Flutter Entertainment PLC (FLUT) 2018 Q4 法說會逐字稿

Welcome to the Paddy Power Betfair 2018 preliminary results. I'm delighted to be joined by Jonathan Hill, our CFO, for what's his first set of annual results and also by Dan Taylor, the CEO of our European business. He is going to speak to you later on about how we've turned around the Paddy Power brand and the ongoing work we've got at Betfair.

I think we're going to cover 4 topics today. Firstly, given the fact that we've seen a very significant year of change in the sector, I want to take a step back and remind you of why we can deliver sustainable shareholder returns by talking about how our sector remains attractive and how well positioned we are within it. I'm also going to take you through our 4-pillar strategy, which I've talked to some of you around. Jonathan will then cover the financial review, highlighting the 2018 numbers and how you should think about our significant U.S. opportunities and also touch on capital allocation. And then under the operating review, Dan and I will discuss the highlights and substantial progress that we made in 2018 against our strategic priorities.

Turning to Slide 4. And it's important to recognize that despite the recent challenges in the tax and regulatory front, the sector remains attractive. The global market is larger, $450 billion, with approximately 11% of it is currently online. And online is growing fast and has a long runway of growth. Each 1% of global offline migration drives $4 billion of extra online revenue. I believe that online gambling exhibits the same dynamics as other online markets, with the economics flowing disproportionately to the scale players.

For global operators with scale and technology, regulation is creating new online markets to invest in. The recent opening of the U.S. is a prime example, but the trend of governments to regulate and tax is playing out globally. Within mature online markets such as the U.K. or Australia, the increased regulation and tax burden also faces the scale players and makes it much more difficult for new entrants to achieve the necessary scale to compete.

On Slide 5, we'll add why I -- why we believe we're positioned well for success within the sector. We've got strong foundations, a substantial scale, distinctive challenger brands and leading capabilities, which have enabled us to build podium positions in key online regulated markets. And given these 3 core markets of the U.K., Ireland and Australia represented 80% of our revenues in 2018, we have a great opportunity to grow as the accessible market online marketplace expands. And crucially, we have substantial financial firepower to support our great ambition.

Now many of you will have heard me talk about our strategy over the past 12 months, but I thought it would be useful to put it on one page for you today. And on Slide 6, you can see our 4-pillar strategy. I'm not going to go through all the details, but in summary, we've got these 4 pillars focused on the consumer markets we're targeting.

The first pillar is around our core markets, the U.K., Ireland and Australia, where with successful execution, we are able to build on our podium position to grow our market share and generate cash.

The next 2 pillars relate to the other international markets, enable us to access additional growth and crucially increase the diversification of our revenues and profits.

The pillar 2 relates to growing Betfair in the 100-plus market to serve outside of the U.K. and Ireland. We're going to accelerate growth in these niche positions by targeting core bettors with our distinct proposition and by offering localized customer propositions.

Pillar 3 is around identifying and achieving new podium positions in additional regulated markets. It is our view that regulation and localization of a consumer betting interest means that success in many markets, substantial local scale and a strong brand presence are required, and accordingly growing to establish leading positions in attractive regulated markets or as I would describe it, podium positions.

And the last pillar focuses about nailing the U.S., where the price of success is likely to be huge and will create significant value. In terms of the enablers and the core values shown at the bottom of the page, I would highlight the importance of product technology and operating responsibly. And Dan and I will share more details to what we're doing in each of the pillars later on in the presentation.

Now I'm really pleased with the performance of the group in 2018. And before I hand you over to Jonathan to discuss the financial performance, I wanted to highlight on Slide 7 the substantial progress we've made across each of the 4 strategic pillars. Operationally, the biggest turnaround has been in Paddy Power, which has regained its mojo and is back taking market share, with spotlight investor and a stronger marketing execution is driving improved customer engagement, and we enter 2019 with very good momentum.

For Betfair, we're evolving our proposition to better leverage the advantage of having both a leading sportsbook and the leading exchange, and we are significantly improving our ability to serve global markets through investments in products and technology.

Sportsbet's success over the last decade epitomizes the advantages of having local scale and strong brand presence that I referenced earlier. This has enabled us to consistently offer the winning customer proposition and grow market share. In 2018, ahead of increased taxes, we deliberately increased our investment in generosity and this has driven additional customer activity. The acquisition of Adjarabet last month have secured us a podium position in the attractive Georgian online market. And in the U.S., we've moved very quickly to ensure we have the best chance of success. With FanDuel, we have both a nationally recognized sports brand and a significantly competitive advantage that are growing fantasy player base. Together with our existing group capabilities, this has enabled us an early -- to take an early leadership position in New Jersey with 35% market share.

And before I hand over to Jonathan, I just want to touch on our announcement this morning of proposed renaming of the group to Flutter Entertainment, which will go to shareholders for approval in May. As the greatest portfolio of brands continues to grow, it's become imperative to rebrand the corporate name. And the Flutter name may be familiar for those of you know their Betfair history, but there are no plans to use it for consumers, but we do think it's a great fit for a corporate name. And we already owned it, and it didn't cost us anything with branding consultants.

And Jonathan will now take you through the financial review.

All right. Thanks very much, Peter, and good morning all. I'm sure you're all keen to get on to the numbers. But actually before I dig into those, I thought I'd share a few thoughts on the business now that I've arrived and have been here for about 4 months.

So when I first met Peter about a year ago, I was excited by a lot of things about the role, the fast-moving and international nature of the business, the great brands, the fact that Paddy Power Betfair was entering a sort of new phase in its life, having undertaken the merger and obviously, with new leadership with Peter. And I must say, I haven't been disappointed by the pace of change in the industry and the group, exemplified by the repeat of [Pastor] swiftly followed by our deal with FanDuel. Since joining, I've been hugely impressed with the business. Our brands are getting stronger, our products better and the efficiency of the organization is improving. Most important for me has been the fantastic quality of the people that I've met across and deep into the organization, and that's not to say there aren't challenges particularly across the regulatory and tax environment, which is why scale and diversification is so important.

