Tabcorp Holdings' (TABCF) CEO David Attenborough on Q2 2016 Results - Earnings Call Transcript

| About: TABCORP Holdings (TABCF)

Tabcorp Holdings Limited (OTCPK:TABCF) Q2 2016 Results Earnings Conference Call February 3, 2016 6:00 PM ET

Executives

David Attenborough - MD and CEO

Damien Johnston - CFO

Analysts

Matthew Ryan - UBS

Adam Alexander - Goldman Sachs

Larry Gandler - Credit Suisse

Mark Wilson - Deutsche Bank

Michael Aspinall - JPMorgan

Mark Bryan - Merrill Lynch

Sacha Krien - CLSA

David Attenborough

Good morning and thank you for joining us for Tabcorp's results presentation for the first half of 2016 financial year. I'm David Attenborough and I'm CEO of Tabcorp and I'm joined on this call by Damien Johnston our CFO. I intend to speak for about 15 minutes taking you through the presentation lodged with the ASX today and then I will open up the call for questions.

If I can now take you to Slide 2; we achieved a good result for our stakeholders with growth in NPAT for four significant items of 7.3% and we've also delivered our shareholders with an interim dividend of A$0.12 per share, up 20% on last year. Incorporating the additional shares issued in March last year, actual dividend payments to shareholders are up 30%. The half also delivered more certainty for the Wagering & Media business, as we successfully completed the ACTTAB integration and locked in Victoria's thoroughbred media rights for five years.

The media rights were important in enabling us for the first time to provide our customers with the full suite of Australian racing. The half also saw good progress with the transformation of Keno, and pleasingly our Keno customers are responding well and this business is returning to growth with particularly good momentum throughout the half. The expansion of TGS continued with machines under contract increasing to more than 9,500 during the half. TGS is well positioned for further sign-ups in New South Wales, where the performance of our venue partners has significantly improved.

Our program of works dealing with the AUSTRAC litigation and AML/CTF continued to ensure our compliance systems and processes are best in class. And in this regard we've made very good progress and have now adopted an enhanced AML/CTF program effective December 31 2015 covering all of our operations.

A Chief Risk Officer, Clinton Lollback, has also recently joined our executive leadership team. In December we were excited to announce the launch of Sun Bets in the U.K. in the coming months, and this deal allows us to take the market leading wagering capability we've developed over many years and enter the A$7 billion U.K. online gambling market with a powerful local brand and content partner.

Finally as you're aware, we held confidential discussions with Tatts during the half regarding a potential merger. We were unable to agree acceptable terms and those discussions ceased, and we remain very well-positioned as a business, and as I've just highlighted, we've made excellent progress on our strategic agenda during the half.

If I can now take you to slide 3 which provides an outline of the Group P&L results, on a statutory basis NPAT was A$81.9 million, down 33.1%, including significant items which totaled A$15.6 million. These relate to the costs associated with the AUSTRAC civil proceedings and preparing for the launch of Sun Bets. I should also point out that in the pcp the Group received a one-off income tax benefit of A$31.5 million.

Slide 4 provides an overview of the results for each business, and while we will look at them in more detail shortly, I'd like to call out a couple of points on OpEx. In Wagering & Media while reported OpEx growth was flat, this outcome benefitted from lower broadcast right fees paid during the half. This also impacted the revenue and variable contribution growth rates as savings were passed onto our venue partners. The growth in OpEx that you see in Keno and TGS in the half reflects our previous guidance for these businesses.

The increased OpEx has been about establishing these businesses for sustainable growth, with investment in the new Keno brand and the TGS people and capability. We are absolutely focused on maintaining our disciplined approach to managing costs and finally, depreciation and amortization growth of 6.3% from the pcp is in line with expectations.

I would now like to take you through more detail on the performance of each of our business starting with the Wagering & Media on Slide 5. This business remains well positioned as market leader. We grew EBITDA by 2.4% and we continue to invest in our products and technology. Notwithstanding increased competition, active TAB account customers have grown by 5% and we have continued to report both turnover and revenue growth during the half. TAB racing revenues, the core of our business, grew 2% in the period and that was despite cycling a very strong pcp.

