International Game Technology PLC (IGT) 2015 Q2 法說會逐字稿

Good day, and welcome to the IGT 2015 second-quarter results ended June 30, 2015 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to James Hurley. Please go ahead.

Thank you, and thank you all for joining us on IGT's second-quarter 2015 conference call. The agenda for today's call includes Marco Sala, Chief Executive Officer, who will provide an overview of the quarter and comment on broader strategic initiatives. Alberto Fornaro, our CFO, will provide operational and financial perspective on the second quarter, in addition to reviewing our outlook for the balance of the year. After the Company's prepared remarks, we will open the call for your questions. In addition to the news release and slides accompanying this call, we've also provided supplemental information on pro forma key performance indicators. You can find this information in the investor relations section of our website.

During today's call, we'll be making some forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. The principal risks and uncertainties that could cause the results to differ materially from our current expectations are detailed in our SEC filings. And now, I'll turn the call over to Marco Sala, CEO of IGT.

Thank you, James, good morning or good afternoon to all of you. I'm pleased to welcome you to IGT's second-quarter 2015 earnings call. This is the first quarter we report as combined entity. As you recall, we closed on our merger on April 7, so we have been operating as a single group, for almost the entire second quarter.

We set up our organization and leadership structure, impacting all of our segments, immediately after closing. It has been functioning effectively from the start. Different from last quarter, when both the legacy businesses were still operating independently, the news release we issued today is based on consolidated financials in US dollars and under US GAAP. We have also provided pro forma historical data for 2014 and the first quarter of 2015, as a reference to assess our present and future performance. The merger was a complex transaction, and establishing a reporting structure and a consolidated entity is a significant milestone in the integration process.

I'm pleased to report that we had a good performance in the second quarter. Comparable revenues were up 1% at constant currency and the adjusted operating income was up 3%. We achieved adjusted EPS of $0.35 per share, and our financial condition is solid.

In the Lottery business, we continue to deliver robust same-store revenues growth, up to 7%, excluding Italy. Instant tickets was the primary driver of growth across jurisdictions. We also had solid performance in draw-based games throughout North America, as well as significant increases in jackpot activity in our international operations, most notably in Eastern Europe. In Italy, Lottery revenue rose 4% in constant currency, supported by the continued strength of 10eLotto and momentum for Numero ORO. We also doing well in terms of new business wins, and extensions of our Lottery operations, reinforcing our leadership position in the global lottery market.

In North America, we were awarded a seven-year contract by the Wisconsin Lottery that expands the scope of our longstanding partnership. The Massachusetts Gaming Commission, a customer serviced by the North American Lottery Organization, selected IGT to provide a central monitoring system for the casino operations that have recently launched in the state. And we recently extended our contract for the Maryland VLT central monitoring system, for an additional five years. In another development, our contract with the Florida Lottery was extended for 18 months, as they restart their RFP process.

We also had good success expanding our international lottery business. In Finland we signed an agreement with the national betting agency to deliver an interactive e-commerce solution that provides a full view of the player, regardless of the channel they use. In South Africa, we went live in early June, supporting the ITHUBA consortium, as they launch operation under the new national lottery license. As part of our facility management, we are providing a complete set of technology solutions, including a central system and 9,000 terminals. I know many of you are interested in an update on the Italian Lotto concession bid. While we originally expected the request for proposal to be issued this summer, based on recent news and reports, the process will likely be delayed until later in the year.

Now let's turn to gaming. While our overall performance has improved in the second quarter, as we had anticipated. The improvement reflects encouraging market response to our new cabinets, stronger productivity for our popular games, and a more robust pipeline of new casino openings in the second quarter.

We completed the integration of our two sales forces, which has enabled us to take full advantage of market opportunities. Given the modest overlap in operations of the two predecessor companies, we were able to maintain a high degree of sales force continuity. That unified sales force was immediately able to leverage a single, more comprehensive portfolio. And we are seeing the benefits of a revitalized customer-centric approach to the market.

As we have noted previously, content is a major factor in achieving success in the global gaming arena, and players are responding well to our offerings, especially new games. And according to a recent industry survey, our Wheel of Fortune and Sphinx games are ranked as the two top performers in the North American premium leased market. We launched exciting new cabinets recently, including the Crystal Dual video reel, and the S3000 mechanical reel cabinets. They are generating a lot of interest in the marketplace, and we are continuing to introduce new game titles on these successful cabinets. The June launch of the Quartermania Megajackpot game on the S3000 machine is very encouraging, and has translated into robust broad-based demand for the game.

As we work to improve game performance further and stabilize and enhance our global gaming operation, retaining key people and attracting new talent is a priority for us. The strength of our gaming credentials, and our steady commitment to regain market share have enabled us to identify and fill talent needs swiftly. Over next few months, new product management, marketing, and game development talent will join, or in some cases, rejoin, the company.

