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Flutter Entertainment plc (PDYPY)

Flutter Entertainment plc (OTCPK:PDYPY) Q2 2022 Results Conference Call August 12, 2022 4:30 AM ET Company Participants Peter Jackson - CEO Jonathan Hill - CFO Conference Call Participants Michael Mitchell - Davy Ed Young - Morgan Stanley James Rowland Clark - Barclays Kiranjot Grewal - Bank of America Monique Pollard - Citi Joe Stauff - Susquehanna Richard Stuber - Numis Joe Thomas - HSBC Simon Davies - Deutsche Bank Daniel Politzer - Wells Fargo Andrew Tam - Redburn Ivor Jones - Peel Hunt Operator Good morning, and welcome to the Flutter Entertainment half year results update call. Peter Jackson, CEO, who is joined by Jonathan Hill, CFO. [Operator Instructions] And now I will hand over to Peter. Peter Jackson Thank you very much. Good morning, and thank you for joining Jonathan and I for this call. Hope you all had a chance to watch our presentation this morning, which helps set out extra color on our half year performance and how well positioned the group is for growth. Before we go to questions, I'd just like to highlight a few key points. I've been really pleased with our performance in the first half of the year. We had positive momentum with revenue up 9% and AMP growth of 14%. Our U.S. performance was outstanding, and continues to exceed all expectations delivering a profit in Q2. This was driven by phenomenal execution with the sports betting market share of 51% in Q2 where we're number one in 13 out of 15 states. And it was also achieved despite the fact we've been leaning into customer acquisition in Q2, acquiring over 0.5 million new customers. As we laid out in our presentation, we have a clear line of sight to U.S. profitability in 2023, for the full year, including the cost of share-based payments. You'll have seen that we now expect the outcome of the arbitration process with FOX in October. Unfortunately, as this is a live process, we can't provide any further detail. However, as previously stated, we remain very confident in our position regarding fair market value. In the group, outside of the U.S., revenue and EBITDA in H1 were in line with expectations with strong performances in Australia, and in our consolidate and invest in international markets. And we're excited to welcome the Sisal team into the Flutter Group last week. In the U.K. and Ireland, our online performance in Q2 improved sequentially on Q1, and we are confident that the proactive measures we are taking from a safer gambling perspective has set the business up well for the future. Across the whole group, the second half of the year started in line with our expectations. Our advantages in scale and diversification position us extremely well to capitalize on the growth opportunities ahead. And with that, I'll now hand you over to Phoebe to handle questions. [Operator Instructions] Question-and-Answer Session Operator [Operator Instructions] And our first question is coming from Mitchell. Michael Mitchell Yes. Firstly, on the U.S. and just to pick up actually on one of your introduction remarks there, Peter, in terms of your Q2 performance and you generating positive EBITDA in Q2 is 1 thing, to do just given the step up in share and customer acquisition is something altogether different. I appreciate something -- you've covered a lot of this in terms of the presentation. But can you comment on how your customer economics and your approach to customer acquisition more generally evolved in the period. Clearly, it has been well documented to a bit more benign competitive environment in the second quarter. If I'm reading the chart correctly on Slide 19, you seem to secure the step up in market share with no major change in the ratio of GGR to NGR. So it's question number one, around your approach to customer economics and customer acquisition in the U.S. And then secondly, in U.K. and Ireland online, I think you referenced as well in terms of the sequential improvement Q2 over Q1. If I've read it correctly, I think it improved from minus 26% external bonus and minus 11% sequentially. I wonder if you could just provide some context for that improved performance and how it positions you heading into the second half of the year. Peter Jackson Thanks, Michael. Look, I think in the U.S., the major point to make about our performance is that we've maintained our disciplined approach to customer acquisition. We've always been very much focused on looking at the ratio of our acquisition cost to lifetime value. And we continue to see advantages around the lifetime value of our customers because of our Parlay penetration and other benefits we get from our very strong product. And so we've remained disciplined with our acquisition costs. And look, whilst other people were pulling back from the market in Q2, we carried on leaning in because we could see that the lifetime values work were being maintained. And so we just took as much business as we could. And as I just mentioned, we've acquired more than 0.5 million customers. And so I think we're very pleased with how we've exited the first half. We've got a much bigger business now in terms of customer numbers than we had anticipated. We actually ended up spending a bit more money on that. But we know that the value the customers are going to bring in is as good as it has been in the past. So the business is very well positioned in that regard. And that's what's driving the very strong revenues that you see. Jonathan, if you have anything to add? Jonathan Hill I think that's the critical point here is we're building the embedded base and all -- and as it pertains to the slide showing the existing customers versus new customers. What we want to do is enter 2023, where there's big and embedded base as possible. And we obviously explained the sort of the 1-year economics to you, our customers. We obviously don't make money off the customers in aggregate with acquisition cost in year 1. So you can understand why, therefore, we can move the revenues