International Game Technology PLC (IGT) 2006 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Lottomatica Conference Call to discuss the Fiscal Year 2006 Third Quarter results.

[OPERATOR INSTRUCTIONS]

The meeting will be chaired by Mr. Bruce Turner, CEO of Lottomatica Globe, together with Mr. Marco Sala, Managing Director of Lottomatica for Italian Operations, Mr. Jaymin Patel, CFO of Lottomatica Globe, and Mr. Stefano Bortoli, CFO of Lottomatica Italy, Mrs. Simona D'Agostino, Head of Investor Relations will attend the conference call. At the end of the conference call, a recording will be available on Lottomatica's website.

Okay, good afternoon. This is Bruce Turner and thanks again for joining us. In a few minutes Marco Sala, the Managing Director of Lottomatica's Italian Operations will be here to discuss his organization's recent business developments. Marco will followed by our [technical difficulty]

It has been a little over two months since Lottomatica completed its acquisition of GTECH. As you might imagine, integrating two industry leaders presents challenges, but the people of Lottomatica and GTECH have responded admirably. I am pleased to report that this process is proceeding swiftly and efficiently, and has had no negative impact on our ongoing business operations worldwide.

Much of the work to integrate our systems and operations has gone on behind the scenes. More importantly, it has been seamless to our customers as well. We also remain confident about our ability to achieve modest cost synergies going forward. Above all I've been impressed by the amount of cross-pollination we have already seen between the two organizations. We've begun a process of having GTECH staff from the United States working with our Italian colleagues on new growth opportunities within Italy, and vice versa.

As just one example, GTECH is testing its self-service instant ticketing dispensing terminals in ten locations around Italy. Player and retailer acceptance of these devices has been quite strong, and sales performance is exceeding our initial expectations. Over the next few months Lottomatica is planning to deploy an additional 100 units for the marketplace. Overall, an excellent example of teamwork for the new organization.

In the meantime, we continue to deliver impressive business results driven by the continued success of our Italian Lottery operation and sustained progress in all key markets.

Year-to-date revenue for the combined company totaled EUR566 million, approximately EUR74 million of which were contributed by GTECH. [inaudible - background noise] the acquisition closed at the end of August. Revenue from the Italian business grew 10% compared to the first nine months of Fiscal 2005. Year-to-date results are a reflection of our substantial operational performance in Italy throughout the calendar year combined with a heavy contribution from GTECH operations for the month of September.

Italian operations experienced continued positive trends in Lottery. In particular, higher than expected growth in instant ticket sales, and continued expansion in Commercial Services. In addition, we recently submitted a tender for a sports betting license in Italy. This is an exciting growth opportunity, and we expect a decision on our application by the first quarter of 2007.

GTECH also made significant progress in achieving its business objectives. In that this is the first time GTECH results are contributing to earnings of the new Lottomatica. I though it would be appropriate to depart a little from our usual presentation and highlight some of the more significant GTECH accomplishments over the first nine months of this calendar year.

GTECH completed the industry's faster ever Lottery system implementation in the State of North Carolina in the United States. In just 58 days we created a statewide online Lottery with more than 5,000 operating terminals. The initial launch was with instant ticket games. Recently, we instituted our third online Lottery game in that state. Sales are meeting expectations and we anticipate North Carolina to take its place as one of the better-performing Lotteries in the United States in the near future.

In the past quarter alone GTECH successfully completed three major Lottery system conversions in the United States. In July, we converted the Washington State Lottery central system to GTECH Enterprise Series, and installed a new communications network, in 3,400 Altura Terminals. One month later --.

[inaudible]

Operator was there a question? I'll continue. One month later we converted the Arizona Lottery. Going live with a new Enterprise Series central system 2,600 Altura Terminals, and a VSAT communications network.

In September we converted the Rhode Island Lottery to our latest version of our Enterprise Series Software platform. We have been productive on the new business front, and our Lottery business world wide as well. The Virginia Lottery selected GTECH to supply a new Lottery central system, terminals, communication network, and ongoing services. And we received contract extensions from Lottery customers in the State of Minnesota, and in Beijing, China.

New games are key to generating new excitement among players and generating incremental Lottery revenue as well. To that end, GTECH launched two new monitor games in Q3 in both Rhode Island and the State of Kansas, both based on our Club Poker product. Kansas Hold 'em is a pilot with 86 retailers in the state of Kansas. With five weeks of sales we're experiencing over 40% incremental sales increases over the Keno platform sales face in that market.

In Rhode Island sales of a similar product, branded Rhody Poker, are equally impressive with nearly 100 retailers averaging EUR400 per retailer per week.

Speaking of new games, GTECH launched a new online game earlier this year in the State of Illinois in the United States. Pick 'n Play is the company's new game category, and concept, designed to combine the appeal of instant gratification, and multiple chances to win with the security and integrity of an online game. Since its launch in March of this year, sales in Illinois have exceeded EUR18 million. Other customers have already shown interest in this new game worldwide.

At the recent Annual Meeting of North American State and Provincial Lotteries Association, or NASPL as it's referred to, we introduced our new state-of-the-art Lottery terminal, which we've named [Altule] to our worldwide and North-American customer base. The reaction was positive, and we anticipate a similar reaction at the upcoming World Lottery Association Meeting in Singapore next week.

We also introduced our latest product in the self-service terminal product family. GameGuard is an automated, instant ticket dispensing machine that attractively dispenses instant ticket games right at the retail check-out or customer service area. GameGuard joins our popular GamePoint product, which is a kiosk-style system completely self-contained, providing a secure, player-friendly alternative to the sale of all Lottery products. Our customers in Rhode Island, Washington, and California are already successfully using the new GamePoint product. Soon we will deploy incremental units in the States of Virginia, Texas, and Arizona.

