International Game Technology PLC (IGT) 2013 Q3 法說會逐字稿

Good day. And welcome to the GTECH 2013 third-quarter year-to-date results ended September 30, 2013 Conference Call.

Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Marco Sala, CEO. Please go ahead, sir.

Good evening, and welcome to GTECH's third quarter earnings conference call. Joining me today is our CFO, Alberto Fornaro. Let me begin with a review of our performance.

Overall, it was a good quarter during which we sustained our momentum with strong same store revenue growth in the Americas, the continuation of positive impact from Canadian product sales, and a return to growth in the Italian lottery sector.

As you have seen in today's release, we are committed to reach an acceptable settlement to the litigation concerning the monitoring of gaming machines in Italy. As Alberto will explain, the most conservative outcome of that one-time impact is reflected in our numbers.

Our view of this is quite simple. Entering into a settlement that is a fraction of the amount originally sought and ending any future liability for us is a good outcome.

Turning now to more strategic matters, our product manager activities are expanding with the launch of our third US-based product management operation in New Jersey that began in October 1.

Private manager operations in Indiana and Costa Rica, which we launched earlier this year, continue to perform above expectations.

Indiana sales are 20% above a similar period when it was a state-run operation. In Costa Rica, we have experienced steady growth for a brand new offering that has reached sales levels approaching EUR2 million per week in the 22 weeks since its launch. We are very encouraged by the player appreciation and the acceptance of the new game.

Other states in the US are looking at similar approaches. And we expect to see more activity once state legislatures reconvene in the first quarter of 2014.

I would like to offer one caution. Private manager initiatives are borne out of the desire of elected officials, usually governors, to change the structure in the management of their lotteries. We are advised and it seems obvious that these methods are not usually undertaken during an election season.

As it happens, 36 out of 50 US governors are up for election in 2014. Overall, we think that will work in our favor as we will have time to build a track record of success in managing the contracts we have recently begun. Of course, we'll continue to support private manager initiatives in states where appropriate.

Internationally, we look forward to the new operation opportunities in Greece and Turkey, which continue to come into clearer focus. We expect to see some progress towards launching new opportunities in those jurisdictions in 2014.

The Greek VLT market has good potential and challenges that are similar to those we successfully undertook in Italy. We look forward to entering the Greek gaming market in a meaningful way.

In regards to Italy, Lottery performed well, driven by a positive performance in Lotto, due primarily by the impact of late numbers and the 10eLotto and the results from Scratch & Win that were comparable to the previous quarters of this year.

You may recall, we had anticipated to you since December 2012, Scratch & Win sales were stabilizing and that trend is being sustained.

Turning now to the developments of importance, we continue to win new business and extend existing relationships. During the quarter, we were selected to provide the lottery technology to a private operator in Paraguay and received contract extensions in Argentina, Kentucky and Wisconsin.

As we have reported in previous quarters, many of our customers have been adopting innovations. For example, Texas and Tennessee, as well as the Czech Republic, have expanded the number of draws for some of their lotto games. The multi-state jackpot game, Mega Millions, has made numerous game matrix and payout improvements that were put in place on October 1.

California and Texas have introduced a new price point for instant tickets. And, for the first time since its launch in 1994, the U.K. Lottery recently increased the price point of its core Lotto game.

We are encouraged that by the willingness of lotteries to try new approaches to drive growth. We are pleased that our collaboration and support are having a positive impact on their business.

I would like to conclude with a few words about our guidance. I think it is important to note that we have made excellent progress, particularly in EBITDA and net financial position.

As Alberto will detail, excluding the one-time impact of the machine gaming provision, we are confident that we will achieve our full year guidance in the important categories and reconfirm that to you today.

Now, I'd like to turn the call over to Alberto for his review of our performance, after which we will take questions.

Thank you, Marco. We achieved a good year-over-year progress in the third quarter across many businesses, including the positive contribution of Italian lotteries.

Now, let's turn to slide seven which shows consolidated results as reported and also adjusted for the impact of the EUR30 million machine gaming provision that we accrued in the third quarter. This payment will put an end to the litigation which began in 2007.

