International Game Technology PLC (IGT) 2012 Q2 法說會逐字稿

Good day, and welcome to the Lottomatica 2012 first half results ended June 30, 2012. Today's conference is being recorded.

And at this time, I'd like to turn the call over to your host for today, Mr. Marco Sala, CEO, Lottomatica Group. Please go ahead, sir.

Good evening, and thank you for joining us for Lottomatica Group's 2012 second quarter results presentation. Joining me for today's presentation is Alberto Fornaro, the CFO of Lottomatica Group, Renato Ascoli, the General Manager of Lottomatica, and Jaymin Patel, the CEO of GTECH who will join in for the question and answer session.

I'd like to begin by providing you with some insight into our performance and the major factors that are driving it. As you are aware by now, Lottomatica Group had a good quarter. Despite the (inaudible) in the economies of some of the jurisdictions in which we operate, our results for the second quarter were encouraging, underscoring the resiliency and sustainability of our business.

As was the case in the first quarter, the sources of our growth continue to diversify. That is evident within the Italian portfolio, as well as geographies outside of Italy. We experienced single-digit growth in revenues, EBITDA, and operating income, while net income attributable to the parent grew substantially by approximately 38%.

Our investments in diversification and innovation continue to sustain us. Despite increasing competition, machine gaming and interactive in Italy were good contributors. California, Texas and Illinois continued their impressive growth pattern. In that regard, it is important to note that the GTECH same-store revenue across US and in the major jurisdictions experienced healthy growth that is continuing yet to date.

SPIELO International's momentum, continued and further solidified its position as the leading solution provider in the Italian and Canadian machine gaming market.

Looking in more detail at Italian operations, we experienced a slight decline in revenues primarily related to the Lotto and scratch-and-win performance. Lotto wages maintain fairly well except for a low incidence of late numbers, which were 28% less than for the similar quarter last year. Penny Lotto growth continued to support Lotto performance which, overall, was in line with our expectations.

As to scratch-and-win, considered in the category's historical high performance in 2011, matching the levels of last year will be challenging. That being said, although wages softened in the quarter and first half, we find that they have stabilized. And we expect to maintain that level of performance for the remainder of the year. We continue to apply new innovation and other optimization programs to sustain the product category.

It is also important to recognize that our diversification program in Italy is having a positive impact. The categories driving our growth are royalties, interactive and commercial services. In addition, sports betting, which was impacted by higher than average payouts in the past quarter, is also an important element of our growth strategy. The intent of our investing in diversification over the past few years was to create a better balance between product categories, and we are encouraged by the result.

In addition, Italian operations have benefited from a cost reduction program. The bottom line over all of these initiatives is that, despite the difficult economic conditions, we have achieved EBITDA growth in the second quarter over the same period of last year, and we are confident that we will achieve a full year EBITDA growth in line with our expectations.

Turning now to GTECH, impressive growth in same-store revenues is continuing, and performance has been above expectations. The improvement in same-store revenues during the second quarter more than offset the price compression impact from contract rebids. Overall, same-store service revenues were up 7% over the comparable period last year, supported by solid growth in almost all regions. Notably, jackpot activity for the quarter was neutral when compared to similar quarter last year.

GTECH enjoyed some business development success, as well. Contract extensions were signed in Oregon, Finland and Ireland, as well as a new contract in Costa Rica.

Now I'd like to give you an update on our private manager activities in Illinois. And our management, the lottery has announced its brand image, added the new retailers and introduced the new innovation. The first in the nation Internet sale program was launched for some lottery product, and that pilot is being expanded and upgraded. As to our performance out of the private manager agreement, we are making good progress toward meeting our objectives. With a full year of management by our North Star Groups, the lottery achieved an overall increasing sales for the fiscal year that ended June 30, 17.9% driven an increase of 27% in Eastern ticket sale.

I think it is fair to say that the concept of a private manager for the Illinois lottery has been demonstrated to be effective. The state was seeking to maximize the lottery results in a responsible manner. The first year of operation has shown that that goal can be achieve with the new operating model. Other US states are considering adopting similar business models.

Since our last earning call, the state of Indiana has launched a bid for an integrated service agreement that is similar in scope to the Illinois model. The state is actively pursuing the project. The tender response and the initial business plan are due August 31 with the expectation than an agreement will be executed with a successful bid by November 1 of this year.

