Flutter Entertainment PLC (FLUT) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to your Paddy Power interim results conference call. My name is Grant, and I'm your event manager.

During today's presentation your lines will remain on listen-only. (Operator Instructions) I would also like to advise all parties, today's conference is being recorded for replay purposes.

Now I would like to hand the call over to Patrick Kennedy.

Good morning, ladies and gentlemen. You're very welcome to the Paddy Power 2013 interim results presentation. I'm joined on the table here, by Peter O'Donovan, the Managing Director of Paddy Power Online; Andy McCue, our Head of Retail; Cormac McCarthy, our Chief Financial Officer; and Jack Massey, our Director of Finance and Company Secretary.

It has been a very good first half for Paddy Power. Net revenue is up by 22%, with revenue growth in every division, and standout growth of 29% in our Online division, which now accounts -- or which accounted in the period for slightly in excess of 75% of our operating profit. Australia was a particular highlight, with a 30% uplift in operating profit.

Paddy Power operates in substantial, regulated, fast-growing markets. In each of those markets, we look to develop and we look to sustain an edge. We're building scale for long-term benefit, investing heavily in people, in product, in value and in brand. We invest to deliver payback in existing markets and at the same time, we invest in pioneering initiatives for the markets of tomorrow.

And on that theme of pioneering initiatives for the markets of tomorrow, as you know, over the last number of years, we've built an industry-leading position in mobile sports betting, in the UK, in Ireland, in Australia. In the last 12 months, we've extended that leadership position, both into mobile sports betting in Italy, and mobile e-Gaming in the United Kingdom and Ireland.

Meanwhile our Retail businesses are also very well positioned, and performing strongly. We opened a record 26 new shops in the period, and we saw a welcome return to top-line growth in our Irish Retail business.

Financially, the earnings per share, in the first half, were up by 13%. Our interim dividend was up by 15%.

And while sports results in the first eight weeks of the second half of the year have been in favor of the punter, turnover has been very good, with 25% growth in Online, and 4% like-for-like in Retail. And the prospects for the Group are as strong as ever.

Today's presentation is about our trading in the first six months of the year. It's also about our insights into the market in which we operate, and our investment strategy that is delivering leadership positions and returns in those markets.

So let me pass now to Cormac to talk through the financial and operating performance for the first half; and I'll come back on strategy and outlook. Cormac?

Thanks, Patrick, good morning everybody, thanks for joining us today.

As Patrick has said, the first half of 2013 has gone very well. Stakes were over EUR3 billion and drove very strong revenue growth of 22%.

Sportsbook revenue increased by 24% and gaming machine growth came to a very pleasing 17%. The first half last year, as you'll know, included stakes from Euro 2012, of approximately EUR70 million and revenue of EUR6 million associated with that. So if we adjust for this, revenue growth in the first half was an equivalent 24%.

It's probably worthwhile, at this point, just taking a look at gross win percentages in the Group, and give some color on those.

The overall Group gross win percentage was up significantly to around 10%, and this is in line with -- roughly in line with our current outlook for a normal gross win percentage, following structural improvements in the expected gross win in all of our divisions.

So if you look at Retail, for example, we're benefiting from the growing popularity of virtuals, more small stakes betting and more football multiples and coupons.

In Online, we benefited from the increasing shift to mobile, more of which anon, and a more mass market and attractive big business mix, with our strong risk management capabilities coming through.

While overall Group gross win percentage in the half was normal, there was some offset between our divisions, given their different business mixes.

For example, Online excluding Australia benefited disproportionately from the strong football sports results we saw in the first quarter, and Retail was hit disproportionately by adverse rating results, particularly in Cheltenham.

Turning to our tax rate of 13%, it's the same as it was in the first half of 2012, and our interim dividend, at EUR0.45 per share, is up 15% on last year.

This dividend growth is ahead of EPS growth of 13%. It's worth noting that if we allow for the half-on-half impact of our Italian investment, product fees in Australia, and MGD in UK Retail, the growth in our operating profit would have come to 24%.

Slide 6, just gives a brief summary of the divisional performance. Net revenue growth in all divisions, which translates into double-digit operating profit growth in total, and growth in all divisions with the exception of Irish Retail, given adverse sports results.

What I'll do is I'll go through each division in turn now. Firstly, looking at Online excluding Australia, very good half year. The first half did have the benefit of the European soccer championships, as I said earlier, but stakes growth of 14% was very strong and gross win grew more strongly for the reasons I mentioned already.

Active customers up 20% to almost 1.2 million in the first half of the year. Almost two-thirds of our Sportsbook customers in Online were using mobile in June of this year, and additionally, e-Gaming mobile growth was particularly strong, up 253% year on year, helped by our proprietary games content developed by Cayetano in Bulgaria. We'll return to the theme of mobile later on in the morning.

Italy continues to progress well which has boosted our year-on-year divisional top-line growth. At the bottom line, Italy had an operating loss of EUR9.6 million. And if we exclude Italy, our Online division operating profit grew by 25% and our margin expanded by 2% to 33%.

Turning to Australia, on slide 8, our Australian business is having a standout year, growing net revenue and operating profit by 33% and 30% respectively in constant currency. This performance was notwithstanding increasing competition in the market, and a EUR2 million half-on-half headwind from new product fees.

Online turnover in Australia grew by 25% and net revenue by 34%. Telephone activities also returned to strong growth because of the popularity of our betting in-play product. Stakes in Telephone were up 33% and net revenue up 15% in constant currency.

Mobile turnover in Australia doubled to EUR274 million, or 35% of Online stakes, with 65% of our Online customers transacting with us via mobile in June. And again, mobile is similar themes in both Europe and in Australia. Online active customers increased by 35% and new actives by 14%.

