International Game Technology PLC (IGT) 2006 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Lottomatica conference call [does] fiscal year 2006 results. [OPERATOR INSTRUCTIONS]

The meeting will be chaired by Bruce Turner, CEO of Lottomatica group, together with Marco Sala, Managing Director of Lottomatica for the Italian Operations; Jaymin Patel, CFO of Lottomatica Group. At the end of the conference call a recording will be available on Lottomatica's website.

Thank you, operator. Good afternoon for everyone, thanks for joining us. I'm here with two of my colleagues -- Managing Director for Italian Operations, Marco Sala, and our Chief Financial Officer, Jaymin Patel.

After I have provided you with my perspective on the fourth quarter, the overall year, and what lies ahead, Marco will provide a review of the recent performance of our Italian Operations, and Jaymin will review the numbers.

In that many of you participated in the extensive road show we just completed to unveil our three year strategic plan, it is our intention to keep today's call relatively brief. I won't review all the elements of our strategic plan for you again, but I do want to underscore a fundamental message.

Our confidence in 2007 and beyond remains high, and we are quite excited about the long term growth prospects of our business. We are investing our collective time, energy, and resources, to ensure that we maintain and grow our leadership position in the government sponsored gaming markets worldwide, which is the heritage of Lottomatica and GTECH.

As we reported to you during the third quarter call, the integration of Lottomatica and GTECH Operations is proceeding well. We have aligned the organizations' internal policies and reporting structures. This is a considerable increasing amount of operational interaction occurring today between the organizations worldwide.

We recently hosted, as an example, our annual management kickoff meeting for 2007, during which the top leadership of both companies assembled in Rhode Island to discuss our collective plans for the upcoming years and beyond. The management team, collectively, came away greatly enthused and energized by the interaction, collaboration and potential that they all recognize as the new Lottomatica.

We are clearly seeing the benefits of the merger coming to fruition as we begin to leverage Lottomatica's operational expertise in several areas worldwide, including privatization plans in the U.S. market, and operator markets in selected regions worldwide. I'll cover that particular topic and opportunity set in more detail in just a moment.

We are also utilizing our GTECH subsidiary operational expertise to supplement growth across the Italian platform, as we look to provide a broader array of technology, content and distribution products, with our Italian World Showcase. A trial of our instant ticket vending machines in Italy, as an example, or ITVMs as they are known, is very encouraging, and we look to significantly expand that program in the near future.

GTECH's [Altura] point of sale terminal is being configured for use as the principal point of sale device in the sports betting network that is currently being implemented. These are but two examples. There are many more.

Turning to 2006 financial highlights for a moment. Lottomatica finished a historic year and delivered solid financial results for the fourth quarter across all three key verticals. Full year revenue for the combined Lottomatica GTECH operations were EUR939 million, which included 12 months of Lottomatica Italian Operations and four months of our International Operations within the GTECH subsidiary, which represented EUR289 million.

Italian lottery sales experienced healthy grow of approximately 19%, totaling EUR10.6 billion, up from EUR8.9 billion in 2005. We are particularly encouraging by the develop of the Italian Scratch & Win or Instants market, which Marco will describe in more detail as part of this presentation.

Our full year EBITDA was EUR361 million, which represents a 37% increase over 2005. Net income was approximately EUR1 million, including approximately EUR131 million after tax in acquisition related transaction cost associated with the GTECH transaction.

Before I detail some of the major opportunities in the near- and midterm, I'd like to review some of the highlights of 2006, with a particular focus on some of the GTECH developments which would be newer to many of you. By doing so, I hope to provide you a better inside as to the types of business developments and announcements that you can expect will normally occur during the course of any year.

To begin, in the Italian market we experienced solid performance in all verticals, particularly strong performance in Scratch & Win segment. Overall market share increased by 300 basis points, to 84% in 2005. Commercial services continued healthy growth, 16%. And we secured a favorable initial position as an outcome of the recent sports betting license procurement process.

In terms of traditional online lottery space, in our international division with GTECH we added new contracts in the states of North Carolina and Virginia in the U.S., and the country of Guatemala. We successfully defended existing contracts as part of traditional rebids in Oregon and Singapore.

And we recently received contract extensions in Minnesota; Trinidad and Tobago; Beijing, China; and Kentucky. Also, New York, one of our largest world wide contracts, recently announced that it will extend our contract for three more years at an estimated value, in aggregate, of EUR150 million.

New York is recognized as one of the top lottery jurisdictions worldwide, so that extension is particularly meaningful to us from a financial and industry perspective. We look forward to the opportunity to demonstrate a range of new solutions to the New York lottery in the coming years of this extension.

GTECH also had success incrementally in the gaming solutions area. A new gaming machines system contract was awarded to us in the Canadian province of Manitoba, and we deployed a material gaming machine monitoring system in Pennsylvania that will become the largest of its kind in the world. And we successfully introduced our new [Winwade] gaming product in Sweden, Iceland and various provinces in Atlantic Canada to outstanding success.

Game content is also a significant driver of same store sales, a critical component of long term growth. To that end we launched a variety of lottery titles under our Pick & Play suite of games. Pick & Play tickets branded as Deal or No Deal and 1 versus 100 were introduced in Illinois, and quickly became top performing games in that market niche on the back of those very popular brands.

The EuroMillions game continues to perform well in the selected jurisdictions in Europe which participate, with record level jackpots occurring on a more regular basis. We expect that game to continue to expand grow with new jurisdictions over time that will further supplement game performance.

