International Game Technology's (IGT) CEO Marco Sala on Q2 2016 Results - Earnings Call Transcript

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International Game Technology (NYSE:IGT) Q2 2016 Earnings Conference Call July 28, 2016 8:00 AM ET


James Hurley - IR

Marco Sala - CEO

Alberto Fornaro - CFO


Barry Jonas - Bank of America

Chad Beynon - Macquarie Research Equities

David Katz - Telsey Group

Cameron McKnight - Wells Fargo

John DeCree - Union Gaming

Domenico Ghilotti - Equita

David Farber - Credit Suisse

Brian O'Brien - Credit Suisse


Good day and welcome to the IGT 2016 Second Quarter Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. James Hurley. Please go ahead, sir.

James Hurley

Good morning. Thank you for joining us on IGT’s second quarter conference call. Marco Sala, Chief Executive Officer, will provide an overview of the quarter and comment on our broader strategic initiatives. Then Alberto Fornaro, our Chief Financial Officer, will provide operational and financial perspective on the period. After our prepared remarks, we will open the call up for your questions.

During today’s call, we will 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.

And now I’ll turn the call over to Marco Sala, CEO of IGT.

Marco Sala

Thank you Jim and welcome everyone. We are pleased to be reporting a solid second quarter results. With continued expansion in our global lottery operations and the resilient global gaming business, constant currency revenue rose 1.5%. Total service revenues which account for about 85% of the consolidated total and are mostly supported by long term contracts were up 6% as cost on currency. That includes an 8% growth in global lottery and a 5% in gaming service revenues.

Our North American lottery and Italy segments were the primary drivers of revenue growth. The growth in service revenues was largely offset by lower product sales, which as we have noted previously tend to vary from quarter to quarter.

Total product sales decline 19% at cost on currency, mostly due to an exceptionally high volume in the prior years. While the product sales typically account only for a relatively small percentage of our total annual revenues, they do impact our quarterly performance. This year we had spent our product sales to be weighted at the second half of the year. This is mainly due to our own product revenue scale.

Our second quarter profitability was good, adjusted EBITDA of 443 million was 4% higher than the prior year, driven by significant profit expansion in our Italy and North American lottery segment. The growth in EBITDA reflects the steady, high margin characteristics of our recurring service revenues.

Lottery performance was of particular note during the period. Global lottery same-store revenues excluding EBITDA increased 6%, while total Italian lottery wages were up 8%. Our North American lottery operation achieved 7% same-store revenue growth, supported by strong multistate [jackpot] activity for both the Powerball and Mega Millions, and more normalized trends for draw based games in (inaudible).

Internationally, lottery same-store revenues rose 2% in the period. In Italy lottery wages grew an impressive 19% on top of 11% (inaudible) in the prior year. Late numbers were an important contributor to wager growth, as was the continued momentum of 10eLotto and Numero Oro. Scratch and win wagers were in line with the prior year, confirming the stabilization of the business as we have optimized the product portfolio, and streamlined the new product introduction.

We are very pleased with the strength of our lottery business, but it’s important to note that multi-state jackpot and the late numbers are more volatile than broad based games and instant ticket. As a result, we do not expect these games to contribute as much to sales and profit in the second half of the year, as they did in the first half.

Now let’s focus on (inaudible) where constant currency revenues were in line with the prior year. Service revenues were up 5% in the period, but lower product sales offset that growth. We shipped approximately 8150 gaming machines in the quarter. Lower replacement unit shipments were significantly better than the first quarter as anticipated, but below last year’s exceptionally high (inaudible).

New expansion units were also higher than the first quarter, but lower than the previous year, when there were more new opening activity in international market. It is important to point out that we continue to have good demand for our newer cabinets around the world, having experienced the strongest quarterly sales for CrystalDual.

The games that we will begin selling later this year will have gone through the rigorous field testing we instituted several months ago. We support our conviction that product sales will pick up in the second half. DoubleDown revenues were modestly below the prior year and below expectations. DoubleDown achieved steady growth over the last several years, almost entirely fueled by [sporting] successful land based content to the social (inaudible).

We have intensified our focus on reinvigorating its growth trajectory and add several new initiatives underway. Earlier this month, we introduced a loyalty program to increase monetization of current players and engage lots of players. We will continue to leverage a prudent land based content online.