Turning to UK Retail, like-for-like Sportsbook turnover was up 2% and revenue was boosted by a return to a more normal gross win percentage. Despite the new machine gaming duty tax regime being a drag on profit of almost EUR1 million, operating profit grew to EUR7.8 million. Like-for-like net revenue grew 3%, comprising a decline in machine gaming revenue of 8%, offset by Sportsbook net revenue growth of 14%.

The decline in like-for-like machine gaming revenue was both the result of increased competition, and a generally weak market, particularly, as we said before, in London. And also, because of our investment in our new loyalty program and new terminal trials. The market's not going to be any less competitive as we go forward, but we do expect that our loyalty program and new terminal rollout, and other initiatives we're taking in this area, to improve our gaming performance in the second half.

We opened 19 new shops in the period at an average cost of GBP270,000 with exactly the same expectation of making at least GBP100,000 of EBITDA from these openings at maturity, which is around, on average, two years. This is consistent with our expectation for new openings in prior years, and we expect to open at least 40 shops in the UK this year.

Irish Retail profits decreased by EUR1.4 million in the period to EUR7.6 million, driven mainly, as I said before, by adverse sports results, particular in Cheltenham. Our shops in Ireland have never been busier, with a 13% increase in like-for-like bet volumes to 34 million, driven by more betting, as I said earlier, on virtuals and increased betting on sport, including coupons again.

We opened seven new shops in Ireland, while our competitors closed about 40 units. And outperforming our competitors at a per shop level and in terms of estate expansion has seen our market share in Ireland rise to 38% in Retail in the period, compared to 35% last year.

Our Phone business is the market leader in the combined Ireland and UK market, and grew operating profit by 9%. Net volumes in our Phone business have grown by 128% since 2007, and we do see this as an important part of our overall offer, which will continue to make a positive contribution to the Group and to our customers.

I'd like to give some color on our operating cost dynamics, and you'll see this on the slide as it travels from left to right. Our sector is seeing significant marketing inflation; as you can see 40% marketing media, '11 to '12, above the line. But our unique approach in Paddy Power and our brand strength, particularly through market leading offers and our use of social media, has a very powerful impact. Patrick will talk about that later on in more detail.

On the easy marketing levers to pull, we're seeing significant category inflation, so TV, as I've said, for example. For those that require capability, investment in technology, display and social media, we're experiencing much less inflation. Our Retail business continues to be incredibly disciplined with like-for-like direct shop OpEx growth of only 2% in the UK and 1% in Ireland.

Although I haven't covered it on the slide, it's worth noting that in Australia, where we still continue to invest heavily, Australian cost growth of 30% was less than net revenue growth of 33%.

In Online, when we exclude Italy, operating costs in constant currency grew by 28% in the period, compared with growth of 50% in the same period last year. And this is despite the fact that we continue to roll out new markets and products, further invest in our technology stack, and we have to support increasing multiple platforms across multiple geographies.

As you can see on the right of the slide, in terms of the slowing of year-on-year operating cost growth, we're making real tangible progress in scaling our business. And as we've said before, scale is critical in this business, given the amount of change that is going on and investment required.

So Group operating cost grew by 24% in constant currency in the half and, again, notwithstanding headwinds from marketing inflation, the demand of additional channels of investment, we're successfully slowing the overall pace of cost growth in the Group.

The next slide is the normal one we show on operating cost growth builder or bridge, and we've given this detail to be helpful. The main cost increases are associated, primarily, with supporting future Online growth, new shops and marketing. Referring to my earlier comments, if we even adjust for Euro 2012, spend on marketing grew by around 20%, which was less than revenue growth of 24%.

Looking at cash flow on the next slide, our operating post-tax cash flow generation has exceeded after-tax profit for each of the last five years, and this period is no exception to that. We used the bulk of this cash flow to open shops, improve products and technology, and pay dividends. Indeed, it's worth remembering that our dividend per share has grown by 19% compound in the last five years.

At the end of the half, we had, as indicated in the slide, we had EUR214 million in cash in our balance sheet, which included EUR58 million of customer balances. And we continue to believe that our cash balances are worth holding on to, at present, to give us flexibility for investment.

Looking at the regulatory environment, it's certainly keeping us busy. In the UK, we expect point of consumption tax, as trailed, will come in from December 2014 at a rate of 15%. If we had this tax in place at that rate for Sports gross win and e-Gaming net revenue, it would have increased our tax payable by EUR20 million in the period.

Now, as we know, opportunities will exist to mitigate the gross impact of this tax through lower revenue share, marketing costs and, potentially and importantly, through market share gains from weaker operators who might have to exit the market or compromise their offer.

In Ireland, in July, the Government published an updated Betting (Amendment) Bill. This will allow the expected expansion or extension of the 1% tax on Irish Retail stakes to Online and Telephone Sportsbook for bets taken from customers in Ireland. And such a tax would have cost us EUR3.5 million in the period, if it had been in force.

The Australian Government published the final report of its review of the 2001 Interactive Gambling Act in March of this year. And following this, the Australian Government announced that it wouldn't pursue the recommendation to lift the ban on in-play betting online. Separately, after Government intervention, the broadcast industry adopted a code in June, restricting the advertising of betting around live TV sports coverage, what you might call the Tom Waterhouse effect.

In Italy the Palinsesto Supplementare will significantly increase sports betting markets imminently and Patrick will talk about that later on.

And in other markets, our business development team are continuously monitoring legal and other developments to find new opportunities; so plenty keeping us busy in the tax, regulatory and other environments.

Final slide from me is just to talk about current trading. We're about eight weeks into the second half of the year and turnover has been very strong in both Online and Retail.

