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Edited Transcript of PPB.I earnings conference call or presentation 7-Aug-19 8:00am GMT

Half Year 2019 Flutter Entertainment PLC Earnings Call

EC4M 7LS Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Flutter Entertainment PLC earnings conference call or presentation Wednesday, August 7, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Barni Evans

Sportsbet Pty Ltd. - Marketing Director

* Jeremy Peter Jackson

Flutter Entertainment PLC - CEO & Director

* Jonathan Stanley Hill

Flutter Entertainment PLC - CFO & Executive Director

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Conference Call Participants

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* Daria Fomina

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Edward Young

Morgan Stanley, Research Division - Equity Analyst

* Gavin Kelleher

Goodbody Stockbrokers, Research Division - Investment Analyst

* Joseph Philip Thomas

HSBC, Research Division - Analyst

* Michael Mitchell

Davy, Research Division - Gaming and Leisure Analyst

* Richard Paul Stuber

Numis Securities Limited, Research Division - Analyst

* Simon John Davies

Deutsche Bank AG, Research Division - Head of UK Midcap & Online Gaming Research

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Presentation

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [1]

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Good morning, ladies and gentlemen. Thank you very much for joining us for our 2019 interim results presentation. With me this morning is Jonathan Hill, and we're delighted to be also joined by Barni Evans, the CEO of our Australian business, Sportsbet. I am going to begin with an update to our strategy. Jonathan will then run you through our financial results in H1 and our guidance with respect to the full year. We'll then provide an operational update on our 3 divisions. In March at the prelims, Dan Taylor detailed our plans for our PPB, which is what we call Dan's online and retail businesses. And we followed this up with our Investor Day in the U.S., focusing the FanDuel Group. So to complete the picture and to make sure that you didn't feel left out, we thought it would be a good opportunity today for Barni to provide an update on what we're seeing in Australia, particularly following the introductions of the Point of Consumption tax there, and he's promised not to talk about the cricket.

2019 is a challenging year from the tax and regulatory standpoint for gaming companies. With the FOBT limits Point of Consumption, tax increases, duty changes, increased RG focused in the U.K. and a number of markets regulating, there's a lot going on in our sector. Growing a more diversified and sustainable business has never been more important. In a very productive first half for the group, in Pillar 1, focusing our core businesses, our ongoing investments in products and brand have resulted in Paddy Power and Sportsbet growing their recreational customer bases impressively, with a clear focus on building sustainable business for the long term. This has been achieved while continuing to make enhancements to our customer protection capabilities. We are currently trialing the second-generation of our CAT model, which allows us to more actually identify customers at risk becoming problem gamblers. We are pleased to announce in conjunction with all the other U.K.'s leading gaming operators, a series of voluntary measures to protect -- to promote safer gambling and support problem gamblers with enhancement well received across the political spectrum.

Under Pillar 2, we rolled out country-specific pricing for Betfair's international Sportsbook. And this has led to a material uplift in revenue across these markets. This enables us to offer differentiated prices by jurisdiction and provides us with flexibility when it comes to choosing when and where we offer enhanced value to our customers.

With respect to our goal of attaining potent positions in additional regulated markets, Pillar 3, we acquired a controlling stake in Adjarabet in February, giving us the #1 position in the attractive Georgian market. We've been very pleased with the performance of that business to date and have been encouraged by the ways in which Adjarabet is leveraging our group's broader capabilities.

And finally, we've continued to make great progress in the U.S. We have a 50% market share in Sportsbet in New Jersey in the first half, and we're now up and running in Pennsylvania too, making us one of the first online sportsbooks to go live in The States ahead of the NFL season.

Barni and I will go into more detail on some of these developments shortly. But first, I'll hand over to Jonathan to take you through our first half financial results.

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Jonathan Stanley Hill, Flutter Entertainment PLC - CFO & Executive Director [2]

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All right. Thanks, Peter. Just before I get started, I do think actually that this is a really solid set of results we've delivered nearly GBP 50 million of headwinds, and I'll go into that as I go through the presentation. Just covering off some of the key financial highlights. Revenue's up by 18% to just over GBP 1 billion in the first half, benefiting from both organic and acquisition-led growth. Obviously, on group's delivered an underlying EBITDA of GBP 196 million on a comparable pre-IFRS 16 basis. This was GBP 21 million lower than the first half of 2018. But as I said, we've had approximately GBP 50 million of headwinds against that. So on that basis, I'm really pleased with what we delivered in the first half.

On the next slide, I'm going to go into a breakdown to help you understand all the moving parts and actually look at the performance on a pro forma basis. Reported PBT was GBP 81 million, which is down by 24% on the first half of last year. And then after the impacts of the minority interest share of the U.S. losses and that share buyback program we completed in the first half EPS is 6% down at 98p. And we've declared an interim dividend at 67p per share, which is bang in line with the first half of the interim dividend from last year.

Great news is we still get a really strong balance sheet with net debt at the half year of GBP 356 million, equating to a leverage ratio of 0.8x.

Okay. So a few moving parts here. So this just looks at it on a comparable basis. This analysis is all pre-IFRS and excludes the U.S. So firstly, obviously, we've taken -- put Adjarabet into the 2018 comparable for pro forma purposes. You then got the large negative regulatory and tax changes of GBP 47 million, and that's consistent with the guidance that we gave you at the prelims for the 2019 impact of GBP 107 million. You can then see the really positive contribution from our organic growth of GBP 33 million. And then overall, EBITDA would have increased by 15% in H1, where it not for those tax and regulatory changes.

In this analysis, we haven't included the -- obviously, the GBP 4 million is included within the GBP 194 million which is the impact of those switch offs. And actually, without those switch offs, we've been up about 18%. But those switch offs, we expect the full year impact to be GBP 11 million on this year. And then on a run rate basis, that goes up to GBP 14 million of profit impact on an annualized basis.

