International Game Technology PLC (IGT) 2013 Q1 法說會逐字稿

Good day, and welcome to the Lottomatica 2013 first quarter results conference call. For your information, today's conference is being recorded.

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

Good evening, and thank you for joining us for Lottomatica Group's 2013 first quarter results presentation. Joining me for today's presentation is Alberto Fornaro, the CFO of Lottomatica Group; Renato Ascoli, the General Manager of Lottomatica; and Jaymin Patel, the CEO of GTECH, that will be also available for questions and answer session.

As with our year-end presentation, I want to be clear that we are still reviewing these matters based on our traditional segmental reporting. We will begin reporting according to our new organizational structure before year-end.

I will primarily focus on strategic development in my remarks. We had a solid first quarter in spite of some high year over year comparisons. I will ask Alberto to review the numbers during his remarks.

When looking at the significant developments, SPIELO continues to monetize its success in the Canadian replacement cycle. Deliveries are largely on track, or slightly ahead of schedule, resulting in a greatly improved product sales.

The sustainability of our Italian business was demonstrated once again. Revenues were impacted by new taxation in the Machine and Gaming area, but overall, EBITDA grew year over year, helped by growth in Lottery and lower Sports Betting payouts.

Comparison of GTECH same stores revenues are impacted by a record-setting jackpot that occurred in the prior year's quarter. If you normalize for the overall impact from jackpot, GTECH's same stores revenue growth was slightly positive.

Turning now to the management service opportunity, on slide 5, we were very pleased to be awarded the New Jersey Lottery's outsourcing contract. The state is dealing with the kind of objection these awards typically attract. We are confident in a successful conclusion, and would expect to sign the contract in the third quarter.

In Indiana, we have been implementing our transition plan, and gearing up for a startup on July 1st. We are pleased with the cooperation and integration we have achieved with the Lottery. Some of the new ideas and games we have proposed are being adopted.

In Illinois, we continue to achieve growth in our year over year result. We are awaiting the completion of the official audio to help determine our performance for fiscal year 2012 under the terms of the Private Manager contract.

I think it is important to note that the three awards of this nature, GTECH has won all three. That will create an unmatched portfolio experience, and very user -- sorry, useful reference point for future opportunities.

There are a handful of other states considering Private Manager scenarios for their lotteries. We will report on those as we see serious progress towards evolving into an opportunity.

Outside the US, we continue to prepare for similar opportunities in Ontario, Ireland and Turkey in the coming year.

I'd like to spend one minute on Greece. As you might be aware, we'll make a strategic investment to acquire a minority interest in Emma Delta, the successful bidder in the privatization of the Greek state's controlling interest in OPAP.

As an industrial partner, we expect to provide expertise in the areas of technology, operations and the launch of products in new sectors, such as Gaming Machines and scratch-and-win. It is the intent of the partnership to replicate the success we have had in Italy, and we are confident that we can help them do so. We expect the transaction to be completed by year-end, conditional to the regulatory approvals.

Now, I'd like to say a few words about the reorganization of the Company, and the rebranding of it as GTECH. As we have noted, the worldwide gaming industry is changing at a rapid pace. Our customers are spanning across the entire gaming spectrum, and we have taken actions to respond to their needs and expectations.

We are making good progress in creating the regional sales organization, and the centralized marketing, development and delivery organization that are at the heart of the strategy. The top levels of leadership of these groups have been assigned, and announced internally.

As I noted on our last call, our senior leadership team has accepted the new roles within the organization. They, and their direct reports, have become champions for the new structure, which I see as an important sign of their commitment to our future.

Earlier today, at the Annual General Shareholder Meeting, the name change to GTECH from Lottomatica was approved. In the days ahead, you will be seeing a more visible sign of the change. An obvious one will be our new stock symbol, it will be GTK. That should happen on June 3rd.

We are excited about the potential of the new GTECH organization, and we'll keep you up to date on our progress.

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

Thank you, Marco. I'm pleased to report that we continue to deliver good results in the first quarter. In fact, EBITDA and operating income grew by 7% and 13% respectively, while we recorded further growth of (inaudible). Now, let's review the results.