I'd also like to share with you how I look at the business, and my focus is really on contribution. As a business, we invest in generosity and marketing to drive customer activity. This drives our revenues from which we pay our variable costs, and this, to me, is our contribution, of which we then have to drive our benefits of scale. And this way of looking at the business is particularly pertinent when we think about the U.S. and the opportunity there, which I'm going to touch on later.

And looking in summary, the group has a great strategy which we're delivering on. We have got an excellent cash-generating business, a really strong balance sheet, which leaves us fantastically positioned to take advantage of the opportunities which are arising within this industry on a global basis, and that's why I'm excited about the future.

Right. Without further ado, we will move on to Slide 9. So revenues in 2018 increased by 7% to GBP 1.9 billion, and EBITDA was GBP 451 million. And before our U.S. sports betting investment of GBP 24 million, our EBITDA was GBP 475 million, towards the upper end of the guidance that we provided at our Q3 trading update.

Profit before tax of GBP 219 million was 11% lower than 2017, mainly due to that U.S. investment. And after the impacts of the minority interest share of the U.S. losses and the share buyback program, our underlying EPS reduced by 5% to 379p.

We are proposing to maintain a full year dividend of 200p, and we are maintaining our medium-term guidance of a 50% payout ratio.

Finally, we've moved into net debt at the year-end of GBP 162 million after our significant shareholder cash returns during 2018 through dividends and share buybacks of GBP 584 million.

So before getting into the details by division, I think it's worth just summarizing our revenue performance in one slide. We delivered a solid performance in our online sports revenue. Our gaming performance was excellent. Thirdly, in Australia, we delivered a strong performance with a significant increase in customer activity, offset by adverse sports results in our decision, specifically to invest in promotional activity ahead of the introduction of Point Of Consumption taxes. In the U.S. on a pro forma basis, we delivered strong growth in our existing businesses, combined with our first sports betting revenues. And finally, in retail, we delivered a robust performance, continuing to outperform our competitors on a shop-by-shop basis.

So moving on to Slide 11. Here we've got an EBITDA bridge, which goes between 2017 and 2018, and I'm going to highlight some of the key items that resulted in what is effectively a GBP 24 million or 5% year-on-year increase in underlying EBITDA before that investment in the U.S. business.

Firstly, foreign exchange had an adverse impact of GBP 9 million driven primarily by the conversion of the Australian dollar profits to sterling. Secondly then, in the second red bar on the left, we have the adjustment for the FanDuel losses which reduces the prior year comparative by GBP 13 million. And then clearly, the large green bar, the revenue growth contributed GBP 71 million to EBITDA, with the online Australian businesses delivering 3/4 of the increase and the remainder coming from the U.S. Revenue growth was clearly held back by the relative adverse sports results, which we estimate cost the group around GBP 30 million year-on-year before any recycling impacts. As we flagged in 2018, we increased the level of marketing, both for Paddy Power in the U.K. and in Australia and the lead up to the Point Of Consumption Tax introduction, and we have absorbed GBP 15 million of annualized betting tax and product fee increases during 2018, again in the U.K. and Australia. And finally, on the bridge, the cost growth reflects the increasing cost of sales in the revenue mix, offset by lower other operating costs.

Okay. As I'm going to talk in each of the divisions in the following slides, I'm going to concentrate here on the items below EBITDA. Depreciation increased as a result of our recent investments that have made -- that we've made in our platform and our product areas across all of our online businesses, and separately disclosed items mainly relate to the amortization of acquired intangibles from the merger and the FanDuel deal as well as the write-down of a goodwill of our original fantasy business, DRAFT. Additionally, there were some transaction costs associated with the FanDuel acquisition and a breakdown is provided in the appendix.

Our underlying tax rate was 14.9%. This compared to 13.5% in 2017 and the 2007 (sic) [2017] year benefited from some tax credits which reduced the effective tax rate in that year. And finally, we can see the impact here of the U.S. sports betting losses borne by our minority shareholders in FanDuel, leaving the profit attributable to our shareholders 7% lower at GBP 201 million.

Moving on to Slide 13, the online business. Our online division, obviously, includes Paddy Power and Betfair brands as well as our B2B activities. And from 2019, this division will also incorporate Adjarabet, further increasing its revenue diversification. Revenue increased by 5% to GBP 948 million with sports revenue up by 3% and gaming revenue 13% higher. In sports, sportsbook revenue increased by 6%, and exchange was down by 2%.

Within sportsbook, staking reduced by 3%, but this was offset by a 0.7 percentage point increase in net revenue margin. This is an important point that the lower stakes was in part due to the recycling of the customer winnings in Q1, but also importantly reflected an increased strategic focus on profitable revenue growth rather than volume. These strategic changes, together with positive shifts in the bet mix, including an increased utilization of Same Game Multis drove the margin increase, with the impact of sports results immaterial year-on-year. The 2% decrease in exchange revenue was driven, as you all know, by the weak performance in Q1, which declined by 7% having been significantly impacted by weather-related racing cancellations.

Across the rest of the year, exchange was -- revenue was flat year-on-year, and Dan's going to talk to you more about that later and the importance of the exchange within the combined Betfair sports and gaming proposition.

Off the scale, sales grew faster than revenue partly due to GBP 7 million of tax and levy changes implemented during 2017, but also due to changes in the revenue mix, including increased gaming. And as we guided in 2018, we increased our marketing costs. Other operating costs reduced by 7% benefiting from a continued focus on extracting operational efficiencies across the group. The division's underlying EBITDA increased by 3% or 4% excluding FX to GBP 316 million.

Okay. Turning to Slide 14 and our Australian business. Net revenue increased by 6% in constant currency terms. Due to customer activity levels growing significantly in 2018 over 2017, our staking increased by 23% in local currency. And due to the mix of adverse sports results and promotional generosity, the net revenue margin decreased by 1.5 percentage points. The impact of each of those aforementioned factors was roughly half of the decrease of 150 basis points.

We are confident that the investments that we have made in generosity and also in marketing will yield good returns, particularly with the backdrop of the introduction of Point Of Consumption Tax. This has supported our activity levels coming into 2019 as well. We increased our marketing spend, again offset by lower operating costs. And overall EBITDA growth in constant currency was up by 4% to GBP 137 million.

