Super Group (SGHC) Ltd Q3 FY2024 Earnings Call

Thank you. Good morning, everyone and thank you for joining us today to discuss Super Group’s Results for the Third 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 the company’s forecast. 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 U.S. 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 the website. On this call, I am joined by Neal Menashe, Chief Executive Officer. And during the Q&A session, we’ll 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.

Thank you. Good morning everyone and welcome to Super Group’s third quarter 2024 earnings call. Quarter three was a super quarter. Total revenues ex the U.S. was an all-time high for a third quarter, growing 13% year-over-year to €395 million. Adjusted EBITDA ex the U.S. was a set of third quarter record, growing 52% year-over-year to €95 million. We are successfully executing our strategy of growing key markets while realizing cost efficiencies with a particular focus on optimizing our OpEx and marketing. These efforts are clearly reflected in our margin, 24% for the second quarter in a row, and that's well ahead of our 20% target. Our casino business is experiencing super growth. Casino represents 83% of overall net revenue for the quarter. We expect continued growth as we utilize our decades of expertise to expand in key markets. This includes rolling out our Spin brands into existing markets, which aligns with our multi-brand strategy. When it comes to key markets, we'd like to highlight the confidence of Africa where we see success and significant opportunities. For the second quarter running, Africa provides the largest portion of our revenue. We have operated in Africa for more than a decade and have built a strong competitive moat. Our footprint spans seven locally regulated markets, and we hold podium positions in five of them. There is more to come. We have a healthy pipeline of new markets that will be viable in the next 12 months. Beyond that, the continent is expected to grow by 1 billion people, reaching 2.5 billion people by 2050. We are well-positioned to capitalize on this growth with our purpose-built platform, local marketing expertise, dedicated teams, and deep relationships with key stakeholders. We expect to perform very well in this growing market. Second to Africa is Canada. We are experiencing strong year-over-year growth across both sports and casino. I want to note that Jackpot City continues to be a leading brand across the entire country. While we plan to continue growing our presence in Africa and Canada, the US has proven to be trickier. We've completed the shutdown of our US sportsbook operation. I'm pleased that the associated costs came in around €9 million less than our previous estimate of €45 million. We continue to assess our iGaming business in New Jersey and Pennsylvania. We are closely tracking KPIs and if we can't reach our goals, we will take decisive action. As we've always said, in order to continue operating in the US or any market, we must be able to see a sustainable path to profitability. We expect our quarter four investment to be less than what we invested in quarter three, and we are pleased to be seeing some green shoots. Moving on to the balance sheet, our financial position is robust, and we finished the quarter with unrestricted cash of €297 million and no debt. This is after having paid the €0.10 per share initial dividend in July. We are exploring ways to return cash to our shareholders, including our plan to initiate a regular dividend of €0.025 per quarter to begin in the first quarter of 2025. In the meantime, an option we are considering in the near term is a further special dividend before the end of the year, a possibility we intend to discuss with our Board at our next meeting at the beginning of December and which may be assessed each year subject to performance and market conditions. Finally, given the strong performance to date, particularly a spectacular October and assuming normalized sports results for November and December, we are revising our ex-US adjusted EBITDA guidance to exceed €345 million, representing a margin of 22%. We are seeing the operating leverage in our business kick in, and we are pleased to be above our long-term target margin of over 20%. We look forward to capitalizing on our momentum and closing out a strong year for Super Group.

We will now begin the question-and-answer session. Our first question comes from Jed Kelly of Oppenheimer. Please go ahead.

Hey. Thanks for taking my questions. Just following up on your last comments. Can you talk about sports results globally, how they're trending into 4Q? And then can you just give a view on how Super Group is viewing Latin America? And then I have a follow-up.

Okay, Jed, it's Neal here. The sports results in October were really strong for us. I’ve mentioned before that when all the favorites win, it doesn’t typically benefit us, but we've still had solid outcomes. Interestingly, September, which marked the end of the third quarter, didn't perform as well. Despite that, we achieved a commendable third quarter. It's crucial for us to balance out our sports performance with our casino operations, which now account for 83% of our revenue.

Hi Jed, Richard here. To come to your question on Latin America. As you know, we are live there in a number of markets at present. Brazil is obviously being spoken about a lot across the industry at the moment. That's a market where we are not currently proceeding in line with all markets that we look at. We want to ensure that we can identify the same path to profitability once we go live. And as Neal mentioned earlier, we're currently focused on optimizing our existing footprint and building on our current revenues.