up, but aren't moving the sort of EBITDA guidance because actually some of that high-performance has been driven by that incremental investment in year. But obviously, that gives us an even bigger base going into 2023, which gives us greater confidence as we cast forward into -- looking forward to hopefully getting to that EBITDA positive position in 2023. Peter Jackson And Michael, regarding your second question around the UKI performance. Yes, I'm sure Jonathan will have something to add to this as well. But you're right in terms of the improvements we've seen from a sequential perspective. And I think that it's important to recognize there's a few things going on. First of all, when you look at the comparative period last year in lockdowns, we know that our customers were more engaged with our products than they were at pre-COVID, and that has reverted. And so that's 1 factor. Secondly, we did move early and make a number of changes from a sort of safer gambling perspective and we're starting to annualize those. And thirdly, I think I point to a number of sort of product improvements we've started posting across the business. Jeremy, I don't know if you want to sort of talk specifically about those? Jonathan Hill I think the other point is we're looking at the GC data as well. And we think we really saw a step up in our performance and in Q2 relative to the -- due to debt on a pro forma basis until -- although we've got some good momentum in the business. The -- when we see the product improvements coming through, which you'll have seen in the presentation, hopefully being able to listen to, that's clearly driving the performance, both in getting Sky Bet back on track in terms of our build of that product and the high engagement levels we've seen at the start of the -- at the end of the last EPL season and then obviously some product improvements is also on the gaming side on Paddy. So really, really positive on that and seeing gaming going back into growth in June year-on-year gives us real confidence as we go into H2, and also it also informs the comment we've made around not seeing at this point any impact in the UK&I certainly from the sort of the cost-of-living question that clearly is exercising people in many industries, but we haven't seen that as yet. And gaming is obviously a pretty key indicator of activity levels. And when we look at things like our Tombola performance, which is obviously a very pure gaming business. And certainly, the gaming across our other brands, we're not seeing anything discernible at this stage, but we are keeping a pretty eagle eye on what's going on in the weekly data. Operator Our next question is coming from Clara Canton. Unidentified Analyst I wanted to also ask a question on the U.S., and maybe sort of on competitive dynamics, realizing that some of your peers have sort of taken a step back. I'm wondering if this is a dynamic that you think is really going to be related solely to sort of non-launch periods? Or do you believe that when sort of the next queue of states or the next cohort of states comes online, is there a chance that the new launch costs could end up being a little bit less extreme also? And then the second question is on product. I wondered if you could talk about product evolution sort of not only to date and your success with Same Game Parlay adoption, but also product innovation maybe heading into the NFL and NCAA season on the back of the year. Peter Jackson Clark, I don't know if to say good morning or good evening. Adjusting to what time it is where you are. So thank you very much for joining the call. Regarding the U.S. and the competitive dynamics, it's very hard to talk about what our competitors are doing because we don't have visibility to is what's motivating them a bit. I think from our perspective, we're very focused on acquiring as much business as we can whatever we're seeing sort of the return -- returns and paybacks that we're seeing at the moment. And that's why in Q2, we continue to lean in hard because we saw some of abundant opportunities. It's worth remembering, and if you look at the statements in the presentation, a lot of our acquisition was coming from some of our earlier states. So this is not just something that's focused around recent state launches. There is a degree of seasonality, obviously, in the U.S. around NFL is a big push from a customer acquisition perspective. And clearly, a state launch also has an impact as well. But I think that it does appear to me that we're seeing our competitors acting with more discipline, which I think is a good thing for the industry. We have always been very disciplined. And we're starting to see, I think, people coming closer to the position that we're taking. Competitors may not have the advantages that we have in terms of being able to monetize customers as effectively and are having to pay higher acquisition costs because they don't have our DFS base to cross-sell into. From a product evolution perspective, your second question, look, I mean, I think we do have the number one sportsbook app in the App Store. We have the benefit of our global organization helping cushion and develop and provide ideas to support the U.S. team. And Slide 7 of the presentation shows a lot of the group benefits that FanDuel has access to. We have around -- more than 80% of our handles price in-house at the moment. It's going to go to 90% in due course. And there's a lot of innovation around the product. The popular Parlays, the Same Pop Parlays, there are more than 80% of our customers play the Parlay product in Q2. We've only just launched search. So there's lots of 1 percentage point differences that we're making across the product. And actually, when I look in places like Australia, where we're actually -- we launched the Multi Revolution, which is what they call the Parlay product, back in 2016. And here we are 6 years later still evolving and developing the products. Now I'm very confident that the situation will remain the same