Jim Hurley - Senior Vice President of Investor Relations Marco Sala - Chief Executive Officer Alberto Fornaro - Chief Financial Officer.
Barry Jonas - Bank of America Davis Katz - Telsey Group John DeCree - Union Gaming Steven Kent - Goldman Sachs Cameron Mcknight - Wells Fargo Antonio Casari - Northlight David Farber - Credit Suisse.
Good day, and welcome to the IGT 2015 Fourth Quarter Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jim Hurley, Senior Vice President of Investor Relations. Please go ahead, sir..
Good morning. Thank you for joining us on IGT's fourth quarter and full year 2015 conference call. On today's call Marco Sala, our Chief Executive Officer will provide an overview of the quarter and year and comment on broader strategic initiatives.
Then Alberto Fornaro, our Chief Financial Officer, will provide operational and financial perspective on the period, in addition to providing our outlook for 2016. After the company's prepared remarks, we will open up the call for your questions.
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 our results to differ materially from our current expectations are detailed in our SEC filings. With that, I'll turn the call over to Marco Sala..
Thank you, Jim, and welcome, everyone. We are pleased to report a strong fourth quarter and full year results that met the top end of our expectations.
Adjusted EBITDA of $449 million in the fourth quarter was up 8% in constant currency, the first quarter of year-over-year growth since the acquisition, and a clear demonstration of the success of our integration efforts.
The $1.704 billion in pro forma adjusted EBITDA for the full year was at the high end of our guidance, and we achieved over $110 million in cash synergy savings during the year, putting us ahead of schedule for our total synergy plan, which we had increased.
Strong profitability and disciplined capital management translated into free cash flow before onetime transaction costs of over $540 million in 2015. As a result, we made very good progress in reducing our debt and leverage during the year, and our financial condition is solid.
Our capability to deliver this financial performance is a testimony to the dedication and focus of our teams around the world. There were other important milestones in 2015. Having completed a transformational acquisition, we combined the world's number one companies in lottery and gaming equipment to create the he global leader in gaming.
Coupling that with the strong position we have in social and interactive, our broad-based coverage of gaming continuum gives us a significant competitive advantage. Geographically, nearly half of our revenues come from North America. Italy represents one-third, and the balance comes from the rest of the world.
That gives us a unique perspective on emerging gaming trends and opportunities, wherever they arise. From a customer perspective our balance between B2C and B2B capabilities enable us to better leverage our proximity with players in everything we do.
And in lottery, but also gaming, we have a significant base of recurring revenues accounting for nearly 85% of the total, with the remainder coming from product sales. As you would expect, integration has been our top priority since the closing last April.
On our first day as new Company, we introduced an organizational structure built around our customers. Each of our clients works with a single IGT representative, who then leverages our centralized product development, marketing, field services, and manufacturing capabilities to meet their exact needs.
Being customer first is in our DNA, and we have worked hard to make it a cornerstone of everything we do. Regarding our full year performance, our lottery business continued to grow worldwide, supported by our sustained focus on innovation. In North America, same-store revenues grew 7%, even without meaningful jackpot activity in the year.
International same-store revenues rose 4% on solid growth in EMEA, including record sales in the UK, Poland, and the Czech Republic. In Italy, total lottery wages were stable, as strong growth in Lotto was offset by Scratch & Win. Lotto wages surpassed €7 billion in 2015, the highest level in 10 years.
10eLotto/Numero now represent 60% of Lotto wages, demonstrating that constant product and process innovation is critical to lottery success. We are also pleased with the positive impact that the new product introductions are having on Scratch & Win, where trends progressively improved during the year.
We secured several contract extensions as we bid during the year. In the US, we had wins or extensions in Minnesota, Wisconsin, and Nebraska. We also won the central system in Massachusetts. Internationally, we capitalized on new opportunities in South Africa, New Zealand, and Portugal.
Over the last 2 weeks, we announced a new 10 year agreement with the North Carolina Lottery and a 4 year extension in Michigan. So 2016 is off to a great start. We also made important progress with our North America lottery management agreements in 2015. As a new business model, LMAs have require some fine tuning, to be expected.
Accordingly, we are unwinding our LMA in Illinois and have restructured our contracts with New Jersey and Indiana, where our annual targets are now better aligned with the current market performance expectation.
It should be noted that the strong performance of the New Jersey and the Indiana lotteries is a tribute to the healthy partnership we have built with these jurisdictions. Instant tickets were an important driver of growth around the world.
It is an area of strategic focus, and we believe that there is considerable room for us to grow our market share as an instant ticket solution provider. We have steadily improved the productivity at our printing operation and stepped up the introduction of our leading game content.
The strength of the lottery business is driven by the experience and the expertise of our teams across many disciplines, including sales and marketing, product development, and technology.
