William Hill PLC PLC Hill William Annual Report and Accounts 2011 Accounts and Report Annual DRIVING INNOVATION ACROSS OUR BUSINESS William Hill PLC Annual Report and Accounts 2011 Contents Overview William Hill at a glance 02 Chairman’s statement 04 Business review Chief Executive’s overview 06 Our market place 10 Divisional overview 12 ‘Setting the Pace’ showcases Financial review 20 some of the ways in which we are using innovation to drive our Managing our risks 22 business forward – developing Corporate responsibility 24 our business through our service, products, technology. Governance Board of Directors 34 2011 proved to be another year Directors’ Report 36 of continued financial progress, Directors’ Remuneration Report 39 reflecting the underlying strength of the business and benefitting from Statement on Corporate Governance 52 our innovations and investments. Report of the Nomination Committee 58 Report of the Audit and Risk Management Committee 60 £275.7m Operating profit1 generated in 2011 £1,136.7m Net revenue achieved in 2011 Financial statements Statement of Directors’ Responsibilities 63 53:47 Even balance between gaming (53%) Group Independent Auditor’s Report 64 and betting (47%) Group Financial Statements 66 More detail Parent Company Independent on page 20 Auditor’s Report 104 Parent Company Financial Statements 106 Five‑Year Summary 114 Shareholder Information 115 1 Operating profit/loss is defined as pre‑exceptional profit/loss before tax, interest and amortisation of Abbreviations and Glossary 116 £3.6m (2010: £3.6m) of certain Online intangible assets (see page 114). William Hill PLC Annual Report and Accounts 2011 William Hill at a glance Chairman’s statement Overview A WORLD LEADING GAMBLING BRAND. WILLIAM HILL IS ONE OF THE WORLD’S LARGEST QUOTED GAMBLING COMPANIES AND, AS A 77 YEAR OLD BUSINESS, HAS ONE OF THE MOST RECOGNISED, RESPECTED AND TRUSTED BRANDS IN THE INDUSTRY. IN ENTERING INTERNATIONAL TERRITORIES WE ALSO BENEFIT FROM OUR EXTENSIVE EXPERIENCE IN THE REGULATED UK MARKET. ON THE HIGH STREET, ONLINE, ON THE PHONE AND ON THE MOVE, WE OFFER A MARKET-LEADING BETTING AND GAMING EXPERIENCE. report2011.williamhillplc.com 01 William Hill at a glance OUR BUSINESS Our business is to provide our customers with a wide range of sports betting and WHAT gaming opportunities. We are best known as a bookmaker providing fixed odds sports betting, which requires a sophisticated odds setting and risk management WE DO capability. This core capability is a significant asset and represents a high barrier to competition. We benefit from spreading the significant cost of this capability across a large scale operation. Primarily we recruit customers through sports betting, but we also offer gaming opportunities to increase their proportion of spend with William Hill and to improve customer retention. In the online model, customers recruited through sports betting have a lower cost per acquisition, are more strongly influenced by the brand proposition and have a longer average lifetime with the business. We aim to make our products available to customers whenever or wherever they HOW want to gamble. Customers access William Hill products via multiple channels, including retail land-based operations, the internet, telephone, smartphone apps CUSTOMERS and SMS. ACCESS OUR PRODUCTS We build a margin into the products we offer, whether on the potential outcomes HOW WE of a sporting event, on casino-style games such as roulette and slots, or from a percentage of the pot from facilitating games of poker or bingo. Gaming activities MAKE MONEY provide a constant and predictable margin. Betting margins fluctuate with sporting results and the weight of money bet on any given outcome can deliver an imbalanced result. As a large operator providing a wide range of betting, William Hill is less exposed to these fluctuations than smaller businesses but they can have a short-term effect on financial results. However, given the law of averages, this will even out over time. In the UK, we are the leading betting and gaming operator. We are the largest high WHERE WE street bookmaker with approximately 2,370 of the 8,800 licensed betting offices regulated by the Gambling Commission of Great Britain. We are a strong operator OPERATE with well-developed core competencies in odds setting, risk management, data management and distribution. Our rigorous focus on costs produces, we believe, the highest operating margin of the major operators in the sector. William Hill Online is one of the UK’s largest operators of ‘remote’ gambling operations, including telephone, online, text betting and mobile. Internationally, no other business combines the strengths we have in land-based and online gambling (see ‘Market overview’). With more governments across the world now regulating