TAB Sports' performance was impacted by two factors, both of which had a similar impact on the results in this segment. Firstly, the benefit of the Soccer World Cup, which is our most popular sporting betting event was included in the prior period's results. And secondly, a strong yield performance was experienced across the category in the prior periods. Yields in first half 2015 and particularly first quarter 2015 were well above the average yields achieved across the full year in FY '15.

In the first half 2016 we've seen yields for TAB Sports return to more normal levels. To give you some context on the underlying performance of the TAB Sports business, if you exclude the Soccer World Cup, TAB Sports turnover was up 10.7%. Sport remains an important growth driver for both TAB and Luxbet. Within media, revenue performance reflects the savings we've passed on to venues as part of new rights agreements agreed in Victoria. This was offset by strong growth in our international business.

If I can now take you to Slide 6, which provides an overview of initiatives undertaken during the half to introduce better products and channels to the market. Our Future Retail program has been piloted across 16 sites so far, and we continue to refine the technology and the offer. Early results have seen positive customer feedback and venue endorsement. This half you will see us launch a mobile bar tab service, OneTab. This will help our venue and racing partners gain better insights into their customers' behaviors.

Cash Out has been very popular engaging customers and driving high margin multi-bets. We were pleased to expand this in recent weeks with the introduction of Partial Cash Out. And yesterday we announced an exclusive Australian agreement with Longitude to introduce a new tote betting platform. It's an innovative technology which will enable us to offer better tote betting products by combining liquidity across bet types. It's been successful in the Hong Kong market and we will introduce it to our offering, post the 2016 Melbourne Cup Carnival, subject to approvals.

I would like to touch on betting on live sport. It's generated a lot of interest in recent months; not just amongst those with vested interests, but the community more widely. We only offer it in our retail outlets and by telephone as permitted by law. It's illegal to offer online betting on live sport but some operators continue to circumvent the law. The current situation is untenable and the Federal Government must act now to address it. Despite the uneven playing field we are delivering digital growth and have continued to invest in our capabilities, growing our in-house team by 80% over the past months.

Finally, we've announced our move to create Sun Bets in partnership with News U.K., and since the demerger in 2011 we have achieved a number of important objectives. We've extended existing licenses, secured new licenses and removed a lot of the risk that was in the business. This has allowed us to create the right domestic capability to enter new international markets. It is now the right time to take our strong in-house wagering systems and capability and enter the U.K. market, leveraging News U.K.'s large customer base and powerful media brands.

Sun Bets will be run from a London office with approximately 50 local employees. We've already made some local hires and will be utilizing our existing bookmaking and back office expertise to support the business.

If I can now take you to Slide 7 and Gaming Services, TGS is a business which provides stable cash flows for Tabcorp. We made gains in the period through signing new venues, expanding the number of Diamond Reward loyalty customers and by extending the duration of a number of Victorian venue contracts. We remain focused on improving the performance of our existing partners, whilst also moving forward with our expansion plans. During the period our focus on driving venue performance was highlighted by our first to market launch of the successful Lightning Link product in conjunction with Aristocrat. Our scale as the second largest owner of gaming machines in the country provides our venue partners with access to the best gaming product before others, and this scale advantage is something we intend to further leverage as we seek to build stronger strategic relationships with the major equipment manufacturers.

In New South Wales our venues are performing very well and that's given us the platform to progress negotiations with other venues about the value TGS can deliver. We now have 700 machines under contract in New South Wales and we are well positioned for further venues to be signed up during 2016. We've also gained approval to offer the service in the ACT and that's a market we now have a strong foothold in as the local TAB operator.

Slide 8 takes you through the results for Keno for the half, a period in which the business returned to growth. New South Wales is the engine room of Keno, so it was particularly pleasing to see it deliver 8.6% revenue growth, whilst the Victorian result was also positive delivering 15.8% growth, albeit off a smaller base. Achieving growth in Queensland continues to be challenging and is reflective of broader softness in Queensland's licensed venues. One of the aims of the recent brand and product initiatives was to give Keno more energy and make it more contemporary. The early indications are that the brand transformation has been well received by customers.

