International Game Technology PLC (IGT) 2005 Q3 法說會逐字稿

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Lottomatica nine-month results 2005 conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [OPERATOR INSTRUCTIONS]. At this time I would like to turn the conference over to Mr. Rosario Bifulco, Chairman and CEO of Lottomatica. Please go ahead, sir.

Good morning to everyone. Fabio Celadon will be making the presentation and then we are available for any types of questions that you do have.

Thank you. Well, good afternoon to everybody. I hope you've been able to download the presentation from the site. So I'll go straight into the presentation and then we'll answer all the questions that you might have.

In terms of key highlights for the result of the nine months '05, I would highlight that the, as you all are aware, the expiry of the Lotto concession has been put back to 2016. The second important item in the -- as to Lotto is the fact that the third weekly drawing has had, so far, a positive impact and the monthly wagers continue to increase. As to the weekly wagers, they are increasing and we're getting towards the 140m target.

In terms of year-on-year comparisons, this statistic has become not meaningful. Particularly in the second half 2005 this is going to be the case, as 2004, as you all know, was the best year ever for Lotto and in the second half of 2004 €7.3b were collected in wagers.

Now, as to the 2005 performance, we're back to the levels of the previous years, in particular the comparison is positive if we look at 2003. And the final comment on this is that the decalage stabilizing effect is going to become very visible in Q4, while it's not as visible in Q3.

At the Instant and Traditional Lotteries, the performance continues to be very high and it's beating our whole expectations. Tremendous success has been registered as to the launch of the €5 ticket, the Miliardario lottery.

And as to Services, the business is growing in line with our internal targets, recording an increase in revenues and a meaningful boost as to its profitability. In Q3 we launched Stamp Duties and recorded initial revenues on that, and set up the vehicle to launch Stored Value, which is -- the name of which is Carta LIS.

Going now to revenues and EBITDA. Revenues were decreased by 9.8% vis-a-vis the nine months of 2004. The overall difference is around €50m. Now, the Lotto wagers performance caused revenues to be €87m lower vis-a-vis last year and the performance of Games and Services allowed us to offset part of that, with a growth of around €37m in revenues from those segments.

As to EBITDA, the EBITDA margin is in line with last year's result and that is explained by the efforts that we've made in terms of bringing forward the cost savings that we planned to achieve over the three-year business plan. We recorded €26m in savings in the nine months vis-a-vis the €30m target that we set for 2007, as a reminder. Other Games contributed around €14m in EBITDA and Services contributed around €9m in EBITDA.

So overall, the decrease of the Lotto contribution margin was partially offset by the profitable growth in Games and Services and by the savings, which we are very happy about.

In terms of the operating profit, operating profit was almost in line with last year. We recorded €202m vis-a-vis €207m last year. The difference is explained by around €10m in loan depreciation because part of the Lotto terminals were fully depreciated. And a further €10m of that difference is explained by lower provisions for risks. As a reminder, last year we had a provision for the antitrust situation.

Net income, and that's another very positive highlight, is absolutely in line with last year. So the Lotto drop in wagers was -- didn't have any impact on the bottom line because of the outlook that we saw.

In terms of the shareholder structure, nothing has changed since our last conference call. Our major shareholder still owns 58% of the outstanding shares and the remainder is free flow, of which some institutional shareholders own significant pieces.

As to the share performance, Lottomatica's stock has outperformed the S&P/MIB index and its market cap was around €2.7b in recent trading days.

Going now on and commenting the segment results, you will see that as the Lotto revenues went down from €435m last year to €347m this year, with EBITDA decreasing less than proportionately to €237.7m. Scratch and Win performed very, very well, with revenues of €35.1m and EBITDA of €10.4m. Other Games' performance improved, both in revenues and also losses were reduced. And Services increased the revenues from €37.8m to €46.7m, with an EBITDA which went from €20.6m to €29.4m.

Just one comment on this line. The unallocated items are comprise basically other revenues but most of all corporate overheads, which we used to disclose on an allocated basis. And this may have an impact on the different margins under International Financial Reporting Standards vis-a-vis what we disclosed before under Italian GAAP.

If we now look at the underlying business performances, Lotto wagers in the nine months were around €5.5b, 26% lower than last year but 6.5% higher than 2003. That, once again, highlights the extraordinary nature of the 2004 performance of the Lotto game, due to the 53 out of the last [indiscernible] late numbers.

