International Game Technology PLC (IGT) 2014 Q1 法說會逐字稿

Good evening and thank you for joining us for GTECH's 2014 first-quarter results presentation. Joining me today for the presentation is Alberto Fornaro, the CFO of GTECH.

As has been our practice, I will primarily focus on strategic developments in my remarks. We had a good first quarter that was comparable to our first quarter last year, which, I will remind you, was a record-setting quarterly performance for us. You will also recall that the similar period last year was positively impacted by the Canadian replacement cycle for the VLTs as well as product sales in our international business.

It is important to point out that in the first quarter of 2014, we were able to generate a significant growth to make up for all of last year's product revenues that we didn't have this year. I will ask Alberto to give you an in-depth analysis during his remarks.

From a strategic standpoint, we had some significant recent developments. This past week, we closed on our acquisition of Probability, a leading provider of mobile gaming solutions. In our view, the next growth stage in gaming will occur in mobile. Adding the Probability team and its proven solution, which we have come to appreciate through their deployment in our mobile offering in Italy, positions us well to meet customer demands and better compete in these high-growth segments.

I would like to underscore the progress we have made in interactive area. Along with the two new programs in Greece and Norway, our portfolio of successful WLA interactive solutions includes a system deployed in Italy, Sweden, Illinois and Georgia in the United States, and a soon-to-be launched system in Ontario, Canada. Clearly, our efforts have gone a long way towards our objective of establishing GTECH as a global leader in the WLA interactive space.

In other developments of interest, we were able to achieve important extensions of lottery contracts in Florida, Michigan, Trinidad and Tobago. In addition, we were recently awarded a 10-year contract for an end-to-end gaming system for the National Lottery in Belgium. Both in the past quarter, we launched the lottery operation in Paraguay, a new jurisdiction for us, and we have begun to deploy some 10,000 new compact instant ticket lottery terminals in the United Kingdom to support Camelot's retail expansion plans.

In commercial gaming sector, our Zuma game has become a sought-after addition to commercial casinos. It has significantly outperformed the floor average where it has been deployed. Orders for Zuma are ahead of expectations and we are able to command premium pricing for it. With the upcoming launch of our new highly acclaimed 3-D game, our products are getting a lot of positive recognition and strong player acceptance. Increasing market share in the commercial casino sector is a major objective, and these new games are helping to achieve that goal.

Looking forward, we are involved in the privatization process in Turkey, for which initial submissions are due in late May. That process will lead to an auction on July 2. I'm sure you can appreciate that we are in a highly sensitive period just prior to a competitive bid. So we are not going to be able to offer much more information. Nevertheless, we will maintain the same investment discipline that we have demonstrated in the past in evaluating these opportunities.

In other developments of interest, the RFP process continues in South Africa, and we expect the decision likely in the third quarter. In addition, there are RFPs underway in New Mexico, as well as in Tennessee, Missouri, and Florida.

We are also anticipating some renewed activity regarding the outsourcing opportunity with the Ontario Lottery Corporation in Canada. And OPAP has formally launched its RFP process for a central monitoring system and VLTs for its new machine gaming program in Greece. GTECH has been invited to participate. Submissions are due on May 19 for a central system bid. OPAP has an ambitious timetable and is hoping to get the VLTs deployed and operating by year-end. We are confident that we have the experience and the readiness to help them accomplish that goal.

Turning now to our performance, the story of the first quarter is fairly easy to describe. The Americas experienced healthy growth in same-store revenue, driven by jackpot activity and distant tickets. The international group delivered operating income growth through contract announcement integration activities and management of direct costs. And our Italian business maintained its performance at the levels comparable to the similar period last year, leveraging good results in the sports betting and innovation like virtual betting.

Also, we are encouraged that the year-to-date wagers in lottery category have remained in line with our expectations. I think it is also worth noting that our disciplined use of capital has helped improve and strengthen our financial position. That has resulted in a recent upgrade of our credit rating by Standard & Poor's. We also -- we are also making good progress toward achieving the significant synergies we anticipated from last year's reorganization of our corporate structure.