At the same time, we are rewriting our product development roadmap, leveraging the player insight we have gained as a B2C operator. We are involving customers, salespeople, and players earlier in the process. We are convinced that we have the right platform to reinvigorate content, and create new games. As an example, we will continue to expand our market-leading True 3D franchise, with new titles to be introduced at G2E.

An important benefit of our merger is our ability to leverage products and content on a global scale. In the second quarter, we sold over 10,000 gaming machines worldwide, including more than 6,000 in North America. The recently-opened Plainridge Park Casino in Massachusetts features more than 400 IGT gaming machines, representing about 35% share of floor, and including the largest placement of the new IGT cabinets.

During the quarter, we sold nearly 1,400 gaming machines in Latin America and the Caribbean, as we leveraged the local relationships of the legacy Spielo sales force. The excitement and energy of the new company is being recognized externally by clients and partners, and that supports and accelerates our integration efforts. We are on track with the planning and execution of our synergy targets. We've made good progress in consolidating our North American manufacturing in Reno. The first Spielo machines assembled there have been shipped to customers.

All North American manufacturing, including lottery equipment, will be transferred to Reno by the end of the year. The teams are identifying commonalities and best practices between the two legacy organizations, to maximize production and procurement efficiencies. We are also making progress on asset disposals. The legacy IGT corporate jet is in the final stages of the sales process. We have executed the purchase and sale agreement for 20 acres of excess land we had in Reno.

In Las Vegas, we recently entered into a letter of intent for the sale of the legacy IGT headquarters, and expect to negotiate a lease-back arrangement for a portion of the facility. We hope to close on that transaction in the fourth quarter. We are encouraged by our initial quarterly performance as a single company. We've accomplished a lot in the last four months, but there is much more for us to do.

Today's news release includes our guidance for 2015, which Alberto will take you through later. It is important to understand that this is very much a year of transformation, as we focus on our integration efforts and securing our synergy targets. Looking beyond 2015, we expect stabilization in underlying operations and the continued benefits from synergies. By 2017, we anticipate a substantial increase in free cash flow. This is largely from the realization of synergies, moderation in capital spending, and the reinvigoration of global gaming operations as we bring exciting new content to market across a range of platforms. Now, I will turn the call over to Alberto.

Thank you, Marco. Before I review the charts presented here, let me say a word about the terminology we are using today. On slide 8, we are showing reported figures that represent IGT PLC in the second quarter of 2015, but only Legacy GTECH in the second quarter of 2014, according to US GAAP. As a result, the change between periods is quite significant, and the comparisons are not meaningful. The increase in the net debt displayed there shows the impact of financing the acquisitions.

I'll base my comments today on pro forma figures, which we believe provide a more meaningful measure of performance, presented here on slide 9. These charts present both predecessor companies as a combined entity in 2014, and reflect the reported results of the new consolidated entity in 2015. We're also presenting adjusted figures for EBITDA, operating income and EPS. The adjustments we have made are generally consistent with the methodologies of the two predecessor companies. The largest items we are adjusting for include purchase price accounting, transaction expenses and restructuring costs. A reconciliation of the adjustments we have made to the reported GAAP figures is provided in the appendix to this slide show, and also in the press release. We are providing these pro forma and adjusted figures, because we believe they offer a more useful way to evaluate the underlying performance of the Company's operations.

As you can see from the charts, foreign exchange had a significant impact in the second quarter. This is primarily due to the translation of our revenues and profits in euro into US dollars, where the average euro/dollar exchange rate was $1.11 in the second quarter of 2015 compared to $1.37 in the prior-year period. Consolidated revenues rose 1% on a pro forma, constant currency basis. Adjusted EBITDA was essentially unchanged from the prior year in constant currency, while adjusted operating income was up 3%, despite increased investment in research and development.

In the second quarter, higher profits from our global lottery activities more than offset lower profits from our global gaming operations. The overall stability in the pro forma, constant currency profitability reflects the diversity of our operating model. You can also see that we achieved $0.35 in EPS on an adjusted basis, even after incurring substantially higher interest expense associated with the financing of the acquisition. I'd like to take a deeper dive into the consolidated revenue and operating income drivers during the quarter, which you can find on slide 10.

Beginning with revenue, strong lottery and gaming product sales were partially offset by a decline in service revenue, mostly due to a lower installed base of gaming machines, and the impact of higher taxes associated with the Stability Law on our Italian gaming machine operations. Our North American Lottery operations benefited from an easier comparison with the prior-year period, when it incurred penalties associated with the Illinois lottery. On the flip side, North American gaming revenue was negatively affected by an expected decline in intellectual property revenue. Moving to the adjusted operating income bridge, you can see that the components of the year-over-year change are consistent with the revenue dynamics I just discussed.