Online stakes up 25%, and Retail like-for-like up 4% all in constant currency, results so far this year, as Patrick has said, have been very much in the punters' favor and this has resulted in gross win being about EUR15 million less than we would have expected before we make any allowance for cost of sales, or recycling.

The Aussie dollar's weakness recently, if it continues, would also reduce operating profit by about EUR4 million in 2013, compared to where we would have seen it in May. And obviously for a larger amount in a full year, again compared to where we would have seen it in May.

Despite this, we are on track for low to mid double-digit operating profit growth this year in constant currency, and we feel very good about the prospects for this business.

I'll now hand you back to Patrick, thank you.

Thanks, Cormac. So I just want to talk about strategy and outlook, and let me start on page 18 with the Group strategy.

The Group strategy is consistent, it hasn't changed; let me just remind you of the key components.

We identify attractive markets, we build strong positions there, we invest in an ongoing -- on an ongoing basis in product, in value, in brand and in people to ensure we execute well, and we invest for the long term to grow our scale. And that has generated strong payback in our existing markets, and also given us the capability to enter new markets.

And that's how we think about the Group, and that's how we think about the individual businesses within Paddy Power. So let me talk about how those individual businesses are positioned within that strategy.

Starting with our largest individual business in the United Kingdom, our Online business in the United Kingdom.

If you look at the overall gambling spend, online and offline, in the United Kingdom, it is very heavily correlated to consumer spending growth and has been for many years.

The online proportion of that total gambling spend has grown and will grow substantially in excess of the total, as evidenced by the 38% growth in regular betters in the last two years that you can see on the chart here.

The reason for online disproportionately growing is, and you know these reasons, but to reiterate them, new consumers are disproportionately online consumers; more retail customers are also becoming multi-channel.

On that theme of multi-channel, as you know we do a lot of work in this area, we estimate that 5% of retail over-the-counter gross win every year migrates out of retail into online, and online growth will also be supported by device rollout.

85% of mobile phones now sold in the United Kingdom are smartphones, and we see tablets as the next big opportunity. There were less than 10 million tablet users last year in the United Kingdom; by 2015 that figure will have grown to 20 million.

In that attractive market, we build standout positions, we over-index in the hot spots of growth.

Online is three-quarters of the Group profitability; within Online we have built market leading positions in mobile in tomorrow's market.

Almost two-thirds of our Online Sportsbook customers now transact with us via mobile and 45% of our H1 Online revenues came from mobile -- that's more than double the rate of our quoted competitors -- with good leadership, as you can see on the page here on the right, in both Sports and eGaming.

And on that theme of hot spots, third party research indicates that because of our e-commerce expertise and because of the strength of our brand and the loyalty of our customer base, we get an Online kicker in the areas where we have shops; that's more than double the kicker that competitive shops deliver.

So strong positions in attractive markets, and on page 20 you can see how we are investing heavily to enhance those positions in product, in value, in brand, in people. I've grabbed some examples, there are many of them in the first six months of the year.

On the left-hand side you can see that we have a very rich mobile product road map, new releases every month. The principle focus of those releases this year have been on convenience and on content. For example, we significantly increased the number of mobile games we offer in the first half; we grew the mobile games we offer from 28 at the very start of the year to 68 by the end of June.

We received our first mobile games in the period from our in-house games development unit in Bulgaria, and Cayetano accounted for 14 of the 40 new games, new mobile games, that we launched in the first six months.

Mobile gaming is interesting; gaming share of wallet of customers with a mobile or a tablet preference, that penetration is lower than with customers who have a desktop preference because the screen size, in particular in mobile, will be always a challenge. But that penetration is growing year on year, helped by new product releases.

Moving to the right-hand side of the page; as you know, our Money-Back Specials are a mile more generous and a mile more creative than the competition, and our brand continues to pull away from the competition.

For example, our odds and our offers on the election of a new Pope, coupled with our presence in St Peter's Square generated over 8,000 articles worldwide, reaching over 170 countries. And in my view our marketing team owns the chat around the Royal baby, the betting chat at least, with over 80 TV interviews and over 1,900 global TV hits.

So we invest heavily in great positions, in growing markets and we get strong payback from that, on page 21.

Our UK Online active customer base has grown on average by over 40% per annum over the last four years. Our average revenue per customer has grown, despite big growth into the mass market in the UK in that period. Just to contextualize that growth into the mass market, we've grown from just over 200,000 active customers to almost 1 million active customers in that period.

And when you couple strong growth into the mass market with growth in revenue per active, you get what you see on the page here, especially in the middle chart, very strong net revenue growth averaging 43% per annum over the last four years.

So that's the United Kingdom; strong payback from strong investment, in great positions, in great markets.

If I move to our second biggest online market in Australia, the themes are exactly the same.

The Australian online sports betting market is growing well, it's growing consistently, it has more than doubled in the last five years.

It's already larger than retail, and given the faster dynamics it will become the dominant channel for betting in Australia over the next decade.

The fundamentals are robust, Australia has the highest tablet penetration in the world, and the second highest smartphone penetration in the world.

And our Telephone activities in Australia are growing well from betting in-running, which is not allowed online as Cormac mentioned earlier.

So an attractive market; and then on the right-hand side you can see how we've built, I think, a very strong position of leadership. We are ahead of the other corporate bookmakers at every stage of the operating funnel, the percentage of online betters who are aware of our brand, who visit our website, who open an account and whose main account is Sportsbet.

And as elsewhere, our approach to driving growth is the same, significant investment in people, in product, in value and in brand. We have some examples here; there are many others I could have put on the page. For example we developed new mathematical models for NRL and AFL in the period. As the graphic shows, we now offer several hundred more AFL betting markets than our nearest competitor.