During the year, we launched Aurora, our next-generation lottery technology solution, which provides our customers the flexibility to evolve with market and technological advances. The power of our technology and capability of our people was recently showcased in the record setting $1.6 billion Powerball jackpot in the US.
A review of the statistics will give you a better insight into what we accomplished along with our partner lotteries. IGT processed approximately 80% of all Powerball jackpot sales. We managed over 1 billion transactions in the final Sunday and Wednesday sales period, and processed over 500,000 tickets per minute at peak level.
This was a remarkable feat for all involved, both inside the organization and at our partners. Turning to gaming, we developed and initiated a comprehensive turnaround program that is built on a closer to market culture.
We expect to drive revenues growth and market share gains through disciplined product development supported by an R&D road map that integrates a cabinet platform and content strategies, along with improved customer service. We are also leveraging an expanded product offering on a much broader, more global scale.
We are already seeing early signs that our turnaround strategy is paying off. North America installed base is beginning to stabilize. Internationally, when adjusted for larger conversion by a single customer, gaming operations have been relatively stable.
On the product sales front, we are encouraged by the customer acceptance of our new gaming cabinet, the S3000, and the Crystal Dual. The 11,562 machines shipped in the fourth quarter represented the best performance of the year. In North America, we ended 2015 with total replacement units up modestly from 2014 level, suggesting steady customer demand.
New cabinets also drove international machine sales, especially the S3000 in EMEA and Latin America and the Crystal Dual in Australia. In the system segment, we achieved important wins during the year, including Wynn Resorts property in Las Vegas, Macau, and Massachusetts, as well as our first casino system in Russia.
System's is a key area of opportunity for us, one where we can apply our lottery expertise with our casino customers.
Mobile gaming is a critical area for future growth, and our OnPremise mobile solution is currently being rolled out at MGM 11 properties in Nevada This is a good example of our capability, both in lottery and gaming to create interactive betting programs that are fully integrated with the a land based system, and operators are responding favorably to the new offer.
We also expanded our interactive operation. Our remote game service platform gained momentum across the region, and the addition of IGT content, such as Wheel of Fortune and MegaJackpots to the probability mobile network has been well received by players.
Finally, we grew revenues in North America social gaming to over $350 million, more than half coming from mobile, as DoubleDown continued to improve player monetization by leveraging IGT's content leadership. It is an area of our business that we believe is primed for continued growth and has significant upside potential.
Our mission is to be the innovation leader in the global gaming industry. We will achieve that by delivering the content, technology, and expertise that drive customer and player demand and define the future of gaming. Our customer first organizational design and our strong financial condition provide a solid platform for us to pursue this goal.
As we look ahead, we have 5 key areas of focus. The first is to grow our global lottery operation, while controlling cost and capital deployment. We expect that growth to come from consistent product innovation, new business opportunities in North America and international and increased market share in instant ticket.
Second, we intend to strengthen our position in gaming, including both machines and systems, as we leverage our turnaround efforts on a global platform. At the heart of this strategy is disciplined R&D investment in game and cabinet development, which is attuned to local market regulation and preferences.
Third, we are expanding our social interactive gaming capability, leveraging on our proven market leading content and also launching new product. We are working on introducing DoubleDown outside of North America, and we are ready to take advantage of the evolving worldwide regulatory landscape for real money interactive gaming.
Fourth, we will protect our market share in Italy across all products and continue to improve operational efficiency. Yesterday was the deadline to submit bids for the Italian lotto concession. As we have communicated, we have bid with a consortium of partners, all of whom we have successful working relationship with already.
The Italian regulator announced that only one proposal was submitted. We are awaiting further details on the process, but we are excited at the opportunity to maintain this historically important business for us.
Finally, at the corporate level, we are committed to growing the revenue and profit of our core operations through achieving our synergy target and through maximizing cash generation to fund CapEx, reduce debt, and remunerate shareholders. Now I will turn the call over to Alberto..
Thank you, Marco. We ended the year with a very solid quarter. On slide 9, you have our pro forma adjusted figures. We achieved constant currency [Technical Difficulty].
Ladies and gentlemen, we are experiencing a momentary interruption in today's conference. Thank you for your patience, and please continue to hold. Please go ahead..
Okay. I was saying that we've achieved constant currency growth in revenues and profits for the first time since the acquisition, which is an important inflection point for us. Foreign exchange again played a significant impact in the quarter as it has throughout 2015.
On a constant currency basis, revenues rose 5% on strong gaming product sales, continued progress on stabilizing the global installed casino base and sustained lottery growth. Adjusted EBITDA increased 8%, and adjusted operating income was up 17%, benefiting from synergy savings and a one-time item, I will review in a moment.
We achieved EPS of $0.63 on an adjusted basis. Reported numbers are provided in the appendix. I should also mention, we have provided enhanced revenue disclosure in this morning's press release that gives you more product-specific insight across our operating segments.
