Rank Group Earnings Call: Growth Versus Tax Headwinds

Rank Group plc ((GB:RNK)) has held its Q2 earnings call. Read on for the main highlights of the call.

Rank Group’s earnings call painted a picture of a business delivering solid operational progress and profit growth, while bracing for a sharp regulatory shock to its UK digital arm and grappling with cost and cash-flow pressures. Management struck a constructive tone: core venues, digital and international operations are all growing, returns on capital are improving, and employee engagement is strong. Yet a hefty tax hike, a one-off fraud hit in Spain, and rising employment and lease costs underline that the path to the medium‑term profit target will not be smooth.

Group Revenue and Profit Growth Regain Momentum

Rank’s core financials showed clear improvement. Like-for-like net gaming revenue rose 6% to £419.8m, reflecting growth across venues and digital channels. Underlying like-for-like operating profit climbed 15% to £40.6m, outpacing revenue, as the group’s operating margin improved to 9.7% from 8.9% a year earlier. This widening margin signals early success in cost control and mix improvements, even before the full benefits of recent capital investments and machine rollouts are realized.

Capital Efficiency and Workforce Engagement Move Higher

The company highlighted better capital discipline and a more engaged workforce as important underpinnings for future growth. Return on capital employed increased by 2.6 percentage points to 15.9%, suggesting management is extracting more profit from every pound invested. At the same time, the employee engagement score improved to 8.2 out of 10, indicating stronger morale and alignment among staff. For a venue-led, service-heavy business like Rank, this combination of higher returns and motivated colleagues is key to sustaining performance improvements.

Grosvenor Venues: Machine Rollout Drives Growth

Grosvenor casinos continued to recover and grow, with average weekly net gaming revenue up 6% to £7.8m. The group completed the rollout of 850 additional gaming machines by December, a roughly 65% expansion of machine estate that helped make machines the fastest-growing product. Grosvenor machine revenue rose 11% in the half, while London revenues were up 13% versus two years ago and machine revenues in the capital have surged 26% over the same two-year period. Management sees significant further upside as these machines mature and customer demand is fully stimulated.

Digital Business Grows Despite Higher Tax and Limits

Rank’s digital operations delivered another period of growth and rising profitability, even as statutory levies and slot staking limits weighed on the sector. Group digital revenue grew 8% on a like-for-like basis, with the UK up 9%. Within that, Grosvenor digital revenue jumped 17% and Mecca digital grew 5%. Digital operating profit increased 12% to £17.8m, demonstrating that the business can still expand margins in a tougher regulatory environment, at least for now. This performance is particularly notable given the looming impact of the 40% Remote Gaming Duty rise.

Mecca Venues: Transformation and Machine Adoption

Mecca’s transformation from a traditional bingo operator into a broader entertainment and gaming venue is gaining traction. Net gaming revenue at Mecca venues rose 4%, driven in large part by gaming machines, which grew 9% and now account for 43% of Mecca’s NGR. Electronic play is reshaping the customer experience: 59% of visits now involve electronic terminals, and tablet players generate 75% of main-stage bingo revenue. This shift to digital-style play inside venues supports higher yields per visit and offers better pathways to cross-sell other gaming products.

Enracha (Spain) Delivers Steady Growth

Rank’s Spanish business, Enracha, continued to post solid growth despite broader macro pressures. Revenue increased 6% on a constant currency basis, while underlying like-for-like operating profit rose 5% to £5.9m. Gaming machine revenues climbed 10%, supported by venue refurbishments that enhanced the customer offer. The Spanish operations remain a useful diversifier for the group, contributing both profit growth and learning that can be applied across the international estate.

Regulatory Tailwinds Boost Bingo Economics

While digital faces a tougher tax regime, Rank’s bingo business is set to benefit from a significant regulatory tailwind. The abolition of the 10% bingo duty from April is expected to deliver an annualised £6.5m benefit. Management expects this change to help Mecca achieve double-digit operating profit in the next financial year. With machine penetration rising and electronic play gaining ground, the removal of bingo duty materially improves the economics of the segment and provides more headroom to invest in product and experience.

CapEx Discipline and Targeted Investment

Rank underscored a disciplined approach to capital allocation. First-half capital expenditure was £27.6m, and full-year CapEx guidance has been trimmed to £50–55m from around £60m, largely due to timing rather than cancelled projects. The company is prioritising investments with strong expected paybacks, such as its expanded gaming machine estate and venue refurbishments. This approach aims to support growth and returns while preserving balance sheet flexibility in a period of regulatory uncertainty and rising lease liabilities.

Strategic Initiatives to Drive Next Leg of Growth

Management outlined a range of strategic and operational initiatives aimed at deepening customer engagement and improving monetisation. Mecca is rolling out unified membership to enable cross-channel personalisation and better use of data. A dedicated gaming machine rewards scheme is being introduced to drive machine play frequency and loyalty. Sports-betting trials are underway in selected casinos, broadening the offer. Rank is also expanding to six machine suppliers to increase product variety and innovation, while investing in data science and AI-led table management to optimise staffing and game availability. These initiatives are designed to offset regulatory headwinds and support the medium-term operating profit ambition.