The amount of the provision reflects the maximum 30%, as established by law, of the EUR100 million in damages set in the first decree ruling by the audit department in February 2012. On November 4, we submitted a request to reduce the settlement to 20% and the case will be decided this Friday.

Going back to our financials, we had a very good quarter, led by the results of the Americas. Consolidated revenues were at EUR730 million. Excluding the aforementioned provision, EBITDA grew over 1% versus the same period last year. Recurring income was EUR132 million, in line with last year.

Net income attributable to the owners was EUR32 million, resulting in EPS of EUR0.18. We will discuss the NFP in more detail later in the slides.

Now, let's look at the P&L. Reported figures reflect an average US dollar/Euro foreign exchange of $1.33, compared to $1.26 in the third quarter of 2012. For this reason, we are also providing a P&L at constant currency.

Revenues were EUR730 million, impacted by an unfavorable foreign exchange comparison versus the third quarter of 2012 of EUR21 million and some cyclicalities of product sales. At constant currency, revenues were up 1.4%.

Reported EBITDA was EUR219 million, or EUR27 million lower than the same period of 2012, due to the machine gaming provision mentioned earlier, and a negative EUR5 million foreign exchange effect. Recurring EBITDA at constant currency was up 3%.

Below EBITDA, depreciation and amortization is slightly higher due to capital investments in 2011 and 2013.

We reduced our nine-month tax rate to 39.8% from 40.8% in the first two quarters, resulting in a third quarter tax rate of 35%. We will look at these more in detail later on.

Now, let's move to the third quarter performance by segment, starting with the Americas. Total revenues for the Americas grew 17% to EUR251 million from EUR215 million last year. At constant currency, revenues were up over 25%.

America's Lottery same-store revenues were up 4.4%, which benefited from healthy North America lotteries growth of 7.5%, primarily from Powerball jackpot activity and improvements in instant ticket sales in Texas, North Carolina and California. This increase was partially offset by lower jackpot activity in Colombia.

Product sales were up EUR24 million, driven by the sales of VLTs and systems in Canada. From the start of the cycle, we have recorded product sales revenues of EUR151 million, of which EUR106 million was recognized in 2013 and EUR45 million in 2012. As the Canadian replacement cycle approaches completion, we are pursuing a number of other opportunities.

We were recently awarded a contract in Oregon to provide an additional 1,500 VLTs, software and games, for expected 2014 product sales of approximately EUR16 million. The 1,500 VLTs will bring our total VLT count in Oregon to 4,000, or 33% total market share.

Total revenues from international in the quarter were EUR81 million versus EUR113 last year. You will recall that the prior year included a peak in product deliveries in the U.K., France and Sweden, which did not recur this year.

International lottery same store revenues benefited from higher online sales in the Czech republic, along with good instant-ticket performance in the Czech Republic, United Kingdom, Poland and Slovakia, but were impacted by lower Euro Millions jackpot activity. EBITDA was impacted primarily by lower product sales.

In Italy, total Lotto wagers were up 3% to EUR1.52 billion, compared to EUR1.47 billion. We benefited from higher wagers, from late numbers and 10eLotto. Instant tickets were up EUR9 million to EUR2.24 billion.

More than half of the EUR26 million decline in the machine revenues was related to the tax increase that took effect on January 1 and the impact on players' behavior following the payout adjustments, and a more competitive environment due to the higher number of machines in the market compared to 2012.

The average number of installed GTECH VLTs in the quarter was comparable to the same quarter of the prior year. Revenues were also impacted by a different mix in the AWP installed base.

Italy third-quarter EBITDA benefited from the healthy contribution of lotteries and lower sports betting payouts. The EUR48 million decline in machine gaming EBITDA, compared to 2012, is mainly due to the EUR30 million one-time provision for the machine gaming settlement.

The remaining difference is principally explained by the revenue decline triggered by the tax increase, together with additional commercial actions to sustain the network and to a minor extent the timing of certain costs.

On slide 12, you will see that year-to-date revenues grew 1.2%. America lottery same-store revenue grew 2.2% to EUR386 million, while international lottery same-store revenues grew 1.5%. EBITDA grew 1%, while operating income was flat. Excluding the Italian machine gaming provision, EBITDA and operating income were up 4% and 6%, respectively.

