WILLIAM HILL PLC FINAL RESULTS ANALYST PRESENTATION 24 February 2017 Philip Bowcock, Interim CEO SLIDE 1: TITLE SLIDE Good morning, everyone. Thank you for joining us. I’ll do a quick intro first and then hand over to Mark Summerfield, our Interim CFO, for the numbers. I’ll then update on our progress and priorities. SLIDE 2: OVERVIEW Looking back over 2016, we’ve ac hieved a huge amount and made good progress across the four priority areas I set out six months ago. With all the heavy lifting that has been done, we’re set up to be in a far better position in 2017. And we’ve have had an encouraging start to year. Sp orts results have been good. Much more importantly, in the UK we made good progress during the second half of 2016 and both sports wagering and gaming net revenue is showing sustained improvement into this year. In financial terms, we ended the year with a strong balance sheet at 1.8x net debt to EBITDA. Though EPS was lower, the Board believes the actions we’ve taken will deliver an improved performance and have, therefore, maintained the dividend flat at 12.5p per share. SLIDE 3: A BUSY YEAR FOR ALL FOUR DIVISIONS The teams have stayed focused and delivered a huge amount as you can see from this list. In my view, Online has turned a corner thanks to all the work on product, UX and marketing. There’ s more we want to do but the signs are increasingly positive. And we’re now attracting top quality new hires from inside and outside the sector into Crispin’s leadership team, including three key senior hires in marketing, gaming and technology. For Reta il, what I’d call out is the modernisation programme, and I won’t spare Nicola’s blushes. It’s been a top-to- bottom restructuring of Retail’s management in a way that increases management attention on the shops and the customer experience, as well as mitigating the National Living Wage in the coming years. It’s one of the most significant changes Retail has undergone in the last decade and has been delivered with minimal disruption. No mean feat. So, thank you, Nicola and to any of her team who are liste ning to today’s presentation. Australia is now going well and the US continues to perform very strongly. So everyone in the business is feeling considerably more confident after the hard work over the last few months. Now, I’ll hand over to Mark for th e numbers.
Mark Summerfield, Interim CFO SLIDE 4: FINANCIAL REVIEW Good morning, everyone. SLIDE 5: GROUP INCOME STATEMENT I’ll start with the Group income statement. As Philip said, we were tracking at the top end of our guided profit range until we were hit by sports results in December, after a weak November as well. This hurt all four divisions and in December alone reduced profits by about £18m. Overall, then, while net revenue and profit before interest and tax both ended the year up 1%, adjusted operating profit is a better indicator of our true performance and this was down 10%. Across the Group, reporting on a constant currency basis would have no significant impact. For example, net revenue would have been down 1% rather than up 1%. Exceptional items included just under £10m of corporate transaction costs and just over £10m of reorganisation costs, including the Retail modernisation programme. Operating and non-operating adjustments differ in quantum from last year mainly due to the financial instrument used for the investment in NYX. A £9.9m loss arose on fair valuing the derivatives related to our investment and £3.2m of interest income arose on the loan element, derived using an effective interest rate. Net finance costs were higher as we incurred the cost of the new £350m bond from May ahead of paying off the existing £300m bond in November. As the coupon on the new bond at 4.875% is considerably lower, net finance costs will come down by around £11m in 2017. Our effective tax rate on adjusted profits is 9.3%, lower than the 15% guided due to a range of small reasons such as the impact of tax rate changes that were announced in the Budget but enacted in September, prior period adjustments and the movement on provisions for uncertain tax positions. We expect the effective tax rate to be 14% in 2017. Overall, then, adjusted EPS was down 10%. But the dividend for the year remains flat at 12.5p per share, a pay-out of 56% of adjusted EPS. SLIDE 6: ONLINE INCOME STATEMENT Turning to the divisions. Online saw a 2% growth in amounts wagered. The core markets of the UK, Italy and Spain were up 5% and ‘Other markets’ were down 11%. For reference, the UK was up 2%. In Gaming, net revenue was down 4% with core markets down 5%. The UK was down 8%. However, there was good growth in Italy and Spain. We launched Vegas-style content in Italy and had a part-year benefit from the launch of slots in Spain in June 2015. Other markets were up 2%.
At the gross win margin, you can see the impact of the sports results in the last two months. We reported gross win margin of 7.7% for the first ten months. December delivered a margin of only 3.6%. Looking at costs. Employee costs were up 21%. This reflects our ongoing investment in the technology, customer experience, business intelligence and international teams. Marketing was lower in H2, as we had the EUROs in H1, and then started to optimise spend and address the customer experience issues. FVAs were 0.9% of amounts wagered overall, down from 1.1% in H1 as we tackled bonus abuse. The KPIs highlighted show the profile we were expecting given the changes we’ve made. By focusing on profitable business we lowered the number of actives but improved the average revenue per user. New accounts are lower as we’re not recruiting customers who give a negative re turn and so the CPA is higher. However, as we start 2017 the top-line trends are encouraging, and Philip will talk to these in a moment. Looking ahead, from August, we’ll be charged Point of Consumption tax on gaming free bets. That’s likely to cost us around £3.5m this year, around £8m on a full-year basis. And the Government plans to extend the horseracing levy to online operators and to charge a rate of 10% of gross win from April. On current levels, that would cost Online around £6-7m on a full-year basis, with a small benefit flowing through to Retail. The main hurdle for the Government is EU State Aid clearance and we’re awaiting the outcome of that stage of the pro cess. SLIDE 7: RETAIL INCOME STATEMENT As previously highlighted, Retail wagering was down with declines in horseracing and greyhounds not sufficiently offset by football. In horseracing, one factor in the fall in wagering was the high gross win margins on Tier 3 horseracing in the first three quarters, which reduced recycling. Margin normalised in Q4. We also now have pictures from South African racing back in the shops and this is improving performance. Racing is a big focus for our Sportsbook strategy in 2017. The SSBTs are now performing well, with 2,000 of our own machines and 800 of BGT’s across over 80% of the estate. In Q4, where shops had SSBTs, they accounted for 7% of total wagering and nearly 30% of football wagering. The proprietary route is the right one to support our Omni-channel strategy. But given the number of SSBTs in the market, it’s likely that we saw less growth in football during our roll -out. Recent trends show we’re getting our offering right and performance improved thro ughout the adoption curve. The machine week average gross win in 2016 was around £600 but in Q4 it was over £720 with further improvements in 2017. Superficially, the gross win margin at 17.6% looks normal but we were at 19.0% in H1 so you can see the second half was significantly below par. Our margin was just 15.9% in Q4, normally one of our bigger quarters. Gaming was good all year, up 6%. We launched 50 new games and increased the yield with B3 increasing from 31% to 34% of the mix. In Q4, growth was around 4%, which seems a reasonable run rate for the coming year.
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