Good day, and welcome to the GTECH 2014 Third Quarter Year-to-date results ended September 30, 2014, conference call. Today's conference is being accorded. At this time, I would like to turn the conference over to Mr. Marco Sala, GTECH Chief Executive Officer. Please go ahead, sir. .

Good evening, and welcome to GTECH Third Quarter Conference Call. Joining me today is our CFO, Alberto Fornaro. I will begin with some insights into our performance in the quarter and conclude with an high-level update about our acquisition of IGT..

Looking at our performance, we achieved good results due in large part to the diversity of the sources of our revenue. Our Italian operation, driven by good performance in lotto and sports betting, was able to help make up for a lack of jet productivity and lower product sales that impacted our results in the Americas and international..

Last year's Canadian replacement cycle continues to impact quarter-over-quarter product sales, although that affected diminishing and will not be a significant factor in future quarters. More importantly, we were able to bring in our VLT sales that helped offset the difference with last year. .

I should also point out that the third quarter last year that had some one-time charges and the lack of those impacts in this quarter benefited us in EBITDA and operating income on revenues that were mostly stable..

From a strategic perspective, we had some significant developments. In Greece, we are making steady progress and are becoming a substantial provider to OPAP. Just recently, we've been notified that we will be one of the providers to supply the soon-to-be-launched VLT program. Negotiations to finalize that award are underway..

In the Americas, we were the successful bidder to provide the online lottery system in Missouri and Washington state. And we expect to sign a new contract in Mexico in the near term. The Monopoly Millionaires' Club, a new national draw game in U.S., launched in late October.

Promotion of it is just beginning, and we hope it will strengthen our efforts to sustain and grow same-store sales. .

In the area of game development, we were also able to obtain the rights for the use of the popular Wheel of Fortune and Jeopardy franchises in the lottery space. That will nicely complement IGT's similar rights to those franchises in the gaming space..

Our lottery management services agreements in Indiana and New Jersey are performing largely in line with our expectations, although they, like many other U.S. lotteries, have been impacted by the lack of multi-state jackpot activity. .

Indiana is achieving results that are above the national average. However, a substantial part of their lotto game performance is related to the national jackpot games. After a review, we are taking an accounting decision to book a noncash item related to our Indiana performance.

Alberto will provide further details, but we expect to make up a good deal of that as we work with the state to adjust and execute our business plan and launch some innovations..

In Illinois, Northstar continues to provide good results for the state. And we are working with the state administration towards a resolution of past issues..

In the international region, despite the lower product sales and the lack of EuroMillions jackpots, we experienced a good same-store revenue growth, driven by improved distribution of eastern tickets and the innovation in the national jackpot game in the U.K. It is a good example of our changes introduced last year in the U.K.

are producing positive results this year. .

We expect the same to be the case in the United States, where improvements to the national jackpot games should drive growth in 2015. We also expect improved contribution from EuroMillions with the addition of some new countries in the first half of 2015.

Overall, the diversity of our portfolio of jackpot games helps create a good balance to offset the natural ups and downs associated with them. .

And we also had some additional commercial success. The National Lottery Board in South Africa published a notice that the consortium we are part of was chosen as the preferred bidder in the tender for the new lottery license. Negotiations are underway and we are confident of a good conclusion. .

In other developments, we are also -- we were also chosen to provide new systems for casinos in Austria, Poland and Russia. And in Australia, Clubs New South Wales selected us to be their vendor partner in the upcoming bid to replace the central system that monitors over 90,000 VLTs.

The award is expected in the first half of 2015, and we believe that the alignment with the Clubs positions us well..

Turning now to Italy. Our performance was encouraging. We were helped by the lotto category that continues to benefit from innovations introduced in the 10eLotto game. Sports betting also contributed positively, helped by virtual betting, increased wagers and a lower payout.

Overall, we are encouraged by the results in Italy that, as I noted earlier, helped offset impact in the other regions..

Now I'd like to offer some brief comments on the IGT transaction. There have been some public notices about the progress we have made so far. Alberto will cover this in greater detail during his comments. And just this past week, shareholders voted to approve the recommendation of the GTECH board to go forward with the transaction.