The income tax rate for the nine months was 39.8%, versus 42.1% due to an increase in the pre-tax income in lower income tax jurisdictions, along with more favorable tax legislation in Italy.

Our net financial position at the end of September was EUR2.59 billion, compared to EUR2.55 at the end of December. In the third quarter, NFP improved by EUR77 million, trending toward the year-end guidance.

Cash from operations was EUR497 million, compared to EUR553 in the first nine months of 2012, primarily due to change in working capital.

Capital expenditures were EUR230 million, which is net of the EUR57 million equity contribution from our partners in the Northstar, New Jersey joint venture. Of that amount, EUR92 million were used for the up-front payment under the 15-year service agreement with the New Jersey Lottery.

To summarize, our third-quarter results were good. And, when excluding the machine gaming provision, we are on track to achieve the upper part of our EBITDA guidance range on a constant currency basis.

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

Thank you. (Operator instructions). We can take our first question from Vaughan Lewis from Morgan Stanley. Please go ahead.

Evening. My first one is on product sales and the profit contribution from those. So if I look at page nine, it looks like an incremental profit margin of around 30% on the Americas product sales. Whereas, on page 10, where you've seen a big decline in product sales in international, it looks like only around a 10% flow through from profits.

So can you just explain what the dynamics are here? And how we should think about the profitability of these one-off machine sales?

The second one is on Italy, on the machine side. Could you just expand on what you were saying on the competitive dynamics and the lower productivity of the machines that we're seeing? And when you might expect that trend to end? And, as part of that, why the number of VLTs was slightly lower?

And then a final one on Greece. You talked about opportunities there. Are you looking to operate VLTs as a sub-licensee of OPAP? Or are you just looking to supply machines into the market on a one-off sale basis? Thanks.

Okay. Let me answer the question regarding the profitability first. What you see regarding the Americas reflects entirely the Canadian replacement cycle. So your deduction regarding the 30% profitability is correct.

When we look instead to the international, there is a mix of sales. Some are machines, but last year there were also systems that carry a lower profitability, particularly the sales in Sweden. So that's basically the mix that is impacting the different profitability of the product sales in the two regions.

Second, regarding Italy and the lower profitability. I think what is happening today in the market is basically an adjustment to higher taxation that has in the market led to a reduction of the pay out in order to preserve the margin.

So at the moment, we have basically, almost entirely offset increased taxation through this management of the payout. We have seen the response from the player in terms of lower productivity of the machines.

So I think that now we are going to see, between now and the third quarter, the final impact. And then we will see for next year that should stabilize, given that the major driver is the change in the payout, triggered by the taxation.

Regarding your comment on the number of machines. Here we have -- these are the machines installed at the end of the quarter. So sometimes there is a number of machines that are changing location or not fully working. So it's a minor reduction compared to the end of the third quarter in 2012.

I'll take the question regarding this. It will depend very much about the OPAP decision regarding the kind of model that they intend to implement in phase one and phase two. But I can answer we are ready (inaudible) our sales, either as a supplier of machine as well as operator. We'll see in the following month.

Great. Thank you.

Our next question comes from Richard Carter of Deutsche Bank. Please go ahead.

Hi. Good evening. A couple of questions. Firstly, on Italy, can you just talk about -- you've obviously had some good success in terms of mitigating the decline in revenue in Italy.

And could you just talk to us about going into next year, do you continue to see opportunities to mitigate the top line? Or do you think it's going to be a lot tougher? And as revenue declines can actually start to impact and flow through to the bottom line in 2014?

Looking at Italy, I think we did an excellent job in keeping our position. By the way, we enforce all our market shares in the various categories, in addition to keep the lottery sales stable or slightly improving during the year.

So we have innovate and we have managed our network in the best way to keep our position in the marketplace. Going forward, next year we expect that we will have another tough year. But we feel our sales are well-positioned to defend our profitability.

