International Game Technology PLC (IGT) 2014 Q4 法說會逐字稿

Good day and welcome to the GTECH 2014 full year results conference call. Today's conference is being recorded.

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

Good evening and welcome to GTECH's fourth quarter and year-end earnings conference call. Joining me today is our CFO, Alberto Fornaro.

Let me start by giving you my perspective on the performance of the business in the fourth quarter and some of the important trends we saw emerging in 2014 that will likely continue. As has been our practice, we will be commenting only on our results and not that of IGT.

As for the 2014 fourth quarter, we enjoyed healthy growth in all key performance metrics, particularly in operating income when we exclude one-offs. In the Americas we were able to overcome weakness in the jackpot games, with a much improved performance of instants and traditional lottery draw games as well as gaming machine product sales. We also achieved lottery contract wins in Minnesota and Mexico.

Internationally, we benefitted from jackpot activity that drove improved same store revenues and from product sales, most notably in Belgium. And we were awarded a substantial gaming machine allocation from OPAP in Greece.

In Italy we experienced good growth in scratch and win, lotto, and sports betting wagers, but we were impacted by a significant drop in late numbers.

On balance, it was a good quarter that helped us to complete a very good year, in which we met or exceeded our commitments in the key performance areas. Alberto will provide you with more insight into that in a moment.

From the strategic perspective, one of the most compelling themes of the quarter and our overall year was the continued growth of Spielo, not only in the WLA space, but most impressively in the commercial casino space. We have achieved industry-leading performance in the North American distributed and participation market, our traditional area of focus, and now we are beginning to grow market share in the commercial casino space.

Our games are now some of the top performers in the North American casino segment, driven primarily by our innovative 3D product line. And we have also made solid progress in commercial gaming machine sales to Europe and Latin America. Spielo's remarkable turnaround story strengthens our confidence that we are well positioned to address challenges in the gaming machine business.

In the commercial interactive area, we recently announced a new initiative with MGM in Las Vegas to support their 11 properties with an onsite mobile wagering platform. We have acquired Probability to propel us into a leadership position in the mobile wagering space, and the MGM deal certainly places us at the forefront of that emerging market with a respected operator.

And finally, another prominent theme was of the complementary nature of our businesses, both across and within our regions, giving us a noteworthy resilience even when facing difficult economic conditions in some of our markets.

All in all, when I summarize our success in 2014, I point to Spielo's continued growth trajectory, the emergence of mobile and interactive wagering, and the underlying strength of our core businesses.

Now let me turn to some other notable developments. One of our leaders decided to take a new position outside of our industry. Jaymin Patel, a 20-year GTECH veteran and CEO of the Americas region, accepted a new role as a CEO in the telecommunications industry. We wish Jaymin well and hope for his continued success.

At the same time, we brought in a new leader for the reorganized North American lottery business unit. Mike Chambrello is a highly respected and accomplished leader in the gaming industry. Having started his career at GTECH, he went on to lead Scientific Games where he was a partner in selected markets, a trusted supplier in the Italian market, and a respected competitor. He has begun working, and we expect a seamless transition as well as a healthy new perspective on our large lottery business.

Let me conclude with some comments about our impending acquisition of IGT. You will have seen from our performance during this past quarter and for the overall year that we have not been distracted by the acquisition. We met or exceeded our commitments. That is a significant accomplishment that speaks to the dedication of our people and the depth of talent that we have at GTECH.

We are now on track to meet our major milestones, and Alberto will add more color in his comments.

One of the most notable things we have announced is the new organization as well as the brand we intend to take to market. We have developed an organizational structure that addresses the turnaround challenges that we have in revitalizing IGT, while at the same time continuing our growth in our core markets and delivering the significant synergies we have identified.

In 2013 we reorganized GTECH to become a customer facing company structured around regions with a centralized products and services support group. We are adapting this proven formula to our new organization while modifying it to address our new challenges, assigning our product and services group to the North American lottery or gaming and interactive organizations as appropriate.

International will pursue its role primarily as a sales and operational group with responsibility for our entire portfolio of products. International will also take on the Latin America region, including Mexico, and Italy will continue to operate as it has.

I'd like to say a few words on our new brand. Both the GTECH and IGT brands have considerable equity, are essentially derived from the same words, and have much of the same values and brand positioning.