And in another example of the benefits of the merger with Lottomatica, we jointly developed the highly successful [Miliardo] game, and Scratch & Win here in Italy. And as you will hear from Marco, the results so far are quite good.

I recognize that on their own, few of these developments may garner headlines, and we do not put press releases out in each case that we perform these activities. However, when these activities are combined selectively in our various points of opportunity worldwide, they demonstrate real momentum and tell the story of how we create value through same store sales growth worldwide. That is off of a stable and recurring base with tremendous upside potential.

Now I'd like to look to the future and review some potential business developments that we are pursuing in the near- to midterm. As many of you know, news coverage of potential lottery privatizations in the United States is now occurring on a daily basis. I trust that you appreciate we are now entering the beginning of the legislative cycle for state governments in the U.S. That cycle normally runs from January through June for most states each year.

It has been widely reported, and continues to be reported, that state governments in the U.S. are in need, in some cases a quite critical need, for new sources of revenue. Thus, the privatization of government assets of many types, including the lottery, represent a new political phenomena in the United States which is getting a high level of scrutiny and, understandably, generating considerable political debate.

There is also a highly active private equity sector promoting these types of deals with states in the U.S. and beginning to consider those abroad. It is important to note that the debate on this topic is just beginning. Some privatization proposals are proceeding with more structure than others. The U.S. states of Indiana and Illinois have taken on prominent financial advisors and sought requests for qualifications through a formal submission process.

GTECH is the incumbent online vendor in Illinois. Lottomatica, through its GTECH subsidiary, responded to these requests along with a major global financial institution that is active in the infrastructure privatization market. While these efforts are moving forward, more legislative activity is required for these proposals to become formal opportunities.

We expect the political debate and discussion around these topics to be quite robust in the next several months. As an example, the governor of Texas, where GTECH is currently the incumbent online vendor, included the privatization of the lottery as a focal point in his annual state of the state speech and has begun various campaign-like activities to gain its approval.

He too has taken on well recognized global financial advisors, but there is not yet a formal process in place to respond to the proposal he has made to the people in the state of Texas. Legislative action for this proposal would be required in Texas, and potentially voter approval thereafter. We are obviously an interested party.

The state of New Jersey has done a formal review of potential state assets for privatization, of which the lottery was a prominent recommendation. Although he has not proposed privatization for this year's budget of the lottery, the New Jersey government - governor has acknowledged that privatizations should be a part of the long term solution to the state of New Jersey's revenue needs, and GTECH as many of you know, is the incumbent online vendor in the state of New Jersey.

As we pursue the privatization opportunities that may come to be in the United States, there are two points that are important in assessing our potential success. The operational expertise that Lottomatica brings to these opportunities is a real distinction for us in this market, and we have aligned ourselves with a formidable and innovative financial partner to make certain that we have the necessary capital and expertise to meet the revenue expectations of the states that are looking to consider privatization seriously.

We strongly believe that we will be able to offer a superior privatization proposal, should the political processes currently underway produce formal opportunities in the coming months.

On other fronts, we are participating in the consortium lead by Camelot that is seeking the next license to operate the lottery in the United Kingdom. Submissions were made recently by Camelot and only one other competitor, Sugal & Damani, a lottery operator in India. As you may recall, GTECH has been a supplier to Camelot since the inception of the lottery in the United Kingdom in 1994.

The rules of the UK procurement prohibit us from discussing it in any detailed manner, but I will say that we think Camelot's proposal for the next license is as innovative and well thought out as any we've seen worldwide. We are confident that it will be perceived as the best way to raise the greatest amount of money for good causes in the UK, which is a key test for all proposals.

Should Camelot be successful, there's also a good potential for Lottomatica to significantly expand our role as a product and service provider to their consortium. We anticipate a decision in the UK is likely by June of this year.

In the Instant space, or Scratch & Win as it is referred to in Italy, we are beginning to seek opportunities with our Creative Games International subsidiary. There have been indications of interest and momentum is building in jurisdictions worldwide. As you will recall during our third quarter conference call, we have just begun our entry into the Instant ticket printing business, with the acquisition of CGI. It is a first step for us as we look for ways to gain size and scale in that particular space.

We believe, incrementally, that there are substantial growth opportunities in the Italian Scratch & Win market. Player interest remains strong, particularly for games like [Miliardo], that offers higher denominations per game play.

As Marco will point out, the introduction of Scratch & Win games has benefited from increased marketing and advertising support. It is likely to be a steady contributor to our success, even if the growth begins to moderate slightly, which would be expected considering what has been an exceptional launch.

As noted in our three year plan, sports betting is a priority area of focus for us worldwide. We intend to use the launch of our sports betting platform in Italy as a spring board into the global government-sponsored sports betting arena. Marco will describe the progress we have made to date in implementing the program here in Italy.

From my perspective, it is but another example of the benefits of the new Lottomatica. There has been a significant internal collaboration to develop the technological solutions, products and services will we need to be successful here in Italy.

The recent EU court ruling concerning legislation that preceded the current 2006 regulations under which our sports betting licenses were issued came out this week. In our view, the ruling will not impact the current activities or timeline for implementation that we have talked to you about in the past. In the near term, we anticipate incremental sports betting opportunities in Taiwan, Spain, and Turkey.