Jackpot pooling is driving customer engagement in Victoria and New South Wales, and it does remain a priority to add Queensland. As we've done in the wagering business, we've recently launched a number of Keno Retail Concept venues, and while it's very much in the early stages, these venues have received strong customer endorsement and venue partner feedback.

We continue to prioritize CapEx to digital product and business expansion, and Slide 9 outlines the major projects in each business. Capital expenditure for FY '16 is expected to be up to A$160 million, which includes growth CapEx for the TGS expansion and launch of Sun Bets. The D&A expense for FY '16 is expected to be approximately A$185 million.

If I can now take you to Slide 10 which shows our capital features, and as you can see, we continue to have well diversified sources of funding and a strong balance sheet. At the end of December our gross debt to EBITDA ratio stood at 1.9 times, down from 2.1 times at the end of FY '15.

So in conclusion, as I take you to Slide 11, the overall first half performance was pleasing. We made good progress against our strategy in the half, executing a number of initiatives that have created growth and value for the Group. We are well positioned for the second half with very clear priorities. In Wagering & Media these include the Future Retail program, product innovation and the launch of Sun Bets. For Gaming Services, the priority is driving the performance of our partner venues and continuing to expand. While for Keno, the focus is jackpot pooling and executing the digital strategy.

The interim dividend was A$0.12 per share fully-franked and up 20% on last year, and this reflects our intention to deliver attractive shareholder returns. As announced in August, our business performance and strong balance sheet position has enabled us to target an increased FY '16 dividend payout ratio, while continuing to invest for growth, both in our existing businesses as well as in new opportunities like Sun Bets. In the course of the coming months we expect the High Court's judgment on our claim against the State of Victoria, bringing this long running legal matter to an end.

Finally, I would like to conclude by saying that the Group is well positioned, we're focused on executing well on our strategic agenda, maintaining expense discipline and we are on track to achieve 14% ROIC by FY '17.

Thank you and I will now open up the lines for questions.

Question-and-Answer Session

Operator

So our first question comes from Matthew Ryan with UBS.

Matthew Ryan

Hi guys. Firstly, I'm just interested in your comments around the expansion in digital in-house team. 80% in six months seems like a pretty aggressive increase. Can you give us an idea of how many people you're actually talking about there and what might have led you to the decision to make such a big increase in that team?

David Attenborough

Hi Matt, David here. We have about 200 FTEs in digital and certainly this increase in this team reflects one, our drive within that digital space in Australia and the work we're doing within this market, but also underpins the work we're doing preparing for the launch of Sun Bets in the first half of 2016.

Damien Johnston

Damien Johnston. I think the other thing you'll recall is that over the last few years we've said that a priority for the company is to manage our productivity and our expenses well, so we can invest in digital and we can invest in marketing. They continue to be two of the big themes that have showed up through our results in recent years, and I think as we've gained momentum we're bringing all that stuff in-house and you are seeing the investment in the expense line.

Matthew Ryan

I was just trying to get an idea of whether this is going to be a material change in OpEx for the Wagering division and I understand that Keno and TGS OpEx is going up. At the moment you've got flat OpEx to revenue in the Wagering & Media division. So are we going to experience a couple of years now where maybe OpEx might have been a bit higher as a percentage of revenue than it has been in the past?

Damien Johnston

There's probably a couple of points there. Firstly, a lot of the digital effort is development work. David referenced some of the projects we're working on. That development activity is largely capitalized and we have our policy in relation to digital assets where we write them off over three years. So that's a shorter lifespan than most of the software assets. Just reflects the fact we're in a fast moving world, so you won't see a large growth in OpEx for that reason. Secondly, when you're looking at the expense line in Wagering you do need to take into account some of the factors David referred to including broadcast rights flowing through that, the savings going through the expense line as well.

Matthew Ryan

I mean just a quick one on Keno. Obviously there was a lot of relaunching costs going through during the half. Are we expecting that you can get some fixed costs leverage moving into the second half and potentially margins might improve from here?

