Flutter Entertainment PLC (FLUT) 2016 Q2 法說會逐字稿

Good morning, folks, and thank you for joining us in Hammersmith this morning for the interim results of Paddy Power Betfair. I'm going to hand over to Alex in a moment, but a very quick overview.

Following completion of the merger, the Group has maintained good trading momentum during a period of considerable operational change. Our focus over the last six months has been on integrating the business to achieve an optimal operational structure; to create a new corporate culture and identity; and, of course, to realize cost synergies. This integration is progressing well ahead of schedule with the majority of key integration actions now completed.

The Group's culture and identity is taking place. And, we've identified some areas where the enlarged Group can become stronger than either of the individual businesses. I'll talk you through that in a fair amount of detail later one.

For the full year we expect underlying EBITDA to be between GBP365 million and GBP385 million, versus the pro forma 2015 EBITDA of GBP296 million.

Alex will now take you through the operational performance in the first half.

Thank you, Breon. Good morning, everyone. Let's start with the Group financial highlights.

Revenues in the first half were up 18% to GBP759 million. This growth is comprising of 16% growth in Q1 and 20% growth in Q2. As we said in our Q1 IMS, sportsbook revenues were impacted in the first quarter by adverse sporting results, most notably Cheltenham and Australia.

That was partially offset by good results in the second quarter, including a strong contribution in June from Euros 2016. The tournament, as a whole, contributed GBP38 million in revenue across our sportsbook and the exchange, with GBP22 million landing in this first half.

The revenue growth combined with operating leverage led to a 31% increase in underlying EBITDA, to GBP181 million; and a 39% increase in underlying operating profits.

A couple of things on cost and then we'll go through revenue detail by division. The overall operating costs increased 14%. The sales and marketing costs increased 31%; other costs increasing 5%. The sales and marketing growth was driven by a number of factors, Euro 2016 being one; continued asset inflation, both on traditional media and digital assets; and from increased competitive intensity in Australia, which we'll talk about more as we look at the divisions.

There was a small foreign exchange translation benefit in the period. And we'll talk about what it will be in the second half of the year. It'll be a little bit bigger in the second half of the year.

On a constant-currency basis revenue was up 16%. So that's GBP11 million revenue impact of currency. Our costs were up GBP9 million. That created a GBP2 million upside for the EBITDA. So on constant currency that will be an increase of 30%.

Finally, on this slide we have declared an interim dividend of 40p per share today. This takes the total interim dividend for the period to 52p, as we earlier paid pre-merger completion stub dividends covering January 2016, which equates to 12p of share, obviously split differently between the two groups of shareholders, of Paddy Power and Betfair.

Now on to the divisions. This is a divisional breakdown for your reference, and probably three things that we should be noting here. Each of our divisions had double-digit revenue growth in the period. 95% of the Group revenue are from regulated markets. 87% of operating profit is from our online divisions -- all of our online divisions combined.

I will now take you through some of the individual division highlights. Online: starting with online division which includes, of course, Paddy Power and Betfair brands, as well as our B2B activity. Revenue increased by 20% to GBP444 million (sic - see slide 6, "GBP440 million"), with the revenue from regulated markets up 25%, and our regulated market decreasing by 13%, due to the impact of exiting Portugal in the summer, in July of 2015.

Sportsbook stakes were up 20%. Exchange and B2B revenue increased by 3%. Sportsbook revenue increased by [37%]. Gaming revenue increased by 20%, driven by continued strong cross-sell from sports.

The division delivered good operating leverage with the total costs up 14% versus 20% revenue growth, notwithstanding significant growth in sales and marketing costs.

Underlying EBITDA increased by 34% to GBP140 million.

We go to slightly less good news, but still a very solid performance. So Australia, stakes continue to grow strongly in 2016, increasing by 29%, despite a significantly intensified level of competition versus prior year, when a number of our competitors were rebranding.

Revenue growth of 17% was impacted by adverse gross margin -- gross-win margin, particularly in horse racing, where over half of the top 50 races in the period were loss making.

Australia's net revenue percentage was approximately 1 percentage point lower than our normal expectation in the period. The impact of this, combined with a 30% growth in costs, resulted in a decline in profit versus the prior year.

Sales and marketing costs is the biggest increase and sales and marketing costs increased by 35%, due both to our ongoing substantial investment in media assets and from assets and from significant cost inflation, driven by the increasingly competitive environment. I think we've made a point that, even with that increase, we didn't actually get all of the media assets that we wanted. The competition is red hot and the prices are very high.

Other operating costs also increased significantly year on year, reflecting new hires in the second half of the year. We would expect this growth in cost base to moderate in the second half of 2017 (sic - see slide 7, '2016'). What I would expect in the second half of 2017 (sic - see slide 7, '2016'), based on this moderation of costs and based on the normalized gross margin, I would expect EBITDA improvement in H2 both versus H1 and versus H2 of last year. Hopefully, that's what will happen. Obviously, gross-win margin is always a question.

There has been a lot of regulatory news flow over the past few months in Australia. Clearly, the industry is facing increased regulatory headwinds, which can impact both on revenue growth and on profitability. We do, however, believe that in longer term, our brand strength and scale allows us to better withstand these regulatory pressures.

On we go to retail, turning to retail where both our UK and Irish estates have good revenue growth in the period, increasing by 11% and 6% respectively on a constant currency basis. Like-for-like net revenue was up 4% in constant currency, comprising 4% sportsbook growth and 5% increase in machine gaming revenue, primarily driven by B3 content. I bet you're all impressed that I know what B3 content is, so quickly in my introduction to the shops, but I do (laughter).

