Flutter Entertainment Regulatory News (FLTR)

8 August 2018

 Paddy Power Betfair plc - 2018 Interim Results

Paddy Power Betfair plc (the "Group") announces interim results for the six months ended 30 June 2018.

Financial highlights (in constant currency3):

· H1 revenue up 7%, with Q1 flat and Q2 up 13% (up 9% in period pre-World Cup)

· Good Q2 revenue growth in all operating divisions:

- Online: revenue up 13% with sports +12% and gaming +14%

- Australia: revenue up 19%

- Retail: revenue up 6%

- USA: revenue up 20%

· H1 underlying1 EBITDA2 up 1% to £217m, or up 6% excluding changes in betting taxes & levies and losses in DRAFT (Q1 flat, Q2 up 13%)

· Net cash of £148m at 30 June; £201m returned to shareholders via dividends & share buybacks in H1

Strategic and operational highlights:

· Good progress on returning the Paddy Power brand to growth

· Sportsbet using scale advantage to increase investment in marketing and customer value to further enhance its leadership position ahead of potentially disruptive tax changes

· Combination of Betfair US with FanDuel completed in July, creating a unique platform to address the nascent US sports betting market opportunity

Outlook:

· Full year 2018 underlying EBITDA, pre-US sports betting, now expected to be between £460m and £480m, reflecting recent trading momentum, the introduction of additional taxes in Australia and the inclusion of losses from the FanDuel daily fantasy sports business

Peter Jackson, Chief Executive, commented:

"It has been a busy and successful few months for Paddy Power Betfair. We have made substantial progress against our strategic priorities and trading in Q2 was good, with all brands and operating divisions contributing to the Group's double-digit revenue growth.

In Europe, product enhancements and improved cross sell rates have led to stronger gaming revenue growth over the past few months for both brands, whilst customer satisfaction with the Paddy Power sports app has stepped up. Recent marketing campaigns have also been successful with the Betfair brand increasingly identified as having the best odds. The World Cup was a showcase event for Paddy Power, with a series of successfully executed marketing campaigns leading to it being one of the UK's most talked about brands in social media conversations around the tournament.

In Australia, despite significant upcoming tax headwinds, Sportsbet continues to target further market share gains by using its scale to increase investment in marketing, product and its value proposition.

In the USA, we were delighted to add FanDuel to the Group's portfolio of leading sports brands, creating the industry's largest online business, with a large sports-focused customer base and an extensive nationwide footprint. Our FanDuel sportsbook is now available in New Jersey and with our recent partnership with Boyd Gaming we're looking forward to launching in further states as the legislation progresses.

We now have much better visibility of the regulatory and fiscal changes in the UK, Australia and the USA, and believe that our scale, leading customer propositions and strong balance sheet mean we are well positioned to build a business that can generate sustainable shareholder returns over the long term."

Notes:

1 The "underlying" measures exclude separately disclosed items, that are not part of the usual business activity of the Group and are also excluded when internally evaluating performance, and have been therefore reported as "separately disclosed items" (see note 5 and page 34 to the financial statements.

2 EBITDA is profit before interest, tax, depreciation and amortisation expenses and is a non-GAAP measure.

3 Constant currency ("cc") growth throughout this Operating & Financial Review is calculated by retranslating non-sterling denominated component of H1 2017 at H1 2018 exchange rates (see Appendix 3).

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 0800 783 0906 or 01296 480 100 from the UK, (01) 242 1074 from Ireland and +44 1296 480 100 from elsewhere. The passcode is 750 401 61.

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

Contacts:

Business Review

In our Preliminary results in March 2018, we set out our immediate strategic priorities. These were to (i) re-establish product leadership in Europe; (ii) return Paddy Power to growth; (iii) accelerate international growth; (iv) invest in retail ahead of regulatory change; (v) invest to take further market share in Australia; (vi) launch, and get to scale quickly, in the US sports betting market; and (vii) improve balance sheet efficiency while maintaining strategic flexibility.

Europe

(i) Re-establish product leadership

Since the completion of our European platform integration in January 2018, development activity has focused on customer facing product enhancements. While still in the early stages of addressing the product gaps that emerged during the platform integration, we are encouraged by the customer response to the initial improvements we have made. This supports our view that product is a key driver of customer engagement and share of wallet.

The impact of improved product has been most material for the Paddy Power brand due to its relatively weaker starting point. Customers are appreciating the speed improvement delivered by its new app, including a 50% faster load time, and we have seen a 12-percentage point increase in the proportion of customers expressing satisfaction with its speed.

As well as speed and ease of use, the development of new features is important for product differentiation in sports betting. A key advantage of operating on a single platform is the increased efficiency of product development, with features now being developed once and released simultaneously across both European brands. In addition, our in-house product development model enables continuous iteration and enhancement of features, ensuring that products can be improved efficiently to respond to customer activity and feedback. The first important feature released on the integrated platform was 'Same Game Multis', with our market-leading product driving good usage on both brands at the World Cup.