Given the difficult comparison with the same period in 2013, our performance in the first quarter speaks well for the sustainability and growth potential of our business. It also gives us confidence that we will achieve our full-year guidance.

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

Thank you, Marco. We had a good first quarter. Robust lottery same-store revenue growth in the Americas partially compensated for the expected cyclicality and product sales in Canada. I would like to say upfront that the Canadian replacement cycle phasing out had a EUR34 million impact on revenues and EUR18 million on operating income. Revenues in Italy were comparable with first quarter of last year, despite the lower contribution from LOTTOLITE numbers.

Now let's look -- let's take a look at slide 7, which show consolidated results for the quarter. Consolidated revenues were EUR781 million versus EUR798 million last year. The constant currency revenues would've been EUR796 million, roughly unchanged. Consolidated first-quarter EBITDA was EUR296 million, the second highest level on record, compared to EUR300 million in the prior year. At constant currency, EBITDA was in line with the last year.

Operating income was EUR181 million versus EUR192 million last year. As you know, US dollar currency fluctuation have a limited impact as to the operating income level in that revenues are mostly matched by costs denominated in the same currencies. We incurred EUR3 million of restructuring expenses in the first quarter of this year as planned. Before restructuring expenses, operating income was EUR184 million. The EUR8 million variance compared to the first quarter of 2013 is due, as said, by the lower contribution of the Canadian gaming product sales, partially compensated by EUR9 million in cost savings from the two-year synergies plan announced in March of this year.

Net income attributable to the owners was in line with last year at EUR75 million, following the increase in our state in the Italy Scratch and Win concession from 51.5% to 64%. EPS attributable to the owners was stable at EUR0.43. NFP was in line with our expectation and accounts for the cash outflow for the Scratch and Win deal. We will look at cash flow and NFP in more detail later. For the time being, let me point out that the recent upgrade in our credit rating by Standard & Poor's is a further testimony of our long-term financial strength.

Now let's turn to the P&L. Reported figures reflect an average euro dollar foreign exchange of 1.37 compared to 1.32 in the first-quarter 2013. Service revenue were up 1%. At constant currency, service revenue were up 3%, while total revenues in EBITDA were in line with last year. As was mentioned earlier, EPS benefited from the lower minorities level.

Looking at the Americas on slide 9, notwithstanding some FX headwinds, revenue was in line with the first quarter of 2013. Same-store revenues were up to 6.7% from multistate jackpot activity, and continued growth of instant ticket sales mainly in California, Michigan, and Georgia. Revenue also benefited from lottery management services agreement in New Jersey and Indiana. On the product sales side, revenues were lower as expected, due to cyclicality of gaming product sales in Canada, partially offset by higher lottery product sales.

America's operating income was lower on a constant currency basis by EUR4 million, primarily due to the loss of profit from Canada, but partially offset by same-store revenue growth and lottery product sales to other customers. Total revenues from international were EUR76 million versus EUR86 million last year. Revenue were mainly impacted by lower machine gaming product sales in Europe and the related one-time service revenue benefit in 2013 that did not recur. In addition, a changing contract terms with the customer lowered revenues yet increased the profit.

Operating income was slightly higher this quarter versus the prior year at EUR15 million due in part to cost of saving initiatives and the timing of certain costs. Revenues in our Italian segment were EUR461 million. Higher sports betting revenues from an increasing wagers partially offset the lower lotteries and machine gaming revenues. Operating income of EUR158 million in the first quarter was negatively impacted by lower productivity of the VLTs and AWPs, lower interactive wagers, as well as slightly higher depreciation.

Lotteries wagers were slightly below the first quarter of last year, due to lower lotto, late numbers wagers, and the different calendar schedule for Scratch and Win product launches. Total lotto wagers were EUR1.57 billion compared to EUR1.6 billion last year. Instant ticket wagers were EUR2.48 billion versus EUR2.55 billion last year. Machine gaming revenues were EUR145 million versus EUR152 million in the previous year. The EUR7 million decline in revenues is primarily attributable to lower productivity. We expect an innovation to help in stabilizing the performance going forward.