We opened six new shops in the first half and closed one UK shop; and, currently, expect to open approximately 10 more shops in the second half of the year. The six openings were three and three, UK and Ireland. The expectation for the 10, the majority will be in the UK.

US, revenue increased by 16% in local currency, driven by 17% growth in volume at TVG and 15% growth in casino revenue at the Betfair New Jersey business. In May, under the Betfair brand in New Jersey, we launched the US market's first online exchange wagering platform for horseracing.

And while the size of the New Jersey market shouldn't get anybody here excited about this, we see there's a good opportunity to test consumer demand for exchange betting. Obviously, it's in a very, very early stage, so please don't ask me about performance. It's extremely early and extremely immaterial, at this point, but we need to see how it goes. It's good to have the opportunity at least to test it.

We move on to cost synergies and as Breon mentioned earlier, integration has progressed ahead of schedule, and the majority of key actions have been completed.

We were pleased to be able to identify additional cost savings and now expect GBP65 million of synergies versus GBP50 million we initially envisaged. 60% of those were headcount, so before you ask me where are these new synergies come from, it's the headcount has driven a lot of it. However, there is -- obviously, 40% were other things, which we've mentioned and those are also very important.

We continue to expect the cost to achieve synergies to be less than GBP65 million, which is what we said. We expect phasing of the synergy benefit as shown on the chart. We now expect the full savings to come in in 2017, a year earlier than we previously expected. In the current year, we expect GBP30 million benefit, of which GBP9 million was in the first half of the year. The key actions involved are listed here. I'm not going to repeat them, all of them have contributed.

The GBP65 million -- I just want to make a point, the GBP65 million that I'm talking about, they have already been achieved. So we already know those synergies. This is not something that we're still -- this is not aspirational. This has been achieved as of now and that's what the expectations are for next year -- for the full year next year.

The one thing I'm going to say now is that this is the one and only time you're going to hear me talk about synergies, period, because we have integrated the businesses. We've set the target. We overachieved on the target. From this point on, it's operations of the combined business. So please do ask me any more whether more synergies, anything else. It's all business as usual from this point on.

Next slide, of course, is the slide that's most important to any accountants in the room. It means nothing to most other people but -- no. So separately disclosed items, I just want to really very briefly cover them.

We have -- obviously, they all relate to the merger, advisor fees and stamp duties total GBP56 million. GBP6 million of which was incurred last year, so there we see the GBP50 million this year.

Of the cost of delivered synergies, GBP49 million was in H1. As I said, we continue to expect the number to be less than GBP65 million. My expectation would be that for substantially all of them, if not really all of them, will hit in the second part of H2, and that will be the end of that story.

Now, obviously, the most significant non-cash charge relates to the acquisition accounting and amortization of intangible assets. All I'm going to say about it is that you have -- in your pack, you're going to have a page that gives you the amortization from now 'til it finishes. It's between two years to eight years. Look at it; study it; enjoy it. I'm not going to spend a lot of time discussing it now.

Something slightly more interesting, cash flow. Our profits continue to convert strongly into cash flow, with the underlying free cash flow representing 77% of underlying EBITDA. The cash outflow relating to the separately disclosed items were GBP63 million, compared with GBP99 million on the P&L charge relating to these items. You should expect further outflows for these items in the second half. Those will relate to people costs and some advisors costs, which we haven't paid yet.

At June 30, the Group had net cash of GBP2 million, excluding customer funds and restricted cash of GBP92 million and customer funds held off balance sheet of GBP307 million.

The year-on-year decline in net cash from GBP121 million to GBP2 million is due to the payment of GBP188 million in dividends. Let me just repeat, GBP188 million in dividends and GBP69 million of merger-related costs in the past 12 months.

Of course, I know the question is coming; we do keep the efficiency of our balance sheet under constant review with the Board. We will have nothing to say about this at this meeting. But, obviously, the Board looks at it; the management looks at it. As soon as we have something to say about this, you'll be the first to know -- after us, you'll be the second to know. I'll be the first to know.

The final slide, the piece de resistance, I'd like to call it, is the financial guidance for the year. This is the summary of the financial guidance. First of all, as Breon mentioned, we expect full-year underlying EBITDA to be between GBP365 million and GBP385 million.

This guidance assumes normal gross-win margin and current FX rates. The range affects the potential impact of adverse sporting results and unfavorable movement in the exchange rates for the remainder of the year.

I've already covered cost synergies.

We have reported the marketing costs were up 31% in the first half and we expect similar growth for the full year.

Now, the one little wrinkle here is that for the second part of the year, that 30% growth will include about -- 10% of that growth is going to come from FX fluctuation. So in real terms, marketing will come down but in terms of -- in terms of what you will see with the FX, provided the FX stays where it is now, of course, you will see the same 31% growth for the full year; a 30% growth for the full year.

We expect -- CapEx is expected to be between GBP70 million to GBP80 million. We expect our 2016 underlying effective tax rate to be 16% and we currently anticipate some upward pressure on this rate over the next few years, but we'll see how it goes.

Now, a couple of things about the FX, and here's what people need to really appreciate. So for the basket of currencies we measure against are of course, Australian dollar, US dollar and the euro. 75% of our profit is in British pounds. The rest of our -- the rest of it is distributed. There is profit in Australian dollars; there's profit in US dollars; and there is a loss in euros. So we have more costs in euros than revenue. Therefore, euro and the movement of FX offsets the positive. So the weakness in the pound is positive for Australian dollar, US dollar for the result, but negative for the euro.