Revenues in the first quarter were up 2%, to EUR798 million, versus EUR780 million last year, mainly driven by [pre-recognition]. SPIELO's product sales in the quarter were up EUR40 million, driven by the Canadian replacement cycle. Based on our estimates, the Canadian replacement market is worth more than EUR400 million, including approximately 36,000 VLTs and five central systems. Based on awarded contracts, our market share is above 40% in value, and more than 35% in terms of Machine.

From the start of the replenishment, between 2012 and 2013, we recorded today EUR80 million in product sales from Canada, and we have delivered approximately 8,200 VLTs. There is also some potential upside from Machine yet to be awarded.

GTECH Lottery revenues were slightly ahead of the first quarter of last year, when you eliminate the impact of the record MegaMillion jackpot in the first quarter of 2012. US multi-state Gaming sales, principally caused by jackpot swings, had a EUR13 million impact on revenues, as we report in the same store revenue analysis that you can find in the appendix.

In the Italian operation segment, revenues in the quarter were in line with our expectation at approximately EUR464 million, versus EUR482 million last year. Revenues benefited from lower Sports Betting payout and higher wagers for late numbers in 10eLotto. However, were impacted by the increased VLT taxation.

Consolidated first quarter EBITDA was up 7%, beating the EUR300 million mark. Higher revenues and profits from SPIELO International, along with lower Sports Betting payout and operational efficiency in Italy, contributed to the EUR20 million increase in EBITDA, compared to last year. EBITDA from the Italian operation grew EUR9 million, to EUR213 million.

EBITDA margin improved to 37.6%, versus 35.9% in the same period last year. As you can appreciate, we are on track to achieve our 2013 EBITDA guidance.

Now, let's look at the P&L below the EBITDA. The 13% increase in operating income to EUR192 million, together with a more favorable effective tax rate, contributed to the increase in net income attributable to the parent, which grew from EUR58 million to EUR75 million. Interest expense was in line with last year, at EUR40 million. On a per share basis, EPS grew 30%, from EUR0.33 to EUR0.43.

Net financial position was EUR2.64 billion at the end of March, compared to EUR2.55 billion at December 2012. The slight increase, which was mainly due to timing of working capital cycle, was anticipated. In addition, it reflects a major overhaul of our payment terminals network in Italy. We entered into a five year lease type agreement with Ingenico to replace 85,000 payment terminals, which will put us in the position to exploit the new opportunities in the Italian transaction services, including contactless payment.

We expect the NFP to improve in the second part of the year, and we are on track to achieve our NFP targets by year-end.

CapEx in the first quarter for GTECH and SPIELO was mostly made up of a diverse base of ongoing maintenance expenditures. In Italy, expenditures were driven primarily by continued investment in the Lottery and Machine Gaming market.

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

Thank you. (Operator instructions) We will now take our first question from Richard Carter of Deutsche Bank. Please go ahead.

Hi, good evening. A couple of questions. Firstly, could you just go through the thinking in terms of -- EBIT obviously grew very strongly in Q1. I think it was up something like 7%. And obviously, you're comfortable with guidance of EUR150 million to EUR170 million. Obviously, if that current run rate continues, then you're going to be above that.

So is there anything that we need to be aware of, or think about in terms of headwinds, and then upcoming quarters, that's going to mean -- you know, start to see a slowdown in EBITDA?

Richard, Alberto. When you look at the performance in Italy, most of the improvement is due to the payout in the Sports Betting, which was very favorable. So we are not anticipating that this is going to continue for the remaining three quarters, and naturally, we are anticipating to go back at historical average, consistent with what we said with the guidance at the beginning of the year.

So therefore, that's the first impact, and you know, regarding that, the first quarter of SPIELO was particularly strong. So these are the two key --

So should we not assume that SPIELO will maintain that type of run rate into Q2 or Q3 or Q4? And is there any timing issues we need to be aware of in terms of SPIELO in the remaining quarters of the year?

No, I would say that the first quarter was pretty strong, and therefore, we will not repeat in the future. It will be very positive in the future quarter, but not at the same level. And therefore, we keep the guidance at the same level we anticipated a few weeks ago.

Okay. Could you also -- you've put a paragraph of additional information regarding OPAP. Could you just talk us through the thinking there, and the opportunities, please?