Paddy Power customers have also enjoyed a significantly improved gaming product following the migration to the new integrated platform at the end of January. This has driven a three-percentage point increase in the proportion of Paddy Power sports customers who also used gaming products, contributing to good growth in gaming revenues in the first half. Following recent product releases, our brands now have the fastest loading gaming apps in the market.

(ii) Return Paddy Power to growth

Over the last few years Paddy Power lost market share. To address this, in conjunction with the acceleration of new product delivery, in March we announced plans to increase marketing spend and to invest more in customer retention.

To ensure the brand better reaches its recreational target audience, the focus of recent marketing has been to increase the relevance of messaging by more closely linking it to topical news content and leveraging the brand's distinct personality and social media presence. Examples in the period included:

· Prime TV advertising slots throughout the World Cup showing Paddy Power's take on alternative, and sometimes risqué, uses for FIFA's new VAR system

· The 'Rainbow Russians' campaign where we committed to donate to LGBT+ charities for every goal scored by Russia at the World Cup, resulting in a total donation of £170,000

· Paddy Power hosted entertainment shows featuring celebrities streamed live during key events

· Sending a 'drunk tank' to Royal Ascot in response to media coverage of drunken behaviour by racegoers at previous high-profile events.

These campaigns have resulted in high levels of customer engagement on social media, with Paddy Power the most cited betting brand in the UK in conversations on the World Cup and the sixth brand globally overall, behind only Adidas, Nike, Budweiser, Coca-Cola and Puma. Supported by increased marketing investment this has driven increased spontaneous brand awareness and more effective acquisition of recreational customers.

We increased promotional generosity to reward loyalty, with the objective of increasing the brand's share of customer spend. Examples of recent initiatives include the extension of the Paddy's Rewards scheme to more customers by easing the qualification criteria, with membership of the scheme doubling since the start of 2018, and the free to play £1m 'Beat the Drop', where customers can keep whatever cash remains after they have answered 20 sports betting related questions. These continue to be supported by generous Money Back Specials on popular selections at key events and are driving increased association of Paddy Power as the brand that has the best offers, with third party research indicating that Paddy Power is now the top ranked brand in this regard, up from 4th place in 2017.

(iii) Accelerate international growth

In the UK, Ireland, Australia and the US we benefit from having scale and leading sports brands. While Betfair serves customers elsewhere, including less mature regulated online markets and many unregulated jurisdictions, it remains sub-scale in these markets.

We believe that substantial scale and brand presence is required to compete for profits sustainably within many online regulated markets. We therefore continue to assess our participation in these markets, including whether opportunities exist to invest more, organically or inorganically, to achieve greater scale.

Within unregulated markets, where profit margins may be higher, our strategy is to participate via a global operating model which enables us to operate profitably without local scale. When investing in these markets we are mindful that any material concentration of revenues can expose the overall sustainability of our profits.

(iv) Retail: continue to invest in leading proposition ahead of regulatory change

Paddy Power retail has consistently outperformed its competitors with its market-leading sports-led proposition based around ongoing investment in the best odds, content, locations and staff.

In the UK, we do not expect the Government's proposed new £2 stake limit for gaming machines to have a material impact on our retail strategy and we are continuing to invest in extending our leadership position. Recent investments include 'Same Game Multis' on SSBTs, the addition of a third in-house TV channel providing coverage of an extra 59 races per day and the ongoing rollout across our estate of enhanced TV displays and a new shop till system which will enable additional multichannel initiatives.

Our shops are more profitable, and outperform on sports betting, enabling them to better withstand the impact of lower machine stakes limits. We operate in high footfall, highly competed locations, which means we are well placed to benefit from competitor shop closures. Our proven track record of acquiring shops and achieving significant uplifts in their revenues (55% uplift on average for shops acquired from 2014-2016) also means we will continue to target selective new shop openings and acquisitions which can further enhance our estate.

Australia

(v) Maintain market leadership; invest to capitalise on industry regulatory / fiscal headwinds

Online market growth in Australia remains strong and, in Sportsbet, we operate the market-leading brand in terms of spontaneous awareness, customer usage and product satisfaction. This position results from substantial investment in its customer proposition and has delivered strong multi-year revenue and profit growth.

In recent months, state governments have confirmed their intentions for introducing point of consumption taxes, with the overall impact being an additional cost equivalent to c.13% of revenues from 2019. While this will impact materially on Sportsbet's profits, where EBITDA currently represents c.35% of revenue, it will have a much greater impact on many of our competitors who currently operate at lower margins due to having less established brands and lack of scale. In this context, while competition remains intense and market consolidation has commenced, we see an opportunity to increase investment to further cement our market-leadership position.

