Flutter Entertainment Regulatory News (FLTR)

24 August 2016

 Paddy Power Betfair plc

2016 Interim Results Announcement

Momentum maintained; merger integration progressing ahead of schedule

Paddy Power Betfair plc (the "Group"), one of the leading sports betting and gaming groups in the world, announces interim results for the six months ended 30 June 2016 (the "period").

H1 highlights1

· Revenue up 18% to £759m, with double-digit growth in all four divisions:

- Online revenue up 20% to £440m, with sportsbook stakes up 20%;

- Australia revenue up 17%2 to £129m, with sportsbook stakes up 30%2;

- Retail revenue up 12% to £147m, with sportsbook stakes up 10%; and

- US revenue up 16%2 to £43m

· Operating leverage delivered underlying EBITDA growth of 31% to £181m, notwithstanding a £37m (+31%) increase in marketing spend

· Interim dividend of 40 pence per share takes total dividends for the period to 52 pence per share (closing dividends paid on merger relating to January 2016 equated to 12 pence per share)

Q2 highlights1

· Revenue up 20% to £420m, including a strong Euro 2016 performance

· Underlying EBITDA up 33% to £122m and underlying operating profit up 40% to £105m

Merger update and outlook

· Merger integration progressing ahead of plan with the majority of actions already completed

· Now expecting £65m of cost synergies with the full benefit to be achieved in 2017, a year earlier than originally envisaged

· Full year 2016 proforma underlying EBITDA is expected to be between £365m and £385m

Breon Corcoran, Chief Executive, commented:

"Paddy Power Betfair has sustained good momentum through a period of considerable change. The restructuring is now largely complete and the merger synergies are being delivered ahead of schedule.

We are creating a world-class operation by exploiting the unique assets and capabilities of each legacy business, particularly in the key functions of technology, marketing and trading.

While our industry remains highly competitive and is exposed to the prevailing economic and regulatory environments, our strong market positions, increased scale and enhanced capabilities position us well for sustainable, profitable growth".

Financial summary

The merger of Paddy Power plc ("Paddy Power") and Betfair Group plc ("Betfair") completed on 2 February 2016 and is accounted for as an acquisition of Betfair by Paddy Power on that date. The reported statutory results reflect this accounting treatment but this announcement also includes results prepared on a "Proforma" basis for the Group as if Paddy Power and Betfair had always been merged as this best reflects the performance of the Group. Proforma results have been prepared using the full 6 month results of Paddy Power and Betfair for H1 2016 and H1 2015. As the statutory results for H1 2016 only include Betfair results since the merger completion on 2 February 2016 and no Betfair results for H1 2015, it is not considered meaningful to discuss the operating results of the Group using the statutory results. Accordingly the Operating and Financial Review has been prepared using the proforma results as this best reflects the performance of the Group. A reconciliation between the statutory and proforma financials is included in Appendix 3.

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1 Proforma basis, see appendix 3 for reconciliation to statutory results

2 Growth rates are in local currency

Analyst briefing:

The Group will host a presentation for institutional investors and analysts this morning at 10:00am (IST/BST). The presentation will be webcast live on the Group's corporate website (www.paddypowerbetfair.com) and a conference call facility will also be available. To dial into the conference call, participants should dial 01296 311 600 from the UK, (01) 242 1074 from Ireland and +44 1296 311 600 from elsewhere. The passcode is 479 379 97

A presentation replay facility will be available later today on our corporate website: https://www.paddypowerbetfair.com/investor-relations/results-centre/2016.

Contacts:

About Paddy Power Betfair

Paddy Power Betfair plc is one of the leading sports betting and gaming groups in the world.

The business was formed from the February 2016 merger of Paddy Power plc and Betfair Group plc and has four divisions:

Online, which runs two of Europe's leading online sports betting and gaming brands, Paddy Power and Betfair, as well as a telephone based sportsbook and a number of B2B partnerships

Australia, consisting of Sportsbet, the market leader in the fast-growing Australian online betting market

US, which combines TVG, America's leading horse-racing TV and betting network, Betfair Casino, an online casino in New Jersey, and the Betfair New Jersey Exchange

Retail, which operates over 600 Paddy Power betting shops across the UK and Ireland, employing 5,000 people.

Following the successful merger, Paddy Power Betfair's strategy is to create and sustain a world class, high performing business by strengthening or developing leading positions in large regulated markets. This will be achieved by generating superior returns through scale, capability and innovation, fuelled by focussed investment in people, technology, product, risk, trading and marketing, primarily in mobile online sports betting.

