TABCORP HOLDINGS LIMITED ABN 66 063 780 709 ( The Company ) ANNUAL GENERAL MEETING 31 OCTOBER 2013 CHAIRMAN S ADDRESS AND MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER S ADDRESS CHAIRMAN S ADDRESS It is my pleasure to provide you with an account of the 2013 financial year as well as some insights on how Tabcorp has maintained its leadership in Australian gambling entertainment. I will also take the opportunity to address matters relating to the regulation of the Wagering industry in Australia. Following my address, our Managing Director and Chief Executive David Attenborough will provide management s perspective on the year in review. David will also provide an overview of trading for the first quarter of the 2014 financial year. 2013 review We can reflect on 2013 as another year of transition for Tabcorp. The business navigated extensive industry change, particularly in Victoria, while implementing initiatives to further strengthen the company s diversified business model and enhance our competitive position into the future. Victoria s new gambling licence structure commenced in August 2012. As I foreshadowed this time last year, this had a significant impact on Tabcorp s operations and earnings in 2013. Tabcorp decommissioned its former Tabaret business and launched a new gaming services business, Tabcorp Gaming Solutions or TGS. TGS leverages the company s extensive capabilities and expertise in gaming. Following its launch in Victoria, we plan to extend the business into New South Wales early next year. We also transitioned to Victoria s new Wagering and Betting Licence on 50:50 Joint Venture terms with the Victorian Racing Industry. It is a credit to the management team and to all our employees that the entire transition was achieved while maintaining revenue growth. The extension of key licences during the year was a significant achievement. We extended the exclusivity period of our NSW retail wagering licence to 2033. The NSW TAB has been part of the fabric of NSW racing and entertainment for almost 50 years, and NSW retail continues to be a core distribution channel where we offer wagering through more than 2,100 outlets. In addition, we secured a 25-year extension to our Queensland Keno licence to 2047. Queensland Keno is a critical part of our Keno lotteries network on the Eastern Seaboard and the licence extension positions us well to continue to enhance the Keno experience for our customers. We ended the 2013 financial year in a strong position, having substantially de-risked the business and having extended key licences. 2013 financial results and dividend I would now like to provide you with an overview of the company s financial performance during the year. Tabcorp reported statutory Net Profit After Tax of $126.6 million. This was a significant decline on the prior year and was foreshadowed as a result of the loss of a full year of Tabaret earnings and the changeover to the new Victorian Wagering and Betting Licence terms. Page 1 of 9
Page 2 of 9 2013 AGM Addresses In addition to the challenges of managing a significant change agenda, the business faced a subdued macroeconomic environment and soft consumer sentiment, particularly in the final quarter of the year. However, the company s revenue initiatives and expense discipline delivered strong growth in revenue, up 2.0% to just over $2 billion and Earnings Before Interest, Tax, Depreciation and Amortisation from continuing operations, up 9.5% to $463.9 million. In 2013 Tabcorp paid dividends totalling 19 cents per share. This constituted a dividend payout ratio of 81% of statutory NPAT, which is consistent with the company s stated policy. We continue to target a dividend payout of 80% of NPAT in FY14. We are focused on driving improved returns from our businesses, and as part of that, the Board recently endorsed a target for growth in Return On Invested Capital of at least 14% by FY16. David will provide more detail on Tabcorp s 2013 financial performance shortly. Market leadership Tabcorp is Australia s leading wagering company and one of the world s largest and most respected wagering organisations. We have continued to strengthen our business in a very competitive marketplace. Tabcorp has successfully grown wagering revenues overall and in the competitive online channel every year since the Australian wagering market opened up to competition in 2008. We have a number of competitive advantages in Wagering - strong and trusted brands in TAB, tab.com.au and Sky Racing; market leading products; and an unparalleled ability to connect with some 1.85 million customers across multiple channels. TAB has long been at the core of Australian racing and wagering - it has been part of Australian life for more than 50 years. It is supported by our Sky Racing media business, which is a world leader in Australian and international race broadcasting. Investments in Market Leadership Much of our investment this year has focused on creating a more exciting and relevant offer for customers via improved digital platforms, an enhanced retail experience and new products like fixed odds on greyhound and harness. We continue to focus on innovation that meets the