And I like the class of the world's largest-ever painted sign there on the right-hand side. It's a wallaby cuddling a lion and it greeted the Lions and their supporters as they landed in Melbourne airport for the second test, and was a hot topic in the Australian media at the time.

And we get payback from that strong investment; on page 24. We've built, I think, a great position over the last four years in Australia, with average annual growth in excess of 30% annually in active customers, revenue and profit.

And that's been supported by our increase in investment since we bought out our partners in Australia 2.5 years ago, and the general investment strategy that we espouse across the Group and in each of our individual markets, I think Australia's a great example of how that works and has worked well for us.

And to put some context on the momentum in our Australian business today, our turnover growth rate in Australia in the first half was the fastest top-line growth rate that we have achieved since we first invested in Australia in 2009. So despite the law of big numbers here, the momentum is stronger than it ever has been.

Moving to Italy; as we've said in the past, Italy is the largest gambling market in Europe, and the online sportsbook and online casino market, where we have a presence, is growing strongly. I've captured here in the top-left corner the latest published figures for the market for quarter 1, which showed 49% year-on-year growth in the market.

As elsewhere, there are structural fundamentals supporting this growth; overall e-commerce growth rates in Italy are the highest in Western Europe. It has the second highest penetration of tablets in the world, behind Australia and given the relative size of the retail market, every 1% of migration from retail to online will grow online by in excess of 10%.

Cormac alluded to the Palinsesto Supplementare. It's being introduced this month, it will result in a significant increase in the range of betting markets that can be offered in Italy, so it will grow the market.

But also, I think, it will allow Paddy Power to differentiate and bring some of the key capabilities that we've proven in the UK and Ireland in betting in-running to the Italian market.

We will increase the number of live tennis and live football matches that we offer markets on by eight to tenfold. We have completed testing, we're ready to go, we'll be amongst the first group of operators to go live and we will then support that advantage with a national TV advertising campaign.

Since we launched in Italy just over a year ago, we have had, as you can see in the middle slide, a very heavy product delivery schedule, there's more to come.

Success in eGaming in Italy is a crucial part of our business model and has been a big focus for recent product rollout, as you can see, and the prospective product rollout with Bingo, Poker and our tablet optimized Casino to come in the next 12 months, as well as mobile streaming and virtual product.

The vision we had for Italy, which was of a disruptive innovative engaging Online-only brand is working, and our market share has grown consistently since launch. You can see there on the top-right corner, we estimate that our Online Sportsbook market share was in excess of 9% in each of the last three months. As in other markets, we have built positions of leadership in mobile and in social.

To talk about mobile for a moment, mobile accounted for 40% of our Sportsbook stakes in June initially and that compared to an estimated industry average of up to 20%. We therefore believe that we have close to 20% of the Italian mobile sports betting market.

Turning from online to retail, the same themes apply. I think retail is a very attractive market. It is very substantial, very resilient and it can be grown, as we have done so, by ongoing product innovation such as virtual product and self-service betting terminals.

Retail producers, as you can see on the slide here, excellent returns on capital, over 50% on our portfolio of openings over the last four full years. A multichannel product offering has significant potential. One in two regular online gamblers still visit betting shops every month.

And then, if you look at the strong position we've built in these attractive markets, I think our retail positions, in both Ireland and the UK, stand out.

Our customers, as you can see on the slide here, rate us more highly than customers of all other leading brands, in both the UK and in Ireland, and we're increasing our share in both markets and we have a lot more to go, particularly in the United Kingdom.

We are investing heavily to enhance our position in the number of new shops and also in the quality of our shops. We now have shops in over 90 towns and cities in the United Kingdom. Our new shops this year have included our first in Newcastle and our first in Wales, in Swansea, and we open -- we've another one to follow in Cardiff in October.

We're investing heavily to enhance our position. We will be the first FOBT operator to trial the new inspired Eclipse cabinet. It's fully touchscreen, effectively like a tablet, and we have an option to roll that cabinet out to our full estate by the end of this year.

Other shop enhancements include improved screens, new shop fit-outs, privacy screens and a new loyalty scheme for our FOBT offering.

That investment in attractive markets, behind what I think are great positions, is delivering strong payback. We've shown the payback here and some examples of it in both the UK and in Ireland, on page 28.

In the UK, that outperformance versus the competition is increasing. We now have doubled the turnover per shop versus the average shop of our quoted competitors and a strong consistent track record of profit growth.

Our Irish business also has good growth prospects. For the last six years, we've been telling you that our shops have never been busier. Cormac repeated that point earlier on. When you aggregate the last six years of increased activity, you see that despite the economic backdrop, as we've captured here, we have increased our bet volumes in our Irish shops by 63%.

The overall top line in that period has been held back by a decline in average stake per bet, principally due to the economic backdrop, but we have seen that stabilize recently as you can see here, with 2% like-for-like turnover growth in the first half of the year. And we now have 38% of the Irish retail market.

I'd like to spend a few minutes on social media, because we are aiming to build the very same position of leadership in social media that we've built in mobile over the last three years.

It's a very attractive market, as you know, and now every man over the age of 18 on Facebook in the UK is connected to at least one Paddy Power fan. So we now have the capacity to target those 15 million men through a friend of theirs; and we also have strong reach through friends of fans in both Australia and, indeed, already in Italy.

If you aggregate the two charts in the middle here, we now have over 1.7 million Facebook fans and Twitter followers; that's more than double the level of our nearest international industry competitor.

