International Game Technology PLC (IGT) 2006 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Lottomatica conference call to discuss fiscal year 2006 first half results.

[OPERATOR INSTRUCTIONS]

The meeting will be chaired by Mr. Bruce Turner, CEO of Lottomatica, Mr. Marco Sala, Managing Director of Lottomatica for the Italian Activities, Mr. Jaymin Patel, CFO of Lottomatica, and Mr. Fabio Celadon, Finance Director of Lottomatica. Miss Simona D'Agostino, Investor Relations will attend the conference call. At the end of the conference call a recording will be available until 11:59 P.M. SET of Tuesday, September 12 on Lottomatica's website.

Okay. Good afternoon. This is Bruce Turner and I'd like to welcome all of you to the first half results conference call for the Lottomatica Group. As indicated by our moderator, I will chair the call today. Since much of the results of today's call will focus on the Lottomatica business results prior to the closing of the transaction between Lottomatica and GTECH, Marco Sala who is the Managing Director of the Italian Division will focus on results for Lottomatica during that term. I will finish up with some highlights of some GTECH business activities and myself, Marco Sala and Jaymin Patel our CFO will be available for any questions that you may have.

Obviously as you all know, on August 29 the acquisition of GTECH was consummated by Lottomatica in a one-step style US merger. I think all of you are familiar with the transaction details. If you need a refresher on those, those are available on the webcast and available on our website. Certainly all of the necessary conditions are satisfied and we look forward to a bright future for the company.

As a refresher as well on financing, many of you were involved and we appreciate your support during the various financing activities that occurred primarily in the months of April and May. As previously announced, we completed USD $2.3 billion in a senior term facility that was heavily over subscribed and is now fully committed. We completed the execution of a EUR750 million hybrid bond, which was 4 times over subscribed, and we completed an equity rights issuance of EUR1.46 billion at a price per subscription of 25.42. All of those proceeds have been applied now towards the acquisition of GTECH at closing on the 29th of last month.

I'd like to highlight for you as well several changes recently approved by the Lottomatica Board of Directors as it relates to corporate governance of the new Lottomatica with its very international footprint. The Board accepted the resignation of Rosario Bifulco as CEO, as well as the resignations of five historic Directors. On behalf of Lottomatica and the Board of Directors we would like to thank all of them for their contributions to our continuing success, we appreciate what they have done. They have given way to appointments of five new Directors with significant international experience.

In addition to myself joining the Board of Directors, it is joined by Bob Dewey, the former Vice Chairman of Donaldson, Lufkin & Jenrette in the United States, an investment banking firm, Jim McCann, the current CEO of 1-800-FLOWERS in the United States, Anthony Ruys, the former CEO Heineken in The Netherlands and Gianmario Tondata, the current CEO of Autogrill. Those appointments have now rounded out a very international Board of Directors, which is well qualified to execute the duties and responsibilities they hold on behalf of all shareholders.

Bob Dewey was also appointed as Vice Chairman, consistent with international practice to have an Independent Director in such a role. Six Directors out of thirteen have been deemed as Independent Directors and Gianmario Tondato has been named as the new Independent Director, Lead Independent Director. As you are away I have been appointed as the Chief Executive Officer of the Group, Jaymin Patel is our new Group Chief Financial Officer, Walter DeSocio is the new Group Chief Administrative Officer. Marco Sala is not the Managing Director of the entire Italian operation, and he will report to me directly.

Additionally, composition of the key internal committees that are in place to represent all shareholders has been completed. The Executive Committee is now comprised of Lorenzo Pellicioli who will be the Chairman, Pietro Boroli, Paolo Ceretti, Marco Drago, Marco Sala and myself. The Compensation Committee has been formed with Bob Dewey, Jim McCann and Gianmario Tondato with Mr. Tondato as Coordinator of the committee.

The management team is focused and aligned around the future for Lottomatica. As I spoke with many of you recently during our various road shows, all of the chief management of the company has signed long-term employment contracts of approximately five years in duration for most members and we are now prepared to execute our business plans for the future. We have considerable expertise, considerable personal commitment and a global platform with which to now operate.

