International Game Technology PLC (IGT) 2011 Q3 法說會逐字稿

Good day, and welcome to the Lottomatica 2011 third-quarter year-to-date results ended September 30, 2011 conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Marco Sala, CEO of Lottomatica Group. Please go ahead sir.

Good evening, and thank you for joining us for Lottomatica Group's 2011 third-quarter results presentation. Joining me today is Alberto Fornaro, who was recently appointed the CFO for Lottomatica Group. Welcome Alberto.

Renato Ascoli, the General Manager of Lottomatica and Jaymin Patel, the CEO of GTECH will join us for the question and answer session.

I will begin by offering some brief comments on the third-quarter results. I am pleased to report that the Group had another good quarter, and the momentum established in the first half of the year is being sustained. We experienced growth in all the major reporting categories versus the same period last year. And, most importantly, we have made great progress in improving our net financial position in line with the significant commitment we made at the start of the year.

As we have previously noted, our investments in the machine gaming sector in Italy, particularly the new VLTs, continues to drive our growth. Although we anticipated some impact, we have not yet felt a significant erosion from the entrance of competitors in the VLT market. No doubt there will be some, but we have established a loyal player base that continues to demonstrate a preference for our games. We believe that speaks well for the future.

In that regard, we were able to maintain our market share in the Italian machine gaming market in terms of total wagers. Lotto wagers, driven by 10eLotto game continued a strong showing and were up approximately 38% over the comparable quarter last year. Scratch & Win wagers also maintained their growth pattern from the first half. Scratch & Win wagers grew approximately 12% over the third quarter in 2010.

Additionally, GTECH's same store revenues which began to rebound in the first half of the year continued to have an impressive performance. Quarterly same store revenue for GTECH were up 6% overall, and 4% in the US when compared to the same quarter 2010.

If you exclude the impact of the Czech Republic quarter-over-quarter overall growth -- overall growth was 8%. The growth was driven by a strong performance of international lotteries, most notably in Poland and United Kingdom.

Same store revenues in the United States were helped by exceptional growth in instant tickets in California and Illinois. Online sales had an overall solid performance, benefiting from jackpot activity. We are very much encouraged by the solid gains that have been made in GTECH same stores revenues. And we are seeing continued progress of sales at the close of the quarter.

In Illinois, our Northstar Group took over operations on July 1 of this year, and is transforming the Illinois Lottery by instituting -- by best practices and bringing innovations to that market.

For the first quarter of the results under our management, overall lottery sales were up 9% from a similar period last year. Instant ticket sales, which had been an underperforming category, are up over 17% for the quarter with the trend continuing in October.

A major rebranding campaign is underway and we are optimizing and expanding our retailer network. To be sure we have just begun, but we are encouraged by the early successes.

As we have noted before the Illinois model of shared risk and reward with a private operator is a model that, we hope, will be seriously considered for adoption by other US jurisdictions. In that regard, we find that New Jersey is the most advanced in reviewing options for the ongoing managing of its lottery.

The concept is also beginning to surface in a handful of other states. It is anticipated that in 2012 some of those jurisdictions will begin to pursue a formal private operator partnership for their lotteries as well.

From a commercial perspective, GTECH secured three new contract extensions during the quarter. It is also important to note that the Powerball jackpot game in the US will adjust the price point of its game, increasing to $2 in the first quarter of 2012. This represents a significant innovation for the Powerball game, which has been offered at the same $1 ticket price since it was launched in 1992. We believe this will be another important contributor to the sustainability of GTECH same store revenues going forward.

Turning to Gaming Solutions, we achieved service revenue growth of approximately 30% over the same quarter in 2010, primarily attributable to the performance of the Italian market.

Overall revenues were impacted by cyclical of product sales --- sorry, by the cyclicality of product sales. And Spielo continued its successful run in the Canadian gaming's replacement cycle by winning a VLT central monitoring system contract in Alberta.

GTECH G2 started showing improvement. Another example of Group synergies, the success of Lottomatica's entrance into the Italian interactive market with cash poker and casino games, was part of a close collaboration with G2.

Going forward, we have decided to merge our Gaming Solutions and GTECH G2 organization to better align with the needs of our commercial and lottery customers. Walter Bugno will lead the integrated company under the Spielo International banner.