All in all, there has been good progress to date..

As previously noted, one of the most compelling aspects of the deal is the consolidation of the 2 companies will generate substantial synergies of approximately $280 million to be captured over the next 3 years.

As we have begun the integration planning process with our counterparts at IGT, we have gained further confidence that the integration targets are achievable..

As in previous calls, due to pre-closing conditions, we will not be entertaining any questions on the acquisition during this call. We'll provide updates when and if there are material developments to report into the future..

Finally, I'd like to conclude with a few words about our guidance. Our business is performing well. Despite the lack of jackpots in North America and Europe, as well as difficult comparison with comparable quarters last year, we are firmly on track to achieve our full year EBITDA, operating income and net financial position guidance. .

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

Thank you, Marco. We achieved good year-over-year progress in the third quarter. Excluding costs related to the IGT transaction, our performance is fully consistent with the full year guidance we have provided, and apart from the impact of a slight different revenue mix, it is also ahead of market consensus..

Now let's look at Slide 8, which shows reported consolidated results for the quarter. Consolidated revenues were roughly unchanged in the third quarter. In Italy, revenue were ahead of last year, driven by the product innovation in the lotto category, as well as wagers and lower payout in sports betting.

These offset lower revenues in our other regions. .

In the Americas, it reflects both the end of the Canadian replacement cycle and the lack of jackpots. And in our international region, it is mainly a question of timing, which will be made up for in the fourth quarter. .

Consolidated EBITDA and operating income were up significantly. In a moment, I will discuss certain one-offs that impacted these figures as well as net income and EPS..

Finally, reported net financial position was up in the quarter. But as you will see later on, stripped off the costs related to the IGT transaction, the net financial position was down sharply, both sequentially and year-over-year..

Now let's look at the P&L on the next slide. Reported figures reflect an average U.S. dollar-euro foreign exchange of $1.33 compared to $1.32 in the third quarter of 2013. Service revenue in the third quarter were up 3% driven by solid performance in Italy.

As Marco alluded to earlier, these include an approximately EUR 14 million reduction related to the minimum profit level guarantee in Indiana for the lottery fiscal year in 2014 and '15. .

As anticipated, product sales were lower, mainly due to the winding down of the Canadian VLT replacement cycle. As planned, we incur EUR 4 million of restructuring expenses in the quarter. These were offset by the net impact of the unusual items, which I will describe shortly.

Virtually all the increase in interest expense come from the bridge loan facility tied to the IGT transaction..

On Slide 10, I'd like to explain some one-offs and unusual items that impacted our third quarter performance. Third quarter EBITDA is EUR 3 million higher than last year when we exclude the prior year Machine Gaming provision.

At the operating income level, in addition to the previously mentioned EUR 30 million impact from the Machine Gaming provision, in the third quarter of this year we incurred transaction costs of EUR 10 million associated with the IGT acquisition that were more than offset by the EUR 14 million gain on sale of the company's sports and events ticketing business in Italy.

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While included all of the above adjustments, operating income would be EUR 3 million lower in the third quarter of this year versus last year.

After allowing for these items, as well as interest expense from the previously mentioned bridge facility and the resulting income tax impact, net income attributable to owners would have been comparable to the same period of last year. .

The most significant adjustment relating to the underlying net financial position which benefited from our stronger cash flow generation in the quarter. At the end of September, net financial position would have been EUR 2.49 billion, down EUR 38 million in the quarter when adjusted for one-offs.

This includes IGT-related transaction expenses and the financial liabilities related to the bridge loan fees, as well as the share repurchase program, partially reduced by the proceeds from the sales -- from the sale of the Italian ticketing business..

Now let's move to the third quarter business performance by segment, starting with the Americas on Slide #11. In the Americas, service revenue were impacted by lower multi-state jackpot activity and the previously mentioned reduction for Indiana, partially offset by strong instant ticket performance across multiple jurisdictions in the United States.

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Product sales in the quarter were EUR 11 million lower than prior year when adjusted for the impact of foreign exchange. We were able to offset approximately half of the anticipated decline in gaming product sales to Canada with sales to U.S.-based customers. The drop in operating income was the results of the 3 major item that reduced revenues..