We want to immediately convey to IGT's core markets that we are now more than a lottery company, that we have become an end-to-end gaming company that appreciates their challenges and can help them to grow.

Unlike the lottery business that has long lead times and procurement and evaluation processes, the commercial gaming market has a more immediate sale cycle. We want our new company to make an immediate impact in this fast moving market. For these reasons, the choice to adopt the IGT name and combine it with the GTECH globe and brand identity was an easy one.

Now I would like to turn the call over to Alberto for his review of our fourth quarter and full year performance, after which we will take your questions.

Thank you, Marco. We achieved a very solid fourth quarter.

My presentation today will follow a slightly different pattern from what you are used to. Our reporting numbers for the quarter and full year reflect the impact of costs related to the IGT transaction and other one-off items. Before discussing these, we want to clearly highlight GTECH's underlying operating performance.

Subject to the approval of the UK court, we are expecting to close on the IGT acquisition on April 7. As a consequence, we are accelerating the closing process as well as certain associated costs. This is reflected in our reported fourth quarter numbers.

Excluding these one-offs, our comparable results met or exceeded our full-year guidance range for EBITDA, CapEx, operating income, and net financial position.

Now let's look at slide eight, which shows consolidated results for the quarter, and let's focus on the comparable numbers. Consolidated revenues were up 5% in the fourth quarter, chiefly driven by higher product sales in our international segment, as we had anticipated last quarter. EBITDA was up 7% versus the same period last year.

Operating income, excluding one-offs, shown here in the center column, was up about 22% to EUR127 million, on the strong results of the international segment. At year-end, NFP before one-offs was EUR2.42 billion compared to EUR2.58 billion at the end of September.

Now let's look at how our businesses did in the fourth quarter segment-by-segment, starting from the Americas on slide nine.

In the Americas, same-store revenues were essentially unchanged, as the solid 4.5% growth in instants and draw games was offset by a drop in jackpots. As you recall, in the fourth quarter of 2013 there was a $636 million Mega Millions jackpot, the second largest jackpot ever in the U.S. history.

By contrast, the dearth of large jackpots experienced through 2014 continued in the fourth quarter, with only one jackpot in the $300 million range in November.

We had a sharp increase in product sales in the quarter, up EUR13 million from the prior year, driven by sales of VLTs in Oregon and gaming machines for Latin American casinos. Demand for our Sphinx 3D machines is strong, as you can judge from the sharp increase in the number of our North American participation units.

In the 2014 fourth quarter, we recorded a settlement provision related to the termination of our lottery management services agreement in Illinois. After a one year transition period during which we will continue to receive compensation and cost reimbursement, we will retain our facility management agreement at least through June 2021.

Revenue expressed in euros also benefited from the strengthening of the dollar.

Operating income in the Americas was up EUR5 million, again helped by higher product sales and by the contribution from our larger installed based of gaming machines, while the Illinois settlement weighted on our results.

Moving to slide 10, total revenues from the international were up 34%, driven by product sales in Belgium, higher machine sales to casino customers in EMEA, and higher system sales in Europe.

International lottery same store revenues were up 5%, driven by jackpot games across the region and growth in instant tickets in the UK, where GTECH compact terminals were rolled out to new retailers. SAZKA in the Czech Republic launched the multijurisdictional game EuroJackpot, and also experienced strong instant ticket sales growth.

The sharp improvement in operating income was driven by higher product sales. It also benefited from the restructuring of our portfolio in Spain where, after an impairment charge recorded in the fourth quarter of 2013, our contract is yielding significantly better results. Finally, cost synergy also contributed to the improvement.

During the quarter, in Greece we were awarded up to 5,550 of the initial 16,500 OPAP machines, in addition to the central system that we had previously won.

Revenues in Italy on slide 11 were down 4% in the fourth quarter, mostly due to lower sports betting revenues.

Total lotto wagers for the quarter were up 4%, driven by strong 10 and Lotto, which more than offset the lower contribution from late numbers. Instant ticket wagers were up over 1% versus last year.

In the sports betting business, wagers grew by more than 7%. Thanks to sizable cost savings implemented in recent periods, we were able to contain the effect of the higher payout ratio on our results.

Operating income of the Italy segment was impacted by the mix of machine gaming revenues, higher remuneration paid to retailers in order to strengthen our long term partnership, and the timing of a large marketing campaign for the launch of a new family of annuity tickets.