It's Marco speaking. It is exactly what's anticipated. We feel that we did, as we have told in the market in the previous months, we would have been interested in having a minority equity position, as long we could have been considered as strategic industrial partners. And that is exactly how this partnership came out.

Now we look forward to give our contribution to the other shareholders in the consortium, in order to exploit the opportunities OPAP has in front of them.

So, you make an investment into this fund, and then obviously, you're going to try and leverage, from your position, leverage the position of SPIELO. You've already got the online contract, and you're currently -- are you currently bidding for the Lottery contract and the scratch-and-win contract as well?

No, the scratch-and-win contract has been already awarded. What we are doing, we believe that the financial investments in OPAP is something in addition to [data], we think that we can we can provide additional contribution, taking position in the future opportunities OPAP have in front. And of course, the opportunities are the opportunities I have mentioned, and you are repeating, the VLTs opportunity is one we look at very carefully, the other opportunity being the interactive.

Okay. And then just finally, on Italian Gaming Machines, is there any sort of visibility on when new content, new games will be allowed on the VLT Machines?

We are expecting, let's say, the certification for and deployment of new content, as well as some features in our architecture to be in place for the last quarter of the year, of this year.

The last quarter of this year?

Yes.

Okay, and sorry, just finally, you talked about recently -- about trying to mitigate some of the taxation impact by playing around with the hold. Can you just talk about that, and how successful that's been in Q1?

Well, as of today, the action that has been taken is to, let's say, drive payout in a way that might not create a turmoil in the -- both in our sales, and the value chain. As far as the quarter is concerned, I think the action was successful, particularly because we decided not to impact the portion of the payout which is used for repeated prizes, but we focus mainly on the quarter of the payout where it goes to the jackpot.

We cannot predict this will be a stable solution. We know, taking a look on different markets, that in time, customers do realize even lesser changes than the one we have made, so we reckon the success so far, we cannot predict that to be a stable opportunity for the next months.

And in terms of the action plans you put in place to try and mitigate the VLT tax in terms of the three or four action points you're looking to implement, are they largely out as you expected so far?

We are happy, what we have done. Again, the major action taken was the one regarding payout. Of course, there are a number of contractual conditions that can protect ourselves from any action in terms of increased taxation. But even that case, I would assess that we are happy for the results so far. We cannot predict that to continue for the following weeks and months.

Okay. Thank you very much.

Thank you. We will now take the next question of Richard Stuber from Nomura. Please go ahead.

Yes, hi, good evening. Three questions for me, please. First of all, could you just quantify what your stake in Emma Delta is, and whether that's a part of the CapEx guidance. And on a similar vein, we talked about opportunities in Ireland and Turkey. Are you -- potentially, would you go down a similar route in terms of partnering up with another financial venture? And if you'd give us some sort of timing around those privatizations, and the stakes that you're willing to input?

And I've got two more questions. One is on Machines, again. I see that revenues are down EUR22 million, but EBITDA's down just EUR2 million. Could you just give us some idea, in terms of what cost change we should be aware of there?

And the final question is just in terms of the organizational structure, do you have any guidance in terms of what costs can be taken out? Thank you.

I take the first and the third question. Regarding our investment in Emma Delta, what I can tell you is that our commitment with the consortium is to invest up to EUR30 million. That is what is our commitment in the fund.

And regarding the other opportunities, we are starting, of course, both Ireland and Turkey, and as always, we are evaluating possible partnerships in each geography. So it's now too early to make comments on it, because first of all, we want to see the tender, and as soon as we will see the tender, we will try to finalize among the different options, which is the best way to approach the opportunity, if any.

Regarding the organizational development that should create some opportunities in terms of efficiencies, we didn't enter this part of that work. It's what we are going to do over the next months. As soon as we are ready to make an assessment regarding the possible efficiencies, then we will make it clear to the market.

Renato speaking. As far as the comment on revenues, EBITDA for the Machine Gaming sector in Italy, of course, the impact of revenues is very well explained by the increased taxation. I think we anticipated that 1% increased taxation would translate into EUR78 million, EUR80 million impact on a full year basis. So what you see here is the per quarter impact.