We also have much more engaging content. This is not just another channel to hard sell a message. It's said that selling in Google is like selling in a department store, but selling on Facebook is like trying to sell at a drinks party, so you need your fans to be much more engaged and I think that's a key point of distinction for Paddy Power.

Do we get payback from this? I think we get it in many ways and I've pulled some of them out on page 30. Half our fans in the UK are Paddy Power Online customers and that contributes to our industry-leading marketing efficiency.

Online marketing spend, as you can see here, represents 20% of Online revenues for Paddy Power as compared to an average of 29% for our major UK competitors.

Our strong social media presence has also contributed to the continued strong, I like to think, inexorable growth in our spontaneous brand awareness in the UK.

I also think it will contribute to the success of Paddy Power In-Play, the first real money sports betting product in the world, on Facebook, which we are beta launching this week; developed in house, here in Dublin in Power Tower and in Bulgaria.

The app will drive -- will add, rather, social engagement to Online betting. It will enable customers to bet on a wide variety of sporting events through Facebook, whilst also giving them visibility of and the opportunities to engage with other users.

For operators who get this right, the Facebook platform, of course, is a huge opportunity. One stat, just to put some context on that, every month, Americans alone spend over 100,000 collective man-years on Facebook, for better or for worse.

We see it as an acquisition channel for the brand. We could target it to fans of other betting brands, for example. We also see it as a means of growing our share of wallet of our existing Online customers.

And so to conclude, this industry is still very early. Mobile will account for 90% of industry growth over the next six years and is changing how customers interact with our sector. Paddy Power is at the leading edge of that. Social may well do likewise and Paddy Power is at the leading edge of that also.

The geographic diversification of our Online activities into Australia and into Italy is working well and, therefore, the prospects for our overall Online division in the UK, in Ireland, in Australia and in Italy, which account for three-quarters of Group profit, are very good.

In Retail, we continue to capture market share and achieve strong returns from new shop openings and, indeed, provide a disproportionate kicker for our Online business.

And so, all in all, we look forward to the balance of 2013 and beyond with confident.

Ladies and gentlemen, that concludes the formal presentation. But we would now be very happy to take questions. There's a full room here and there were people on the line. We have a microphone here in the room and I think we'll start with any questions that there may be in the room.

Gavin Kelleher, Goodbody. Just firstly on Italy, can you give a figure for the actual investment losses you expect in the current year and how that might trend into FY '14? We currently expect -- are we still expecting to reach breakeven? That's firstly on Italy.

Sure. Do you want to go through them all, Gavin?

And then, yes, on Australia, very strong underlying performance in Australia. Have there been any signs of weakness more recently due to the consumer? And maybe just give us a bit of color on where gross win margins can get to in Australia maybe in a full year, next year.

And on Retail for Andy, in terms of machines, obviously, H1 a bit disappointing, new cabinet coming on stream. You say an improvement in H2. Will we see a like-for-like improvement or do we have to wait until FY '14 to see a like-for-like improvement in machines?

Okay, thanks, Gavin. Cormac, do you want to deal with the investment losses in Italy, breakeven trajectory and the gross win margins in Australia, please?

Yes. So we said that the loss in Italy in the first half was EUR9.6 million. We expect that loss to be, for the year, around EUR15 million, EUR16 million, which is approximately, as we said before, about two-thirds of what last year was.

Going into next year, not giving a number, but our expectation holds, as we said before, which is that we expect Italy to break even next year. We said that when we launched and we're holding to that, so breakeven sometime next year.

And on Australian margins, Sportsbook gross win margin in the half was 9.5%, up about 9.1% from same period last year. We expect that to trend 9.5% to 10%, because we're getting structural improvement as we're offering more and more markets to risk management.

Also, we've got the benefit of what we said earlier about the betting in-running coming through on the phone, so that tends to be a richer margin and with multiples as well. There's more fixed odds betting coming through in our business in Australia as well and that tends to give us better margin.

So over the last number of years, the Australian margin has improved relatively steadily over time. We see that progression continuing, so guidance is around the 9.5% to 10%.

You asked a question about recent weakness and the business is very strong in Australia and continues to be so. So, as Patrick said, the momentum keeps there.

Thanks, Cormac. Andy, Retail?

Yes, so in terms of outlook for machines, there's a few moving parts, Gavin. So first of all, we've been trialing alternative machines in the marketplace through the course of this year. That's had some inevitable disruption effect on performance through the course of this year. That trial unwinds at the end of September; so, inevitably, we'd expect to see some uptick in performance when that unwinds.

When the new machine is introduced, there's some potential that has some adoption impact as well; so it's reasonably uncertain, but we're very confident we're going to be implementing the best machine in the marketplace.

Then we continue to refine our loyalty scheme. So over time, we've collated a lot of data, we've been refining that data, built in-house a number of CRM models and through that, we continue to optimize our return through that loyalty scheme. And the efficacy of our marketing improves through the course of that year as well, so we'd expect to see some continuing benefit from that.

Then also, we [weed out] what we'd describe as some of the one-off effects of the competition catching up. So we've -- the competition have caught up with what we describe as some hygiene factors. So for a number of years, for three years, we had extended opening hours in our shops, particularly on a Sunday evening. The competition have cottoned on to that in the last 12 months.

And for seven years, we've had a maximum density of machines per shop and again, the competition have obviously been catching up on that front over the last 12 months. So that resets the base going forward as well in terms of growth.

Thanks.

Tom Holmes, Investec. Just touching on Italy, I know your market share is up strongly in the last few months. How competitive are you finding that market and what do you see is a reasonable medium-term target in terms of market share there?

And also, could you just give us an update on your licensing activities in the US and whether you're more or less positive on the prospects for an entry into that market than you were, say, six months to 12 months ago?

