James Hurley - Investor Relations Marco Sala - CEO Alberto Fornaro - CFO.
Barry Jonas - Bank of America Merrill Lynch Cameron Mcknight - Wells Fargo David Farber - Credit Suisse David Katz - Telsey Advisory Group Todd Eilers - Eilers Research Kevin Coyne - Goldman Sachs Dennis Farrell - Wells Fargo David Hargreaves - Sterne, Agee & Leach.
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, Jim. 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 a 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 new organization and leadership structure, impacting all of our segments, immediately after closing. It has been functioning effectively from the start.
Different from March quarter, when both the legacy businesses were still operating independently, the news release we issued today is based on a 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 ticket 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 are 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 7 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 as we recently extended our contract for the Maryland VLT central monitoring system, for an additional 5 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 most 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 that 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 product 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 – from 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 sweetly. 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 certainly 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 leaseback 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 marketing, sorry, 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. .
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 €1.7 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 €2.2 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 U.S. 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. U.S. 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 expected 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 €350 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?.
Thank you. [Operator Instructions] We'll take the first question from Barry Jonas from Bank of America Merrill Lynch..
Hi, guys. 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 then what is – what's driving the growth in CapEx to get to your $450 million of $500 million target?.
Barry, this is Alberto. Regarding guidance, so as we anticipated in the prior 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're basically projecting more or less the same profitability.
We have some good news that will impact in the second half and that are related to synergies.
On the other side, in the second quarter, product sales benefited also from and from a very good impact coming from new openings as well as we had in the performance field business almost 1,000 VLT sold in Canada and right now the visibility on those is not as positive as it has been in the Q2.
So, these are the two major drivers that have basically led us to give a forecast for the next quarters in line with the profitability of the segment.
Regarding the CapEx, we have in this - regarding the CapEx, we have some delays of investments that are related to new bids that we have confirmed that were series of contracts that were won by us towards the end of last year and the beginning of this year where we're going to deploy the capital and it’s generally related to our North American business in the lottery space..
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 I guess what you’re seeing in your discussions with customers what - thoughts about your market share and then 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 sales of SPIELO not being well captured in general installed base, because it was relatively more compared to other competitors, but also because part of the trend in the SPIELO business is in the realty market and sometimes, they are able to sell machine not only during the business spikes of the Canadian replacement cycle, but they are able to sell with certain lengthiness additional machines.
So, that's first one of the area particular in this quarter that is imagined due to the good performance of SPIELO.
On the other side, certain products 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 Sphinx side Regarding in general product sales, that 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 starting to produce good results with the commercial casino, both in Europe and in international region and the Americas.
I want to reiterate this point; I think there’s a product sales performance of Q2 is not related to the fact that could properly launch the Crystal Dual cabinet. We continue the deployment of the S3000 combined with the new content that are – were conceived from the market. And that is what we believe.
I mean, at the end of the day you can grow these business as long as you provide innovation in the marketplace. And we are working on each those going forward in order to produce content that can continue the trend of the cabinet..
Okay. Great. Thank you, guys..
The next question comes from Cameron Mcknight from Wells Fargo..
Thanks very much. Good morning and good afternoon.
On the subject of free cash flow, if we were to include IGT and exclude the one-offs in any acquisitions, pro forma would free cash flow would’ve been about $250 million for the first six months of this year?.
Yes. I think you are directionally correct, because as I said we have a free cash flow of $50 million on an, call that IGT PLC. There are more than $150 million on extraordinary expenses related to the acquisition and then I mentioned 83 as cash flow from operation net of CapEx is around 50. So obviously if we consider that, we go towards 250..
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 adding it. 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 you know within 2015 and 2016 we expected to have on top of the normal CapEx the euro or the Lotto which will reduce this number for those two years..
Got it.
But excluding lumpy items or "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 experienced that. Now projecting is a different story. But it’s pretty in line with the prior trends in years in which GTECH been attached [ph] to swings in CapEx..
Okay. Great. Thank you very much..
The next question comes from David Farber from Credit Suisse..
Hi, guys.
How are you?.
Good..
I've got a couple questions. I wanted to first talk about the pro forma EBITDA you provided, the guidance.
Can you sort of talk to what you are using, what you’re adding back in your pro forma savings for the $1.570 billion and $1.675 billion? I just sort of want to get understanding of what you are doing with the $230 million of cost savings, does any of that included and that have a couple follow-ups? Thanks. .
Okay. So it’s basically the price we have detailed to get from the operating income on as reported basis to the adjusted EBITDA, so as you can imagine we are adding depreciation and amortization.
We are adding the transaction expenses and we are adding back, and there is an item that the other service revenue amortization where are adding back the amortization of the outcome fee of the Scratch & Win in Italy which, we have paid in 2010 and therefore we don’t have any payment anymore and so we have backed that amortization.
There’s a piece of the purchase price accounting that is non-cash, that is added here, the remaining is already included in the organization figure then around restructuring costs. Then there is the cost -- the stock compensation.