Damien Johnston

That's a good question. At the August results we guided to some increased Keno expenditure in line with actually the growth in 2015. In this half the growth rate is higher than you probably would have expected, but it really reflects the launch of the rebrand during the half. As you say, that means we're essentially a bit front-ended on Keno OpEx growth in the first half. So the second half will be a relatively flat sort of outcome which will average out over the years as something similar to last year's growth rate. So yes you would expect that.

Matthew Ryan

Okay, thank you.

Operator

Your next question comes from Adam Alexander with Goldman Sachs.

Adam Alexander

Good morning guys, just a question on the expenses as well. Looking through the P&L the marketing and promotion costs look like they're up about 67% year-over-year. Can you just maybe break that down across whether that's in response to the corporates in Wagering or a fair bit going into the rebranding of Keno?

Damien Johnston

It does include the rebranding of Keno certainly the driver in the results, but of course in Wagering it's a highly competitive market. We've increased our spend consistently year-on-year within the parameters that we're managing to, which as you know, is the 20% to 21% OpEx to revenue. So it largely reflects the key things I mentioned a bit earlier which is that we are prioritizing spend towards marketing and technology. You'll see that in the numbers and we've been disciplined about how we do that. Some important properties we've lost. We've invested more into the digital side of marketing. There's probably more to come, but it's all within the context of managing discipline overall and within a framework that should allow us to get nice growth in earnings over time.

Adam Alexander

Then just David maybe on the U.K. joint venue, could you just run through what you think that Tabcorp's competitive advantage will be in that market given it's pretty well serviced already? And then secondly, just for you Damien just how those expenses will come through the P&L from the U.K. bet launch once it gets going in the second half?

David Attenborough

So thanks for that question. The deal that we've done and the move to move into that market has been well thought through and working with News U.K. We really have created we believe a very strong model to enter that market. And what I mean by a strong model, it's a partnership model and we play the long game and have built our business on successful partnerships. They also operate a number of partnerships and both of us already worked well together before we were launching this program. The second thing is the Sun brands and the brands that News U.K. bring to the partnership are extremely powerful in that market. A really big reach, well over 10 million customers per week, and also combine that with the Dream Team and some of their other properties. This is a powerful market reach, that combined with the assets that we add to the partnership which have been developed over the last five years, the systems, the processes around fixed odds and management of sports and racing, really creates quite a powerful entry. We are -- just so you can think about how we develop this, we've been involving over 100,000 customers in the U.K. in the development of the systems that we're going to bring to market. We have a -- similar to what we've learnt in Australia, we developed the systems for that market working with the customers in the market, so a lot of what will come to the market digitally and when we launch has been developed with a large customer base already in the U.K. market. So it won't necessarily be what's been seen before, because actually some of the customers are asking for something a little bit different. And certainly it will build on the EPL, and it will build on some of the core areas that the market is so strong in. But it will also bring some of the unique elements that we are developing. So it's an exciting project. It's why we've geared up so substantially in the digital space, and it is leveraging off a lot of our learnings over the last five years.

Damien Johnston

So to the second part of your question, the thing you should be thinking about the establishment costs as a significant item as they were in the first half, so you shouldn't expect to see the launch of Sun Bets impact on the results before significant items in the second half.

Adam Alexander

Would you expect it to be breakeven from launch? So once it does launch I mean that'll be in probably the FY '17 year and I imagine then that the revenue and operating costs go above the line from that time. Are you expecting it to be breakeven then?

Damien Johnston

A lot of the efforts right now are focused on getting set up and getting a launch away during Q4. What's really important is that that happens well and that we are set up for FY '17, and as you say from FY '17 Sun Bets will just be a part of the continuing business of the company. So all of the focus really is on a successful launch and we might have a bit more to say in August, but that's all I can say at the moment.

Adam Alexander

Okay, thanks guys.

Operator

Your next question comes from Larry Gandler with Credit Suisse.

