Bally's Intralot S.A. (BYLOT) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. I am Maria, your Chorus Call operator. Welcome, and thank you for joining the INTRALOT conference call to present and discuss the first half 2020 financial results. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Christos Dimitriadis, CEO of INTRALOT. Mr. Dimitriadis, you may now proceed.

Thank you. Hello. This is Christos Dimitriadis. I would like to welcome you all in this call. We will be discussing INTRALOT's financial results for the first half of 2020. And the agenda consists of 3 parts: in the first part, I will present a business review; in the second part, our group financials will be presented by our group CFO; and the third part is the Q&A session. Starting with the business review. During the first half of 2020, INTRALOT has taken the following initiatives. First, we have revisited our strategy and accelerated its execution, taking into account the new business environment saved by the pandemic. We have started international technology trends in several industries and in the gaming industry as well. The new demand for diversification that was intensified in our industry, the change of behavior per demographical group, the need of the player and of the operator as well. As a result, our strategy, as already presented, consists of 5 pillars. The first one, which is around business innovations through technology, as we are looking forward to transform our industry through our digital technologies. The second one, which is about focus on service provision, targeting at advanced service offerings and the development of economies of scale. The third one, which is about focus on B2G and B2B contract, especially in the United States. The fourth one about partnerships for enhancing our B2C business. And the fifth and final one regarding the optimization of our capital structure. We have reorganized the group, and we have put talent in place for leading us to the future. We have a brand new lean structure at a group level from our technology factory to our commercial, financial and service delivery divisions. We have given priority to the safety of our people, enabling our business continuity plan and working remotely with no disruption on the provision of our services. As a result, during the first half of 2020, we have achieved significant growth in our North American operations, increasing revenues by 15.2% and EBITDA by 35.8%. We have also seen substantial reduction of the group's OpEx by 26.5%, while the Greek OpEx was reduced by 14.2%. The group net CapEx in the first half of 2020 was lower by 52.1%, while our group cash at the end of the first half was EUR 137.5 million, maintaining very strong liquidity levels. The net debt was EUR 623.1 million, lower by EUR 29.3 million year-over-year. These achievements were realized while INTRALOT is addressing the effect of COVID-19 as well as the aftermath of the discontinuation of operations in Bulgaria and Turkey. Our response to these events were driven by our strategy, a response that not only demonstrated resilience but was also evidenced by our achievements. Examples of the acceleration of strategic executions are reflected through our public announcements. Our technology was recognized through the award received for Photon X that was named Lottery Product of the Year at the IGA's Awards 2020 and through the shortlisting of INTRALOT Orion Sports Betting solution at the Global Gaming Awards of 2020. The flexibility of our platforms is reflected through the rapid development of LOTOS Xi for Internet lotteries in just a few months after the start of the pandemic. In B2C, we have diversified our portfolio in Malta by introducing virtual Sports Betting, deploying an AI-driven betting product and by initiating E*SOCCER Betting. In a similar example, we have launched INTRALOT eSports in Peru. In B2B, we have launched Sports Betting in Washington, D.C. and Montana. We have signed a sports betting contract with that state lottery for 4 plus 3 years, extended our contract with Vermont Lottery for approximately 1 year, and introduced eSports and the new CMS solution in Taiwan. Through our services division, we have continued creating economies of scale, contributing to the reduction of OpEx and CapEx for the group. In the capital structure optimization front, as you are aware, within the first half of 2020, we announced the appointment of Evercore and A&O as our financial and legal advisers earlier this year, after which we completed the preparations needed, to begin engagement with our stakeholders and their respective advisers. Our dialogue has since progressed, and we are optimistic that we will be able to achieve a positive solution on an expedited basis. Our priorities remain to support the growth of the company, while at the same time, respecting the interests of all stakeholders who, for many years, have supported and continue to support INTRALOT. At the same time, our people are highly energized, fully aligned and committed in implementing our strategy. And it is not a coincidence that INTRALOT has recognized -- was recognized as one of the top 10 most attractive employer brand winners during the first half of 2020, while we have seen our employees winning first place in Blockchain Hackathon. With this final point, I would like to ask our CFO to present the details of the financial results of the first half of 2020. Andreas?