At the same time our Gaming solutions business made good progress as well. We received a video central system contract from Manitoba Lotteries Corporation in Canada. We also secured our first significant placements of the new WinWave gaming machine platform with Atlantic Lottery Corporation in Canada, and our customer in Sweden, Svenska Spel.

Just last week we announced that we will provide Icelandic Gaming with an additional 300 WinWave products to be installed at retail locations throughout Iceland. This machine sales, the results of our successful pilot program with Icelandic Gaming instituted with our VLT subsidiary Spielo this past summer.

Third quarter also saw a great example of how GTECH's core Lottery technology can be leveraged effectively in the gaming solutions arena. In July, GTECH and Spielo teamed up with the Multi-State Lottery Association in North America, or MUSL as it's referred to, to launch a new product called Ca$hola, the country's first multi-state, multi-vendor video Lottery wide area progressive game. Racinos in Rhode Island, Delaware, and West Virginia are participating with the potential to reach video lottery jackpots of over EUR1.6 million to a single winner. This is the first time a product of this type has been launched in the United States. The first Ca$hola jackpot of more than EUR558,000 was hit this past July at a facility in Rhode Island.

Progressive jackpot is managed by GTECH via our Enterprise Series video system, and linked to more than 250 participating video Lottery terminals. Other vendors are planning to participate in the game in 2007, which will result in increased revenue for GTECH, and most importantly for our customers.

Also in July the New York Lottery held its official grand opening at Tioga Downs racetrack, creating a new venue for Spielo VLTs. We supply video Lottery terminals to this program throughout New York in return for a percentage of net win. Although not part of this quarter's results, it is important to note that Yonkers Raceway, located in close proximity to the New York City population center, recently opened as well with approximately 450 VLTs, all of which were Spielo units.

By January, this number is expected to grow to 1,356 Spielo units with other manufacturers participating in this facility as well. As anticipated, performance of the games at Yonkers has far surpassed that of the other smaller facilities currently operating in the state of New York.

GTECH is also leveraging its commercial service business to expand Lottery products in Chile. As you know, we have been providing bill payment services and pre-paid phone air time in Chile since 2000. In June of 2006, Lotería de Concepción, an operator of commercial Lottery games in Chile, began selling its Lottery tickets on GTECH's Altura terminals at certain of our Commercial Services locations. Now many Chilean Lottery players can perform both their Lottery and Commercial Services transactions all from a single convenient location.

With these and other operational successes, including those you'll be hearing about from Marco in a moment. We have a strong, productive foundation in place to support our continued strategic progress and growth.

Another area of strategic interest is the retail space in Europe. In recent years, GTECH has made major strides in making it easier and more convenient for Lottery players to buy both online and instant Lottery tickets through self-service terminals and machines. We've also helped retailers integrate Lottery products with their other businesses through our Lottery Inside program. We've seen opportunities to deploy these technologies throughout selective markets in Europe to expand our retail presence and help our customers generate incremental sales.

As our new ability to draw upon the operational expertise of Lottomatica has provided us, we've also seen opportunity to aggressively pursue new contracts and the acquisition of Lottery and gaming operators in diverse markets such as Turkey, Russia, and China, where a number of governments are seeking to privatize or at least considering the possible privatization of their Lottery operations. We also expect to see a new RFP in South Korea in the first half of 2007.

Speaking of acquisitions, I'd like to point out that in the midst of our integration with Lottomatica we announced the acquisition of Creative Games International. This transaction which marks our initial entry into the instant ticket printing business, could be completed by the end of November.

As part of our master contract with the Rhode Island Lottery, GTECH officially opened its new US headquarters in the heart of downtown Providence this week. Next week and in the coming days, 500 GTECH employees will re-locate to this office building as part of an incentive agreement that gives GTECH the right to be the exclusive provider of online instant ticket, and selected video lottery central systems and equipment for the Rhode Island Lottery for a 20-year term.

We have also good news to report out of the state of Oregon in the United States. On Wednesday, GTECH was notified by the Oregon Lottery of their intent to negotiate a new long-term online Lottery contract with GTECH. We will report the sedative details of that once contract discussions have been completed.

Finally, there's been a development with GTECH's contract award in New Jersey. The New Jersey Department of Treasury has decided to cancel a protest process by a GTECH competitor and will re-bid the Online Lottery contract as a result of technicalities in the bid process. While we are certainly disappointed with this outcome, we look forward to a new RFP process and remain confident that our upcoming proposal will re-affirm our earlier selection by the State of New Jersey and the New Jersey Lottery. In the meantime, as the incumbent vendor we will continue to operate the Lottery under our existing contract terms.

Before I turn the presentation over to Marco, I'd like to acknowledge our process towards developing and delivering a new business plan for the combined entities. We expect that by early 2007 we will be able to present a comprehensive plan for the business going forward. Obviously, we will report the details of that comprehensive plan once we are complete and can articulate to you in the proper fashion.

And with that I'd like to introduce Marco Sala, who will review the performance of our Italian operations. Marco?

Many thanks Bruce and good afternoon everyone. Today I am going to review the third quarter year-to-date performance with emphasis on the Italian business. We continued to deliver health financial results for nine months of this fiscal year. And our Italian Total Lottery wager grew 20% on a year-to-date basis.

We also experienced continued positive performance in Commercial Services segment. We recorded solid top-line growth in all key verticals with revenues up 10% on a year-to-date basis. Total Italian Lotto Gratta e Vinci wagers increased 20% from 6.5 billion in Quarter 3 last year to 7.7 billion in Quarter 3 '06. And strong Scratch & Win Lottery performance more than offset the slight decrease in Lotto. Lotto game wagers were 5 million, a 9% decline versus 5.5 billion in Quarter 3 last year with Lotto revenues of 322 million versus 347 million in Quarter 3 year-to-date '05.