The decision to integrate seemed to be common sense. Working along with GTECH, G2 has successfully developed and launched solutions for our WLA customers, and is working with US customers to support their efforts to get ready for interactive lottery wagering.

As interactive gaming continues to evolve, it is clear that commercial gaming operators are also seeking solutions to compete in this space. Most of the major operators have formed alliances or internal organizations to focus on interactive gaming. Spielo will now have a complete set of solutions to support their customers' interactive challenges.

Paolo Personeni, the former Head of G2, will take on a new role as Group Senior Vice President for Strategic Development, while continuing to help lead the Spielo/G2 integration. The position is an important one that we have envisioned for some time. Paolo will lead corporate strategy development and efforts to leverage and integrate our technologies in the individual business units. He will also be responsible for M&A activities as well as other strategic corporate initiatives, including Group-wide sports betting projects.

As you have seen from our announcement today, our performance in the third quarter was encouraging. Revenues reached a record level. EBITDA growth over the same period of last year was 19% impacted by one-time expenses, investments in product launches and adjustments in variable compensation costs. The impacts were primarily related to timing.

Looking at our earnings on a pro-forma basis, quarterly earnings per share were EUR0.29, up 16% over the third quarter of 2010. For the nine months, again on a pro-forma basis, EPS was EUR0.91 per share, a 26% increase over a similar period of last year.

Our net financial position has had a significant improvement. As you can see, net financial position came in at approximately EUR2.8b, an improvement of approximately EUR173m since the beginning of the year. The focus we have given this area is paying off, and we are pleased with the progress to date.

As you are aware we increased our overall guidance fairly substantially during 2011. With the results we have achieved through the third quarter, we are confident that our full-year guidance is comfortably within reach.

Let me conclude by saying that we are encouraged by the trends we are seeing in the business. Same stores revenues are being sustained. Innovations and the new products are producing results. And our investments are driving growth. Our business is sound and growing. We expect the positive momentum to continue, and we are confident in our prospects for the remainder of the year as we have outlined.

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

Thank you, Marco. Now, let's review the results for the third quarter. I am pleased to report that overall we delivered solid operating results in the third quarter of 2011, and the first nine months of the year. In fact, revenues hit a new record in the third quarter.

Revenues for the third quarter were up 34% at EUR741m compared to EUR552m in the third quarter of 2010. At constant currency, revenues were EUR755m.

The increase in revenues reflects a EUR14m impact relating to the Illinois Lottery private manager agreements, under which Northstar Lottery Group receives compensation for its management services as reimbursement for certain operating expenses. As you recall, GTECH holds an 80% controlling interest in the Northstar Lottery Group.

EBITDA was up 19% to EUR237m compared to EUR200m in the third quarter of last year. Third quarter 2011 EBITDA on a constant currency basis was EUR241m.

This positive EBITDA performance, compared to the third quarter of 2010, was achieved despite additional costs, some of which were non-recurring; including higher commercial costs to sustain recently-launched products and new products in Italy, lower margins on product sales due to geographical mix, higher variable compensation related to a good performance of the Group in 2011 versus 2010 as well as certain provisions of legal fees.

The EBITDA margin was 32% compared to 36.2% in the third quarter of 2010.

When looking at the Lottomatica Italian operations, our Scratch & Win business generated gross wagers of EUR2.4b, up 12% versus the third quarter of last year. The number of Scratch & Win tickets sold in the quarter was 549m with an average price point of EUR4.36, supported by launches of instant ticket games in the first quarter of 2011, in particular, the EUR20 ticket that was introduced in January.

Lotto wagers were up 38% to EUR1.8b, compared to EUR1.3b in the same period last year. 10eLotto performance contributed approximately 34% of total lotto wagers in the third quarter.

Lottomatica's sports-betting wagers in the third quarter were EUR154m, compared to approximately EUR173m in the same period last year. Sports betting payouts in the third quarter were approximately 81%, compared to 71% in the same period last year.

It should be noted that wagers were higher in the third quarter last year through the -- due to World Cup Soccer. As of September 30, our sports betting market share in terms of total wagers was 21%.

