International Game Technology PLC (IGT) 2012 Q4 法說會逐字稿

Good day and welcome to the Lottomatica 2012 full-year results 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 year-end and fourth-quarter results presentation. Joining me for today's presentation is Alberto Fornaro, CFO of Lottomatica Group. Joining us for the question-and-answer session will be Renato Ascoli, the general manager of Lottomatica, and Jaymin Patel, the CEO of GTECH.

I would like to begin with a brief overview of our results and some insight into the major developments and trends that are important to the Group. Alberto will give you a more detailed review of the numbers. I want to be clear that we are reviewing these matters based on our regular segment reporting. We will begin reporting accordingly to our new organizational structure in future meetings.

Looking back on 2012, it was a good year in which we achieved growth in every one of our businesses. I think that is quite an accomplishment, given the difficult economic climate in some of the geographies in which we do business. Our GTECH and SPIELO subsidiaries continued to deliver solid gains. While maturing, our Italian business has shown remarkable resiliency, and we achieved EBITDA growth in 2012.

As we noted previously, the results for the year in Italy were impacted by a low occurrence of late numbers, some unusually high sports betting payout and increased Machine Gaming taxes that were enacted at the beginning of the year. Through prudent management, the team was able to implement meaningful cost savings to help deliver their plan.

Growth in GTECH same-store sales was a highlight of 2012. Even when accounting for record jackpots in the first quarter of 2012, same-store sales held up well throughout the year, driven by instant ticket growth and new sales initiatives that we have worked with our customers to introduce.

SPIELO International continues its growth trajectory and began to see the positive impact of their successful campaign in the Canadian replacement cycle reflected in the fourth quarter results. It is important to note that we are anticipating a full year of positive impact from Canada in 2013.

In the interactive space, we are seeing a growing awareness and acceptance of Internet wagering in US. Illinois and Georgia lotteries are offering their products for sale over the Internet. Numerous other states are expected to do the same. New Jersey has approved Internet wagering for poker and casino games, and Nevada has approved Internet poker wagering. We expect to leverage these accelerating trends.

In regards to our private manager activities in the United States, we have begun implementing our transition plan as part of our 15-year integrated service agreement with the lottery in Indiana. We are making progress in Illinois and continue to achieve growth in our year-over-year results. We are still awaiting the completion of the annual audit and the adjustment through arbitration -- awarded through arbitration to determine our 2011 performance under the private manager contract.

As to other private manager opportunities, we are the sole bidder in New Jersey, and there should be more developments to report with that process in the weeks ahead.

In general, there are a handful of other states considering private manager scenarios for their lotteries. There may be more to report in this regard as the legislative season progresses in the US.

Outside of the US, we continue to prepare for similar opportunities in Ontario, Ireland and Turkey in the coming year. The bottom line is that the private manager model is taking hold and we are well positioned to capture the best of these opportunities. We expect to see the benefit of that in 2013 and beyond.

Now I would like to say a few words about the fundamental reorganization of the Company we have announced in January. It is clear to us that the transformation of the worldwide gaming industry is accelerating. In addition, customers that traditionally had operated in single sectors are now expanding to find new opportunities across the entire gaming continuum. To stay ahead of these trends, enhance our competitiveness and remain relevant to our customers, we are evolving into a single unified customer-facing organization and providing them with a single point of accountability. We are creating regional organizations focused on the Americas, international and Italy that will be responsible for selling our entire portfolio of products as well as for the P&L of each region.

In this way, our most senior leaders will be closer to our customers and opportunities in the region they cover. The regional organizations will be supported by centralized marketing, development and delivery organization to better leverage the experience and the expertise of the entire Group and enhance the synergies. Achieving efficiency gains was not the main driver for this reorganization, but it will be a natural byproduct of it. We expect to see some tangible benefit of the synergies in 2014.

I'm pleased that our senior leadership team that has been delivering outstanding results have accepted the new roles within the organization. While we are changing our approach to the market, we are not changing our leadership team. I think that is critical to maintaining momentum and sustaining results as we transition to the new organizational structure.