This is like the Legacy IGT methodology to add back the stock competition that is not in cash, so the loss of incentive that you pay which stock. And finally any impairments of assets that is non-cash value. These are the main components that 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. .
No. The $230 million are the synergies and this 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 in the SG&A. So right now basically there is very little of it, because we will realize them 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. Look, I think that the process has been delayed by some qualification that - as with Italia Regulator. I think Italia Regulator will provide it very shortly with State Council, at that point in time I think they could issue the term shortly.
I think that their willingness as to cashing that $350 million by the end of the year should expedite the process. So you know that we are under the current contract till next year, June next year. So we will enjoy our fee till that moment and I think the award will be done much earlier than that..
And does this process change your confidence and sort of the bidding process one way or the other?.
No, I mean we're as confident as we always were..
Very good. And just last one from 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..
Look, I mean the Greece business is not very material given the size of our EBITDA and by the way for the 2016 I was really minor.
I believe by the end of the day that they will end up implementing the best program because I think one of revenue opportunities the government has to deal with the difficult situation which is the yea, but in year-to-date we have not sales trading for this year for any delay and we look for the future development and there is for a long-term..
Very good. Thanks for your thoughts..
The next question comes from David Katz from Telsey Advisory Group..
Hi. Good morning, all..
Hi..
Hi..
Good afternoon. So, 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 or rapidly..
David, that’s a good question and the cost - the magnitude 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 a stable cash flow from our stock. And that’s what basically we're doing.
We're continuing to do that, we announced at the time of the deal and therefore we're consistent with what we said at the time. At that time, in particular, we evaluated the life today, what are cash out most that we're seeing and obviously, there is [Indiscernible] which is significant in '15 in '16.
But once we move forward the company would 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 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 machine 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, so why it was down sequentially?.
Okay. I think the answer on Lotto, as I was saying, we expect the process to be concluded by year-end. So, we do not expect major delays. This looks pretty good on a government behavior and let me say supported in this favor by the fact that as you can imagine they are winning casino, the €350 million in the first store. Okay.
Regarding the product, let me tell you, now we look at the entire company, but anyway given that we are in a transition phase, we’re still aware – 24% of the total in North America, so it was quite a significant for the quarter – for this quarter.
When we go to the DoubleDown you mention, we had an issue with the platform migration and, therefore, it was quite significant because for several days it impacted our ability to function 100% of result.
So, the team led by IGT is working on the topic here to pick on the ground, to try to pick the issue for the future, and that’s one of the major drivers.
The other one that I mentioned is the fact that due to the changing calendar, normally the IGT quarter would have ended up on July 4th, we are ending at June 30, so that our four days less and this also had an impact on the overall performance of DoubleDown..
Got it.
Well, 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 say that we are focused on the B2C impairment. We are implemented a program in order to announce our side to use more social features, we are thinking about adding some verticals or let me say some gaming verticals will be in our offering, and we are also thinking to improve our international fashion.
So, if I had to say our first focus is on the B2C impairment and how we can continue our growth going forward..
Thank you very much..
The next question comes from Todd Eilers from Eilers Research..
Hi, guys. Thanks for taking my questions. 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 1000 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 they could you also tell us how many Illinois VGT shipments are game sold were in the current quarter for both IGT and Spilo?.
Around 550..
Perfect. And then last question was with regards to international game sales, looked like a pretty strong number for new openings and expansions 1,213 games. Can you maybe give us a sense for what kind of hit in the quarter that drove that strong number this quarter? Thanks..
It’s pretty widespread across the region Asia-Pacific, Europe and Latin America in particular. And I’m commenting the total number rather than only the new.
We had a very good quarter in Europe and also in Latin America, in 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 and therefore IGT that before was using a distributor and now didn’t anymore, but was able to leverage our sales force there..
Perfect. Thanks guys. .
The next question comes from Kevin Coyne from Goldman Sachs..
Hi. Good morning. Thanks for taking the question. 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 – product that had a different price, the average sales price is really the results of the meet rather than a true indicator of your capability to sell the product and if the product is premium or not.
What I can tell you regarding the new openings, they are related as we’ve had to plane wage [ph] 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 of it is the stability in Italy to introduce the tax on the gaming machines that reduced our overall revenues by that amount.
When you look at the lottery, which means the Lotto plus the Scratch & Win in Italy had a positive performance, the Lotto was up 11%, the Scratch & Win 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 are – should be expected over the remainder of fiscal 2015. I believe in your disclosure you’ve 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 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 the previous question the guidance excludes that, so if you hit that guidance we should expect EBITDA to be $100 million higher?.
Let me rephrase it and we will be very precise. 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 will have 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 talk the second topic you touched. The second topic is related to how this synergy went 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 your one.
So it means that you will not achieve two-thirds or $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 over time in 2016. So, one, the topic we provided was in terms of roundabout not in terms of effective savings generated one year after the merger..
Okay. Thanks for that clarification. .
The next question will come from Dennis Farrell from Wells Fargo..
