Tabcorp Holdings Limited (TABCF) CEO David Attenborough on Q4 2018 Results - Earnings Call Transcript

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About: TABCORP Holdings Limited (TABCF)
by: SA Transcripts

Tabcorp Holdings Limited (NYSE:CHD) Q4 2018 Results Earnings Conference Call August 7, 2018 8:00 PM ET

Executives

David Attenborough - MD and CEO

Damien Johnston - CFO

Analysts

Don Carducci - JP Morgan

Matt Ryan - UBS

Larry Gandler - Credit Suisse

Mark Wilson - Deutsche Bank

Monique Rooney - Morgan Stanley

Nick Basile - Goldman Sachs

David Fabris - Macquarie

Rohan Sundram - MST Financial

Anthony Longo - CLSA

David Attenborough

Good morning and thanks for joining us on the call. I’ve been in the gambling industry for around 30 years now. And as I look back at the year we've had, it has been the most exciting and the most challenging of my career. We are excited by the opportunities arising from the combination of Tabcorp and Tatts. Six months in, the integration is on target to deliver at least $130 million of EBITDA from synergies and business improvements in FY21. And importantly, the team's focus on the integration has not disrupted our businesses with the group delivering a strong second half performance, particularly in Lotteries & Keno and Wagering & Media.

And I am here today with our CFO, Damien Johnston. And for the next 20 minutes or so, I'll take you through our FY18 results presentation. And then, I'll open the line up for questions.

So let's start with slide three. And FY18 for us was defined by the successful combination with Tatts. The makeup of our businesses is compelling. Diversified across wagering, media, lotteries, keno and gaming, and operating powerful consumer and B2B brand in attractive markets.

We hit the ground running by announcing a new executive team on day one, drawing on the best talent from both companies. We’re executing the integration and we’ve taken all the decisions needed to deliver $50 million of EBITDA synergies in FY19 with $8 million already delivered in FY18. We have also exited the loss-making Sun Bets and Luxbet businesses. Recent regulatory reforms have created a more positive and sustainable operating environment for Tabcorp. And we've extended our debt maturity profile to derisk and secure the balance sheet for the long term.

We’ve stepped up investment in the digital customer experience and the digitalization of the business. In fact, our lotteries business experienced its fastest digital growth ever. We brought new products to market, such as changes to Powerball, which by the way has an $18 million jackpot tomorrow night. And other new products include TAB Multiplier, and Keno Mega Millions in Queensland. We are well positioned for the future, and this is reflected in our full year dividend of $0.21 per share and our revised FY19 dividend target.

If I can now take you to the statutory results on slide four, the contribution of Tatts earnings from 14th of December 2017 is reflected in the growth rates. Statutory NPAT of $28.7 million, was impacted by significant items of $217.5 million after tax. And given the significant changes to the shape of the group in FY18, we’ve presented pro forma results for the group and for each business unit. And this provides an annualized picture of the group's performance. And at a group level, pro forma revenues and earnings were up more than 2%, respectively.

Slide six and seven give you the group and business results on a statutory basis, reflecting the contribution from Tatts from 14th of December.

Now, to an update on integration program on slide nine. We've been focused on delivering the benefits of the integration as efficiently as we can while making long-term decisions and maintaining momentum in each of our businesses. We have a highly qualified team in the integration management office, and we’ve embedded achievement of the synergies into our business plans and the KPIs for our senior management team. And I want to call out some of the key points across the five boxes on this slide.

We’ve put in place a strong leadership from Tabcorp and Tatts. We have been pleased to see the cultural similarities across the companies, and achieving a strong aligned performance culture is a key imperative. We have consolidated corporate functions and achieved cost savings and headcount reductions, and we have commenced a rationalization of our combined property portfolio.

In Wagering & Media, the integration of UBET is well underway with a focus on fixed odds management and market and product expansion. Adam Rytenskild and his new team have done an excellent job of building momentum in the Wagering & Media business, achieving double-digit earnings growth, joined this period.

In technology, we are making decisions on core systems and removing duplication that will underpin the synergy benefits in later years.

In Lotteries & Keno, we have integrated the marketing teams, and we are planning to include South Australia in our pooling for Keno in FY20.

And in Gaming Services, we have consolidated the Dandenong call center into Graham Bell, combined our sales teams and are progressing the collocation of our field services teams.

Moving on to slide 10, and these integration activities have ensured that we are on track to deliver $50 million of synergies and business improvements in FY19, and at least a $130 million of EBITDA in FY21.

Slide 12 provides a reconciliation from our statutory reported results for FY18 to a pro forma financial annualized picture. The adjustments are set out on the slide.

Slide 13 provides the group pro forma picture of the two halves, where you can see the significantly improved second half performance with EBITDA growth of 7% on the pcp. There were two key drivers of the second half performance, the first being VC margin expansion, supported by strong digital growth; and the second being good cost control, combined with the $6 million of EBITDA cost synergies and the closure of Luxbet in the first half.

