International Game Technology PLC (IGT) 2007 Q3 法說會逐字稿

Good afternoon. This is the Conference Operator. Welcome and thank you for joining Lottomatica's Conference Call to Discuss 2007 Third Quarter Year-to-Date Earnings Results.

(OPERATOR INSTRUCTIONS)

The meeting will be chaired by Mr. Bruce Turner, Chief Executive Officer of Lottomatica Group together with Mr. Stefano Bortoli, Chief Financial Officer of Lottomatica Group. Mr. Marco Sala, Managing Director of Lottomatica for the Italian Operations and Mr. Jaymin Patel, Chief Operating Officer of GTECH's operations will join the Q&A session. Ms. Simona D'Agostino, Head of Investor Relations will attend the conference call.

Please go ahead, sir.

Thank you, Operator, and welcome and good evening to those in Europe. Good afternoon to those in the United States. With me today is Stefano Bortoli, Chief Financial Officer for Lottomatica Group. Also joining us for the Q&A segment will be Marco Sala, our Managing Director in Italy and Jaymin Patel, the Chief Operating Officer of GTECH. Also joining us today is Lorenzo Pellicioli, the Chairman of the Board of Lottomatica.

As you have no doubt read by now, there will be some changes in leadership at Lottomatica. At today's Board meeting, I tendered my resignation as Lottomatica's Chief Executive Officer. This was a difficult decision, but one that is timely and in the best interests of both Lottomatica and myself. Leading this company has been a tremendous opportunity, I mean that sincerely, and one that I have enjoyed immensely. I am confident that I leave this company having made a contribution that is of value. The integration and restructuring of the organization is complete and the company is well positioned to take advantage of the tremendous opportunities in ever-expanding public and commercial gaming markets worldwide. I have every expectation for Lottomatica's continued success and market leadership.

From a personal perspective, I have held a long interest in returning to the investment world, to start my own investment management business. Recently the opportunity for me to do so has become a reality. After careful consideration and thought, I have determined that this is an appropriate time for me to leave Lottomatica and pursue this new adventure and a personal life-long dream.

Good evening and good afternoon to all of you, Lorenzo Pellicioli. First of all, Bruce, let me start by thanking you for your leadership in guiding Lottomatica to this point to where we are today. It seems like ages ago when you and I met for dinner to explore the possibility of putting the two companies together. Today our dream of that night was -- is a reality and I agree that we are well positioned to take advantage of significant opportunities in the near term. Of course, I wish you well in your new life and we assure -- and I can assure you that we will miss you in the future.

My enthusiasm and confidence in the future of Lottomatica is based on the strength of our business and of course on the quality and the strength of the management team we have to drive it forward.

Let me start from Italy, the results that we have achieved in the Italian market are absolutely unprecedented and astonishing. That kind of performance should not be taken for granted, of course. It requires well thought out of our strategy, proper execution and diligence and hard work. Of course, I have to thank for the results and Marco Sala and his colleagues in his team for what he has done here in Italy and I have of course to say that I have a lot of confidence on Marco and his team for the future.

The GTECH franchise is one that we could not have possibly built on our own. That's the reason because the acquisition was a strategic coup and a strategic decision for Lottomatica and for us. And I continue to be impressed and enthusiastic about the fundamentals of the business of GTECH and the opportunities that are related to it.

There again also in this case, it takes good people to make a business successful and GTECH has them. In particular, I have come to know and respect and rely on Jaymin Patel, who is here now President of GTECH. When we met the first time, he was CFO of GTECH. I am mindful of the commitment that we made to GTECH employees and customers that the leadership of the company would have authority to act in the best interests of the company, so the first decision related to the departure of the -- of Bruce is that I intend to appoint Jaymin into the position of CEO of GTECH moving him from the actual position of COO. So Jaymin will be CEO of GTECH.

Of course, since when Bruce, a few weeks ago, approached me about discussing succession, a succession plan, I have given a great deal thought to the needs of Lottomatica Group going forward. And of course I had to decide on certain priorities and in particular I didn't want to distract from our plans and to the progress that we have made in achieving them with leadership appointments that require time and energy to be assimilated into the organization. Accordingly, to this priority, I have decided to take on the responsibility of Chief Executive Officer to the -- to guide Lottomatica Group through this next period of growth. And the Board of Directors just appointed me in this position, I thank them for the confidence, but I suggested them this decision exactly for the reason that I was mentioning before. I am confident that I can be successful in this role because of the outstanding team of individuals I have supporting me. Without them, I wouldn't have -- I wouldn't be in the position to accept this task. I have every expectation that we can and will deliver value for our shareholders, enhanced value for our shareholders.

Now of course as Bruce said, he will leave at the end of the year, so I will turn the call over to Bruce, Stefano and the other colleagues for their normal discussion about the nine month performance, the guidance for this year and the guidance -- the preliminary guidance for next year. Obviously in the future, I will be leading this call, but today leave it to Bruce to do so one last time.

Thank you to all of you and I am -- please, Bruce.

Thank you Lorenzo and thanks for taking the time to join us this evening. As is our custom in these calls, we will refer to Lottomatica when discussing items relating to corporate level performance and we will differentiate between our operating entities by referring to those as Italy and GTECH respectively when discussing their performance and contributions.

I'd like to start off today by giving you my perspective on Lottomatica's performance for the first nine months of 2007 after which you will hear from our CFO, Stefano Bortoli, and then we'll take your questions at that time.

Lottomatica's financial performance was good. There are areas that we have targeted for improvement, but overall we are encouraged by the results. The fundamentals of our core business continue to experience positive growth.

I'd now like to give you a more detailed review, beginning with our financial performance. Revenue for the first nine months of 2007 were EUR1.22 billion, representing a year-over-year increase of approximately 116%. Revenues included EUR623 million of contribution from GTECH and EUR599 million of contribution from our Italian operation.

