Ainsworth Game Technology Limited (AGI.XA) Earnings Call Transcript

Thank you for standing by, and welcome to the Ainsworth Game Technology Limited 2025 Half Year Results Investor Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Harald Neumann, Chief Executive Officer. Please go ahead.

Thank you. Good morning, everybody, and thank you for joining us for the Ainsworth conference call on the release of our financial results for the 6 months period ended June 30, 2025. Lynn Mah, our Chief Financial Officer; and Mark Ludski, our Company Secretary, will also attend the conference call. On the call today, I will concentrate on the key points on the results and provide a regional review. Lynn will take you through the financials. All the numbers Lynn and I quote throughout the call are denominated in Australian dollars, unless otherwise specified. At the end of the presentation, we would be pleased to answer any questions. I also note that we have announced an ASX this morning that NOVOMATIC has notified Ainsworth of its intention to make an unconditional alternative takeover bid for Ainsworth at AUD 1 cash per share under Clause 2.3 of the scheme implementation date. The independent board committee has released an announcement in relation to this matter this morning, and I refer shareholders to that announcement. As discussed in that announcement, further information will be provided to shareholders in respect of the takeover bid and the scheme in due course. Coming to Page #4, the results summary. Let's make a start on Page #5, sorry, with a summary of the financial results for the first half '25. The overall reported results were a profit after tax of AUD 4.9 million with normalized profit before tax, excluding currency translations and one-off item of AUD 13.9 million on a revenue of AUD 152.1 million. The normalized result reported was similar to the AUD 14.3 million in the previous corresponding period ended June 30, '24 and in line with the market guidance of approximately AUD 14 million provided on May 12, '25. Lynn will provide more details on this in her financial review. Underlying EBITDA for the period was AUD 26.9 million, consistent with the AUD 26.8 million reported in the prior period. Revenue of AUD 152 million reflected an increase of 25% of the prior period and as previously outlined, a 6.6% increase on the period ended 21st (sic) [ 31st ] of December '24. The progression of product initiatives in Australia have assisted to offset challenging conditions with the Americas and lower online contribution in the current period. Despite the growth in the revenue experienced in the current period, the competitive and consolidating market we operate within requires Ainsworth to at least maintain its current level of investment in product development to ensure we can effectively compete with larger industry participants who have the scale to more readily invest in new technologies and innovative products. We remain cautious given these competitive factors and the challenging economic condition, which will potentially impact the company's operation within the global market we operate within. On Page 6, we outlined that at the reporting date, we had a total of 6,649 units under gaming operation, a decrease on the 6,871 at December 21, '24 -- 31, '24, primarily as a result of the reduction in Latin American gaming operation units, which were converted from operation to sale during the current period. Class II units, including HHR units represented 31% of total units, consistent with December '24. Installations in new and expanded properties in Virginia, Wyoming, New Hampshire and Kentucky in the current period. International revenues accounted for 80% of the group's total revenue lower when compared to the 86% in the prior period as a result of stronger domestic revenue contributions. Recurring revenue, including HHR were AUD 50.7 million in the current period, consistent to the AUD 48.9 million in the prior period. HHR opportunities are expected to continue, although at a reduced rate. In coming periods, following the passage of legislation for a new facility in Wichita, Kansas, more locations becoming available in Ontario as well as continued installation in the established market. Let me turn to the results on Page #8. As I noted, revenue was AUD 152.1 million, an increase of 25% on the AUD 121.4 million in the prior period and 6.6% on the AUD 142.7 million in the prior period. The increase was attributable to improved revenue contributions within Australia in the current period following the release of the A-STAR Raptor hardware in February '25, which was highlighted in our trading update announced on May 12, '25. Reflecting the introduction of A-STAR Raptor, domestic revenue increased in the current period by 84% and 35% compared to prior period and prior half. Gross margin achieved in the period was 56%, consistent with the prior half. Margin continued to be adversely impacted in the period by a range of factors, including the product mix of sales in Latin America, competitive market condition, the planned run-out of previous generation cabinets prior to the launch of A-STAR Raptor across additional markets and the under-recovery of production variances expensed in the period. Page 9. As outlined on Page 9, the underlying PBT was AUD 13.9 million, [ favorably ] compared to AUD 8.9 million in the prior half, however, lower than the AUD 14.3 million in the prior period. Translational foreign currency losses in the current period were AUD 8.6 million compared to gains of AUD 2 million in the prior period. These losses were primarily as a result of further weakening of the U.S. dollar against the Australian dollar compared to the gains recorded in the prior period and the prior half. Other one-off items outside normal operations included a noncash impairment charge of AUD 2.1 million for the online segment and AUD 1.6 million relating to costs associated to the announced NOVOMATIC scheme of arrangement. On Page #10, we outlined that the reported EBITDA was at AUD 14.6 million for the current period. After considering currency and one-off items, underlying EBITDA was AUD 26.9 million, consistent to the AUD 26.8 million when compared to the prior period. This was primarily attributable to factors in Latin America, as I've outlined and the reduced contribution from the online segment following the termination of the exclusivity agreement with GAN in March '24. I do highlight that despite underlying EBITDA being consistent with the prior period, margin were 17.7% for half year '25 compared to 22% in the prior period, reflecting the margin pressure experienced in the current period, as I have noted. Coming now to Page #17, North America. North America revenue in the current period was AUD 83.1 million, an increase of 22% and 5% on the prior period and the prior half. Revenue in the current period on a constant currency basis was AUD 79.6 million, similar to the AUD 79.1 million in half 2 '24. The A-STAR Raptor cabinet continues to perform with titles from the Triple Troves and Coin Kingdom family. Machines placed under participation and leased under HHR connection fees, which generate recurring revenue contributed 47% of the segment revenues. Machines under operations in North America at the reporting date were consistent at 2,961 with the 3,015 units at December 31. HHR products continue to perform with 10,496 units connected to AGT's HHR system at the reporting date following new installations and expansions in Virginia, Wyoming, New Hampshire and Kentucky during the current period. Strong average selling prices and recurring revenues along with disciplined cost control resulted in a rise in segment profit to AUD 36 million versus AUD 32.6 million in the prior period. Segment profit margin achieved 43%, slightly lower than the 45% in prior half. Margin pressure were experienced within the region in the current period due to the increased sales contribution of Gambler's Gold product, poker, keno and video reel content in multi-game and video lottery markets, which have lower margins. Coming to Latin America and Europe, revenues of AUD 31.6 million were achieved in Latin America and Europe in the current period compared to AUD 29.3 million in the prior period. However, a reduction of 16% to the AUD 37.5 million in the prior half. As noted, the reduction in revenue resulted from a challenging economic condition within the region and continued import restriction within Mexico. Demand continues to grow for the A-STAR range of cabinets with Xtension Link and San Fa being consistently top-performing products in the region. At June 30, '25, a total of 3,688 units were under operations, generating AUD 11.3 million in recurring revenue, a reduction of 7% to the prior period, however, a 9% increase compared to the prior half, with the average yield being maintained at USD 12 per day. The competitive landscape in Latin America region has intensified and has necessitated continued innovation to maintain our market position. The broader economic conditions, including inflation and changing consumer spending habits have influenced discretionary spending on gaming affecting revenue across the region. Page #1 (sic) [ #21 ] outlined the region of Asia Pacific. As we have previously reported, this segment consolidated Australia, New Zealand and Asia under the one region as a result of previously changed management responsibilities introduced. AGT's Asia Pacific performance benefited from the release of the A-STAR Raptor, which resulted in a revenue of AUD 34.6 million in the current period, an increase of 81% and 47% on prior period and prior half. The region achieved 1,049 unit sales in the period with Australia contributing 92%. Average selling price were AUD 25,900, consistent with the prior period and an increase from the AUD 22,800 in the prior half due to discounts to run-out inventories on previous generation models prior to the launch of A-STAR Raptor cabinet. Segment profit improved to AUD 7.9 million compared to AUD 1.6 million in the prior period with both gross and segment margin increasing as a result of operating leverage on higher unit volumes and revenue. The A-STAR Raptor cabinet was launched with 3 game families, Year of the Snake, Nugget Hunter, and Eagle Riches, each released with 2 titles. All 6 games have consistently performed above house average since rollout. The ongoing review of regulations and technical standards by Australian and New Zealand regulators is expected once implemented to present gaming manufacturers with additional restrictions in future development of gaming machines, game software and related equipment. On Page #22, we outlined the Digital segment, which reported revenue of AUD 2.8 million compared to AUD 5.1 million in the prior period. Following the termination of the GAN exclusivity contract in March '24, the group continues to directly pursue opportunities with global operators, including BetMGM, Caesars, DraftKings, Resorts and Rush Street. I will now ask Lynn to outline a summary of the financials.

