International Game Technology PLC (IGT) 2010 Q4 法說會逐字稿

Good day and welcome to the Lottomatica 2010 full year results conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to your host today, Mr. Marco Sala, CEO and Managing Director of Lottomatica Group. Please go ahead, sir.

Thank you. Good evening for -- and thank you for joining us for Lottomatica Group's 2010 four quarter and year end 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 CEO of GTECH will join in for the question-and-answer session.

As I am sure you are aware, we had a call a few weeks ago to announce our preliminary results and offer guidance for our three-year plan. As you have seen from today's announcement, the final results are in line with our expectations. Revenues, EBITDA and operating income experienced solid single-digit growth over the previous year. Due to impairment and other charges, our net income was at a breakeven.

As you evaluate our guidance for 2011, I encourage you to focus on the 2010 fourth quarter performance as an indicator of our progress. The results were encouraging. We achieved double-digit growth in our top line categories. It is our belief that we have established momentum going into 2011. We have previously highlighted some of the areas that we will have the greatest impact on our growth. I'd like to recap them for you.

For Italian operations, maintaining and growing our lottery and machine gaming operations are a top priority. For GTECH reenergizing same-stores revenues across its entire portfolio is a must. Executing our product manager business plan is another crucial objective. And capturing opportunity in the Canadian VLT replacement cycle and in the recovery in the commercial casino gaming market are also important factors.

I do not mean to underemphasize other businesses. They will receive appropriate levels of focus and attention. I hope you appreciate that the areas I have highlighted are some of the major drivers of our growth and the foundation of our guidance.

I'm going to ask Stefano to give you a detailed review of the numbers during his presentation. I'd like to spend my time discussing how we intend to maintain our momentum going into 2011. Our business, Italian business accounts for a majority of revenues and profits. I would like to give you a sense of how 2011 is shaping up so far.

Lottery is doing well. The Italian Lotto game has become a major contributor to Lotto wagers. In the fourth quarter, Lotto wager increased approximately 9% versus the previous year. During the first two months of 2011, Lotto wagers increased by 36% over the previous year. It is important to note that the results are being positively impacted by the occurrence of late numbers.

To give some perspective, excluding 10eLotto, approximately 21% of Lotto wagers during this period were for late numbers. That compares with similar period last year when wagers on late numbers were only 3% of Lotto wagers. Even when taking into account the impact of late numbers, the underlining Lotto performance driven by Italian Lotto has been good and consistent with our guidance.

Likewise, Scratch & Win wagers has continued their positive trend. Wagers were up 2% in the fourth quarter over the similar period in 2009. Wagers have increased by 9% during the first two months of this year compared to a similar period last year, supported by a number of new game launches. While we have only two months experience for this year we are encouraged by the underlining trend.

We are also in the process of installing some 9,000 video lottery terminals. Continue to expend SPIELO's presence in the market, we will also be offering approximately 1,800 licenses from our total allotment for a separate distribution package with our SPIELO machines. We expect this new distribution channel to produce attractive returns as well.

As you will recall, we were the first operator certified to enter VLT market. And we are gaining a strong initial foothold. As of the end of February, we had 5,500 VLTs installed and operational. By year's end, we expect to have our entire allotment of licenses fulfilled.

It is important to appreciate that VLTs are being installed in social spaces that have a collection of machines along with amenities like food, drink and entertainment. For that reason, we do not anticipate that wagers on our AWP machines which are located in traditional retailers will be significantly impacted.

Player response to the new VLT games has been positive. And wagers are running ahead of our expectations. I should point out that other competitors are now entering the market and that may impact our machine performance. Nevertheless, this segment will be the important driver of our future growth and one of the underpinnings of our guidance.

Turning now to GTECH same-store revenues, there are some encouraging trends that should help to offset price compression impacts that we will experience in 2011. For the fourth quarter, GTECH same-store revenues were up 2%. That performance was supported by some year-end jackpot activity that also flowed over to the first week in 2011. Even with that jumpstart, same-store revenues have demonstrated a solid upward trend.

For the first two months of 2011, GTECH's same-store revenues are up by over 2%. It would appear that the momentum we have established in the fourth quarter is continuing and growing in 2011, particularly in the United States which was up by over 4%. Again, this is an important element of our guidance.

