Entain Plc (ENT) Earnings Call Transcript & Summary

Good morning, and welcome to Entain's Q2 Trading Update and Investor Call. I will now pass you over to CEO, Jette Nygaard-Andersen to open today's call.

Good morning, everyone, and thank you for dialing in today. As usual, I'm joined on this call by Rob Wood, CFO and Deputy CEO, as well as the IR team. And I'll start with a brief performance overview, and then Rob will take you through our Q2 trading in greater detail, and then we'll open up to Q&A. So I'm pleased to say that Entain continues to deliver on our strategy of focusing on our customers. We continue to attract broader, more recreational audiences with great products, engaging content and exciting experiences. In fact, in Q2, we had our highest ever of actives, up 60% versus Q2 2019, i.e., versus pre-COVID. Our retail operations continue to see customers engage with the richer experience our shops provide with volumes back to pre-COVID levels and in some cases, ahead. However, while we grew revenues quarter-on-quarter, we did face some headwinds in Q2, including tough comparables year-on-year as we lapped last year's COVID enhanced performance and pressures on consumers from the weaker macro environment. As a business, we are relatively resilient to cyclical macroeconomic effects. However, new business is completely immune. We've seen some moderation in the rate spent by customers, resulting in lower underlying growth across many of our markets versus our expectations earlier in the year. We also continue to enhance protections for customers with more stringent affordability checks in the U.K. Also, competition in Brazil is intensifying ahead of regulation which has showed -- slowed the rate of growth we are seeing there. That said, in Brazil, we still grew NGR by 26% in the quarter. We continue to lead that market, and we remain very excited by the long-term prospects of the country. Meanwhile, over in the U.S., BetMGM continues to deliver, reinforcing its leadership in North America. As you heard from Adam and his team at the BetMGM Capital Markets event in May, we have exciting plans for second half of the year, particularly with further enhancements to our sports products. Following a successful launch in Ontario, BetMGM went down to announce 2 exciting innovative partnerships. One with Carnival cruises to provide on-ship betting and gaming under the BetMGM brand and an exclusive agreement with Sony to provide a unique Wheel of Fortune experience, bringing together a range of Wheel of Fortune games, including ones we specifically developed in our Entain's studio. These types of partnerships really highlight that we think differently and more broadly about our customer acquisition opportunities. M&A continues to be a key part of our growth. Our recent announcement of the BetCity acquisition in the Netherlands marks the fourth transaction so far this year, and the pipeline of opportunities remain exciting. Sustainability and responsibility remain at the heart of our strategy alongside growth. We continue to make progress on our sustainability agenda. And it was notable that we were awarded Advanced Safer Gambling Status by GamCare, recognizing how we are leading the industry in this important area. We also continue to make progress on ARC with trials continuing across many of our international markets. So before I pass to Rob, I just want to stand back from the short-term headwinds and remind everyone that the long-term fundamentals and health of the business are strong. We continue to deliver our strategy of growth and sustainability. We have a diversified business across both geographies and product providing relative resilience and also long-term growth. Our track record on M&A is strong, and we continue to grow through acquisition. The underlying growth dynamics of our markets remain compelling, with an ever-growing and broadening audience, engaging with online betting and gaming. New markets are regulating, opening up further new opportunities. So we look at a potential total addressable market of over USD 160 billion as we grow in existing markets, into new geographies and into new verticals, creating a market opportunity 3x larger than we operate in today. And of course, all this growth potential is underpinned by our Entain platform that enables us to outperform our markets. So I remain extremely confident that as we continue to execute on our strategy, we can deliver significant upside to our shareholders. Now over to you, Rob.

