Flutter Entertainment PLC (FLUT) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Paddy Power Betfair full-year results update call, hosted by CEO Breon Corcoran and CFO Alex Gersh. My name is Deborah, and I'm you're event manager. (Operator Instructions). I would like to advise all parties that the conference is being recorded.

Now, I'd like to hand over to Breon. Thank you Breon, please go ahead.

Thank you, and welcome to the Paddy Power Betfair 2016 preliminary results presentation. Indeed, our maiden preliminary results presentation, as I saw described this morning, and welcome to Hammersmith.

Following completion of the merger, the Group maintained good trading momentum during a year of considerable operational change. Revenue increased by 18%, with good performances across all four of our operating divisions.

Combined with efficiencies arising from the merger integration and continuing underlying operating leverage, this 18% revenue growth drove a 35% increase in EBITDA to GBP400 million.

Our key focuses in 2016 was in integrating the businesses to achieve an optimal operational structure and create a distinctive corporate culture and identity. We are pleased this integration -- we are pleased that this integration progressed ahead of schedule.

We entered 2017 focused on fully unlocking the combined operations potentials. And I will update you on this further later.

Alex will now discuss the operational performance in 2016.

Thank you, Breon. We'll just start straight with the Group's financial results.

As Breon just said, revenue, in 2016, was up 18%, to GBP1.55 billion. The composition of this is 19% growth in sports revenue, and 14% growth in gaming revenue. In constant currency, the overall growth rate is 11%.

Operating cost growth was 12%, driven predominantly by marketing cost. Marketing was up 27%. Non-marketing cost growth was limited to just 4%, due to both merger synergies and underlying operating cost efficiencies, and, actually, declined when you take out the impact of FX. In constant currency, there was a decline of 3%.

Operating leverage, which we keep talking about and have been talking about for years, continues to show itself. That means that 18% revenue growth led to 35% increase in underlying EBITDA to GBP400 million, as Breon said.

EBITDA margin went up by 3.4 percentage points, to 25.8%.

Proposed final dividend of 113p per share. A total dividend for 2016 is 165p per share, represented 50% of pro forma underlying profit, as per our dividend policy.

Please trust me on that, you won't be able to figure it out from the financials, because pro forma is -- but you're looking at the statutory results, but please trust me the numbers are as I've just described them to you.

And finally, on this slide, at the end of 2016, we have a net cash position of GBP36 million, after payment of merger-related transaction expenses; and integration costs of GBP104 million; and dividends of GBP179 million. I will cover the cash flow in more detail a little bit later on.

Now, this is a new slide, for the presentation. This is just to give you an EBITDA bridge between 2015 and 2016, and to highlight some of the key items that resulted in GBP104 million, or 35% year-on-year increase in profits.

Firstly, FX; we're going to take the FX out. Approximately 30% of our EBITDA is in non-sterling denominated currencies, principally US dollar and Australian dollar. Therefore, weakening of the sterling, from June, had a positive translation benefit of GBP11 million at EBITDA level. On a constant currency basis, EBITDA increased by still quite healthy 31%.

Secondly, of course, we're going to have to isolate Euro 2016, the major football tournament, as all of you know, contributed about GBP13 million to Group EBITDA in the year. About GBP20 million was spent on marketing costs for the Euros and that's part of the GBP13 million. So, the revenue was marketing cost income and some additional cost of sales.

It's worth noting that across the year, as a whole, the Sportsbook net margin was broadly in line with the prior year. With the benefit of favorable Euro 2016 result in the second and third quarters, offset by adverse sports result at Cheltenham in the first quarter, and adverse football results in the fourth quarter of last year.

Excluding Euro 2016 and the year-on-year FX movement, which I described, underlying revenue growth resulted in approximately GBP90 million increase in EBITDA in 2016, after reflecting direct cost.

Now, a few things on costs. 2016, as you know, benefitted from GBP35 million of merger cost synergies. As we're going to discuss later, there's GBP30 million more in 2017 to come, which is the GBP65 million we've committed to.

Underlying marketing cost growth, excluding Euro 2016 spend and FX, was about GBP30 million, or approximately 12%, driven by continued asset inflation on both traditional media and digital assets.

Other costs excluding synergy benefits and effects, increased by GBP15 million. Within this, cost of sales was adversely impacted by approximately GBP7 million of new increased betting taxes and product fees. We'll talk about things that are happening in the next year in terms of regulatory costs a little bit later.

Excluding this underlying cost, costs was approximately 1% reflecting the scalability again of the business. We keep saying that the revenue should grow faster than cost, and you see it again and again, and you see it here as well.

Moving on -- on slide 5 here we including divisional breakdown for your reference; just a few high-level points. Each of our divisions had double-digit revenue growth in 2016; over 95% of the Group revenue were from regulated markets, and 88% of operating profits are from our online division. Of course, we will start with the individual businesses, but, of course, start with the online division first.

Revenue increased by 14% to GBP853 million with revenues from regulated markets up 16% and unregulated market revenue decreasing by 2% due to the impact of exiting Portugal in July 2015.

Sportsbook stakes were up 19% and exchange revenue increased by 7%.

Gaming revenue for the year -- for the full year increased by 14%. As we highlighted in our January trading update, Q4 saw some weakness in gaming performance and revenue flat year on year in the quarter, in constant currency versus 17% growth across the rest of the year.

This weakness was driven by reduced direct consumer acquisition of Paddy Power brand, reduced cross-sale on Betfair brand, along with weaker VIP activity than prior year.