With the successful Texas lottery rebid, GTECH has completed a major rebid cycle. We feel comfortable in growing the portfolio of contracts that we so successfully defended. That is happening. California is an excellent example of it. We have highlighted price payout reform and its importance to growing California lottery sales. Payout reform was enacted into law in the latter part of 2010. We have worked closely with the lottery to develop and implement game changes to institute the new payout ratios. The result has been impressive.

The lottery has rolled out 14 new games, each of which has achieved an increase in sales versus previous games. When compared to current weekly average, instant ticket sale have increased over 40% from their low point in 2009, and for the first seven weeks of 2011 sales were up 27% over the similar period last year. As I hope you can appreciate, California is well on its way to achieving its potential. This is just an example, but an important illustration of how we can support and grow same-store sales.

We are looking at similar opportunities in which we believe that our lottery customers could greatly improve their results by adopting industry-best practices. Better serve our customers, the GTECH organization has been realigned to put more resources closer to our local operations. Further, even the highest level managers are closely interacting with the day-to-day operations of our customers. These actions, I believe, will better enable us to help our customers adopt best practices that drive same-store sales.

Finally, I'd like to turn to our private manager activities in Illinois. We are proceeding according to plan. The organization and the staff are in place. Day-to-day operations have begun. On March 1st, we officially completed our transition phase. We have begun making operational decisions for the lottery and are now eligible to be reimbursed for our operating expenses.

Having just come back from a trip to meet with the Illinois lottery and the Northstar staff, I'm pleased to report that they are making significant progress in executing their business plan.

An expanded retailer recruitment operation is underway. One of the key objectives is to optimize and expand the retail base. Over 4,500 new retailers are being added to the current base of approximately 8,000. In addition, a re-branding of the lottery has been completed, and we expect to launch 50 new games this year. Finally, we are replacing the older technology with new systems and terminals that will be better able to support our growth. By July 2011, we expect to become fully accountable of the lottery's performance and eligible for bonus compensation.

Other US space are considering similar models to Illinois. There is a tremendous need for space to find new revenues to meet their budget deficit. We do not anticipate any near-term developments in that regard. However, we can appreciate that the proper execution of our Illinois plan is critically important not only to earning the returns we expect, but to potential future opportunities as well.

Let me wrap up by saying that the Group had a successful year in 2010, and most importantly ended the year on an upswing. We are entering 2011 in good shape and early indications give us confidence in our plans and guidance. We will have more to say about that during our first quarter results presentation in April.

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

Thank you, Marco. And good evening or good afternoon everyone. I'm happy to report that overall we delivered very good operating results in the fourth quarter of 2010. In fact, we achieved growth across all of our business segments in the fourth quarter and the full year. We are seeing this positive trend continue through the early part of 2011, which we find very encouraging.

Revenues for the fourth quarter were up 10% or approximately EUR643 million compared to approximately EUR585 million in the fourth quarter of 2009. At constant currencies, revenues were EUR620 million. EBITDA was up 15% to EUR215 million compared to EUR187 million in the fourth quarter of last year.

Fourth quarter 2010 EBITDA on a constant currency basis was EUR207 million. EBITDA margins were 33.5% compared to 32% in the fourth quarter of 2009. The increase in fourth quarter EBITDA margins is primarily attributable to good performance from Italian Lotto, partially offset by the higher payout percentage for Sports Betting in Italy.

Looking at Lottomatica's Italian operations, our Scratch & Win business generated gross wagers of approximately EUR2.34 billion, up 2% versus the fourth quarter of last year. The number of Scratch & Win tickets sold in the quarter was EUR592 million, up 7% versus the same period last year. To continue driving sales, we introduced a new EUR10 ticket in October, sales of which we find encouraging.

In January and February of 2011, we also launched a EUR20 ticket, Maxi Miliardario, and a EUR3 ticket Buon Compleanno to further drive sales. Lotto wagers were up 9% to approximately EUR1.6 billion compared to EUR1.4 billion in the same period last year. The Lotto options game, 10elotto, was re-launched during the last week of September and is generating more than EUR100 million in incremental revenues per month.

Lottomatica's Sports Betting wagers in the fourth quarter were up 20% to EUR293 million compared to approximately EUR245 million in the same period last year, primarily due to a higher payout percentage in the fourth quarter of 2010. Machine Gaming wagers were up 26% compared to the same period last year at EUR1.35 billion. The number of installed machines in the fourth quarter of 2010 grew to over 59,000, up 23% versus the fourth quarter last year. This machine count comprises AWPs and VLTs connected to a Lottomatica system.

