Paddy Power Betfair's (PDYPF) CEO Peter Jackson on Full Year 2017 Results - Earnings Call Transcript

Paddy Power Betfair PLC (OTCPK:PDYPF) Full Year 2017 Earnings Conference Call March 7, 2018 5:00 AM ET

Executives

Peter Jackson – Chief Executive Officer

Alex Gersh – Chief Financial Officer

Analysts

Gavin Kelleher – Goodbody

Mike Campbell – Whitman Howard

Tal Grant – Credit Suisse

Richard Stuber – Numis Securities

Joe Thomas – HSBC

David Jennings – Davy

Ed Young – Morgan Stanley

Ivor Jones – Peel Hunt

Patrick Coffey – Barcap

Darren McKinley – Merrion

Alistair Ross – Investec

Peter Jackson

Are we ready in Houston? Okay. So good morning, and welcome to the Paddy Power Betfair 2017 Preliminary Results Presentation. It’s my pleasure to present to you for the first time as CEO. I’m very excited at the opportunities ahead of us and believe the group is well placed to be a long-term winner.

While I may have been close to the business and the industry, given my previous board roles, the last 8 weeks have helped to reinforce my views that Paddy Power Betfair has great brands, fantastic people and exciting prospects. I wanted to share – I wanted to start with sharing some of my initial observations before handing over to Alex. And rather than sort of popping up and down, I thought I’d do this bit from here and then we’ll switch.

So firstly, the group delivered a very solid financial performance in 2017, which Alex will talk to you through shortly. It’s clear that we have many important commercial – sorry, competitive advantages, including substantial scale, strong brands, differentiated products, the exchange and leading operating capabilities in areas such as technology, risk and trading and marketing. The final piece of merger integration has now been completed.

The platform integration was finalized in January, almost 2 years to the day since the closure of the merger, and it’s one of the most successful technology integrations I have seen. Many take 3 times as long in my experience. With the scalable, flexible platform, it can operate multiple brands and in multiple jurisdictions. Integration, however, was a material headwind for our European brands over the last 2 years, and we’re now fully poised to capitalize on our considerable scale by unleashing our significant product development capabilities.

In Australia, Sportsbet has an excellent position in what remains a very attractive market. The more I learn about our operations there, the more impressed I am. Consistent execution and investments in our brand and customer proposition has delivered impressive track record of growth. While regulatory changes present short-term headwinds, I believe they also give us the opportunity to cement our long-term leadership position.

I also believe there are learnings we can apply to our European operations from our success in the Australian market. Over the medium term, regulatory changes can provide additional opportunities by potentially opening up new markets. For example, our assets in the U.S. give us a head start in what could potentially be a very substantial market.

And finally, as I think about the long-term strategic direction for Paddy Power Betfair, I’m very conscious that further set of consolidation is likely, if not inevitable. And since the start of the year, we’ve taken a number of key decisions to help deliver long-term growth. I’ll cover these in more detail later, but the highlights include: a simplified organization structure to give better brand clarity and decision-making and ensure responsible gambling has a seat at the top table; upon the completion of the platform integration, we’re now focused on developing customer-facing products.

We’re making additional investments, particularly in the Paddy Power brand, international markets and on retention. And we determined the medium-term leverage target to improve the efficiency of our balance sheet while maintaining strategic flexibility.

I’ll now hand you over to Alex to take you through the financial and operational performance.

Alex Gersh

Thank you, Peter. Let’s go straight to Slide 4, there we go, Slide 4, okay. So just to give you some highlights that you can obviously see here and read in our statements, revenue in 2017 were up 13% to £1.75 billion, driven by 16% growth in sports revenue.

Total operating costs increased by 9% or 5% in constant currency basis. By the way, our revenue would have gone up in 10% constant currency basis. Within this, sales and marketing spend was up 14% and other operating costs were flat year-on-year, benefiting from annualization of merger synergies and continued underlying operating efficiencies.

Operating leverage meant, probably the phrasing here from every single time I stand here, meant that 13% of revenue growth led to an 18% increase in ROI and EBITDA, with the EBITDA margin up 1.3 percentage points or up 2.2 percentage points in constant currency to 27.1%.

EBITDA at £473 million was above £450 million to £465 million guidance range we gave you in Q3 at our Q3 trading update, with the outperformance driven by favourable sports results over – particularly over the last 2 months of the year.

The underlying effective tax rate in 2017 was 13.5% versus 15.2% in 2016. I’ll give you – just because I know the questions will be asked, the guidance for the underlying tax rate will be 13% to 15% going forward. This year, we had some very favourable settlements with some of the tax authorities, which please don’t ask me which ones and how many. We had some settlements and that has brought the range to 13%. But we would do the guidance between 13% and 15%, somewhere in that range going through medium term.

And finally, on this slide, our proposed final dividend of 135p per share takes the total dividend for 2017 to £2 per share, up 21% on 2016 and represents 50% of underlying profits after tax, as we’ve always – as was our guidance.

Moving on to the bridge, which I think is quite an important point when we talk about drop-through and all of these kinds of things, additional revenue to the EBITDA. This, I think, answers a lot of questions that perhaps you would have and breaks it out in, I think, in a very good way. But we have bridged the EBITDA here from 2016, obviously, to 2017 to highlight some of the key items that resulted in a £73 million or 18% year-on-year increase in profits.

So first, let’s just get the FX out of the way. It has an adverse impact of £3 million and small. Let’s not discuss it anymore and let’s move on to the bigger issue, which is the revenue growth. After cost of sale contributed £119 million, which included the benefits, of course, of favourable sporting results as we discussed in the statement, and that result is gross – as it is – the gross benefit to our revenue of the favourable sporting result in 2017 was approximately £40 million, so that’s in £119 million, £40 million. And that was predominantly in the fourth quarter, and the majority of it has been obviously in our online division.

And a couple of things to note on that, again, I’m anticipating some of the questions, so hopefully, it will answer them. So in the context of the EBITDA outturn, if you look at that £40 million, so the first of all, this £40 million is a gross benefit, that there’s a benefit to revenue before adverse recycling trends due to customers having less money in their wallets as we obviously won a lot of that money.

Some of that upside has been captured in our guidance flashes. So when we saw the trends, when we gave you the Q3 guidance, some of that has already been captured in there as well. And the benefit to profit is, of course, reduced by increased variable cost, including betting taxes, as well as the impact of higher employees' bonuses as well as increase in certain promotional activity. So all of those things reduced that number. As you think about how much of that £40 million should drop through, please remember all of those things, right? So it’s very, very important that we just keep that in mind.

Finally, on the bridge cost growth, we have shown separately the impact of £15 million DRAFT start-up losses. The increase year-to-year investment in marketing of £29 million and the impact of additional betting taxes and levies payable in 2017 by £11 million.

Excluding these items, we had a net savings of £12 million for other costs, driven by – mainly by our annualization of merger synergies, which for those of you who don’t maybe remember, that was £30 million in the year, right? So £30 million of merger synergy taken through in a year. So that gives you a net increase in cost of £18 million if you think about our cost base. I think it’s a story of a great efficiency and cost control that continues.