Accordingly, we have further increased our promotional generosity in the first half. This included more daily races featuring money-back specials and the extension of early payout offers, where we pay out early when your team is ahead, to the NBA and the World Cup. We are also increasing our marketing activity to support this increased generosity and further extend our brand reach.

USA

(vi) Launch sports betting in key states and achieve scale quickly

The US market has recently experienced positive regulatory change opening up a potentially significant long-term future growth opportunity. Accordingly, it is expected that a large number of operators will target the nascent sports betting market. We believe four key factors are necessary to successfully build scale businesses, with the combination of the FanDuel brand and daily fantasy sports business, our existing TVG and online casino businesses, supported by the Group's resources positioning us well:

a. Brand & customer base:We will use the FanDuel Sportsbook brand to address the market. The FanDuel brand has a high level of recognition amongst sports fans nationwide following substantial historical marketing spend. Furthermore, the combined business has over 1m active customers and 8m registered customers in 45 states and over 80% of FanDuel customers say they already bet on sports. The combination of strong brand and existing customer base provides a good opportunity to build scale quickly through both new customer acquisition and cross-sell.

b. Market access:Most states are expected to require operators to partner with existing licensed entities, such as land-based casinos and horseracing tracks. Our scale makes us an attractive partner for these entities as they typically receive a share of sports betting revenues generated through their licence and, in the case of racetracks, we have strong existing relationships through TVG. To date, we have signed market access agreements which mean we currently operate a sportsbook in New Jersey and we will potentially have access to a further 14 states nationwide, subject to favourable legislation and regulatory approvals.

c. Sports betting operational capabilities:We have operated multi-state, real money wagering in the USA since we entered the market in 2009 through the acquisition of TVG. For US sports betting we will leverage this together with the Group's global sports betting capabilities, including risk management and trading, sports betting product expertise and retail betting capability.

d. Balance sheet:Achieving scale in the sports betting market is likely to require substantial investment. While our existing assets give us a good launch pad in achieving scale and our existing capabilities can allow us to operate more efficiently, the Group's strong balance sheet gives us substantial firepower and provides a competitive advantage in reaching scale.

Capital structure

(vii) Improve balance sheet efficiency while maintaining strategic flexibility

The Group had net cash of £148m at 30 June 2018 and has targeted a medium-term leverage range of between 1x and 2x net debt to EBITDA. This target reflects the Group's strong cash flow generation and general capital market conditions and will improve balance sheet efficiency whilst retaining strategic flexibility.

In May, as an initial step towards a more efficient capital structure, we announced our intention to return £500m of cash to shareholders and commenced a £200m share buyback programme. On completion of the initial £200m programme in the coming weeks, we will commence an additional £300m share buyback programme.

Responsible gambling  

Responsible gambling is critically important for both our own business and the wider industry. For us to have a sustainable, long-term business it's vital that our business is built on sustainable income sources and that customers have entertaining, safe experiences across all our products, whether online or in shops. Accordingly, we continue to invest in our responsible gambling capabilities, including investment in technology and people. This year we have established a distinct global Corporate Risk function and one of the key responsibilities of the Chief Risk Officer, who reports directly to the CEO, is to deliver an ongoing and sustainable responsible gambling strategy that continues to deliver best in class capabilities in this area. We have recently appointed a Responsible Gambling Strategy Director to oversee Group wide responsible gambling developments and improvements. On a day to day basis, over 60 staff manage our operational responsible gambling processes and that team is growing. Our approach is split into three areas.

First, we continue to invest heavily in understanding our customer base to help us identify and interact with customers who are displaying potential signs of harm. Our Customer Activity Awareness Program (CAAP) is a predictive model based on academic research that forecasts a customer's likelihood of developing an issue with their gambling at some point in the future. This type of predictive modelling prompts different levels of intervention to support customers in ensuring gambling remains fun and controlled. The predictive model is complemented by a 'real time' model to detect 'at-risk' customers in the moment. Once customers are identified, we intervene in the manner most appropriate to that customer. We are committed to continuously enhancing the effectiveness of these processes.

Secondly, we continue to invest in technology, for example further improving the range and visibility of time and spend management tools for customers on our websites. This better visibility, combined with direct customer interventions, has resulted in these tools being used by an increasing number of customers. Since the start of the year we have rolled out a new automated electronic self-exclusion process for retail customers in the UK. We are also committed to improving responsible gambling capability as an industry and have been heavily involved in the funding and launch of the UK's national online self-exclusion scheme 'GAMSTOP', where customers will be able to self-exclude from all gambling sites at the same time.

Finally, we support a wide range of research and treatment initiatives for problem gambling, committing 0.1% of our UK gross gaming revenue to various causes, including Gamble Aware and YGAM - and supporting Dunlewey Addiction Services in Ireland.

