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William Hill A well-executed year of transition

William Hill PLC (LON: WMH) has announced its final results for the 52 weeks ended 31 December 2019. Comparatives relate to the 53 weeks ended 1 January 2019.

Financial results

· Group net revenue fell 2% to £1,581.7m

· Adjusted operating profit2 from existing operations fell 37% to £147.0m, ahead of management expectations, following the implementation of the £2 stake limit

· Exceptional charge and adjustments of £134.1m, primarily in relation to the closure of shops and redundancies, leading to a statutory loss before tax of £37.6m

· Operating cash flow fell 7% to £183.0m reflecting the 37% reduction in adjusted operating profit2, offset by the reclassification of lease expenses under IFRS 16

· Net debt for covenant purposes4 increased, as anticipated, to £535.7m, reflecting the acquisition of Mr Green, the impact on adjusted operating profit2 of the £2 stake limit and disciplined investment in the US expansion, resulting in net debt/EBITDA of 2.4x

· Full year dividend of 8p is confirmed

Operational highlights

· Safer Gambling

o Committed to protecting our customers; signed up to the Safer Gambling Commitments in November 2019, significant increase in accounts setting deposit limits

o Self-regulatory measures implemented in 2019 including the ‘whistle-to-whistle’ advertising ban and the voluntary levy for research, education and training

· Online

o UK maintained market share; three consecutive quarters of growth5 in line with the market

o UK absorbed £13m impact from the increase in Remote Gaming Duty

o International net revenue fell 3% on a pro forma basis6, impacted by regulatory headwinds and legacy product

o Mr Green performed in line with expectations and achieved cost synergies of £4m

· Retail

o Decisive response to the £2 stake limit, closing 713 shops

o Net revenue fell 13% on a like-for-like basis7, at the better end of our expectations

o Sportsbook staking increased 6% with average weekly staking on SSBTs increasing 17% both on a like-for-like basis7

· US

o US net revenue increased 38%, capturing nationwide market share of 24%

o US Expansion net revenue tripled and Nevada grew for the seventh consecutive year

o New purpose-built digital platform live; 55% of all US wagers handled through our online channels

o Preparations to incorporate the operation of Caesars and CG Technology sports books are well underway which we anticipate will occur in the first half of 2020, pending regulatory approval

o CBS media partnership established; grants exclusive rights to promote William Hill across CBS Sports’ digital properties, a unique integration of sports betting, media, product and technology

Ulrik Bengtsson, William Hill Chief Executive Officer, commented:

“2019 was a year of transition during which we executed on our ambition to diversify internationally with the acquisition of Mr Green and the continued strong growth of our US business. The Group delivered a strong operating performance, ahead of our expectations and against a challenging regulatory backdrop.

“We move into 2020 in a stronger position. Almost a quarter of revenue is now generated outside the UK compared to 15% in 2018. We made positive progress with our digital platform, launching our purpose-built platform in the US and product developments in the Online business in 2019. We will invest in our proprietary technology as we continue to improve the competitiveness of our customer offering. We have also made great progress embedding a culture of safer gambling across the Group.

“This is an exciting time to be William Hill’s CEO. Our industry is evolving and this brings great opportunities, underlining the importance of our efforts to reposition the business. We look forward to building on these foundations with a renewed focus on customer, team and execution.”

Notes:

  1. Both the statutory and adjusted results include the performance of Mr Green since the acquisition completed in January 2019.
  2. Adjusted operating profit/loss is defined as profit/loss from continuing operations before interest and tax, excluding exceptional items and other defined adjustments. Further detail on adjusted measures is provided in note 3 to the financial statements within our 2019 Annual Report.
  3. Basic EPS is based on an average of 873.0 million shares for 2019 and an average of 857.0 million shares for 2018. Adjusted EPS is based upon adjusted profits after tax.
  4. Net debt for covenant purposes and EBITDA for covenant purposes are non-statutory measures. The basis of the calculation is as described in note 25 to the financial statements within our 2019 Annual Report, with the addition of the EBITDA of Mr Green for the full rolling 12 month period.
  5. Reported on a pro forma basis, assuming Mr Green was consolidated into the Group at the end of January 2018 and also adjusting Q4 2018 so that it is on a 13 week basis given 2018 was a 53 week period.
  6. Where pro forma results are stated, this assumes Mr Green was consolidated into the group at the end of January 2018, in order to provide a more meaningful comparator period. Further detail on pro forma results are provided in note 18 to the financial statements within our 2019 Annual Report.
  7. Where like-for-like (LFL) results are stated, this adjusts the 2018 comparative for shops closed during 2019.
  8. Broker research, CIA country profiles, U.S. Census Bureau, H2 Gambling Capital.
  9. Results in the Online operating review table are presented on an adjusted basis including Mr Green’s results post acquisition on 28 January 2019.
  10. The US Existing business has now been simplified to contain only revenues from Nevada, with all revenues from Delaware now recognised in US Expansion. 2018 results are restated to reflect this change.
  11. 24 states is contingent on the completion of the acquisition of Caesars by Eldorado. Excluding the inclusion of Caesars, William Hill US has access to 18 states. When referring to states this includes Washington D.C.