It's important to note that the pro forma results in the PCP have been adjusted to exclude some Sun Bets, incorporate the impact of the purchase price accounting, and some minor adjustments made to present Tatts financial results under Tabcorp’s accounting policies.

Slide 14 sets out results for each of the businesses on a pro forma basis to illustrate their underlying performance. And I'll take you through them in more detail now, kicking off Wagering & Media on Slide 16.

From a wagering perspective, this is very much a new look business with the addition of the UBET business from Tatts and our exit from Sun Bets and Luxbet. Almost half of this business is now digital, complemented by an extensive retail offering in all states, except Western Australia. The customer offices supported by wall-to-wall racing vision through Sky. Under our new team, the focus on performance was maintained, despite business closures, and we had a strong second half with double-digit earnings growth. TAB achieved revenue growth of 2.5% of turnover growth of 2.9%, while UBET revenue declined 0.7%. In our media business, a key milestone was the further commercialization of our digital Sky Racing vision.

Slide 17 shows you that the key drivers for the TAB business have remained strong across digital and fixed odds where competition is fiercest. TAB digital turnover grew at 16.3% off a large base, and it was pleasing to note the growth in active account holders. This was supported by success across the key racing carnivals, a strong Soccer World Cup campaign as well as venue signups. We now have 720,000 active account customers across TAB and UBET. Double-digit revenue growth in TAB fixed odds more than offset the decline in tote betting. TAB outperforms UBET on old KPIs. We continue to see lots of opportunities for improvement across UBET's digital and retail channels, and in product and yield management. I would note here that while it's early days, UBET’s revenues achieved growth of 1.2% in the second half. This is the first time UBET's revenues have grown since FY15. Later this year, we’ll roll out the iconic TAB brand to replace UBET in Queensland, South Australia, Tasmania and the NT.

Moving to slide 18. TAB has historically been able to achieve stronger yields in UBET. Importantly, TAB has also been able to consistently grow, both fixed odds turnover and revenue over time. And therefore, as I’ve said, UBET’s fixed odds performance is a significant business improvement opportunity. The groundwork has been laid through the combination of fixed odds books, the expansion of markets, and customer segmentation. This is already delivering benefits and is a key focus of our team.

Turning to slide 19. Our Lotteries & Keno business led by Sue van der Merwe, has reached into more than half the Australian adult population, trusted brands, a core product proposition that has transcended generations, and an extended retail network complemented by a rapidly growing digital network. The business delivered double-digit EBITDA growth with better VC margin from digital expansion and lower OpEx.

As part of the active management of our product portfolio, we relaunched our flagship Powerball game during the second half. We’ve repositioned Australia's biggest jackpotting game to deliver prizes overall and the bigger jackpots customers want. And they have the biggest Powerball jackpot in almost 10 years, tomorrow night.

On to slide 20, the Powerball revamp builds on changes towards Lotto in FY17 from which benefits flowed into this financial year. We have a favorable jackpot sequence of $15 million plus across our two major jackpot games, and a significant increase in the average value of the jackpot pools, as the chart shows.

Lotteries’ digital sales were up a record 28%, while still achieving retail growth. Digital now makes up almost 18% of lottery sales, and we now have more than 2.9 million registered online players. Investment in our Lotteries & Keno digital platforms and marketing team helped drive digital growth. These included a new website for the lot, which has grown visitation and brand awareness, and enhancements to our Lotteries & Keno apps. As part of our plan to introduce more digital elements into retail, we’ve rolled out new electronic point-of-sale displays in more than 1,000 of the 4,000 lotteries’ retail outlets.

Keno has also benefited from a digital focus in what has historically been a retail-only offer. Digital share increased from 0.7% of total sales in FY17 to 3.8% in FY18. We saw the launch of Keno Mega Millions in Queensland in March, and we expect to launch Mega Millions in Victoria in FY19.

On to slide 21. Under the new leadership of Frank Makryllos and his team, Gaming Services has a portfolio of businesses with national reach, underpinned by contracts and licenses. Pro forma revenue and EBITDA for the Gaming Services was essentially in line with the pcp. EBIT however declined by 5.8%, as a result of softer second half revenues and depreciation and amortization increase of $7.5 million for seven months of the year. This was driven by the extension of the Centralized Monitoring System license for Max in New South Wales. Max, and Maxtech are businesses characterized by stable annuity style revenues, augmented by project work.

In TGS, new gaming machine arrangements in Victoria, announced this financial year, provide welcome certainty for the industry, post 2022. The TGS team moved to extend contracts with existing venues to beyond 2022. While these extensions come at a lower margins, they support the sustainability of the business. Machine numbers dropped by 300 in FY18 with a further 600 contracts having expired since yearend. This will have a negative impact on our earnings in FY19. We now have 7,800 machines, of which 98% are contracted to 2022 and beyond.

TGS continues to engage with its customers on contract extensions. And we are also working to leverage the scale of the combined business to attract new signups across Victoria and New South Wales, where the market is both large and fragmented.

eBET’s performance was adversely impacted by the uncertainty associated with the merger and the competitive pressures, and the diversity of Odyssey. With the merger now complete, we are very focused on improving the performance.