Thank you, Harald. Turning to Page 11. Operating costs continue to be carefully managed, rising by 4% to AUD 71.4 million compared to the PCP. However, were consistent on both on a constant currency basis and compared to half 2 calendar year '24. Operating costs reflected an increase in variable selling costs on the higher revenue achieved during the period. The implementation of cost measures focusing on technology, development and culture to improve product performance, lift staff retention rate and enable the attraction of experienced development talent resulted in improved fixed cost leverage in research and development and administration expenses. R&D expenses were broadly consistent with the PCP and prior half, reflecting the company's continued focus on product development investment to produce competitive products. R&D expenses as a percentage of total revenue was 16% in the current period, a reduction on the 21% in the PCP. The reduction as a percentage of revenue reflected the higher revenue achieved as well as reduced evaluation and testing costs and the lower amortization expenses in the current period on previous generation products. On Page 12, AGT's global headcount was 569 employees at the reporting date with 65% within the Americas. This represented an increase compared to the same period in 2024 with reductions in Asia Pacific assisting to offset additional resources within the Americas. R&D resources increased to 182 at 30th June 2025, slightly higher than both the PCP and prior half. However, 53% were located within the Americas compared to 48% at the same period in calendar year 2024. The global organizational structure provides product leadership with clear lines of accountability to ensure efficiencies and ongoing development of a broad range of diverse and new product offerings. Management continues to implement measures focusing on technology, development and culture to improve overall product performance, lift staff retention rates and enhance AGT's ability to secure new development talent. On Page 14, you'll see we closed the current period with a net cash position of AUD 1.1 million with borrowings of AUD 11.4 million. The reduction in net cash position of AUD 8.3 million compared to 31st December 2024 was primarily due to inventory requirements purchased during the reporting period to fulfill ongoing production requirements. I do note that the loan facility established with the company's lenders, Western Alliance Bancorporation, WAB, was amended in June 2025, resulting in an increase of facility amounting to USD 75 million. Previously, it was USD 50 million. The increase in this facility was undertaken in line with requirements disclosed under the scheme implementation date to potentially fund any permitted dividends as allowed under the scheme of arrangement subject to satisfaction of conditions. Further details are provided in the scheme booklet announced on 25th July 2025. Inventories held as at 30th June 2025 was AUD 78.2 million, representing an increase of 14% on the AUD 68.4 million at the end of December 2024. The increase in inventory levels was required to fulfill production requirements for expected demand with 34% represented by finished goods. Initiatives have been progressively undertaken to ensure the end-of-life transition of older cabinets is managed effectively and minimize working capital pressures. The company has AUD 356.4 million of net assets at a reporting date. On Page 15, cash outflows from operating activities in the period was AUD 4.7 million with borrowings on established facilities of AUD 11.4 million. Borrowings on the loan facility previously made to facilitate payments to the Mexican tax administration service SAT were partially repaid in a period with additional drawdowns being made for working capital purpose. Net cash held at the reporting date was AUD 1.4 million, a decrease from the AUD 9.7 million reported at 31st December 2024, following additional working capital investment, primarily inventory purchases to ensure production requirements are able to be fulfilled. Thank you. And I will now hand you back to Harald for some concluding remarks.