Business Overview

The merger between Paddy Power and Betfair completed on 2 February 2016, creating a Group with leading positions in the largest regulated online markets as well as exposure to a number of other international markets. The Group has leading, differentiated sports betting products, a portfolio of distinctive, complementary brands, and significant in-house technology and marketing capabilities.

H1 performance1

The focus in the first half of the financial year has been on integrating the legacy businesses efficiently while minimising disruption to the Group's trading momentum. Revenue was up 18% with good performances across all four divisions and operating leverage resulted in a 31% increase in underlying EBITDA to £181m. At key trading events, including Cheltenham, the Grand National and Euro 2016, our marketing, technology and operations performed well despite the considerable operational change within the organisation.

Integration and delivery of cost synergies

The objectives of the integration are to achieve an optimal operational structure, to create a new corporate culture and identity, and to realise cost synergies.

The integration is progressing ahead of schedule. Key integration actions include the appointment of the senior management team, rationalisation of duplicated roles, shifting of technology resources to our existing European development centres, closure of five offices and the consolidation of our data centres. We are also realising cost synergies from procurement savings, in areas such as marketing agencies, payment providers and data feeds, and from the reduced use of third-party suppliers, in areas such as gaming content, product development, digital marketing, and risk and trading.

We now expect to realise ongoing cost synergies of £65m per annum with the full benefit to be achieved in 2017 (c.£30m benefit in 2016, of which £9m was delivered in the first half). This compares to our initial £50m target and will be delivered a year earlier than initially expected. The one-off cash implementation costs to achieve the synergies are still expected to be less than £65m (£49m of which was incurred in H1 2016).

Strategic update

Before the merger, Paddy Power and Betfair had many shared strategic priorities. Each company focussed investment in the areas of the market with the highest growth rates, prioritising investment in online, sports, mobile channels and regulated jurisdictions. Both companies recognised that investing heavily in product, marketing, technology and talent is crucial to success in online gaming. This approach will remain unchanged in the combined Group as we look to maintain, and where possible extend, our leading market positions and capabilities.

To maximise our competitive advantage and achieve sustainable profitable growth our three key areas of focus are:

· Combining the best assets and capabilities of each legacy business

· Optimising our brand positioning in the UK and Ireland

· Capitalising on our enhanced scale

Combining the best assets and capabilities of each legacy business 

The merger of two strong businesses has provided an opportunity to create an even stronger Group by combining the best people, assets and practices from each. This approach is being followed across all parts of the business, and includes:

Technology and product development

Our objective is to operate an efficient, scalable, flexible and controllable platform that supports our multiple brands, channels and geographies. This will be achieved by extending the modular, predominantly in-house architecture of Betfair's existing platform, which has demonstrated a high level of scalability as the business grew rapidly over the past few years. This platform is being enhanced with key functionality from the Paddy Power platform such as its market leading sportsbook pricing tools and proprietary gaming content, which has already been integrated into the Betfair gaming platform.

This platform will deliver a number of benefits, including significant improvements in the speed and cost of releasing new product across multiple brands, channels and geographies; enabling customisation of customer bonuses and promotions; and reducing the investment required to enter new markets. For example, with the current platform significant additional development work would be required to release the recently launched Paddy Power 'Kicker' product across channels (e.g. onto the Paddy Power desktop) or across brands (e.g. onto the Betfair sportsbook). The new platform will allow such product roll outs with minimal further development.

Further advantages of the platform include improved pace of development, retention of knowledge and IP, as well as greater control over our development roadmap and improved efficiency (the cost of our in-house resources is approximately one third of that of typical third party development services).

Risk and trading

Paddy Power has historically developed a wide range of proprietary sportsbook pricing and risk management tools. The sharing of these pricing models, combined with the greater volume of bets taken across the combined operations and the use of the Betfair exchange, will improve the accuracy of our price formation.

This also facilitates additional markets on our sportsbooks. For example, a significantly improved tennis offering is already available on the Betfair sportsbook.

Exchange pricing will also be used to enhance our sportsbooks, including increasing the availability of Cash Out offers to customers when a sportsbook price is unavailable (e.g. when the market is suspended following a goal), and providing pricing information for markets that are otherwise difficult to price, such as in-running horseracing. The exchange also provides a low-cost way of hedging unwanted exposures.

Our customer risk management capability is also being enhanced through the sharing of data, models and processes between our brands.