Peter, do you want to talk about Italy?

Sure, yes, on the competitiveness point, it is obviously a competitive market, but in terms of the income with operators that are there and also, some of the newer entrants like ourselves and William Hill.

We've gone in with the value offering when it comes to Sportsbook, so we go in at very competitive pricing and value-driven offers around pricing, around Money-Back Specials, etc.

In terms of market share, we're not giving guidance on what our market share is going to get to. We're very focused on continuing to grow it and we continue to grow it quite strongly. For the last three months, we've averaged about 9%.

I think interestingly we feel that our mobile market share is nearly double that and if we look in similar themes in the UK, being mobile being tomorrow's market, again, rolling out our mobile leadership position that we have in the UK into Italy is something that is also going to help us drive share ultimately.

I think in relation to the United States, Tom, the -- and specifically New Jersey because I think New Jersey -- this is, as you know, a state-by-state issue and New Jersey is in the vanguard. We don't have any more -- we have applied for a license, as people are aware. We don't have any update on it.

The regulator has been given, obviously, substantial flexibility by legislation and we don't know, as yet, who will be allowed to play. We don't know as yet what the cost base for operators will be; in other words, what resource needs to be specifically in New Jersey as opposed to elsewhere and can be shared.

This will be substantially a poker market, so we don't know how liquidity will form and will be allowed to form in the poker market. So there are still too many unknowns for us to be very specific about which way the ball will bounce. But we continue to work closely there.

David Jennings, Davy; just one question. I was wondering if you could give us an update in terms of your thinking regarding a post point of consumption competitive environment and specifically, you mentioned the scope for mitigation. I'm just wondering how you balance the need to protect near-term earnings and improving long-term returns as weaker competitors potentially exit the market.

Yes, David, I think we're very focused at one level on the point of consumption and at another level, we're building our business for the next 10 years and so -- and Cormac used a phrase earlier on, there are easy levers to pull and I think some operators in the market are pulling the easy levers and television media is a big part of that.

I think what Paddy Power does is try and invest across the piece and aggregate multiple advantages across what we like to think is smart investment; across product, across technology, across people.

So, I think that what will happen post-POC is structurally the market will continue to grow for the reasons we've pointed out. I think that the market concentration will increase and it has been increasing in any case, but I think the POC will accelerate that.

And I think what we're doing is, as you can see from the presentation, we're just trying to position ourselves to be -- to grow our share and to be one of the top winners and performers in that market in both Sports betting and eGaming and I think the dynamics of those two sectors are somewhat different.

There's greater concentration in Sportsbook; there's greater fragmentation, relatively speaking, in eGaming and therefore I think there may be greater fallout there. And we, as I say, in both, are continuing to position ourselves to be the winners.

Okay, if there aren't any other questions in the room, we now go to the telephones and hand over to the operator on the phones.

(Operator Instructions) Ivor Jones, Numis.

I wonder if you could talk a bit more about what's going to happen to costs, maybe whether point of consumption tax that you were talking about is going to be an inflection point for costs overall.

But I was looking at slides 12 and 13 and you show 500 more heads in headcount over a couple of year period and slide 13, marketing, the driver of the business that you talked about a lot in the presentation, was sort of flat year over year.

I know on a high base, but then EUR16 million more of costs on stuff that I would have thought wouldn't have required more costs; more betting markets and events, new racing and football pages, new gaming content, feels like stuff existing headcount would have been delivering.

So, you talked a lot about where revenue's going to come from; could you just talk about what the trajectory of costs is going to be? You make a point that cost growth is down to 24%, but excluding marketing changes, when's cost growth going to be zero? Thanks.

Cormac, do you want to answer that?

Well, when cost growth is going to be zero, in an industry that changes and is growing as rapidly as it has, if you look at Patrick's final slide on 2018, the amount of change we see, it's very hard to see cost growth going to zero.

But nonetheless, to answer your questions, firstly, just to clarify a point on slide 13. The marketing inflation is relatively flat because last year we had significant investment in Euro 2012; this year we didn't.

I said in my commentary that if you adjust for this, marketing cost is up about 20%, half on half, and that's notwithstanding significant inflation in above the line categories. So we continue to grow our marketing costs but we grow it at less than the industry. And that plays back into the investment we make in social media etc.

On the EUR15.6 million, when you look at the Group as a whole and the amount of content we're offering, in the first half of this year, we offered some 295,000 events, which is up 20% on last year and 4.25 million markets for those events, which is up 30%.

So, we're covering on betting in live sports coverage, we're betting in-running, that increased by over 30% on the first half of last year. The number of uniques and new customers we're getting does require that we have a technology infrastructure that supports that. We continue to invest that.

The growth in Australia as well, as we said earlier, we continue to invest in growth in Australia. We have over 400 people in our business in Melbourne now and the growth in people in the last couple of years reflects the fact that we're now on multiple platforms in multiple geographies, going heavier into mobile. We have iPads and tablets growing as well.

So there's a lot of investment that has to come down the pipe and again, in Retail as well, new shops, new presentation styles all require investment for growth.

The reason we trail on the previous slide that the rate of growth is slowing is we're starting to get some scaling effects in the business, so that's a good sign from our perspective. But there is a lot of change in this industry; there is a lot to go for, we think, in the next few years, particularly where mobile goes, that that investment is well worth making.

And again, in things like social media, in Paddy Power In-Play we believe that that's an investment worth making. In Italy, we continue to invest, as Patrick said, we've got over 90 people working on that and that is still a story in progress.

So, we are growing our footprint on our business very significantly. That requires investment. There are multiple platforms that we have to build and support. They will continue to require support as we go forward and we're putting more people into our Online marketing business, where we've had a lot of success and that's important to continue to invest in. And that's both in Europe and in Australia.

