International Game Technology PLC (IGT) 2010 Q3 法說會逐字稿

Welcome to the Lottomatica 2010 third quarter year-to-date results ended September 30th, 2010 conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Marco Sala, CEO and Managing Director, Lottomatica Group. Please go ahead, sir.

Good evening and thank you for joining us for Lottomatica Group's 2010 third quarter results presentation.

Joining me for today's presentation is Stefano Bortoli, the Chief Financial Officer of Lottomatica Group. Renato Ascoli, the General Manager of Lottomatica and Jaymin Patel, the Chief Executive Officer of GTECH, will join in for a question and answer session.

To begin, we had a good quarter. Revenues were up 12% and EBITDA grew by 20%. We were able to regain momentum in our Italian operations, recovering from a slower start in the first part of the year.

As you have seen below operating income, we also recorded an unrealized foreign exchange loss related to some hedging activities. This is a one-time, non-cash expense.

Further, year-to-date the Group experienced growth across all the business segments. For the same period, revenues were up 5%, and EBITDA was comparable to last year. I should emphasize that we remain confident in our ability to deliver on our overall 2010 financial commitments as projected.

Before I get into specifics regarding our results, I'd like to first provide you with an update of some of the meaningful developments that have occurred this quarter that should help to enhance value and sustain our growth.

During the past quarter, we demonstrated the capability of the Lottomatica Group companies to work together to pursue and secure new opportunities. One of the most notable results of our integration effort is taking place in Illinois.

Combining the operational expertise of Lottomatica and the innovative technology solution of GTECH, we formed the Northstar Lottery Group, which was selected by Illinois Lottery to enter into first of kind private manager agreement. The integrated offering proved to be the key of our success.

Under the terms of the agreement, the lottery will rely on a GTECH led consortium to develop and execute a business plan for the Illinois lottery. The business model adopted by Illinois balances risk and reward very well. The management entity is accountable for various levels of performance. But, the private manager can also achieve substantial incentive payments for results higher than the lottery would have expected to achieve on its own.

The concept is generating a lot of interest from other states. By and large, state governments are more politically comfortable as regulators rather than operators. Further, we leveraged GTECH's experience and knowledge of the local market to our advantage.

We have always considered GTECH's global footprint and strong consumer relationship an important strategic asset, particularly when coupled with the expertise of our Lottomatica operations. We are completing negotiations and processes are being reviewed. It is expected that the lottery will be in a position to go forward with a contract signing within the next few weeks.

Turning to other developments of importance, the Italian market has resumed a positive growth trend. Scratch and Win is benefitting from new game launches. Additionally, the Italian lotto game has been redesigned and is generating very positive player reactions.

October was our first full month of results including the new game. With its additional contribution and support of late numbers, Lotto wages for October were the highest of any month this year, with a growth of approximately 10% over October 2009. We find the trend to be very encouraging.

We were first to the market with VLTs, and the segment is experiencing significant growth along with machine gaming in general. Again, I want to highlight the integrated nature of our approach to the Italian machine gaming market and the VLTs specifically.

Our SPIELO and Electronic organizations worked side by side with their Lottomatica colleagues to be devise our strategies and drive our market leadership. It is also hard for me to imagine a simple vendor-supplier relationship producing a similar result.

Finally, with the emergence of Sports Betting as a solid contributor, we are continuing to see the positive impact on our strategy to diversify our Italian revenue sources. In that regard, the accomplishments of our Italian operations have been quite remarkable.

While we are waiting for the announcement of the Texas award, which is expected shortly, the Group is in the final phase of completing another major rebid cycle. Since the later part of 2008, GTECH has successfully competed for businesses in 15 major procurements. We also received extensions to 12 existing contracts, in most cases surpassing planned rebids.

Looking forward, GTECH does not have any rebids of major contracts for the next two years, and the Italian licenses are secure for longer terms.

Let me give you some perspective on the impact of the rebid cycle on our business. Including the Lottomatica license rebids, from 2008 until present, we had EUR5.8 billion of revenues up for rebid. We retained 92%, or EUR5.3 billion, of that total.

The weighted average length of our contract portfolio is seven years. And we have more than 80% of our revenues under contract over the next four years. And we have been successful in filling the pipeline to drive future revenue growth. A positive outcome in Texas will further improve those numbers.