I would to emphasize our impressive Instant Lottery gross ticket sales growth. 2.6 million versus 0.9 billion in Quarter 3 year-to-date, with continuous growth of price point equal to approximately EUR2.3.

Instant Lottery revenues were 94.4 million versus 35.1 million in Quarter 3 last year, an increase of 159%. We also witnessed substantial growth in Commercial Services, with revenues of 56.1 million, a 20% increase over Quarter 3 year-to-date '05, driven by over 167 million electronic transactions and the new services contribution, for example, stamp duties, which contributed approximately 6 million.

Our Vending Machine segment contributed approximately EUR6 million, with 8,500 machines located at 5,000 point-of-sales. Finally, in the Other Games revenue, which mainly consists of Sports Pool, revenues were 10.9 million compared to 9.7 million in Quarter 3 '05, an increase of 13%.

We experienced overall EBITDA margins of 52% and EBIT margin of 43.3% in line with Quarter 3 year-to-date '05. Please note that the total operating expenses as a percent of revenues were in line with last year's trend. Notwithstanding a decline in Lotto contribution, Lotto margins are higher than Scratch & Win margins.

On the new opportunities front, Lottomatica recently submitted a bid for sports betting and horse betting licenses. And we expect a decision by first quarter of 2007. This is a key opportunity in our future growth strategy, as this market in Italy, has been growing steadily over the last years, in particular sport betting. Overall, horse and sports betting sales in '05 were approximately 3.7 billion and we expect some 10 to 15% growth over the next few years.

The new public tender for sports pool licenses was published on August 28th as anticipated by the [inaudible]. The deadline to present the bids was October 20, 2006. The tender distinguishes between sports betting, horse race betting. The difference between the two tenders is that sports betting includes fix-odd betting with the exception of horse racing.

The expected point-of-sales are, for sports betting, 1,900 stores and for 4,400 corner point-of-sales. Horse racing betting, 500 stores and 9,500 corner point-of-sales. This correlation between -- difference between horse races and sports betting include the collection of bets via Internet, TV and telephone. Lottomatica's goal is to enter the physical network by operating mainly corner point-of-sales which will spread it out in the bet locations, as well as by entering into interactive channels.

Instant and traditional Lottery gross ticket sales continue to experience growth, reaching approximately 2.6 billion compared to approximately 0.9 billion over September 30, 2005. The number of Scratch & Win tickets sold equaled 1,137 million compared to 542 million in the first nine months of last year. The price point grew to approximately EUR2.3 due to the success of the EUR5 ticket, we call Miliardario launched in September '05.

In the first nine months of 2006, four new Scratch & Win games were launched. The EUR2 Medaglia d'Oro linked to the '06 Winter Olympic Games in Turin. The EUR1, Portafortuna, the EUR2, Tutti al Mare and the EUR2, Tuffati nell'oro. As we look at the contribution from the various segments of our businesses we can see that we recorded substantial growth both in Lottery and in Services. Lottery revenues increased by 9% over the same period of last year and Services grew by 20% as previously pointed out. EBITDA increased 8% in both these segments.

To summarize, Italian operations performed year-to-date shows continued growth and we are confident on future, positive neutral from our side. Now Jaymin will discuss the combined entity results.

Thank you very much Marco. Good afternoon everybody and good morning to those of you in North America. Let me start by reminding you that this is the first earnings announcement of the consolidation of results for Lottomatica and GTECH. As such, the results we are reporting include nine months of Italian operations and one month of contribution from GTECH for the year-to-date 2006. In comparison, the results of Fiscal Year 2005 include nine months of operations from standalone Lottomatica.

As Bruce and Marco both highlighted, we experienced overall positive financial results recording top-line growth in all verticals. Total revenues were EUR566 million which represents approximately 26% growth year-over-year. Of that amount, GTECH operations contributed approximately EUR74 million.

Year-to-date EBITDA was approximately EUR269 million, an increase of 14% versus the same period last year. And of that, GTECH operations contributed approximately EUR13 million. On slide 15 it is important to note that the impact of one-time transaction costs, the amortization related to GTECH's step-up and other non-transaction costs, EBITDA for the nine-month period would have been approximately EUR287 million.

This performance level reflects a 22% increase, versus the same period last year. And adjusted EBITDA margins were 51% versus 53% last year.

Turning to EBIT on slide 16, EBIT was approximately EUR200 million, which was broadly in line with the third quarter year-to-date comparison with Fiscal Year 2005. EBIT similarly adjusted would have been approximately EUR232 million representing approximately 17% growth over the same period last year.

Net income for the nine months ended September 30, 2006, was approximately EUR39 million as reported. Again, excluding transaction-related items totaling approximately EUR91 million, net income would have been approximately EUR130 million.

On slide 17 you can see a summary of the reported results of the nine month period. Before I move on, it is important to note that our future reported results will be impacted by the amortization of intangible assets related to the GTECH step-up. For the fourth quarter of 2006, we expect these charges to be approximately EUR23 million, and for the full year 2007 approximately EUR105 million.

Moving on to financial income and charges, we incurred approximately EUR95 million of charges for the GTECH acquisition-related hedging activities. These charges consist of approximately EUR70 million of hedging fees, and EUR25 million of net foreign exchange losses. Interest expense was impacted largely by the interest on the hybrid bonds and the senior credit facilities.

As we look to the relative contribution from the various segments of our business, we can see that the contribution levels remain fairly consistent with the modest increase in gaming revenues period to period. The Lottery business represents approximately 87% of total group revenues at EUR491 million for the period.