A very bright future in terms of the Instant and Traditional Lotteries. The nine-month wagers are around €917.8m, so we're getting close to the €1b. Well, we got to €1b in October, but as of September we were very close already to the €1b mark. And that's thanks to both the sale of tickets and also the effort we've made in terms of increasing the average price of tickets. Now, only the launch of the €5 ticket had a very positive impact and we will see that in the wagers of October, which were around 100 -- well, more than [€106m]. So, Instant and Traditional Lotteries are doing very, very well and we are heading to our target far in advance vis-a-vis the business plan.

As to Services, nine-month revenues of €46.7m were 23.6% higher than last year, due to the continuous success of the prepaid top-ups and all the traditional businesses like Car Road Tax and TV License are more or less in line with the previous years. The Ticketing business is growing according to plan and the loans for Stamp Duties contributed €4m in revenues in the nine months.

If we now compare revenues of 2000 -- of the nine months 2005 vis-a-vis the same period in 2004, Lotto we have a drop of around €87.6m in revenues. Scratch and Win contributed €24.5m in additional revenues, Gaming machines €3m in additional revenues, Services nearly €9m in additional revenues. So the difference in revenues was less than €50m.

In terms of operating expenditures, as mentioned earlier on, we recorded almost €26m in cost savings. And that's a very important result that compares with a target for the three-year business plan of €30m, as we disclosed when we presented the three-year plan. The decrease in revenue -- in volumes for Lotto had an impact of around €7m. Some further volume differences contributed another couple of millions. New businesses had an impact on the cost structure for around €15m.

Overall, the EBITDA comparison of the nine months '05 vis-a-vis '04. Lotto, the combination of the cost savings and of the contribution -- and the drop of the contribution margin had an impact around €50m as to the EBITDA. Scratch and Win Lotteries contributed around €13m in additional EBITDA and Services contributed around €8.8m in additional EBITDA. So overall, the drop in EBITDA was around 10%.

If we now look at the consolidated income statement, I won't comment on the EBITDA or EBIT lines, but will highlight once again the fact that at the bottom line the figure was exactly the same as last year. And all the EBIT and net income margins increased vis-a-vis last year.

On slide number 17 we provide a comparison between 2004 under Italian GAAP and 2004 under International Accounting Standards, and the same we did for 2005. I will not spend much time on this, as we now disclose our figures under GAAP, but it's probably useful for some of you who want to understand how the numbers would have looked under different principles.

As to the cash flow statement, our cash flow from operations in the nine months were around €136m. That is due to the combined effect of around €216m in gross cash flow and €78m negative in terms of change in working capital. Capital expenditures were €35.4m and we start to see the impact of the Lotto terminal replacement program. Finally, overall the net financial position improved vis-a-vis the first half result and closed at €94.8m.

As for the balance sheet, not much to say. Net invested capital slightly increases and it's basically the impact of net working capital and the net financial position we already commented on.

We now look at the events after the nine-month results and basically the perform -- the Lotto and Instant Lotto's performance October year-to-date. Well, Lotto continues to perform better than 2003. We are up around 5.7%. The overall number is €6b with €1.3b in late numbers and €4.8b in core collection. Last year year-to-date -- October year-to-date the number was €9b with €4b in late numbers collection.

As to the revenues, the impact will be much slower than what the collection would suggest. And the reason is that the average commission rate last year in Q4 was around 1.4%, whereas this year it's probably going to be north of 4.5%, probably closer to 4.7%. So in Q4 we will see a positive comparison vis-a-vis Q4 last year. Also, as far as Lotto.

Finally, Scratch and Win Lotteries. We got €1.066b, with €615m in tickets sold in the period at an average price that continues to increase, up to €1.73. Now, that impact is basically explained by the successful launch of the €5 ticket, along with the continuous improvement in the other price segments of the Instant Lotteries.

So this is, very quickly, the summary of our Q3 results. I would now turn it to you for questions and then we can answer them.

[OPERATOR INSTRUCTIONS]. The first question is from Miss Laura Leonardelli from UBS. Please go ahead.

Good afternoon. I have three questions. The first one is related to the operating savings already achieved in 2005, relative to your 2005/07 business plan. Could you explain exactly why you have already achieved them and if there is any possibility of incremental operating savings going forward? In particular, I would like to know if you have any guidance or expectations about the EBITDA margin potential for the Lotto game and for the Services category.

Then my second question is related to net working capital trend for 2005. Considering that top-ups are performing very well and Scratch and Win tickets are accelerating in the second part of 2005, do you expect a further improvement in the last quarter?

And my last question is related to your merger plan that should be completed by year-end, if you have any update, in particular in terms of available reserves that this deal could generate? Thanks.

Hello.

Yes.

