International Game Technology PLC (IGT) 2010 Q1 法說會逐字稿

Good afternoon and welcome to Lottomatica's 2010 first quarter results ended March 31, 2010. My name is Ena and I'll be your coordinator for today's conference. For the duration of the call you will be on listen-only and at the end of the call you will have the opportunity to ask questions. (Operator Instructions)

I'm now handing you over to Marco Sala, CEO and Managing Director, Lottomatica Group to begin today's conference. Thank you.

Thank you for joining us for Lottomatica Group's 2010 first quarter results presentation. With me for today's presentation is Stefano Bortoli, the Chief Financial Officer of Lottomatica Group, Renato Ascoli, the Managing Director of Lottomatica and Jaymin Patel, the Chief Executive Officer of GTECH will join us for question-and-answer session.

Now I would like to begin with a perspective on our results for the past quarter. I think it is fair to say that the results for the first quarter can be described in two broad categories. First, we experienced some very positive outcomes that position us very well for future growth. Secondly, not withstanding very challenging comparisons, the underlying operation performance for the quarter was solid and in line with our expectations. When you evaluate the results carefully, I believe you will come to the conclusion that the fundamental strength of our -- of the business continues.

The outcome of the Scratch & Win bid in Italy was a major success for Lottomatica. We are also seeing strong growth in Gaming Machines and Sport Betting in Italy as well. GTECH has launched a major lottery in which it acts as operator. And GTECH customers in US are implementing a major cross-selling program. And California is reenergizing its lottery. These strengths and developments offer great promise.

As is sometimes the case with our business, quarterly comparisons can be misleading. Our results can be impacted in the short term by one-time events such as large jackpots not recording product sales, fluctuation in the payout percentage, as well changes in our contract portfolio mix.

I would like to remind you that our business relies on statistics. The impact of jackpots, price payout and the late numbers, all important variable in our business, are predictable with a high degree of reliability over longer periods of time. It is given that this event will occur over the course of the year. But their impact on a quarter can vary. It's -- that's just the nature of our business.

Let me give you some insights into what this can mean. In the first quarter of 2009, Lottomatica experienced some unusually low payout level in its Sports wagering business. GTECH had a large product sales and the favorable impact of larger facilities management contract that has since expired. Combined with a solid operating performance, the first quarter of 2009 was the best quarter the Group has had since its formation.

Looking at the first quarter of 2010, you will see that the positive impact of one-time events was impressive. I think you can appreciate that year-over-year comparison with the first quarter of 2009 isn't a true indicator of the performance of the Group during the past quarter. More importantly, we expect improvement going forward. And I'm confident in our ability to achieve a modest but continued growth in revenues and EBITDA for the year. And the guidance that we are supplying today reflects that.

As I mentioned, based on historical performance, we believe that during 2010 there will be a predictable level of jackpot activities. Sports Betting prize payout levels will stabilize. Late numbers will occur. And new initiatives like the cross-selling of multi-state jackpot games in US will take hold. That is why I encourage you to look beyond the first quarter numbers to get a better view of the performance of our business.

Strategically, there are some very positive developments and trends I'd like to bring to your attention. As you are aware by now, the Italian Scratch & Win license was resolved yesterday with Lottomatica as the sole bidder. This is a very positive outcome for us. It is important to appreciate that we'll have now secured the Scratch & Win business throughout the 2011 at rates that are more favorable than the current ones. We have been preparing for this license for some time. We are ready to implement a comprehensive marketing plan that includes innovative approaches and appealing new products that will drive sales.

I think it is fair to say that our retail network is one of the best and we intend to selectively expand it over time. Along with our network we also have the marketing expertise to sustain the profitability of this sector going forward. At the same time we are witnessing an evolution of the Italian gaming market. I very much want to underscore the importance of this dynamic to our future growth.

Lotto's Scratch & Win will continue as a foundation of our success in our Italian business. However, Sports Betting and in particular Gaming Machine will have a significant impact on our growth going forward. As anticipating this trend, we invested in these sectors starting in 2007 and we are very well-positioned to capture that growth and we are confident in our plans to do so.

As noted, the other important development in the Italian market is that we have exercised our rights for the maximum allowable number of VLT licenses which amount to 10,761. The licenses have a nine-year term and a very attractive rate of return over that period. We expect to have our first VLTs introduced to the market in July. As we have previously pointed out, the new VLTs will be introduced in different types of retail spaces than of -- than that of our AWP installed base of more than 51,000 machines. This should have minimized the impact of the new VLTs on the performance of our AWPs.

Turning now to the development of importance for GTECH, we recently launched a new lottery in Spain in partnership with ONCE. You will remember that our arrangement with ONCE essentially makes us the operator of that lottery. Our expectation is that GTECH's operation in Spain will become a significant contributor and driver of GTECH's growth. In addition, the two US multi-state jackpot games, Powerball and Mega Million, began cross-selling one anothers' game at the end of January. More time is needed to properly analyze the impact of this development. However, initial results seem to validate the prediction that cross-selling will drive growth for GTECH's customers in the US market. We are encouraged by the fact that Florida is planning to join the cross-selling effort and California is evaluating joining as well.

