Flutter Entertainment PLC (FLUT) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen; and welcome to the Paddy Power prelim call, hosted by Andy McCue and Cormac McCarthy. Now, I'd like to hand over to Andy. Go ahead, please.

Good morning, everyone, and welcome to the Paddy Power 2014 preliminary results presentation. I'm delighted to be here, and especially to present such strong results.

Over the last few months I've been focused on understanding the market context in each of our businesses, which has helped frame a new strategy.

I've made changes to the top team, which align with that strategy; and those changes come into effect on January 1; and that's allowed us to hit the ground running so far in 2015.

I'm joined this morning by Cormac McCarthy, our Chief Financial Officer; Peter O'Donovan, Chief Product Officer; Cormac Barry, Chief Executive of Sportsbet; and Jack Massey, Director of Investor Relations and Company Secretary.

We have two objectives today. First, Cormac will walk through 2014 financial and operational performance; and then I will outline my strategy for the Group.

So starting with the 2014 highlights, on page 3. 2014 was a record year for Paddy Power, with the Group achieving strong double-digit growth in stakes, revenues and profits.

Revenue was up 18%, with strong momentum in all key top-line metrics.

Group profit before tax increased by 21%; earnings per share increased by 18%; and dividends grew by 13%.

Our future strategy places greater emphasis on products differentiation. In the future we will release innovative, compelling products, built primarily in-house. We will deepen the distinctiveness of our brands, which will, in turn, support the launch of new products. And we will continue to develop leadership positions in strong, large, regulated markets.

Now, as set out in our statement this morning, we are proposing to utilize surplus cash and a planned debt-raising, to return EUR8 per share, a total of EUR392 million, to shareholders.

We believe that now is an opportune time to do this, given our confidence in the Group's strong cash flow generation; our assessment of our development pipeline; and the favorable capital market conditions, which allow us to increase our efficiency by moving from a net cash to a net debt position.

We are very confident that this does not compromise future growth.

Moving to the current year, 2015 has started well, with results broadly in line with expectations.

I'll now hand over to Cormac.

Thanks, Andy. Good morning, everybody; and thank you for joining us today.

As Andy has said, and the slide 5 shows, 2014 was an excellent year for Paddy Power, with Sportsbook stakes of over EUR7 billion driving strong growth in Sportsbook revenue of 16%. Gaming revenue was up 25%.

Sports results were very poor in the first half of the year, but more favorable results in the second half, combined with strong customer acquisition during the World Cup, meant we enjoyed very good momentum in the second half.

Operating profit for the second half of the year was EUR104 million, up 62% on the prior-year comparative.

Overall, sports results for the year were below expectations with a gross impact of some EUR24 million. That's before any customer recycling of winnings and related reductions in cost.

Full-year operating profit of EUR164 million was up 22%, ahead of 18% revenue growth.

Our operating cost growth rate continued to moderate, as a result of efficiencies from scaling, and more focused investment, as well as the benefit of investment we undertook in headcount and capabilities in prior years.

We grew EPS by 18%, despite absorbing EUR11 million from new taxes; increased product fees in Australia; and currency translation costs.

Our effective tax rate of 13% was in line with the prior year. But I would note that we expect this rate to increase gradually over the next few years to a high-teens percentage, due to changes in the mix of taxable profits. Some of you on the call haven't got this number yet, so you might need to make appropriate adjustments.

The Board is provide -- is proposing a final dividend of EUR1.02, bringing the total dividend for the year to EUR1.52, which is up 13% on 2013.

And turning to our divisional breakdown, on slide 6. You can see that we had strong stakes and revenue growth in each of our online and retail divisions.

Operating cost growth was below revenue growth in all channels, with the underlying trend in costs remaining, as I set out to you before, whereby we're seeing upward pressure on OpEx, as a result of increased complexity from mobile; marketing media inflation; increased competition for new customers; and such things.

On the other hand, we're also generating downward cost pressure through, for example, scaling efficiencies and our online marketing capability, coupled with our distinctive brand personality.

Before I go through each of the main divisions in detail, I just want touch briefly on our UK and Irish telephone business, which continues to perform well, relative to the competition.