The Gaming Solution Organization has made good progress, based on SPIELO's strong performance in securing contracts for machines and systems in government sponsored machine gaming sectors. We anticipate that the Canadian machine gaming market is entering a replacement cycle. To that end, SPIELO is very well positioned to maintain and grow its Canadian market leadership.

Quebec recently selected SPIELO to provide machines and a central monitoring system. We hope and expect that other Canadian provinces will take notice of that selection as they look to rebuild and replace their systems and games. In addition, we are expecting to grow our presence even further in the Italian machine gaming market by providing systems and games to additional operators.

With the commercial success of the Group, we believe that the timing is right to undertake a restructuring of the Group's financed side of the scheduled maturity of our current obligations. As you will recall, we have pursued a strategy of gradually reducing our US dollar denominated debt. The actions we will be taking are another step in executing that strategy.

The Lottomatica Group Board has authorized us to undertake EUR2.3 billion worth of financing activities that will include capital market transactions, additional bank loans and revolvers, and monetizing a minority interest in the Italian Scratch and Win license. I should note that we will remain the majority and controlling partner in the operating company.

The result of those activities will better align our euro and dollar denominated expected cash flows in the rebalanced debt portfolio. It will also extend out the maturities of our debt and create a financial structure for the Group that has the flexibility needed to sustain and drive growth while maintaining our investment grade credit rating.

We expect to complete these activities within the first quarter of next year. Stefano will provide a more detailed review during his presentation.

Now, let me review our financial performance for the third quarter of 2010. As I noted, in the most recent quarter we produced a positive operating result. Group revenues, as reported, were up 12% versus the same period of the previous year. EBITDA grew by a healthy 20%, underlining our capability to generate meaningful contributions from our top line growth. And operating income was up 33%.

As I noted in the beginning of my remarks, Italian operations continued to make good progress. Machine Gaming revenues were up 41%, while the number of machines sold increased by 10%.

Sports Betting and the Interactive segment also performed well, and were up 99% and 21% respectively.

Turning to GTECH Lottery operations for the quarter, overall service revenues were up 6% primarily due to positive foreign exchange impact. Same store revenues were impacted by the lack of major jackpot activity during the quarter. Further, there was major jackpot activity in the comparable quarter of 2009.

While we anticipate that jackpots will occur on a fairly regular basis, this is not a given for any one or two quarters. Statistically, we are confident that over the longer period of time, jackpots will occur.

GTECH enjoyed commercial success beyond Illinois, winning a new 10-year contract with Pan Malaysian Pools, a new contract for an electronic instant system with Swiss LoRo, and a new six-year agreement with Nebraska to provide a unified online and instant ticket system. That represents another primary contract win for GTECH Printing, its third primary contract win this year.

The Nebraska win was strategically important to GTECH because the Nebraska lottery was a long time customer that had been lost to a competitor. It is very satisfying to welcome them back.

After the quarter had ended, GTECH announced a new contract with FDJ in France for the provision of a new central system, a four-year extension with the Florida lottery, a two-year extension in Mexico, and a new opportunity with the Shenzhen Welfare Lottery in China.

In the Gaming Solutions business, our SPIELO subsidiary is experiencing solid and sustainable revenue growth, driven by its activities in the Italian and Canadian markets.

In the Interactive segment, our G2 subsidiary continues to invest in the valuable segment where lotteries are looking for new distribution channels. Most notably in Canada, G2 was selected to help some provincial lotteries to create a new portal network. The launch of that network is expected shortly.

All in all, I hope I have given you a good perspective on our future. I think you can see from our experiences in Illinois and Italy that the operating entities that make up Lottomatica Group are combining to secure new opportunities and deliver value.

When I look out over the next few years, it is evident that our pipeline for new revenues is already beginning to fill. I'm firmly of the belief that we are reaching a time where the value of Lottomatica Group as a whole is far greater than the sum of its parts.

Now, I'd like to hand over to Stefano for a detailed review of the results.

Thank you, Marco. Good evening and good afternoon for those overseas.

I am happy top report that overall we delivered very good operating results in the third quarter of 2010. In fact, we achieved growth across all of our business segments in the first nine months of this year.