There were other major developments in California. Price payout reform legislation has been finally authorized. The California lottery will now have the authority and flexibility to manage its portfolio of games to implement industry best practices. Since it began, the California lottery has been (inaudible 17.40) by an inflexible set of regulations that limited its ability to set prices payout levels to the industry standard.

The lottery will now have the potential to become one of the world's top performing lotteries. Obviously that won't happen overnight. But the lottery is expecting to see improvements take hold this year and is predicting and $2 billion increase in sales over the next two to three years.

After a concerted restructuring effort, our gaming solution business has made a turnaround from the last year at this time. While still suffering the impact of low demand, they are encouraging signs of improvement, particularly in the government-sponsored markets in the US. In addition, our SPIELO subsidiary has established a major presence in Italy, the fastest growing Gaming Machine market in the world. This week SPIELO was one of only two providers that were authorized to go forward in the Italian market. To your benefit, SPIELO is providing solutions to Lottomatica as well as other operators. And we expect to be announcing additional SPIELO business in Italy in the short term.

Let me wrap up by noting that our commitment to maintaining an investment-grade credit rating remains steadfast and we will manage our finances going forward accordingly. I appreciate that the first quarter results are open to interpretation. Many variables were at play. But we are confident in the results for the full year and expect that 2010 results will surpass that of last year.

Now I'd like to handover the call over to Stefano for a detailed review of the results and our guidance for the remainder of the year after which we will take your questions.

Thank you, Marco and good evening everyone. As Marco stated earlier, we are reviewing results for the first quarter of 2010 versus our best quarter on record in terms of operating income, EBITDA, and EBIT. In the first quarter of 2009, we had solid revenue performance, exceptionally low Sports Betting payouts, considerable jackpot activity and a significant product sales for GTECH.

By comparison, during the past quarter we experienced an unusually low level of late numbers in the Italian Lotto game, higher than average payout levels in Sports Betting and no major product sales on significant multi-state US jackpots for GTECH. Hopefully, you can appreciate that in this case a year-over-year comparison isn't a true indicator of the performance of the Group during the past quarter.

Let me also state that our 2010 first quarter performance is in line with our expectations. And we have taken actions and believe we have a solid plan in place to deliver growth in our full-year EBITDA. I will provide guidance for 2010, but first let's review our first -- our quarterly result.

Revenues for the first quarter were approximately EUR545 million compared to approximately EUR582 million in the first quarter of 2009. At constant currencies revenues are EUR549 million. EBITDA was EUR197 million compared to EUR240 million in the first quarter of last year. Q1 2010 EBITDA on a constant currency basis was EUR199 million. Price payout for Sports Betting, product sales cyclicality as well as changes in our contract portfolio impacted EBITDA in the first quarter of this year. Margins for the first quarter of this year are in line with full year 2009 and reflect the revenue mix. EBITDA margins were 36.2% compared to 41% -- 41.1% in the first quarter of 2009.

Looking at Lottomatica's Italian operations, our Scratch & Win business generated gross wager of approximately EUR2.5 billion, slightly below wagers for the first quarter of last year. Due to the timing of delivery, a portion of December 2008 Scratch & Win sales were recorded in January of 2009, thus increasing January sales by an estimated EUR100 million. Note that Scratch & Win performance in February and March showed a slight improvement when compared to same period last year.

As is consistent with past years, the average price point for Scratch & Win continues to increase. In fact, the average price point grew 2% to EUR3.9 in the first quarter of 2010 when compared to the first quarter of 2009. This increase is due to the introduction of the two new instant tickets in the quarter one of which is a EUR5 perpetuity ticket and we recently launched a new EUR10 ticket. We also have a comprehensive marketing plan in place to introduce a minimum of five new tickets over the next few months.

Lotto wagers were approximately EUR1.2 billion compared to approximately EUR1.4 billion in the same period last year, down 16%. Lotto wagers were primarily impacted by a low incidence in the numbers as well as one less draw when compared to the first quarter of 2009. Sports Betting wagers grew 20% to EUR309 million in the first quarter of 2010 due to the continued strong performance of Finsoft's sports betting. Finsoft's sports betting wagers in the Italian market were up approximately 17% over the same period last year at EUR1.3 billion, while Lottomatica's Finsoft sports betting wagers grew nearly 29% to EUR283 million. Growth in this market has been driven primarily by higher payout percentages.

Machine Gaming wagers were up 6% compared to the same period last year at EUR1.1 billion. We continue to adjust our installed AWP base in Italy to improve our profitability to increase management of our machines. Interactive wagers were up 36% versus the first quarter of last year at EUR103 million. Lottery revenues were EUR168 million compared to EUR186 million in the first quarter of 2009. Revenues from Sports Betting were EUR49 million versus EUR64 million in the first quarter last year, driven by higher price payouts. Machine Gaming revenues were up 38% to EUR49 million, driven by a 6% increase in wagers as well as an increased number of Lottomatica-owned AWP machines in Italy.