in America with lots of innovation to come and us able to benefit from the expertise and innovation that the FanDuel team sees from their colleagues across the world. Just going back to your first question. I think the start of the NFL season is such a customer acquisition point in the year for U.S. sports betting that we still expect there to be a very competitive start of season. And while people may have pulled back to an extent in Q2, we certainly expect and our planning that it will be a highly competitive start to the NFL season. Again, I think it will be every single year. And we have to be very clear. We've got to win again, and we're going to earn the right to win. So we shouldn't be in any way complacent by a very strong Q2 performance, and we've got to be really focused on winning again at the start of season and NFL because I'm sure everybody will come out with guns blazing again. So we need to stay pretty focused on that at this point in the team. We've got a great plan for the start of NFL. And look, it's against the context where there's the elections in November as well. So we know that there's going to be a lot of noise from a media and advertising perspective. So Jonathan is absolutely right. It is the most competitive, and there's going to be a lot of people out there with messages and attractive offers. Operator Our next question is coming from Ed Young. Ed Young Thanks for the level of transparency and disclosure in the presentation. It's really appreciated. My first question is on the U.S. on Slide 23, you've given very helpfully a breakdown on estimated breakdown to some extent of the P&L in New Jersey. I appreciate you're doing to try and give an indication that mature states are significantly profitable. But I just wondered -- in terms of the 3 buckets there, you've already flagged, I think marketing will come down further over time. Cost of sales there is a 59% gross profit margin is also still quite a competitive state and it's aiming to promotions might be a bit higher and then other operating costs, but then presuming going to get some more operating leverage. So I guess what I'm asking is, is that a kind of implicit steer or guide to how we should think about FanDuel's overall profitability and say when those states are 4 years in other branded average? Or is that too much to read into it? And it's just really saying this is healthily profitable of that period? My second question is on the U.K. one of your peers had a comment on recreational customers yesterday and the chart around that. You put it on Slide 28, which again is useful showing that you're actually covered. I just wonder if you could help quantify what you mean by tier 1, tier 2 and tier 3, so we can think about to what extent it's possible a like-for-like comparison. Peter Jackson Look, let me just deal quickly with the U.K., and then we come on to about the U.S. We don't put a -- we won't provide you with this as the details of tier on tier -- tier 2, tier 3 customers. But I can tell you that the base that we have in the U.K. is now sort of very representative of what the U.K. looks like, whether you take slices of income wealth, income tax or whatever. So we think that we've set the business up very well to be sustainable moving forward. Jonathan, I don't know whether you want to talk to Ed's point around the EBITDA breakdown for New Jersey? Jonathan Hill What we're trying to do here, Ed, is just -- is not try and sort of let you read too much into the forward view on this. What we're trying to do is say, should people have confidence that we're on a profitable EBITDA trajectory on the states from when they've started through to year 4, and do we judge on a sort of on the basis of trying to work out how we -- it's not sort of rocket science how we've allocated the OpEx. We've done it in a way that we think makes sense to give you guys a steer on the fact that we are EBITDA profitable in that state. Clearly, this will evolve further over time. And you're right, we do expect the P&L to alter over time and particularly certainly on the marketing line. But at the end of the day, this state is still growing. And actually, when you look at some of the penetration curve data that we put in on Slide 20, I think you can quite quickly work out which states New Jersey from that penetration. And you can see it's still going up steeply. So you've always got this issue of how much top line growth do you end up driving by investing in marketing and promo spend. But the P&L in year 4 is still driving significant top line growth, and you can see that from the penetration curve on the middle graph on Slide 20. So yes, I don't try and read too much into it. I think we're just we're just giving -- trying to help people see the track we're on at this point with further opportunities for the P&L to evolves over the next few years. But obviously, we're doing Capital Markets Day and in November, and we can maybe touch a bit more on that at that stage. We're not going to sort of extrapolate any more at this point. Operator Our next question is coming from James Rowland Clark. James Rowland Clark A couple of questions, please. I just have sort of a slightly different way of asking as last question is on Slide 23, on the left-hand side, you've got the sort of chart indicating the operating leverage that you have in the U.S. with revenue growing at 2x the operating cost base since H1 '19. Would you mind just giving us a little bit of help on how we should see that evolve over the next 6 months, and into next year? And then secondly, again, on the U.S., you've delivered an EBITDA profit of EUR 22 million in Q2. Could you just help us with how that looks for FanDuel versus Fox Bet, you have in the past a bit out the 2 businesses? Peter Jackson James, I mean, I'll let Jonathan give us the details on that. I mean I think the profit that we made in Q2, it's worth noting, not only hit all of our U.S. business but also includes the costs, the investments we've been making to launch Fanduel