On slide 11, we are sharing with you the consolidated key performance indicators we consider most indicative of our performance, and that we intend to update for you quarter after quarter. Let's start with gaming. As a supplier to casino operators and governments in the US and Italy, our installed base was approximately 60,000 machines at the end of the second quarter. That compares to a pro forma installed base of about 66,000 in the prior-year period. The reduction is almost entirely related to the casino segment, where roughly two-thirds of the decline reflects conversion of participation units to product sales in the past twelve months. On a sequential basis, the comparison is more favorable, and the decline of the casino installed base is only about 400 units. This is due to both lower losses on the Legacy IGT base, and increased installations of Spielo games.

In order to provide more ease of comparison for those of you of you who track overall industry and market trends, we've excluded two elements of our gaming machine business that are unique to our Italian operations. The first component is approximately 11,000 VLT machines related to our role as a B2C operator in Italy, a figure that has been pretty consistent over the last year. The second piece is over 62,000 AWP machines, an installed base that has been declining due to the implementation of the Stability Law, and the related exit of marginal machines from the market.

We had a strong quarter for gaming product sales, selling over 10,000 units worldwide, including robust replacement sales. VLT sales in Canada and new casino openings were other important drivers of product sales. About 60% of units sold were to North American customers, with the balance spread across Latin America, Europe and Africa. Unit growth was supported by compelling innovation, including the new cabinets. The comparison is very encouraging when we consider that the second quarter of 2014 included the sale of over 1,000 Illinois VLT units, and approximately 1,400 conversions in Mexico.

Let's move to our four segments, beginning on slide 12 with North American Gaming & Interactive. It is worth reminding you that, in North America, we have divided the business up into two units: North America Gaming & Interactive, and North America Lottery. In a world where products and services are converging, the key differentiator between the two North American segments is the type of customer served. North American Gaming & Interactive customers are casino operators, while North American Lottery customers are government entities.

First, due to the acquisition, there were four fewer days for legacy IGT operations during the second quarter. This primarily impacted recurring service revenue and DoubleDown during the period, accounting for about $12 million less revenue. Excluding the calendar effect, pro forma, constant currency revenue declined 4% in the second quarter, primarily due to the lower installed base and decrease in IP revenue, partially offset by strong product sales, improved game performance and growth at DoubleDown.

The decline in the installed base relates to legacy IGT operations, as GTECH's Sphinx, Zuma and Bejeweled installations increased, supported by strong demand for Spielo product and True 3D technology. Encouragingly, WAP yields improved from the prior year. Higher product sales reflect stronger demand for new and replacement units; conversions were not material in the quarter. The increase reflects growing interest in the Crystal Dual video reel and S3000 mechanical reel cabinets.

Average selling price was also higher than the prior year, mostly due to mix. DoubleDown revenue rose 2% from the prior year, driven by mobile revenue growth, improved payer conversion and enhanced slot content. Revenue was down 9% on a sequential basis due to two factors: First, the change in the fiscal reporting calendar, which lowered growth by 5 percentage points compared to the prior year, and by 4 points sequentially. In addition, the site experienced technical difficulties as a result of a platform migration. It is difficult to pinpoint the impact of the disruption, but it was significant. The DoubleDown team is focused on upgrading the site's architecture over the next year. Finally, you can see the lower IP revenues, which we had anticipated.

Moving on to the North America Lottery division on slide 13, pro forma revenue increased 14%, and currency did not have a material impact on growth. If we normalize for the Illinois penalty we recognized last year, revenue was 3% below the prior-year period. The 6% increase in lottery same-store revenues reflects broad-based momentum in instant tickets and draw-based games across the portfolio. The same-store revenue growth is especially noteworthy, given the lack of meaningful jackpot activity during the quarter.

The strong increase in instant tickets reflects improved pricing architecture, prize structure and optimized distribution. We also had a record month for instant ticket printing in June, with new product introductions, such Bringin' Home the Bacon in Indiana and Loteria in several jurisdictions, supporting that milestone. The contraction in product sales is a function of the lumpy nature of that business, as we had large system and terminal sales in Canada and California in the prior-year period. The contribution from new contracts, essentially Colorado and Ontario, also supported revenue growth in the quarter.

On slide 14, you see that revenue from our International segment rose 17% on a pro forma, constant currency basis, fueled by strong lottery and gaming product sales. We sold nearly 4,000 gaming machines during the quarter, with demand very well distributed across Latin America, Europe and South Africa. Average selling prices were also higher, mostly due to the mix impact of large conversion sales in the prior-year period.

Gaming operations revenue was down as a result of a contraction in the installed base, that is almost entirely a result of conversions, primarily in Mexico. The decline in gaming operational revenue was mitigated by improved yields. On a sequential basis, the installed base has been stable for the last three quarters.