Revenues from commercial services were up slightly to EUR24 million due to increase in bill payment services, electronic top-ups for prepaid mobile and ticketing services. Revenues from our interactive business in Italy generated EUR11 million, up 12% versus the same period last year primarily from online poker.

On slide nine, we provide a breakdown of GTECH lottery service revenue for the first quarter of 2010 versus the first quarter of 2009. Note that this includes Gaming Solutions and GTECH G2. International lottery, thanks to our service revenue, were in line with the prior year. We experienced solid growth in Western Europe, especially the UK and Ireland. In addition, Latin America performed well driven by Mexico and Trinidad and Tobago. This was offset by softness in Eastern Europe.

US lottery same-store service revenues were also in line with the prior year. While we are seeing some encouraging signs of recovery with solid performances as in Illinois, Michigan, New Jersey and North Carolina, it is not yet a universal trend. In addition, jackpot activity negatively impacted our performance in the first quarter. When viewing the combined results for Powerball and Mega Million, the first quarter of 2009 introduced five major draws while 2010 produced only two major draws. Given the level of jackpot activity last month, we are confident in the progress we can achieve in the full year.

Revenues from Italian operations in the quarter were EUR301 million compared to EUR319 million in the same period last year. This decrease was primarily attributable to higher Sports Betting payouts and the low incidence in late numbers during the quarter.

Revenues for GTECH, Gaming Solutions and GTECH G2 were EUR244 million compared to EUR263 million in the first quarter of last year primarily due to product sales cyclicality and changes in our contact portfolio. Gaming Solutions contributed EUR33 million to first quarter revenues, up 6% versus the same period last year. GTECH G2 contributed EUR18 million to our first quarter revenues, up 6% compared to the first quarter of 2009.

EBITDA from Italian operations was EUR134 million compared to EUR166 million in the same period last year. As mentioned earlier, EBITDA was impacted by a low incidence in late numbers and higher Sports Betting payouts. In the quarter, we were also impacted by the timing of advertising expenses. Investments we have made in our business segments over the last couple of years are producing results. For example, we are seeing higher contributions from our Machine Gaming business which is the fastest growing market segment in Italy.

EBITDA for GTECH, Gaming Solutions and GTECH G2 was EUR63 million compared to EUR74 million in the first quarter of 2009. Again EBITDA was impacted by the timing of product sales and changes in our contract portfolio. Looking at the profit and loss, operating income was EUR118 million in the first quarter versus EUR155 million in the same period last year. Interest expense is in line with last year.

In the first quarter of 2009, we had EUR11 million on non-cash foreign exchange gains principally in connection with an inter-company loan. Income before tax was EUR77 million compared to EUR124 million last year.

Group net income was EUR41 million versus EUR86 million in the same period last year. Net income attributable to the owners of the time was EUR29 million, resulting in earnings per share of EUR0.18. Our net financial position at March 31, 2010 was EUR2.52 billion which is in line with full-year 2009 before the impact of foreign exchange. GTECH G2 and gaming maintenance CapEx of EUR42 million was primarily related to investments in GTECH contracts in New York and North Carolina. For Lottomatica maintenance CapEx was EUR11 million while growth CapEx totaled EUR10 million.

Now let's turn to our guidance for 2010. Overall, 2010 is expected to deliver further moderate growth to our top-line revenues. In Italy we expect high single digit growth for Machine Gaming through our combination of increased wagers and direct management of AWP machines. We also expect to see continued growth in the Italian Sports Betting business. We expect Scratch & Win wagers to be comparable to 2009 while Lotto wagers are expected to decrease by 5%, 6% versus the prior year. Given our completed and future investments in Machine Gaming, VLTs and Sports Betting, we believe we have a well-diversified and balanced portfolio of products in Italy to deliver meaningful growth in 2010 and beyond.

Turning to GTECH, in the US we expect low single digit same-store revenue growth with contributions from cross-selling of Powerball and Mega Million tickets as well as increased price payouts in California. In the international market we expect to see low single digit growth in same-store revenue due to higher than average growth in Latin America, good performance in certain Western European countries and also taking into account some softness in Eastern Europe.

While only recently launched last week, our new startup business we launched in Spain is expected to generate additional revenue beginning in the second half of 2010. Our Gaming Solutions business is primarily focused on implementations in the Italian and Swedish markets which once completed will represent the most advanced end-to-end technology solution in the distribution VLT market. We will also continue to pursue commercial gaming opportunities in the US and Canada.

GTECH G2 continues to work directly with WLA customers and will develop and execute interactive foundations for VLT -- for WLA in several jurisdictions across the globe. We will also work to improve our service levels in Europe, particularly as it relates to poker and skill games in Italy. Our management teams are also focused on improving performance through cost reduction initiatives representing savings of approximately EUR25 million to EUR30 million in 2010. This is a multi-year plan focused on recurring operating costs. In the meantime, we're continuing our efforts to reduce terminal and system costs.

Given the size of the investments we have in front of us, we would like to shed some light on the most important components of our 2010 CapEx. As you are aware, we are required to make upfront payments for the Italian Scratch & Win license and the second [trench] for VLT rights, totaling EUR880 million. For the Scratch & Win license, the other partners in our venture will contribute their share of equity.