Now we’ll go through the individual divisions, and of course, we start with online. Starting with our online division, which includes Paddy Power, of course, and Betfair brands as well as our B2B activities. Revenue increased by 5% to £898 million, with sports revenue up 8% and gaming revenue decreasing by 2%. I hate to use that word, decreasing, but I couldn’t come up with a better word. It is decreasing, unfortunately.

In Sportsbook, Sportsbook revenue increased by 14% and exchange revenue is up 1%. Sportsbook revenue growth benefitted from more favourable sports results, partially offset by increased investment in pricing and promotion.

Total operating cost increased by 6% or 3% in constant currencies, with sales and marketing up by 14% and other cost decreasing by 3%. We also again, please note that the cost of sale does include a lot of this impact of additional levies and point of consumption on gaming, most of it is in this division, so that’s all in cost of sales and numbers. And you can see there that the biggest – sorry, the biggest synergies are, obviously, in the technology cost, where you see that decrease of 11%.

The division profit increased by 6% or 9%, excluding FX, to £306 million. Australia won’t be hearing the word, "decrease" here anywhere. Sportsbet revenue increased by 21% in local currency. This continued strong performance was driven by good underlying market growth rates and by investment in product and promotional generosity in total.

And in 2017, we gave an additional £35 million to customers. We increased generosity with the investment, driving very, very good returns. We continue to be disciplined in managing operating cost ahead of further regulatory and tax changes. And just because we’re disciplined in general, the operational cost, excluding marketing, were flat year-on-year. Overall, that led to strong profit growth with EBITDA up 42% to £139 million. Sorry, yes, £139 million, yes.

Turning to retail, where we also saw very strong profit growth with EBITDA increasing by 31% to £82 million. This growth was driven by good performance in both our UK and Irish estates, which increased revenue by 11% and 8%, respectively, on a constant currency basis.

Like-for-like net revenue was up 8% in constant currency, comprising 9% Sportsbook growth and 7% increase in machine gaming revenue, primarily driven by B3 content. Just a reminder, B3 is 1/3 of our FOBT roughly.

We continue to apply very conservative regulatory assumption when assessing opportunities to expand our estate. Despite this, given our ability to selectively acquire units and significantly uplift their revenue, we were able to open 11 new UK shops in 2017. In Ireland, we opened 3 new shops and we closed 1. And as of couple of months of this year, we already opened 3 shops in Ireland. Three shops in the UK will be opened before Cheltenham. They haven’t been opened yet.

So again, the idea that we can find the right shops, even with the regulatory uncertainty, is being underscored by our performance and what we’re trying to do. To the U.S. U.S. division revenue in local currency increased by 15%, with 13% growth in sports revenue and 29% growth in Betfair New Jersey Casino, which has currently approximately 12% market share of the online market.

Sports revenue was comprised of 10% growth in TVG, supplemented by revenue from DRAFT and Betfair horseracing exchange in New Jersey. The good performance at TVG was driven by continued investment in product and marketing, including the introduction of Money Back Specials, the U.S. horseracing market and our unique free-to-play TVG Super 8 Contest.

Overall, the division contributed £4 million of EBITDA in 2017, with profit growth at TVG and Betfair Casino offset by start-up losses of approximately £15 million incurred in DRAFT and Betfair Exchange. And as you see, we’ll talk about that £15 million we’ll continue into this year. We’re guiding to the same amount. And the reason for that is because we actually see a very reasonable growth in DRAFT. We’re very pleased with the performance, and we see this as an opportunity ahead of any potential regulation changes for us to continue to step on the gas and to drive customer acquisition and to drive up the value, customer value.

On the cash flow. Our profits convert strongly into cash, with underlying free cash flow of £395 million in 2017, up 57% and representing 118% of underlying profit after tax.

A couple of items to highlight here. First, you should note that 2018 working capital did have a one-off benefit of approximately £20 million. It really is a timing benefit. There’s always timing, either benefit or not or the other way, in every year so we’re just giving you the number. There are many different items. None of them are anything specific – anything that I would want to highlight. They’re just a group of items that can happen any year. It’s £20 million, just for you to understand.

And secondly, cash flow shows a decreased dividend payment versus 2016, and that’s because of the special dividend of, I think, £62 million that was paid to Paddy Power shareholders after the merger. So that’s really the only reason. It’s like-for-like, it’s an increase as we discussed. As of December, of course, 31, £244 million on the balance sheet. And that’s it.

Now financial guidance. I’m going to say a few things here, but Peter will then expand on a number of things here, really requires some strategic direction and discussion. So I will just simply give it to you, and then Peter will go through some of the specific details. So this slide includes summary of financial guidance and the key regulatory items that we should consider.

First, Peter referenced and he will talk more about, we need to consider the impact of additional investment we’re making in 2018. We will invest an additional £20 million, an additional £20 million. On top of everything we thought we were going to invest, this is an additional £20 million, right? Of course, the Paddy Power brands in the UK and Betfair brands in the international markets. So Paddy Power brand, obviously, UK and Ireland and Betfair in international markets.

We also expect start-up losses, as I said, from DRAFT to be maintained at the level of about £50 million, which is the same as this year. And just on the regulation, a reminder that we continue to expect, the state government in Australia will introduce, for the point of consumption, taxes that will cover all of our revenue in the country. We expect further updates on this in the coming months.

We can also confirm that there’s no change to our estimate of the impact of the FOBT stake limits changes for those we gave to – from those we gave to you in our retail briefing last autumn. As a reminder, they are in the footnotes of the report, on the announcement that you have. The last area that I just want to highlight is that you need to consider that 2018 – for 2018, estimate is FX. The current spot rates currency will be a £10 million headwind to 2018 profit versus 2017, primarily relating to the translation of Australian profits.

And finally, on this slide, in 2010, we expect CapEx to be between £90 million and £100 million and our underlying effective tax rate, as I said, between 13% and 15%. Our CapEx this year is £89 million. Our CapEx in 2016 was £85 million, so 80 – £90 million to £100 million is really where we think the CapEx should be. Again, that’s – and that’s it for me. I’m going to turn it over to Peter to go through the strategic part of the presentation.

Peter Jackson

Thank you very much, Alex. Also feels like an opportune time to sort of acknowledge the release that we made earlier this week, confirming Alex will be leaving the business this year. I’ll be very sorry to see you go, Alex, having been on the board with you. Not long after you started, I joined the board and I think you’ve done a great job for the business, so thank you.

So Slide 13 summarizes the priorities I’ve set for the coming year. And in some aspects of the business such as Sportsbet, the exchange and Paddy Power retail is very much a case of continuing to do what has been successful historically, while in other areas we’re making some changes. I’ll cover most of these areas in more detail in the following slides.

But in summary, I believe that we have some important competitive advantages, give us opportunity to be one of the long-term winners in our industry. Most of the initial changes I’ve identified relate to the Betfair and the Paddy Power brands. For the group to achieve its overall growth targets, it is imperative that the Paddy Power brand returns to growth. It’s had a number of headwinds in the last few years, but it’s a great brand and has a real opportunity to successfully address the mass market.

At the same time, it’s clear that as the online market continues to mature, future market growth rates in the UK are likely to be lower than historical levels. Therefore, it is important we also see growth in other markets. Betfair has an initial foothold in a large number of markets, predominantly due to its unique exchange proposition. We’re going to assess opportunities to accelerate growth through additional exploratory marketing in 2018 in some selected markets.

