Flutter Entertainment PLC (FLUT) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Paddy Power IMS conference call. My name is Tia, and I'll be your operator for today. (Operator Instructions).

I would now like to hand the conference over to your host for today, Andy McCue. Please proceed.

Good morning, everyone, and welcome to the Paddy Power 2015 interim results presentation.

I'm joined this morning by Cormac McCarthy, our Chief Financial Officer; Cormac Barry, Chief Executive of Sportsbet; and Johnny Hartnett, Managing Director of Paddy Power Online. Our plan this morning is to take you through our performance in the first half, and to update you on our strategic progress and outlook for Paddy Power.

We're also delighted to announce that we have reached agreement, in principle, on the key terms of a possible merger with Betfair. The proposed merger is hugely exciting, and I will give a little more color on this at the end of the presentation.

Before I hand you over to Cormac to walk through the financial and operational performance, let me start with the highlights, on page 3.

The Group delivered a very strong performance in the first half with operating profit up 33% to EUR80 million. All of our online and retail divisions contributed to this performance with each business achieving strong double-digit revenue growth, and growing its market share.

In June, we implemented a new capital structure, and, including the final dividend, returned EUR441 million to shareholders. And we're increasing the interim dividend per share by 20% to some EUR26 million.

I outlined our new strategy to you in March, and I'm delighted with the substantial progress made. I will speak in more depth on this later, but we are particularly pleased with our new product pipeline. And we will release two new proprietary Sportsbet apps in paddypower.com next quarter.

This strategic progress, combined with the strong first-half performance, now means that we have an upgraded outlook for the full-year's operating profit, with growth now expected to be a mid to high single-digit percentage above last year, and also the consensus market forecast.

I will now pass you over to Cormac to review the financial and operational performance of the first half.

Thank you, Andy. Good morning, everybody, and thanks for joining us today. As Andy has said, and as slide 5 shows, the first half was an excellent one for the Group with strong growth in revenues and profits; up 25% and 19%, respectively, when measured in constant currency.

Revenue growth comprised a 28% increase in sportsbook, and 17% growth in gaming. In sportsbook, stakes were up 18%. And year-on-year revenue growth also benefited from an increased net revenue percentage, primarily due to channel mix and structural benefits.

As was the case in the first half of 2014, and as has been well trailed, punter-friendly results impacted across the sector, notably, in the first quarter. While the adverse impact this year was marginally less than last year, the actual gross win percentage was around 50 basis points below our normal expectation.

Operating cost growth was below revenue growth in all divisions. Increased investment in product and brand was funded successfully through savings generated by more focused and efficient execution, as well as through the benefit of scaling efficiencies, following heavy investment in headcount and capabilities in prior years.

Operating profit increased by 33%, or by 68% in constant currency, before taking account of the impact of new taxes and product fees.

Our effective tax rate, in line with previous guidance, increased from 13% to 15%, due to changes in the geographical mix of taxable profits, principally Australia.

Our interim dividend of EUR0.60 per share is up 20%. Allowing for the share consolidation arising out of the B share scheme, the total interim dividend is up 7% to EUR26 million, reflecting our confidence in our underlying performance.

Given the significance of the impact of new and increased taxes and product fees in the first half, I'd like to walk you through the year-on-year Group profit bridge to highlight both their impact and our very strong underlying growth. And this is on slide 6.

Total profit growth of EUR20 million comprised EUR45 million underlying growth; a EUR7 million benefit from a weaker euro; and a negative impact of EUR32 million in new taxes.

Underlying profit growth, as shown in the middle of the chart, was very strong across all of our divisions, with the exception of our UK and Irish telephone business. As we flagged in our May IMS, this channel was impacted by a freakish sequence of sports results; a run of results which have a less than 1% probability of occurrence, and, therefore, had negative revenues in the first half.

There's been no change in our view on the normal structural margin for the channel. And in the second half to date, the net revenue percentage is in line with our normal expectations.

As I referenced earlier, the overall year-on-year impact of sports results was only marginally better than the comparative half, with the main channel to benefit on a year-on-year basis being paddypower.com within online Europe.

The breakdown of the EUR32 million of new taxes is shown on the slide, with all of these having been already well trailed.

It's also worth noting, as we've set out in our statement, that the second half also sees a further half-on-half impact from Irish point-of-consumption tax, which commenced this month. It's about EUR8 million on a full-year basis. And also, some further increases in Australian product fees.

Our scale and our efficiency leaves us in a very strong position to both absorb new taxes and step up to the requirements which new taxes and regulation bring. The first-half performance prove this, given the 33% growth in spite of these significant tax headwinds.

On slide 7, as usual, we've included our divisional breakdown, just for reference purposes. And I'll now take you through each of the main divisions in detail.

Slide 8 deals with online Europe and includes our paddypower.com and Paddy Power Italy businesses, as well as our B2B activities. Underlying sportsbook growth was strong. Net revenue increased 37%, with a significant year-on-year rebound from sports results.