Revenues for the third quarter were up 12% or approximately EUR552 million compared to EUR494 million in the third quarter of 2009. At constant currency, revenues were EUR532 million.

EBITDA was up 20% to EUR200 million compared to EUR166 million in the third quarter of last year. Third quarter 2010 EBITDA, on a constant currency basis, was EUR194 million. EBITDA margins were 36.2% compared to 33.6% in the third quarter of 2009. The increase in third quarter EBITDA margins is primarily attributable to lower payouts for Sports Betting in Italy.

Looking at Lottomatica's Italian operations, our Scratch and Win business generated gross wagers of approximately EUR2.14 billion, up 1% versus the third quarter of last year. The number of Scratch and Win tickets sold in the quarter was in line with the third quarter of last year at 561 million.

To continue driving sales, we introduced a EUR5 in early July. Three additional games were launched in September and October.

Lotto wagers were approximately EUR1.3 billion compared to EUR1.4 billion in the same period last year. While Lotto wagers were down year-over-year, there was a 6 percentage point improvement over the previous quarter, a trend we find encouraging. The redesigned Ten and Lotto game was launched during the last week of September and is generating incremental revenues.

Lottomatica's Sports Betting wagers in the third quarter were EUR173 million compared to approximately EUR189 million in the same period last year, due to a lower payout percentage in the third quarter of 2010.

Machine Gaming wagers were up 28% compared to the same period last year at EUR1.1 billion. The number of installed machines in the third quarter of 2010 grew to over 55,000, up 10% versus the third quarter last year. Note that this machine count comprises AWPs and VLTs connected to a Lottomatica system. Approximately 45% of the total count are directly managed by Lottomatica.

In July, Lottomatica launched the first VLT network in Italy. And at the end of September, approximately 150 VLTs were installed.

Interactive wagers were up 26% versus the third quarter of last year at approximately EUR101 million. This increase is due to higher overall wagers in skill games.

Lottery revenues were EUR157 million compared to EUR162 million in the third quarter of last year as a result of Lotto performance.

Revenues from Sports Betting were up 99% to EUR49 million versus EUR25 million in the third quarter of 2009. The increase is attributable to lower prize payouts during the third quarter of 2010 versus the prior year.

Machine Gaming revenues were up 31% to EUR53 million and include a limited contribution from the newly installed VLTs.

Revenues from Commercial Services were up 8% to EUR26 million due to an increase in bill payment services, electronic pop ups for prepaid mobile, and ticketing services.

Revenues from our Interactive business in Italy generated EUR11 million, up 21% versus the same period last year.

Revenues from Italian operations in the third quarter of 2010 were EUR296 million compared to EUR258 million in the same period last year, up approximately 15%. This increase was primarily attributable to higher revenues from our Sport Betting and Machine Gaming product lines.

EBITDA from Italian operations was up 34% to EUR134 million compared to EUR100 million in the same period last year. Performance was up across all segments in our Italian portfolio. The increase was primarily attributable to lower prize payouts for Sports Betting and the expansion in Machine Gaming as well as cost reduction programs.

Revenues for GTECH, GTECH G2, and Gaming were EUR256 million compared to EUR236 million in the third quarter of last year, up approximately 9%.

Lottery revenues were up EUR18 million, primarily due to the weakening of the euro against the US dollar as well as effective rate changes and higher product sales, partially offset by a change in GTECH's content portfolio and decreases in same store revenues.

The third quarter of 2009 produced two extraordinary jackpots that did not repeat in the third quarter of this year.

An increase in the intergroup sale of VLTs from Gaming Solutions to Italian operations is the primary driver behind the EUR22 million change in revenue eliminated in consolidation.

EBITDA for GTECH, GTECH G2, and Gaming was comparable to the third quarter of last year at EUR66 million. GTECH EBITDA improved due to fluctuations in foreign currency and higher product sales, but was upset by lower jackpot activity and changes in our contract portfolio.

Gaming Solutions improved due to good operational performance and the continuing integration effort between SPIELO and Atronic as well as the launch of VLTs in Italy, which, as previously noted, are eliminated in consolidation.