With that I would like to turn over the call to Marco Sala to talk to you about first half results, which were exclusively the old Lottomatica Group, and he'll highlight the various business elements therein.

Yes thank you, Bruce. Good afternoon to everybody. Just to comment, the first half of '06 we have to say that the semester was rather good. The financial performance shows solid top line growth in all verticals. The lottery wager grew by 17% and we consider combined Lotto game and Instant Lotteries. In fact, they moved from EUR0.5 million in '05 up to 5.3 million in '06. And as I mentioned, the Instant Lotteries performance offset some weakness on the Lotto region.

We continue to grow significantly in commercial services revenues. We have 29.9% above last year, mainly driven by the 110 million electronic top-up transactions and the positive roll out of stamp duties. We increased also the EBITDA margins moving from 53.3% up to 54.9%, mainly due to the savings we are continually putting in our business. We have concluded the rollout of new terminals in the marketplace that now represents the most part of the terminals in stores. In fact they are 33,000 out of 39,000.

As you know in April we paid the dividend term, that is EUR1.30 per share and we are experiencing in the first half a strong net cash position due to completion of the fund raising in financing GTECH acquisition.

So the first semester shows in terms of overall revenue an increase by 7.2%, the enhancement of EBITDA margins up to 54.9%, the EBIT margins at 45.9% and the net income of 31.9% that includes some costs of the transaction in the region of EUR80 million and also the EBITDA includes EUR3 million deriving from the GTECH [gold] Corporation company that accounted for about EUR3 million.

More specifically, if we look at the EBITDA we see that we moved from 169 million in '05 up to 187 that we showed to make the comparison completely clear and apples-to-apples, we are showing either EUR3 million deriving from the gold costs already included in our P&L.

The EBIT is moving from 146 up to 156, the point here we had an increased [devaluation] because of the terminal rollout and also the amortization of the new terminals installed. I already mentioned regarding the net income, 31.9 compared with last year 84.4 and that as I said includes the costs related to the GTECH transaction but also a benefit coming from tax in the region of 26.5 million.

If you notice structure, you will see that we have De AGostini with 53.23%, we have Nouva Terrena with 2.88, [inaudible] is the investor -- institutional investors that represent the named ones 13.3% while the remaining 30% is the floater market. It's clear that we are now here increase of share capital completed in June 2006 with the issuance of 57 million new shares offered to shareholders at the price 25.4 with an amount of EUR1.46 billion.

During this first half we experienced a share performance quite positive. We have +8% vis-à-vis the indices that are below our performance, the Standard & Poors but also Dow Jones. The six-month average price was equal to 30.5% corrected for the capital increase and after the capital increase, our market cap is about EUR4.4 billion.

Entering a little bit in the comment of the business lines we see that I will mention Lotto wagers were decreasing vis-à-vis last year of about 10%. You see that is distributed between late number and core base. But if I have to make a comment here, the situation regarding the core base vis-à-vis the late numbers is more complex than shown in this chart because notwithstanding the historical record we experienced with the late numbers in this first half, the wager related to this number was [immaterial] compared with the previous year performance.

So, late numbers are somehow vis-à-vis the performance that is not as in line with the past if we consider the performance of this first half. While on the other hand we see the instant lotteries performing very well because we are now 3x the wager of last year, the ticket sales moved from 352 million up 759. But even more important for our profitability the average price moved from 1.6 up to EUR2.3 per ticket.

If you see the performance by segment, focusing on EBITDA, we see that notwithstanding the reduction in revenues of Lotto, the EBITDA is at the same level of last year, mainly due to two facts. The first is efficiencies that represent around EUR10 million. Another EUR10 million is a shift from the Lotto allocated, of course, to the unallocated items accordingly to the new standards.

You see that the contribution of the Instant Lotteries is quite remarkable in the region of 34 million, and the services are growing in line with the turnover growtb. As I mentioned before as far as services, the performance is mainly due to the prepaid mobile top-up transaction, but an important contribution is provided by the Stamp duties during this period of time representing an important of our revenues and profitability.

Looking at the bridge, if we consider the revenues, you see what we have commented so as far as Lotto is concerned and how is more than offset for by the Instant Lottery performance. And you see also the contribution of the other business to provide us with the growth by 7%.