Before reviewing the quarter in more detail, I'd like to take a step back to offer some perspective on our profit trends throughout 2015. On slide 10, you see that we have consistently achieved over $400 million in adjusted EBITDA each quarter.
The range across the quarter is fairly narrow, $414 million to $449 million, a clear demonstration of the stability and resilience of our business. The important contribution of product sales to overall profitability is clear in Q2 and Q4. The benefit of synergy is also reflected here, especially the fourth quarter.
On slide 11, we have an overview of the operational driver of consolidated revenues and operating income for the quarter. Product sales were up significantly, rising 15% in constant currency on 11,562 gaming machine unit sales. New and expansion units of 2,640 were nearly double the prior year on strong VLC demand in North America.
Global replacement units of 8,922 were up 9% on international demand. Operating income related to product sales was up only slightly due to a favorable mix of lottery products and gaming machines sold in the period. Gaming service revenue was relatively stable despite a lower installed base.
DoubleDown revenues were up on higher monetization of active users. Global lottery service revenue growth reflects continued same-store revenue momentum in North America and international, despite weaker multi-state jackpot trends.
On a pro forma basis, adjusted operating income increased by 17% in constant currency, or $47 million, supported by revenue growth and synergy savings partially offset by revenue mix impact.
Included in the $47 million improvement is the positive impact of the $16 million value-added tax credit, which reflect a favorable ruling of the Christmas ticket [ph] Italy Scratch & Win expenses as deductible cost. Of the total VAT credit, $8 million represents a catch-up from prior years.
The remainder is attributable to 2015, which we expect to be recurring. We also did not incur any lottery management agreement penalties in the fourth quarter compared to the negative impact of such penalties in prior years. Let's move to our operating segment, beginning on slide 12 with North American Gaming & Interactive.
The fourth quarter was the strongest performance of machine unit sales in 2015. We shipped a total of 6,597 North America units supported by significant increase of 1,540 in new and expansion sales, mostly VLT compared to prior quarter - prior year quarter. Product sales growth also benefited from stronger system and software sales.
Gaming service revenue was down, reflecting the decline in installed base versus the prior year. We continue to see signs of stabilization in our installed base, which grew 181 units sequentially, the first increase in 9 quarters. However, we still expect some near term downward pressure on the premium segment, consistent with overall industry trends.
DoubleDown revenues improved 5% from growth in mobile penetration, which reached 53% in the quarter, as well as by higher average revenue per paying user. Since legacy IGT fiscal reporting calendar is different from ours, there were 6 fewer days in the period compared to the fourth quarter of 2014.
Adjusting for that, DoubleDown revenues would be up double-digit year-on-year. Operating income for North America Gaming & Interactive improved on higher DoubleDown profits and synergy savings, partially offset by revenue mix, particularly lower gaming service revenue. Let us turn to the North America lottery division slide 13.
We achieved 6% same-store revenue growth in the quarter, driven by continued strength in instant ticket sales and local draw-based games. The wins in Ontario and Colorado also contributed to growth in the quarter. Operating income for the North America lottery division rose 47% on stronger same-store revenue growth and positive LMA comparison.
Turning to slide 14, you see that strong product sales was the main driver of the 5% constant currency revenue growth of our international segment. Total units shipped jumped 23% from the prior year to nearly 5,000 machines, primarily due to a 35% increase in replacement units. We saw particular strength in Latin America.
Product sales also include 600 Mexico units that were converted from the installed base to product sales in a single transaction. The decline you see in gaming operations reflects the impacts of the Mexican conversion sales of the installed base.
Lottery same-store revenues rose 4% in the quarter on continued strength in instant tickets and draw-based games across most jurisdictions. The termination of the Illinois [ph] lottery contract was partially offset by the new South Africa business.
International operating income was lower, primarily due to foreign exchange impact that had 11 points of the reported decline and to the changing mix of products and services. Our Italy results are on slide 15. We see another substantial impact from currency translation, but the resilience of the underlying operating trend is confirmed.
In the fourth quarter, we experienced relative stability in most of our core activities and saw improvements in machine gaming, designing higher unit’s productivity, and overall machine mix more than offset the decline in units. Lotto wages rose 6%, fueled by strong 10eLotto/Numero performance.
Scratch & Win demonstrated continued improvement in year-to-date trends, supported by new product introduction, as well as good performance of Christmas tickets.
Italy fourth quarter operating profit was up 42% in constant currency, with approximately half of the growth coming from underlying performance and expense discipline, despite the stability law cost. On slide 16, we have pro forma results for the full year.
Revenues were down 4% in constant currency, reflecting weaker gaming product sales and modest decline in service revenue, as growth in lottery and social gaming partially offset lower commercial gaming and sports betting revenues.