Indiana's relative standing compared to other US lottery would indicate that it has significant potential for growth. We find it encouraging that Indiana is focused on long-term growth and performance guarantees rather than significant upfront payments.

In Naperville, Pennsylvania, a top performing lottery announced the formal process to select a private manager. The fact that Pennsylvania would introduce a private manager model is another significant endorsement of the concept.

As we have previously reported, New Jersey has begun a process that we expect will result in a private manager style opportunity being offered. That process is likely to begin in the fourth quarter of this year.

In my view, the most important aspect of these developments is that states are looking to innovation to increase revenues from their lotteries. Our customers are being confronted by an ever-increasing demand for additional sources of funding to meet the state priorities.

For some, immigrating to a private manager model will be a compelling proposition. For others that are comfortable and successful with their current business model, it will mean expansion and optimization. Regardless of the path they choose, we are encouraged by their focus on increased revenue generation from which we benefit.

Similar activities are also underway in the international jurisdictions. The provincial government in Ontario, Canada, has announced a process seeking input from potential providers as part of its strategic plan to modernize lottery products and distribution within Ontario. The Ontario Lottery and Gaming Corporation has a significant diversifying set of offerings, including casinos, distributed VLTs, and traditional lottery.

As we have noted, Ireland and Greece are also seeking to privatize gaming asset. Each is impacted by the current economic crisis, and we will review these opportunities as they develop with our usual risk-adjusted analysis for the investments.

Turning to SPIELO, the Canadian VLT replacement cycle is underway, and SPIELO's enjoying continued success. During the past quarter, it won a new business in Atlantic Canada that continues SPIELO's successful string of having one business in every provincial VLT procurement to date. We are encouraged by the continued progress at SPIELO and anticipate the growing contribution from them.

Now I'd like to offer some comments on our earning guidance. As you have seen in our announcement today, we are making good progress toward reaching all our guidance target. We are particularly pleased that the cash flow generation has been strong and, as a result, has been a positive impact on our net financial position. Accordingly, we remain confident in achieving our current full year guidance. Clearly, it is achievable, but not without some additional hard work.

Let me conclude with a more eye-level narrative. It is one that I believe it is familiar to you. Despite economic uncertainties in some jurisdictions in which we operate, our diversified product offering and geographical footprint provide a natural hedge to help offset the ups and downs of product categories and local performance.

As is evident in our results, growth in the Italian portfolio is coming from new innovations. And as Italy deals with the impact of the current recession, GTECH and SPIELO have rebounded, making significant and sustaining contribution to growth. I would point out that these rules, the fundamental justification for the investment that we made in an enquiry in GTECH and its SPIELO subsidiary. Lottomatica Group is a broadly diversified international business, and we are positioned well to take advantage of a growing gaming sector.

Now I'd like to hand over the call to Alberto for a detailed review of the result.

Thank you, Marco. I believe the result we achieved in the second quarter of 2012 confirm how important it is to have diversification in our portfolio businesses by segment or by geography. We were able to grow both revenues and EBITDA. This is not a guarantee for future results, but based upon what I see at this stage in the year, I feel confident we will be able to meet our 2012 financial target.

As we will discuss shortly, while international operation are performing well and in the line with expectation, in Italy, despite (inaudible), the gaming market has reacted well thus far and is encouraging. In the meantime, we renew our efforts on our cost management programs. By year-end, we will have achieved a EUR15 million to EUR20 million savings on a recurring basis as opposed to the initial target of EUR10 million. Approximately two-thirds of the overall savings will come from process optimization and one-third from price reduction on fixed and variable costs.

Let's return to the earnings announcement. Revenue for the second quarter were up approximately 6% to EUR743 million compared to the second quarter of 2011. The increase in revenues is primarily attributable to revenue growth outside of Italy and favorable foreign exchange. EBITDA was up approximately 6% in the quarter to EUR260 million. All business units contributed to the increase in profitability at the EBITDA level, led by GTECH.

EBITDA margin was stable at approximately 35%.

Revenues from Italian operation in the second quarter were EUR445 million compared to EUR452 million last year. Higher revenues from machine gaming, interactive, and commercial services partially offset the lower revenues from Lotto, instant tickets, and sports betting. Lower late number wagers are higher, and higher payouts impacted revenues for Lotto and sports betting respectively.