I'd like to mention Turkey for a minute, specifically. In Turkey, GTECH successfully challenged the conduct of the procurement for the sports betting license that has been in place. In a unanimous court decision, a panel of the Turkish appellate judges nullified the current license due to irregularities in the award. The situation is quite fluid, but we expect the license to be rebid, perhaps as early as next month. And I can assure you, we will be a bidder.

Efforts are underway to temporarily keep the games operating with current vendor. We continue to monitor that situation closely, and we will not hesitate to seek judicial relief if we believe the decision of the court is not being properly observed or our rights are not being respected. Obviously it is an area of great interest to us, and a part of the world that we would like an expanded presence in.

Looking at the traditional online lottery space, there are good opportunities to expand our global base by competing for contracts currently held by some of our competitors in markets such as Pennsylvania, South Carolina in the United States, and South Korea, internationally.

The Netherlands is realigning and combining two existing lottery operations, one of whom is a current customer, into a single contract for which we will compete in the near future. We also expect to see incremental procurements in Russia, Korea, and potentially other new jurisdictions in Asia, that have long been considering lottery launches.

In the gaming solutions arena there is the potential for continued growth in the Italian gaming machine market through consolidation of operators and the expansion of games which would require regulatory approval. In Sweden there is a market realignment underway that will provide opportunity for us to compete for additional machine sales from our [Spilo] subsidiary.

GTECH has responded to the - to an invitation to tender in Sweden, from [Sven Suvsvel] for a server based gaming solution with options for machines and content. We have submitted and responded to that request for proposal, and a decision on that bid is likely in the next several months.

And our customer in Poland, [Total Eventor Sportovi] is diligently working on getting the necessary approvals to launch a VLT program for which we expect to see an RFP in the second half of 2007.

And the iconic transaction continues to move forward toward a late 2007 closing. The trigger of that foreclosing is licensing, which we expect to be completed for Lottomatica and all necessary individuals by the end of this year.

We also see opportunity in the commercial services space. I want to reiterate what we outlined for you in the road show recently. That our objective in this space is lottery overlay model, in which we add complementary services products in jurisdictions where we have existing lottery operations over the existing infrastructure. It is not our intention to pursue standalone commercial services opportunities worldwide.

In summary, we are clearly seeing the benefit of the merged organization. Our performance in 2006 reflects an excellent foundation for continued growth in 2007. As I stated at the outset of our call, our confidence in 2007 and beyond is high. There are excellent opportunities for growth. We have developed a comprehensive and achievable plan to meet our objectives, and we're very excited about the long term growth prospects world wide of our collective businesses.

I'd now like to turn the call over to Marco and Jaymin for their respective comments.

Many thanks, Bruce, and good afternoon to everyone. Our results for the Italian business continues to exceed expectations as driven by Instant lotteries business where Italy is in the process of becoming one of the strongest markets in Europe since the launch in '04.

Overall with [a little] matters strong Europe performance in 2006. For our Italian operations total in operating wages grew 19% year-over-year, and we experienced continued growth in commercial services segment. With our recent sport betting award we look forward to launching and developing this business in the following months.

Taking a look at financial side of the Italian Operation, we recorded solid top line growth in all key verticals, with revenues at EUR650 million, up 11.5% on year-to-date basis. In our core lottery business we continue to grow in instant tickets side of the business with introduction of new Scratch & Win games.

And the new trend in Europe instant tickets which was developed with our [mentorix] from GTECH in January of this year has been very well received by our players.

We also announced our lotto game with the launch of new [Instantlot]. The total Italian lotto Scratch & Win wages increased 19% from EUR8.9 billion in 2005 to EUR10.6 billion in 2006 as a strong Scratch & Win lottery performance more than offset the slight decrease in lot.

We have been [pinned] the proposition in the Italian lottery market where we must stand a 54% market share. Lotto game wages were EUR6.6 billion, a 9.9% decline compared to EUR7.3 billion in 2005. With lotto revenues of EUR406 million compared to [EUR432 million] in 2005. Note that the decrease in lotto revenues was much less at the six point percent due to the stabilizing aspect of the coverage.

It is important to emphasize our impressive instant lottery gross ticket sales growth, which has more than doubled year-over-year, from EUR1.5 billion in 2005 to EUR3.9 billion in 2006. A continuous growth of prize total.

As Bruce pointed out earlier, the introduction of Scratch & Win games has benefited from increased marketing and advertising effort. Instant and traditional lottery revenues for the year were EUR139 million versus the 55 million in 2005, an increase of 153%.

We also experienced the substantial growth in commercial services, with revenues of EUR75 million, a 16% increase over our 2005 result, driven primarily by more than 329 million [accrolling] transaction, approximately 273 million in 2005, and new services contribution, for example, [Sterbulis].

Our gaming machine segment contributed approximately EUR8 million, with the [tech] machines that detect 5,000 [points]. We experienced overall EBITDA as EUR278 million from EUR254 million in 2005, and EBIT was EUR221 million versus EUR212 million last year. EBITDA [markings] for 2006 were 43%, with EBIT margins of 34%.

On the new opportunities front, we were successful in winning new sport endorsed betting licenses in Italy and now starting in December of last year. The [total] people we win at the majority of licenses available, we also secured the so-called [Karma] distribution market for more widely known shopping shop centers in the leisure [facility].

We are all the biggest in the sport betting shopping shop segment with 1,137 [runs] and 19% of location wins. Wins with EBITDA versus EBITDA of 120%. [GBP40 million] were payment [share] of possible 45%. Let me provide you with a general review on the Italian betting market.