Could you maybe talk about how that's going to be possible next year? Because, obviously, you've managed to mitigate a lot of the tax. You've obviously taken costs out of your Italian operations. So what is there for (inaudible) --Marco Sala^ We'll continue. I mean, on side we take away -- we can keep our position in some segments. On the other side, we will mitigate through cost savings, additional cost savings, possible decline in our top line. But we will discuss more in the details when it comes as we are discussing the guidance (inaudible).

Okay. And then, secondly, could you maybe just talk about the pipeline for gaming machine product sales in the Americas? And maybe if it's possible, explain the visibility that you have on that business?

Well, there are in total six states that have installed the VLT in the United States. Oregon is one of them. We just provide you the update regarding it. There are other five where there are machines installed. And where we expect, in the next couple of years, there will be a replacement of these machines, even though these replacements will not be like in Canada. It will be scattered through the various jurisdictions.

So on top of the other five jurisdictions, the one in which we are actively working is Illinois where the number of machines is gradually going up. And where we have an interesting market share of around 20%.

Okay. And so it's difficult to sort of have visibility in terms of that division. So how should we think about US machine product sales going forward?

In total, let me say that the total market of these six jurisdictions I was mentioning is about the size of Canada in total. So we don't manage the timing. However, we expect, like for Oregon, in the next couple of years that the part of these [park] will be replaced.

Okay. Thank you.

Our next question comes from Fabio Pavan of Mediobanca. Please go ahead.

Good evening. And thank you for taking my questions -- three very quick questions. First one is related to the cost savings. I was wondering if you could provide us some update on the activity on 2013?

The second question is related to the tax rate. What is the level we could expect for the full year 2013?

And, finally, I was wondering if you could provide us some update on the October trend for the Italian lotteries? Thank you very much.

Okay. Fabio, regarding the cost savings in Italy, we initially, at the beginning of the year, we provided figures of around EUR10 million for the year, of which EUR5 million were recurring and another EUR5 million were additional actions.

Today, year-to-date we have achieved around EUR8 million in savings. And we are projecting EUR13 million total cost saving for 2013 in Italy.

Regarding the tax rate, we basically expect that the current tax rate of 39.8% is a good proxy for the full-year tax rate.

And, finally, regarding the October performance in Italy, I can say that regarding the lotteries, the picture is quite encouraging because late numbers are sustaining the lotto growth in the month, compared to the same month of 2012. And Scratch & Win are in line with last year. So overall, we see some stability for the Lotto, a little bit better.

Thank you very much.

Our next question comes from Domenico Ghilotti of EQUITA. Please go ahead. Your line is open.

Good afternoon. The first is a follow-up on the tax rate guidance -- just understanding the close to 40% guidance. It can be also a good proxy looking at next few years.

And the second question is clarification on the product sales. In particular, there are EUR31 million left from the Canadian contracts. Should we expect that this EUR31 million are booked in Q4? Or is there a tail into 2014?

And the third question is a clarification on the court decision to be taken next Friday. Should we expect that the court, basically, either accepts the EUR20 million settlement, or rejects the settlement so that there is no possibility that you go back to the EUR30 million?

Okay. Regarding the tax rate -- I mean, it's quite early to anticipate what is going to happen in detail. However, you have seen that it's probably a reasonable guess at this moment, compared also to what happened last year when we eliminated the impact of the one-off.

The second question related to the product sales in Canada. This is not the remaining -- the tail of the replacement cycle is not an event of the fourth quarter of this year, but will be a 2014 event.

So, regarding the Corte dei Conti in case they reject the request of 20%, we can get back to 30%.

Okay.

And we will pay by 15 of November.

Okay. So you can go back to the EUR30 million?

Yes. Because we have already got the EUR30 million. Now we are presenting the request of the 20% accordingly to the -- let me say, the amended law. Now, they can either accept or reject it. If they accept, done. If they don't, we will have our 30% already ruled.

Okay. Thank you.

Our next question comes from Richard Stuber of Nomura. Please go ahead.

Hi. Good evening. Just a few questions from me.

First of all, could you just give some color in terms of how the cost savings are going on? I know you've spoken about Italy. But given that you've taken SPIELO reorganization, could you give us a little bit guidance there? And when we could expect those cost savings to come through?