OVERVIEW

We have made good progress on the commitment made in 2018 to develop William Hill into a digitally led, internationally diverse sports betting and gaming business of scale with a strong online position and access to fast-growing markets, particularly the US.

Performance summary

2019 was a year of transition, although it was not without its challenges. To accelerate our international diversification, we acquired Mr Green giving us an established hub in Malta, with relevant teams and capabilities, from which to grow our international business. Mr Green also gives us a strong market position in a number of European markets, for example Denmark and Sweden. Our UK Online business has stabilised, growing in line with the market for three consecutive quarters5 and maintaining market share. We achieved this through a relentless customer focus and investing in both product and service.

The implementation of the £2 stake limit on B2 gaming products in April 2019 led us to remodel the Retail estate and close 713 shops in the third quarter which impacted the profitability of Retail by £67m. The UK Online business absorbed the increase in the Remote Gaming Duty which impacted profitability by c£13m and regulatory developments in the International Online business restricted growth. These events underline the challenging trading environment due to regulatory pressures and reinforces the importance of our drive to diversify the business geographically.

We continued to invest in our biggest opportunity, the US, where one in every four sports bets is made through William Hill. Following the Supreme Court’s decision to overturn the Professional and Amateur Sports Person Act (PASPA) in May 2018, the opportunity for William Hill US is significant. By the end of 2019, 14 states were live and we are in nine of them, more than any other sports betting operator. We will continue to leverage our recently launched, purpose-built US technology platform and market access partnerships, most notably with Eldorado Resorts, Inc. (“Eldorado”) which is expected to complete its proposed acquisition of Caesars Entertainment (“Caesars”) in the second quarter of 2020. Market estimates suggest that the US could generate between US$5bn and US$19bn8 of sports betting revenues by 2023, depending on the speed and nature of state-by-state regulation, and William Hill is well positioned to participate with market leading access secured in 2411 states.

Delivering on our strategy

At our capital markets day in 2018 we laid out our ambition to be a digitally led, internationally diverse business of scale which remains unchanged. At the time we set out a number of strategic objectives: to drive digital growth, remodel the UK and grow scale in the US while developing a culture of customer protection and self-regulation. We have already made material progress towards achieving our objective to remodel Retail. The business responded with conviction to the regulatory challenges and is once again ready to focus on the future.

To accelerate the delivery of our ambition, we will increase the operational emphasis, holistically across the Group, on the keys to our success: Customer, Team and Execution. We will achieve this through five strategic priorities that will be implemented Group-wide: competitive customer offering, a collaborative and agile team, revenue growth, operational efficiency and scale.

Customer

Create a ‘competitive customer offering’ through continuous innovation, increasing personalisation and best-in-class customer support while protecting our customers.

We have a clear product mission to delight our customers and we have already automated our customer support functions leading to an all-time high customer satisfaction score. The immediate future will be about product, with five areas of operational focus:

· Brilliant Basics. Be a market leader on app performance for the customer moments that matter: Deposits, Withdrawals, Login, Settlement, Registration;

· Establish a sustainable competitive advantage through faster innovation, a focus on football and in-play experience, provide a rich gaming experience and enable flexibility and scalability in the US;

· Exceed our customer’s service expectations through faster response times based on a combination of automated back office, increased self-service and high-touch service when necessary;

· Promote Safer Gambling activities through innovation, including Real Time Monitoring, UK customer dashboards, unified Safer Gambling tools for the UK & International;

· US technology platform evolution, introducing sophisticated trading capability at scale.

Team

We will build capability around a ‘collaborative and agile team’. We have introduced a Chief Product and Technology Officer who will have end-to-end accountability for driving our customer offering across all divisions. The new role of Chief Operating Officer will focus our key business support operations into a single, customer centric function.

We are streamlining our processes, evolving our ways of working and investing in our people to ensure we reach our long-term goals. Improvements have already been made within engagement and we will continue to develop the end-to-end employee experience to attract, retain and motivate our people. During the coming year we will further simplify the operating model to enable collaboration and facilitate a focus on execution. We are building skills programmes and talent academies to ensure we are future-proofed.

Execution

Our focus on customer and team will be supported by the execution of three key drivers; revenue growth, operational efficiency and scale.

Revenue Growth

Revenue growth will be achieved by growing our International and US businesses and maintaining share in the UK, where we expect to perform in line with the market. Our intention to provide personalised customer experiences and targeted real-time engagement to drive share of wallet will be enabled by robust customer data analytics delivered in parallel with cost optimisation, driving operational leverage to improve our operating profit. Each division has a clear plan in place to drive revenue growth:

· Online UK:

o Maintain UK market share by optimising the yield of existing customers through the new Smart Data Platform and continuous product enhancements.