Advertising is an additional element that is recently launched and we expect that it will become a meaningful contributor. We are confident in the longer term prospect of DoubleDown.

Last quarter, I highlighted our arrangement with the Paradise Entertainment that will create opportunity for us to bring innovation to electronic table games around the world. Earlier this month, we announced the largest alive electronic table games installation in the United States at The Sands, Bethlehem in Pennsylvania. The casino has 150 ETG terminals supported by four live dealing tables of Roulette and Baccarat games. This is an important first step in developing these emerging extensions to our product portfolio.

(inaudible) more significantly we have began rolling out the highly anticipated Wheel of Fortune 3D machines. This is the first game we have released that marries the proven brand power of Wheel of Fortune with a compelling innovation of 3D technology. While there were only few dozen units on the floor at the end of June, early performance indicators are encouraging.

We first introduced 3D cabinets with one cycle in to 2013. There are currently seven games on more than 2000 units in North America. We expect the installed base of 3D machines to accelerate, due to the growing customer demand for the expanding library of 3D cycles. All in all, we are pleased with the quarterly performance and we are at [dual] figure.

Now I’ll turn the call over to Alberto.

Alberto Fornaro

Thank you Marco. We achieve a solid financial results in the second quarter demonstrated here on slide 8. Note that with the anniversary of the acquisitions, we no longer need pro forma adjustment. Revenue rose 1.5% on constant currency on strong service revenue growth. Adjusted EBITDA increased 4% on the higher revenues and synergy savings. We achieved adjusted EPS of $0.43 in the second quarter up from $0.38 in the prior year and we have earned a $1 per share year-to-date.

On slide 9, we have another view of the operational drivers of reported revenues and adjusted operating income for the quarter. Lottery service revenue was up sharply supported by same store revenue growth in Italy, North America and Latin America. Gaming service revenue was also up as a higher contribution from software was partially offset by a lower global installed base.

Product sales primarily reflect a more challenging comparison to last years’ quarter, when we recorded a significant lottery product sale in South Africa and at the larger Canada VLT replacement stage. Lower international sales in new and expansion units also contributed to the decline in product sales.

On an adjusted basis, operating income increased 2% supported by revenue growth and synergy savings, higher operating expenses; primarily reflect cost associated with the timing of the merger.

Let’s turn to North American gaming and interactive on slide 10. Gaming service revenue improved 4% to an increase in the software contribution that was partially offset by the lower installed base. For the quarter, we shipped 1277 new and expansion units and 3886 replacement units for a total 5163 units in North America, both of which were up sequentially. Last year we had sizeable VLT sales which negatively impacted the comparison of replacement units.

The S3000 Scepter and the Crystal Dual maintain momentum and were the top selling cabinets in the quarter. System sales were strong reflecting demand for IGT system add-on application in particular service [wing]. DoubleDown revenue was slightly below the prior year, as a decline in active users was partially offset by strong monetization.

Operating income reflects lower revenue from terminal sales in addition to incremental cost to support the gaming turnaround. Those costs include investment in R&D in collateral such as signage for the installed and in targeted pricing actions.

Turning to North American Lottery on slide 11, same store revenues were 7% on continued strength in jackpot gains as well as solid results from instant and draw games. Many of the largest lottery including California and New Jersey, North Carolina and Texas grew same store revenue faster than the market average.

Consumer preference for high price point tickets was an important driver of instant growth and we are successful in launching of a new Wheel of Fortune ticket in Florida. Operating income rose 31% from the prior year, demonstrating the strong operating leverage profile of this business. Product mix and the favorable Lottery Management Agreement comparison with last year also contributed to the increase.

Moving to the International (inaudible), the constant currency lottery service revenue increased 10%. We achieved the same store revenue growth for 2% in lottery, which was supported by strengths in Latin America and Eastern Europe that was partially offset by weaker UK performance. Total lottery revenues also benefited from a higher mix related effective rate in the period.

Gaming service revenue was unchanged at constant currency as a stronger performance in EMEA partially offset lower service revenue in Latin America due to conversion sales that took place in late 2015. Sequentially, the installed base remained fairly stable at 9478 units. Total product sales were down in the second quarter, lottery product sales had a challenging comparison with the central system, a 9000 unit terminal sales in South Africa in the second quarter of 2015.