Since December, we have increased our TV share of voice on Paddy Power. We went above the line, and hopefully some of you saw our ads on Paddy Power brand. This is improving our new customer acquisition trend, while on Betfair brand we continue to work on optimizing our customer cross-sale journey.

Whilst gaming revenue in the first two months of 2017 has improved on the fourth-quarter performance, it's still behind our expectation. That's still got a lot of work to do, which Breon will cover.

Overall, in 2016, EBITDA increased by 27% to GBP289 million with the division delivering good operating leverage, notwithstanding significant additional investment in marketing cost versus prior year, and the total costs up 8% versus the 14% revenue growth.

Moving on to Australia; really, a tremendous story for the year, and certainly for the second half of the year. For the full year, stakes continued to grow strongly in 2016 increasing by 25%, despite intensified level of competition.

Revenue growth of 18% was affected by adverse gross win margin in horse racing in the first half of the year.

Stakes and revenue growth in the first nine months of the year benefited from our Bet Live in-play betting app, prior to it being withdrawn from October.

Over the full year, in-play betting contributed 12% of stakes, 6% of revenue, double the level of 2015 when we didn't have Bet Live app. From October, the in-play mix has returned to levels broadly similar to those seen prior to the launch of the app, so broadly seen in 2015.

Sportsbet EBITDA increased 18%, although this masks a significant difference between the first six months, when EBITDA reduced by 10%, and the second half when profits increased by 39%. This partially reflected the lapping of some significant operational expansion during the second half of 2015, which we had flagged at the interim results. But, also, reflects an increased focus on achieving operating synergies.

Now, moving on to retail. Both UK and Irish estates had a good revenue growth in the period, increasing by 8% and 2% respectively on a constant currency basis.

Like-for-like net revenue is up 3% in constant currency comprising 1% sportsbook growth, and 7% increase in machine gaming revenue, principally driven by B3 content. B3 content represents about a third of revenue of the machines for our retail operations.

We opened 16 new shops in 2016 and closed one UK shop.

Going now to the US; US division revenue in local currency increased by 13% and operating profit increased by 9%.

These results include TVG, where revenue increased by 9% on hand, or stake growth of 4%; and Betfair casino in New Jersey where revenue increased by 39%. The casino is now operating at the breakeven EBITDA after a couple of years of startup losses.

Now, we get to some accounting stuff which is slightly boring. I won't spend too much time on it, but just to be clear that everybody --

Obviously, we have very, very large separately disclosed items. They represent a couple of things; advisor's fee and stamp duty payable on the merger, total GBP56 million, and are fully incurred with GBP6 million in 2015 and GBP50 million in 2016; one-off integration costs to deliver the merger synergy are also now fully incurred and total GBP66 million.

Then, of course, you see some amortization of goodwill and some of the intangible items going through as well.

As I outlined on our -- to you last August there are a number of non-cash accounting charges which arise from -- which arise when accounting for the merger. The appendix to this presentation, again, includes the amortization schedule for future periods for your reference, so you could see there'll be a big decline in amortization next year and continue going forward. But you can see all the numbers, which we've given to you.

A couple of things on cash flow. Working capital; our profits converted strongly into cash with underlying free cash flow of GBP252 million representing 91% of underlying profit after tax.

A couple of items. Working capital, both in 2016 and 2015, movements were impacted by some one-off items. In 2016, it was impacted by our harmonization of the POC tax between payments between Paddy Power and Betfair, so it's really just a timing difference, as well as some one-off tax payments -- international tax payments that we have to make.

In addition, when you're looking at the cash balance you have to remember two other things. We have reclassified about GBP8 million of cash from cash balance to restricted cash to conform to the Maltese policy of keeping the cash that's been bet for open bets into the restricted cash, into customer cash even before the bets are closed.

This is what always happened in Betfair, but we have to conform Paddy Power to that rule. You'll see GBP8 million of the cash decline; really, it's just a reclassification from cash to restricted cash.

Of course, because you're looking at the net cash due to the FX movement, there's been a GBP9 million increase in euro debt, which effectively reduces cash by GBP9 million from the FX perspective.

All of those items together are really affecting our cash balance, as well as some of those, of course, are affecting the working capital.

Separately disclosed items. The cash outflows for separately disclosed items was GBP104 million compared to GBP116 million P&L charge relating to those items. So, you should expect to have further cash outflows in the current financial year.

At December 31, the Group had net cash of GBP36 million, excluding customer funds and restricted cash of GBP65 million, customer funds held off balance sheet amount to GBP349 million. Unfortunately, there's no interest associated with that.

You will have noted that this morning's -- that in this morning's statements we reiterated our comments on capital structure that we made in August. We continue to keep the efficiency of the Group capital structure under regular review and the relevant consideration, including the Group's strong cash flow generation, it's investment plans and the potential for future market consolidation. Of course, it's not just us but the Board of Directors as well are looking at this constantly.

So, now, a few words about financial guidance, as much as I'm going to say about it today. Just to say that our current intention on profit guidance is similar to last year. Is, to give profit guidance for the full year at our interim results in August, so the first time we'll give you any guidance from -- as a range would be in August.

Turning to cost synergies, as we told you last August, the total merger cost synergies will be GBP65 million as I've just said before, with GBP35 million benefit realized in 2016. There will be GBP30 million realized in 2017. I have already referenced the one-off costs were all fully incurred in 2016, although there'll be some cash coming out in 2017.