Thank you, Chris. As stated during the Q1 2020 investor call when the pandemic outbreak had already started affecting our numbers and the performance of our companies worldwide, the second quarter of 2020 was also expected to be affected by the COVID-19 impact. So the main reasons that affected the second quarter of 2020 were the pandemic and, if comparing against 2019 respective period, the discontinuation of our operations in Bulgaria and in Turkey. On the other hand, and more importantly, we saw our U.S. business presenting an outstanding resilience during this difficult period and managing to overcome the impact of the pandemic to a very large extent. In almost all other geographies, however, we experienced important implications resulting from the pandemic outbreak, and some of them are still affected. The final outcome of it is still uncertain because it highly depends on each evolution in various jurisdictions and the implications in local economies of the potential second wave of it. We can confirm, however, that the assumption we have made and the guidance we have given for an impact in the order of EUR 25 million for EBITDA for the year 2020 is still valid. In accordance with our strategy though, our primary target was to minimize or partially offset the negative impact of the pandemic, supported by our strong liquidity while preserving it to the maximum possible extent. So having this in mind, our cash position, excluding partnerships, landed at EUR 129 million from EUR 135 million by the end of March 2020. The respective number as of the end of August was in the order of EUR 124 million, indicating the prudent handling of our liquidity. The first point that we need to highlight is the performance of the U.S. operations, which is gradually replacing the lost EBITDA from the Bulgarian and Turkish businesses, indicated by the strong performance of INTRALOT, Inc. already. However, it is difficult to have the full year -- the full effect of the shift already in 2020, primarily due to the impact of the pandemic if the commencement of the newly introduced Sports Betting contracts, which will require some more time to unwind given the postponement of sporting events and the overall health of the sports betting activity. This has started gradually during the summer, but it's still heavily suffering from the reduced schedule of events primarily in the U.S., but also worldwide. The second thing that we need to highlight is the cost control that we have been implementing during this difficult period in order to preserve our cash balance to the extent possible without, however, risking the execution of all projects in our pipeline, which are progressing as per schedule and will contribute positively short to medium term. The prudent handling of our expenses though are one of the -- of our activities clearly indicated by the lower OpEx by 26% as well as the lower CapEx by more than 50% versus a year ago. And so gave the ability of the group to adapt to the new realities being, of course, the result of the effort of previous periods, supported by the maturity of our products as well as the absence of planned implementations, which was the case over the last few years. Thirdly, in relation to CapEx, we have already said that part of it will be either deferred or either waived if we assess that this will have no substantial negative impact in our growth in the medium term as part of our strategy to support liquidity. To this end, the same trend of Q1 was also continued in the second quarter, leaving CapEx to be kept at minimum levels within the first half of 2020. And we will continue to handle our CapEx spending in a prudent way, having always in mind the cost-benefit analysis in relation also to the difficult period we are currently facing. So moving on to the H1 2020 financials. Our results on the revenues presented in detail in Slides 6 to 8 have been heavily impacted by the Bulgarian and the Turkish entity developments, the Moroccan business and also by COVID-19 pandemic in all geographies. More specifically, the change in the consolidation method in Eurofootball accompanied also by the negative developments in the market affected the revenue line by EUR 140 million, out of the EUR 210 million overall deficit. As regards to the impact from the Turkish market, we had a negative variance of EUR 23 million, primarily from Inteltek, which was EUR 16 million, but also from Bilyoner lower by EUR 7 million. Bilyoner's impact is attributed both to the sports -- new sports betting era in the country, but also from the COVID-19 since the absence of sports betting events affected the performance of our electronic agents in the market Bilyoner. The rest of the markets, namely Malta, Australia, South America and Morocco were also largely impacted by the pandemic, resulting to a deficit of EUR 47 million versus a year ago. On the positive side though, the U.S. performance showed outstanding resilience during this difficult period. To this end, our U.S. subsidiary has grown by 15% and 36% year-over-year in revenues and EBITDA, respectively. What is worth mentioning here is that this result was not only attributed to the contribution of Illinois, which run for fewer months in 2019, but was also the result of the performance of the rest states. So on a like-for-like basis, so if excluding all elements that affected positively or negatively both H1 periods and are not there in the different period -- respective period, the underlying business in the U.S. performed better by 6%, confirming the resilience of the business. The whole lottery business performed better by EUR 7.6 million versus a year ago, with current year being positively affected also by the lockdowns of casinos, which drove the market to a large extent towards more traditional gaming activities such as the lotteries and instance. In accordance with the revenue drop, GGR line was also declined by EUR 85 million, collectively, for the same reasons mentioned in the revenue analysis as shown in Slide #9. EBITDA for the period landed at EUR 26.7 million, lower by EUR 32 million versus a year ago. EUR 23 million was the negative contribution for Bulgaria and Inteltek, while Morocco was negative by EUR 4.3 million. As regards to the rest markets, they were negatively affected by the pandemic, resulting to a deficit of EUR 14 million versus a year ago. However, the performance of the U.S. as well as the cost optimization initiatives at headquarters perimeter companies mitigated this deficit to a very large extent. USA was positive by EUR 6.3 million, while headquarters perimeter companies were EUR 4 million EBITDA better compared to the respective period in 2019. EBITDA margin on sales was slightly better by 0.4 percentage points, driven mainly by the U.S. operations performance with the full effect of the landmark Illinois contract as well as the Canadian one with BCLC, being partly offset by the discontinuation of our operations in Bulgaria and in Turkey. What is also worth mentioning though is that the group managed to absorb to a significant extent the COVID-19 impact by reducing its OpEx, so keeping our EBITDA margin almost at similar levels compared to the previous year. Moving on to the EBT line. The result for the first half was negative EUR 42.8 million from negative EUR 10.5 million (sic) [ EUR 1.5 million ] last year. So it was lower by EUR 41.3 million versus a year ago. Apart from the EBITDA negative contribution of EUR 32 million, EBT was also negatively affected: firstly, by the worse results from participation and investments, which were lower by EUR 7.4 million; secondly, the worse FX results by EUR 6 million versus H1 2019; thirdly, the worse net interest results by EUR 1 million; fourth element was the capital structure optimization expenses in current year, which was EUR 1.8 million for this period; and also the share of net results from the equity method consolidation of associates, which were lower by EUR 1.5 million versus H1 '19, mainly due to the performance of our associates in Peru and Taiwan affected by COVID-19 as well. The negative effect was partially counterbalanced by the lower impairment of assets for the period, that's by EUR 3.6 million versus H1 2019, which was mainly the impairment recorded last year for Inteltek's contract. And secondly, the decreased D&A by EUR 4.9 million due to the increased impairments and entities and also change in the consolidation method and the end of useful life of older assets. On the bottom left of Slide #10, we see that the net CapEx for the quarter stood at EUR 15.3 million, lower by EUR 16.5 million versus a year ago as a result of the absence of major contract implementations in the U.S. compared to previous year, mainly in the U.S. Operating cash flow decreased by EUR 32 million and stood at EUR 17.3 million and was largely driven by the lower recorded EBITDA year-over-year and the higher tax payments of EUR 5.3 million. The latter was fully offset by a favorable working capital movement of EUR 5.7 million. Improved working capital versus a year ago is largely driven by the positive timing variance of liabilities of payments in various projects and a favorable receivable balances position due to the fact that in the U.S. operations, primarily, previous year was negatively impacted by the Illinois project start. Net debt stood at EUR 623 million, up by EUR 29 million versus the end of 2019, which was affected by the dividends of EUR 6.9 million paid to our partners in Inteltek as a result of the contract discontinuation, the tax payments at parent level by EUR 6.4 million, the investments in the U.S. and in other projects by EUR 4.2 million as well as the negative impact in the normal course of business by EUR 7.3 million, which was also an effect due to the COVID-19. However, it was better by EUR 29.3 million compared to the respective period of last year when this respective metric was EUR 652.4 million. Lastly, in Page #12, we see the main contributors for revenues and EBITDA being the U.S. operations primarily, but also the markets of Oceania, Malta and the Netherlands contributing substantially and the partnerships with only a small part of our activity after the recent developments in Turkey and Bulgaria. The latter is also depicted in Slide #13, where we see that the EBITDA contribution of the partnerships is substantially lower if comparing against last year's respective period. And at this stage, the presentation of the first half of 2020 results is finished and the INTRALOT executive team is at your disposal for any questions you may have.