[Revenues] in the sport betting sales in 2006 were approximately EUR5.6 billion, but it is the sport betting segment that is growing at a double digit pace. The compounded annual growth rate of approximately [EUR68 million] 2001 and 2006. While the betting segment that is stable, we expect the strong betting market to double in the next three years to more than EUR5 billion.

As we discussed in our 2007/2009 business plan presentation, our goal is to reach approximately 51st for the shopping shop segment market share by 2009. We are [representing] approximately 85 to EUR90 million, including EUR55 million [clocked] by such transitions.

We view these opportunities our future growth strategy as it is allows us to leverage our distribution to network to provide the betting from. And we have already secured 600 of the 1,144 sports betting locations awarded to us as we move toward commencing operations during the third quarter of the year.

The following slide [shows] our lottery instant growth and traditional lottery gross ticket sales performance. As I said earlier, lots of [wages] were EUR6.6 billion versus EUR7.3 billion in 2005. The [extrapolate] numbers was due mainly to the introduction of the third little growing that significantly impacted the late number's wages creating an increase an interest and a little embarking [problems] among the players. To this end we continue to work on lotto games, involved in promoting consumer loyalty and in new product innovation.

Our instant lottery performance throughout 2006 was stellar. Such tremendous performance of instant tickets including traditional lotteries resulted in sales of approximately EUR4 billion. Scratch & Win tickets generated a total sales of EUR3.8 billion, compared to sales of approximately EUR1.5 billion in 2005. Year-over-year total gross sales were approximately 2.6 times 2005 sales.

The price on [view] was approximately EUR2.4, mainly driven by the success of the EUR5 ticket [Miliardo] launched in September, 2005, which, alone, generated new sales of EUR2 billion in 2006. As we look at the contribution from the various segments of our business, we can see that during the quarter substantial growth both in lottery and commercial services.

Lottery revenues comprised of lottos such as [win and instant] games were up 11% from EUR512 million in 2005 to EUR566 million in 2006. Commercial services revenues increased by 16%. EBITDA increased respectively 9% in lottery and 11% in commercial services.

Note that EBITDA is before allocated [over rate] and lottery EBITDA for 2006 does not include transaction costs related - transaction related costs and had one time charges.

Taking a brief look at the current DSO format setting date, lotto wages for the month of January and February 2007 experienced a decline over the same period of last year due to a strong performance in later numbers during the month of January and February 2006.

Instant lottery wages from January and February were impressive, with sales surpassing EUR700 million for the month of January alone, due in large part to the introduction of the new EUR10 instant lottery ticket launched in January this year.

Based upon the initial result for special winnings 2007, the [lotto] means that instant sales will be approximately EUR6 billion this year.

In summary, we are very confident that the Italian Operations performance in 2006 will continue in 2007 as well. Now Jaymin Patel will discuss [inaudible - background noise].

Okay, thank you very much Marco, and good afternoon, everybody. Welcome to our earnings results conference call. As you all know, this earnings announcement includes the combined results of Lottomatica group, including 12 months of Italy Operations and four months of contribution from GTECH to 2006. In comparison, the results of fiscal year 2005 include 12 months of Italy stand-alone operations.

I am pleased to report that we experienced overall positive top line growth in all of our key businesses. As Bruce mentioned, total revenues were EUR939 million, representing a 61% growth rate year-over-year. Looking at Italy, revenues were EUR650 million, and GTECH contributed approximately EUR289 billion in the four month period.

Full year EBITDA was approximately EUR361 million, an increase of approximately 37% versus 2005. The EBITDA contribution from GTECH for the four month period was approximately EUR83 billion.

On the following slide, we have adjusted EBITDA for certain transactions and other costs. To exclude these items from EBITDA for 2006 the result would have been approximately EUR409 billion, an increase of 55% versus fiscal year 2005. With respect to margins, EBITDA margins as adjusted would have been approximately 44%, broadly in line with 2005.

Reported EBIT for 2006 was approximately EUR219, representing an increase of approximately 3% versus 2005. EBIT as adjusted for the impact of GTECH related transactions and other costs, and the purchase price amortization of EUR38 million, would have been approximately EUR304 million, representing a considerable growth rate of over 43% versus the same period last year.

Net income for 2006 was approximately EUR800,000, including approximately EUR131 million of after tax transaction related and other items. Again, excluding such items, net income for the period would have been approximately EUR132 million after tax compared to approximately EUR114 million for fiscal year 2005.

On Page 18 you can see a summary of the [Staca 3] results for the full year. Before I move on, I would like to again pull your attention to the impact of the purchase price amortization intangibles related to GTECH's assets equal to EUR38 million for the four month period to date the acquisition.

Our future reported results will continue to be impacted by this non-cash expense. For 2007 we have estimated the expense capitalization to be in the range of 100 to EUR110 billion.

Moving on to financial income and charges. On a net basis, we incurred approximately EUR185 million of financial charges. Charges for the GTECH acquisition related hedging activities were approximately EUR70 million and EUR51 million of net foreign exchange losses. The increase in interest expense of EUR78 million was driven by interest on the capital securities and senior credit facilities.

As we look at the relative contribution from the various segments of our business, we can see that the contribution levels remain fairly consistent with a modest increase in gaming revenues due to the GTECH contribution.

