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

Ladies and gentlemen, thank you for standing by. I'm Costantino, your Chorus Call operator. Welcome, and thank you for joining the INTRALOT conference call to present and discuss the 9 Months 2020 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Chrysostomos Sfatos, Group Deputy CEO of INTRALOT. Mr. Sfatos, you may now proceed.

Thank you. Good afternoon. I'm Chrysostomos Sfatos, Deputy CEO of INTRALOT, and I'm joined here by my colleagues, Mr. Nikolakopoulos, the Chief Commercial Officer; and Mr. Konstantellos , the Chief Technology Officer. And of course, by the Chief Financial Officer, Mr. Chrysos, who will do the presentation today. I'm also joined by Group Tax & Accounting Director, Mr. Pavlakis; and Mr. Sotiropoulos, Group Finance Controlling and Budgeting Director. At the opening, I'm going to read a statement by our Chairman and CEO, Mr. Sokratis Kokkalis. In third quarter '20 INTRALOT continued its efforts to mitigate the effects of COVID-19 and the impact from adverse developments in certain jurisdictions through consistent implementation of its business plan and operational improvements. Strong commercial performance in the U.S. in combination with OpEx reductions worldwide and postponement of CapEx have limited the expected COVID impact of full year EBITDA in the area of EUR 25 million to EUR 28 million. The reopening of Australian market and the smoother operations in sports betting activities, create a more positive picture for the fourth quarter of 2020. INTRALOT has also made significant progress in its discussions with its creditors to address the September 2021 notes maturity and the overall capital structure and will provide an update in that respect very soon. After these introductory remarks, I now pass the microphone to Mr. Chrysos for the presentation.

Thank you, Chris. Good afternoon, ladies and gentlemen. Before starting our presentation for the third quarter and 9 months of 2020 results, I would like to provide some guidance in relation to the current outlook for the year-end closing against the targets that we have set at the beginning of the year. The main targets for 2020 were the following: one, maintain the same operational metrics as in 2019, depending also on the impact of the pandemic by replacing the lost EBITDA from Bulgaria with new EBITDA, mainly from the U.S. and other projects and assisted also by the savings in the OpEx; two, reduce the CapEx by at least 10% to 15%, again, depending also of the COVID-19 maintain impact; three, try to maintain our strong liquidity to the maximum possible extent as a quotient to the half period due to the pandemic; and lastly, to reach the $50 million EBITDA trajectory for the U.S. lottery business and the successful launch of our first sports betting contracts in that market. Today, we are in a position to say that as regards to the first target, the full year EBITDA outlook will be in the region of EUR 60 million to EUR 62 million, already evident from the 9-month period, and we are heading towards this target. The COVID-19 impact is estimated to reach EUR 25 million to EUR 28 million for the full year. Therefore, if excluding this impact, EBITDA would be in the range of EUR 85 million to EUR 90 million as it was the 2019 one. EBITDA was strongly supported by the strong performance of the U.S. in addition also to the OpEx savings of 26%. Two, the CapEx of the 9-month period was EUR 28 million, and the outlook is that it will not exceed EUR 40 million, being close to 30% lower than targeted in an effort also to mitigate the COVID-19 impact. As regards the sale target, the cash position stood at EUR 107 million, a consolidated level versus EUR 137 million in June 2020, 2/3 of the reduced amount referring to the coupon payment in September. Lastly, the U.S. EBITDA for the 9-month period was above $40 million, heading for a full year performance in excess of the $50 million target were the sports betting projects with -- Washington DC one, which was commented first to deliver encouraging results, also making us very optimistic for 2021. After a tough second quarter, heavily affected by the pandemic in all geographies, we saw a much better third quarter performance. What needs to be highlighted is that although our numbers versus last year continue to be impacted by the discontinued contracts in Bulgaria and Turkey, depicted in the book-like metrics revenue and GGR, EBITDA of Q3 was positively affected by the substantially lower OpEx, therefore, mitigating, to a large extent, the negative impact of the loss of these contracts. More importantly, our U.S. business continued to present an outstanding resilience in this quarter