There is an offset, so that's something that people have to appreciate. When they look at it, it's not evident that in euros we, actually, have more costs in euros than we do revenue. So that's a very important point to understand.

Now, what that does, when you look at it in today's mix, for every 1% change in the GBP rate against the basket of currencies, you get GBP1 million to GBP1.5 million movement in the EBITDA for the year. So that's roughly how you need to think about it.

I'll tell you that my expectations currently, if the rates stay where they are, the tailwind for the EBITDA on FX for the full year is roughly around GBP9 million. We got GBP2 million in the first half, roughly GBP7 million in the second half; so roughly GBP9 million for the year would be the tailwind provided, again, the exchange rates stay where they are.

On that note, I thank you for your attention and I'll give it back to Breon. Thank you.

Thanks, Alex. We thought, given this is the first proper set of results since the merger, that we'd go into a little bit more detail about some of the values that we see is created because of our scale. So there'll be a little bit more strategy than we might have otherwise done at this time.

Obviously, the merger created a global group -- or largely a global group with leading positions. We're the number one online operator in key regulated markets and we also have addition our exposure to a large number of other international markets.

We have a very good retail estate in the UK and Ireland. And, we have leading differentiated sports betting products and a portfolio of distinctive complementary brands.

I think we've some of the best people and probably the best team in the industry with some great assets. We've leading capabilities right across our operations including in technology, product development, marketing, risk and trading.

We talk all the time about scale of the business, but this is now a business of some substantial scale. We, of course, highlight the enormous quality business of Bet365. But we feel that our local online scale in the markets, highlighted on the right, combined with the resources that the global scale offers us, puts us in a good position to compete in this very competitive market.

Going to a second for our strategic focus. Before the merger Paddy Power and Betfair shared many strategic priorities, and these continue in the combined Group. We will continue to prioritize investment in the fastest growing areas of the market, specifically prioritizing digital channels. We'll be sports led and a mobile first in most of what we do.

We'll continue to take a cautious approach to unregulated markets and our investment will focus on markets where there's good regulatory visibility.

You've heard me say many times before, but we believe that ongoing substantial investment is critical to success in this industry. We include in that product marketing and technology, but also talent. This approach will continue.

Many of you have heard my views on the benefits of scale for online businesses -- online consumer businesses. We think that this allows increased return on investment particularly in terms of product and marketing. We'll dwell on that in a few seconds.

It in turn allows us to invest more and it's a significant competitive advantage, both in existing markets and when we enter new markets.

Both companies sought independently to achieve scale and their growth in recent years had progressed well on that front. But I think, in truth, in our darker moments, we wondered whether other operators had an unattainable head start from us. I think now we, undoubtedly, we have the scale we need to succeed.

There are simply three key priorities. Firstly, the merger of the two businesses has started very well, but there continues to be opportunity to improve upon that and that remains the primary focus at this time.

Secondly, we're seeking to maximize growth in the UK and Ireland by optimizing the brand positioning of the two very complementary brands.

And finally, we're focused on doing this efficiently, using our scale, but also delivering returns to our shareholders. I'll talk through each of those in turn.

In terms of product, you've heard me say before, we believe that Paddy Power and Betfair independently were two of the top three operators in the industry. This merger gave us a one-off opportunity to select the very best people, assets and practices from both operations and, accordingly to enhance our overall competitive positioning.

We started quickly to do that. It helped that there was some shared knowledge between the two businesses. But there was also a real spirit of cooperation from the very outset. And I think these results show some early wins there.

One of the first places we got synergies was in trading and risk. I (inaudible) of runs that function for us had previously worked at both Betfair and Paddy Power. Although, it's only in the last two weeks that the teams have been co-located, located together in the new head office in Dublin, from the very start, even before Cheltenham, there was synergistic thinking and knowledge share in that team.

You see there highlighted on the slide. We started sharing trading models so that the Paddy Power sportsbook now has additional in-play football markets, including flash markets, where customers can bet on what happens in the next minute. These have been very well received. 20% of in play bets and 11% of in play stakes at Euro 2016 came from these new markets for Paddy Power customers.

Similarly, our Betfair sportsbook customers have benefited from a number of new sports and markets. This is probably most significant in tennis where you see on the top right, twice as many matches are now available in play.

We're also pleased to note that we were able to very quickly add some of the Paddy Power proprietary gaming content, the Cayetano content to the Betfair website and mobile products.

This content -- this quality content contributes over 50% of the gaming volume of the Paddy Power games tab and in many areas has outperformed third-party content. There are now 18 of these games available to Betfair customers and over the last month they contributed 17% of volume on the Betfair arcade tab.

While these changes have undoubtedly improved the customer experience -- the product and the customer experience for both brands offerings, full product sharing will continue and won't fully take place until the platforms are further integrated to a common platform.

With that, we find ourselves talking about technology more and more here. These two charts were to illustrate where the companies have come from, and the next slide is where we hope to get to.

This slide shows the basic architecture of the current online platforms with the Betfair platform on the left and the Paddy Power platform on the right. The in-house components are highlighted in yellow and green respectively.

At the top of the chart, so the customer facing websites, mobile apps, which we refer to as channels, you can see that across both platforms the key sports channels are proprietary, including the Betfair website and mobile channels and the Paddy Power mobile app.

Specifically, what that means is that the Paddy Power desktop is still tightly bound to the original OpenBet stack and we can't talk about it being a proprietary channel at this time.