Total gaming units shipped were 2989 in the second quarter, replacement units were up 4% from the prior year, while new and expansion units declined significantly on lower overall market activity. Operating income declined year-over-year, approximately two-third of the decline was due to lower product sales and one-third due to unfavorable foreign exchange.

Our Italy results are on slide 13, during the quarter we experienced a strong lottery growth and resilient in gaming. Lotto wager rose 19% which included significant late number activity. Excluding the late numbers, Lotto wager posted a 7% growth compared to the prior year, scratch and win wagers were flat for the quarter.

Higher wagers per machine and lower return to players drove machine gaming growth despite a decline in AWP units installed and also the stability law impact. Sport betting wager were flat for the second quarter, while revenues decline on a higher payout. Italy second quarter operating profit was up 14%, driven by the strong performance in Lotto, a shift in timing of certain marketing expenses and the net 7 million one-off benefits versus the prior year from a multi-year value added tax, VAT credit.

Following the four quarter VAT announcement, we have in fact completed the administrative work for the retroactive claims related to the treatment of certain scratch and win expenses. The additional positive impact is reflected in the second quarter and we do not expect any incremental VAT benefit going forward. Operating profit growth was partially offset by stability law impact.

Lets’ turn to our debt and leverage profile which you can see on slide 14. Net debt for the second quarter was 7.8 billion. Excluding the impact of foreign exchange, net debt for essentially in line with the four quarter level despite the $240 million Italy Lotto upfront payment. As reported on the consolidated financial statement, the full 390 million upfront payments is accounted for in our cash flow used in investing activities, while the capital contribution from minority partners of 150 million is found in cash flow from financing activity.

The second full upfront concession payment for 250 million euro is scheduled for the fourth quarter. Leverage was 4.43 times last 12 months adjusted EBITDA improving some 4.52 times six months earlier, as improved profitability in discipline operational management more than compensated for the large Lotto concession paid.

I would also like to mention that we successfully completed an amendment for approximately (inaudible) billion in multi-currency revolving credit facility comprised of 1.6 billion and 1 billion euro line of credit. In doing so, we have extended the maturity from November 2019 to July 2021. In addition to the maximum leverage (inaudible) threshold was increased by 25 basis points effective from third quarter 2016 through the third quarter of 2019.

We decided to proactively extend the maturity now because of advantageous market condition and to reduce nearly $5 billion of bond, term loan and credit line maturity in 2019. While we remain committed to reducing our net debt and leverage, our action provide the company significant financial flexibility over the next several [weeks].

The higher profit and operational discipline are more clearly evidenced on slide 15. We generated 424 million in cash from operation in the first half of 2016 including [318] million in the second quarter. CapEx was approximately 220 million in the first half, which mainly correspond to maintenance in investment and that reflects a fairly normalized run rate.

The free cash flow you see here is before minority partner’s capital contribution for the Lotto including debt contribution generated 64 million free cash flow in the first half even after the substantial Lotto gain.

Let me provide some perspective on our outlook for 2016, which we have summarized on slide 16. We are very comfortable with the range of adjusted EBITDA guidance of 174 to $1.79 billion. We delivered strong profitability during the first half of the year, supported by significant lottery growth and the contribution from synergy.

As you build your forecast for the remainder of 2016, there are important considerations to keep in mind. First, that our products in Italy are traditionally [higher] in the first half of the year. This is primarily due to the rate we have on Lotto which declined today as wages grow. This will be different in the future because the fee will be at a fixed level for the entire year. Second, as I mentioned earlier, Italy profits benefited from marketing expenses that shifted out of the second quarter and in to the balance of the year, as well as incremental VAT benefits. Third, we are planning for the moderation in Lotto wager growth to more normalized levels as the contribution from late numbers has been above average.

Along those lines, the record Powerball jackpot in the US was another significant contributor to profits in the first half of the year that is not expected to recur in the second half. Just as lottery was an outside contributor to profits in the year-to-date period, gaming is expected to be the more important driver in the second half of the year. This is primarily due to product sales expectation, a ramp up in synergy will also contribute to the [back out].