Slide 22 provides an overview of Sun Bets which recorded an EBITDA loss of $37 million, and we’ve signed an agreement to exit the business and it has ceased trading. The Sun Bets opportunity was about entering a large growing and well-regulated market with an established partner in News Corp. with whom we still maintain a strong relationship. However, the business didn't meet our targets and we made the decision to exit.

On slide 24. Capital expenditure for the year was $240 million on a pro forma basis, in line with BAU CapEx in prior years. Over the next two years, integration CapEx is expected to be $70 million, primarily related to systems consolidation and retail enhancements.

Tabcorp is also undertaking two major property projects in the next two years. The relocation and consolidation of legacy data centers and the fit out of the Ann St. premises, which is held under an existing tax lease. The fit out of Ann St. is expected to be offset by the planned sale of our Brisbane properties in FY19. The data center consolidation highlights one of the benefits of bringing the companies together. The total expected cost of the relocation is $31 million less than Tabcorp and Tatts had budgeted to spend on a standalone basis.

Moving to slide 26. Tabcorp's balance sheet remained strong with gross debt to EBITDA of 3.4 times at year-end, within the target range of 3 to 3.5 times. Tabcorp intends to maintain an investment grade credit rating. And during the year, Tabcorp successfully refinanced the $1.8 billion bridge facility, taken out to fund the acquisition of Tatts, with long-term maturities in the U.S. private placement market. And the Board has declared a final dividend of $0.10 per share, bringing the full-year dividend to $0.21 per share. In FY19, we are targeting a payout of 100% of NPAT before significant items, amortization of the Victorian wagering and betting license and purchase price accounting.

On to slide 28, another defining aspect of FY18 with significant regulatory change. And I've always believed that gambling needs to be well regulated, delivered in line with the public's expectations, with the proceeds shared with the community through taxes. Recent reforms tick these boxes.

The Federal Parliament has passed legislation banning synthetic lotteries with effect from January 2019. During the year, we saw most states follow South Australia and announced plans for point of consumption taxes. These new tax regimes will see states generate revenues from bets placed by their residents with the Northern Territory and the other interstate license bookmakers, for the first time. This is expected to commence in Queensland in October 2018, and in other jurisdictions from January 2019. And we are working with governments and racing to ensure that the significant fees and taxes, we already pay under our state licenses, are recognized in line with the principles announced.

Restrictions on gambling advertising during live sports broadcast came into effect in March and building on moves to ban credit betting and online in-play betting, the Commonwealth and states are focused on developing a national consumer protection framework for online gambling. These reforms will create a better regulated industry and a fairer playing field.

So, as I take you to slide 30, we’ve entered FY19 with four main priorities. The first being progressing the integration and delivering the expected benefits. The second is to execute on growth opportunities across each business through improving the digital customer experience, deepening the integration of digital technology in retail, launching new products and harnessing our CRM capability as a combined group. We will also continue to invest to maintain the highest levels of regulatory compliance. And finally, we will remain disciplined with OpEx, capital investment and balance sheet management.

Thank you. And I will now open the line up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from Don Carducci from JP Morgan. Please go ahead.

Don Carducci

Good morning, everyone. My first question is, with the point of consumption tax being different rates across some states, will this inhibit Tabcorp's ability to grow market share in certain aspects of wagering, or do you see the point of consumption tax changing again in the near future?

David Attenborough

The first point is, we see the introduction of point of consumption tax as a positive regulatory change, and we see that being rolled out across the states over the coming 12 to 18 months. The difference in rates, initial rates, we are managing and we are certainly looking to see the rates aligned over time. And we would hope that over the coming years the rates will align across all states.

Don Carducci

And with retail turnover declining a lot, you mentioned a property rationalization. Can you please walk us through some of the features of this?

Damien Johnston

Don, Damien Johnston. The key features, so property rationalization comment is really related to corporate style properties. We’ll be exiting Bowen Crescent, which is a corporate property we’ve had for a long time, and the reallocation of the data center from that property is key to that. In the Tatts, corporate properties in Brisbane, we have two offices, LB, which has a legacy data center. We’ll be moving that data center and combining it with the legacy data center from Bowen Crescent. And we’ll also be exiting, Woolloongabba office and the staff will be relocated to Ann St. So, they’re a couple of the very large projects. Of smaller projects, which are part of the integration strategy, will look at the opportunity to consolidate in an operational area. And a good example of that is our field services team is based in Vermont, Victoria. We’ll be consolidating Vermont operations into Dandenong in the coming half. So, those tactical type consolidations will also occur during the next year or so.

Don Carducci

And then, my final -- just a quickie question here. Media revenue was only slightly up in the second half. What can we expect from license payments for Sky rights into ‘19? And will the opportunity be much greater internationally than it currently is domestically?