Sports betting revenues was 9% higher, benefiting from the introduction of virtual betting, partially offset by a slightly higher payout compared to the record low level of the first quarter of 2013. Cash from operation was EUR163 million compared to EUR52 million last year, mainly due to changes in working capital. CapEx was EUR68 million included -- includes EUR40 million of growth CapEx, of which EUR22 million is related to the Probability acquisition. NFP at the end of March reflected the EUR72 million buyout of unit credit stake in Scratch and Win, and also reflects the EUR74 million of capital return and (technical difficulty) cash distribution to minority shareholders.

I'd like to remind you that these cast distribution historically occurred in the second quarter of the year. The Probability acquisition will not impact the net financial position until the second quarter of this year. Therefore, we feel very positive about the trend in the net financial position, and overall, are comfortably within our guidance.

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

(Operator Instructions). Vaughan Lewis, Morgan Stanley.

Just a first one on Scratch and Win. You talk about the sort of calendar a lot but the broad trend has been negative for a long time now, both in volume of tickets and overall wages. When do you think that could stabilize? And what do you think that the medium-term outlook is for that product?

Look, last year, I, as a matter of fact, we had just -- we were 1% below the previous year and so we claim for stability for 2013. The quarter started slightly below last year. And the reason for that is that the product launches in the first quarter of last year were more, like you say, substantial than what we did this year. And we believe that we can recover with the launches we have planned for the remainder of the year. By the way, I can anticipate that April has closed at 1% above April last year. So at the end of the day, we are still planning to keep the stability of the product by the -- for the remainder of the year.

Okay. And then a second one on Italy. Can you give us any sort of update on the political mood and whether there is still a sort of strong anti-machine view in particular?

Look, there are always debates regarding the gaming sector in particular, with about slot machines. But as it happened last year, at the end of the day, there are debates but not actions have been taken so far that can be considered a negative for the sector.

Okay. So nothing imminent then. And then a more general one on the European segment or the international segment, why is same-store sales negative there? And what do you think the trends we should think about for European lottery and international lottery?

Yes, the same -- consider that there are the same-store revenues. When it comes to the same-store sales, they are slightly positive because we are 2% above last year. The mix is penalizing the performance for us this year. I think for the remainder of the year, we are positive regarding the possibility to grow in that region, considering that, also in this case, April is registering a 10% increase.

Sorry, can you just explain -- on page 10, I'm looking at minus 3.9% same-store sales, so -- for international, so which bit is positive?

The same-store sales -- these are the same-store revenues, meaning that they are reflecting the revenues for our portfolio. There is a difference between the same-store sales that is the market growth that is about 2% and the same-store revenues [EBITDA] what we are factoring accordingly to the different fees we have in the various contracts. So the mix has been negative in the first quarter.

So, in other words, the underlying trend is slightly positive. We were slightly negative because of the mix. But what I can anticipate to you is that April is showing quite solid growth.

Just to be clear, sorry, is that the impact of price compression? And what is the mix impact that you're talking about?

The mix impact is that we have different fees in different contracts. And therefore, if compared to last year, there are jurisdictions where we have -- we are having a lower fee that are growing more than the average, the mix is resulting in a negative comparison for us. Notwithstanding the overall growth is there. In other words, as I would say, if I take the overall jurisdiction, they are growing about 2%. The mix of those jurisdictions accordingly to the different fees that we have in the different contracts are providing for a result that is negative in terms of revenues compared to last year.

Okay, thank you.

Andrea Randone, Intermonte.

My first question is about gaming machine in Italy. I wonder if you can comment us the difference between VLT and IPP wagers in the first quarter? And this is my first question. The second one is about minorities of Scratch and Win. I was quite surprised by the level in the first quarter. I wonder if you can provide us a guidance for the remainder of the year or at least a comparison about last year minority level, if where we assume the unit credit buyout? Thank you.