Okay. So this slide shows, on the left-hand side, the reported income statement for the first half of the year. Then we get the pre-IFRS numbers and then the comparatives for '18. Obviously, the comparable numbers in the second and the third columns. Obviously, the remainder of this presentation is going to be done on a pre-IFRS basis. So I'll just deal with this upfront. The net impact on the group is GBP 1 million EBT level in the first half of the year. There is a detailed slide in the appendix for everybody, which breaks this impact on by divisions and gives the impact at finance charge as well and not through the stuff. So we'll obviously continue to provide this information on this basis for the rest of this year, both on a pre- and post-IFRS 16 basis.

As I'm going to go through each of the divisional EBITDA performances later, I'm just going to focus on the stuff not below that level. Depreciation is up a bit higher capital expenditure with these ongoing investments in platform and product and then some specific increases around U.S. and obviously adding Fan and Adjarabet as well. In H1 '19, those separately disclosed items solely relate to amortization of acquired intangibles. There's nothing else in there. And that's the acquired intangibles in the merger from FanDuel and from Adjarabet.

And then finally, we can see at the bottom, the impact of the U.S. sports betting losses borne by the minority interest shareholders leaving that profitable attributable to our shareholders, 13% lower at GBP 77 million.

Okay. So moving on to online, which obviously includes Paddy Power, Betfair as well the B2B. And then obviously, in 2019 incorporates Adjarabet, which, as Peter said earlier, was acquired from the 1st of February '19. So revenue up by 8% to GBP 497 million. Stripping Adjarabet revenue was 1% higher. Q2 period, we were up by 4% and actually in the pre-World Cup period, we were up by around 10% in net revenue terms.

Looking specifically at sports. Our Sportsbook revenue increased by 1%. Our net revenue margin was 20 basis points ahead of our expectations in H1. Obviously, we told you at Q1 that we had had some very customer-friendly results, both in racing and football. But actually, this has been more than offset in Q2 with favorable results, particularly around the U.K. football. We're saying that in Q2 period prior to the World Cup, the Sportsbook revenues were about 22% up in that period.

Expected margin, a really strong increase in our expected margin to 7.5% compared to 6.9% in the first half of last year. This reflects a few things, positive mix of bet types. Obviously, increasing the recreational customer base. But the big impact here is the introduction of country-specific pricing. This pricing change effectively has meant that in our international business we've increased our net revenue. But obviously, we've taken out at the same time a significant quantity of lower or no value staking in our international operations. So on the one hand, you take staking out, but on the other hand, you've got a big increase in your expected margin. So expecting -- so if we then look at the excluding market switch offs and World Cup, actually our international revenue is up by about 30%.

Okay. So on the exchange, we're 2% decline on the exchange. This is due to the World Cup with a 4% decline in Q2. And actually, in the Q2 period prior to the World Cup, the exchange and B2B were flat in that period. The World Cup and switch offs will obviously have an ongoing impact, particularly as we go into Q3, and it's worth pointing out that obviously the switch offs have a disproportionate impact on the exchange.

Gaming revenue, 29% higher or 8% excluding Adjarabet. Obviously, Paddy's continues to perform really strongly. However, we did communicate at the time of Q1 some of the responsible gaming -- gambling measures are having an impact on some of our higher-value activity across both brands, and that's as we expected is playing through.

On the cost of sales, we've got a GBP 10 million impact of the tax increases, which is U.K. Online Gaming, Irish Betting Taxes, other taxes increases in Italy and Romania.

And then on the marketing, we're flat in the first half of the year, year-on-year, notwithstanding the GBP 17 million we spent in the World Cup. Last year, obviously, we've got Adjarabet coming into these numbers and we have pulled some of that marketing relatively forward into H1 versus H2.

Total operating costs up by 4%, but are actually flat if you take out Adjarabet.

And then at the bottom, underlying EBITDA down by 2%. But I think given the headwinds and the fact that we're moving to a more sustainable business, we feel this is a really robust set of results.

Okay. Moving on to Aussie, I don't want to steal too much of Barni's thunder. I'm really glad he is here today to talk about the Aussie market and why Sportsbet has delivered such a great set of results in the first half. Our revenue is up 16%, primarily driven by customer growth, with our net revenue margin bang in line with expected. Cost of sales as a percentage of net revenue, as you'll see on the chart here, increased from 28% to 40% as a result of the Point of Consumption tax increase. So roughly GBP 24 million of impact on the half-year numbers.

Marketing spend was actually down in the first half of the year. That's due to 2 factors. Firstly, obviously, the World Cup in the first half of last year. And secondly, we specifically said we were going to accelerate marketing spend last year and the run-up to POC and that was a deliberate decision that we took during last year. And I think that certainly appears to have been vindicated.

Overall, EBITDA was down by just 3%. Excluding those tax increase, it's kind of 64% increase. So it's a really great result in Australia.

Okay. Moving on to the U.S. on Slide 11. Again, this is -- we've been showing this on a pro forma basis to make it more intelligible. I'm showing it as though we had on FanDuel throughout the totality of both periods. Revenue is up by 46% on a constant currency basis to GBP 160 million. Our established sports businesses being TVG and our daily fantasy increased revenues by around 5%. Gaming growing very strongly and sports betting contributing GBP 35 million of revenues in the first half. And Peter is going to talk a lot more about how we're doing and what's driven our success in New Jersey and also talk about that cross-sell and explain it later. So I won't go any further on that.

EBITDA positive at GBP 3 million against GBP 9 million in the prior period with, as expected, double-digit contribution growth across our non-sportsbooks verticals, which is exactly in line with what we expected. As you'll be aware, the start of the NFL season is fast approaching in September and this is the key acquisition period for acquiring customers. It was true in the daily fantasy business. We expect it to be absolutely the same from our experience so far in sports betting. Therefore, our acquisition span is very heavily weighted into Q3. So we do expect to deliver H2 losses, while we are building that sports betting business further in New Jersey and obviously in Pennsylvania. We'll talk about that a bit further when we get to guidance.