The lottery group business represents approximately 87% of total group revenues, at EUR819 million for the period. Year-to-date net cash flows are impacted by a number of items. Number one, the acquisition of GTECH, including transaction costs, of approximately EUR3.3 billion net for cash acquired.

And secondly, of course, capital raising activities, including a write offering of EUR1.46 billion and the issuance of hybrid bonds and senior borrowings. Our net financial position at the end of the period was approximately EUR2.5 billion.

On Page 23 you will see a summarized balance sheet indicating that Lottomatica has net invested capital of approximately EUR4.4 billion, and shareholder's equity equal to EUR1.9 billion. At the end of the period, cash balances were slightly below EUR400 million, and gross debt was EUR2.87 billion. Again, our net financial position, or net debt, was approximately EUR2.5 billion at the period end.

In summary, as you will appreciate, our results for 2006 include a number of complexities due to the GTECH acquisition. The underlying performance of our business, both in Italy and worldwide with GTECH remains strong. Our performance in 2006 combined with positive trading results in the early part of the first quarter of 2007 give us confidence in our 2007 outlook and beyond.

As a short update for you on first quarter business developments, I am pleased to confirm that our business continues to perform well. As Marco mentioned, our Italian instant ticket performance for the first two months of 2007 is quite impressive, with gross sales of approximately EUR1.4 billion, versus EUR540 million in the same period last year.

Lotto wages for the first two months of 2007 decreased compared to the same period last year, due to the strong performance in late numbers during the month of January, 2006.

Overall, Italian lottery sales for the first two months of 2007 increased some 30% versus the same period last year. Based upon the initial results of Scratch & Win in 2007, we now believe that instant sales will be approximately EUR6 billion this year.

At this juncture, we are not changing our 2007 earnings guidance, as we plan to invest some of the expected incremental contributions from the instant ticket business in areas that will drive future growth, including product development and innovation.

In closing, as Bruce said, we remain positive about the near and long term outlook of the business, and we remain confident that we can unlock the potential of the [commod] entity. Thank you very much, and now we will be happy to take your questions.

[OPERATOR INSTRUCTIONS] The first question is from Mauro Baragiola of Citigroup.

Hi, hello everybody. A couple of question. Can you please provide us - at least enlighten me to the - of the pro forma numbers for 2006, because I mean compare the four month, plus the Italian to the old Italian showing double digit growth is not that interesting for us. So at least enlighten me to that.

Second question is can you provide some update on Turkey privatization, and third, during the last - latest road show, you were talking as a signal that the price pressure on the Belgian markets was lowering. The problems that [Interlot] was facing in Taiwan, yesterday the Taiwan came out and Interlot came out with a quite bullish statement on the successful operation of Interlot, so I wondered if you can comment more on this, especially related to what you said a couple of weeks ago.

And third, and last question, I mean, reading the press release you say we are clearly seeing the benefits of the merger in the beginning to leverage Lottomatica operation expertise. Honestly, I don't see that much benefit so far, because - I might be wrong, but you are mostly talking about the growth in the Italian business, and that's stand-alone to me and not a merger. So you can also provide more color on this statement that you made in the press release. Thank you.

Okay, Jaymin - I'll ask Jaymin to talk to you about your first two questions, and I'll take the second two of the four.

Okay, first [inaudible - highly accented language]. As you know, Mauro, we certainly had not planned public pro forma information for the combined entity because it's not particularly meaningful given the significant changes that took place in the business during 2006.

What I can tell you at a fairly high level is that GTECH pro forma revenues for 2006 would have been in the range of 1.050 billion revenue -- EUR1.050 billion, and it's lower by - between 50 and EUR60 million as you might expect because of the early exit from Brazil.

You have the figures for Lottomatica obviously for every quarter, that's pretty clear, and if it's helpful to you we can provide you with some more detail by [corporate] or offline. But as a company policy, it's not our intention to be positing pro forma data for 2006.

Your second question was Turkey, I believe. And with respect to Turkey, there's been no new news of the privatization. This matter has - really hasn't been raised for several months now. We're still watching the situation quite carefully.

Obviously with respect to the sports betting bid, it now represents - we now have opportunity to put in a sports betting bid given the situation with [Inteltech], and we are expecting the government to issue the RFP sometime in the April timeframe, and what I generally understood is that a decision will be made by September, 2006, with a launch of the new system by March the 1st 2008, which basically gives the existing operator one year to continue operating the business.

Okay. Mauro, your other questions, in terms of - really, [Interlot]. Certainly it sounds like, as I had indicated during our - during the road show, that it was my expectation that they would eventually solve their technical problems. It sounds like they've made great progress. That's good for them, good for the industry. I should point out, however, to confirm that based on what we have seen they have struggled somewhat in certain markets.

I can also confirm to you that based on the recent evaluation in the state of Connecticut, which we are happy to make available to you, the technical review of the various bids that were submitted, GTECH, Scientific Games and Interlot are as follows.

GTECH was given the highest technical score. Scientific Games was very close. Both of us were roughly, out of a hundred point scale, at approximately 97 points, or 98 points. So virtually a dead beat. Interlot was scored by the technical evaluation committee of the state of Connecticut at 7.5 points out of 100. Now I think that does represent a significant point. We also are aware that evaluators everywhere differ.

We are quite confident in our position. We're certainly pleased. It sounds like they have improved their business in Taiwan, and we have nothing further to talk about in that regard at this time.