Thanks, Jette, and good morning, everyone. As a group, our NGR was up 6% in constant currency in Q2 and up 18% for the half. Before I get into Online, I'm going to kick off with retail today because our shops were the star performers this quarter, delivering ahead of expectations. We're delighted to see that customer volumes in shops were ahead of pre-COVID levels. So if we compare Q2 of 2019 to the quarter just gone, so pre-COVID NGR was up around 2% per annum on a CAGR basis. Of course, year-on-year growth percentages for retail are very large due to lockdown restricted trading in the prior year. Those figures for retail are a blend of all of our territories with the U.K. and Italy, our largest businesses, showing the strongest performance. In the U.K., the strong results are driven by continued digitalization of our estate with gaming machines and self-service betting terminals, both seeing fantastic outperformance. Now on to Online. Online NGR growth in Q2 came in at minus 8% in constant currency or minus 7% for the half. Now we expect it to be down versus last year as we lapped lockdowns and the Euros in the prior year. We wait for Netherlands licensing and the tighter affordability measures play through the U.K. ahead of the U.K. Gambling Act review. However, the outturn was ultimately behind our expectations from earlier in the year due to a couple of headwinds. Firstly, whilst our business is resilient to weakening consumer sentiment, we're not immune from it. So given the headlines over the last few months, it's not surprising we are seeing some moderation in spending by customers. Our active numbers remain strong, but we estimate that spend per head is down around 4 to 5 percentage points versus our expectations for Q2 due to the macro environment. Let me put that another way. In spite of the gloomy economic headlines and backdrop, our strong actives show that our customers are still playing with us. They're just spending around 95% of what we had expected them to. So still spending at 95% is why we see our business as relatively resilient to macro conditions. Secondly, in Brazil, we always expected there to be increased competition ahead of regulation, but the intensity has arrived a little earlier than anticipated. And while our NGR growth in Brazil in Q2 was still an impressive 26%, that was nevertheless lower than we had been expecting, which results in approximately a 1 to 2 percentage point drag versus our previous expectations. You remember, we have previously talked about Q2 year-on-year growth being down low single digits, largely as a result of the COVID impact unwind. So those 2 factors together should help you bridge from that expectation to what we're reporting today. As we plan ahead, whilst macroeconomic impacts are cyclical, we think it prudent to assume they persist across the balance of the year. Additionally, we need to digest the delay in Netherlands licensing, and therefore, we now expect the second half to deliver mid- to high single-digit NGR growth, leaving Online NGR for the year around flat. What I find particularly encouraging is that the underlying performance of the business remains strong. We saw positive underlying momentum across the first half, with Q2 NGR ahead of Q1 NGR. As Jette highlighted already, we continue to deliver on our strategy of broadening our customer base with further growth in actives, up 60% versus the same period in 2019. And in fact, Q2 was our highest level of actives on record. Our business in Australia continues to grow -- to go from strength to strength with NGR up 21% in Q2. And as already outlined, Brazil continues to grow strongly, up 26%. And when looking through the COVID variables, we continue to deliver double-digit Online NGR growth with a 3-year CAGR, up 13% in constant currency for the first half. Moving on, M&A continues to be a key part of our growth. I'm delighted to recently announce the BetCity acquisition, which, once we receive licenses for our existing brands, provides us with a leadership opportunity in that market. Completion is expected later this year with the real benefit being seen in FY '23. And last but not least, BetMGM and the U.S. As Jette said, we are firmly #2 across online sports betting and our gaming markets where we're active with a 24% market share for the rolling 3 months to April. This excludes New York where our strategy is different due to the high tax rates. In iGaming, we continue to lead the market with 29% market share in our states. Customer engagement remains as strong as ever and on a same-state basis, BetMGM continues to deliver growth of over 30%. In Ontario, it's still relatively early days. But despite it being highly competitive, in June, BetMGM saw over 80 million transactions in the month. With BetMGM continuing to deliver, we remain on track with our ambition of over $1.3 billion of NGR this year and reaching positive EBITDA during 2023. With that, I'd like to hand the call over for Q&A.

[Operator Instructions] We will now take our first question from Ed Young from Morgan Stanley.

Can you hear me?

Yes. Ed, go ahead.

Great. Great. So my first question -- obviously, you gave the original guidance in March. It's now quite a significant update you're giving now. Can you just talk about when you started to see this impact during Q2, just so we can sort of about exit rates versus entry rates in Q2? And perhaps connected to that, you're thinking on the cadence of what growth might look like in Q3 and Q4, if that's possible? Obviously, you've given an overall expectation for H1. The second question, I wonder if you might be able to give a little bit more geographic color. I didn't hear a U.K. growth number. I may have missed it. But the reason I say that is you're sort of saying you're putting through the full macroeconomic impact that you've seen the sort of spend per head coming down 4% or 5%. Are there any geographies that were particularly weak or particularly strong or you feel you've seen that more or less than in other places? Or is it a fairly uniform effect across your geographies? And then third is retail is obviously a very strong, frankly, a very impressive number there. But if you're seeing a macroeconomic impact across Online, is there a reason to think that wouldn't hit at some point in retail as well? Or do you think that's cushioned by COVID offline reversion or else maybe how should we think about the sort of maybe a slightly phased risk but risk nonetheless to retail growth for H2 onwards?