Now looking at retail on Slide 15. Revenue was down by 1%, with the U.K. actually 1% ahead and Ireland 4% lower in constant currency, the latter being more impacted by the weather-related closures in H1 of the year. EBITDA declined by GBP 10 million with the increase in operating cost largely reflecting an increase in the cost of racing content. We have maintained our retail estate at 626 shops, and we would not expect this to vary materially over the next 12 months.

So moving on to the U.S. on Slide 16. Here, we show the performance on a pro forma basis as though we had owned the FanDuel group for both 2017 and for the whole of 2018. The 2018 EBITDA includes GBP 24 million of sports betting losses, as I said. Therefore, the nonsports betting U.S. results include -- improved by GBP 19 million year-on-year from a loss of GBP 9 million in the previous year to a profit of GBP 10 million before those sports betting investments. The existing business has benefited both from revenue growth and from cost synergy benefits in bringing together FanDuel and DRAFT.

Sports betting contributed GBP 11 million of revenue in 2018 and the remainder of the business increased revenues by 13%. A large component of the increase in cost of sales was due to the sports betting taxes and sales and marketing reflected the synergy savings when putting together FanDuel and DRAFT and that was more than offset by our marketing investment in the sportsbook.

Okay. So going -- on the U.S. going forward, the first thing to say is that hereon we intend to report the U.S. as a separate business, so you'll get group excluding U.S. and U.S. This is because of few reasons. Firstly, it's clearly -- the U.S. business is clearly a very different stage than the rest of the group in terms of its investment cycle. Therefore, we do expect it to be incurring losses in the short-term as we build the very valuable customer base on a state-by-state basis in the U.S. And we report as one business mainly because there are various parts of the U.S. business that will become increasingly integrated.

Okay. On Slide 18. What we have provided here is a bit more detail and a split between, what I'm going to call, our existing businesses being fantasy, TVG and casino and our new sports betting business. And we've split that out for revenue, contribution and EBITDA. Again, this is on a pro forma basis. This is being provided to assist you to think about the U.S. business going forward and how the investment is likely to evolve over time.

For the non-sportsbook business, you can get the clean comparison from the previous page of 2017 and a few comments on the net revenue generation of the sportsbook in particular. The high level of promotional activity is driving our active customer numbers. This is creating embedded value for the future, but naturally results in a lower net revenue percentage in the early days. Furthermore, the margin is likely to be impact -- is being somewhat impacted by the mix of customers, and we think we're seeing a more sophisticated customer being an early adopter of the sports betting in New Jersey. And then thirdly, as with any business, when it starts up, we'd expect the net revenue percentage to start a bit lower, and then over time, we'd expect that to grow, and this is partially reinforced by further growth that we expect in multis or, as we should say, parlays, over time. The combination of the lower net revenue percentage in these factors and our investment in marketing led to the negative contribution of 7 -- of GBP 9 million in New Jersey in 2018. That said, we exited the year with an impressive and growing market share and a customer base that is far bigger than we initially anticipated. And that bodes extremely well for the future.

Okay. With respect to U.S. guidance. We believe the best way to think about this is in 4 component parts. So if we think firstly about the non-sportsbook business, the fantasy, TVG and casino, we expect to generate further customer and profit growth in 2019, although we expect the growth to moderate somewhat from here given the maturity of some of those businesses.

Secondly, for the New Jersey sportsbook, we expect to generate a negative contribution again in 2019, but with the balance of new and existing customers changing as the year progresses. The scale of contribution losses will depend on several factors, including the rate of market growth, our market share of that, the level of contribution within the stake, particularly as some new entrants are anticipated. That said, we now expect the New Jersey sportsbook to deliver a positive contribution at some point between 18 and 30 months post launch, therefore, in 2020 at some point.

The third factor to consider is the rate of new openings by state which remains uncertain. Clearly, the quicker we have new state openings, the greater the near-term losses as we build our customer base for the future.

And finally, we expect our operating cost base, excluding marketing, to increase from around GBP 106 million -- from GBP 106 million in 2018 to between GBP 145 million and GBP 155 million. Now this is partly due to the annualization of costs because clearly we're only operational in sportsbook for 4 months during 2018. But it's also some extra roles that we will bring in to fill out that capability in the U.S. This cost base should then be relatively scalable across different states, with many of the resources being shared across different products. Accordingly, we will not be splitting out our costs between sportsbook and other parts of the U.S. business going forward.

While the investment in FanDuel is material, we see it as hugely positive development. We are very happy with the customer acquisition metrics we are achieving in New Jersey and the expected lifetime value of the customers we are acquiring. For as long as the prospective returns remain as attractive as they are, I will be more than happy to continue investing in this business.

Okay. Moving on to Slide 20 and cash flow. Our underlying free cash flow was GBP 247 million, representing 81% of underlying profit after tax of GBP 304 million. In 2017, we benefited from strong working capital benefit of around GBP 20 million which reversed in 2018 as guided at the last year-end by Alex. Furthermore, we made some material prepayments during 2018 relating to European marketing and U.S. sports betting assets, and we would expect this negative impact on working capital to start to reverse in future years.

As I mentioned earlier, we made a significant cash return to our shareholders during the year and ended the year with a net debt at GBP 162 million as we move closer to our long-term leverage target.

I'm going to touch on this Slide 21 very quickly. It's really the top 3 bubbles on this chart. You can see the evolution of our leverage going from net cash at the end of 2017, the 0.4x at the end of 2018. And with the acquisition of the 51% of Adjarabet for GBP 101 million and the completion of our buyback program during February, we now have leverage of 0.7x equating to net debt of GBP 310 million.

This slide really lays out our thoughts on capital allocation, Slide 22. We have the benefit of a high cash-generating business, and we have a very strong balance sheet position as we sit today. Therefore, this gives us flexibility and options to allocate capital as we move forward. And there are 2 key areas that we will focus our investment on. The first, there are some high-returning opportunities for organic investment in new markets, the key example of which is obviously the U.S. Secondly, we believe that there remains interesting M&A targets in new markets, which we may be able to acquire and grow. And we will be disciplined in our approach with a focus on ensuring that the returns are compelling for each investment. We are retaining our medium-term guidance of 1 to 2x because I believe this is the right level for a group in this industry.

