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Edited Transcript of WMH.L earnings conference call or presentation 1-Mar-19 11:30am GMT

Full Year 2018 William Hill PLC Debt Investor Conference Call

London Mar 13, 2019 (Thomson StreetEvents) -- Edited Transcript of William Hill PLC earnings conference call or presentation Friday, March 1, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Hirst

William Hill plc - Group Treasurer

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Presentation

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Mark Hirst, William Hill plc - Group Treasurer [1]

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Hello, and good morning, everybody. Thank you for joining our 2018 results presentation. My name is Mark Hirst. I'm the Group Treasurer here at William Hill. I'm also joined by Tom Randell, who's the Head of Investor Relations. So Tom will support and help answer any questions. And if I can invite questions at the end of the session today, that would be great.

So without further ado, let's begin. So before I dive into the financials, which I think is what most of you are on the call to hear, let me explain a little bit about how the business is currently doing and strategy. And with this, I will talk to, I guess, the 3 main revenue-generating units or segments of the business.

So first of all, it's pleasing to say that we started 2019 with real clarity and with real purpose as we focus on long-term sustainable growth. 2018 was a pivotal year at William Hill and the business has seen a lot of change over its 5-year history. But arguably, never before with such far-reaching consequences in such a short window of time.

We know a lot more now given the regulatory clarity that we do have and we know what the challenges look like. Equally, we know what the opportunities look like and we're very, very clear now about our strategy, which, as some of you may recall, was presented in our Capital Markets Day back in November.

We know where we're going and this means we can meaningfully start to reshape William Hill over the next 5 years.

Okay. Moving on to operational highlights in 2018. As I said, I talked a little bit about each of the businesses. So first of all, in Online, the transformation program had begun 2 years ago, reshaped the business, refocused the team and got us back into revenue growth.

Now we're reshaping the customer base for long-term sustainability dealing with the impact from enhanced customer due diligence measures. We're also, at the same time, delivering strong acquisition rates among mass-market customers. And of course, we're also building out an international platform with Mr Green.

Retail is ready for the challenge of the GBP 2 maximum stake limits, which, as you know, comes in from the 1st of April and has continued to trade well against a very difficult backdrop.

In the U.S., we moved fast because we had a team in place with a strong track record already in Nevada, and because we invested ahead of the PASPA decision.

Selling Australia last year gave us focus at the right time and also cash. And finally, we're driving forward with the Nobody Harmed ambition, including putting our weight behind a self-regulated whistle-to-whistle advertising ban.

Okay. If I move on to the financials now, I'll start with the group income statement and take you through the highlights there.

So first of all, our Online business produced a good underlying performance with net revenue up 6% and operating profit up 11% when you exclude the impact of our enhanced customer due diligence, which impacted these results by GBP 22 million and GBP 17 million, respectively.

Retail had a successful year in the face of continued underlying decline and uncertainty. We have the best retail team in the industry who's delivered another year of market-leading performance.

Obviously, the key item impacting our results this year is the noncash GBP 883 million impairment of our retailer space, which was announced at the half year and which recognized the impact on future cash flows from the reduction of the maximum stake limits from GBP 100 to GBP 2.

As anticipated, our U.S. business was broadly breakeven with GBP 33 million of investment in the Expansion business, offsetting a record year. And the Existing business has produced net revenue up of 42% and profit up of 91% in local currency. That is the sixth consecutive year of growth.

Our US Expansion business is now live in 6 states and is performing in line with our expectations, with a profitable Retail business and investment ongoing in Online to build brand awareness and gain market share.

This will result in adjusted operating profit growth of 4% year-on-year when the GBP 50 million impact of US Expansion and the enhanced customer due diligence measures are removed.

Full year dividend is 12p per share in line with our guidance to pay approximately half of underlying earnings, excluding US Expansion. From 2019, the calculation will include the impact of US Expansion but will be underpinned by a minimum of 8p per share. So it will be no less than 8p per share.

Moving on to Online and mass-market momentum. So in line with our strategy to build a digitally led, internationally diverse business, we will provide the split between U.K. and international KPIs going forward. For our half-year results, the International KPIs will contain Mr Green, plus our current non-U. K. Online business.