Larry Gandler

I'm focused on the December quarter Wagering performance, excluding Media. Based on your disclosure I calculate that revenue growth to be about 0.5% which to me is a bit low. I guess my question is this, with 5% increase in the customer base, it seems to me that you're perhaps losing transaction share but your marketing and advertising is up by 67%, so perhaps that marketing and advertising is not effective. Can you talk about customer base growth versus transaction share in the context of the fact that you've invested heavily in Wagering & Media and marketing?

David Attenborough

Larry, I'll give that a crack and Damien might well come in on the back. I mean the December quarter was a good quarter from a point of view of executing operationally. We had actually a very good Carnival systems [wise up], but it was a highly competitive quarter and also compared to a very successful pcp in the previous year. We grew in the half digitally around A$160 million in turnover. But the growth in customers we're talking about are digital customers only. We're not talking about what was happening across our retail estate. We're investing hard and we are playing a long game in this space. Looking at our positioning and what we're seeing in the launch of Partial Cash Out in January we think we're very well positioned going forward and I think we're doing the right things in investing in the right areas. And every dollar we spend on marketing we look at very carefully and we look at what it will drive and it is about driving increasing share of wallet over time and we are very focused on getting -- I'm never satisfied -- getting better and better in this space.

Larry Gandler

So it looks like punters may have two accounts roughly or more and it seems like they're giving their marginal business -- they're remaining active with TAB, but they're giving their marginal business to one of the other bookmarkers or multiple bookmakers and yet you're trying to stimulate them with increased marketing. Is that a fair description of what you're seeing as well?

David Attenborough

Well what we saw -- certainly we did see a lot in that fourth -- in that last quarter, was a phenomenal amount of advertising and special offers over the major seven days of the Carnival. If you were active in taking up those offers, there was a lot of money on the table and a lot of turnover essentially being bought by different operators to try and gain some traction with customers. In that environment it's very difficult to just measure success around sales because ultimately sales just indicate a lot of giveaways and it's a lot of noise over that period. When we look outside of that period, we're not seeing anything that in any way indicates that customer behavior's changed, but certainly when there is a huge amount of giveaways on key days, you will see a change in customer behavior but really on those days.

Larry Gandler

Just moving over to Sun and the build-up of digital capability and staff, how come some of that staff, if it's for the Sun initiative, how come that staff is in Tabcorp and not in the partnership with the joint venture?

Damien Johnston

Larry, Damien, I can answer that. The nature of the joint venture arrangement is that Tabcorp is in fact the Wagering operator. So we hold the license and we will run the business. What News bring in the U.K. is marketing by virtue of their digital assets particularly and that's what they contribute. So we are in fact the operator and the licensed operator of that business. So we'll be taking bets, managing the odds, running the office. I mean that 50 people that David referred to, that's what Tabcorp does, we provide all of the operational capability.

Larry Gandler

Okay, so those -- Tabcorp establishing a local office in the U.K. approximately 50 employees, they will be Tabcorp employees?

Damien Johnston

Employees, 100% correct.

Larry Gandler

Is that included in the 80% build-up or is that in addition to?

Damien Johnston

No most of the development people are in Australia, which is the 80%. The 50 are more operational more so than developers.

Larry Gandler

Thanks. Thanks guys.

Operator

Your next question comes from Mark Wilson with Deutsche Bank.

Mark Wilson

Was just wondering if you could elaborate on a couple of things. If we're again looking at that December quarter, digital turnover, the growth rate there seemed to [age] from what we have seen previously from Tabcorp and in the broader market and likewise we saw an increase in the rate of decline in totes and retail revenue fixed in, when I would have thought the environment was a little bit more positive than that.

David Attenborough

Damien's going to probably add on the back what I'm going to say. First of all digital growth, I think I've covered it off, but I mean it was an interesting pcp. We had a lot of growth in the FY '15 year in that quarter that we're comparing to and also I think I've talked about those major seven days. Those seven days had a big impact on what you'd call the optical growth numbers. We're obviously all over what's happening outside of those days and as I've said, we're not seeing anything that indicates any sort of major change in customer behavior outside of the major days. When we look at retail, it's really a tale of two states. It sort of reflects a little bit the macro environment. So over the half you're probably looking at New South Wales retail pretty flat year-on-year, with a bigger decline in Victoria. It also probably reflects a little bit the alignment with stakeholders in those states where we have massively strong alignment with the New South Wales racing industry and a slightly less aligned position with the Victorian racing industry and their investments in racing.com and the sponsorships that they've signed up with some of the corporate bookmakers.