Marketing

In digital marketing, we have found that the legacy companies had different strengths in, for example, the key areas of CRM, paid search and display advertising. We have selected the best technology systems and processes from each and this will result in both brands having access to stronger digital marketing capability than they had previously.

We are using analytics data from the two brands in econometric modelling and this is giving us greater insight into the effectiveness of marketing activity and leading to improved optimisation of spend.

Returns are also being improved through the sharing of media assets. For example, the Betfair brand is now using advertising slots on Channel 4 racing that were originally acquired by Paddy Power, giving it access to a key audience that it wasn't previously addressing.

Operations

The pooling of resources means that we can optimise our customer services. For example, during Euro 2016 our agents provided customer support across both brands which resulted in faster response times and increased first contact resolution during peak periods.

Sharing of information can help to improve the customer sign-up journey. By pooling our customer verification data and processes we will be able to increase the proportion of new customers whose identification is verified automatically, which leads to improved conversion rates.

Our fraud teams are also sharing information on fraud patterns and potential attacks, allowing for a more responsive and efficient fraud management approach.

We are similarly sharing knowledge across Responsible Gambling functions, enabling us to improve reporting and training across the Group. We are also aligning Responsible Gambling site tools across both brands.

Optimising our brand positioning in the UK and Ireland

Paddy Power and Betfair are two of the leading brands in the UK and Irish markets. To maximise growth we have the opportunity to optimise the positioning of both brands. We segment the sports betting market on consumers' level of spend, attitude to gambling and sports preference. The market consists of clearly differentiated customer groups with distinct reasons for choosing a brand.

Our two brands currently over-index in distinct market segments. For example, Betfair attracts customers whose gambling motivations are primarily money-centric whilst Paddy Power attracts customers who say that social interaction and entertainment is their primary motivation. Accordingly, the customer overlap of the brands is limited. In 2015, only 9% of our combined UK online customers were active on both brands.

We are continuing to review how best to use our two brands, but we have identified opportunities to improve efficiency by adopting a more targeted approach to the customer proposition and messaging for each brand. Betfair will primarily target customers whose motivations to bet are money-centric with a brand approach that emphasises a strong value proposition on both the exchange and sportsbook. Paddy Power will target customers whose primary motivations are social interaction and entertainment.

We believe this focussed approach will both strengthen our positions in the segments where the brands are already performing well, as well as allowing us to better target segments where both brands are currently under-indexing.

Capitalising on our enhanced scale

Having greater scale reduces the average cost of service and provides an opportunity to increase our returns on investment in product and marketing, which can in turn lead to a virtuous circle and drive long term revenue growth.

Substantial ongoing investment in product is essential for acquiring and retaining customers and to maximise our share of their total spend. We can now put even more resources into product development and generate higher returns on this spend by making these products available to a larger customer base. The Group now has approximately 1,000 in-house product specialists, significantly more than either legacy business.

In marketing, we can now acquire the most attractive assets due to both our substantial firepower and the ability to share assets across brands and/or geographies. For instance, for the 2016/17 football season we have the top advertising packages across Sky Sports and BT Sport and in the last few months we have signed a five-year sponsorship deal with the NRL in Australia, and have become the official global partner of FC Barcelona for the next three years.

Outlook

The second half of the year has started in line with our expectations and for the full year we expect proforma underlying EBITDA to be between £365m and £385m (2015: £296m).

Our industry remains highly competitive and exposed to external factors including the economic and regulatory environment. However our scale, market positions and leading capabilities position us well for sustainable profitable growth and we look forward to the future with confidence.

Operating and Financial Review1

Group

Note divisional key performance indicators and quarterly information are included in the Appendix.

Group revenue increased by 18% to £759m with good growth in both sports and gaming revenues and double-digit revenue growth in each of our divisions. On a constant currency3 basis, revenue growth was 16%. Within this, we saw a strong Euro 2016 performance, generating £22m revenues across the Group in June (and £38m for the full tournament, which concluded in July). Sportsbook revenues in the first quarter were affected by adverse sports results, most notably at the Cheltenham Festival. Accordingly, the overall group sportsbook net revenue percentage for the half year was approximately 50 basis points lower than our normal expectations. Revenue from regulated markets represented 95% of total revenues in the period.

The revenue growth combined with operational leverage led to a 31% increase in underlying EBITDA to £181m (H1 2015: £138m) and underlying operating profit increased by 39% to £148m (H1 2015: £106m). There was a small foreign exchange translation benefit in the period and on a constant currency basis underlying EBITDA and operating profit increased by 30% and 38% respectively.