Government policy has a key role to play and we welcomed the UK Government's decision to reduce the stake on Fixed Odds Betting Terminals ("FOBTs") as we believed the negative sentiment towards these machines had undermined the sector as a provider of entertainment, employment and tax revenue in addition to being a supporter of sports such as horseracing. With this in mind, we hope that a timeline for the stake cut can be announced as soon as possible to give our sector the certainty it needs to move on from this decision. We remain fully supportive of the introduction of the Gambling Control Bill in Ireland at the earliest opportunity, and we continue to play a leading role in Responsible Wagering Australia.

As ever, we remain supportive of further regulation in all jurisdictions to track customer behaviour, introduce better processes to avoid harm and reduce the volume of pre-watershed TV advertising to protect young children. It is our intention to be active and provide leadership in discussions between the industry and governments across the world on responsible gambling and related issues. 

CFO succession

The Group confirms that, further to the announcement on 28 March 2018 regarding his appointment, Jonathan Hill will take up the position of CFO on 22 October 2018. Alex Gersh will continue as CFO and remain on the Board until that date.

Outlook

Overall, the second half of the year has started in line with our expectations. For the full year we now expect underlying1 EBITDA to be between £460m and £480m, before the impact of US sports betting. This outlook reflects our recent trading momentum, with a better than expected performance in gaming and strong conclusion to the World Cup offset by continued weakness in exchange horseracing revenues, as well as the impact of additional Australian taxes and product fee increases, and the inclusion of the FanDuel daily fantasy sports operations.

We are focused on building a business that can sustainably generate profits and shareholder value over the long-term. The Group's strong balance sheet allows us to continue to invest in our customer proposition and marketing, while also maintaining flexibility for strategic investments and returns to shareholders.

Operating and Financial Review

Group

Group revenue was up 5% to £867m, with a 2% decline in Q1 revenues offset by 12% growth in Q2 revenues. On a constant currency ("cc") basis, excluding the adverse FX impact from the translation of non-UK revenues, revenue growth was 7% (Q1: flat; Q2: +13%).

Q1 revenue was adversely affected by reduced customer activity in the UK & Ireland, relating to the sustained period of bookmaker friendly sports results from November 2017 through to February 2018 and a high level of weather-related racing fixture cancellations, and by adverse sports results in Australia.

Q2 sports revenue was up 12% (14%cc) with 7% (9%cc) growth in the period prior to the World Cup commencing boosted by £23m of revenues from the World Cup in June (total revenues of £45m for the full tournament, which concluded in July). The total profit contribution for the full tournament, after estimated cost of sales and marketing investment, was approximately £8m with an immaterial contribution in the first half due to phasing of marketing spend.

Overall, sports results were broadly in line with our expectations for the half with favourable sports results in European Online offset by adverse results in Australia.

Cost of sales were adversely affected by approximately £8m from the annualisation of changes to betting taxes and levies implemented during 2017. Total operating costs increased by 5%, or 7% on a constant currency basis. Within this, sales and marketing spend increased by 14% in constant currency and other operating costs increased by 1% in constant currency.

Underlying EBITDA was down 1% to £217m and underlying operating profit was down 3% to £174m. Excluding the adverse impact from foreign exchange translation and the annualisation of start-up losses in DRAFT and changes to betting taxes and levies, on a like-for-like basis underlying EBITDA was up 6% (Q1 flat; Q2 +13%) and underlying operating profit was up 6%.

After separately disclosed items, which do not relate to the usual business activity of the Group and therefore are excluded from underlying profits, the Group recorded a profit before tax of £106m (H1 2017: £102m).

Online

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

Revenue increased by 5% to £462m with a 2% decrease in Q1 offset by 13% growth in Q2. The significant uplift in performance in Q2 in part reflected the fact that Q1 customer activity was adversely affected by a high level of weather-related racing cancellations and reduced recycling of customer winnings but also was due to improved underlying trading in Q2 and the benefit of the World Cup.

The improved underlying trading was most evident in gaming, where revenue Q2 revenues were up 14%, compared with a 4% decrease in Q1. This was driven by a strong improvement in the Paddy Power brand where a significantly improved product post platform integration has contributed to higher cross sell rates.

Sports revenue was up 5%, which comprised a 12% increase in sportsbook revenues offset by a 4% decline in exchange and B2B revenues. In sportsbook, stakes were down 8%, reflecting the reduced recycling of customer winnings in Q1 and a greater focus on profitable revenue growth, rather than volume. Both sportsbooks brands have shown good revenue momentum across the half with 3% total sportsbook growth in Q1, increasing to 15% growth in Q2 in the period prior to the World Cup (Q2 total growth 23%).

While football commissions are also showing good momentum on the Betfair Exchange, overall exchange revenues were down 1% in Q2 due to continued weakness in horseracing commissions. The weak horseracing performance in Q1 could largely be attributed to the high number of fixture cancellations, but the fact this weakness continued in Q2 highlights the competitive challenge facing racing commissions from low margin sportsbooks and price discounting by smaller exchange competitors.