Okay. Looking at retail on Slide 12. Total revenue down by 4%. U.K. down 10% and Ireland 6% ahead. Sportsbook revenue is 5% up. Some of that is obviously a substitution across that we're seeing from some of that FOBT which is driving that 4% staking increase. Looking at gaming specifically, revenues are down 21% in the first half with -- in Q2, a 44% decrease after the introduction of that reduced maximum FOBT stake on the 1st of April. Our guidance before the introduction of this was a 33% to 43% range. We're marginally above that, but actually the trend we've seen is slightly improving. So we find ourselves at the bottom end of that range at this point, and we're kind of in the area we expected.

And overall, EBITDA down by GBP 8 million. We're starting to see announcements of shop closures, and you guys will be very well aware of that from our competitors. We haven't necessarily seen that playing through in actual shop closures, but we are obviously convinced the high-quality sports-led nature of our stake gives us great confidence that we're in a very strong position going forward in our retail business.

Okay. Coming on to cash flow. Underlying free cash flow of GBP 141 million, which is actually 121% of our profit after tax of GBP 117 million. So a really exceptional conversion of cash into -- profit into cash. We've got a few movements in working capital here. H1 benefited from the unwinding of prepayments that we made at the end of '18. And the first half of '18 also contained adverse impacts from '17. I think we guided both of those and talked about both of those at this year's prelims and the half year last year. And obviously, as a result of these factors, the cash flow is really strong and significantly up from the first half of last year.

So moving down to cash flow. We've obviously got the completion of the share buyback program. The Adjarabet acquisition and contested payments for the Greek -- the Legacy Greek and German tax matters that we remain confident in our grounds for appeal on both of those tax matters. We'd retain a very robust balance sheet with this 0.8x leverage. This compares to our 1x to 2x guidance. And as we expect to generate further strong cash flows in the second half, it gives us a lot of flexibility to consider opportunities where we might deploy our capital on an ongoing basis to the extent that we can find places we can deploy that to generate significant returns for our shareholders.

Okay. Final slide for me, guidance for the full year. The first thing to say is our trading remains in line with our expectations. And clearly, we've got good momentum across the group. Guidance obviously falls into 2 components, as we explained at the prelims. First is group excluding the U.S. And on that consistent pre-IFRS 16 basis, we expect EBITDA of GBP 420 million to GBP 440 million. And then for the U.S., we're expecting an EBITDA loss of around GBP 55 million due to our ongoing investments in customer acquisition. As part of this guidance, we are assuming Indiana launches online in H2, obviously following on from Pennsylvania which we launched recently and obviously New Jersey as the key nature space.

Given that this is just our second NFL seasons and the second season sports betting in the United States will stop being legal, the timing and the quantum of the investment does have some variability and that we will continue to ensure that we are investing with discipline in terms of customer acquisition in the U.S. on a state-by-state basis.

Some other specific areas just to touch on here. Firstly, obviously market switch offs. We touched on GBP 4 million in the first half, GBP 7 million in the second half, GBP 11 million therefore for the full year and GBP 14 million on an annualized basis. And then with respect to marketing as planned for PPB online Dan's business. In H2, we expect marketing to be GBP 10 million lower than it was in the second half of last year, a lot of that is down to World Cup in the prior year comps. And in all, as we expect marketing as a percentage of net revenue and the second half of the year to be pretty similar to the first half of the year, again in line with our previous expectations.

In summary, I'm really pleased with these results. I think it's a great performance given the headwinds we faced, and we're looking forward to getting stuck into H2 even though we're already a month in.

And I'm now going to pass back to Peter.

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [3]

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Thank you, Jonathan. As far as prelims, I talked about our approach to response to the gambling and I want to return to that topic this morning. In a fast-changing world, we're determined to build a business that is focused on the right long-term values, where we combine our social responsibility with our commercial ambitions. We are working ever more closely with our regulators and collaborating with our competitors to promote responsible gambling. And this is a vital moment for the industry. We have the opportunity, and more importantly, the responsibility to improve the sustainability of the business by making sure that we do all we can to protect at-risk customers. If that means that we must reshape our business to reduce engagement with at-risk individuals, then this is something we will continue to do. Ultimately, we want to be [the shining light] for the millions of customers to enjoy our products responsibly and that is the right area for us to focus.

So what are we doing in this area? As I said in my intro, we are currently trialing the second-generation of our CAAP model, of the Customer Activity Awareness Program, in case you wonder what that stands for. This will allow us to significantly increase the number of customer behaviors that we can monitor for potentially harmful activity and to more accurately assess the risk of individuals becoming problem gamblers.

As you will have seen, we recently announced a series of voluntary measures with our U.K. competitors to promote safer gambling and support problem gamblers, including a tenfold increase in industry contribution for research, education and treatment. We also made commitments to use technology more effectively to better protect our customers. We are taking a company-wide approach to RG. It's not just something we're adjusting in the U.K. and Ireland, it's an area of focus right across the group.

And now let's turn and look at the commercial progress we made across the various parts of our business in the first half.

Starting with Paddy Power. I'm delighted to say that the good progress that we've made with respect to the brand has continued into 2019. We've more than doubled the number of customers Paddy's Rewards Club following the huge success of our Rhodri Giggs campaign. There's no exaggeration to say that the campaign truly went viral, generating 6.7 million social media views in the first 3 days alone. Our Irish billboard campaign around the 6 nations also proved to be a big hit. But I suspect the Irish members of our marketing team will probably think twice about jinxing their national team in the future. And these marketing campaigns, coupled with ongoing improvements to product, have once again seen us grow our recreational customer base impressively. Dan spoke in March about how we closely track the number of average daily activities across the brand and these were up 22% in Q1 and 16% in Q2 in the pre-World Cup period. So overall, I'm very pleased with our Paddy Power as performance.