In July, Lottomatica launched the first VLT network in Italy, and at the end of December approximately 4,000 VLTs were installed. Interactive wagers were EUR105 million versus EUR113 million in the fourth quarter of last year. Lottery revenues were up 12% to EUR193 million compared to EUR174 million in the fourth quarter of last year as a result of 10elotto performance and the new Scratch & Win concession fee.

Revenues from Sports Betting were EUR32 million versus EUR65 million in the fourth quarter of 2009. Machine Gaming revenues doubled to EUR101 million and include the few months of contribution from the newly installed VLTs. Revenues from Commercial Services were up 17% to EUR28 million due to an increase in bill payment services, electronic top-ups for prepaid mobiles and ticketing services. Revenues from our Interactive business in Italy generated EUR12 million, up 11% (sic - see slide 9) versus the same period last year.

Revenues from Italian operations in the fourth quarter of 2010 were EUR366 million compared to EUR323 million in the same period last year, up 14%. The increase was primarily attributable to higher revenues from our machine gaming business, 10elotto and a higher fee for the Scratch & Win concession which commenced in the fourth quarter of 2010. The increase was partially offset by lower revenues from Sports Betting in Italy due to a higher payout percentage in the fourth quarter of 2010 compared to the fourth quarter of 2009.

EBITDA from Italian operations was up 16% to EUR138 million compared to EUR119 million in the same period last year. The increase was primarily attributable to the previously mentioned 10elotto performance and the expansion in Machine Gaming, partially offset by higher price payouts from Sports Betting.

Revenues for GTECH, GTECH G2 and Gaming were EUR277 million compared to EUR262 million in the fourth quarter of last year, up approximately 6%. Lottery revenues were up EUR24 million, primarily due to the weakening of the euro against the US dollar as well as effective rate changes and positive contributions from same-store revenue growth.

Gaming solutions improved due to good operational performance and the continuing integration efforts between SPIELO and ATRONIC as well as the launch of VLTs in Italy. And increasing the inter-group sale of VLTs from gaming solutions to Italian operations is the primary driver behind the EUR19 million change in revenue eliminated in consolidation. EBITDA for GTECH, GTECH G2 and gaming was up 13% versus the fourth quarter of last year to EUR77 million. GTECH EBITDA improved due to higher product sales and improved same-store revenues. Fluctuations in foreign currency contributed as well.

On slide 12, we provide a break down of GTECH lottery service revenues for the fourth quarter of 2010 versus the fourth quarter of 2009. Note that this includes gaming solutions and GTECH G2. Domestic same-store revenue increased 3% versus the fourth quarter of 2009, driven by the Mega Million jackpot which grew to EUR240 million for the drawing on December 31st.

We experienced particularly strong growth in California where instant ticket sales were up 22% in the fourth quarter as well as good performance in Texas, New York, Virginia and New Jersey.

International lottery same-store service revenues were in line with the fourth quarter of last year. We benefited from improved performance in Western Europe driven primarily by the UK and Ireland. Although our business in Eastern Europe remained soft, we did benefit from improved performance in Poland.

Looking at the full year, revenues for 2010 were up 6% or approximately EUR2.31 billion compared to approximately EUR2.18 billion in 2009. At constant currency, revenues were EUR2.25 billion.

EBITDA increased 4% to EUR812 million versus the same period last year. On a constant currency basis, EBITDA was EUR794 million. EBITDA improved to significant contribution from machine gaming in Italy and foreign exchange. This was partially offset by lower profits from Sports Betting in Italy due to a higher payout percentage in 2010 versus last year. EBITDA margins were 35.1% compared to 36.0% in 2009.

Now, let's look at the P&L below EBITDA for 2010 which is in line with the preliminary results we disclosed on February 7. Group net income was EUR45 million versus EUR112 million in the same period last year. Net income attributable to the owners of the parent was breakeven compared to EUR68.1 million in 2009. Again, this is due to pretax impairment losses of approximately EUR48.4 million primarily associated with the GTECH G2 segment in 2010, approximately EUR55.7 million of costs associated with the refinancing of bank facilities finalized in December and EUR41.4 million of foreign exchange losses.

The EUR41.4 million of foreign exchange losses were principally associated with the settlement of the option structures. We hedged a portion of the Group's US dollar-denominated debt. On a comparative basis, foreign exchange losses in 2009 were EUR15.8 million.