changing preferences of our customers so that we can capture new opportunities. Just this month, we released an exciting racing website with a simple and fast betting option specifically aimed at users of tablet computers, such as ipads. We are being agile in this fast-moving environment and centre our digital strategy on 100-day plans. We also expanded our successful loyalty program, TAB Rewards, into the Victorian market, enabling us to reward Victorian customers for choosing to bet with TAB. Customers are embracing the fact that they are able to bet with us in some 15 different ways, and this is helping to drive deeper engagement and build on the strong customer loyalty we already have in the market. For example, in a single day a customer might deposit money into their TAB account at their local outlet, then have a wager via their mobile and then bet again with us later in the day at the racetrack. It is this ability to connect with TAB in so many ways to access our market leading range of bet types offered on a market leading range of events that is attractive to our large and loyal customer base. Melbourne Cup Day Next week is always an exciting one for our business since Melbourne Cup day really showcases Tabcorp s leadership in Australian wagering. Research commissioned by us, indicates that 74% of people in NSW and Victoria who bet on the Melbourne Cup, bet with TAB. Last year, over $92 million was wagered with us on the Melbourne Cup race alone. Interestingly, more is bet on the race in NSW than in Victoria, such is the event s truly national appeal. A lot of preparation
has gone into our systems capability to ensure that we are ready to meet strong customer demand on the biggest day in Australian racing. At its peak, our wagering system will be processing as many as 2,000 transactions per second. This is a remarkable achievement in itself. We will continue to invest across all of our businesses to enable them to maintain leadership in their respective markets and underpin future growth and shareholder returns. Responsible gambling At the core of Tabcorp s business and ingrained in our DNA is a strong commitment to best practice in the management of responsible gambling. I am pleased to report that our efforts in this area were once again acknowledged by the Dow Jones Sustainability Index, which recognised Tabcorp as the global gambling industry leader for 2013. This is the eighth time in nine years that Tabcorp has been recognised as the global leader. The index also gave Tabcorp a 100% score for Responsible Gambling, Anti-Crime Policy Measures and Brand Management. Stakeholders Tabcorp s strength as a business is underpinned by the trusted relationships we have built with our stakeholders over many years. We have strategic partnerships with the racing industry, other sporting codes and distribution partners across the country. By ensuring that our investment priorities are aligned, and that we have a shared commitment to delivering our products and services with integrity, we work together to better service our customers. We value our constructive, ongoing relationships with governments and other stakeholders and recognise that their mutual support is integral to the success of our business. We also remain committed to supporting the communities in which we operate. Our community engagement program, Tabcare, is now into its second year and gives employees the opportunity to give back to their communities with Tabcorp s support. During FY13, $1.3 million in voluntary funding was contributed by Tabcorp to charitable organisations. Much of this was delivered in partnership with our stakeholders, such as our annual sponsorship of Greyhound Racing Victoria s TAB Great Chase series. National Approach to Wagering Regulation I would now like to address the issue of wagering regulation. Wagering in Australia is currently regulated on a state-by-state basis. Tabcorp has long held the view that a consistent and national approach to wagering regulation is necessary. Not only is it in the public interest, it is also in the interests of the Australian racing industry and sporting codes, and will deliver a better outcome for government. Tabcorp and the country s other TAB operators provide the bulk of funding to Australian racing through state-based licence arrangements that share a proportion of wagering proceeds. As you know, Tabcorp holds the NSW and Victorian licences which account for 42% of the Australian wagering industry. In the 2013 financial year Tabcorp returned more than $725 million to the Australian racing industry through wagering and contributions from our Media and International business. The licence model of Victoria and NSW, where Tabcorp is the exclusive wagering partner, is the envy of the racing world. The commitments that go with our TAB licences provide the financial support necessary for a thriving racing industry. Page 3 of 9