Sorry, I was talking with [Emile], so apologies for that. As to the first question, we were -- I think that was related to the savings. The reason we are recording higher savings than expected is because we accelerated the efforts to achieve them. And we will probably be able to achieve, in '05, more than the original target for the three-year business plan. So we will probably go beyond the €30m mark that we set back in March. So that's probably good news and as we are in mid-November, we feel comfortable that such an achievement will be delivered.

As to the second question, I think it --

I'm sorry. On the operational savings, could you explain how you have achieved these savings? Could you provide the detail about, I don't know, is it more efficient network or could you explain exactly what is the operating costs that you have reduced so dramatically?

Well, the main results are due to the network, both in terms of maintenance of the new terminals and in terms of the shift -- technological shift in the telecommunication. So basically, that's the most important voice or line of the savings line. Then, some of the [indiscernible] savings continue to improve, but the most important item is effectively the network.

And is this the best-case scenario you could achieve also for the future, in terms of efficiency?

Sorry, can you repeat that? I missed your --

Considering that during the last three years you've planned a material operational saving structure, I would like to know if, after the achievement of this €30m in 2005, two years ahead of your business plan, do you expect further savings going forward or if the current structure is the most efficient structure you could achieve?

Well, I think this year has been an effort will have been made by the end of the year to get to an efficient structure. So the €30m target is probably going to be beaten already this year, as I mentioned, by a few millions. And by then, I think we will have gotten to a fairly efficient cost structure. Even if you compare the overall result, it's going to be beyond €100m vis-a-vis 2001, we're talking about a significant portion of the overall cost structure.

Well, just to tell you something on my side. Actually, what we have done up to today is quite impressive, as you know. And I guess by the end of this year, we're going to close since when we started, with a very high level of efficiencies, very, very, high. And we are almost one year, or more even than that, more than one year ahead in respect to the plan.

If your question is if we, the next years, we are going to be able to keep up the pace, of course it's more and more difficult to because we started from a greenfield [indiscernible]. Now it's more and more difficult. But still, we have a lot of factors here, so we will see if we are able to find other possibilities. The cost for us is all into [GSM], in technology and in telecommunications. That's our main source of savings. So it's from that area that we will see if we are able to do more than that. Also logistics, financially we are trying to something more and better than what we are doing. So I am confident we will be able to continue working hard to continue at this pace.

Thank you.

As to the second question, the net working capital might be affected by the way the regulator goes about the Instant and most of all Traditional Lotteries. It is possible that by the end of the year the other wagers on Traditional Lotteries, with [Grupo Italia] might not be considered part of our net financial procedures. And that particularly means that net working capital would be affected, and on this we'll have to keep you posted as we have no answer. We don't have a very final answer.

Now, out of that, all the businesses competed to have a negative working capital growth line. And therefore the only item that might change the situation is whether the last day of the quarter is when you have already collected the wagers from, and the services from, the retailers or not. So on that there is no change. The only item that might have an impact on the full year result is actually the Traditional Lotteries, as I mentioned.

And finally, as to our merger plan, we have had some feedback from the [indiscernible] but no, there's no -- nothing we can say to our ability to implement the merger by the end of the year. I think everything is going according to plan. There should be no change on that. There's no reason for us to anticipate any issue on that.

And finally, as to the distributable reserves, as I keep saying, I think we continue to maintain our conservative position, giving a guidance of around €170m to €200m in additional reserves.

Okay, thank you.

You're welcome.

The next question is from Miss Laura Pennino from Intermonte. Please go ahead.

Hello. I have just two questions, if I may. One is about the old ratio. Because in the past you gave indication of a 70% payout, can we assume this for the following years or should we higher it to around 100%?

And the second one would be in the guidance you gave in the triennial plan for EBITDA margins for Scratch and Win was around 10, 15%, and now it seems very conservative. Can you give an update to this guidance?

And then the third one, sorry, would be if you can give some comments on the new Budget Law.

All right. I will take the first two and then Mr. Bifulco will comment on the new Budget Law.

Okay. If you can wait just one second.

Okay. So, as to the dividend policy, in the last year or so we have changed the way we discuss about dividends. We no longer talk about a payout ratio but rather we try and set targets in line with the dividend yield that we think the market will be happy with. And, of course, the net earnings and the distributable reserves will be specific to that but we continue to think that we should offer our investors a dividend deal in line with the best practice in similar sectors. So that's the way we look at the dividend policy.

As to the second question, you are absolutely right, the EBITDA margin of Scratch and Win Lotteries was far better than we thought that it would be. There's a few reasons for that. First of all, the main income comes from the higher average price of the tickets. That, of course, is on a pure revenue; there's no costs attached to it. The second reason is that our retail network is more concentrated and dense than we thought it would be. And therefore, the logistics is less of an issue -- or it costs less than we thought it would.