Turning to Betfair, we are busy developing further functionality. In the first half, we rolled out country-specific pricing across our international sportsbooks. What is that? Well, essentially, it allows us to offer Betfair's sportsbook customers differentiated prices across various jurisdictions. And being able to do that, brings 2 advantages. Firstly, it allows us to adapt prices for different tax regimes, which is critical in the market such as Germany, which has a high turnover based tax. Secondly, it allows us to direct our best odds offers to certain markets without having to offer them everywhere. We can, therefore be best odds on La Liga in Spain, but not in our other markets where customers might be less price-sensitive when it comes to Spanish Football and where games may form parts of their [efforts].

As Jonathan explained, this has already had a material effect on our international revenues, with a substantial improvement in margin in these markets. In addition, we're improving the ways in which we offer generosity to our customers. In Ireland, we've launched MyBetfair rewards, a scheme designed to personalize loyalty and increase customer engagement with a range of different commission rates. Upon qualification, customers can opt for a no-frills basic commission rate or opt to pay a higher commission with access to other benefits, such as cash back and exchange losses, free spins on gaming or sportsbook free bets. While it is early days since launch, we are pleased with the increase in player engagement that we've seen so far with no fall in commission.

In addition, in the coming quarters, we'll be expanding how we offer general C&I exchange with a significant improvement in our free bet capability. This will enable us to compete more directly with low-margin sportsbooks and address an historic weakness where customers perceived, but we did not offer the same level of promotions as our sportsbooks' competitors. And while all of these developments will support the future growth of Betfair internationally, we have faced some unexpected headwinds over the course of the first half due to regulatory based international market switch offs.

Jonathan has run you through what the financial impact of these will be. But for me, they just emphasize why it is so important that we diversify scale and international presence over time.

With that, I'm going to hand you over to Barni who will give you an update on Australia.

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Barni Evans, Sportsbet Pty Ltd. - Marketing Director [4]

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Thank you, Peter. Good morning. It's great to be here, not at least with the scope of ribbing I'd be getting about the cricket if I was back home.

Before I get started, just to introduce myself to those who I haven't met before, I'm Barni Evans. I'm the CEO of Sportsbet. I joined the group back in 2001 firstly as Director of Marketing for Paddy Power. After 10 years there, I moved down to Melbourne in 2011 and was appointed into my current role in early last year, 2018.

So on my first slide, we just want to initially capture the 3 key areas that have driven Sportsbet's performance. And I'll come on in more detail much later on. And it's really quite simple. The 3 key areas that drive Sportsbet are value, products and marketing, and those are underpinned by really good execution from the highly engaged team operating in the great culture. And like I said, I'll give you examples later on. But just to summarize at that top level and on the product side of things, keeping the product refreshed is really important. We need to keep giving customers new reasons to come back to Sportsbet and talk to us with their friends. On the value side of things, Australian punters like British and Irish expect right value. But being able to offer both really innovative headline promotions and more targeted personalized value is key to keeping people engaged. And finally, our brand, now its vibrant personality has always been a key differentiator. But increasingly, we're augmenting that with ever-improving marketing technology, which will extend us apart from our competitors.

With the combination of those 3 factors then, I think it has allowed us to build a high-quality business that will scale and that scale is really obviously important now as we approach a different tax paradigm.

So what has it delivered for us? As you can see on the top left, and our recreational customer base has grown at an average of 16% over the last 5 years and net revenues have grown broadly in line with our customer growth. On the bottom left -- sorry, on the bottom left, as of today, Sportsbet has higher brand recognition than any other bookmaker in Australia, even the TAB, which obviously has an exclusive free terminal point. And then focusing on the success of our mobile product on the bottom right, when we asked punters in Australia, which brands they bet with most often and what their main account is when it comes to mobile betting, 42% of them said Sportsbet. For me, this shows how well positioned we are as a scale operator, but by far, the biggest recreational customer base.

Now as you know for 2019, the year of change in the Australian market, the introduction of Point of Consumption tax, or POC. And this resulted in a significant step down in the profitability of corporate bookmakers. And for us, the new tax is equated to roughly 11% of net revenues. Now the former taxation exists in the form of product fees or race fields feels as they sometimes now. And these have continued to increase in 2019, most notably in Queensland and the racing industry is under significant financial pressure. And total increases announced in 2019 today equate to roughly 1% of net revenue.

We ultimately received slightly less attention, but the changes brought about by the National Consumer Protection Framework, for NCPS, as you'll see. And some of the key changes there include the banning of sign-up offers since the beginning of May and new rules on setting up and renewal of deposit limits for customers. Now as an established operator, with a wide recreational customer base and as part of the Flutter Group globally with a very strong emphasis on responsibility and sustainability, we welcome these changes because we think it puts the Australian betting market on a more sustainable footing.

And how has the market responded so far to all of these changes? Well, I'd say 3 things. The first of which is still remains very competitive, and the evidence would suggest that all players in the market fully intend to trade through these changes. Secondly, we believe that decision, as Jonathan highlighted earlier on, to increase our level of marketing investment ahead of the taxes last year has been vindicated and we're really pleased with customer engagement levels since then continuing right away through it into H1 this year. And thirdly, while it's early days, we're seeing some early signs of reduced marketing costs throughout across the market. In digital, for example, Google PPC rates are coming down year-on-year. And the traditional media are seeing certain competitors relinquish the rights to some headline media assets that previously we've retained. So that reflects our belief that we might see less discretionary spend in the market overall.

