The Stars Group (TSG) Q2 2019 Earnings Call Transcript

The Stars Group (TSG)
Q2 2019 Earnings Call
Aug 12, 2019, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for standing by. [Operator instructions] As a reminder, this conference is being recorded today, Monday, August 12, 2019. Replay details are included in The Stars Group's earnings press release issued earlier this morning. I will now turn the call over to Vaughan Lewis, SVP of communications.

Vaughan Lewis -- Senior Vice President of Communications

Thank you, and good morning. Some of our comments today will contain forward-looking information and statements under applicable securities laws that reflect management's current views with respect to future events. Any such information and statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking information and statements. Undue reliance should not be placed on such information or statements.

Please refer to today's press release and the webcast presentation for more information. During the presentation, we will reference non-IFRS financial measures. For more information about those measures and reconciliations to the nearest IFRS measures, please refer to the appendix of the presentation. Today's earnings press release and presentation will both be available on our website.

I will now turn it over to our chief executive officer, Rafi Ashkenazi.

Rafi Ashkenazi -- Chief Executive Officer

Good morning, and thank you for joining us on the call today. With me is Brian Kyle, our CFO, who will provide further details about the second-quarter financial results and 2019 outlook; and Robin Chhabra, the CEO of FOX Bet, who will expand on our plans for the launch of FOX Bet in the U.S. Turning to Slide 4. I would like to start with an overview of our second-quarter 2019 highlights.

Over the past few years, we have built a leading company in the online gaming industry through a combined strategy of organic and inorganic growth. Importantly, we have derisked and diversified our revenue base. And we have transformed from a poker-only company with less than half of our revenues generated from locally regulated or taxed jurisdictions to a balanced and highly diversified betting and gaming company with nearly 80% of revenues regulated or taxed with the prospect to increase that figure to over 90% over the next 18 months. In line with this strategy, we continue to execute against our top three strategic priorities for 2019 during the second quarter as we continue to position the business for strong long-term sustainable growth.

First, integration. The Sky Betting & Gaming acquisition has already benefited the company in multiple ways. And we are now beginning to realize even more significant revenue synergies. After migrating Sky Bet Italy player base to our PokerStars platform, we are pleased to report that Sky Bet by Stars in Italy had a great quarter with betting revenue growth of over 25%.

We are expecting further revenue synergies as we reinforce the partnership with Sky Italia. I'm also delighted to confirm that we just launched Sky Bet by Stars in Germany and will begin cross-selling players from sports betting to poker and casino in the near term. In addition, to further accelerate revenue synergies, we are working on what we refer to internally as the U.K. ecosystem.

Beginning in early 2020, customers in the U.K. will have their accounts paired across our brands available in the market, enabling quick and easy fund transfer between wallets, with Sky Poker being relaunched as Sky Poker by PokerStars and providing U.K. customers with access to some of the best poker, casino and sportsbook product offering in the world. Second, we remain focused on execution.

And we are encouraged by the strong momentum we are seeing in our business. We reached a number of key milestones during the quarter. SBG reported record quarterly revenue -- revenues in local currency with impressive adjusted EBITDA growth of over 50%. PokerStars hosted a new record online poker tournament with over $100 million in prices.

We cemented our very exciting launch plan for FOX Bet in Pennsylvania and New Jersey and secured further market access. And BetEasy signed a strategic partnership with Kayo Sports, an Australian multisports streaming service. Third, as we remain focused on rapid debt repayment, we have repaid $350 million of our first lien term loans so far this year and have repaid over $500 million since completing the SBG acquisition last year. We are on track to reduce leverage toward our target ratio of net debt-to-adjusted EBITDA of under 3.5 times in the medium term.

Moving on to Slide 5. I'll recap our financial results for the quarter. The second quarter of 2019 was a busy quarter for the core Stars international business, with growth in most markets offset by certain market closures and disruption in some other markets. Overall, constant currency revenues were down just 2.5% despite these headwinds, which I will expand further in a moment.

Sky Betting & Gaming was the key driver for our overall performance in this quarter. The investment in promotions that we made in the first quarter are paying off as the U.K. segment added $253 million of revenue, with quarterly active uniques, revenues and adjusted EBITDA hitting all-time highs for the business. All while our betting net win margin was 9.7%, just slightly above our historical long-term average.

Our Q2 results reflect the underlying strength of the business. And we remain on track to see low double-digit growth in revenue for the full year. We believe this has been an exceptional acquisition for the company. And given the strong future growth prospects for the business as well as our unique ability to replicate the proven Sky Bet model in FOX Bet in the U.S., I'm very confident that this acquisition will drive strong shareholder return.

Moving on to our second-quarter highlights on Slide 6. We continue to drive innovation and product leadership in all key geographies. Within our International segment, we hosted the world's first online tournament series that pay out over $100 million with our Spring Championship of Online Poker. And we continue to cement our leadership in poker tournaments.

Casino had another great quarter with underlying growth of around 20% as we continue to roll out new casino games and further improve cross-sell rates. Within SBG in the U.K., as previously mentioned, the business saw a record performance. We were very pleased to see the strong and immediate return on investment from our Cheltenham Festival promotion during the first quarter while the Grand National in that field was the biggest single event in Sky Bet history, with stakes up by more than 1/3 from last year. In addition to racing, we saw record poker stakes on the Champions League final, which even exceeded the levels we saw during last year World Cup games.

BetEasy also had another solid quarter, with 13% growth in stakes and adjusted EBITDA margin of 11%, in line with our expectations. We signed an exciting strategic partnership deal with Kayo Sports during the quarter that we believe positions us well to expand further into the recreational market in Australia going forward, leveraging the media integration strategy for our SBG business to drive effective customer acquisition and retention through sports media. Turning to Slide 7. I'd like to expand on some of the factors that are impacting the reported performance of our International segment and why the strength of our underlying operation is not being fully reflected in our reported results.