We have also committed to the maximum number of VLT rights, or 10,761 rights. And we expect to have these machine deployed by mid-2011. VLTs in the Italian market and our new startup business we launched in Spain are amongst our most significant growth investments that are expected to provide meaningful contributions beginning in 2011. Additionally, we will continue to invest in the 10 and Lotto game in Italy as well in GTECH's lottery contracts in New York and California. Note that three-quarters of our CapEx in Italy are growth investments. For GTECH, one-fourth of our investments will be related to growth.

Now let's look at our guidance for 2010 which is based on an exchange rate of $1.40 to EUR1. We expect revenues for the year to be in the range of EUR2.3 billion to EUR2.4 billion. EBITDA is expected in the range of EUR785 million to EUR805 million. As we mentioned earlier, CapEx is expected to be in the range of EUR1.2 billion to EUR1.25 billion. Our net financial position is expected in the range of EUR2.85 to EUR2.95 billion. We will provide further visibility on future years in due course.

And now we will open the lines for Q and A, after which we will hear closing comments from Marco. Operator, please.

Thank you. (Operator Instructions) And we have a question from the line of Alessandro Bajbadino of Deutsche Bank. Alessandro, please go ahead.

Yes, the first question is regarding the new Scratch & Win license. When do think the process of authorization from the Italian regulator will terminate and therefore the new license will be awarded to Lottomatica? And that means also the new fee will start.

And ask you regarding the cash out, if you can confirm when you first bagged that cash out, the first installment and the second installment.

Regarding your full-year 2010 guidance, can you provide some tales between Lottomatica and GTECH in term of EBITDA if it's possible, like more or less where the two companies stand off? And again on your guidance, you show in your slide EUR140 million, EUR160 million for Italy. Can you give us some flavor of what that amount of money is related to? That's for the first part of my question. Thank you.

Are we going to have a second part --?

Let's see.

No. I will try to answer to the first question on Scratch & Win. I mean, I think we will -- the commission will have a meeting probably tomorrow and -- but -- I mean, I cannot anticipate since I do not believe they will have major items to review. We could in principle be awarded starting from tomorrow and maybe tomorrow or in the following days.

After the (inaudible 36.45) as the provision to have the first installment, 15 days, within 15 days after the awarding of the concession and the second installment is confirmed to be in November this year. As regard to Scratch & Win, Stefano, would you like to reply --

Yes. So the second question was if I could have commented the composition of expected EBITDA --

Yes, between Italy and --

-- between GTECH and Lottomatica?

Yes.

We expect, let's say, in terms of Lottomatica to have a slight growth which is coming from, mostly from the Gaming Machines trend. In terms of the remainder of the component, slight growth which is again coming from a stable GTECH lottery business and slight improvement on the Gaming solutions.

The third question you asked was about the more flavor, more color on the composition of CapEx on the Italian side. The major driver of our investment plan for 2010 is the VLT business where we are going to invest in our own machines. We expect to have on the ground, installed by the end of the year, as we have said, in between 40% and 50% of the total machines in operations and all the associated investment in terms of point of sales and the communication and central system. A second important piece of the investment is associated to the enlargement of the Scratch & Win distribution network and the sustaining of the new games for Lotto.

So out of that roughly 11,000 rights you are expecting at the end of 2010 to have installed roughly half of it, is that correct?

We expect to have on the ground, yes, that number of machine. It's an ongoing process. We will start at the end of the testing phase. The average number of machines in place for the full 2000 year on a yearly basis will be around 1,000 machines in operation for your perusal given the concentration of this installation in the second part of the second semester of the year.

Okay. Regarding the Scratch & Win, any other block from a local court or any other appealing, anything like that is expected? I mean, you're 100% sure getting the license nothing should stop that award.

I think you can never be sure that no appeals will happen. But -- I mean, rationally, consider that this was not a new tender, it was the first tender that has been confirmed by the highest administrative cost in Italy and based on that ruling it has been a standard, the possibility to present the offering. So these -- the structure of this standard has been already reviewed by both the administrative court of the Italian legal administrative court. So, I mean, I do not see at this point in time any additional ground for any appeal. But having said that, I mean, I cannot give the certainty of it, but I'm pretty sure that it's very difficult to find out a new way to appeal against this tender.

Thank you.

Thank you. Our next question is coming from the line of Fabio Pavan from Mediobanca. Fabio, please go ahead.

Yes. Hello, good evening to everybody. Just a couple of question. The first one is related to the cost reduction plan you announced. I was wondering if 2010 figures are already assuming the savings, I'm talking about the guidance on EBITDA level.

Secondly, on the Lotto business you're assuming a recovery for the coming quarter? April is showing some sign of recovery or it's too early? And my last question is on the Spanish contract of GTECH, starting from when revenues from that will become visible and some contribution on margins also.

Okay. So Fabio, I will take the first one. In terms of cost reduction, the impact of the actions that we have identified and that are already in the execution phase is reflected in the EBITDA that we have indicated as our target for 2010. The actions are addressing every single component of our business. So from the Italian side and the GTECH side, on Gaming and G2. So Renato will comment of Lotto performance.