And with regarding Indiana, growth in Indiana considering -- considerably outperformed the average U.S. lottery sales growth in Q1 and Q2 of 2014. In Q3, online and instant also outperformed the average U.S. growth.

However, the timing of jackpots, in particular Powerball, combined with Indiana heavy dependence on these jackpot games, negatively impacted Q3 sales. We decided therefore to take the EUR 14 million accrual in the quarter and are looking at the growing impact of the Indiana supply contract to contribute to the overall profitability. .

In order to continue to drive growth from jackpot games, the new multi-state Monopoly Millionaires' Club was launched on October 19. It should help drive additional revenues. In addition, a change in the featuring the matrix of Powerball has been approved, with an April 2015 start date..

Total revenue from international here on Slide 12 were down to exceptionally high product sales in prior year, partly offset by a 4% increase in lottery same-store revenues, driven by solid performance in U.K., the Czech Republic and Poland. Operating income was primarily impacted by lower product sales.

We are expecting to recoup in the fourth quarter the product sales shortfall of Q3, and we foresee significant improvement in Q4 and full year profitability in the international region, driven by cost synergy, restructuring of less profitable contracts and new business won. .

Revenue in Italy on Slide 13 were up 7% in the third quarter, driven by significant growth in lottery and sports betting. Total lotto wagers were up 16%, driven by strong performance of 10eLotto, which was more than offset by lower contribution from late numbers. .

Revenues from sports betting were up sharply on growth in wagers, driven by virtual betting and on a lower payout. Italy operating income, excluding last year Machine Gaming provision and the sales of the ticketing business, jumped by EUR 24 million, driven by lotto and sports betting..

As usual, you'll see here on Slide 14 your year-to-date performance. I will only comment on our effective income tax rate for the 9 months, which stand at 41%, slightly higher than prior year. This increase is due to the impact of some nondeductible acquisition costs related to the pending acquisition of IGT. .

The net financial position at the end of September was EUR 2.58 billion compared to EUR 2.51 billion at the end of December.

When excluding IGT-related transaction costs and the sales of the ticketing business in Italy, we reported strong cash flow from operations of EUR 634 million in the first 9 months, which compare favorably to EUR 497 million in the prior year period. This improved -- improvement was primarily due to higher cash flow from changing working capital..

Total CapEx for the first 9 months included EUR 104 million as maintenance CapEx and EUR 84 million as growth CapEx, mostly attributable to Colorado contract, sports betting in Italy and the acquisition of.

Probability..

In terms of full year guidance, we remain well on track to achieve EBITDA and the operating income, and we are anticipating closing the 2014 with a net financial position in the lower part of the range that we are communicating at the beginning of the year when adjusted for the impact of the IGT acquisition..

As you see on Slide 16, we are progressing as expected with the acquisition of IGT-related work streams. In August, we cleared U.S. and Canadian antitrust orders and we're also closed -- we also closed on the bridge loan credit facility syndication.

We filed the preliminary registration statement with SEC in October, and IGT 2019 bondholder consent was completed in the same month. .

Last week, GTECH shareholders approved the cross border merger of GTECH S.p.A. into Georgia Worldwide PLC. And we executed a new 5-year, approximately $2.6 billion multi-currency revolving credit facility.

We are in process of getting consent from bondholders on our 2018 and 2020 notes at the early voting deadline, respectively, 87% and 91% of the bondholders of the 2019 and 2020 bonds submitted interaction in favor of the consent solicitation. Therefore, we look positively to November 24 for final approval by the bondholders meeting. .

We also -- we have also launched recall on our 2016 notes as a liability management exercise. There is a development on financing, consent and RCF have allowed us to have committed financing in place for approximately 50% of this new entity performance, capital structure after closing..

On the integration side, we have established a steering committee and program management office. We have identified a launch to enter critical work stream and [indiscernible] progress here. Steps to moving closer to the completion of the IGT acquisition are on track. .

So all in all, we're quite pleased with the progress we made in the quarter, both with regards to our operation and to the implementation of our strategy. .

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

[Operator Instructions] We will now take our first question from Richard Carter from Deutsche Bank. .

Three questions.