As you can see in the chart on the left, our rest of the world or top-tier markets, which now represent 83% of the international revenue, are seeing organic growth, with 4% growth in constant currency. This growth rate is relatively consistent with a 6% rate that we saw in Q1 2019, and we believe it broadly reflects the current underlying growth profile of the segments. We then have a group of disrupted markets where our products, marketing or payments have been disrupted or where we have had to suspend or otherwise adjust our offering as part of the regulatory or licensing process. This market now only represents around 15% of our international revenue compared to 20% in Q2 2018.

The main markets within these segments are Russia, Norway, the Netherlands, Switzerland and Slovakia. On the top right, you can see the impact of the strength that we have experienced in these markets over the last few quarters. Within these markets, in the aggregate, constant currency revenues were down 27% in both Q1 and Q2 2019. That being said, we have seen encouraging signs of recovery in these markets, most of which are largely stabilizing.

And we are optimistic about our prospect for the future, with encouraging trends in Russia, strong potential in the Netherlands as we move toward the full local license and our plan to relaunch our Swiss poker business on a local license basis in the second half of 2019. The recovery in these markets has been a little slower than expected. And the launch of our licensed poker business in Switzerland is slightly delayed. As a result, we now expect our International segment's revenues for the full year to be lower by mid-single-digit percentage.

Nonetheless, we have taken rapid action to reassess and optimize our cost base in this segment in order to mitigate the adjusted EBITDA impact and free up funds to invest in product and marketing in our top-tier market -- markets, supporting our mid-teen growth targets. There are many exciting opportunities emerging in this segment, including new deregulated markets and our plans to increase marketing spend on direct customer acquisition for casino and betting. This initiative gives us confidence that our revenue growth will accelerate as we begin to lap the majority of the disruption in certain markets from the beginning of 2020. As we move to Slide 8, I would like to take a moment to reiterate our confidence in our strategy to deliver strong, sustainable future growth.

We are operating in large and high-growth markets with encouraging regulatory progress in the U.S. and Latin America. We are a diversified global leader in this industry. And I'm pleased with the progress we made during the quarter to leverage the capabilities across the group, as evidenced by the operating momentum we saw with Sky Bet in Italy and the development of our plan in our U.K.

ecosystem integration that will enable our U.K. customer base to benefit from our leading PokerStars product. We believe we have significant sustainable, competitive advantages, and we continue to leverage these to grow market share in our attractive end markets. We further strengthened our market share in key markets in the second quarter and continued to launch further innovative, proprietary products and content.

Our business is uniquely set up for scale benefits. With our strong brands, proprietary technology and operating expertise, we have the ability to replicate our products in new markets. These competitive advantages also provide us with an immediate head start in new markets. And I'm really excited about the forthcoming launch of FOX Bet in the U.S., which Robin will expand on shortly.

Finally, we believe we have highly attractive financial model and continue to generate strong cash flow, which we currently intend to use for debt reduction while investing for future growth. With that, I'll turn the call over to Robin, who will provide additional detail on our plan to launch FOX Bet in the second half of 2019.

Robin Chhabra -- Chief Executive Officer of FOX Bet

Thanks, Rafi, and good morning. The U.S. betting market is the largest and most exciting medium-term growth opportunity for our company. We believe our proprietary technology, operating expertise in sports betting and our unique FOX Sports brand partnership positions us ideally to become a leader in this market.

You can see a couple of examples of how our FOX Bet products and ads will be seamlessly integrated into FOX Sports broadcast on Slide 11. This provides us with huge sustainable competitive advantages, significantly broader access to recreational sports fans as potential customers, a trusted authentic and credible brand and a series of free-to-play games that will become part of the day-to-day sporting and entertainment narrative for sports views in the U.S., in turn, driving ongoing engagement with our products. The scale of FOX Sports is impressive and will create a wide funnel of potential customers for both our free-to-play games and in relevant states, our real-money betting products. Our partnership with FOX Sports also provides us with direct access to nearly all U.S.

households. In fact, the FOX broadcast network is a leader in live sports viewing, broadcasting more events with viewership over 20 million, more than any other sports network and is available in 99% of U.S. households. FOX Sports is also one of the leading cable sports networks and is available in over 80 million U.S.

households, featuring more than 800 live sporting events annually. Since we last spoke in May, we have been focused on securing the plans for our launch, as highlighted on Slide 12. We have built a strong experienced team, including great operators from Sky Bet, BetStars and from other leading sports operators. We've also transferred some fantastic creative talent from FOX Sports over to FOX Bet and signed up many FOX Sports presenters, all household names, to be brand ambassadors for FOX Bet, which will increase our alignment with this great brand.

Eric Shanks' team at FOX Sports have been incredibly engaged. And we believe we have the operational plans in place to begin replicating the success of the Sky Bet model in the U.S. We have most of our partnerships in place, with potential market access in up to 20 states, including recent deals with the Mohawk Casino Resort in New York and Penn National Gaming. With our plans in place, I would like to provide some additional color on our expected investment.

We currently expect to invest approximately $40 million in the second half of 2019 primarily focused on customer acquisition, launching the FOX Bet brand in Pennsylvania, relaunching our betting products in New Jersey with FOX Bet, building strong and talented operational and marketing teams and product development across real-money and free-to-play apps. We expect to continue investing in this business next year. And based on our expectations with the regulatory environment, state openings, skin availability and expected addressable market size, we anticipate the U.S. business to break even by the end of 2022.