Page 4 of 9 2013 AGM Addresses The regulatory regime for corporate bookmakers licensed in the Northern Territory is very different to the states framework. These differences have driven the increased activity of the Northern Territory licensed corporate bookmakers, who do not have the same licence commitments that Tabcorp does. Indeed, up to eight cents in every dollar spent with the TAB on a totalizator bet goes to the racing industry. This compares with only 1 to 2 cents in the dollar for bets placed with corporate bookmakers licensed in the Northern Territory. There are three primary areas where conditions for Northern Territory licensed corporate bookmakers are less rigorous than those for TAB. These differences have adverse impacts on the community and the racing industry. The first relates to credit betting. All Australian jurisdictions except the Northern Territory either prohibit or severely restrict credit betting. This means the Northern Territory licensed corporate bookmakers can, in fact, offer credit to punters regardless of where they reside in Australia. The new Federal Government has outlined a policy to prohibit credit betting. Tabcorp commends the government for this policy as it delivers a consistent and national approach to an issue that we believe requires tighter regulation. The second area relates to wagering taxation. This also starkly illustrates the differences between the states and territories. In the 2012 financial year, wagering taxes collected in the low-tax Northern Territory regime were a little over $2 million, despite more than $5.7 billion in turnover attributable to the Northern Territory licensed corporate bookmakers. In the same period, Tabcorp paid $292 million in state wagering taxes in NSW and Victoria on turnover of $10.8 billion, a proportion which is 77 times greater. Given one of the primary aims of licensing gambling products is to return a fair share of the proceeds to the community, the Northern Territory is grossly under taxing its licensed corporate bookmakers. We note that the Northern Territory Government has announced it is reviewing wagering taxation and we encourage them to align its rates with other states. The third area relates to tote odds products offered by corporate bookmakers licensed in the Northern Territory. These are products derived off our totalizator dividends. In simple terms, totalizator dividends are calculated taking into account TAB s funding commitments to support the racing industry. Totalizator odds offered by licensed TABs were traditionally a mechanism by which the revenue could be shared between punters, the racing industry and the totalizator. The low level of racing product fees and taxes paid by the Northern Territory-licensed corporate bookmakers, combined with the fact that they don t have obligations to share revenue derived on tote odds betting products with the industry, enables them to offer enhanced tote dividends to punters. Over the medium to long term this regulatory difference will undermine racing industry funding. A successful Australian racing industry is important to the economic and cultural fabric of the country and should not be taken for granted. As Australian racing s most substantial financial contributor, we want to work with the Federal Government in addressing the inconsistencies in Australian wagering regulation, particularly in relation to tote odds betting, as a matter of priority. Tabcorp is committed to working with the various Governments, regulators and our stakeholder partners to ensure a fairer and harmonised approach to Wagering is implemented in Australia. The National Commission of Audit is looking at ways in which governments can work more productively and eliminate inefficiencies between states and territories. Earlier this year the Government took action on sports betting promotion during live events. We have also seen the Federal Coalition s appetite to address credit betting. These are steps that we support, but we believe the next stage is to ensure more robust, national regulation of wagering that ends state-based fragmentation and promotes a strong, sustainable and well governed industry. Victorian Supreme Court proceedings I would now like to provide you with an update on matters involving proceedings in the Supreme Court of Victoria. As I outlined at last year s AGM, Tabcorp filed a Statement of Claim in the Supreme Court seeking a payment from the State of Victoria of $686.8 million. The State s obligation to make the payment came
into existence when it privatised the Victorian TAB and listed Tabcorp on the ASX in 1994. Tabcorp s entitlement to payment was triggered on the grant of the new Gaming Machine Entitlements and the new Victorian Wagering and Betting Licence in August 2012. The matter is listed to be heard in February 2014. As this matter is before the courts, it is not appropriate to provide any more commentary about it today. I would like to also provide an update on a separate legal matter relating to the Health Benefit Levy. In June this year, the Supreme Court of Victoria ruled in favour of Tabcorp in relation to the application of this levy on our former gaming machine operations. This followed a Victorian Government determination to apply the levy for the full 2013 financial year rather than the 46-day period in which Tabcorp was operating gaming machines before the expiry of the licence. The Supreme Court ruled that the Victorian Government has a discretion