David Attenborough

So, we’re not giving guidance on the payments to be expected from the digitization of the Sky vision. But, certainly, the effect of FY18 coming in towards the end of it was small. But, we certainly see the opportunities of digitalization of the Sky vision as very positive for the media business going forward. And there are continuing opportunities internationally to develop the reach of our vision and also to manage the vision for other countries. And recently, we’ve started managing vision distribution for South Korea. We also manage vision distribution for a number of other countries as they look to expand as well. And that's a core area of expertise for the group.

Operator

Thank you. The next question comes from Matt Ryan from UBS. Please go ahead.

Matt Ryan

My first question is just related into your synergy targets. And I guess I’m referencing on slide nine where you sort of outlined timing for changes within the UBET. So, I guess, I'm interested in knowing when the large part of those UBET synergies are going to come through. We’ve obviously got numbers by year now. But, I imagine that UBET part of this synergy process is a very large part of it. So, could you just talk through the timing around that? And also, there is a comment there around harmonization of tote products. If you could just clarify what you meant by that comment?

Damien Johnston

Sure. Matt, Damien Johnston. Perhaps might be easier to talk to slide 10 where we can see the profile of the revenue related synergies as say are expected to flow over the next three years. As you pointed out, the large part, the large majority, vast majority of those -- the EBITDA from revenue is from UBET business. What we saw in the second half of ‘18 was some initial improvements that related to fixed odds. And fixed odds is a big thing going forward. And the fixed odds improvements came from offering more fixed odds markets. So, we’re already expanding the amount of fixed odds markets that customers can bet on. And of course we’re managing the yield. The yield improvement strategy is being implemented -- well, partly implemented. We expect it to be mostly implemented during the next half. So, if you look to FY19, you will see $5 million of net benefit. Actually the underlying revenue growth should be higher than that. That bullet on the right hand says that we’ve allowed for the introduction of the Tabcorp model across UBET states that includes things like digital commissions. So, we netted the cost of those things against the revenue benefits. So, fixed odds revenues should be picking up during the course of FY19. The substantial part of the actions to drive yield improvement will be implemented this half. And then, finally, that will be fully implemented when we get into FY 21. So, the trajectory over ‘19, ‘20s is largely a fixed odds growth stream.

FY21 is where you really see some of the retail improvements coming through as well, and that's partly the reference you asked tote harmonization. By the we complete FY20, we will have completed the systems integration, the host systems, the harmonization of the products. And we expect to see the full run rate running through in FY21. So, fixed odds early; tote harmonization, product harmonization during FY20, and full run rate in ‘21.

Matt Ryan

So, the harmonization you’re referring, that’s nothing that the customer are going to be able to see themselves.

Damien Johnston

There’ll be some changes. So, in some cases, it’s new products of the customers. So, we’ll be introducing -- so, if you’re UBET customer, today, you don’t get cash out coding. [Ph] They’ll see that type of enhancement coming through. So, yes, there will be new products for customers as part of their process.

Matt Ryan

Okay. Thank you. And then, just the wagering VC margin, really a lot of it changed over the past 12, 18 months. Just curious on what your thoughts are around 2019, whether you think that will sort of a flat VC margin.

Damien Johnston

Look, I should probably just comment on what we saw in FY18 and put a bit of context around that. You will be aware that our theme for a long time has been that there are structural drivers for VC margin enhancement in the business and the key ones have been the strong growth in digital and of course we saw particularly strong growth continuing through the FY -- financial year. So, that’s positive for margin improvement for the obvious reasons. We’ve also got margin expansion from fixed odds products where by and large we pay lower taxes and fees on fixed odds revenues than we do on racing --- sorry on parimutuel. So, that trend has continued.

What we also saw in 2018 was a favorable mixed variance, because sports grew more strongly than racing, and that’s obviously assisted by Soccer World Cup. So, that’s a positive mix for us. And going forward of course, structurally, sports has been growing stronger than racing. So, they are the positive trends.

What we’ve seen in the last year or so, as the business model has evolved, we saw the introduction of digital commissions, which is very important for us because obviously it drives strong alignment with our retail partners but it allows us to drive the retail transformation -- or the digital transformation, I’m sorry, of the retail business. And the benefits of that are partly reflected in the very strong digital growth rate. In this second half particularly and in the year, we are cycling the introduction of those commissions in previous periods.

And of course, you can’t see any race fields increase in the period. So, there is -- it was a very clean period for us, perhaps the one perhaps I should call out is that Luxbet of course trading after the first half. If we took out the effect of Luxbet, then the VC margin would have actually been higher than what we showed. So, looking forward this next year, we’ve already announced that there are some race fields increases announced by Victorian race in WA. So that -- will be aware of those coming through. But, of course, the underlying trends are positive for us. So, particularly good period for us in the year just gone. I think, this illustrates the structural positioning of the business.

Operator

Your next question comes from Larry Gandler from Credit Suisse. Please go ahead.

Larry Gandler

Similar question for me, except with regards to lotteries VC margin. Was digital -- the strong growth in digital, the major influence on the uplift in that VC margin or is there some other factors?

Damien Johnston

Larry, that is the key driver. And you saw on slide 20 where we set out the strong growth in digital that’s 17.7% of lottery sales through digital, and the growth rate about 28% in the period. So, that’s positive for margin.