Finally, we will be taking the GTECH name for our corporate identity. Over the years, GTECH has become known throughout the world for leadership, integrity, reliability, capability and innovation. We will still maintain our key local and B2C brands that have achieved market recognition in geographies and sectors they serve, but we firmly believe that the GTECH brand is the ideal global platform for us to go to market.

Finally, I would like to update you on our guidance for 2013. As you have seen from today's announcement, we are well ahead of schedule in delivering on our current three-year plan and we believe that 2013 will be a continuation of the progress we have made to date. Alberto will give you a more detailed perspective on that during his presentation.

Now I would like to hand over the call to Alberto for his review of the results.

Thank you, Marco. We have streamlined our presentation today. We are providing more backup slides and additional financial tables in the appendix of our press release to make the Q&A session more effective. Now let's review the results.

Revenues for the fourth quarter were EUR813 million compared to EUR828 million in the fourth quarter of 2011. Our Italian operations were impacted by unusually high sports betting payout, higher taxation on the VLTs and the slightly lower machine gaming wagers. GTECH US Lottery same-store revenues in the fourth quarter were up over 5%, benefiting from a 31% increase in multi-state jackpot game activity which was driven primarily by the Powerball game. We also experienced sales growth in our international jurisdiction where same-store revenue grew by more than 8% in the fourth quarter.

SPIELO International product sales were up EUR31 million in the fourth quarter, driven principally by the Canadian replacement cycle. Consolidated fourth-quarter EBITDA was up 6%. EBITDA from Italian operations grew by EUR9 million to EUR169 million.

Now let's turn to our full-year results. Revenues were up over 3% compared to 2011 and cost on currency full-year revenues would have been up about 1%, mainly attributable to the GTECH Lottery and SPIELO International segments offsetting slightly lower revenues in Italy. Service revenue growth from GTECH Lottery segment was driven by an approximate 8% increase in same-store revenues due to record first-quarter jackpot activity and higher instant ticket sales.

SPIELO International service revenue grew 9% due to higher revenues from the VLT market in Italy, participation markets in the US and Central system. The EUR44 million increase in SPIELO product sales revenue was principally due to delivery of new equipment in Sweden and new terminals in Canada. The Canadian replacement cycle commenced in the fourth quarter of 2012 and will cover a period of approximately six quarters.

In Italy, despite the economic climate, our business fundamentals remained solid. Revenues from our Italian operation were approximately EUR1.79 billion versus EUR1.88 billion last year. Revenues were impacted by the step up in the VLT taxation as well as some extraordinary events, including higher sports betting payout and lower late number wagers. The 6% increase in full-year Group EBITDA is attributable to growth across all business segments. At constant currency, EBITDA was up 4%, comfortably ahead of constant currency revenue growth. Higher revenues and profits from the GTECH Lottery and SPIELO International segments and Machine Gaming in Italy, along with operational efficiency in Italy, contributed to the EUR62 million increase over 2011.

EBITDA margin was 33.5%, up 90 basis points from the 2011 level.

Now let's look at the P&L below EBITDA. A EUR44 million operating income increase to EUR583 million, together with a EUR13 million decrease in interest expense and a more favorable book tax rate were the main contributors to the growth in net income attributable to the parent, which reached EUR233 million. As you have noticed, we benefited from a lower effective income tax rate in 2012, which was 37.4% compared to 43.8% in 2011. For 2013, we expect our effective tax rate to be lower than 2011, but not as low as 2012.

On a per-share basis, EPS grew 34% from EUR1.01 to EUR1.35. Pro forma EPS, which principally excludes non-cash purchase accounting associated with the GTECH acquisition, was EUR1.60 compared with EUR1.21 last year.

Cash from operations was EUR812 million. CapEx was at the lower end of the guidance at EUR256 million, due to timing of certain investments, which has now shifted to 2013, including investment in Belgium and the sports betting tender in Italy.

CapEx in 2012 for GTECH and SPIELO was mostly made up of a diverse base of ongoing maintenance expenditure. In Italy, expenditures were driven by the continuing investment in the Machine Gaming market.

Strong cash flow performance generated levered free cash flow of EUR303 million in 2012. As you recall, levered free cash flow represents the base to determine the dividend payout. The Board of Directors today proposed a dividend of EUR0.73 per share, or a total cash contribution of EUR126 million, equal to 41% of 2012 levered free cash flow.