Regarding the different performance between the AWPs and VLTs, what we can say is that we are maintaining the wagers in AWPs because we are compensating a lower productivity with a slight higher number of machines. We cannot have in the first quarter a higher number of VLTs, and therefore, the productivity of the machines impacts our revenues. So, the productivity of the VLTs in other words is still going on, even though we are -- we see for the reminder of the stabilization in the comparison of -- with last year, because we will install in the remainder of the year additional 500 rides, and we will deploy additional games that will help us in recovering market share that, by the way, we are still reinforcing.

Regarding the Scratch and Win, overall, for the full-year, we expect a reduction year-over-year of 20% of the minority interest. You see that total activity related to it has been anticipated in the first quarter, and therefore, particularly on the cash flow, you see a big impact related to minorities. But overall, again, we are expecting a decline year-over-year of the minority interest.

Thank you. Just a quick follow-up on the gaming machine. Because if I'm reading correctly, the table, the number of machines in the first quarter increased by 1%, both VLTs and AWPs, while wagers declined 16% for VLTs and were stable for WPs. And so probably I'm not reading correctly the figure, but these trends seem very different.

Related to the different decline of the productivity. And because the productivity in VLT is declining more than in AWPs.

Okay. Okay, thank you.

Rachel Short, RBS.

Just one question from me, regarding the hybrid bonds. Would you be able to share with us the likelihood that you might call the existing bonds? And do you also have any plans to tap the hybrid market again?

We have discussed this topic several times, and regarding the hybrid, it will be considered at the appropriate time when we are going to look at the refinancing of the Company. For the moment, in the past and now, it provides a good support to our capital structure and we like that.

Okay, thank you.

Manuel Herold, UniCredit Bank.

Buongiorno. This is Manuel from UniCredit. I just wanted to ask -- could you please provide us some more color on the Turkish bid, please? Thank you.

The only color that we can provide to you is that we will present our credentials at the end of May, and the economic submission is due at the end of June for an auction expected to take place at the beginning of July. I can reiterate the fact that we are interested and we will present our credential. But given the competitive situation, I'm not in the position to disclose more about the matter.

That's fine. Thank you.

Domenico Ghilotti, Equita.

Three questions. The first is related to the same-store sales in the American portfolio. Could you help us in understanding what is the underlying trend? So excluding the jackpot productivity and also considering the tougher comparison for Q2.

The second question is related to VLTs. Back to the previous question, basically the dilution in the profitability is quite significant. Do you think it is related to market share declines or to the growing presence of competitors? Or there is some kind of maturity or even some deterioration in the market overall?

And the third question is related to sport betting. Is the growth related in Q1 related to a market growth? Or have you been growing market share? Or is there a more general trend in the market? And do you have an expectation for the size of the market or your market share in for the full-year?

Domenico, I'm not sure I got the last part of the question. Let me summarize. Let me answer to what I understood, and after, you will last rephrase the last question.

Regarding the same-store sales in US, as we were saying, also the beginning of the year, we expect that the underlying trend to be in the region of 4% or 5% for the full-year. That is what we said. It has been proven in the first quarter, and we do not have different view of according to what we see going forward.

Regarding VLTs, we are enforcing our market share which will be the quarter of last year. The issue is that the productivity of the machines is going down. I mean, the effect of the taxation increase is resulting in a reduction of the productivity. And notwithstanding the enlargement of the machines, driven by a competitor that still have rights to deploy, the overall market is suffering.

We expect that from our side, that we will reinforce our market share going forward, because, as I said before, we will deploy additional machines. But even more importantly, in the second part of the year, we will start deploying new content in order to refresh our offering that will help us in sustaining our market share.

Just a clarification on this point. So taxation in Q1 was fully comparable. So it wasn't changed compared to previous year?

No, no, I don't mean it wouldn't change the probability. I'm saying that all the adjustments that all the operators did will be also the payout now is resulting in a lower productivity. And that is what is happening.

And in terms of productivity loss, you think you are basically in line with the markets, so there is no (multiple speakers) --?

No. I think we are doing slightly better than the market. I think we are doing slightly better of the market. And we expect to continue doing better than the market when we will combine our plans both on machines as well as in content.

