U.S. Markets open in 3 hrs 34 mins

Edited Transcript of WMH.L earnings conference call or presentation 9-Aug-19 10:30am GMT

Half Year 2019 William Hill PLC Earnings Call (Debt Investors)

London Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of William Hill PLC earnings conference call or presentation Friday, August 9, 2019 at 10:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Mark Hirst

William Hill plc - Group Treasurer

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the William Hill Debt Investor and Half Year Results Conference Call. My name is Charlotte, and I will be coordinating your call today. (Operator Instructions) I will now hand over to your host, Mark Hirst to begin. Mark, please go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Charlotte, and good morning, everybody. My name is Mark Hirst, I'm Group Treasurer here at William Hill Group. Thank you for joining this morning's half year 2019 results presentation. For those of you who've had chance to download the presentation from the website, and I will refer to slide numbers as we go along so you can track progress.

 

But let me start briefly by setting the scene. So Slide 3, half 1 2019 highlights. This is the first year of the new strategy we set out back in November of last year at our Capital Markets Day. We may be clear that this year is a year of transition for all parts of the group, and the results reflect that and are in line with expectations.

 

We're making good progress against the plan we set out, and are rapidly moving the business towards a more digital, more international and more sustainable future.

 

In Online, Mr Green and our existing international business now represents 1/3 of the -- our total Online business. In the U.K., Online has seen the performance improve as we've gone through the period with net revenue up 7% in Q2.

 

We have now more regular period impacted by our enhanced customer due diligence measures, by completing the heavy lifting on some key projects that improve our long-term competitiveness while also improving our customer metrics as you'll see shortly.

 

We are seeing positive momentum in this decree, the integration is progressing well and we're on track to deliver around GBP 4 million of annualized cost synergies this year and GBP 6 million on an annual basis thereafter.

 

In U.S., we're building a business with meaningful scale and the $1 billion of amounts wagered in half 1 alone. Our market share was 27% in half 1 and we're now live in 8 states, and we'll be launching in 2 further states shortly. While giving ourselves the best possible platform for serving our new states with immediate launch of our new proprietary tech stack. The first solution designed and built for the very specific demands of the U.S. market.

 

We're also excited by the potential of the Eldorado Caesars Hyatt, which will immediately allow us to expand the cash generative Retail business and offers significant digital and marketing opportunities across the U.S.

 

In U.K. Retail, we now have customers responding to the GBP 2 stake. So far the changes are very much in line with our expectations and what we set out as our plan. And finally, we're making real progress on proactively tackling the regulatory agenda and rebuilding public trust. We're getting all the financing issues such as advertising, funding for treatment and the encouraging safer gambling for all customers. We've made a very strong start but need to keep doing more.

 

Okay. Turning to Slide 4. And then moving on to Slide 5 very quickly to talk about our financials. So as I've said, we laid out the strategy back in November, and this is the first half of year 1. What you see are a complex set of numbers with a lot of moving parts as we transition the business. However, the overall message is that we are expected -- we are where we expected to be.

 

If you look at group income statement on Slide 5. On a statutory reporting basis, net revenue of 11 -- sorry, GBP 812 million was up 1%. The growth in U.S. and the addition of Mr Green from February offsetting the steep declines in Retail from Q2 was the impact of the new GBP 2 stake limit and weaker Online U.K. revenues.

 

Cost of sales were flat with quarter -- with 1 quarter in the change of Remote Gaming Duty and additional Mr Green costs offset by lower costs of Retail linked to the drop in net revenue.

 

Net operating cost amounts went higher including Mr Green but without the benefit of the cost mitigation measures in Retail, as these will come through from Q4 onwards.