Thanks, Ed. I suspect many of this morning's question will be for Rob on the trading. So Rob, handing over to you, guidance, exit rate and Q3, Q4, geographical differences and retail, whether we expect to see any macro impact. Do you want to take those?

Sure. Thank you, Jette. Yes, so let's start with when do we first start seeing an impact? Really, spend per head started to dip in April. So realistically into May before observing it as a trend and watching it closely. May continued. And likewise into June, albeit when you lap a tournament, there's a bit more noise in that mix of actives in spend per head. So really the step-down beginning in April. When you think about when, across the globe, the headlines really started hitting consumer confidence levels dip, it was around that sort of time. So that clearly prompted us to investigate. You can clearly see that progression in spend per head decline from Q1 to Q2, both in absolute terms and on a year-on-year basis and nothing else was really changing. So it was started to become clear to us, I guess, during May that this is a trend that we need to watch closely, drilled into the detail. And we talked to all our businesses. I spent the last couple of weeks doing a quarterly updates with all our MDs, and some territories are feeling it much more than others. Australia, for instance, is going fantastically well. It's sort of being flagged as a risk, but we don't think we're seeing a macro impact in Australia yet. But other parts of the world, this is really moving on to another one of your questions, but in other parts of the world, particularly Europe, I'd suggest it's clear there's an impact. In the Baltic, for instance, inflation is nearing 20%. And you'd be mad to think that you're not seeing an impact as a result of those kind of conditions. And when you bring it back to group-level sort of on a weighted basis, we get to around 4 or 5 points of being the sort of unexplained, if you like, drop in spend per head, which we absolutely attribute to being the macro environment, but it is cyclical. We're not forming a view on when it comes back, and we felt it was sensible to assume that it continues through the rest of this year. To your question around Q3 into Q4, I expect Q3 to be better than Q2. And then I expect Q4 to be better again. There are some fairly material movements between Q3 and Q4, just to note when you're thinking about that progression. One is football tournaments. So obviously, in Q4, we have one whereas we did in the prior year. And in Q3, we don't have one, whereas we had the end of the Euros in the prior year. There's also Netherlands relicensing. I think it's -- Q4 is our assumption going forward. We don't know that, but it's our best view. And obviously, you remember, margins were a little tough in October last year, and hence, there's a bit more of a margin movement helping Q4. So I think the quarters from a year-on-year perspective get progressively better. So your second question was all about territories. And really, I think I've hit the headlines already. There absolutely are some strong territories out there such as Australia and Brazil, that we've mentioned. The ones that are struggling the most, I would say, it's really concentrated around Europe. And then your last question was around macro impact on retail. It seems that unlikely that there's no impact at all on retail. What we are benefiting from right now though is outcompeting on the high street. We're really confident we're taking share. You can see it in the comparators. Our revenue per shop is looking very strong. How are we doing it? It's primarily through a stronger gaming machines offering and stronger bet stations and I can dig into the detail on that, if you'd like. But we're really confident we're outperforming. And hopefully, that will continue and market share gains are really the best way to offset any potential impact from macro conditions. Let me pause there.

And just to follow up. So are you able to give a U.K. number? Or are you not giving that today? And I guess the other sort of thing that comes out of it is that if you've got some geographies that appear to be wearing the macro impact much more than others, is there a chance that you end up with a higher blended impact than the 4 to 5 points you're looking at now if other geographies also start showing some of that weakness? I guess, what people want to understand is how conservative do you think the macro impact you've swept into the H2 guidance is? Or do you think there's a chance that we could be looking at Q3 and having to bring it down more because countries that -- maybe Australia, as you mentioned, is a risk, some countries like that start showing more than we've seen previously earlier. Just your thoughts on that in general?

Really tough one to call, Ed. I think we're doing a sensible thing, which is assuming current levels continue, and some territories could start improving while others go the other way. We're such a globally diversified business. You might hope that the blend stays broadly where it is but clearly, we'll be keeping a close eye on it. There are some territories that consider their economy to be really quite insulated from global conditions and therefore, are not expecting an impact at all. So one for us to keep a close eye on. And U.K. is down 15% for the half, very similar numbers, Q1, Q2, clearly with a significant impact from the U.K. affordability measures that we've been taking as everybody else, as you know.

We will now take our next question from Simon Davies from Deutsche Bank.

Can you hear me?

Yes, Simon. Loud and clear.