As far as the impact on EBITDA, again, our contracts today allow us to divide quite evenly the impact between us and the retail chain. And the [extra] contribution comes from the action on payout, and a minor one comes from the action we are taking -- we are constantly taking, I would say, in cost reduction. So that explains the difference.

Great. Thank you.

Thank you. We will now take the next question from Domenico Ghilotti of Equita. Please go ahead.

Good afternoon. I have a couple of questions. The first is related to the US Lottery performance, because even excluding the jackpot, you said that you were slightly positive. So you are running below the mid-single digit expectation for the full year. So I wonder if you can elaborate a little bit more on this, on the trend.

And second question is on the Italian Gaming Machine, and particular, in Video Lottery, because you are mentioning the successful actions on the payout. But I saw the wagers had declined quite significantly, if I am correct, if I took the right figure. So I would expect a lower impact, at least, in terms of [coin in].

And the third question is on the Italian profitability, because it is true that you had a more favorable payout, but probably you had also some cost savings, as you mentioned, in Video Lottery. So if you can quantify the total cost savings that you booked in Q1.

Okay, Jaymin will reply to your first question.

With respect to the first question on US same store sales, as you will recall, we had a very strong MegaMillions jackpot in the first quarter of last year, of $656 million. So the decline Q1 over Q1 of 8.5% is driven entirely by that change in jackpot activity. We had a rather low jackpot activity, between MegaMillions and Powerball, and in-state jackpots in the first quarter of this year. The other games, other Online Games and Instant Ticket games grew mildly in the first quarter.

Beginning in week 14, we have begun to see an improvement week to week in US same store sales growth. Instant Tickets growth is reviving, as are Online Games. So my expectation is that for the full year, we expect the North American growth to be between 3% and 4%.

Adjusted for the jackpot activity, or also, you are already taking into account the -- let's say, the extraordinary impact of last year?

No, no, I'm talking about growing between 3% and 4%, including the impact of the first quarter impact. So in fact, it's more if you strip out the negative effect of the first quarter jackpot comparison.

Okay, thank you.

Thank you. We will now take the next question from Vaughan Lewis of Morgan Stanley. Please go ahead.

Hi, there. Just on the Italian profitability, to start with, can you just expand a bit more on how you've managed to grow profits despite the drop in revenues? It looks like the costs are down EUR25 million to EUR30 million in aggregate. I appreciate that sports margins were better, but that comes through in higher revenues, and revenues are down despite that.

So can you just explain where the costs are coming out, and how sustainable that is? That's the first one. I've got a few more after that, if that's okay.

So, Renato speaking. I think I'll cover the previous question, that unfortunately, we were not successful in replying.

Regarding the wagers decline in VLTs, it's mainly driven by the increased taxation, so we do, as we expected, see a reduction in wagers, both overall and per unit. The key action that we have taken is, again, as I said, both in contractual terms with the retail chain, and in leveraging payout. So this is why we have this kind of different trends in profits, and overall wagers.

As far as the Italian profitability so far is concerned, I think we clearly stated that the key contributor to Q1 performance comes from betting payout, which was particularly favorable this year. It was about 72%. And you all know that standard position, the payout on the long-term had only 80%, 81%. Last year it was 82%, so a bit higher than average. And that is the key contributor to performance, then, again, we cannot predict.

So, the other component, which is cost reduction, because the actions taken provided some benefit in this quarter for about EUR3 million. We still have room for improving going forward. But as we said, despite this strong quarter, we can easily predict stability in Italy for the full year, and this is why -- and this comes -- stems from the fact that we expect both payouts and late numbers to align to statistical standards, as we've seen in last years.

Just to expand on that, it doesn't look like a payer issue, because obviously, the revenues include the better payout. So Italian revenues, in aggregate, are down EUR18 million year on year, which includes the benefit of the better payout ratio. But even though revenues are down that much, EBITDA is still up. So it's not the payout that's boosting profitability, it's something below that. You seem to be stripping out a lot more costs from somewhere in every part of the Italian business. It's just not clear how much of that is sustainable, how much of that is timing issues, whether there was some one-offs last year, or -- if you can explain what's affecting the costs, specifically, not the payout.