On a full year basis, however, these factors were more than neutralized, yielding a 3% increase excluding one-off items.

Now let's look at the fourth quarter as reported on slide 12. Operating income as reported was EUR97 million, the difference coming from IGT related transaction costs of EUR22 million and an adjustment to goodwill related to the sales of the ticketing business for EUR8 million.

The quarter-over-quarter increase in interest expense was driven by the bridge loan facility for the IGT acquisition. Other expenses, totaling EUR73 million, primarily reflected the make-whole payment on our 2016 notes.

As reported, income taxes for the quarter was EUR57 million. They were negatively impacted by taxation related to our Italian reorganization. In addition, certain costs associated with the IGT acquisition are not deductible for tax purposes.

On a reported basis, we recorded a fourth quarter loss attributable to the owners of EUR93 million. 2014 diluted earnings per share were negative EUR0.54.

Excluding one-offs, net income attributable to owners would have been EUR53 million, up from EUR29 million in the comparable quarter last year, and diluted EPS would have been EUR0.31, up from EUR0.17 in the fourth quarter of 2013. Further details on the one-off items may be found in the appendix.

On slide 13 you have a summarized fourth quarter P&L on a reported basis. Reported figures reflect an average euro/dollar foreign exchange of 1.25, compared to 1.36 in the fourth quarter of 2013. In constant currency terms, fourth quarter operating income would have been 3% higher than in reported terms.

On slide 14 we are presenting full-year 2014 consolidated highlights, also showing results before and after the impact of the one-offs as detailed in the appendix.

Revenues as reported were in line with last year at EUR3.1 billion, while EBITDA grew by EUR21 million. Operating income was EUR567 million, or EUR596 million excluding the one-off items.

On a full year basis excluding one-off items, our net financial position improved by more than EUR90 million, and even more at the constant dollar/euro exchange rates. The details of this progression are found on slide 15.

Net of adjustments, we reported strong cash flow from operations of EUR821 million for the full year, which compares favorably to EUR696 million in 2013.

Total CapEx included EUR158 million maintenance CapEx and EUR96 million of growth CapEx, mostly attributable to Colorado, gaming machines in Italy, and the Probability acquisition.

The strength of our cash flow also enabled us to execute the buyout of the Unicredit shares in the scratch and win business.

On the right side of the bridge, you see our reported NFP of EUR2.59 billion and the impact of the one-off items. Most of the one-offs are directly or indirectly related to the IGT acquisition, and they include the full value of the bridge loan fees, the declaration in December 2014 for the early dividend payment, and the amounts paid for transaction costs. These items are partly offset by a change in the invoicing cycle in Italy, as well as the sales of the ticketing business.

On slide 16, let's take a look at our results versus full year 2014 guidance. On the revenue side, we made up a large part of the challenging comparison with last year's Canadian replacement cycle. We have overachieved on the other items.

At the operating income line, we exceeded our EUR40 million cost synergy target, enabling us to end the year above guidance.

Total CapEx was lower than guidance. This is largely due to our ability to significantly tighten maintenance CapEx. In addition, CapEx deployment for some customers was delayed.

The drop in net financial position, ending the year well [bottom] our indicative range, is noteworthy.

On slide 17, you will find the company full year 2014 P&L. Service revenues were up 1%, while product sales for their part were impacted by the comparison to 2013 base, which included the bulk of the Canadian replacement cycle.

As with our Q4 results, the bridge loan is the primary driver for the increase in interest expense, and the redemption of the 2016 notes was the primary driver in other expense.

Our reported effective income tax for the year was 66% as compared to 47% in 2013. Unusual items negatively impacted the rates in both years. Our normalized rate in 2013 was approximately 39% after removing the unusual items as well as the tax audit settlement in Italy.

Our 2014 normalized rate is approximately 38% after adjustment for items including a capital gain tax in Italy associated with the reorganization of our Italian business, as well as the impact of nondeductible acquisition costs due to IGT transaction. The normalized tax rate is in line with our expectation.

Net income attributable to the owners was EUR83 million, and the resulting EPS was EUR0.48. Excluding one-offs in both 2013 and 2014, net income would have been up from EUR216 million to EUR250 million, and EPS from EUR1.25 to EUR1.44.

Now a quick update on the IGT transaction. As you see on slide 18, we are progressing as expected with our IGT acquisition related work stream. In November, we received consent from holders of our 2018/2020 notes, and we redeemed our 2016 notes in December.