GTECH total revenue is comprised of EUR579 million derived from services and EUR44 million associated with specific product sales. Overall Italian Lotto and instant sales continued to experience very solid growth, totaling EUR10.6 billion, up from EUR7.7 million in the first nine months of last year. A 38% year-over-year increase.

Our market share was consistent with our historical position in the marketplace. As we've seen throughout the year-to-date, the popularity of the Italian instants product continues its remarkable growth. As Stefano will describe in his comments, in the presentation, we continue to experience very respectable margins in our key business segments. EBITDA for the first nine months was EUR541 million compared to EUR270 for the similar period in 2006. EBITDA margin was 44%, operating income for the first nine months was approximately EUR324 million with an operating income margin of 26.5%.

Net income grew EUR72 million from EUR39 million for the same period last year. As I turn our attention to a review of our operations I believe it is fair to say we have had some meaningful successes and as we have pointed out to you in the past, we've had some challenges as well. I would like to provide you with my insights as to the factors that have contributed to our success and what we need to do better to meet our continuing long-term commitment to our shareholders to drive value.

Again, GTECH delivered performance that was in line with our expectations which we outlined to you at the beginning of 2007. Our core lottery business is the principal driver of that growth. The major indicator that we look to for the vitality of our core is what we call same store revenue, same store revenue growth came in at 5%. I think it is fair to say that based on historical trends and our expectations for this year there is substantial room for continued improvement in this area. Our experience indicates to us quite clearly, and we've seen this many times, that same store sale revenue tends to be cyclical over time. I'll address some actions we have taken and actions that we are continuing to take to improve same store sale revenue and growth, in a moment.

GTECH business activity continued at a good pace. To give you a high-level perspective of that pace, during the 14 or so months since we joined together with Lottomatica, GTECH has participated in 19 competitive procurements. Of the EUR1.3 billion in potential business available from those 19 competitive procurements GTECH won approximately EUR1.1 billion or 82% of total revenue available. That's an enviable win rate for any company and one that we're quite proud of.

I wanted to continue to make this point as I have in the past so as to keep the proper perspective on lottery industry contract announcements. It is revenue, much more importantly the news flow in individual contracts that drives value for this company over the long term. While we made note of it in our last call, GTECH is a major technology provider to the Camelot consortium, was chosen during this quarter to receive the next lottery license in the United Kingdom which is one-off the largest lotteries in the world. This contract covers a ten-year period. GTECH will provide technology solutions for the operation of the lottery through the year 2019. During the ten-year license period we expect to receive revenue in excess of EUR600 million. The UK win holds great opportunity because we believe we will be able to improve our contribution from this relationship while showcasing the latest in GTECH technology in one of the leading markets in the world.

Additionally, customers in Denmark and Western Canada awarded GTECH contracts for new lottery terminals. While the Connecticut and Rhode Island Lotteries chose GTECH to provide a portion of their instant ticket printing services. These awards provide a majority opportunity for our printed products division, to demonstrate it's value to well established instant tickets market worldwide. And, more recently in New Jersey we received a 19 month contract extension worth approximately EUR27 million.

There also have been some noteworthy announcements that have come after the close of the third quarter. GTECH was successful in defending our contract in Oregon which has been a GTECH customer since the lotteries inception in 1985. We competed for and won a new ten-year contract worth approximately EUR50 million over it's term. GTECH also announced that we have received a valuable extension to an existing contract with the State of Illinois, worth EUR24 million.

Additionally, in our Gaming Solutions area GTECH's subsidiary Spielo was provided to provide the Manitoba's Lottery Corporation with 650 new slot and bingo gaming terminals for installation in two of the casinos operated in this jurisdiction. We've also successfully closed in the acquisition of ThinSoft we did that in the third quarter. An important entry point for Gruppo Lottomatica in the sports betting technology market place. ThinSoft has established relationships with several recognized commercial customers such as William Hill, Betterbet, Pagebet, Corbett and [Turftax] and has received significant new orders from Boylesports, Sportingbet and Betfred and fits nicely with what we are doing in Italy as well.

I would also like to update you on upcoming biz, as we have noted on prior calls, there are some significant online lottery contract opportunities in the near-term. GTECH is the only bidder for the online contract in the State of Michigan where we are the incumbent. We have submitted proposals, Pennsylvania, South Carolina and West Virginia. Each of these contracts is currently serviced by a competitor. We have also submitted proposals to the District of Columbia, a current GTECH customer, and The Netherlands, where competing lotteries have joined together to seek a provider under a new facilities management arrangement together. In the next few weeks we will be submitting additional proposals for recently issued RFPs in Ohio and New Jersey, both current GTECH customers. And a RFP for a new VLT monitoring system in the State of Kansas.

Privatization activity in the United States received a charge recently when the Governor of California revisited a proposal to lease the lottery where GTECH is currently the incumbent provider. His proposal has met with resistance from the powerful education lobby where members rely on lottery funds for support. Nevertheless when Governor Schwarzenegger makes bold announcements it does get the attention to the media and has some political significance. As we have reminded you in the past, predictability of major breaking news, such as privatization is very low, these will take some time.

Perhaps more interestingly the new ruling party in Poland has a policy platform of favoring privatization of state assets, including the lottery. GTECH has been the supplier to Totalizator Sportowy, the Polish lottery since it's inception in 1991. It's a bit too early in the formation of that government to understand how they may approach privatization and what they're timetable is, but we are encouraged and we are certainly watching continuing developments with great interest.

Finally, an update on Taiwan, where the Ministry of Finance announced the award of the license for a sports betting lottery to our former lottery partner, Taipei Fubon Bank. That award was unsuccessfully challenged which delayed the issuance for an RFP for supporting technology. Late last week Taipei Fubon Bank. issued an RFP with responses due in mid-November. We remain optimistic that we can successfully compete for that business in Taiwan.