Let me -- this is Alberto here. Let me try to summarize, okay? You have a 9 -- let's look at the EBITDA. You have an increase of the EBITDA of EUR9 million, which EUR11 million is coming from the Sports Betting. So when you eliminate the effect of the payout on the Sports Betting, you will see a reduction of EUR2 million. On top of that, there are -- we estimate around EUR3 million of benefit in terms of cost reduction coming from carryover. And as well as, there is a couple of million of positive one-offs we had in 2012, in the Lotto area, that is basically explained.

So overall, the reduction in the revenues is mostly in the VLT, and we have been able, through the sharing with the network, and through the reduction of the payout, so basically, reduced the impact in the first quarter.

Okay. I mean, if we exclude the impact of the Sports Betting margin, revenues are down EUR27 million in Italy, so it's still hard to understand how you mitigate all of that, but we'll -- if we can move on to the next one.

Can we have an update on the online market in the USA, both for Lottery and how Illinois is doing, and for your plans for the games in poker, please?

Yes. Let me update you on what is going on in the United States. As you probably are aware, there are several jurisdictions across the country that have proposed legislation to legalize Interactive Gaming, whether that be sports -- sorry, not sports, whether that be poker, casino games, and Lottery games.

So what we are doing is, we are -- where it's possible, we are working with our Lottery customers to implement interactive systems that will sell iLottery and iInstants. So the traditional Lottery games provided over the Internet, and there are a handful of jurisdictions which are preparing themselves for that, like Illinois and Georgia, which have already gone live.

And then, in other jurisdictions, where for example, in Nevada and New Jersey, where casinos are -- have obtained licenses to provide poker games, we are working with potential partners to present our broader iGaming solutions in the US market.

So we are very active. We improving our product offerings to be ready as the US market opens up. We have built a significant organization from our European base, and are preparing ourselves to have a full (inaudible) offering as the US market opens up.

And how has Illinois been?

The initial result in Illinois and George, I suppose, are consistent with sales that we have seen in European jurisdictions, which is that for the online business, the existing draw based game business, you might expect initially 1% to 2% of transactions, volumes coming through the interactive gateway. It depends upon the range of games that are offered. And initially, in these states, they're only offering one or two games out of the draw based games portfolio.

So initially low, and consistent with the development that we see in European jurisdictions as these games are launched.

Great, thanks. And then a final one on interactive in Italy, if I can. That looks very weak. So what's going on there? There should have been a benefit from slots, but it seems to be down quite sharply year on year. And what's the outlook for the rest of the year there, do you think?

Well, the overall portfolio is going down, but with different dynamics within. The casino business is growing, mainly because of the wheel games that have been introduced last year, in December. The -- our performance is strong there on a year over year basis.

Well, we do, let's say, experience today, but like all the other concessionaires, it's a strong reduction in poker, which we consider -- the poker revenues, which we consider is a market-driven phenomenon.

So we have not the yet data regarding market share, but we can predict we should be operating at a stable market share. And the softness that we see here is very margin and market run.

And should we expect that to continue for the rest of the year, then, do you think?

Let's say we think that the (inaudible) will stabilize at some point in time. We see that some action we have taken tend to relax them on this fact. But on the other hand, we do not see, for the time being, any recovery in growth.

Great. Thank you.

Thank you. (Operator instructions) We will now take the next question from Andrea Randone of Intermonte. Please go ahead.

Thank you, and good evening to everybody. Just very quick questions. The first one is just (inaudible) clarification on the press release. You mentioned there is a EUR4.5 million one-time recovery of a foreign investment. I'm not sure I have fully understood what you are talking about, if you can explain me a little more.

The second question is about Illinois. Can you update us about the final audit, why it's taking so long? And about, again, on Illinois, what is the growth you have assumed in your business plan for the current year?

And the last question is about Italy. The new government has been recently formed, and there are just a few talks about measures -- I mean, for control, problematic gamblers. If -- can you give us your opinion about these ongoing discussions? Thank you.

Okay. Regarding the recovery from the foreign investment, in the past, GTECH made an investment, and in 2012, the investment was not very profitable. But in 2012, we were able to get the recovery and the payment from that investment. And it was impacting positively the results of the first quarter of last year for GTECH, for EUR4.5 million.