Perfect. First, can you give us a bit more detail around affordability? You talked about the impact in the first half broadly. But can you put any numbers on that? I mean what percentage of the weakness in the U.K. is coming through from types of affordability checks and where do you think you are relative to the rest of the market? And then secondly, we've seen Australian tax hikes in New South Wales and Queensland. Do you think it's reasonable to expect that we'll see other states following suit? And what impact could that have? And thirdly, M&A, is that still on the agenda? Or given the weaker macro backdrop, are you looking to conserve balance sheet and hold back for the time being?

Got it. Thanks, Simon. So let me start from the back. I'll comment on M&A and also start off on affordability. And then, Rob, if you will continue affordability and then tax, Queensland, Australia. So listen, on M&A, we are as active as ever. Very happy with the BetCity acquisition that we did recently closing later this year. So that's our fourth transaction this year. And our pipeline is as exciting as ever. And really, when you look at the BetCity acquisition, I look at this as a classic maintained deal, which is complementary, attractive in price, synergies in the outer years, and it gives us a strong foothold before reentry of our brands, we win and party. And it also basically leaves our leverage in a good place. So there's still room to invest. So we are as active as ever on M&A and remain really excited about our pipeline. On affordability, really maybe where I wanted to just kick off is just to take us back a little bit, and we've talked about affordability has really been a journey for us since the GCs came out with guidelines back in late 2020. So we had through 2021, implemented a number of things around affordability. And I think we've said that -- this before, so let me reiterate it. I think all operators have worked through the last year, 18 months in implementing tighter measures like thresholds and different affordability checks. So this, when it comes to a licensed operator, this is across the industry. And operators have different approaches, but we're all addressing the same thing, right? So for our side, we've included 3x more behavioral markets than others. We are capturing real-time data here, meaning that we can do bespoke or hyper-personalized customer protection, which is enabling us also to impose variable staking limits for some player cohorts, and we're doing self-certification and questionnaires and working on the customer journey. And the reason why I say this is that it's been a process. So what we're trying to do is really bake this into our forecast as we go along because it's really part of our industry and part of doing business. So I'll pause there. I'm happy to talk more about our measures, but why don't I hand over to Rob, if you want to say anything more affordability and then turning to Australia and taxes.

Thanks, Jette. Simon, so to the question of the impact of affordability, look, it is hard to unpick the competing drivers. So for example, we're seeing spend per head fall in the U.K. That's the driver of the 15% decline that I mentioned. How much of that is affordability measures versus other measures versus ARC, but also versus macro conditions? It is hard to separate with confidence. What I would say is we do see macro impacts in the U.K. as well because if you look at spend per head on the lower spending cohorts, then you can see a falloff as well. So it's not just driven by less top end activity, but really hard to unpick the two, so I wouldn't attempt to do that. Interesting to see that the recreational mix in the U.K. continues to improve at pace. Now clearly, that is partly due to U.K. affordability, having an impact. So you know it's having an impact. Also the pivot towards that audience from a brand and product and customer proposition perspective. But if you look at the contribution from the top cohorts of spenders in the U.K., it's fallen by just over half since the start of last year. So very material movement in the customer base in the U.K. On to Australia. Is there a risk of further tax rises? There's always a risk that what you would say in Australia, though, is that the blended tax rate now, once you roll forward the proposed changes, is comfortably over 20%. So it's on the high side. And that is on top of high product fees. So the gross profit margin in Australia was already one of the lowest globally, and this now puts further pressure on that. So in other words, there's not a lot of room you would have thought for further movement in Australia. But if it does happen, then we move into mitigation mode, as we always do. We think actions internally can typically mitigate around half, something like that. And then, of course, you get the knock-on benefit of smaller operators who just simply can't make it work anymore in these kinds of conditions. So unless you've got a decent market share, you're going to be loss-making as a result of these changes. And ultimately, that will play through to higher market share for ourselves. So is there a risk of further tax rises? Same as everywhere, yes. But then you can mitigate, you can flex through the marketing line. There's other measures and ultimately, the scale operators are the ones that win in that sort of situation.

We will now take our next question from David Brohan from Goodbody.

Just a couple of questions for me. Firstly, can you give any color around sports win margin either at a group level or in terms of some of the key geographies you call out? And then in Australia, a very strong outcome in Q2. Is that -- is it volume-driven or margin-driven? And then just kind of finally on the affordability side of things. Have you guys made any changes to your slot stakes across the U.K. space? Or is that something you're willing to disclose?