Notwithstanding the substantially increased level of winnings from customers, the World Cup in the comparators, and the curtailment of low-value customer acquisition this year, stakes grew 9%. If we exclude the World Cup, stakes grew 14%, and net revenue by 47%.

We have good gaming and B2B revenue growth of 14%, or 16% before the impact from new Irish VAT, which is deducted from revenues. This growth was again driven by mobile and proprietary content, whose momentum accelerated this year, with proprietary content now representing 22%; and mobile representing 55% of total eGaming revenues.

Our Italian business made good financial progress in the half, whilst also implementing significant operational improvements, which Andy will talk about later on. The operating loss fell substantially by EUR4.2 million to EUR4.7 million, with net revenue up 24%.

Operating costs in Italy reduced by 19%, and cost of sales as a percentage of net revenues decreased by 19% also.

Overall, operating profit for our online Europe division increased by 21% to EUR32 million, with the underlying increase before new taxes amounting to 127%.

As slide 9 shows, our Australian business again delivered another outstanding performance, with accelerated momentum in revenue and profits.

We further increased our market share, with stakes growth of 37%, driven by continued strong active customer growth of 34%.

Net revenue increased 46%, driving operating profit growth of 69% in the period, on top of the 68% increase we achieved last year.

Mobile growth in Australia was particularly strong with mobile stakes up 81%, to represent almost two-thirds of total stakes.

Telephone stakes also grew strongly, due to betting and running, which continues to be prohibited online.

We do note the recent introduction by some of our competitors of automated telephone betting and running products. We consider these products to be an unjustifiably high risk, as evidenced by the reaction of both the regulator and some of the large TV channels.

The situation does highlight, however, the inconsistency of Australia's current regulatory regime in allowing in-running staking in retail and phones, but not online.

Cost growth in Australia, 34%, was less than revenue growth, despite substantial levels of investment in new products, and in marketing. This, combined with the structural improvement in the net revenue percentage, led to a 4% expansion in our operating margin to 26%, notwithstanding increased product fees.

Turning to slide 10, UK retail operating profits grew by 3%, despite a EUR2 million impact from increased machine gaming duty, and the impact of additional regulations.

Like-for-like revenue growth comprised machine gaming growth of 8%, and sportsbook revenue growth of 9%, and a 5% increase in stakes.

Total net revenue growth of 9%, combined with strong operating leverage with OpEx only up 3%, due to good costs and continued cost discipline, and scaling of central UK head office costs, driving like-for-like profit growth of 6%.

The new regulations for the GBP50 staking journey on machines came into effect in April. The impact on year-on-year growth rates was mid single-digit percentage decline, which is in line with our expectations. Like-for-like machine revenue growth in quarter 2 was 3%.

Given our leading product proposition and per-shop profitability, we are still identifying attractive shop opening opportunities, taking account of increased MGD, new regulations, and planning laws. We now anticipate opening up to 25 new shops per annum over the next few years.

On slide 11, you can see that Irish retail profits grew by 36%, driven by strong revenue growth in the existing estate, and increased new shop openings.

If we exclude new openings, like-for-like stakes in Ireland were up 5%, and net revenue grew by 10%. This performance was helped by our shops now being allowed to open every evening, all year round, which also contributed to 7% like-for-like operating cost growth.

In both of our retail estates, we expect continued revenue growth, driven by both market growth, due to resilient core retail customer demand, and improving economic conditions, and by continued market share gains.

On slide 12, we cover our cash flow and capital structure.

We announced in March our intention to return cash to shareholders and implement a new capital structure, as Andy has said, moving the Group from a net cash to a net debt position. In June, we completed this, returning EUR391 million, or EUR8 per share, by a B share scheme, which was funded by surplus cash and EUR245 million of debt.

Profits in Paddy Power continue to convert strongly into cash. Operating post-tax cash flow generation has exceeded after-tax earnings for each of the last five years, being, on average, 133% of PAT, with the first half in line with that long-term average.

Net debt at June 30, was EUR147 million, or 0.7 times 2014 EBITDA.

It's the Board's intention, as we've said in the statement, to maintain net debt between 0.5 times and 1 times prior-year EBITDA to ongoing investment in the Group's business; and cash returns to shareholders by regular dividends and opportunistic share buybacks.

Normally at this point, before I hand over to Andy for the exciting and colorful strategic update, I take the opportunity to bore you senseless with lots of detail on tax and regulatory developments. Given you've, no doubt, had an eventful morning, and that I've already talked you through the significant impact new taxes have on the period, I'll let you off the hook this time.

So, in summary, 2015 to date was an excellent one for Paddy Power.

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

Thanks, Cormac. Let me start with a brief overview of the market context on slide 14, which informs our strategy, and Paddy Power's current positioning within that market context.

Global market dynamics are clear and well established. Online growth is outpacing retail as consumers migrate from retail to online; future foreseeable market growth virtually all lies in mobile; and sportsbetting is the biggest segment of the market.