And my last question, just to rephrase my question, I was wondering if you can provide an expectation for the wagers in the spot betting market in 2014? I was surprised by the strength of Q1 in terms of your wagers. I don't know if it is a growth in market share or if it is a more general trend in market?

The wagers are helped very much by the mutual betting and the overall market is growing. I mean in this business, it is very difficult to provide a view for the reminder of the remainder of the year, because it's going to be very much influenced by the payout evolution. Therefore, we are enjoying these results that are driven by also the innovation that has been deployed in the market.

And we will see the workup contribution in the third and the fourth quarter -- in the second and the third quarter. And at that point in time, we will have more visibility. But it is very difficult to predict the remainder of the year, notwithstanding the start I share with you at this, it is very positive.

Okay. Thank you.

Richard Stuber, Nomura.

Just a few questions for me, please. The first question is on Florida. I see you've extended the contract for six months. Can you just say why it's so short? Obviously, these contracts are typically five to seven years. Is it because Florida is thinking of maybe enlarging the scope of the contract?

And the second question is on cost savings. I think you said you delivered EUR9 million in Q1. Can you split that out between the different divisions, and whether you are very comfortably on track to deliver the EUR40 million for the year? And on the same sort of tact, I think you've costed EUR3 million so far in this quarter one, and I think your guidance is EUR18 million for the full-year. So, is -- are the costs associated with the cost savings also on track? Thank you.

Okay, regarding the costs, I mentioned the cost synergy for EUR9 million in the first quarter, and anticipated that for the year, we were expecting three major areas to contribute to the cost savings. The first area was related to the rationalization in our footprint through intervention related to the footprint of the interactive, the data center and so on. And then to add to that is for around 25% each -- one was the sourcing and procurement, and the remaining in the technology.

In the first quarter, we had a very good contribution in the footprint area, which was almost half of the entire EUR9 million that was mentioned. And it is due to the fact that part of these footprint savings are related to action we took in 2013, particularly, in our reorganization of the interactive business in Sweden. And then that the procurement are around EUR3 million and the remaining is related to the area of technology. Regarding Florida, there is an extension that is going to bring us in 2015 around September of 2015, and then we will go for a formal RFP that is already out and we have started working on it.

Great. Thank you very much.

(Operator Instructions). Andre Juillard, Natixis.

I had a question regarding development on external growth. I think that you both spent Company on mobile. Are you planning anything else during the year or in the future months?

Look, I mean it's always almost impossible to answer this kind of question. Let me put in context that the acquisition of Probability. We have stated several times that we intend to move forward with our internal development. It might happen that in some cases, when it comes to evaluate the technology or business opportunity you want to speed up, that the buy option is better than to make one.

And in the last couple of years, the only acquisition we did was the Probability acquisition, because we consider the mobile segment very promising, as everybody knows in this industry. And we believe that Probability would've accelerated our development in that area. We do not see, for the time being, other opportunities similar to this one in the next month.

But regarding mobile in general, do you consider that it's a real big opportunity for you for the future? Or what is the rationale behind it exactly?

Behind what? Sorry, didn't catch perfectly the question.

Yes, sorry. Regarding the mobile (multiple speakers) --

Yes.

-- developments and the kind of games you can propose on mobile. What is the kind of potential do you see on these products? And how do you evaluate what you could do on that drop?

Yes. I mean for mobile, we assume that the weight of our mobile will represent 50% of the interactive DGY by the end of the decade. Probability will strengthen our mobile capability, adding key competencies, and we will use this technology to build casino instant and side games. This new framework will allow us to produce more content, we believe, more efficiently, serving multiple channels at the same time with a minimal effort. Those are the reasons that I have given as the strategic grounds to execute this acquisition.

Okay. And when you consider that 50% of the business could be done on mobile in the next decade, do you consider that this will be through a cannibalization of the existing gaming environment? Or is it going to be an additional (multiple speakers) [product] of business?

Look, I want to be clear. When I talk about the 50%, I talk about 50% of the interactive, not the overall market.

Okay. Okay.