On slide 20 you can see that year-to-date net cash flows are impacted by a number of items, including the acquisition of GTECH, GTECH costs -- sorry, the acquisition of GTECH including transaction costs of approximately EUR3.5 billion, and of course, the substantial capital raising activities this year including a rights offering of EUR1.46 billion, the issuance of hybrid bonds, and the raising of senior borrowing at the GTECH level.

At the end of the period cash balances stood at over EUR400 billion and net debt, or net financial position is approximately EUR2.5 billion. Net debt is approximately EUR300 million better than expected. On page 21 you will see a Summarized Balance Sheet indicating that Lottomatica has net invested capital of approximately EUR4.5 billion.

In summary, our performance year-to-date continues to give us confidence about the future of our business. We are experiencing good results that provide a strong foundation from which to continue the progress that both GTECH and Lottomatica have experienced prior to the acquisition. We remain confident that we can unlock the potential of the combined entity. As Bruce noted, we expect to present our business plan in the early part of the first quarter of Fiscal Year 2007.

Thank you very much for your attention, and now we will be happy to entertain any questions that you might have.

The first question is from Mr. Angelo Manca from Schroders.

Yes, hello everybody. Just a question about the situation on Video Lotteries in Italy. If you could give us an update about the business prospects, if you have started roll out of new- generation machines?

And if you could elaborate a little bit about the split of the remaining 11, 12% I think, of wagers which is available to managers of the games going forward. What kind of slice of this 11, 12% GTECH and Lottomatica will be able to catch basically?

The situation regarding the gaming machine business in Italy is the following. We have put 8,500 machines in the marketplace through the operators that are linked to our system. I think that this market will evolve over the time, to elaborate on the perspective, because we waited with -- I mean, a level of attention very high the evolution of this business in terms of our technology. Because what the regulators said, you want to improve, to increase the level of control of this network. It will imply to have a new version of a WB machine that will be more easily and completely controlled by the central system.

In addition to that we are still waiting the regulation of -- further, of the VLT market. I think that this can be considered an opportunity for us and be one of the businesses where we can leverage on the technology of GTECH. If you consider the central system for example for VLTs, GTECH is the leader in US covering 50% of betting market. And I think as soon as this market will be enhanced, in terms of technology, we will be in the position to expand our market share.

Thanks.

It's okay?

The question is from Oleksiy Soroka from BNP.

Yes, good afternoon. I have a couple of quantitative, or one quantitative, one more qualitative question. Can you please share with us your CapEx budget for next year, obviously for the combined business?

And secondly, pardon me, maybe it's a general question, but do you contemplate any acquisitions in the next 12 to 24 months?

Okay, this is Jaymin Patel speaking, I'll take the question on CapEx. At this time we have not provided any guidance on capital expenditures for 2007. What I can tell you, in general terms, is that our maintenance capital spending, which is the capital required for re-bids and extensions runs at approximately 12 to14% of recurring service revenues. So if you assume that recurring service revenues run at EUR1.3 to EUR1.4 billion for the combined group, that will give you a broad perspective as to the level of maintenance capital.

Over and above that, as you might be aware from our history, we typically invest in one to two new contracts per year and that investment can run anywhere from EUR25 to EUR50 million per year. But aside from that we can't be any more specific until we publish the new business plan.

On your second question regarding acquisitions, obviously it's inappropriate for us to speculate about possible business transactions in the future. As I already announced to you, we did a very small acquisition recently in the United States that gave us an entry strategy in the printed products market. We will however continue to maintain and re-affirm our desire to maintain our investment great credit rating. That's something we made clear during our road show and continues to be something that's important to our business worldwide.

Our philosophy regarding the allocation of capital is consistent with our requirements and debt covenants, to carefully evaluate all opportunities on a global scale. We obviously have a global platform with an opportunity-rich environment to determine if incremental value-creating possibilities exist within a proper capital allocation framework.

So that gives you just a little bit of idea. I know it's not a specific answer to your question, but we do not speculate on potential acquisitions in the future.

No, that's quite helpful. The only remark I would make if I may, is that you were referring to "The presentation", during your presentation, and I cannot find that presentation on your website so perhaps going forward you can synchronize it. That would be helpful from our point of view. Thank you very much.

Very good, thank you.

Next question is from Mr. Ian Rennardson from Merrill Lynch.

Good afternoon I have three questions if I may. Number one, in terms of the New Jersey contract, when do you expect the re-bid process to be complete?

Two, if you could just help us a little bit with the Brazil contract that has finished in August I think. What affect would that have on sales and EBITDA?

And then finally, I'd just like a little bit more information on the opportunity in sports betting or fixed-odds betting in Italy. I'm not sure I understood the numbers that Mr. Sala gave us earlier. if we could just go over that again that would be great. Thank you.

Certainly Ian. I'll address the New Jersey question, I'll ask Jaymin to address, to the extent that we have shared public information on Brazil, to give you some clarification regarding that, and Marco can follow-up on sports betting.

We have not seen an RFP issued yet by the State of New Jersey. They have recently given us an 18 month extension. I would expect that they will issue an RFP probably in the next 90 to 120 days, maybe sooner. And then usually you'll have a couple of months response time, this may be a bit abbreviated since they've already gone through this exercise once. So I think in total we would expect the whole bid process to take no more than six months, and conversion time to a new system if -- for whomever is selected to be, roughly 12 months.

Okay.

Jaymin do you want to -- ?

Yes, with respect to your question on Brazil, for the first seven months of calendar year 2006, GTECH recorded revenues of approximately EUR60 million, and the EBITDA on those revenues was at a very high margin, approximately 50%. Those results are not reported in the most recent Lottomatica results because we only have one month of GTECH operations, the month of September. But if you look at GTECH stand-alone, EUR60 million of revenue from Brazil.