In January, our Registration Statement with the SEC became effective. We also finalized the cash exit rights for GTECH shareholders.

In February, IGT shareholders approved the merger agreement, and we closed on the $5 billion dollar equivalent secured notes as permanent financing for the acquisition. As the result of this, we terminated the bridge facility.

On February 26, we received approval from the Nevada Gaming Control Board and the Nevada Gaming Commission to merge with IGT. We have now secured all the regulatory approvals required to go ahead with the merger.

On the integration side, we have identified the new corporate leadership and formed four key region business units. We are currently in the process of filing cross-border merger documentation in UK and Italy and buy back the shares of the withdrawing shareholder. As expected, progress on this critical work stream is ongoing.

Finally, in the view of the imminent closing of the IGT acquisition, it's not meaningful to provide 2015 guidance at this time. 2015 will be clearly a year of building for the future, with the organization focused on integration and building a robust platform for growth.

As we near the closing of the IGT transaction and our big board listing, we decided to strengthen our investor relation capabilities with a specific focus on our upcoming US needs. Giuliano Boggiali has accepted another position within the group, and I would like to thank him here for all his work in advancing Lottomatica first and GTECH's later financial communication over the years.

A couple of weeks ago, James Hurley joined us as VP of Investor Relations, reporting to me. Jim brings us a rich experience in financial communication for the international blue chips, as well as the benefits of his prior work as a sell-side analyst and banker. Jim will be based in the US.

The IR team will also comprise Alessandro Baj Badino, whom you all know well, who will be based in London once we relocate our headquarters. So, we have the right team in place on both sides of the Atlantic to address all the needs of the global financial community.

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

Thank you. (Operator instructions.) Fabio Pavan, Mediobanca.

Yes. Hi, and thank you for taking my two questions. Actually, the first one refers to the invoicing cycle. So, can you please provide more color on the change in this invoicing cycle in Italy and the reasons behind this change?

And the second question, if I may, is on the withdrawal share. I was wondering if you could please elaborate on what you are going to do with these shares. Many thanks in advance.

Fabio, I'll answer the second question first. The Board has decided not to offer the shares, and therefore the shares will be withdrawn by the company.

Regarding the invoicing cycle, let me tell you that we didn't have the same invoicing cycle for the different products in Italy, and also we wanted to facilitate all the work on the reporting of all the accounts to our network during the weekend. And so, we basically moved the invoicing week ending two days before.

So, we were expecting this year to have a negative impact because the receivables would have been collected after the close of the year. But, with this change, they have been collected before, and so it's pure timing.

The value is around EUR160 million. And therefore we have highlighted them into the timing -- in the causes of the net financial position in the timing and one-off rather than a structural improvement of our net financial position.

Extremely helpful. Thank you.

Gian Magrini, GAMCO.

Good afternoon, everyone, and thank you for taking my question. First of all, congratulations on moving along with the IGT acquisition and obtaining all the gaming authority approvals. I just was wondering if you could provide a bit more clarity on what needs to occur between now and April 7th in order to close the transaction.

Yes, basically it's a matter of procedural steps that need to be taken with the UK court. We need to file all the documentation that is required for the court to approve the cross-border merger and verify that the condition precedents for the merger are satisfied, and then there is a period of 21 days between the approval and when it could become effective.

Also, in the meantime we are working to finalize the application for the New York Stock Exchange, as well as we are working on all the technical details related to the conversion of the shares, the delisting of IGT and GTECH from the Italian Stock Exchange, IGT from the New York Stock Exchange and GTECH from the Italian Stock Exchange, and the listing of the new combined entity.

Great. Thank you very much, and look forward to see you here in the States and help any way we can.

(Operator instructions.) Domenico Ghilotti, Equita.

Good afternoon. I have three questions. The first is related to the implementation of the budget laws or the EUR500 million that were asked to the gaming machine concessionaires. I wonder if you can give us some update on how are you really implementing this law in terms of -- particularly in terms of cash impact and also counter negotiation.

Then I have a question on the contract with OPAP, so if you can clarify what is the timing for the invoicing of these machines.

And then, the last question is on the so-called [delega fiscale]. So, I wonder if you can give us an update on the timing for the full -- for the presentation of the delega fiscale. I don't know if you can also give us some comments on the current rumors. But, anyway, if you don't want to comment on this, just on the timing.