G2 continues to invest in valuable opportunities, for example in Canada and Eastern Europe, where costs are typically ahead of revenues during the startup phase of the project.

On July 14, we provided a breakdown of GTECH Lottery Service revenues for the third quarter of 2010 versus the third quarter of 2009. Note that this includes Gaming Solutions and GTECH G2.

In the US, extraordinary jackpot levels from the third quarter of 2009 are negatively impacting our same store comparisons this year. Last year, there were two major jackpots that exceeded $250 million. Conversely, for the third quarter of this year, there were no major jackpots. Partially as a result, US same store revenue were down 5% in the third quarter. Despite the difficult comparisons, the underlying performances of Illinois, Georgia, and California were encouraging.

International Lottery same store service revenues decreased 3% versus the prior year, primarily due to softness in Eastern Europe and Ireland. We experienced growth in the UK and certain Latin American countries, including Trinidad Tobago, Mexico, and Jamaica.

Looking at the P&L below EBITDA, operating income was up 33% to EUR112 million in the third quarter versus EUR84 million in the same period last year. This was driven primarily by the aforementioned strong EBITDA results, partially offset by higher depreciation arising from growth investments we have made in our Italian and GTECH segments.

Increasing interest expense was primarily due to higher average debt balances arising from investments we have made and higher weighted average interest rates resulting from a different mix of our debt.

As part of the Group's strategy to balance our debt portfolio, from time to time we enter into hedge contracts. Beginning in May 2010, we entered into option structures expiring at varying dates between December 2010 and March 2011 on a portion of the US dollar denominated debt equivalent to approximately EUR600 million.

In accordance with accepted accounting practices, these hedging contracts resulted in a year-to-date unrealized foreign exchange loss of approximately EUR55 million. In the third quarter of this year, the Group recorded mark to market unrealized foreign exchange losses of EUR71 million related to these hedging contracts.

Over the past three years, including the actions we are proposing today, the Group will have converted $1.7 billion of debt at an average exchange rate of $1.37 to one euro.

Revenues for the first nine months were up 5% at approximately EUR1.67 billion compared to approximately EUR1.59 billion in the first nine months of 2009. At constant currency, revenues were EUR1.63 billion.

EBITDA increased slightly to EUR597 million in the nine-month period versus the same period last year. On a constant currency basis, EBITDA was EUR587 million. EBITDA improved due to significant contributions from Sports Betting and Machine Gaming in Italy, cost saving initiatives, and foreign exchange. This was partially offset by Lotto performance in Italy and contract portfolio changes for GTECH in the US.

EBITDA margins were 35.7% compared to 37.5% in the first nine months of 2009.

Looking at the P&L below EBITDA for the nine-month period, operating income was EUR340 million, whereas it was EUR346 million in the same period last year, due to higher depreciation.

As indicated earlier, the increase in interest expense was primarily due to higher average debt balances arising from investments we have made and higher weighted average interest rates resulting from a different mix of our debt.

Also as noted earlier, the increase in foreign exchange losses is primarily due to the unrealized foreign exchange losses on derivative instruments that occurred in the third quarter of this year.

Income before tax was EUR157 million, compared to EUR218 million last year. Group net income was EUR84 million versus EUR143 million in the same period last year. Net income attributable to the owners of the parent was EUR51 million, resulting in earnings per share of EUR.30.

We had healthy free cash flow generation of EUR528 million in the first nine month of the year, providing the capacity to fund, among other things, CapEx, interest, dividends, and minorities' payment. Note that we include unrealized foreign exchange losses in other net.

Our net financial position at September 30th, 2010 was EUR2.92 billion. At the end of the nine-month period, we also had approximately EUR800 million of cash or in committed undrawn lines of credit.

Our CapEx is progressing in line with plans. EUR130 million of maintenance CapEx for GTECH, G2, and Gaming was primarily related to investments in GTECH's New York, California, and Kentucky contracts. The EUR21 million in acquisitions represent the final payment for the acquisition of Boss Media, a previously reported financial liability.

For Lottomatica's Italian operations, maintenance CapEx was EUR533 million primarily related to the Scratch and Win license, while growth CapEx totaled EUR90 million due to the investments in VLTs, 10 and Lotto, and Sports Betting.