And just as a follow-up, you're obviously generating a fair bit of free cash flow. Can you just talk about how we should view your capital returns policy, another dividend or strategic M&A? Can you just give us an update there? Thank you.

Hi. It's Alinda. Neal mentioned that we are definitely considering a supplementary or special dividend in the last part of quarter 4 this year. For other uses of cash, we continue to focus on investing in our technology and finalizing that project, while also allocating funds for marketing. That's why, particularly in quarter 4, we have reduced our spending slightly on marketing. Regarding M&A, I will let Richard confirm, but assessments are always being conducted, though there is nothing definitive for quarter 4.

Yes. Jed, nothing that's worth mention on this call, but we are constantly looking at potential strategic opportunities across the markets that make sense for us.

Our next question comes from Bernie McTernan from Needham. Please go ahead.

Great. Thanks for taking the questions. Maybe just to start, Neal, you mentioned October really strong month, but it seems like sport outcome might have gone the wrong way. So just can you detail what you're seeing exactly whether it's on the cost efficiency side or just better engagement and retention with your customers?

So yes, I mean obviously, September sports wasn't as good, but October we had great volumes in our system, our customer base, etc. The same happened in October; it was a spectacular month on all fronts. Customer numbers, volumes, revenue, etc. So we're seeing it all come through. We're focusing on efficiencies in our marketing, the operating efficiencies within our different companies coming together. So it's all coming together really well. Also, the focus is you can't be in every country. We're closing the countries we're in and focusing on the markets in which we operate.

Understood. And just thinking about the top line still. Would love to just get any color in terms of what year-to-date growth has been excluding India. And the reason why I ask is as the growth guide for this year, about 10%, there's some FX headwinds in there. You're comping the India shutdown. So as we start to sharpen our pencils on '25 more. I think there's some reasons why reported revenue could accelerate next year, but would love to get your thoughts.

Okay. So it's Neal again. Just to remind everyone, we shut down India at the end of September last year. So you're 100% right; ex India, we're up 24%.

Okay. Really strong number. I have two more questions. Considering the long-term cost efficiencies and better-than-expected margins, you mentioned a long-term target of over 20%. How much more can we anticipate beyond that, and how quickly can you reach that?

Hi, Bernie, Alinda here. We've reported two consecutive quarters with over 24% margin. The operating efficiencies are definitely coming through, which is a very good result for the 18 months we've been focusing on that. Secondly, we are really looking into our marketing efficiencies now. We're unpacking every campaign and marketing investment to make sure there's a great return. So in the long term, when we put out that 20% target, we are happy to beat it, and now we feel comfortable that we will probably lift that to 22% to 24% during 2025 as a standard.

Got it. Perfect. That's great. And then lastly, just one quick modeling question. Should any of the US shutdown costs bleed into the fourth quarter? And also just any color on the reconciliation in the press release, regarding US shutdown costs and then also just other market closures, just what that other market closure was the €5 million. Thank you.

Alinda here. I'm pleased to say there is nothing to report for quarter four. This is also the reason for the impact on overall profitability mentioned in the press release. The sportsbook closure has already been accounted for in quarter three and quarter two, so there’s nothing for quarter four. The other market closures, which are related to an investment in a processor that we had to impair, stem from last year's closure in India.

Understood. Thanks for taking questions.

Our next question comes from Michael Graham of Canaccord. Please go ahead.

Thank you and congrats on the improved profitability outlook. I wanted to ask about Africa. You have a podium position in five of the seven markets that you're live in. And just wondering if you could talk about the difference between those top five versus the other two? And just maybe share a little bit about how durable you think your position is in Africa?

Yes, hi. It’s Neal here. We've been operating for 10 years with a dedicated team of over 1,000 people. The Betway brand performs particularly well in Africa, likely due to our extensive branding efforts in football, which is the most popular sport there. In the leading countries, we have strong performance. However, in the other two markets, we recognize we aren't performing as well as we could, but we are working on that and have plans for others. We are providing online casino options in most of these countries and have been launching Jackpot City. This allows us to maximize our impact through both the spin approach and the Betway approach for Super Group in these regions. Our marketing investment and revenue in these markets are significant, and we feel confident about the growth opportunities we expect from that content.

And then I'd love to just get a little more color on iGaming in the US. Just maybe talk about the long-term view on how you're thinking about online casino for you in the US?