In Australia, where notwithstanding recent regulatory changes, the market remains very attractive with the online market continuing to grow strongly. Our priority is to maintain our leadership position and to take advantage of any disruption and competitor weakness that arises from new taxes and other impacts such as the credit brand – credit ban. You’ll be aware of potential regulatory progress in the U.S.

While the prospects of online sports betting have increased, we had still flagged that there are still significant hurdles that need to be cleared before the market opportunity materially expands. That being said, our current U.S. assets give us a head start in the market, and we’re considering options for the appropriate way we’ll participate in the event of positive regulatory changes. And finally, as I’ve already mentioned, we reviewed the appropriate capital structure for the group, and we’ve decided the balance sheet efficiency can be improved while retaining strategic flexibility.

Turning to our European brands on Slide 14. I wanted to provide context to the actions we’re taking, and I thought it’s helpful to show the 2017 online revenue performance by product and brand, which is something I know we have not previously done. Betfair sports have been performing well despite the lack of new product, with strong Sportsbook growth resulting in overall revenue growth of 9%. But it’s clear that the Paddy Power brand has been losing market share, with Sportsbook revenue growth of 3% and overall revenue declining by 1%.

The Paddy Power brand is one of the key assets of the group. In a crowded marketplace, it has a distinct personality, and there are a few other brands I would choose to target the UK recreational market. Accordingly, our most important organic opportunity within the European online business is to return the Paddy Power brand to growth. There are four main actions we’re taking to achieve this. Following the merger, it’s clear that there’s some loss of focus on what makes Paddy Power special. We’re making changes to address this to ensure an increased focus on the brand’s distinct identity and proposition, and I’ll cover this in more detail shortly.

Secondly, when the platform integration commenced, Betfair enjoyed product leadership, but Paddy Power was about to receive significant investment to overhaul its products. And to deliver our integration objectives, we had to take the hard decision to disrupt those plans. This means the product has fallen further behind the pack and is a contributing factor behind Paddy Power having a relatively low share of its customers' wallets.

Happily, completion of the platform integration means that Paddy Power customers are already enjoying an improved product, and our substantial product development resources are deployed on addressing product weaknesses. Ultimately, our ambition is to return to product leadership. The next most important driver of share of wallet is the rewarding of loyalty. Recognizing this, we’re increasing retention spend with an expansion of the Paddy’s Rewards scheme. And finally, with the products improving, we’re increasing the level of marketing investment to return Paddy Power spend levels back to an appropriate level for mass-market brand.

And while over the last – over the past couple of years it may have lost some ground, we are confident that over time these changes will return the brand to a leadership position. Before I take you through the rationale and supporting context for these decisions and also the reasons why we are focusing the Betfair brand on the core betting market in the UK, I want to cover the gaming vertical.

Both our brands have underperformed versus the wider gaming market, both on cross-sell revenues from sports and on revenue from direct gaming customers, while our sports-led brands remain underpenetrated. While our gaming proposition has benefitted from some important product improvements in recent months, including a new games app for Paddy Power customers and an improved live casino product offering on both brands, our gaming product still requires additional investment to address gaps versus competitors. These include improving in-app customer journeys and our promotional capabilities. In this context, we are yet to see a return to revenue growth, and we continue to do further work to examine how best to position our gaming brand propositions to compete more effectively.

Slide 15 outlines our new organisation structure. The European business historically didn’t have a single person with responsibility for commercial decision-making and has operated under a matrix structure. This could mean, for example, three senior people being involved in a marketing decision, which slowed decision-making. The group will now be managed by three regional CEOs, with responsibility for Europe, Australia and the group’s U.S. businesses.

Dan Taylor has overall responsibility for Europe, which essentially means that Paddy Power and Betfair brands outside of the U.S. Within Dan’s team, there’s now clear commercial ownership for each of the brands. Previously, there wasn’t a clear specific responsibility on these lines, which meant people have to think about both the Paddy Power and Betfair brands simultaneously, and that reduced focus. I believe this structure will facilitate an increased focus on each brand’s distinct identity and customer proposition.

And this is particularly important for a unique brand like Paddy Power, leveraging its distinct personality as a key element for us to effectively target the recreational market with the brand. While for Betfair, we will continue to invest in its value proposition and leverage the exchange to target the core betting market. The regional business units will continue to be supported by central functions. And one change I would highlight here is that we have a new leadership role focused on responsible gambling, allowing us to shine a light on the good work we’re doing in this area.

Moving on to product. After two years of focus on platform integration, since the end of January, our European development resources are now again focused on developing customer-facing products. We believe that investing in product is a key driver of market share growth. And in my view, the completion of the platform integration was a vital element in ensuring that we are well-positioned to deliver product excellence over the long term.

We have substantial resources with approximately 1,000 product development specialists across the group, including our development Centers of Excellence in Porto and Cluj. The platform has been built to be scalable, flexible and responsive, and crucially now enables us develop once the deployments across multiple brands, not just our two current European brands. With key technology components both from proprietary systems and with the sports betting expertise we process across risk and trading and the exchange, in sports, we’re in a great position to differentiate our products.

While over time we expect to return to product leadership, in the near term, our development output is more about addressing gaps against competitors that emerge over the last few years whilst we had limited product development and our competitors did not stand still. As shown on the left-hand side of chart, customer research highlights that our products have fallen behind on key metrics such as on speed and ease of use, and competitors have also introduced some features that aren’t currently available from Paddy Power and Betfair.

Some of these features are similar to those we have introduced on Sportsbet, where they’re proven very popular to customers and have driven revenue growth. Product gaps have been partly addressed for the Paddy Power brand since customers were migrated to the integrated platform in the last few months. We set out to build the fastest app on the market, and we believe we have achieved that goal. For example, the app load time is now 50% faster.

Also, navigation is much improved and the app is using the superior Betfair cash-out algorithms, which has driven a 60% increase in the cash-out usage by Paddy Power customers since migration. Across the coming quarters, our product development resources will continue to address the remaining gaps in our products. For sports, this includes addressing pain points around ease of use and accelerating developments of new product features, some of which will be launched ahead of the World Cup. In gaming, we will make further enhancements to our apps to improve customer journeys and promotional capabilities.

We will release new casino apps, and we’re developing a single content management system across our brands. We’re also assigning some product resource to support international growth, which requires specific additional development work. Overall, this means that from now on, our customers will benefit from the continuous rollout of improved products as we begin to capitalize on the material product development resources enabled by the merger.

As I indicated earlier, Paddy Power has a low share of its customer wallet versus Betfair and other key competitors. This is highlighted on the chart on the top left-hand side of Page 17. The chart on the right-hand side shows the different attributes that drive a brand’s share of wallet, order from top to bottom in terms of relative importance.

The key takeaway from this chart is importance of product in pale blue, which we’ve already covered; and value, which is represented by the dark blue bars. For Betfair, value is delivered through price. The significant improvement in sportsbook odds we made in 2017 has resonated strongly with customers, with 45% of football betters associating Betfair as offering very attractive odds versus 35% one year ago and 25% at the end of 2015.