In terms of the OpEx, we maintain more or less the same level of last year, we have an increase of 3.5% mainly driven by the businesses that are experiencing robust growth. I mentioned the EBITDA, the growth is mainly driven by instant tickets, services and efficiencies we have delivered during this period of time. On CapEx we had an investment of EUR22 million, 10 for new terminals and 6 for Lotto. For Lotto, the investments are as many of you today have[ looked] at them, and maintenance costs.

If we can comment very briefly the EBITDA consolidated income statement, what we can comment in addition on what we have already said is that the EBITDA margin is improving from 53.3%, up to 54.9% and we have already commented on the situation the GTECH transaction costs that are 3 million costs at the EBITDA level and net financial charges of EUR81 million combined with a tax benefit of approximately EUR26.5 million.

The cash flow is showing a change in net working capital, we have a substantial increase in net working capital mainly attributable to the new wages collection rules set by our regulator for the Instant Lottery tickets effective from 1st of January, this year. That means that we have to pay weekly instead of paying at the beginning of the following month. And as far as the other, that includes 1.4 million coming from the rights issue and 45.9 million of capital increase for stock options plans.

The only point to comment on the balance sheet is the shareholder equity is EUR1.9 billion because of the capital increase. The long-term debt comprises 750 million hybrid bonds at 2008, and 360 million bonds net of accessory costs of approximately 20 million.

As far as the business update for the -- I can leave the other to my colleagues, just that I commenting what is going to happen with Italian market. We have the update in the business consolidated on track to meet the current expectations, both the [inaudible] Lotto and Instant Lottery strength continues to be healthy, Lotto wager at 4.5 billion as of August 1st and Instant Lottery 2.3 million, that is substantially above last year. And just to make a comment on the integration of Lottomatica as a GTECH operational group, we are proceeding well and we are setting all the groups we need to develop even more effectively our business.

On July 3rd we announced the launch of Instant Lotteries, that is a new optional gaming for Lotto as provided by the law. And the Instant gives a chance to participate in an instant, dedicated drawing while at the same time playing for the Lotto's usual bet through the same bet (numbers and draws). And players select cost of game, it's possible to pay a minimum of EUR0.50 to a maximum amount that coincides with the amount based on the traditional game. This is -- the acceptance from a trade point of view is quite positive. We will see over the next month how this business will be established in the consumer market.

I thought I would highlight several recent developments on the GTECH side that our newer Lottomatica shareholders may not be quite as familiar with. We recently signed a contract with the Province of Manitoba in Canada to supply a turnkey video lottery central system that will include a five-year support agreement to monitor the security and integrity of approximately 5,500 gaming machines located throughout the Province of Manitoba.

In addition to that contract, we signed a 24 month contract extension in the State of Minnesota, carries us through 2011 to provide a full range of services. We expect that contract to generate north of $20 million over that extensions term.

Additionally, we were awarded a new contract in the State of Virginia as the successful vendor to provide a full lottery system, terminals and new IP wireless communications network in a seven-year integrated services contract with three one-year extensions.

Additionally, recently, we announced that we had secured a new three year extension taking us through 2015 to provide a range of services to the Beijing Welfare Lottery Center in Beijing, China. We will continue that successful relationship which we began in the year 2000.

I should note, as we outlined to many of you during our various financing activities, it was our expectation that our contract in Brazil would cease in the intermediate term, although we did not have a definitive date at that time. Our contract did end on August 14 and we are complying with all requirements to de-install our final activities to support [Heisha], our customer in Brazil. We wish them the best of luck in the future with their own activities.

Additionally in South Africa, we were recently notified that our consortium, of which we are a small equity partner, Uthingo, who had been the incumbent operator, was not selected to negotiate as the preferred bidder for the second running license in South Africa. We remain the alternative consortium supplier and we are prepared to supply the country of South Africa if the preferred bidder is unsuccessful in negotiating and implementing a successful contract.

I should point out to you as well before we take your questions, we expect to provide a detailed and comprehensive update of our long-term outlook in November, following formal consideration of our detailed plans and the approval of those plans by the Lottomatica Board of Directors.

