International Game Technology PLC (IGT) 2005 Q4 法說會逐字稿

Welcome and thank you for joining Lottomatic's full year 2005 results 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. Please go ahead, sir.

Good morning to everyone. I guess this is going to be my last conference call with Lottomatica [indiscernible] with you, and we are here to present the results for 2005. [indiscernible] the presentation and Fabio Celadon is going to demonstrate to you what is written up there. Then, of course, as usual, we will open the for a Q&A session.

Thank you. Good afternoon, everybody, and thank you for attending the fiscal year 2005 consolidated results conference call. I think you should be able to download the presentation off our website so that you can follow the presentation. Now, let me, first of all, go through some key highlights and milestones regarding 2005. At the corporate level in 2005 at the end of the year, we completed the merger by incorporation of old Lottomatica and FinEuro Games. The ordinary shares of new games that was then called Lottomatica started trading on the Milan stock exchange in December and, more specifically, on December 20th. The result of the merger was the creation of additional security for reserves of around €217 million and so that's the first highlight for the year.

Then in 2005 we also migrated our financial reporting to International Financial Reporting Standards from first half results and going forward. And, finally, we set up the vehicle that will allow us to enter store value. Such vehicle will cut the list, which is effectively a joint venture with Banca Sella. We have 85% of it in Banca Sella stock, with the remaining 15% received authorization by Bank of Italy to operate as the first IMEL is due to the [indiscernible], which is Italian for stored value card issuer and also that vehicle got the authorization to operate as a participant member by Visa.

In terms of business highlights, a few comments on each of our business lines and segments. In 2005 there was the arbitration ruling that set to expire of the Lotto concession in 2016. In terms of underlying wagers, the 2005, despite the exceptional late number wagering in the previous year, went back to normal levels in line with the portfolio 2000-2003, which is something we regard as a success. The wagers were €7.3 billion, and revenues were €433 million.

In terms of the innovations that were introduced by the 2005 budget law, the third week of drawing was confirmed in October, and therefore this is going to remain as a stable feature of Lotto.

Instant lotteries -- this is something that we regard as a very important success. The gross ticket sales trebled in 2005 relative to 2004. Lottomatica sold €790 million tickets with an average price, which increased substantially throughout the previous year to €1.9 per ticket. Five new games were launched in '05. I'm not going to go through the names of them, but the one thing that I will point out is the fact that the launch of the €5 ticket, which is the highest-priced ticket, was extremely successful and sold around €50 million for the ticket in 2005, and that's still contributing in a meaningful way in 2006 as we will see.

Sports pools -- a few comments -- new Pari-mutuel betting were launched related to non-sports events but also related to horse racing with a number of new betting offerings, which is going to be replacing -- or has replaced -- the old Tris.

The gaming machines -- we installed 8,500 AWPs in a market, which is -- in a market, the size of which is around 150,000 installed machines. Now we also recently received the final confirmation of the concession by way of decree, which we also regard as a milestone of the company.

The services business -- that continued to grow meaningfully with revenues up by 32% and EBITDA by 40% with the electronic top-up service, which has claimed the lion's share in terms of growth but also with the extreme success that belongs to the stamp duties and the improvement of the utility bills payment service.

Very quickly in terms of the strategic guidelines and to elaborate on them -- we have signaled to the market that we would focus on core business and then, particularly in '05, went through the focus on Lotto in terms of marketing of the new innovations of the game and, most of all, in terms of maintaining the collection and wagers at the level of historical 2000-2003 period despite the dropping in late numbers wagering as one would expect after such an important year in 2004.

We started the Lotto terminals replacement project, and we are going to complete that in the first few months of 2006.

In terms of the gaming portfolio diversification, the one thing to mention is, most of all, the strong performance of these lotteries business and also the restructuring of the sports pools distribution network and the launch of the pari-mutuel betting, as mentioned.

Just to the development of the services business, I made a few comments already. Two additional ones would be that the migration to the independent network was completed for most of the services, and the extension of the network continued. We have now about 50,000 direct and indirect point of sales distributing our services, and, finally, by the end of last year, we rolled out around short of 18,000 new stamp duties printers.