We are updating our output for capital expenditure to $[550] million to $580 million, which includes technology related CapEx for the new Lotto concession. This is down from our prior expectation of approximately $575 million to $625 million, which did not include approximately $35 million in Lotto related infrastructure (inaudible). The reduction is mostly related to the shift in timing of anticipated Florida lottery capital requirement and Italy’s sport betting renewal.

At this point, we would like to open the call for your question. Operator, can you please proceed with instructions.

Question-and-Answer Session


[Operator Instructions] We will now take our first question from Barry Jonas from Bank of America. Your line is now open.

Barry Jonas

Broadly speaking, how far along do you think you are in the turnaround of the North American gaming business? And then just for the quarter, a little bit ahead of what we were thinking on a normalized basis any shipments you might call out, whether it's VLTs in Canada, Oregon, or anything else.

Marco Sala

Hi Barry, it’s Marco. I think that went it comes to being so big. I think that in the second quarter we should see some improvement in the sense that we believe that the decline in our installed base will begin to moderate and progressively stabilize later on. And we rely on a very exciting new games, such Wheel of Fortune 3D, Aladdin, TMZ, Plant v/s Zombie also in 3D that we have just introduced or will be launching.

And operators are enthusiastic about the potential of these games and orders reflect that view. So that is mainly the reason why we expect that we will see compared to the first half of the year, some progress there. In the sense, I repeated that we expect that we will moderate the decline. While in internationally, we expected greater stability and even improvement coming from Latin American and Europe and Australia. So on this part of the business I think we are in the right direction.

The same applies to the product sales, because we believe that in the second part of the year, we will do better. We have already anticipated that in the first quarter commentary when we were saying that we will progressively improve and therefore we expect that in the second part of the year we will be better overall than in the first part of the year.

Again, we are talking about our new era cabinet such as S3000, Crystal Dual that are performing well. We are introducing a new (inaudible) cabinet internationally, and along with the new cabinet, we have also developed new contents in North America and internationally to support them. So that is the reason why we expect that we will move forward improving the outlook of the gaming business in the second quarter.

Alberto Fornaro

Barry, Alberto, regarding your question on VLT, last year we had in total almost 2,000 units, 1965 in various jurisdiction in Canada and in the US. This year we have the 916 in total so almost entirely the reduction in the volume is coming from the VLT. 950 is the reduction in Canada, we didn’t sell anything this quarter, the remaining are in the other jurisdiction. Of the 900 we sold in the second quarter of ‘16, 400 are in Illinois and the remaining is Oregon and Georgia.

Barry Jonas

Great. And just a question on synergies, can you say maybe where you are at now on an annualized run rate basis, and maybe what are some examples of incremental areas for savings at this point.

Alberto Fornaro

Barry, we are interacting actually running better than the 70 million that we said slightly better, so we have the absolute confidence regarding achieving what we have told the streets. Regarding the area, you will not see a lot of impact in the future in the operating expenses. That will be mostly at the gross profit level because the remaining synergy are mostly related to activity like the procurement area and the [fee] service.


We will now take our next question from Chad Beynon from Macquarie.

Chad Beynon

This quarter we've heard a lot from just broad consumer companies that results were slightly weaker than expected, because of all the acts of terror and negative events that we've seen around the world, including the Brexit situation as well. But in your results it didn't look like you were really affected by any of this.

Could you kind of talk broadly if you think that these situations may have reduced your growth in the quarter? And then more importantly if you think there will be any impact in the back half of the year from Brexit or anything else that you're seeing from your customers?

Marco Sala

Chad I would say that the overall macroeconomic environment for the moment we cannot say has had an impact on our business. In general regarding Brexit we have done a preliminary evaluation and we don’t see a part of our potential macroeconomic impact in general due to the uncertainty of the process, we first of all don’t see any immediate impact.

And second, given the fact that we have on one side relatively low percentage of our revenues coming from the UK at the same time we have customers in the UK that is larger than the simple lottery activity that we do, because part of our (inaudible) interactive game that we don’t see any major issue coming also from foreign exchange consideration.

More long term it depends what is the outcome of this process and the agreement that will be taken politically, worst case scenario at the moment, given the analogy we have done, some of the benefits that we were expecting in terms of financial flexibility, with all the impacts between different countries, with no impacts on dividends, and may be depending on what is the solution could be impacting and therefore these will be lower opportunities from that point of view than a real impact compared to the current situation.