That's -- I'm not saying that 50% of the gaming of IDN of the decade. I mean I'm saying that is growing much faster within the interactive space, and we expect that in a few years, it will reach 50% of that segment. That's the reason why we invested in order to reinforce our position to get advantage from that development.

Okay, thanks.

Vaughan Lewis, Morgan Stanley.

Just two very quick follow-ups. Why was the sports betting profit down despite the strong revenue growth in Italy? And then secondly, when do you think we might actually see some positive incentive fees from the PMA contracts in the Americas? Thanks.

Regarding the sports betting, we -- there is a -- quarter-over-quarter, there is an increase in the payout, which was extremely favorable in the past year. And the other important variable that impacted the P&L for the quarter are related to the fact that we are launching the mutual betting with some associated costs. And, at the same time, we are starting to amortize the cost of the new licenses that we have bought recently.

Regarding the question for the incentive and penalties, we basically don't expect anything for this year. And it's for the new contract that we have just started. We'll see, as I said, in general, we expect the first two to three years to be more or less without penalty and incentive, so it will take some time to generate positive returns on the PME side.

On the FM side, the increase in sales is higher than what normally happens, will give us more profitability compared to other contracts, where we have all the different contracts.

Great. Thank you.

Richard Stuber, Nomura.

Just a quick follow-up. I think in Q1, you generated EBIT margin of 23.1%. Your full-year guidance sort of means it implies 17.8% EBIT margin guidance. Can you tell me what you think is driving down the margin? Is it just that the US is growing faster, so that drives down the [Greek] margins? So is there anything else we should be concerned with? Thank you.

Usually, as you can see in the history, the first quarter has always been a very positive compared to the others. And this year in particular, you will see that there are two items that are going to impact later on during the year. First is related to the D&A, which it increased in the first quarter has been quite limited, but we expect it to increase in the next three quarters. And also we expect also it is anticipated that the restructuring expenses will be higher in the next quarter. These are the two important areas that will reduce the profitability in percentage.

Okay, thank you.

Domenico Ghilotti, Equita.

I have a question on the competitive environment in the renewal business. So if you can comment in the most recent tenders, if you're seeing any pickup in the competition? Maybe just give us some color or some consideration on the contract in Belgium, and also on the contract that you did not renew in Ireland.

No, I will provide you an overview regarding most of our competitive bids. I mean, honestly, they are competitive as always, but we do not see, let me say, new trends or new phenomena that are changing our competitive landscape. And considering our ability to retain or to win our business, we continue to feel are very well-positioned when it comes for renewal.

I think Alberto can provide you with some more colors regarding the Belgian bid.

Did you say Belgian or Ireland?

Well, both. So one was successful, the other not. So it is interesting to understand (multiple speakers) --.

Okay. Regarding Belgium, it has been a long process. And at the end, it has been a mix that we will have a component that is product sales, and we will have a component that is service. So, overall, let's say the complexity was to put together a very complete proposal. But in terms of a bid, I would say it was not different from what we were expecting.

Regarding Ireland, it's a different concept. Because here we're talking about a contract that is for 20 years to manage the lottery, and we did an important upfront fee. We are very comfortable with the way we bid in Ireland, looking at this prospects of the lottery in the long-term. And therefore, we are okay with the results of it.

When we talk about the disciplined use of capital, Ireland is a good example.

No, I was referring to -- I thought you had also a procurement contract to the new lottery operator?

No, we do not have it.

Okay. Okay. I'm fine, thanks.

As we have no more questions in the queue, I would like to turn the call back to Mr. Marco Sala, GTECH CEO, for any additional or closing remarks.

Thank you. All in all, we have had a very good start of the year. Same-store revenues in the Americas appeared to have a lot of vitalities. There are some interesting international opportunities in Greece, Turkey, and South Africa. Our Italian operations continue to demonstrate resiliency, and we have made significant strides in the interactive space, particularly in mobile.

While it is only the first quarter and there are many challenges ahead of us, we have had solid performance, and feel that we have already made good progress toward achieving our full-year guidance. Thank you for joining us and good evening.