Moving to the right-hand side of the slide, the four pie charts clearly show how Paddy Power is exceptionally well positioned for this market context with three-quarters of our profits from online; with over two-thirds of online revenues, or 40% of total Group revenues, coming via mobile devices; and almost three-quarters of our revenues coming from the large and robust sportsbook market, where we can both more readily use our leading capabilities to differentiate from the competition, and also where customers can be acquired more cheaply, and are less likely to churn.

The last graph, in the bottom-right, shows how we are also well positioned geographically, with profit spread across multiple markets.

We showed slide 15 in March, which gives an overview of our strategy. And let me remind you of the three key elements. Firstly, product differentiation: by this, we mean ensuring our products provide the best possible intuitive customer experience and that we launch innovative and distinctive betting products.

The second key element is distinctive brand and marketing capability, ensuring our brands stand out as entertaining and engaging, as well as communicating our product advantages.

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 and investment in growth.

We have also made good progress on ensuring the three elements are underpinned by clear accountability, and focused execution.

We are, as planned, successfully funding increased investment in product and brand from savings generated by more focused and efficient execution, achieving cost savings from a range of measures, including further increasing our presence in Bulgaria; the consolidation of our product development activities; and the restructuring of some roles.

We are pleased with the progress we have made since March in each of these three elements of our strategy, and I'll take you through this in detail on the following slides.

On slide 16, taking the first key element of the strategy, product differentiation, as you see in the top graph on the left, product is the most important factor in driving customer's choice of operator.

And, as shown in the bottom graph, for mobile products, where our investment is focused, customers place greatest importance on ease of use and the speed of apps. Accordingly, it is critical that we ensure the betting experience with Paddy Power is intuitive, easy, and fast.

We have been very busy in the last six months developing new products, and on the right-hand side you see the significant new product releases which are coming this year.

Next month, in Australia, we release Punters Club; the first of the new original compelling sports products we have in our pipeline. Punters Club makes setting up a betting club simple, secure, and fun, eliminating the need to chase your mates for money, or keep track of those whose turn it is to bet.

In quarter 4 this year, we will launch two new mobile applications in paddypower.com. Firstly, a new fully Native iOS app built in-house. The second release is a new HTML 5 web app, also proprietary, and improving our products across a whole distribution of platforms, replacing our current Android and iOS web apps.

These new apps will greatly improve our customer experience by delivering hugely improved designer navigation, resulting in apps that are easier and faster to use.

Customers will be able to find and place bets quicker; for example, the number of taps from app launch to placing a pre-match football bet is halved. And placing accumulator bets will involve a much smoother customer journey, most notably for cross-sportsbetting.

Following their release on mobile sports, we will own the customer front end, and be able to release new features and updates more rapidly.

The new apps also lay a strong foundation for further innovations which we have in development; and, along with an increasingly global approach to product development, fundamentally better position us within our competitive markets.

In eGaming, on slide 17, whilst we utilize key strategic partnerships with third-party providers to ensure we deliver a wide range of products to our customers, we also continued to expand and enhance our in-house capabilities.

Proprietary content is becoming increasingly material to Paddy Power. In paddypower.com its proportion of total revenues, as shown on the left, has doubled in the last year up to 22%. And during the first half, we launched our first proprietary games in Italy, and on our UK retail gaming machines.

The games content we are producing is of the highest quality. As you see in the center, proprietary games significantly outperform third-party games, and increasingly so.

And we are developing beyond content with our new proprietary bonus engine management system, giving us the ability to use customer analytics to intelligently promote our proprietary products, which will further drive growth.

Turning to marketing, on slide 18. In Australia, we materially increased spend to take advantage of the state of brand flux in the market. The additional spend has been both above the line, such as our TV ads promoting new products; and also in market leading promotions, such as our AFL lead-at-any-break money-back special.

In Europe, we secured leading packages on Sky Sports and BT Sport.

We decided to curtail some lower-value customer acquisition in the first half, most notably at the Grand National, for paddypower.com. Post-execution analysis highlight that this decision has boosted the return on our marketing investment, and significantly increased our yield per player.

We also, in line with our strategy to prioritize sports over gaming, reduced our TV investment in poker and bingo.

This focus on optimizing our spend helps maintain our long-standing, sector-leading marketing efficiency, as highlighted in the graph.

And there are three primary objectives of our marketing campaigns, as illustrated on the right-hand of the slide. Firstly, they aim to deepen the distinctiveness of our brands, and raise awareness with consumers.

Earlier this month in the UK, for the start of the football season, we launched a new creative campaign, and we are pleased with the results to date.

The next set of TV ads will be used to promote our new app launches, in line with the second key objective of our marketing, which is to highlight and differentiate our product offering to customers. And this is something we have done very successfully in Australia. For example, our current cash-out TV ads have helped contribute to Sportsbet being seen by 70% of consumers as the brand most associated with cash out.

Our marketing must also ensure that customers see us as being competitive on value with distinctive, simple, and relevant offers. For example, our bet GBP20, get GBP10 promotion in paddypower.com is clear and consistent, and targets key growth areas of football and betting in play.

Turning to slide 19, 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 20% per annum on average, and the growth accelerated further this year to 35%.