Machine Gaming wagers were up over 150% compared to the same period last year at EUR2.8b. The number of installed machines in the third quarter of 2011 grew to over 63,000. This machine count is comprised of AWP and VLT connected to a Lottomatica system. In July, Lottomatica celebrated its one-year anniversary of the first VLT network implementation in Italy, and at the end of the quarter approximately 7,400 VLTs were installed.

AAMS reported total third-quarter VLT wagers in the Italian market of EUR3.35b which includes re-played credits. In the third quarter of this year, Lottomatica's machine gaming wagers totaled EUR2.8b. Wagers from VLTs only were EUR1.76b, generating EUR115m in revenues from an average of approximately 7,000 VLTs in the third quarter.

It is important to reiterate that the current payout is higher than 90%. The current taxation is 2% of wagers. The difference in wagers less payout represents net cash-in. Net cash-in less taxes represents the net win which is what Lottomatica accounts for as VLT revenue.

Interactive wagers were EUR558m, up from EUR101m in the third quarter of last year. This performance was principally driven by an increase in skill gaming wagers, resulting from the introduction of new games such as Poker Cash and Casino. We are well positioned in the interactive environment with a market share of over 17% year to date, due to these recently launched games.

Lottery revenues were up 32% to EUR208m, compared to EUR157m in the third quarter of last year, as a result of Lotto's performance, higher instant ticket sales and increased percentage fee from the Scratch & Win concession.

Revenues from Sports Betting were EUR30m versus EUR49m in the third quarter of 2010. The revenue decline is due to a decrease in wagers when compared to the third quarter of 2010. As was mentioned earlier, wagers in 2010 third quarter were unusually higher, driven by World Cup Soccer.

Machine Gaming revenues grew to EUR167m, compared to EUR53m in the same period last year, due to the newly-installed VLTs which were in a very early startup phase in the third quarter of last year.

Revenues from Commercial Services were up 23% to EUR31m, due to an increase in bill payments, prepaid cards and ticketing services for sporting and musical events.

Revenues from our Interactive business in Italy generated EUR23m, compared to EUR11m in the third quarter of 2010. It should be noted that the gross gaming yield of the newly-introduced interactive games in Italy are structurally lower than the average of skill games and tournament poker. This explains why the five-fold increase in wagers is reflected in doubled Interactive revenue.

Revenues from Italian operations in the third quarter of 2011 were EUR459m compared to EUR296m in the same period last year, up 55%. This increase was primarily attributable to higher revenues from our Machine Gaming business and the 3.9% fee for the Scratch & Win concession which commenced in the fourth quarter of 2010.

EBITDA from Italian operations was up 30% to EUR174m compared to EUR134m in the same period last year. Lottery EBITDA contribution was EUR7m, net of certain previously mentioned additional costs and non-recurring items including the increase in variable compensation, legal fee provisions and higher commercial costs related to Lotto, Scratch & Win and Interactive. The VLT business, which was in the very early stage in the third quarter last year, is the primary drive for the Machine Gaming contribution.

Revenues for GTECH Lottery, G2 and Spielo were EUR282m, up from EUR256m in the third quarter of last year, primarily due to higher GTECH same store revenues growth and product sales and the compensation for the Northstar's management services in Illinois as previously mentioned. This growth was partially offset by foreign exchange.

EBITDA for GTECH Lottery, G2 and Spielo was EUR63m compared to EUR66m in the third quarter of last year. EBITDA was positively impacted by higher same store revenue growth, offset by change in GTECH Lottery, contract portfolio mix and renewals, as well as foreign exchange.

On slide 12 we provide a breakdown of the GTECH Lottery service revenues for the third quarter of 2011 versus the third quarter of 2010. Note that this includes Gaming and G2.

Domestic same store revenues increased 4% versus the third quarter of 2010. Jackpot activity in the Mega Millions game was relatively constant when compared to the same period in 2010 while Powerball jackpots were strong versus last year.

In addition, our efforts to grow instant ticket sales continued to be successful. As a result, we experienced good performance in California, Illinois, North Carolina, Wisconsin and Florida. The instant ticket sales growth was particularly strong in California where sales increased 26% and Illinois where sales grew 17%.