Your last question dealt with the - leveraging the benefits of the Lottomatica expertise. If you're looking for something in the current quarter, you're right. You won't see that. Were we are seeing benefits from that is coming in the very important request and submissions we are making real time in the states of Indiana and Illinois, with six other states under discussion concerning privatizations.

The bid response team for that activity includes professionals from Italy that work with Marco Sala and his team, who are working side by side with their international colleagues from GTECH, and with our major global financial partner, to develop the operating plans in great detail that form the very foundation of the bids. You will not see the results of that until we are able to actually submit bids if that comes.

But there is no question in our mind that we are very pleased with the particular expertise that we derived from Italy, and its ability to allow us, as a vertically integrated operator, to bid with more precision for some of these larger opportunities that seem to be emerging than we believe our competitors will be capable of doing.

Okay, sorry. A follow up question if I may. I mean, I understand, and I am not interested in Interlot in itself. What am I interested is, if I remember correctly, Interlot made an offer to the Taiwan government which was considerably below your offer.

So I understand that in the U.S. they might require higher standards, but emerging markets might be happy with the kind of offer that Interlot is currently giving.

I understand. I'm sorry, I misunderstood your question. The -- it's hard to say, Mauro, what different people will do, and all markets are different. Recognize as well that Interlot's bid in Taiwan was to Chinatrust, not to the government, and they chose to select them for their low price. There may be certain jurisdictions that choose to do that.

We, as you know, as we have announced previously - we have taken a series of deliberate actions to optimize our efficiency worldwide. We have previously talked about those. Those included a meaningful downsizing in selected markets around the world, and we have specific efforts underway to consider carefully other activities to further reduce our executive costs in the areas of hardware and software. We will have more specific detail to talk about that over time.

With that said, we don't chase the competition. We are quite confident that at the levels that have been bid in certain markets that our competitor is losing money. I don't need to see their financials to understand that. That type of behavior, while that can be strategically an imperative in the short term, is unsustainable in the long term, and we will continue to work to leverage our market position and our critical mass to further reduce our costs.

We believe that is likely to increase our value proposition for our customers worldwide. So our focus continues to be on how we can make our customers value proposition better, both in terms of costs and functionality.

The next question is from Ian Rennardson, from Merrill Lynch.

Good afternoon. I have two or three questions for you. The first one is where do you see the Italian EBITDA margin going given the increasing importance of the Instant or the Scratch & Win, which is obviously a lower margin business - where do you think that might settle down at?

Second, could you give us an idea of the potential profit from the Italian sports betting on a two or three year view, please?

And finally, just on the situation with the [Opap] terminals. Where are we at the moment with that one? Thank you.

Yes, this is Jaymin. With respect to your first two questions, the Italian business margins are actually holding up very well in the 42 to 44% range, and as the Scratch & Win business proceeds we don't expect a significant [dilution] there, because we have reached a level of sales where, incrementally, the contribution is quite positive. So we feel quite confident that we will be able to maintain margins in the low to mid 40s going forward for the Italian overall business.

With respect to your question on the Italian sports betting business, I'm going to ask my colleague Marco to comment, but in terms of margins, we certainly expect that - margins to be roughly 25% by 2009, because of the way that we planned to account for sports betting at a gross level minus price payout and minus taxes. But the market profit on market side is in line.

Yes, we expect in a couple of years, in 2009, the market will be about EUR5 billion. That means roughly EBITDA will [double] it is today. And our plan there is to reach a market share of about [20%] in the corner segment. That means for the overall market to have a market share between 11 and 12%. That's the estimate as far as this business is concerned.

I think it's helpful to point out as a reminder to people on the call today that, over the long term, we do not plan to discuss the margins by game or by business or by country. So certainly we can appreciate the desire to understand margins historically for Italy especially, given the business, but in the future we certainly plan to talk about the business on a global basis for our lottery gaming and commercial services business.

On your final question, we continue to await the outcome of the formal evaluation of the infrastructure bids in Greece for Opap. Obviously we've been waiting - all of us have been waiting for some time. We continue to feel that we're well positioned, and I would certainly hope that we have some indication soon.

I've heard mixed reports, we all have, about [WinMat] and [AD]. The latest dates are anywhere from potentially immediately to June. So I don't really know when that will be. We don't control that. Obviously as soon as we know it's probably likely that you'll know as well.

Thank you. I just misheard what Mr. Sala said about your intended market share of the 5 billion. Did he say 11 to 12%?

For the overall market. It means that if we consider the segment of the market where we are in, that is the corner segment, in that specific area we will reach - or at least we have the objective to reach a 30% market share.

Thank you, thank you.

The next question is from Domenico Ghilotti from Euromobiliare.

Good afternoon. I have several questions. I will start with Scratch Cards. I would like to understand what is or what was your assumption in the business plan in terms of volumes coming from the Italian business? And if you could elaborate a little bit more, why you are not changing your guidance if you have a very - above expectation result from Scratch Cards?

The second question is related on an update also on the South Africa lottery situation.

And the last question is on same store sales, you mentioned this driver - a very important driver for GTECH. Could you provide us with an indication for '06 performance at same store sales level?

Regarding the Scratch & Win plan, in our original plan it was to objective of 4.7% for the third year.

4.7 billion.

Yes, 4.7 billion for the '09, the third year of our business plan. In [view of that amount] we are reviewing the [FOLCA] because we launched the product the EUR10 in January, and it was at that time quite difficult to plan the results we are experiencing in these days.