CapEx for 2017 is expected to be between GBP80 million and GBP90 million. We expect our 2016 underlying effective tax rate to be approximately 15%.

Approximately 70% of our profits are sterling-denominated. Accordingly, we are not exposed to FX -- we're not exposed to FX translation fluctuation. The balance of profits is primarily made up of Australian US dollar profits from the Australian US operation and there, of course, we are exposed to the FX movement.

On the euros, our cost, basically -- our revenue basically balance out our costs. Again, while we're exposed on euros on revenue, on the top line, we're not exposed on EBITDA side for Europe for the FX fluctuation.

But just to give you a sense, for 2017 in relation to FX, it's worth noting that if current spot rates continue for the rest of the year we would expect to have only a small FX benefit for the year of approximately GBP2 million, and this would land in the first half of the year. Obviously, that assumes that the spot rate continues.

Finally, on this slide we have listed the various -- sorry, I'm on the wrong slide. Here, we've listed various regulatory headwinds you need to consider when looking forward, right there at the bottom.

I will now pass it back to Breon for his presentation. Thank you.

Thank you, Alex. You may remember that at the interims in August we set out of our immediate strategic priorities. They were to capitalize on our increased scale; to combine the best parts of the two businesses; and to optimize our brand positioning, primarily in the UK and Ireland. I'll take you through some of the progress we've made in each of these areas.

There is plenty of detail on the slide, but, as we saw, with scale, we've long held a view that, as in other online consumer industries, scale is a very important determinant of long-term success, perhaps the most important determine of long-term success, and can facilitate a virtuous circle of profitable growth.

Revenue growth is driven by ongoing investment in the customer proposition. In marketing, our scale allows us to spend, in round numbers, GBP300 million a year. In product, we have 100 in-house software engineers across the Group. And, in value, where through offering customer leading promotional offers and pricing, which I'll come back to in a few minutes, we can leverage our scale to drive revenue growth.

The significant fix component of our cost base means that revenue growth drives improved operating efficiency and higher profits. For example, in 2016, as Alex said earlier on, OpEx excluding marketing spend decreased by 18% on a per customer basis.

The platform integration that we're currently undertaking will further improve this efficiency, and is a good example of the benefit of scale. A single platform where products are developed once can serve multiple brands, multiple jurisdictions, multiple customer basis and drives down the overall cost of service.

Reducing that cost of service will drive margins already evidenced by the 4-percentage point increase in our operating margin in 2016. That, in turn, allows further investment in our customer proposition.

In addition to driving higher returns within our existing market, our scale better positions us to withstand regulatory headwinds and, when combined with our enhanced technology and operational capability, it gives us greater capacity to enter new markets as opportunities arise.

I'm sure we'll take some questions on this. This is a variant of a slide we've used previously and we've talked -- and we'll talk over the rest of this about the integration -- the ongoing integration of our online platforms.

The primary objective is to ensure that we are best positioned for the long term by having a single platform that's efficient; scalable; flexible; and controllable; and, that can support multiple brands, channels and jurisdictions.

The diagram on the left-hand side is a reminder of the base architecture of this unified platform. It's based on the modular architecture of Betfair's existing platform, which is currently being enhanced with key functionality for the Paddy Power platform, as well as further developing the platform's overall capabilities, flexibility and scalability.

Once this platform work is completed, the Paddy Power brand and, critically, the Paddy Power customers will migrate to this platform. We're on track. We're happy with our progress. We're on track to deliver this by the end of Q4.

Most of the proprietary functionality of the Paddy Power platform, including the pricing and risk management systems and the Cayetano content, the Bulgarian games, have already been integrated with the Betfair platform. This is starting to have benefits, particularly for the Betfair's sports book, which I will return to in a few minutes.

We've also completed work on improving the platforms operational resilience, such as processes to better detect fraud and verify customers, as well as adding other payment processing capability to the Betfair stack, to ensure redundancy for all of our customers.

Most of this ongoing work is to ensure that the Betfair platform is ready for the migration of the Paddy Power customers, including scaling up for the demands of the future -- the scaling up capacity for future demand and adding functionality to operate multiple brands, which will include the flexibility of operating a third or fourth brand -- further brands in the future.

So, managing the migration of the customer base will be carefully managed and won't be a big bang switch over. As with any technology change, we can start with a small [core] of customers and throttle up this migration once we're confident there are no issues. In many cases, customers won't even notice this process, other than having access to new products and features that weren't previously accessible on the Paddy Power stack.

This does mean that, this year, Paddy Power customers will experience limited new products up until the time of migration and developing new product at this stage, that product will be redundant within months and would, therefore, almost certainly, not generate a return.

It also means that the throughput of product development on the Betfair platform will be reduced as a significant proportion of our resources are focused on this platform integration.

Having said that, we're not standing still and this slide represents some of the highlights of new products and enhancements we've released over the previous year. Some to call out, top left, Each Way Edge, which is only available to Betfair today, allows customers to increase or decrease the number of places included in an each-way horse racing bet, and the odds change accordingly.

For both our brands -- for both our European brands live streaming improvements and an increase in the live streaming offer, where now, along with 365, we offer considerably more events than any of other competitors. This includes the FA Cup; La Liga; Serie A; all ATP and WTA tennis events; and of course, all UK and Irish horse racing.

Power play is a sports bet product, a product we've launched in Q4 in Australia that allows customers to choose to enhance odds on one bet of their choice increasing loyalty to the brand. We're sharing that information back with Europe and it's probable that will be part of our roadmap as we look into 2018 for the European market.