While this channel faces higher betting taxes this year, we expect it to make an ongoing positive contribution to the Group, given, for example, the fact that phone-registered customers spend a similar amount with us online as they do on the phone.

On slide 11 (sic) we cover online Europe, and this includes our paddypower.com and Paddy Power Italy businesses, as well as our B2B activities.

Underlying Sportsbook growth was strong, while stakes growth of 20% will have benefited somewhat from customer recycling. Customer metrics were also very healthy, with active customers up 24% and paddypower.com sportsbook customer acquisition up 39%. The strength of that acquisition performance manifests itself in free bet costs where acquisition-free bets are the main component.

Mobile continues to drive growth with three-quarters of our customers transacting via mobile in December.

We had good gaming in B2B revenue growth of 17%, driven by mobile and proprietary content. In the year, 40% of gaming revenues came from mobile devices. In December, 38% of our games channels revenues were from games developed by our Bulgarian development center.

Operating profit growth was negatively impacted by the new UK Point of Consumption Tax, introduced last December, and also by adverse sports results, which combined had a gross impact of approximately EUR14 million year on year.

Overall, paddypower.com's business rebounded strongly in 2014 as we addressed the increased competitive -- competition experienced in the latter part of 2013 with increased investment. In particular, we addressed weak football performance by increasing our TV share of voice.

Accordingly, topline performance accelerated substantially on 2013 with 39% growth in new customers, 26% growth in actives and 18% growth in stakes, compared to growth rates of 10%, 13% and 10% respectively.

Like the unfavorable sports results, one month of Point of Consumption Tax and increased marketing in customer acquisition spend, paddypower.com's operating profit margin, as a percentage of net revenue, at over 28% was still among the healthiest in the sector. This leaves us very well positioned in the new tax environment compared with smaller scale and less profitable operators.

Our Italian business made further progress last year. Net revenue increased by 85% with cost of sales as a percentage of net revenue falling 17% and operating cost growth slowing to 14%. However, as we noted last year, overall market growth remained slower than expected, and Andy will cover this later on.

As slide 8 shows, our Australian business had another standout year with continued momentum and increased market share. We're delighted with how the business in Australia is performing.

Net revenue grew 34% and operating profit increased by 68%. This growth was delivered in an environment of increased competitive intensity in the market and with the impact of higher product fees from the second half of the year.

Our online growth accelerated in Australia last year with customer acquisition up 33%, active customers up 38% and net revenue up 34%. Mobile growth was particularly strong with mobile stakes up 66% to over half of online stakes over the year, boosted by our in-house developed smartphone and tablet apps.

Betting and running is still not allowed online in Australia, but it grew strongly on our phones, delivering an increase in net revenue of 39% despite a fall in stakes.

Cost growth in Australia of 24% last year was less than revenue growth and this, combined with an increased gross win percentage, as well as good sports results, led to a 5% expansion in our operating margin to 23%.

Turning to slide 9, UK retail, operating profits increased by EUR7.3 million, or 50%, as a result of both 38% profit growth in the existing [estate] and new shop openings.

Like-for-like revenue growth comprised machine gaming growth of 13% and sportsbook revenue growth of 4%, and a 5% increase in stakes. Total net revenue growth of 8%, combined with strong operating leverage with OpEx only up 3%, due to cost discipline and scaling of central UK head office costs, drove profit growth of 38%.

Given our leading proposition and per shop profitability, we're still identifying attractive shop opening opportunities. This year we anticipate opening some 30 new shops, subject to the new proposed planning laws not being more limiting than we currently expect.

On slide 10, Irish retail stakes exceeded EUR1 billion for the first time last year and profits increased by 15%, helped by a record 20 new shop openings. Excluding new openings, like-for-like stakes in Irish retail were up 5% with net revenue up 3%, impacted by poor sports results.

Our net revenue percentage at 11.6% was below the 12% we expect in retail with the normal run of results.

In both our retail estates we expect continued revenue growth this year as we see resilient core retail demand and we use our leading position in both markets to improve our offer and take further market share, but we also benefit from improved economic conditions in both geographies.

Turning to our cash flow on slide 11. Profits at Paddy Power convert very strongly into cash. Operating post-tax cash flow generation has exceeded after-tax earnings for each of the last five years, being on average about 133% of after-tax profit, with 2014 in line with that long-term average.