We will continue to invest in pricing, and we’ll also increasingly focus on rewarding loyalty. For Betfair, we’re doing this through a customized targeted rewards program called Select. The most significant uplift in our investments, however, is in Paddy Power’s retention activities, including an expansion of Paddy’s rewards. This scheme has proven successful since its launch in the second half of last year, and we’re now enhancing the generosity given to customers. All this is delivered in the brand’s unique tone of voice, of course, as well as a clear rewards mechanic, where customers receive free bets in return for prescriber activity. Unique Money Can’t Buy rewards are offered. An example of these include a trip of a lifetime to see the Mayweather-McGregor fight in Las Vegas with Paddy Power himself.

Slide 18 highlights the relative positioning of our two brands. The chart on the left-hand side shows which attributes are considered important by sports betting customers split by segment. For each attribute, the gray bars show the importance to recreational betters and the blue bars show the importance to core betters. A couple of observations. The chart illustrates that price is the most important factor for attracting core betters, but less important for targeting recreational customers.

And secondly, brand is the most important driver of operator choice for recreational betters. The second chart shows spontaneous brand awareness for the second largest sports brands in the UK Despite similar levels of advertising spend over the last few years, Paddy Power retains markedly higher brand awareness than Betfair.

And the third chart shows the top five drivers cited by new Paddy Power and Betfair customers as reasons for choosing the respective brand. As you can see, there are marked differences between the brands. For example, a higher percentage of new Paddy Power customers cite seeing an ad for the brand as a reason for joining.

And accordingly, a high brand awareness and share of voice is more important for Paddy Power than Betfair. The bottom left-hand side chart shows that the Paddy Power brand’s personality continues to be recognized by customers. They say it is clearly those attributes such as fun and entertaining. All of these factors combine to explain why we use the Paddy Power brand to target the recreational market in the UK and Ireland. Betfair’s leading value and differentiated exchange proposition, however, means it’s better positioned to target core betting market where price is the most important factor for attracting customer spend.

This is evidenced in the high percentage of customers who cite referrals, good odds and the exchange as a key reason for choosing to bet with Betfair. And the final chart shows that while as a group we spend more than any other operator in the UK, each brand individually spends less than key competitors.

I should point out that as this chart measures pounds spent, some of the relative decline of our brands represents the buying efficiencies achieved through the merger. If buying efficiencies are excluded, I’d imagine that Betfair would be broadly flat and Paddy Power will be more like 13% than 12%. We believe, however, that to properly serve the mass market, Paddy Power share of voice needs to return to historical levels. Conversely, for Betfair, investments in its value proposition and leveraging the exchange are relatively more important than above-the-line marketing spend. We therefore intend to invest more in the Paddy Power brand, in part by rebalancing the mix spend between brands. To date, we spend similar amounts on each brand, but the different brand positioning means we now have the opportunity to optimize this spend.

Slide 19 summarizes the brand strategy for Betfair and Paddy Power. As I just described, in the UK and Ireland, Paddy Power will target the mass market and Betfair will target core betters. In addition, Betfair has a presence in a large number of countries that has only limited market share in each. We have identified a number of existing markets that may have the potential to deliver increased revenue and are assessing this opportunity with additional exploratory marketing investment in 2018. Within this, our approach to unregulated markets remains unchanged. We will not operate in markets where it is illegal to do so, and we will not make significant investments in markets where significant regulatory uncertainty exists.

We are also aware of concentration risks in all markets, including regulated jurisdictions such as the UK We’re particularly cautious about creating significant positions in markets where there’s no certainty that revenues will be sustainable. And overall, taking to account optimization of spend between the brands, the additional investments we are making in marketing and customer retention total approximately £20 million in 2018. Moving to retail on Slide 20.

Paddy Power retail has consistently outperformed its competitors, delivering sustained revenue and profit growth. As shown in the charts, since 2013 on average, revenue has grown by 12% and EBITDA by 18% per annum. This success has been driven by offering the market-leading customer proposition, including the newest and best invested estate in the industry, more product and content for customers to bet on and the best odds and offering in retail betting. We’re continuing to invest in extending this leadership position ahead of regulatory change.

This year, we are adding a third in-house Paddy Power TV channel. We’re expanding the Paddy’s Rewards loyalty scheme and are rolling out a new shop EPOS system that will enable multichannel initiatives over time. And as highlighted on the bottom right-hand side of the slide, we are well-positioned to benefit from competitor shop closures, which is likely to follow regulatory changes. Our shops are more profitable and are outperforming sports betting, enabling them to better withstand reduced property revenues.

And we don’t envisage closing any shops regardless of what new maximum stakes limit is introduced. All our shops are located in high footfall, highly competed locations, with an average seven competitor stores located within 0.5 mile radius, and this positions us to benefit from competitor shop closures. Furthermore, our proven track record of acquiring shops and achieving significant uplifts in our revenues with an average of 55% uplift to shops acquired in recent years also means we’ll continue to target selected new shop openings and acquisitions, which can further enhance our estate. This year-to-date, we’ve opened two new shops in Ireland, and we’ll be opening three new shops over the next few days ahead of Cheltenham.

Turning now to Australia. Sportsbet is a clear market-leading online brand in terms of spontaneous awareness, customer usage and product satisfaction, as shown in charts on the top left-hand side of Slide 21. This position has been established over many years a substantial investment and is leading customer proposition and has delivered strong revenue and profit growth. As shown in the chart, revenue has increased by 29% on average since 2013. This, combined with operational efficiency, has driven EBITDA growth of 39% per annum on average over the same period, notwithstanding increased betting taxes.

As has been well flagged and Alex as already mentioned, we expect to see the widespread introduction of point of consumption taxes throughout Australia over the next 12 months. As illustrated by the charts on the bottom of the page, we believe that Sportsbet scale and resulting profitability is in a good position to withstand increased taxes and benefit from market consolidation. We currently have approximately 26% market share of online revenues, with competitors either side of us likely to be distracted with integration, and we have an opportunity to grow this year. In this context, we’re continuing to invest in our leading proposition, and as illustrated on Slide 22 this investment is across many different areas.

Last year, we invested an additional £35 million in customer promotions with key investments, including the loyalty-encouraging Power Play daily odds boosting product and our headline 24-up and 12-up offers. These promotions, together with product features such as same-game multis, contributed to strong customer activity on AFL football and NRL rugby. Other recent product innovations have included The Fold, which offers our customers a unique bet insurance by allowing them to cancel their bet mid-race and get a full stake refund. This year, we are continuing to invest and will be increasingly looking to personalize our promotional generosity to both ensure Sportsbet continues to be recognized as rewarding loyalty with value and to maximize efficiency of spend.

Moving on to the U.S. Before the market opportunity materially expands in the U.S., there’s still significant regulatory and other hurdles that need to be cleared. And let’s remember, people have been talking about this market opening for many years. Whatever happens, and certainly in the first instance, it is unlikely there will be – we will see a single, unified online market structure across country. But should attractive market opportunities arise, we are well-placed to take advantage. So our current presence gives us a head start and we also benefit from the group’s wider resources and capabilities. The key things I’d highlight are: we’re currently one of the largest online operators with over $140 million of revenues in 2017 across our four businesses and with customers in 46 states. Our global technology, risk and trading and marketing expertise provide a strong competitive advantage. TVG has an extensive distribution reach via its TV channels, which are available in 45 million homes.