 

As a result, adjusted operating profit was GBP 76 million, 33% lower than last year, including a GBP 10 million loss from U.S. Expansion. As you will see, we recorded an exceptional charge of GBP 114.3 million. Of this, GBP 97.1 million relates to costs we have incurred from the Retail mitigation strategy. In P&L terms, the 700 shops were proposed to close. We have to account for the full cost and release obligation due to a break under the IFRS 16 standard. Without any impact from mitigation measures plus the estimated cost of redundancies for activations, et cetera.

 

In cash terms, our guidance was originally GBP 40 million to GBP 60 million. We're expecting it to be at near term with our range, but based on prior experience, we are confident there are number of mitigation measures which drive the difference between P&L number and the cash impact due to the exceptional charges related to acquisition of Mr Green and the tail of our transformation program.

 

 

We've applied the new IFRS 16 accounting standard for the first time, and we've adopted this for half 1 2019. And but we're not going to be doing a 2018 comparative, but the impact for half 1 2019 so far is, depreciation increased by GBP 22.1 million, interest expense increased by GBP 2.3 million and other admin expenses reduced by GBP 23.2 million.

The net effect of all of that is an increase in PBIT of GBP 1.1 million, and the decrease in cost after tax of GBP 1.2 million in the half.

 

Net finance costs are GBP 8.1 million higher with additional interest from the new GBP 350 million bonds we did back in May. Early interest payments on the early repurchase of the outstanding 2020 notes and also the change of outline to IFRS 16.

 

On a statutory basis, there is a tax credit of GBP 2.3 million on the losses. On an adjusted basis, the tax charge was GBP 3.8 million on adjusted pretax profits of GBP 50.8 million, giving an effective tax rate of 7.5%.

 

This is clearly a big change from last year because now more of our profits are coming from outside of the U.K., and a provision was released following the sale of our Australian business.

 

I now expect our full year tax rate to be around 8% because of that tax provision release, moving back to our medium-term guidance of 12% next year.

 

Basic adjusted earnings per share was 5.3p. It's worth noting, the average number of shares increased in the period to 871.8 million due to shares being issued to our U.S. partner Eldorado Resorts.

 

The Board has announced an interim dividend of 2.66p per share in line with our previous commitment to an 8p underpin during this period of transition and also based on the usual practice of paying 1/3 of the anticipated full year dividends at the half year.

 

Moving to Slide 6 and looking at Online KPIs. Clearly a year of transition and diversification, as we described previously. In the U.K., net revenue was down as we rolled over the closure of customer accounts starting in mid-2018. New accounts and actives are also down against foreign acquisitions due to World Cup period last year. Average revenue per user and cost per acquisition are both better than a year ago with no World Cup spend, and a continued focus on expanding our mass market customer base.

 

Going forward, we're optimizing the balance between acquisition and yield, particularly with slower U.K. market growth and the improvements we're making to our data and marketing technology.

 

Now for international. As a reminder, our international business now consists of Mr Green and the existing William Hill International businesses, which are now managed by the international team based in our Malta hub.

 

Since we acquired the business, Mr Green has traded strongly in all key markets with the exception of Sweden, where new regulations disrupted the whole market in the early months of the year.

 

We are now seeing Swedish performance improve month-by-month. During the first half, the new Malta-based team was very focused on the integration of Mr Green, whereas in the second half they will focus more on the international markets, including Italy and Spain with product improvement and marketing investments to come. The ingredients are now there for the team to significantly improve our market position.

 

 

Slide 7, Online P&L. These numbers for Online include Mr Green from the date of acquisition, i.e., February. And here we have a balanced growth from the addition of Mr Green, offset by the impact of our enhanced customer due diligence measures.

In the half, the impact from last year's enhanced customer DD was GBP 16 million on revenue and GBP 11 million on profit. That's following the GBP 23 million and GBP 17 million impact recorded in half 2 2018.

                                                             Net year-on-year impact is now explained. Sportsbook amount wagered were down 3% principally because of these measures. You'll remember that gross margin was above average last year that's come back down in line with our normal range of 7% to 8% this period, resulting in Sportsbook net revenue being down 7%.