EBITDA from the Italian operation was up 2% versus the second quarter of last year to EUR192 million. The softness in lotteries and higher sports betting payout were more than offset by the performance of machine gaming. Despite the increasing taxation from 2% to 4%, the VLT business was still a key contributor. Marketing expenditure in our interactive business were EUR4 million higher when compared to the same period last year.

Total Italian market wagers for Lottomatica Italian operation were up over 7% compared to the second quarter of last year. Instant ticket wagers were approximately EUR2.43 billion in the second quarter of 2012, an 8% decline when compared to the same period last year. I would like to point out that this is an unfavorable comparison in that the second quarter of 2011 was at a very high level historically in terms of sales.

Also, taking into account that the economic environment, as well as the new real estate tax payment deadline in June, which likely has an impact on sales. We are focusing our marketing efforts on product portfolio development and retail network productivity.

Lotto wagers were down approximately 4%, but this trend is in line with our expectations, and it is mostly due to lower incidence of late numbers. Total wagers were just over EUR1.5 billion due to the continued strong performance of the Italian lotto.

Machine gaming wagers were up approximately 13% compared to the same period last year at approximately EUR3 billion. The EUR333 million euro wagers increase year-over-year was mainly attributable to the newly installed VLTs while overall AWP wagers were up 2%. The number of installed machines in the second quarter of 2012 grew to more than 73,000, up 24% versus June of last year.

At June 3, 2012, approximately 10,000 VLTs were in place compared to 6,600 machines at the same time last year. The average number of installed VLTs was 9,553 in the second quarter versus 8,860 in the first quarter of this year. Total VLT wagers for the period were approximately 1.9 billion, a 20% increase compared to the second quarter of 2011.

Sports betting wagers were in line with the second quarter of last year, impacted by higher payouts this year versus the same period in 2011. Interactive wagers were up over 400% to EUR572 million compared to the second quarter of last year. Our 2012 results benefited from the July 2011 production of Poker Cash and casino games.

Lottery revenue was down 5% to EUR197 million versus the second quarter last year. Machine gaming revenues was EUR162 million, up 1%. AWP revenues grew to EUR60 million from EUR57 million in the second quarter of 2011, while VLT revenues were EUR102 million net of a gaming tax increase from 2% to 4%. We continued to work at optimizing the retail network and answering the gaming content and maximizing and diversified our machine portfolio in order to achieve our target

Revenue for sports betting in the quarter was EUR31 million versus EUR39 million in the second quarter of last year. No fixed odd sports betting wagers benefited from the Euro Soccer championship. Payout was in the 85% range versus approximately 81% in the second quarter 2011.

Finally, commercial services revenue grew by 4% principally due to higher number of transaction processing. Interactive revenues grew 68% to EUR21 million.

Revenues for GTECH, lottery and SPIELO International were EUR298 million, up from EUR255 million in the second quarter of 2011, primarily due to higher GTECH lottery same-store revenue growth and the compensation for North Star management services in Illinois of EUR9 million. As you'll recall, this is a pass-through items representing the cost reimbursement an all-star receives from Illinois.

Revenue growth also benefited from favorable foreign exchange. EBITDA for GTECH, lottery, and SPIELO International was at EUR68 million, up from EUR57 million last year. EBITDA was positively impacted by higher same-store revenue growth and foreign exchange, partially offset by GTECH recently renewed lottery contracts, in particular Texas and Poland.

On slide 13 we provide a breakdown of GTECH, lottery, and SPIELO International service revenue for the second quarter of 2012 versus the second quarter of 2011. GTECH US total same-store revenues in the second quarter were up 7%. GTECH benefited from continued growth of instant ticket sales, which grew 14% year-over-year. In California, Illinois and Texas, instant ticket sales grew by 32%, 24%, and 9% respectively. Total GTECH jackpot activity in US was consistent year-over-year.

As we mentioned last quarter, the Illinois Lottery began selling lottery tickets for its residents over the Internet on March 25. In terms of sales volume, over the past three months, approximately $2.3 million have been wagered over the Internet, with approximately 155,000 users registered. We also experienced sales growth in our international jurisdiction. Same-store revenues grew by 7% in the second quarter. This increase is principally due to strong performance in Poland and Colombia, as well as the continued recovery in the Czech Republic, where our customer has emerged from bankruptcy.