Adjusted EBITDA of $1.704 billion was at the high end of our guidance and included approximately $95 million in synergy savings. Keep in mind that the adjusted EBITDA was after nearly $200 million of negative currency, CapEx was $403 million on a reported basis for the year and $429 million on a pro forma basis, right in line with our guidance.
Slide 17 recaps our progress on synergies. Our objectives was to implement the action needed to secure two thirds of the total $230 million in total cost synergies on an annualized run rate by April 2016. We achieved that growth in the fourth quarter, three months ahead of schedule.
We've also identified approximately $40 million in additional synergies, and that increased our cash cost target to $270 million with $230 million flowing through the P&L by 2018.
In 2015 we achieved $110 million in cash synergy savings, roughly half from personnel and half from procurement and other savings, about $95 million of these savings flowed through the P&L during the year. We have made equally good progress on our debt and leverage profile, which you can see on slide 18.
That has been consistently and substantially reduced throughout 2015. A function of core operating performance, proactive cash generation initiatives and synergies. We ended 2015 with net debt of $7.7 billion, which is comfortably below our guidance of below $8 billion.
Leverage was 4.52 at the end of the fourth quarter, down significantly from the third quarter.
Moving on to slide 19, the reduction in net debt leverage was possible because we generated a considerable amount of free cash flow, $333 [ph] million on a reported basis in 2015, which is after approximately $160 million in one-time transaction related expenses.
The reported free cash flow does not include the $57 million generated by legacy IGT in the March quarter which preceded the acquisition. We also generated approximately $100 million in cash from sales of non-strategic assets. On slide 20, we have laid out our actual performance versus our guidance.
The key takeaway here is we exceeded or met the high end of our expectation on all assets. On slide 21, we have our outlook for 2016, which assumes that we secure the Italian Lotto renewal.
We currently expect adjusted EBITDA of $1.74 billion to $1.79 billion for the full year period, using an average euro, dollar exchange rate of 1.10 versus 1.11 last year. However, we do expect a modest FX headwind from other currencies, notably the British pound, Australian dollar, and certain Latin American currencies.
Implicit in our outlook is improved performance for each of our operating segments except Italy. Relatively stable underlying performance in Italy is expected to be impacted by increased taxes on gaming machines and a lower contribution from Lotto due to the new concession terms.
These headwinds will be mitigated by at least $70 million in incremental synergy savings during the year.
CapEx excluding Lotto is expected to be $575 million to $625 million, lottery maintenance and gaming CapEx of approximately $500 million include a significant piece for the Florida renewal that was originally expected in 2015, approximately $100 million is for lottery growth CapEx.
A successful renewal of the Italian Lotto concession would require an additional capital outlay of at least $660 million at current rates. Net debt is expected to be between $7.7 billion and $7.9 billion at the end of 2016. Our lottery gaming operations generate strong cash flow.
Capital expenditure and the Italian Lotto concession fees are an important use of net cash in 2016. As we have demonstrated in 2015, paying down debt is a key priority. Based on the range of our 2016 expectation, we expect our leverage ratio to be 4.3 to 4.54 times EBITDA.
There are a few other items provided here to help you forecast the adjusted figure we report. I will conclude with some perspective of medium term nature. As you know, given the lumpiness of our CapEx, our free cash flow tends to fluctuate widely from year-to-year.
However, if we look at over a longer period, say 5 years, and we spread the Italian lottery from field in the terms of the contract, it is not unreasonable to expect normalized free cash flow of about $500 million per year.
On that basis, which corresponded to our current outlook, we believe we can reach our leverage target of 4.0 times EBITDA or below by 2018. These goals are supported by a disciplined investment policy that should generate mid-teens after tax returns, allowing us to continue to remunerate to shareholders as we invest for growth.
At this point, we'd like to open the call for your questions. Operator, can you assist with that? Operator, we're ready for questions..
Thank you. [Operator Instructions] We will now take our first question from Barry Jonas from Bank of America. Please go ahead..
Hi, guys. Thank you for taking my question. I just had a couple around the Lotto consortium.
First, why - what was your motivation for partnering in a consortium as opposed to going at it alone this time?.
Hi, Barry. Marco, and I reply your question because it is a very spot on question. Look, let me start by saying that Lotto is a very attractive and profitable business, and by the way, it is the historical foundation of Lottomatica.
But as a matter of fact, it's a mature product and Italy is a mature market that still accounts for a large portion of our sales and profit. So at the time of thinking about the bid, we knew that we had to think about the bid strategically, so we decided on a consortium.
By doing so, it gives us greater flexibility to invest in global growth opportunities and to further diversify our portfolio geographically, and we did it with partners we know well. I would remind you that this approach is consistent with our strategy in other bid opportunities.
By the way, Scratch & Win in Italy, we run the business being the leader of a consortium. We participate to the privatization in Turkey in a consortium, so we did also for the North American LMAs. In addition to that, this approach helps us also to keep our commitment to consistent deleveraging.
