William Hill PLC Annual report and accounts Focused on opportunities for growth 2016 Contents 01 48 85 Strategic report Governance Financial statements 02 Chairman’s statement 46 Board of Directors 93 Directors’ responsibilities statement 04 Looking ahead 48 Chairman’s introduction 94 Independent Auditor’s Report 10 Strategy update 50 Report on Corporate Governance 99 Group Financial Statements 12 Our business today 60 Report of the Audit and Risk Management 141 Parent Company Financial Statements Committee 14 Key trends in the market 149 Five-year summary 64 Report of the Corporate Responsibility 16 Our business model 150 Abbreviations and glossary Committee 18 Key performance indicators 151 Statement of Group Accounting Policies 66 Report of the Nomination Committee 20 Our marketplace 157 Shareholder information 68 Directors’ Remuneration Report 24 Divisional overview 90 Directors’ Report 30 Financial review 32 Corporate responsibility 40 Managing our risks 04 10 Looking ahead Strategy update Technology, Building on the the UK and good work International already underway growth 16 48 Our business model Chairman’s introduction to governance Creating Good value for all governance in stakeholders a demanding year Pages 01 to 45 form the Strategic Report of William Hill PLC for the period ended 27 December 2016. The Strategic Report has been approved by the Board of William Hill PLC and signed on behalf of the Board by Philip Bowcock, Interim CEO. 01 William Hill PLC Strategic Annual Report and Accounts 2016 report Introduction Governance Financial statements We are one of the world’s leading gambling companies. With over 80 years of heritage, William Hill is a powerful brand. Millions of people around the world enjoy betting with us. With compelling growth opportunities, we are building on our strengths and investing in our digital and international expansion. And we continue to innovate to give our customers the best possible gambling experience. 02 William Hill PLC Annual Report and Accounts 2016 Chairman’s statement A motivated team driving improvements Gareth Davis Shareholder returns Chairman The Board has approved a full-year dividend of 12.5p per share. Although EPS declined for the reasons described above, the Board believes the Group’s continued strong cash generation and our confidence in delivery of strategic priorities and future growth prospects warrant maintaining the current dividend level at this time. Our target balance sheet is 1-2x net debt to EBITDA4. During the year, we returned £95m to shareholders and invested £104m in the NYX / OpenBet and Grand Parade transactions to improve our technology capability. This left us with net debt to EBITDA for covenant purposes4 of 1.8x at the year-end. Performance overview Australian business deliver top-line growth following extensive work to improve the Corporate activities 2016 was a challenging year for William Hill, product, user experience and marketing. During the year, we also assessed certain with performance below what the Board In the US, we continue to expand, adding large-scale M&A opportunities. We believe expected at the start of the year. However, new sports books in Nevada, launching a shareholder value can be realised from we have made a number of strategic and new mobile app and signing an agreement sector consolidation, not least from cost leadership changes to address this and that takes us into Iowa. ultimately delivered a full-year profit within synergies. However, opportunities should the range of our revised expectations. Online’s performance was weaker than also present significant industrial logic to last year. In March, we highlighted that be compelling. To summarise the results, Group net more customers than expected were 1 The Board declined Rank and 888’s revenue and profit before interest and using the new ‘time-out’ and automatic approach in July first and foremost tax were both up 1%. However, adjusted self-exclusion measures; we were required 2 because of the lack of strategic progress operating profit , which gives a clearer to add these to our portfolio of responsible it offered; the combined group would picture of underlying performance, declined gambling measures from November 2015. 10% in 2016 to £261.5m (2015: £291.4m) and have remained as exposed to the UK and basic, adjusted earnings per share (EPS)3 While this regulatory requirement was land-based businesses as William Hill alone declined 10% to 22.3p (2015: 24.7p). outside our control, Online was also does today. affected by weaker performance around The potential combination with Amaya was Although we benefited in both wagering product and marketing. Specifically, strategically more compelling but, following and margin terms from the EURO 2016 new customers acquired in 2015 consultation with a number of our major football tournament, other sporting results were generating less revenue than shareholders, we decided not to pursue this were poor, including Cheltenham in March expected, indicating our marketing was opportunity. We, like them, recognise