International Lottery same store service revenue grew 10% compared to the third quarter of last year. The Euro Millions game experienced two large jackpots in the quarter which resulted in solid growth in the UK and Ireland. In addition, jackpot activity in Poland and Colombia generated strong growth there as well. Excluding the impact of the Czech Republic customer bankruptcy, International Lottery same store service revenues were up 14%.

Now let's turn to a quick overview of the first nine month results. Revenues were up 28% at EUR2.1b compared to EUR1.7b in the first nine months of 2010. At constant currency, revenues were EUR2.2b.

EBITDA was up 24% to EUR738m compared to EUR597m in the first nine months of last year. EBITDA on a constant currency was EUR749m. EBITDA margins were 34.4% compared to 35.7% in the first nine months of 2010.

Now let's look at the P&L below EBITDA. Operating income was up 24% in the first nine months to EUR422m versus EUR340m in the same period last year. I would like to point out that amortization for the new Scratch & Win concession commenced in the fourth quarter of 2010.

Interest expense net was EDUR124m comparable to the same period of last year.

In the first nine months of last year, the Group recorded net foreign exchange losses principally associated with mark to market losses on option structures which hedged a portion of our US dollar-denominated debt. These options were terminated in 2010 when we completed the refinancing of the Group debt.

The income before tax was EUR290m, up 85% compared to EUR157m last year. Group net income was EUR156m versus EUR84m in the same period last year. Net income attributable to the owners of the parent was EUR127m, resulting in earnings per share of EUR0.74.

For the third quarter, EPS was EUR0.34 versus a loss of EUR0.08 in the third quarter last year. Further details on the third quarter EPS can be found in the appendix.

On the next slide we will look at the pro forma EPS year to date. To give a more accurate perspective on the core earnings generated by our business, we are presenting EPS on a pro-forma basis. Note that this pro-forma calculation principally excludes non-cash foreign exchange losses associated with euro-denominated debt on the GTECH balance sheet, and non-cash purchase accounting associated with the GTECH acquisition. Excluding these items, EPS for the nine month period was EUR0.91 compared to EUR0.72 last year.

We generated cash flow from operations of EUR642m in the first nine months, providing the capacity to fund capital expenditure, interest payments and minority interest payments. Our net financial position at the end of the quarter was EUR2.8b, down from EUR2.98m at the end of 2010.

At the end of the third quarter, the US dollar to euro conversion was $1.35 versus $1.34 at the end of 2010. We also have EUR853m of cash for committed undrawn lines of credit available at the end of September 30.

Our CapEx is progressing in line with plans. EUR180m of maintenance CapEx for GTECH Lottery, G2 and Gaming was primarily related to the investment in GTECH's Texas, Illinois and Poland contracts. For Lottomatica's Italian operation, total CapEx was EUR90m primarily related to the new VLT business and Lotto.

Now I would like to open up the lines for Q&A, after which we will hear a closing statement from Marco.

(Operator Instructions). And we will take our first question from Alessandro Bai-Badino of Deutsche Bank. Please go ahead.

Yes, good evening to everybody. My first question is regarding if you can give us a precise figure or the one-off cost that impacted into a quarter, you quoted a couple of times in terms of amount.

Then, second question if you can give us some more, let's say, flavor on the second austerity package that the government was looking forward to, let's say, approve on the gaming sector if you have any visibility on that.

And then my third question is regarding, given your long-term visibility, can you provide us a guidance on the free cash flow generation for full year, [leverage] free cash flow for full-year 2011?

And last question is regarding VLTs. You say that competitors are far behind in terms of installing new VLTs, can you give us your market share in terms of wagers and in terms of VLTs installed versus the total market. Thank you.

Okay I --- Alessandro, I suggest Renato to answer the second question and the fourth question regarding the Italian market, and the austerity measures as well as the VLTs.

Right, well, so far we have no idea how Monopoli di Stato will take the lead in introducing new regulation regarding a way to collect more, let's say, money for the income state.

For sure, we have some visibility regarding some hypothesis they make of enlarging the scope of a number of games or potentially introducing new ones. But no precise resolution has been made so far, so we do not have any specific comments to deliver to you. We have, of course, expectation that some visibility will be given by year end, and we can say that according to pressure that we can -- our intelligence is getting that something will have to be done by year end in order to make the law consistent.