too, making us confident that the targets we presented for this part of the world will be achieved. In relation to the pandemic impact, we can confirm that the amount that we have assumed from the very beginning of the outbreak each contract and will be in the region of EUR 25 million to EUR 28 million at the year end. In accordance with out strategy of growth, our primary target was to minimize or partially offset the negative impact of the pandemic, supported by strong liquidity while preserving it to the extent possible. Our cash position, excluding partnerships, at the end of September was in the region of EUR 100 million from EUR 152 million, where we ended 2020. And having paid already 2 bond coupons of around EUR 44 million since the beginning of the year. If excluding the capital structure exercise cost so far, the cash paid for the 9-month period is less than EUR 10 million, much less than the impact from the pandemic, indicating the prudent handling of our liquidity. In relation to the U.S. business the 2 major highlights are: first of all, the performance of our U.S. lottery operation which has largely reflected lost EBITDA from the Bulgarian and Turkish businesses; and secondly, the encouraging evolution of the newly introduced prospect in contracts which after a difficult start due to the pandemic and the nonexistence of sporting events before the summer have gradually started to perform better. And especially for the Washington D.C. one, we are almost at the performance levels we have assumed in our business plan. As an overall outlook, we are fairly optimistic because we see that after a difficult second and to a less extent, third quarter, the fourth one has started from a much better position because the second wave of the pandemic is not hitting our numbers as the first one. And the primary reason for this is because of main markets such as Malta, are not in a lockdown. And also, the sporting events continue uninterrupted. Therefore, the sports betting activity is continuing normally. Furthermore, after a prolonged lockdown of the venues, Australia is now open and operating normally. And after this short introduction, we will start with the presentation. So moving on to the 9-month financials. Our results on the revenue line presented in detail in Slide #6 to 8 have been heavily affected by the Bulgarian and the Turkish pandemic development, the Moroccan business, but also by the 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 213 million, out of the EUR 290 million overall deficit. As regards to the impact from the Turkish market, we had a negative variance of EUR 26 million, primarily from Inteltek contract discontinuation. What needs to be highlighted here is that in Q3, our electronic engine, Bilyoner, showed a total recovery from the second quarter turbulence performing even better compared to the respective quarter of last year by 12%, showcasing the potential of this business after the difficult period it had as a result of the pandemic impact, but also from the new era in that market since August 2019 onwards. The rest markets such as Malta, Australia, South America, Morocco and Greece were largely impacted by the pandemic resulting to an overall deficit of EUR 63 million versus a year ago. Focusing, however, on Q3 performance, we observed that the revenue deficit comes mainly from the discontinued businesses in Bulgaria and Turkey, representing EUR 77 million of the EUR 80 million deficit for the quarter, being assisted by an equipment sale and services in the Netherlands and the performance of the U.S., but also from the partial recovery of the main markets due to the pandemic impact. Positive contributors during the 9-month period as the U.S. performance, which showed an outstanding resilience, as already mentioned, during this difficult period, growing by 13% year-over-year as well as the Netherlands performance assisted by the equipment and services sale in Q3 of current year. Now moving on to Page #9. And in accordance with the revenue drop, we see the GGR line also declining by EUR 108 million, collectively for the same reasons mentioned in the revenue analysis. Continuing the analysis on this page, EBITDA for the 9-month period developed to EUR 45.2 million, lower by EUR 33.6 million versus a year ago. What needs to be highlighted, though, is the EBITDA performance of Q3, which has landed at EUR 18.5 million, or EUR 1.6 million less than a year ago. And more importantly, 74% higher compared to the EBITDA of the second quarter of 2020. If comparing against the previous quarter, the swing was attributed to the partial rebound of the negative COVID-19 effect in the markets that were hit in the second quarter. And most