Moving down the platform, the differences become more apparent. Betfair's platform reflects the businesses' technology heritage and consists predominantly proprietary systems. Its modular architecture; its shared APIs and platform services ensure a high level of scalability and flexibility.

Paddy Power, historically, has had more reliance on third-party systems, but has in-house proprietary market leading a sportsbook pricing and risk management tools along with the proprietary in-house gaming content we talked about earlier.

While this architecture has served Paddy Power very well, coming as they did from a bookmaking and branding background, we're very excited now about combining the best of both architectures and just being more strategic in our sourcing of technology platforms in the future.

When we think of the future, this slide illustrates our probable future platform architecture. The primary objective is to ensure that we're best positioned for the long term by having a platform that's efficient, scalable and flexible and controllable; and then, can support multiple brands, multiple channels and multiple geographies.

We will achieve this by extending the modular architecture, Betfair's existing platform, and enhancing that with a key proprietary pricing and gaming content from Paddy Power. This new platform or this aspirational -- this illustrative platform will deliver a number of key benefits.

Having the key functionality located in proprietary platform layers delivered an improved pace of development; improved retention of knowledge and IP; and gives us the ability to customize customer bonusing and promotions. It also improves efficiency.

With in-house developers typically costing about one-third of the cost of third-party development resources and probably being more efficient, because they have domain expertise and that we keep them for longer, we're quite excited about this.

It significantly improves the speed and the cost of releasing new products and multiple brands, channels and geographies.

I want to dwell on the opportunities, but to contextualize this, Paddy Power Kicker, which is an innovative side bet product that was launched on mobile, on IOS and mobile web, was -- when you place a bet on soccer matches it proposes a side bet. That's a very clever piece of product, but requires quite a lot of work to rebuild that for the desktop offer.

When we get to an end-state architecture like this, it will facilitate rolling out product, testing products like that more quickly, but critically rolling them out across all channels more efficiently.

We're excited about the key benefit of lower time to develop -- lower cost and time to develop, and that's also an advantage when we think about new markets.

This may be a little bit too detailed for some of you, but just to illustrate the advantages of the modular architecture and in-house development, we'd like to examine the cash-out product currently offered by Paddy Power and the Betfair brands.

The schematic on the left shows the location of the key cash-out algorithms. Betfair's product was developed in-house. I think we were first to market with that, and is developed in the platform services layer.

You see the yellow box in, from your perspective, the left-hand chart. Betfair service was developed externally with OpenBet and is positioned in a slightly different place in the stack.

Now, cash out places substantial demand on our system, on our networks, particularly at peak periods, nearing the end of Saturday 3PM fixtures where customers frequently refresh the value of their cash-out offers.

You've heard us talk about that in the past and I think we've highlighted that. It isn't actually just the building of the algorithm, but also supporting the demand.

To highlight that, at peak -- the record number of requests for cash out, the record number of refreshes was 11,500 refreshes per second experienced on the Betfair stack earlier this year.

This demand requires investment in peak capacity to provide a good customer experience. This capacity is currently 4 times -- the Betfair capacity is currently 4 times that of the Paddy Power product.

Secondly, understandably customers expect cash out to be available when they want it. Typically, on a fourfold football accumulator, the Betfair cash out is available 91% of the time, and the 9% downtime representing time around key event, such as goals and red cards.

That compares, we think, with an average of about 81% on the Paddy Power cash-out offer. You can see on the top right that customers seem to notice the difference.

Surveys show that Betfair cash out is rated as being best in the market. The next one after that is from another operator, who has a proprietary cash-out technology.

The four brands on the right are third-party technology, and while satisfactory and more than satisfactory in terms of getting a product to market, we continue to believe that investment in product and technology capability around stuff like this, that the customers really value, gives our combined Group an opportunity to out-compete.

These factors have led to a much greater use of the product by Betfair customers with 7 million bets cashed out in 2015 compared with 2 million in Paddy Power.

That's not a perfectly like-for-like stat, because obviously the Paddy Power business has a much stronger cut-through on horseracing. But I think it illustrates that customers, over time, value subtle differences in product. I think we're well-positioned to compete given the technology capability here.

In marketing, so we've talked about some of the opportunities we've seen in risk and trading, and how they were achieved earlier. We've talked about some of the opportunities we see for product and technology.

There's also been substantial opportunities in marketing. We're already beginning to see dividends from that.

There really was complementary -- almost on a function or some function by function basis, there was complementary capabilities in the two businesses.

In digital marketing the different teams had invested in different areas. There's a number of examples where one team either has an advantage in terms of technology, process or people.

One business had invested in proprietary systems to optimize paid search. There's dark-ish arts around how to optimize bidding, and that business was achieving significantly better returns on their spend as a result. Both brands are now using that technology.

One of the businesses had superior use of ad server technology and data techniques to deliver content to more relevant audiences, again improving returns. Both businesses will shortly be using the same technologies there.

One business had an improved CRM platform with more technology in-house where there was more advanced algorithms where customers were delivered the most appropriate next message based on where they were in their lifecycle.

There was greater automation of this and it was more scalable than the other. Within the next few months, so by the end of the year, we hope that this platform will be used by both brands.

We also see that by pooling our analytic data and, actually, seeing how two brands compete in periods of time where it's harder to know, actually, what's going on in the market, be that the Euros or the Olympics, but by pooling analytics data we're able to -- and understanding the different marketing mixes, we're able to improve our econometric modeling. We see excellent opportunities for A/B testing, different promotions across different brands.