And our local operational expertise is advantageous, particularly in areas such as payments and digital marketing, which in the U.S. present unique challenges versus more liberalized markets such as the UK Our U.S. leadership team enjoys good existing relationships with regulators and other key stakeholders. And DRAFT, our early-stage daily fantasy sports operator, is acquiring customers who are likely to be early adopters of online sports betting. In this context, I’m closely monitoring developments, and we have a specific team in place, including both senior leadership from the U.S. and from the group considering options to the appropriate way we will participate, including holding discussions with potential partners.

Turning to Slide 24. It is critical that we continue to make substantial investments in product, customer proposition and marketing so we can continue to sustainably generate profits within our existing markets. I also believe we are well-placed to capitalize on new growth opportunities that may arise due to regulatory changes. As we assess strategic options our strong balance sheet, together with the highly cash-generative nature of our business, is very valuable.

However, we believe that we can improve the efficiency of our balance sheet while continuing to invest in the business and retain flexibility for strategic investments by moving to net debt position. Accordingly, we’re adopting a target medium-term leverage range of between one times and two times net debt-to-EBITDA. This freeze episode substantial amount of capital, which the chart on the bottom right indicates. At this point, we’re still considering the path towards the target leverage range.

This is likely to be a combination of strategic investments and increased returns to shareholders. So in summary, both European brands derive success by being product leaders, and we’re determined to return to that position and have the resources and technology platform to deliver. We’re investing across the business to enhance growth, but particularly in the Paddy Power brand. We’re already making better decisions. We’re, of course, facing headwinds from regulation and taxes, particularly in the UK Retail and in Australia. But this also brings an opportunity to gain share. And our balance sheet is a viable asset when assessing strategic opportunities. We believe we can increase balance sheet efficiency whilst retaining flexibility. Alex and I would now like to invite questions. We start with questions from the room, and then we will move online to the phone.

Question-and-Answer Session

Q - Gavin Kelleher

Hi, good morning. Gavin Kelleher from Goodbody. Few for me. Just on, Peter, on the Paddy Power brand. You’ve obviously highlighted a lot of the attributes it has. Do you think there’s any, sort of, change in the message that has to take place? Has anything happened there? Or any thoughts on that? And just in terms of the £20 million that you’re going to spend, can you give any sort of – you’ve hinted that it’s obviously Paddy Power-related and some on Betfair International. Can you give any sort of split on how much is going into Paddy Power, how much into Betfair International? On the international markets that you’ve highlighted or you’ll do some exploratory marketing in, can you give any sort of color on which markets they are? That’s a few for the moment. Thanks.

Peter Jackson

Okay, thank you, Gavin. Let me pick up the points about the Paddy Power brands' essential markets, and Alex will address the one about the marketing spend because this is, I suspect that will be on many of your minds, so best to deal with it once. From the Paddy Power perspective, I just mentioned, it’s important to understand the context of where the business has come from. And two years ago when we embarked on the integration journey, the product wasn’t in as good of shape as the Betfair product was. And so we have not had the ability to talk about product for Paddy Power for some time. And that has impacted the way we go to market with it and the marketing messages around it. We will start to get some – we already got new product features, and you may have seen the new ads we’ve been running about the speed and ease of use of the app. We’ll start to launch new product features.

Eventually, new Paddy Power campaign launching around Cheltenham, which is focused around Paddy Live almost being sort of broadcast to fill to some of our advertising promotion, which I think is really, really clever. But we need to wait and see how the new products benefit the business. In terms of international markets, the exchanges are very well-represented internationally. We’re already operating in a number of markets through the Betfair brand, as you’re aware. This investment is to help support some of the high-margin opportunities that we see in some of those markets, that we’re not showing today, which ones are necessary going off, but it’s an exploratory intent. If it works, well, we – it will be because of generating good returns. But Alex, do you want to address the marketing point?

Alex Gersh

Well, I think the operating point that Peter has made is that this is an experiment. So therefore, to say specifics – I guess we have a plan, but to say specifically where we – a couple of things you do need to remember, and again from Peter’s presentation, some of this money is going to be spent on loyalty, right? Some of it is going to be spent on share of voice. Obviously, when you think about – those of you who think about modeling and where are those things applied? They are obviously, in different places. Some are in revenue. Some are in cost, right? So that’s one thing. I think that the – where, how much is going to be spent, really does depend on the results that we see.

That’s why we’re calling it an experiment. As Peter just said, and I can only – on the international market, it’s exactly the same thing, but there’s a lot of small, high-margin markets where we can spend some more money and get a bang for a buck. But we will see which one of those are working? And if they’re working, we can spend more; and if they’re not working, we address it to a different market. So tie ourselves now to something just may completely change.

Michael Campbell

Good morning. Mike Campbell from Whitman Howard. Just two for me, if I may. First of all, you alluded to the capital structure. Just give us a, sort of, what’s your definition of medium term in terms of the capital structure, give us a sense of period of time, yes? And then the second question just relates to Slide 14. You had the two brands up in terms of sports betting, and you’ve alluded to improved pricing on the Betfair side, which is clearly driving your activity there. Are you seeing customers switch from Paddy Power into Betfair as a result of that?

Peter Jackson

Let me address the second point, Mike, just in terms of, sort of, pricing and then allowing us to talk about the capital structure. From – you heard us talk about the – I shared with you some of the stats in terms of how important price is for the sort of core bettors. That’s why we’ve been investing under the Betfair brand. The best odds on English footballs is a sort of good example for you. And I think that’s what’s helped when we happened to have the ability to launch new product features there, over the last year or so at Betfair. We have actually lead to that price message, which is very important to that target segment of the market. I don’t have the stats, I am afraid, in terms of customer switching between the brands.

Alex Gersh

As far as the capital, when I say medium term, what that means in a very plain simple word, is that by interims, we will tell you what we’re going to do, right? And what we’re going to tell you, we don’t know because we have to, first of all, complete our work and then make sure our board approves it, right? So my view on this would be – this is when you hear and then you will hear, you will hear some definitive actions by that – at that point. Thank you.

Tal Grant

Good morning. Tal Grant from Credit Suisse. Three questions. Firstly, maybe it’s the same answer you’ve just given, Alex, but you talked about setting up a couple of task forces, one to look at the U.S., one to look at gaming. When do you think, you’ll be able to communicate, what the decisions are? And what you’re going to do about those three areas? Second one, just with regards to M&A. Have you had a look at the kind of potential targets out there? Is that – would it have to be in the sort of regulated market or a company only operating and regulated markets? What are your thoughts around that? And then finally, obviously, it’s very commendable that you’ve created this new position for responsible gambling person. I’m just wondering, Peter, from what you’ve seen so far, are you happy with the quality of the revenue in the regulated markets? So, you are happy with the kind of online slots revenue that you’re getting there, but it’s not from customers you shouldn’t be betting as much, let’s say?

Peter Jackson

Let me take those in turns. So the U.S. in gaming, respectively, I mean, we don’t yet know whether the U.S. market will open up. We could have been deciding that year-end here, long time ago and still been holding our breath, right? So we hope it will. We are planning, preparing for the eventualities as we see them.