Lottomatica Group is committed to maintain our investment grade rating. And the decisions taken today by our Broad are a tangible indication of this commitment. We have approved a series of initiatives to refinance our bank facilities well in advance of the 2012 maturity.

While improving the capital structure, our goal is to extend the average life of our debt, further diversifying lending sources, and reducing US dollar denominated debt wages. Our cash flow generation in euro and euro related currencies is progressively increasing while US dollar flows are stable.

Our goal is to increase our financial flexibility to support operations and to preserve a competitive weighted average cost of debt. When the refinancing is completed, we will then issue the senior unsecured bond of up to EUR500 million and a new hybrid bond of up to EUR300 million.

We intend to replace our bank facility with a committed senior unsecured bank facility including a $700 million term loan and EUR900 million in multicurrency revolver facilities.

Let me eventually comment upon the Scratch and Win monetization. We have answered in previous calls that we would take the action necessary to secure resources to address growth opportunities and support our investment grade credit rating.

For these reasons, we structured a deal to monetize a minority interest in our Scratch and Win license while maintaining control and the flexibility to buy back the shares at a future date.

The new partner, UniCredit Group, is investing side by side with us, taking on the performance risks of the business. We will maintain a majority interest and managerial control. For an option, we will have the flexibility to buy back the shares.

Simply, this is the right approach. A majority of the shares UniCredit is receiving are preferred shares. A preferred share obviously has dividend preference, but the reality is expected to be lower than our return on the business. That makes this attractive to us.

This is a good way to balance our need for greater investment in a very attractive growth segment of the dollar market, funding requirements of being the sole Scratch and Win concessionaire, and maintaining our investment grade credit rating. We think that this multifaceted financial plan makes good sense.

At this point, we would like to open the lines for Q&A, after which we will hear closing remarks from Marco. Operator?

Thank you. (Operator instructions.) We are now taking our first question from Fabio Ianelli from Kepler.

Yes. Hi. Good afternoon. This is Fabio Ianelli from Kepler. Just a couple of questions, an update on the VLTs. If I understood well, you had mentioned 150 VLTs installed by the end of September. If I remember well, your target was 1,000 by year-end. So, if you can please confirm this target, whether it's viable or not. And going forward, what's the target you can see also in 2011?

And the other point is on your cost savings. If I remember well, your target was EUR30 million in 2010. So, what's the state of the art in that sense? Thank you.

So, regarding VLTs, we ended up September by having about 850 VLTs installed. And our projection for 2010 is to have at least three times that figure of VLTs installed.

We expect to compete rollout in 2011 in quarter three and therefore to have almost 11,000 VLTs in place at that time.

Okay.

In terms of cost reductions, Fabio, we are well on track to deliver the expected results at year-end. And Q3 as well has been impacted by the benefits of cost saving actions that have been taken starting in the second quarter 2010.

Okay. If I may, just a follow up question. Looking at your nine month results, and looking at the pattern you are going through on VLTs and the trend on basically Sports Betting in -- domestic Sports Betting, well, the guidance on EBITDA 2010 is still 785, 805. I mean, because it looks a bit conservative as of today, because I guess you are on track to do much better than that. So, if you can just -- I don't want you to give me a figure, but if you can just give the color, that will be -- I'll appreciate it. Thank you.

So, looking to the year-end results, we are confident that we can deliver upon the guidance that we had presented during our call in May. So, we confirm the guidance that we have presented in terms of EBITDA with a range which is 785, 805.

Okay, thank you. Thank you for your answer. Thank you.

We are now moving on to a question from Alessandro Bajbadino from Deutsche Bank.

Okay. My first question is regarding your Lotto guidance for the full year. Given you say that October is improving, what is the guidance for the full year for the Lotto? And second question regarding your Scratch and Win sales, if you can, let's say, give us more color regarding this transaction and how the company is going to be set up.

The further question, can you give us, as of today, your all-in cost of debt with the current trade facility you have in place? Thank you for now.

So, starting from Lotto, the last time we talked we were projecting a stop of the loss for the third quarter. We have now a consolidated position for, let's say, September and October showing that this is happening. And this is driven mainly by two drivers.