To put this investment into context, as previously discussed, we've seen an addressable market opportunity of around $9 billion of revenue by 2025. We are not planning to sit at the sidelines now that we have one of the strongest media partners in the world and a strong strategy in this emerging market. Rather, we are planning to ensure that we become one of the market leaders in this industry across all product verticals and free-to-play games. I couldn't be more excited about the launch of FOX Bet.

With our world-class proprietary technology and strong operating expertise and with the FOX Sports brand partnership, we are poised for an effective launch. With that, I will hand over to Brian for more details about Q2 results.

Brian Kyle -- Chief Financial Officer

Thanks, Robin, and good morning. As you've heard from Rafi, we have continued to make significant strategic programs during the quarter. And it is really exciting to outline our plans for FOX Bet in the U.S. I'll now provide a bit more context on the second quarter, starting on Slide 14 with a summary of our financial results.

As reported, net earnings for quarter 1 was $5 million. After adjustments, including removing the amortization related to purchase price allocations, adjusted net earnings was $138 million, giving us adjusted diluted net earnings per share of $0.48. On a pro forma basis, revenue declined by 2% year over year. However, we saw a constant currency growth of 4% as most of our major currencies were weaker year over year compared to the U.S.

dollar. As we lapped the World Cup and were impacted by disruption and closures in certain markets, this underlying growth of 4% was in line with our expectations. As highlighted on the slide, the acquisitions we made last year have significantly improved our mix of revenue from regulated and taxed markets and derisked our business, with 79% of revenue now from regulated or taxed markets and a further 12% from markets that are in the process or potentially regulating. Lastly, we continue to rapidly pay down debt and ended the quarter with net debt of $4.75 billion, down from $5.06 billion at the end of March 2019.

Over the next few slides, I'll provide an overview of our quarterly performance by segment. Turning to Slide 15. I would like to start with additional details about our performance in the International segment. As you heard from Rafi, encouraging trends in most markets were offset by headwinds in certain disrupted markets.

Despite these headwinds, as reported, revenue were down 8% with constant currency revenues down only 2.5%. Within poker, revenues were down 12% in the second quarter or down 7% in constant currency. In line with last quarter, we are experiencing low single-digit poker growth in most markets offset by headwinds in certain disrupted markets. As a reminder, we will begin to lap the majority of the disruptions from quarter 4 2019 onward in poker and continue to believe that we will see low single-digit growth in constant currency over the medium term.

Our casino revenues were up 2%, which represented 9% growth in constant currency despite the impact from certain disrupted markets and some closures. The strong underlying performance reflected the continued success of our product and content rollout, with new game launches continuing at about 30 per month as well as continued progress in cross-sell, which reached new record levels during the quarter. Excluding the markets where we have seen disruption, on a like-for-like constant currency basis, underlying casino revenue growth was approximately 20% year over year. Betting revenue was down 7% as reported, with stakes flat as we lapped the World Cup in the prior year period and faced the impact of certain market closures.

We also continue to roll out new products including virtual racing and more requested variants from Sky Bet. During 2020, we plan to ramp up direct acquisition through our international sports business and currently expect to see strong growth rates following suit in the coming years. Our adjusted EBITDA margin was down 2.5 percentage points at 44.5% during quarter 2. The gross margin was 3.7 percentage points lower as we continued to increase the mix of revenue from regulated and taxed markets and saw higher taxes in certain markets.

This gross margin decline was partially offset by our continued efficiency gains and the delivery of acquisition synergies. Turning to the U.K. segment financials on Slide 16, which currently comprises the SBG business and are presented in pound sterling. The second quarter was an exceptional period, setting new record levels in local currency for financial and operational performance for the business.

Stakes grew 15% to new record levels, a strong performance against tough comparatives, which were boosted by the World Cup in the prior year. We saw strong engagement from new customers that were acquired during the Cheltenham Festival in quarter 1 2019. And with a new record level of quarterly active uniques, we continue to see strong returns from this investment. Gaming revenue was up 20%, also a strong performance that reflected the growth in actives and the continued rollout of premier products, content and promotions.

The betting net win margin was 9.7%, which was broadly in line with our long-term historical average of around 9% but slightly below the same period last year, resulting in betting revenue growth of 9%. Overall revenues were up 13% to an all-time high in pound sterling of GBP 196 million. The adjusted EBITDA margin was up 11 percentage points during the period, benefiting from the phased investment in marketing and customer acquisitions in quarter 1 2019. With that said, we believe that the year-to-date adjusted EBITDA margin of 33% is a fair reflection of the ongoing profitability of this segment after a focus on efficiency and streamlining of the cost base to mitigate the higher gaming duties that came into effect during quarter 2 in the U.K.

The SBG business reported impressive adjusted EBITDA during the quarter and remains on track with our cash flow and adjusted EBITDA expectations from the time of the acquisition. Turning to Slide 17. We provide an overview of the financial results for the Australian segment. As a reminder, this is in local currency to provide increased clarity about the underlying operating trends.

Stake growth in the quarter was 13% to AUD 1.1 billion, with continued solid trend driven by the rollout of our personalization plan and successful player management. The prior year period includes the acquisition of William Hill Australia from April 2018 with three weeks at the start of the period that only relate to CrownBet. If we include the full contributions from William Hill Australia in quarter 2 2018, staking growth on that basis would be 5%, a strong performance considering the trends in the William Hill Australia business prior to the acquisition and migration of its customer base to the BetEasy platform. The betting net win margin of 8.5% in the period was broadly in line with our expectations, with adjusted EBITDA of $10 million and a margin of 11%, consistent with the range of 10% to 20% that we previously outlined and reflecting the impact of the new point of consumption taxes that were in place at the first of the quarter.