As far as Lotto performance as Stefano clearly stated, the key drivers of the GAAP, the year-over-year performance are related to the fact that one draw is missing in the comparison as we will recoup this missing draw in May, not in April. And the second point is the fact that no late numbers appeared in the first quarter. April is very much in the same trend of the first quarter as we expected. And we might see some, say, change in trend by mid-May and further months.

Okay. Thank you.

Jaymin?

So with respect to your question on Spain on say, as Marco mentioned, we just launched that business in the last few days. And we are in the middle of a national rollout, so we have about 4,000 selling retailers today. By the end of the year we'll have 9,000 to 10,000. So I would expect that we will start seeing a significant revenue contribution sometime in the third quarter because we are in the launch phase at the moment and we're spending very heavily on marketing and advertising costs. So in terms of product contribution, I wouldn't have an expectation of anything this year because of the investments we're making for the launch. But from 2011 onwards I think that we will start to see a contribution from that new business.

Okay. So which step of lottery and gaming are you launching in Spain, if I may?

Yes, we are starting with a range of Scratch & Win products, so EUR1 to EUR3 products that were launched last week. That will grow to more expensive price points later in the year or higher price points, as you say, later in the year with higher price payouts. And then at the end of May we are launching a keno-style game across the network as well. So we'll have both Scratch & Win and online products on the network by the end of this month -- by the third quarter.

Okay. Thank you.

Thank you. The next question is coming from the line of Domenico Ghilotti from Equita. Domenico, please go ahead.

Good afternoon. My first question is on an updated sensitivity to the US dollar, at least for sales, EBITDA and net debt.

And the second is a clarification on the Scratch & Win contribution to the full-year guidance, in particular if you have assumed, let's say, the new fee already, let's say by -- from the second half or if you are (inaudible 45.54) guidance the more with the existing fee.

And the last is related to the same-store sales. You mentioned that you are expecting basically a recovery both in US and internationally. So I would like, if possible, to elaborate -- you to elaborate a little bit more on the cross-selling contribution and why we haven't seen any positive contribution from cross-selling in the US in Q1.

Okay, Domenico, I'll answer your question about the US dollar sensitivity. In terms of EBITDA, given the composition of our portfolio of revenues, we have, let's say, a larger cost base because even cost in non-US denominated contract of the cost in dollars. So I would say in terms of EBITDA improvement of the dollar strength is around, let's say, 1% in terms of our EBITDA or every $0.10 roughly speaking, probably less than that.

In terms of debt, let me remind that in the last couple of years we have substantially decreased our US-dollar debt and today probably 30% or so of our debt is US-denominated. And in case of a $0.10 strengthening, we would have an incremental debt which is in the range of EUR80 million.

Okay.

You have further questions about the --

Scratch & Win.

-- yes, of the same-store sales in terms of Scratch & Win we have assumed the new license starting from June 1st. So in terms of fee and everything else is consistent with this assumption.

Okay.

So in terms of your question on same-store sales, let's deal first of all with the US market. You have to look at the US market in two categories, those jurisdictions that have launched cross-sells, either Mega Millions and -- or Powerball and those jurisdictions that have not, if you look at the first quarter's performance, it's very clear that those jurisdictions that have launched cross-sell have grown by approximately 2.5% to 3% in the first quarter taking into account all gains. And looking at the specific Powerball or Mega Millions category, those games have grown by 8% to 10% in the quarter giving an overall growth of 2.5% to 3%.

Then there is a category of jurisdictions that have not launched Powerball and Mega Millions yet for various reasons. And that category includes two large US states which are California and Florida as well as a handful of small jurisdictions. That category has not grown in the first quarter, in fact has -- is down by a few percent in the first quarter versus the first quarter of 2009, primarily because the large jurisdictions, Florida and California, had tremendous in-state jackpots in the first quarter of 2009.

So when you combine the fact that the cross-sell category grew by 2.5% to 3% and the non-cross-sell was down by few percent, you have the overall effect of a fairly flat same-store sales in the quarter. But it's very clear that if you look at those jurisdictions that actually implemented the cross-sell, they're growing quite comfortably. With respect to international, the business has done well in a number of economies but we are seeing a weakness, we're seeing weaknesses in Eastern Europe in particular where the economic impact has really hit the Eastern European economies very hard. So we are working with our customers to implement new programs to try to recover the situation.

Operator, any other question?

Thank you. Our next question comes from the line of Laura Pennino from Banca Leonardo. Laura, please go ahead.

Good evening to everybody. I have just a few questions. One is relating to Sports Betting in Italy. You said that the Sports Betting payout was exceptionally high. Can you give an indication what you expect for the full year? And can you also give an indication of how competition on online poker in Italy is going?

And just another question regarding Scratch & Win. In the tender specification, the Scratch & Win concession has a nine-year duration and it says that it can be renewed only once. What does this mean, it can be renewed only once? It means that you -- at the end of the nine years you will have to pay again the upfront and that there won't be a tender or actually it can be renewed without tender? That's it.