Great. Thank you. Good afternoon. I was wondering if you could just touch on few things.
One you talk about 2015 is being kind of a trough year for the business and I was wondering as you look out to 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 a stabilization of the business and expect the growth and profitability will be arrived on -- mostly from synergies that is what we believe.
Going forward we were saying we expect the both lotteries as well as our gaming business can regain momentum and we will have by 2017 more balanced 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 that model could translate into other state expansion. .
I think as long as one proven to be effective generally we see other states internationally taking look at it. I am not aware about the [indiscernible] that are 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 state that implemented the program is enjoying it’s possible that the date that we've set. But again I’m not aware of any practical development in this area..
Okay.
In regards to you have a leverage target in your presentation of four times on a medium-term basis? If you look at over the long run, would you like to get to like to leverage profile that you add when you're investment-grade is that longer-term target for you guys or are you comfortable at that four times range?.
No, we are comfortable with the four times range, that’s working and then we will see….
Once we get there, we will decide. It’s tough getting there..
Right. Okay.
And then lastly in terms of the Italian contract, could you just outlay assuming that you successfully kind of move along what is -- what would you kind of estimate as the cash outlays over the next two to three years?.
You mean….
In dollar terms?.
Lotto, if we repay the Lotto issues the cash flow you see with that business.
Is that your question?.
Okay. You broke up there.
I know you say that there would be a $350 million euro payment; I was just wondering in addition to that what else did you have to pay?.
The additional -- what is required is an upfront -- let me put it this way. There will be a tender and the base for the tender will be $700 million and this $700 million will be in three installments. The first $350 million in the 2015 -- in the first year, let's assume it is 2015, it was redevelopment plan.
The second installment will be in the following year in 2016 of $250 million and a remainder, considering that if today’s for the offering the 700, the remainder is in the third year..
Okay.
And the tenure of the contact is still going to be about nine and a half years, is that correct?.
Nine years, yes. I was -- I want to be precise. I'm talking in euros when it comes to the Lotto business, so the 700 million is €700 million and the contract is nine years..
Okay, fantastic. Thank you very much..
Thank you..
The next question comes from [Indiscernible] from Bluebird Asset Management..
Hi, thanks for the call. Couple of questions.
The stock purchase 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 delega fiscale, 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 over 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..
The first question was regarding?.
Was whether the delega fiscale and the Lotto are tied up together?.
I got it, sorry.
No, no, it is not related at all with delega fiscale, I mean, the role that was drafting the frame for the tender was the budget low, so nothing to do with delega fiscale and base on that loan as we approved, because it is budget low last year for the final stage, it remains as it is and the tender as to follow the provisions that are contained in that law.
So nothing to do with the delega fiscale, I mean regarding the other clarifications that state council ask to the regulator of USA, they asking some clarification on the inclinations of the business in terms of our previews and experiences saying that probably they’ve ask to let me say too high, to lower down in the beginning business and in the previous years.
And now to the regulator to answer to this request of state council, so at the end of the day it’s quite – let me say not a fundamental issue and they, of course, I cannot say what the regulator will reply, but as far as we are concerned we think, they decide to reply there’s not enough change in the perspective our position in the tender..
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?.
No. I mean, what I’m saying the state council asks for clarification on the – let me say the conviction of the leaders. What I’m saying that whatever the answer from the regulator will be, it will not affect our position in the tender..
Understood, great. Thank you. Two other questions for 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 sort of out of date? And then I have a last question on the guidance..
No, 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 and above in terms of maintenance CapEx.
So there has been some delays, and therefore, we have given a guidance that it’s slightly higher that’s an average the overall requirement with stage rates for future years..
Okay. So, this is a catch up here, I guess..
Yeah, and also consider that for 2015 we had a new contract, like so probably for example it was not included. So that’s basically overall, I would say no change, okay..
Got it. Okay.
And then somebody had asked this and 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 room for the greatest variance going in the next half?.
The earlier was the very importantly, especially basically the product sales from beginning business where there is always, some effects that they’re 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 as we seen the beginning. We are comfortable in the achievement of the synergies. That we are not impacted the remainder of the year..
Thank you. .
The final question please..
We will take the final question from David Hargreaves from Sterne, Agee & Leach. Please go ahead..
Hi.
Just trying to reconcile sort of the steady-state cash flow with your comments about the dividends and your leverage target for four times, and with the lottery outlays, should we assume that for the next, so may be until 2017 we're not going to see any real movement in the leverage?.
I think you – it's probably safe to assume we are 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 first of all to thank you all for joining our call and for your interest in IGT. We are very encouraged by the first quarter of our joint operations.
While there is still a lot of work ahead, we are pleased by the progress that we have made in just four months, and by the pace and the success of our integration network. We are in a position to transform the gaming industry with our end to end product solutions, exciting content portfolio and our commitment to innovation.
I look forward to seeing many of you in September at G2E. Good luck..
Thank you. That will conclude this conference call. Thank you for your participation ladies and gentlemen. You may now disconnect..