We continue to utilize this cash to invest in growing our business and our capabilities. Last year we spent EUR49 million opening shops, on improving and expanding our products and on further enhancing our technology capability.

The ongoing strong cash generation and the strength of our balance sheet also allowed us to return EUR93 million to shareholders last year through regular dividends and our share buyback program, which we recommenced last August.

At the end of the year we had EUR218 million in cash in our balance sheet, excluding EUR67 million in customer balances.

Turning to slide 12 and as Andy has trailed, we're pleased to announce today a proposed cash return of EUR8 per share, or EUR392 million to our shareholders. We don't see opportunities for capital deployment right now that look better than our organic strategy, which can easily be funded through ongoing cash generation.

Whilst we've bought back shares since August last year, market liquidity means that our surplus capital position is unlikely to be addressed promptly in a meaningful way through a buyback program.

Given this fact and considering our shareholder preferences, we feel that the B share-type scheme mechanism, giving shareholders a capital or income option that we are proposing, represents the most efficient means of repatriating capital to shareholders.

This return will be funded through some EUR200 million of cash in our balance sheet and we will borrow the balance, taking our gearing from a negative position towards a modest 1 times EBIDTA. This cash return is in addition to our normal dividend.

Considering the relatively unique nature of the proposed scheme and the inefficiency of our balance sheet, we believe that an exercise like this should be meaningful. The amount of our proposed return represents about 12% of our market cap.

This restructure, coupled with our dividend program, which will remain unchanged, means that we will be returning significant value to our shareholders in this and the coming years.

Even after completing this proposed restructure, our relatively conservative balance sheet, coupled with ongoing cash generation means that we're retaining flexibility to respond to opportunities should they arise.

This B share type scheme will be immediately followed by a share consolidation to preserve approximate share price parity and we'll be seeking approval for this at our AGM in May.

Turning to tax and regulatory developments on slide 13. The impact of new taxes, fees and regulatory changes is highlighted in our statement and on slide 13.

The regulatory engagement overall has been both substantial and encouraging over the last 18 months. This has led to a range of meaningful measures, which will increase protection for those who may be at risk from gambling, whilst leaving others free to engage in an enjoyable leisure activity.

We'll continue to work closely with governments and regulators in all of our geographies on proposed changes affecting our business.

Our scale and efficiency leaves us in a very strong position to both absorb new taxes and to step up to the requirements, which new taxes and regulation bring.

It's critical that as new taxes and regulations are introduced, they be equitable and enforceable. We continue to urge governments and regulators to implement as wide a range of enforcement mechanisms as is possible.

So in summary, 2014 was another excellent year for the Group.

I'm delighted to hand you back to Andy now, who'll take you through the strategy and the outlook.

Thanks, Cormac. Before I present the strategy, I'd like to cover an overview of the market context, and I'll explain how Paddy Power is currently positioned within that market context.

So turning to slide 15, and I'll move through this slide from left to right. First, online growth is clearly outpacing retail. Globally, consumers are migrating from retail to online and online, as a percentage of the total markets, now represents 11%, as opposed to 6% 10 years ago.

Clearly, there is still plenty of migration to play out, given the relative size of the retail market. For example, in Paddy Power's markets, every 1% of retail that migrates will translate into 5% growth to online.

As you see in the middle of the slide, future foreseeable industry growth pretty much all lies in mobile. In the UK, over 90% of total sports and gaming future growth will be via mobile devices. Increasingly, customers are choosing to use mobile exclusively over desktop.

In Australia, within the sports betting market that we operate in, all the growth is in mobile, with retail, phones and desktop all forecast to decline.

And as you see on the right-hand side, sports betting is still the most popular with consumers. In the UK, 56% of regular online gamblers bet only on sports versus 6% who only play gaming.

Turning to slide 16, you can see how exceptionally well positioned Paddy Power is for this market context; over three-quarters of our profits are from online.

In mobile, we have the sector-leading penetration, with 55% of our online revenues last year coming through mobile.

Over 70% of our revenues are from the large and robust Sportsbook market.