Cost of sales were adversely affected by approximately £6m from the annualisation of the extension of the UK Horserace Betting Levy to online (from April 2017) and changes to the treatment of free bets for online gaming point of consumption tax (applying from Q4 2017). Total operating costs increased by 9%, driven by 13% growth in sales and marketing investment. Accordingly, notwithstanding the 5% revenue growth, underlying EBITDA for the division decreased by 4% to £142m.

Australia5  

The Australia division operates the online betting brand Sportsbet.

Revenue increased by 12% to £182 million with 22% stakes growth partially offset by an 80bps decrease in the net revenue margin which in part reflected less favourable sports results (approximately 10bps impact year-on-year, primarily in Q1) but was primarily due to the significant investment in promotional generosity.

This increased promotional generosity was supported by increased investment in marketing, with sales and marketing spend increasing by 14%. Total operating costs were up 6%, with other operating costs decreasing by 4%. Therefore, notwithstanding the adverse impact on cost of sales growth of South Australian point of consumption tax (which became payable from H2 2017) and increased NRL product fees, the 12% increase in revenues converted to an 18% increase in underlying EBITDA to £59m.

Retail

The Retail division operates 629 Paddy Power betting shops across the UK and Ireland.

Revenues from UK shops increased by 3% and Irish shop revenues decreased by 4% in local currency. Excluding the impact of new shops and year-on-year currency movements, like-for-like6 revenues decreased by 1% and operating costs increased by 1%. The like-for-like6 revenue growth was comprised of a 3% decrease in sportsbook revenues, driven by a 9% decline in stakes partially offset by improved sports results, and machine gaming growth of 3%. The weakness in sports staking was driven by racing, which was affected by a large number of weather-related cancellations in Q1 and April. This was partially offset by good growth in SSBT and football staking including the benefit of the World Cup.

The decline in sports revenues resulted in an 8% decrease in EBITDA for the division to £34m.

During the period, we opened three shops in the UK and two shops in Ireland and closed one shop in each estate.

US5  

For the period, the US division comprised TVG, America's leading horseracing TV and wagering network; Betfair Casino, the second largest online casino in New Jersey; the Betfair Exchange in New Jersey and the early-stage daily fantasy operator DRAFT.

Revenue increased by 21% in local currency terms, comprised of 22% growth in sports revenue and 18% growth in gaming revenues.

Customer interest in horseracing was enhanced by Justify's Triple Crown bid and TVG increased its market share in wagering following strong growth in active customer numbers. A major part of this success stems from further product enhancements, including a new wagering app which has embedded streaming of its two horseracing TV channels. It is also successfully employing marketing strategies used elsewhere in the Group, including promotions such as 'Money Back Specials' and a free-to-play Super 8 promotion, in which customers pick the winners of eight races for the chance of winning a $1m prize.

Gaming revenue from the Betfair Casino increased by 18% and the brand is now the second largest online casino in New Jersey.

EBITDA was up 38%, with profit growth at TVG and the Betfair Casino partially offset by start-up losses incurred in DRAFT and the Betfair Exchange.

In May, the Group agreed to combine its US assets with FanDuel, a leading daily fantasy sports operator, to strengthen its opportunity to target the prospective US sports betting market and this transaction completed on 10 July 2018, with the Group owning 61% of the combined business. The combined business will operate as the FanDuel Group and will incorporate the FanDuel daily fantasy sports business and the Group's US sports betting operations together with the Group's existing US division. FanDuel Group will be accounted for as a subsidiary, with financial results being fully consolidated and a minority non-controlling interest recognised on the income statement and balance sheet.

Although not included in the reported first half results, FanDuel revenue increased by 4% year-on-year and it generated a small EBITDA loss in the period. The combined US business is expected to be loss making in the second half of the year due to the seasonality of daily fantasy business, which has high levels of marketing at the start of the NFL season in September and October, and the launch of the sports betting business.

Regulatory update

UK

In May, the UK Government published it Review of Gaming Machines and Social Responsibility Measures, which included a proposal to implement a new stake limit for gaming machines of £2. We estimate that the direct, pre-mitigation, impact of this new stake limit would be a 33% to 43% decrease in our total machine gaming revenue. In 2017, this would have equated to a £35m to £46m revenue impact, representing 2.0% to 2.6% of Group revenue. Potential mitigation factors include reduced direct variable costs (including Machine Gaming Duty at 25% and supplier revenue share), product development, substitution to other betting products and market consolidation.

The Government also announced a plan to increase the rate of remote gaming duty (currently 15%) to offset some of the lost tax receipts relating to gaming machines. For the Group, based on our H1 2018 gaming revenues, each percentage point increase in the remote gaming duty rate would result in an additional £2.5m of duty being payable on an annualised basis.