Turning now to our Italian operations we had another solid quarter of growth. Our market share remained at historic levels. Overall, Lotto and Instant sales for the first nine months of 2007 totaled EUR10.6 billion versus EUR7.7 billion in the same period last year, 38% higher. Scratch-and-Win market had record sales of EUR5.9 billion compared to approximately EUR2.7 billion in the first nine months of 2006, represents growth of 124%. While this is excellent growth, we should point out that there are signs of moderation in that trend, which are consistent with our expectations.

Lotto wagers were slightly down at EUR4.7 billion but relatively stable compared to EUR5 billion in the same period last year. We continue to point out that the underlying trend in core numbers provides the most useful comparison into Lotto performance as the previous experience during the first nine months of 2006 with the Cagliari-34 late number phenomenon skews the top line revenue comparison. Core numbers, the main driver of Lotto were stable at EUR3.9 billion.

Our new Italian sports betting network operating under the Betta brand, launched during the quarter, almost 1,100 corner shops are now open for business in Italy. Of these operators, that received licenses -- of those operators that received licenses Lottomatica was the first to market with scale operations and we believe that will create some brand loyalty in the intermediate term. As other operators have begun to enter the market place as expected we have launched, recently, an extensive advertising campaign to bolster our product recognition in the market place. Additionally, last week we launched our Internet wagering site which will further expand our core product offering. Early results are meeting our expectations, revenue were EUR5.2 million and have been steadily increasing.

Commercial Service offerings in Italy were stable, experiencing 3.2% over the comparable period last year, this despite changes in the regulatory framework and the marketplace. In the Gaming Solutions segment we experienced impressive growth of 164% driven primarily by an increase in gaming machines being monitored by our system, from approximately 10,000 at the end of last year to 21,000 connected machines by the end of the third quarter, that's quite impressive. It is interesting to note that the rollout of the sports betting program has been a driver of our growth in the AWP market, or the gaming machine market. We have been successful in packaging and offering of both products. Retailers signing up for sports betting services is also able to take advantage of gaming machine placements from us as well, this was part of the plan. It is a great example of how our programs compliment one another and create growth opportunity. The jump in our population of AWPs is a direct result of the benefit of this sales initiative.

Now let me turn to review the progress we have made towards achieving the goals we set for ourselves in our three-year plan. In terms of growth, profitability and value creation for shareholders we remain confident that we will deliver results in line with our guidance for this year. Stefano will elaborate further about this during his comments.

During our most recent investor road show we had the opportunity to review, quite candidly where we are today relative to where we thought we would be at the time of Lottomatica's acquisition of GTECH. In general, while we are pleased with progress on many fronts we have acknowledged that there are some disappointments. I would like to share with you the actions we have taken to address those areas of concern, quite proactively. As I noted earlier one of our major assumptions was that we would see more robust same store sales revenue and growth. In order to help drive growth in our core business we need to move same store sale revenue approximately 200 basis points or two percentage points higher, remember incremental contribution margins exceed 80%.

I believe that's achievable for a variety of reasons. Our business tends to be counter-cyclical. In the very turbulent economic times, I would now suggest we are now entering those times, the governments our lottery customers support have significant revenue gaps that are created as a result of economic stability. It is our experience in these environments that our customers are looked upon by their governments as a vehicle to increase revenue by expanded offerings thereby growing our business as well, they're only other alternative is to raise taxes.

We are also achieving positive results and increasing same store revenue by focusing on various strategies to expand and optimize retail operations and increase the presence of GTECHs suite of self-service products where we are the global leader. Our activities in these areas have resulted in measurable increases in sales in the various markets that we have targeted in this area will continue.

I firmly believe that we will have an impact in this area that will be meaningful, it won't be just marketing programs which are vitally important but supplemented by new, technological innovation in game delivery systems that meet our customers needs to deliver more content faster. By faster I mean in fractions of the time that it takes to do the same today.

Another area in which we have seen increased challenge is in competition, there is no question about that. For us to be successful and remain successful we need to be the most responsive and responsible low cost provider in this industry, period. That requires us to operate a bit differently, as many of you know we recently realigned our investments and global resources while reducing our corporate overhead and global personnel costs. This is an important undertaking for us and has been part of a continuous improvement program that has been going on for some time.

You will see reflected in our guidance, a one-time charge for this year that's estimated to be in the range of EUR10 million to EUR15 million representing the impact of actions which eliminated 125 GTECH positions immediately. While that was the most visible part of the competitive enhancement program we have undertaken it is hardly the only part. We are making significant progress in reducing the capital intensity of our business and the resultant costs to deliver system solutions and implementation of those solutions.

Our technology group has had a dramatic impact on the most costly part of our systems and that is point-of-sale hardware or terminals. Our new Imagine Terminal that will be rolling out in the United Kingdom with 28,000 units over the next year represents an innovation in technology that clearly leapfrogs our competitors and significantly reduces the cost of the point-of-sale hardware by a substantial magnitude. That lowers our breakevens and allows us to bid more aggressively and continue to create value with our economies of scale. by 2009, our like-for-like capital intensity should be down by 35% to 40% from 2006 levels.

We are also accelerating programs to take advantage of GTECHs global footprint and variety of centers of excellence worldwide to move work manufacturing and software development to the lowest cost centers of excellence globally. GTECH already has software hubs in Poland, Serbia and India that afford us the most competitive rates in the world. And our Imagine Terminal is being developed in partnership with world-class manufacturing companies in both Taiwan and China. That project is underway and manufacturing is taking place at this time.

We began implementing our multi-sourcing strategy last year, we expect to see a major impact on our costs related to those areas over time in coming years.

Bottom line of these activities is that we will be able to deliver solutions to our customers at a fraction of the cost that we incur today. We will deploy global economies of scale. In turn, our capital needs will be less intensive than they have been historically, all of which will result in a dramatic continuous process of improvement in our global competitive standing and as we are well on our way to achieve goals in this area.