As reported, operating income was up 5% to EUR386 million versus EUR366 million in the same period last year. Increase is primarily due to the aforementioned improvements in EBITDA along with lower impairment losses in 2010 versus 2009. Increase was partially offset by higher depreciation and amortization due in part to the commencement of amortization for the new Scratch & Win concession and high depreciation related to the higher machine gaming installed base.

Increase in interest expense was primarily due to higher weighted average interest rates resulting from a different mix of our debt, even the issuance of a EUR750 million of guaranteed notes in December 2009 along with higher average debt balances. Increase in foreign exchange losses is primarily due to the aforementioned settlement of derivative instruments that hedged a portion of our US dollar-denominated debt. Income before tax was EUR114 million compared to EUR188 million last year.

We generated strong cash flow from operations of EUR768 million in 2010, providing the capacity to fund capital expenditures as well as interest, dividend and minorities payment. Planned Scratch & Win concession investment and the impact of foreign exchange regulations have driven our net financial position to EUR2.98 billion. At the end of the year, we also had EUR667 million of cash or committed and undrawn lines of credit available.

As you are aware, the Board recently recommended a new dividend policy based on free cash flow generation. The Board today decided that the 2010 dividend would be awarded in the form an in-kind distribution using treasury shares in ratio of one share of Lottomatica stock for every 50 shares owned as of May 23, 2011. We will be distributing our currently owned EUR3.17 million of treasury shares, and approximately 205,000 shares will be acquired over the next few weeks to support the dividend distribution for approximately EUR2.4 million consideration based on current stock prices. We do not intend to repurchase additional shares during 2011.

Our capital expenditures is progressing in line with plans. EUR145 million on maintenance CapEx for GTECH G2 and Gaming was primarily related to investments in GTECHs New York, Kentucky and Spain contracts. EUR26 million in acquisitions represents contingent payments primarily related to the acquisition of Boss Media and Finsoft which were previously reported financial liabilities. Lottomatica's Italian operation's maintenance CapEx was EUR898 million primarily related to the Scratch & Win license, while growth CapEx totaled EUR133 million due to investments in VLTs.

As we stated in February, we have completed the refinancing of EUR2.65 billion of debt extending our weighted average debt maturity to 5.3 years and diversifying our sources of capital while improving terms and conditions. In December, we issued a seven-year EUR500 million senior bond and refinanced our bank facilities with a five-year term loan and committed revolver facilities for a total of EUR1.4 billion. As a result of what we have completed in 2010, we have no significant debt maturities over the next four years. We also have a solid business profile. And our capital structure can support our investment-grade credit ratings.

Now I'd like to open up the lines for Q&A after which we will hear closing statements from Marco. Operator.

(Operator Instructions) Matthew Gerard, Credit Suisse.

I've got a few questions if that's okay. Firstly, could you give us a guide on the payout ratio on VLTs? Obviously wages correlating what you're saying with the data from [AAMS] look well ahead of what you were expecting. So could you talk a bit about what kind of payout ratio your VLT networks are operating on at the moment?

Secondly, could you talk a bit about some financial charges, your P&L tax charge? Looks likes it's coming at 60% on a basic level on your FY '10 numbers. Could you give us an update on P&L and cash tax expectations please for 2011? And related to that, could you talk a bit about the structure of the CNL consortium and what that means for minority cash dividends going forward as well, and how that may differ from the P&L minority charge from 2011?

And then lastly, if you could give us an update on the recent developments in Florida where the discussion about the private management contract seems to have moved on to another level over the course of the last week. Is there any timeline you're aware of that we need to know of with respect to that? Thank you.

Matthew, so payout ratios for VLTs, for the time being the indications we have are so preliminary that we will, let's say, be more specific on that item when we will be reporting the Q1 actuals. As you know, we have had only few full weeks of operations, so the information are so preliminary that we don't want to release information that might prove to be inaccurate in few weeks.

Coming to the financial charges and the tax associated, you have referred to a 60% book tax rate. That is due to the fact that some of the one-time charges that we have taken are not tax deductible, particularly relating to the impairment charges that we have taken for the G2 goodwill and G2 assets.

While if you move to the tax cash for 2011, we will be incurring a lower amount of taxes in 2011, given the fact that it will be the first year of operation of the newly incorporated entity for Loterie Nationale. So we will be paying a lower advance for taxes in 2011. And the amount of total cash paid in terms of taxes will be in the range of EUR100 million for 2011 and will be higher in 2012.