As many of you know, we expected Greece's VLT program to commence during the second quarter. That didn't happen because the program has been suspended for the time being. Greece was not expected to be a material contributor to sales and profits in 2015, but it does represent a compelling long-term growth opportunity. We continue to monitor the situation closely, and are hopeful that OPAP and the Greek regulators can reach a favorable resolution.

International Lottery trends were strong during the second quarter. First and foremost, we had a big increase in lottery product sales, including about 9,000 terminals and the central system to support the South African National Lottery. In terms of recurring revenue, international lottery same-store revenues rose 8%, led by strong instant ticket growth across most jurisdictions. We also experienced continued jackpot growth in Eastern Europe, particularly Poland and the Czech Republic, which is still benefiting from the launch of the Eurojackpot.

Turning to Italy on slide 15, where second-quarter revenue was down 4% in constant currency. Incremental taxes, primarily those associated with the Stability Law, accounts for the entire decline in revenue. Lotto performance was the real standout in Italy during the quarter, with total wagers rising 11% to EUR1.7 billion. The robust growth was driven by the strong performance of our newer products, namely, 10eLotto and Numero ORO, which overcame a contraction in core wagers and late numbers. Instant-ticket wagers of EUR2.2 billion were 4% below last year. The decline is due to the timing of new product introductions, which are weighted toward the second half this year.

The decline in machine gaming revenues reflects the anticipated impact of the taxes associated with the Stability Law. Excluding the Stability Law, gaming machine revenue was in line with the prior year, as improved productivity offset an 11% decline in the installed base of AWP machines. Lower sports betting revenue reflects challenging comparisons with the World Cup in the prior year, and the decline in other revenue is primarily attributable to lower commercial services revenue. Today, my segment review focused on our top-line performance. We intend to discuss operating income by segment on future calls, and to provide you with historical data as soon as possible.

On slide 16, we are presenting the income statement with reported figures. Here, I'd like to focus on interest expense and foreign exchange. The increase in interest expense is attributable to our higher debt, which you can see detailed by instrument to the right. At the end of the second quarter, our debt was split approximately 50% between dollars and euros. The foreign exchange impact you see here is a non-cash charge related to the mix of the debt. In the future, you can expect similar non-cash swings in the income statement, due to the movement of the euro/dollar rate.

Turning to slide 17, you can see we generate a significant amount of cash, with $217 million in cash from operations year-to-date. For those of you more familiar with legacy GTECH, it's worth noting that interest paid is included in cash from operations under US GAAP, where it used to be in financing activities under IFRS. Cash from operations was also impacted by over $150 million in one-time, transaction related expenses, and it obviously does not include the $83 million in cash from operations generated by legacy IGT in the March quarter. Capital expenditures were $167 million in the first half of 2015.

I will conclude with our outlook for the balance of the year, on slide 18. First, we are on track to achieve our $230 million in cost synergies. Our expectation to achieve two-thirds of the savings on an annualized, run-rate basis by April 2016 is unchanged. We are working to go even faster than what we had initially announced, and will communicate our progress when appropriate.

Regarding our more specific outlook, we currently expect pro forma, adjusted EBITDA of $1.575 billion to $1.675 billion for the full year period, using an average euro/dollar exchange rate of $1.10 versus $1.33 last year. Therefore, the guidance includes a significant foreign exchange headwind. The same EBITDA range at an average euro/dollar exchange rate of $1.33 would be approximately $200 million higher. US GAAP conversion negatively impacts EBITDA also by approximately $30 million.

Implicit in our outlook is relative stability for our lottery operations, and a decline in global gaming EBITDA that exceeds the benefits from synergies we expect to achieve in the period. This outlook is consistent with year-to-date trends. In terms of seasonality, we expect pro forma, adjusted EBITDA to be modestly higher in the fourth quarter than in the third quarter. The variance in year-over-year dynamics between the quarters relates to legacy IGT performance in the prior year. Legacy IGT had very strong results in the third quarter of 2014, which was the final quarter in their fiscal year. That was followed by less favorable trends in the fourth quarter, which magnifies the variances in quarterly comparisons.

As Marco mentioned earlier, 2015 is very much a year of transformation for the Company. As such, it should represent a trough in profitability, as we focus on both merger integration and stabilizing gaming operations, especially in North America. As we look to 2016 and 2017, we expect stabilization and then growth in profitability and cash from operations, first as we realize our synergy targets, and eventually, as we grow our market share in the gaming business.

CapEx for 2015 is expected to be $450 million to $500 million. To the extent we are successful in renewing the Italian Lotto concession, it would require an additional capital outlay of EUR350 million, or approximately $385 million at current rates. As you know, our lottery and gaming operations generate strong cash flows. We expect capital expenditures and Italian Lotto concession fees, assuming we are awarded the contract, to be an important use of that cash in the next two years. Our next order of priority is to pay down debt, which is how we expect to use most of our cash, starting in 2017. We've established a medium-term leverage target of 4 times EBITDA.