Sports compared to gaming offers us more strategic opportunity to differentiate from the competition and has customers that are cheaper to acquire and less likely to churn.

On slide 17, you see that we are also well positioned geographically, with profits spread across multiple geographies. We only operate in markets where we can achieve critical scale to succeed. Within the UK, Australia and Ireland, we have established market-leading positions, with potential to further grow share as activity flows towards the best and most-efficient operators.

Unusually in our sector, our profits are only derived from legal and licensed markets, where earnings are more visible and sustainable. Within the UK and Ireland, our retail estate has a disproportionately high multi-channel reach.

Our prime pitch locations, differentiated offer and leading capabilities means, as you see on the graph on the right-hand side, our 565 shops have sports betting turnover over 2 times that of the average competitor units. This gives us an effective sports betting reach of almost 1,200 units.

Furthermore, our focus and discipline of opening shops in prime locations means that in Great Britain, almost half the population live within 5 miles of a Paddy Power shop. We have the highest profitability per shop in the industry and this gives us greater resilience to withstand shocks.

Turning to the strategy on page 18. Our sector and the wider consumer environment continue to evolve and we need to adapt our business accordingly. Our strategy comprises three key elements.

Firstly, product differentiation; now this is a very decisive shift in our emphasis towards products. By this, we mean providing the best possible intuitive customer experience. We will launch innovative betting products, which make us distinctive from the competition. To achieve this, we need to operate at pace and flexibly, and so we will further expand our in-house development capabilities.

While we have a competitive product today, I firmly believe we have the capabilities and the ideas to create clear blue water between our products and those of the competition.

The second key element is distinctive brands and marketing capability. While our brands today are entertaining and engaging, we can make improvements in how we communicate our product advantages, while furthering our reach by continuing to invest in social media and digital marketing expertise. Before you ask, the edginess of the brand will not be changing.

And thirdly, we aim for leadership positions in large, regulated markets. We build scale positions with potential to grow share and drive long-term profitability and, therefore, enabling a virtuous cycle of ongoing growth and investment.

These three elements are underpinned by clear accountability and focused execution, with is a topic I will come back to later on.

And we have also set in place priorities for future investments and these are shown on the right-hand side, which in line with the market context I've described, emphasizes investment in online over retail. It emphasizes investment in mobile over desktop; and it emphasizes investment in sport over gaming.

Finally, although we have evaluated the attractiveness of a number of possible acquisitions over recent years, we have yet to see any opportunities that are as compelling as the organic strategy outlined here.

So taking the first key element of the strategy, product differentiation and why is this so important?

Well, the simple answer is that consumers tell us it is. As you see on the top left, on slide 19, across our markets 35% of consumers cite product features as the key factor driving operator choice, while analysis of lost customers indicates that, on average, about one in three customers go elsewhere due to product reasons.

Customers' hierarchy of needs will map to our development priorities. We have developed, and are working on, enhancements throughout the journey to improve customer navigation, as well as making the product increasing personalized to individual preferences and richer in relevant content.

Product innovation will come across multiple dimensions, as you see on slide 20, be it via platforms, either through existing platforms or via emerging technologies. Via bets, for example our industry-leading risk and trading teams, and our global trading platform can be further utilized to create new betting opportunities. By introducing new market and game types; and by developing products for multi-channel customers, which enable us to capture the higher share of their online spend.

Under our new strategy, we aspire to be the first to market with good innovations. However, where we aren't first, we'll follow fast; for example, with cash outs, which we recently launched in Australia.

We've extended the cash-out functionality to each-way bets in PaddyPower.com. In quarter 2, we will launch partial cash out. We've even extended it to gaming with the launch of cash-out blackjack.

We continue to increase the proportion of development we control and build in-house. This year, we expect nearly three-quarters of our product development spend to be in-house.

We are uncoupling and gaining ownership of critical customer-facing front ends from third-party suppliers. This allows us to differentiate our product from other operators.

We do not, however, strive to ultimately do everything in-house. We will continue to cultivate third-party partnerships, where they allow us to operate at pace or more efficiently by leveraging their scale or for parts of the customer proposition, which do not necessitate differentiation.