So we're not shy of saying that we continue to invest for growth and to support both resilience and both platforms. We're very pleased that in the course of Cheltenham and the Grand National this year, we were probably the only bookmaker that stayed open and live for the whole of that week in Cheltenham without a particular glitch. And the same for the Grand National. That's important customer service that we have to differentiate on.

So rate of growth slowing, absolutely, we are getting some scaling, but down to zero, not in the next couple of years, I'm afraid, Ivor, but very happy with the progress we're making.

But Patrick, you talked about UK -- about Online ex Australia being in a payback phase and yet even ex Italy, although maybe I should be ex-ing out the Italian revenue too, but it looks like operating profit growth was less than revenue growth.

So does payback get to be a point where operating profit grows more than revenue? Or the operating leverage does not come through because there'll always be additional costs required. Is that what Cormac was saying?

You're right, Ivor, you do have to take Italy out of that. And I think it's -- the term payback phase sounds like we're into the phase of milking the business. We're not. We think this business is very early. We're pointing out how we are getting payback.

But, in general, we see the online markets that we're in, notwithstanding the very substantial growth they have to deliver and the opportunity that we'll invest in to capture that, we do see the cost base growing by at around the rate of growth of the top line, as we continue to invest for that.

Okay. Thank you.

Richard Stuber, Nomura.

Just a quick question on mobile and the differential between mobile gross win margins and Online gross win margins. You say in the UK you've got now 50%, 55% or so is now done by mobile and you've got overall mobile gross win margin of 9.7%.

Could you just break up what it is this year, mobile versus non-mobile Online and how that percentage has changed over the last couple of years?

And also, finally, where you think mobile penetration can get to in, say, two years? And are there any obstacles for it getting any higher, because I understand things like the Android app can't be downloaded from the Google, Google Plus? Thank you.

Just on mobile penetration, I'll ask Peter to answer that, and mobile margin I'll pass to Cormac. Peter?

So mobile penetration, obviously as we continue to invest in product throughout Sportsbook and for eGaming you'd expect the penetration rates to increase.

Where they'll get to, there are obviously some ceilings there that you point out in terms of that we don't have the ability to be in the Android app store at the moment. So that, to some extent, diminishes our distribution channel.

However, as we continue to invest in product and as we follow the overall momentum of consumer adoption of smartphones, UK adults over the age of 18, 85% smartphone penetration, so there's a natural ceiling there as well.

However, if we expand mobile out to include tablet devices, we do feel that that is really the next phase of growth in terms of mobile device penetration and we do expect that figure to continue to increase.

Where it gets to, we're not certain and that's broadly in the hands of the consumers, but we're totally focused on ensuring that our product follows consumer demand when it comes to devices, and tablet is our next key area of focus to follow our leadership position in mobile.

Thanks, Peter. Mobile margin, Cormac?

Our mobile margin in our Online business excluding Australia in the first half of the year, mobile margin was about 10.7% and desktop was about 8.8%. So there's a differential of 1.9%, 2% between the two and that differential has expanded since the first half of 2012 by 20 or 30 basis points.

The reason for that is that we have more offers on mobile, so we've increased what we're doing. And the market is growing in that arena. So, to Patrick's point about growth in Mobile and the offering we have, the more that penetrates, the more that will accrue to our margin and it offers us opportunities for margin expansion.

In Australia, in Sportsbook, these are Sportsbook numbers, the differential again is about 2%. So Sportsbook Online, excluding Phones, mobile margin's about 11.8%, 11.9% and desktop about 10.1%, 10.2%. So we see similar expansion in Australia in mobile versus desktop.

That's great. Thank you.

Victoria Greer, JPMorgan.

The first question I had was talking about -- you talked about the multichannel uplift that you see. I think it was on the slide 19, talking about seeing an Online kicker from your shops more than that of competitors.

Could you just talk a bit more about what that means and how that's measured, because I didn't quite get that?

Second question on the Facebook project that you talked about. The first thing you said, I think, in the presentation, that you see the Facebook project as a means of growing share of wallet of customers. And I just wondered if you could go into that in a bit more detail.

And then, secondly, I wonder -- this is clearly at a fairly early stage, but I wondered if you could talk about to what extent you think the Facebook project is something that could need significantly more investment and development from the stage it's at now.

Just on multichannel -- I'll pass the Facebook point to Peter. The way that that multichannel Online revenue uplift has been measured is we've looked at our Online penetration. We've studied this carefully right across the United Kingdom.

And then we've looked at the penetration that we have in the radius around -- in the 2 kilometer radius around our shops. And the difference between the market share that we have in the near radius to the shops versus the overall market share is how this has been calculated.

And consistently we see that we have a disproportionately high share around where we have shops. And consistently we see that we have a disproportionately high share relative to what our competitors have around where they have shops. And that's the point that's been made.

And I think the reasons for that, as I mentioned in the presentation, I think they're quite a number. But I think the main ones are that I think our e-commerce funnel -- we gave an example of our e-commerce funnel in Australia, but I think our e-commerce funnel is very strong. So when somebody does actually get attracted to the Paddy Power brand I think we convert well.

And, secondly, I think Paddy Power customers love Paddy Power disproportionately. And when you're a Paddy Power loyalist, if you go to a Paddy Power shop you are much likely to go to Paddy Power Online than customers, retail customers of our competitors are to go their online websites.

I think they're the two principal reasons for it.

Peter, in relation to Facebook?