Remote Gaming Duty Hike: A Seismic Hit to UK Digital

The most significant headwind discussed on the call was the increase in Remote Gaming Duty to 40% in the November budget. Rank estimates this change will reduce UK digital profits by around £46m before mitigation, a sizeable impact relative to current digital profitability. Management expects a “seismic” shift in the market, with reduced competition and industry restructuring as weaker players struggle under the higher tax burden. Rank plans to respond with marketing cuts, supplier renegotiations and efficiency measures, but the step-change in taxation underscores the volatility of the regulatory landscape.

Spanish Payment Fraud Weighs on Cash Flow

The group’s cash performance was dented by a one-off issue: a £6.5m cash impact related to a payment fraud incident in Spain. While the investigation is now complete and internal controls have been strengthened, the event materially affected first-half cash flows and formed a significant portion of the £5.5m of separately disclosed cash flows. Investors will take some comfort from the remedial actions, but the incident highlights operational risk in international markets and the need for tight control environments.

Rising Employment and Statutory Costs Pressure Margins

Cost inflation remained a clear theme. Group employment costs increased by £6m (around 4%), with Grosvenor’s wage bill up £3.8m and Mecca’s up 2.9%. These increases were driven largely by higher national living wage and national insurance charges. In addition, a higher statutory levy and increased depreciation from recent capital investments weighed on reported results. While revenue growth and machine-driven mix improvements are helping to absorb some of this pressure, the cost base is undeniably rising and will require continued productivity gains to protect margins.

Cash Flow Constraints and Rising Lease Liabilities

Despite improving profits, Rank’s cash generation in the period was modest. Net free cash flow came in at £3.8m, reflecting the fraud impact, higher lease payments and a heavier investment programme. The group ended the period with £39.4m of net cash, but once lease liabilities are included, net debt stood at £165m. Lease payments rose to £23.4m, partly due to capitalising gaming machine leases and extending key property leases. The balance sheet remains manageable, but the rising lease burden and modest free cash flow underline the need for cautious capital allocation and successful execution of growth initiatives.

Soft Q2 and Consumer Confidence Headwinds

Trading momentum moderated during the second quarter. Revenue growth slowed from 9% in Q1 to 4% in Q2, which management attributed to tougher comparatives and weaker consumer confidence around the November budget. However, trading improved over the Christmas and New Year period and into January, suggesting the slowdown was not structural. Still, Rank operates in a consumer-facing discretionary sector and remains exposed to swings in sentiment and spending power.

Machine Maturity and Incremental Returns

The ambitious expansion of Rank’s machine estate is still in its early phases, and the returns are not yet uniformly strong. In venues where machine numbers jumped from around 20 to 80, revenue per additional machine has been lower than in sites with more modest increases. Management believes these venues are at an early point on the maturity curve and that further optimisation, marketing and product refinement will be needed to fully stimulate demand. Investors should expect a ramp-up period before the full earnings contribution from the expanded estate is realised.

Digital Market Risks: Unlicensed Operators and Consolidation

Beyond taxation, Rank flagged structural risks in the digital market. Higher taxes may push some customers towards unregulated, unlicensed operators, and government enforcement funding remains limited. That raises competitive and regulatory challenges for compliant operators. Management also expects industry consolidation and a shift in strategy for smaller proprietary brands, which may see reduced marketing investment or changing roles within larger portfolios. This evolving landscape could create both opportunities and risks for Rank as it seeks to strengthen its position in a higher-tax, more concentrated market.

Forward Guidance: Medium-Term Profit Target Intact

Management reiterated that Rank remains on track to deliver at least £100m of annual operating profit in the medium term, underpinned by growth in venues and digital, the expanded machine base and regulatory tailwinds in bingo. Full-year CapEx is now guided at £50–55m, following £27.6m invested in the first half, with spending focused on high-return projects. H1 net free cash flow was £3.8m and closing net cash stood at £39.4m, though net debt including leases was £165m. The board proposed an interim dividend of £0.01 per share, signalling confidence in the cash outlook and balance sheet. Key objectives include lifting Grosvenor’s average weekly NGR to £9.5m and its operating margin above 13.5%—a roughly 500 basis-point improvement—building from the current £7.8m weekly NGR and the 850-machine rollout. Mecca is expected to reach double-digit operating profit next year, supported by the £6.5m annualised benefit from the abolition of bingo duty. The group is targeting to offset most of the estimated £46m hit from the new 40% RGD through marketing cuts, supplier renegotiations and efficiency gains by April, while its new market launch in Portugal is expected to carry only a small single-digit million loss this year.

In closing, Rank Group’s earnings call showcased a business that is executing well on its operational strategy and investing in growth, particularly through gaming machines and digital channels, even as it navigates a more hostile regulatory and cost environment. Revenue and profits are rising, returns on capital are improving, and bingo is set to benefit from a meaningful tax cut, but the sharp increase in Remote Gaming Duty, higher employment and lease costs, and modest free cash flow are clear constraints. For investors, the story is one of solid underlying momentum with a credible plan to reach the £100m operating profit target, tempered by the reality that regulatory risk and execution on mitigation efforts will be critical to delivering on that ambition.