Alberto Fornaro

Anyway to elaborate a little bit more on these, we do not see from the consumer standpoint in our main geographies it’s a subtle change in behavior. On the other hand these business has proven being rather resilient even during very important economic downturn. And for the time being at least we are not registering the change of attitude.

Chad Beynon

And then Marco on your prepared remarks you talked about the Wheel of Fortune 3D being out in the field. I think you mentioned a few dozen are out there. Can you talk about your strategy in the third quarter in terms of how you're planning to roll this out on a piecemeal basis or allowing every operator who is asking for it to get it right away, and then if you could give us any color on maybe a potential backlog pipeline if you're willing to?

Marco Sala

What I can tell you is we have already quite a substantial number of order, we are progressively deploying and from the promotional standpoint we will continue along these lines. And what I think is the most important comment I can say in this moment is, the machine is doing well in the floors that have already deployed the product is I think is the more interesting part of the conversation, and again there is interest that is something customers are telling us and it is something that is reflected in our pipeline.


We will now take our next question David Katz with Telsey Group.

David Katz

I wanted to ask about the North American gaming business, and just sort of following through on the Wheel of Fortune 3D, a couple of thoughts about it. How is that pricing in the field relative to your historical pricing on other 3D games, and are there additional iterations on that in the works behind it to continue whatever momentum you may be building going forward?

And then just on the core video which is a topic that comes up as we’ve talked with your customers, if you could give us some color about games that are in some stage of testing or approval process or it sounds like we are counting on some sales for those or should be counting on some of those sales in the back half of the year, and I'd love to get just a little more color on that, please?

Alberto Fornaro

David regarding Wheel of Fortune, I would say that in general pricing is aligned with the best premium product that we have in the field, and so therefore no major change compared to that. On the other side, we have in the field around 50 units now and the performance have been - they are not a lot, but it has been very encouraging, given the low number of units that we have.

In terms of or regarding the color of products, what I can tell you is that we have not a set of new contents that has been pasted over the previous (inaudible) along the line of the process that we have anticipated and we believe that some of that content are accordingly to the results of our tastes and are very promising, and therefore we rely on them for the second half of the year.

So I think that the only way is to apply the discipline we have anticipated. We’ve done it and we feel that there are some of these products that has a good potential.

David Katz

Understood. If I can ask about DoubleDown, I know Marco you touched on some strategies to try and reinvigorate that business, one of which I believe you said was a loyalty program. Can you put a bit more detail around what those strategies or what the nature of those strategies might be? I'll let you answer the question, but I'd love to get a little more color on what to do with that business which had been flat for a while and is now looking to be down?

Marco Sala

Yes I understand. But look DoubleDown I think so it remained as growth and now we are facing an increased competition and that is a matter of fact because other players are introducing their successful and base content and they are bringing some innovation. There are new apps in the market, but we have our own roadmap and we are focused on a well-defined set of actions that should allow us to return to growth.

And you’re right, the loyalty program we all recognize the loyalty program as fundamental to attracting and keeping the players is a primary focus of our activity. And we always felt that regarding let me say the social features of DoubleDown was lagging a little bit behind and now this loyalty program should help us in reducing the gap.

On the other hand, I think we still have - we have plenty of successful games in our library that have yet to be launched on DoubleDown and therefore we rely on them, a host of contents and points. I think we can mention also advertising as another thing that was introduced recently and we expect it will become meaningful. And of course we continue to invest in technology in order to allow us to introduce innovation more easily. So we are working on all those lines and we expect that those let me say developments will help us to stabilize and then get back the business up a little.

Because the market is still a very interesting market, we believe in the social casino space and we are confident that DoubleDown is a very good platform to compete in it.

David Katz

If I can just follow that up, I know that we've talked about on premise and some of those technology offerings, and I know that you have an entertainment system offering as well. What progress or what updated thoughts do you have around integrating DoubleDown as a B2B offering within your casino technology offerings in addition to it being a business in and of itself?

Marco Sala

Look we are now focused on the B2C component of that part of the business. There are some developments but the on-premise part is not focused on what you’re (inaudible) regarding the ability to provide a pulsating and real money gaming on at the [premises] of our customers, more than on the social space.