into Canada. So the gross number for Fanduel is actually greater than the one you see on the front of the presentation. Jonathan? Jonathan Hill I mean you'll see, James, in the interim release, we referred to the fact that Fox Bet was, I think, 3% of revenues and 20% of the EBITDA loss in the half. So you can work out that it's $30-ODD million of which you can take half in Q2 because it's a pretty flat business. So therefore, you can probably gross up the 22 and get to a number closer to 40x Fox Bet. And then obviously, we've got, as Peter said, within that, the investment of FanDuel in Canada, so -- and we've got to step up and the lean-in. We did benefit from some positive sports results, but even without those, we feel that FanDuel is in a very strong position in Q2. And on the other point on Slide 23. Look, I don't like guiding on very short term because actually if you had looked at this graph a year ago, you would have seen a different story, which would have been even more revenue growth relative to OpEx because we sort of had a slight hiatus in 2020 as we entered COVID in terms of our OpEx growth we've pulled back quite strongly then we stepped up in 2021. Then we get the annualization of that into '22. So I think looking at half year is quite difficult. What I would say in H1 this year over H1 a year ago is on a -- if you normalize revenue from H1 '22 to '21, we had 71% revenue growth, and we had about a 46% growth in OpEx. So it's not quite the 2:1 ratio, but it's not a million miles away. But over the medium term, this is not a bad assumption to sort of think about -- we have built a lot of muscle in the business in the U.S., and we've built a lot of areas where the scaling will -- we've scaled the teams but it's not a bad framework within which to think about the business going forward rather than necessarily the specific Tier 1 ratio. It's just -- it's a reasonable directional framework. Operator Our next question is coming from Kiranjot Grewal. Kiranjot Grewal Just a couple of questions from me. I think in U.S., you've been talking a lot about being opportunistic during Q2, we acquiring customers, while others are spending less. The biggest in the U.S. still the biggest globally, and you have a strong balance sheet. I mean could you not be opportunistic to maybe spend more even going further on acquiring customers. So that's one question. And then secondly is around the customers in the U.S. How sticky is the customer in the U.S. versus those in more mature markets, say, the U.K.? Just trying to get a sense of the customers won in Q2. How much of that you'll retain as maybe marketing spend goes up by competitive? Peter Jackson Look, in terms of the 2 broad questions, we did spend a lot more than we had originally planned to in the first half typically actually around Q2. And so we ended up -- together with the team, we saw a lot of opportunities in the U.S. and so we pushed hard. I'm not sure that we could have spent a lot more in the subsequent way that we always tried to do. I'm sure that there would have been some further opportunities, but it may not have delivered the returns that we wanted, but we have been pushing very hard. You're right, we have been putting all the investment that we can into the business. So we don't feel constrained about that. And in fact, there were a number of states that were planned to launch that we haven't seen. And irrespective of that, we went ahead and understand the money. Jonathan Hill In terms of just to add 1 point, I mean, we maintain consistent discipline. We did exactly the same thing in the diametrically opposite situation in the run-up to NFL season last year when everybody was going pretty crazy with helicopter money and $5,000 free bets and whatever else. We maintain real clarity and discipline in what we are doing. And when we had the opportunity to lean in, we also kept the same level of discipline and clarity on what we were doing. It served us well in both situations, and we think it's the right way to build this business on a really clear, disciplined and focused way. And we think we took some great opportunities in Q3 to bring in some customers, particularly around our NBA product is fantastic, and it gives us a great opportunity to bring people in, and we think we did that really effectively. Peter Jackson In terms of the stickiness of our customers, I'd probably best refer to Slide 21, where we show the cohort performance of some of our customers. It's quite hard to identify kind of -- we can look at this on a clean basis because of COVID. But if you remember, last time we talked about the sort of year 2 on year 1 performance where we're seeing an 11% growth in the revenue performance on a cohort of customers. On Slide 21, you can see that we're now -- we've seen that accelerate somewhat on the -- on us if we look at the customers in year 3, and look at the revenues and then compared to with them. This is the same customer cohort that we had from year 1, obviously. We've seen now seen an acceleration of that revenue growth. And so there's now a 22% CAGR performance. And if you think about the way in which we've presented some of our other businesses over the years, too, whether that's sports bet or some of the stuff that we know -- that I know that the Sky Bet team has shown in the past, and we see in a number of our other businesses where you can see that just year-on-year, even if you see us -- attritional number of customers, actually the revenue call from those customers can grow on a year-on-year basis. And we are continuing to see that trend in the U.S. market. Jonathan Hill But overall, when you look back at the cohort charts for Sky Bet for Sportsbet, these are -- the cohort charge for the U.S., they create as well. Operator Our next question is coming from Monique Pollard. Monique Pollard Just a couple of questions from me, if I can. The first is on the UK&I online performance. Obviously, as you said, the percent revenue growth down 19% in the first half, and I think