Firstly, why did the AWP installation base go down 3% in the quarter? Is there anything we should know about what you're doing there? And secondly, on the potential increase in VLT and AWP taxes in Italy, could you just talk a little bit about timing? And also there's been a lot of speculation and it varies on how much you would actually theoretically cost to upgrade the machines for altering the payout ratios, so could you just give a little bit of color there? And then thirdly, why is depreciation in Italy falling? I thought it'd be increasing year-on-year, given you've got more VLTs and you're rolling out shops and things like that.

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Richard, to answer regarding your 3 questions. First of all, regarding the AWP installation that is going down. There, it's a perfectly.

[Audio Gap].

Basically when we will get a better understanding regarding the final provisions of the law. And finally, regarding the amortization of the VLT, it has been quite stable.

There is a small reduction that sometime, it is due to the fact that we reassess in the entire gaming machine the economic life of some of the machines that we have, but it's really a minor impact. .

We will now take our next question from Vaughan Lewis from Morgan Stanley. .

Just the first one's just a follow-up on that tax rise proposal.

If it does go through as planned, would it be possible to run the machines business profitably, do you think, or would it make it pretty much impossible? Secondly on the guidance, you sound confident about the EBITDA and operating income guidance, but why is revenue running well below the initial guidance? What's been the change there? And how have you been able to offset the weaker-than-expected revenues? Are you including all the sort of one-offs and the disposals in your guidance to hit operating income? And then the final one on the U.S.

PMAs, I mean, Indiana is now losing money. Illinois' already lost a lot of money.

Is it fair to say these have been very disappointing? And what do you think might change in the future that these might ever make some money? Or should we pencil in losses forever now?.

Okay. Let me answer to the second and third question that are linked together. First of all, the fact that we are not going to achieve the revenues we anticipated is mostly related to the jackpot games in the United States. Let's not forget that there is an important component of our revenues in the LMA that is basically a pass-through.

And therefore, when we have reduction of sales compared to our forecast, it impacts both the pass-through revenues that the total revenues for the facility management contract. And that's one of the major area that is impacting the revenues. For what is related to the LMA, let me just put in perspective the performance of Indiana.

First of all, Indiana was a contract we didn't have before. So the entire profitability that is coming from the facility management contract is going to build over time a buffer in total for whatever is going to be the result of the Private Manager Agreement. As you can imagine, in Indiana, the volumes are going up.

Therefore, the facility management contract year-over-year improved the profitability. But also, it's -- we are not 100% managing from a facility management contract the activity in Indiana because there is still a part of the contract that we manage, but we are transition part of the terminals from the prior incumbent for the Indiana contract.

Beginning July 1, 2016, we will have 100% of the facility management revenues related to these contracts which further will increase this buffer that we build eventually to support the negative news we can get from the PMA.

On the other side, when we look to the Private Manager Agreement regarding Indiana, again, I want to stress the fact that we have in the first half of the year, substantially outperformed the rest of the United States, and therefore, the contract is proving very successful from that point of view.

In Q3, we are basically, for the jackpot, we are at that same level of growth experiencing that the other contract in the United States, but we still believe that there is a substantial improvement that we can achieve in the remaining part of the year. So overall, again, we believe that in the long term, this is a 15-year contract.

Considering the fact that we have improved results from the facility management and later on the growth of the bid net income in the PMA will be limited. This contract will basically provide a good chunk of our profitability in the future years. .

Okay. I'll try to give some additional colors on the question related to the budget law in Italy that regards the lottery machine business. Yes, we want to be clear. If the law is going to pass as it is, it will have a very negative impact on the segment, no doubt regarding that.

The point is without that, it will pass in this way, as Alberto was saying, it will impact very negatively the net revenues for the Italian government and will bring back legality part of the current legal market. So I think there will be quite extensive debate in the parliament regarding this law.

And I think there are strong arguments to change -- to try to change the law. And do not forget that this law is not expecting any net tax increase deriving from this action.

So in the budget law, there are no provisions that are coming from the increase in taxation in VLTs, so it means that also the government is realizing that the effect of this maneuver is so far very unclear. .

We will now take our next question from Fabio Pavan from Mediobanca. .