The first one is the fact that the late number contribution is visible at the moment. And secondly, the full-fledged (inaudible) Lotto introducing a new price structure and, let's say, more different kind of ways to play is, as we said, showing encouraging trends leading to, as I say, a positive October increase on a year-over-year basis that Marcos had already declared before.

We expect, then, for the full year performance to have, as I say, the stop in loss. And so, let's say, probably a year-over-year constant performance vis-a-vis 2009 wagers.

So, in terms of the other question about the Scratch and Win monetization, the deal that we have disclosed today is a binding offer that UniCredit Group has presented to the Board of Directors of Lottomatica that has accepted. And it's an investment of EUR100 million made by UniCredit so that UniCredit will basically own 12.5% interest in the overall Scratch and Win business.

This investment will be managed through a separate vehicle in which UniCredit will inject EUR100 million, EUR60 million in the form of the preferred shares and 40% in the form of ordinary shares. As a result of that, Lottomatica Group will own -- will still own 51.5% interest overall, directly or indirectly, in the Scratch and Win business.

The preferred share will have a cap return which is much lower than our expected return on the business. And that's the reason why it is an attractive proposition for us and the Board has accepted this proposal.

We have an option after the approval of the financial statement 2013 to buy them out, and therefore limiting their participation in the Scratch and Win project to a limited time span, which is basically a three year -- '11, '12, and '13 year period.

In terms of your last question about the cost the debt, then new term loan is still to be negotiated with the banks. And we are starting the syndication process most likely tomorrow. The senior facility was a facility put in place in 2006, therefore in a different environment overall in terms of spread.

But, that spread, which is based on upon an agreed different level of spread based upon the net debt to EBITDA ratio, will be a little bit more expensive in the new facility. But, we can manage through improving our ratio going forward to maintain a competitive cost of capital in the next few years. We will be more precise when we will have a deal completed.

Thank you.

We are now moving on to a question from Andrea Randone from Intermonte.

Thank you, and good evening to everybody. I've got a question about VLTs and -- sorry, gaming machines. Are you expecting the fourth quarter to -- Lottomatica to benefit from tax relief because the threshold of EUR21 billion was overtaken, and so this tax relief was -- Lottomatica will benefit from this tax relief entirely or partially?

And secondly, you have increased the number of gaming machines during the quarter. Don't you think this could be a risk looking forward to 2011 when the number of VLTs will be completed? Thank you.

Sorry, the line was not that good. We had a hard time to understand. If I understood well, you are asking about the benefit that Lottomatica could earn from a tax relief in 2010 on the AWP business, and if that is something that will continue going forward. Is that the question, because we had a hard time to understand you. Sorry about that.

Yes, thanks. The first part of the question was correct. The second was if you don't consider it could be a risk, increasing the number of gaming machines, AWP, at this time looking forward, when in 2011 the possible competition against the VLTs will be -- I mean, we cannot estimate this factor. So, I want to understand how do you approach this issue. Thank you.

So, splitting the question in two, while of course the tax mechanism is there, so the benefit is for all the concessionaires when you reach a certain threshold in the overall wagering. And so, this is -- Lottomatica is totaling in our considerations.

From the second point, you raised the potential inconsistency of having more AWPs with an incoming market of VLTs, you should consider two things. First, the overall number of VLTs would be only, so to say, about 50,000, 55,000 on the whole. We are using a selective approach in the market.

So, what we are looking for are good partners, both for VLTs and AWPs. Because we have selected a number of locations worth a good price for the two, let's say, gaming solutions together, we are quite confident we can start the best location conditions for the two together.

The number of increased AWPs, as Stefano has said before, are the targets we had in mind since a year ago. And we are happy to have closed those deals in due time.

Thank you.

(Operator instructions.) We are now taking a question from Matthew Gerard from Credit Suisse.

Hi. Good evening. Some of mine have been asked already, but just a couple from me, then. Going back to the Scratch and Win monetization, could you just outline the terms or on what basis you can buy back the position from UniCredit after 2013? How is the price of that set? How does the mechanism work?

And secondly, you mentioned Texas at the start. Could you just give us a bit of detail on when you expect the decision from Texas now? Thank you.