Larry Gandler

So, that’s the major -- it's quite a substantial move, so I’m just -- that is the major fact thee, okay. And next question with regards to wagering. Obviously, for a modeling, you kind of need to have a feel for the influence of Soccer World Cup, considering it’s an intermittent event. Just wondering if you can give us a feel for maybe the revenue contribution in the half.

Damien Johnston

Yes. So, if you are looking at slide 16, I can see the revenue growth overall at 0.7%. That of course is starting a period where we had Luxbet. So, if I just talk in terms of ex-Luxbet, that 0.7% would have been 2% revenue growth, and ex-Soccer World Cup would have been about 0.5%.

Larry Gandler

Okay. So, you are on slide 16…

Damien Johnston

Yes. 0.8, I beg your pardon, 0.8%, ex-Soccer World Cup in H2 and ex-Luxbet.

Larry Gandler

Okay. I just want to clarify, you are on slide 16?

Damien Johnston

Yes.

Larry Gandler

2H ‘17 was 0.7%?

Damien Johnston

Yes. So, if you took out the effect of Luxbet, then, it gets you to 2% growth.

Larry Gandler

Yes.

Damien Johnston

And we within that 2% growth is Soccer World Cup. If you took out Soccer World Cup, it would be 0.08%.

Larry Gandler

Okay, great. That’s good. Thanks. And Dave, one last question perhaps for you. With point of consumption tax coming in, it might be the case that bookmakers push prices up to reflect the tax, but the tote -- the punter pretty much determines the price. Just wondering if you can sort of think about the dynamic there, whether we’re going to see, either tote become relatively better value for the punter in a POC environment.

David Attenborough

You’re quite right to call that out, Larry. The tote pricing is in some ways, compared to fixed odds pricing at the face of it. And should the pricing increase from the bookmakers, the tote pricing will appear more competitive in a number of cases. So, it would be a positive outcome for us.

Larry Gandler

Okay. And do you expect then the revenue movements to diminish, the revenue erosion to diminish?

David Attenborough

So, certainly, how we are focused on the business, Larry, is we have a number of initiatives that we are looking to introduce on the parimutuel side and including instruction of Longitude in the first half of the coming year. And certainly, we are looking to improve the position of parimutuel betting.

Operator

Your question comes from Mark Wilson from Deutsche Bank. Please go ahead.

Mark Wilson

Just a question on costs, very good performance on costs in the second half in wagering and also lotteries. Just wondering, what you are targeting going forward relative to revenues?

Damien Johnston

Mark, our absolute focus in terms of cost next year is to deliver the synergies that we've held out on slide 10. You'll see that in that -- on that slide, we expect to see $45 million of cost-related EBITDA improvements next year, which is an incremental $39 million on what we saw in FY18. So, the focus is absolutely on delivering that. Of course, in a boarder context, we are still running the business and competing hard against competitors. Some of the things around investment in marketing and technology, particularly digital technology will continue. So, I think overall, we are looking for a very positive outcome on the expense line, reflecting the benefits of those synergies as they come through next year, but also reflecting the fact that we are competing hard in a competitive marketplace. So, we’re looking for a strong result on OpEx.

Mark Wilson

Yes. I guess would look at it, ex synergies. So, maybe if we can just look at the second half, what actually drove the reduction in OpEx in both wagering and lotteries?

Damien Johnston

So, wagering and lotteries, there’s a couple of I think call-outs here in the second half, was that your specific question? In the second half of course, in wagering, we’re cycling the closure of Luxbet, certainly important driver on the cost line. Advertising growth was strong in that period. And if that’s -- advertising -- underlying advertising growth was quite strong in lotteries. So, we’re cycling actually a strong period where a number of new initiatives were launched in 2017, like the lots and some issues around product. So, the underlying growth is probably north of CPI, which really reflects the investment in marketing and technology.

Mark Wilson

Right. And that’s what you would indicate going forward?

Damien Johnston

Yes. I think that’s reasonable, because the marketplace is a tough one, currently. And I think those trends will continue. And of course what we’ll see coming through are the benefits of the integration synergies, which is going to make a very positive impact on the overall cost outcome.

Mark Wilson

And one final one. Cash flow, it looks that was very strong. What were the key drivers there?

Damien Johnston

Well, a strong EBITDA performance in the second half. And as you know, the business model of the Company is very much a cash-driven business model. We have very low levels of debt and inventory. So, I think, largely, it’s a solid operating performance and good cash conversion.

Mark Wilson

And timing of payment associated with the significant items, are they more fiscal ‘19 than ‘18?

Damien Johnston

The Sun Bets exit payment is an FY19 cost. The majority of the Tatts related spend will have been incurred in 2018, and the Luxbet closure costs were largely non-cash, particularly [ph] there was some cash costs that incurred in 2018.

Operator

Thank you. Your next question comes from Monique Rooney from Morgan Stanley. Please go ahead.