Regarding the fixed-odds sport betting, what I can tell you is that there is a bid in this period that enlarge the distribution, the physical distribution of fixed-odds betting, sports betting in Italy. Nowadays there are less than 1,000 concession in the territory, that means shops.

There was later decided to expand the distribution in terms of shops, adding 1,900 point-of-sales. In addition to that, regulated also the possibility to distribute fixed-odds betting also through corners very likely in what -- in the shops that are currently distributing games. I'm saying is better -- is the choice of the concessionaire. You can do in place that are already selling games, or you can put a corner in another point-of-sales. It's clear that by having a quite impressive number of point-of-sales for us, the choice will be mainly to focus our attention in point-of-sales that are already selling games.

Under this respect we decided to participate to the bid, and we bid to the maximum expansion possible of point-of-sales that are 20% of the overall number I gave you before. Now, we will see by the end of the year what will be the result, because this bid is done locally. It means that NCP has a certain number of rights, the bidders give their offer and the regulator will rank the bidders based on the value of their offer. It's clear that we could end up with a number of point-of-sales - we will end up with a number of point-of-sales that we win. And then we enter a completely new segment for this company that is the operator in this field that is the only one we missed to complete at least in Italy, but I know also out of Italy, the complete portfolio in the gaming business.

So we'll have an Italy, Lotteries gaming machines and we enter one of the most growing markets in Italy, but also in internationally where we are not in so far.

Thank you. Can we just confirm that the Italy will move to 1,900 betting shops is that what you were saying? Or an additional 1,900?

Additional.

Additional.

Additional to the current ones.

Okay, thank you very much gentleman.

Next question is from Mr. Peter Morris from Morgan Stanley.

Thank you yes, just some quick questions. In terms of your net financial position, I just want to confirm, I think you're classifying the hybrid bond as debt is that right?

That's correct, yes.

Great. On investment grade, I hate to do this but maybe someone should answer the question, you are investment grade, but you're right at the bottom of investment grade. Are you quite happy to be there, would you like a one-more notch margin for error, or you're indifferent?

We're very comfortable being where we are, we are investment grade credit, BBB- effectively. And the capital structure that we have put together for the new Lottomatica is one that we thought about very carefully and we feel that the capital structure gives us the right balance of financial security and the ability to raise capital in the future for acquisition and growth activity. So it's a very flexible capital structure, so we don't see any great benefit of improving the credit rating by one notch.

I hear you. So I assume you have a pretty -- my only observation would be when you have no margin for error I would assume you have a pretty active dialogue with the agencies just to avoid any misunderstandings?

We have a very active dialogue with the agencies. As I mentioned in my prepared remarks we have EUR400 million of cash on the balance sheet. We have a revolver of $0.5 billion at the GTECH level, and if you look at our long-term plan we're confident that we're going to generate sufficient free cash flow to pay dividends and meet all of our obligations. So we feel we have enough financial flexibility.

Great, then on that subject the -- if you said this then I missed it and I apologize, can you identify what was the reason for the 300 million better than expected?

Excuse me. It was driven by two factors. First of all both companies, GTECH and Lottomatica had a little bit more cash on the balance sheet than expected at closing. And the second factor was that as a result of the strengthening of the Euro between transaction announcement date, which was in January, and the closing date in August, we ended up having to pay less in dollars effectively, given the strength of the Euro for the acquisition and hence we had some additional proceeds from that conversion.

Great, and then one final very small question. In the P&L there's an -- what seems to be a new line which is Capitalization of Internal Construction Costs?

That's simply -- we have a number of internal construction costs relating to software deliveries and product sales which we are required to record as such on the Income Statement. We don't -- and just to be very clear with you we do not capitalize research and development. We expense all those costs directly, but where -- on the GTECH side, where we are working on specific customer deliveries, and we're using -- we're using our own human resources for software deliveries, those costs get capitalized against the cost of a project delivery.

And that can be reasonably lumpy, in the sense that it looks as though that whole number occurred during third quarter '06 and there were no similar numbers anywhere in the first nine months of '05 or the first half of '06.

No, indeed, and the reason for that is because we only have one month of GTECH in the consolidated results. So it -- this is -- this happens at the GTECH level because of the way our business was. We provide technology and services to over 100 customers, whereas Lottomatica operates one large -- one very large business. So going forward, you will see that capitalization of internal labor -- it's strictly a presentational matter. If you go back to our historical result it's always been shown as a net to cost-of-services.

Great, thanks very much.

Next question is from Ms. Laura Pennino from Intermonte.

Hello, I have just three questions. Regarding the sports betting concession bid, can you just give an indication of what would be the amount invested considering both the concession and the equipment for the new betting places?

The second one, if you could comment on the State Council's decision which has forcing Sisal to make a new bid for the Supernalotto concession?

And the third one would be if you can give some indications for the Lotto wager evolution because this year it was quite low with respect to the other years, not withstanding the weekly draw?

Just one moment please Laura, we're just going to confer for one second.

Okay.

Okay, let me answer the three questions. For the first one, we cannot provide you with a figure because we delivered that to the regulator and we will be well known once the envelopes will be opened by the regulator himself.

Regarding the second question was the Supernalotto is the issue that is raised between the regulator and Sisal and we are not involved. It's clear that we will look after quite careful at the situation, but I think before making any comments we have to understand which is the sentence. Because now we have a decision, after I think everybody has to look what is in.

Regarding the evolution of Lotto, I think that now the wagers are quite stable. The wager where -- that we are seeing the lowest in the last quarter is quite stable. I think that over the time can increase slightly because we expect an evolution in late numbers that can help our wager over the next month.

Okay, thank you.

Next question is from Mr. Angelo Manca from Schroders.

Yes sorry, a follow-up question about Video Lotteries in Italy. You currently make 1% of revenues out of wagers. The question is, do you think this will change working together with GTECH in the future in this business? Will you be able to make more than 1%?