Looking at the rest of 2019, we expect to capitalize on the personalization of our products to increase customer engagement and satisfaction and drive profitability through our focus on high-value recreational customers. We therefore expect a slightly higher betting net win margin in the second half of the year, assuming normal sporting results. And we are on track to continue to achieve an adjusted EBITDA margin within the range of 10% to 20% in 2019. Turning to Slide 18.

I'd like to reiterate the strength of our cash generation. Our adjusted EBITDA in the period was $237 million. After working capital and adjustments, this covered our cash interest cost of $51 million and taxes of $39 million, of which $18 million reflected onetime tax payment related to preacquisition period in Australia. Capex was $37 million and we had integration cost of $5 million.

Overall, this meant we saw free cash flow of $85 million in the period. Excluding the items that are more onetime in nature including the integration cost and the historical tax settlements and adjusting for the prepayment of debt, this would have been around $120 million available for debt repayment. We've already repaid $350 million of debt this year following $100 million repayment in quarter 4 2018. As we prioritize debt reduction with our strong cash flow, we continue to monitor the debt capital markets in order to optimize our capital structure given prevailing market conditions.

Turning to Slide 19. I'd like to provide an update on our 2019 guidance. We now expect revenues in the range of $2.5 billion to $2.75 billion, and this represents growth of 5% to 8% on a constant currency pro forma basis. The change in our revenue guidance reflects the impact of updated FX rates, a historical low betting net win margin in the first quarter in the U.K., the slower-than-planned recovery in our disrupted markets and some delays in launching our new licensed operations in certain jurisdictions such as Switzerland.

We previously indicated that we would likely be at the low end of our adjusted EBITDA guidance range of around $960 million. And we are now updating this range to reflect the following main factors: First, as Robin outlined here, we plan to invest around $40 million in our very exciting U.S. opportunity. And we look to build a leading prominent presence with the launch of FOX Bet.

With our proprietary technology sportsbook operating expertise and leading brand, we are excited for the tremendous opportunities this investment brings. And second, a $15 million increase in FX headwinds compared to previous assumptions, with the U.S. dollar further strengthening against our major currencies. Taking these factors into consideration, we now expect adjusted EBITDA in the range of $905 million to $930 million.

Excluding the impact of the change in FX and investment in the U.S., our adjusted EBITDA guidance range would be $960 million to $985 million, relatively consistent with our prior guidance. After taking into account our expected depreciation, interest and tax, this amounts to adjusted EPS of $1.68 to $1.83, based on 283 million diluted shares. For a detailed discussion of the factors and assumptions underlying our guidance and changes to the same, please refer to this morning's earnings release and the appendix to this webcast. We now expect total capital expenditures this year of about $150 million, at the high end of our previous guidance range due to our investments in the U.S.

Importantly, during 2019 we remain focused on our strategic priorities of integration, execution and debt reduction. And we are laying the foundation for strong future growth. With that, I'll now turn the call over to Rafi to conclude.

Rafi Ashkenazi -- Chief Executive Officer

Thanks, Brian. To conclude and recap the quarter, we continue to build our U.S. plans with further market access deals in preparation for our FOX Bet launch. And we are ready to build FOX Bet into a market leader.

We saw all-time highs in our U.K. segment with strong returns from our Q1 investment in player acquisition. And we saw over 25% growth in Sky Bet in Italy and just relaunched Sky Bet in Germany. We believe the transformation of our business is paying off.

And we are confident that we have built a strong platform to deliver our medium-term growth plans. And with that, I would like to hand the call over to the operator to begin the Q&A session. As usual, Marlon Goldstein, our chief legal officer, is joining us for the questions.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Thomas Allen with Morgan Stanley. Please proceed with your question.

Thomas Allen -- Morgan Stanley -- Analyst

Hey. Good morning, everyone. Well, depending on where you are. Just touching on FOX Bet first.

How are you thinking about -- how should we think about kind of the 2020 and 2021, how this business is going to trend? If it's $40 million of losses in the second half of this year, does that mean $80 million next year? Or should that go down? I know you said that breakeven target late 2022, but I just wanted to think how we think about our model. And also, are you going to report it as a separate segment? Thank you.

Robin Chhabra -- Chief Executive Officer of FOX Bet

Hi, Thomas. This is Robin Chhabra speaking. Yes. So look, as I said in my prepared remarks, we're going to invest heavily in this opportunity.

We are talking about the biggest opportunity this industry has seen for a generation. And given the assets that we've amassed, we're certainly not going to sit on the sidelines. We have the partnership with FOX. We have a strong brand, amazing market access, great technology, great operating expertise.

You have seen the market access that we have with Eldorado, with Penn and Mohawk, Mount Airy Resort. And of course, we've got the funds to invest from the cash generation from the rest of the group. What I'd also say is that we will invest in a disciplined manner. And we have natural benefits here with the brand.

With the marketing integrations, we can attract a lot of customers at competitive CPAs with the product that we have, with the operating expertise that will drive player values. And we will be taking advantage of the scalable global platform. So that's -- so that FOX, that will have an efficient cost structure. So yes, we'll invest but the ROI should be very, very good.

Now when it comes to 2020, I wouldn't necessarily extrapolate the $40 million and annualize that especially if we're only looking at just Pennsylvania and New Jersey. We are setting up the business so some certain costs won't repeat. Revenues this year will be low because we're investing to build a customer base rapidly. And that involves quite a load of costs in terms of bonuses and offsets, and that will dissipate over time.

That said, look, if there are a couple of big space opening at the back end of next year, then we're going to want to launch strongly and we will do so. That will lead to short-term cash outflows, but that will be the right thing to do for the business. So as we said, we're not sitting on the sidelines. We are going to invest in this opportunity.

And we expect to drive strong returns as a result of all the assets and capabilities that we have.