Our leverage ratio, which is the ratio of NFP to EBITDA, decreased to 2.5 at the end of December 2012 compared to 2.8 in 2011. This leverage ratio target was achieved a year ahead of schedule.

Let's now look at the 2013 revised guidance. In 2013, we expect revenue growth across all segments driven by the Canadian VLT replacement cycle and same-store revenue growth in the US and international. We also expect lotto late numbers and sports betting payouts to return to normalized levels. Taking all of these factors into consideration, we now expect revenues in the range of EUR3.2 billion to EUR3.3 billion, and EBITDA in the range of EUR1.05 billion to EUR1.07 billion.

When we announced our 2011-2013 strategic plan, we had just completed a major rebid cycle and several acquisitions, and we were foreseeing lower CapEx levels for 2011-2013. Based on our existing portfolio contracts, maintenance CapEx for 2013 is in line with our expectation, in the range of EUR235 million to EUR250 million, or approximately 23% of 2013 guidance midpoint EBITDA.

In the past two years, we were able to deleverage faster than we had anticipated and we hit our leverage ratio target a year ahead of schedule. Deleveraging remains a priority, though in 2013 we are planning to use a portion of our excess levered free cash flow for a number of growth investments, including Indiana PMA, US Interactive and potentially New Jersey, as well as selectively expanding our presence in Italy in the area of sports betting and supporting SPIELO expansion of VLTs.

Therefore, growth CapEx for the full year is expected to be in the range of EUR115 million to EUR130 million. All told, total CapEx for the year is expected in the range of EUR350 million to EUR380 million.

In the meantime, we will continue improving NFP and expect a leverage ratio of 2.3 to 2.4 by year end. We expect deleveraging to happen in the second half of the year.

And now I would like to open the lines for Q&A.

(Operator instructions) Fabio Pavan, Mediobanca.

I would start with my questions on the Italian business. The first question is related to the guidance, so could you provide some more color on what are your expectations for the Italian business in 2013? In addition to that, I was wondering if you would like to share with us an update on the trend of wagers in these first months of 2013. And finally, I was wondering if, after the major (inaudible) activity in terms of cost savings there is still room to contain costs in the domestic business.

On GTECH, the main questions are related to, I would say, the leverage of, I would say, the date of the business trend after the comments we had yesterday night from Scientific Games; an update on the contracts you are already managing, so Illinois and Indiana; and, clearly, it would be nice also to have an update on -- I mean you already argued about the New Jersey, probably you can provide some more color. But any additional details would be welcome.

You didn't leave any questions for your colleagues. Anyway --

Sorry, I have a lot of questions.

We will try to organize the answers now. I would leave the answers for the Italian market to Renato, and later on Jaymin will elaborate regarding your questions as far as on GTECH is concerned.

Well, as a general statement regarding the guidance, we can say that, notwithstanding a number of unfortunate events, such as the increase in taxation for VLT that occurred at the end of the year, we still think that the contribution of overall EBITDA should be stable in 2013 as far as Italy is concerned. And the reason for that is we think that we might have some, let's say, positive outcome coming from the lotteries because we thought that last year has been a very negative year in lotto for almost the entire lack of late numbers, scratch and win, because of a number of, let's say, problems we had in distribution, particularly the first part of the year; and also potentially from sports betting because we definitely assessed, as Alberto already said, that last year's payout in sports betting was extremely unlucky for all concessionaires. So this gives us some, let's say, optimism regarding the trend in 2013.

As far as the trend by business, I will say very briefly, of course, that as far as Lotto is concerned, we are seeing, let's say, quite a stable contribution on a year-over-year basis. We are still suffering from a lack of late numbers that will appear sooner or later, just for statistical chances. And we still see some opportunities in the 10eLotto. And of course, as you are all aware, I think, we are about to launch the online version of digi-lotto that will positively contribute to 2013 performance.

Scratch and win is -- the story is very much one that we anticipated last year. We were, let's say, forecasting a stop in the negative trend in 2012. That did take place, particularly in the last half of the year. As far as we are today, we are moving more or less in line with last year performance. And thanks to the introduction of new content, new price points and the continuous improvement Internet for distribution, we feel that we might experience some very moderate growth, but probably not anymore increase in scratch and win.