Thanks, David. Let me just start from the back, and then I'll hand you back to Rob. So on affordability, we are constantly working with different thresholds, different customer segments. But when it comes to any specific, let's say, implementations, we're waiting for regard to see what they come up with when -- and if hopefully soon that we see the white paper there. But it's through 2021 and 2022 we are working with the different levels of different of thresholds. But on specific slots, we'll wait and see what comes with the white paper. Rob, over to you on sports margins and Australia.

David. So sports margin in the quarter was a very solid 12.6%. We have this every quarter, I sort of get asked whether our expectation is ticking up. I think it is ticking up, particularly due to the recreational mix point that I was referring to earlier. It feels like numbers starting with a 12 are more normal than 11 now. So a decent quarter for margin. No particular stories, I have to say, on a geographic basis. Everywhere, broadly in line with expectation. Broadly down a little year-on-year, but broadly consistently. So unusually, no real stories by geography for the quarter. Then on to Australia, not margin-driven. I wouldn't say that the 20% growth is volume-driven, and it's really a mix of both spend per head and actives. So healthy growth rates, volume-driven, at least half active, other half spend per ahead.

We will now take our next question from Monique Pollard from Citi.

Just a few from me, please. The first is on the GAR. Obviously, you mentioned waiting for that before giving sort of further guidance. But I'm just trying to understand whether -- even if it comes out before Boris leaves office with the gambling minister resigning today they're saying that the paper is with #10. Can we have confidence that it isn't later amended? So would that be a clearing event? Then the second question on M&A. I just wanted to understand given you've got that strong pipeline in the BetCity acquisition, as you say, completely falls into your criteria. What are you seeing in terms of valuations and expectations from the acquisition target in your pipeline? Are they coming down, I guess, in line with how your valuation has been coming down? And then finally, on Brazil, is it reasonable now to no longer expect the sports betting market there to regulate before the October election? How do we think about that in terms of 2H growth expectations? Would regulation have been a drag on growth or a benefit to growth?

Monique. Yes, I'll start out with GAR and Brazil regulation. And maybe, Rob, you can continue. So I think on the GAR and listen, I've adjusted my notes on the white paper on the GAR the last 24 hours for this call. And we don't know when it will come out. It's probably unlikely that it comes out before the summer recess. But as you mentioned and as [indiscernible] said this morning, it is the #10. So we know that the process is working and it's going through the tariffs and so forth. And yes, it can still be amended, and it will also be consulted on once it's published. However, we are quite confident that the process is working. So #10 and treasury are taking the different comments in and they still are. So I suspect that there's still ongoing work around that. But they will see when it comes out, whether it can still come out before the summer recess? Probably, unlikely. But then after the summer and before potentially Boris steps down whatever is out this morning just when we started the call. So that's on the white paper and the GAR. When it comes to Brazil, so I expected that regulation would be published just after the -- sorry, the election here. But I think probably looking at it right now, it's probably unlikely that it will come out before the World Cup and then we move into sports betting licenses by mid-2023. That doesn't really change our excitement about the region. But we are seeing right now that competition is heating up in the market ahead of regulation coming out. And therefore, for us, we're looking forward to regulation actually happening because as being #1 in the market. That obviously is a benefit for us when it comes to market growth and marketing and so forth. So yes, signing probably after the elections now and that means licensing into 2023. So we are seeing a bit of a delay there. Rob, do you want to say anything more about Brazil? And I don't know if you want to comment on M&A or I can do it?

Yes. Let me do both of those things. So just to add a little bit more on Brazil. One of the benefits of licensing actually will be to clean up the market. So it's interesting, looking at the competitive intensity over there. It's not just some of the larger operators and positioning themselves ahead of regulation. It's also a very large number of smaller unlicensed or lower-quality operators. I've seen reports that there are over 2,000 operators right now in Brazil. So clearly, a licensing regime will help tidy that up. The marketing point is a big one as Jette has just mentioned. Also, being able to give customers better journeys through more popular payment service providers, that sort of thing. These are all reasons why we expect the market to grow very well and in particular, for the likes of ourselves, albeit new taxes being introduced, needs to -- we'll pull back EBITDA a little bit versus where otherwise would have been. But most definitely, we're expecting growth. And to the question on M&A, valuations in particular. So clearly, public companies’ valuations adjusted, private not by as much. That's for sure. If owners of businesses have no reason to sell, they're not forced to sell. They're more than happy to sort of ride out difficult macro periods. So private does make it a little harder. But clearly, there's sympathy for things like cost of debt going up and needing to make sure that's reflected in acquisition prices and so on. So there's some movement, but clearly much less in the private environment.