At this point, I'd like to open the call for your questions. Operator, can you assist with that?

(Operator Instructions)

Barry Jonas, Bank of America Merrill Lynch.

I had a couple of questions, and apologies if I missed this, my line is not so clear. But for the outlook for 2015, is the implied second-half guidance is that $765 million to $865 million, and then where are the key assumptions in the $100 million spread, and what is driving the growth in CapEx to get to your $450 million to $500 million target?

Barry, this is Alberto. In the guidance as we anticipated in the final quarter, we're basically looking at the trend that's improved our EBITDA in the second quarter to continue in the third and the fourth, so we are basically projecting more or less, the same profitability. We have some good news that will impact in the second half, and that's related to synergies. On the other side, in the second quarter, product sales benefited also from a very good impact coming from new openings, as well as we had in the performance field, almost 1,000 VLTs sold in Canada, and right now the visibility on those is not as positive as it has been in Q2. So these are the two major drivers that have basically led us to give a forecast for the next quarter that's in line with the profitability of the second. Regarding the CapEx, we have some [devays] of investments that are related to new bids that were confirmed that were the series of contracts that were won by us towards the end of this year, and the beginning of this year, where we are going to deploy the capital, and it's generally related to our North American business in the lottery states.

Okay. Great. And then in terms of your North American replacements, they were, I guess, a bit stronger than what we were thinking relative to Legacy IGT's numbers. Can you talk about what you're seeing in your discussions with customers? What thoughts about your market share, and then Spielo as a percentage, whatever color you can give on Spielo, because I'm thinking that's maybe the difference relative to our expectations.

Well let me talk about Spielo first. In general, Spielo has always been -- the sale if Spielo has not been well captured in general in some ways, because it was relatively small compared to other competitors, but also because part of the press of the Spielo business is in the realty market, and sometimes they are booked to sell machines not only during the business spikes of the Canadian agreement cycle, but they're able to sell, with certain lumpiness, additional machines. So that is first one of the area particular to this quarter, that is due to the good performance of Spielo. On the other side, sales and profits introduced by Spielo last year, like Sphinx and Zuma are performing very well, and that is an important contribution on the casino segment for the Spielo side. Regarding in general profit sales, that result is quite good for the market from the two cabinets. In particular the S3000, which is the third quarter that is in the market, and we have got a very good response, and now also the Crystal Dual are starting to produce good results with the commercial casino, both in Europe, both in the international region and in the Americas.

I want to reflect at this point that I think the product performance of Q2 is not related to the fact that we properly launched the Crystal Dual cabinet. We continued deployment of S3000 combined with the new content that we see from the market. And that is what we believe. I mean, in general today, you can grow this business as long as you provide innovation in the marketplace. And we are working on going forward in order to produce content that can continue the trend on that.

Okay. Great. Thank you.

Cameron McKnight, Wells Fargo.

On the subject of free cash flow, if we were to include IGT and exclude the one-offs and any acquisitions, pro forma, would free cash flow have been about $250 million for the first six months of this year?

Yes. I think you are actually correct, because as I said, we have $50 million on a IGT POC. There are more than $150 million of extraordinary expenses related to the acquisition, and then I mentioned $83 million as cash from operations, net of CapEx is around $50 million so if we concede that, we go towards $250 million.

Okay. Great. Thanks. And then with $810 million of pro forma EBITDA in the first half, and $250 million of free cash flow, that's about a 30% conversion rate, 30%, 31% conversion rate. Is that a fair number to use as we think about forward cash estimates? Or should we adjust that, our thinking on that conversion rate?

No. I think you need the dynamic of the CapEx in the lottery business is influenced by the opportunity that we have, or simply by [the rebeat]. So that's why we usually provide some guidance separately from EBITDA to CapEx, because the CapEx could be quite different year-over-year. In fact, within 2015 and 2016 we expect to have on top of the normal CapEx, the Euro Lotto, which would reduce this number for those two years.

Got it. But excluding lumpy items, quote-unquote one-offs like the Lotto payment, or any potential acquisitions, just purely on an organic basis, is 30% a fair conversion rate to be using?

I would say that normally we have exceeded that. Now projecting is a different story, but it's basically in line with the price trends, which GTECH didn't have swings in CapEx.

Okay, great. Thank you very much.

David Farber, Credit Suisse.

A couple questions. I wanted to first talk about the pro forma EBITDA you provided, the guidance. Can you talk to what you're using, what you're adding back in your pro forma savings for the $1.570 billion and the $1.675 billion? I just want to get an understanding of what you're doing with the $230 million of cost savings. Is any of that included? And then I have a couple follow-ups. Thanks.