In retail, our revenues have grown substantially, and consistently, at 18%, and our market positions continue to offer significant growth opportunities.

In Italy, we completed the strategic review of our business in May. The review concluded that whilst market growth has been slow in recent years the medium- to long-term dynamics are attractive with mobile expected to be the key driver of future growth.

The review also highlighted that we had invested in a local presence, which was excessive relative to the size of the market; and that inconsistent investment in marketing had resulted in limited awareness of our brand.

It was also clear that these were addressable issues, and we have subsequently made good progress implementing substantial operational improvements. We have restructured our cost base, and generated further efficiencies by refocusing our customer acquisition strategy.

We continue to improve our customer proposition. And Italy will benefit from the global product releases I mentioned earlier.

We are also developing a new marketing strategy to address our low-brand awareness.

And these changes were achieved whilst also making good financial progress in the half.

As we set out in May, given our appetite to invest to achieve the best position for the long term, we do still have a way to travel to achieve profitability in Italy. We are pleased with the progress we have made to date, and are confident in long-term returns.

In other markets, we recently added a new Spanish B2B partner, Reta, a multi-channel operator and market leader in the Basque region. And we also renewed our PMU and BCLC partnerships.

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

Starting with online Europe, on slide 20, and our position within the current market context. As the graph highlights, we had strong revenue growth in the first half relative to our peers, and we grew our market share.

The UK market shows no let up in the level of competitive intensity with, for example, double-digit cost inflation in the BT Sport and Sky Sports media options completed in the first half. However, our view of the long-run impact of point-of-consumption tax remains unchanged in that we believe larger scale and profitable operators will ultimately take share as a result.

The right-hand side highlights two areas that we have targeted that has contributed to the market share gains in the half, and continue to offer further growth opportunity.

In football, we expect our new marketing campaign, well-targeted value offering, and the rollout of new products to drive further growth.

And in eGaming, we continue to maximize the sports cross-sell opportunity by extending our mobile leadership position and in differentiating with exclusive proprietary products.

Moving to Australia, on slide 21, where our top-line momentum has accelerated, and we further grew our market share, overtaking Tabcorp in the last six months to become the number one online brand in the market.

As the bottom graph shows, this top-line momentum is translating into very high profit growth with profits up 69% in the half, on top of the 68% increase achieved last year.

And to put this sustained growth in some perspective, it's noteworthy that profits in the first six months of this year were 24% higher than profits for the full year in 2013.

Our substantial scale and growth allows us to continue to invest substantially to drive further growth, whilst it has also enabled us to achieve margin expansion, with profit as a percentage of revenues up 7 percentage points over the last two years.

Our growth is underpinned by providing customers with leading products. And we further extended this in the half with some significant new releases, including the most extensive cash-out product in the market; adding live Victorian racing pictures; and by improvement to the mobile customer journey, such as fingerprint log-in.

As I referenced earlier, we have accelerated marketing spend during the year. And as the graph shows, in total this year, we expect to spend over double our 2013 marketing spend, illustrating our substantial growth and scale.

This increased spend is driving strong returns across all metrics. For example, we further extended our number one ranking for spontaneous awareness. We have the leading share of search on Google; and most particularly on mobile, where we have 30% more searches than the nearest competitor. And we are the number one brand used on mobile.

Turning to retail, on slide 22, which, for Paddy Power, continues to be a growth business. Growth is driven by both consistently strong top-line momentum in our existing estate, as shown in the graphs, and by new shop openings. The top-line momentum is driven by our market-leading customer proposition in both sports and gaming.

In sports, we continue to have the leading and most consistent value offer. For example, we were first to launch happy hour in our UK shops over five years ago now. And despite some recent competitor attempts to copy, our over-the-counter business continues to grow.

Self-service betting terminals is another area where we were first to market, and significantly ahead of our peers. We continue to be the market leader with over double the terminals per shop as our nearest competitors.

In gaming, our content is already the most expansive in the market. And that advantage was extended further with the addition of exclusive proprietary content.

We also continue to make good progress on multi-channel initiatives. In the coming months, we will work out in-store online sign-ups across our UK estate, following successful trials in the first half. Whilst paddypower.com has also successfully promoted a retail offering to online customers.

So, turning to current trading and outlook, on slide 23, the second half has started well. We are pleased with the substantial strategic progress we have made in follow-up differentiation, and in marketing.

This progress, combined with the strong first-half performance, now means that we have an upgraded outlook for the full-year's operating profit with growth now expected to be a mid to high single-digit percentage above last year, and the consensus market forecast.

And, on slide 24, as announced this morning, we are delighted to confirm that we have reached an agreement, in principal, with Betfair on the key terms of a possible merger of the two companies.

We believe that combination of the two businesses has compelling strategic rational, augmenting the organic growth strategy I have already outlined. It would create one of the world's largest online gaming public companies with revenues over EUR1.5 billion.

It represents an attractive opportunity for both Paddy Power and Betfair to enhance their position in online betting and gaming with enlarged scale and capabilities, leaving a better place to compete in existing and new markets.