We will now take our next question from Joe Thomas from HSBC.

Rob, if I could ask my questions, please? First one would be in the U.K., are you seeing any sort of market share issues? And the reason I asked that is because I think it was well understood that 365 were making a bit of a land grab earlier on in the year. And I just wondered to what extent that might have influenced the revenues that you're seeing over the course of the most recent period? That would be the first question. The second thing is on Australia. Can you remind the scale of the impact to EBITDA of the tax increase in New South Wales and Queensland? And also importantly, would you plan to mitigate that by higher over rounds, which I think is what you did in the past? And the final thing, I'd just like to ask you about, please, is cost inflation in the business. I mean developers, et cetera, are not getting any cheaper. And I just wondered to what extent that is going to impact your sort of SG&A line?

Thank you, Joe. Why don't I take the first one? And then I'll hand over to Rob for Australia and inflation. So on U.K. market share, no, we're not seeing impact on market share. So when we look at the data that we have, the data that's published in 2021 and also into the year. When we look at our biggest competitors, we have grown our NGR ahead of the data that we've seen from competitors. And when you look at a 3-year CAGR basis, we're also very happy with how we are growing overall market shares there. So a little different from the different brands. But overall, we are holding on to our share. So we're not seeing that as an impact. And maybe I should just comment a little bit about the recreational audience and actions there. As Rob mentioned earlier on, it's really difficult to dissect, which are the different impacts on growth on the recreational base. But outside of any impact from affordability and regulation, the team has also worked extremely hard in terms of engaging recreational audiences. It is a key cornerstone of our strategy in mature markets to increase that base. So we're doing things and Rob mentioned earlier, both around brand and product, but driving low stake, low-risk promotions, expanding our free-to-play games, looking at gamification new experiences and make products easier and more fun to play. Live casino is something that we've doubled down on. It's also something that attracts a bigger base. So both when you look at the NGR, but when we look at the actives, we're pleased with what we have seen there in terms of our share and actual drive. Rob, Australia, Queensland, NSW and inflationary pressures?

Yes. Let me take those. So if we look at the 2023 impacts of the two movements in tax rates, we make it somewhere around GBP 35 million EBITDA impact pre-mitigation. And then the team are confident of mitigating broadly around half that. So that should give you a steer for the economic impact. How did the team mitigate? There is some activity to be done around GGR margin through over rounds. You have to be super careful with that. It's quite skillful but there'll be some of that, I imagine. We're also talking about clearly more efficient marketing is a must. And there's also ways to redirect customer activity to the higher gross profit margin products. So simple example, things like the next-to-go promotions on the carousel. You can choose which activity you choose to promote. You can choose which activity or free bets are redeemable against. You can focus your different marketing promotions, whether above the line or below the line. You can focus on certain products with margin in mind. So that's all before thinking about fringe operators struggling as well. That's further opportunity. But the single best mitigation actually is just continued market share growth. And all the while that we continue to take share in that market. That's the best protection we can have against bottom line. Then there was a question about cost inflation. I mean, absolutely, it's a watch out. The guidance for online is mid to high single digit. I don't think we're in a position to need to change that. In retail, particularly the U.K., European is more of a franchise model. In the U.K., the watch-outs really are energy prices and potentially salaries. I think I spoke on the last call about how the bulk of the rest of the cost base is either on a rev share basis, things like content deals or it's of a fixed and more longer-term nature like the rent roll, for instance. So energy, undoubtedly, is under pressure. And salaries, we'll have to wait and see. Right now, we lifted our pay earlier this year to GBP 10 an hour, which is ahead of the national living wage and the real living wage. So almost some natural protection there, but to be determined later this year, what 2023 might look like. So there is a watch out there. The good news in retail, there is all the while that the revenue numbers are outperforming then that's creating a buffer to absorb any cost inflationary type pressures.

We will now take our next question from Kiranjot Grewal from Bank of America.

Just a couple of questions from me. Firstly, how should we think about your leverage level when we're thinking about M&A? Is there a cap you're assuming, especially given the macro backdrop? On the affordability measures in the U.K., you mentioned tightening of the measures for Q2. When did you start making these changes? I know you've said that you've been working on it for the last year or 2, but it's the first time you called it out. And lastly, on Australia, a really good performance there. Are you winning market share?