Monique Rooney

I’ve got a question on the lotteries business. I’d just be interested to understand if -- what the volume and cannibalization impact was associated with the Powerball price increase, and was this ahead or below your expectations?

Damien Johnston

The Powerball price increase has been implemented towards the end of the year. Overall, it’s been a positive introduction. Typically, there’s around sort of 30% to 50% of the benefit will flow through, net of cannibalization. That’s probably a bit early to call. At this time, will probably be more -- sorry, better placed in 12 months time, but the early signs are positive. And we expect that that game change overall is going to have a positive impact on the performance in lotteries. And really, I think thinking into next year, the big drivers will be that very strong digital growth that we’re seeing. And I think the Powerball changes, we’ll be able to talk in more detail about those during the course of next year. But, they will expect it to have positive impact.

Monique Rooney

And maybe just on -- I mean, you talked about strong digital, but is there any thoughts about taking the distribution wider? I know you’re going look out for New South Wales petrol stations. But, I mean, is there any kind of thought to expand distributor wider for lotteries?

David Attenborough

There is some. Sorry. It’s David here. Yes. There is some work being done around at the retail network. If you look at the retail network, it has declined a numbers over the last few years. And work continues around ensuring that each community is properly served. And one of the areas is petrol convenience, given the different trading hours that they provide. And certainly, you could expect to see some changes in that part of the retail network.

Monique Rooney

And maybe just to kind of turn to wagering. Just interested on your marketing spend. I know, when you -- it sounds like you guys do mid-single-percentage of revenue. But, when you look at your competitors, they spend about 20% to 30%. Understand, on dollars, obviously you still spend a fair bit, but is less than some of your peers. So, in the current environment, are you happy with that marketing spend, or do you think that potentially you might have to increase this?

David Attenborough

So, we are continuing to increase our marketing spend. We think we’re -- well, we know we’re very well-positioned as the TAB business, very strong brand, our digital assets are scoring the highest they’ve ever scored in customers satisfaction measures, the vision is cutting through. So, we will be increasing our marketing spend. We are looking to compete in that business strongly. But also, we are looking to manage the areas of cost in the business that we can reduce in order to provide ammunition, to put into that side.

Monique Rooney

And maybe just one last one for me. Just I guess in the capital management, you have walked away from mentioning any share I guess buyback. But, I’d just be interest in terms of -- I know WA TAB potentially come up for sale, and you are sitting towards the higher end of your own gross to debt EBITDA covenants. Would that prohibit you from participating in a sale like that?

Damien Johnston

Monique, it’s Damien. I think they’re both good points. Clearly, we see WA TAB privatization process unfolding. That’s something we will monitor closely over the coming 12 months. And we’ll be well placed to participate in that process if we choose to do so. Once the gearing ratio is at the higher end of the range -- it is actually within the within the range, and the pro forma 3.4 times that we pointed to in deck, actually includes the effect of having just paid the Victorian lotteries license payment of $120 million. We’ve allowed for the payment to exit the Sun Bets business of that $70 million. So, those numbers are included in that ratio. And the trend for the business, as the EBITDA grows is that ratio can come back. So, we’re very comfortable with where we’re at. Obviously, we expect that ratio to improve as we look across the integration period and the EBITDA benefits start coming through. But, we’ll be well-placed to participate in the WA Tab process if that’s how it unfolds during the course of the year.

Monique Rooney

And what about the buyback. Would there be…

Damien Johnston

No reasons. [Ph] As mentioned, with WA TAB being a potential opportunity for us, that would be basically factored into thinking. So, the buyback would be off the table for that reason alone. And because we are at the top end of the gearing range, it wouldn’t be appropriate to conduct it. So, WA TAB says that’s off the table for the being. And then, we will have a look down the track, based on really the priorities for capital and WA TAB is potential for one of those.

Operator

Your next question comes from Nick Basile from Goldman Sachs. Please go ahead.

Nick Basile

Just a question I have in relation to the integration of TAB and Tatts. How confident are you of a smooth transition of those UBET customers to the Tabcorp brand platform? And, what perhaps are the reasons of high integration costs in this next year? And I guess, following on from that. Can you provide a sense of what those integration costs are expected to be, taken below the line in FY19?

David Attenborough

So, I’d just deal with the integration point on the customers, and then, you take over on the cost side. So, on the customer side, we are absolutely focused on ensuring a smooth transition. It is -- and one of the first steps we’ve highlighted in the pack is, on the back of what we are doing around the fixed odds side and the adding of additional products and markets, we will be transitioning the brand on the UBET digital assets, post carnival. There will be a real focus to make that as smooth as possible. There is always a risk that some clients will not be happy. But, we believe that by really focusing on a per customer basis and managing and adding to the products, they have got are not changing the environment dramatically for them, post carnival, but adding value to it that we can retain those customers and grow them.

Damien Johnston

To the cost question, we previously indicated implementation cost of around $140 million, roughly half CapEx and half OpEx. And we are working towards that. We’re early into the execution phase of a pretty large and complex integration program. As we’ve indicated we’ve got two years to run on that. So, we are very focused on integrating and moving that indication previously of around $140 million. It is possible of course that it could be a higher cost, but that’s something that we would address down the track.