under the relevant Act to calculate the levy on a pro rata basis. The Victorian Government has appealed that ruling. The appeal will be heard on 20 February next year. The future As Tabcorp enters its 20 th year in 2014, we are well positioned for the future. Tabcorp is an integrated gambling entertainment business with strong trusted brands, geographic diversification, long dated licences and a unique multi-product and multi-channel distribution network. We will continue to focus on delivering sustainable and superior returns through financial performance, operational excellence and industry leadership. Our strong cash generation will enable us to continue to invest in the business and to deliver attractive returns to shareholders. I would like to thank the management team, led by David Attenborough, and our 3,000 plus employees for their continuing contribution to the success of our company. Their efforts have ensured we are well placed for the future. I would also like to thank my fellow directors for their contribution during the year and to thank you, our shareholders, for your loyalty and continuing support. I will now invite our Managing Director and Chief Executive Officer, David Attenborough, to provide a detailed operational account of the 2013 financial year. Page 5 of 9
MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER S ADDRESS Thank you Chairman. It is now my pleasure to give you management s perspective on the 2013 financial year and the initiatives we ve implemented to strengthen Tabcorp s position as Australia s leading gambling entertainment company. At this time last year, there were questions about the threat of a second retail wagering operator in NSW, how the case involving the operation of Betbox Internet betting kiosks in licensed venues would play out, how TGS would perform and whether we would be able to meet the Minimum Performance Obligation to the Victorian Racing Industry under the new Victorian Wagering Licence. These issues have been largely resolved. We navigated a lot of change in FY13, and in doing so, we have substantially de-risked the business. In the context of this substantial change agenda and difficult consumer environment, we delivered a positive set of results, with strong revenue and EBITDA performance. This was underpinned by good expense management, particularly in the second half, with operating costs down 1.1% on the prior period. With a clearer horizon, this is the right time for the Company to focus on increasing returns. Our stated objective, as fully set out in our Investor Day announcement two weeks ago, is to achieve a Return on Invested Capital of at least 14 per cent by the 2016 financial year. The return in 2013 was 12 per cent. In 2013, we activated initiatives that have strengthened our competitive position and we have set up new businesses that have hit the ground running. We have invested to ensure we have four quality, market-leading businesses, whose resilience is supported by geographic diversification and long dated licences. Wagering I would like to now provide some greater detail on the performance of each of these four businesses, starting with our core Wagering business. This business consists of totalizator and fixed odds betting on racing and sporting events in some 2,900 TAB retail agencies, hotels, clubs and on-course in Victoria and NSW, as well as nationally via internet, mobile, phone and pay TV. The business had a good year, in what was a highly competitive Wagering environment, with total Wagering revenue up 5.9%. The reported revenue result, a 4.8% decline, reflected the allocation of revenue to our Victorian Racing Industry Joint Venture partners under the new 50:50 arrangements. Totalizator revenues make up around 72% of Tabcorp s total betting revenues and it was pleasing that our combined totalizator revenues grew for the first time in a number of years. This was largely the result of Tote Tasmania customers shifting back to being direct customers of our NSW and SuperTAB operations. We are also Australia s leading fixed odds bookmaker. Fixed odds was again a key driver of performance, with TAB fixed odds revenues growing by 25.8% on the back of expanded products and disciplined risk management. Revenues from Luxbet, which competes directly for share against the Northern Territory licensed corporate bookmakers also grew strongly, up 40.1%. Retail continues to be strategically important, contributing $6.77 billion in turnover in FY13. We have removed the uncertainty in the retail environment, closing out some of the risks associated with this important channel which still delivers almost 58% of our wagering turnover. Retail provides us with a great opportunity to showcase the TAB brand in an environment that is fundamental to the Australian wagering experience. We see retail and digital as complementary with around 70% of TAB account deposits being made with cash in retail outlets. Our multi-channel approach allows customers to connect with the TAB Page 6 of 9