Let me take the second one around affordability first, and then I can hand you over to Rob. So you're absolutely right that affordability is something that we worked on through 2021 and into 2022. And I think some of the things that we're putting in place now is also in preparation for the latest guidance from a GC that's coming out after the summer. So it's an iterative process that we're going through. And we constantly put it into our business model because it is part of doing business in this industry. So I wouldn't say that it's -- you could say that it's something specific we've done in Q2, but we are constantly upgrading those measures as we follow the guidelines that is put forward from the GC. And it comes back a little bit to Rob's point around how we see the impact now on spend per head that we are talking to today. So I don't know if Rob want to talk more about it, but he said earlier on this call that it's really difficult to point to what is the specific from affordability and macro. But that's what we've tried to do today when we split out the different impacts for the impact on Q2. Rob, do you want to start with leverage and if we have any cap on that due to the macro?

Yes. Very happy to, Kiranjot. So no hard cap but no change either to the position that I've been communicating probably for 3 years now, which is that 3x feels like the level that we'd like to stay below. But as I've said before, we would go beyond that. So long as there's a path to getting back under in short order. But that sort of continues to be the level at which we're happy we prefer to stay below. So no particular change on that position. In terms of Australia, that was the last question, I think. So are we taking share? Yes, it's been clear that we've been taking share for some time. Obviously, notice that the large operator in Tabcorp, which is not so strong online, and that's benefiting us, but also taking share from the #1 operator as well. I'm just looking at a market share chair -- chart in front of me right now, and it's a very healthy picture over the last few years, really, and it continued to accelerate through 2021, and we believe first half of '22 as well. And I think we've talked on these calls why is that? What are the guys doing? And it really is about having a leading customer proposition. So a ton of work in the products, but also some more innovative developments around things like content. We've spoken about the horse video content that the team produced there and the engagement that we have via that. We launched something called Mates Mode earlier this year, which is seeing great adoption. I think Dean told me there's been 250,000 chats using that feature since it launched a few months ago. So this is a way of creating an account for a group of people with their own chat functionality, private chat functionality within it. We're working on more social experiences that are exciting and also building a new racing channel, which hopefully will be going live in due course. So it's sort of nonstop development of the customer proposition in a really interesting and innovative way.

We will now take our last question from Andrew Tam from Redburn.

Rob, just a quick one for me. Just following on from Rob's query about the retail portfolio with respect to the macro. Retail obviously, cycling the COVID recovery. Obviously, that looks like it's largely over. Does this prompt a reexamining of the size of that portfolio? Or given that you're still winning market share, does that mean that there's opportunities to potentially grow that? And how does that work from, I suppose, from a capital allocation perspective versus your online business? So that's probably the first. The second is just on Australia. You mentioned you've got some market share gains there. You have a higher tax rate as well. But is that likely to change just in terms of the competitive dynamics, potentially with a reinvigorated encumbered in Tabcorp there and then potentially with new entrants as well? How do you think that will factor in? And sorry, just going back to retail. You mentioned the rent roll in terms of the SG&A earlier. Do you not have CPI increases factored on your leases? Just want to clarify that to your point as well.

Why don't I let Rob continue on the retail? Two questions, whether we are reviewing the portfolio, SG&A, lease agreements and back to Australia, competitive environments.

Thanks, Jette. So in terms of capital allocation. So yes, we're pleased with how retail is progressing. Are we looking to open materially more shops? I think the guy said to me that we're already in 119 out of 124 postcodes in the U.K. So for us, I don't think there's a lot of opportunity to open more shops. So no. But is there opportunity to invest? Yes. We have already and continue to invest in the digitalization of the estate. We think we have over 40% of the market share in the U.K. And we think there's a lot more to go at. The ones who are investing in the best quality product, particularly when it comes to the gaming machines and the self-service betting terminals. They're the ones that are going to win over the next period of time. The average age of users of these gaming terminals, it's similar to online. It's a similar profile. And the combination of SSBTs and gaming machines is now around 2/3 of the shop revenue. So you have 2/3 of the revenue with a good demographic and good growth prospects as well. So we invest in the technology, in particular, in shops as opposed to looking at opening new shops. In terms of the lease structures, yes, it is a mix, but it's not something that -- when you compare to energy inflation, for instance. It's also worth noting that our betting shops, the rent bill is quite a low mix of the cost base compared to other retailers because our units tend to be smaller, very often in sort of secondary locations and so on. So we're less exposed to rent than many others. Australia, I think we've spoken quite a lot about market share change. Is there a threat from new entrants with one in particular? Absolutely, we'll be keeping a close eye on that. Do we have a reinvigorated competitor in Tabcorp? Let's see what changes with their product proposition. As we all know, in this sector, we really compete on product. And so if they bring out new improved technology and products, then that will be interesting. That will be a catalyst for change if there is going to be.