Cost of sales were adversely impacted by £6m of new taxes and product fees. Total operating costs increased by 14%, with 31% growth in sales and marketing costs (driven by Euro 2016, increased competitive intensity and continued asset inflation) and 5% growth in other operating costs. Operating cost growth in the period benefitted from £9m of merger synergies but was adversely impacted by £8m from year-on-year foreign exchange movements.

After deduction of separately disclosed items, which related entirely to the merger, the Group recorded an operating loss of £48m for the period (H1 2015: profit of £106m).

Online

Online division includes the UK/Ireland telephone business.

* Active customers throughout this statement are defined as those who have deposited real money and have bet in the reporting period, excluding indirect B2B customers. Note that the active customer numbers have not been adjusted for customers who were active on both the Paddy Power and Betfair brands.

The Online division includes the online brands of Paddy Power and Betfair, the Paddy Power telephone sportsbook, as well as a number of B2B partnerships.

Online revenue increased by 20% to £440m. Within this, revenue from regulated markets was up 25% and unregulated market revenues fell by 13%, mostly due to the impact of exiting from Portugal in July 2015. Active customers increased by 17% driven by strong sportsbook acquisition growth from regulated markets across both our brands, including at Euro 2016.

Sports revenue increased by 21% to £316m. This was comprised of a 20% increase in sportsbook stakes, improved year-on-year sports results and 3% growth in exchange and B2B revenues. Mobile continues to be the key driver of sportsbook growth, representing 76% of revenues in the period.

We continue to launch innovative new betting features such as Paddy Power's 'Kicker', which suggests an additional bet to football customers on the bet slip, giving them the chance to earn an escalating pay-out based on their backed team's margin of victory.  We are also making incremental improvements to our exchange product, for example in July, ahead of The Open, we added each-way betting on Golf.

Our marketing is focussed on highlighting our new product releases and also on maximising our exposure around key events such as Euro 2016 and the Brexit vote. Paddy Power's 'Vive La Bantz' Euro 2016 TV ad rounded up a host of Scottish 'icons', created some cross border tension and was voted 'Best Euros Advert' by a leading UK marketing magazine. Betfair used the exchange's transparency and liquidity (with £127m traded) to generate the highest Brexit-related PR coverage in the industry, over the campaign.

Gaming revenue increased 20% to £124m driven by increased cross selling from sports and strong growth in mobile revenues. Betfair gaming customers are now benefiting from exclusive Paddy Power proprietary content.

Underlying EBITDA increased by 34% to £140m (H1 2015: £104m) and underlying operating profit increased by 40% to £123m (H1 2015: £88m). Within this cost of sales was adversely impacted by £5m of Irish point of consumption tax, which has been payable on sports betting since August 2015. Total operating costs increased by 14% versus the 20% revenue growth, with 32% growth in sales and marketing costs, driven by continued asset inflation and Euro 2016, offset by low growth in other cost categories.

Regulatory update

In the UK budget in March, it was announced that from August 2017 the treatment of free bets for eGaming point of consumption tax will change to bring it in line with their non-deductibility for sports. While we await the precise details of how this will calculated, at current revenue levels, we estimate the gross impact will be approximately £6m per annum. The Government also announced its intention to replace the Horserace Betting Levy with a new funding arrangement from April 2017.

Australia4  

The Australia division operates the Sportsbet brand which is the market leader in the Australian online betting market.

Stakes continued to grow strongly in 2016, up 30% to £1.3 billion, despite the intensified level of competition versus the prior year, driven by 31% growth in active customers. Revenue, up 17% to £129m, was impacted by adverse sports results, in particular in horseracing where over half of the top 50 races were loss making.

Mobile revenues represented 78% of online revenues. Telephone betting grew strongly with in-play betting contributing 15% of stakes and 8% of revenues in the period versus approximately 8% and 4% respectively in the full year 2015. This increase was driven by our 'Bet Live' product which was released in December 2015 but will be switched off in the next few weeks, as required under our licence from the Northern Territory Racing Commission.

We continue to invest heavily in Sportsbet's product and marketing to maintain our online market leadership position. Key product releases in the first half included 'Multibuilder', which enhances the ease with which customers can place accumulator bets, and 'Quick Bet', which allows a bet to be placed in just two steps. In the last few weeks we launched 'Same Game Multi', an innovative new feature allowing customers to build a custom multiple bet on a single AFL match with the recalculated odds displaying as they combine their selections. We also renewed our partnership with the NRL in May, becoming their official wagering partner until 2020. 