Sports betting -- you might be aware that the preliminary results have been very favorable for bookmakers, so we -- that, by the way, we are performing in line with the market, potentially slightly better this year than the previous ones. We are enjoying a favorable contribution and hopefully we will try to keep this space throughout the year.

AWPs -- we are actually keeping the momentum in AWPs, trying to match the inevitable reduction in productivity of AWPs with a higher strategy in volumes, while with VLTs, for the time being we see, let's say, not a huge impact of the increase in taxation on customer behavior. And we see a very limited impact on the retail distribution.

Interactive is probably an area where from one side we are benefiting of the launch of the new [wheel] games that happened in the last part of the year. There will be a benefit throughout the year. On the other hand, we cannot disregard some softness in the overall wagering potentially related to some, let's say, no more expansion of the population of the customer base while playing on the interactive segment.

The last point, I think, was on cost savings. Again, this is an obsession of the Italian team, and we are not intending to, say, relax there. We still have some opportunities that are a carryover of the actions taken in the last year, but we also envisage some extra opportunities that will be handled in the months to come. So again, cost savings will be another leitmotif for 2013 as well.

Fabio, with respect to your questions on GTECH, I didn't quite catch your question, number one, with respect to leverage and update on the business plan. So let me answer questions two and three, and maybe you can come back to one at the end.

So question two is about Illinois and Indiana. With respect to Illinois, our business is progressing well there. As you may know, for the first full year of operations, we achieved 18% sales growth year over year, which we were very pleased about. We are still waiting for the final audit of the results for 2012. But as Alberto mentioned, we are not expecting any surprises there and we believe that our results will be -- the net audit will be in line with our expectations there.

We are off to a good start in the year 2013. I can't give you any information at this point in time because it's not public at this point, but we are off to a good start for the second year and we will have more to report later in the year.

With respect to Indiana, we officially take over the integrated services agreement on 1 July, 2013. We are currently in the ramp-up period. What I can tell you is that the ramp-up period, as in the current fiscal year, is performing well. It is in line, slightly better than our business plans. We feel comfortable that things are moving very much in line with our expectations for the handover in July.

Your third question was with respect to New Jersey. And in New Jersey, as you know, we are a member of a consortium -- we are the leading member of the consortium that has submitted a proposal for the private manager contract there. And we are waiting for a decision from the state. We believe that we have presented a very responsible proposal and we are looking forward to the conclusion of that process.

So I think that's all I have to say on points number two and three. If you could go back to question number one, please?

Yes, thank you very much. My question was just, as Mr. Sala argued about a potential leverage of the existing activity into the, I would say, online once and today international press like steel was already suggesting huge potential from (inaudible) in the US. I was just wondering if you could provide some more color of what could be a way to address this new market.

Well, of course, what I can say is that we are very interested with the developments of interactive gaming, which we call i-gaming, in the United States. Marco referred to four jurisdictions that have either legalized or are in the process of legalizing interactive gaming, and we believe that over the next couple of years there will be many more states that will introduce legislation to adopt either lottery games or poker and bingo games, and we remain very interested in exploiting our very strong position through our G2 business in those markets.

So either through lottery organizations or more broadly through commercial organizations, we look forward to offering our very substantial experience and product offerings as the US market opens up.

And yes, just to add a comment about sizing, it's very hard to predict the sizing today because there are a lot of predictions about the size of the market, the size of the -- what is the so-called gray market. So we will provide you with our estimates in the future as the market develops.

Thank you.

Domenico Ghilotti, Equita SIM.

I have three questions. The first is on the EBITDA growth expected for 2013. You gave a detailed description of the drivers for the Italian business. Can you provide some color also on GTECH and SPIELO, in particular if you are expecting flattish EBITDA in Italy? And you have Canadian cycle and positive same-store sales; I wonder if you are a bit cautious on the 2013 guidance.

The second question is still on SPIELO. If you can provide us some indication on the sustainability of SPIELO EBITDA after 2013, so after the completion of the Canadian cycle.