We've much greater insight into the impact of altering spend on certain channels, when comparing data from just one brand on its own at that time.

The obvious and simple advantage of this is, by trying different approaches and then reacting quickly, we're able to [up-weight] activity where it's delivering the best returns.

Coordinated bidding can improve the efficiency for both digital assets and traditional media assets. In paid search we're able to optimize bidding across key words on both brands. Interestingly, we've found that the effectiveness of each brand differs depending on the sporting event at that time.

We're also enhancing overall returns from sharing traditional media assets, for example, Betfair chose -- we decided at Betfair that we couldn't afford Channel 4 racing slots for the Betfair brand on a standalone basis. But we're now able to use some of the slots originally acquired for the Paddy Power brand and we think that's increasing the average return for each add for both brands.

Many of you know that Paddy Power had real deep proprietary capability in sportsbook pricing and risk management. By the sharing of these pricing models combined with the greater volume of bets that we're seeing across a broader customer base, we're able to price more accurately and respond to the market more accurately than either brand could have done.

That certainty around pricing should lead to gross win -- an opportunity for gross-win margin improvements. We're not going to be led at this stage and we're not going to dwell on this stage on whether we keep that or reinvest it. But we have more confidence in our pricing now and a greater ability to quickly respond to the market.

There's the enhanced customer risk management experience to sharing more data and that continues. I think the very fact that we're already happy with the results of that, but have only, in the last couple of weeks, put the guys together in the same room, is quite exciting.

Similar to what we're doing in marketing, we can test different pricing strategies and observe customer behavior, different price points and different promotional behaviors across the two brands.

Exchange pricing now is more visible to Paddy Power. We can reduce, for example, the amount of time that sportsbook prices are unavailable when there's been a suspension.

Finally, on this slide, not because they're material in their own right, but because we wanted to highlight that there's been real appetite, there's been very real appetite from both legacy teams to really maximize the value at every level in the organization and at every different part of the P&L.

We've started using pool customer service teams at peak times. During the European Championships agents were able to answer calls and queries from both brands. That improves agent response times and efficiency. We believe and have evidence that sharing information can improve customer signup journey.

We seek to verify customer identity using automated sources to remove a key obstacle to conversion. But, in 2015, approximately 200,000 customers -- 200,000 new activations failed to convert into active customers when they were asked to manually verify documents. We now believe that being able to pool verification across the two brands will allow us to automatically verify significant proportion of customers on the other brand.

Obviously, there are benefits here in the areas of fraud retention -- fraud management and responsible gambling, which benefit from having a combined function.

So that highlights a whole -- some of the opportunities that we've already captured and how we're thinking about some of the opportunities ahead.

And I'll move then for a second to talk about the brand positions in the UK and Ireland.

Both brands are very well established in the UK and Ireland, but have a relatively limited customer overlap. You'll recall that last year we shared data from a third-party researcher that suggested the customer overlap between the two brands was about one in eight customers, about 12% or 13%.

We've now had an opportunity to compare the two databases. The chart on the left shows that about, we believe, only 9% of the UK -- of the combined UK customer base, used both brands in 2015.

If we look at that on the most comparable basis being the two sportsbooks, the chart on the right-hand side shows that only 8% of combined sportsbook revenues in 2015 came from customers who are active on both brands. That results partly from the two brands having a stronger presence in different market segments. It's quite encouraging too, in terms of the opportunity that we have to play for.

When we think about segmentation of the market, we segment the sports betting market based on the customers' attitudes to gambling, between customers who are money-orientated and focus on value, to customers who are thrill-seekers and customers who've bet for social interaction and entertainment. That segmentation is shown on the horizontal access.

The vertical access represents sports preference, they're obviously customers who primarily bet on racing or football, or customers who bet on a mix of other sports or on many sports.

These three categories of customers' attitudes or gambling motivations, there are distinct reasons for what brand they choose, the key drivers for that choice are shown at the bottom of the chart. Obviously enough, money-centric customers value best odds, range of market, but are very, very sensitive to the reliability of the website.

On the other hand, as you'd probably expect, social, they care more about the emotional -- there's more of an emotional response, an emotional attachment to the brand, and the brand that does things differently is valued by them.

The size of the box roughly indicates the proportion of the total market represented by each segment. The yellow and green shading show the segments where each brand over-indexes relative to its overall marketing -- its overall market share.

This shows that the two brands are currently strong in distinct market segments. It explains the limited customer overlap and gives us an opportunity to enhance our overall combined positioning.

So, for example, no surprise, Betfair historically has appealed to customers that are more money and value-orientated; and Paddy Power has appealed to customers more on the social interaction and entertainment side.

We've opportunities to improve this efficiency, and I think with our scale as we improve usability, range of markets and convenience, as we improve that for both brands, that will help us also get into the gray space in the bottom left of the chart.

Our brand approach will be pretty obvious to those of you who have been watching the advertising. This is initial thinking but I think we'll be -- reflects how I thinking will be for the next number of years.

The Betfair brand will be largely functional and rational; Paddy Power will be more brand-led and emotional. The two pictures here are stills from the latest adds. Betfair will focus on the types of customers that you -- we've just described. Paddy Power will focus more on the other. There will continue to be an overlap, but I think that by sharpening our focus on these segments we can more resonate with those customers and that in turn will be a more efficient way for us to grow the business.

Now, let's turn for a second to a third key area of focus, actually capitalizing on our scale and on this slide with particular reference to marketing.