While regarding VLTs, of course there is no specific knowledge regarding the share of machines in place at the moment. What we can estimate, for the time being, is that most likely the number of machines at the end of September could be something around 30,000; that is our estimate and that would give us 26% of the installed base. While we do know, because this data are delivered by Monopoli, that the share in terms of wagers [accrued] to Lottomatica is 55% in September.

I switch to Alberto for the better description of the one-off costs.

Okay, regarding the one-off costs, they are in the region of EUR12m to EUR15m. However, it would not be prudent to add those to the performance of the year and draw a conclusion on the fourth quarter because, still, we expect pretty heavy fourth quarter, particularly for the additional cost for new products.

Regarding the second question related to the leverage cash flow, at the moment our estimate is something at least around EUR200m.

Thank you, for now.

And we will take our next question from [Frauka Volgemut] of WestLB Mellon Asset Management. Please go ahead.

Hello and thank you for taking my question. I've just a short question. Can you give us an impression or a feeling how is the current environment in Italy going? Do you already see people playing less, putting in less wagers, especially in the last summer months and now in September/October?

In reality, we have always anticipated that this market is very resilient and also the results that we are commenting are proving these resiliencies. So we are not anticipating, accordingly to the results we are getting also in the month of October, any change in the trends we have commented so far.

So you think the whole momentum will go on in 2012, as well -- early 2012.

We have not seen, so far, any change in the trend that we have commented.

Okay, thank you.

And we will take our next question from Vaughan Lewis of Morgan Stanley. Please go ahead.

Hi there. Just following on from that question on the outlook, if trends are solid and no slowdown, the guidance seems to be for flat EBITDA or a slight decline in Q4 for you to hit your full-year EBITDA guidance, so could you just run us through why Q4 should be so much lower than the year-to-date performance in terms of EBITDA growth?

Secondly, on the VLTs, it looks like you've only rolled out about 800 machines in Q3. Do you still expect to have all 9,000 machines rolled out by the end of this year?

And then a final question on Greece. Are you planning to bid for the National Lottery and do you plan to bid to operate some of the VLTs there or will you be looking to supply machines rather than operating them? Thanks.

Okay, Alberto, let me answer the first question. As I said, we are planning to invest in our Italian business to sustain the momentum right now and so we are planning for increased expenditure in product innovation and support in the fourth quarter. Also we are anticipating the possibility of more licenses being offered with the intent of raising money for the Italian government. And also let me remind you that we are still dealing with the effect of the bankruptcy of our customer in the Czech Republic, at the moment.

As far as VLTs are concerned, yes, we can confirm that our rollout plan is sound and in place so we do expect to have about 9,000 VLTs by year-end, at the moment.

As far as Greece is concerned, Jaymin?

Let me answer the question on Greece. As you will recall from the last several conference calls, we have been quite active with respect to business development activities in Greece, both on the video lottery front as well as evaluating the potential for bidding on the Scratch & Win license, which is now out in terms of expression of interest. We remain interested in Greece but, of course, we have taken a cautious view this week, given the political events that are -- that we see in front of us, and the turmoil. So, investing capital in Greece today is not a very comfortable proposition for us. However, Greece is a strong gaming market. We believe in the long-term future of Greece and we'll have to evaluate how the political and economic situation evolves in the coming weeks.

It, I think, is a little bit easier for us to proceed with interest on the VLT business because we hope to be able to deploy VLTs, both as an operator and a supplier, like we have in the Italian market.

But, in terms of the Scratch & Win license, if there is a substantial upfront license fee, again we remain interested for the long term but I think we have to take a cautious view in the short term given the economic uncertainty.

If I could just check on the VLT, so you plan to both supply machines to OPAP and to others and also bid for some of the sub-licenses from OPAP, is that correct?

Yes, I think we will take a view on that. Clearly, we view ourselves as a VLT operator which we -- as you've heard the results in Italy, we're very successful here. And our Spielo International business does supply VLTs and systems and games into the Italian market, so a similar model would be something that would be quite attractive to us in the Greek market.

Okay, great. Thank you.

And we will take our next question from Roohi Siddiqui from Merrill Lynch. Please go ahead. From Matthew Gerard, Credit Suisse. Please go ahead.