Brian Kyle -- Chief Financial Officer

Thomas, it's Brian. Just to answer your second question on reporting it as a separate segment. Definitely, this is going to be one of our most strategic business opportunities that we're going to be focused on. We are aligning it to be structured as a separate segment.

We expect to report it as a second segment beginning in 2020.

Thomas Allen -- Morgan Stanley -- Analyst

And then in the quarter, SBG U.K. business really stood out with really strong margins. And appreciate the commentary that we can kind of extrapolate first half margins going forward. But can you just talk about the sustainability of the strength here? And should it continue to be this kind of a lumpy one period of investment then you reap the rewards as we go forward? Thank you.

Rafi Ashkenazi -- Chief Executive Officer

So yes, we do expect sustainability in this business. This business is a strategic asset that we have in the U.K. We will continue investing exactly in the same way that we are investing -- that we have invested so far. We just had the beginning of the season this last weekend.

And we've been doing quite a lot of investment for the beginning of the season because we want to ensure that we are set up well for the start of the season and for the rest of the year. So I would say yes, we do believe that there will be sustainability in this business. We're not planning to operate on those high-level margins going forward. Exactly as we said, we are seeing this business operating at approximately 33% margin.

But in terms of the investment profile, this will continue going forward. And we still expect this business to grow. It's in our belief the best asset in the U.K. There is no reason in the world not to continue investing and not to continue taking market share and not to continue to build our customer base.

Thomas Allen -- Morgan Stanley -- Analyst

All helpful. Thank you.

Operator

Our next question comes from the line of Patrick Coffey with Barclays. Please proceed with your question. Mr. Coffey, please check to see if your line is on mute.

Our next question comes from the line of Chad Beynon with Macquarie Group. Please proceed with your question.

Chad Beynon -- Macquarie Group -- Analyst

Good morning. Thanks for taking my question. On the disrupted markets that you parsed out in one of your slides, you noted that the business has stabilized from a loss standpoint, reflecting kind of a similar type of loss as you saw in the first quarter. As we think about the algorithm particularly for international going forward, is the goal to really stabilize this? Or is there hope that given some of the things that you're doing internally in those markets that these markets could eventually grow off of where they are? Just trying to figure out how this kind of plays into the medium-term outlook.

Thanks.

Rafi Ashkenazi -- Chief Executive Officer

Not a problem. So we are planning to grow this business. I mean we have been in the same situation before where we have FX impact and -- versus the headwinds. And we have demonstrated quite a great recovery over the past three years, '16, '17 and '18.

This business in my view has the biggest opportunity out of the U.S. simply because the business is so global. Markets are opening up all the time. There are opportunities in Brazil.

We're about to launch in Argentina. We're still working and lobbying for the Italy shared liquidity. We're going to launch poker in the U.S. even though it's going to be reported obviously in the U.S.

segment. The Netherlands is now in the process of regulating, and we see the Netherlands as a great opportunity. And we're doing some work around rebranding within the international business. Essentially, the target that we have is really to promote two master brands if you wish.

One is the PokerStars brand and the other one would be the Sky Bet. So in markets where we operate PokerStars and we don't have great brand equity in Sky Bet, we are likely to move away from BetStars and start promoting PokerStars sports and also PokerStars Casino and then have PokerStars as the master brand. And we believe that we -- through that, we can get more marketing efficiencies in those markets. And obviously, markets where we do have Sky Bet as the brand and it's available and we do believe that we have a good relationship that we can build with the local Sky broadcaster like Sky Italia and Sky Deutschland, then obviously we will start investing in those brands.

So yes, we were not looking at this business on the base of stabilizing it. We are looking at this business on the base of what do we do in order to continue growing this business. And we do believe we will continue growing this business.

Chad Beynon -- Macquarie Group -- Analyst

OK. Thanks, Rafi. And then my follow-up is just back on the U.S. market.

Some of your competitors have given very broad targets in terms of market share. Are you willing to provide some goalposts on what kind of your internal expectations could be a few years out after the programming and the integration is fully launched and we're at a better, steady state?

Robin Chhabra -- Chief Executive Officer of FOX Bet

Sure. Look, with the assets and capabilities that we've amassed, we expect to do very well in this market. We're not going to give out market share targets right now. Let's see how we evolve.

But we are planning to invest in the market $40 million this year, $40 million as a starting point for next year. And as we said, with the brand, with the technology, with the marketing integrations that we have, we expect to do very well in this market. But at this stage, we're not giving out target market shares.

Chad Beynon -- Macquarie Group -- Analyst

OK. Thank you very much.

Operator

Our next question comes from the line of Omer Sander with JP Morgan. Please proceed with your question.

Omer Sander -- J.P. Morgan -- Analyst

Hi, guys. Thanks for taking the questions. Can you help us understand your 2019 guidance? How much of this reduction has to do with disrupted markets? And then what's included in that other cost bucket? It looks like it was up $65 million from prior? And then just on top of that, how do these kind of moving pieces flow into those medium targets that you provided previously?

Brian Kyle -- Chief Financial Officer

I think the way to look at our guidance going into the balance of the year starting with where we landed in quarter 2. So basically, the quarter 2 results were in line with our expectations. I mean these were reflecting record results in SBG not only from a financial perspective but also from an underlying operational perspective. So we were very, very pleased with that.

The other point I want to highlight is the cash flow and the free cash flow generation. Again, this was at exceptionally strong levels coming in on an adjusted basis at about $120 million. And we continue to execute on our debt reduction strategy, paying off about $250 million in the quarter and making it our third consecutive debt repayment quarter since -- basically since we closed on SBG. Looking at specifically adjusted EBITDA, we were tracking at the lower end of the guidance range in quarter 1 after reflecting the low net win margin that was realized in the quarter, coming in at about 6.1%.