This slide is really for reference, and hopefully, it will help people think how the changes in tax and regulation that we announced in Q3 impact each of 2019 and 2020. So the GBP 118 million of impact is effectively a 2018 revenue levels. We can see GBP 107 million of that comes in, in 2019 and an incremental GBP 11 million in 2020.

Guidance. I'm not going to go through this slide because there is a lot on it, but I'll leave you to take this one away. But it gives a couple of items that I want to pull out here. Firstly, current trading albeit early in the year is in line with our expectations with good momentum across the group. Secondly, we've decided that we will no longer report EBITDA in our Q1 and Q3 trading updates. While offering more detail generally helps the market to better understand how the business is performing, in this case, the seasonality of our marketing investment, I think, it was actually leading to a greater confusion, in some cases, causing unnecessary concern. We'll, obviously, continue to provide plenty of detail around revenues.

To sum up. I'm excited about the future prospects of this group and believe that we have the assets and strategy in place to continue to grow our business materially in the coming years.

And with that, I'll now hand you back to Peter.

Thanks, Jonathan. I'm going to start this section by talking about the topic that's probably the most important to the long-term sustainability of our business.

So Slide 26. As a progressive operator, we have always thought operating responsibly at the core of our business to help us deliver sustainable returns. It's imperative for all stakeholders, our customers, our shareholders and our employees, and it is critical that we're proactive as a company and as an industry to ensure we deliver. We've always invested in providing customers the tools to help manage their play. We were one of the first to market with our data-driven intervention methods. We must have market-leading responsible gambling features available. We recognize that we need to sustain and continually improve these.

Furthermore, I believe the industry collaboration is an important part of the solution. And we'll continue to support the recent political signs we've seen in this regard. For example, this year, we are further updating our proprietary algorithm that monitors and identifies at-risk customers, expanding its capability to monitor more than 115 separate customer behaviors across our customer base and to assign risk scores to each active customer.

As an industry, we're starting to get better at collaborating, and we're pleased that we could work with our players last year to put in place the solution and the level of advertising in the U.K. This is a start, but there is much more to do.

Overall, our group has always taken responsible operating very seriously. It's an area that was always important that is becoming ever more critical, and I'll be endeavoring to ensure as an industry to become more proactive.

I'll now pass you to Dan to talk about Paddy Power Betfair.

Thanks, Peter. So to introduce myself, I'm Dan Taylor, I'm the CEO of our European business, which in external reporting terms, is our online and retail division.

And let me start with Paddy Power, which is our U.K. and Ireland focused mass markets brand. 2018 was a pivotal year for brand. We reversed the trend of the previous years and began to win back significant market share on the back of the completion of our tech migration and some subsequent product enhancements. What we've seen at Paddy Power, I think, is also the case at Betfair, as we've only got strong and fresh products and we couple this with effective marketing, our performance is very strong. Of course, the reversible is true. When product development fails for whatever reason, performance results would be bleaker. Product enhancement this year, coupled with some fantastic marketing through the year and a more targeted and focused investment in value drove revenue growth to 11% in 2018, significantly ahead of the previous year.

As I flip to Slide 28, we'll talk through some of these improvements. Since we launched the Paddy Power product just over a year ago, they are significantly faster and easier to use. These are key attributes for all customers, but particularly to the more occasional users. We've made really good progress there, and in terms of speed and use, we're now ranked as the third best brand, but we still have a way to go to get back to leadership where we want and intend to get. We're driving further differentiation through our sports products. We released Power Up in Q4 2018, which allowed individually personalized price enhancements to deliver the customers based on a full understanding of their betting behaviors and interests.

In terms of product improvements in 2018, gaming was a standout. On completion of the platform integration in Q1, customers got access to the fast gaming app for the first time in over 4 years, and then some of it really significantly enhanced gaming content embedded into our sports apps. And more recently in December, we will launch Paddy Power Vegas. It's a tournament proposition which gamifies the slots experience, allowing customers to play against other players with additional prizes based on the tradition -- on tournament leaderboards. No other U.K. major operator has this product. Crucially, we've seen very material uplift in this portion of customer cross-selling to gaming from sports. Now we can especially send it back to customers in a month.

Within a more mature market like the U.K., winning share of wallet and loyalty is incredibly important. This time last year, Peter outlined to you how we were stepping up our investments in this area. And since then, we've more than doubled the members of our Paddy's Rewards club. Of course, we'll also be true to our distinct brand and its (inaudible) roots, we've put our own spin on that concept and bringing it to consumers through our Loyalty's Dead. Live for Rewards campaign led by Rhodri Giggs, our new ambassador, and I hope many have seen it. In fact, I imagine a little hard for you to avoid it, but over 7 million views in the first weekend of its launch, something we're incredibly proud of.

We stepped up the frequency of our adjusted suites and promotions, always ensuring these are topical and relevant for our sports customers something that is particularly iconic for our brand, and we've doubled the proportion of customers receiving those in Q4 versus the previous year.

Any of you backed Sergio Garcia in the Masters, you'll receive (inaudible) when he went into the water 5x on the same hole. It seemed only fair when his game resembled, something that came to mind.

So what does that allows us to do. For me, one of the key metrics I use to judge the health of business is our daily active customers. This gives me an indication as to the health of our business and whether we're growing our recreational base and appealing to the right sort of customers. The chart on the bottom right shows a material turnaround in this metric over the course of 2018, and that continues.

So let's turn to Slide 29, will focus on retail. As Peter and Jonathan have talked about, we consistently have outperformed our hosting competitors. That drivers of outperformance is shown on the left-hand side, in essence, our strategy is very simple. We offer the customers a leading sports betting experience in the best investment shops. We've built an estate focused on high portfolio locations where we outperform local competition, and we don't expect the strategy to change. You're all very aware of the significant regulatory headwind facing retail this year. In fact, we went live with our trial of the GBP 2 stake yesterday in Birmingham, in a small number of shops to test the operational impact of that. But our retail team was fully focused on improving and enhancing the in-shop experience for our customers, accelerating our omnichannel proposition. And we don't have the distraction of [nationalizing] the estate. Accordingly, we remain very confident that we'll capitalize on further market share and consolidation through 2019.