One of our goals, which we constantly pointed out, was the margins improvement. Now, we signal and we gave guidance that we will achieve 30 million in additional savings in the 2005-2007 period. Technically, in 2005 we exceeded that amount, delivering more than 40 million in additional savings on top of the 73 million achieved in the year 2002-2004. Now, that drove increased EBITDA and EBIT margins as we will see.

One of our goals was always to optimize capital structure and distribute cash to shareholders. Now, the board of directors this morning decided to propose to the AGM, the distribution of €1.3 per share. Now, on top of the amounts of dividends distributed so far, to see if the new management team was appointed, that yields more than €1 billion in dividends distributed over the period 2002-2005. So that's a meaningful, once again, a meaningful distribution of cash. And in terms of expanded growth by one common [indiscernible] as we all know, we achieved the [indiscernible].

In terms of financial highlights, while despite the drop in revenues due to the meaningful reduction in wagers for Lotto, revenues in 2005 were steady compared to 2004. We recorded €583 million in revenues, where the €62 million in dropping Lotto revenues were offset by around €36 million in additional revenues coming from special new lotteries and €16 million of additional services coming from the growth in services.

Now, in terms of EBITDA, the effort on the cost saving side coupled with the profitable growth of the special new lotteries and service businesses, allowed us to achieve a 15% growth driving EBITDA from €233 million to €266 million, and then also is a meaningful achievement of the company.

In terms of EBIT, on top of EBITDA growth of around €34 million, in 2005 we booked depreciation -- lowered depreciation by €10 million, and that allowed EBIT to grow by 25% and, finally, net income grew by 33% from €85.6 million to €114 million with a net income margin of just short of 20%.

Net debt at the end of 2005 was around €90 million. At the beginning of the year, it was €51 million, the difference is explained as we will see, mostly by a change in working capital by the capital expenses program for replacement of the terminals of Lotto and, finally, because of the 2004 fiscal year benefit from the disposal of the 50% stake we used to have in Global Bingo Corporation. Shareholders equity was up meaningfully mainly due to the [indiscernible] part of the merger.

I won't go to the shareholding structuring and share price performance, as the shareholding structure has remained stable over time. We still have our De Agostini shareholder at the level they've been in the last several months. And in terms of price performance, last year Lottomatica performed just short of the S&P mean performance but distributing -- not by offering the dividend yield, which was significantly higher than the average market yield.

So to financial results -- I will go through the segments reporting. In terms of revenue, we already commented on the dropping Lotto revenues. Revenues in '04 were €494 million. That went down by 12.5% to €433 million despite a drop in wagers of around 37%. That is due to the [indiscernible] effect whereby, effectively, in Q4, revenue went up, year-on-year by 43%.

In terms of the EBITDA -- in absolute terms, EBITDA was flat; '05 vis-à-vis '02 in that the important result would be a meaningful cost-saving program that was put in place. In terms of the other games, as you can see, revenues went down slightly but, most of all, losses at the EBITDA level were reduced thanks to the restructuring program in terms of the sports pools business, and, finally, in terms of the gaming machines, you can see we are getting out of a startup phase with revenues increasing by more than -- by short of €6 million and EBITDA breaking even. Services, finally, we can appreciate here the meaningful growth, the profitable growth, that allowed the services business to grow in terms of revenues from short of €49 million to €65 million with EBITDA of €37 million vis-à-vis €26.5 million the previous year.

The unallocated items stayed as cost in terms of EBITDA impact as International Finance Reporting Standards implied a separate disclosure of corporate overhead and corporate stock costs.

If we look very quickly at the underlying fundamentals of the business that drove performance, the meaningful growth in the traditional and instant division of lotteries is the one item that we need to go through in details as best that shows that in one year we were able to treble gross ticket sales. The amount wagered in 2005 was around €1.5 billion. Now, the growth was due to both the significant growth -- the number of tickets sold but also the creation of the average price per ticket, which benefited from the introduction of the €5 ticket and also the very careful management of the portfolio of lotteries out there. Overall, 187% in terms of growth, and as most of you know, as we have issued a press release recently, in the first couple of months of 2006, this performance continues to be very, very strong, with more than €500 million in amount wagered in the first couple of months, which makes us very, very confident that the performance in 2006 for the instant and traditional lotteries, in particular, the price points in the first couple of months of 2006 is now about €2.3, which is very important success in terms of the way we manage the portfolio of lotteries. I will not comment on the Lotto wagers, as I went for it in comment in the previous slide.