Finally, we are moving steadily towards the closing of the Atronic transaction to drive our gaming solutions strategy, as previously noted the licensing process which is needed to complete this transaction is tracking towards an early 2008 closing. As we reflect on some of the assumptions we made during the Lottomatica merger, we hoped that the Gaming Solutions group would be a greater contributor than it has been so far, we based that on assumptions that there would be a greater adoption of machine gaming programs by our customers and new jurisdictions worldwide. That hasn't happened at the pace that we had hoped for and expected, but we see the governments around the world continue to look at machine gaming programs to enhance revenue requirements to meet their ever-changing needs and we don't believe that is going to change.

With our merger with Atronic we will have access not only to the government sponsored gaming market in which we have a strong presence, in our Canadian based Philos subsidiary, but the commercial gaming market worldwide as well. Our new Gaming Solutions business will certainly benefit from enhanced scale and opportunity breadth. We are also expecting the Italian machine gaming market to continue it's evolution over time from it's early stage of adoption to a fully developed gaming program. We will keep you posted on this new group now scheduled worldwide as it evolves steadily over time.

In summary, we have a solid foundation from which to grow to meet the expectations we all have for this company and we're not waiting for tomorrow to execute. It cannot be overlooked that in executing our growth plan we are sometimes faced with conditions that are relatively unpredictable in the short-term, and they certainly represent real challenges that we are prepared to face, whether those are adverse currency fluctuations, which is a real factor, or the reluctance of government leaders to more rapidly embrace gaming expansion as may have been anticipated which also happens from time to time, we still produce results and create substantial value for our shareholder, that will be evidence quite clearly as you evaluate free cash flow over the long term.

As Stefano will highlight in his remarks, the signs of our vitality are present in many places and most importantly we generate significant cash flow, which helps us fortify the base from which we use as a springboard for long-term value creation and growth.

Now I would like to turn the call over to Stefano for a review of our financial performance.

Thank you, Bruce, and hello everyone. Again, welcome to our 2007 Third Quarter Year-to-date Results Conference Call. Let me start by reminding you that this earnings announcement include the combined results for Lottomatica Group. In comparison, the results for 2006 included nine months of Lottomatica Italian operations and one month of GTECH operations starting from the closing of the transaction on August 29, 2006.

As Bruce highlighted I am pleased to report that we experienced overall good results. Combined revenues for the nine-month period were EUR1.22 billion which represents a year-over-year increase of approximately 116%. Year-to-date EBITDA was approximately EUR541 million, an increase of approximately 100% versus the same period last year. EBITDA margins for the nine months were 44.3% compared to 47.7% in the nine months of 2006. Again, note that the change in the EBITDA margins compared to last year is principally driven by the inclusion of GTECHs results for the nine months of 2007. The underlying margins for the Italian and GTECH operations remain consistent period-over-period.

As a reminder, typically Italian Lotto contributes higher margins for the first quarter of the year due to the decollage effect of the Lotto game. For the third quarter alone combined revenues were EUR386 million which represents a year-over-year increase of 71%. GTECH contributed EUR195 million while the Italian operations contributed EUR191 million increasing approximately 26% over the nine months of 2006.

Third quarter EBITDA was approximately EUR161 million, an increase of some 93% versus the same period last year. EBITDA margins for the quarter were 42% compared to 37% in the third quarter of 2006. Comparing revenues for the nine months of 2007 with the nine months of 2006 indicates combined service and product revenue growth of EUR656 million. GTECH experienced same-store revenue growth of approximately 5% over the same period last year, mainly driven by Jackpot activity in the third quarter.

Revenues from Italian operations in the nine months increased approximately 22% when compared to the same period last year. Overall, revenues from Italian operations in the nine months contributed EUR599 million while GTECH operations contributed approximately EUR623 million.

And now, let's look at revenues by segment as reported, Italian Lotteries revenues increased approximately 22% compared to the nine months of 2006. Please note that in this segment we included the new sports betting business launched two months ago. Because we are in an early stages we see a small but meaningful contribution from -- for approximately EUR5 million in revenues calculated on gross wager less prize payout.

Commercial Services in Italy increased by approximately 3% and Gaming Solutions for our Italian operations performed very well with an increase of 164% driven by the installation of approximately 11,000 additional AWP machines from the end of 2006, bringing the total machines in our network to approximately 21,000 as of the end of the third quarter of 2007.

Now, slide 13 and 14 reflects the key revenue performance of GTECH operations and Italian operations separately. Continuing on to the GTECH side of the business, a breakdown of Lottery Service revenues by United States and international regions is shown. As described last quarter, United States revenues may be divided into Mega Millions states operations and Powerball states operations. The Mega Millions Group includes some major GTECH customers such as Texas, New York, California, Illinois, Michigan and Georgia. The Powerball Group includes among others, key contact with Kansas, North Carolina and Rhode Island.

A breakdown of Lottery Service revenue by United States and international regions is shown. Please refer to U.S. dollar value to appreciate the trend of the business, otherwise affected by the euro appreciation versus the dollar. In total, GTECH's same-store revenue grew 5%. United States Lottery revenues benefited from robust Jackpot activity primarily in the Mega Million game with particular strength in Georgia, Michigan, New Jersey and Illinois. International Lottery revenues were driven by solid performance in countries such as Poland, The Czech Republic and Ireland.

Moving on to Italian operations, let's look at our Lotto and Instant and Traditional Lottery gross ticket sale performance for the nine months of 2007 versus 2006. Lotto game wagers were EUR4.7 billion compared to EUR5.0 billion in the nine months of 2006. Sales were particularly strong in the first quarter of last year due to a record number of wagers related to Cagliari-34. Lotto wagers related to core numbers were comparable to the same period last year at EUR3.9 billion.

In the third quarter, Lotto wagers were EUR1.53 billion compared to EUR1.5 billion in the same period last year. For the nine months, Lotto revenues were EUR303 million compared to EUR324 million in the same period last year, a decline of approximately 6.4%.