The dual-brand strategy in Europe will utilize the distinctive and complementary brands of Paddy Power and Betfair, and it would combine two companies with complementary online businesses and geographical mixes. And it would create a diversified group with strong platforms across online and retail in the UK, and Ireland; and attractive international growth opportunities in Europe, the US, and Australia.

In addition, we have identified opportunities for cost and revenue synergies, which underpin the compelling strategic rationale for the transaction.

Under the terms of a possible merger, Paddy Power shareholders would own 52%, and Betfair shareholders 48% of the combined group. In addition, immediately prior to completion, Paddy Power shareholders would receive a special dividend of EUR80 million.

Also on the page is the composition of the combined group's Board of Directors. The combined Board would consist of an even balance of both companies. The existing Paddy Power Chairman, Gary McGann, would become Chairman of the combined Group; Betfair's Chief Executive and Chief Financial Officer would become the Chief Executive and Chief Financial Officer on the combined Board; and I would become the Chief Operating Officer and sit on the combined Board.

As we have already announced, ourselves -- as we have announced, sorry, ourselves and Betfair remain in discussions regarding the other terms of a possible merger. And, as such, there can be no certainty that a transaction will ultimately occur.

As I am sure you will fully appreciate, we are not constrained in what we can say in relation to the transaction, other than what we have outlined in this morning's announcement.

We will, of course, look to make a further announcement to you and the market as soon as we have further updates.

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

David Jennings, Davy. Several questions for me, please; some of which, I have no doubt, you won't answer. You did mention that you've identified cost and revenue synergies post-merger. Can you actually give us any kind of indication as to what kind of level we should expect?

Secondly, can you give us an indication as to the expected timeline from here for the merger? I think you mentioned in the statement this morning that we should expect another update in the not-too-distant future, but any detail would be useful.

And then finally on the merger, would you foresee any competition authority issues in any region should the deal be completed?

Thank you, David. I think you answered all three questions yourself. But starting with synergies, we can't comment on specifics at this time, but clearly we do see opportunities to leverage the combined scale of the Group, and to drive benefit from complementary nature of the two businesses. But we can't comment any further at this time, I'm afraid.

In terms of timetable, discussions are ongoing, as I say. And just to reiterate, there is no certainty that transaction will occur. But we're working on the structure of the combined Group, in particular, so that work is ongoing. But it's well advanced, and so we will update the market in due course. It's hard to say any more, at this point in time.

To your third question on competition, as is customary in mergers of this scale, we would expect there to be filings with relevant authorities. But given the complementary nature of the respective businesses, we're confident that we will be able to address any matters arising.

Okay, thank you for that. Just some questions on the standalone business. Firstly, just in relation to the marketing strategy, it looks like there's been a shift in approach in relation to customer acquisitions from volume to value. Can you talk a little bit about the reasoning for that change, and how you've gone about it?

And then, just secondly, in relation to in-play in Australia, as you alluded to, several of your competitors are offering an in-play product. Have you any indication as to how long it will take before we get a clearly go determination as to the legality or not of that product? And are you concerned that it puts your business at a competitive disadvantage, in the meantime? Thank you.

David, just on the first question, are you referring to paddypower.com?

Sorry, yes, paddypower.com, both UK and Ireland, and Italy.

Okay, I'll ask Johnny to take that one, and Cormac to take the one on in-play in Australia.

Yes, just on the move from volume to value in terms of our acquisition, we look very hard at the customers we acquire, particularly your end big events, which can often be seasonal and once-off punters.

We believe that at times the Grand National acquisition, historically, hasn't given us sufficient payback, and we made a very conscious decision this year to withdraw from that. To a degree, we're very happy with the results of it. The yield per player in our business has increased significantly in H1, up 33%, which gives us some validation that the strategy was right. It was primarily round big events.

In Italy, almost the exact same thing applies. We've been conscious to ensure that the customers we acquire we acquire them at the right price and the right CPA, and that we get the right value from them. Again, very satisfied with progress in the first half of the year, that, that strategy is paying off.

Cormac, on in-play. And it's probably worth just to bring out the distinction between the in-play products we do have and the competitor products.

Yes, absolutely. Currently, the high level legal position in Australia is that betting in-play is allowed on the phones, and is allowed in retail, and is prohibited online.

We have a very strong live betting business through our phone channel, and you've seen the revenues grow very strongly through that channel over the last numbers of years; and we're continuing to see very strong growth in those numbers simultaneously with the launch of these new competitor products.

While the legal situation is slightly gray, I think it's a very high-risk approach by the competitors; it's very aggressive in terms of regulatory behavior. Three of our competitors have launched these products; one of them has since withdrawn it.

We do know that there have been complaints to the regulator, who is ACMA. We do know that ACMA have referred those complaints to the Federal Police. We do know that the operators in question have been contacted by ACMA. We obviously will monitor events very, very closely, and we'll take actions, as we see appropriate, from there.

Any more questions in the room?