Thank you, Lynn. In conclusion, Ainsworth has moved into the current half year period and enters the remainder of calendar year '25 with a solid foundation following solid progress against identified strategies with good momentum and an expectation of continued improvement in product performance and profitability. Ainsworth's North America business continues to make progress in both Class II and Class III markets. Opportunities are continually being pursued in existing and new HHR markets. Despite more volatile market conditions in Latin America, the company is maintaining its position to benefit as constraints are relaxed within these regions. Domestic markets have benefited from the A-STAR Raptor hardware release, combined with further improvement in game performance following the release of new game titles. We will continue to leverage our key strengths of Ainsworth's trusted brand and the company's enduring commitment to develop superior game technologies and entertaining offerings for our customers and players. With a strong balance sheet and the commitment to produce innovation, Ainsworth will pursue strategies to deliver improved financial performance. As I have previously outlined in the past, to sustain our performance, measures are needed to R&D investments, which are necessary to lift the competitiveness of our product and pursue potential growth opportunities as they arise. The expanded capabilities within R&D in both the Sydney and Las Vegas studios as well as additional R&D studios have enabled more creativity and diversity to our product offerings. Quality initiatives are continually assessed to improve game designs, mathematics and graphical arts to create a more diverse and targeted range of product offerings to our customers. We have implemented measures focusing on technology, development and culture to improve product performance, lift staff retention rates and enhance AGT's ability to secure our position in a highly competitive and consolidated market. Before I close, I would like to formally thank the Board and my colleagues at Ainsworth for their continuing contributions under challenging circumstances. I remain optimistic that we have put in place the necessary infrastructure going forward to effectively compete against larger providers with significant scale and resources. Prior to opening the call to questions, I would like to remind participants that any questions and discussions should be in relation to the results released yesterday, including the operating and financial performance of the business. We appreciate that you may have questions regarding the NOVOMATIC transaction. If you do have questions regarding the NOVOMATIC transaction, we refer to the ASX announcement that we released this morning. Thank you for your time today. I will now hand back to the operator to open up the lines for questions. Thank you.

[Operator Instructions] The first question comes from Helen Karlis with Morrow Sodali. Please go ahead. Helen Karlis, your line is open. [Operator Instructions].