Again, some detail on this slide about risk and trading. The risk and trading integration is substantially complete. You'll recall that this time last year we wanted to minimize disruption pre-Cheltenham and pre the Aintree festival. There was little-enough change made before that.

But the guys visibly got on with integrating the two teams in Clonskeagh and Ringsend in Dublin. Now, over 85% -- 85% of bets and 19 sports on the Betfair sports book are being priced used legacy Paddy Power models. That not just gives us a better range, it gives us better pricing certainty and has a cost advantage.

The increase in volume of bets driving these models, the sharing of data and processes between the brands and the use of the exchange has improved our overall pricing and risk management capability.

While both brands are benefiting from the integration, the most significant benefits are being seen on the Betfair's sports book today, which due to its lack of relative scale prior to the merger, use some third-party sources for the majority of its markets.

This change has led to two major customer-facing benefits. It's enabled a broader range of markets to be offered with outside of football and racing, a 70% increase in the number in-play bettering events now offered on the Betfair's sports book. And, as I've said earlier, we've improved significantly the accuracy and responsiveness of pricing allowing us to cut overrounds by preserving growth win margins.

So, notwithstanding the integration work and the distraction of tech resource I've mentioned earlier, we continue to invest in our proprietary model.

The right-hand side of this slide describes the next generation of our in-house football model that we've launched for premier league matches in January 2017. This work has been underway at Paddy Power, helped with Betfair engineering over the last 12 months, but is really a dividend of some 18 months planning or so, and it is a material improvement as you can see there.

The model enables more accurate pricing, which compared to the previous model produces higher gross win margins for the same level of overround, but it's also reduced the time that markets are suspended. For example, now during an average football match the market is suspended for less than 60 seconds, down from about five minutes previously.

As the table shows, markets are priced up and able to accept bets almost instantaneously after a game -- after a goal is scored. This compares to about 45 seconds previously and puts us well ahead of the vast majority of competition. Further benefits include a greater range of markets, faster bet acceptance and reduced settlement times.

The other key focus has been understanding how to optimize our brand positioning, and I'm happy with the progress we've made on that. We've previously shared that there was limited customer overlap between the two brands, only about 9% of our combined UK customer base use both brands.

Over the last six months we've continued to optimize how the brands are positioned to maintain a distinctive customer proposition, which has been supported by a share of digital marketing, risk and trading, customer operations and functions.

A key part of this is ensuring that each brand communicates with customers differently, and I think is somewhat illustrated by the slide.

The Betfair brand is primarily focused on customers and motivations to better value related. Therefore, its marketing has a key emphasis on highlighting a strong value proposition and product functionality.

The Paddy Power brand in many ways goes back to its heritage and is focused on customers whose primary motivation of social interaction and entertainment in addition to value. Therefore, the brands marketing communication has focused on cultivating its distinctive personality.

Surveys show that this was increasing -- this positioning has been recognized by customers. Betfair customers see the Betfair brand as the number one operator for best odds; Paddy Power customers see that brand, as being the number one for fun.

The brand positioning is supported by the value proposition. This slide hopefully highlights how each of the brand offers value in a different way.

Betfair's position is to offer consistently strong sportsbook pricing across all selections, supported by the unique value of the exchange offers, and by innovative product feature such as Price Rush and Acca Edge.

The graph on the left shows that the Betfair offers market-leading overrounds on premier league football. Note that, in the last three months, we've cut overrounds on the Betfair sportsbook, which has facilitated -- which has been facilitated, in part, by access to the increased -- or the enhanced risk and trading capability the Group now have.

Conversely, Paddy Power's football proposition focuses on giving the best value on the most popular bets. That is, the market's leading odds on the most-backed premier league favorites, as shown on the chart on the right. This is then supported by stand-out headline promotion offers such as the current 2 Up You Win offer, which pays out almost immediately when the team you back goes two clear goals ahead, regardless of the final match results.

Cheltenham is another example of the differentiated approach. You can see the offers on the front page of our presentation. But, in summary, Paddy Power offers the insurance of getting your money back on near-misses if your horse comes second; whereas Betfair allows customers to win more by giving free bets off the back of a winning bet, at odds of 3 to 1 or more.

This, in conjunction with the consistently strong odds, one of our key messages is that, on the exchange last year we were best-priced, on 96% of runner at -- in the Cheltenham Festival.

This targeted approach to each brand's marketing and value proposition ensure the two stay focused on further deepening their strengths, and limits the overlap between the two.

Alex has previously talked about the progress made in Australia in the second half of last year. The business continues to invest in its brand, and for it's -- for example, secured sponsorship of free-to-air TV coverage of AFL, to complement its continuing sponsorship of the equivalent NRL coverage. This investment has helped to maintain the highest levels of brand awareness in the market, as shown on the top-left chart.

Sportsbet currently operates on a separate text site to the European business. This leads to some inefficiencies, due to duplicated effort. For example, the product development output hasn't been materially affected by the -- so the good is that the product development output in Australia hasn't been a materially impacted by the platform work we're doing in Europe. The bad is that we don't leverage their Powerplay as quickly as we'd like.

Powerplay, as I mentioned earlier, isn't the stand-out product development for them in the last quarter. Also, a couple of features that facilitate accumulator bets, bets that make it easier, a tool that makes it easier to create accume bets on mobile, and another that allows accumulators in the same game.

Currently, the main product synergy between Australia and the European business is knowledge-sharing. There are people back and forth, and working groups set up to share IP in terms of product, in terms of customer operations, in terms of technical progress generally.