Three very quick questions. The first one is related on cost. I was wondering if you could provide some more color on the savings plan you were mentioning before. Also if you could elaborate a little bit more on the net that is better for you [ph]. And finally, an update on Italian lotteries for the last quarter of the year. .

Fabio, regarding the synergy, we are on track. We are further [ph] achieving the EUR 40 million that we have discussed at the beginning of the year. You have seen that sequentially every quarter, we have increased the results that we have achieved.

On top of that, we have some additional cost savings particularly related to some initiatives that we have in place in Italy that will add compared to the original target in terms of synergies, these cost savings will add an additional EUR 10 million by year end. So good news on that front.

Regarding the net financial position at year end, I would say we are progressing very well towards the lower end of the guidance. Depending on the timing of certain activities related to the acquisition of IGT, we may incur costs related to the IGT acquisition.

And so the size of these are basically a function of timing that could happen in Q4, that could happen in Q1. Having said that, again, I repeat we are going to be very comfortable inside the guidance and most probably towards the end of.

And sorry, can you repeat the third question?.

Just an update for the Italian lotteries for the last quarter of 2014, some of the trends you are experiencing in October and then maybe you have already some color for November as well. .

I can tell you that as far as lotto is concerned, October was likely below last year because last year, we enjoyed a high level of late numbers. But on the other hand, the product innovation on 10eLotto are performing well, and they will produce good results in the remainder of the year.

On the other hand, Scratch & Win, we launched a set of our new products there. And the first results are rather encouraging, and so we are positive for the fourth quarter for -- in the Italian lotteries. .

We will now take our next question from Domenico Ghilotti from Equita. .

Three questions. The first is just a follow-up on a previous question.

So on your revenue guidance, can you clarify where are the areas where you are down compared to your expectation and in particular if you were able to offset in this area the profitability or what are the areas where you were able to offset the profitability? The second question is on the CapEx.

You seems -- you seem quite below the full year guidance, so if you can confirm also the target in terms of capital spending. Then just a clarification on the net financial position guidance, in general, on the confirmation of the full year guidance. If I have to understand that this guidance is excluding the one-off IGT refinancing costs. .

Okay. Domenico, yes, the third question, you should consider our guidance net of the IGT costs, which are mostly related to the financing, but not only to that. Regarding the CapEx, we are trending better than what we anticipated for the first 9 months. And therefore, we should probably be on the lower side of the guidance comfortably.

Regarding the revenue guidance, it's very simple. The 2 major areas where the revenues are sure -- are short of the expectations are related to North America, and they are mostly linked to the jackpot games.

In one -- from one side, the reduction in revenue does not produce any impact on the operating income level when it impacts the so-called reimbursable costs that we book as revenues and 100% as costs, so it's just basically inflating the 2 items in the P&L.

Partially, the reduction in the jackpot, it impacts the revenues of all the facility management contract, and that has some impact on the profitability of the year in terms of operating income. These are the 2 major items.

The fact that you don't see at the consolidated a big impact is because the revenues in Italy, particularly in the lotto, are better than expectation and they have a good profitability attached to it. .

And just a clarification on the outlook for the lotteries when Mr. Sala was referring to slightly down year-on-year in the lotto, it was including both the traditional business jackpot activity and the 10eLotto innovation.

So is the total wagers correct?.

Yes, but we do not have the jackpot in lotto. .

No, I mean, you're right.

Total wagers, okay?.

No, total wagers. Our total wagers, we are slightly below overall in October, just to say. Because last year in October, as I already said, we had a high level of late numbers that we have not having -- that we didn't have, sorry, in October 2014. While 10eLotto is doing well and looking forward, I think will provide a good boost to the overall brand. .

We will now take our next question from Richard Stuber from Nomura. .

Just 2 questions, please. The first one going back to sort of the Hoosier contract. If jackpot lottery was normalized, would you have expected it to take any shortfall on the back of that contract at all? And the second question just in terms of the timing of the IGT completion.

Do you expect now that should be done by the end of Q1 or is your -- you're sticking with your official guidance still some time in H1?.

Okay. Regarding the IGT transaction, we are marching according to the time line at the moment. Part of the time line is also not related to us and it's linked to the approval of the regulator. Therefore, we have not changed our initial expectation even though, I mean, again, we are marching according to what we have envisaged.