Yes, sure, just to follow up on that. I just -- I guess the reason for asking the question is more along the lines of -- you spoke about the mitigants earlier on. And I just wondered how successful that would be in light of that change in competitive dynamic, I suppose?

Not much more to add. I think as we always see in these kind of environments is the scaled operators tend to improve. So if you're thinking about a new entrance business plan, the path to profitability looks materially worse now than it did before. And that goes to how much you can spend on marketing and so on. So it's really important to be on the podium in these kind of situations and continue to deliver for your customers. So nothing really new to say it's clearly a market that we like. We're interested in. Remembering as well that it's only for online, it's only pre-match sports betting. That's the only product available. It continues to be a market that we want to invest in and grow.

We will now take our last question from Ivor Jones from Peel Hunt.

Could I ask about contribution margin online? How do you respond to a reduction in customer value? Do you -- what you're prepared to pay as a CPA to try to protect the contribution margin? Or do you keep spending at the same marketing level to try and grow share even though customers are less valuable? And secondly, you said that the top 2 cohorts in the U.K., it had revenue halved as a result of affordability measures. Was that to do with a reduction in their spend per head? Or is that a large proportion of those customers simply churning off when challenged on affordability?

Rob, do you want to take those two?

Yes. Yes, I can have a go. So in the U.K., the higher spending cohort are not top 2. They're the top spending cohort has halved in terms of its contribution to the total mix. It's a combination of moderating spend plus losing customers. You inevitably -- some don't want to go through the kind of processes that are in place. So I would say a combination. And then to the contribution margin question, great question. The way that we operate our digital P&Ls with the MDs is the more revenue you make, the more you can spend on marketing. If you miss your numbers, you need to pull back. So we have that natural protection in the model. How that's done is a variety of things. You point to one really good measure, which is the comparison of CPAs to value. So if you're in a situation where the tax rate has gone up therefore, player value has gone down, therefore, CPA needs to moderate so that the unit economics are preserved. And that's clearly, therefore, something that we pay a lot of attention to and you would expect a rational market to go through that process, and that is ordinarily what comes. Sometimes you just have to be more efficient, and you have to cut out that last 5% of marketing, which you can't prove that there's a return against it and so on. But the key message is that we try to keep that rate of marketing spend consistent as revenue goes up or down.

Just to be clear, Rob. Does that mean that you tried -- you're implying you try to protect the contribution margin because obviously, you could still have healthy revenue growth and a 20% contribution margin? Both the contribution margin you're targeting because you're targeting the marketing ratio?

That's right. So I think what I've consistently said over the last couple of years is try to keep contribution margin flat in your models over time because inevitably taxes will go up, meaning there's pressure on the GP margin. But equally inevitably, the marketing rate will tick down over time, partly in compensation for any movement in tax, but also because we just get better at marketing, more efficient with performance marketing gets better. The digital marketing, marketing technology improves. And also, of course, many territories are introducing restrictions on marketing, which naturally gives protection as well. And for the larger established brands that you get -- it doesn't hurt the top line in the same proportion. So for all those reasons, preserving contribution margin where it is, is an important metric for us to monitor.

And just to be clear, does that apply to the implied revenue change for the second half of this year, that will -- you'd expect that to drop through at the contribution margin? There's no funny as I should be thinking about that would imply -- that drop through?

That's certainly be -- absolutely, the intention, yes.

This concludes the question-and-answer session. I would now like to turn the call back to Jette Nygaard-Andersen for any additional or closing remarks.

Thank you, operator. And thank you to all of you for your time today. Our group performance continues to demonstrate that customers are choosing to play with us, both online and in our shops, reflecting our focus on more recreational players and us putting the customer at the heart of everything we do. Our customer focus, our diversification and proven ability to grow both organically and through M&A means we remain well positioned to deliver on our strategic opportunities for the rest of 2022 and beyond. So I look forward to updating you on this progress at our interim results on the 11th of August. And as always, if you have any other questions, do get in touch with David and the IR team. Thank you, and goodbye.