And the third question is related to the Italian video lottery and gaming machine market. And after the decision by the regulator not to renew the concession to B Plus, I was interested in understanding your view on what is going on, on the market.

I will take the first two questions here. Regarding the EBITDA for 2013, most of the growth will come from SPIELO. We expect SPIELO to contribute at least half of the Group EBITDA growth, and the remaining basically is coming from GTECH as we assume that Italy will be more or less stable. And this is obviously linked at what you mentioned, in terms of the Canadian replacement cycle. But not only that, it is also quite important to the presence that SPIELO has developed and is developing in Italy without the concessionaire. And this is helping the profitability of SPIELO.

Going to your question regarding the long-term view for SPIELO, when the Canadian replacement cycle ends in 2014, the strategy of SPIELO is changing a little bit, even in Canada. In addition to product revenues, we are increasing our percentage of recurring service revenue that will continue beyond 2013. So in it, the Canadian replacement cycle should not be seen only as a product sale anymore.

There are also other opportunities that we are exploring. In particular, we expect growth in the US VLT operator market. There are several jurisdictions that have the potential for growth. Some are new, like Illinois, where we have already delivered some machines. But, also, there are some states in which, in the past, the VLT have been deployed, like Oregon, potentially Louisiana, West Virginia. And that's another market.

Third, I just mentioned the presence in Italy, where we have secured contracts and we will continue to work to improve our presence. And finally, overall, we are trying to increase the weight of our recurring revenues in the US casino market.

I will take the third question. Just to say that we cannot anticipate a renewal, so we do not have clarity regarding how our Italian regulator will manage this issue. I cannot provide you a view regarding that because, for having a view, you need to understand how the legal issues will develop and, based on that, which will be the position that our regulator will undertake.

And, sorry, could you comment on what is going on from a commercial standpoint, so what is going on with the clients or the gaming machine operator down on the ground that are probably now puzzling on the future outlook?

We are not seeing, for the time being, major activities. I think they are waiting as well to get more clarity before taking their own decisions.

Okay, thank you.

Andrea Randone, Intermonte.

My first question is just a clarification about VLTs in Italy. I would wonder if you can provide us the revenue just related to VLTs, or if you don't give these numbers.

The second question is about the dividend. I did not carry out the proper calculations yet, but as far as I can guess, according to your 2013 guidance I wonder if you can tell us if there is room to confirm the same dividends you are distributing now also for the next year.

And the last number is about New Jersey, but you partially answered already. And I wonder if -- which part of the CapEx is, in your plan, is related to this contract.

Okay, let me start regarding the second question, that it is related to the dividend. It's premature to talk about it, so we had publicly stated what is our policy and we will continue to go with it.

The first question was related to the revenues for the VLT in total for the year 2012. We are talking about slightly above EUR400 million; we are talking about EUR414 million.

Thank you.

Regarding the CapEx for New Jersey, we have blended the growth CapEx for the initiatives, obviously. And, also, you are aware that we are in a consortium, and so, therefore, we will split with other members of the consortium part of the investment, and that is what we can say at the moment, given the fact that we are still during the bidding process and under a confidentiality agreement.

Thank you very much.

Roberta Ciaccia, Exane BNP Paribas.

Actually, I have three questions, if I may. The first one is on tax rate for 2012. If you can elaborate a little bit more on what were the drivers of this very low tax rate compared to expectations so that we can understand better what to expect for 2013 in the range of between 2011 and 2012.

Secondly, on CapEx, if you could provide us broadly, as far as you can, with the split between Italian operations and the rest of the Group?

And finally, on lotto, forgetting about late numbers for a moment, I would like to understand what was the trend in the course of 2012 and the differences between a traditional lotto and digi-lotto and what kind of actions do you intend to implement in the course of 2013, in order to enhance the performance of these two games.

Okay, so I will take the first question. Regarding the tax rate, the tax rate for 2012 was impacted by some one-offs happening in the fourth quarter. Some were driven by the regulation that changed in terms of deductibility of certain items from the ERS, and part was related, the deductibility, to the current tier. But the most relevant part was instead related to previous years and, therefore, not repeatable in the future. And some other are related to some litigation, where we had some accrual. The litigation was resolved positively. So just to give you a idea, the one-offs more or less were around 3 points for 2012.