At our Capital Markets Day back in November, we talked to you about our enhanced customer due diligence measures and our focus on increasing our mass-market customer base.

The impact of these actions can be clearly seen in the Online KPIs in the U.K. So new accounts, up 10%; actives, up 25%, benefiting from new accounts plus improved retention; a lower ARPU due to the mass-market nature of these new accounts; plus a reduced cost of acquisition due to increased marketing efficiency, which was a focus of our transformation program.

The U.K. Online growth rate was 7% and as such, when adjusting for enhanced customer due diligence measures, we'll be broadly in line with the market. Global growth was 39%, 3% higher than that of our own international business, primarily due to a lack of focus in this area. With our renewed focus on the international business with the acquisition of Mr Green, we aim to return to above-market growth rates next year.

Okay. Moving on to our Online P&L. So I've already talked about the net revenue trends. Cost of sales increased by 7% year-on-year, primarily as a result of annualizing the Online horseracing levy and remote gaming duty on free bets. Marketing costs as a percentage of net revenue remains in line with expectations at 23% despite it being a World Cup year.

Employee costs declined year-on-year once the transformation was completed, and other costs include the recharges increase during the year due to further investment in technology. Given the revised operating environment following the recent regulatory decisions, the group recharge methodology was adjusted to reflect current and expected future usage of services, resulting in a roughly GBP 4 million increase to the Online allocation of central costs.

Operating margin for Online decreased by 1 percentage points, but we will focus more on this going forward as we highlighted the part of Online strategy to deliver operating leverage.

Okay. Moving now onto retail. So in the year, retail net revenues declined by 2% year-on-year. However, we outperformed the market on all key measures, including stakes and margins. Our Retail business has stayed competitive over the last few years, and we believe has captured market share, mainly at the expense of independence. The management team are ready for the challenges of competing in this market and for the GBP 2 limit, which is coming in next month.

We held operating costs flat as the benefits of the transformation program were realized, offsetting inflation and also the impact of above-inflation increases in the National Living Wage and increased content costs from a second channel. All of this leads to an operating profit decline of 7% year-on-year.

Retail continues to generate cash, which facilitates investment across the rest of the group. And as a proxy for cash flow, underlying EBITDA, less CapEx, less one-off cash items was around GBP 155 million. As discussed at the Capital Markets Day, this is a measure we will use to address performance over the next 3 years.

U.S. So again, back in November, we talked about the U.S. and how we would measure progress in the U.S. We wanted to be present in every state that had regulators, and we certainly are, as we found today. Our aim is to have an average market share of 15%. Again, we've delivered on that so far. We said retail should be profitable in year 1, and you'll see shortly that, actually, including start-up costs, Retail in the U.S. is profitable in year 1.

We also said we wanted to build and we needed to build brand awareness. In New Jersey, brand awareness has increased from 5% in September to 22% in February this year. So that's a solid start. Gross win margin would be between 6% and 8% and across the portfolio, this continues to be a reasonable assumption.

We also said we needed to build a portfolio of contracts and partners to secure market access with the operational flexibility to deliver against the new regulatory model adopted by any state. And in this, we are achieving.

However, this results in a degree of reporting and accounting complexity, which I'll try to explain just now. So the figures you may have seen in the presentation that has been published on the website talks about handle, margin and market share. Hopefully, for most of you, these figures will be familiar as we've covered these before. And these are also the figures that are actually published by the state regulators.

And from these figures, we calculated our market share state-by-state. This gives you a good sense of volumes being handled by our business and also how we're doing competitively.

How we then account for our operations depends on the nature of the contractual arrangements we have with our partners and also the regulatory system that's present in each state. In New Jersey, for example, we are the operator as we directly contract with customers. So this is recorded as direct revenue and handle.

While in states where we act as service provider, it is our licensed land-based partner who directly contracts with the customer, and so we record our revenue from that source as service provider revenue and we don't record the amounts wagered in our U.S. P&L or income statement. The profitability of these various models are different and, of course, subject to start-up costs.

Please note that in the instance of Delaware, we have both Existing and Expansion business this year, and that's in both Existing and Expansion columns, as we had the Existing parlay business prior to the PASPA decision.