In terms of the option, the option is set in a way that after the approval of the 2013 financial statement, we can repurchase the ordinary shares at a premium that will be paid to the investors, which will be much lower than the expected IRR from the project itself. So, we will have, let's say, anyway an advantage in buying out the financial investor in 2013.

And with respect to Texas, the Texas Lottery Commission expected to be announcing the preferred bidder on or around the 12th of November, which was last Friday. We don't have precise visibility on when they will announce. But, we think it's imminent within a number of days or a week or two. So, we are awaiting their decision.

Okay. Thank you.

We are now taking a question from Laura Pennino from Banca Leonardo.

Hello to everybody. I have just a question regarding the Scratch and Win. As you are monetizing the Scratch and Win, could you consider other parts so you could be introducing a new financial partner? Or, with the debt renegotiation and discussion, is it just it?

And second question more on the Scratch and Win for the operating part. Are you planning to make a marketing campaign over the next year to launch again the service, or what are your marketing efforts directed to next year?

Well, Laura, let me answer your first question. I think that the plan that we have presented today is a very comprehensive, strategic financial plan that should put us in a solid position going forward to face our investment opportunities and maintain investment grade rating. So, I think we have designed a plan for the next few years at Lottomatica Group.

And I'll turn to Renato for the Scratch and Win advertising and marketing efforts.

In fact, as you said, since the beginning of the new concession, we strongly use the lever of new products combined with communication. So, in September, we launched an entirely new EUR3 price point game. And in October, we launched a new EUR10 price point. In both cases, we devoted communications to deliver these new products to the market. It was press advertising for the first one. It was, let's say, TV advertising for the second one.

We think we will go on with that, encouraged by the results we had these two months. So, we had a healthy 5% increase in wagers in September and the performance was duplicated in October as well.

Looking at 2011, for sure our marketing strategy, we have a number of pillars. The first one would be the product development. The second one would be increased advertising and marketing efforts. And the third will be the, let's say, optimization/extension of the replay macro was well.

Okay. Thank you.

We are now taking a question from Alessandro D'Erme from UBS.

Thank you very much. My question has already been answered.

We are now moving on to a question from Domenico Ghilotti from Equita.

Good afternoon. My first question is on your same store sales performance in GTECH, if you can give us some more color and some updated guidance for the full year, given the weaker quarter.

And also, I would be interested in some comments on the contract you signed with the Shenzhen Welfare Lottery. And a third question, on the refinancing, I would like your comment on the impact of the refinancing on your dividends policy.

So, with respect to your first question on same store sales, as Stefano reported earlier, for the year-to-date, same store sales in the US market have been fairly flat to slightly down, in fact, on a year-to-date basis.

That's driven by the fact that in the nine months year-to-date, we had much lower jackpot activity in 2010 versus 2009. So, if you look at the actual results, you'll see that for Mega Millions and Powerball states, both of them are down because of the large number of jackpots that we had in 2009 versus 2010.

The impact of cross sell, which was the launch that was made in February of this year where states are now selling both Mega Millions and Powerball, that has been quite positive. In fact, we believe that the impact of cross sell has helped to offset the otherwise reduction in general online sales in the United States. Instant tickets, on the other hand, have been quite positive, growing at approximately 2% on a year-to-date basis.

We expect the trend to continue at about this level for the remainder of the year. So, my expectation is that the US market will be somewhere in the flat to down 1% range for the year, unless, of course, there is an extraordinary level of jackpot activity in the last two months of the year, which is very hard to predict.

Coming to your second question, Domenico, what I would like to tell as an answer is that we have always structured our business and the financing associated with the business to balance the needs for investments in growth opportunities, but in the meantime to return value to the shareholders.

And while I have to remind everybody the decision to grant a dividend is a recommendation that the Board makes to the shareholders, I have to note that the Group has acted consistently in matters relating to dividends throughout the recent years.

Sorry, there was one more question, Domenico, on the matter of Shenzhen. So, Shenzhen is our second substantial lottery contract in China. We run the Beijing lottery and now the Shenzhen lottery. These are very good, small sized -- small to medium sized lotteries that generate several million dollars of recurring service revenue for the business with up to 1,000 terminals.