Having said that, we have to look carefully over the next month the possible cannibalization of the product with the rate of the range. And for this reason, we think that for the time being our best estimate for '07 will be in the region of 6 billion.

I'll take the second question, which was given the initial strength, after a couple of months of Scratch & Win why are we not changing our guidance. Bear in mind that when we have significant developments of the type that you're well aware, we want to make sure that we have a sustainable trend.

Obviously, the first two months are spectacular. No question about it. We're quite pleased with that. We also are quite aware that that was the initial introduction of a new product with all of the marketing, advertising and creative support that goes along with the launch of a new product.

We would automatically expect trials of that product and a high level of sales that is likely to moderate over the course of the year to something that is slightly lower than what we've experienced in the first two months. That would be a reasonable way to approach that. That may or may not prove to be correct.

In terms of guidance, obviously that could imply upside to what we have provided you with some weeks ago. At the same time, as a company, we always look for opportunities and we have on standby a variety of investment initiatives that we believe could accelerate long term growth.

Those come in our technology subsidiary, in GTECH, in the form of research and development. If we have an opportunity to accelerate research and development, to expand competitive advantage and to further accelerate growth in individual product, point of sale devices or content, we will do so.

So some of the potential upside, as Jaymin pointed out in his comments, will be ultimately embedded in increased R&D spending for the current year.

Once we have a better handle with more than just two months of experience on what the sustainable run rate is based on the new level of sales for Scratch & Win in Italy, if it is appropriate on a net basis for us to revise our forecasts in any fashion, we will do so at that time. You should not expect to hear from us again on that until our second quarter time period.

In terms of your question on South Africa. In South Africa there was a legal challenge mounted by Uthingo, which was the operator since the inception of the lottery. We are partnered in that group. Regarding the bid itself, a court ruling has been issued, suggesting that the decision making body in the Ministry of Finance was not informed of shareholdings of interested parties that could have influenced the outcome of the bid.

As a result, for the moment, the bid has been determined to be invalid. We would expect that there will be an appeal. I'm not aware at this moment if an appeal has been filed, but I would expect one. So we can't give you clarity on exactly what may happen in South Africa long term.

We do know that it's not uncommon in South Africa for stays of decisions of this type to occur to allow business activities to continue. Obviously we will protect our rights with Uthingo as appropriately in South Africa, and if this ultimately results in a new bid, then we will be a bidder yet again.

The final question you had was one on same store sales --

Right, so on that one - I'll take that one. With respect to the GTECH business for 2006, same store sales growth rates were between 4 and 6% growth for the quarter. I think in the four month period they were talking about in the consolidation is fairly consistent with that.

You saw that for Lottomatica Italy total lotto growth was, as mentioned - as Marco mentioned, 11% revenue growth for that 12 month period. So we're still seeing very healthy growth throughout the world, and we see no reason to change our growth outlook where we said that the GTECH level we expect same store sales growth rates of between 5 and 6% a year over the three year planned horizon.

Okay, thank you.

Thanks for your question.

The next question is from Marco Baccaglio from Cheuvreux.

Good afternoon. I have a question on your results for 2006, and namely if you could give some explanation about the one off charge related to a deal. I have seen that in nine months you had charged about 19 million, in terms of operating expenses for [Videl].

These were 48 million at the end of the year, so about 29 million more charging in the last quarter, a total level. And well I would like to know what - if you can give an explanation of what is this about?

Well we have a number of items in the adjusted category that happened after the transaction closed in the fourth quarter. We have had some stock expenses related to management stock matters in Q4 as well as a number of restructuring actions that we took in the GTECH subsidiary in the fourth quarter.

We had to -- part of our normal cycle of optimizing our cost structure, we took some actions to reduce our resourcing levels in the company as well as eliminate some excess overheads around the business. So all of those costs were effectively charged to expenses in the fourth quarter, and those are the ones that we're adding back when we talk about adjusted EBIT and EBITDA.

Okay, and this is not going to be present anymore in '07?

No. In fact, we don't expect to have similar costs in 2007. I think the majority of actions have been taken. Obviously as a global business with over 100 customers we are always going to have modifications to our business and our cost structure, and we would expect to charge any restructuring type costs to the P&L on an ongoing basis, with us [hiring] out.

Yes, and that's very important. You should understand our philosophies here. While obviously a transaction of the type that was consummated here is quite extraordinary, and there will be costs associated with that that are equally extraordinary.

Our common business practice, however, is that if there are what we consider to be routine costs, and all businesses have those, we will generally not highlight those for you over the long term. We consider them simply a part of normal running of businesses, and those things will occur from time to time.

Thank you.

Next question is from Domenico Ghilotti from Euromobiliare.

Sorry, just two follow up questions. The first is related on the networking capital that at the end of '06 was negative for around 600 million. I wondered if it is sustainable working capital typical of other business, or if we are to expect some significant change in -- during the next few years?

The second question is related to the [Superanalotto] in Italy. Do you expect that the bid is for a single concession or a multi-concession model, let's say? Do you have any update?

Yes. Why don't you answer the second question firstly, and I'll just prepare -

Marco, with regards to your second question while Jaymin tries to look up the numbers for your first.

Regarding [Superanalotto] we are awaiting that the regulator, he should bid. Regarding the timing, it's very difficult to say. The general commitment was March. We will say very soon if it will be respected. Regarding the fact that the bid in exclusive or multi-provider concession, the declaration that has been done has been a single concession.