it was down 11% in the second quarter, much better than the U.K. gambling commission data, which was now 23.5% and 22% in the 2Q. So it seems clear that you're taking share in that market. I'm just wondering whether you think less potential to prefer the share gains into the second half given if I think about some of your new products like the build [indiscernible] product was only launched relatively recently. So it should have more of an impact 2H versus 1H. And then the second question, just on the U.S., it sounds very much given that New Jersey EBITDA margin, just helpful just in terms of getting insights to profitability in some of the immature states. Just wanted to understand whether EBITDA margins generally, you see us being higher, lower or relatively consistent in sports betting only space versus sports betting and our gaming space. Peter Jackson Thank you, Monique. Look, in terms of the UKI online performance, I think you're right to highlight the favorable performance of our business in Q2 compared to the market and where we're taking share. I think that there's a few factors there. I think, firstly, we're seeing the benefits of our more recreational focused business. When you think about our portfolio brands in the U.K. Tombola, Sky Bet, Paddy Power positions us very well compared to the market. I think secondly, we have always been at the forefront of trying to lead the market around safer gambling. And I think we've taken a number of very proactive measures some time ago. And it appears other people are beginning to catch up with us. And as I stated in the past, I always saw that if the white paper would provide some finality to some of these questions. But I did think that the Gambling Commission we appreciate their support in terms of going in and encouraging operators to be more responsible. They have been raising the bar, first of all, and I think you're beginning to see that impact, a number of operators. And I think the third thing I'd highlight is that we are continuing to invest in developing our products. There are a few areas where we thought we'd set a bit behind. And I think we've continued effects on delivering good products. And actually, when I look at the performance of our business in June to see gaming up year-on-year, I think, is great validation of the work that the teams are doing. Jonathan Hill Look, Monique, in terms of your other question, at the end of the day, we if you think about it, it doesn't matter whether a single product, multiproduct, triple product. If we're still investing in a CPA-LTV basis, that makes sense, we should still be delivering something -- yes, not an inconsistent profit between the different states overall because the overall economic should still work through on that basis. I mean there may be slight divergences between the stage we are in and the investment strategy. There will be a small impact probably from multiple products over single product, but I don't see it being a massive divergence. And actually, when we look across other states, we can see them on a similar basis moving into the EBITDA profitability that we're seeing in New Jersey. It's just they're further behind at this point in terms of their -- in terms of the evolution. So we've got other states who fall into this profitable EBITDA basis when we do exactly this allocation across all of the states. Monique Pollard Okay. Perfect. And some of their states, could you maybe just step in new states. Jonathan Hill Exactly, yes. Yes, yes. Very much so. Operator Our next question is coming from Joe Stauff. Joe Stauff Two questions, if I could, on the U.S. I wanted to ask around the dynamic, especially user growth, New York versus New Jersey, and Pennsylvania obviously, a big new state that's exploding you're doing well in. And then say, the 2 large states. Were you able to grow users, say, in the second quarter in New Jersey and Pennsylvania? It's really kind of like the first question. And the second question is as we kind of think about sort of the U.S. group and kind of waiting for the arbitration and so forth to be settled, I'm wondering if you've ever kind of framed out maybe the margin kind of benefit or the additional costs necessary to add to the U.S. group, again, if they weren't sitting within the total group in terms of the Flutter group, obviously. Peter Jackson Yes, Joe. So look, in terms of the dynamic around sort of customer acquisition. I mean I think the best chance to look at is probably Slide 20. And if you look at that, you can see -- this is all of our states on them, you can see this sort of penetration rates. And -- but they're all following a very similar trajectory that they're all moving up, right? So none of the states have reached sort of now a point where the growth rates are plateauing. And so -- and you can -- based on the dates of launch, you can therefore infer which is New Jersey because it's the longest line, and you can see it is continuing to follow a very similar trajectory as it followed in the past. And that's even whilst New York has done. So I think we're seeing very good growth rates and customer acquisition volumes from the more historical states, and I say more historical rather than mature because the growth rates are not slowing down in there. And I think that is important. And we are continuing to acquire business. And I think that was a point Jonathan was making in the conversation we're having earlier in terms of the EBITDA margins we're seeing in New Jersey even whilst we're seeing big acquisition volumes in Jersey. We're still seeing those EBITDA margins. And obviously, if we ever get to the point New Jersey slows down, and of course, the marketing investment will drop off. In terms of your second question, Joe, just on the -- I think 1/3 of our acquisitions in the half were on pre-2021 states. So that tells you, we acquired 1.2 million in the first quarter, 0.5 million in the second quarter. So over 1/3 of those came from pre-2021 states. So you can see there's still huge