Now moving to Betfair. Betfair is our global brand and it appeals to what we call core bettors. These are recreational customers where they tend to bet more frequently, they're incredibly important customer segments in both the U.K. but also globally. And this is somewhere where our products and the combination of assets we have gives us a unique source of competitive advantage. The top of this slide shows who Betfair customers are, how they engage with the products and value drivers of the brand. While the bottom of the page, we have some of the reasons why Betfair can offer an unparalleled sport betting experience.

A few key points to note here. The brand is sports led and the exchange is a very valuable part of the business, it's integral to our value proposition. It's highly differentiating as customers are sticky. But to fully serve our customers, we use both the sportsbook and the exchange. As you can see on the chart on the bottom left, they serve very different customer demands, and actually these 2 products complement each other. The customer views the exchange, the labor and the trade and the sportsbook drives it multiple and to access promotions. This long-value proposition is core to our DNA and runs through all of our products. And when our customers use both of our products within the brand and all of our products, we see that significantly stickier and we drive the greatest share of wallet, and you can see that in the chart here in the bottom.

Finally, I think it's important to cover the exchange liquidity to recognize the important and complex topic. A high level liquidity consists of 2 components. Firstly, they were large liquidity providers essentially you can think of these as bookmaking businesses that don't have a brand and they come into our platform to access a global pool of recreational customers. With this global and diverse pool of recreational customers that make the exchange resilient.

Now on Slide 31, I have included the same chart which includes the Paddy Power here, highlighting the long-term revenue trend and also the 2018 revenue momentum. We run the Betfair business served across the entire business model, not individual products, and its total revenue, therefore, resulting our focus. Revenue growth in 2018 was 4%, and I'll take a moment to talk you through the chart on the other side.

On the black line, we've got Betfair's total revenue, on the yellow line, you have the total exchange revenue, and on the blue line, you've got the exchange revenue removing the markets where we've turned off for regulatory reasons over recent years. And I think it's worth highlighting a few distinct phases of growth in the business and the ways -- the different ways Betfair has delivered growth over this period.

If I look the periods of 2012, the growth is very much driven by the exchange and strong growth in that product. Since 2013, however, the growth predominantly has been driven by sportsbook. This was launched at the end of 2012, grew very rapidly, particularly cross-selling from existing customer base, but more recently, the sportsbook is growing at very material scale. It started to grow and trend closer to the market rates of growth this month -- 2018. As we can see, overall, the exchange alone has been broadly flat for the last 5 years, with market switch-offs due to regulatory changes offsetting underlying growth in other markets. And performance in 2018 was consistent with this, with revenue flat in quarter 2 to 4 and as previously disclosed a weaker Q1.

Now there are some medium-term pressures which remain on exchange. We talked about this before but thought I'll just give a little bit more flavor on the ones that I see. Regulatory change has proven to be a headwind for exchanges in certain markets. And as you see, certain markets have been switched off over time. Horseracing, we've seen the historic competitiveness of the product and price advantage eroded, particularly for Best Price Guaranteed and Money Back Specials. And thirdly and importantly, as we've been showing to focus on revenues are sustainable, over recent years we've been increasingly proactive in responsible gambling.

Now moving on to a new phase of growth that I think about the Betfair products, which is the internationalization and the globalization of the Betfair product and accessing the colossal market that's outside the U.K. and Ireland with our highly differentiated proposition, and that something I'm hugely excited about as a key focus for the brand over the coming years.

If you stick to Slide 32, I'll talk a little bit more about what we're doing there. Now we're building out our capabilities to offer global Betfair customers an enhanced proposition. While Paddy Power did a significant update to product last year, of course Betfair didn't, and this is a critical focus for us. The development will rectify a few highlights on the slide and enable to subsequently increase promotional and marketing investments and drive further international growth. It will also allow us to turn back on from the markets we've had to switch off in recent years as we couldn't historically accommodate regulatory demands.

A few key aspects of this development is worth focusing on. Firstly, we're expanding the range of language we offer on the site and automating the way we translate the content. Clearly, it's really critical to customers to have the site accessible in their own language. We'll offer much greater range of local currencies. For example, in the last couple of weeks, we turned on the Brazilian real in that market and it resulted in the cost of customer [efficiency] falling by 1/3 overnight.

Our payment operation -- payment options have traditionally been somewhat limited in many markets, we haven't been able to accommodate those. We're rectifying this. Content localization. While it makes sense, the U.K. horseracing to be predominantly displayed in our apps in the U.K. and Ireland, it doesn't necessarily make sense for Brazilian football fan to see the 2:30 Uttoxeter. We must present customers with relevant betting content for them that's relevant in their market.

Local sportsbook pricing. We historically didn't have the ability to change our pricing in different locations. We ran a single pricing strategy with every country in the world. We've recently introduced some development that allows us to change that and has 2 distinct advantages. Firstly, it allows us to adopt our pricing for different tax regimes. You can imagine in a market like Germany which has a high turnover tax, operating through our office in the U.K. is a very challenging thing to do, and we released different pricing strategy in Germany in last month. Secondly, it allows us to tailor our pricing intensity based on the local market conditions. As you can imagine, the different sets of competitors in different markets is incredibly important we're able to vary our pricing strategy in different parts of the world.

So overall then, I'm hugely excited by the opportunity we have to grow internationally. We've got to say, we will improve our global exchange liquidity and enhance our diversification.

And I'll hand back to Peter.

Thanks, Dan. So we've referenced the importance of scale and strong brand a number of times this morning and the success of Sportsbet is probably our perfect case study on this. And if you turn to Slide 33.

As shown on this, the top 2 charts on the left-hand side. You can see that Sportsbet has grown revenues and market share consistently over many years. This has been driven by investments in its brand and in offering customers a market-leading proposition across product, value and promotions. Combined with scale, it has driven strong profit growth and margin expansion despite increased taxes and product fees, as you can see in the charts on the top of the right-hand side.

As you are all well aware, the level of tax has substantially increased this year, which reduces our profit margins that will further embed the competitive advantages of scale and strong brand gives us.