The answer -- I realized -- sorry I forgot to answer before, the point is 1%. I think that it will be very much linked to the evolution of our -- the system. I mean as soon as the higher level of technology will be involved, better will be the position of the concessionaire that will invest on this business in order to announce the margins vis-a-vis operators in the marketplace.

If I can give you some perspective internationally, it depends on what business model the regulator chooses. Obviously they've chosen this first half to get this going, it's been very successful. As you're aware they are considering the possibilities of moving towards advanced technology, both on the systems side and on the gaming machine side. What we have seen historically on a world-wide basis is regulators in the advanced technology arena tend to like to have a single system provider for the advanced system technology, usually with data centers either co-located with the regulator or overseen by the regulator. And then the model of distribution of gaming -- advanced technology gaming machines can either be a distributed network involving operators, or in many cases the government agency themselves procures the gaming machines. Those can be wrapped up into an entire package where the operators are providing capital. Obviously, if we were afforded such and opportunity to bid for that business we would be interested.

Typically in that type of arrangement the participation to the technology provider both systems and terminals, if you aggregate those together can range anywhere from , depending on the business conditions, anywhere from 5 to 8% of revenue.

Yes, but just to be sure that it's clear, the regulator has not, so far, put any rules regarding VLTs. What for the time being we can do is to follow the evolution of [AWP]. In that respect the only way to announce margins is to provide the capital with some additional services. We are working on it and I think we can go in that direction. But the change of the market is mainly based on the decisions that the regulator will take.

Thank you very much.

The question is from Ms. Laura Leonardelli from UBS.

Good afternoon, I have some questions on your strategy on -- I'm talking about the slide number seven. Firstly, if you could provide additional details about the current prices of Atronic in commercials casinos, and what's your strategy in terms of geographic expansion?

Then moving on, the Lottery segment. I would like to understand exactly if you have filed a bid for betting -- for the sport betting market concession for the maximum amount so I know that there is a market share limit on that side? So if you could provide additional details on it.

And in addition, a comment about the Italian gaming market, if you perceive any potential sales cannibalization from this new concession? Thinking about the fact that the Lotto performance is slowing while the scratch cards are performing very well, so I do perceive a sort of cannibalization in the different segments.

And finally in terms of the third point, launch of the new monitor games, fresh new context, if you could provide additional details on that? Thanks

Okay, I'll do the best I can. We make have to ask you to take that -- that's a range of many, many questions that could take hours to explain.

Sorry.

That's okay, they're great questions and they're very important. I might as you if you could follow-up with this later because in the event of time I'm just going to give you a couple of high-level points here and then we can follow this in greater detail. I should point out here as well. At some point in the future, probably after the beginning of the year it is our intention to try to set up an analyst conference where we will have all of you together and we can explain many of these business elements in greater detail, since we have these questions often and much of the business is new to you.

Your question regarding commercial casino and Atronic, I should remind you that we have a nominal presence in providing commercial gaming technology today. Bear in mind that the products are the same that you sell to governments or commercial gaming. Atronic is an acquisition that came with the GTECH transaction. We cannot close that transaction until all of our global licensing activity is completed. And I would expect that that's probably the end of next year. We do have regular due diligence update meetings with Atronic, we share technology when we can. But that will not have a meaningful impact on our business until 2008.

In terms of geographic expansion, the list is far too great to go over today. We are actively pursuing a number of Lottery opportunities worldwide. I should point out that the selling cycle for new Lotteries can be very long -- we're quite accustomed to that. We have major market opportunities in key markets such as Russia, China, Vietnam, selected markets in Central America, selected competitive markets in North America as well.

In addition, as I pointed out in my comments, several jurisdictions, worldwide, are least discussing the possibility of privatization. Obviously as the only vertically-integrated company in the world in this space, that could be of interest to us at some point in the future if that evolves. But at this point we remain simply an interested party.

We have a variety of new gaming initiatives underway at all times. We spend more on research and development than all of our competitors combined, annually. A good portion of that goes to developing new content for delivery across many different distribution systems. Europe tends to be the most progressive in that regard and so we're looking for a variety of opportunities to work with our customers to help them drive their business as well.

You also had one question, if you could repeat it, about the Italian gaming market and I'll ask Marco to address that.

Yes, I read the press release by the Italian monopolies are talking about the possibility to bid only on some sport betting locations. And I suspect there is also a market share limit on the total amount of locations, so I was wondering what was your bid on that part of the business?

And then if there is any sales cannibalization on the other gaming segments?

Okay. There is of course, I already mentioned, there is a limit for each bidder, that is 20% of the overall point-of-sales that the regulator indicates as possible rights. And therefore it is clear that we submitted a bid for the maximum allowed. That's the answer.

Regarding cannibalization, that is a good question, but the point is the following. Over the last three years the market doubled. That is a matter of fact. And if you consider, even before, many games were added to the previous one without a sufferance of the pre-existing product. I mean Lotto was not affected by the launch of Superenalotto. If you look at the addition of other businesses such as the gaming machines quite doubled the market but the other games were on track following their own performances.

The only cannibalization we have seen in the marketplace is the cannibalization of the fixed-odd betting vis-a-vis, sports pool, but because of the game was quite old and not in line to satisfy anymore the consumer expectations. I mean it's clear that we have to take into account some cannibalization, some minor cannibalization, but the history of this market has shown that if well positioned by the regulator as it is -- these products cover different customers, different attitudes and the point that they look after is the portfolio management. And I must say that they did it effectively.

Therefore, it's clear that we cannot exclude some minor cannibalization but if we look at the big numbers involved, I can say that there was so far very few cannibalization.