Gavin Kelleher, Goodbody. Just in terms of Australia, Cormac, could you give us a bit of color on current trading? Is there any economic impact down there, given what we're hearing about in terms of the macro economy?

And just in terms of marketing spend in the European online business, any phasing in that this year? Will we see a bigger increase in H2, given the double-digit increases you saw in Sky and BT that you mentioned?

Cormac, do you want to take Australia first; and then, Johnny, take the marketing question on online Europe?

The Australian economy remains robust and resilient. Consumer expenditure in the first half is very close to being up 5% year on year. We're obviously seeing very, very strong growth in our business. And the online wagering sector continues to growth north of double-digit within Australia.

While, I think, there are some concerns in terms of the global context, the Australian economy is very resilient, and we certainly don't have any significant concerns in that regard.

There is some phasing in the marketing spend on the online business in Europe; it's primarily driven by the World Cup comparators last year, where there was significant marketing spend around that event, specifically. But we expect to maintain our normal rate of marketing to online net revenue growth in the second half, which is circa 21%.

Okay, one more in the room.

(inaudible), [Ulster Bank]. Just a question on the taxes, Cormac; apologies for bringing you back to it. I think previously I saw some overview as to how the industry in the UK was looking to maybe come up with a framework to have a multi-year approach on taxes with the authorities. I'm just wondering is there any update on that? And what's the outlook for new taxes, or is the kind of the (multiple speakers)?

Yes, this is about industry taxes. The current government has continued with the policy of the previous government, and they have indicated to us that they are satisfied with where things are with tax at the moment, and they want to see how things bed down.

There's been some significant increases in taxes in the industry in recent years, not the least of which were a 20% increase -- a 25% increase in machine gaming duty from March of this year. And also, we've seen point-of -consumption tax come in.

Our understanding with government is that they are happy -- or happy's not the -- they're satisfied, that they should see how this progresses and take it from there.

So, we don't see anything on the horizon at the moment that would indicate any pressure in that regard. You never can tell. But the industry has gone through an awful lot of change in terms of what is implemented in machines, in particular, in retail in recent years, and the application of point-of-consumption tax modernizes things on online.

Our sense of it is you never can be sure about these things; that we're in an environment where the government have -- are happy to let things work their way through. And we see that as being the case for a reasonable period to come, but you can never tell with these things.

Okay, I think we're done in the room. So, we'll move to the phones, please.

(Operator Instructions). Vaughan Lewis.

Just, first one, online, can you just expand a bit on this volume-to-value strategy change? You've seen active customers drop, but very strong ARPU growth. Is that ARPU growth sustainable? And where do you see active customers going over the next few months, and years?

Secondly, on gaming, you talked about this shift to proprietary software, but your third-party software costs seem to be up in line with revenue. Why are the costs up so much there if you are driving more business through your own products?

And then finally, on the merger, can you just outline a couple of real key factors where you think Betfair is stronger than you, or what you think you'll be gaining that you don't have already? Thanks.

Okay, thanks, Vaughan. I'll ask Johnny to take the first one on online acquisition; Cormac to take the second one on gaming costs; and I'll deal with the merger.

Yes, just to expand a little bit on the online acquisition piece, the difference here was primarily driven by two things, which was the World Cup, which is obviously one-off event; and the Grand National. We believe the Grand National strategy was the right one for a couple of the reasons you've highlighted.

While our ARPU growth is 33%, we believe this is sustainable because stake growth per player was still significantly ahead of where our turnover number was. There is a small impact of results there, but not significant. And our ARPU growth in eGaming has been relatively flat, even though we've increased uniques by 22%.

I see no reason into the future why we would not return to sustainable growth, given it was a once-off event around the Grand National for both acquisition and our active customer numbers. And, obviously, we would expect an acceleration on this in H1 next year with the Euro 2016.

Thank you.

The one on the gaming shift to proprietary, that cost of sales line doesn't include just our gaming affiliate, it includes a whole lot of other things in there. So, yes, we are shifting more to proprietary. But we still have relationships with third parties that we buy games from, and we're happy to do that.

It's a bit of a math, Vaughan, because the gross win percentage is down, so you get a little bit of a distortion. Year on year, there's nothing in there that gives us any cause for concern; it is just the math and the gross win percentage being down. And we continue to have third-party relationships in a whole variety of areas, not just gaming.

Vaughan, to your third question, I think, as you see from the trading statements from both ourselves and Betfair this morning, both these companies are approaching -- are coming into this merger from clear positions of strength. And I think what you also see, and you will know well, is there is a good amount of complementarity between the businesses.

And I think you can -- you see complementarity if you take a cut either on product, on geography, on capabilities; and putting that together and looking at scale of the overall Group, gives us strong opportunities going forward for two companies where the strategies, their organic strategies, are already reasonably well aligned. So, it's putting that all that together that makes it incredibly compelling, from our point of view.

Great, thank you.

Patrick Coffey, Barclays.

Three questions from me, if that's okay. First of all, has Betfair been acquiring Paddy Power customers over the last year?