When we look at -- going to your first question related to Indiana, without the jackpot, we would probably have taken a minor accrual, offset by the results on the facility management contract with the normal performance of the jackpot games. .

We will now take our next question from John McGreeni [ph] from Gabelli Asset Management. .

I just have 2 quick ones. First, if there any updates on the financing and sort of the options there available to you after the term loan is up. And second, if you have any updates on the [indiscernible] process, any feedback on that would be highly appreciated. .

Okay. Regarding the financing, we basically have split our activities in 2 phases. In the first one, we are -- our intent is basically to make sure that the current source of funding of GTECH and partially of IGT are basically existent after closing through the bonded consent process.

And also, we have replaced our credit facility and the large date [ph] eventually to make it accessible also to IGT after closing. The second part, which is the acquisition financing, will be a matter that will be addressed when we have certainty of transaction.

And the process has just started because we have just got the approval from the GTECH shareholder. Regarding the withdrawal rights, the only factor that we know is that approximately 70% of the shares have voted in favor of the merger, and therefore, the pool available for withdrawal is the remaining 30% of the shares.

So that's what we know as a fact. As you can imagine, the critical point, we think, will be how the stock price will move in the next days. So it's very difficult to make any prediction regarding the final outcome. .

We will now take our next question from Andrea Randone from Intermonte. .

Just a very quick question regarding sports betting. I wonder if you can tell us which is the contribution coming from bets on the actual events in your total wagers. .

Regarding the breakdown, we don't disclose by product inside the sports betting, the breakdown between the different channels and between the different products. .

[Operator Instructions] We will now take a follow-up question from Domenico Ghilotti from Equita. .

I have a follow-up question on the stability law, in particular, I'd like to have your comments on the part of the law that is try to enforce tax payment on unlicensed operators.

Do you feel that in the current form, this enforcement is really effective or can be effective?.

You are asking me an opinion as a journalist? Look, I think I consider positive that Italian government is focusing on the illegal market because we still believe that is a source of revenue for the state. In many occasions, there were clear indications that part of the current offering in Italian market is illegal.

I think -- I see with favor the fact that the Italian government is focusing its attention on that because it can, of course, represent a source of business for the legal offering. And generally speaking, I'm positive with that provisions. .

And the last question is some color on the loans of the new Monopoly Millionaires' Club. .

That's -- I mean, it's too early to make an assessment regarding a product that's been just launched, so I cannot anticipate anything concrete. But it's positive -- it's positive that there is a continuous thinking about national games, about innovating the portfolio within the American market.

There are other tools regarding innovation on core games that I consider are positive and are providing us some optimism regarding the future. The jackpot that there was the first jackpot hit last week, so we will see what the reaction will be. But generally, in this business, innovation is the only driver for future growth. .

We will now take a follow-up question from John McGreeni [ph] from Gabelli Asset Management. .

Just very quickly regarding the [indiscernible] process.

In the event the 20% threshold gets breached, can you guys tell us how you would be thinking about that, given the essentially you have the unilateral right to walk away or stick with the deal and the significant termination fees attached to it? So just trying to say -- to think how you will approach that eventuality. .

Let me answer it this way. We really think that 20% for a company that is -- that has a float of 40% of the total because the remaining is with De Agostini is really a very important number. You're talking about 50% of the float.

So therefore, when we chose that number is because we had -- we made an estimate that it could be enough to allow the conclusion of the transaction. If not, we will decide at the moment. That's why we left the option open, but we believe it should be enough. .

As there are no further questions at this time, I would like to hand the call back to Mr. Marco Sala for any concluding remarks. .

Okay. It appears that I can wrap up. We are pleased with the third quarter results and are confident that the plans and activities we have will ensure that we will achieve our guidance. The IGT acquisition is progressing well. The synergies we expect are realistic and achievable.

From our customer perspective, we have just participated into a major exhibition in lottery gaming in each, it was clearly evident that our customers value our existing offerings and are excited about the potential of our merger with IGT. Thank you for joining us, and we will provide updates as developments warrant. Good evening. .

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