Damien Johnston

I think David I'll just add a couple of comments. So the first thing I'd say is, I wouldn't read too much into the fourth quarter or more than you should. At the end of the day you're going to have probably -- the shorter the measurement period you're going to have potential ups and downs that are not actually reflective of a trend, just reflect things that might have occurred in a relatively short space in time. I'd reiterate David's comments, I think the retail performance actually has been pretty good, particularly in New South Wales, to come out basically flat in the half when you've got a highly competitive market with heaps of offers out there and everybody going digital. I think that shows that our retail strategies are progressing. Victoria is a bit softer than New South Wales and probably for the reasons that David has mentioned. So I'd just be careful to read too much into it. I think it's a relatively short time frame. Highly competitive time frame. We adjust our strategies, we respond to things we see.

Mark Wilson

Damien, just on the cash flow, big jump year-on-year, but there is the tax refund. Anything else that you would like to point out there?

Damien Johnston

I think I should just point out that when you look at the cash flow statement, the EBITDA conversation to operating cash flow for Tabcorp is typically around the 100%. That really reflects the business model, which is a very good business model. In the half we called out significant items below the line. Of course they're Cash, AUSTRAC and U.K. start-up costs. So when you look at that cash flow conversion you should allow for that. It'll still be a little under 100% in the first half, but that's typically a seasonal thing. A number of our arrangements with the racing industry require us to pay fees and things in the first half for the year. You'll see that pull back -- come back in H2. So our conversion will continue to be around that 100% mark. So just don't think there's a -- just be aware of that. In terms of the cash flow, cash generation was good. I think we paid down borrowings by over A$100 million in the half, partly related to receiving the cash from the tax settlements in that half. So that resulted in a good balance sheet position. We're at 1.9 times debt to EBITDA you'd expect us to be the range of 2 to 2.5 times. So we're well placed and it really does underpin the increase in returns to shareholders. Our dividends are now gone sort of A$0.08, A$0.10, A$0.12 over the last couple of years and we're in a really good position with the balance sheet there.

Mark Wilson

Thanks very much.

Operator

Your next question comes from Michael Aspinall with JPMorgan.

Michael Aspinall

Just a couple of quick questions. On TGS, we've touched on most of the other segments, is the increase in OpEx, should we expect that to be ongoing or is that frontloaded like in Keno?

Damien Johnston

Not so. Michael, Damien Johnston. It's not particularly front loaded. At August we indicated that we're investing in the capability of TGS. We're very focused on making sure that we're delivering value to our venue partners. They need to invested in and drive their performance. We indicated that we'd be committing an additional A$5 million in operating expense investments, which will be taken to be coming in this year and that will be a recurring level. So this year you should expect to see OpEx growth about A$5 million above FY '15, but then there should be [CPI] plus in that sense beyond that.

Michael Aspinall

Just a last one, back to the start-up costs for Sun Bets, should we expect a similar level in the second half or did the A$8.4 million include once off license costs and other one off costs?

Damien Johnston

You could expect to see a slightly higher rate as we get into H2. There's still obviously employing more people. We're getting -- we're moving forward, so you could expect to see the H2 costs for Sun Bets be higher than H1. And of course in relation to AUSTRAC, that's a continuing matter. The court hearing is scheduled for September 16. So you'd expect to see some further costs come through in H2.

Michael Aspinall

That was all, thanks.

Operator

Your next question comes from Mark Bryan with Merrill Lynch.

Mark Bryan

Thank you. I also wanted to dig in if we can I'm afraid to that Q4 number in digital. It's obviously getting a bit of focus this morning. Is there anything you can say around how the business has trended in the last six weeks or so? It does feel anecdotally that the corporates have stepped up their actions particularly around live in play. And just on that topic, David, obviously we're still awaiting for the O'Farrell Review. Should that come out and support live in play, would that have any impact on your change and your views around live in play or would you have to wait for that to be legislated? And of course that itself is a big question mark if it gets through legislated [press] at all. Thank you.