Okay. So it's basically the price we have detailed to get from the operating income, and as-reported basis to the adjusted EBITDA, so as you can imagine, we are adding depreciation and amortization, we're adding back the transaction expenses, and we are adding back in -- there is an item that is other -- something amortization, where we are adding back the amortization of the [app proceed of discretion] win in Italy, which we have paid in 2010, therefore we didn't have any payment anymore, and so we have back that amortization. There is a piece of the purchase price accounting, non-cash that is added here, the remaining is included in the amortization figure. Then there are the restructuring costs, then there is the cost -- the stock compensation, this is like the Legacy IGT methodology, where that the stock compensation that is not in cash is a larger incentive, that you speak. And finally any impairments of assets, that is non-cash. These are the main components on page 16 of the press release, also they are in the appendix of the presentation.

Understood, but are you adding back any of the pro forma savings, the $230 million to that guidance you just provided? Is I guess the question.

The $230 million of the synergies, and these will be achieved over three years in total. And we are not adding them back, but we should see over time the impact on different areas of our P&L in the margins, and in the G&A. So right now, basically, there is very little of this because we will realize over three years.

Okay. That's helpful. And then just on the Italy contract, I was hoping maybe you could discuss what you think might happen should the process be delayed? Would you be entitled to profits regularly during that period, and then any thoughts on that would be helpful, additional to what you gave in the prepared, and then I have one follow-up. Thanks.

Yes. I think the process has been delayed by some qualification that has been requested, with Italian regulators. I think Italian regulators will provide fairly shortly with state council, and at that point in time, I think they could issue it shortly. I think that their willingness to cash in $350 million by the end of the year should expedite the process. So you know that we are under the contract until next year, in June next year so we will enjoy our fit in that moment, I think, the award will be done.

And does this process change your confidence in the bidding process one way or the other?

We are as confident as we always were.

Very good. And just last one for me, I think it's small, but I just wanted to double check, can you talk a little bit about any potential impacts from Greece in the business that you have on the GTECH side? And then I'll hop back in the queue, thanks.

The business is not very material, given the size. By the way, it was very minor. I believe at the end of the day that they will implement the best program because I think one of those opportunities the government has to deal with this difficult situation which they are, but we are not responsible here for any delay, and look forward to the government in Greece for a long term cue.

Very good. Thanks for your thoughts.

David Katz, Telsey Advisory Group.

I wanted to just hear your thoughts on the philosophy, or the thought process around establishing a dividend, versus paying down more debt more quickly? And how you think about that as a value driver for shareholders? Right, it's around $158 million in dividends annually, versus just paying down more debt, more rapidly.

David, that's a good question, and the logic behind that is very simple. We have always enjoyed in the past the fact that there is a portion of our investor that is interested in the dividend, and in stable cash flow from our stock. And that's what basically we are doing. We are continuing to do that. We announced at the time of the deal, and therefore we are consistent with what we said at the time. At that time in particular, we evaluated that today what application that we are seeing, and obviously there is the [lock hole], which is significant in 2015 in 2016, but once we move forward, the Company will generate substantially more cash flow, and therefore given the possibility of our cash flow, we feel confident that we can continue right after the merger the dividend policy that we had in the past, and also announced at the time the deal was put together.

Okay. Perfect. And then just a couple of details that I think you may have said, and I'll apologize if I missed. If the process on the Italian Lotto contract goes the way you expect, just by when do you expect that we would have an outcome from that? And then in the game sales, I think it was asked previously, there's some Spielo driving that North American total machines shipped number in the quarter, and then I think you also mentioned on DoubleDown sequentially, it was down, I think you mentioned a platform migration, but there was some other reasoning in there as to why it was down sequentially.

Okay. I think the answer on Lotto, as I was saying, we expect that the process to be concluded by year-end, so we do not expect major delays. This looks like the government behavior, and let me say supported, and is favored by the fact that, as you can imagine, they are winning casino the EUR350 million in the first store.

Okay and let me tell you now we look at the entire Company, but anyway, given that we are in a transition phase. The Spielo were 24% of the total in North America, so it was quite significant for the quarter, for this quarter. But when we go to the DoubleDown, you mentioned that we had an issue with the platform migration, and therefore, it was quite significant, because it was several days it's impacted our ability to function 100%. So the team, led by veterans at IGT is working on the topic here, the technology on the ground, they're trying to fix the issue for the future, and that's one of the major drivers. The other one as I mentioned in my speech is the fact that due to the changing economy, normally the IGT quarter would've ended up on July 4, we are ending it June 30, so there are four days less, and this also had an impact of the overall performance of DoubleDown.

All right. Just one last quick one, if you don't mind. With respect to DoubleDown, what thoughts do you have, if any, around driving this business into a B2B business line and providing solutions for casino customers, as well as being a B2C business?

Look we are, I just want to impact, we are focused on the B2C investment. We have implemented a program in order to announce our side to use more social features, we are thinking and validating some gaming verticals. Some gaming verticals will be in our offering and we are forcibly thinking to improve our international expansion. If I had to say, look for us to ease on the B2C development and how we can continue our growth going forward.