The second question is really could you just reiterate what your CapEx guidance is for this year. Sort of in particular, when the cash outflow for the stake in OPAP comes out, and any other investments? So, I'll leave it for that at the moment. Thank you.

Okay. Let me start from the question on the CapEx. Regarding the CapEx, first of all, regarding OPAP, we have already made a contribution of EUR20 million for our share of the equity at the end of September.

In terms of total CapEx, we reconfirm the guidance. I remind you that we have a guidance of EUR350 million to EUR380 million in total, of which EUR115 million to EUR130 we said were dedicated to growth initiatives.

So we are basically reconfirming the guidance, given the information we have today. However, we're going to see probably a slight decrease of the maintenance CapEx and a slight increase of the growth CapEx mostly because of OPAP which was unexpected at the time we provided the split of the total CapEx. Overall, we will be in the guidance.

Regarding the cost savings I mentioned, the cost saving regarding Italy, we are completing all the exercise of the synergies related to the new organization. And probably on the next call, we'll provide you with an update regarding that.

And you have already seen some initiatives that have been announced. For example, the one in Sweden. These are the kinds of things that we are doing, both of Italy and outside of Italy, in order to improve our cost structure.

Thank you.

(Operator instructions). Our next question comes from Roberta Ciaccia of Exane BNP Paribas. Please go ahead. Your line is open.

Yes. Hi. Thanks. So I have a couple of questions. The first one is on Greece. I have seen a press release from [Amadelta] a few weeks ago stating that Mr. Sala is in the board of the company. I wanted to know if you can confirm that?

And always regarding Greece, do you think there is any chance that you can get the IT contract currently managed by INTRALOT?

And the second question is on Ireland. Given that the management of the lottery has gone to Camelot, I wanted to know if there is any upcoming tender for the IT part of the contract coming at some point? Thanks.

Regarding OPAP, yes I was invited to be a board member of the Company. And I accepted. So I will attend my first board in a couple of days.

Regarding INTRALOT, it's up to the management of OPAP to decide regarding the technology. So I cannot comment anything.

Can I get a follow-up question on this?

Yes, sure.

Oh, thank you. Because I understood there was a press release issued by OPAP last summer basically saying that they could, at any point in time, basically scrap the contract with INTRALOT and decide for another operator?

I do not know the details of that.

Okay.

Therefore, I cannot comment on this.

Okay. Good, on Ireland?

Okay. Regarding Ireland, the process for the bid has not been completed yet. So we are the incumbent for the technology. And so when the process is completed, we are going to sit down and discuss that. So it's kind of, at the moment, premature to discuss this until the formal process is closed and the winner is awarded.

Okay. Thank you.

Our next question is a follow-up question from Domenico Ghilotti of EQUITA. Please go ahead.

Yes. I have two questions. The first is related to the (inaudible). Can you provide some color on the impact of the price increases in the U.K. lottery? And if this is a sizeable and significant on the international lottery same-store sales for Q4?

The second question is related to the guidance. In your comment, you basically stated that you are confirming the full-year guidance of EBITDA at constant ForEx. Well, ForEx are not really changing the picture that much. So I would like to understand if you are stressing constant ForEx because you see a greater impact going into Q4? Or some risk going into Q4? Or the guidance is achievable also at constant ForEx?

Domenico, let me answer regarding this. Our EBITDA guidance was based on $1.13, okay? And basically, we are referring to that so it's comparable.

Last year, what happened was exactly the contrary. The guidance was as at a certain level. We did better. We didn't change the guidance. We are not changing now. And was referring to the same ForEx.

Overall, the impact is around EUR8 million to EUR9 million in the first nine months. There is no minutes at the moment to believe that it could be much different. But, anyway, the ForEx is the ForEx.

That's why I [prescribed] that it is in currency. We will be in the upper part of the range. So that's it, basically. And I just want to caution a little bit because the movement of the ForEx is not easily forecastable.

And the second one is the price increase in the U.K. You know it's quite early. We have just seen the first impact. So it's difficult to judge what is the final results. So maybe we'll follow up on that when we have more evidence across the board.