growth there in the early stages. And that's borne out on exactly on Peter's point on the Slide 20 with those, you can see FanDuel penetration in each of these states and those lines still going up. So it's really exciting for us seeing growth across new, and I was going to say, more mature, but I don't even like using the word mature a lot for these states, historical because they're still growing. That's fantastic. And in terms of the second part of your question, Joe, I think it's something like what you're getting at. I was just wanted to understand what the benefits were for FanDuel for being part of Flutter. And they're significant, right? If you look on Slide 7, you can see that we've highlighted some of the benefits that they get, the risk and trading capabilities, which are very significant. I mean I think when you think about the superior economics that we see around monetizing handle a lot of that comes from the group's risk and trading capabilities where -- we have so much more of that done in-house. The fact that our Parlay products are -- have been developed in house and the price in-house means we keep all of that incremental margin and we have a far superior customer proposition as a result. Obviously, the group technology, the global betting platform is something which helps the team at FanDuel. We have the best casino product in the world with our PokerStars business. And we will increasingly be bringing more of that product and capability into handle as well. And that's something that you'll start to see us accelerate in the future. So there's a lot of benefits. Jonathan Hill And I just wouldn't underestimate the benefits of being able to bring in and connect people across the group who are experts in the application of generosity, the -- how to present games, most effectively to consumers, all these different areas, the insight we've got from all of our global markets is huge. And we've got so many people in the U.S. who've brought fantastic expertise from elsewhere in the group, but also sort of the teams who link up to make sure that the best practice that we've got in different markets and the learnings we've got in different markets can be transferred across markets really efficiently and really quickly. Operator Our next question is coming from Richard Stuber. Richard Stuber Two. First the -- your guidance for GBP 225 million to GBP 275 million loss in the U.S. I think the full year implies about GBP 100 million to GBP 150 million of losses in the second half, which is actually similar to what you did in the second half of '21. To me, that seems it's still pretty conservative, especially given the GBP 16 million of profit you made in the second quarter. Is this purely a function of ramping up the customer acquisition ahead of the NFL? Or are there other costs in the second half, which we should be aware of? And the second question is, I think in your presentation, you discussed some things like personalized generosity investment to Sportsbet. Is this something that you've rolled out across your other regions? And I'm thinking in particular in the U.S. Jonathan Hill Richard, I mean you answered your own first question. So the -- I was going to say the answer is one word answer. Yes. Look, we expect that -- we've got more states live. We've got more states live for the first time with NFL, which would be really exciting. And we'll be -- we're going to be investing positively, aggressively with our usual level of discipline through both Q3 and the run-up to NFL, and through Q4. And we obviously have Kansas coming live. We hope and believe in Q4. So that will give us another state. So it's really just that investment and scaling up the business and making sure we're taking the opportunities that we see before us in the market. Peter Jackson And Richard, in terms of your question around personal generality. I mean, this is a journey, right? So we've been making significant strides to improve the performance of an application of our generosity in Australia for a number of years now. It's something that we continue to improve. And we're also have been doing this and we've got a lot of opportunities to benefit from this in the U.K. market as well. It's one of the areas where when we think about some of the stuff that we'll be doing over the back end of the year to integrate the businesses more closely will be taking the best practices from a generosity perspective. In the U.S., when we launched the global betting platform into the market, we're able to bring across some of the tools and capabilities that allow us to apply so personalized generosity to the customers. We have a platform that we internally call as CPP, which is our cross-promotional platform that allows us to personalize that generosity. So it is something we're doing. There are always opportunities to improve it and enhance it. And of course, it's something that we can do with reference to local taxes and also think about cross-selling with different sports and things as well. Operator Our next question is coming from Joe Thomas. Joe Thomas So my question is, first of all, please. I just wonder -- you mentioned in the presentation that you're thinking about optimizing marketing spend in the U.K. I just wondered could you clarify exactly what that means, please? I'm guessing that means reducing it. And I'm just wondering how also you can tack this on to it, how the news that you're getting rid of the best odds guaranteed offer at times in the U.K. feeds into that. So it's part of the same thing. That would be question one. The second thing is the presses has had a variety of management -- mentioned a variety of management changes that you've been making and there have been some job losses as well at Flutter. Are these changes that had always been planned? And what is it that you think be working better. I'm sort of wondering kind of why they're being done. Peter Jackson Joe, look, we -- it's worth remembering that the U.K. division is made up of the historicals of