· Online International:

o Accelerate growth in the Nordics by capitalising on the launch of Sweden, improving content in Denmark and increasing localised marketing;

o Grow Spain & Italy by monetising recent product improvements and launch Mr Green in Spain.

· US:

o Capitalise on the competitive customer experience and products that will be supported by the new technology platform;

o Improve marketing return on investment;

o Leverage our partnerships to accelerate our expansion as the states continue to legalise and regulate.

Operational Efficiency

We will evolve our operating models, through a culture of continuous improvement, to deliver simplified ways of working, increased automation and improved marketing efficiency.

In 2019 we commenced an Operating Model review to drive automation, improve location footprint and remove duplication of efforts, and this will continue throughout 2020. We defined a set of initiatives within our Customer Service operations, including robotic process automation to substantially improve service quality and consequently reduce costs. Further in 2019 we launched the Smart Data Platform and analytics tools that will allow us to make timely decisions and ensure greater efficiency from our marketing efforts going forward.

Scale

We will generate economies of scale by using selected core platform components and processes across multiple divisions and selective non-organic opportunities. As we invest in our proprietary technology, our Global Trading Platform and Smart Data Platform will be utilised across the Group. As we evolve our business, we will optimise our technology blueprint, location strategies and core back office operations to ensure we maximise the benefits of scale.

Safer gambling

Throughout 2019 we responded to regulatory change across all regions, facing into the challenges in Europe, the opportunities in the US and continuing to drive forward with safer gambling measures. At the start of the year we set ourselves the objective of increasing the number of online customers that set deposit limits by 50% and we have delivered on that target.

In July we agreed to increase our funding for research, education and treatment, in collaboration with industry peers. This will see a ten-fold increase in our financial support for safer gambling measures in the next five years with our contribution rising from 0.1% of UK gross gambling yield (GGY) to 1% by 2023. In August, the voluntary whistle-to-whistle ban on advertising around live sports matches came into effect with the intention to reduce exposure to under 18s. We are pleased to note this has been a successful initiative with analysis revealing a 97% reduction in sports gambling adverts seen by children.

In November the launch of a new representative body, the Betting and Gaming Council, was accompanied by the announcement of a package of Safer Gambling Commitments, a comprehensive set of measures intended to deliver long-term benefits to minimise the harm caused by gambling. We, along with many of our peers, have committed to prevent underage gambling, increase support for treatment, strengthen our advertising and marketing codes of practice, protect our customers and create a culture of safer gambling. At William Hill that journey is already well advanced.

In January 2020 the Gambling Commission announced that the use of credit cards to gamble in the UK would be banned from April 2020, a restriction which extends to e-wallets funded by credit cards. A small proportion of deposits, approximately 5%, are taken through credit cards online and our retail outlets accept cash and debit cards only. We will continue to engage with the Gambling Commission and wider stakeholders as we have done increasingly over the past few years.

Our aim is that all of our customers play safely and within their means. To support this goal, we have continued to invest in personnel, IT systems and rigorous processes to ensure our customers are appropriately protected. With the support of technology we closely monitor patterns of play, provide our players with tools they can use to remain in control and, where appropriate, we will enforce a break in play. As we continue to embed customer protection and self-regulation at the heart of our culture, we will develop tools and processes that ensure we protect our customers from gambling related harm. There is more to do with respect to customer protection but the progress that has been made at William Hill and by the industry is real.

Board changes

During 2019 we reshaped our board to reflect our intention to be digitally led and internationally diverse. We welcomed Gordon Wilson, Jane Hanson and Lynne Weedall to the board as non-executive directors, bringing with them experience in technology, international expansion, regulation and compliance and cultural change. In September Philip Bowcock stepped down and Ulrik Bengtsson was appointed Chief Executive Officer (CEO).

In January 2020, Ruth Prior, Chief Financial Officer (CFO), notified the board of her intention to step down to return to the private equity sector. She has supported the Group through considerable change and we thank her for all she has done for the Group. More recently we announced the appointment of Adrian Marsh as William Hill’s new CFO. Adrian is a proven CFO of a FTSE listed company with M&A, deal execution and multi-sector finance experience in US and European markets and we are delighted to welcome him to the Group. The effective date of Adrian’s appointment to the Board and Ruth’s departure will be announced in due course.

Outlook

2019 was a year of transition during which we laid the foundations to deliver our long term ambition to be a digitally led, internationally diverse business underpinned by our commitment to safer gambling. We are on track to perform in line with our expectations for 2020, assuming normalised gross win margins and a stable regulatory landscape. We will continue to manage our leverage carefully as we balance the investment opportunities available to us against the potential for regulatory developments across the Group.

More specifically, the growth of Online, the stabilisation of Retail and the continued strong growth of the US are addressed in more detail in each of the divisional outlook statements.

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