Underlying EBITDA, which was impacted by the adverse sports results, decreased by 10% to £30m (H1 2015: £34m). Cost of sales growth in the period was adversely affected by 5% due to product fee rate increases previously announced and applying from the second half of 2015. Sales and marketing cost growth of 34% reflects our ongoing substantial investment in media assets, as well as cost inflation driven by the increasingly competitive environment. Other operating cost growth reflects a significant level of new hires during the second half of 2015 with cost growth therefore expected to moderate from the second half of 2016.

Regulatory update

In April, the Federal Government published its response to the Review of the Impact of Illegal Offshore Wagering in which it announced that it does not intend to enable the offering of online in-play betting and also stated that it intends legislating to ban 'click to call' type in-play betting services. The Federal Government's response also stated its intention to ban credit betting and announced a series of consumer protection measures. We do not anticipate that the impact of a credit betting ban would be material to our business, given the limited use of credit by our customers. We lead the industry in responsible gambling and accordingly do not expect a material impact on our business from the announced consumer protection measures.

In June, the South Australia Government announced that it will introduce a 15% place of consumption tax in the state, effective from July 2017. In the first half of 2016, revenues from South Australian customers represented 7% of our total revenues.

In July, the New South Wales Government announced that it is banning greyhound racing in the state from 1 July 2017. NSW greyhound racing staking currently contributes approximately 4% of our total revenues and we anticipate that a significant proportion of this staking will be substituted to other products including greyhound racing from other states.

Whilst the industry is clearly facing increased regulatory headwinds impacting growth and profitability, we believe that, over the longer term, our brand strength and scale enables us to better withstand these regulatory pressures.

Retail

The Retail division operates 603 Paddy Power betting shops across the UK and Ireland. The business continues to take market share and good like-for-like revenue growth coupled with shop maturity, careful cost control and a foreign exchange translation benefit drove a 21% increase in operating profit to £23m (up 14% excluding currency benefit).

Total revenues increased by 12% to £147m (or 9% excluding currency). Revenues from UK shops increased by 11% and Irish shop revenues were up 6% in local currency. Excluding the impact of new shops and year-on-year currency movements, like-for-like revenues increased by 4% and operating costs increased by 3%. The like-for-like revenue growth was comprised of a 4% increase in sportsbook revenues, on 2% stakes growth, and a 5% increase in machine gaming growth, primarily driven by growth from B3 content.

In sports betting, we continue to benefit from our leadership position in Self Service Betting Terminals ("SSBTs") both through having the greatest density of terminals per shop and from our unique content and features, such as our exclusive 'Track My Bet' service. Our UK machine gaming terminals continue to benefit from carrying sector leading content including our in-house developed games, which also help to deliver consistency of gaming content across online and retail channels. Other initiatives with which we are successfully targeting multi-channel customers include in-store self-service online sign-up tablets and our cash card.

We opened six new shops in the first half (three in each of Ireland and the UK) and closed one UK shop. Whilst increased taxes and regulations, coupled with our greater estate size, mean that the rate at which we are opening new units has declined versus prior years, we are still selectively identifying locations which can further enhance the quality of our estate.

US4  

The US division combines TVG, America's leading horse-racing TV and betting network (operating in 32 states), Betfair Casino, an online casino in New Jersey, and the Betfair New Jersey Exchange.

Revenues increased by 16% to £43m, driven by growth in both our TVG and Betfair New Jersey businesses, and EBITDA increased by 50% to £6.9m.

In TVG, handle and revenue increased by 17% and 16%, respectively, as the business continues to increase its market share.

In May, under the Betfair brand we launched the US market's first online exchange wagering platform for horseracing in New Jersey. Whilst the size of that market is limited, it is a good opportunity to test consumer demand for exchange betting and show that it can contribute additional growth to the overall betting market.

Responsible gambling

Ensuring our customers bet safely and responsibly is of the highest importance to our business. Following the merger, the Betfair brand has become part of the Senet Group and its advertising now includes Senet's "When the Fun Stops Stop" messaging. The Group continues to support a range of initiatives, including a project aimed at standardising self-exclusion procedures across the industry.

We recently participated in 'Gamble Aware' week, with our UK retail sites running responsible gambling messages across all shop windows and staff joining a range of initiatives aimed at raising awareness of processes and tools amongst customers. We have also participated in industry initiatives to increase the frequency of alerts being seen by customers on gaming machines.