Paddy Power Betfair business together with Sky Betting & Gaming. And we always said at the time of the merger of the Stars Group we weren't going to rush into the integration, but it will take our time and do care takers because we wanted to maintain momentum in the business. I say frankly, the changes that you're seeing coming through at the moment are really just a reflection of that. So there were going to be -- there are always going to be some job losses associated with some of the integration, and we're seeing that now. There are opportunities for us to share best practices around marketing and generosity. We need to reflect some of the changes that we're seeing in the market dynamics and some of the changes to some of the lifetime values as opposed -- as a result of some of the changes we've made to take a gambling, and so all those things are being reflected in what you're seeing in the U.K. division. And so -- no, look, the work we're doing around tech platform, the work we're doing from a people perspective. And there's optimization we're doing around marketing generosity are all a function of that. The best odds guarantee changes we're making, look, we continue to review the approach we take for generously making sure we're applying it to the right customers and to the right, good products. And so it's just a standard part of the way in which we access and reassess what we do in the market. Jonathan Hill And then just building on your other point, which was, is this just about reducing spend? No, it's about, firstly, trying to optimize and find areas where we think our -- some of our spend is suboptimal. There's then a secondary question is how much of that do we want to reinvest if we can find effective ways to invest to drive growth. So there's sort of 2 different -- there's 2 different steps there. So yes, the first step is, as you say, identify and therefore, reduce, but we may reinvest if we can see the opportunities to do so. Operator Our next question is coming from Simon Davies. Simon Davies Two from me, please. Firstly, the Sisal deal takes you into the international lotteries market. Do you see that as a strategic opportunity for the group, and something you want to invest in more broadly, given that it's a relatively early stage of this digital development? Or is that possibly something you might exit? And second question, just returning to the U.S. What are your thoughts in terms of timing of the launch in Massachusetts and how material would that be in terms of start-up losses? And do you have any thoughts also on the likelihood of California opening up over the next 12 months? Peter Jackson Simon, look, in terms of your sort of questions, we've only just closed the deal with Sisal. I mean clearly, the international lotteries operation they have there, which is -- for those on the call who haven't sort of followed is in Morocco and Turkey, yes, as well as we think it's an exciting business, and we're looking forward to getting in the skin of it and understanding more about the opportunities that the team have been pursuing. But -- and it's exciting both on a stand-alone basis, but also as a way to getting into new markets that we may not be able to have sports betting in, but could also subsequently use as an opportunity to follow up with sports betting. In terms of your second question, I don't think we have the specific details yet of when Massachusetts is going to go live. Jonathan Hill We think it's probably going to be '23. I wouldn't guide specifically around the loss in Massachusetts. What we've said is we've got a view on 2023 and the states that are going to launch. But the overall mathematics of the size of the retained base versus the new base still means that even with launches that we might expect in 2023. We expect, subject to California, to be EBITDA profitable in 2023. Peter Jackson Yes. It will add another 2 percentage points to the population that we have covered by sports betting in America. Clearly, the big one is California. Look, it's worth might be more than 5th largest economy in the world, but it's going to be a tough fight. Ask me on the 9th of November, how we're feeling about and I'll tell you. Operator Daniel Politzer And congrats on the U.S. profitability. Just to clarify a point on that. It sounded like you spent more in the second quarter on sales and marketing than you previously planned but you've seen the flywheel continue to work. So as you go into the third quarter, I just want to confirm you're I guess, now planning to spend more on sales and marketing than you previously had. Is that a fair characterization? Jonathan Hill I wouldn't necessarily say that is I'd say we remain very agile in making decisions based on what we see before us. what we saw before us post Super Bowl and into Q2 was an opportunity to invest. We have plans -- which we still expect the competitive market to be pretty similar to what we probably expected. We expect people to step in again having maybe said some powder in Q2 and step back in the market. So I wouldn't necessarily extrapolate what's happened in Q2 into Q3. We will judge the competitive market, the competitive dynamics and our paybacks as we go through August and into September. And we'll adjust our spend based on the metrics that we always adjust our spend by, which is CPA to LTV. So we expect it to be as probably as competitive as we previously expected it to be. As yes, we saw, I think, a bit of a step back in Q2. Dan, I think you have -- did you have a second question? Daniel Politzer Yes. Yes. So just as a quick follow-up. In terms of iGaming and M&A, and I guess they're kind of interrelated. How do you think about growing the iGaming business? Do you have a target share versus the high teens, I guess, that you're currently at? If you think about growing it, how do you weigh organic growth and product improvement versus maybe doing something inorganic via M&A? Peter Jackson Yes. Look, I mean, I think our share is around 20%, which we think is pretty