Australia

In South Australia, a point of consumption tax at 15% of gross revenues was introduced from July 2017. In September 2017, the Western Australian state Government announced that it will introduce a point of consumption wagering tax from 1 January 2019 at a rate of 15% of wagering revenue. In recent months, other state governments have also confirmed their intentions for introducing point of consumption taxes.

In May 2018, the state Government of Victoria announced that it will introduce a point of consumption wagering tax from 1 January 2019 at a rate of 8% of wagering revenue. In June 2018, the Queensland state Government announced that it will introduce a point of consumption wagering tax from 1 October 2018 at a rate of 15% of wagering revenue. In June 2018, the New South Wales state Government announced that it will introduce a point of consumption wagering tax from 1 January 2019 at a rate of 10% of wagering revenue. In June 2018, the Australian Capital Territory Government announced that it will introduce a point of consumption wagering tax from 1 January 2019 at a rate of 15% of wagering revenue.

The overall impact of these announced taxes for Sportsbet is an additional tax at a current blended rate of approximately 11% of gross revenues (or c.13% of net revenues) which on revenues for the 12 months to 30 June 2018 levels equates to approximately A$95m.

In June, Racing Victoria Limited and Racing and Wagering Western Australia announced changes to the structure of their racefield fees (product fees payable on races in their states) applying from 1 July 2018. The net impact of these changes, applied to Sportsbets's revenue level and mix in the 12 months to 30 June 2018 would be approximately A$4m adverse.

From February 2018, the prohibition on credit betting implemented by the Interactive Gambling Amendment Bill came into effect.

From March 2018, gambling advertising during live sports programs on television, radio and online platforms has been prohibited from five minutes before the commencement of play, until five minutes after the conclusion of play, between 5:00am and 8:30pm.

From July 2018, the New South Wales Department of Liquor & Gaming will be enforcing amended NSW gambling advertising laws in a stricter manner which prohibits advertising of certain promotions and products deemed 'inducements' from being viewed publicly in NSW by consumers, regardless to whether or not the consumer was being excluded from taking up such promotion or product. This impacts permissible wagering advertising on national advertising mediums such as subscription TV. However, the law will not be enforced for any such inducements advertised on exclusive racing media platforms.

Under the National Consumer Protection Framework for online wagering, other consumer protection measures are anticipated to be introduced across the second half of 2018 and 2019, including reduced times for customer verification, a ban on sign-up offers and a national self-exclusion register.

Ireland

The government is continuing to work towards introducing the Gambling Control Bill. The bill seeks, among other matters, to establish a dedicated regulator of the gambling sector in Ireland. We remain supportive of the bill and its aim to introduce into Irish legislation, regulation in line with international best practice.

Other regulated markets

In Italy, the Government in July 2018 introduced a ban on all gambling-related advertising and sports sponsorship that will take effect from July 2019.

In Spain, last month the Government confirmed that the tax rate on online betting and gaming is reduced from 25% to 20%, effective from 1 July 2018.

Separately disclosed items

Separately disclosed items do not relate to the usual business activity of the Group and therefore are excluded from underlying profits. In the period, these included £44m of amortisation of intangible assets recognised on accounting for the 2016 merger of Paddy Power and Betfair. Following the agreement to combine the Group's US assets with FanDuel, we reviewed the carrying value of assets and contingent consideration relating to Group's existing US daily fantasy sports business, DRAFT, which resulted in a net non-cash write-off to the income statement of £16m in the period.

Costs relating to restructuring and strategic initiatives totalling £13m were incurred in the period. These arose from operational and strategic changes made following the appointment of a new CEO and transaction costs arising during the period from the combination of Betfair US with FanDuel.

In February, the Group disposed of its remaining stake in LMAX Exchange Group for £22m, with a £7m profit on this disposal recognised within financial income. The 31.4% stake was previously held as an available-for-sale financial asset and accordingly no contribution from the business was included in the Group's income statement.

Taxation

The Group's underlying effective tax rate in the period was 14.5% (H1 2017: 14.4%). The full-year 2018 underlying effective tax rate is expected to be between 13% and 15% (FY 2017: 13.5%).  

Capital expenditure  

The Group had £50m of capital expenditure in the period (H1 2017: £50m). Approximately 20% of the expenditure related to our retail business with the remainder relating to technology projects, product development and capital expenditure in our US business. For the full year we now expect total capital expenditure to be approximately £100m. This expectation includes only currently incurred and committed expenditure relating to US sports betting.

Cash flow and financial position

As at 30 June 2018, the Group had net cash of £148m, excluding customer balances. During the period, over £200m was returned to shareholders via dividends and share buybacks. Working capital in the period was adversely affected by both the timing of some Q4 2017 costs paid in Q1 2018 (c.£20m) and material prepayments in the period in relation to marketing assets.