So at the end of the day, it was not a difficult decision as long as you put together all these pieces..
Got it. And then just following up on the consortium, can you help you us understand IGT's agreement to provide services? Is that effectively that you'll get more than 61.5% of the total economics? And then just in terms of - I believe there's a call option with one of the JV partners.
Should we think of this similar to the unit credit call option for the ticket contract? Is it sort of market based or perhaps a discount?.
Barry, Alberto here. Regarding the technology contract we will be the provider of the technology. Now all the details have not been completely defined obviously and we are waiting to create the joint venture and all the contracts would be executed once. Obviously we have noted that. We will be the winner of the contract.
But, you know, it's what we normally do because we are the one that has the technology and provide all the different services, not only the technological ones. So we'll be a 100% let's say from an operating point of view, we will have 100% leadership regarding the contract. That's for your question regarding technology.
Regarding the option, let me say that its - on one side there are some standard - it's different from the mechanism of UniCredit.
It's going to be some standard put and call related to governance potential event of the joint ventures and also we provided some kind of comfort to have a partner for the operation in the first year - of the first year of the new joint venture. That's basically it. So it's quite different from the UniCredit structure..
Great. Okay. Well, thank you very much..
Thank you very much..
Thank you, Barry..
We will now take our next question from Davis Katz from Telsey Group. Please go ahead..
Hi, good morning, all..
Hi, David..
I wanted to just follow on on that topic for a moment, when - I would say that the one aspect of the quarter with the results being very good and congratulations are in order. When I look at the CapEx outlook it was a bit higher than what I may have been expecting.
Is the $660 million around the Lotto contract, is that just your portion of it that you're responsible for and is that apportioned by the ownership structure?.
David, so let me go orderly, okay. So I can explain the way we have built the guidance. First of all, let's go to the Lotto.
The $660 million are the equivalent of €600 million, which are the first two installments for the upfront fee of the Lotto contract, which means that its only that we are not including any figures yet for the investment in technology because we don't have all the information available at the moment, as well as we don't know yet when the transition period to start the contract will be.
And, therefore, we have kept for the moment that out of the forecast because we are not able to quantify.
When we go instead to the other part of the $600 million you are mentioning, let me say first of all that, $100 million are related to some growth initiatives and therefore this will generate additional revenue and then we have $500 million for the lottery maintenance CapEx and whatever is needed in the gaming business.
If you compare to this year in 2015, the amount is higher and it's roughly $100 million for maintenance. So this is exactly related to the Florida contract. If you remember, in 2014 initially our guidance regarding for CapEx, $450 million to $500 million.
Then we brought it down to $400 million to $450 million because there was delay in the Florida contract and now the delay of the contract is all in 2016. So it's basically these quite larger contract and the timing of it that is impacting the 2016 CapEx needs..
Okay.
So there's really more information to come as it relates to the Italian Lotto, right, in terms - we can't know timing yet and we should expect that the magnitude actually will grow; correct?.
The only missing information in regards the CapEx for the infrastructure. You know, that just give you the sense, the bid required minimum $90 million CapEx - €90 million of CapEx. For the rest, for the starting point of the concession it will depend from the process that the regulator will want to put in place.
Because for sure we will see the process, maybe the process considering there is one - only one bidder might be accelerated, but it's something that is harder to predict at this point in time.
Anyway, it will take the transition also for us being incumbent, it will take some months because there are some administrative methods that have to be redefined with the start of the new concessions..
Perfect. And if I can ask just one more quick one, which on specifically the North American gaming operations business.
If you could just provide a little bit of color as to how you expect that to evolve and how you thought about that in your guidance this year? It's clearly an important part of the IGT business that you've acquired and what you can reasonably expect in terms of the installed base and its yield?.
Yes. And that is the earlier spot-on questions. The point is, first of all, let me comment on the numbers of this year that at least demonstrated our ability to reduce the - let me say the gap of the previous quarters.
Because at the end of the day, if you look at the full quarter against the first quarter of this year the reduction is 2%, that is much lower than the reduction the company experienced in the last in '14, and in the previous quarters.
That I think is already a good sign of our, let me say focus, trying to stabilize the installed base of gaming operation in North America. While we expect the overall market remaining quite stable over the next year, we will focus our attention in defending our position.
It's clear that we rely very much on the introduction of new games that is going to happen, such as the Wheel of Fortune 3D and other initiatives we have in mind. But at this point it's clear that we will continue in our aim, in our attempt to stabilize the installed base in North America..
Okay. Thank you..
Thank you, Davis..
[Operator Instructions] We will now take our next question from John DeCree from Union Gaming. Please go ahead..
Good morning, everyone. Thank you for taking my question. And congratulations on the long and fruitful year. Just wanted to follow up on kind of the gaming operations in North America, as well as the unit shipments. Looked like unit shipment as you indicated were relatively flat and installed base stabilizing.