Thank you very much.

Todd Eilers, Eilers Research.

I wanted to ask a follow-up on North American game sales. In your prior comments, I thought I heard you mention something about Canadian VLT replacement sales of 1,000 games. Was that for the current quarter, or was that for last year's quarter?

Current quarter.

So it was in the current quarter?

Correct.

Okay, thank you. And then could you also tell us how many Illinois VGT shipments or games sold were in the current quarter for both IGT and Spielo?

Around 550.

Perfect. And then last question was with regards to international game sales. It looked like a pretty strong number for new openings and expansions, 1,213 games. Can you maybe give us a sense for what hit in the quarter that drove that strong number this quarter? Thanks.

It was pretty widespread across Asia-Pacific, Europe, and Latin America. In particular, and I'm commenting the total number rather than only the new, we had a very quarter in Europe, and also in Latin America. Particularly in Peru, we had an important trade show, where in a few days, we were able to sell 600 machines, leveraging the presence of our Spielo business there. It was pretty strong in the past. Therefore IGT before was using just amusement, but was able to leverage our sales force there.

Perfect. Thanks.

Kevin Coyne, Goldman Sachs.

I was just wondering, with the new machine sales, if you could give us the percent change in the average price per machine sold?

We have not provided the average price, because particularly in our case, given the fact that we have a completely different price, the average sales price is really the results of the meet, rather than a true indication of your capability to sell the product, and if the product is a premium or not. What I can tell you regarding the new openings, they are related, and which we had the opening in Massachusetts, where we sold over 400 units, and another important opening that is going to happen in the Bahamas.

Okay. Just a quick question on Italy lottery information you provided. I'm just looking at the pro forma revenue detail table, where you give a constant FX year-over-year change for Italy service revenue, which shows down 3.7%. But then, when I look at the key performance indicators for Italy, it's saying Italy lottery revenue growth of positive 3.6%. Can you reconcile those two numbers?

We have overall, the revenues Italy were adjusted per currency, are down around 4%. The most important driver these days is the stability in Italy to use the tax on the gaming machines that reduced our overall revenues by that amount. When we look at the lottery, which means the Lotto plus the win in Italy and the positive performance, development was up 11%, discretionary was down. The sum of the two is up.

Okay. And then just one follow-up on a prior question regarding the synergy expectations that should be expected over the remainder of FY15. I believe in your disclosure you have said that $230 million of operating expense synergies, two-thirds of which should be in the first, let's say, 12 months or before April of 2015 so if we back of the envelope that, that's about $150 million, and if we assume a straight-line basis through the end of the year that would be about $100 million benefit? I guess what you answered in a previous question, the guidance excludes that, so if you hit that guidance, we should expect EBITDA to be $100 million higher?

Let me rephrase, and we will be very precise here. In the guidance for the year, we include a piece of the synergies that we are going to get until the end of the year. I said that in the current quarter, we don't add a lot of impact of synergies, because we just started, and therefore the synergies that are included in the current quarter are fairly small. That's the first topic.

The second topic is related to how the synergy will back out of profitability in the future. The $230 million, which by the way, are only the cost synergies, will be realized in three years; however, we have given ourselves and communicated to the market to go to a complete actions, that are going to bring us two-thirds of the synergies by the end of year one. So it means that you will not achieve two-thirds of $230 million by April of 2016, but the action will be completed and therefore, from that point, you will get the full benefits of the two-thirds in 2016. So the topic we provided was in terms of run rate, not in terms of effective savings generated one year after the merge.

Okay. Thanks for that clarification.

Dennis Farrell, Wells Fargo.

I was wondering if you could just touch on a few things. One, you talk about 2015 as being kind of a trough year for the business, and I was wondering as you look out into the future, what aspects of your business do you see as the greater drivers of growth? Is it lottery? Gaming ops, or replacement sales in 2016?

We are looking at 2016 as an organization of winners, and we expect that the growth and profitability will derive mostly from synergies. That is what we believe. Going forward, we were saying that lotteries as well as our gaming business are gaining momentum, and we will have, in 2017, more contribution between the growth of the business, as well as the completion of our synergy program.

Okay. The VLT market in Illinois has been pretty strong, and has been a good tax generator for the state. I was wondering if you believe that model could translate into other state expansion?

I think as long as one has proven to be effective generally, we see other states taking a look at it. I am not aware about other states, or suggesting that one state instead of another is thinking about that. But my experience is telling me that once it works, and the other state are looking at the proceedings that the states have implemented their program, is enjoying, it's possible, but again, I'm not aware of any practical development in this area.

In regards to, you gave a leverage target in your presentation of 4 times on a medium-term basis. If you look out over the long run, would you like to get to like to the leverage profile that you had when you were investment grade? Is that it longer-term target for you, or are you comfortable at the 4 times range?