Sportsbet leads the Australian industry in responsible gambling. In February, we supported Responsible Gambling Awareness Week in New South Wales through on-site and in-app digital assets, social media posts and on-air segments during the live telecast of National Rugby League matches.

Separately disclosed items

All the separately disclosed items relate specifically to the merger and therefore are excluded from underlying profits. Merger deal costs include costs, fees and stamp duty incurred to complete the merger. These costs totalled £56m and are fully incurred, with £6m included in the second half of 2015. Merger integration costs are one-off cash costs incurred to achieve recurring cost synergies. Total integration costs are expected to be less than £65m with £49m incurred in the period.

The merger is accounted for as an acquisition of Betfair by Paddy Power with the accounting treatment therefore resulting in the recognition of a number of non-cash items. These include amortisation of intangible assets (£79m in the period), a fair value adjustment on the replacement of legacy Betfair share-based payment awards for equivalent awards in the Group on completion (£13m in the period) and asset impairments of £4m in relation to assets impaired as a result of integration actions taken.

Taxation

The Group's underlying effective tax rate in the period was 16.0% (H1 2015: 15.7%).

Dividend

The Board continues to target a payout ratio for the Group's dividend of approximately 50% of underlying profits after tax. The Board has declared a second interim dividend of 40 pence per share. This is in addition to the stub dividends paid to both Betfair Group and Paddy Power shareholders on merger completion, which in part represented dividends for January 2016 equating to 12 pence per share. The second interim dividend will be paid on 30 September to shareholders on the register at the close of business on 9 September.

Capital expenditure

The Group incurred £34m of capital expenditure in the period, primarily related to technology spend for product development and retail shop expenditure. For the full year we expect total capital expenditure to be between £70m and £80m.

Cash flow and financial position

The Group's profits convert strongly into cash flow, with the underlying free cash flow representing 114% of underlying profit after tax in the period. Free cash flow in the period increased 39% to £140m (H1 2015 £100m), driven by increased EBITDA and reduced capital expenditure due to less shop openings and the HRTV acquisition by Betfair in the comparative period.

As at 30 June 2016, the Group had net cash of £2m, excluding customer balances.

The efficiency of the Group's capital structure is kept under regular review by the Board. Relevant considerations include the Group's strong cash flow generation, its investment plans and general capital market conditions.

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1 Note throughout this Operating & Financial Review results are reported on a Proforma basis as if the merger completed on 1 January 2015. Appendix 3 contains a reconciliation of the proforma results to the statutory results

2 Net cash at 30 June 2016 is comprised of gross cash excluding customer balances of £213m and borrowings of £211m. The comparative balance shown as at 30 June 2015 is comprised of gross cash excluding customer balances of £67m, borrowings of £174m and Betfair's net cash of £120m (see Appendix 4)

3 Non-sterling denominated component in H1 2015 retranslated at H1 2016 exchange rates

4 Growth rates in commentary are in local currency

Appendix 1: Half-yearly Divisional Key Performance Indicators

Proforma

Notes:

Q2 2016 Divisional Key Performance Indicators

Proforma

Appendix 3: Reconciliation of Proforma results to Statutory results

The merger of Paddy Power plc ("Paddy Power") and Betfair Group plc ("Betfair") completed on 2 February 2016, with the merger accounted for as an acquisition of Betfair by Paddy Power on that date. The Statutory results reflect this accounting treatment. Proforma results for the Group are prepared as if Paddy Power and Betfair had always been merged and are included in these Interim Results, as they best depict the underlying performance of the Group. The difference between the Statutory results and Proforma results is the results of Betfair in the period prior to completion as per the table below.

1 In the Proforma results, in H1 2016 the weighted average number of shares is taken for the period from merger completion, 2 February 2016, to the end of the period, 30 June 2016 (83.3 million shares). For the H1 2015 Proforma results comparative the weighted average number of shares is taken as the number of shares on merger completion, 2 February 2016, adjusted for shares held in treasury, shares held by long term incentive plan trust and unexercised vested share options (83.2 million shares).