Secondly, as a combined entity, how easy will it be to link up the Paddy Power sportsbook with the Betfair Exchange, in order to offer a price-wise product?

And finally, in terms of omni-channel, in a scenario whereby you do merge, can you give us an idea of potential timescales? Or, indeed, how important is it to get an omni-channel product up and running, whereby Betfair customers could take out their deposits from Paddy Power stores? Thank you very much.

Patrick, just taking your first question, we won't get into the detail of that today. As you are well aware, it's a very competitive marketplace. It's intensely competitive. But I'm not going to get into the specifics of which operators we're taking share from, or vice versa.

In terms of the price rush and the omni-channel question, I'll put those together. We're not at a stage today where we can comment on specifics around the operating model. We'd be very hopeful that we'll be able to come back in, hopefully, not too short order in order to give you more color when we're more advanced. But we're still in discussions. We still have some detail to work through. So, if it's okay with you, we'll be back in more detail in due course.

Thanks very much.

Nick Edelman, Goldman Sachs.

I also have three questions, please. First is could you give us some idea of when you initiated talks with Betfair in earnest?

Second, in terms of the retail shop growth that you talked about today, would you be willing to step that up materially if other shops come up available for sale?

And then thirdly, in terms of the UK retail machines' impact that you talked about from the GBP50 journey, now that you are a few months on from that, is there an adoption curve to that? So has the run rate improved, or is it just very difficult to tell given the World Cup comp? Thank you.

Nick, listen, we've been talking for a while. The talks have been very constructive, they've gone well, we're happy with the pace; and we are very optimistic that, that will continue.

In relation to the retail shop growth and whether we'd be interested in any particular assets on the marketplace, what we -- we'll always be as consistent to our strategy, which, for some time in retail, has been a flight to quality.

And so, we have particular criteria that we work towards, which is that they need to be high returns on capital from retail; that we meet a particular threshold of expected returns per shop, so that we have protection on the downside; and such that it doesn't cannibalize our existing estate.

To the extent there are assets that come onto the market that meet that criteria, we'd be interested. If they don't fulfill that criteria, fair to say, the opposite is true.

In relation to the GBP50 journey, yes, you're right, it's still relatively early days. But I think the guys did a great exercise in terms of both managing the transition to the new regime in light of the GBP50 change; but also, foreseeing the expected impact.

We have had an impact from the proportion of stakes over GBP50 coming down. That's not been sufficiently offset by substituted revenues less than GBP50. We are happy with our carded play, and that's sector-leading. But I won't be giving a number; I think it's competitively helpful.

And the run rate is a little bit too early to tell. But the second quarter was a plus 3% growth, so quite a change from the first half. That was around a mid single-digit contribution from the GBP50 stake change, so I think that's something to read for the trajectory going forward.

Thanks. Maybe a small follow up to the last one. That card-based play, for example, in terms of cards issued, is that something that's just steadily growing, or you'd prepared significantly ahead and so actually there's not a significant ongoing change in card-based play?

The team re-launched our machine card in February this year, so well ahead of the change of April 1, which I think absolutely, with hindsight, was the right approach. That materially stepped up the proportion of carded play, and that's held to a very solid level since that point. And we're very happy with that. Normally, you'd expect some deterioration in the proportion of carded play, but it's held up very well.

Okay, that's helpful. Thank you very much.

Philip O'Sullivan.

Just a couple of questions from me. Firstly, on the retail sector, you're up to 334 shops now in the UK. I know you talked about opening 25 per annum over the next couple of years, but do you have a figure in mind for the market share you'd like to ultimately get to in UK retail?

And just related to that, I note that there was one closure of a shop in H1. Was this the first time you've done this? And was it a consequence of previous M&A, or some portfolio optimization?

Philip, market share is not particularly the way we think about it. We don't have a specific target in mind of market share; we just do think about it in terms of maintaining that return on investment threshold that I talked -- that I referenced earlier.

So, given that threshold, we now expect to open up to 25 shops. That's obviously some way down from the number of shops we opened through the course of 2013 and 2014; and that's a result of the combination of the increased machine games duty, and the GBP50 changes coming in, which negatively impact on our return on investment potential. So I would certainly work on and model on the basis of 25 shops, up 25 for the next two or three years.

Yes, we had one closure. It's the first closure in the UK business since 2006. It was an organic opening. It just didn't work out. It wasn't meeting its threshold and so that was the right decision to close.

Okay. And just the other two questions from me, guys. CapEx in the first half was [EUR14.3 million] down from [EUR20.4 million]. Obviously, as you say, the pace of store openings is a bit lower. But where do you see the full-year level of CapEx?

And then, on Italy, are you happy with the pace of the implementation to date of the restructuring plan, please?

Cormac, do you want to take the CapEx question; and, Johnny, on Italy, please?

Yes, we still have a store acquisition and opening program going on. So our CapEx guidance for the current year, notwithstanding phasing, is in line with the prior year.

You need to look at total CapEx; you're only looking at one part of it. So, total CapEx was higher than that. And our guidance for the year is around the EUR60 million, EUR65 million level for the Group.