Our brands aim to engage and entertain in a way that is impossible for others to replicate. In a crowded marketplace, our Paddy Power and Sportsbet brands stand out.

To further deepen the distinctiveness of our brands, we will launch new creative campaigns for both the Paddy Power and Sportsbet brands this year.

We dominate our industry on social media, both in terms of the number of fans and followers we have, but also on the level of engagement with these fans. We will continue to push the boundaries of social engagement.

When it comes to our marketing campaigns, we will increasingly focus on highlighting to consumers our new and original product features. For example, our recently-launched TV campaigns in Australia feature the cash card and cash-out products. And, in the UK, we are currently promoting the recently launched pitch visualization.

Our marketing will also ensure that customers see us as being competitive on value with distinctive, simple, and relevant offers. For example, next Tuesday at Cheltenham, we will refund losing bets in each of the first two races if the favorite wins. This is our most generous offer yet.

Investment in marketing will be optimized and efficient. Last year, we substantially increased our TV spend, driving material increases in our share of voice, both in the UK and Australia. This generated strong returns, including 28% growth in online customer acquisition.

We will continue to invest in our leading share of voice in the UK and Australia, whilst furthering our digital marketing capabilities, to ensure we maintain our lead in our marketing efficiency. For example, last year even with the significant increase in TV spend, our efficiency elsewhere ensured that total marketing cost per new customer acquired was flat year on year.

We aim to be the leader in large, regulated markets. Within the UK, Ireland and Australia, our track record of growth is impressive. Over the last three years, we have grown our online revenues by 22% per annum on average; and our retail revenues by 17%. Our market positions continue to offer substantial growth opportunities.

Having entered the Italian online market in May 2012, we have made significant progress, including reaching meaningful sportsbook market share.

However, overall market growth, as we reported last year, remains slower than expected. When you strip out the impact of previously unregulated business, transferring into the regulated market, the total online gross win was 2% lower in 2014 versus the prior year.

Furthermore, there is no growth in online customers, with, for example, the average monthly sportsbook actives, excluding the World Cup, down 5% year on year.

We are currently undertaking a review of the opportunity, which will allow us to better position our business for this market's reality. You will understand that's all I have to say until we've finished the review. The review will be completed in the coming months and we will update you in due course.

We continue to look globally for opportunities to enter new B2C markets. In markets which we deem unfeasible for B2C entry, we pursue B2B opportunities. We do expect to add some additional partners without distracting from our B2C activities.

The success of Paddy Power is built on its people. However, we can deliver more by organizing ourselves better and focusing on disciplined execution. Therefore, as you see on slide 23, we have changed our organization structure to align with our strategy, and improve our efficiency.

The structure now comprises three customer-facing segments: online Europe, online Australia, and retail; two global centers of competitive advantage: product and marketing, which deliver differentiated products and experiences; with these all supported by enabling central functions.

I'm delighted to have appointed Peter as Chief Product Officer. For the first time, we will now have a global approach to product development, with the central coordination of innovation and development allowing us to release cost synergies, which in turn will afford greater product output.

In the past, we have achieved operational leverage in our central functions. Overall rate of Group headcount and OpEx growth has slowed over the last two years.

Further opportunities for efficiency exist, through improved investment discipline, leveraging scale, and through geographic synergies. Crucially, these will allow us continue to invest in products and marketing in line with our strategy to differentiate and win.

What I'd now like to do is to take you through our three customer-facing segments to give you further details of the market context; our positioning in each market; and also some specifics of how we are implementing our strategy.

Starting with paddypower.com on slide 24, and our position within the current market context.

As Cormac referenced earlier, we were pleased with the rebound in top-line performance in 2014 for paddypower.com, by in particular investing in TV share of voice and targeting football. As the graphs show, all key metrics accelerated on the prior year and this gives us strong momentum into 2015 and beyond.

We continue to assess the impact of point of consumption tax. It's still early days, but we have seen some encouraging initial evidence of deflation in the price of industry media assets, although we will know much more following the sales of next season's Sky Sports and BT Sports media deals.

In the long run, we believe larger-scale and profitable operators, including Paddy Power, will benefit.

As the two pie charts at the bottom of the slide highlight, we are relatively underpenetrated in football and in eGaming. We believe these present opportunities for us in 2015.