Our Instant Lottery performance continues to be impressive, resulting in gross sales of approximately EUR5.9 billion compared to sales of approximately EUR2.6 billion in the nine months of 2006. The number of instant tickets sold in the nine months was EUR1.7 billion compared to EUR1.1 billion last year.

As reported in our previous conference calls, growth in Instant Ticket sales was driven principally by the introduction of the EUR10 in January of this year which generated sales of approximately EUR1.8 billion alone in the first nine months of 2007. In the third quarter Instant wagers were EUR1.72 billion compared to [EUR0.88 billion] in the same period last year.

The average price point for the nine months grew to approximately EUR3.4 compared to EUR2.3 in the prior year. Again, for the nine months, revenues for the Instant business were approximately EUR208 million compared to EUR94 million during the same period last year, an increase of 120%.

Now I would like to focus your attention on revenues and EBITDA for the nine months of 2007 compared with 2006 pro forma figures for the same period. Third year year-to-date figures, excluding Brazil, were shown at constant currency and as reported to allow a meaningful comparison of GTECH in the two periods. While service revenues for GTECH have increased by 1% product sales decreased from EUR105 million to EUR46 million. In 2006 significant sales of system, Instant Ticket vending machines and terminals took place. I would like to mention Spain, Spain-Anza, France, West Auckland, New Zealand as well as VLTs to Sweden. This reduction drives the 9% decrease of EBITDA at constant currency. And then foreign exchange rate reduced revenue by EUR40 million and EBITDA by EUR18 million.

I would like to remind you that not withstanding this, at the net income level the company's not materially impacted by the depreciation of the U.S. dollar as I will describe later. Now, let's review performance by segment. Lottery contributed approximately 88% of total revenue and 92% of EBITDA. Consolidated EBITDA reflects the allocation of corporate overhead.

Moving onto financial income and charges, on a net basis we incurred approximately EUR189 million of financial charges compared to EUR140 million in the nine months of 2006. It is important to point out that the third quarter '07 figures are substantially impacted by a non-cash foreign exchange translation losses of approximately EUR47 million. This loss is a non-operating accounting item driven by an inter-company loan set up for the acquisition financing and should be evaluated in connection with the value of the U.S. debt.

Let me highlight on a true cash basis the group has no meaningful exposure at the net income level, while different lines of the Profit & Loss Statement may vary. Total interest expense was EUR147 million compared to EUR48 million last year relating primarily to interest expense on our senior credit facility and capital securities. In more detail, interest expense on our senior credit facility accounted for EUR81 million and on capital securities for EUR46 million.

Next, you are able to see our performance on profit and loss level for the nine-month period. The impact of amortization of intangible assets related to the acquisition of GTECH and operating income amounted to EUR72 million for the nine months this year. For the full year 2007, we have estimated the purchase price amortization in the range or EUR90 million to EUR95 million. Operating income was EUR324 million for the nine months, up 62% over the same period last year. Income before tax amounted to EUR135 million impacted by non-cash items as we just commented, related to unrealized, non-cash foreign exchange translation loss on inter-company loan.

Net income for the nine months was approximately EUR72 million, up 86% compared to EUR39 million in the same period last year, after income taxes of approximately EUR63 million. Net income plus minorities was EUR47 million bringing our earnings per share for the nine months to EUR0.31. Net cash from operating activities amounted to EUR369 million, an increase of EUR163 million compared to the last quarter of this year.

Operating cash flow before changes in market capital was approximately EUR427 million. The use of cash associated with working capital changes is primarily attributable to increased volumes of Instant Lottery in Italy which are generating an increase of receivables. In addition, the third quarter was positively impacted by the sale of poker which brought in net cash of EUR169 million partially reinvested in the acquisition of Finsoft. In summary, the third quarter cash generation was strong and better than the second quarter. So, that cash available at the end of the period was EUR444 million.

Reviewing a summary of our balance sheet you will note that Lottomatica's net invested capital of approximately EUR4.08 billion, which includes shareholder equity amounting to EUR1.77 billion. Net financial position at EUR2.31 billion at the end of the period, improved compared to the second quarter this year.

And now, let's look at guidance for the full year of 2007 and our preliminary guidance for 2008. We are pleased to update you on our latest estimate as Bruce has said before. Gross sales for Scratch-and-Win will be approximately EUR7.5 billion to [EUR7.8] billion for the full year 2007. While for Lotto we anticipate Lotto sales to be in the region of EUR6.2 billion. At the GTECH level based on the performance of these first nine months we estimate same-store sales growth to be in the range of 4% to 5%.

Overall, we estimate revenues in the range of EUR1.65 billion to EUR1.68 billion. And consolidated EBITDA for the full year is expected to be approximately EUR695 million to EUR700 million. And I would like to point out that the consolidated 2007 guidance includes approximately EUR10 million to EUR15 million of one-time costs associated with our restructuring plan that Bruce has announced earlier, offset by a one-time recovery related to Brazil legal matters.

GTECH Brazil, in fact, recently received a favorable ruling to release its Brazilian reals, almost 40 million held in escrow, approximately EUR40 million, in connection with a 2004 court decision regarding revenue withholding. The decision to release escrowed funds was made unanimously by a five-judge panel in the Superior Tribunal Justice which is Brazil's highest court for non-constitutional matters. This ruling, recently handed down, cannot be appealed. We anticipate cash recovery within the next three to six months.

Operating income is revised to the range of EUR405 million to EUR410 million. And then let me take a moment to discuss a number of indicators below the operating income to give you a clearer view on our net income. We estimate the effective tax rate to be in the range of 47% to 48% for the full year. The tax plan we have enacted will achieve its full impact from 2008 onward as you can see in the guidance e for the next year. In addition, we estimate earnings per share as reported in the range of $0.35 to $0.37.