[Operator Instructions] The first question is from the line of Felix, Wolfgang with Sarria. Mr. Wolfgang, can you hear us?

Yes. Can you hear me?

Yes, I can hear you.

Yes, sorry. I was asking about your time line with respect to credit engagement and, yes, how you see the timing of that process this year versus next year?

Sure. Thank you. So as far as the capital structure optimization is concerned, as I said, it's a process in which we are working very hard together with advisers in order to be able to provide you with an update on a timely manner. So within that scope, we are expediting the process. We have exchanged information with -- between, of course, our advisers and the advisers of the book holders of both [ '21 and '24 ]. Right now, I'm not in a position to give you a definite deadline. All I can say is that the process is accelerating and that we're optimistic that we will be able to provide an update soon.

And then maybe one more question on your Greek operations. You summarized, I suppose, headquarter and R&D center, et cetera, generally under Greece. The minus 13% here so far, would that be indicative of the level going forward? Or should we be expecting a further reduction of those levels going forward?

It is indicative. So it is -- yes.

The next question is from the line of Walther, Daniel with Morgan Stanley.

A quick question. So for this year, what type of EBITDA number do you forecast? I think you mentioned the EUR 25 million negative impact was actually the number that you're targeting. And obviously, it was impacted by COVID this year. What do you actually sort of see as your run rate EBITDA at the moment?

Actually, we will be reluctant to provide specific guidance for the EBITDA, given the fact that we are still evaluating how the pandemic is evolving. For the time being, it seems that the half 1 result is representative of the performance, but we are not in a position to provide specific guidance given the uncertainty that we are facing in the markets. And actually, we see in many markets second waves of the pandemic. So we would be -- we would refrain from providing a specific guidance regarding the EBITDA.