Turning to how we are implementing our strategy for paddypower.com; in products, we enhanced our live betting pages in football within the last six months, and this year we will upgrade to other sports. Proprietary games now account for almost 40% of our games channel revenues.

We will continue to launch exclusive games. The team also innovates more broadly, for example, developing a games recommendation engine to assist customers finding games they like, based on their previous-play history.

Our brand and marketing will emphasize our product offering and we will continue to invest in our TV share of voice.

Now, not all innovative ideas will work and in this context, to ensure focus and efficiency, we have decided to discontinue Betdash and our Paddy Power Facebook social betting product, as well as our secondary gaming brand Roller.

Moving to Australia, where the market growth drivers are ideal for Sportsbet. Market growth is in online, fixed odds and sports. We lead in each of these areas with the best fixed-odds offering, broadest sports range and leading mobile products.

This has contributed to growth in our online share of almost 7 percentage points in the last two years, notwithstanding the market becoming increasingly competitive, following consolidation and new entrants.

This growth, combined with [our] substantial path investment in our capabilities, means that we have built both scale and profitability, which positions us relatively better than smaller or less-efficient operators to withstand both increased competition and all product fees.

There is still significant growth for further growth, given that TAB still have 78% of the total betting market.

So how are we implementing our strategy to maximize this opportunity? Well, in products, our new cash card facilitates withdrawal from ATMs across the country. We will have the most extensive cash-out product in the market and continue to improve the mobile customer journey, as well as leading the market on both pre-match markets and in-running markets available to bet over the phone.

Our brand and marketing, we've increased our investment in media assets, leveraging our increased scale in the market. Further enhancements can be made to our capabilities by leveraging Group expertise, which will also release some cost synergies, in particular in relation to sport product development.

Turning to retail which for Paddy Power is a growth business. Growth is driven by both strong top-line momentum in our existing estate with like-for-like growth accelerating in 2014, and by new shop openings.

Profits have grown by 18% on average over the last three years and this strong profit growth gives us greater resilience to withstand headwinds.

This is underpinned by a leading offer in products: we continue to add new sports content. Our machine gaming content is already the most expansive in the market, and that advantage will be extended with the introduction of proprietary game developed in our Bulgarian lab.

We are focused on attracting valuable multi-channel customers with initiatives, such as the simultaneous release of games on retail machines and online.

We're also currently trialing next generation TV displays, pictured here on the right hand side, to further enhance the shop experience for our customers.

We continue to manage costs in our estates closely and make disciplined investment decisions, targeting high returns and testing new formats rigorously before rolling out further.

Finally, turning to the year-to-date trading. As I said at the outset, 2015 has started well and sportsbook stakes are up 18% online and 8% in retail on a like-for-like basis. Sports results have been broadly in line with expectations.

I am confident that our strategic focus on product differentiation, distinctive brands and marketing capability, and leadership in large regulated markets will ensure we win in our markets and create value for shareholders. As a result, I am very confident about the future.

Now that brings us to the end of the formal presentation, so I'd like to invite questions. We'll start from the room and then move onto the phones.

Gavin Kelleher, Goodbody Stockbrokers. Just three from me please. Just on current trading, could you give a bit of a flavor, you say about sports stakes, how is gaming performance in online and on machines?

And in terms of results being in line with expectations year to date, just given what your peers have said, can you just give us some insight into what the difference is for you guys versus your two closest peers?

And in terms of -- maybe those first and then I can --

Yes, so just on current trading in relation to gaming, we're not breaking out the numbers, Gavin. But you will have seen that we finished the second half of last year strongly, both on online gaming and on FOBTs and on gaming machines. So that gives us good momentum coming into 2015.

With regard to results, like we say, it's been broadly in line with expectations; I wouldn't say it's been spectacular. I think others have referenced: there's been ups and downs, so week three of the Premiere League was very bad and said that was followed by a good week of FA Cup results when, in particular, Burnley knocked out Chelsea.

Last Tuesday was very weak; Champions League and the Championship last week were very bad results across the board. Having said that, we got some back on Wednesday night when Arsenal managed to lose to Monaco.

So it's been up and down, but as we said broadly in line with expectations.