All those tax changes then are obviously significant. We firmly believe the Australian market remains attractive to the Flutter Group, especially for scale operators, such as AFL, the shift obviously from Tote to fixed odds and from retail to online means our addressable market continues to grow really well. And other operators recognizing the benefits of scale have consolidated, but the market continues to have a multitude of operators and even new entrants who don't seem to have been put off by the new duties.

Now as I promised earlier, and just want to give a bit more color on the progress we've made in those 3 areas of product, value and marketing. On product, and as I think Peter mentioned, we've made great progress expanding our product range, particularly in Multis and Same Game Multis. But as we do expand that range, it's really important that we help customers navigate through that broader choice, and that's where personalization comes in. So as of today, roughly 15% of all interactions from our home screen are personalized, which means we're getting customers so they bet much faster despite the increased choice that they have.

On the value front, we've continued to innovate there, particularly with our up promotions as notably in tennis and the domestic football courts IFL and NRF. But within generosity, and it's really important, but we're becoming more targeted so that and our important and valuable customers are getting a better deal than they were previously.

In the marketing space, we've ramped up how technology helps customers and potential customers engage with our product and brand. And marketing technology is enabling much better targeting, decision making and real-time customer interaction, which is obviously great for customers because it means their experience and their journeys through our products are more intuitive and seamless, but it's great for us because it means our activity is much more effective. But to be honest, the technology that supports marketing is only as good as the brand that it supports and the Sportsbet brand, much like the Paddy Power brand that you know and continues to be a really vibrant, relatable entertainment brand that sets it apart in the marketplace. But rather than trust life words for it, let me just give you a few examples of the unique Sportsbet brand.

(presentation)

I'm pretty sure the marketing team to be actually stand just despite me.

So that brings me to my final slide, which I think here demonstrates how effective we've been at delivering operating leverage. Even though cost of sales have gone from 23% to 40% of net revenue in just 4 years, we've managed to maintain largely the same profit margins.

I'll leave you just in conclusion to say that with a market that continues to grow and a proven strategy that over many years has delivered consistent gains in market share, without being complacent, we approach the future with confidence and a genuine sense of excitement.

With that, I hand back to Peter.

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [5]

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Thanks, Barni. And so on to the U.S., where we believe we're very well positioned to succeed. As we outlined at our Investor Day in March and we have an established sports-focused brand with high national awareness. We have an extensive and growing national customer base with over 8.5 million registered customers. We have unique cross-selling opportunities as the only operator with 4 distinct product verticals. We have all of the expertise and resources that Flutter can offer. FanDuel huge had started to see this market opportunity.

And what have these assets delivered to date? Okay. In the first half of 2019, we had a 50% share of the sports betting market in New Jersey. We generated as much revenue as the next 10 operators combined, and we did that while growing the rest of our U.S. business and completing the development work to get us live in Pennsylvania, the next big state. We achieved our share through a combination of direct customer acquisition and cross-sell from our 400,000 customers in the state and demonstrated clearly our customer acquisition capabilities. We continue to lead in terms of brand awareness.

Our team of 800 colleagues and 300-plus developers designed an easy-to-use app that offers more varied types of bets than our competitors. The charts on the bottom show the gap between FanDuel and our competitors when it comes to the number of markets on offer. We've also leveraged the expertise of the group to enhance our risk in trading team.

And to top it all off, we're now live in Pennsylvania. We're the only sports betting app currently available in the app store that works across both Pennsylvania and New Jersey. We, therefore, hope to replicate the success we've had in New Jersey and Pennsylvania too. The first few days, we've seen great results with Pennsylvania staking volumes already at 20% of New Jersey. Our success in New Jersey is not just confined to sports betting. We more than doubled our gaming revenues year-on-year in the first half, thanks to cross-sell, and we saw our overall market share growth from 10% to 15%. We are continuing to enhance across our journey for our casino customers and have now launched embedded casino content within the FanDuel app. When we did something similar in Europe, it led to a meaningful acceleration in growth. So I'm very pleased with the operational progress that we are making in the U.S. I'm more excited than ever about our prospects there.

Of course, we're keeping a very close eye on the size of the price. And it's fair to say that we're very encouraged by the momentum behind the online sports betting regulation. Since PASPA was repealed in May of last year, a total of 10 U.S. states have regulated online sports betting. These 10 states account for 18.9% of the U.S. population, meaning the addressable market could be circa 6.7x the size of New Jersey once these markets go live. Furthermore, we remain optimistic that more states will follow us over the next 12 months, which brings me back to what we showed you in March when we laid out what we thought was a realistic path to market that could be over $6 billion in GGR, or 10x back at New Jersey. Based on the states that have already passed legislation, respective market size is already up to $4 billion, 2/3 of the way there just 4 months later. All of which points the possibility that the final size could be bigger than the illustrations we presented.

In the meantime, the goal of the entire team remains on going live in as many states as we can, as quickly as we can and continuing to acquire sports betting customers and as focused and a disciplined manner across the board.

To sum up, we've had a very productive first half. We responded well to the various challenges that come our way and delivered good underlying performance across our business. Our focus remains on growing more diversified and sustainable business. And I'm confident we can make further progress in the second half.

With that, we'll now be happy to open up for any questions.

(Operator Instructions)

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Questions and Answers

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Gavin Kelleher, Goodbody Stockbrokers, Research Division - Investment Analyst [1]

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Gavin Kelleher from Goodbody. Just firstly, on Betfair International. And obviously, you've had the pricing changes that you've made that have helped drive pretty good growth and you've noticed content currency and payments. When should we start to see those changes to be made? And just for clarity, what time during H1 were the pricing changes made?