The services business, we continued to see a very meaningful growth in terms of prepaid top-ups, which went up €29 million to €36 million [indiscernible]. We also see that the traditional services like payment of the TV license fee and car road tax fee are just about steady as they are mature market, and we are containing our market share.

In terms of the commercial services, the ticketing service also grew from €4.6 mil to €5 million in revenues, but, most of all, the launch of stamp duties allowed us to book €5.7 million in revenues in 2005. Now that was accompanied by a 40% EBITDA margin, which we continue to consider a very important source of profits and cash flows.

We now go to the detailed comparison of revenue contribution in fiscal year '05 relative to fiscal year '04, we see that Lotto dropped by €63 million, but that was practically offset by a growth in special lotteries by €36 million; game machines, by €5.7 million; and services by just about €16 million.

We look at the cost base -- despite the growth in new businesses, all growth costs went down by €37 million. Forty one million euros were the cost savings achieved, €24 million was the decrease in variable costs related to the decreased volumes, in particular, in terms of Lotto, and then around €27 million of additional cost coming from the development of the new businesses.

EBITDA -- that is the result of the analysis performed in the previous [indiscernible] line, in particular, we see that Lotto did -- the effort in terms of cost savings offset the drop in revenues and the growth in special lotteries and services was a profitable one, and that was also accompanied by the reduction and losses at the gaming machines level.

Finally, if we look at the overall cost savings program that was delivered over the period 2002-2005, we exceed €110 million, which is a very meaningful result if we consider what the cost base is, which is over €300 million, so in relative terms, it's very meaningful.

Finally, in terms of capex, we recorded €91 million in capex in 2005; €53 million of that is due to the Lotto terminals replacement project and the remainder is broken down in profits incurred for the loss of business, the services business, and gaming machines and the new headquarters and, in particular, in terms of services, then our €13 million in capex were the effect of the rollout of the new stamp duties printers.

We will very quickly look at the consolidated income statement. We see that with standard revenues, we increased margins at all levels -- at the EBITDA level -- from 39.6% to 46%; at the EBIT level from 29% to 36% and, finally, net income from 14.6 to 19.6 with the net income for the group of €114 million.

I will now cover the details, the conversion between the Italian GAAP and International Reporting Standards financial results, but we've provided you with a slide that goes to that just to see what the performance -- what it looked like if they all Italian GAAP had been applied.

Finally, in terms of free cash flow and net financial position as of the end of the year, you can see that cash flow from operations in 2005 was €191 million vis-à-vis 250 the previous year. Now, that breaks down into a gross cash flow of €202 million in 2005. That compares favorably with €182 million in 2004. So the gross cash flow grew.

Cash flow from operations was actually impacted by a negative change in working capital. As in 2004, cash flow benefited from the buildup in the negative working capital of the new instant and traditional lotteries business, and also in 2004, the tax bill benefited from the careful tax planning that we went through in 2003. So [indiscernible] ops in 2004 were less than in 2005 by around €15 million.

So then we go to the other items in the cash flow statement -- capital expenses went up by around €50 million because the terminal replacement project. In 2004 we divested Global Bingo Corporation, and we paid €177 million vis-à-vis €151 million in 2005. So, overall, the end of year net financial position in 2005 was just short of €90 million, which is a very conservative one by all means.

The consolidated balance sheet, I will not go through. I will just comment on the impact of the merger. We provided you with a summary table that basically shows that the total goodwill created by the merger was around €217 million; that as we mentioned before, it's lower than the amount of goodwill that we would have recorded under Italian GAAP. A brief formula is that much of the goodwill arises by transactions between entities within De Agostini Group. Now, International Financial Reporting Standards do not provide for a specific principle applicable to business combinations under common control, and therefore we were prudently advised to apply the U.S. GAAP principle, which favors continuity of historical values in inter-company transactions. So that is the reason why the amount of research created for this less than one might have expected.