We are comfortable with the 4 times range, that's working, and then we will see, once we get there, we'll decide.

Let's start getting there.

Right. And lastly, in terms of the Italian contract, could you just outlay, assuming that you successfully move along, what is what would you estimate as the cash outlays over the next two to three years? In dollar terms.

(technical issue) The Lotto issues the cash flow we'll see with that business. Is that your question?

You broke up there. I know that you say there would be a EUR350 million payment, I was just wondering in addition to that, what else did you have to pay?

The original what is required is an upfront -- let me put it this way. There will be a tender, and the days before the tender will be EUR700 million. And this EUR700 million will be in three installments. The first EUR350 million in the 2016, in the first year. Let's assume the payment was in April. The second installment will be in the following year in 2016 of EUR250 million, and a remainder, considering today's for the offering, this remainder in the third year.

And the tenure of the contract is still going to be about 9.5 years; is that correct?

Nine years. To be precise, I'm talking in euros when it comes to the lot of the EUR700 million. And the contract date is nine years.

Okay. Fantastic. Thank you very much.

[Yahansei Hassan, Bluebird Asset Management].

The stock which is on the Italian Lotto, two questions. The first, can you explain to me, is the tender offer for the Lotto in any way tied up with the [Delegafes Calle], which I believe is now dead, for lack of a better word, or is it a separate process? And then secondly, I think local Italian press mentioned that the delays in the RFP process are centered around a complaint that there are some restrictions on size for any bidders. So can you just explain to us what the nature of the delays are, and when we might expect those to be resolved? Thank you.

Yes. The first question was regarding?

Was whether the Delegafes Calle and the Lotto are tied up together?

I've got it, sorry. It is not related at all with Delegafes Calle. I mean the law it was drafting, the frame for the tender was passed into law. S nothing to do with Delegafes Calle, and based on that law, it has been approved. Of course, it is a passed law, and last year for the Italian state it remains a tender, as to follow the provisions that are contained in that law. So nothing to do with Delegafes Calle.

I mean regarding the other clarifications that the state council asked to the regulator, as we were saying, they were some clarification on the inclinations of the business, in terms of operations and experiences, saying that probably they would ask to -- let me say, too high, too low, down in the beginning business in the previous years. And now to be a later request of state council. So at the end of the day, it's a quite not fundamental issue, and of course, I cannot say what the regulator would imply, but as far as we are concerned, we'll pass. They decide to reply that no change in perspective, our position is incumbent.

Just to make sure I heard that last bit clearly, you said, your understanding is that they have not recommended a change in the tender criteria?

I mean what I'm saying, the state council ask for clarification on the, let me say, the convictions of the leaders. What I'm saying is that we'll tender the answer from the regulator, who will be, it will not affect our position in the tender.

Understood. Great. Thank you. Two other questions from me. One with the CapEx for this year being a little bit higher, as you mentioned, maybe for some North American lottery wins. Is it still -- should we still expect a more run rate level of CapEx between the $350 million to $400 million range for the combined business, or is that out of date? And then I have a last question on the guidance.

I think that if you remember in the last couple of years, actually, we performed better than what we anticipated to the market for a couple of years, in terms of maintenance CapEx. So there has been some delays that therefore, we are given a guidance that is slightly higher as an average, the overall requirement will stay in place for future years.

Okay, so this is a catch up year, I guess?

Yes and also consider that for 2015 we had a new contract, for example, that was not included. So that's basically I would say no change, okay?

Got it. And then somebody else had asked this, but maybe just to get a finer point on it, in terms of the range on your EBITDA guidance for the year, where do you think the greatest variability in your budget and your expectations, is it synergies? Is it in the slots business? In the lottery business? Where, is there the room for the greatest variance going in the next half?

The importance is basically the product sales from the gaming business, where there is always someone says that you are related to the replacement and also from the new opening, because some of the openings can be delayed.

Perfect. Thank you very much.

We are comfortable with it as we see it. It is good. We are comfortable in the achievement of synergies. So there will be no impact.

Thank you.

Final question, please?

David Hargreaves, Sterne, Agee and Leach.

Just trying to reconcile the steady-state cash flow with your comments about the dividends, and your leverage target for 4 times. And with the lottery outlays, should we assume that for the next maybe until 2017, we're not going to see any real movement in the leverage?

I think you -- it's probably safe to assume we're not going to see a big change in the debt. That would be probably more precise.

Got you. Okay, thank you.

Okay. So let me make my final remarks. I would like to thank you all for joining our call and for your interest in IGT. We are very encouraged by this first quarter of joint operations. While there is still a lot of work ahead, we are pleased by the progress we have made in just four months, and by the pace and the success of our integration efforts.

We are well positioned to transform the gaming industry with our end-to-end product solutions, exciting content portfolio, and our commitment to innovation. We look forward to seeing many of you in September at G2E. Goodbye.

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