Cash flow from separately disclosed items includes the receipt of £22m for the disposal of the Group's remaining stake in LMAX Exchange Group.

Dividend and share buybacks

The Board continues to target a pay-out ratio for the Group's dividend of approximately 50% of underlying profits after tax. The Board has declared an interim dividend of 67p per share (2017: 65p per share), which equates to an expected total interim dividend of £55m (2017: £55m). This will be paid on 24 September 2018 to shareholders on the register at the close of business on 24 August 2018.

On 29 May 2018, the Group entered into a £200m irrevocable share buyback programme. To date, £170m of this programme has been completed with 2.0m shares repurchased at an average price of £85 per share. It is the Group's intention to enter into an additional £300m share buyback programme to commence on completion of the £200m programme.

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1 The "underlying" measures exclude separately disclosed items, that are not part of the usual business activity of the Group and are also excluded when internally evaluating performance, and have been therefore reported as "separately disclosed items" (see note 5 and page 34 to the financial statements.

2 EBITDA is profit before interest, tax, depreciation and amortisation expenses and is a non-GAAP measure. It is defined as profit for the year before depreciation and amortisation, financial income, financial expense and tax expense / credit. The Group uses EBITDA, Underlying EBITDA and Underlying operating profit to comment on its financial performance. These measures are used internally to evaluate performance, to establish strategic goals and to allocate resources. The directors also consider that these are commonly reported and widely used by investors as an indicator of operating performance and ability to incur and service debt, and as a valuation metric. These are non-GAAP financial measures and are not prepared in accordance with IFRS and, as not uniformly defined terms, these may not be comparable with measures used by other companies to the extent they do not follow the same methodology used by the Group. Non-GAAP measures should not be viewed in isolation, nor considered as a substitute for measures reported in accordance with IFRS. All of the adjustments shown have been taken from the audited financial statements.

3 Constant currency ("cc") growth throughout this Operating & Financial Review is calculated by retranslating non-sterling denominated component of H1 2017 at H1 2018 exchange rates (see Appendix 3)

4 Net cash at 30 June 2018 is comprised of gross cash excluding customer balances of £317m and borrowings of £169m. The comparative balance shown as at 30 June 2017 is comprised of gross cash excluding customer balances of £232m and borrowings of £145m (see Appendix 2).

5 Growth rates in the commentary are in local currency.

6 Like-for-like growth rates are in constant currency3 and are calculated by only including in the H1 2018 results, financial results from shops open prior to 2017 plus the financial results from shops opened during H1 2017 only from the anniversary of their opening date.

Appendix 1: Divisional Key Performance Indicators

Half yearly

1 Constant currency ("cc") growth is calculated by retranslating non-sterling denominated component of H1 2017 at H1 2018 exchange rates (see Appendix 3)

Appendix 2: Reconciliation of Presented cash flow to Reported statutory cash flow

In the Operating and Financial Review the cash flow has been presented on a net cash basis. The difference between this and the reported statutory cash flow is the inclusion of borrowings to determine a net cash position, as reconciled in the table below.

1Underlying EBITDA includes the following line items in the statutory cash flow: Profit for the period, separately disclosed items, tax expense before separately disclosed items, financial income before separately disclosed items, financial expense before separately disclosed items, and depreciation and amortisation before separately disclosed items.

2 Capex includes loss on disposal of property, plant and equipment and intangible assets, purchase of property, plant and equipment, purchase of intangible assets, purchase of businesses net of cash acquired (excluding DRAFT acquisition shown separately in presented cash flow), capitalised internal development expenditure and payment of contingent deferred consideration.

3 Working capital includes increase in trade and other receivables, (decrease) / increase in trade, other payables and provisions, employee equity-settled share based payments expense before separately disclosed items, and foreign currency exchange gain /(loss).

4 Cash flow from separately disclosed items includes proceeds from the disposal of investment & restructuring and strategic initiative costs paid.

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

Appendix 3: Reconciliation of growth rates to constant currency growth rates

Constant currency ("cc") growth is calculated by retranslating non-sterling denominated component of H1 2017 at H1 2018 exchange rates as per the table below.

STATEMENT OF DIRECTORS RESPONSIBILITES

For the six months ended 30 June 2018

The Directors are responsible for preparing this interim management report in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU, the Transparency (Directive 2004/109/EC) Regulations 2007 ("Transparency Directive"), and the related Transparency Rules of the Central Bank of Ireland.