Now, let's look at the P&L below EBITDA. Operating income in the second quarter of 2012 was up 9% year-over-year to EUR153 million. Net interest expense was EUR39 million, down slightly versus the same period last year, principally due to lower debt balances. Income before tax was EUR120 million compared to EUR99 million last year. Net income attributable to the owners of the parent grew to EUR64 million, resulting in a diluted EPS of EUR0.37.

Now let's review the first half results for 2012. We experienced revenue growth across all of our business segment. Revenue for the first half of 2012 were up over 8% to EUR1.52 billion compared to the first half of 2011. The increase in revenues is primarily attributable to stronger year-over-year jackpot activity, instant ticket sales in the United States, machine gaming in Italy, and favorable foreign exchange rates.

EBITDA was up approximately 8% in the first six months of 2012 to EUR540 million. All business units contributed to the increasing profitability at EBITDA level. The main drivers of the year-over-year increase are strong same-store revenue growth of our GTECH, as well as machine gaming in Italy. EBITDA margin was approximately 35%.

And now, let's look at the P&L below EBITDA. Operating income in the first half of 2012 was EUR323 million, up 10% year-over-year. Interest expense net was EUR78 million, down 6% versus the same period last year, principally due to lower debt balances. The Group recorded foreign exchange gain of EUR2 million in the first half of 2012 compared to foreign exchange losses of EUR32 million in the first half of last year. As we recall, we had non-cash foreign exchange losses in 2011 associated with the euro-denominated debt on GTECH balance sheet.

Income before tax was EUR244 million compared to EUR173 million last year. Net income attributable to the owners of the parent grew to EUR121 million, resulting in diluted EPS of EUR0.70. Our performance in the first half of 2012 was good, but we acknowledge that the Italian market is in a recession. Overall, we remain confident we will deliver our M&A and EBITDA targets.

We had strong cash flow performance in the first half of this year, with EUR428 million of cash from operation net of tax, providing the capacity to more than fund CapEx, the interest expense, dividend and minority payments in the second quarter. CapEx was EUR102 million, and we believe we will be within the guidance range for the full year.

As a result of an April 2012, the banking law change in Italy, clarifying the nature of some assets and liabilities in the electronic money business. the Italian subsidiary, now are commercial services businesses, recorded an adjustment in the second quarter to move a EUR49.3 million from cash into current assets on the balance sheet. And an equivalent amount of prepaid card liabilities from current financial liabilities to account payables.

This accounting change has no impact on net financial position but impacted cash and cash equivalents. Our net financial position at June 30 was EUR2.70 billion versus EUR2.74 billion at the end of 2011 and EUR2.65 at the end of March. We remain comfortably on track to achieve our year end guidance of EUR2.6 billion to EUR2.65 billion even when we assume a dollar euro in the current rating range.

In terms of liquidity, our spare capacity had EUR824 million of cash, and uncommitted, undrawn lines of credit available at the end of June.

Now I'll ask the Operator to open up the lines for Q&A.

(Operator instructions.) Matthew Gerard from Credit Suisse.

Hi, good evening. I have a couple of questions. Perhaps take them one at a time. So your guidance earlier in the year on the full year outcome talked about low mid-single digit lottery growth. I guess that's changed a bit in some components of your overall guidance within it, I suppose, have shifted a bit. Could you, just to clarify, what do you now expect for growth in the lottery business or the performance of lottery within your FY '12 guidance?

And by implication, what's your assumption for GTECH in the second half?

Okay. I would ask Jaymin to start replying the question regarding GTECH.

With respect to GTECH, as reported earlier, for the second quarter of same-store sales revenue was in the range of 7%. And we believe that the results for the second half of the year will track to the performance in the second quarter. Obviously you might remember that, in the first quarter of 2012, we benefited from a record $656 million Mega Millions jackpot, and so that contributed approximately 2% of additional growth in the first quarter, hence the reason why the second quarter was a bit lower. But we feel comfortable that, for the second half of the year, overall same-store sales growth should track in the range to 6% or 7%.

Just on that 7% Q2 performance, how much of that is California, and can you remind me when we lapped the California payout ratio comps?