And we hope we’ll get more clarity in quarter 2 around how that could happen. And yes, I mentioned that we’re talking to potential partners, and so I’m not in a position to share more about our thinking that we will do so. In terms of gaming, I am – I’ve only been in the business for 8 weeks. There isn’t a gaming task force. They’re your words and it’s too early for me to, sort of, make any observations about that. With regard to our position on regulated and unregulated markets and M&A relating to that. We’ve – I think we’ve been pretty consistent on our views about unregulated markets.

And I think as long as there isn’t significant concentration risk associated with that and the dynamics of the margins make sense, we’ll continue to participate in them. And then from an M&A perspective, it’s a – I think the sustainability of unregulated markets means it will be difficult to do lots of M&A, though we’re very much focused on those markets. And I think it would inevitably have an impact on the prices you have to pay. I mean, I think there’s been a lot of speculation about consolidation in Australia and stuff, recently.

And I think we’ve demonstrated good discipline in terms of pursuing assets in that market as an indication of the approach we take to any potential future M&A. With regard to responsible gambling and our analogy, in that part of our business. Again, I’ve only been here 8 weeks. I think the approach I’m talking about internally within, sort of, responsible gambling is to shine us a search light to identify the good things that we’re doing in the business and there are a lot of very good things, we had some good feedback recently from the Gambling Commission about our annual Insurance statement.

But there are – news and spotlight to identify things that we could be doing better than I think. As we see the Gambling Commission sort of intervene in the market. They are trying to raise the standards across-the-board, it’s something we’re supportive of the standards across-the-board being raised. When they identify things that need to be addressed, we make sure we deal with them appropriately.

Richard Stuber

Just two, please. On the online Sportsbook, it’s about the unregulated revenues grew slightly faster than regulated ones. Could you say which countries contributed to that growth more than others? And the second question is, it goes back to the gaming point. I think your predecessor said you may introduce another brand in gaming. It sounds like you’re fully focused on the Paddy Power brand and Betfair brand. Does that mean that you’re rolling out a new – launch of a new brand?

Alex Gersh

I don’t want to talk about specific countries. We’ve always said that there is, outside of the 3 or 4, it’s a long, long tail. One day it’s one. The other day, it’s the other. We’ve all – I think we’ve highlighted before that we like Brazil as one potential country, but I wouldn’t be highlighting, and they would change from period-to-period.

Peter Jackson

In terms of gaming, I mean, without repeating myself, I’ll repeat myself, it’s very early.

Joe Thomas

It’s Joe Thomas from HSBC. Sorry for – perhaps I’m being a bit slow on the pickup here, but you’ve talked a lot about loss of focus in the Paddy Power brand. I’m still not entirely sure and understand, what you’re defining as a loss of focus? What do you think is? is it just the marketing spend? Or is it the tone of the marketing spend? And can that marketing efficiency that they previously benefited from, can it be resumed.

I know there was a talk about turning down the more mischievous, if you like, elements of the message. Can you also, please, perhaps, Alex, talk about the first quarter and results have gone your way? I’m not clear, you do talk – you do say that there’s been a hit to staking, I just like to understand the extent to which those things offset each other. And then finally, maybe it’s my inadequate math, but it looks as though the exchange has had a good Q4, which was surprising. Perhaps if you could just confirm if that is the case? And what’s been driving that, in particular?

Alex Gersh

So let me start with the exchange. You’re right, 3% growth in Q4 and I can confirm that. Right, I would also say that, when I – when we always talk about the exchange, I always say, while it’s not subject to the results, right, obviously, it is subject to the behavior of our customers. So the results are lumpy quarter-on-quarter. We’ve always said 2% or 3% growth on the exchange would be great. Anything more than that would be amazing.

But I wouldn’t – I would not make any – I would not use a quarter to extrapolate anything. They are lumpy, right? So you have to accept that. On the first quarter trading, I will only say, so we know – as you know, we don’t give guidance until the interims and we won’t do it now. I hope – I will just reiterate the point that there has been a – due to significantly increased margin, right? In terms of gross win, there has been, as we say in the statement, significant decline on staking for the – as of now, as of today between the 2 months of this year versus the 2 months of last year, right? So I will confirm that, and that’s about – that’s all we’re going to say about current performance.

Joe Thomas

Just one thing Paddy Power is the trajectory getting worse in the Paddy Power business, that’s inflection?

Alex Gersh

I would say that what is it a reflection of is? As I’ve said, right? It’s a reflection of a very significant margin, right? A problem, and therefore a recycling reflection. Now I think Peter has pointed out 2 of the issues in Paddy Power, and I think you’re also pointing out, what are we going to do to try to solve those issues? We’ll have to see how that goes in the future periods. 2 months of the year, after he just said – I mean, there’s no impact of anything, that we’ve talked about in the last 2 months.

Peter Jackson

And Joe, to pick up on your question about the sort of the focus on the Paddy Power brand. And I think we operate a number of challenger brands within our business. I think Sportsbet is a challenger brand. Betfair was, you all remember the coffins being carried through the city when we first launched. And Paddy Power is also a challenger brand. I think what is important for a challenger brand is that you’ve got something you can really deliver for your customers.

That’s certainly, what we’ve been doing in Australia, it’s what Betfair does. But for Paddy Power, for the last 2 years we haven’t been able to develop products. And actually, we started on the back foot, to some extent, at the beginning of that period anyway. So that has made it difficult for us from a marketing perspective – and comes perspective with customers, so it’s adjusting when we address those things.

Alex Gersh

So but I think Peter’s point on loss of focus was very much had to do with the matrix organization, right? Look he – I mean, he said it very clearly, right? The focus was dispersed over a number of people looking at these things. And I think what this new organization is – brings that focus and accountability to a few people responsible for the brand as well as responsible for online business.

David Jennings

David Jennings, Davy. Two questions, please. Firstly with respect to future investments, I was just wondering how open you would be to potentially investing substantially in land-based assets? And then possibly related to that, my second question is, I was just wondering, what your views are at this stage in terms of the attractiveness of being able to offer multichannel approach?

Peter Jackson

Thank you, David. Look, the – I think we’ve demonstrated with our retail business, that we are very, very professional operators in that space. I think we are the one in it. Every space, whichever category we look at, there aren’t many businesses that made the transition as successfully as we have from asset retail focused business, the one which is a proper, sort of, I really don’t like the word, omnichannel one.

So I think could we use that retail experience in other markets? Of course, I think it would something we could consider in terms of investing in land base. I think in terms of other stuff, the multichannel stuff, we know, we talked about that, about how retail focus i.e. the benefits we get from a multichannel perspective, and I think that something, which is important. It’s one of the reasons why we’re making investments in our system out and we are very close to the journey as well.

Ed Young

Ed Young from Morgan Stanley. I’ve got two questions, please. The first one is about acquisitions. One of the themes you’ve talked about is, that the developers are now free to produce customer-facing products. You talked about the discipline in Australia and competitors being distracted by acquisitions.

Given, you sort of see the needs to sort of catch up on product this year, how does that affect the way you think about the size or materiality of possible acquisition or sort of potentially the timing of that? And then second of all, you talked about the generosity instead of improve on some Betfair, increase loyalty on Paddy Power. How do you view generosity on the exchange? Do you think that needs to be addressed at all? Can you talk more generally about the competitive environment there?