sports betting and gaming, online as well as land-based, we are taking our sports betting expertise and operational strength into new markets, whether directly to the consumer or via commercial or government partnerships (see ‘Strategy’). WILLIAM HILL IN A 15,9 0 0 2,370 employees in the UK, Gibraltar, betting shops in the UK SNAPSHOT Israel, Bulgaria, Italy, Spain and the Philippines 02 William Hill PLC Annual Report and Accounts 2011 William Hill at a glance Chairman’s statement Overview Mobile Multi-channel orts bet Sp ting e l l e g e n g n n n i e n l n i l l o n l a William Hill e n a e i h s h h l s c s c - p The Home of Betting i s s - n t i l s o e t l r l u Brand, Marketing, o r u O C e M Innovation, Trading C M T Gaming Multi-channel Retail UK Bulgaria Italy Spain Gibraltar Israel Philippines 1 million 9,000 £17.9bn bets processed per day gaming machines taken in stakes in 2011 report2011.williamhillplc.com 03 Chairman’s statement Gareth Davis A POSITIVE PERFORMANCE BENEFITTING FROM INNOVATION AND INVESTMENT Our people Performance overview As a customer service-led business, the strength of William Hill delivered a positive performance in 2011, particularly in a year without our performance relies entirely on the commitment a major international football tournament and despite seeing an additional £9m and quality of our people. The William Hill team is spread far and wide, not only across the UK but of cost arise from the increase in the VAT rate. The business has benefitted from also overseas in Gibraltar, Israel, Bulgaria, a strong focus on innovation, both in the product range and in the use of technology Italy, Spain and the Philippines – and we hope to enhance the customer experience. The Retail channel saw encouraging wagering to welcome new colleagues to the Group in the US later in 2012. What unites them is their growth over-the-counter as well as further good growth from gaming. William Hill hunger for success, their commitment to delivering Online continues to grow strongly, with net revenue up more than 20% for the outstanding service, their hands-on approach to ‘making it happen’ and their respect that second year in succession. the contribution from everyone matters. They have, together, delivered another strong performance The Group has made good initial progress in its strategy to expand internationally and this year and I would like to record the Board’s thereby reduce its reliance on the UK market. In the Board’s view, regulatory changes thanks for their continuing efforts and commitment. across the world present exciting opportunities for the development of William Hill, with its distinctive multi-channel betting and gaming model. During 2011, we undertook organic expansion through the launch of William Hill Online in the regulated Italian market and also announced plans to acquire three land-based sports betting businesses in the State of Nevada in the US. Given the appeal of the multi-channel approach, the Board continues to look at the potential to grow through different channels in different countries. Overall, the Group recorded a 6% increase in net revenue, and Operating profit2 was £275.7m (2010: £276.8m). Basic adjusted earnings per share was 12% higher, benefitting from a reduction in income statement interest and taxation charges. Basic earnings per share fell by 11% impacted by the non-cash impairment of our Telephone business. The Group has a strong balance sheet, with the net debt to EBITDA ratio reducing further to 1.5 times. This reflected continuing strong cash generation, with net cash inflow from operating activities of £242m in the year and, consequently, a reduction in net debt for covenant purposes of £83m, from £499m to £416m. 04 William Hill PLC Annual Report and Accounts 2011 William Hill at a glance Chairman’s statement Overview Net revenue1 £m Dividend The Board has approved a final dividend of 6.7p per share (2010: 5.8p per share), giving a total 2011 dividend of 9.6p per share (2010: 8.3p per share). This represents Group KPI +6% 16% growth, reflecting the Board’s confidence in the strong underlying growth 2009 997.9 in earnings. 2010 1,071.8 2011 1,136.7 Net revenue grew in both the Retail and Online Board and corporate governance matters channels, in spite of the gross win margin being lower than in 2010, which had benefitted from a In May, David Allvey stood down after nine years on the Board. On behalf of my high-margin World Cup and better sporting results. fellow directors, I would like to thank David for his considerable contribution and Retail saw growth in OTC wagering and continuing good growth from gaming machines. William Hill for his guidance during this period of significant change for William Hill. Online delivered 28% net revenue growth, with higher revenue in all four product verticals.