In terms of the main event after the close of the year, as you all know, we announced the proposed acquisition of GTECH in January. The timetable is in line with what we described back then and during our roadshow. What I will say is that this morning the board proposed the AGM and EGM, which is going to be held on April 12th. The issuance of 1.5 billion -- a maximum of €1.5 billion in additional equity, and so divides offering of opposite sides. The board also asked the AGN -- or the EGN, to delegate powers to authorize additional €170 million in additional equity, which is going to be -- which is not going to be issued but rather is going to be authorized, and that is because of one of the features of the [hybrid] bond, which requires that at the time of the issuance of the bond, the company should have authorized equity in order to be able to pay for additional coupons in case that is needed.

And, finally, the board of directors also proposed the EGN to delegate powers for a dedicated capital increase for the management rollover. The size of that is going to be up to a maximum of €50 million, and that is going to be subject to the M&A deal closing.

That's it in terms of update on the GTECH acquisition process. A few comments on business and the way business is performing in 2006. The Lotto business is performing very well compared to 2004. We are up 4% at €1.3 billion. It is down 30% vis-à-vis 2005, but I will remind you that the first month, month-and-a-half of 2005 wagers still benefited from the [indiscernible].

So, overall, we think this performance is in line with our expectations and will allow for a 2006 without surprises. And, finally, as mentioned, the special lotteries are going very well -- €541 million of wagers in the first two months. We have a price point -- sorry -- an average price of €2.4, which confirms the very strong performance of the more highly priced [indiscernible] portfolio.

Now, with that, I think that's probably, in terms of the presentation of the results, and I would open it up for questions.

[OPERATOR INSTRUCTIONS]

Domenico Ghilotti from Euromobiliare.

Just a few questions -- first of all, if you could elaborate a little bit more on the lower margins you had in the services in Q4 compared with Q3. And on the expected impact of the stamp duties in '06 -- if you could provide a guidance for '06 capex for [indiscernible] Lottomatica [indiscernible] and as regard to the Lotto performance, if I am correct, there is a late number currently, so could you elaborate a little bit more on the impact that is quite lower than '05 despite this late number on the Lotto wagers?

Well, in terms of the services margins, we now think the Q4 margins were lower than they have been. Probably, the way the International Financial Reporting Standards have us disclose numbers is not exactly in line with what we used to do, so if we look at the EBITDA level on a fully loaded basis, so also accounting for the allocation of overhead, that's meaningfully higher than described [indiscernible] reporting, and I would tell you that EBITDA grew by 62% if all costs had been included in the disclosure. So we don't think there is any decrease in performance, rather, it's a problem of disclosure.

In terms of the stamp duty printers, at the end of the year, we roll them -- by the end of the year we had rolled out around 17,000 printers, and in the first couple of months of 2006, we added around 4,000 additional printers. So we continued to roll out according to plans all the printers, and effectively the new dematerialized -- that's the wrong word -- essentially these are replacing the old fiscal ones, so we expect that service to continue to contribute in '06 in a meaningful way to our revenues, although the revenue case is going to be different, as more of the processing, the transaction processing revenues will start to contribute more, whereas the installation fees from the printers are going to contribute less than that. So, overall, meaningful contribution expected from that in '06 as well.

Of course, in terms of the rollout of those terminals required capex of around €10 million in '05 as we complete the installment and the rollout of the printers, capital expenditures will, of course, no longer be incurred.

The other question, I guess, was on Lotto and on the impact of late numbers in '06. I think it's very difficult to predict the late numbers and the way the late numbers wagering plays its basic role throughout the year. Now, the one comment that I would make, though, is the fact that the third, with the drawing, has probably had an effect over amount wagered, and therefore we do not expect -- overall, we can't predict that. But we do not expect the late numbers wagering to look like the way it did before the introduction of the [indiscernible].

Not so well I am forgetting any other question. I think that was it.

Laura Leonardelli from UBS.

I have three questions. The first one is if you could provide additional details about your 2004 compliant classification of deposition amortization and EBITDA, because if I remember correctly, EBITDA was 247 under International Accounting Standards, and now it's €232 million.

First of all, in 2005, we changed the way we report EBITDA. We are now going to report EBITDA now all provisions and therefore we also restated the 2004 figures for comparison purposes. Last year we had around €15 million of provisions. The bulk of it was related to the antitrust procedure. Now we only restated EBITDA to account for that as well. So that's it.

Okay, my second question is related to services. Are you still comfortable by your 2007 guidance as stated last year in March when you mentioned potential sales about €110 million and EBITDA about €50 million? Because I haven't seen in the performance for utility bills and the value services. If you could update that [indiscernible].