impressive because we know that there's some substantial improvements that we can make. Around half our customers have come direct, which I think is a testament to the strength of the FanDuel brand and its potential. We have started scaling up the resources we're applying to the Fanduel business in the U.S. So we brought across [Asad] to lead the casino business. He started in May. So it's starting to have an impact now. We brought other folks over from Paddy Power Betfair and from -- other people from PokerStars as well. The focus now is going the basics in place. And we've got a new casino strategy. We're very excited about the opportunities of bringing some of the key expertise we have elsewhere in the group over to the [indiscernible] business. And we can talk to you more about that at our Investor Day that we'll have in November. Operator Our next question is coming from Andrew Tam. Andrew Tam Andrew Tam from Redburn. Just staying with the U.S. for a minute. Just in terms of the 2:1 operating leverage. It sounds like that's a little bit of a move from in terms of that operating leverage ratio. I mean to what extent does that improve going forward as, I suppose, new state launches happen and start to fall away. Should that not improve over time? Or is that sort of your rules down as state launches are ongoing. I suppose that's the first one. And the second part to that, just in terms of leaning into the customer acquisition spend that you spoke about earlier, how do we think about that record sales versus, let's just say, somebody reviews your comments -- some of the key comments just in terms of New York being prioritizing some states like New York. How should investors think about that? Jonathan Hill So if I take the off-leverage question, we -- some costs just move with scale. So customer ops costs will move to scale. As we do a new date launch, we need to have the regulatory and compliance folks associated with each of those states. Some things are just volume related, either volume of states or volume of customers. So we'll naturally have an element of the cost base, which is variable and activity dependent. Look, this is a historic rule of thumb it's a reasonable framework within which to think about it. And -- but we're comfortable with that as a current sort of framework to get to people to think about. And if we can find a way to make that ratio improve over time, we'll clearly be looking at it. But at the minute, I think it's a sensible way to just think about it. Peter Jackson And in terms of your second question around the fact that we're leaning in around customer acquisition in Q2. At the same time, as deprioritizing New York. I think the important point about New York is that we've been very thoughtful about application of generosity to customers, free bets and things like that, that carry the same tax levels that the rest of the business of New York. And so we're very thoughtful about the application of generosity bases like New York. More generally, the point to [indiscernible], we just -- we continue to see very robust lifetime values, and we saw opportunities to pick up additional business. As Jonathan said, we're very agile with our marketing spend and we chose to sort of buffer in Q2 and spend more money. Andrew Tam Got it. And then how should we think about just in terms of -- the focus has been on customer acquisition spend. I mean how does that compare to your spending or marketing spend on retention. Peter Jackson So yes -- I think that -- it's a slightly bigger topic to cover and we can talk about it more in November at the Investor Day because I'm slightly conscious of time. But look, we are investing in retaining our customers. It's something we just referenced earlier on the call, and we're talking about the spend on sort of generosity and the personalized generosity and the ability to utilize some of the great tools we have from across the group. So look, we'll talk to you more about that in November. Operator Our last question from the queue is coming from Ivor Jones. Ivor Jones Can I ask 2 things about Italy? Longer term, is Sisal a nice growth business? Or is there a step change coming as it becomes part of the group and you integrate the other brands? And the narrow question is, Sisal is performing well, is that because retailers recovered more quickly than you expected to get to the expected level? Or is it outperforming your expectations even as we get into July and August. Peter Jackson Look, we're very pleased with the performance of Sisal. The business only closed last week. So in terms of how we think about that moving forward, online penetration is very low in Italy, and we do expect it to continue to grow. There was a step change in online penetration with COVID. What we have -- it is like a lot of those customers with online that are staying with this product, but we have seen a big bounce back in the first half as customers are able to use retail this year in comparison with the lockdown last year. There are synergies we're expecting to deliver off the back of the transaction. We will be able to utilize our risk and trading capability in Sisal, which will obviously save some cost but I think, help improve the product. our Poker business, we'll be able to utilize the network of retail points for deposits, which is going to be important. And will also sort of think about cross-selling poker into the Sisal base as well. But it's -- and then the gaming content is the third big element, and we're pretty excited about that. And because of the time it's taken to get all the approvals done, we've been able to get ourselves lined up to hopefully getting on with the integration wasn't -- now that we've brought the business together, we're very excited about it. Okay. look, thank you very much, everybody. Appreciate all of your time. Sorry, we've nearly used the entire hour. Got some great questions, so thank you. Jonathan Hill Thanks all very much. Comment

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