When one thinks of Facebook, one really needs to think that it's predominantly a mobile platform and it's really that -- that's one of the key advantages that we are taking into account when we think about the [Plutus] opportunity, which is, as Patrick outlined, they will be the only real money sports betting application available through the platform which, as I said, is predominantly mobile.

So we feel, having that exposed to every male over the age of 18 in the UK who we know, some [will] bet with other online providers, although we ask them not to, that the product will allow us to grow their share of wallet through betting through the Plutus platform. And that's one on the key bits around the design and the overall investment behind the Plutus opportunity.

In terms of investment, going forward, we will invest as we see success in this. We've a team who are focused on it, at the moment, and they have a number of further releases after this initial beta release that they're working on. We anticipate they'll be working on that for the next period of time. If we see success take off, and we hope that it does, we'll invest further behind that, but it will be with growth in mind and, ultimately, with profitability in mind.

And, Peter, just the number of people working on the Plutus opportunity, the Facebook opportunity.

Yes, in terms of (inaudible), we've about 20 people working on it, at the moment, in terms of developers. And as we go in live, we're going to add to that a team of five to six people who will be managing it in live as well, so that's broadly the [FCU] requirement around that.

Thanks.

Vaughan Lewis, Morgan Stanley.

Just to clarify on Italy, you said breakeven next year; is that an exit rate for 2014, or will it actually be breakeven for the full year for the P&L?

Similar question for BetDash and Cayetano, how are those performing, relative to their budgets, and when will they break even?

And then just a quick one on the outlook; you're saying mid double-digit EBIT growth for constant currency, and a 4% headwind. So you're looking for 10% reported EBIT growth, are you? Is that the way to think about it? Thanks.

Thanks, Vaughan. Cormac, do you want to take those? Italy is the easy one, sorry, the brief one, it's the exit rate; it's the last hour of the last day of the last week of the last month of 2014, so it's basically 2015 we enter in profit. The outlook, Cormac?

Yes. Patrick's clarified the Italy point, which I should have done earlier one, so apologies for that, and he's said it correctly.

BetDash/Cayetano are BAU now, so we don't disclose any particular numbers about those, because they're in full production now. And Patrick mentioned earlier the number of games we're getting from Cayetano now in our live business and, thankfully, those games are actually outperforming the rest of our games. So our expectations in Cayetano have been more than delivered, but it's into BAU production within the Online business, so nothing exceptional to be disclosed.

BetDash is now part of the Paddy Power stack overall. Interestingly, we learned a lot from BetDash to help us with Paddy Power In-Play, so it's an offering that will continue.

Just on the outlook, you're right; at the end of the day we are saying mid double-digit growth, given what we said about the performance so far this year in terms of sports results, and also, currency headwinds. So when you adjust for the currency headwinds, that brings it down in nominal terms. So EUR10 million to EUR15 million headline, and you can make your own mind up on the nominal when you take the currency into account.

Great. Thank you.

Ed Birkin, Credit Suisse.

Just a quick one on your strategy for UK Retail. You talked about the strong return profile of new openings and, given the continuing negative rhetoric in the press about proliferation of shops, do you see any reason to, perhaps, increase your rollout ahead of any potential clampdown that may occur in the future?

Andy?

Not really; there's always, and has been for some years, Ed, some political noise around number of shops, shop clustering. And sometimes that translates into negativity around machines, as we've seen in the recent past as well. That doesn't change the way we think about the business.

We think about finding good shops that make good returns, so we have a very clear target list that we work to. Our biggest constraint is finding the right locations in the right pitches, and we don't compromise on that. And consequently, what that means is we don't make mistakes. So we haven't closed a shop, I think, since 2006, and we don't intend to.

So it's more of the same. We've slightly increased the run rate over recent years, as you will have seen, and the risk to our opening numbers are probably somewhat on the upside, looking at the pipeline as we see it today.

Okay, great. And just a quick follow-up on machines; there's still a big differential between the net revenue and gross win numbers, because of free bets, so assuming the MGD being constant. Is that something which will close as you go further along the rollout of your loyalty scheme, or should we expect that differential to increase, going forward?

Yes, so there's two components to free bets. So one is those associated with the loyalty program, and there's those associated with standard promotional activity in the marketplace, tournaments, promotions, what have you.

So with regard to those connected with the loyalty program, those will fall, and are falling. We expect those to continue to fall and, to my point earlier, as we continue to optimize the data around our loyalty solution, we get more, frankly, bang for our buck on that marketing spend.

Okay. Great. Thanks very much.

James Ainley, Citigroup.

Just had a question on mobile cross-sell from Sports to Gaming. Can you talk us through where you are in terms of the technology there, whether you're got a single wallet enabled, or whether your customers are very much downloading discrete apps at this point?

Sure, thanks, James. Peter?

Yes, so across Sports with eGaming, it is a single wallet. The strategy we've adopted to date is that they are discrete apps. As we begin to improve the interfaces of those discrete apps, one of the areas that we're focusing on a lot at the moment is actually that cross-sell from app to app. So that's a key opportunity to improve the cross-sell rates and the one that we're focused on at the moment.

And when might we expect to see that coming through?

We've a number of iterations; I think the first iteration comes in toward the end of this year. We have some already in market at the moment, in terms of improving the cross-sell, so that will be an ongoing area that we're looking at in terms of improving -- the most substantive update will be toward the latter part of this year.

Thank you.

We have no further questions currently in the queue.

Okay. Ladies and gentlemen, thank you very much for joining us. We'd be delighted, as you know, to take any further questions, any further contacts you might have further to the meeting, you know where we are, and just feel free to reach out to us. But thank you for your time this morning.

Thank you, ladies and gentlemen. That concludes your conference call for today, you may now disconnect. Thank you all for joining, and have a very good day.