Hi, good afternoon, guys. I think I've three questions, one of which was clarification following Vaughan's question. How much is this extra cost investment going to be in the fourth quarter because, as Vaughan said, clearly from a revenue perspective you've hugely outperformed in the third quarter? What -- and I think previously in July you'd said you're assuming Scratch & Win wagering growth of 3% to 5%, which you've clearly beaten, and Lotto for EUR6b of wagers, so just looking at the revenues for a second, what's your revised guidance assuming for the fourth quarter from a revenue perspective by your major concessions in Italy? And then, second to that, how much is the extra cost investment and can you quantify that for the fourth quarter?

And then, second, can you give us an update on the packaged VLT license sales, the other 1,800, and where we are with that process? Thank you.

As far as the major concession in Italy are concerned, I would say that in Scratch & Win we still keep the guidance on having a one-digit growth in 2011. You should consider that notwithstanding a very good performance we reckon so far, we are now comparing the following months to a very strong months in 2010. Particularly last year we launched two very successful tickets at EUR10 with a Win for Life concert included in October and then a very strong Christmas ticket in November. And, as we already anticipated, we have -- we decided in 2011 to locate all the best performing ticket and the most attractive ones in the first quarter of the year so now the comparison will be somehow unfair.

Besides, we have less selling days in 2011 versus 2010 and that will also reduce the pace of growth that we have seen so far. I cannot really tell you that October will be very much in line, this year, with the last year performance, again, thanks to a different contribution in terms of new launches.

As far as Lotto is concerned, I think that the performance so far has been very good. We have a very high share of late numbers in this year. So far, the share is about 25% while we usually have a normal share, which is located between 15% or 16%, so this year we've been very lucky regarding late numbers. I'm sure you are aware that at the beginning of October the latest late number has been hit and so we do expect a very normal performance in November and December to come.

Sorry, if I can just come back then. So if you add all of that together and it's mid-single-digit growth, say, for Scratch & Win in the fourth quarter of the year and your Lotto guidance previously with EUR6b of wagers, presumably that's gone up again. What does that mean for the extra cost investment in the fourth quarter? Are we talking another EUR15m or is it higher than that?

It should be around EUR10m; that's the current forecast.

Okay, thank you.

And we will take our next question from Roohi Siddiqui of Merrill Lynch. Please go ahead.

Good evening, guys. A few questions from me, please. Firstly, if you could just clarify what the level of VLT wagers were in Q3. I missed that point.

Secondly, if you could just talk a little bit more about any innovations that you have planned in Scratch and Lotto. And if you could give us a proportion of how much 10eLotto makes up now in terms of wagers as a whole, that would be useful.

And then, on the extra costs, could you just clarify a little bit in Q4 which areas you're going to see that in?

And then just to clarify on the Lotto wagers late numbers, you said 25%. Does that refer to year to date or in Q3? Thank you.

I'll try to provide you the information you are asking for. When I refer to 25% share of late numbers I'm referring to year-to-date performance. And when I refer to 15%, 16% I refer to the average of the last five-year performance on the whole.

10eLotto in today's performance is about one-third of the combined Lotto and 10eLotto. We are at about EUR1.9b at the end of October.

In terms of innovations, we do not forecast any major innovation in 10eLotto until the beginning of next year and so we will postpone to the first quarter of 2012 some relevant innovations in the market. While, as far as innovation regarding the Lotto concession are concerned, I'm sure you are aware that in the July fiscal decree there is some room for innovation allowed by the decree, itself, and by the law, itself, by now. And so we are currently testing a number of minor innovations that should announce the bond between the customer base and the brand of the Lotto itself.

I'm sorry, could you just clarify a little bit more what these innovations are as set out by the July decree?

No, there's no specific innovation there. Just, as I say, an open opportunity allowing the concessionaire to discuss with Monopoli the start of other further, as I say, minor innovations regarding Lotto. There is no final result done, at the moment. The discussion is ongoing with the Monopoli and so we are not in condition today to announce anything to the market.

I guess there was a comment on the VLT wagers, did I get it right?

Yes, that's right, in Q3.

: The VLT wagers in the third quarter were EUR1.76b and the total market was EUR3.35b.