In terms of the way the newly incorporated entity for Scratch & Win is working, it is called Loterie Nationale. It's no more a consortium; it's rather a limited company incorporated in Italy. We will be entitled to earn 51.5% of the income, while 48.5% will be associated to minorities.

As you have surely clear in mind, given the fact that the depreciation charges associated with the license will be impacting by EUR89 million the P&L of the Loterie Nationale vehicle in 2009, the net income of the consortium will be substantially reduced compared to the previously reported figures. So in terms of minority interest, it means that the expected minorities will be lower from 2011 onwards.

And for the Florida answer, I'll turn to Jaymin.

Thanks, Stefano. With respect to Florida, I think it's very early to (technical difficulty) the situation there. A bill has been introduced recently, but hearings have not been (technical difficulty) yet. So the pathway to legislation is not clear and will take some time as these things always do.

We are very closely monitoring the situation, and when we get clearer signals from the administration, when we have a clearer perspective, we'll have more to report. But I think it's quite early yet to predict the potential outcome here.

Okay. Thank you, guys.

Roohi Siddiqui, Bank of America.

I have a few questions, if I may. Firstly, on the [Gioco del Lotto]. Could you give a sense of how much that is of overall Lotto wagers? Perhaps on an annualized basis what you expect that to be for 2011?

The second thing is on Greek VLTs, is it possible for you to give us an update on what your thoughts are following the Greek government's announcement late yesterday of their plans to sell VLT licenses potentially to the highest bidder? Would that change your plans in any way?

The third point, overall could you give us a sense of what your depreciation is going to be in 2011 and going forward as a whole because it seems to have been bigger than I thought in 2010? Those are the three questions from me.

So as far as Gioco del Lotto is concerned, I think that the current performance is showing this lotto to be something around 28% of overall wagers of the Lotto concession related wager. Our expectation for the full year will be to end up in a share which will be 25%. The reason for that is that we expect that during summer holidays there might be a reduced impact of the access to this game because of the fact that a number of point of sale will be closed in -- during summer time. So we still think that guidance we gave are very much in line with the standard performance, the current performance.

Okay, let me answer the question on Greek VTLs. So as you probably are aware, the draft bill on taxation was passed into law the last couple of days, last two days, and the bill has to now gone to the European Commission for approval. And that will take, we think, about a quarter or so. So I would say probably at the end of the second quarter or early third quarter will this finally go to the Greek parliament.

So what is going on from the bill is that there are going to be a total of 30,000 VLTs with four to ten licenses issued in total, which is very consistent with our initial thoughts. The number of VLTs has increased by 5,000 to now 30,000. And what is different, I think, from the previous expectation is that the 30,000 VLT licenses will go to the highest bidder. So you could have a number of bidders in the marketplace and the bidder who's prepared to pay the most for the licenses will be awarded those VLTs. So, of course, we are very interested. We will be monitoring the situation closely. And as time moves on, we will now prepare our business plan with a little bit more clarity on the way forward.

In terms of depreciation and amortization, including amortization of intangibles associated with acquisitions we have made, it will be in the range of EUR550 million. Most of the increase is associated with the nine month of incremental depreciation of the license of Scratch & Win, and the VLT's depreciation is EUR450 million.

Great. Thank you very much.

Alessandro Bajbadino, Deutsche Bank.

My first question is for Jaymin. Jaymin, I know you don't have any, let's say, concession coming to expiration in 2011-2012. But are in US or in around the world any major concession coming to expiration that doesn't belong to you?

The second question, Stefano, if you can repeat how many are the share you have to buy back in the coming days, because I missed the point? And that's it for me at the moment.

Okay. With respect to the first question, just to confirm, we do not have any significant concessions coming up the next two years, 2011 or 2012. We do some. We have Ireland, which is a potential. So that may come up this year or it's possible that there may be one-year extension there, so it could be delayed until 2012. But there are no other major concessions that we do have coming up in the next couple of years.

There are a handful of competitor contracts that are coming up in the next few years, both in the United States and internationally. The one that we are looking at, of course, is the OPAP technology contract. The OPAP rather has issued an RFQ for interested parties to become prequalified to provide a whole range of technology solutions to OPAP, which will be delivered I think some time in 2012. So that's something that is quite interesting to us.

While to be able to distribute 1 share every 50 share owned, we have to buy 205,300 shares from the market.