Looking at performance, after a number of fantastic years in Sportsbet, the business had a slight wobble in the first half of last year, when OpEx grew more quickly than revenues.

The management team in Melbourne was quick to make changes, and place more focus on operating efficiency. The result of this was, as Alex said, EBITDA was up 39% in the second half of the year, compared to a 10% decline in the first half.

The bottom-right chart illustrates one of the challenges of operating in Australia. Over the past two years the cost of sales, as a proportion of revenue, has increased by 3 percentage points as a result of increases in product fees. This represented our headwind of approximately AUD17 million.

Fortunately, Sportsbet's growth, combined with scale, means it's able to offset these increases through operating leverage; and OpEx as a percentage of revenue declined by 3 percentage Group points. This enabled the EBITDA to grow by 31% CAGR over the past two years.

Looking ahead, scale and operating efficiency will be increasingly important to deal with the further regulatory or fiscal headwinds in Australia. We believe -- we take considerably comfort from the fact that many of our local competitors don't have the luxury of either our scale or our operating efficiency.

Moving to the US for a minute. TVG has maintained its market-leading position. Its primary competitive advantage is its distribution. As you know, TVG1 and TVG2 TV channels are the local equivalent of Racing UK and At the Races. Both channels are now HD-enabled, allowing us to further expand our network coverage. It's currently available in just over 40 million American homes.

TVG also has product leadership, particularly in mobile. That benefit comes from some of our European technology strength. The two start-up businesses in the United States, while strategically interesting, are still very small.

The Betfair casino in New Jersey has maintained a low double-digit market share, and is now operating at break-even. We're very proud that a new brand, and a new technology, and a new team have done that in the face of some very well-funded, well-run domestic players.

We think that positions us well in the case of further deregulation or further introduction of online gaming -- regulated online gaming in other states.

The horseracing exchange launched in May 2016. The challenge here is to show that the product grows the market rather than cannibalizing existing pools wagering -- the existing pools wagering market.

Initial data supports that hypothesis, with about 70% of revenues coming from customers who don't currently bet into the pool. This is very important if we're to see the exchange launch in other states.

The retail business was also a star performer last year. Our high-quality estate has been built around providing a fun social environment, focused on live sports. We're continually improving the customer experience with new products.

Our shops have the best content in the market, including UK and Irish racing, Sky Sports and BT Sport. The presentation of some of this content will be enhanced in the next few months, with the new Paddy Power TV service.

The launch of our Track My Bet service on our self-service betting terminals, SSBTs, along with in-store self-service online sign-up tablets, have successfully targeted multichannel customers. I think we probably do a better job there than we talk about, and I'm happy with the progress.

In December, we launched free Wi-Fi in all our shops.

In January 2017, we launched a new retail app, Paddy Power Onside, which brings some of the benefits of digital into our retail estate, but in a way that's more attuned to the retail customer. It, ultimately, provides another platform for online cross-sell.

Store openings in 2016 were lower than in previous years, partly due to a caution about new sites, and partly due to regulatory uncertainty. We continue to look for attractive options to expand the estate, but we apply conservative regulatory assumptions, while assessing business cases.

As illustrated in the bottom two charts, our estate continues to outperform the competition. Our average EBITDA per shop, in 2016, remained significantly higher than our competitors. We feel this leaves us very well placed to deal with any regulatory or other cost headwinds that may arise.

Before we turn to questions and summary, 2016 was about maintaining our trading momentum, and combining the businesses efficiently, and in a way that best positions us for long-term growth.

We're very pleased that the major operational changes were completed sooner and more efficiently than expected.

Accordingly, we're now focused on further unlocking the enlarged Group's potential, a key which -- a key component of which is the platform integration work already underway, and expected to run for the rest of the year.

2017, though very early, has started in line with our expectations. This industry remains highly competitive, with operators competing hard in all of our key markets.

We continue to be aware that the industry is posed -- exposed to industry-specific regulatory factors and, overall -- the overall economic environment.

However, we believe we remain very well positioned. We've created a business of some scale, with market-leading positions in a portfolio of interesting geographies, with leading operational capabilities and with the ability and the appetite to invest further in enhancing those.

With that, we're very happy to take questions.

Ivor, maybe just introduce yourself for the (inaudible).

Ivor Jones, Peel Hunt. You talked about a bit of inefficiency in the way the Australian business is structured, because of the independent technology. Could you quantify that financially? How much more efficient could it be, in terms of costs, if you had an integrated platform?

I think it's premature to put a financial number on that. But in round numbers there are several hundred people in product and technology, mostly in Melbourne.

At some stage, in the medium term, one could expect that the back office at the very least will be outsourced to a central global stack.

I think the channel work, so the customer-centric, front-end work, will almost certainly stay closer to the market. But there is a -- there's both this -- there's a synergy both in terms of being more efficiently able to share product across the Group, and a synergy potential in being able to much more efficiently run the product stack that I think we can target at some stage in the medium term. But that's a few years away.

Not 2018?

No.

We haven't really talked about the exchange. Growth was positive in 2016, I think on a constant currency basis. Should I worry that that will start -- the exchange will start to decline?

You haven't talked about it from a technology point of view. Would there be things on the exchange technology development roadmap if you had the resources to commit to it?

Yes, as it happens the -- part of the exchange tech stack is at arm's length, from the wallet from the eCommerce and the platform stuff. So, there's ongoing progress to be made on the front end. I think that's been well received by customers.