Once again, we can't comment on Italy when the bid will be issued. For the time being we are, as many others, awaiting the formal move by our regulator.

With respect to your question on capital, it looks like - I don't understand where you get your numbers from, because if you look at our published cash flow statement, the change in net worth in capital is approximately 70 or 80 +/- 70 or EUR80 million, relating to changes in receivables.

So I think what you might be doing, if I may suggest, is you probably adding into that the repayment of the GTECH debt that occurred as part of the acquisition. So we had approximately EUR440 million of GTECH debt, which was repaid as part of the acquisition.

And in the other category, on Slide 21 of the presentation, we have included that debt repayment in Other. So I wouldn't count that as loss in capital. I think we focused on the published P&L.

And you should always be aware - you may not know this. Normally in our international business we are in a net positive net working capital position because most of our customers pay for the deployment of resources in advance. Now obviously that's not the case in Italy, but you shouldn't see material variations in net working capital over the long term.

Thank you very much.

Next question is from Laura Leonardelli from UBS.

Good afternoon. I have three questions. The first one is related to the [trading stations] you disclose on the lotto games for the first two months of 2007. Could you repeat the comment and maybe provide a rough indication about the total [collectances] for the lotto game please?

My second question is related to 2006 figures, particularly EBITDA margin. I know that you are not disclosing the divisional EBITDA margin any longer, but could you provide any indication about the lotto EBITDA margin and also for GTECH if they were stable auditor rating or improving?

And my last question is related to your EBITDA margin for 2007. In particular for Italy, could you disclose an indication only for the lottery business, because I understood roughly 40% in Italy, but would like to understand exactly I have a higher expectation for 2007 in Italy.

Right. I'm not sure I caught all those questions but I'll try to answer them and perhaps we can supplement afterwards, and Marco, please just jump in. With respect to your question on the first two months of 2007, the Scratch & Win business generated EUR1.4 billion of sales versus EUR540 million last year.

Lotto wages were down for the first two months of the year. We'll get the numbers for you, I don't have the exact number -

Yes, I have the number. The number is slightly above 1 billion against 1.3 last year. But you will remain -- you can remind that last year there was a peak in the first quarter because there were the late number -- the historical record since ever that was covering all the first quarter. It means that in terms of performance it was due more likely above versus the average of the last six months.

Yes, and what I had said in my script was that total Italian lottery sales will be above - will be higher by 30% or are higher by 30% for the first two months of 2007. I think the point that we're trying to make today is that we expect that our Scratch & Win sales for '07 are going to be approximately EUR2 billion higher than our original expectations for '07 as Marco pointed out.

As Bruce then explained, we don't -- we wouldn't apply -- doesn't necessarily count all that as upside, because we do intend to reinvest some of the incremental contribution in the business. There will be [sell offs] by the quarter. Some of that we intend to reinvest in the business.

With respect to your question on margins, again, I think I mentioned earlier that for the Italian business we expect EBITDA margins to be in the low to mid 40s over the three year period, and that, we think will remain fairly consistent as the business grows.

The lotto business enjoys higher margins than Scratch & Win because of the fact that it's been around for many, many years. Generally speaking, the lotto business margins are in the low 50s, and the Scratch & Win margins are in the low 40s -- high 30s, low 40s, with an average between 42 and 44%. Again, that's all we would like to say about that, we don't plan to be more specific going forward. The third question was -

2007 EBITDA margin?

Well 2007 EBITDA margins, that guidance hasn't changed from the guidance notes from the business plan presentation. What we said to the investment community was that we expect EBITDA margins of 38 to 39% in the year 2007, a little bit lower than the Italian margins for two reasons.

First of all, we have the mix. We now have 12 months of GTECH in 2007, and GTECH EBITDA margins are 38 to 40%, mixed with the Italian margins of 42 to 44%, and number two, as we've discussed before, we don't have a Brazil contribution in 2007.

So those two factors impact margins in '07 going forward. As a reminder for you, we have said publicly that we expect to expand EBITDA margins by approximately 50 basis points a year on average for the next three years. They should improve to 40, 41% by 2009.

Thank you.

The next question is from Ian Rennardson from Merrill Lynch.

Sorry, just a follow up. When we see the reported accounts, will that have the Director's incentive plan in there? And when does the option price get set? Thank you.

The annual report, the [conson] filing, does include a significant section on the stock option plan. I do not believe it is specific by director or manager. But it is quite detailed in the description of the plan.

Okay. And when will we see that?

It will be published next week.

Okay, thank you.

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

It doesn't sound like there are any final questions, operator. In conclusion, I'd like to wrap up with a few final operations. Lottomatica and GTECH are emerging as one. The integration of our businesses is on track. It's producing some very positive synergies, some of which are impacting us immediately, some of which are setting us up for a promising future.

Our businesses enjoyed solid performance and growth in 2006, and our expectations are for continued growth in 2007, and we have high confidence in that expectation. Our confidence in our future expectations is based on a long-term strategy that we firmly believe is properly focused on substantial opportunities in key government sponsored gaming markets world-wide.

As the world's leading lottery operator and technology solutions provider we are well positioned to capitalize on opportunities in the near-term. It is important to reiterate that as we pursue these strategies worldwide, we will always maintain a fundamental commitment to returning capital to our shareholders as the situation allows.

Thanks for joining us. This ends our call. We look forward to speaking with you again in the near future. Have a great weekend.