Just wanted to know if you could provide a little bit of color on, you obviously have some new products in the market place that have appeared to be very well received.
How much of your kind of success here in the fourth quarter is kind of driven by those products and how much running room do we have ahead for the Crystal Core and the S3000 going into 2016?.
Look, let me start by commenting one number. In the last quarter S3000 and Crystal Dual represented 40% of our unit sales, compared to the less than 30% in the full year period. I think it gives you the sense that the contribution of those products has not been minor. So we rely on - as we have anticipated.
I mean, look, the turnaround is a turnaround that takes time. We have anticipated that is a matter of 18, 24 months since when we presented the transaction. We are working hard on all the components of the mix, starting from content, cabinets and we are releasing new titles and new products quarter-by-quarter.
And we will rely on that to achieve the objective that you have mentioned..
Great. Thank you. Just switch gears quickly to the social gaming business in North America.
Obviously DoubleDown has been a great area of growth, each quarter it seems like the average daily yield is increasing and the mobile mix is probably a big part of that? Should there be any reason we shouldn't expect the mobile penetration to continue to grow and yield will increase with it or are we kind of reaching a plateau on the mobile penetration at this point?.
No I think there is still some room to increase penetration, but having said that, we have a solid program on DoubleDown over the next month because we have the objective to enlarge the content, we are delivering on DoubleDown.
We have the objective to launch new verticals in DoubleDown and we have also the objective to let me say to strengthen the position of DoubleDown outside US.
Because as we were mentioning in some previous occasions, DoubleDown is very concentrated in US, while we intend to expand this brand outside US more effectively In addition to that, we can rely also to the recently launched advertising program through DoubleDown that over the next quarter can provide as some additional revenues..
Great. Thank you all..
[Operator Instructions] We will now take our next question from Steven Kent from Goldman Sachs. Please go ahead..
Hi. Good morning..
Hi, Steve..
We have questions still on clarifying the guidance, given the consortium bid.
Are you counting in EBITDA contribution, an equivalent of the 61.5% share of the proposed JV, is that how we should be thinking about it, the $660 million of CapEx, is that prorated? And then, I guess more fundamentally just on the lottery, the Italian p lottery, I mean, I get it that it lowers your risk profile, but it also means less EBITDA directly to you.
So does that mean you feel better about the slot business, so that's sort of my first question? The second question is on the North American gaming unit sales.
Can you just give a sense of breakdown of new and replacement units there, what kind of ASPs did you achieve on them and were any of the sales pulled forward from 2016 or in other words, are you seeing the same momentum in Q1 that you saw in Q4? Thank you..
Steve, let me clarify. I think it's very important, in fact your question, because it allows me to clarify the accounting and provide more insight into the guidance. As the majority shareholder, the new company, the consortium will be fully consolidated in our results. It's exactly alike the Scratch & Win.
This means that we will present 100% of EBITDA and also we will show the 100% of the CapEx in our cash flow. However, we will show in our P&L the interest of the minority for what goes to the minority and in our cash flow what is paid to minority as dividends and also return to capital if any.
And therefore, based on this accounting treatment, what we are anticipating in the CapEx was the $660 million of the upfront fee payable in 2016 for the 100% of the investment.
Is it clear?.
Yes, it's clear. Although, its still, I guess I'm still wondering on that part of the question.
What sort of is the cash EBITDA that will ultimately come out of this and does it indicate anything about your you view on the other parts of the business, meaning do you feel more confident on the other sides of the business and are willing to reduce some of the cash that you're actually going to get from this business?.
No, I think the answer here is what I tried to elaborate at the beginning of our conversation by saying was most strategic decision to reduce the exposure to Italian market, then to reduce the exposure to the lottery business. We have still a very strong position.
We started doing that by the way with the Scratch & Win because when we renewed the Scratch & Win some years ago we maintained the consortium structure and we could have changed it. But we deliberately decide that with this kind of position.
At the time, Lotto, I mean, is the first time that is going to be renewed and we took the same view we were having for Scratch & Win. The point is, we want to have the flexibility to invest more in growth opportunities when growth opportunities will materialize over the future, and that is the reason why we took this decision..
Okay. Thank you. And then if you could - my question on - my multi-part question on North American sales, if you could….
I hope, I remember all of them, but in the event you can tell me..
Sure..
What I'm missing..
Yes..
The first was regarding the numbers regarding the new and the expansion quarter four against quarter four last year, was that the question?.
Yes, the breakdown of new and replacement units?.
Yes, the new - the total is 6,597, the new is 2,191 and the replacement is 4,406. That is the breakdown. And - but if I can make another comment regarding the product sales, I would not comment very much the product sales quarter-by-quarter because now we have a good quarter.