We first began strategically increasing the level of Sportsbet's generosity to drive customer activity during 2017. And early in 2018, we decided to materially further increase generosity, ahead of the new taxes, and in light of industry and brand consolidation. We've been very pleased with the returns we're seeing on this investment, and despite the market, the company notably more competitive from the second half of last year, Sportsbet still offers the market-leading offer.

It is our intention to maintain this leading generosity.

(technical difficulty)

And by what we're seeing to date in New Jersey, this spend will migrate to regulated online sites.

As you've seen elsewhere, a properly regulated product will make the market more accessible and recreational, thereby increasing the total revenue pool.

In the long term, we expect lots of states to legislate. But even in the near term, the potential market is huge. The combined population of New Jersey, New York and Pennsylvania alone is 1.7x the size of Australia, and these are all states where there will be sports betting and we'll be very well-placed in them.

The middle of Slide 35 shows why I would not trade our position for anyone else's. Our brand, our market access, our relevant customer database, the unique cross-selling capabilities and our extensive local experience. Whilst it's early days in the market evolution, the bottom of the slide shows how our advantages are translating into early success in New Jersey.

Slide 36 shows some of the key drivers the market share we have secured in this market. There's no doubt that fantasy sports gives us an advantage. To date, almost half of our sportsbook customers have come from our fantasy player database, with a significant number of these being lapsed players, those who haven't played fantasy in the previous 12 months. As well as enabling us to acquire more customers, it also allows us to do more economically as the CPA for the fantasy customers is substantially lower than those acquired directly.

Exciting thing of course is while we wait for other states regulating, we continue to grow our extensive fantasy footprint nationally. Really good execution over the NFL season on products and promotions including specific initiatives aimed at recreational customers has meant that we had strong growth in active customers, up 13% in 2018. And we added a further 300,000 new customers across the U.S.

Our sportsbook strategy in the U.S. is similar to what has driven success elsewhere. We want to achieve scale quickly in key online states by offering customers a leading proposition. That means offering leading product, fast and easy-to-use apps with significant betting content. For example, the Super Bowl, we have 52% more player profits than our nearest competitor.

It also means offering competitive pricing and generous and distinctive promotions. Examples have included grabbing headlines at an early players in Alabama to win the college football (inaudible) And our headline 53-to-1 odds offer on the Super Bowl.

In December, we also started to cross-sell the Betfair Casino to find new customers in New Jersey and this has accelerated casino growth, and this is before we embed the casino content within the sports app which will further enhance our customer proposition.

I'm excited about our prospects in New Jersey. We know the market is going to get increasingly competitive with new entrants and existing brands improving their product but we intend to continue to offer leading customer propositions and to leverage our unique advantages. And we plan on executing a similar strategy in other key states as they regulate. And we'll continue to invest and grow our fantasy and TVG operations ahead of that to optimize our opening position in each of those states.

So in summary, on Slide 37. The sector remains attractive with the regulation bringing significant opportunities as well as the known headwinds. We are well-positioned to take advantage of sector opportunities. We have good momentum in our core markets on the back of significant progress made in 2018. We've got robust plans and we have a strong position in the nascent U.S. market. And these opportunities will allow us to deliver strong and sustainable shareholder returns.

Now Jonathan, Dan and I would like to invite questions. In the interest of giving everyone an opportunity, particularly having many people here, I suggest we just start with a couple of questions first and then we may be able to come back to you if you had more later.

David Holmes from Merrill Lynch here. Just on the Australian market, how do you think about promotional activity into 2019 and the competitive intensity there? And then the second question is, Peter, you referenced in your outlook regulatory headwinds going forward are inevitable. Is there any particular areas of the regulatory framework that concern you?

Well, in terms of the first question about Australia, obviously with the point of consumption tax payment came in most states at the beginning of this year, and actually I have been quite pleased to see that the corporate bookmakers seem to have responded quite rationally to it. It has taken a lot of profits out of the pool. So we have seen the level of generosity reduced. One notable bookmaker's reduced -- has removed its loyalty program and the cost of some marketing efforts has come down as well. Now the TAB are pushing hard to try to take advantage of the disruption in the market and so we know that they're stepping up their level of generosity and making a little noise about it. But we -- I think we're seeing the market respond as we expected and have actually been quite rational. We'll continue to try to take advantage of that and take market share. In terms -- with respect to your sort of second question, I think from a regulatory perspective, there are issues that we see in markets around the world. For Dan and his business, when you're operating in 100 markets, you're going to get regulatory changes and interventions occurring. We are making sure we can set our platform up to accommodate those on a more flexible way and on an ongoing basis, but there are also going to be changes very specifically in our major core markets as well. There's -- you will see in recent speculation in the U.K. Market right now. I think we're well-placed to deal with this thing.

Gavin Kelleher from Goodbody. Just on the Betfair strategy internationally. You kind of mentioned Brazil. What other markets are you going to concentrate on this year? And when -- is it a H1 kind of iterations where it'd be up and launched? Or is it all throughout the year? And how many international markets are you going after or focusing on?

I think in terms of the Betfair strategy and the group strategy, our belief is we want to go after a niche position but in many markets. And we're not trying to necessarily build podium position to Betfair in that way. In terms of the development, we're actually -- there is not a kind of defined end or we are iterating this as I said in my kind of notes. We've released pricing capability to allow us to do different price reductions in different geographies. That's already happened and that's live in Germany and that will happen subsequently into other countries. We released our first new currency in Brazil a couple of weeks ago and new currencies are coming on board. Some of the local -- our personalization will take longer. So I think, yes, there's 12 to 18 months of work here, depending what other regulatory changes come along the way frankly, as well. But we've got 12, 18 months of work to get through and in that time, we'll turn back on some markets. The big markets that we're in, the usual like Brazil, Germany, Italy, Spain, Scandinavia, all of those. But we're not expecting to try and build big podium positions in any one that we're doing.

Just in terms of -- you noted of a market exit last year in Betfair. How much of an impact would that have?

That was Columbia. It wouldn't have been hugely material for us. You should have seen more come in as well but none of them -- none of them individually are hugely material but the collective impact put sales down.