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [2]

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Okay. Thank you, Gavin. Look, we're making ongoing changes to the Betfair business. We're not trying to do a big bang launch business changes this year rolling out on an ongoing basis, and we'll continue to do that. So we have plans to make further enhancements and improvements, whether that's around currencies, payments, languages. We're also doing some work to integrate and develop a new app for the Betfair business as well. So there's lots of ongoing plans that we have to deliver over the course of the next 12 months to the business.

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Jonathan Stanley Hill, Flutter Entertainment PLC - CFO & Executive Director [3]

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The only point I'd add is obviously the impact on staking in the uplift in the net revenue expected margin is more Q2 weighted than Q1 weighted. And as Peter said, it's ongoing because you're actually in a position where you can start to yield manage markets on a much more interactive basis rather than a static single price set. But you cannot...

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Edward Young, Morgan Stanley, Research Division - Equity Analyst [4]

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Ed Young from Morgan Stanley. First of all, market in Australia, very interested by the comments there around the weighting into H2. How much that reflects like-for-like reduction in marketing cost? You mentioned POC already, and how much of that reflects reduced volumes in marketing? Whether that's your choice to take a bit more profit in the less rational market or less availability through regulation and availability of assets? And sorry, if I tag on just more widely strategically, how do you view that opportunity in terms of mentioned last year, keeping the pressure on during the transition of POC, where you wanted to double down and continue that or was you frankly given ideas of the sort of the strategic considerations of that marketing choice?

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Barni Evans, Sportsbet Pty Ltd. - Marketing Director [5]

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Sure. Thanks, Ed. So I think, firstly, I'll reiterate what Jonathan said. A lot of that -- the changes in terms of comps, obviously, the World Cup and obviously in comparison to when we went pretty aggressive in advance of POC coming in. So it's more normalizing than it is reduction. And there's a couple of other factors. And as I mentioned that some competitors have relinquished some mainstream assets and that has a slight deflating effect and we've benefited from that. So in some instances, we've been able to buy the same, in fact slightly more for less money. But once you've brought a question, strategically, we'd brief very clearly from these guys is to continue growing. So the first thing we look out every day is active customer numbers and clearly marketing is the fuel that drives those. And our intention is not to let up and over the medium- and long-term. We see no sign of anything else.

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Edward Young, Morgan Stanley, Research Division - Equity Analyst [6]

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And the second one on the impact in retail. I was interested about the comments again trying the month-to-month improvement as those trends have continued. Can you give any sort of color on the customer behavior? You've obviously confirmed what you originally said was a niche impact at the high end of the range down towards the low end of the range. Could it possibly trend below that? And also noting that the stakes behavior was very similar in Q2 to Q1, there's been a huge change in the sports behavior from previously, although obviously better performance than peers historically in that sports business. So any color around the player behavior will be very interesting?

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [7]

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So I cover off the math of the first that. Obviously, we were at 44% in Q2, which means we actually started worse than that, and we trended through the quarter to slightly better than that and we were at 33% to 43%. So actually, at the end of the quarter, we were just within the bottom end of that range and that's continued into July. I'd prefer to wait to have a longer discussion about that as to when we've actually seen more shop closures, a stabilization of player activity and behavior, which I think we're still seeing working through with a minute.

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Jonathan Stanley Hill, Flutter Entertainment PLC - CFO & Executive Director [8]

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I think from -- when Dan and I talk about the retail business, I mean, clearly, we're waiting for competitors to announce special closures, and we do expect to see some migration of business into our shops, which should help offset some of the shortfalls we're seeing as a result of the state limit changes. There have been some customer behavioral changes. The old fashion customers that came in to stay, the focus is that's what they -- that's where we have seen some migration towards [others] and some of the other machines, but it's a very different customer segment. I think the sporting heritage that we have and the focus on quality of our products and execution we deliver in retail is going to be very important to help us in the future as other competitors shut their shops and people looking for some other can again place that in the sporting ranges.

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Michael Mitchell, Davy, Research Division - Gaming and Leisure Analyst [9]

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I'm Michael Mitchell from Davy. Two on the online division, if I could, please. First of all, on the expected margins and the structural improvement we've seen there, it's 7.5% of 60 basis points year-on-year. Just a little bit of color in terms of where we are on that journey? I mean, we now captured at 7.5%, significant amount of where we think margins in that division could go for sportsbook? Or is it more to go for it? And then secondly, on market switch offs, I'm just interested in your view in terms of what point do we hit the inflection where you can start to go back into some of these markets and actually the work you're doing at the back-end will actually drive a benefit to profitability from some of these markets?

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [10]

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Thanks, Michael. Let me just pick up on the market switch offs first and then I'll let Jonathan talk to you about the risk, particularly on the margins. I mean, we have seen an unprecedented level of markets switch offs in the first half of this year. We started trading down coming to see me because we know every time we did it was bad news. That is just not something we've seen happen over the last several years in the same way. It's very unprecedented. Clearly, one of the things that we've been talking about is under the ability of our strategy is ability to grow the business themselves into those markets we're already in. And a lot of that is around having better offering for the markets we're already in. Clearly, part of it also being able to reenter some of the markets we've had to switch off in the past because the cost of developing of the regulatory requirement is high. So it is going to be an area where we'll be focused on. The extent which we go back into some of those markets over the regulating is dependent on us getting license and prioritizing it. I think Dan and the team are doing -- at the moment is focusing on the customers we have and adding gaming to some of the markets where it hasn't been available in the past.