[Operator Instructions] Our next question is from Cameron McKnight from Wells Fargo.

Cameron McKnight

First of all, in the first half you generated underlying cash flow before the Italian lottery, around about $300 million. Should we think of this as a baseline level of cash flow generation going forward, so $150 million a quarter or roughly $600 million a year?

Alberto Fornaro

Cameron we said in the long term on average we were looking at a number that is slightly over. What we have seen in the first half of this year, in general, has been a good cash flow generation. It has also been impacted by two important thing, one, dynamic of the working capital in Italy, that has been more favorable and sometimes it happens because its related to the normal cycle of the cash in Italy which is higher in certain days of the week when the quarter ends in certain days of the week and lower in other.

So, part of it is due to - will be reabsorbed. The other is that we actively have been looking at our balance sheet and obviously if there are assets that we can monetize, we have done it last year for example to finance the restructuring expenses and we are continuing to do it. So overall I would say what I said a couple of quarters ago in terms of average cash flow that we expect from the business. Having said that, we will strive to get more and this is a quarter we have been successful.

Cameron McKnight

And you mentioned the potential to monetize assets. Just on the topic of DoubleDown, there are press reports that one of DoubleDown's competitors is being shopped for what seems to be a pretty high valuation or a pretty large valuation and high multiple. Is DoubleDown an asset that at the right price you'd consider selling and monetizing the content through licensing deals or is DoubleDown something you see as being too core to the business to consider selling?

Alberto Fornaro

Cameron, I was talking about ideal assets, not assets that generate profit. Anyway Marco would probably give you a better view.

Marco Sala

Of course we are following with interest the development of the deal. I don’t know at which stage they are, for the time being we are thinking to keep these assets within our portfolio.


We will now take our next question from John DeCree from Union Gaming.

John DeCree

Just wanted to shift gears to the lottery business more broadly; I think, Marco in your prepared remarks you've mentioned some product expansions and developments that you guys have had that have been successful to drive growth. I was wondering if you could add some color as to how much meat is left on that bone and what we could expect going forward, is that something that's going to be continuous over the next couple of quarters.

James Hurley

John we missed the first part, can you repeat it?

John DeCree

Sure. Just wanted to shift gears to the lottery business more broadly and the comments in the prepared remarks that suggested some of the product innovations on the lottery side has been key catalysts to driving some of the larger growth in the lottery business overall. I was wondering what the pipeline of that lottery product expansion is going forward, and if we should expect similar trends over the next several quarters?

Marco Sala

I think that the catalyst in the first quarter John in the first couple of quarters were mainly the jackpot and the exceptional performance of late numbers for the lotto part of the business. The rest of the business was growing at [VLT] average growth. It is always between 3% and 5% that is very good.

We are referring to that part of the business where we are constantly innovating our products. We did it in Italy, we are suggesting our customers to do better in all the continents, and we are very good in developing new ideas regarding draw based games on (inaudible) and along these lines we help our customers growing their business.

This is a business that has proven to be with a very stable growth. In the last year it grew around 35%, and we expect that it has all the potential to grow going forward. Also because there are very different performances across the various jurisdiction inside United States is through outside United States and we are helping our customers fulfilling the gaps whether they exit or improving their performance or whether they are doing better, working hard on the produce, the payout, the price points, the distribution, the advertising, all the elements that are representing the mix of the lottery that can be moved in order to continue to grow.

John DeCree

If I could just follow-up on the multi-state jackpot games that have been really strong in the first two quarters, and realizing that the business is volatile and very much jackpot driven, only two quarters here that we've really seen good growth. Is there any sense as to consumer preference? Is there - realizing that the large jackpots are unpredictable, but any sense that these games are increasingly popular with the consumer and that maybe elevated consumer spend levels on multi-state jackpots is something that might stick around or is it purely just too volatile together - ?

Marco Sala

You have to look at the entire portfolio of lotteries. The entire portfolio of lotteries have as the jackpot gains have growth based games, as the (inaudible), and it’s clear that when it comes to the jackpot games, they are interesting players when the jackpot is increasing. And by the way the multi jurisdiction organizations have worked on the metrics of the jackpot in order to create more momentum in the jackpot generation.