Appendix 4: Reconciliation of Proforma cash flow to Statutory cash flow

The merger of Paddy Power plc ("Paddy Power") and Betfair Group plc ("Betfair") completed on 2 February 2016, with the merger accounted for as an acquisition of Betfair by Paddy Power on that date. The Statutory cash flow reflects this accounting treatment. The Proforma cash flow for the Group is prepared as if Paddy Power and Betfair had always been merged and is included in these Interim Results, as it best depicts the underlying performance of the Group. The difference between the Statutory cash flow and Proforma cash flow is the cash flow of Betfair in the period prior to completion and the inclusion of deposits and borrowings to determine a net cash position, as per the table below.

1 Underlying EBITDA includes the following line items in the statutory cash flow: (Loss) / profit for the year, separately disclosed items, income tax expense before separately disclosed items, financial income, financial expense and depreciation and amortisation before separately disclosed items.

2 Capex (including retail & HRTV acquisitions) includes profit on disposal of PPE, purchase of property, plant & equipment, purchase of intangible assets, capitalised internal development expenditure, payment of contingent deferred consideration and purchase of businesses, net of cash acquired. Note the H1 2016 adjustment to exclude Betfair pre-merger completion cash flow includes £139.9m of Betfair cash acquired on completion.

3 Working capital & tax includes increase in trade and other receivables, increase in trade, other payables and provisions, income taxes paid and movements in restricted cash balances.

4 Interest & other borrowing costs includes interest paid, interest received and fees in respect of borrowings facility.

5 Other includes proceeds from the issue of new shares and purchase of shares by employee benefit trust.

DIRECTORS' RESPONSIBILITY STATEMENT IN RESPECT OF THE HALF YEARLY FINANCIAL REPORT

For the six months ended 30 June 2016

Each of the Directors confirm their responsibility for preparing the half yearly financial report in accordance with the Transparency (Directive 2004/109/EC) Regulations 2007, the Transparency Rules of the Central Bank of Ireland and the Disclosure Guidance and Transparency Rules of the UK Financial Conduct Authority ("FCA") and with IAS 34 'Interim Financial Reporting' as adopted by the EU, and that to the best of our knowledge:

The Directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future, a period of not less than twelve months from the date of this report. For this reason, they continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements.

On behalf of the Board

24 August 2016

Understanding and managing our principal risks

The Board continuously assesses and monitors the key risks of the business. The key risks that could affect the Group's performance and the factors that mitigate those risks have not significantly changed from those set out on pages 47 to 50 in the Group's Annual Report and Accounts 2015 (which is available to download at www.paddypowerbetfair.com). The principal risks facing the Group, together with the Group's risk management process in relation to these risks, continue to be monitored, reviewed and re-assessed. A summary of the principal risks and uncertainties that are most relevant to the remainder of the current financial year is included below:

· Macro-economic conditions - The economic, demographic, technological, consumer behaviour and other macro factors affecting demand for the Group's products. The Group monitors developments closely to ensure changes in the macro-economic climate are identified and adequately addressed. The Group's geographical diversity also helps mitigate this risk. The Group's financial position is strong with significant cash generation capabilities. The recent UK decision to exit the European Union has created considerable economic and political uncertainty. To date however, the Group has not noted any material adverse impacts on any of its businesses or the financial results of the Group overall. The market uncertainty created by the prospect of Brexit is likely to continue for the foreseeable future until more clarity emerges on the mechanics of the proposed exit. The Group will continue to monitor related developments and how these might impact.

· Competition - The intensity of competition in the Group's markets and the Group's ability to successfully compete. The Group has a programme of brand investment and product innovation to maintain and enhance its market position. The Group also monitors competitors and their promotional offers.

· New business/acquisitions - The ability of the Group to enter new markets, launch new products or introduce new technologies or systems in a successful, cost effective and / or timely manner, either organically or via acquisition. The Group rigorously assesses any potential acquisitions, new products and / or new technologies.

· Merger and integration - The combination of the resources of Paddy Power and Betfair that rely upon different technology platforms. Difficulties in combining the operations, technology and resources could result in additional costs to the Group and synergies not being fully realised. A highly professional integration team has been established to ensure the groups are combined effectively and that the benefits of the merger will be achieved on a timely basis. External advisors are being retained as required.

· Taxation - Changes in current tax law, interpretation or practice in the areas of betting tax, value-added tax, payroll, corporation or other taxes. Increased payment obligations to racing and sporting bodies either directly or indirectly through related obligations to government authorities. The Group has its own internal tax function which has responsibility for all tax compliance matters. The Group also engages external tax advisors for guidance on matters of compliance where appropriate. The Group engages proactively in relevant consultations with government authorities with respect to taxation of betting and gaming or payments to sporting bodies.