Thank you. And then just coming on the extra cost in Q4, if you could just clarify a little bit where that's going to be spent, or what sort of initiatives. Is it more marketing? Is it more -- what exactly is that?

Yes, maybe I can give you a bit more color on that. We have experienced a very positive correlation between advertising and the increase in the number of players in some games, particularly in the Interactive business. And there is some positive connection also between the expanding of the customer base of 10eLotto and advertising.

This is why we decided to increase the pressure in advertising from now to the end of the year, trying to expand the customer base of 10eLotto and to increase the number of players on the Interactive segment so this, too, will be the most focused area that we're going to expand. Of course, we are doing that not only in order to have a better competitive advantage versus incoming new competitors and also in order to have a good start in 2012 in order to have a better performance since day one in the New Year.

And, guys, can I just have a follow-up, please, if you don't mind, which is on Lotto wagers for next year. I realize it's probably too early to talk about it but then next year we should be thinking about a normalized level of late numbers, should we, 15%, 16%? So, would you then expect to -- further innovations to keep Lotto wagers at least stable or should there be a decline, do you think?

Of course, I would wait for closing year 2011 before forecasting anything stable or declining or going up in the following years. For sure, what we can assess already today is that a fair expectation on late numbers is no higher than 15%, 16% of the traditional Lotto wagers. As for the rest, I think we will have time to comment our forecast later on.

Great, thank you very much.

(Operator Instructions). We will take our next question from Marco Baccaglio of Cheuvreux. Please go ahead.

Good afternoon. My question is regarding Northstar. I've seen in your bridge of EBITDA (inaudible) there is a significant negative impact in Q3 from a change of rates, and so on, so I would like to know if you could be a bit more precise about what is the impact of this new contract in Illinois, both in terms of service contract and performance of Northstar. Thank you.

Yes, the reason for the one-time costs in the bridge is because, as part of the Northstar launch, we are responsible for making investments as a startup of the new entity so those are the one-time costs. Going forward, we certainly wouldn't expect to have any one-time costs or recurring costs of this nature.

In terms of the business, itself, as we mentioned in the prepared remarks, the business is doing quite well from July 1. Overall sales are up by approximately 9% to 10% with strong growth in the instant ticket business of just over 17% for the first quarter. So in terms of the contribution to the business, we have a positive contribution from the service contract. And then the way that the business is structured is that Northstar earns an incentive for achieving net income targets over the next 10-year period. So, at this point in time, it's premature for me to make a comment on our potential income level from the incentive because we still have a full year or nine months to go. But, so far, we feel quite confident that the business is off to a good start and the performance will continue.

What was the commitment you had in terms of increasing wagers on year one, can you remind us?

Yes, the increase in wagers in year one was from approximately $2.2b of wagers to approximately $3b. I'm giving you round numbers -- I haven't got the exact numbers here -- but approximately $3b in the first year.

Thank you.

Thank you.

And we will take our next question from Domenico Ghilotti of Equita. Please go ahead.

Good afternoon. My first question is on your net financial position target. You have already basically reached the -- your target for full year end so could you elaborate if there is any reason why you should not generate cash and improve your net financial position in Q4?

The second question is related to the gaming machine performance for GTECH for the International business. I would like to understand if there is -- how is the visibility on the replacement cycle supporting Spielo product sales, given the macroeconomic concerns?

And a third question is what is the possible potential impact from the $2 Powerball ticket?

Let's have Jaymin with the $2 tickets.

Yes, next year, as you know, the Powerball price point change to $2 will take place on January 6. It's very hard to give you an exact number but we are expecting to see an overall lift of Powerball wagers in the range of 20% to 30% for the year so that's our current view. There'll be some -- that's a net number, net of some cannibalization of playership but we feel quite confident with the research that's been conducted with our customers that we should see a net lift of over 20%.

I'll answer regarding the gaming machines. The business is -- probably in terms of replacement is progressing quite well as far as the Canadian replacement is concerned. That was the replacement that we were waiting since a long time. Now, all the tenders that have been issued by our customers has been got by Spielo so we are now in this respect planning quite a significant growth in Canada for the next years so I feel that -- I regard that as a good news and that will give good perspective to Spielo business, going forward.