Okay. Thanks, Laura.

Okay. Yes. So as far as Sports Betting is concerned, we might consider -- starting considering that the full year 2009 performance in Sports Betting ended up with an overall payout of less than 80% as far as Italian operations is concerned. Nowadays pay in -- our operation are showing a payout of about 84% plus. So compared to last year it was 14 percentage points below, is -- it can be considered higher than average, definitely higher than our common performance and extremely -- let me say, a bit higher versus an extremely low performance in year 2009.

We think that in the longer period overall payout, which by the way, is very much in line with market payout, moreover I would say we performed better this year than last year versus the market average, I would say. We think, as I was saying, the -- in a longer term, the payout will move to the 80% which we think could be the most likely outcome for year 2010.

As far as poker is concerned, which was your second question, we are experiencing a huge competition both in terms of acquisition of new customers and in advertising campaigns. We think that most competitors are pushing investments very high. I do not think -- we do not think that this will continue for -- on a longer period, otherwise there won't be margins in the business at all. We are cautiously investing in both acquiring new customers and providing good information regarding our plans. And we are seeking profitability for this year.

I'll try to elaborate the question regarding the renewal of the Scratch & Win. It has not been specified. That is the way of the possible renewal of the concessions. Generally speaking, based on our experience, when is a -- concession is renewable is a total discretion of the regulator that can start a discussion with the operator or rather with concessionaire to discuss a possible renewal.

It's a discretion, it's up to them. And it's up to them also to define which are the conditions based upon that you can have the possibility to renew the concession. So -- I mean, it's not something that is written in the method. It's just a way, a right of the regulator to have a discussion with the concessionaire. That is possible without issuing a tender. But it's just a discretion.

So, excuse me, just your -- in your basic -- base assumptions, you are assuming that it will -- that the concession is adjusted, nine-year concession and then a tender could be put in place.

When we have made our internal estimate for the bidding, we have based all our IRR calculation on a nine-year term.

Okay. Thank you.

Thank you. Our next question is coming from the line of Michela Ferruta from Intermonte. Michela, please go ahead.

Yes, hi. Michela Ferruta from Intermonte. I have a few questions on Gaming Machines and your assumptions for 2010. Well, first of all, once you have installed all the video lotteries, how will the mix between owned machines and managed machines evolve? And how many machines do plan to have?

I remember in the last call you said you were actually finding places so that you don't have to take away the AWTs. If I can just -- I don't know whether you can confirm this or not.

And are there any initial thoughts on the VLT's trials? And I'm not sure I understood Stefano's indication on the 1,000. You said the average VLTs which will contribute to the year or to the semester?

And the second question on GTECH and regarding the guidance, I think you said flat US service revenue growth. And I understood the explanation on Q1 differences between those states which have and have not done the cross-selling. Are you assuming that for the year we will see a similar trend so that overall we will remain flat or is there any potential room for surprise? Thank you.

Okay. So let me take it from this last one, in terms of the US perspective we expect revenues in same-store sales to go up a couple of percentage point given the launch of this initiative that will be impacting from the second quarter onward but mostly in Q3 and Q4.

So more precision about my previous statement about VLT's introduction. We will install VLTs and we plan to have installed by the end of December 2010 roughly 40% to 50% of the total number of rights that we have targeted, so the 10,761.

In terms of revenue generation and profit generation, we are estimating an average number of machines which would be 1,000 in 2010.

Okay --

So that's the number. As we have previously stated, the distribution channels that we have targeted are different from the existing AWP installed base today. But I'll leave Renato --

Yes, just to remind everybody, the regulation says that new VLTs can be installed only in betting shops in the bingo halls or in arcades, dedicated arcades. So because of our distribution, because of our focus on, let's say, corners and bars, we will install VLTs in new location, mainly in new locations without creating overlapping or a conflicting position in our AWPs versus new VLTs.

You mentioned the trials. So for the July start we will focus on betting shops and existing arcades. So we have found partners, we have a huge list of them, and we will focus the most attractive one. Now, that is the operating area with AWPs and they will substitute progressively the AWPs with new VLTs. But we are not in those locations so far.

And I had a very last question on the mix between owned and managed Gaming Machines once all the VLT gamings have been installed.

Today we have, let's say, a mix which is of the 51,000 AWP installed. We have basically roughly 30% -- 35%-ish which is owned and the rest which is only managed and not owned. So one-third and two-third. We will progressively grow so that we will hopefully balance in terms of portfolio which we will have a 45%-ish to 50% owned and 50% to 55%-ish managed.

And the ones owned will be the VLTs, I mean the ones that are growing.

The ones that are growing is, let's say, mainly VLTs, yes.

Mainly. Thank you, thank you.

Thank you. Our next question is coming from the line of Alessandro Bajbadino from Deutsche Bank. Please go ahead.

Yes, some question regarding US. Can you give us an update regarding the privatization of Illinois lottery, if we had any -- that further in the process of outsourcing these services? And also, there is a question regarding Texas, if you can confirm the deadline to present the offer when the winner will be appointed on the Texas lottery.