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Jonathan Stanley Hill, Flutter Entertainment PLC - CFO & Executive Director [11]

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On the expected margin side, obviously we've got a real step change from AFP, which is the primary driver of that uplift in expected margins. That's kind of a one-off benefit. So you certainly shouldn't expect us to be able to continue with that sort of movement. But within that, there'll be small changes as we -- as I've mentioned earlier as we think about yield management across the markets. But that's at the margin. So if you understand what I mean. Secondly is the customer base moves more to recreational. I mean, you can see the effect in Barni's business was the 38% of people taking the Same Game Multis as we move towards an increasing recreational base, particularly in Paddy's, hopefully, we'll get that bet next start coming through. And Dan's always challenging as trading team to look at how can we sensibly -- how we can maximize the opportunity and give ourselves a chance to improve those margins. But I think a lot of those things are small incremental things. I'm not going to guide on future expected margins, and I don't think you'd expect to see either. But I think there's a lot of things we can continue to work on, but this is really a step change at this point with AFP driving on a lot of low-value staking, as I said, and really giving us a step-up in expected margin.

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Richard Paul Stuber, Numis Securities Limited, Research Division - Analyst [12]

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Richard Stuber from Numis. You mentioned that you've exited from several markets and the impact that's going to be. Are there any markets over the last 6 months you think from a legal perspective they look more a bit more attractive and you entered into new markets on the exchange or the sportsbook?

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [13]

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These precise [lines] will be America. But in a -- clearly, in a -- there are changes in the recent regulatory cycle, where we've seen a number of states, I think they just -- I think one area where we are is increasingly sort of investing and looking to sort of the opportunity that is in South America. So we hope we'll be able to do business in Argentina same as the licensing regime that was going on there, and we feel like we're quite in a good position to get net license. So there's a number of regulatory developments. Clearly, as those markets regulate and come online, it takes time as we're seeing here in the U.S. to invest and grow and develop the acquisition.

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Richard Paul Stuber, Numis Securities Limited, Research Division - Analyst [14]

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And just one on the exchange. You said that in Ireland, you've offered [new field] type of products associated with lower commission. I mean, is that something that you would be looking to real out across other exchange markets like the U.K.?

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [15]

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I've talked in the past about how we've been doing some testing is -- effectively, it's a good-better-best commission structures where we have different sort of benefits associated with it. We were pleased with the way that performance is now launching live in Ireland, and we need to just give it a little bit of time to mature and see how that, as I said, it's performing in line with our expectation. I think if that continues to be the case, we would expect to see [that roll out also].

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Daria Fomina, Goldman Sachs Group Inc., Research Division - Equity Analyst [16]

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Daria Fomina from Goldman Sachs. 2 questions from me, if I may. The first one is on the U.S. loss, GBP 55 million. Can you give a bit more color on what assumptions went behind there? And if and when Indiana is a bit delayed, where that loss can end up being as opposed to whether you will be investing all of it regardless? And the second question on the shareholder return and your generally approach to capital allocation. So obviously, very strong cash generation in the first half. Your buyback is over now. Can you talk a little bit about your thoughts there versus how your M&A pipeline looks at the moment?

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [17]

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Yes. Why don't I just give you a brief overview of both, and then Jonathan can pick up as well? But it's very, very hard to make forecast in the U.S. because we aren't quite sure how well our product is going to land, we don't know how our competitors are going to react. And it's -- literally, this is the first time we've been live in an August in America. But we'd have to constant management. So you've got to recognize that. We do -- we are developing a model there in terms of thinking about how much money we will invest behind the big states when it goes live. And clearly, the timing of the NFL season and the acquisition cost that you have essentially into the second half means that you end up with a loss when the market comes on screen as you acquire the business. And so we have a view in terms of the amount of money we spent on, it's a big state and obviously, spend a lot less money on the smaller state. But we ran some mind as the only spend amount or spend as it doesn't make sense. We're very disciplined in terms of the acquisition economics that we are following. Jonathan will share with you in a minute also the assumptions and some our thoughts in terms of how much money we expect to spend on a big or small state. And clearly, if Indiana is delayed, we take some of the investments we've got in for that and it would get pushed back. From a cash generation perspective, you're right, we are very cash generative. As a business, we've talked about also capital allocation strategy in the past. I think we've got a very clear strategy that we're following as a group. And we don't see any reason to change that focus.

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Jonathan Stanley Hill, Flutter Entertainment PLC - CFO & Executive Director [18]

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Yes. I mean, I think the fundamental underpin here is we've got an assumption based on the paybacks and we expect to see in the markets we're already in and then the sort of payback that we expect to see in Pennsylvania and then Indiana should it launch. If we can't get those paybacks and see this will show great discipline, but we find that we've got more customers coming in than we expected at great paybacks. And we'll expand them, and we'll push forward on that basis. It's really difficult with one major state having been live for 4 months, Peter said, to really understand precisely what the dynamics are going to be this year versus last year because clearly we expect a more crowded marketplace and a more competitive marketplace. So we've built it on the basis of paybacks and we will stick rigorously to assessing those paybacks and make sure we're getting value for money. If Indiana didn't switch off -- switch on at all, you could be looking at sort of 5 million to 10 million sort of a range that would come out of its projections. But again, I would just say, it's really difficult to be very precise. At this point, we've got some assumptions that, obviously, down in the bottom on a state-by-state basis and hopefully, this will hold and hopefully we can get the great paybacks, the same in New Jersey last year. Just on the application of what we do with the capital, I mean we've been pretty clear. We laid out that model at the interims. The first place is making sure we're investing organically to grow our business, and that's clearly the U.S. is the biggest element of that. But there are other areas where we may find ourselves doing organic investment and it's interestingly we mentioned Argentina and that's an interesting opportunity for us and clearly a market like that will have a deep characteristic as the U.S. might have. The second area we'll clearly look to invest is M&A. As Peter said, we're really pleased with the way our integration, not just the acquisition, the integration has gone on the performance of Adjarabet has been relative to when we bought it and we are really pleased we're buying in line with our expectations. So we know we can do this and integrate and run that process well. If we find other opportunities that give us the right characteristics of payback, then unlike characteristics of risk and we'll consider those. And then, obviously, we said at the -- at the bottom if we get excess capital, we'll look at whether we have to then distribute that. If we don't distribute it through the first 2, we're not going to dash down, not [move it] every half year deciding if we've got excess capital. We're going to get ourselves a better flexibility over a period of time. And if the right things come up, we may buy them. If they don't, we will not spend the money. I can't be very definitive, but we're going to give ourselves flexibility because I think there will be opportunities that come up.