David Attenborough

Lots in there Mark. The first thing on digital, I've tried to be quite clear in what I've said without giving any forecasts which is that outside of those major days, we've seen no particular change in customer behavior and I've used words like we're well positioned for the second half. I'm not going to say more, but certainly digitally we are very focused on that area and we're spending a lot of energy and time investing in it and focusing on marketing in the right areas. When looking at live online betting on live sport, it is illegal in Australia. Without doubt it's illegal. There are some operators trying to circumvent that through various practices and the Federal Government must really act now to fix it. So that's the first thing. We operate within the law. So whatever the law allows we operate within but we have made it clear and I think certain other TAB operators who also obey the law have also made it very clear that it's not good for racing and it's not good for pubs and clubs, if online betting on live sports is legalized. If it's not good for our major stakeholders you can be damn sure long term it's probably not good for us. So we've been quite clear that the government needs to think very carefully before they take that extra step of legalizing it.

Mark Bryan

That's helpful thank you.

Operator

Your next question comes from Sacha Krien with CLSA.

Sacha Krien

Good morning guys, just a couple of questions on -- more questions on retail please. So you had a decline of 2.4% I think in the December quarter some of which appears to have been Trackside. Was there any issue with the Trackside win rates during that quarter or is that product losing some of its shine in retail venues?

Damien Johnston

Sacha, Damien, I'll have first crack at that. Look Trackside's been a product that has demonstrated good growth in recent years. But at the end of the day it's a retail only product. Therefore to some extent it's subject to obviously the performance of retail generally. So in Victoria we saw a softer retail performance than New South Wales. So it's still a -- and as you know in New South Wales it's our highest margin product, so it's still a very valuable product for us. I would say as I said a bit earlier I'd be careful about people reading too much into a quarter. You can't extrapolate a quarter and then suddenly think that you've now got yourself a trend. We've had this before where people have looked at quarterly numbers and tried to draw inferences and conclusions that have been sort of proved wrong subsequently. So don't read too much into it. We're very focused on the core things that David said. We are well positioned for the second half. We're looking forward to a good performance.

On Trackside because it's an interesting product because it is exclusive to us and we are aware of it and we've got a small dedicated team that are focused on it. We've got a lot of actions being taken around graphics and products that are built into Trackside. Because there's been little change with that product over the last 18 months and whenever you with any entertainment product if you're not continually refreshing it and providing something different and new it can get a little bit stale. So we are very aware and the team are very aware that they need to come out and we've got some nice stuff coming. So again play the long game, great product exclusive to us, it fits retail venues well and you can play on it every three minutes. So great product.

Sacha Krien

Just on retail more generally just wondering if you are going to elaborate a little bit on the Future Retail program and whether you need to incentivize any of these venues to actually participate? I guess I'm thinking more in the terms of what sort of commissions they're going to receive under the program and going forward?

David Attenborough

The Future Retail model does involve certainly working with the venues when customers are in the venues and working with them on driving the right outcomes. But it is also built around technology, beacons, future form, the way that we're going to develop the self-service products and a whole range of interfaces that will essentially drive towards that perfect outcome where the customer just has that seamless experience when they go in there that is both digital and retail fully connected. So yes there will be some compensation but the compensation will be built around customers that are actually the venue's customers. So it is appropriate. It's not built around suddenly unpacking the digital piece. It really is about creating that seamless experience for the customer working with the venue to get the best outcome. So it will be good for the venue, good for the customer and good for us. That's what any model should be.

Sacha Krien

How confident are you of getting some of the bigger groups across the line? I guess I'm thinking clubs, New South Wales in particular, because a lot of the feedback you get is that they're not too keen on investing a lot more in Wagering which a lot of them would claim to be fairly profitable for them these days and more of an important driver of traffic?