 

Gaming fared better up 37% with the due diligence impact offset by the addition of Mr Green, which you will remember, derived more than 9/10 of its revenue from gaming.

 

Overall net revenue was up 14%. Within this, U.K. was down 1%, but performance improved as we went through the half and in Q2, growth was 7% with underlying growth of 12% excluding the impact of customer due diligence measures.

 

Cost of sales and operating cost increases also reflect the consolidation and integration of Mr Green, and we saw the increase in Remote Gaming Duty up from 15% to 21% in April, which cost GBP 5 million in the period.

 

This has resulted, as you can see, in an adjusted operating profit for the half of GBP 54.3 million, down 9% on previous year.

 

In the second half, we will be rolling over the due diligence impact from half 2 last year, and we expect Mr Green to deliver strong growth partly because we only completed the acquisition in February. Sweden trends have been encouraging and the business traditionally has a Q4 skew in addition to the delivery of synergies. Other international markets will also benefit from the focus of the new Malta team, new product and marketing investments.

 

Moving on to Retail on Slide 8. So remodeling our Retail estate, we'll more to a smaller but sustainable business with strong cash generation, and an engaged team focused on gaining market share.

 

Our confidence to do this comes from the results to date and our deep analysis of the betting shop or LBO market. Gaming has obviously been impacted by the new GBP 2 staking limit that came into effect from the 1st of April. As a result, the change in mix has resulted in a higher gross win margin.

 

 

Q2 Sportsbook was 7% like-for-like, with substitution from Gaming from April onwards. Underlying costs have been well managed with roughly a GBP 2 million increase in the national living wage in April being offset in other categories. Again, you can see the impact of IFRS 16 in 2019 numbers with the shift between property costs and depreciation. Depreciation and amortization came down GBP 4.4 million in half 1 as a result of the impairment last year.

 

As we said at the Capital Markets Day, we're looking at 1 quarter of normal profit from Retail this year and 3 quarters of disruption as we work through the mitigation measures, with more benefit occurring as we progress through Q4 closing loss-making shops and moving towards a new operating structure.

 

Our expectation is that our market will act rationally. Today, there's been around 350 shop closures across the sector.

 

Now for the U.S., slide 9. So this slide really paints a very pleasing picture for the U.S. Here you can see we have strong momentum with 27% market share across all states that have regulated so far against our long-term ambition of 15% market share. In Nevada, amounts wagered grew 16% on a local-currency basis, continued to be driven by mobile growth, in a market that has been regulated for quite some time.

 

Mobile now accounts for 69% of Nevada wagering. Of course, it's an impossible task to match last year's unusually high gross win margin, and we have reversed it to a more typical level 6.5%, winning net revenue was down 2%. Our market share though remains at 32%.

 

In New Jersey, we are #1 -- we are the #1 non-Fantasy brand. Our margin across mobile and Retail are market leading in the state, and these are the early signs of the benefit of our experience in this market.

 

Market share for digital was 10% in the period, 16% as we exited the half. This was ahead of having the technology in place and ahead of significantly pushing our marketing or committing to a media partnership. So a good outcome so far with further building blocks to come.

 

Other things to note. There's $1 billion of amount directly wagered to the period, and 23% of all our total amounts wagered is coming from states other than Nevada and New Jersey. So let's not underestimate the value of those smaller states, especially where they also contribute early profits.

 

 

Our aim, as we've stated before, is to be in every state that regulates, we are not yet represented in Arkansas and New York, the other 2 states that regulated in the half. We are capital disciplined in our approach to our U.S. investments and decided the access fees being sought by New York casinos would not allow a sufficient return. If the Eldorado Caesars deal completes, we will have access to New York.

 

We've recently launched in New Mexico, and we'll be launching in Iowa and Indiana in the coming weeks, access coming primarily from our partnership with Eldorado.