Now let's turn to 2008 guidance. We will provide further clarity around our 2008 guidance when we release our three-year plan outlook on the early part of next year. Our preliminary guidance are estimating total revenue to be in the range of EUR1.9 billion to EUR2 billion and bear in mind that we will fully consolidate Atronic by the end of the first quarter of 2008. At the Italian operations level, we estimate Scratch-and-Win sales to grow at a low single-digit rate in 2008 while Lotto sales will be stable.

At the GTECH level we estimate same-store sales growth to be in the range of 4% to 5%. EBITDA for the full year to be approximately EUR750 million to EUR765 million. Operating income of EUR440 million to EUR450 million with operating income margins in the range of 22% to 24%. We estimate a lower, effective tax rate compared to 2007 to be in the range of 42% to 44% for the full year. In addition, we estimate earnings per share as reported, in the range of EUR0.67 to EUR0.77.

To summarize, the underlying performance of our business remains strong and this performance combined with positive trading results in the nine months of 2007 give us confidence in our 2007 outlook and beyond. And now we would be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS) The first question is from Mr. Ian Richardson of Merrill Lynch. Please go ahead sir.

Good afternoon, it's Ian Rennardson at Merrill Lynch. If I could have three questions please. First of all, on the guidance, the operating income number has change, you know, you were EUR490 million to EUR500 million before. Am I right in assuming that you are now including the amortization rather than excluding it as you did previously?

Second question was to Bruce, I'm struggling a little bit Bruce to understand your timing. Is this anything to do with the poor share price performance of Lottomatica? And then finally a similar question of the EPS guidance of EUR0.35 to EUR0.37, is that including the amortization and also you did EUR0.31 in the first nine months so why only EUR0.04 or EUR0.05 in the final quarter?

Okay, Ian, Bruce here. I'll address number two and ask Stefano to address your other questions. The timing of my decision to resign is purely personal. While I'm disappointed as one of the largest individual shareholders in this company, with the stock price performance, I've been either in this company or in the investment business for 18 years. I've seen ups and I've seen downs, I know how to drive value and I'm quite confident with the outlook for the company. So that has not affected my own personal decision at all. I've been through bruises over life, as many of you have as well. So that's not an issue in my personal decision, it's more about an opportunity that's presented itself, and candidly is a life-long dream I've had and now seems like a good time to pursue that.

If I could ask, are you going to remain one of the largest individual shareholders?

Excuse me?

Are you going to remain one of the largest, individual shareholders in Lottomatica?

It's certainly my expectation to remain a shareholder over the long-term. Obviously once I'm doing other things I'll make the same evaluations that you do.

Okay, thank you. Good luck.

Coming to your question number one and number three, both operating income and EPS are after the amortization of intangible assets related to the GTECH acquisition.

Hello?

Did that answer your question Ian?

Sorry, I didn't hear the answer I got cut of for a second.

Stefano, try again.

Yes, both the operating income and EPS are after the amortization of intangible assets related to the GTECH acquisition.

Okay. Thank you very much that's very clear.

As a reminder at the end of the conference call a recording will be available on Lottomatica's website. The next question is from Mr. Luca Orsini, OneInvestments. Please go ahead sir.

Yes, good afternoon everyone. Again, I was cut off just when Bruce was answering about his -- what he's going to do with his own Lottomatica shares. And then I have a question for Mr. Pellicioli, good afternoon, first of all. Is, you are now the CEO of the company, is that something that is there to stay or you are there for a period and then after you've sorted out the things someone else will step in and you will become Chairman again?

Luca, this is Bruce, unfortunately Lorenzo had another engagement and was unable to continue to stay through the call. So if you don't mind we'll have him follow-up with you directly, if that's okay?

Perfect.

And I don't know if I -- with my prior answer to Ian, if I had addressed your --.

I just couldn't -- again, it was just a matter of line, just the line went -- we couldn't hear when you were saying the answer, that's all. I couldn't hear, at least.

I'm sorry, Luca, I was having a hard time hearing you, the -- my intention today is to remain a shareholder of the company.

Okay, thank you. Just was unclear.

The next question is from Ms. Carmen Hummel of UniCredit, please go ahead Madam.

Yes. Good afternoon, I have a question referring the target for net debt by the end of 2007. As far as I remember this one was just around EUR2.5 billion, is that still valid?

And then the next thing is concerning your ratings do you anticipate any rating actions from agencies based on the reworded, revised guidance? Thank you.

So I see you have understood that the net financial position at the end of September is the range of EUR2.3 billion. We do not anticipate any substantial change. It will be by the end of the year in the range of EUR2.35 billion, EUR2.4 billion as we had projected since the beginning for this year. And in terms of the investment grading we are confident that the rating agencies will consider that position appropriate to maintain the investment grade in that we have been awarded last year.

Okay thank you.

The next question is from Mr. Larry Klatzkin of Jefferies. Please go ahead, sir.

Hey, Bruce, so you're onto a third career. Congratulations.

I've got to compete with you, Larry.

I've been doing gaming for 25 -- I don't know. China, what do you see for the future of gaming there? I know you guys do run one Macau and it's still way under-penetrated. What potential do you see for the company?

Well, let me give you some preliminary comments on that, Larry, because it's topical and I think I'll ask Jaymin since he's responsible for that part of the world to follow up and supplement. As you know, Macau is quite robust. That's a gross understatement. But is isolated in terms of how the Chinese government views gaming. On the broader Mainland it's a much more conservative approach to gaming. Advertising is generally not authorized. Lotteries and games of chance are divided amongst provincial jurisdictions along the lines of sports and welfare, and overall managed by the ministry of finance.

We continue to expect that the market will evolve steadily over time but I do believe it is more prudent to assume that evolution to be quite a bit slower.

Sorry guys. That's about it. But thank you, guys and Bruce, again ,good luck with your rest of the future and I hope you are successful in your next venture.

Thanks a lot, Larry, take care.