brand through a variety of touch points. Using the TAB Rewards loyalty program, we are driving deeper engagement with our customers and building on the strong customer loyalty that already exists. Turnover in our retail and call centre channels declined, partly reflecting the consumer shift to digital, and also generally subdued retail consumer sentiment, particularly in Victoria where trading in licensed venues has been soft. Digital turnover grew 13.6% in FY13, largely driven by betting via mobile devices. In October this year, mobile devices accounted for more than 50% of all our digital sales for the month. To give you an idea of the rapid shift to mobile, this was only 11% in FY12. We continue to make significant investment in the digital space to stay in step with consumer preferences. These investments encompassed upgraded TAB apps, which have exceeded 1 million downloads, improving the online customer experience, particularly the speed and simplicity of our tab.com.au and tab.mobi offerings, and the introduction of a world first in the TAB/Sky Watch and Bet. This allows our customers to watch a race whilst wagering simultaneously on the same ipad screen. Finally, I should mention the growth in international co-mingling, which is the merging of totalizator pools. Some of our most attractive assets are the deep NSW and Victorian pools. We continue to leverage these assets in conjunction with Sky s racing pictures, to expand international wagering on Australian racing. We are now pooling bets with Singapore, New Zealand and South Africa and we continue to look at opportunities in other markets. Our jointly owned global tote gateway business, Premier Gateway International, continues to facilitate the growth of international wagering into our pools. Media and International Turning to our Media and International business. We operate three Sky Racing TV channels through which we broadcast some 90,000 thoroughbred, harness and greyhound races a year. These channels are distributed to audiences in TAB agencies, hotels and clubs and to 2.4 million Australian homes. This business is critically important in supporting and driving TAB s wagering operations and returns to the racing industry. The focus of Sky management continued to be on investing in digital technology and distribution to provide the wagering customer access to the optimal vision and data experience across multiple media platforms. Our Sky business also continued to expand the international export of Australian racing in FY13, securing a new deal with broadcasters in the Middle East and Africa. This means that Australian racing is now exported to 51 countries. Australian racing is highly respected for its quality and integrity and we will continue to expand its global reach. The success of these initiatives in FY13 was headlined by revenue growth of 9.1%, supported by increased subscriptions and the expansion in international operations. With negotiations for TVN media rights underway, it was particularly pleasing to also be able to demonstrate strong growth in racing industry contributions from the business, up 22.5%. We are working through the TVN negotiations and are committed to achieving a fair and commercial outcome. Gaming Services With the lapse of our Victorian gaming licence Tabcorp identified a significant opportunity to use our existing intellectual property and capabilities to create a substantial new business. Our gaming services business, TGS, subsequently went live on 16 August 2012. TGS now supplies electronic gaming machines to licensed hotels and clubs in Victoria, contracting almost 8,500 machines in 166 venues. TGS has secured about 30% of the Victorian EGM market and delivered EBITDA of $58.3 million in FY13. Page 7 of 9
TGS is the only full service, end-to-end gaming services provider in the market that helps venues with their gaming performance across services such as machine supply, the Diamond Rewards loyalty program, venue design and responsible gambling management. In Victoria we are focused on the roll out of the next stage of in-egm loyalty. This, coupled with strong venue service support and ongoing EGM upgrades, will ensure a reliable, contracted income stream for the company going forward. Management has secured the necessary approvals to take the TGS business model into NSW, although we highlighted at our full year results that the benefits from the initial entry would be modest. Keno Let me now take you through our Keno business. Keno gives Tabcorp a presence in the Australian lotteries market and the game is offered in 3,650 venues in NSW, Queensland and Victoria. In FY13, Keno revenues grew 12.2% to $205.4 million, supported by the contribution from our new Victorian operation. The strong EBITDA growth of 23% to $75.5 million was underpinned by a good expense outcome in the second half. One of the main highlights of the year for Keno was securing the 25-year extension to our Queensland Keno licence. This was a great outcome for Tabcorp and our venue partners and provides long-term certainty for our operations in Queensland. On another note, Tabcorp took an $18.6 million impairment charge against the carrying value of our Victorian Keno licence in FY13. This reflected slower customer adoption than anticipated in a tough market. We were disappointed to have taken the charge and continue to focus