Quarter 2, we are back in line with our 9% average. And again, all we are doing is adjusting from that low-end average to reflect FX impact, which is about $15 million based on current spot rates and the investments that Robin outlined in our U.S., which is about $40 million. So adjusting for those two items only, we are going from the low end of our range, the original guidance range, down to our new range of $905 million to $930 million.

Omer Sander -- J.P. Morgan -- Analyst

Thank you. That's helpful. And then second on the U.S. Has it become -- I know it's early, but has it become easier to find partnerships given the relationship with FOX Sports? And how has the rollout kind of proceeded relative to your expectations both on the regulatory and the partnership side?

Robin Chhabra -- Chief Executive Officer of FOX Bet

Sure. So yes, I think we're very happy with where we are in terms of access. We've got access to potentially 20 states. And you would have seen the recent announcements on the Mohawk in the key state of New York and obviously Penn National Gaming.

So we are absolutely confident we'll get all the access we require. And as you correctly said, life becomes even easier now that we have FOX as a partner, so no issues there. I think I would agree with my peers in this sector when I say that the pace of legislation has been more rapid than we thought, which is obviously very good news for the entire market. So we are seeing more states go live faster than we anticipated.

We are seeing more bills pending than we anticipated, which is all very good news for us.

Rafi Ashkenazi -- Chief Executive Officer

I just want to add one quick comment here. It's been only three months since we signed a deal with FOX, only three months. I mean just -- we need to consider that in the bigger -- in the big picture. Since we signed FOX, we are going to roll out very soon a range of free-to-play games.

And we are going to launch FOX Bet in Pennsylvania ahead of the NFL season and relaunch BetStars as FOX Bet in New Jersey. And obviously, we've already built up further market -- not just positions in more markets. And it's been only three months since we signed this deal. So yes, we are expecting still a lot to happen in this market obviously.

Omer Sander -- J.P. Morgan -- Analyst

Thank you.

Operator

Our next question comes from the line of Tim Casey with BMO. Please proceed with your question.

Tim Casey -- BMO Capital Markets -- Analyst

Thanks. Sticking with the U.S. opportunity. You've got a line in the slide where you talk about breakeven in 2022.

Can you talk to us about what is in that assumption? And should -- you also -- Robin mentioned $40 million as a starting point for 2020. How many -- reasonably, how many states should we expect you'll light up in addition to Pennsylvania and New Jersey in 2020?

Robin Chhabra -- Chief Executive Officer of FOX Bet

So there are a number of factors. We've obviously ran a number of scenarios. There are a number of factors which you will appreciate: the pace of legislation, the size of the market, the legalized tax rates. The number of verticals which are legalized, that obviously influences cross-sell rates, and also the number of skins that are available there because that influences competitive intensity in those states.

So based on a reasonable assumption on each of those that we get to a breakeven position at the back end of 2022, clearly a material change in those factors could lead to a change of outlook. There are positive reasons why that may be pushed back because we're gaining lots and lots of market share, the economics are very positive, the returns on investment are very strong. But based on what we see today, that's our best estimate. In terms of state rollout, I would imagine that we are looking anywhere between, say, two to four states every year.

We are going to prioritize those states which are the largest, which present the best opportunities for us, also where we've gotten particularly strong as well. There are a number of factors. So again, we will prioritize based on potential economic returns.

Tim Casey -- BMO Capital Markets -- Analyst

Thank you.

Operator

Our next question comes from the line of Joe Stauff with Susquehanna. Please proceed with your question.

Joe Stauff -- Susquehanna International Group -- Analyst

Thank you. Good morning. I wanted to ask about the Sky Bet and the stakes growth that you had in the second quarter and how to think about that. You had mentioned the newer subscribers and customers that you had achieved basically at the horse race had certainly contributed to that.

But I was wondering if you can help us understand other drivers that really help generate that type of stakes growth in the quarter.

Rafi Ashkenazi -- Chief Executive Officer

Sure. I mean it's a -- I would say going back to all the basics that Sky Bet is doing so well. First of all and above everything, the retention level, I think I mentioned it several times. When we looked at the company before acquiring that, before acquiring Sky Betting & Gaming, we were highly impressed by the retention level of their customers.

It's not something that we see in the gambling industry. It's something that you can see in other industries, not very frequently in the gambling industry. As a matter of fact, I've never seen that degree of retention level in any company in the gambling industry. So the ability to continue to retain customers and obviously monetize those and increase the ARPU of those customers will continue to contribute to the stake level that we have.

Secondly, Sky Bet in general is a category builder. We are investing in promoting sportsbook. And we are investing in making the market bigger, and we've been quite successful doing so. When we look at the market share in terms of the customers, we do have the largest market share in the U.K.

from customer base perspective. And that's obviously another area where we believe that we are going to continue to generate or increase stake level. Other than that, I mean it will be all the usual tactics that every gambling company is doing in terms of promotions and CRM and both, etc.

Joe Stauff -- Susquehanna International Group -- Analyst

OK. Thank you. And my follow-up is on the disrupted markets. Russia is, correct me if I'm wrong, a large contributor just in terms of that aggregate disrupted markets.

I know in past quarters, conference -- quarterly conference calls, you had provided some update in terms of trends. Can you provide that for your Russian business in the second quarter on a sequential basis?

Rafi Ashkenazi -- Chief Executive Officer

Sure. So we do see sequential improvement in the Russian market, and it is improving. You can't really compare Q1 to Q2 because in Q1, even though we said it's stabilizing to be 20% -- 27% lower in those both quarters, there were some other impacts that happened in Q1 that can happen later. So just as an example, we still had Switzerland for a period of time in Q1 with casino.