Moving on to the U.S. P&L on Slide 10. So in terms of the U.S. numbers, and giving you again transparency of what's coming from U.S. existing, digital expansion and Retail expansion. And as anticipated, Nevada and Expansion Retail profits are underpinning digital investment, with a division in a small profit for the first half.

 

Direct wagering growth of 51% include the service provider wagering is over 90%. This shows we are able to serve customers across a portfolio of different business models.

 

Our U.S. Expansion business directly handled $241 million in the period, making it already equivalent to nearly 1/3 of what we do in Nevada. Gross win margins were in line with our expectations across the piece. We did record a loss from the Expansion business of $13.1 million, down from last year when we were carrying a lot of startup costs, ahead of generating significant revenues.

 

We invested CapEx of $26 million, it was roughly around GBP 19 million in our U.S. business in the half, with around $18 million going into digital expansion predominantly the technology platform.

 

 

Moving on to group cash flow. As you know, cash flow is a primary focus for the group. So EBITDA was GBP 12.3 million lower with group depreciation GBP 24.8 million higher following the change and the adoption of IFRS 16.

 

The acquisition of Mr Green resulted in a net cash outflow of GBP 170 million and we invested GBP 60 million in CapEx, which includes work on the new U.S. technology platform.

 

We issued a new GBP 350 million bonds and used GBP 170 million of those proceeds to repurchase part of the outstanding 2020 notes. And with dividends coming in at GBP 67.7 million, that gives us a net cash outflow for the period of GBP 77.2 million.

 

Slide 12. So let me pull all this together for you. Overall, this gives us a net debt to EBITDA for covenant purposes of 2x. And the covenant calculations continue to be done on an IFRS 16 adjusted basis, and we will continue to focus on this key metric.

 

As I've said before, we expect the leverage to increase in the second half above our medium-term guide rails of 1 to 2x, because of the capital we're investing in the U.S. Expansion opportunity and also the reduction of Retail EBITDA.

 

In terms of guidance, the group is in line with what we laid out at the Capital Markets Day, and reiterated the final results back in March of this year.

 

As I've said before, Retail steady-state profit range of GBP 50 million to GBP 70 million, given the timing of the mitigation measures we should be around the middle of the range this year, moving to the top of the range in 2020. The shape of that in 2019 is 1 quarter of normal profit, then the change of 1st of April and mitigation kicking in towards the end of the year. Exceptionals will be at the top of the GBP 40 million to GBP 60 million cash range.

 

Online. To reiterate, we are assuming mid-single-digit revenue growth in Online during this year of transition on a 52-week pro forma basis. That's in line with our growth expectations for our markets.

 

U.K. is where we expect it to be. Mr Green is showing good momentum, and we are focused on marketing and products to drive other international growth in half 2. The impact of Remote Gaming Duty for the full year is GBP 15 million.

 

In the U.S., we have recently launched in New Mexico and are planning additional lunches in Indiana and Iowa soon, and we will track any additional states that come through.

 

Good performance overall means that with these additional states, we are still within our previously guided range of a loss of $0 to $20 million this year from U.S. That will of course also play into 2020, and we will update you later in the year on 2020 guidance for the U.S. as the number of moving parts need to be clarified first, including the number of states and type of regulations, possible media partnerships and further access deals. And the positive implications of the Eldorado Caesars deal and the view of ongoing investment levels will also be communicated later this year.

 

So just in summary, the key message here is we are in line with expectations during this transition period, and we're on track to deliver.

 

Like to thank you for joining today's call. Very happy to take any questions that you may have.

--------------------------------------------------------------------------------

Operator [3]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Mark Hirst, William Hill plc - Group Treasurer [4]

--------------------------------------------------------------------------------

Okay. Thank you, Charlotte. And there's -- I'd like to wrap up the call there, and thank you everybody for joining.

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's call. If you have missed any part of this call or would like to hear it again, a recording will be ready shortly. Thank you for joining today's call. Have a lovely day.