Sure. I'll take the first question and the third question. Regarding the budget law, as you are aware, we are now contacting our customers and reviewing the contracts in order to get their part of value in order to fulfill our commitment in due course.

You might be aware that all the concessionaires filed an appeal against this law before the administrative tribunal. The 18th of March there will be the hearing, and we will know if the administrative tribunal will decide to suspend the execution of this law or not.

In any event, we are working hard in order to collect -- to review the contracts and collect the money in due course. As you are aware, we have already anticipated to the market that our, let me say, share of the entire value chain represents between 15% and 20%, so the impact on our P&L going forward should be in that region.

Regarding the [spoken in Italian], as you are aware it's unpredictable to understand or to know when the ledger will be discussed within the government and the full discussion also within the commission that, in the Parliament, is expected to review that law.

Therefore, notwithstanding we are looking forward this law in order to get the clarity we need to compete in the gaming machine business in Italy. It's hard to anticipate which will be the outcome of this discussion.

Domenico, regarding your question regarding OPAP, obviously we are marching as fast as possible for the delivery of the VLT. There has been some announcement recently for a slight postponement in Greece, so we don't have yet a date.

Obviously, we are working to make it happen in 2015, but we will see when we have the go-ahead from OPAP. We will provide an update as soon as we have more visibility on the timing.

Okay. And just as follow up, on the payment for the [spoken in Italian] for the withdrawal right, should we expect that is basically at closing or immediately after closing?

It should be -- the shares will be withdrawn by us right before closing.

Okay, perfect. Thank you.

(Operator instructions.) Andrea Randone, Intermonte.

Thank you and good evening to everybody. My question is about the delisting. You mentioned the 7th of April as a possible date for the approval. If this will be correct, when you would expect the stock will be delisted from the Italian Stock Exchange? It's just a technical question, but they ask me about this point.

Yes, the delisting will happen on April 2nd.

So, five days earlier, yes.

Yes, in the middle there are -- is their vacation. So, basically from a -- there is going to be --.

Oh, yes, there is Easter. Yes, sure.

Yes, there is going to be continuity between the two exchanges.

Thank you, Alberto.

(Operator instructions.) Fabio Pavan, Mediobanca.

Yes. Very quickly, a usual question, if you could provide some update about the performance of your business in the first two months of 2015, it would be extremely helpful. Thank you.

Yes. What we can tell you is that, as far as the Italian market is concerned, we can say that the first couple of months we have seen a lot of continuing performing quite well.

We have some softness with the eastern tickets because we are comparing a quarter in 2015 against a quarter in 2014 when we relaunched our most important product, the Million Dollar EUR5 and EUR10.

We have a quite significant growth as far as sports betting is concerned but with a very high payout. And therefore that will impact our numbers, while in VLT we are seeing stability as far as AWPs are concerned and we continue with a decline as far as VLT goes. So notwithstanding, in the last six months we are keeping our market share.

Internationally, we are enjoying a quite robust same store sales growth in US, driven by the jackpot activity. As we were commenting, last year was a year where we suffered a very low jackpot activity. This year these things is coming back to normality, and the first eight weeks in terms of same store sales is quite robust, while internationally is a continuing positive trend that we have commented talking about the business.

Thank you very much. Thank you.

Richard Stuber, Nomura.

Yes, hi. Good evening. Just one follow up question, please. Could you give an update on the timing and your expectations for the Lotto contract renewal for next year, please? Thank you.

We do not know yet about Lotto because, notwithstanding the law has been issued by the end of last year, we are still waiting the tender being issued by the Italian regulator. But, so far it has not been issued.

Great. Thank you.

(Operator instructions.) We have no further questions in the queue. I would now like to turn the call back to you, Mr. Sala, for any additional comments.

Thank you very much. Let me conclude as follows.

We have closed our last full year as GTECH. As we prepare to take on new challenges with a new organization and name, there are a number of things that will not change.

Our approach will always be focused on creating success for our customers through hard work, dedication, and innovation. It's a simple formula that we know works well.

We will also remain true to our core values of honesty, integrity, and accountability. Our approach has always been one that is centered on transparency and authentic communication. And finally, we will operate our business on the fundamental principle of creating shareholder value.

As we look to the future, we are humbled by the opportunity to create and grow the leading company in the gaming industry, as we are truly excited about the potential of this enterprise. Thank you for listening.

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