Okay. Hi. It's Neal here. So yes, we tried sports; it didn't work. But casino, we're really good at. We are in New Jersey and Pennsylvania. We're seeing good revenue increases and good green shoots. We're not chasing revenue for the sake of it but want to ensure that we can achieve our revenue targets and then turn this into a profitable business. If it gets too far away from being able to achieve profitability, then we have to change stance. The casino business is easier for us, and this is our core brand identity across the world. So America will be no different.

Okay. Thank you, Neal.

The next question comes from Mike Hickey of The Benchmark Company. Please go ahead.

Hey, Neal, Richard, Alinda, good morning or afternoon for you guys or evening. Congrats on a great quarter, fantastic, great year, kudos to all of you. Just following up maybe on Michael's question on the US market, Neal, I appreciate the color there. You've obviously sized up your losses here considerably exiting sports betting. On the iGaming front, I mean, it's early days here. Obviously, 2025's going to be interesting. Just getting a better sense of your path to profitability, said you're hitting your revenue targets into 2025, and thinking about the political atmosphere and the change here, how you think that could impact potentially iGaming regulation in the US in 2025?

Yes, from our point of view for 2025, we are not aiming to invest more money than you're seeing in them for the last two quarters. What we have to see is can we grow the revenue, which has been growing and make sure we do see a path to profitability. With the new government comes new regulations or not changing the existing regulations, so hopefully, the new Republican government will understand that if you over-tax, you get worse results, which we've seen in Germany with the black market and the regulations shutting many out of business. Thus, let's see how it goes; hopefully, it should be good for us.

Looking at, I guess, North here in Canada, you've got a great share position too. Can you just talk about your success in Canada, your market share position and the pluses or minuses of Alberta regulating here? Thanks a lot.

Okay. In Canada, overall year-on-year growth has been very good. Ontario is better, but it's not where we need it to be. However, we are still in a good position there. We learned lessons in Ontario now that we're regulated, and we apply those lessons to Alberta’s upcoming regulations, maybe in 2025 or 2026. Our brands resonate well there, and we're now focusing on fixing any under-indexing in marketing relative to bigger competitors. The rest of Canada is improving, and we're sorting out traffic issues with our brands, which we are actively working on.

Yes, moving to Africa, you've mentioned it briefly. Clearly, you have a significant head start and hold the number one position on the continent. Could you provide some context on the market opportunity in Africa regarding competition? It appears that several leading online players have not entered the African market yet, which is intriguing. Additionally, I'm interested in understanding how consolidated your market share is and if you have a specific figure for your total market share in that region.

Yes. We did market shares. In the podium positions, we definitely remember, we only operate in seven countries, right? There are lots of countries we're not in, but we’re coming to. It’s been a long time coming, and we've been at it for ten years. Remember the population is exploding, and mobile phone use is increasing. Our product offering, brand, and dedicated teams are integral to our success. Our marketing budget originates from our global strategy, adjusted for local markets, and our plan is to determine which other markets we enter based on fair regulation and tax rates.

Do you have a sense of how big the TAM is or potential TAM in Africa? And what's been the sort of market growth rate or maybe even your growth rate in the region?

Yes. We estimate the TAM is about 5 billion, and it has been growing consistently. As more regulations open up, markets such as Rwanda and Angola haven't established solid regulations yet. Senegal is another market we're eyeing, and others where we can get in. Our long-term commitment in Africa, especially with Betway and Jackpot City branding, drives our confidence in this market.

How can you assure US investors about the regulatory environment in Africa, and what makes you feel comfortable with it, Neal?

We get this question all the time. We work with the regulators and all the government bodies, and we help draft regulations. The question may also be, what happened in Germany, the Netherlands, or Belgium – they went the other way, with tax rates causing a black market phenomenon. We understand this risk as a business across the world and believe working closely with governments will yield good results.

Do you have any sense of when you think some of the larger online players, like Flutter or 365, might start to engage in the market? They might already be involved, but I do not believe they are. Do you have an idea of when they might enter?

The truth is none of them are really there at all. They might be focusing on Brazil. We picked our battle and decided to prioritize areas we know, so the only one that's there is really small, is 888, but there's no significant competition yet.

Okay. Appreciate the color, guys. Thank you. Good luck.

Thank you.

This concludes the question-and-answer session. The conference is adjourned. Thank you for attending today's presentation. You may now disconnect.