Last quarter was a weaker quarter, and therefore, if I look at overall and I look at one year of product sales, what are the takeaways that I can comment with you. As far as the replacement, we are in line with what we were doing last year. If I want to make a comment even slightly better.
Having said that, on the new and expansion it's clear that we have less opportunity this year and therefore, overall in the new and expansion we are having less units.
But having said that, our internal assessment is that with the new openings we are keeping our market share, and therefore from the competitive standpoint I consider these results as good results.
And on this basis we intend to continue the deal over time having the ambition as long as we deliver better content and cabinets even to increase our position over time.
But for the time being, in a transitional year with everything we did, the fact that in a soft - let's assume a flat market we keep our position is already something that I believe is positive for the stabilization of the North American business in 2015..
Okay. Thank you..
We will now take our next question from Cameron Mcknight from Wells Fargo. Please go ahead..
Good morning. Thanks very much..
Hi, Cameron..
Morning. Couple of questions. First of all, the net debt and EBITDA guidance you gave, excluding the Italy payment implies free cash flow of around about $500 million for 2016.
Is that about right?.
Cameron, the net debt includes - regarding the Lotto, let me be specific what is in it. In the net debt we have included $660 million of the upfront fee, 100% of it, the first two installments of the upfront fee. And then what we have also included is the fact that we will receive a portion of it from the other - from the partner, okay.
So in the net debt there is the net of the two. We have not quantified in the CapEx the investment in technology because we are not sure yet when and how much will be. But we have included it in the net debt with an assumption. So therefore, you should take for 2016 the guidance for the net debt including all the flows related to the Lotto..
Got it. Okay.
So the difference is the partner contribution and the additional investment in infrastructure in Italy?.
Correct..
Okay. Great. Thanks very much. Then just a second question.
Just on the topic of FX, have you guys quantified what a 1% move or some sort of percentage move in the US dollar versus your basket of currencies would represent in EBITDA going forward, either up or down?.
Well, it's difficult to make an assessment on the different currencies because there is some exposure related to currency Latin America. But what we normally do is to assess the exposure compared to the euro rates. Let me say that $0.01 of change between the dollar euro rates in terms of EBITDA impact is around $6.5 million..
Okay. Got it. Thank you very much..
Thank you..
We will now take our next question from Antonio Casari from Northlight. Please go ahead..
Hi. Good morning.
First question is regarding CapEx and what are the assumptions regarding the renewal of the betting licenses in Italy, what's the amount that you are assuming is the tender assumed to be to happen in 2016 and what are the key criteria that you used?.
The CapEx for the betting is included, I won't elaborate too much on it because you know, obviously provides competitive information regarding the size in terms of shops and corner we are going to beat, but it's included in our guidance..
Okay.
Is it possible to have an order of magnitude of the amount?.
No, unfortunately not, Antonio, because it's clear that it gives too much information to the market and to competitors in this case, not the financial market, regarding our strategy on the spot betting distribution, in the incoming bid.
But I can tell you that we intend to beat and we intend to have all in that market and for we will have the right size of investment to fulfill our ambitions..
Perfect.
Second question is regarding the phasing of your guidance over the year and in particular if it's possible to have better visibility on Q1 considering that we are mid-March in terms of what are your expectations for Q1 versus Q1 last year and overall how the year would unfold quarter-on-quarter if you see any material change?.
Regarding the guidance, we think it's appropriate for the time being to maintain the guidance we have provided in 2015 in terms of EBITDA, CapEx and so on. We are still at the level of leverage where these measures are important and then - and that we are facing 2016 where we have large capital expenditure due to the Lotto.
So we have kept the kind of information to the market. At a certain point if there is a need we will evaluate a change. But we stick to it for the moment. Regarding the first quarter, let me provide a little bit of color rather than guidance.
The color is that as you can imagine, the North American lottery performed well due to the Powerball, but also in general, not only for the spike in volumes of the Powerball in the first couple of months, the same we can say regarding the lottery.
In Italy, is regarding the gaming in general in terms of product sales, we expect to be slightly - to be lower than what we have experienced in the fourth quarter even though as Marco was saying the outlook is overall for a certain stability for the entire year..
Perfect. Thank you very much..
Thank you..
We will now take our next question from David Hargreaves [ph] from Stifel financial. Please go ahead..
Hi. I was wondering what color if any you can give us on average selling price by segment..
Again, what we are experiencing is a negative impact coming from the mix. We have already mentioned the fact that we have quite a large sale in the VLT in this quarter. However, when we eliminate the mix what we are seeing is general. And this is true for both international and the North America market.
We see a general improvement in pricing and this is due to the fact that as Marco was mentioning before, the product sales of the new product that carry a higher price tag are higher and so they're driving ASP higher when eliminate the mix in North America, and when eliminate the currency in international..