Peter Jackson

Sorry, I didn’t hear. In terms of acquisitions, I mean, it’s – you often don’t control the timing on these things, I mean, if only we could. I think we have learned a lot through the merger, and I think we’ve done a fantastic job in bringing the businesses together and putting onto our single platform.

As I said earlier, to have completed the technology integration, so 2 years to the day practically of the closing the deal I think is a remarkable thing to have done. And I think we have created a platform which gives us the opportunity to operate in other jurisdictions with other brands and things on it. So we will be disciplined, if we look to any M&A, whether that’s a bolt-on or sort of more strategic. In terms of generosity, we’ve got a lot of good experience in terms of our Betfair selector program and also what we’ve been doing with Sportsbet. It’s clearly in a highly competitive market. Everything you can do to keep your customers rather than seeing them soft of cycle around, is something you should be encouraged in driving loyalty. And that’s why we’re doing – investing and setting up new investments into the Paddy’s Reward Club.

And from an exchange perspective, we’ve been doing a lot of work over the past year around, sort of, pricing and sort of engagement with customers. Is that – the market is getting a lot noisier. I don’t know whether it’s genuinely getting more competitive? As there is a lot – some of the competitors are making a lot of noise about it. I think that’s just a reflection of the fantastic asset that we have and people would love to have a piece of it.

Ivor Jones

Ivor Jones from Peel Hunt. Can you talk about a couple of aspects of costs? And firstly, I don’t think you’re talking about cost reduction, particularly on the product and technology side, but I thought you might be given the – you’ve been through such a major project in the last couple of years, maybe the opportunity to take costs materially out there.

And then secondly, in relation to marketing, your marketing spend in online was up 14% for lots of reasons, slightly ho-hum results in the revenue line. And marketing in Australia was up 5%, fairly spectacular top line results. Is that the future that the online business will have to continue to spend very heavily on marketing in order to drive what growth it can? And Australia is now done in terms of growth because it controls its share of voice in the market?

Alex Gersh

Well, so on the technology, I think we’re now at the point where, as I, as Peter highlighted, that we are going to – we’re certainly not thinking about cost reduction. What we’re thinking is about, is a product introduction and revenue growth, right? Now, as we’ve always said and we said this before, that’s the goal.

That’s what these 1,000 developers are out there to do. And when we talk about global developing centers, if something does happen in the U. S. I mean, this is the brain trust. This is the technology center that can help us. So there’s no anticipation or expectation of cost reduction there. Hopefully, the top line, this is what – the products.

On the marketing side, I think, what you – you know quite frankly, what you see is a lot more investment in loyalty in Australia, right? So while – you know, you could see it on a different line, but I think, I absolutely think our Australian market is very competitive. And I think you will see more investment on loyalty. For us, as Peter just said, we’re coming from behind, right? So first, let’s achieve parity. Let’s make sure – let’s test different things. Let’s look at the loyalty elements.

Let’s look at the share of voice element. The decision as to what you do longer term with the marketing spend is open. We have to see, at this point, where – I mean, Peter was very clear, we’re coming from behind. So there is absolutely no anticipation of reduction in marketing spend. In fact, there’s an additional investment that’s going in.

Ivor Jones

Thank you. Can I follow-up on gaming? You’ve talked primarily about product issues. Some of your competitors have talked about problems, maybe not specifically in gaming, but resulting from regulation about the customer base, KYC, those kinds of issues. Are there no customer- related, regulatory-related drags on gaming? You haven’t got too many high-rollers, you haven’t had to limit people’s plates, all about product from your point of view to track on the gaming side?

Peter Jackson

My response on gaming, it’s very – it’s too early for me to give you a chat on issues that we’re facing. But I think – what I would state with regards to some of the regulatory interventions you’ve seen around in gaming, as we all know those, we clearly make sure that we are maintaining a very responsible approach to dealing with that. The Gambling Commission are making changes to the approach for the operators to take, and yes, as when they do that, it will inevitably are not going to impact in all operators' businesses.

Ivor Jones

I shouldn’t go away from this thinking that the regulator issues will bottom out and give you a platform for growth and then you might get product side, right? So this is primarily about product?

Alex Gersh

I think, look it’s a very easy convenient excuse to say, let’s have – let’s give it all the regulation. But if you look at those growth rates, that’s not regulation, okay? The guys who talk about regulation don’t grow at those rates. They still grow at a higher rate. So I think we are focused on fixing – is regulation impacting everybody? Will it impact us? Of course. Of course, it will, right? But this problem is not a regulation problem.

Ivor Jones

And could you talk about – you talked about Paddy Power and Betfair, separate brand, separate investment, the share of wallet issues. Can you talk about your thought process in leaving the business with those opportunities, but also the inefficiencies of running to brands? Was there an opportunity to focus on a single brand in the online market and grab greater share of voice against competitors? And why was that rejected, if that was considered?

Peter Jackson

I’m very happy to pick that up. At this stage, I am 8 weeks into the business, right? And we have got two fantastic brands operating in the market. I think the Paddy Power brand is going to be focused very much on the recreational customers and the Betfair brand on the core bettors. We’ve actually shared with you a slide where we – one of my slides, where you can see what the impact is on brand recognition across the brands.

We’ve been spending very, very similar money on them. And you can clearly see that the benefits that the Paddy Power brand brings. But Betfair brings its own benefits, too. So at this stage, I think the dual-brand strategy works well for us. There is a degree of operational and organizational complexity that is required to run a dual-brand business. I’ve done it and I’ve experienced it in the past. We’ve got a single technology platform, staff that is supporting it, and I think we’ll make it work. Can I suggest we move to questions on the phone? I know you have another one, but we need to make sure that we share this out a little bit.

Operator

Hey, thank you. Your first question comes from the line of Patrick Coffey. Please go ahead Patrick.

Patrick Coffey

Yes, everyone. Three questions for me, please. If we look at Slide 18, it shows the product features are less important than price for both recreational and core bettors. This seems to me to be in contrast to previous Paddy Power research. So if I look at the Paddy Power FY 2016 interim results, the data that Paddy’s released, said that the most important factor on choosing a better product with 35% of customers choosing this as a key factor and compared it with price, which at the time was just 10% of customers.

I appreciate that the chart on Slide 18 also has ease-of-use, which gives the product, but it definitely seems like price has increased materially as a key driver, customer choice. So I guess I’m wondering, why is that? Is it because there’s been a lack of product innovation over the last few years across the industry, and basically, it’s just a price-led industry now?

Second question, on the exchange. You’ve released a new exchange product to target recreational customers. I appreciate it’s very recent development, but any initial feedback here on either how that’s going or the reason for doing that? And then finally, an annoying question, I know, but why is 1 times to 2 times the right level of net debt-to-EBITDA in the medium term, with your cash flow profile and your leverage can usually be 2 times to 4 times. So could you just talk us through your system process for 1 times to 2 times.