California in the second quarter was up substantially year-over-year. So even though the payouts began before the second quarter last year, we are still benefiting from the program of launching higher price point tickets and higher payout games. So in terms of the exact percentage increase in California, if you just give me one second, Matthew, I'll look it up for you. The exact percentage in the second quarter was 21% growth in sales in the jurisdiction. So I'd have to do a quick calculation to figure out how much of the same-store growth in the US came from California, but the absolute amount of growth was 21% in California.

Okay. And just sticking with GTECH, Jaymin, on the PMCs that are coming up in the second half, I don't expect you to clarify the kind of structure of your bids, but what can we take from Illinois in terms of what's worked with the partnership structure and what hasn't? And is there any kind of guide we can get from the structure of North Star and Illinois as to how we might expect bids for PMCs in other states, or is it more of a kind of go-it-alone mentality for GTECH now?

Well, obviously it's very difficult for me to make any comments, given that there are a number of live bids in the market. And as you may appreciate, a number of those jurisdictions prohibit potential bidders from making any comments, so I want to be very careful in terms of what I say.

Lottomatica and GTECH remain interested in the privatization model. I think as both Marco and Alberto remarked in their prepared comments, we are pleased with the performance of Illinois in the first 12 months under our management. Sales for the year are up just under 18% with instant tickets up 27% in the first year. At this point in time, we are not in a position to discuss net income growth because the results are being audited, but we feel confident with our overall performance. And we will evaluate these privatizations in the light of market circumstances. I think it's hard to comment beyond that at this point.

Okay. And sorry, just going back then to the guidance figure market and how GTECH implies the new guidance for Lotto in Italy, or sorry, lottery, in Italy, I should say?

Yes. Well, as far as lotteries in Italy are concerned, I think there are two separate stories there. Starting from Lotto, we despise the situation now, we see a sound, let's say, performance of lotto. What is really lacking in our figures is the late number contribution. As you are well aware, nowadays we reckon a contribution of about 12% of late numbers revenues -- wagers, sorry -- on traditional Lotto while, in the same period last year in the first half, we reckoned 21% contribution on late numbers on overall traditional lotto.

On the other hand, we will see digital lotto positively contributing to performance even in a better way than we did last year. So all in all, we might experience, let's say, some softness on late numbers this year. But should the average statistic contribution come to the previous year levels, we can predict a stable performance on lotto in the following months and years to come.

As far as the scratch-and-win is concerned, as we stated before, we were coming from an exceptional year in terms of performance and increase in a very short time. For sure we had some softness in the first half. Part of the softness is affected by, let's say, exceptional situations. We had very poor -- they were very bad weather conditions in February. We had a number or strikes in transportation that impacted distribution generally and partially in June.

On the other hand, we did have some impact, particularly in the second quarter, and indeed in June we had a particular effect on wager. If we see the following weeks, and then we see the further performance. We think that the pitfall in June has been partially recovered. So in July, the performance comes to a more normal trend, the one we saw before. So we are quite confident that the pace that we have reckoned in the first half is most likely to continue for the year on, potentially with a slightly better trend.

Okay. and obviously, with the release yesterday on the G2 and OPAP online structure for Greece, could you give us a bit more color on potential expenditure related to that and just how it forms, and the kind of timeline, I suppose?

Look, [Jeff], it's Marco speaking. We are going to enter now in a conversation regarding this agreement, and so I cannot anticipate the details on the agreement. It's clear that there was a short list of three players, including our (inaudible) the [Interlotta], we were selected, and the balance sheet would offer the provision of the current OPAP games portfolio. It also allow for any new games that are licensed by the Greek state. So we are now currently awaiting formal documentation deriving from OPAP. But after that many years, OPAP selected another vendor, and so we are entering in a partnership that we believe will be fruitful, looking forward, because the Greek market remains a quite attractive market regarding the propensity of Greeks for gaming.

Okay, thank you.

Vaughan Lewis from Morgan Stanley.

Evening. Could you provide a bit more detail on the cost-cutting? So if we look at machines, it looks like EBITDA is up EUR12 million in the quarter, and revenues were up only EUR1 million. So what is at least driving that, and where are those cost savings coming from?

Regarding the cost cutting in general, as I said, we have put a series of action and a series of initiatives that have benefited different product line. In some cases, we have reduced fixed costs. For example, we'll look at the facilities. In other cases, we have been able to reduce the variable costs associated, for example, with the cost of the ticket for certain businesses.