We still had Slovakia until the end of Q1. So we do see sequential improvement in Russia. And I'm quite excited about this market because there are more opportunities that we are seeing in this market. First of all, we just signed the UFC deal.

We're going to launch the UFC TV campaign in Russia very soon. On top of that, we are planning to apply for a sportsbook license in Russia under the PokerStars sports brand. And we are seeing, again as I mentioned, sequential improvement in the market. We added more and more payment methods.

So as time goes by, I do expect Russia to continue growing.

Joe Stauff -- Susquehanna International Group -- Analyst

Thank you.

Operator

Our next question comes from the line of Simon Davies with Deutsche Bank. Please proceed with your question.

Simon Davies -- Deutsche Bank -- Analyst

Good morning, guys. Can I kick off asking about Germany? You've launched your sports product in the German market. Obviously, they're planning to launch a licensing process for sports in the new year. Can we assume that you're planning to apply for a license? And if so, do you see any risk that, that might impact on your ability to offer a casino and poker product in the German market?

Marlon Goldstein -- Chief Legal Officer

Simon, it's Marlon. Let me see if I can tackle this one for you. Look, if we look at Germany, I think for the foreseeable future, we anticipate the status quo to continue for quite some time. We talked previously that we have a license from Schleswig-Holstein.

And that permits us to operate all verticals in the market, not just sports. In terms of the current state treaty, as you know, that expires in June of '21. And we're hopeful that as things progress, the next state treaty is going to include a broad commercial framework similar to what Schleswig-Holstein has already adopted. That's going to allow the operation of all products, not just sports.

So we are hopeful looking forward. But currently, we expect the status quo to continue.

Simon Davies -- Deutsche Bank -- Analyst

And if there is a licensing run over the next three, four months, would you expect to participate in that for sports licenses?

Marlon Goldstein -- Chief Legal Officer

I think that's something we will take a good look at. And certainly, we'll kind of evaluate it as it comes.

Simon Davies -- Deutsche Bank -- Analyst

Great. Just secondly in terms of your target breakeven in the U.S. Can you give some kind of indication of what kind of revenue run rate you need to achieve that breakeven level?

Robin Chhabra -- Chief Executive Officer of FOX Bet

We're not going to be providing that information at this time. As I said, once we launch, as we get some data through, we'll share more on our plans in the future but nothing for now.

Rafi Ashkenazi -- Chief Executive Officer

I'm going to add one more quick comment around Germany. As I mentioned on the call, we have launched Sky Bet in Germany under the PokerStars ecosystem. So now Sky Bet is fully integrated into the PokerStars ecosystem. And we have signed a relationship or a partnership with Sky Deutschland.

And we are going to be integrated and obviously continue to develop this business in the market. So we're quite excited about this market overall.

Simon Davies -- Deutsche Bank -- Analyst

Great. Thank you.

Operator

Our next question comes from the line of David McFadgen with Cormark Securities. Please proceed with your question.

David McFadgen -- Cormark Securities -- Analyst

Hi. Thanks for taking my questions. Let me just -- first of all, just start off with the international business. You talked about -- actually, you didn't talk about it. But Apple said that starting, I think, in early September, all the betting apps or all of the apps have to be completely native iOS apps, can't have any HTML5 components.

So I'm just wondering if you're going to be compliant there. I'm just wondering about the risk to the international business, I guess specifically poker. Maybe you can address that? And then I'll follow up.

Rafi Ashkenazi -- Chief Executive Officer

Sure. The answer when it comes to poker and PokerStars is very simple. This is all native so there's essentially no risk. By the way, same goes for BetEasy.

And same goes for some of the applications that we have within the PokerStars business. And all the rest of the business is taking whatever preparation and adjustment in order to make sure that we are in compliance with the iOS policies.

David McFadgen -- Cormark Securities -- Analyst

OK. Great. And then just a question on FOX Bet. I was kind of surprised at the level of investment.

I guess it's per customer acquisition. So I was kind of surprised given the PokerStars database, the U.S. database that you guys can use and then FOX is a U.S. digital database that you can obviously use as well.

So I was just kind of surprised. What is really the factor driving those EBITDA losses in the short term?

Rafi Ashkenazi -- Chief Executive Officer

I wasn't sure if you're asking if you're surprised because it's too low or it's too high. But I guess you mean it's potentially too high in your view.

David McFadgen -- Cormark Securities -- Analyst

I thought it was a little high. But anyways, can you talk about it?

Robin Chhabra -- Chief Executive Officer of FOX Bet

Look, we want to take full advantage of this opportunity. And we want to take a lot of market share. And both are substantial customer bases on top of the ones we have access to. Poker is a very important vertical in the U.S.

But sports betting is far more mainstream, far more widespread and will attract a wider number of people. So we need to look beyond the poker database if we want to become one of the leaders in this market. As I said, I think we will deliver very good returns on investment as a result of the FOX brand, as a result of marketing integrations and some of the exclusive positions we have with them. So I feel confident that we will generate positive returns to shareholders from that investment.

But as I said, we need to look beyond those existing databases if we want to become a leading player in this market. And that is clearly our intention.

David McFadgen -- Cormark Securities -- Analyst

OK. All right. Thank you.

Operator

Our next question comes from the line of James Rowland Clark with Barclays. Please proceed with your question.

James Rowland Clark -- Barclays Bank -- Analyst

I've got a couple, please. Firstly just as a point of confirmation on the U.S. losses. I think you said earlier that a $40 million loss is a good starting point for next year.

I just want to double check that. And does that mean to say that the $40 million of losses this year have about $20 million also nonrecurring or accelerated cost in that number? And then secondly, in the past you've given us a flavor of how the quarter is progressing so far for Sky Bet. So I wonder if you could just give us a flavor of how Sky Bet is performing so far in Q3. And then finally on the guidance.