Great. And when I look at your pro forma EBITDA for the year of $1,704 billion and compare that to the $1,611 billion, if I recall IGT had - what was it $75 million in the first quarter that wasn't included.
I'm just wondering what the other difference is?.
Well, in terms of change between the pro forma, it's mostly due to the first quarter of IGT. It is the main driver..
Fair enough. Thank you..
Thank you..
We will now take our next question from David Farber from Credit Suisse. Please go ahead..
Good morning, guys.
How are you?.
I'm good.
What about you, David?.
Good. Number of my questions have already been asked. But I wanted to follow up on just a couple items. First, on the lottery, the deadline I'm curious if it officially passed are there any extensions available.
And then maybe just simply put, can you tell us what you think your cash outlay will be given the JV in the context versus the 660 you’ve talked about. And then if you're successful in winning can you remind us if you intend to pay for it using the revolver or there any other ways you consider paying for it? And then I had a follow-up? Thanks..
Okay. David, let me understand the second and the third question, and the third question regarding the Lotto. Actually, let me answer the third which is easier. We are going to use our credit lines in order to pay for the Lotto. We have ample availability of cash and credit lines, so that's basically our intention.
Going to the second question, did I understand, what you were asking about what is our take in terms of cash out for the CapEx of the Lotto?.
Yes, I'm just curious what you think your cash outlay will be on the JV versus the 660 you're talking about. And then, I also want to know if there are any deadlines that can be extended, given that you're the only bidder currently? And then I had a different question. That's it..
Okay. Regarding the second question, the participation in the upfront fee will be proportional to the share in the joint venture. So we will provide 61.5% of the total..
The first question is, if the regulator could extend the period for submitting offerings?.
Yes, I wanted to understand if there are any extensions available.
Are you officially the only bidder and will become the only bidder?.
I think given the press release that the regulator sent out yesterday, we are assuming that we aren't the only bidder and that the process will continue with one bidder..
Very good. Okay. And then my last question was just on the presentation. You described, I don't know, $400 odd million related to a purchase accounting. And I just wanted to understand what that was, maybe you can talk to that and that's it from me. All my other questions have been asked already..
David, we have disclosed because in general we receive this question because this is basically a non-cash item.
So due to the acquisition, particularly to the acquisition of IGT, we had some intangibles that are amortized during the year and therefore, we are providing what is basically the impact on our P&L coming from the amortization of these intangibles because they are not a cash item..
That's what I thought. Very good. That's it from me. Thanks..
Thank you..
We will now take our next question from Adam Mael from Private Property Council [ph] Please go ahead..
Good morning. You gave some guidance on cash taxes for 2016 which is helpful.
Can you talk about cash taxes going forward and the cash tax rate? It may tie into your last comment on the amortization?.
Yes, let me say regarding the cash taxes, we are at the moment - we forecast at a certain point an increase in the payment, this is due, okay. Obviously we optimistic, we think our profits go up and therefore we pay a little bit more taxes. But also to the fact that at a certain point we have some NOL that we will - that will be completely utilized.
So when it's going to be appropriate, we will modify the forecast for the cash taxes, but for the moment they are pretty consistent with 2015. Regarding the tax rate, I wouldn't go too much into the future because there is a lot of moving parts there. But I can give you an idea what we are thinking more or less for the year.
It could be something in the mid-40s, low to mid-40s what we had in mind for 2016..
Okay. Thanks. And then the free cash flow of $500 million a year for a few years, I'm assuming first of all that that's all net of minority interest and so forth of course.
And then secondly, could you talk bit about what you think you will do with that free cash once you hit your leverage targets?.
Okay. First of all, this does not include the minority, this assessment does not include the minority, which until now for the Scratch & Win were relatively small.
The second clarification is related to the - sorry, you mentioned regarding the cash flow, what was the second question?.
The $500 million of free cash flow, that's ex the minority interest of the Italian Lotto go forward, no?.
That one is not considered, it's not included. So it is before the minority.
And the second one was?.
The use of free cash flow?.
Okay. Regarding the use of the….
Once you hit your leverage target?.
I think that when we get at below 4.0, we will have to make an evaluation because first of all it will be extremely important for us to understand what is the pipeline of opportunity in the lottery market and in terms of growth opportunities, and then after that, depending on what are the market conditions, we will consider after obviously having paid for the maintenance CapEx for our contract portfolio, what is the optimal location of the cash flow if we want to continue to reduce the debt or if we want to remunerate more the shareholders.
But this will happen after we reach 4.0..
Thank you..
As there are no further questions in the queue, that will conclude today's question-and-answer session. I would you now like to turn it back to Marco Sala, CEO, for any additional or closing remarks..
Thank you for joining us on today's call. 2015 was a transformational year for IGT. We have quickly established a strong global platform to build from and we are excited about the future. We appreciate your interest in the company and I look forward to seeing many of you over the next few weeks..
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect..