William Hill Interim Results

William Hill PLC 27 July 2012

Successful first half sees double-digit revenue and profit growth

William Hill PLC (LSE: WMH) (William Hill or the Group) announces its interim results for the 26 weeks ended 26 June 2012 (H1 2012 or the period). The comparator period is the 26 weeks ended 28 June 2011 (H1 2011).

(1) Operating profit is defined as pre-exceptional profit including associates and excluding interest, tax and £1.8m (2011: £1.8m) of Online amortisation relating to trade names, affiliate relationships and non-competition agreements (see note 17)

(2) Basic EPS is based on an average of 701.8 million shares for 2012 and an average of 698.3 million shares for 2011

(3) Adjusted EPS is stated before exceptional items and £1.8m (2011: £1.8m) Online amortisation relating to trade names, affiliate relationships and non-competition agreements

Key points:

Ralph Topping, Chief Executive of William Hill, commented:

"We have seen a strong performance in our multi-channel UK business in the first half, with a good performance from both OTC and machines in Retail, and with our focus on innovation and investment continuing to deliver outstanding growth at William Hill Online. Mobile remains a top priority and continues to outperform our expectations. The William Hill Sportsbook app, which has been top-ranked since its launch in the Apple App Store in mid-February, has delivered more than 40,000 new customers. Our rapidly growing mobile business increased to 22% of our Online sports betting turnover and 11% of gaming net revenue in the first half.

"We have made good progress in the period on our strategy in expanding internationally, including being awarded an online licence in Spain. It was also very pleasing to be awarded the Nevada licences in June and to complete the acquisition of the three land-based sports betting businesses. Though their contribution to the Group today is small, they represent an important strategic step for William Hill as we look to build our international business.

"With further innovation to come, the Group is in good shape and the Board remains confident of its expectations for the full year."

A separate conference call will be held at 11.00 am BST for debt analysts and investors. Dial-in details are:

UK telephone: 0845 634 0041

International telephone: +44 (0)20 8817 9301

Passcode: 7933425

Archive of the debt call:

Telephone: +44 (0)20 7769 6425

Passcode: 7933425#

Notes to editors

William Hill, The Home of Betting, is one of the world's leading betting and gaming companies, employing more than 15,000 people. Founded in 1934, it is now the UK's largest bookmaker with 2,370 licensed betting offices (LBOs) that provide betting opportunities on a wide range of sporting and non-sporting events, gaming on machines and numbers-based products including lotteries. William Hill Online (www.williamhill.com) is one of Europe's leading online betting and gaming businesses, providing customers with the opportunity to access William Hill's products online, through their mobile, by telephone and by text services. William Hill PLC is listed on the London Stock Exchange and generates revenues of over £1.1bn a year.

Cautionary note regarding forward-looking statements

These results include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "expects", "intends", "plans", "goal", "target", "aim", "may", "will", "would", "could" or "should" or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout these results and the information incorporated by reference into these results and include statements regarding the intentions, beliefs or current expectations of the directors, William Hill or the Group concerning, amongst other things, the results of operations, financial condition, liquidity, prospects, growth, strategies and dividend policy of William Hill and the industry in which it operates.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond William Hill's ability to control or predict. Forward-looking statements are not guarantees of future performance. The Group's actual results of operations, financial condition, liquidity, dividend policy and the development of the industry in which it operates may differ materially from the impression created by the forward-looking statements contained in these results and/or the information incorporated by reference into these results. In addition, even if the results of operations, financial condition, liquidity and dividend policy of the Group and the development of the industry in which it operates, are consistent with the forward-looking statements contained in these results and/or the information incorporated by reference into these results, those results or developments may not be indicative of results or developments in subsequent periods.

Other than in accordance with its legal or regulatory obligations (including under the Listing Rules, the Disclosure and Transparency Rules and the Prospectus Rules), William Hill does not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

The Group has delivered a strong performance in its multi-channel UK business in the first half of 2012. Retail saw a good performance from both over-the-counter (OTC) betting and gaming machines, and the focus on innovation and investment is continuing to deliver outstanding growth at William Hill Online. Group net revenue grew 11% to £627.8m (2011: £567.8m) and Operating profit1 grew by 14% to £167.8m (2011: £147.7m).

 Good staking volumes were seen on the Euro 2012 football tournament, up 61% against Euro 2008. Results from the tournament favoured customers in the reporting period but that reversed in the semi-finals and final, which took place after the period end. In the reporting period, the tournament yielded in total £3.6m gross win at a combined margin of 5.1%. However, the Group's gross win overall on Euro 2012 was £10.2m, including £5.6m in Retail and £4.5m in Online, at a combined gross win margin of 11.3%.

The Group's first half gross win margin benefitted from good outcomes in both the Grand National and during the Cheltenham festival. Football results also proved favourable across the half as a whole, although the second quarter saw some adverse results, particularly during the last week of the Premier League and in Euro 2012 where 58% of favourites won.

William Hill Online continued to build its market position in the UK with net revenue growth significantly ahead of estimated industry growth rates4. Net revenue was 30% higher at £198.4m (2011: £152.7m). Operating profit was up 23% to £68.9m (2011: £55.9m).

Sportsbook continues to lead the growth, with stakes up 33% and net revenue up 52%. A series of gaming innovations were introduced in the first half, including the launch of a much improved and leading edge Live Casino offering. This helped Live Casino net revenues grow by 51%.

Mobile technology is a major development focus for William Hill Online. During the period, betting on mobile devices increased to 22% of sports betting stakes and 11% of gaming net revenue. This was helped by the launch of the Sportsbook App in the Apple App Store and of Bingo and Games mobile sites.

We continue to invest in marketing, investing £55.5m in the period, which equates to 28% of William Hill Online net revenues. We are also investing selectively to expand in regulated markets internationally. During the period, William Hill Online launched its Spanish site (www.williamhill.es) following the award of licences in June and expanded the Italian website (www.williamhill.it.) through the launch of Sportsbook and Bingo.

In Retail, total amounts wagered grew 1%, despite some weather-related disruption to racing fixtures in February and May. OTC gross win margin was towards the top of the Group's normalised 17-18% trading range at 17.8% (2011: 16.8%). Net revenue grew 5% to £417.4m (2011: £398.8m), with 5% growth in both OTC betting and in gaming machines. As a result, Retail saw 6% growth in Operating profit1 to £109.8m (2011: £104.0m).

We continue to develop our estate to support further growth and increased the estate by a net four shops in the period. We are also introducing new shop designs from the third quarter to improve the in-shop environment in all new licences and also those units scheduled for refurbishment this year and next. Following the award of a sole-source contract to Inspired Gaming Group (Inspired) in January, we completed on schedule the roll-out of the Storm Plus gaming machines to the 500 shops not previously supplied by Inspired in the second quarter. Self-service betting terminals are nearing the end of their trial phase in around 10% of the estate and video walls have been installed in 35 shops, giving customers a high-end and differentiated viewing experience.

The Group's net cash inflow from operating activities was £168.7m (2011: £128.9m) and net debt for covenant purposes was reduced to £355m (27 December 2011: £416m). The Group continues to invest to grow the business. Cash capital expenditure increased to £30.2m (2011: £24.4m).The Board has declared an interim dividend of 3.4p per share (2011: 2.9p per share), an increase of 17%over the prior year reflecting the 15% increase in basic earnings per share.

The Group has made good progress in the period on its strategy to expand internationally. On 21 June, William Hill became the first European bookmaker to be awarded a licence by the Nevada Gaming Commission. Subsequently, on the first day of the Group's second half (27 June), we completed the acquisition of three land-based sports betting businesses that operate in Nevada and Delaware for a total cash consideration of $49m (£31m), together with $6.4m (£4.1m) of arm's length convertible loans advanced to American Wagering, Inc. (AWI) and Brandywine prior to acquisition. Through these acquisitions, we created our William Hill US operation and will integrate the three businesses over the summer. By combining their strong operational capabilities with the William Hill brand, product range and financial strength, we believe William Hill US will be well-placed competitively and to take advantage of future changes to land-based or online gambling regulation.

In the fourth quarter, the Group will have the opportunity to commence a process to acquire from Playtech its 29% stake in the William Hill Online joint venture through the first of two contractual call options. Our Chairman and Chief Executive continue to meet regularly with their counterparts on the Board of Playtech ahead of this. Discussions have been amicable and continue.

The William Hill business is strongly positioned competitively, as demonstrated by the continued strong growth of the Online business and the good performance of Retail, and financially, with strong cash inflow from operations of £168.7m in the period helping to reduce our net debt for covenant purposes by £61m since the full year to £355m. With further innovations to come from Online and Retail, the Group is in good shape. The Board remains confident of its expectations for the full year and of the Group's ability to continue to grow in the UK and internationally.

Summary of financial results

(1) Operating profit is defined as pre-exceptional profit including associates and excluding interest, tax and £1.8m (2011: £1.8m) of Online amortisation relating to trade names, affiliate relationships and non-competition agreements (see note 17)

(2) Online amortisation relating to trade names, affiliate relationships and non-competition agreements

William Hill Online

William Hill Online delivered another outstanding performance in the first half of 2012. Net revenue was 30% higher and Operating profit1 was 23% higher, reflecting the benefits from investment in marketing and the expansion of operational capabilities, particularly in catering for increasing mobile usage by customers.

Sportsbook amounts wagered increased 33% and have now grown by 220% in the last three years. Staking levels in Sportsbook now equate to 83% of the OTC stakes seen in Retail. This growth comprised 37% growth in pre-match stakes and 27% in in-play stakes. Underlying in-play growth rates are stronger than the headlines suggest as the period last year saw high staking/low margin high roller activity. Despite the weak Euro 2012 results in the period (gross win margin of 2.8%), the overall Sportsbook gross win margin in the period advanced by one percentage point to 7.8% (2011: 6.8%) with year-on-year gross win margin growth in both the first and second quarters on the back of generally good results. In-play margin improved to 4.9% (2011: 4.2%) while pre-match margin increased to 9.8% (2011: 8.8%). Staking on the Euro 2012 tournament overall was 236% higher than for Euro 2008. Sportsbook net revenue grew 52% to £80.3m benefitting from the overall staking growth and the improvement in margins.

During the period, we enhanced our basketball, tennis and football systems to deliver substantial increases in the number of matches covered annually and implemented models for a number of minor sports, such as volleyball, beach volleyball, table tennis, badminton and squash, to increase the range of betting opportunities in these sports ahead of the Olympics.

Gaming net revenue increased 18% in total to £118.1m (2011: £99.7m). The strongest growth was in Playtech Casino, up 28%, and Vegas Casino, up 20%. Within the Vegas Casino number, net revenue from the exclusive and innovative new Live Casino offering increased by 181% to £10.1m. Bingo net revenue was 7% higher. Poker net revenue declined 7% but, as highlighted at the time of our first quarter results, this reflects a reshaping of this business and we have substantially improved the profitability of the poker product.

Following the launch of the William Hill website in the regulated Italian market in July 2011, we have extended the product range by adding Bingo in February and Sportsbook in May 2012. In June, we were awarded a Spanish licence and launched a site offering sports betting and Casino games. This followed the payment of £4.6m in disputed back-taxes to the Spanish tax authorities, which has been treated as an exceptional item given its non-recurring nature and materiality.

Online costs were 31% higher, primarily as a result of a step-up in marketing investment as well as increased operational costs, particularly in IT, bank charges and content costs. Marketing investment was equivalent to 28% of net revenue.

Operating profit1 was 23% higher at £68.9m (2011: £55.9m). The non-controlling interest for Playtech was £18.7m (2011: £16.5m).

Retail

Our highly cash-generative Retail business is continuing to deliver a good performance. Retail amounts wagered grew 1% year-on-year. OTC amounts wagered were 1% lower than in 2011. There were 9% fewer horse race fixtures than in 2011 following weather-related cancellations in February (snow) and May (waterlogging), the impact of which more than offset the benefit of increased staking on the Euro 2012 tournament.

OTC gross win margin was towards the top of the expected 17-18% range at 17.8% (2011: 16.8%). This reflected a higher than normal 19.4% margin in the first quarter (Q1 2011: 18.1%), with a second quarter at 16.4% (Q2 2011: 15.6%). With this stronger year-on-year margin performance, OTC net revenue was 5% higher.

Gaming machine net revenue is continuing to grow steadily, up 5% in the period, with gross win per machine per week of £924 (2011: £902). As a result, total Retail net revenue was up 5%.

Costs increased in line with the Group's expectations at 4%. With the benefit of Retail's operating leverage, its top line improvement and good cost control drove a 6% increase in Operating profit1 to £109.8m (2011: £104.0m).

We increased the estate by a net four shops, opening ten new licences and closing six during the period. A further nine shops were re-sited.

Telephone

Amounts wagered in the Telephone channel were 13% lower, impacted by racing fixture cancellations and by the termination of certain high roller activity at the end of 2011. The gross win margin was 150 basis points lower than in 2011 at 6.0%. Gross win was almost £4m lower at £8.9m. Offsetting these year-on-year declines, the Group released c£3.4m of accruals relating to taxes and other costs of sale, of which c£2m relates to the prior year, following the completion of a review by HMRC. Other costs were held broadly flat, and the channel made a modest Operating profit1 of £0.7m (2011: Operating profit1 of £0.2m).

US acquisitions

On 21 June, the Group and five of its senior personnel were unanimously granted non-restricted gaming licences by the Nevada Gaming Commission at a meeting held in Las Vegas. A non-restricted licence is the highest tier of licence in Nevada.

On 27 June, following the close of the period, we completed the previously announced acquisitions of American Wagering, Inc. (AWI) (OTC:BB: BETM), Brandywine Bookmaking LLC (Brandywine) and the racing and sportsbook assets of Sierra Development Company, trading as Cal Neva for consideration of approximately $49m (£31m) in total. This amount included $4m (£2.5m) for the settlement of debt and preference shares. In addition to this consideration, the Group advanced $6.4m (£4.1m) in arm's-length convertible loans to AWI and Brandywine prior to acquisition.

The acquisitions were funded in cash and are expected to be marginally earnings enhancing (before exceptional transaction and integration costs and the amortisation of intangible assets associated with these acquisitions) in 2013.

The combined business currently operates in 164 locations in Nevada, both in casino-based Sports Books and in bar locations. It is also the exclusive risk manager for the State of Delaware's sports lottery and the risk manager for the Marriott hotel in St Kitts, provides hardware and software to most of the major Nevada Sports Books and has the leading mobile wagering application available in the US today. In 2011, the combined business's pro forma handle (or stakes) was $360m and win (or gross win) was $22m.

Integration of the three businesses is ongoing. Rebranding of the sports books to the William Hill brand will take place in the coming weeks. The competitiveness of William Hill US and its attractiveness as a partner is expected to be enhanced by combining the operational strength of the existing management teams with William Hill's brand, greater financial strength and extensive product offering. This will ensure it is well-placed to capitalise on any regulatory changes, whether land-based or online.

Financial review

Pre-exceptional income statement

The Group's net revenue grew 11% to £627.8m in the first half of 2012 versus £567.8m in 2011. William Hill Online saw growth of 30% and Retail of 5%, with c5% growth in net revenue from both OTC betting and gaming machines.

Pre-exceptional cost of sales, at £84.7m, was 5% higher than that seen in the prior year (2011: £80.4m). This line includes taxes, levies and royalties relating to the operation of a betting and gaming company. Cost of sales in William Hill Online grew 53% to £17.8m, reflecting the increase in taxes payable in licenced markets and the impact from growth in mobile net revenue. Online cost of sales benefitted from the release of £2m of tax accruals no longer deemed necessary following developments in regulation in overseas markets, of which c£1m relates to the prior year. The Telephone segment benefitted from a £3.4m credit arising from the release of accruals for taxes and other cost of sales following discussions with HMRC.

Pre-exceptional net operating expenses were £378.6m in H1 2012, up 10% from £342.9m in H1 2011. As previously indicated, pre-exceptional Retail net operating expenses grew by 4%. Pre-exceptional Online operating expenses grew by 30%, with increases in marketing as well as in other operating costs. This growth reflects the continued growth of the Online operation in Gibraltar, Sofia, Tel Aviv and in other international locations, such as Spain and Italy, following licensing in those markets. Other operating income was £1.8m, down slightly on the prior year (2011: £2.5m).

The Group saw a £1.5m contribution from its associate SIS during the period (2011: £1.4m).

Operating profit1 grew 14% from £147.7m in the first half of 2011 to £167.8m in the first half of 2012, reflecting Operating profit1 growth in all three channels. This is before amortisation of £1.8m (2011: £1.8m) relating to acquired William Hill Online trade names, affiliate relationships and non-competition agreements. After amortisation, pre-exceptional Group profit before interest and tax (PBIT) was £166.0m, a 14% increase on the comparator period (2011: £145.9m).

Pre-exceptional net finance costs were £15.7m, a 4% reduction on the prior year (2011: £16.4m). This reduction arose as a result of the lower levels of net debt held over the period as compared to the same period in 2011. Pre-exceptional pre-tax profit for the year was £150.3m, up 16% on the comparator period (2011: £129.5m).

Exceptional items

There were three exceptional items in the first half of 2012. The Group saw £2.0m of exceptional transaction costs linked to the three US land-based acquisitions in Nevada. The Group now expects to incur c£6m ($9.5m) of exceptional costs in regards to these transactions and up to a further £1.3m ($2m) dependent upon negotiations regarding settlement of an onerous contract. From inception to the end of the first half, the Group had incurred £3.7m ($6m) of exceptional costs relating to this transaction. The Group also incurred £4.6m arising from a self-assessment payment made to the Spanish tax authorities prior to the granting of a Spanish online gambling licence. Finally, there was a small loss of £0.4m on the Group's hedging instruments, which roll off at the end of 2012. In total, the Group incurred £7.0m of exceptional items in the first half of 2012 (2011: £2.6m). 

Taxation

The Group incurred £26.0m of tax on pre-exceptional profit at an effective tax rate of 17.3%, compared to £24.7m at an effective rate of 19.1% in H1 2011. Versus the statutory rate of 24.5%, the Group's lower tax rate arose from deferred tax movements caused by rate changes enacted at the Balance Sheet date, as well as the changing mix of profits between Retail and William Hill Online.Tax on exceptional items was a credit of £0.6m (2011: £0.5m credit), resulting in total tax for the Group for the first half of 2012 of £25.4m (2011: £24.2m).

The Government announced in March an additional reduction of one percentage point to the corporation tax rate in 2012, on top of the 1% previously announced. This will take the statutory corporation tax rate to 24% from 1 April 2012 and to 23% from 1 April 2013 following a further 1% reduction in 2013. As a result, the Group has revised its effective tax rate guidance for 2012 from 20% to 17%, reflecting an increased deferred tax credit as well as the statutory tax rate reduction. The effective cash tax rate for the year is expected to reduce from 22% to around 21%. For 2013, the effective tax rate is expected to be around 18% and the cash tax rate around 20%.

Earnings per share

The Group made £117.9m of profit after tax (2011: £102.7m), of which £18.7m related to minority interests (2011: £16.5m) and £99.2m (2011: £86.2m) was attributable to equity holders of William Hill PLC.Basic adjusted earnings per share was 15.0p, a 17% increase on the prior year (2011: 12.8p). Whilst this was predominantly driven by the growth in pre-exceptional Operating profit1, the lower year-on-year absolute interest costs and the reduction in effective tax rates also contributed. Basic earnings per share grew by 15% from 12.3p in 2011 to 14.1p in 2012.Cash flow and balance sheet

The Group continued to generate substantial levels of net cash inflow from operating activities, with £168.7m of cash inflow (2011: £128.9m), of which £32.1m arose from favourable working capital inflows. The Group invested £30.2m in cash capital expenditure in the period (2011: £24.4m) and its expectation for the full year is now for cash capital to be in the range £60-70m. Looking at the second half in isolation, the Group expects that its working capital movements will be negative, in the range £15-20m.As at 26 June 2012, drawn debt was £480m (27 December 2011: £470m) and net debt for covenant purposes decreased to £355m (27 December 2011: £416m; 27 June 2011: £499m). This reflects a net debt over EBITDA ratio of just over one times and is reflective of the good period of cash generation just seen. Shortly after the period end, $49m (£31.2m) was invested in the acquisition of three sports betting businesses in Nevada.

Following an increase in the liability discount rate as corporate bond yields grow and a fall in inflation expectations, the 'accounting basis' pension scheme deficit has reduced substantially in the first half of 2012, falling from £34.1m at the start of the year to £19.2m at the Balance Sheet date. Separately, the Group reached agreement with the pension scheme trustees in 2011 in regards to a funding plan to eliminate the 'actuarial basis' pension scheme deficit over an eight-year period.

Fiscal and regulatory update

UK taxation and regulation

The UK Government announced in March 2012 that Machine Games Duty will be levied at a rate of 20% of gaming machine gross profit from 1 February 2013. At this point, it will replace VAT, which is currently levied on machines revenue, and Amusement Machine Licence Duty. This change in the tax regime would have cost the Group an additional c£12.5m based on 2011 performance.

In the same Budget, the UK Government confirmed its intention to apply a 'point of consumption' (POC) tax to the remote gambling industry. It indicated that it currently expects to apply a 15% gross profits tax as from December 2014. However, the exact timing and rate will be reviewed and, following a consultation on the design of the tax that closed on 28 June, there will be further engagement on aspects such as business and competition impact. The Group's view remains that there is no demonstrable need for the proposed POC regulation based on consumer protection, which is the Government's justification, and that rigorous enforcement would be required to avoid market distortion.

International regulation

In the US, discussions about routes to regulate land-based sports betting and online gaming continue in a number of states. Land-based sports betting is restricted to four states: Nevada, Delaware, Oregon and Montana. In Delaware, it is permitted in three casinos and William Hill US is the exclusive risk manager for the Delaware Sports Lottery, which it operates in partnership with Scientific Games. In June, the state approved a bill to expand sports betting to at least 28 more locations this year and significantly more in 2013.

Ongoing regulatory developments in other markets are being closely monitored.

Dividend

The Board has approved an interim dividend of 3.4p per share (2011: 2.9p per share). The dividend is payable on 7 December 2012, the ex-dividend date is 24 October 2012 and the record date is 26 October 2012. The Group estimates that approximately 705.6 million shares will qualify for the interim dividend.

Principal risks and uncertainties

The key risks areas for 2012, which have not changed since we published our 2011 Annual Report, are as follows:

- UK and overseas taxation and duties;

- regulation in online gambling;

- the economic climate;

- recruitment and retention of key employees;

- key supplier relationships;

- UK and international growth opportunities; and

- business continuity and disaster recovery preparedness.

For a discussion of these risks and how we are addressing them, please refer to our 2011 Annual Report and Accounts, which is available in the investor relations section of the corporate website at www.williamhillplc.com.

Directors' responsibility statement

We confirm to the best of our  that, this condensed consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

·; that the Group financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

·; an indication of important events that have occurred during the first 26 weeks of the financial year and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining 26 weeks of the financial year; and

·; material related-party transactions in the first 26 weeks and any material changes in the related-party transactions described in the last annual report.

By order of the Board,

R.J. Topping N. Cooper

Chief Executive Group Finance Director

27 July 2012 27 July 2012

Reference notes

(1) Operating profit is defined as pre-exceptional profit including associates and excluding interest, tax and £1.8m (2011: £1.8m) of Online amortisation relating to trade names, affiliate relationships and non-competition agreements (see note 17)

(2) Basic EPS is based on an average of 701.8 million shares for 2012 and an average of 698.3 million shares for 2011

(3) Adjusted EPS is stated before exceptional items and £1.8m (2011: £1.8m) of Online amortisation relating to trade names, affiliate relationships and non-competition agreements

(4) H2 Gambling Capital

William Hill PLC

Interim Consolidated Income Statement (unaudited)

for the 26 weeks ended 26 June 2012

William Hill PLC

Interim Consolidated Statement of Comprehensive Income (unaudited)

for the 26 weeks ended 26 June 2012

William Hill PLC

Interim Consolidated Statement of Changes in Equity (unaudited)

for the 26 weeks ended 26 June 2012

William Hill PLC

Interim Consolidated Statement of Changes in Equity (unaudited)

for the 26 weeks ended 26 June 2012

William Hill PLC

Interim Consolidated Statement of Financial Position (unaudited)

as at 26 June 2012

William Hill PLC

Interim Consolidated Cash Flow Statement (unaudited)

for the 26 weeks ended 26 June 2012

William Hill PLC

Notes to the Group Financial Statements

for the 26 weeks ended 26 June 2012

1. Basis of accounting

General Information

William Hill PLC is a Company incorporated in the United Kingdom under the Companies Act 2006. The address of the registered office is Greenside House, 50 Station Road, London, N22 7TP. The condensed consolidated financial information for the 26 weeks ended 26 June 2012, which has been approved by a committee of the Board of Directors on 27 July 2012, has been prepared on the basis of the accounting policies set out in the Group's 2011 Annual Report and Accounts on pages 71 to 72, which can be found on the Group's website www.williamhillplc.co.uk. This condensed consolidated financial information for the 26 weeks ended 26 June 2012 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, "Interim Financial Reporting" as adopted by the European Union. The condensed consolidated financial information for the 26 weeks ended 26 June 2012 should be read in conjunction with the annual financial statements for the 52 weeks ended 27 December 2011, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The accounting policies used in the preparation of the interim financial information have been consistently applied to all periods presented.

The condensed consolidated financial information for the 26 weeks ended 26 June 2012 is unaudited and does not constitute statutory accounts within the meaning of section 435 of the Companies Act 2006, but has been reviewed by the auditors and their report is set out at the end of this financial information. The results for the 52 week period ended 27 December 2011 shown in this report do not constitute the Company's statutory accounts for that period but have been extracted from those accounts, which have been filed with the Registrar of Companies. The auditors have reported on those accounts. Their report was unqualified and did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The directors consider that the 'adjusted' earnings per share measure, as disclosed in note 8, provides additional useful information for shareholders on the underlying performance of the business. It is not a recognised measure under IFRS and may not be directly comparable with 'adjusted' measures used by other companies.

Adoption of new and revised standards

There have been a number of new and amended standards and interpretations effective in the period, including IAS 24 Related Party Disclosures (Revised), IFRIC 14 Prepayments of a Minimum Funding Requirement (Amendment) and the Improvements to IFRS (issued 2010), none of which have had a significant impact on the results or financial position of the Group.

Basis of accounting

The interim condensed consolidated financial information has been prepared in accordance with IFRS adopted by the European Union and therefore complies with Article 4 of the EU IAS Regulation.

The interim financial information has been prepared on the historical cost basis, except for the revaluation of certain financial instruments.

Basis of consolidation

The financial information incorporates the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 26 June 2012. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities.

The results of subsidiaries acquired or disposed of during the period are included in the interim consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All intra-Group transactions, balances, income and expenses are eliminated on consolidation.

Business combinations and investments

On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to profit and loss in the period of acquisition.

Going concern

The Group meets its day to day working capital requirements through its cash resources on hand supplemented by £300m of 7.125% Guaranteed Notes due 2016 and available bank facilities of £550m, which expire in 2015. Whilst current economic conditions create uncertainty over the level of demand for the Group's products, the Group's forecasts and projections show that the Group should be able to operate within the level of its borrowing facilities.

Therefore, after making these enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the interim financial information.

Seasonality

The Group's overall profitability is primarily sensitive to sporting results, largely in terms of outcome but also in terms of the timing and presence of significant events that attract a large amount of stakes. For example, the current period includes part of a major football tournament, the European Championships, where the comparative period does not. In addition, adverse weather conditions can disrupt the sporting calendar and limit betting opportunities. However, as the gaming element of revenue relating to FOBT machines and William Hill Online increases, then this sensitivity is reduced.

2. Segment information

The Board reviews its reportable operating segments in line with guidance provided by IFRS 8 'Operating Segments'. The segments are aligned with the reports the Board and the Group's Chief Executive review to make strategic decisions.

The Retail distribution channel comprises all activity undertaken in LBOs including gaming machines. The Online segment comprises all activity undertaken on-line including an online sportsbook, online casino, online poker sites, mobile betting and other gaming products. The Telephone segment comprises the Group's telephone betting services including telephone bet capture positions at its call centres. Other activities include on-course betting and greyhound stadia operations.

Business segment information for the 26 weeks ended 26 June 2012:

(1) Included within amortisation for the Online segment is £1.8m on intangible assets relating to trade names and affiliate relationships arising from the acquisition of Playtech assets. This amount is added back to arrive at the Group's non-statutory operating profit measure of £167.8m. A reconciliation of this is provided in note 17.

(2) The telephone segment 'GPT, duty, levies and other cost of sales' includes a £3.4m release of accruals previously charged to operating profit relating to taxes and other costs of sale, following the completion of a review by HMRC.

Business segment information for the 26 weeks ended 28 June 2011:

(1) Included within amortisation for the Online segment is £1.8m on intangible assets relating to trade names and affiliate relationships arising from the acquisition of Playtech assets. This amount is added back to arrive at the Group's non-statutory operating profit measure of £147.7m. A reconciliation of this is provided in note 17.

Business segment information for the 52 weeks ended 27 December 2011:

(1) Included within amortisation for the Online segment is £3.6m on intangible assets relating to trade names and affiliate relationships arising from the acquisition of Playtech assets. This amount is added back to arrive at the Group's non-statutory operating profit measure of £275.7m. A reconciliation of this is provided in note 17.

3. Exceptional items

Exceptional items are those items the Group considers to be one-off or material in nature that should be brought to the reader's attention in understanding the Group's financial performance. Exceptional items are as follows:

The tax impact of exceptional items is as follows:

1 In 2011 the Group signed binding agreements to acquire three USA-based businesses. This transaction completed post half year on 27 June 2012. Both transaction and integration costs relating to this acquisition have been charged as exceptional items.

2 During the period the Group applied for a gaming licence in Spain. As part of that process the Group agreed to settle a back taxes claim with the Spanish tax authorities which, including penalties and interest, totalled £4.6m.

3 During the 52 weeks to 27 December 2011, following a review of the carrying value of goodwill in line with the requirements of IAS36, the directors wrote off the carrying value of goodwill and other fixed assets in the telephone division, with a combined value of £46.6m.

4 During the 52 weeks to 27 December 2011, the Group completed the sale of its remaining 15 shops in the Republic of Ireland to the Irish bookmaker Boylesports for a cash consideration of €1.5m. This sale completed on 13 December 2011. The net loss on disposal, including provisions for impairment of remaining assets, is presented above as an exceptional item.