Nick Basile

Okay. Thanks. So, that’s reiterated, that 140 for now. Just another question on the Gaming Services division, things like those issues -- sort of items there, which impacted the result, how we should we think about return to business as normal into ‘19? How many one-offs should we expect impacting ‘19 or should return to sort of a more stable operating outcome?

David Attenborough

So, I’ll start and Damien will add some value at the end. Gaming Services is a business that is in transition. Its performance has been impacted by a number of matters. One, the disruption and uncertainty from the merger, particularly in the first half the divestment of the Odyssey business. And although it was a small business, it took an incredible amount of focus from the team in gaming to do a smooth divestment in the time, to meet the deadlines of the merger. And also, the third element is the roll off of some of the TGS contracts that completed that roll off in August this year. But, these were the contracts from August 2012 that ran for six years.

So, the combination of those transition matters. But, we are now in a much clearer area of certainty. And what do I mean by that? Well, the merger is complete. So, we’re clear of the merger and the team are now really focused. We’ve got the Vic EGM entitlements that have now been -- clarity has been given out to 2032, and that allows us to get cracking on extending contracts. And we've had the license extension for the Max monitoring business. And the delivery of that monitoring system and all the regulatory requirements of that are largely complete. So, we are in a position of much more certainty now across that gaming business.

And now, the team are really focused in a number of areas. We've been carrying out, and we've highlighted the integration of some of the teams and putting in place a new leadership team within gaming. And there is a real focus now on not only extending contracts within TGS but using the scale of the group and the other offerings of the group to really drive new sign-ups. And from the eBET business through the combined sales team, we are really looking to drive a strong sales outcome from that business and from those systems really as part of a combination with the Max businesses. So, looking ahead to FY19, yes, there is some fall off of those EGMs from the TGS business under management, but there is also some building some real momentum in the pipeline and some real sales momentum. So, the sort of two to three-year outlook for that business we believe is very positive.

Damien Johnston

Yes. I’ve got nothing to add. I think that’s a good summary.

Operator

Your next question comes from David Fabris from Macquarie. Please go ahead.

David Fabris

I've just got a few questions on lotteries and I'll follow-up on wagering. Just on lotteries, are you guys planning to tweak or reprice any other games over the next 12 months? And secondly there, are you aware of any potential jackpot fatigue, given the Powerball game changes as in customers may wait longer to chase those higher jackpots than previously?

David Attenborough

So, we are not planning any product pricing changes over the next 12 months, any other. And certainly, we are seeing really strong base activity across all the other games. While these big jackpots are playing out across both Oz Lotto yesterday and the Powerball product tomorrow night. So, one of the things we do monitor is the play across the other games. And what's quite interesting is, these big jackpots drive extra footfall. And in fact, the other base games have been positively impacted as well. So, it's very much lotteries is driven by larger jackpots that does drive increased activity. But, it's -- there is a large level of base play across, particular on Saturdays.

David Fabris

And just on the costs in the second half there in the lottery business. Were there any costs associated with the relaunch of Powerball that we should be aware of?

David Attenborough

No. There’s nothing there to call out, David.

David Fabris

And just on wagering then, if I may. Just focusing back on the Soccer World Cup. So, we see $70 million [ph] revs in the second half of the year. What gives you the feel for the EBITDA margin on the Soccer World Cup products?

Damien Johnston

Above high because of the higher translation to VC. So, probably -- higher than average conversion.

David Fabris

And just one last question, just looking at win rates across the Tabcorp business sort of at the group level and the wagering division. It looks like it’s coming lower than previously, just going to get ahead around whether it was -- so just a soft patch, given luck factor, or if there’s been any changes or repricing in your wagering product?

Damien Johnston

We’ve given the yield performance in a couple of different slides. Overall, the yield performance for TAB was 14.7% for the year, which is broadly in line with what we said previous years at around 14.6%. So, we have made some changes that have impacted yields by production of Multiplier but we also have been managing yields effectively. So, yes, there will be some things that cause the yield to go down, things like multiplier would be one of the drivers for the strong digital growth. That’s an account-only product. So, you have to have an account. And of course, the vast majority of the account turnover is digital. So, overall, we’re seeing a really satisfactory performance in that area.

Operator

Thank you. [Operator Instructions] Your next question comes from Rohan Sundram from MST Financial. Please go ahead.

Rohan Sundram

Just a couple of quick questions, firstly on leverage just following up on David’s question. Can I ask -- is there any regulation that governs the frequency at which you can make changes to the games?

David Attenborough

There are there. They do require regulatory approval, any changes to these games. And also, they’ve got to be well thought out and planned, so that they’re positive for the customer. You don’t want to be making changes that aren’t driving and meeting customer behavior. So, the Powerball changes were done because the customers absolutely were wanting large jackpots.

Rohan Sundram

So, are you saying that you can do it in any reasonable timeframe as long as you have approval?

David Attenborough

Correct.