That concludes our prepared remarks, we would now be happy to take any questions that you may have.

There are no questions at the moment. [OPERATOR INSTRUCTIONS] The first question is from Mr. Domenico Ghilotti from Euromobiliare.

Good afternoon to everybody, I have some questions on the Lotto performance. In particular you had EBITDA that was close to the interest of '05 level, despite the 26 million lower sales. So I would like to understand this efficiency due to real savings, recurrent savings and how much is due to some delays in marketing costs?

Also on the services on top up cards, I see that sales growth is much higher than the number of transactions growth, so if you could help us in understanding this dynamic?

Yes. For the first question the answer is the following. Regarding the Lotto performance, we are experiencing in EBITDA number, three things, the first efficiencies that account about EUR10 million. The second is an allocation cost that moved from Lotto to unallocated costs on our balance sheet. And the third issue is that compared with last year we had some delays in the marketing activities spend. That's the answer why we maintained the same EBITDA, notwithstanding a decrease in true numbers.

Regarding the second question, we have two things to tell. The first is the average price regarding this period in time, regarding our transaction and we have increased also what we call indirect to numbers to be added -- from the service we do for some customers.

And sorry, just one question on the new entity, when do you expect to present the new business plan?

We will present the new business plan in November after such time as we have presented that plan and had that plan approved by the Lottomatica Board of Directors.

Okay thank you very much.

You're welcome.

The next question is from Mr. [Emanuel De Figueiredo] with [Fusitago Generalas Management

Good afternoon, I have three questions related to opportunities in the concession business outside the US. The first one is can you give us a bit of color on why do you think you lost the South African contest, I think you're preferred bidder? Secondly, do you have any interests at the moment in Russia? And could Russia be an opportunity? And finally if you can just give us some idea outside the US what are the most important renewals coming up for grabs on new opportunities? Thank you.

Okay, I'll address that question and then I may have Jaymin Patel offer any other thoughts as well. We don't have details at this time that have been made public in South Africa regarding the basis for their decision. So as a result it is very difficult for us to understand the context of that decision. So at this point I can't give you a better answer than that, we're hoping for some more details at some time. However the National Lottery Commission in South Africa has to date indicated that they may not provide details on the basis for their selection.

Russia, to your second point, is a target market. I think you may be aware that Russia does have the approval from the political parties in power to launch a national lottery at some point in the future. They have been evaluating various scenarios for that possibility of a launch. We do expect sometime in the next 12 to 18 months there will be an RFP issued for a national lottery in Russia and we will be a bidder.

Outside of that your third question dealt with the most important renewals. The primary most significant renewal in the near to intermediate term is the United Kingdom. We are a party to a contract with the national operator of the lottery in the United Kingdom, Camelot, it is our intention to bid with Camelot again and we are evaluating other alternatives as well. Outside of that, we have significant new opportunity that we expect in the intermediate horizon in Greece, primarily on the infrastructure side, we have a variety of opportunities that we are evaluating at this time in China, as well as selected markets in Southeast Asia and Central America.

Bruce, just to add to that, over the last several years we have rebid approximately between 50 and 60% of our service revenue portfolio in the last three years. So aside from the UK, as Bruce mentioned, we don't have any significant contracts coming up rebay in the next 24 months.

And sorry if I may, how easy is it in your business for a relatively new upcomer to try and grab market share?

Generally pretty tough for someone brand new to the market to take market share. We do have very specific probity requirements that are quite onerous and candidly keep a very high barrier to entry to many potential entrants into the marketplace. History suggests over long periods of time that this business, as a result of those barriers and the nature of the business, is a limited oligopoly.

Today there are only three meaningful providers of technology services in the world and there probably are only a very small number of companies with operating experience that have the capability to go outside their jurisdictional boundaries. But we are the only company in the world that is vertically integrated with both particular operating expertise within Italy and a full range of world class services and products within our GTECH subsidiary as well.

Operator, do we have any more questions this afternoon?

No more questions.

Okay. Well on behalf of all of the executives and 6,500 professionals around the world at the new Lottomatica, we thank you for your participation and your confidence, and we look forward to chatting with you again in the near future.