You've had a fairly regular stream of downgrades in the last 12 months. So is it fair to say that your new guidance is a little bit more conservative than usual? Thank you.

Robin Chhabra -- Chief Executive Officer of FOX Bet

I'll take the question on the U.S. losses, so $40 million for this calendar year, that's 2019, $40 million as a starting point for next year. But what I said was that I wouldn't necessarily annualize that if we're just looking at New Jersey and Pennsylvania and obviously the launch of free-to-play. What could change that would be launches particularly in the second half of next year in large new states where there could be significant investments to build customer bases.

So that's the position and size of the losses -- the investment is concerned.

Rafi Ashkenazi -- Chief Executive Officer

When it comes to Sky Bet in Q3, we started Q3 in a very positive way. And we actually had to start off the season, which kicked off this last weekend. And we had a very good start. So Sky Bet -- or Sky Betting & Gaming is doing well in Q2 so far.

And I'm expecting them to continue to do well throughout the year and going forward in general. I mean I do genuinely believe that they're the best asset in the U.K. When it comes to the guidance, I wouldn't say that we're too conservative here. I would say that we are realistic with our estimation for the year.

James Rowland Clark -- Barclays Bank -- Analyst

OK. Great. Thank you.

Operator

Our final question comes from the line of Gianluca Tucci with Echelon Partners. Please proceed with your question.

Gianluca Tucci -- Echelon Partners -- Analyst

Yes. Hi. Good morning, guys. Just a question on your efforts in Italy on their rebranding. So what are some of the takeaways there that you can apply to your other jurisdictions and integrating your existing platforms?

Rafi Ashkenazi -- Chief Executive Officer

So yes, we are actually very happy with the way that we rolled out Sky Bet in Italy as part of the PokerStars ecosystem. The same thing happened just now in Germany. We launched only a few days ago. And we signed a partnership with Sky Deutschland.

And we are expecting to see essentially the same type of trend also happening in Germany. In terms of the other markets, I think I mentioned it before. We are planning to use Sky Bet where available and obviously where Sky has brand equity. And there are a few considerations around those markets, the operating size key markets and we are exploring those.

And some of the other considerations that we have around the brand is again something that I mentioned before. We are looking to move into PokerStars as the master brand. In the markets where we don't have Sky or Sky Bet and where Sky doesn't have like a strong brand equity, we are going to start using PokerStars sports. And for that matter also, we are going to use PokerStars Casino.

So that's the plan going forward. We are looking to ensure that we are as efficient as we can in terms of the marketing. And we are really extracting value from the assets that we've managed to build and acquire over the course of the years.

Gianluca Tucci -- Echelon Partners -- Analyst

OK. Great. And just a follow-up to that question. Can you give us an update, I guess Brian, on how the synergies across your assets that you acquired last year are advancing and how much are still to be generated for the balance of '19? Thanks, guys.

Rafi Ashkenazi -- Chief Executive Officer

Sorry. Before Brian answer, I just want to add one more comment. I think maybe it was lost in what we said previously. But we are planning also to have the U.K.

ecosystem rolled out toward the beginning of next year. And we also believe that this will actually drive very meaningful revenue synergies over time. The U.K. ecosystem, just to maybe add a little bit of substance to what this project actually means.

It means that we are going to put the PokerStars and the Sky Betting & Gaming customer bases into one ecosystem and allow customers to transfer funds between one ecosystem and the other ecosystem, essentially allowing the customers on Sky Betting & Gaming access to the best poker business in the world, the best poker offering, the best poker product in the world and obviously allowing PokerStars access to millions of customers on Sky Betting & Gaming business, which they'll require over the course of the years in the U.K. So that's another quite exciting opportunity that we see. This is something that we are hoping to roll out to the beginning of next year. And there would be follow-up projects relating to obviously the extracted value of the revenue synergies as time goes by and as we tighten the integration between the two ecosystems.

So that's just a follow-up remark on your previous question. Sorry. Brian, go ahead.

Brian Kyle -- Chief Financial Officer

And then just answering the question on synergies. Synergies are tracking very well. The only point that I would add is that the large proportion of those will be realized through H2. So again, from a basing perspective, they were heavily weighted into the back half of 2019.

We continue to look at other cost optimization opportunities. Then again, the whole objective here is to ensure that we're operating effectively and allowing us to free up funds to continue to invest back into our business through marketing efforts. So overall, synergies are tracking exceptionally well.

Gianluca Tucci -- Echelon Partners -- Analyst

Thanks, guys.

Operator

Thank you. This concludes the time allocated for questions on today's call. I would like to turn the conference back over to Mr. Ashkenazi for any closing remarks.

Rafi Ashkenazi -- Chief Executive Officer

OK. So thank you, everyone, for participating on today's call and the ongoing support and interest in The Stars Group. Thank you. Goodbye.

Duration: 0 minutes

Call participants:

Vaughan Lewis -- Senior Vice President of Communications

Rafi Ashkenazi -- Chief Executive Officer

Robin Chhabra -- Chief Executive Officer of FOX Bet

Brian Kyle -- Chief Financial Officer

Thomas Allen -- Morgan Stanley -- Analyst

Chad Beynon -- Macquarie Group -- Analyst

Omer Sander -- J.P. Morgan -- Analyst

Tim Casey -- BMO Capital Markets -- Analyst

Joe Stauff -- Susquehanna International Group -- Analyst

Simon Davies -- Deutsche Bank -- Analyst

Marlon Goldstein -- Chief Legal Officer

David McFadgen -- Cormark Securities -- Analyst

James Rowland Clark -- Barclays Bank -- Analyst

Gianluca Tucci -- Echelon Partners -- Analyst

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