Rohan Sundram

And just secondly on wagering, just a general question. Have you noticed any change in competitive behavior in the last six months on the back of all the consolidation and the changing regulatory landscape, anything noticeable?

David Attenborough

The competitors are out there, they’re trading very hard, and they have been for a number of years. So, it’s fiercely competitive, but nothing unusual relative to -- it was fiercely competitive last year and the year before. And we expect that it’ll be competitive in the years ahead.

Rohan Sundram

Just my final one, just a quick one for Damien. Can I confirm the pro forma EBITDA of 989? I’m looking at slide 12. Is that absorbing the Luxbet loss?

Damien Johnston

That includes Luxbet in the -- in that number? So, we haven’t pro forma it out Luxbet. That’s in the result.

Operator

Thank you. Your next question comes from Anthony Longo from CLSA. Please go ahead.

Anthony Longo

Just a quick one on the debt level, so looking at gross debt to EBITDA. So, I guess, following on from Monique’s question early. But, in terms of -- how are you guys thinking about that ratio? So, in time as those benefits come through, do you expect -- or should we expect debt levels to ultimately go down or is it something that you sort of may relever [ph] the business to potentially take into, probably have a crack at WA TAB, which -- the natural owner of? And also, potentially a lower risk entry into the U.S. as well, so maybe a bit more clarity on that?

Damien Johnston

So, perhaps just in terms of how we’re thinking about it. We’re thinking about it positively. We’re in the target range. This is the first year of the combined entity. We’ve had to go through a lot of investments with -- so, we’re well priced. I think as you point out, you would expect to see that ratio come down. The callout over the next year or so would be some of the key capital spend that we highlighted in the CapEx page. So, that’s an above normal level of investment. But, that's to be expected as we implement a couple of sort of one in 20-year type changes with data centers and the like. The underlying trend will be what you say, expect to see that come down. And in terms of capital priorities, WA TAB may well be one of those. And if we got to the bottom end of that gearing ratio, then, really it’s a question of capital priorities, or capital management. But that’s for the near future.

David Attenborough

And probably commenting on the -- your mention of the USA market. We’re monitoring and keeping developments on that market and what's going on. But, having said that, right now, our focus is on this very large transaction and integration program, and that’s our main game. But certainly, we continue to look at the opportunities as they develop over there.

Anthony Longo

Excellent, thanks for that. And then, just back on wagering, so those second half numbers. So, just looking at I guess the fixed odds sports yields, particularly like while fixed odds revenues appear to be up year-on-year, it looked like -- the second half yields look really weak on a sequential basis. Is that all Multiplier, and how much of that differential would you attribute to advertising, if you may - if I may?

Damien Johnston

So, I think you’re probably looking at the slide 35 in the appendences? Yes. So, the left hand side is the TAB performance. And the TAB performance at 13.4% is sort of broadly in the range. So, we’d expect for sports yields 40% for the year. And as we’ve said, in previous periods, it can bit higher or a bit lower in the course of the year. So, in the first half, 15%. We typically expect sports to yield a bit below racing -- sorry, racing at 15% for the year and sports, giving an overall fixed odds yields for TAB of around at 14.7% is overall a solid performance, and that’s where we would expect to be. It includes the effect of the various initiatives and it all comes back to managing that book, the customers and the margins as well as we can.

Looking across to the UBET side, what you see really is the opportunity that we have to really see some serious improvement in fixed odds revenue growth from the UBET side. You’ll see on slide 18, if you look at the historical trend, the UBET brand fixed odds revenue growth has been 6.9%, 5.8% 6.3%, around 6% per annum versus double digits plus for TAB. And pleasingly, in the second half, which is close to first half since the merger completed, we saw a pickup in fixed odds revenue growth for UBET. So, I think that all goes well for what we are doing. And as the integration of the fixed odds teams get its momentum, and the tools and strategies are implemented as we’ve highlighted on the synergy side, we expect to see some momentum in fixed odds across the next 12 months. So, it’s a big opportunity of course. We are very focused on capturing it.

Anthony Longo

I’m sorry. Last one from me. Just sort of looking at I guess with digital, digital has obviously been a big driver of business and opportunity for the margin expansion. How are you guys sort of thinking about lotteries business and then cross selling it to wagering customers? I know, it’s something that -- I mean, perhaps legacy Tatts probably would have tried before. But are you thinking about things like maybe you [ph] might just offer a lotteries ticket processing as you sort of get your bet flip and then stuff like that is? Are there any opportunities on that front? And could that actually gain traction too?

David Attenborough

Yes. There are opportunities to cross sell. We are looking through those working through them. But, we also recognize strength and focus. So, right now, the focus of each team, whether it be the Lotteries & Keno team or the Wagering & Media teams are really driving their products to their customers. But, the opportunity to cross sell is there and we are exploring where the best way of leveraging that.

Operator

Thank you. There are no further questions at this time. I’ll now hand back to David for closing remarks.

David Attenborough

Thank you. I appreciate your time. And I’ll bring the call to a close. Thank you.