on improving the performance of the business and increasing transaction volumes. We are doing a significant amount of work around customer and trade awareness and activation. Keno brand awareness in Victoria is now at levels comparable with NSW and Queensland. Management is also progressing the necessary approvals and technical system changes to enable the pooling of Keno jackpots between states. Regular, sizeable jackpots are instrumental in driving the performance of our NSW and Queensland Keno businesses and linked jackpots would certainly assist in raising the performance of the Victorian business. Capital Our four businesses are supported by Tabcorp s strong balance sheet, which has well diversified sources of funding. We recently extended a $400 million bank facility to May 2018. And we are now evaluating a range of refinancing options for our retail bonds and medium term notes, which mature next May. Following Tabcorp s successful extension of the exclusivity period of our NSW retail wagering licence to 2033, our corporate credit rating was revised to BBB- with a stable outlook. This adjustment did not affect Tabcorp s cost of funds and we are committed to maintaining an investment grade rating. First quarter trading update I will now comment briefly on our revenue performance in the first quarter of the 2014 financial year. Group revenue for the three months to 30 September 2013 was $503.9 million. This was up 3.1% on the prior corresponding period. The revenue performance is largely in line with the trading in the second half of the 2013 financial year, with the Wagering business delivering total revenue growth of 5.4% on the back of continued strong growth in fixed odds and digital wagering. Page 8 of 9
The Media and International business continued to track well with revenues up 10.1% for the quarter and TGS revenues were solid and in line with expectations. The softer retail consumer environment negatively impacted the Keno revenue performance, which was up just 0.4%, and the retail-only Trackside product, which was up 2.2%. However, the overall revenue growth we achieved in the first quarter demonstrates the resilience of Tabcorp s businesses in what are tough external trading conditions. Tabcorp s people Of course, Tabcorp s achievements during the 2013 financial year could not have been realised without the efforts of our more than 3,000 employees. Our people have shown great commitment during a time of significant change and I thank them for their support. It is our intention to provide the best customer service in the market and the quality of our people and their collective efforts are crucial to the delivery of this target. We continue to invest in our people s capability to enable them to perform. A key initiative in FY13 has been the development of our talent management program that aims to foster leadership potential and talent in our workforce. High performing organisations also depend on highly engaged and diverse teams. We have an objective to have at least one third female representation in senior management by 2015. We have been focused in FY13 on ensuring we have the right policies and procedures to achieve this outcome. As part of our diversity commitment, we were pleased to announce new employee policies which increased paid parental leave entitlements from six to 13 weeks and also encouraged and promoted greater flexibility for employees in the workplace. Conclusion In conclusion, we can look back at 2013 as a year in which we successfully managed a significant transformation program and substantially de-risked the business. Our priorities for the 2014 financial year are clear. We will continue to lead the transformation of the wagering industry by providing the most compelling wagering entertainment offer in the marketplace. It is not by chance that we lead the wagering market and continue to grow revenues. We will leverage our unique multi-channel distribution model and drive for digital leadership. This will be supported by ongoing investment in our brands, products, services and customer engagement. For the Media and International business, we will pursue international growth via co-mingling opportunities and seek to retain media rights on acceptable commercial terms. In our Gaming Services business we will focus on growing core revenues in Victoria, expanding geographically into NSW and launching the next phase of our customer loyalty program, which already has 130,000 members. In our Keno business we will drive growth through further product and self-service expansion. Finally, in FY13 we maintained good discipline on costs and management will continue to improve efficiency and manage cost growth across the business. In closing, I would like to thank the Chairman and the Board for their support throughout 2013. Next week is one of the great weeks of the year on the Australian social and sporting calendar. Best of luck if you re having a wager with TAB and enjoy what is always a special Melbourne Cup week. These addresses will be webcast live on Tabcorp s website at www.tabcorp.com.au from 10.00am (AEDT Sydney time) and will be archived on the website for viewing later today. Page 9 of 9