We confirm that to the best of our knowledge:

On behalf of the Board

7 August 2018

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 47-49 in the Group's Annual Report and Accounts 2017 (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:

· Regulation and licensing and regulatory compliance - The regulatory, taxation, consumer protection or legislative environment, including interpretations or practices, applicable to the Group's activities in the various markets in which it operates, including those markets where no regulatory framework exists, and the related risks from limitation of business activities or litigation by third parties can make it commercially challenging for us to operate or restrict our ability to grow the business. Breaches of regulations can damage our reputation as well as lead to fines, investigations and affect future growth. We have dedicated internal and external Legal, Compliance and Tax teams with responsibility for advising business units in these matters and through appropriate policies, processes and controls. Our dedicated Regulatory and Compliance teams work with regulators and governments in relation to proportionate and reasonable regulation. As the first line, Management has ultimate accountability for compliance, and training and communication strategies have focused on ensuring appropriate awareness of requirements. A risk-based approach is taken to key areas and there are appropriate second line functions in the business who test the systems for compliance. Management report periodically to the Audit Committee and the Risk Committee on the application of various laws and regulations by the relevant jurisdiction to ensure that 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 management and cyber security - The inability to adequately protect customer and other key data and information could result in formal investigations and/or possible litigation resulting in prosecution and damage to our brands. The Group invests significantly in IT security resources and works with a variety of external security specialists to ensure security arrangements and systems are up-to-date with emerging threats. The Group's Information Security team continuously assesses the risks and controls around security and IT operations. We have in place a number of data protection policies in order to protect the privacy rights of individuals in accordance with the relevant data protection legislation, including compliance with the new EU-wide General Data Protection Regulation which came into force in May 2018. The Group's Legal and Compliance teams ensure that the business is aware of, and adheres to, industry best practice standards and relevant laws of data protection and privacy.

· Product availability and competition - An inability to deliver market-leading customer-facing products across our brands could materially impact competitiveness and market share. The strategic direction of the Group is clearly articulated. There is a structured product prioritisation process in place that ensures the right product development is prioritised for customers. The Group has a programme of brand investment and corporate communications to maintain and enhance its market position. The Group also monitors competitors and their promotional offers. We develop products with an emphasis on mobile products and innovative features and acquisition through marketing.

· Technology infrastructure, systems stability and availability - Our operations are dependent on technology and advanced IT systems and any damage or failure to these could reduce revenue and harm our business reputation. Reduced availability of our products arising from software, infrastructure and system issues could result in a poor customer experience and may have an impact on customer loyalty affecting our ability to grow the business. Further to the completion of the single technology platform, customers are interfaced onto a single platform, which has increased resilience. We continuously invest in a cost-effective technology platform to ensure stability and availability, to eliminate single points of failure and improve performance. Key metrics are in place to monitor key systems and platforms and identify potential emerging issues. There is a formal incident management process for identifying, escalating and resolving issues and a post incident process to ensure similar issues cannot happen again. Robust development and change management processes help reduce the risk of unplanned outages.

· Health and safety - A major health and safety incident in our retail betting shops would have a material impact upon employees and could lead to significant reputational damage as well as fines and regulatory action. There are processes in place to manage the risks in our retail betting shops, including health and safety structures, single manning processes and loss prevention and security measures. There are a number of risk assessments conducted in our shops at various stages of their lifecycle. In addition, a formal incident management process and follow up procedures reduce the likelihood of repeat issues.

· Business continuity planning and disaster recovery - The ability of the Group to recover from severe disruption to our technology systems and business operations is paramount. A significant disruption to one of our data centres or offices can cause reduction in revenue and loss of customers. Delays in restoring services following a major disruption could result in loss of customers and reputational damage. We regularly review our Business Continuity Plans and our IT Disaster Recovery capability and have in place service level agreements with third parties. Where possible, we have failover solutions and seek to limit single points of failure.

· Reliance on third parties and key supplier relationships - We rely on third parties across our business. Managing relationships with, and performance by, key suppliers, particularly those supplying software platforms, payment processing and data to support the Group's products is key to the Group's strategic objectives. Where possible, we limit reliance on a single supplier to reduce potential single points of failure. 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 adequate protection for the Group. The Group monitors the performance of third-party suppliers in order to ensure the efficiency and quality of contract performance.

· Key employees recruitment and retention - Continued success and growth is dependent on the performance of Executive Directors, senior management and other key employees. Retention and recruitment of these individuals is a key component in securing the ability to grow and develop the business. The Group's ability to continue to attract, retain and motivate passionate and highly skilled employees in an intensely competitive environment is key. The Board reviews key positions and reward through the Nomination and Remuneration Committees. The Executive Directors, senior management and other key employees are part of medium or long term incentive plans, which reward performance and loyalty. Our HR function actively manages succession planning and the processes that are in place throughout the business to identify key roles and conduct regular appraisals, succession and talent reviews, engagement surveys as well as career development opportunities. All employees are subject to regular salary reviews, a comprehensive benefit package and are able to join (subject to local jurisdictional requirements) our all-employee save as you earn share scheme, which provides an opportunity for them to participate in the Group's performance.

CONDENSED CONSOLIDATED INTERIM INCOME STATEMENT

For the six months ended 30 June 2018