Okay. For the moment, we will continue to split out the US Existing and US Expansion numbers, and we'll also split out US Expansion between Online and Retail, so that you have good visibility on what's happening.

The US Existing business delivered its sixth year -- consecutive year of strong growth with net revenue up 42% and adjusted operating profit of 91% in dollar terms, with a gross win margin of 7.2%. Market share reached 32%, up 3 percentage points from the year earlier. This is a tremendous achievement that underlines our confidence in the quality of our sports betting business in Nevada.

The US Expansion business, on the other hand, is live in 6 states, making us the only operator to have launched in all 7 states that have regulators. In the first few months, direct wagering with William Hill in New Jersey and West Virginia was $212 million, which generated $13.4 million of revenue, at a gross win margin of 6.7%.

The other US Expansion states handled $218 million of amounts wagered, as I showed previously, and this is not recorded in the P&L as I previously explained. From this though, we recorded revenue, i.e. net of costs, of $1.8 million.

What you can see clearly is that the Retail operations are already profitable, but the Online operation, i.e. New Jersey and mobile, is loss-making as we're investing in marketing to build brand awareness and to acquire customers. And fortunately for us, it looks like there could be a strong bias towards Retail or tethered mobile among the states that are currently progressing legislation, with the minority of states considering the New Jersey model at least to begin with.

Moving on to cash flow. EBITDA was $40 million lower year-on-year due to the investment predominantly in the US Expansion business. Cash exceptional items and working capital line shows a roughly GBP 65 million outflow due to exceptional spend on the transformation program and the settlement of various provisions and accruals, including direct tax liabilities taken in 2017.

Tax payments in the year was GBP 17 million lower on the sale of Australia, lower U.S. profit and an offset in 2018 of prior year overpayments in the U.K. and Gibraltar. Capital and investing receipts of $230 million, of course, relate to the sale of Australia and NYX earlier in the year.

We increased CapEx to GBP 117 million due to the investment in the U.S. and Online with reduced investment in Retail as you would expect. Free cash flow of GBP 308 million was up 45% driven by the capital and investing receipts, and operating cash flow before movements of working capital was GBP 275 million, up 9% year-on-year.

Okay. Moving on to the balance sheet. I think we gave a very detailed guidance at the Capital Markets Day back in November, but it's worth updating on a few items from then and also giving a couple of reminders.

So first of all, we confirmed that final implementation was to be re-forward to April 2019. This results in an expected 2019 EBIT of between GBP 50 million and GBP 70 million versus the GBP 70 million versus -- GBP 70 million and GBP 90 million disclosed at the Capital Markets Day, and probably towards the lower end of that range as we won't have a full year of benefit from litigation measures.

The corresponding bring-forward of the increase in Remote Gaming Duty from 15% to 21% also results in an expected 2019 Online EBIT GBP 10 million lower than 2018. These changes are already factored into market consensus. Effective tax rate for 2019 is now expected to be 12%, reflecting the changing shape of the business.

After further detailed work, we can confirm that IFRS 16 is expected to increase operating profit by GBP 2 million to GBP 3 million due to the short nature of our leased retail estate.

So what do we need to remind you on? So a call out for the interims, really. So triennial mitigation in the first couple of quarters may be limited as customer and competitor changes take time to kick in. Secondly, at the year-end, our net debt-to-EBITDA ratio was 1x, at the bottom of our guidance range of 1 to 2x.

But with the Mr Green acquisition, reduced EBITDA in 2019 and with the expected cost of investment in US Expansion, you should expect to see our net debt-to-EBITDA ratio increase above 2x. The actual level will depend, of course, on what happens after April. And thereafter, we will see some natural delevering in 2020.

I can also confirm that our U.S. guidance remains unchanged as no additional states have legalized sports betting for the moment.

Okay. I'd like to leave it there in terms of the financials. I would like to open up the floor, as it were, to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We currently have no questions registered. So I'll hand back to you, Mark.

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Mark Hirst, William Hill plc - Group Treasurer [2]

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Okay. I'd like to thank you all for dialing in today, and that concludes today's presentation.

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Operator [3]

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Ladies and gentlemen, this does conclude today's call. Thank you for joining. You may now disconnect your lines. Have a lovely day.