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Joseph Philip Thomas, HSBC, Research Division - Analyst [19]

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It's Joe Thomas from HSBC. The marketing spend in the online business, you talked about -- pulled that forward into the first half of this year. Can you just explain the reasons behind that and why you did that? And should we expect a compensating decline for the -- yes, so you leave your overall full year projections unchanged. I'm just wondering how we should be thinking about that sort of marketing spends to revenue ratio in the future? And then secondly, on the AML sort of responsible gambling stuff that you flagged at Q1, can you just give some sort of indication about what the pace of growth would have been had that been stripped out? And at what point you start to lap that?

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [20]

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Yes. Let me pick up on those 2 points on that, and let Jonathan follow. I mean, in terms of the AML and RG changes, I think the way I described it, we felt us long way down the road in terms of the changes we want to make to put the business in a more sustainable footing. These are not things you do in sort of one go as we launch our new CAAP model, for example, we're finding the use of it. I think we -- when we look at the timing of those changes, we have made significant changes in the second half last year and we continue to make changes this year. So I think at some point of this year, we'll start to lap some of the changes. As to what's the pace of growth would have been if we hadn't have done it, it's very hard to gauge up. What I would say is within the Paddy Power business, I shared with you the rate of growth which we're very pleased with. The Betfair business obviously has a focus on slightly higher staking customers and so it's a bit more impacted by some of those changes made and has also been impacted by some of the market switch offs. With regard to the marketing spend, look, we are delivering right across the group, very good growth in active customers. We are looking at Barni is delivering sort of a 15% growth in activity in the first half and the end of Q2 growth in debt assets and Paddy's sort of underlying basis, we're pleased with the growth rate that the Betfair is showing. So I think we're not playing any tricks in terms of sort of marketing spend back, I think, which is getting more -- it's getting better at spending in order to spend in a focused way. And actually, to some extent -- some of the switch in spend from TV to digital lands us to be a little bit more targeted and spend it more effectively.

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Jonathan Stanley Hill, Flutter Entertainment PLC - CFO & Executive Director [21]

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I mean, there's a few moving parts. Obviously, the first half of last year we didn't -- we haven't finished the -- some of the Paddy Power launch and improvements until some way through H1 last year. So naturally, we're going to have a full 6 months that then we'll skew it more this year into H1 because actually have got a run rate expenditure going through there. Secondly, you've got a whole lot of World Cup. I think we had GBP 7 million in the prior year in marketing, which clearly isn't going to repeat. There is a small nuance around we've now got the capability of doing exchange free bet, which we didn't have historically. So basically, that means that customers were giving us the sense that they weren't feeling they were getting value from the exchange and our ability to not to do promotional through free bets actually gives us another bow to the arrow -- in fact, an arrow to the bow, effectively. So what you'll see is that we'll come up in other marketing and into the premium lines. So there's a little bit of extra coming out there. But we design our marketing budgets around how we think we can spend the money effectively through the year. We're not doing this to -- the guys don’t think about H1, H2 when they're designing exactly how they want to best spend their money through the year.

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [22]

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And this is -- I think, we've always shown a disciplined approach. I think it works both ways. As and when we develop better infrastructure for some of the Betfair business in the international markets, I'm sure that they will be able to better spend money into those markets effectively as well. So we're spending to the point where it makes sense to spend and about full time spend and the team in PPB as well as Barni and Met in the U.S.

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Simon John Davies, Deutsche Bank AG, Research Division - Head of UK Midcap & Online Gaming Research [23]

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Simon Davies from Deutsche Bank. 2 from me, please. Firstly, you referred to some softness in the VIP activity in online. Can you put a number on this some of your competitors have? And presumably that kicked in sort of early on in the year. So should annualize Q1, Q2 next year. And secondly, it's early days, but obviously, we've got a new Prime Minister and a new team at the DCMS. Do you have any hope or expectation that we may be entering a slightly more benign period for politics and regulation for the industry in the U.K.?

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [24]

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If you look at the exchange, Simon, you see there's a 50% chance in election this year, so -- but again, meet new team in DCMS could be lined up with that alone. Look, I think we are doing the right thing for ourselves and trying to help encourage the collaboration across the industry to do the right thing to drive more sustainable industry. I think you have heard me on Radio 4 talking about it. I think we are starting to get out that a little bit more and talk about the work that the industry is doing because it is important that we acknowledge and share the progress we have made. I think people don't appreciate quite how much we've done, and you'll see us do that a little bit more. I think that's the -- I think it's really, really important we do that. I mean, it is a fairly substantial increase in investment of the industry if committed to some of the big 5 operators, 10x increase to support research education treatment. I think it is the right thing for us to do. As regards to the VIP softness, we're not going to put a number on it. I mean, I don't think some of our competitors have done that because that's been taking earning downgrades. We've committed to our consensus numbers with our guidance today. So we're not going to put a number on it. In terms of the time line of when we made some of those changes, I'd point to some changes we made at the back end of last year as well as further changes we made this year and we have to acknowledge we're long way down the road, there may be further things we want to do as well.

We don’t have questions. Are there any coming in on the phone, just before we close?

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Operator [25]

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(Operator Instructions)

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Jeremy Peter Jackson, Flutter Entertainment PLC - CEO & Director [26]

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Okay. Well, look, thank you very much, everybody. Appreciate it.

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Jonathan Stanley Hill, Flutter Entertainment PLC - CFO & Executive Director [27]

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Thanks.