So, we think that Shenzhen will look very much like Beijing and will be a medium sized but profitable contract. I'm not in a position today to discuss numbers, because we are still in the process of launching the business. So, we'll have more color on that in future periods.

Thank you.

(Operator instructions.) We are now taking a question from [Maura Galberro] from One Investments.

Good evening. I've got a couple of questions. Considering the current FX rate, can you give us an indication about the foreign exchange line in the fourth quarter? And then secondly, looking at 2010 results, the interest expense line has always been in the range of EUR40 million, EUR42 million per quarter in terms of net expenses. Looking at your refinancing, what sort of increase we should pencil in?

And finally, am I correct in considering that the foreign exchange loss equal to EUR72 million booked in the third quarter is also included in the net financial position? Thank you.

Okay. Let me answer your last question. The loss that we have booked in the third quarter is year-to-date, corresponding to a non-cash loss of EUR55 million because we had previously reported a profit in June which was in the range of EUR80 million.

So, in terms of ForEx, as of today we would be probably slightly better or aligned with that EUR55 million loss. And the EUR55 million loss has been considered as part of the net financial liabilities already at the end of September.

Coming to your question about the cost of the debt and financial charges going forward, as you understand, we are, let's say, on the edge of launching these debt capital market transactions. We will be in a position to answer precisely once the two capital market transactions will be completed, and the same is for refinancing.

There might be a slight increase in the overall interest expense. But, it's, I think, a tradeoff worth the incremental cost because we are targeting to lock in maturities which are, for the bank loan, up for five years, and for the bond it's about 60 years. And for the senior bond, it's seven to 10 years. So, I think it's worth the tradeoff between a longer tenure, a much longer tenure that will, let's say, push our maturities far ahead from today and a slight incremental cost.

We are now moving on to our last question from Roohi Siddiqui from Bank of America.

Hi, there. Good evening. I have a couple of questions, if I may. Firstly, on your financing, was there any reason why you decided to do -- why are you trying to do hybrid securities? I though that would be more expensive. I mean, I appreciate that the ratings agencies would probably want you do to that, as you would then be able to treat part of it as equity. But, isn't that more expensive?

And the second question is on the Scratch and Win. I don't quite follow the rationale for giving away some of your value in Scratch and Win. Could you just perhaps talk about some of the rationale behind that? Thank you.

Okay. So, about the hybrid, we have decided to launch this transaction, which is, let's say, a transaction intended to reinforce our capital structure, given its equity content from the rating agency's perspective. We will earn 50% credit equity content from Standard and Poor's and Moody's, hopefully.

Therefore, combining that equity content with the standard of 60 years, I think the incremental cost is worth the expense. And bear in mind that we have a call date for that hybrid, according to the most recent standard, which is positioned in year five. So, if the deleverage is taking place, we could, at that point in time, get rid of that more expensive piece of debt.

And in terms of the Scratch and Win rationale, I think that the overall financing plan should not be considered as bits and pieces, but rather as a multifaceted but one single strategic plan that we wanted to deliver at once, taking away from the market the uncertainty about our capital structure.

This is intended to respond to all questions in that that might have been raised in the past about our capital structure. It puts us in a solid position. It gives us plenty of financing, plenty of liquidity to confront ourselves with the next investments. And we will be well positioned to maintain investment grade rating going forward and return value to shareholders. So, the single transaction cannot be appreciated if not in the frame of an uncomprehensive plan.

Okay. Thank you.

As there are no further questions in the queue, that will conclude today's Q&A session.

Thank you, operator.

As you can appreciate, the Lottomatica Group is reaching an important milestone. We have successfully navigated through a major rebid cycle. The integration of our various business is coming together as we had hoped, and is creating sustainable value and growth opportunities.

Governments all over the world are turning to their lotteries to expand their activities and contribute more to help address severe budgetary shortfalls. And we are anticipating, then, that more operator and manager opportunities will emerge.

The strategy behind the formation of Lottomatica Group was targeted exactly at the emergence of those opportunities. We have prepared ourselves well and are greatly anticipating the evolution of the industry to these new models.

Finally, our financial structure is being redone to provide us the flexibility we need to address the next phase of our growth.

Thank you for joining us. Enjoy the holidays, and I'll look forward to speaking with you in the next year. Thank you.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.