And would Australia be significantly ahead year to date, or?

Cormac do you want to take that?

Yes, no I mean the results in Australia are also in line with expectations. Increasingly, some of those ups and downs in soccer also play in the Australian market. But, yes, momentum in Australia continues to be in line with expectation.

And just in terms of Australia, gross win margins going forward, you benefited from results last year. What should we think about gross win margins in Australia this year?

Yes, results last year were in line with our expectations and there is potential for further margin increase, as the mix continues to change. So as it goes more mobile, more fixed odds, as we increase the number of multiples that customers are placing bets on, that should drive margin further upwards over time.

Okay. Just finally, just on the European online business, can you give us some feel for free bets and marketing spend, what you expect this year? You talked about a bit of deflation in marketing assets; how should we look at those this year?

It's still early days, Gavin, so we're two month into the year. As Andy said in his statement we've seen some encouraging signs, the Channel 4 auction for racing last year showed some deflation but that's only 10% to 15% of the total market.

As Andy said, the Sky and BT auctions coming up will tell a lot on that. It's still competitive on the free bet front.

Our marketing, the best measure we have is marketing costs in online as a percentage of net revenue and that's trended back down towards the 20%/21%. It was higher in the first half of last year, obviously lower second half. Our expectation is we keep that number there or thereabouts, at the 20% level.

But it's still early days, there's new competitors in the market place although the [small] on our tail has eased back. We've seen Dafabet come in, we've seen others come in with big money. So it will be a while before we can be clear on it, but we expect our leading, marketing as a percentage of net revenue to stay leading.

David Jennings, Davy. Two questions please. Firstly, given the strategic changes announced this morning, I was just wondering what we should expect in terms of ongoing CapEx. In particular, with greater in-house development, should we expect a shift from expense to capitalized cost?

Then secondly, you talk about the scope for further improving leverage of Group product development and risk and trading functions in Australia. Setting aside any potential further changes in gaming taxes there, I was just wondering what you think the scope is for further improvements in underlying profit margins in Australia. Thanks.

Okay, I'll ask Cormac to take the CapEx question and then Cormac Barry to take the Australian question.

David, yes, our CapEx guidance for this year, if we give guidance on it, we said it last, will be roughly around the same it was this year, so we've got to a point where we still see opportunities to invest in retail, be it through -- we won't be opening as many shops, but we have new-generation screens that we're rolling out and there are still refurbs to be done. So we will invest in retail as we go.

And in Ireland, we've seen opportunities to get other shops as well, so that continues on.

On the split between CapEx and OpEx, I can't really give you a steer on that yet. We're still -- this year won't change significantly. The direction of travel is towards more in-house development, some of which is capitalized, some of which is expense, but we don't break that out per se.

I would say a guidance on CapEx this year, roughly the same as last year.

In terms of Australia, we continue to guide that revenue and costs should grow in line. Obviously, we've learnt from other markets the importance of having a strong or high operating margins, so we will be continually focused on leverage.

As Andy has outlined, there's an increasing Group focus on leverage within product, particularly within innovation, but also in other areas across procurement; talent management; and other areas where we can drive Group synergies. So we're certainly very focused on it and we see it as very important strategically to try and continue to move that number.

Any other questions in the room? Then we'll pass to the phones please.

(Operator Instructions). Vaughan Lewis.

On Italy, why do you think the market growth has been so disappointing? And are you now basically saying that that won't change and the market's stagnating?

Secondly, on online, just following on from that question there. Should we assume a step up in cost inflation to increase that investment in new product development and new technology?

And then finally, on Australia, has there been any progress extending the availability of in-play betting with any sort of automated functionality on smartphones maybe? Thanks.

Thanks, Vaughan. Just taking Italy first, as we referenced last year, market growth has been disappointing; certainly, considerably lower than when we first entered the market.

We're doing a lot of work on it. That's one of the points of the review at the moment. In particular, we're interested in the rate of migration from retail to online in Italy, but that's part and parcel of what's going on in the review at the moment. So we will have more to say on that in the coming months.