But the importance of the lottery is the entire portfolio, and the entire portfolio is done by different processes that are all appreciated and there are of course some spikes for the jackpot games when it comes - that the jackpot is very high. So you cannot predict on that going forward when the jackpot will materialize.

John DeCree

If I could just switch gears quickly to the electronic table game installation in Pennsylvania, I've seen existing customer in Sands in Las Vegas, because I’m wondering if you could discuss the opportunity for that electronic table game in the US elsewhere. Is there anything in the pipeline and would that be an increasing focus for IGT?

Marco Sala

The products are approved in Nevada and Pennsylvania, there are upcoming installations, and I feel that [TRAI] scheduled for The Bellagio and Rio in the third quarter and we look at these businesses as an opportunity to grow our sales. That’s the reason why we did the deal with Paradise, that’s the reason why we believe that we can progress in that part of our portfolio.


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

Domenico Ghilotti

My first question is related to the decrease in the CapEx guidance. I see that you are mentioning the possible delay in the sport betting investments. Are you now counting on basically on this standard to be issued after year end, so in 2017 or just waiting for the investment for the roll out? And well if you can elaborate a little bit more on the current development on this topic?

The second question is on DoubleDown, a follow-up. I'm trying to understand if you see the relaunch of DoubleDown as a potentially long and expensive. So if you're ready to take some dilution in your profitability or even severe dilution in your profitability in order to relaunch the business, and if you see this process as quite a long process, several quarters on the road?

Marco Sala

I’ll start from the second one, I think we have a solid roadmap and we have to execute that. To execute that roadmap we do not envisage additional investment. Regarding the sports betting the answer is, we expect that the tender will be postponed to next year. We do not see any possibility to get it done. That is our view and that’s to get it done by year end.

Domenico Ghilotti

If I can follow-up on another question, you were mentioning as a weak performance in the lottery business in the UK, and it is clearly - countries now heavily affected by much uncertainty. On the other side, you were commenting about the resiliency of the lottery business. So do you see any reason behind the UK weakness that is not consumer driven? So something specific comparison or whatever that is behind the weaker UK performance?

Marco Sala

No I think that is totally unrelated to the Brexit. There is the jackpot game that is having some difficulties and for what we understand Camelot team is working to address it. So it’s very specific to one game that is under the --.

Domenico Ghilotti

It is a matter of product innovation basically, lack of product innovation?

Marco Sala

Let me put in a wide sense, yes.


We will now take our next question from David Farber with Credit Suisse.

David Farber

Most of my business questions have been asked and answered. I just wanted to ask about the credit facility amendment that you put in the release? I was just curious if there was any fees associated with it and just sort of your thoughts around extending it and then increasing the ratio. You haven't really touched on that. So, that was my question and that's it for me.

Alberto Fornaro

Maybe it is very simple, conditions are the same that we got when we structured a deal that are very, very convenient. We paid more fee as amendment fee to get it done. What is really important is the fact that we can count now for five years on these facilities. We have the bigger concentration on maturities in 2019 that we have now significantly reduced, and therefore for other case removed an uncertainty in a moment that we believe is good that the market there is abundantly liquidity and our pool of bank is very, very supportive of our story. Regarding the covenant it is simply, you know being now the facility for five years and we get a little bit more flexibility, that’s it, but there is no change at all in our plans.


We will now have a final question from Brian O'Brien from Credit Suisse.

Brian O'Brien

I just wondered if you have publically disclosed what the leverage covenant is on the facility.

Marco Sala

No, we have never talked about it regarding that, but we are comfortable below.

Brian O'Brien

And just in terms of deleveraging targets, what are your thoughts on where you think the business can get to, say in the next one to two years. Do you have a view on where you'd like to see this business operating with on a net debt-to-EBITDA basis?

Marco Sala

No change compared to what we have said in the past. We have a goal achieve 4.0 in net debt-to-EBITDA leverage ratio by 2018.


I would like now to turn the call back to Marco Sala for additional or closing remarks.

Marco Sala

Thank you very much for joining us today. We’ve had a strong first half and are excited about the product innovation we will bring to the market in the second half of the year. As always, we appreciate your interest in the company and we look forward to seeing many of you at the [GDE] in September. Bye, bye. Thank you again.


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

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