So just on the U.S. when would you...

You had enough. Seems best to...

Sorry, sorry.

Patrick from Barclays. Two for me, please. One on self regulation and one on win margins. On the win margin first. Europe and Australia, obviously, big changes year-on-year. So should we just assume that's the new normal? Those, kind of, margins that you did in 2018?

I think on -- Jonathan referenced it earlier, I think we shouldn't -- I think in Europe the sporting results, broadly equipment, so I think we have seen benefits of results in the interest of the Same Game Multis. I think in Australia, specifically, and Jonathan highlighted, half of the difference we've seen in our performance was down to sports results, which we hope will not be sustained.

And then on self regulation. I guess, effectively you have a perception issue. We don't see joint statements necessarily on self regulation. All I could give you that is the sector appears vulnerable to be reactive rather than proactive with regulators. When will this change? Or to put it another way, [PC] said there is much to do with regards to self-regulation. So what should the sector do? And if I can be cheeky and just add a part 2 to that. Can you just remind us how management and staff incentivized with regards to responsible gambling?

Now I think we made an important first step with the changes that we made around advertising here in the U.K. Market. I mean, we have a lot of experience of operating in markets with advertising restrictions, in Italy where the advertising is particularly strict, and of course, Australia where they introduced, what they described in Australia in terms of the siren-to-siren ban rather than whistle-to-whistle. So that we have experience in that. And I think it was a very important sort of thing for us to do as an industry and we did do that. So I think it's given us a blueprint for further changes. I suspect the right way for us dealing with it from an industry perspective is not to sort of come out every week with something but to try on a less regular basis come out as a package of changes and that's something I hope you'll see us do. In terms of how colleagues across the organization are sort of incentive -- incentivized, you'll see from the Annual Report the ways in which Jonathan and I have our bonuses which are focused around on sort of revenue and EBITDA. Neither Jonathan nor I have any sort of explicit sort of target associated with responsible gambling by that in terms of financial metrics, but it's also a very important part of what we do at the board with our risk committee and the focus that we have around that.

I could maybe build on that slightly. We set team and individual functional goals for the business. And within the strategy that has been set for the European business, certainly would have very clear goals and objectives set to be delivered in 2019 and in 2018 actually well in terms of responsible gambling. And on the back of that, we have committed additional and material technology resource to deliver that and actually, so we you can imagine we rate -- staff get rates in (inaudible) based on how the goals are delivered and those goals incorporate our key goals.

Jonathan and I can't have sort of personal objectives in our bonuses, but Dan and his team all do and it's an important component.

Clearly, when you consider our LTIP as a 3-year, there's every driver management to create sustainable earnings streams going forward.

Richard Stuber from Numis. Two questions, please. The first one, you've got all these data-driven and intervention tools. Could you say in terms of online have your level of intervention actually increased year-on-year i.e. are those tools sort of really working? And the second question is just in terms of your retail stop -- stores. You said that you started the trials in Birmingham. Obviously, very early days, but what exactly are you doing? Are getting small people on the floor to help encourage people to understand what's going on? Show them like virtual base as alternative? What exactly were you doing at that level?

Yes, I think the retail one first.

Yes. You take the retail.

Okay. So for the retail went live yesterday, so early days is probably an understatement. The predominant reason for trial at this stage, is we're testing operating new content being done on the machine, content being taken off the machine, making sure that staff were familiar with the regulations and can drive customer through it. So yes, they will be explained to people that the rules have changed and it is under a different content, and of course, there is OTC and FOBT content available. But primarily, the trial really from our perspective is kind of operationally, do we make sure this thing works by the time we get to April. We don't want anything -- we don't drop any balls.

With regard to the sort of intervention, which is, we have our current CAAP program, which helps us identify customers who want to intervene with. And so that spits out a certain number of interventions, we should do massive email and other channels with our customers. What's really important there is seem to be with the right type of customers. And so we got a new tool, which is well, the refreshed CAAP tool we'll have available shortly, we may end up actually with a smaller number of interventions but more focus on the right customers. The way I think about it is in terms of risk ranking. You'd want to have a thinner way of ranking your customers as you can so you can really understand how you can point your resources on the most important ones. And the extent to which you are less able to distinguish between the riskiness of customers, you are less effective.

I have two if I could. First of all, capital allocation. Jonathan, your slide talked about the use of free cash flow. You talked about M&A and you mentioned new markets. Is that the way to think about M&A? Are new markets the priority from an M&A perspective or could it be a blend of new markets and existing markets? That's the first question. And then second question, on Australia and slightly higher level. But I guess, one of the outcomes of what we've seen is that the financial contribution from corporate bookmakers is now significantly higher. Did that change your lobbying position, your negotiating position? And could there as a result, be some positive developments here in terms of what we could see in the market for us in the corporate bookmakers?

You take the first question?

Yes, sure. I mean, the M&A really supports the third pillar of the strategy, which is about building those podium positions, so you should expect that to be in new markets, possibly where we might already be with Betfair but effectively new regulated markets where we feel we could get a leadership position, so that's where you should expect our focus to be in terms of M&A.

And I think your question about Australia and the contribution all of the corporate bookies made towards the (inaudible) is very significant and so I think with that we have all those -- more influence over just the future direction of [indiscernible] industry.

It's Monique Pollard from Citi. A couple of questions for me. The first one on the U.S., Peter, you're talking about how the cost per acquisition looks very attractive versus the lifetime value of the customer. Could you just go into a bit more detail on that? How do you understand the lifetime value of the customer in such early markets? And why you are so confident that the cost per acquisition that you're seeing makes sense? And then secondly, just in terms of the cost savings that we've seen in the business this year. The online business and also the Australian business, some of those other OpEx lines coming down actually and delivering significant operating leverage. How should we expect that to evolve going forward? And can you give us some examples of the initiatives you've done to reduce the cost in those businesses?