In marketing, we have substantial fire power with approximately GBP300 million in spend across -- in 2016 across the Group. This spend, combined with the ability to share assets across brand and/or geographies mean that we can now acquire the most attractive assets.

For example, in the new football season we're the largest advertiser in the gambling category by some distance. I believe we're the second largest advertiser on Sky full stop, after Unilever.

We've also secured the top advertising package on BT Sport.

In the last few months we've become the official global partner -- betting partner for FC Barcelona for the next three years which will be valuable to us in multiple territories. And, we've just signed a five-year sponsorship deal with the NRL in Australia.

So we have the opportunity to compete for the very best assets in the space. As Alex said earlier, there continue to be good assets out there that we don't own; and there continue to be other operators who challenge us for this. But we are now the go-to guys when people think about partnership -- multi-year partnerships for premium assets for betting companies.

Combined with the ability to share media, our scale also allows us to more efficiently utilize this. For example, the top chart on the right-hand side, we estimated the average unit cost of key TV assets is significantly below market cost. We thought about whether to include this chart or not, but we think this is apparent to our competitors. It's a function of our purchasing power, the absolute amount we're spending. It's also a function of the fact that we're using multiple brands. We think that's a sustainable advantage for us in the UK and Ireland.

The bottom chart shows that we are using this efficiency to drive increased exposure for our brands. On a combined basis, our share of voice for the football season has increased from 24% last year to over 30% this year.

This very important chart is here just to, again, highlight the importance of product development and technology. Substantial ongoing investment is required for achieving and retaining -- for acquiring and retaining customers and to maximize our share of wallet.

Even after the synergy, even after the redundancies that have come as a consequence of the merger, we have approximately 1,000 employees across the Group developing products, which is significantly higher than either business had. This allows us to roll out more products in existing markets. It also gives us capacity to enter new markets, over time.

Typically, new market entry requires specific development to satisfy local regulations. For example, when Betfair entered Italy a couple of years ago, at one stage more than 20% of the developers in the Group were focused on getting live in the Italian market. So having more scale here allows us to get more stuff done more quickly than our competition. We think that that's a very encouraging part of the story.

In conclusion, the last six months were about maintaining our strong trading momentum. I'm very proud of the achievements of the team in delivering that, but also combining the two businesses efficiently.

We're pleased that we've been able to deliver a good financial result for the first half, and that integration is ahead of schedule, with the additional cost synergies identified.

Our strategy is consistent with that of both legacy businesses, and clear on what we need to get right over the next number of years. This industry remains very, very competitive, red hot in the words of my Finance Director, and established operators and new entrants competing hard in our new markets.

We're well aware -- or you're well aware that this industry is also exposed to specific regulatory risks and the overall economic environment. However, our scale and capabilities position us very well.

With that, Alex and I are very happy to take questions. A couple of my colleagues are in the room and available for questions after the fact. But we'll take questions from the room first. Thank you.

Gavin Kelleher, Goodbody; just a couple from me. Just on slide 22, the architecture that you want to get to. Can you give us any sort of sense on when you'd actually be there? Will it be next year or is it longer than that?

Just on the share of voice, obviously a big increase more recently of over 30% for both brands in the UK. Can you give us any sort of color on the individual brands? Has Paddy Power seen a significant increase within that?

And just on other regulated markets outside the UK and Ireland, can you just give us a bit of color how you're performing there, please?

Yes, share of voice; we're not going to be drawn. We're advertising both brands aggressively, and happy with the growth in both. But we decided at the start of this process that we will report one online number for the European business and not go into brand splits. So I'm not going to be drawn on.

I think share of voice is going to go up and down for both brands in the UK and Ireland; and in the UK and in Ireland differently. I think it's unhelpful to get too focused on that.

On the technology slide, on slide -- I have it on slide 21. This is illustrative. For instance, this doesn't address Italy, and this doesn't address retail in any particular sense. This work has started and this work will continue.

In truth, it will never be fully done. I think we will materially get over the hump in the next 12 months. But it would be unwise and unhelpful to say that this will -- that there will be one moment in the future where this is done. It'll never be fully done, because the market keeps changing.

But this will allow us flexibility when we get there, sometime in the next 12 months or so, to accelerate customer-facing improvements across multiple channels, including, notionally, different channels in the shops.

So we think this is -- although it's a moving target, I'm happy with the progress towards it, and I think we will see dividends. It's important that we will see dividends from this on an ongoing basis over the next 12 months.

On your final question, Gavin, about international, the guys in Italy, I'd highlight the fact that they've done an awful lot of work over the last few months. Although the Italian business is still pretty small, I'm very happy with the momentum there.

We're happy with the progress we're making in Spain. We have a menu of other small markets that we've either launched in over the last 12 months or continue to be focused on entering.

We would highlight, of course, the removal of the exchange in Portugal was one of the reasons behind the decline in unregulated revenues in the first half.

Vaughan?

Vaughan Lewis, Morgan Stanley. You talked about the importance of talent and personnel. Did you lose any good people that you didn't want to lose during the process? And then what's the overall level of staff satisfaction now? Is everyone happy and well-motivated?

Secondly, the integration seems to have progressed incredibly quickly. Would you be ready for another deal now? And if so, would you use your firepower on the balance sheet or would you use shares?

Then thirdly, just on the exchange. Exchange in games revenue up a couple of percent low single digit. Is that similar for exchange volumes, or is there any pricing in there? And should we expect the exchange to continue to move forwards steadily? Thanks.