Regarding Illinois, your question, we have a period of 45 days to resolve, in the good faith, with the Lottery, any difference in opinion that we have regarding the interpretation of the contract. That line is expiring, but we still have not resolved our differences. So we are cooperating right now with the Lottery, and trying to understand where the differences are coming from.

We will communicate, obviously, as soon as possible when we know what is going to be the result of our conversation.

And with respect to the growth in Illinois for the current year, which is fiscal year '13, ending June 30th, we are expecting an overall growth rate of 7% to 8% for sales. And on -- I can't really talk about net income at this point in time, it's too early. And that, of course, does include the fact that the first quarter of 2013, which is the third quarter for Illinois, is low, because, of course, we had the benefit of the jackpot last year. So that's our expectation.

Marco Sala. I'm taking the question regarding Italy, and what is expected from the new government. Look, it's very early to make an assessment on that. If I raise the point regarding taxation, we are talking about taxation since years. And also, the issue on the market regarding the control of some activities is a long term debate.

We'll see. What I am always saying is, the level of taxation has been already very high. I think that increase the taxation means reduced volumes, and that is not protecting the net revenues for the government.

On the other hand, we are more than happy, and we will be more than happy to give our contribution to the government if we'd be asked, in taking all the measures in order to better control some aspect of our activity that are impacting some part of the population. That would be a very good opportunity for us to provide our expertise to our government.

Thank you very much.

Thank you. (Operator instructions) We will now take the next question from Fabio Pavan of Mediobanca. Please go ahead.

Yes, hello, good afternoon, and thank you for taking my question. I would like to start with Italian wagers. I was wondering if you could provide us an update on the trend in the second quarter of this year. In particular, what I would like to know, if -- do you believe -- if it's possible to confirm the positive trend of late numbers. And a second part of the question is related to the [press] point for scratch-and-win that has been quite positive in the first quarter. Do you believe that this trend will last also in the upcoming quarters?

And the second question relates to full year guidance. I was wondering if you could share with us some assumption related to the cost of debt and the tax rate we would expect for the full year. Thank you very much.

So, I will take the question regarding the trend, the expected trends in wagers for the months to come. I think you are particularly concentrating on the Lottery business, so starting from Lotto, as you see, we have experienced a positive performance so far, basically driven by late numbers. We can anticipate that April will show up to be positive.

On a longer term, I would not predict the late number contribution to be as strong as it was this quarter, so potentially, it would stabilize, as we said.

Instant Tickets, scratch-and-win performance has been slightly negative, if you just see the first quarter comparison. If we build in a comparison between December to March, which we think is the most appropriate way to look at the market, because of the problems we had in 2011, 2012 in distributing scratch-and-win to the retail network, we would see that the performance is about 0.5% up, versus the previous four months. And we can also anticipate here that even April will show up to be positive, too.

Again, is it a stable sign of performance? We think that overall, Lotto and Instant Tickets performance combined would be stabilizing, or at best, having a very, very minor increase versus prior year.

Thank you.

Regarding the debt and the tax rate, there is no news compared to the guidance that we have provided. For the tax rate, we said that there were some extraordinary components, so they were impacting positively 2012 tax rate. And we were going to be, in 2013, between the tax rate of 2011 and 2012, and you see that our estimate in the first quarter is 40.8%. So basically, it's what we provided in the guidance.

Regarding the cost of debt we are expecting for 2013, more or less something in the region between 5.25% and 5.50%.

Thank you very much.

Thank you. As there are no further questions in the queue, I would now like to hand the call back to Mr. Sala for any additional or closing remarks.

Okay, I'm going to offer some final comments. All in all, there are many positive developments, and a very good momentum as we launch the new GTECH. Our core business are robust and very well positioned. Canadian replacement cycle is providing the benefit we thought it would. And we have become the leader in Private Manager business in the US, which has always been one of our top priorities.

This will strengthen our hand, both with other US jurisdictions, and for opportunities in other parts of the world as well.

As to the organization, the integration is happening seamlessly. The senior leadership team has quickly adapted to their new roles. Customers have told us they see the logic and the advantages of the strategy. Although it's in the early stages, we clearly see the opportunities for synergies across the Group.

And most importantly, the organization has provided the spark that seems to create its own energy and excitement.

Thank you for joining us, and good evening.

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