What I can tell is that Camelot is expecting a positive impact from this decision overall on the numbers of the sales.

Okay. Thank you.

Our next question is a follow-up question from Vaughan Lewis of Morgan Stanley. Please go ahead.

Hi. Just a couple of follow-ups to the earlier questions. On the Irish lottery, why did you pull out of the bidding for that in the end because that seemed to be one of your targets earlier in the year?

And then can you just clarify what you were saying about the cost savings? I think that you said that the initial EUR10 million target is now EUR30 million. And all of that's been taking in 2013. Is that correct? Thanks.

Let me clarify the issue regarding the cost savings. So at the beginning of the year, we said EUR10 million recurring cost savings. And EUR5 million were basically a carry-over from a prior year, another EUR5 million was new initiatives.

So I'm updating that number now, saying that we expect EUR13 million for the full year in Italy, of which EUR8 million have already been achieved in the first nine months.

Regarding Ireland, we did our submission. We didn't pull out and we are now waiting the process coming to an end.

Great. Thank you.

Our next question is another follow-up question from Richard Carter of Deutsche Bank. Please go ahead.

Hi. Just a question on the balance sheet and [gearing]. You talked about you're looking to potentially explore new global operator opportunities. And I was just wondering what level of debt-to-EBITDA -- or whatever metrics you think are the right ones -- would you be comfortable going to if there are opportunities are out there.

Richard, I think that where we are today is a much comfortable position compared to some years ago. Last year, we were able to achieve early the target of the leverage. And, therefore, as I said nine months ago, basically we will dedicate some part of our CapEx for growth and that's what we are continuously doing.

In general, what we are trying to achieve is not a certain level of leverage, but trying during the period in which we don't have a lot of re-bid, obviously, to deleverage and create the flexibility. So that we can take advantage of new opportunity for growth or, specifically in this case for the important re-bid, including the lotto in 2016.

So we are looking at growth opportunities. Always on the horizon of three to five years, understanding what are the requirements.

Another example I can provide is the fact that we took the opportunity in New Jersey, which we thought was a very good opportunity. But at the same time, through partners we have been able to -- also a financial pattern -- to contain the overall capital investment, taking anyway the opportunity of the business there.

So is it not possible to give us some level of guidance and in terms of where you'd be comfortable with a level of gearing? And then, just a follow-up to that. There's obviously, as you know, been a bit of consolidation happening in the global machine market. I mean, obviously, you look at that. If the right opportunity is there, would GTECH be in a position to execute an M&A strategy?

Richard, we are happy with the current level of leverage because it gives us some flexibility for the known re-bid but also for some growth opportunity.

We are in a situation in which there are a lot of organic opportunity to grow our business, both in the lottery space as in the other areas. And that's what we are focused on.

Okay. Thank you very much.

We can now take another follow-up question which comes from Richard Stuber of Nomura. Please go ahead.

Hi. Just one follow-up. In terms of the Illinois contract, could you give an update in terms of how your negotiations are in terms of the shortfall? I know you mentioned it a bit at the H1 results. But I was wondering if there's any progress since then please?

Richard, I really don't have any update compared to what I did in the last call. So we are still waiting to resolve through an arbitration the pending issue and I have nothing new.

Okay. Thank you.

That will conclude today's question-and-answer session. I would now like to hand the conference back to Mr. Marco Sala for any closing or additional remarks.

Thank you. It appears I can wrap up. Let me conclude by giving you a brief update on the reorganization of the Company as we put the final touches on our 2014 plan. I can report to you that we have completed our transition phase and are now functioning as a single, unified operation under the new structure.

And as I have said previously, synergies were not the focus of the reorganization, but we expect to achieve some efficiencies in the coming years. We are evaluating those impacts in light of our multi-year planning process.

Overall, we have achieved the strategic objective of creating a streamlined organizational structure that should also give greater transparency to the reporting of our results.

And finally, with the passing of another successful quarter, it is apparent that, as we have noted, we are on track to achieve our full-year EBITDA and net financial position guidance. Thank you for joining us. I look forward to speaking again in the new year.

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