5 During the 26 weeks to 26 June 2012, the Group incurred £0.4m of valuation losses on ineffective swaps and collars, following adverse movements in the forward interest rate curve during the period.

 4. Investment income

5. Finance costs

6. Tax on profit on ordinary activities

The effective rate in respect of ordinary activities is 17.7% (26 weeks ended 28 June 2011: 19.1%; 52 weeks ended 27 December 2011: 21.8%). This is lower than the 2012 statutory rate of 24.5% due to a £6.2m deferred tax credit arising from the fall in the UK corporation tax rate to 24% and a lower effective tax rate on the income of William Hill Online.

The effective rate in respect of ordinary activities before exceptional items is 17.3% (26 weeks ended 28 June 2011: 19.1%; 52 weeks ended 27 December 2011: 17.3%) and excluding the deferred tax credit is 21.4% (26 weeks ended 28 June 2011: 23.8%; 52 weeks ended 27 December 2011: 22.4%).

No account has been taken in these interim financial statements of the 2012 Finance Bill that was substantially enacted in July 2012, after the balance sheet date. It is estimated that the further reduction in the corporation tax rate from 24% to 23% from April 2013 would have resulted in a £5.2m reduction in the net deferred tax liability held on the balance sheet at 26 June 2012, if the change had been applied in the interim statements. 

7. Dividends proposed and paid

The directors have approved an interim dividend of 3.4 pence per share (2011: 2.9 pence per share) to be paid on 7 December 2012 to ordinary shareholders on the Register of Members on 24 October 2012. In line with the requirements of IAS 12 - 'Events after the Balance Sheet Date', this dividend has not been recognised within these interim results.

The 2011 final dividend of 6.7 pence per share (£47.1m) was paid in the half year ended 26 June 2012.

By agreement, the William Hill holdings 2001 Employee Benefit Trust agreed to waive all dividends. The Company estimates that 705.6m shares will qualify for the interim dividend.8. Earnings per share

The earnings per share figures for the respective periods are as follows:

An adjusted earnings per share, based on profit for the period before exceptional items and amortisation (relating to the intangible assets relating to trade names and affiliate relationships arising from the acquisition of Playtech assets), has been presented in order to highlight the underlying performance of the Group.

The basic weighted average number of shares excludes shares held by The William Hill Holdings 2001 Employee Benefit Trust and those shares held in treasury as such shares do not qualify for dividends. The effect of this is to reduce the average number of shares by 1.2m in the 26 weeks ended 26 June 2012 (28 June 2011: 3.3m, 27 December 2011: 3.2m).

9. Investments

On 27 June 2012 the Group completed the acquisition of three US businesses, American Wagering Inc, Brandywine Bookmaking LLC and the Club Cal Neva Sportsbook Division. Convertible loans were advanced to those businesses prior to acquisition and totalled £3.4m at the prior half year rising to £4.1m at the full year. When the loans were extended, the Group's intention was to exercise its conversion option at completion; accordingly they were classified as investments. On completion however, the Group has opted not to convert these loans and consequently they have been reclassified as other receivables at the half year. Details of the acquisition are set out in note 15.

10. Bank loans and other borrowings

Bank facilities

As at 26 June 2012, the Group had a committed bank loan facility of £550m provided by a syndicate of banks. This facility is a Revolving Credit Facility ("RCF"), expiring in November 2015.

Borrowings under the RCF are unsecured but are guaranteed by the Company and by William Hill Organization Limited, one of the principal operating subsidiaries of the Company.

Borrowings under the Facility incur interest at LIBOR plus a margin of between 2.00% and 2.75%, determined by the Group's consolidated Net Debt to EBITDA ratio as defined in the loan agreement. A commitment fee, equivalent to 40% of the margin, is also payable in respect of available but undrawn borrowings under the RCF.

Overdraft facility

At 26 June 2012, the Group had an overdraft facility with National Westminster Bank PLC of £5m (28 June 2011: £5m). The balance on this facility at 26 June 2012 was £nil (28 June 2011 - £nil).

11. Non-controlling interest

The non-controlling interest relates to the 29% share in William Hill Online owned by Playtech Limited.

In 2011, William Hill Online opened a telebetting operation in Gibraltar. The Group agreed with Playtech that they would not take a share in the profits of the new telephone business but would receive a £1m annual payment as compensation for use of shared services. This transaction effectively restricts Playtech's interest in the new telephone business to £1m annually. This annual fee has been recognised as a liability, in addition to the equity element set out in the table above. The liability has been valued at £8.8m, of which £7.8m is non-current. This transaction was taken through reserves in accordance with IAS 27.

There are circumstances under which this annual fee would be forfeited by Playtech, in which case this liability will reverse through reserves. 

12. Notes to the cash flow statement

Cash and cash equivalents (which are presented as a single class of assets on the face of the statement of financial position) comprise cash at bank and overnight deposits.

13. Retirement benefit schemes

The Group operates a number of defined contribution and defined benefit pension schemes in the United Kingdom and Republic of Ireland. The UK schemes are operated under a single trust and the assets of all the schemes held separately from those of the Group in funds under the control of trustees. The respective costs of these schemes are as follows:

Defined contribution schemes

The defined contribution schemes, to which both the Group and employees contribute to fund the benefits, are available for all eligible employees. The only obligation of the Group with respect to these schemes is to make the specified contributions.