Taking your question on cost inflation in online, no, we don't see that. So we see two things in that business. We see the potential to invest more in products. We have great ideas within the business to innovate and develop products globally. But we don't anticipate that that will result in an increase in overall cost relative to net revenues. So we think we can find efficiency to invest in greater product output.

I'll ask Cormac to take the question on in-play in Australia.

Yes, in terms of in-play, there's no change on the regulatory front. The minister responsible for gambling, the portfolio changed prior to Christmas; so that has switched to Scott Morrison, and he is undertaking a review of the sector. The working group, which had previously been announced, is still expected to happen, but possibly in the second half of the year.

In terms of our focus on in-play, the phone channel is now effectively almost completely an in-running business and we're increasing our efforts in terms of promoting that above the line and also, as you say, trying to streamline that process. So yes, continue to watch this space and we'll look to maximize the opportunity our competitive edge gives us in the space.

Great, thanks.

Richard Carter.

Okay, three questions. Is it possible to say what proportion of your UK retail OTC is horseracing? And then could you just talk a little bit about what's been going on in that business over the last 12 months, in light of negative comments from the peer group that saw negative trends last year?

Then secondly, on UK retail gaming machines, I couldn't see it, but maybe it's in the release. But could you say how much of revenue it was from B3 games?

And then lastly, on the later shop openings in Ireland, how should we expect that to impact the business? And is this really going to be more of an impact in the summer months; some help around that?

And then just finally, actually, on the net debt, one-time net debt to EBITDA, is that a medium-target, because clearly, with the cash generation of the business, you're going to be materially below that very quickly? So how should we think about that as well please?

Richard, we don't split out the horseracing splits by division. But safe to say, horseracing isn't growing, but we're not seeing the particular pressures that I think one particular operator is seeing. So I wouldn't infer that it's a market effect to the extent that one operator is seeing.

Having said that, it's not a growing product and football is the growing product within retail, so that focuses our attention substantially.

With regard to gaming machines, B3 games account for around 25% of revenue for ourselves.

Later shop openings, the later shop openings in Ireland is a change in the winter months only. For a number of years, we've opened in the summer months in the evenings.

We expect that there's going to be some sort of a maturity curve, as customers get used to evening opening through the course of the year. So we expect that to have a broadly flat EBIT effect through the course of 2015.

I'll pass the net debt to EBITDA question to Cormac.

Yes, Richard, it's obviously guidance that we've given. It's not one times. We will draw down the debt and we will see how we go. We feel that that's the kind of range we will be in and we will see how we go.

So for the medium term, we'd be happy to keep it at those levels, that it depends on how things play out and opportunities present themselves or not. But as you say, it could pay down very quickly, but we're minded to keep some structural debt on the balance sheet.

Okay. Thanks.

Ed Birkin.

Just one for me. With regards to Italy, the proposed change in tax rate onto a gross win could change the market dynamics quite a lot. Does that mean we should expect this review to be quite a long one in order to give you time to evaluate how the market growth is going to change on the back of that? Or should we expect to hear something at the interims perhaps?

It will certainly, Ed, form part of the thinking within the review. It's certainly a scenario that we will consider.

We don't necessarily expect any change in relation to the tax rate through the course of 2015. But clearly, there is -- it is a scenario that we're considering.

Okay. And then just secondly, thinking of wider international aspects, I notice there's been more slightly encouraging signs about sports betting in the US. Anther of the commissioners say they expect it; it's inevitable perhaps in the next five years. What's your view over there? Do you still have someone based in the US looking at that?

Yes, we still have a very active watch and brief. You've seen what we've seen, which is obviously Adam Silver at the NBA was very positive. That was followed by positive comments from Major League Baseball as well. So certainly the commentary is more positive than it has been for some time and we keep a very close watching brief on it.

Great. Thank you.

Richard Stuber.

Just one quick question please. In Australia, could you split out what proportion is online and what proportion is telephone please? Thanks.

95% of it is online, so the phone business represents a very small portion of the business.

Great. Thank you.

Thank you. We have no further questions in the audio queue at this time.

Okay. If there's no further questions, then thank you very much, everyone. We're on the road for a few days, so look forward to seeing you and, of course, you know where we are if you want to pose any more questions. Thank you.

Thank you, Andy. Thank you, Cormac. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and have a very good day.