Now, coming specifically to the VLT, in the second quarter, there is the improvement in the -- profitability is basically coming from three areas. There are approximately EUR3 million of cost efficiencies related to this program. There is a EUR4 million on nonrecurring positive impact. And additionally, we had a EUR4 million favorable comparison with the second quarter of 2011 because, in 2011, we experienced some one-off startup costs related to the deployment of the new [vends].

Okay, that's helpful. Thank you. And then, looking at lotto, it's clear from your comments that 10A lotto has been very successful. Can you give us an idea about how much of the mix that is, and do you think that's starting to be fully ramped up now, or is there further to go on the growth in that product? Thanks.

As I said, the (inaudible) is performing very nicely. I may add that we are pretty happy about this year's performance, this first half performance, because it's much more related on expansion on customers rather than an increase in average funds, average bet.

We still see there's some opportunity to grow and expand the productivity of a part of the network, the retail network. And all in all, I think if we combine lotto and digital lotto, digital lotto now is worth about 45% of the combined games together.

Sorry, you said digital lotto is 45% of total lotto, is that what you said?

Total lotto, yes, traditional lotto and digital lotto. And we see some, let's say, scope for an increasing share.

Great. Thanks very much.

Frauka Volgemut with WestLB Mellon Asset Management.

Hello, and thank you for taking my questions. It's just a clarification concerning your--.

--Excuse me, we cannot hear you.

Hello? Can you hear me now?

Speak up -- yes, go ahead.

Okay. Okay, perfect. So my question was just concerning a clarification concerning the situation or the conversation with Greece. Did you say something about the -- or what did you say about the timetable, the timeline? When are you expecting to go in, let's say, for the developing steps?

Frauka, we are still awaiting for the proper documentation. I think we will enter the negotiation with OPAP in the next days. And at that moment, we will have more clarity regarding the process they intend to implement.

So let's put the question a different way. Are you--.

--You will get to the same answer any way.

Or let's pose my question in a different way. Are you not afraid of Greece leaving the euro, and then you get stuck with a drachma business?

No, not on this business, because we believe that we have not asked to deploy capital there, so we will review the opportunities. When -- this opportunity that you have regarding, you are talking about the online business now, not the other businesses. Is that correct?

Yes. You were talking about online business, yes.

Yes, that's fine. If that is the case, of course we will enter in a discussion and a negotiation with a partner. But considering what we know regarding the business, it's clear that the capital I required to start up the business is not concerning as going forward. It's clear that we will discuss with OPAP also this aspect.

Okay, thank you.

(Operator instructions.) Domenico Ghilotti from Equita.

Good afternoon. My first question is on the cost savings. You are targeting EUR15 million, EUR20 million savings for the full year. How much has already been achieved in the first semester?

Then I have a question on the operating leverage in GTECH and international business in general. I saw that currency-neutral, you achieved some 30 basis point improvement in EBITDA. Considering the good same-store sales in Q2, I wonder why sort of the operating leverage was so low.

And then, the third question is on the D&A. Well, I was expecting some ramp-up due to the heavy [day] lottery rollout, why that -- pretty stable. So if you can give us guidance for the full year in terms of depreciation?

Okay. Domenico, let me go one by one here. First of all, regarding the cost-cutting, we should be around EUR6 million in the first half. The second question, it's I think related to GTECH, regarding the results of GTECH. Please keep in mind that particularly the contract of taxes in Poland were rebid in 2011, so we will still have a negative impact for the price compression in this year that will start to be reduced in the fourth quarter of this year. Next year, obviously we don't have any significant impact from price compression, and therefore we will see a much better flow of the increased sales and EBITDA generated through the increased sales to basically the bottom line for GTECH.

And the last question regarding the D&A, let me say that obviously the delay in the investment in the first half, we have EUR102 million of CapEx. It's obviously helping us compared to last year in keeping the D&A under control. Now, obviously a lot depends also where the CapEx is -- where the foreign exchange will be at year-end because it impacts this number. But right now, probably it should be a little bit in excess of what was last year, not dramatically up from last year, okay?

Okay, thank you.

(Operator instructions.) Andrea Randone from Intermonte.