Defined benefit scheme

The Group operates a defined benefit scheme in the UK for eligible employees which closed to new members in 2002. Under the scheme, employees are entitled to retirement benefits varying between 1.67% and 3.33% of final pensionable pay for each year of service on attainment of a retirement age of 63. The scheme is a funded scheme and the rate of Company contributions paid during the period for future service benefits was 25.0% of members' pensionable pay. The general principles adopted by the Trustees for the purposes of this funding valuation are that the assumptions used, taken as a whole, will be sufficiently prudent for pensions already in payment to continue to be paid, and to reflect the commitments which will arise from members' accrued pensions right.

For the purposes of preparing the information disclosed in these accounts, a full actuarial valuation of the scheme was carried out at 30 September 2010 and updated to 26 June 2012 by a qualified independent actuary. The present value of the defined benefit obligation, the related current service cost and past service cost were measured using the projected unit credit method.

With effect from 31 March 2011, the defined benefit scheme was closed to future accrual. Employed members of this scheme were transferred into the defined contribution scheme.

Disclosure of principal assumptions

The financial assumptions used by the actuary in determining the present value of the defined benefit scheme's liabilities were:

In accordance with the accounting standard, the discount rate has been determined by reference to market yields at the balance sheet date on high quality fixed income investments at a term consistent with the expected duration of the liabilities. Price inflation is determined by the difference between the yields on fixed and index-linked government bonds with an adjustment to allow for differences in the demand for these bonds, which can distort this figure. The Bank of England target inflation rate has also been considered in setting this assumption. The expected rate of salary growth and pension increases are set with reference to the expected rate of inflation.

The mortality assumption is kept under review and has been updated. The current life expectancies for a male member underlying the value of the accrued liabilities are:

The assets in the scheme and their expected rate of return are set out in the table below. The expected rate of return is determined by taking the long term rates of return available on government and corporate bonds at the balance sheet date. The expected return on equities is calculated by applying a suitable "risk premium" to the return on government bonds having regard to historic returns and long-term future expectations.

Movements in the present value of defined benefit obligations in the current period were as follows:

Movements in the present value of fair value of scheme assets in the current period were as follows:

14. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its associate and joint ventures are disclosed below.

Trading transactions

Associate

The Group holds an investment of 19.5% of the ordinary share capital of Satellite Information Services (Holdings) Limited (SIS). During the period the Group made purchases of £20.4m (26 weeks ended 28 June 2011: £17.8m; 52 weeks ended 27 December 2011: £37.4m) from Satellite Information Services Limited, a subsidiary of the Group's associated undertaking, SIS. At 26 June 2012 the amount payable to Satellite Information Services Limited by the Group was £0.1m (28 June 2011 - £0.1m; 27 December 2011 - (£3.8m) receivable). Purchases were made at market price. The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received.

Transactions between the Group and key management personnel in the first half of 2012 were limited to those relating to remuneration, previously disclosed as part of the Director's Remuneration Report within the Group's Annual report and Accounts 2011. There have been no other material changes to the arrangements between the Group and key management personnel.  

15. Acquisitions

On 27 June 2012, after the half year balance sheet date, the Group completed the acquisition of American Wagering, Inc. (AWI) for $13.4m, Brandywine Bookmaking LLC (Brandywine) for $14.3m and the Club Cal Neva Satellite Race and Sportsbook Division (Cal Neva) for $21m. No contingent consideration is payable for any of the three acquisitions. The Group acquired 100% of the issued share capital of both AWI and Brandywine as well as completing an asset purchase of the Cal Neva Sportsbook division. The primary reason for the acquisitions is to establish the Group's land based presence in the United States as part of the Board's strategy for international expansion.

Due to the timescale between completing the acquisition and the production of this half-yearly financial report it has been impracticable to properly determine the provisional fair values on acquisition for all assets and liabilities.

However, we estimate that total goodwill from the three acquisitions will be approximately $35m in addition to separately identifiable intangible assets of approximately $25m. The final figures will be dependent on the final fair values on acquisition and deferred tax associated with the intangible assets. The identified intangible assets will be amortised over a period of four to eleven years and the goodwill will be subject to annual impairment reviews in line with the Group's accounting policies. The goodwill arising on the acquired assets is attributable to the anticipated synergy in combining the three entities and the growth opportunities created by sharing technology, marketing skills and bookmaking specialism. 

16. Contingent Liabilities

In June 2010, the Group recognised a £5.6m credit following a refund of overpaid VAT from HMRC. The VAT repayment relates to our claim that the application of VAT to income from AWP machines contravened the European Union's principle of fiscal neutrality. HMRC have challenged a similar claim made by Rank plc and our claim will not be determined until the Rank case is resolved. In 2011, a judgement of the CJEU confirmed the facts must be taken into consideration when determining whether there has been a breach of fiscal neutrality and Rank's claim will be heard again in the Tax Tribunal in 2012, based on this interpretation. Should HMRC ultimately be successful in the Rank case then the Group would have to repay the monies received, although the directors consider this unlikely.

17. Reconciliation of profit before interest and tax to operating profit