Then another question is regarding the Internet possible development on US lotteries, if there are any news there or any possibilities in what is Lottomatica possibility in this game. And last, we touched on this subject few times, Florida and California, do you have an exact date when Florida and California will do the cross-selling of the Powerball and Mega Million? Thank you.

Okay Alessandro. So with regard to your questions, first of all with regard to Illinois, the state is still moving forward with planning for the release of an RFP to appoint a private manager, as they call it in the state. Just a few weeks ago, they actually appointed a transaction advisor, a company called Oliver Wyman and Associates. And the transaction advisor is going to assist them in producing a private manager RFP which they have said they will issue sometime in the July timeframe.

So the expectation originally was that the governor would sign a private manager contract with an operator by the September-October timeframe. Given where we are today, that looks a bit tight. So I think it will be a little bit later than that. But the process is continuing.

Secondly with regard to Texas, the original expectation was to submit a bid at the end of May. However, in the last few days, the Texas lottery has extended the deadline for response to June the 27th due to a request from a competitor in the market to extend the deadline and the lottery has agreed to that, which is certainly fine with us. And so we will be responding by the end of June.

There is no real movement with respect to interactive legislation in the US market. As you probably are aware, there are several activities taking place with different gaming parties presenting their positions with respect to interactive gaming, whether it be poker or sports betting, et cetera. But I would say there is nothing material to speak of and I don't expect there to be any legislation passed for at least a couple of years on this subject. So we're tracking it careful. Of course, we have our own interest there as well, but no real movement to speak of.

Can you just remind me your last question?

Yes, regarding the cross-selling of Florida and California, we touched the subject, but is there a deadline of any time they want to --

No, I don't really have a deadline for that. Both customers, as Marco mentioned in his remarks, are actually considering the launch. But I don't really have any clear guidance for you.

Okay. And the last question from me to Renato Ascoli, regarding the skill games, when is the project of starting a real casino online beside the poker, when that activity should start related to the other games?

Well, the -- we expect it to happen in the last quarter of this year. We say that because we think that the regulator is busy at the moment to really find the standard protocols for the whole interactive business and so they decided to focus the attention in redesigning how the connections with [SJ], the IT branch of the regulator has to be put in place by the end of August. So I would definitely think that the launch of new games, as you said, cash poker and casino games should be located within -- in the last quarter of the year.

Thank you.

Thank you. The next question is coming from the line of Roohi Siddiqui from Bank of America. Please go ahead.

Yes. Good evening. I have a few questions if I may. The first one is on the depreciation going forward. With all those step-up in CapEx, what should we be expecting for depreciation and amortization charges in 2010? And if you could provide some color on that between the Italian operations and GTECH that'll be really helpful.

The second question is on Spain. Could you give us some idea of the potential opportunity in Scratch & Win in Spain and the size of the -- the potential revenues that we could expect, the fees that you would get from there? Thank you.

So let me answer your question about depreciation. If you move from 2009 depreciation, as reported, you should increase that, because of the additional depreciation stemming from the license, the Scratch & Win license, it's a fair trade calculation EUR800 million.

Yes.

It's a straight line methodology, depcreciated of nine-year license -- nine-year term starting from June 1st, 2010. So it's a mathematical exercise, something more than EUR50 million.

On top of that, there is the depreciation associated to VLTs, investments, and -- which are incremental to 2009 and related licenses, which would increase depreciation charges versus last year by some EUR30 million overall. Those are the two major changes versus 2009 base. No other significant changes. And as you see these are all incremental expenses on the Italian side. So I think you can figure out very accurately what is the expected depreciation charge for 2010?

Thank you. And on Spain?

So on Spain, by way of background, Lottomatica and GTECH have entered into a 50-50 joint venture with Logista, which is a Spanish company. And we intend to roll out over 15,000 terminals, probably 20,000 terminals across Spain by the end of 2011, and then operate a multi-year concession.

It's very hard to give you exact predictions, because the Spanish instant ticket market is fairly new. They have a fairly modest [five-market] today.

But it certainly would be our expectation that instant ticket sales could reach EUR1 billion over time. I wouldn't say in next two years, but certainly over time as well as, of course, the contribution from online keno.

So it would be our expectation that as a joint venture our business would certainly be in gross sales over EUR1 billion over the next several years. So that's -- that gives you some gross sizing, I think, will be more specific on guidance, perhaps later this year or beginning early next year.

Thank you. And here you're referring to wagers is it?

Yes, I'm referring to wagers, yes.

Okay, and sorry, just -- are you the only -- do you guys have a monopoly there or --?

Well, the customer today -- the blind Spanish lottery does have a modest instant ticket business, which we are nationalizing, taking national and selling through the retail channel. And so this will become -- we expect this will become the largest instant ticket business. The other instant ticket channels in Spain are very modest.

Okay, thank you very much.

Sure.

Thank you. Our next question is coming from the line of Domenico Ghilotti from Equita. Please go ahead, Domenico.

Hi, I have a couple of follow-up on the Italian business. First of all, if you can give us an update also on the trend for Scratch & Win and the second is on the lotto performers. In particular, you are -- you mentioned 5%, 6% decline expected for the full year, but you are still running well above the 10% decline.