So, we've launched and we're trialing some -- it's a form of personalization, but some form of surfacing content, based on the location in which people are. That's the exchange leading the way on that.

There's ongoing investment there. I'm happy with the progress. But that's a bigger, slower beast and, historically, has been harder to accelerate growth. So, that's not being limited in quite the way that some of the sportsbooks are.

And it's certainly not our expectation that it will decline.

And you've talked about offering Paddy Power related content to Betfair customers. Is there a process of pushing the exchange to Paddy Power customers, or are they just too different?

There's no work underway at the moment to offer the exchange to Paddy Power customers. Medium term, I could see why that might happen perhaps in the Irish context. But it's -- right now, we're trying to fully nail down the discreet positioning of the two brands in the UK.

I think offering an exchange product to Paddy Power customers in the UK would dilute our efforts, so it's not something that we envisage happening in the next number of years.

Okay. Thank you. And last thing, just in relating to gaming. You've talked about some headwinds in the second half of the year. I'm trying to get -- to make sure I understand how much they are external and how much internal.

So, dropping TV advertising, I guess, one would have expected to cause a headwind. When you talk about VIPs, is that highlighting a problem with KYC, in particular, that's yet to fully flush through, that you need to do more reviews of whether those customers are appropriate?

And then you talked about a cross-sell not working. A couple of those things look like they were under management control. Were they mistakes, and are they now being reversed?

Yes. I think, as we tend to, we try to highlight where we feel we can improve our performance. Gaming is the bit that -- where we feel we haven't operated -- we haven't achieved the level of growth that we'd like last year.

I think some of those issues, to your point, were -- some of those were self-inflicted, and we're working on remediation of that. Some of those are market.

I don't think it's necessarily regulatory or KYC-related in the UK. I think it continues to be a very fragmented competitive market. I think some of the pure-play gaming businesses have probably made a little bit more progress over the last few months.

So, we're focused on improving our gaming offer back to where it should be. But we'd rather talk about that when we feel we've made more progress.

That's great. Thank you very much.

David Jennings, Davy. A couple of questions. Firstly, just in relation to the platform integration. You said in the statement that this will somewhat limit the amount of new product that you can offer on Paddy Power Betfair, in 2017. Do you still think it's feasible that online can match market rates of growth with less product being rolled out?

And then, secondly, just in relation to Italy, I was just wondering if you could update on progress there, and how the shift to a single brand is likely to affect medium-term returns?

So let me take Italy first. In the Italian migration, so the plan -- the stated plan was to move to one brand, and the Betfair brand in Italy.

To do that, there is a regulatory requirement and approval process before the actual customer bases can be migrated. That's taking some time. That will happen a little bit later than we expected. I still think it will happen this year, but we probably thought -- we expected it might happen a bit earlier.

On the product side, it's very hard to argue that releasing less customer-facing product can help improve our business on the Paddy Power side.

We must stress that we are continuing to pull other levers and, indeed, to improve the customer proposition through product. It's just that we're not launching things, like Acca Edge or Price Rush, or Hotshot Jackpot.

We -- rather than worrying about or try to forecast exactly how much market share we will pick up, or whether we will trade in line with the market, or whether we possibly lose some market share this year, we're focused on getting the work done.

We take considerable comfort from the absolute levels of marketing spend, and from the ability to leverage scale in other parts of the value chain. So, we're investing in the customer operation, the customer service offer. I think we're seeing some -- although it's very early, we're seeing some signs of improvement there. We think there's a long way yet to go there.

I've talked about the risk stuff. We're offering a broader range of short-term markets to the Paddy Power customers, because we can pipe that through the existing infrastructure, without having to build new product.

So, it would be, at the very least, unwise, but to be honest, close to impossible for us to forecast exactly what the headwind is from the efforts being focused on the platform.

We clearly see that medium term, to go to Ivor's earlier question, if we have a platform that allows us to do age verification, dual location, KYC payments, once globally, that we're massively advantaged as a business. As opposed to currently, there's some things we have to build six times.

We're focused on getting it done. We're happy with the momentum. The level of investment seems appropriate, and I think we look forward to seeing dividends of that next year, but aren't spending an awful lot of time working out -- I'm not sure we can work out exactly what headwind that -- the effect of headwind this year.

Thanks.

Gavin Kelleher, Goodbody Stockbrokers; just two from me please. Just on marketing, could you give some guidance on what we should expect in the online Europe business from marketing this year? Just given there's GBP20 million you spent on the Euros last year, how we should think about that?

Just on streaming. Seems to have been a big increase in January, with the new contracts you have and the amount of stream products. Is that usually an immediate benefit from that streaming going up? Or is there a lag in terms of how customers notice it?

I think I'll just talk about marketing. I think we spent GBP300 million on marketing and, I've always said, it difficult to visualize spending a lot more. I think you do need to think about -- the only way to think about more, whether it's Europe or anywhere else, is if you're thinking about new markets.

So, if there is an opportunity to enter a new market, and if we think that there is an opportunity to get paid by investing more in the marketing, we certainly have the capability to do that. But certainly, when you're looking at UK and Ireland, it's hard to see how much more you can spend and where you would spend it.

On the streaming, Gavin, high transactional customers, highly active customers, notice pretty quickly that we've improved our streaming offer. You will have seen -- or you probably will have seen that we pushed it in the launch pages for the apps and on desktop.

Market research shows that customers, on average, associate bet365 as having the strongest steaming offer. I think it takes time for us to claim some of that market position as well.