Okay.

On Italy, very happy with the pace of implementation. Obviously, we started a review of Italy at the end of last year, and so we started to make some operational improvements from that point, despite the major announcement only coming in May.

Very happy with net revenue growth, particularly on eGaming, [which is an] eGaming-led market and that was a segment we were significantly underpenetrated in.

And the new team, new leadership team there have landed very well. So, very, very happy with progress to date. We're back on TV for the first time. And we intend to invest cautiously in marketing going forward in Italy. But very happy with the pace of our turnover, customer, and revenue growth.

Thanks very much.

Richard Stuber.

Just one question left for me, actually. I'm not sure if you can help answer it. In terms of potential cost synergies, I understand you can't give a number out, but is there any guidance you can give in terms of where those big pockets of cost savings can come from? Thank you.

Again, Richard, good try. I can't -- I'd like to, but I can't. And we're just not at that stage yet. So, to my reference earlier, we hope to be able to come back in fairly short order and give that color that you're asking for.

Okay, thank you.

Ian Rennardson.

Jefferies. Just one question for me. Seems to be quite a lot of detail I would have expected to get at this stage still to be sorted. That's around the synergies, it's around the product, it's around where you're going to be listed. I'm slightly wondering why you needed to announce now before you could give us a lot more detail, please.

Ian, I just think that we had a sufficient amount of key terms agreed, that it was the right opportunity to announce that to market. I think that's the right thing to do. As we are very clearly noting, though, discussions, they'll continue on the other terms. And once we have agreement on them, which we would expect to get, then we'll be back to give that more detail.

Okay, thanks.

[James Lennarson].

Just a few quick questions from me. Firstly, have you got any comments on the Australian regulation, both with respect to negatives, and also with respect to in-play going forward? I know you spoke about the landscape for your competitors, but just in terms of how it could impact you, going forward.

Secondly, if there's any potential for further geographic growth outside of Australia, or Italy, either organically or via the merger.

And lastly, of the 25 retail shops you're going to open per year, is this going to be in Ireland, or Britain? Are you seeing any difference in how those markets are performing? Thank you.

Just for clarity on the final question, so 25, up 25 shops is a UK number. I expect a handful of shops to open in any given year in Ireland.

Cormac, do you want to take the first question on Australian regulation?

Yes, I think the Australian political environment is very much already on an election footing. I think it's very unlikely we'll see any significant regulatory change at the federal level prior to the next General Election.

The government did announce a working group around the Interactive Gaming Act at the end of last year, but that working group has not kicked off. So, I think the traction in that area is slow.

We do, on an ongoing basis, see pressure around advertising. Advertising is a significant issue within Australia, and the level of gambling advertising, so we do see some creeping levels of state regulation, but nothing significant.

And in terms of the product fees, the direction of travel of product fees has been upward for some time. I think, in the last period we've seen, well, further increases of mitigation of the rate of increases. I think we'd see that as a positive signal, going forward.

So, really, the status quo, I think, would be the main message.

And, James, as to further geographic growth, we're always on the lookout for new opportunities, principally B2C. We apply a particular filter, which we've applied for a number of years, which is the size of the market needs to be attractive; the regulatory environment needs to be attractive; and the competitive context needs to work for us; as well as being somewhere that we feel that our strategy to operate will be effective.

It's clearly the case in the case of the combined Group and the combination with Betfair that the geographies are very complementary. And it's very much the intent that, that new Group would be very strongly positioned to attack new markets in the future.

Great. Thanks, guys. Very helpful.

Richard Carter.

A couple of questions, please, on the digital cost growth. It increased 10% constant currency; could you just say how much of that was driven by the OpEx increase? And, I don't know if you've already talked about this, but was marketing spend up in absolute terms?

And then secondly, you've obviously upped your product investment in the first half, and you were going to start to release these new products in H2. So, have you capitalized much costs? And what do we need to think about in terms of [D&A] in the second half, and going into next year, please.

I'll ask Cormac to take the second one, first, on accounting treatment of product development; and then Johnny to talk about the paddypower.com cost growth.

Yes, so, Richard, just to answer your question on marketing cost growth, there was a reduction in marketing spend of [7%] half on half, mainly in paddypower.com.

The other change in terms of our percentage -- marketing as a percentage of net revenue was driven by the increased net revenue in the year. So marketing was down, revenue obviously up, which was driving the decrease in marketing as a percentage of overall net revenue.

Richard, most of our development cost is run rate OpEx, it's not CapEx. Our CapEx is largely physical infrastructure. And our D&A guidance is in line with the growth in CapEx over the last number of years. There's a lag effect, obviously, but our CapEx for the Group overall has kind of topped out around mid-60s. So, your model can pick that up.

But we don't generally expense software development. We don't generally capitalize software development. And depreciation would be up mid-teens in 2015, consistent with our expectation.

Okay. Thank you.

There are no further questions in the queue at this time.

Okay. Thank you very much, everyone. You know where we are. Look forward to talking to you over the next number of days. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Have a great day.