David Attenborough

Yes. So we work very closely with clubs where we're aware that some venues -- they're always venues that have less successful Wagering businesses than other ones. They are very successful club venues we work with all of them to look to improve the performance of Wagering in those venues. What we are planning is all about enhancing performance and we are spending a lot of time working with our stakeholders. We have long exclusively licenses in retail and we will make sure that we invest in those and invest in the venues. So we are absolutely focused on making sure those relationships are strong.

Sacha Krien

Okay. Just a follow up question David please on Mark's question on in-play betting. So hypothetically if the government was to loosen regulations and permit online in-play wagering. First of all do you have the technology ready to go to implement that? And secondly in terms of your relationships with the racing industry in New South Wales and the licenses you have in New South Wales and Victoria can you actually proceed on that?

David Attenborough

Yes and yes.

Sacha Krien

So final question for me on gearing, Damien. The gearing now is below your previously stated target range. I'm just wondering what sort of options you're considering there?

Damien Johnston

Good question. So look obviously we're very pleased with where the balance sheet's at. As I mentioned our dividend is up 20% in the half and in fact dividends -- or the cash flow statement was up over 40% in the half. That strong balance sheet does underpin increased distributions, which we've been able to do consecutively for the last few years. We're not that far under the target range to be honest. We're 2 times to 2.5 times in that range. We'd prefer to be at the bottom end of that range rather than top end, so it's not a concern right now. It just gives us a lot of confidence when we think about what options and investments we're making. We're well placed to fund all of that and continue to provide strong distributions.

Sacha Krien

Thanks a lot guys.

Operator

[Operator Instructions] Your next question comes from Larry Gandler with Credit Suisse.

Larry Gandler

Hi guys apologies, a few follow-up questions. I guess David one of the things you said in answering somebody else's question actually quite surprised me. You said your alignment with the two racing industries New South Wales and Victoria, it's better with New South Wales than it is with Victoria. Yet you guys have a 50-50 partnership with Victoria. What is it that's not perfect with the Victorian racing industry and why that having the inside running as a partner why can't you fix it?

David Attenborough

To answer that Larry the misalignment is particularly is around essentially the Victorian industry embraces the advertising of corporate bookmakers in their market. The New South Wales racing industry does not. If you break it down it comes down to simple modeling and I think it was even stated in the letter that came from one of the other TAB operators today, which is that for every dollar bet with us they make a lot more per dollar than they do than if it goes with a corporate. So when I talk about alignment I get frustrated sometimes when industries market corporates that provide them with far lower returns which can undermine prize money, which then undermines field size that then undermines stability of industries. So we spent a lot of time trying to educate industries but sometimes they don't always act in their own best interest.

Larry Gandler

So is there a particular impedance there that you're working to overcome or is it just trying to convince them?

David Attenborough

Larry I think it is a model that Victoria with their racing.com and advertising model have gone down and we work within that. We have a JV. We focus on operating that JV as effectively and efficiently as we can.

Larry Gandler

Two other questions. The South Australian Industry Review, can you update us on that and whether you think that'll have broader national implications? The review on taxation I think, advertising.

David Attenborough

It's far too early. We're obviously aware of it, we'll work with it. All reviews we work with and ultimately we'll see what comes out of it. It's far too early really to comment on it.

Larry Gandler

No worries. And WA can you update us on what the status is with WA Racing and where the government's at?

David Attenborough

I think your knowledge is probably as good as ours. They seem to be indicating at some stage there may be a transaction down there, we'll see.

Larry Gandler

Okay thanks.

Operator

Your next question comes from Adam Alexander with Goldman Sachs.

Adam Alexander

Hi David. I'm just wondering just on the discussion with Tatts, if you can make any comments there. What were the key sticking points in those negotiations and what's the likelihood that down the track you will revisit those in future?

David Attenborough

Certainly we entered into discussions with them, those discussions were about a merger, they were confidential. And really all I can say is they've ceased. We don't comment on corporate transactions of this nature. We're not about to start now but I appreciate your interest.

Adam Alexander

I thought I'd try, thanks.

Operator

There are no further questions at this time. I will now hand back to Mr. Attenborough for closing remarks.

David Attenborough

Thank you very much for joining us on this call and appreciate your time. thank you very much.

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