we won't do it.
Stefanos Crist (Analyst)
Got it. Thank you.
Operator (participant)
This concludes our question and answer session, and the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.