Okay, one last question, if I may. Regarding the ForEx effect, are you expecting a negative impact in the first quarter or is everything ended with the full year results?

In terms of cash ForEx losses, we have no further exposure entering into 2011. As we have mentioned before, there might be some non-cash foreign exchange losses or gain to be reported, given the fact that now we have on the GTECH books some euro-denominated debt. And so it is, let's say, a strategic decision that we have made to align cash flow to the debt composition. And so it will be simply an accounting entry, no exposure related to any type of derivatives or actual risk on the Company. So it's simply an accounting matter and no real economic or cash flow exposure.

Thank you.

Domenico Ghilotti, Equita.

First question is a clarification because in the press release you mentioned that you are increasing your free cash flow given the good start of 2011. I do not understand if this is, say, comparing your new projection to the target you gave a few weeks ago or not.

And the second question is on the same-store sales reported by GTECH. Could you provide some color also on the underperforming market because you mentioned some impressive results in California, but overall you are up by 2%. So I would like to understand what is, let's say, the missing part in this picture.

Okay, Domenico, coming to the first statement, the press release that we have published was intended to confirm the guidance that we feel confident that we will deliver in accordance with our guidance in terms of cash flow generation and overall in terms of major goals for 2010. No change from the guidance that we have published a month ago.

Yes, so as Marco mentioned in his remarks, we are enjoying some positive performance in the first few weeks of 2011 in the United States where same-store sales growth has been slightly above 4%. That's driven by the fact that we had very strong jackpot activity in the first week of 2011 combined with some positive instant ticket sales in a number of jurisdictions including California.

The overall same-store sales growth rate is around 2% for the first few weeks globally, because internationally there are a few jurisdictions that have not grown strongly primarily because in the first quarter of 2010, there was some large jackpots, there was a large EuroMillions jackpot which affected, of course, Ireland and the UK, very positive results one year ago, and in Mexico there was also a very large jackpot as well. So there is nothing structurally that is of concern to us. It's really the timing of jackpots in those international jurisdictions that's causing international to be relatively flat year over year in the first few weeks only.

I have another question on the Loterie Nationale. You mentioned that you will have obviously a much higher, let's say, cash flow generation compared to the net profit. So I would like to understand if you will distribute as a dividend to minority shareholders more the cash flow component and not the net profit. So we have to assume that's a much larger cash dividend compared to the net profit. And if this issue, let's say, will affect the IRR granted to UniCredit in the call-option agreement that you have.

So in terms of the ex-cash that will be available at the Loterie Nationale level, we will get together with the other shareholders and agree on the best use of that cash subject to the respect of the agreements we have in place. And we might consider to return the excess cash, not in the form of dividend, but in terms of reduction of the share capital of the Company, so distributing reserve. And in terms of the agreement with UniCredit, the -- as you remember there are no opportunity for us to buy back the shares before the approval of the financial statement of 2013. We have no intention to change the agreement that we have completed and reached with them in December 2010.

Yes, what I mean -- I mean the IRR that you, let's say, granted is also considering dividend distribution in any kind, net profit distribution and distribution (multiple speakers) --

Yes. There is no change of the assumption that we have made at the time. We have decided for that transaction.

Okay.

(Operator Instructions) Fabio Pavan, Mediobanca.

My first question was related on the good performance of both Lotto and Scratch & Win. I was just wondering if this performance is in line with your positive expectation or the assumption you made for 2011 or the first two months of running faster than expected.

And secondly, a quick question on online gaming market, just to know your view on the upside that could be provided by the recently approved reform. Thank you.

So starting from the how the -- do Lotto and Scratch & Win performance match with our expectation. Of course, they do match what we think will be the guidance for this year. To be more specific, Lotto performance nowadays is mostly influenced by the contribution of this Lotto as we said but also by late (technical difficulty) contribution as Marco was commenting before in his remarks (technical difficulty) in the first two months of this year the wagers on late numbers are 21% of the traditional Lotto wagers. Last year they were practically irrelevant. They were about 2.6%. So we are enjoying this particular phase of the year, but I think the overall expectation of the year are in line, perfectly in line with our guidance.

As far as Scratch & Win, current performance is strong but you should consider that we have invested, so to say, in two very important launches. The new EUR20 ticket is exploiting the next payout and we will have to therefore to launch minor price points as the year goes along. And again, even in this case because of the concentration on the EUR20 and EUR3 Win for Life concept which was launched in February we think that the overall assessment of the guidance is still in the right direction.