On the net financial position, it's clear that where we are we're in a very comfortable position for the future. However, we have benefited, our working capital, particularly the payables and receivable are quite erratic. And we think that it will be prudent, at this moment, to keep the guidance even though we are in a very comfortable position.

Okay, thank you. A follow up if I may on the Sazka situation because you mention also this has the potential to concern, so I would like to have some update because I thought that the issues were improving.

No, I think the situation is definitely improving. The current situation is that the company, Sazka, has emerged from bankruptcy and the new equity owners are in the process, this week actually, of taking over the business. We have committed, as an organization, to continue providing long-term services to them in terms of technology, support services and marketing for the long term. Our contract extend beyond 2020.

The reason that we're being a little bit prudent is that we have some balance sheet receivables that have to be resolved and cleaned up by the end of the year and, given that the business is emerging from bankruptcy, we want to take a prudent approach. Nothing is wrong but I think a prudent approach is worthwhile, given that emerging from bankruptcy there are always cash flow issues to be concerned about. That's all.

Okay, thank you.

And we will take our next question from Alessandro Bai-Badino of Deutsche Bank. Please go ahead.

Yes, a couple of follow-up questions. First of all on your CapEx, during second quarter call you said that from the EUR350m CapEx you said we should add -- sorry, EUR320m, EUR350m guidance CapEx we should add around EUR25m related to the second --- sorry, the first austerity package. Given that there is no [equitive] decree yet so that be postponed to 2012. And, again, on CapEx, I think you were estimating to spend around EUR25m in Greece VLTs, is that still something on the table?

And then, Jaymin, can you add some data on how the US Lottery privatization? Is anything going on? Thank you.

Sorry, I didn't quite catch your last question but let me perhaps start with the Greece question and then I can ask my colleague -- one of my colleagues to discuss the overall CapEx numbers, then you can repeat the final question. But in terms of Greece, just to be clear, we always felt that the Greece capital would be over two years because, clearly, we did not foresee the investment in VLTs being primarily in fiscal year 2011. So if we decide to move forward in Greece, pursuant to my earlier comments on the VLT business, the investment will be in 2012.

But, in terms of the overall CapEx, I'll ask Alberto or Marco to comment, or maybe Renato.

Yes. Last time we talked I think we made it very clear that we were not changing the guidance in terms of the CapEx number so we were not taking into account, there, any further investment for new licenses in Italy, although we did say that we -- in the expectation regarding the net financial position for the year end, we did take into consideration the room for about EUR30m in potential CapEx for new rights.

You're right when you say that, so far, only one tender appeared out of the three that were expected by year end; the one for new AWPs and VLTs. We are still waiting for the tender on betting to appear. It was expected by October 31 but it's not visible yet. And we are also waiting for [infield] poker to be launched by the end of November. We will be able to make a final assessment on CapEx by -- when -- soon after these two tenders will be launched.

Yes, I just was told that your last question was on privatizations in the United States and so what I can tell you is that, at this point in time, we are aware that the State of New Jersey is actively looking at its options with respect to a potential private manager or outsourcing type contract. I believe that they're looking at whether it would be worthwhile to expand existing operations or existing outsourcing options to maybe a full sales and marketing outsourcing contract all the way through to the Illinois-style private manager contract. And I expect to see something later this year in terms of an expression of interest and then perhaps an RFP next year.

Other states that are actively discussing the matter are Ohio, Michigan, California, Florida and some other states as well, but I would say that they are less advanced in terms of establishing a process.

Thank you.

Thank you.

As there are no further questions in the queue, that will conclude today's questions and answers session. I would like to turn the call back to Marco Sala, CEO, for any additional or closing remarks. Please go ahead.

Thank you. Let me sum up. The results we have announced today we believe solidly position us for continued growth. Most importantly, we have been able to sustain the momentum we created during the first half. Clearly, the guidance we have provided is achievable. There is work to do, but we are confident in our prospect for the full year. There have been some questions about the fourth quarter; let me reiterate. We will be investing in our businesses to sustain further growth.

Finally, we are very pleased with the progress we have made towards the deleveraging and improving our net financial position. It's one of our top priorities. What we have achieved in nine months took hard work and commitment but we made it happen.

Thank you for listening and good evening.

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