Thank you, and good evening to everybody. My first question is about Illinois. I understood that the net income will be calculated in the next month. I read in September, probably. Can you help us in understanding how do you account this contract for the time being in terms of the incentive scheme? And if you'll book a proper accounting maybe in the third quarter.

And the second question is about VLTs, if you can provide us a qualitative comment about how do you see competition in this sector after the competitors have deployed their network more and more over time. Thank you.

Okay. For the Illinois and the accounting treatment [lane], let me tell you that we have three revenue streams from the contract in Illinois. The first one is basically we provide the technology service, like any other contract. We get the remuneration for the technology services. Secondly, we provide some services in the marketing, and these are mostly reimbursed by the lottery, and that basically inflates both our revenues and our costs.

The third piece is related to the [mechanized move] incentive and penalties that has been established with reference to the net income achieved by the lottery compared to the targets. I remind you that the incentive compensation that North Star may earn would be reduced by a short full payment in the event the performance does not achieve the levels we are guaranteed, and these annual shortfall payments may not exceed 5%. On the other side, again, we might get an incentive, and the incentive, too, depending on the level of net income reached. The incentive, too, is capped at 5%.

Now, at the moment, given our estimates regarding where the net income of the lottery is, and when we consider both the incentive and the penalties, we believe that if there is a penalty, it is now going to be material. On top of that, we are basically -- when we look at the recent information provided by the lottery, I would just want to be precise that the lottery put a press release out saying that, first of all, the net income will not be completed until September or October. And second, they indicate in the press release that they will be transferring a record amount of EUR708 million to the Group causes. So this is a record amount compared to the past, but it is not an indicator of the expected net income performance.

As far as VLT is concerned, what I can say is that, nowadays, we have deployed almost 10,000 VLTs in the market. We have a plan to deploy all our right, which are worth EUR10,000 and more than EUR700. So we are worth 19% of the overall number with licenses that have been delivered by (inaudible). We estimate our share of the installed base to be about 24% by saying that we expect the market to have deployed 41,000 VLTs as of June. And in the same period, we are worth 36% in terms of wagers.

So in other words, we are pretty confident that we have a premium in terms of operational capability to deploy these machines and in terms of selection of good games and good locations in the market. Having said that, we do expect some dilution in market share. We were about 42% market share in wages by the beginning of this year. At that time, we estimated -- we expected to have 36,000 VLTs in the market. Nowadays, there are 5,000 more, so we have a smooth dilution from this standpoint, but we still think that our choice of location and choice of games, it is paying off.

Thank you very much for your reply. Just a quick follow-up about the VLTs. Do you think new rights will be sold by the government during this year -- new rights, I mean?

We have no clue at the moment of any, no indication in that direction.

Thank you.

Fabio Pavan from Mediobanca.

Yes, hello, good evening, just a very quick question on GTECH, basically coming back to the profitability. Wondering if this increase that has been visible--.

--Forgive me, we cannot hear you very well, (inaudible).

Hello? Hello?

Yes, repeat the question. It was impossible to understand.

Can you hear me? Hello? Hello?

Go ahead.

Okay. So a question on GTECH's profitability. Was wondering if this kind of profitability could be sustainable, so also in the second half of this year, and if not, what could be the reason for a slowdown? Because it seems to me this increase is quite linear, and so I would expect it could be (inaudible) increase is really nice, maybe not this year but in 2015. Thank you very much.

Well, let's say that, if the performance in terms of same-store sales will be one of the first stuff, which is going to be difficult because it was extremely positive, we are going to say a better profitability due to the fact that a piece of the price compression will go away during the second (inaudible) [particulate] in the fourth quarter. I mean, that's directionally what I can say regarding the second half.

Regarding (inaudible), a lot depends when. From one side, then I think we'll be audited and whatever is the amount of the net income, and on the other side, a recent arbitration, as you probably know, regarding potential adjustment to the target of the net income that we agreed at the time of the bidding. So this is what we expect to -- regarding the target, we expect some kind of answer in September. So hopefully will be this year, but we cannot guarantee that.

Okay, thank you.

Thank you. As there are no further questions in the queue, I'd like to turn the call back over to you, gentlemen, for any additional or closing remarks. Thank you.

No, no additional remarks. Thank you very much for listening, and have a good vacation for those of you that are going to have some vacation. Thank you.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.