But when you say the EUR 25 million kind of delta, so that's a delta to what?

It is a delta compared to the expectation that we had at the beginning of the year when we were preparing our plans and preparing our budgets. So it is not a year-over-year. It was -- it is a negative impact comparing to what we were initially expecting for 2020.

The next question comes from the line of Kogge, Maxime with ODDO.

So you had a very good performance in the U.S. this quarter. You made EUR 13 million of EBITDA in the -- I mean, in North America, more precisely. Can you give us the impact of the one-off payment for the Canadian contract and of the terminal sell in Ohio? You mentioned in the past that you plan to make sales, I mean, to make terminal sales that would bring EUR 6 million or EUR 7 million of EBITDA in Ohio. Do you expect more in the coming quarters? And did you have any impact of the Sports Betting contracts in the U.S. in Q2? Or is it still too early? So that's my first question.

Actually, in relation to the Canadian contract, this is commercially sensitive info and we cannot provide, but it's not a large impact on the performance of the U.S. Actually, the U.S. is performing exceptionally well and also without the BCLC contract. Now in relation to Ohio, we do not expect for the remainder of the year and -- a sale in the machines. Of course, we are still waiting on that front. But for the time being, we are not able to confirm any such sale within the next period.

And regarding Sport Betting, did you have any impact this quarter in terms of EBITDA?

Not -- let me complete the reply saying that it is, however, in the budget of the state. But given the circumstances and the difficult period globally, for prudence reasons, we do not confirm that we expect the sale. Of course, it's not that we're not working towards this direction. But it remains to be seen what we have. Currently, we do not have in our plans.

Okay. And Washington, D.C. and Montana Sports Betting contracts. Did they bring some EBITDA in the quarter? Or is it still too early?

So as far as Sports Betting is concerned, COVID-19 is impacting the ramp-up of the new projects and the activity, and the poor game schedule is affecting this negatively. So we had a major event slam down for quite some time now. We are gradually ramping up as the industry recovers. So we have spent -- so we're expecting to see a better situation there. I would also like to comment that as far as the U.S. as a whole is concerned, it is worth mentioning that even the like-for-like lottery business is -- excluding any different items from both years, has grown by 6%. So it seems that the target of EUR 15 million EBITDA for the lottery may be feasible even during 2020, which, of course, depends highly on the impact of COVID-19 and on. So -- and of course, if the same trend continues, this target is feasible. So what we've seen in the U.S. is a better lottery performance and a pose in the Sports Betting performance that is wrapping up as the industry recovers as a whole.

Okay. And second question. Do you still see an impact right now as we speak in September of COVID in your various operations? I guess this is the case in Argentina and Chile. Is it also the case elsewhere?

Yes. It is also the case. We see impact in Australia, where the government is -- has decided to prolong the measures taken as a response to COVID. And we see partial impact in a number of European countries as well. Generally, the situation, I would say, it's stable. And we need to keep monitoring the situation, especially as the autumn and winter are in front of us in the northern hemisphere. So this is why we are reluctant for providing absolute numbers and projections. And this is why we need to keep monitoring the impact from COVID in order for us and the rest of the industry to understand how this will shape up in the next few months.

Okay. And last question, you provided the liquidity number at the end of August. So EUR 124 million is for the holdings and the entirely consolidated entities now, can you confirm that?

It refers to the cash balance of the group, excluding the partnerships. So [ partnerships ] defined as Argentina, Turkey [indiscernible].

Okay. So it's minus EUR 5 million compared to June 30?

Correct.

The next question comes from the line of Sisak, Paul with CQS.

First of all, congratulations to a pretty decent quarter given the circumstances. So I wanted to ask a few things. Number one, on Brazil, you have a receivable that kind of seems to tick up EUR 1 million or EUR 2 million every year. Now EUR 27 million. It seems like that the business there is meant to be profitable. Question is, how do you think about the recoverability of that and getting cash back on that? That's #1.

Actually, Brazil, it is also experiencing the effect of COVID-19 to a very large extent. Anyway, the Brazilian business has its difficulties even before that period. So you may understand easily that the recoverability of this amount is a challenge. So we are not saying that it may not be able. But for the time being, it seems that the circumstances are not favorable for the recoverability of this amount.

Okay. And I guess, the contract there is coming to an end. Do you expect that to be renegotiated? What do you expect to happen with that? I mean it seems like you invested EUR 27 million so far in this and got nothing back?

There is one specific contract for the moment with the State of Minas Gerais that, as we said, is coming to an end in 2022. And the options are, of course, to extend or repeat depending on what the local government is going to do. But there are also a couple of other important projects that we are looking in Brazil through the same vehicle. One is the Sports Betting that according to our information, the regulation is going to be in place by the end of the year or much in the first quarter of 2021, plus some other states that we are discussing in order to implement the same model like the State of Minas Gerais.