Okay.

Sorry, Fabio for the last part of the question, did you mean the Internet in Italy on the Italian market --

Yes, yes --

Because we didn't really understand the question (multiple speakers) --

Yes, yes, I was just curious to have your view on that Internet Italiana wagers.

Yes, the recent evolution is, let's say, is consistent with our expectations, monopoly will start to deliver a number of regulations that actually allow (technical difficulty) in the first chance concessionaires to renew the platform according to different, let's say, technology standards as have been introduced.

And secondly, new games will be authorized to be launched in the following month. So we expect casino games and cash poker to be delivered to the market, let's say, in about two, three months, and we expect to be in the first row in the launch of these new games.

Okay. Thank you very much.

Andrea Randone, Intermonte.

I got two question on the Italian business, if I may. The first one is about Sports Betting and more specifically about payout you expect in 2011 for Sports Betting or at least if you expect that it will be lower than in 2010 when it was 81% plus.

And second question is about video lotteries. Looking at the figures you provided in the presentation, it looks like video lotteries are collecting much more wagers per machine than slot machine. And can you provide us an idea what you book as a percentage of wagers for video lotteries in the fourth -- in the fourth quarter? Thank you.

All right. So as far as betting is concerned, of course, the -- it is very hard to make projections on payout. It strongly depends on luck from one side and the ability of punters to, let's say, become more and more skilled in the design of their bets.

The only thing we can say is as of today the market payout as well as our payout is below 81%, and that therefore we can consider that 81% on a full-year projection is a good and fair projection of what could be the year-end actual performance.

As far as VLTs, again we cannot discuss too much at the moment because the market is not mature and the -- we are, let's say, enjoying, let's say, a first mover advantage because of the fact that we had been the first one to have our system certified by SOGEI and the first one to deliver a significant amount of VLTs in the market. So we have not reached what we might consider a steady state to make final assessment of the market.

But what we can say is that a time two or time three overall performance of average VLT versus an average AWP is solid expectations because of our current experience.

All right.

Laura Pennino, Banca Leonardo.

I have just a few questions, if I may. One is on -- looking at -- if you can say, you are looking at -- you said that other jurisdictions are looking to the example of Illinois. Can you just give a little bit of more color on which jurisdiction could be interested and what specifically they could be looking at as lot of contracts have already been renewed.

And on this case, if they are interested in the management of the service just for the market in part, would that mean you would need further investments or not?

And the third question is that in September there is a hearing for the Lotto concession expiree as AAMS has opposed your arbitration on the Lotto expiree. Can you please comment on what you think is going to happen in September? Thank you.

Okay. So with respect to your first question on US jurisdictions, I think what I should say in the beginning is that of course every single US state is facing significant budget shortfalls in their 2011 budget. So states and governors are looking at ways in which they can raise funds. There are at least three jurisdictions, perhaps even more, that are seriously considering different models to running their existing lottery operations. Those are New Jersey, Ohio and Florida, as I mentioned earlier.

They are all in different stages of discussion. In New Jersey, an RFP has been issued to appoint an advisor to the state to help them determine whether they wish to pursue a private manager path. In Ohio there are discussions taking place in the state as well as to whether a private manager model would be -- it would be wise to be able to optimize performance. And in Florida, a bill has been introduced, again to determine whether it would make sense to issue a private manager contract.

In all these cases, it is not necessarily the case that you have to have the termination or the conclusion of the existing FM or technology contract with the supplier. I think what they're looking for here is a company to assist in optimizing performance to raise more money for good causes.

So it's really hard for me to predict the timing or the nature of these awards. There could be an award where there is upfront capital requirement. Or it could be in the case of Illinois whereby the state is looking for a revenue guarantee over multiple years. It's just very hard for me to predict which way these will go because there is no clarity from any of these states at this point in time.

Okay. I --?

I take the question regarding the Lotto. I mean, the situation is the following. As you might know, we had a discussion with the regulator regarding the date of expiration of our concession, and accordingly to the concession itself to end up with a view between the part you have to conduct an arbitration.

We did it a couple of years ago and the arbitration committee that is formed by three members ended up saying that the expiration of the contract has to be considered 2016. As you were mentioning, the -- and consider that the three members, there is a chairman, one member appointed by one party and the other member appointed by the other party. And I want to stress the fact that the decision was unanimous. So even the member appointed by our regulator voted in favor of the expiration of our concession in 2016.

Now, there is the appeal. Of course, all the appeals cannot -- I cannot predict what's going on. What I have to stress is we have a quite solid ground that is deriving from the arbitration outcome.

And also I want to underline that the appeal does not enter in the merit of the discussion, but it has to review if the arbitration was formally conducted properly. So they have to review if the ground check is consistent with the outcome that the three members ruled out. So that is what I can see, what -- and is we feel comfortable given these premises in the outcome of the ruling in September.

Okay. Just a few follow-ups. Regarding the US jurisdictions, would it mean you should have to invest again like you did for the Illinois even if the contract is not finished or would it just be an assistance, I mean, like a consultancy and not for investments?

While for on the appeal, you said not in the merit but just formally. This means that in any case, even if you would -- we hope not to lose the appeal, the -- you feel very confident that the expiry will be in 2016 anyway. So just to -- there is no way to change that. Is that what you were meaning or not?

I answer the -- immediately the second part, no, it is not what I was meaning. I mean, what it's meaning is that the appeal regard the formal structure of the arbitration outcome. It is clear that the judge can decide that if it is not formally properly conducted he enters in the merit the issue. So it does not mean that he cannot take a decision that in principle he is against.

But to do that, he is not going to judge the merit at the beginning.

Okay.

What he is doing at the beginning, he looks how the outcome has been ruled out from the formal standpoint. In other terms, the consistency between what it has been analyzed and the outcome without entering the merit. If he feels that --

The (multiple speakers) --?

-- these analyses has not been properly conducted, he can enter the merit.

Okay, that is the situation. And we feel, let me say, comfortable, as you can feel comfortable in this situation regarding the consistency of the ruling. That is all I can say.

Perfect.

With respect to your first question on US jurisdictions I don't think that the US state necessarily have to terminate the existing vendor contract to be able to go to a private manager model, because the objective of the private manager model is to help the state to maximize performance to raise money for good causes, to raise more money on behalf of the state. So it is perfectly reasonable to have the existing technology contract and to invite in a private manager to help run the sales and marketing part of the business to drive performance.

It's certainly advisable and preferable to have both contracts joined together, but I certainly would not expect a situation where a state will be looking to terminate the existing contract to issue a private manager type bid because that would be very unusual.

Okay. Thank you.

(Operator Instructions) Roohi Siddiqui, Bank of America.

On slide 10 where you show the performance breakdown for -- in the fourth quarter, machines contributed an incremental EUR10 million of EBITDA versus the previous year. Should we assume that that is -- the majority of that is coming from VLTs? I know your machine state also increased over the time on the -- in the AWP side or is it sort of two-thirds coming from VLTs, et cetera?

And then could you give us a sense of what the EBITDA margins were, order of magnitude, in Q4 for overall machines?

So in terms of composition of that EBITDA in Q4, it is mostly AWPs. As you know, we have increased the number of machines and we have improved the direct -- directly on machines, which is the basic driver of that incremental EBITDA, which is again influenced by the increase in wagers. So that's the three major driver. It is mostly AWPs. VLTs have not influenced substantially and materially. They are least of the performance in 2010.

In terms of EBITDA contribution, it's, let's say, FLC margins in terms of EBITDA margin contribution and we expect that even to, let's say, improve going forward because of the contribution of VLTs, to be more precise in Q1 2011 as soon as we will have an extended period of [reservation] on VLT's performance.

Okay. Thank you.

As there are no further questions in the queue, I would like to turn the call back over to Mr. Marco Sala for any additional or closing remarks.

Thank you. I have put up the guidance slide that we presented at our last conference call. I'm not going to go through all the numbers.

I would like to draw your attention to the 2011 plan. I hope you can appreciate that we have put forth a plan which we believe is achievable. We are starting the year in good shape with a fair amount of momentum.

Lottery growth trends are picking up and that should help lessen the impact of price compression we will experience as an outcome of the rebid cycle. Governments are thinking very differently about their gaming programs which provide us an opportunity to increase our services and more directly drive growth. And most importantly, the new private manager model rely on increased returns from better management rather than large upfront license fees.

In Italy, our investments in the new growth sectors are beginning to generate the returns we anticipated. And the fundamental of our lottery operations are responding favorably to the new innovations. We have set an ambition course for ourselves to improve cash flows. Obviously, it is fairly in the process, but we like where we are starting from.

I look forward to continuing the conversation during the first quarter presentation. Thank you and good evening.

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