The second question was related to the CapEx for 2012, basically 60% of the CapEx was for GTECH and SPIELO and the remaining for the Italian operation.

Sorry, and for 2013?

For 2013, it depends a lot on what kind of investment in growth we are going -- I am going to make. So at the moment, it would be premature to give you a breakdown without being sure of where we are going to invest.

Okay.

I'm taking the question on Lotto. I understand there are some figures in [GNX's], so you have all the information there. But of course, I think the explanation of 2012 performance is very clear. On the whole, lotto wagers were down almost about EUR600 million, and most of them are coming from the absence, I would say, rather than reduction of late numbers just to see where the contribution of late numbers actually have in 2012, and the reduction was about EUR500 million.

On the contrary, there was some important growth in the digi-lotto performance, compensating the reduction of the softness in the traditional lotto.

What are we planning to do? First of all, we have launched some innovation in the late part of 2012 and the traditional Lotto. Lotto (inaudible) innovation that we are watching very carefully. It is producing some positive, although minor, contribution. But it is good for the bond that has been taken between the brand and the customer base.

Digi-lotto -- we are still seeing there is some potential in the distribution network. So we are continuously educating the point of sales in order to better present and expose this opportunity to the market. And as I said, there are two probably more relevant innovations in 2013. One is the introduction of interactive Lotto and digi-lotto, and that is going to happen in April. And we are also in a condition to enlarge slightly the distribution network of the traditional lotto and digi-lotto. And by selecting about 2000 points of sales we consider of good potential, we might also create further contribution.

We have, theoretically, the possibility to introduce further innovation in the traditional lotto. We are starting other processes and probably other features might be delivered in the last part of 2013.

Okay, thank you.

Domenico Ghilotti, Equita.

I have two follow up questions. The first is on growth CapEx. I wonder if you are looking also at acquisition in order to address and pursue some of the growth opportunities that you are mentioning, or you think you can address these on a stand-alone basis?

And the second question is on the dividend sustainability. Let's put in this way -- is the growth CapEx included in your recurring free cash flow calculation in order to set the dividend policy?

I will answer the first question, and Alberto will answer your second question. At this point in time, we do not expect to invest in acquisitions. What we are focusing our attention on are the opportunities that are around the world in terms of operators' models. That is what we are more concentrated on. And it is clear that we are, as always, looking after to any further possible opportunity. But our focus is much more concentrated on those developments.

And this is the same also for SPIELO and for the interactive opportunity, so you think you can move on that?

Yes, yes. I think we do not envisage for the interactive opportunity other acquisitions, since we have (multiple speakers) completed our portfolio and we are ready to deliver the entire offering. And also for SPIELO, we have the opportunity to grow our business, given the willingness of many jurisdictions to regulate VLTs that, from the CapEx standpoint, would mean investments but are not factored, as you say, as acquisitions.

So it is more a matter of marketing your product portfolio?

For the time being, yes, yes.

Domenico, regarding your question, our dividend policy is confirmed. We will distribute up to 50% of the free leveraged cash flow as a dividend. The remaining will go to deleverage and growth opportunities because we have already reached the level of the ratio 2.4 to 2.5 set for 2013. We have decided to allocate part of the excess cash flow to further deleverage and partially to the new opportunities.

Okay, thank you.

There are no further questions in the queue at this time.

Okay. So I will offer some final comments. Hopefully, it is apparent to you from the 2012 results in the updated guidance that we have provided that we are able to sustain and build on the momentum in our business. Our sources of growth are becoming more diversified. GTECH and SPIELO are enjoying solid gains with excellent prospects for the coming year. And our core market in Italy has been resilient despite the economic downturn.

The growth spectrum of games that we offer in the Italian market and the new channels in which we operate have helped us to maintain our leadership and deliver meaningful results.

Finally, we are moving quickly to integrate our organization to better involve our senior leaders with customers, improve our effectiveness and maximizes synergies across the group and adopt the name of GTECH, a recognized world leader in gaming. We think that is the right path to ensure continued value creation.

Thank you for joining us and we look forward to meeting many of you in person in the coming days.

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