We can confirm that as well, based on international experience in many, many markets. The variety of different gaming types have different market segments based on propensity to consume and the type of product delivered. And we have generally seen very little cannibalization of the core product line such as Lotto and Scratch & Win from other game types such as video lottery and sports betting.

Sorry. Don't you justify part of the slowing sales in the Lotto category because of other segments more than doubled during the last one year and a half?

I guess that the going down of Lotto is mainly due to the production of the total [inaudible - background noise], then the enlargement of the other -- the introduction of the other products that were launched now also before without it affecting Lotto.

I think that in this period of time we are experiencing soft performance on Lotto mainly due to that, and there is in the last month a suffering as far as the late numbers are concerned. That's the point. I think as it happened also other times it can be back. It's clear that we will monitor with a lot of attention a possible cannibalization.

And after that, if I have to assess, the performance on Lotto, taking into account the two things I mentioned I think that the impact of the third drawing, that was exactly introduced by the regulator in order to reduce somehow the dependence of the consumer on late numbers that sometime were too much, and created problems. Also from the social responsibility that you have to look after. But I think at the end of the day that it has been the most single variable, somehow affecting our performance nowadays.

If I can just add one comment on a Atronic, I know Bruce talked about this earlier but I want to reiterate the point because it's very important. A number of analysts have reflected some level of revenue and contribution from Atronic in their 2007 full costs. And as Bruce mentioned, at this point, it's unlikely, very unlikely that we're going to close the Atronic deal during 2007. It's the licensing delays we're experiencing, so I think you can just make a note of that point.

Yes, and be aware that the licensing delays are not related to any issues, they're simply related to the fact that we've had, relative to where GTECH was, we've had a change in ownership obviously, with our new ownership group at Lottomatica. That requires all of the regulators to continue licensing [inaudible - background noise], and for a period of time, while they we're waiting, they stopped working. So that just means that we're going to have to take a little bit longer before we will be officially allowed to close that transaction and do business in all our existing markets. Operator, any more questions?

Next question is from Ms. [Alisa Johnson].

Yes, Hi. Good afternoon. Just a very quick question on the clarification on the Superenalotto. I couldn't quite understand what you said in terms of obviously, the court ruling. Is this something you could bid for, you will bid for, you don't know whether you'll bid for, I'm sort of confused?

I think, candidly, it's quite premature for us to speculate. Obviously, the court has just recently issued a ruling. We would expect the regulator will, as one would anticipate, will prudently evaluate the rulings of court -- the written addition. A hearing result has not been issued yet so it's difficult for anyone, certainly for a very a results-oriented regulator to understand exactly what that means and therefore, how they can analyze that, so we really have to wait.

I am confident that the regulator will act prudently and appropriately, to determine what actions will take place, but we can't speculate, nor should we, on what those may be or what we might do. We simply have to wait.

Okay, but there's nothing -- is there anything that would stop you because you ran the Lotto franchise, so is there sort of one operator of Superenalotto or if it because a multi-concession franchise? Is there anything that would stop you or could stop you bidding for that? Did you --?

Again, please don't think that we're trying to be evasive, we're not, but our experience worldwide, and the same is true here in Italy, the regulator would decide what terms and conditions an RFP would take. We can't possible know what that might be and it would be inappropriate for us to speculate.

Right, but just because I think my question was because you run the --. Just trying to understand how it might work in Italy in terms of competition issues, just because you run the Lotto franchise, there'd be nothing to stop you, potentially running the Superenalotto franchise, or is there already something enshrined in regulation that means one person can't run both?

I think that what Bruce is saying that we're not going to make any comments on this point because the RFP that might ensue, as a result of the regulator's decision, may contain all kinds of provisions that it's inappropriate for us to make any comments right now.

We cannot. Even the regulator has to look at the notification of the sentence before taking any action for doing anything. Once again, we have to wait. We have no any possibility to make any comment.

As we would, anywhere in the world, for any type of business RFP where we have particular expertise, we will wait for the RFP to determine, under what conditions we can or cannot bid and then determine if it's appropriate to do so.

Oh, okay so effectively, the regulator can basically create the framework around the product as they go?

That's normal in all markets around the world. Yes, it's certainly the case here in Italy as well.

Okay. Understood. Thanks very much.

You're quite welcome.

Next question is from Mr. Domenico Ghilotti from Euromobiliare.

Good afternoon. I've just two questions left. The first is if you could provide some indication on the pro forma nine months results, do you have any to share with us? The second question is related to the Lotto performance. You said that the late numbers could have an impact on the wagers but at the beginning of the year we showed no impact at all despite very late numbers and so why do you think that now, late numbers could have any factor on the collection?

I'll ask Marco to handle the second-part of your question first and then Jaymin can provide some high-level comments on the first question.

Regarding Lotto wager, you see the performance the first part of the question regarding the performance, is very much linked to the first quarter where we compare beginning this year, a performance [inaudible - background noise] last year. In fact, while our current performance, 50% less, was registered in the first quarter.

Getting back to the why we consider that late number, because you can see that nowadays the late numbers are very, very low. And I think that under certain respects, and we will check of course, we carefully look after this point, that over the time if we will have some late numbers growing, very likely as some customers can be back playing the late over the next month.

For the time being, they are very weak, but they played the late numbers for many years. I can understand that they now they have slowing down but we can expect that they can be back, if some late number will achieve a level of numbers of growing that is interesting enough to be followed by customers.

Okay. With respect to the nine months pro forma results, it's obviously very hard to provide pro forma information so I'll give you some round numbers that might be helpful to you. If you look at the third quarter year-to-date for 2006, the combined revenues for nine months would have been approximately EUR1.27 billion, compared to EUR1.228 billion for last year.

At the EBITDA level, if you adjust for one-time transaction costs, EBITDA would have been in the order of 555 to EUR560 million compared to about 535 last year. Thank you.