that and significant losses in football in the final not as efficient as planned, and the there is near-term value to be generated weeks of the year. competitiveness of our sports betting and from improving our own performance and gaming products had diminished while we Excluding the sporting results, Retail, this remains our priority. Australia and the US all performed well. focused on delivering our important front- end platform and undertook less product It is encouraging to see the Australian Corporate governance update business deliver top-line growth following development than usual. extensive work to improve the product, We changed Online’s leadership early in the To support the Group’s digital and user experience and marketing. year and were pleased to appoint Crispin international expansion strategy, we have made some key Board changes. In July Retail progressed our omni-channel Nieboer as Managing Director of Online. 2016, James Henderson stood down as strategy by rolling out 2,000 proprietary He has successfully refocused the team, CEO after two years in the role. I would like self-service betting terminals (SSBTs) who have worked incredibly hard to turn to record the Board’s thanks to him for his and also successfully implemented its around performance. One of their major contribution over more than 30 years with modernisation programme. This revised achievements of the year was a redesign William Hill. the management and staffing model of the Sportsbook app, delivered in time throughout the business to increase for the start of EURO 2016. This gave us a Philip Bowcock took over as Interim CEO customer focus and will also help mitigate market-leading sports betting offering once in July 2016 and continues to perform the cost of National Living Wage increases again and we saw early signs of improved excellently in leading the business. in future years. It is encouraging to see the financial performance in the second half as a result. 03 William Hill PLC Strategic Annual Report and Accounts 2016 report Governance Financial statements We are also pleased to welcome John O’Reilly, Robin Terrell and, from April 2017, Performance highlights Mark Brooker as Non-executive Directors, who together bring additional digital, multi- channel and gambling industry experience Net revenue1 to the Board. Outlook Looking ahead, we remain focused £1.6bn on continuing to improve Online’s +1% performance. We are progressing our omni- channel plans, bringing Online’s extensive product to Retail’s customers and creating a more consistent cross-channel Profit before Adjusted experience for customers. Australia is now interest and tax operating profit2 growing well and we continue to build our digital and physical footprint in the US ahead of possible regulatory change. In 2017, we are implementing a £225.6m £261.5m transformation programme that is expected to deliver at least £40m of +1% -10% efficiency savings. Given our confidence in the business, we will be reinvesting these savings in marketing, product development Basic earnings Basic, adjusted and enhanced technology systems to 3 further support growth. per share earnings per share Longer term, our strategy is to grow our digital and international revenues. With a more diverse revenue mix, we can better 18.9p 22.3p manage the volatility inherent in our business from both sporting results and -13% -10% regulatory change. At the same time, the strong cash flows from our UK Retail business support our investments in technology and marketing as well as good Dividend per share returns to shareholders. The Board believes William Hill continues to be very well-placed to benefit from the 12.5p structural growth of online gambling in the UK and internationally. 0% This confidence is underpinned by our core strengths: we have a sports betting capability that is hard to match or replicate; our 83-year-old brand is widely recognised and trusted by customers; and we have built proprietary technologies that enable 1 Net revenue is an industry term equivalent to revenue as defined in the notes to the financial us to give our customers a differentiated statements. – and therefore highly competitive – 2 Adjusted operating profit is defined as profit before interest and tax, excluding exceptional items experience. and other defined adjustments. We previously referred to this metric as ‘Operating profit’ and have updated its naming to clarify that it is an adjusted measure. Further detail on adjusted measures is On behalf of the Board, I would like to provided in note 3 to the financial statements. 3 thank our William Hill colleagues for their Adjusted EPS is calculated using adjusted profit after tax and is used for remuneration purposes (see page 68 onwards) and in evaluating performance for dividend policy purposes. Further detail commitment to the business through a on adjusted measures is provided in note 3 to the financial statements. The calculation of EPS challenging year, and for their continuing measures is shown in note 11 to the financial statements.