And finally, the margins you see are somewhat impacted by what I mentioned in terms of the new Accounting Standards, because some of the unallocated costs we used to allocate on the segments. And therefore, when we discussed about the business plan, we were highlighting full cost margins, basically.

Sorry, can you give a guidance what you think EBITDA margin could be for the following years, for 2007 for example?

Well, it's a little early, as we're working on the new business plan, which will be disclosed in 2006, around March. Now, the 5% level is definitely something we can achieve, but I won't comment much more on this.

Okay, thank you.

About the Budget Law. There are all issues over innovations or things that regard the gaming sector and, of course, mainly ourselves. One side of it is that everything -- there is a lot of innovation regarding the AWP in terms of improvement, the profitability and the margins for the concessionaries for us. And on the other side, there is the forecast -- the provisions for the new VLP activity, that is the allotment for the AWP, that means a new area. And also, more interesting for us in terms of the technology, in terms also of profitability.

On the other side, there is all issues of innovation regarding the interactive or gaming. And in particular, the Lotto draw, a daily Lotto draw with regard to the Internet gaming or the interactive gaming, anyway. And this is also true for other [indiscernible] or other games. Of course, for us there is a possibility of selling cards, prepaid cards from our point-of-sale, and this is beneficial, I think, for us in terms of business.

In addition, there is a series of things regarding the betting. And that is still, I think, it's not still fixed, so I would not comment very much because I see there is a lot of movement going on.

At the end, the Cartel Lotto has forecasted a new game, complementary game for the Lotto. That means something that is new that we are designing, and this is still to be disclosed. So I will keep it for the new plan.

At the end, the loss only is on the Lotteries. The Lotteries, also in this game we are going to be able to activate the Instant Lotteries interactive online. This is also something new, a new project that we will tell you for the next plan. So there is a series of interesting news for the sector and for us.

Okay, thank you.

The next question is from Mr. Domenico Ghilotti from Euromobiliare. Please go ahead.

Good afternoon to everybody. I've just two quick questions. The first one is related to the marketing costs in the nine months, if you could provide us with these figures?

And if you could elaborate a little bit more on the contribution of Stamp Duties that had a €4m contribution to sales the first quarter after launch. So I would like to understand what could be the contribution going forward.

Marketing costs. Can you hear us?

Yes, sure.

Sorry. The marketing costs, we are around €35m -- €37m at the end of September year-to-date. And I will remind you that marketing costs for Lotto are calculated based on the previous year revenues, so this year we will have an important spend on marketing.

As to your second question, the Stamp Duties business is made up of basically providing the merchants with a printer -- special printer that prints out the tickets. So the sources of revenues are basically two. One is the transactions that are processed by machine. The other one is the contribution that we get on the installation of it. And going forward, on the maintenance and servicing of that machine.

So this year the balance is more on the installation side, but then going forward we anticipate having more weight on the transaction processing side. So we --

At this moment, it's still in parallel with the traditional stamps. Next year they will be completely [visual -- ritual]. So the -- all Stamp Duties will be passed to our [indiscernible] system. Overall, the guidance is that the revenues will continue to flow through our system, although it will be -- the mix will be different.

Okay, thank you.

We have a follow-up question from Miss Laura Leonardelli from UBS. Please go ahead.

I'm sorry, I have another small question. Do you perceive any change in your tax rate for full year '05, following the legislation change in terms of goodwill amortization to be tax deductible?

Well, yes. If the tax rule changes, then we will have to change the way we drop out -- make the tax shield on the amortization of goodwill. Now, of course, the extent of adding the tax charge -- sorry a charge deductible of one-tenth of the original goodwill tax charge -- tax capital charge will be one-twentieth of the actual goodwill for the remaining years. So the answer is yes, although it's far less significant than what you might have read in some reports in the last few days.

Thank you.

[OPERATOR INSTRUCTIONS].

Maybe for the benefit of clarity, any goodwill created on the new merger of Lottomatica with the Italian companies will not be tax deductible. So the amortization of the new goodwill that might [indiscernible] on the current corporate restructuring, that amortization will not be tax deductible. So we are talking only about the goodwill amortization coming from the Tyche/Lottomatica merger.

[OPERATOR INSTRUCTIONS]. Mr. Bifulco, there is no more questions at this time.

Okay. If there is no other questions, I will thank you for your participation and we'll talk next time. I guess that's for the results of the year and the presentation of the new plan.

Thank you very much to everybody. Good afternoon.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.