Next question is from Ian Rennardson from Merrill Lynch.

Just a follow-up question, if you may. I'm looking forward to the business plan when you present it early in the New Year, but I just wondered why it had been delayed two times so far? Are you experiencing some difficulties or is it just something else?

No difficulties Ian. Bear in mind that when we originally did our road show we anticipated a closing date that would be as early as the end of June. As a result of the regulatory reviews conducted around the world, our closing date was not until the end of August. We could not begin to process the integrated business planning until after closing, so that by itself simply delayed it a little bit.

We're also, as you can expect, in the middle of a very comprehensive review of all business lines that are competitive conditions, all strategic opportunities. We're doing that at the same time, we're doing budgets in a very detailed fashion for 2007 and we're doing all of that very carefully and prudently with the De Agostini Group. So I'm quite confident that early in the new year we will have a very detailed business plan and be able to elaborate with great specificity what our goals and objectives are at that time. It's premature to do that now though, we're not quite ready.

Okay. Appreciate that. Thank you.

Certainly.

Next question is from Mr. Mauro Baragiola from Citigroup.

Ciao everybody. Very quick questions. The first one is should we expect some charges in Q4 for either Brazil or for the deal?

The second one is, coming back to the previous question on gaming machines, if I remember correctly GTECH has already a small operation in Italy, so I wonder which kind of fees and wagers was cashed in GTECH from that operation?

And assuming a 5 to 8% wager [FE] in the future, which kind of CapEx or working capital do you expect? And the last two questions are, first, if you can provide some guidance on the net debt for year end? And last, but not least if you are at the -- about the introduction of [Lotto Sentanio]? Thank you.

I'll handle those as best I can. There will probably be a few charges in the fourth quarter. I don't know exactly how much yet, but there will probably be some charges at both the GTECH and Lottomatica levels. We have, I think, picked up the majority, the overwhelming majority of transactions off severance costs and so on, that you can think of as part of the transaction, in the third quarter. But certainly there will be some minor spillover in Q4.

I'm not going to -- I might answer your questions in the order that you asked them, but jumping around a bit. You asked for guidance for the full year, we're not providing any guidance at this time. As I think we all mentioned in our prepared remarks, we're confident that the trend of the business is continuing to be strong, so you shouldn't expect any material deviation from [inaudible - microphone inaccessible].

With respect to the net financial position, I want to reiterate this because it's very important, the EUR2.5 billion that we are showing for the third quarter is, I think, a lot lower than people were expecting and I don't expect that to change materially by the end of the year.

You then asked a question about the introduction of a new game?

I'll speak to that one. If I understand your other questions, I'll kind of lump a couple together. You were asking about VLTs and what CapEx might be with a 5 to 8% possible participation rate. It's impossible for us to answer that. Obviously, all markets are different. Here in Italy, we don't have any clarity, at this point on how the market might evolve from its current state so it's really premature to speculate in that regard.

I can tell you from our other experience in other markets, the participation business where you provide the gaming [machines] and you provide the systems in some competitive fashion, is a business that is very good and generally speaking will have above-average margins. But it can be done differently in many different places. Until -- again, until we would have greater specificity on what might be possible, it's impossible to speculate and I would discourage you from trying to come up with a what-if scenario on that. It's a bit premature at this time.

Just going back to your question Mauro on GTECH former concessionaire contract for the VLT business in Italy, we are close to finalizing the sale of that business as was required as part of this transaction so we will no longer have that business going forward. A fairly small business for us, which is now being sold.

Okay. Regarding Lotto Sentanio, we launched the product and nowadays we are reaching something between 7 and 8 million per month. I think that it contributed to the advertising and the promotions we did to increase the wager in the last three months vis-a-vis the previous one. And before, I mean, it is contributing a little bit in recovering the wager over the last three months.

Okay. Thank you.

The next question is from Ms. Laura Leonardelli from UBS.

I have two additional questions on your business. Looking at the Italian scratch cards, have you decided about the potential launch of scratch cards at higher prices? And the last question is GTECH sales performance year-to-date, if you could provide an indication about the sales performance in domestic lotteries, please?

I'm not sure that we caught the - your second question that well.

Looking at the GTECH, all the classification by business. I'm talking about the domestic lotteries. We don't have visibility on the year-to-date sales performance. I know that maybe you don't have the precise numbers, but if you could provide and indication about trading conditions in the US?

Regarding the first question, I -- first of all I have to say, that we are impressed by the performance of [inaudible - background noise]. We have had some discussion before launching it and it performed better than any expectations and before that moved that the price point, also impacting very positively on our profitability. It is clear now we are thinking about higher prices. We are thinking about EUR10, but as soon as we will get the green light from the regulator, that we have not so far obtained, we are still discussing on that, but is a thought that we have already shared with the regulator. And it is up to them to deciding if we are going to launch or not.

Yes, with respect with GTECH's US Service's business, for the first nine months of the year, the business is performing well. We have a number of new game launches that are performing fairly well. The level of jackpot activity in this year is a bit lower than last year. The first half was very strong but in the third quarter jackpot activity was a bit lower that the third quarter of last year. What we can do is, we can provide you with our US Services revenue, which haven't got to hand, but we can always provide that to you separately.

Okay.

Operator, we have time for two more questions.

There are no more questions at the moment. [OPERATOR INSTRUCTIONS]. No more questions.

All right. Well, if there are no further questions, I'd like to wrap up our call today with a brief summary.

As we move further into our full, first quarter of combined operations, we're pleased with our business performance to date. We're encouraged by the pace of our integration. We remain enthusiastic about our enhanced total prospects for the long-term.

We will be back in touch in March to review our full year results. Until then, please accept our best wishes for a wonderful holiday season and a Happy New Year from all of us at the Lottomatica Group.