So, I'm happy that we did it reasonably efficiently. I think the usability will continue to improve. I think it's an absolutely essential investment to make in the long term, for the long-term health of the Group. But it's not an overnight payback.

Joe Thomas, HSBC. Alex, you talked about gaming having got a bit better in Q1 compared to the minus 1% that you did in Q4. Could you perhaps give us some sort of sense of that? Are we just very low single digit there?

The only thing that I could say, it hasn't declined in Q1. But the increase was not -- it was underwhelming. It certainly, as I actually made a point, and I think Breon made one, we're not satisfied where our gaming is today.

Relating to that, one of the reasons that you gave for the poor performance in Q4, was marketing was -- or advertising was cut back, because you were finding it more difficult to earn a sensible return on some of that advertising, if I remember rightly.

Is it the case that marketing assets have now declined in value, such that you are able to earn a sensible return and that's why you're spending more? Or are you just having to swallow those increases?

I don't think it's particularly the former. I think we achieved a lot last year. But I think if we're self-critical, one of the places where we probably should have been -- we could have been a little bit more focused, was on the gaming business.

You can imagine that the gaming business is an important part of the offer, but, in some ways, it's seen as an appendage to the two sports-led businesses. And while there was a lot of focus and effort on how to best leverage the capabilities of each, maybe we should have put a little bit more energy into gaming.

So, to answer this point, we'd highlight that it's not fixed yet. We'll continue to focus on it, and we'll talk about that as we get closer to fixing it.

And I think if there is good news here, is that we've got it, we realize that was the wrong thing to do, we've changed it. It all happened relatively quickly. I think that's part of the flexibility that we have to recognize these things.

And then just finally, relating to your point that you made, Breon, about the regulatory issues that you've encountered. It's the first time I've heard about that. Could you perhaps just give us a little bit more detail as to what the hurdles you have to jump over are? And what has caused the delay there?

Well, I think that was in reference to Ivor's question about whether there was a material change in the KYC processes. I think some of our competitors have talked about that. We don't think that's what's going on here.

So, this is nothing to do with the data integration at all, that you're expecting by the end of Q3/early Q4?

Sorry Joe, we're maybe mixing things here. The gaming -- there is a VIP component and gaming softness in Q4, but I don't think that's a function of regulatory change. I think that's just this business can be lumpy.

Why I also mentioned KYC in the context of -- it's one of the improved efficiencies that we get. We're already seeing some benefit just from being able to share data across the two brands, and an improved tech process.

But by the end of it, if you think about our Group right now, we're doing -- take payments, which slightly super set of KYC, we're doing payment work in the Paddy brands and the Betfair brands UK and Ireland.

Similarly, in Italy, that's four discrete pieces of work; similarly, in Australia; and similarly, in the United States. So, that we're often doing KYC, AML processes six times, and we're very focused on removing that inefficiency, which we hope we will have materially improved are capabilities on that front by the end of the re-platforming in Q4.

Monique Pollard, Goldman Sachs. Just two questions from me. In terms of the overall UK online market, could you perhaps comment on how quickly you think it's growing? I know we heard from William Hill a couple of weeks ago, they thought 10% to 14%.

And then just in terms of the level of competition in the market at the moment. Obviously, you're commenting that some of the niche gaming players you think have been doing well in the first quarter, but overall is the level of competitive intensity around the same as we were seeing last year?

Yes. So, completing those, it's hard to know exactly how fast the market's growing. It's hard to know whether that individual competitor was talking about historic growth rates or recent historic growth rates, or forecast for the future.

We've always said that we would grow in line with market. It's beyond our pay grade, it's beyond our ability to, actually, know whether markets are growing at -- to forecast market growth at 7.5%, 10% or 12.5%. And I think we're still broadly in line with market growth.

The gaming stuff is competitive. I think a lot of the sportsbook operators acknowledge that gaming got harder in the second half of last year. I'm not sure that we fully nailed down all the reasons behind that. I think there is some increased activity from gaming-only entrants.

If you look at the number of gaming brands advertising on Sky, it's a multiple of the sports-led businesses advertising on Sky. So, it remains quite competitively intense. I don't know that it's got much worse but I think it's incumbent on us to find the best way to compete in gaming, just as we have on the sport side. And we will progress that and I think we'll talk about it more when we feel we've turned a corner.

Jeffrey Harwood, Stifel. Staying on gaming, can you say how exposed you are to high-staking players? And were there to be some regulatory change, does that concern you unduly?

No. The summary is no. These businesses have been very sensitive, not just to the strict regulatory stuff but also the spirit of those regulations over a number of years. So, we've no evidence that we've anything other than, I would guess, a lower than market level of exposure to that.

Ivor, Peel Hunt. Just thinking about what you said about not being able to grow faster than the market, is there a debate to be had with shareholders about the tradeoff between revenue growth and profit?

And, whether this is the right level, whether you're constrained by the need to hit consensus numbers, because one of the advantages of scale you haven't talked about is to be inefficient with marketing in order to affect the competitive environment. Do you feel you've built a battleship but you're not being allowed to fire the guns?

The transcript will tell us. I don't think I said that we would grow less than market. I said it's possible, today, we are growing a bit less or that we're growing at market. Indeed, it's possible in the future we'll grow faster.

We're happy with the absolute level of marketing spend. We challenge ourselves to think about how can we spend more money? We challenge ourselves to think how can we spend more money on technology? It's very tempting at a time like this to introduce further complexity by spending even more money on technology.