· Compliance - The regulatory, consumer protection or legislative environment, including interpretations or practices, applicable to the Group's activities in the various markets in which the Group operates including those markets where no regulatory framework exists and the related risks from limitation of business activities or litigation by third parties or the Group. The Group has a central Compliance and Regulatory function which has responsibility for guiding business units in their management of compliance matters. This function reports periodically to the Audit Committee. The application of various laws and regulations by relevant jurisdiction to ensure they are appropriately understood and managed. The Group's internal and external auditors report the findings of their audit procedures to the Audit Committee on relevant compliance matters. 

· Data security - The ability to adequately protect customer and other key data and information. The Group has a number of data protection policies in place in order to protect the privacy rights of individuals in accordance with the relevant data protection legislation. The Group's Legal and Compliance teams ensure the business adheres to industry best practice standards and relevant laws of data protection compliance. The Group has made significant investment in IT security resources and partners with a variety of external security specialists to ensure security arrangements and systems are up to date with emerging threats. The Group's Information and Security function continuously assesses the risks and controls around security and IT operations.

· Key supplier relationships - Managing relationships with and performance by key suppliers, particularly those supplying software platforms, payment processing and data to support the Group's products. The Group has strong commercial relationships with its key suppliers. Contracts and service level agreements are in place and are regularly reviewed. Proposed new contracts are passed through a procurement process to ensure the Group is protected. The Group monitors the performance of third party suppliers in order to ensure the efficiency and quality of contract performance.

· Business-to-business customer relationships - Managing relationships with and performance for business-to-business customers. The Group has good commercial relationships with its key business-to-business customers. Contracts and agreements are in place and are regularly reviewed.

· Business continuity planning and disaster recovery - The ability of the Group to maintain, develop and avoid disruption to its key information technology systems. The Group has an information security function that monitors controls to maintain the integrity and efficiency of the Group's technology systems. An IT disaster recovery plan exists and is tested regularly with specific arrangements in place for alternative data centres (live replication) for the online sportsbook.

· Bookmaking risk - The performance of the Group in managing bookmaking risk so as to achieve gross win margins within expected percentage ranges. The Group's Risk & Trading function has responsibility for the compilation of bookmaking odds and for sportsbook risk management. Predefined limits have been set for the acceptance of sportsbook bet risks. These limits are subject to formal approval by the Risk Committee.

· Disruption to sporting calendar - Disruption to the sporting calendar or the broadcasting of major sporting events due to weather or other factors. Geographical diversification, with operations in Europe, North America and Australia, is helping to mitigate this risk. Diversification of products also helps mitigate this risk via gaming (gaming machines, games, casino, bingo and poker), and business to business activities.

· Key employees - The ability of the Group to attract and retain key employees. Succession planning, management training and development and competitive remuneration structures have been established by the Group and are actively managed with the support of the Group Human Resources function.

· Brand and reputation - Negative social, media or political sentiment towards the Group, its brands, reputation and its businesses. The Group has a programme of corporate communications, brand investment and product innovation to maintain and enhance its market position.

· Intellectual property - The ability of the Group to successfully defend its intellectual property rights or claims alleging infringement of the intellectual property rights of others. Protecting the intellectual property rights of the Group is key to its operations. The Group has invested significantly in its brand and new technologies to maintain and enhance its market position. Similarly, the Group understands and abides by the intellectual property rights of others in order to mitigate the risk of litigation and related costs.

· Foreign exchange risk - Changes in the exchange rates between pound sterling and the foreign currencies in which the Group transacts business, primarily the euro, US dollar and the Australian dollar. It is Group policy to maintain a naturally hedged balance sheet by ensuring that foreign currency denominated liabilities are broadly matched by foreign currency denominated assets, primarily cash deposits. The Group uses forward contracts (subject to Investment Committee approval), to manage foreign currency exposures on expected future cash flows.

· Credit risk - The performance of the Group in managing credit risk arising from treasury activities. The Group has an established treasury policy which places limits on cash deposits and foreign exchange forward contracts with its banking counterparts. These must typically hold a Moody's (or equivalent) long-term credit rating of A3 or higher and a Moody's (or equivalent) short-term credit rating of P1 unless otherwise specifically approved by the Investment Committee. The Group carefully measures counterparty risk by monitoring credit agency ratings, Credit Default Swap spread prices and other public information, and takes action to mitigate such risks as are identified.

CONDENSED CONSOLIDATED INTERIM INCOME STATEMENT

For the six months ended 30 June 2016