Well, let me pick up the point on the U.S. and then Jonathan can talk to you about the cost saving piece. The -- clearly, it's very early days in the U.S. market. But you have to remember that we've got 6 million customers around the world. Quite a lot of models and expertise and understanding in terms of what happens with early life on book behavior from the customers in the year, what we expect that to do over their lifetime. And so I think we are reasonably confident in our ability to predict how customers will perform in the sort of the year 1 theoretical revenue from us. In the U.S. market, as we showed earlier, half of our customer that come in from, in part being crossover from our fantasy customer database and obviously, that is a very, very -- had a very low acquisition cost. But even those ones requiring the market coming in at a much lower acquisition cost than we had expected. And so it's based really on the -- on our experience elsewhere in the market. We expect those customers to be paying back between 6 and 12 months, which is why we're pushing so hard at the moment to acquire as many customers as we can.

Currently these days, a couple of things. Firstly, I think we've just delivered a really robust set of cost controls. Secondly, I think when you get 1 and then 2 years postmerger, you'll probably find other areas where you can actually take some cost and strip that out. I think the third thing is the -- if we think about the IT systems and the cost to maintain versus the cost to develop, clearly the cost of maintenance is coming down is actually bigger so we have a nice -- actually we're getting slightly more of that development spend. There is none going into developing a product. And a little bit of that is coming into CapEx. In terms of thinking about the way forward, you shouldn't see a material further stepped on, but you should expect us to deliver cost control.

Ed Young from Morgan Stanley. Might you please -- first of all, on Paddy Power, you obviously split out the good revenue growth in a very good recovery year-on-year. Can you give us an idea of how much that's been driven by gaming? It seems like there's sort of outsized change in things i.e., how much opportunity is there in the sports product to sort of continue to try and improve and drive further growth in online? And then the second question is how do you characterize your exposure in U.K. casino to high staking, high loss customers?

Dan, do you want to take that Paddy Power question?

Yes, 2 slightly intertwined things also. So think about the we sort of talked about 11% growth in Paddy's. It was -- gaming grew faster than sports within that and was a large driver of it. But I think there's headroom in both. The good thing for me is that we are, and you saw it on the slide, that we are driving the active base and the frequency of those users. So we're driving more customers and those customers we're getting are more loyal and I think so. One of the things that continues to amaze me is that Paddy Power, the number of people that have the Paddy Power app installed in their phone is colossal. Actually I think we're the second biggest in terms of app downloads in the country. Historically, the brand has suffered from a share of wallet challenge rather than a, kind of on a frequency challenge. And I think we made great progress on this and I think that applies equally to sports and gaming so I see kind of opportunities in -- over the medium-term in both of those areas. In terms of our exposure to high value. I would say it's kind of, in reality, kind of broadly consistent with the rest of the market. I don't think we're -- we work with Playtech and others and they would guide us that we are in line.

It's Joe Thomas from HSBC. Can you just go back onto the market openings or reopenings, please? What exactly is changing there? Is it just a technical ability? Or is it some change in legal advice? And is it -- I'm a little bit confused, is it exchange or sportsbook-driven? Or what's taking the lead there? Second thing is relating to the staking trends that we see in the sportsbook business in Europe. You were talking about turning -- effectively turning off unprofitable customers or focus on profitability. Just give us a bit of history, please, would you? Why did you end up with so many unprofitable customers to start off with? And how is this going to progress?

Okay. You want to take the ...

Fine. So starting with the first one. So when we think about market turnoff, the history of the business was, the last few years in particular, but was that -- when a business regulates -- when a market regulates, sorry, they require a whole different set of technical requirements to operate in that market. The flexibility of the Betfair platform and the focus the business had on another party meant that we couldn't necessarily accommodate that work. And actually if we take one small example would have been FIFA. That was a market that regulated a couple of years ago. We took the decision to turnoff revenue there because we didn't have the technical resource at the time to keep that market on. We now are building a flexible platform to mean, yes, we can turn markets back on again, but also when future markets regulate and we -- that is sort of the pathway that we expect to continue, we will be able to more easily and rapidly adapt to those regulatory requirements. We maintain our presence in Sweden when that got regulated from January 1. We were awarded in Sweden. We have a license there on the Betfair. Regulation is changing in Denmark this year. We will have to do that as well. So I was thinking actually about this -- it was a technical constraint rather than anything a different approach from a legal perspective, and it's sort of had slightly, in my opinion, kind of hamstrung the business and we've been constrained there for a period, and it is important to me for the long-term health of the business, that it is resolved and hence, taking a long-term view to build that flexibility. In terms of the history of the stakes and I think there are a few drivers of it. One particular on our focus on would be on Paddy Power. Historically, you could sign up for multiple accounts, and we didn't have -- the history of the business in 2016 and historically, there was no real limitation, you could sign up for as many accounts as you wanted. As a result, you would come in, you could stake quite a lot with free bets but with incentives. But actually that wouldn't be a profitable thing for us to do either on the net revenue line or certainly on a kind of EBITDA line because you paid money to acquire a customer you've already got, and you've acquired them 10x. That isn't necessarily the thing to do. So turning off that turnover where it doesn't pay back is important. The other example I'll give you was it's very, very easy to acquire customers on what I'd call kind of the GBP 1 offers. You pay GBP 1. I saw one last night, some 60 to 1 on (inaudible) to win or something. So it wasn't a good bet last night. But typically, you can acquire a lot of customers. They'll come in and stake but actually the expected revenues of those customers is low because they have low loyalty, they churn and leave the business. So we took the view that we didn't want to spend marketing money and drive turnover from customers that didn't drive our net revenue line and certainly didn't drive our EBITDA line. And we've changed and refocused the marketing spend and put on a sort of controls and accordingly.

The technical issue that you're resolving, is that on the exchange or is it...

No, it's on the Betfair. It's the whole -- the Betfair platform. It's not the exchange. It's the Betfair platform.

Joe, the way I think about that is, and I think Sweden is a good example of this, the Swedish market recently regulated. We could have at less resource put in some sort of half-fixes to put in place the requirements in the Swedish market. But actually, if we'd done that, then we would have to sort of redo a lot of that work again with half-fixes in Denmark. Actually, building it in a way in Sweden that's configurable it cost us more in terms of the time and resources. But subsequent changes in other markets are easy to do. And say that there's a short-term, long-term trade-off. We are making the short-term one and Joe, it's the right thing to do.

Well, if there's no more questions, thank you very much, everybody.

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