There's a seminal work on software development written in the late sixties called, The Mythical Man Month. The tech guys use it to remind us that nine women can't have a baby in one month and there is -- some things that just take time.

So, we will develop. We will finish this project towards the end of the year. We'll have the efficiencies that come from that new platform. We'll still have GBP300 million plus or minus in marketing spend. We'll see what the market is growing at and we'll see how we can compete.

So no, we're happy. It's frustrating that we're not getting credit from our customers for the work we're doing at the moment. But I think we will get credit from our customers in due course.

So you're saying another GBP50 million of marketing spend wouldn't get a return? I'm not sure GBP50 million is the right number, but --

I'm not sure what the right number is either. So, we will flex up and down that marketing number as market opportunities allow and as our confidence in driving that allows. But we're not feeling constrained, in terms of investment on either marketing, people or tech -- anywhere.

Great, thank you.

We might just go to the phones and see if there are any questions there for a moment.

(Operator Instructions). Patrick Coffey, Barclays.

Three questions from me. Just on that GBP300 million in marketing number, Breon, you just mentioned that you can flex it up and down. What's the range of flexibility there? Is it GBP20 million/GBP30 million up or down per year? And should we be thinking then if you've got less investment in products in Paddy Power and Betfair this year that maybe, actually, the marketing budget doesn't actually go up much at all in absolute terms?

Second question, when you were talking about the IT integration, you mentioned that you're scaling up capacity so that you could take a third or fourth brand in the future. Should we be thinking that's the direction of travel then, so further acquisitions rather than any cash returns?

And if we were thinking acquisitions, presumably you would be wanting to diversify revenues away from the UK. Or are you happy to take on a lot more market share in the UK?

And then finally, much shorter term question, but can you just quantify the impact of the leap year in 2016, in terms of the current trading? So, what would amounts wagered be ex that? Thanks.

Thanks, Patrick. I'll take the first two. The mathematical one, about the leap year, I'll pass to Alex.

And I'll send him an email, because I don't have the answer right now.

I think it's a day on 62, so I don't think it's a material driver of the outcome.

On the range of marketing spend, obviously, we can flex numbers up and down. I don't have guidance on how that might -- I don't have any guidance on the quantum by which we might flex it up or down. As we said earlier, we operate in a pretty dynamic market, we challenge ourselves to see should we invest more money.

Equally, we value and we think our shareholders value the operating efficiency, the discipline we've shown over the last number of years. So, somewhere in there we find a marketing number that seems right at a point in time.

On the tech platform, you're right, I did say three or four brands. I really should say multiple brands. It goes to one of the earlier questions. I think it's probable, at some stage in the future, and this may be years away, but I think it's probable at some stage in the future that we would entertain running the Sportsbet brand on a global platform.

I do think, though, that a benefit of this work is that we will be a very efficient buyer of businesses like this. But I think that the necessity to contemplate a sports bet, or the appetite to consider offering a sports bet on a global platform necessitates more brands than just two.

In terms of M&A, I think, the business more or less is back to steady state, so if there are things to look at, we will look at them. But we're very comfortable that, as a consequence of the deal we did some 55 weeks ago, strategically we're a balanced portfolio with international diversification. It's a very good platform to think about growth over the coming years that doesn't require future M&A. But obviously, if there's an attractive asset at the right price, we'll be very thoughtful about that.

Thanks.

Patrick, we'll send you something on the leap year, so that you can -- because I don't have an answer for you right now.

Okay, thanks.

(Operator Instructions).

It's 11 o'clock, so if there're any other questions in the room we'll take it, or otherwise we'll go to -- in fact, there's one other question on the phones.

Simon French, Cenkos.

Just a quick one on unregulated markets. In H1, revenue was down 13%; for the full year, just down 2%. How much of that difference is FX and how much is underlying growth in regulated markets in H2, please?

The difference is all Portugal. The downside has -- obviously, there are some benefits in the FX, but the difference -- the down difference, is all Portugal.

I guess I'm just trying to get to whether or not unregulated market revenue grew H2 on H2.

We'll have to come back to you. Sorry, I don't have the answer.

Okay, thanks.

That's a scheduled fire alarm, so apologies. We don't own the building, nor do we plan to (laughter). But it's a scheduled fire alarm. Maybe we'll wrap it up. Sorry, there's one other question on the phone before we wrap up, guys.

James Wheatcroft, Deutsche Bank.

Just two follow-up questions, please.

Firstly, perhaps you could just give us a bit of color on the weight of marketing spend by brand since the merger and into the future; and also, maybe, the mix of how you're actually spending it?

And then, secondly, just in terms of markets. Are there any unregulated markets that may be heading towards regulation, which you might be tempted to look at?

James, we look at a whole host of markets pre-regulation, early regulation; very hard to forecast what material opportunities will be ahead. So, to be honest, I don't have a concise answer on that.

I think it's premature to be drawn on the weight and mix of advertising. We're still learning as we go. We want to continue investing in a full-blooded way in both brands, across both routes to market. There is a slight flavor to each one; the social media probably does lend itself to Paddy Power a bit more.

But, at this point in time and for the foreseeable future, it's both brands, all guns, with no strategic mix choices. That may be something we will review down the road, but, at this point in time, that's where we are.

Thanks.

Okay. Folks, I'm going to wrap it up there. We'll take questions one on one, if that's helpful. Thank you for joining us in Hammersmith, and good luck to you all next week.

Ladies and gentlemen, thank you. Those on the audio, that concludes your conference call for today. You may now disconnect. Thank you for joining and have a good day.