Unfortunately, at times like this, one loses some people that you'd like to keep. However, we have retained the vast majority of the people we hoped to retain. That's been through careful planning and a considerable amount of work explaining to people where we think this business can go and where the opportunities are.

I think most people, not just in this Company, but many people in this industry, think that if you want to work in this industry, this is the Company you want to work at over the coming years.

I think staff satisfaction was lumpier earlier in the year. There was a considerable amount of change. The businesses generally have different levels of resilience in the face of change.

But we continue to monitor that carefully. A recent staff survey completed in July, I think, showed considerable improvement. So I think we're definitely over a hump there.

I was going to say something trite about staff happiness at Paddy Power Betfair compared to Morgan Stanley.

But your ambition for future acquisitions, we share your ambition. I think, Vaughan, we've been very busy. We've got on with it, partly because we didn't want prolonged opportunity [cost]; we didn't want to be out of the market if there were things to do.

I think there will be things to do in time. But I think it's too early to go into any specifics on any of that.

We'd highlight, again, that we we'll have the only multichannel, multi-brand, multijurisdictional platform in-house won in the game. I think that's something that will be advantageous and give us strategic optionality in the future.

The exchange, as you know the exchange is a very mature product. We continue to invest in it. We've made a number of new hires recently. We're continuing to improve the user interface; saw some encouraging stats on that, even over the last couple of weeks. But it's very hard to move the needle. So I think we're happy to see steady low-single digit growth from the exchange.

Pricing is not a lever that we expect to create an awful lot of value from. But, of course, we will continue to try and create more value from the exchange.

David?

David Jennings, Davy. Three questions, if I may. Firstly, on branding strategy outside of the UK and Ireland. Assuming that it's just one brand going forward, are there going to be cost savings that might arise as a result of that?

Secondly, having had the chance to look at the retail channel today, how tangible do you think the merits are of multichannel at this stage?

And then finally, just in relation to scope from market share gains over time, if you had to identify one or two things that will separate the winners from the also-rans what would they be?

Sure. so I think and you know that both businesses have long held a view that you compete and you win at this competitive industry by the aggregation of small advantages. We stand over that, we think that every part of the customer proposition, be it customer service, be it brand, be it the right promotions product, range of market, usability, all of those things are critical.

I do think the unifying theme though is technology and that having the resource and the capability to ever improve that will matter more in future. I think it matters already an enormous amount, but I think it will matter more in future.

On retail, as I said earlier, it's actually -- it's quite a high-quality business and a high-quality team. We are seeing evidence that we can deliver some value through multichannel. The guys have been quite innovative about SSBTs in particular, and have a Track My Bet capability that's at this point exclusive to us.

We haven't -- we're some time away from leveraging the core online technology in the shops and the businesses are, from a technical point of view, largely siloed right now. But there's already evidence that a well-managed retail business can cross-sell customers, and I think we're getting better at that.

But that's a -- I think that's a multi-year project as opposed to something that we can just switch on in a shorter number of months. It's a multiyear project before we get full dividends, full value from that.

On brand strategy, yes, to your point, obviously the Sportsbet brand is the leading brand in Australia and will remain our focus there. In the US we have TVG and Betfair for the casino on the exchange. In Ireland the UK we will keep both brands. Paddy Power really then only exists in Italy in any material sense after that.

There was evidence, and indeed there was evidence before the deal, both companies had realized that having the word bet in your brand just facilitates conversion for international. So I think it will be the Betfair brand for most other international territories.

In terms of, will there be cost savings from that? Not really, other than -- we'll continue to invest in Italy. So we don't see that there's a material saving there, but there will be hopefully more efficiency over time.

I think also the operating leverage that we will achieve and will continue to achieve, we will reinvest some of it. When people say, are there going to be savings? There are going to be savings, it's just that they're going to be reinvested in things to continue to effectively extend the competitive gap with our competitors. That's really the way I would look at it.

Patrick?

Patrick Coffey, Barclays. Just one from me, for once. On gross-win margins you mentioned that obviously you've got the Paddy Power algorithms and technology which could improve pricing for the combined Group, which could increase gross-win margins. You mentioned that you may reinvest that so we shouldn't get carried away, gross-win margins going up. But if gross-win margins did go up, what would be kind of quantum of that?

So if something hypothetically happened, what if -- yes. So I don't know. This is very -- these are -- it's a lever that we use very carefully, pricing.

Betfair has -- the Betfair brand in the UK has the perceived price superiority. But among very studied gamblers they know that that's in particular places and not everywhere. So, for example, I think our betting-in-running -- our sportsbook betting-in-running pricing needs to sharpen up a bit.

We're not going to be drawn on a number either in terms of gross-win margin guidance or indeed the absolute uptick. It's really a question of how quickly you get the payback. It's just too -- it's also too early to say.

Just a follow-up on the exchange. I asked last time about the user interface and changes you may make there to make it appeal to a wider customer base. Can you maybe just talk us through what you have done on that and what the future plans are for the exchanges interface?

Yes, we obviously are growing primarily through -- the growth is primarily coming through the sportsbooks and we see real dividends from getting both brands and both technology platforms onto a combined platform.

The exchange is technically insulated from most of that work, so we continue to be able to make tweaks and stuff. But I can't identify a game-changing product that would be released on the exchange in the coming -- in the foreseeable future. It's small incremental tweaks to try and improve usability mostly.

Joe Thomas, HSBC. Can you talk -- you talk about it to some extent in the release this morning, but the use of the exchange as it's -- within the context of the wider Paddy Power Betfair business and whether there are any opportunities for any products like Price Rush to be rolled out towards -- to Paddy Power customers and indeed any other opportunities that may come from there.