The next question is from Constantinou Evros of Credit Suisse. Please go ahead, sir.

Sorry about this. I have a couple of questions. One is if you can tell us something about the -- your expectations as to CapEx for '08? And the other thing I would ask also is in terms of how much of the product sales revenues from the UK contract are included in your '08 guidance and how much for the years following that?

Okay, let me repeat your question since our audio is a little crackly to make sure I got them right. CapEx for 2008?

Yes.

Is question number one -- how much of our UK business is included in our 2008 guidance? And what our assumption for the U.S. dollar exchange rate is?

And I would also ask, sorry, I would also ask in terms of your guidance again how much you would be expecting in terms of contribution from your Italian sports betting operation at maybe that level, if you could tell us something?

Okay I'll ask Stefano to handle questions one through three, CapEx, UK and foreign exchange and I believe Marco Sala can address expectations for Italian sports betting.

Let me start from the foreign exchange rate, which was number three of your question. All the figures we have provided you have assumed a $1.40 equal EUR1.0. In terms of the UK business we have assumed the normal grant rate of the last year of the contract which is basically the same kind of contribution we had in 2007.

The new contract will impact P&L beginning February 2009, which is the new starting point of the concession. And in terms of maintenance capital 2008 would have a level of investment which is in the range of 8.5%, 9% of the revenues of the group.

Marco, if you could address the Italian sports betting?

Yes sure. Regarding the sports betting our view for next year overall is to anticipate of one year our last forecast. And I consider that the numbers that you know very well can be considered, anticipated by one year because we see a strong performance of our operation after a couple of months and therefore we believe that the market will grow above EUR4 billion for next year while we are going to maintain our view, regard in the market shares. All combined it means that we anticipate of one year the guidance we provided last year for 2009.

Okay, thank you.

We have a follow-up question from Mr. Ian Rennardson of Merrill Lynch. Please go ahead, sir.

Hello again. The ADR program or the planned ADR program is that planned, still planned to go ahead, and if so, when in the U.S.?

The ADR program has already started.

It's started, yes.

The ADR is traded under the [acronimos LTPOY] and it has been traded on -- let's say the gray market for the second half of September, the first half of October and now it's trading regularly.

Okay, thank you.

Ian, we are in the process. Obviously. I think you understand how the sponsored program works. At the moment we have one market maker. They have exclusivity under the rules for 30 days. There are a number of other market makers that have expressed interest, Bank of New York, is helping us to cultivate interest and there are at least a handful of U.S.-based brokerage houses who have a very good historic understanding of the GTECH business who have at least expressed an initial interest in considering adding research coverage as a result of the fact that we now have an active ADR.

Okay, thanks.

We have a follow up question from Mr. Constantinou Evros of Credit Suisse. Please go ahead, sir.

Thank you I just got another question which has to do with what you said about the improvement in the corporate overheads and also in terms of the CapEx from your new set of the the Imagine terminals we should expect this benefits to flow through from 2009 onwards in terms of -- in terms of the cost savings there?

Sorry, Evros, the quality of the audio is so poor that we didn't understand the question, sorry about that.

Sure, let me try this again.

Could you repeat?

My question was on [Vim], in terms of Vim, in terms of Vim CapEx again and the total CapEx, should we see the improvements from using these new types of terminals and the new structure in terms of the costs that you were talking about these improvements and then improvements in the margins are they going to come through in 2008 or 2009, that was my question.

Why don't -- why don't we have Jaymin address that question since he's been intimately involved. You came through loud and clear that time by the way, Evros.

Thank you.

Hi Evros.

Hi.

We do expect that over the next several years we're going to see some significant benefits in terms of lower maintenance capital from the lower investments we'll make in the business both in terms of terminals and lower communications costs. So we expect that the average investment in maintenance capital will go down from 10% to 11% of recurring service revenue to perhaps the 8% to 9% level over a multiple year period. As you know in our business it's very hard to measure maintenance capital in any single year because the capital investments are quite lumpy depending upon the contract rebid cycle.

But looked at over a five-year period you could expect a 2% or 3% reduction in the investment as the lower costs come through.

Thank you.

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

Good afternoon, my first question I would come back on the previous question on the EPS implied by your guidance. So in Q4 you are implying around EUR0.04 so I would like to understand if you are already factoring in some further, let's say, ForEx exchange losses and if you could elaborate on the reason why you increased so much the tax rate compared to the previous call? And just, the last question is just to check if guidance is, let's say, on EPS after minorities?

So let's start from the last one, the EPS is after minorities, of course. In terms of the EPS it's calculated as we have said before after the amortization of intangibles and have been accounted to the extent we knew foreign exchange translation effect on the inner company loan that exists today.

The other question was tax rate versus the previous.

The tax rate is so high because we had planned to enact a tax saving plan, which we have been able to secure only at the end of September, basically 2007, and that plan will fully impact the P&L starting from 2008 and that you have seen the guidance for the tax rate in '08 it's substantially lower. So decreasing by 4 and plus point percentage.

Yes, I was surprised by the increase in tax rate in '07 compared to the previous guidance there can be obviously some let's non-tax deductible costs, I don't know.

Well, the tax rate we have disclosed through 2007 has been let's say in the range of 46%. If you look at the reports, actual reports and the reports we have disclosed in June and September the actual tax rate was 46%. Now we anticipate to do something to lower that which we have not been able to complete before September and that's the reason of a slight increase. Bear in mind that there are the non-deductible amortization of the step-up costs which impact.

Yes, for sure. And the second question is related to the guidance on the Lotto. It is implying also the -- I would say for the Q4 and then for the 2008 you are assuming a further slowdown. There is anything that could be done or that is foreseen for example in the budget law that could enhance the performance of the Lotto? And do you see these trends as a consequence of the cannibalization of existing and potential/future development for example, the SuperEnalotto?