Excuse us, we have one more question from Mr. Domenico Ghilotti from Euromobiliare.

You made in time.

Okay sorry, just a follow-up, could you be interested in entering the betting market both in Italy and abroad obviously?

We are evaluating very carefully opportunities in the fixed odds wagering marketplace worldwide and I think that, if it's appropriate for us to pursue those opportunities in prudent and rational ways we will do so, but we don't have anything to report at this time.

Okay thank you very much and congratulations for your results.

Thank you.

The next question is from Loizou Areti from Blue Mountain Capital.

Hi there, I was wondering if you could give us an update with regards to what's happening the Texas Lottery Commission? I've seen a number of announcements being made for New York and Florida, Ohio but I haven't actually heard anything yet on what's going on with Texas.

And my second question would be if it is possible at all to give us a little bit of guidance about the GTECH LTM EBITDA number so that we can maybe compare it to the numbers that were given in the red and try and get some pro forma leverage ratios as well? Thank you.

Okay. Texas was one of the many jurisdictions that approved the transaction with Lottomatica. We worked extensively with Texas to explain a variety of business activities worldwide in great detail, I did that personally. And at the conclusion of that the Texas Lottery Commission indicated publicly that they have no issues with persons or parties relating to the transaction and that they are not concerned about the property of involved participants. I should point out that the type of scrutiny that was applied by Texas is applied normally to us worldwide.

We are licensed in more gaming jurisdictions than all of our competitors combined and we voluntarily go through a wide range of scrutiny. So it's not uncommon to go through the type of activity such as we did in Texas, we welcome that type of review. I have Jaymin Patel review your question on our trailing EBITDA.

Just to clarify, so the Texas Lottery Commission has come back to you and has said that you can continue with the license and there is no -- I mean I know there was this whole issue about them going through their own internal due diligence et cetera, et cetera and there were some articles in the press that now you've got the okay and you can continue with that contract without having to worry about anything else. Basically Texas is done.

Texas is done, you're absolutely correct and you described it well.

Okay. All right.

Okay so with respect to trailing 12 months EBITDA, I don't have the exact numbers for the 12-month period, since you're probably aware by now we've changed our fiscal year to December in Lottomatica. But for the trailing six months GTECH EBITDA was EUR218 million and I'll be happy to give you a call back later with the numbers for the last six months of calendar year 2005.

Sorry that was EUR2 1 8 million?

Correct. EUR218 million for the first six months of calendar year 2006. That's excluding transaction costs, so it's a pure operating EBITDA number.

Okay. Okay thank you.

Sure.

The next question is from Laura Pennino from Intermonte.

Hello, good afternoon, I just had a few questions. Regarding the unallocated ticket costs for Lottomatica, can you give an indication for the full year what we should expect for this year? And another one would be related to New Jersey, GTECH had one of the new bids but I think there were some problems for the renewal or not? And another thing, when you say you are interested in Russia, can you give an indication of what the amount of the bid of the revenues that could come from Russia could be?

I'll ask my colleague Marco Sala to address your question on Lottomatica. I will address the questions on New Jersey and Russia.

As far as the unallocated costs, I think it's in line with the proportion we have experienced in the first half because most of them are fixed costs, our rent and offices and so on and so forth. Therefore I think it would be in proportion with the [true number].

Okay.

On New Jersey, GTECH was awarded the contract in New Jersey. It is not uncommon in our business around the world for awards of this type to be protested, they are seldom successful. That has been protested. A ruling on that protest has not yet been made. I should point out that we did receive an extension in the State of New Jersey that is in effect at this time. So we're continuing to work with them, we certainly believe that we will keep New Jersey in the future.

Russia, it is impossible for me to provide you a scope on size at this time. Obviously it could have a wide range of possibilities, it really depends on what their request for proposal ultimately looks like. At this time that has not been issued. So you can expect however that for a market that could be of substantial size that we will engage in bidding in that market with appropriate partners in the Russian economy and we'll evaluate the request for proposal in more detail once it comes out.

Okay thank you.

There are no more questions at the moment.

Okay. Well Operator, thank you very much, and for all participants we appreciate your time and attention today. Have a good day.