And then also it would be useful to hear a little bit more color on Australia and what sounds like a very tough market over there at the moment, where you think that competition is particularly coming from? And how long we're expecting to see this asset inflation going on there?

So the exchange is a very strong product in its own right, but as you say it also facilitates things like improved cash out for the sportsbook and Price Rush.

We've had -- we have the choice as to how we embark on this kind of re-architecture. We're going to put the platform stuff together first to facilitate offering different products. We haven't decided yet that it's right to offer all product features on both brands, so it may be that we don't offer Price Rush on the -- to the Paddy Power customers.

But already the traders of Paddy Power have better market knowledge through the exchange. We're better able to, as I said earlier in the presentation, think about suspension times, for example.

And hedging for the Group, while not a source of enormous value for, that we're able to do that with ourselves, as opposed to with a third party, is advantageous.

I think we have work to do on the product before we get into exactly what exchange base products are offered to the Paddy Power customers. I think that's a conversation for some way down the road.

In Australia, there's a few things going on in Australia. It's quite a noisy place, at the moment. So the gross win -- our business has grown phenomenally well over the last number of years, as you all know, and 2015 was a stellar year.

The business has grown off the back of consistent, continuous, thoughtful investment in people and marketing and technology. There was some -- there continues to be some real technology capability there.

But the market is surprisingly competitive. Tabcorp is a very good operator. And, you've got a bunch of other operators that are plus or minus break-even, William Hill, Ladbrokes, CrownBet that are competing very aggressively for marketing assets, and in terms of product and promotions.

You've had the enormous successful sportsbook on the one hand. You've got very, very aggressive smaller competitors trying to take bites out of us. Their ability to sustain and their ability to compete in the long term remains to be seen, but it's a very real dynamic at the moment.

Then you have considerable regulatory change at the moment -- sorry, both currently and in future. You will have read about the probable changes to dog racing in New South Wales. There has been the changes about betting-in-running. We think that product will be removed from the market over the coming weeks.

You have the probable introduction of point of consumption tax in South Australia, so it's hard to know just exactly how this market finishes up.

But we take considerable comfort from the scale we have there; the quality of the brand; the quality of the team and from the materiality of the investment made in past years.

Alex has talked to you earlier about how we expect the cost inflation to moderate in the second half of the year. But we're conscious of the fact that our operating profit went backwards in the first half.

And just a follow up on Australia, given all this activity that's going on, what do you think the market is growing at in staking terms?

I think the market's still growing at low double digit. It's a little bit hard to know for sure, because we've had real growth coming from the in-play product, which is about to disappear.

We're normally wary about giving forecasts on market growth rates. We'd be doubled wary in Australia, given all of the noise.

Dog racing in New South Wales, it's not a very material part of the business. There is an expectation that other states will offer more dogs. But it remains to be seen just how that changes the customer proposition as well. So it's a place of just a little bit more uncertainty today than previously.

We'll just take another question from the room and then see if there's any questions on the phone.

Julia Pennington, Credit Suisse; apologies if you've already covered this. But I just wanted to ask what do you see as the parameters for an optimal balance sheet position, or when you might be able to communicate this? Thank you.

We've talked about the cash balances. We've talked about the cash-generative nature of the Group. We've reaffirmed the dividend policy as laid out back at the time of the proposed merger.

It's just premature. The Board reviews the balance sheet all the time, frequently. But we're not going to give guidance on optimal end state just yet. We think it's too early both in the context of this new Group and also in the context of everything else going on in the market. So it's too early to be drawn on an end state at this stage.

(Operator Instructions).

Okay, there's another question here? Vaughan?

Just one follow-up, going back to the branding and the positioning. With Betfair you seem to have dropped tap, tap, boom. You've definitely sharpened up the prices, at least in football a bit. And you're talking about pricing and value. Is this the end of Betfair as a mass market proposition and going back to being niche value customers and Paddy Power very much the mass market brand?

I don't see it like that in any way at all. I think that by re-sharpening the focus of both brands, we can take real ownership of those segments of the market.

But the scale, both independently and jointly, allows us to build a product that will be more user friendly. We'll have more range of markets. We'll have more advertising. That will be advantageous and leak into other customer segments over time.

Betfair remains the -- or Betfair will be the primary brand outside of the UK and Ireland. I think, for both brands, it's a refocus on where they were, and I think focus is typically a good thing.

Patrick?

Just one follow-up. On the retail division, it's grown quite a lot over the last 10 years. Do you think their cost base there is optimal as it is at the moment? Only one of your competitors is looking to one of your competitors is looking to cut a lot of costs from their retail division.

Well I highlighted earlier, I think the guys in retail do a very good job. They're very, very disciplined about it. I don't have the year-on-year increase in costs to hand. But they're very diligent about managing the cost base and realize that the time isn't really their friend.

There is -- obviously, the digital businesses are growing faster. So I don't have any expectations that there'll be a need for a dramatic change in the cost base. We continue to work on it, but it's an ongoing process not a step changed every few years.

Okay, guys, thank you for your attention. It was a slightly longer presentation than normal. A number of us will be staying around, but a number of us also, we need to be available to journalists and stuff.

So thank you for joining us here in Hammersmith. Enjoy the beautiful weather, Hammersmith-sur-Thames. Paul Cutter is here, the Chief Technology Officer and Cormac Barry, who some of you know is the CEO in Australia, and they're happy to chat about things as well. Thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.