Peter Jackson

Hello, Patrick. I mean, I think the – it’s quite – you’ve obviously got the advantage sitting there with the 2015 Paddy Power pack of events here, which I haven’t got and I can’t recall. But this research that we have in here is the sort of the current view of how consumers are feeling about the market. I think there has been a big emphasis and focus on product features in the last few years. But if you look at – for me, I think one of the important factors to understand, why we have a low share of wallet?

Which we call out on Page 17 and there’s clearly important pieces there in around ease-of-use, which is something that we know, we’d fallen behind on, and I think that is particularly important for the recreational customers. And I think price is, obviously, very important for core bettors, which we flagged on Page 18, which is why we’ve been investing into that for Paddy Power customers.

But I have to go and look at some of those historical data you’re referring to. But I think we have had this issue in the last couple of years, where we haven’t been able to chance about our product for either of the businesses. And I contrast that with Australia, where we’ve been able to align our marketing loyalty spend and product investment here altogether. I think its position is very well in that market. In terms of the recreational exchange, you know, I mean it’s a great product. If you haven’t seen it, you should go and have a look at it at Cheltenham next week. We will be handing tips out to the end pole, we’ll be. And I haven’t got any stats on takeup on that today, Patrick. And Alex, you may want to talk about why 1 to 2, not 2 to 4?

Alex Gersh

Thanks for that question Patrick. I know it’s early in the morning, I think, where you are, so you’ve come up with a dizzy there. Look I think the reality is, what we did is, we looked at the 3-year plan, right? Then we looked at the 5-year plan and then we run a whole bunch of sensitivities scenarios, which I won’t bore you with, nor I would be discussing them, right? Some of them could be positive. Some of them could be negative.

One of them for instance, issues you have to think about, if something does happen in the U.S., what’s the level of the investment, potentially that you would make over the next few years? But that’s just one. There are many factors, right? And after we’ve done all those sensitivity analysis, we thought that the 1 to 2 very nicely encapsulates what I would call, some pretty bad things that could potentially happen or some bigger investments that would potentially cap in, that would still allow us to maintain that leverage. And that’s the range. That’s how we came up with it. So there is something behind that. It’s not just that we dreamed it. But it is – and there are a lots of different pieces to it, which you can – just have to trust me, we’ve done.

Patrick Coffey

Okay, Alex.

Operator

Thank you. The next question comes from the line of Darren McKinley from Merrion Capital. Please go ahead.

Darren McKinley

Just a few questions. Firstly, on the online Sportsbook net revenue margin of 7%, how this – would you recall that this is stabilized? And secondly, with regard to user growth within the online division and the Australian division, have you any color on the momentum there? And then lastly, within Australia, how much of the group revenue and EBITDA comes from South Australia? Thank you.

Peter Jackson

Alex, do you want to pick up the – I think it was?

Alex Gersh

What was the point? I couldn’t hear it.

Peter Jackson

It was the net deadline net revenue margins, momentum revenue growth and how much of the business Australia represents? I think. South Australia.

Alex Gersh

How much business South Australia?

Peter Jackson

I think it’s the point of consumption.

Alex Gersh

7%. Paul just told me, Paul Rushton just told me, it was 7% business in Australia, right? That’s what it represents. And I don’t – I mean, net revenue margin being stabilized, it’s – we’ve just – we’ve talked about some results, which obviously have impact. We’ve talked about some additional investments. We’ve talked about loyalty investments that are going to be made, right? So I don’t know what you mean by stabilize? We are going to invest in the margin, and we are going to invest in the loyalty. And the sports results matter. So I don’t know, I don’t know that, that – I can’t make a statement, that 7% is net revenue margin stabilized.

Darren McKinley

Okay, Alex. Thank you. What was against the user growth?

Alex Gersh

Active customer? We don’t – so we don’t report active customers, right? And the reason why we don’t report active customers is because a customer who has made one bet in a month is an active customer. If that bet is £5 or if it’s a free bet, these are all active customers. We don’t manage the business on the basis of the active customers. We don’t think it’s the right metric to use. We don’t use it in the business and we don’t report it externally.

Darren McKinley

Okay, no problem. Thank you.

Operator

Thank you. The next question comes from the line of Alistair Ross from Investec. Please go ahead.

Alistair Ross

Good morning, guys. Just a quick one in terms of additional marketing spend that you’re planning on spending in FY 2018. I mean, marketing and revenue are highly correlated, and therefore, should we expect an increase in cost with a sort of a parallel increase in revenue? Or are you actually guiding numbers down on the back of that marketing increase?

And then are you seeing recent increase competition from matchbook and bet deck, and is this part of the reason you’ve rolled out a recreational exchange? Also, it’s notation to the exchange. How much do you think the exchange contributes to EBITDA? I’ve heard varying ratios in terms of EBITDA margin. That would be useful. And then just in terms of gaming, I’m sorry to hope on a lot of this, but obviously, over the last 9 quarters, gaming is flat.

Obviously, if it is a product-related issue and you’ve got 1,000 developers, should we expect an improvement in gaming over the next 12 months? And have you seen some sort of a turnaround? Obviously, a decrease in Q4, which doesn’t bode well. And then lastly, just in terms of the 1,000 developers, you’ve mentioned the U.S. If the appeal doesn’t go ahead, how should we think about those 1,000 developers? And what is the cost in relation to these 1,000 developers? Is this all expensed on the product and technology? Or are there other line items?

Peter Jackson

Thank you very much. It’s quite a set of questions there. I think we’ll call it quits after these ones. Alex, do you want to have a go at some of these?

Alex Gersh

Let me try the – Well I’ll try some of these. So the additional marketing investment, we’re flagging it because it’s an incremental investment that would have an incremental EBITDA impact, right? So I don’t know what else I can say other than that. On the exchange, we will not talk about contribution of the exchange to EBITDA.

It’s obviously, look, we don’t spend a huge amount of marketing on the exchange. It’s a very, very good business. But we’re not going – we don’t disclose it, nor we will disclose it today. The 1,000 developers, really – I mean, it has nothing to do with the U.S. We won’t disclose the cost of them, the cost of them is in the technology line. But obviously, this is for, to produce product for UK and Ireland and international markets, markets where today there’s products to be introduced. So whatever happens in the U.S. will have a zero impact on these 1,000 developers.

Peter Jackson

Thanks, Alex. In terms – If I pick up the question about, sort of, improvement here to gaming, let me be very clear. We’ve got the developers who are focused at the moment on closing a lot of the product gaps we’re facing in our core Sportsbook business for Paddy Power and Betfair, and that is the right thing, first to have them focused at the moment.

We’ve got some exciting things we want to get out there before the World Cup and then indeed, into the back end of the year. We’ve a lot of high gaps to close with our competitors over the last couple of years. And in terms of the, sort of, the reason why we’ve created the recreational exchange, this is not a response to what other competitors are doing. It’s what we’ve been talking to our customers about what we think is the right thing to do to help meet their needs.

Okay. Look, thank you very much, everybody. Thank you all for coming in to Hammersmith. I was slightly concerned when it started snowing last week, that we’d never get anyone here. We almost got stuck in the curfew in Dublin, but thankfully, everyone survived. It was very good to see. We’ve got a bit of time, I think, having to catch performance, have a cup of coffee now, but then I need to disappear half past 11, again to talk to the business. But thank you all very much.

Alex Gersh

Thank you.