Well, regarding the Lotto the first question is regarding the stability of the fourth quarter. I tend to confirm the stability related to the first quarter -- the last quarter of this year that allow us to project the stability over the next year. That is already the guidance that we shared with you with the presentation of the last year.

No regarding budget law, I don't see any news that are involved in the Lotto and therefore there is a nothing to say regarding something related to the budget law. Regarding the cannibalization I mean the cannibalization coming as you mentioned the cannibalization coming from SuperEnalotto.

I wonder if you are being cautious also on let's say potential revamping in Lotto due to the fact that SuperEnalotto will have a new concessionaire and with a potential let's say revamping, trying to relaunch the game and to push the game?

No, I feel quite comfortable on that because I mean we have already experienced the launch of SuperEnalotto. If you come back with the time you see that when SuperEnalotto was completely launched, that means where the performance of about EUR3 billion didn't affect at all Lotto. And what all what has been done over this period of time between the different strategies in both Lotto and SuperEnalotto, we didn't see any cannibalization between the two games. If I have also -- I mean I can also add there is the experience of Scratch-and-Win. I mean we have launched, relaunched Scratch-and-Win. We passed from EUR250 million up to EUR7.5 billion, EUR7.8 billion this year without experiencing a major cannibalization on Lotto. I think a good argument to keep comfortable over the next future.

Okay thank you.

(OPERATOR INSTRUCTIONS). The next question is from Laura Leonardelli of UBS. Please go ahead.

Hello?

Yes, madam your line is open.

Thank you, sorry, just the name was wrong. I have three questions please. I'm sorry my line is not particularly good. The first question is really Scratch-and-Win, looking at your minority interest posted in the first nine month of this I would expect a discussion with EBITDA margin to have improved dramatically. So could you provide an indication about the EBITDA margin for Scratch-and-Win please? Is it close to the last one?

Why don't you list all your questions first and then we'll address them one at a time.

The second question is related to GTECH operations I was wondering if it's possible to have the EBITDA margin discussing your 2008 guidance please? And my last question is related to the foreign exchange losses you recorded during the first nine months as soon as they're realized at year-end are they tax deductible or shall we remove that from the deductible income? Thank you.

Okay, I'll ask Marco to address possibly with Stefano's help if necessary the Scratch-and-Win outlook and EBITDA margin? I should point out, however, that we generally don't disclose margin by product and gain. But I think we can give you some -- we can give you some very, very broad guidance.

(inaudible) comments.

I'll ask GTECH, the GTECH question to be addressed by Jaymin and Stefano will address your tax-related question on FOREX losses.

So let's start from the Scratch-and-Win business, you were asking about profitability of that business. As we approach these volumes so the profitability of this business is increasing both of the volume effect and the profitability is very close to the Lotto profitability so in the range between 50% and 55%.

And the other question is about minority interest, as you may have seen at the end of September the minority interest that we have disclosed, the net income level is EUR25.5 million so by year-end will be in the range of between EUR30 million and EUR33 million according to the volumes, actual volumes of the sales between EUR7.5 billion and EUR7.8 billion.

So to answer the question on GTECH margins if you look at the nine month year-to-date September 2007 GTECH margins are between 35% and 37%. As reported slightly higher on a constant currency basis as high between 38% and 40% on a constant currency basis. And that margin level is quite consistent with the nine months for 2006 as well.

Sorry, I was asking about the implied target you are assuming to use on 2008 guidance?

We didn't hear the question, I'm sorry, can you say it again?

The EBITDA margin for GTECH you are discounting in your 2008 guidance?

Oh in the '08 guidance we expect EBITDA margins for GTECH to be fairly consistent with 2007. We haven't provided a breakdown by business but fairly consistent.

Thank you.

As I said in my opening comments our 2008 guidance is preliminary. It would be our expectation that early in the New Year we provide a greater degree of clarity around those and obviously we'll have better information at that time.

Thank you, sorry I'm missing the answer to the foreign exchange losses at year-end if they're realized deduction or not?

We heard your question. We're just making sure we get the right answer, hold on.

Okay thank you.

From a cash point of view they're non-deductible.

Operator, any more questions at all?

I'm sorry, sir, we have a question from Benjamin Gecan of Providence Journal. Please go ahead, sir.

Thank you it's Benjamin Gedan of Providence Journal. How are you?

I'm doing fine, Benjamin, how are you doing?

I'm doing great thanks. I wanted to ask you just a couple of quick questions. The first about your plans, a few details if you had any about the investment firm you're establishing whether it will be structured as a private equity firm? What industries you may focused on? Will it be based in Providence, or Rhode Island, those sort of things? And then I had one other question about Providence in the broader scheme of GTECH and Lottomatica now?

Yes, Benjamin, why don't I suggest, I've got Bob Vincent here with me, I think you know Bob.

I do yes.

Why don't we give you a call back since the questions you have are for more local story and content?

Absolutely, that would be fine.

Does that make sense?

Sure that would be absolutely fine. You've got it.

I'll call you back.

Sure thank you.

(OPERATOR INSTRUCTIONS). You have a question from Karen Hooi of Goldman Sachs. Please go ahead, madam.

Hi there it's Karen Hooi from Goldman Sachs. Hello?

Hi Karen what's your question?

Hi there, I'm looking at your Scratch-and-Win guidance for 2008 and it seems, you know, it sounds fairly conservative to me. Will you be in discussions with the Italian authorities in terms of the new sort or products that you could or marketing that you could do in 2008 and that will only take place in early 2008? Thanks.

Regarding the Scratch-and-Win in 2008 we are constantly in contact with our regulator to develop our product range and for sure we will launch a new product within the price point range that are still now in the market.

Okay thanks.

Mr. Turner, gentlemen, there are no more questions registered at this time.

Operator, thank you for your assistance and for all participants this evening thanks for joining us and goodnight.

Ladies and gentlemen the conference is now over and you may disconnect your telephones. Thank you for joining.