The plan we discussed one year ago was based on a different mix than the one we think is going to contribute to our growth going forward, though we feel comfortable about the guidance. Now, during this conference call we will not give any further guidance or we will not make any forward-looking statement as we are in the process of, as you know, right offering and highly security issuance, and we intend to go on the road in a few months' time to discuss the combined business plan as a result of the GTECH acquisition. So within that context, more guidance will be given, and also more flavor with the event to be different business segments that Lottomatica -- the new Lottomatica will be involved in. And the services business is, of course, a meaningful one.

So you're not commenting on the utility bills?

I am commenting on the utilities. Sorry, I was commenting on the guidance given one year ago.

All right.

We did the billings in 2005. We processed around 450,000 utility bills payment transactions. As you know, the launch of the utilities payment service was less successful, if you will, than expected. The reason for that was a combination of several things. First of all, we launched that service by making the payment table only for debit card -- only by way of debit card transactions.

Towards the end of the year, we renegotiated our contract with the utilities and are now providing also service for utility. Now, that has provided a boost to that service, and in January we processed around 90,000 utilities-based transaction and in February 110,000. So, as you see, the growth of the service, is there. The problems we experienced at the beginning will be overcome by the new way we are offering that service.

My last question is related to operational savings. You mentioned last year guidance for €30 million, and you said 41 only in one year. So I was wondering if you could elaborate a little bit on exactly what's the current efficiency structure of your cost structure -- just the fact that also in the past you said now we are efficient so we do not expect a strong [indiscernible] of savings, but then you accelerated this plan.

I wouldn't make the same statement that I made before. In terms of the room for additional efficiency, [in a bunch of years], €114 million savings were delivered. Now, that is very visible, if you consider that our cost structure now is around €300 million. So we said we would achieve the €30 million savings in three years. Now what we were able to do was bringing that forward but that does not mean the significant additional room or meaningful cost reductions other than the continued 4% of writing efficiently the distance the way [indiscernible].

Does that answer the question?

Yes, thanks.

Domenico Ghilotti from Euromobiliare.

Sorry, just a follow-up on the provisions -- if you could provide us that provisions recording in '05, both DBDA.

In '05 we -- let me rephrase that -- do you want to know what's comparable to €50 million of last year?

Yes, the total amount of provisions recorded in '05 -- just because I had provisions below, so just to have a comparison with -- to see if it is more consistent with my estimate.

Right. We recorded [indiscernible] in '05 of around the same amount, but they were all, or most of all, cash items, so it's a different thing -- not the reason but [indiscernible]. Most of them were, of course, related to the merger or the arbitration for saving, but they were, once again, cash items.

And what was, more or less, the total amount of, let's say, no recurring costs?

[indiscernible]

Sorry?

Fifteen one-five.

Fifteen, okay, thank you very much.

Antonella Frongillo from UBM.

I have two questions -- the first one is in relation to unallocated costs. If you could provide a breakdown of these items, because if I remember correct, last year it included also some costs like restructuring costs and stock options and startup of new business and I would like to know if these items were also present this year. And the second question is in relation to the GTECH acquisition -- if you could anticipate the costs of the acquisition.

Let me handle the second one first. The costs of the acquisition, you're probably referring to transaction costs.

Yes.

Well, the cost of the acquisition is going to be in line with the cost of acquisitions of that size, it's going to be related to financing fees and advisory fees. It's probably going to exceed €100 million, which is in line with, once again, the cost of stock acquisitions. It's all been included in the [indiscernible] that we put together in order to provide financing for the acquisition.

The first question was on the unallocated costs. As mentioned, the unallocated costs are mainly overhead and stock and corporate services costs. The personnel account for probably short of 50% of it, and the remaining is other services costs related to the headquarters and the central services.

Not a restructuring costs in 2005?

Correct?

Not a restructuring cost in '05?

Restructuring costs wouldn't get allocated there. Did you mention stock options? They are also included in that amount.

Which is the amount of stock options?

It's around €8 million.

[OPERATOR INSTRUCTIONS] Gentleman, at this time, there are no further questions registered.

Well, thank you very much for attending this 2005 results conference call, and if there is any further questions, Simona will be our investor relator and myself will be available if you want. Bye-bye.

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