So I would like to understand if you are assuming that the more important contribution coming from [digital] lotto, if you are seeing this improvement mainly related to the late number -- potential impact?

Yes, so as far as the Scratch & Win is concerned, as Stefano was stating before, we had a, let's say, a negative impact in January, and both February and March showed an increase in -- versus the last year. On the whole we are still lagging behind on -- in the quarter and April shows, let's say, a similar trend.

12) up to a maximum of let's say about 30,000, and we will start expanding the metro in the following days.

Okay, so from 5,000 to 30,000, is that correct?

Sounds like that, yes.

Okay. Thank you.

Thank you. We currently have no questions coming through. (Operator Instructions). We have a question from the line of Roohi Siddiqui from Bank of America. Please go ahead.

Hi, it's me again. If you could just give me some guidance on the tax rate for the year, that'd be helpful.

The tax rate as reported in the Q1 is a -- is a good reference, probably on a yearly basis might be one or 2 percentage points up or down.

Okay, thank you.

Thank you. The next question is coming from the line of Maria Gancheva from Bank of America. Maria, please go ahead.

Hi good evening and thank you for taking my questions. I have a few questions for you. If you could please bridge the guidance for net debt to the first quarter, that'll be very helpful in terms of a bit more detail.

My second question to you will be if you could give us some color as to the accounting treatment of the Scratch & Win concession renewal as I'm asking in relation to your mandatory deferral covenant, which is fixed charge of 2.5 [was] adjusted for CapEx.

My third question will be, you obviously are re-leveraging. Do you expect any changes from rating agencies? Have you discussed with them? And my last question will be on available liquidity as of today. Thank you.

Okay. So let me take these questions from the end of the list you have made. In terms of the accounting rules for licenses, for the Scratch & Win license that is included in the intangibles, and to the calculation of the hybrid covenant is not considered as a capital expenditure.

In terms of discussions with the rating agency, this is an ongoing relationship we have with them. We will continue to talk to them and they are keep -- they are kept informed of regular developments of our business. In terms of bridging our net debt, let me repeat that we have indicated our guidance at the end of 2010 based upon $1.4 versus EUR1.

We have indicated the value of our investments during the year, and at this point in time we have enough liquidity to face all the investments that we have to sustain in 2010, and we are committed to maintain investment grade rating, and we will evaluate our options in support of maintaining our investment grade rating as appropriate.

This will include any optioning amongst others that would add new financial partners to one or more of our businesses. Our commitment in such a case would be to remain the operating partner and maintain majority control of the business. And this is very much in line with the manner we have approached other operators' opportunities.

And so just to clarify, when you say you are searching for new partners, is that for the VLT business or adding to the scratch & win consortiums?

I will repeat. We will -- we are at steadfast commitment to investment-grade rating. And if and when appropriate, we will evaluate options in way of maintaining our investment-grade rating. That may include having new financial partners to one or more of our businesses, depending on the circumstances and the most convenient options we will have to deal with.

Okay, that's great. Thank you. Just really finally on the liquidity, if you could just give us the current undrawn facilities?

I have to check that data, but if you give me one minute, I have to look that up. In terms of our undrawn and committed facility, let me check that number, just to be sure. We had at the end of March EUR300 million available under the Lottomatica revolving credit facility, EUR300 million, which is our committed credit line. And we had at the end of June as well, roughly -- March, sorry, we had roughly EUR200 million available under the GTECH facility for a total of EUR500. And on top of that we had cash available for roughly -- how much is it, let me check that data as well. It's over EUR350 million.

Okay, well, that's great. Thank you very much.

Thank you. Our next question is coming from the line of Mauro Baragiola from Citigroup. Please go ahead.

Hello, everybody. A quick question because I missed your previous answer. Can you confirm me the edge on the US-denominated debt, is still edge only on the coupon rate or is also edge on the currency now?

Sorry, didn't -- we said before that we have US dollar denominated debt.

Yes.

And that we are in presence of strengthening of the dollar by $0.10, we would incur an incremental euro value in the range of EUR80 million.

Okay. No, I apologize but I told you that I missed that answer. So okay, perfect.

Thank you. We have no further questions coming through. I hand back to your host for closing remarks. Thank you.

Thank you everybody. I will wrap things up. With the successful conclusion of the Scratch & Win bid, Lottomatica Group has tremendous ability and visibility into its future. We are well positioned in the high-growth sectors of the Italian and global gaming market. Hopefully, we have made a good case that the first quarter results were effected by many one-time events and variables that are not indicative of how we see the full year coming together.

As our guidance indicates, we expect Lottomatica Group to have a good year in which we see the continued evolution of the Italian market to high-growth sector such as Gaming Machines and Sports Betting, the emergence of Spain as a major operator market for GTECH and improvement of same-store revenues with the full implementation of cross-selling in our core lottery business in the US. We have made strategically important investments to position the Group to continue to prosper. Now we are going about the business of capturing those opportunities. Thank you for joining with us today and good evening.

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