specifically, Australia, Morocco, Malta and Bilyoner in Turkey, which performed Q-on-Q, better by EUR 7 million; and South America, mainly Chile and Argentina, which performed Q-on-Q better by EUR 3 million. If comparing against the respective quarter of 2019, the main contributor has been the adjustment in the OpEx line that has been reduced by 26% year-over-year for the third quarter. Therefore, mitigating the 45% reduced revenue of the third quarter to a large extent, which has been the result of the lost contracts in Bulgaria and Turkey. Of course, the outstanding performance of the year, which has been assisting the financials throughout the whole year. Bilyoner also presented a positive stream previous year's expected quarter, showing the dynamics in this market for the future as well. All in all, the negative impact from the lost contracts and COVID-19 effect of minus EUR 9.5 million in total, has been recovered by more than 80% from the performance of the U.S. entity and Bilyoner in Q3. The OpEx adjustment as well as the improved margin in the U.S. market has been reflected in the EBITDA margin of sales also being 7.6 percentage points better compared to the third quarter of previous year. Moving on to the EBT line. The result for the 9-month period was minus EUR 56.8 million from minus EUR 6.9 million, lower by around EUR 50 million versus a year ago. Apart from the EBITDA negative contribution of EUR 33.6 million, EBT was also negatively affected by the following reasons. The worst results from participations and investments, lower by EUR 15.7 million mainly due to the high impairments of investments in associates, which have been largely a result of the COVID-19 pandemic. The decreased dividends income from associates in 2020 and the higher net income from the sale of participation and investments back in Q3 of 2019 due to the Hellenic Lotteries disposal and the bond buybacks of the respective period last year. Secondly, the worse FX results by EUR 11 million versus the respective period of 2019, largely driven by the impact of the favorable U.S. dollar movement against other currencies in the 9-month period of 2019 by the quite high portion of cash in our Turkish entities, which was held in U.S. dollar in that period. And lastly, the capital structure optimization expenses in current year being around EUR 3 million, EUR 2.9 million to be precise in -- the amount. The negative effect was partially coupled by the following reasons. The lower impairment of assets for the period by EUR 3.9 million versus the 9-month of 2019, mainly due to the impairments recorded for Inteltek's contract last year, and secondly, the decreased depreciation and amortization by EUR 9.8 million due to the increased impairments and entities liquidation, the change of consolidated method and the end of useful life of older assets. On the bottom left of Slide #10, we see the net CapEx for the 9-month period, landing at EUR 27.7 million, lower by EUR 16.5 million versus a year ago. As a result of the absence of major contract implementations compared to previous year, mainly in the U.S., operating cash flow decreased by EUR 49 million, and stood at EUR 25.5 million and is largely driven by the low reported EBITDA year-over-year. The higher tax payments by EUR 3.8 million and the adverse working capital movement of EUR 9.4 million. The reasons for this negative working capital. And first, the time lag in the revenue receipts impacted also by COVID-19. Secondly, an unfavorable movement in liabilities, partly offset by a favorable inventory movement, which resulted in this EUR 9.4 million already mentioned. Last year's movement also was positively affected by an advanced payment received for our projects in Canada and in the Netherlands. Turning on to Page #11 and focusing on the net debt. It stood at EUR 642 million at the end of September, up by EUR 14.5 million versus December 2019. The main reasons for this increase were the renewal and growth CapEx, mainly in the U.S. and in Croatia, which was EUR 10.7 million. Inteltek's license continuation impact of EUR 6.1 million, including also the dividends that have been paid to our partners Inteltek as a result of the contract discontinuation. Tax payments at parent level of EUR 7.7 million, the capital structure optimization costs of EUR 2.9 million and the negative impact in the normal course of business of around EUR 26 million, affected also by COVID, but primarily reflecting the coupon payments in March and September, a specific metric 1 year ago was EUR 634 million. Lastly, in Page #12, we see the main contributors to our revenues and EBITDA being to the U.S. operations primarily, but also the markets of Oceania, Malta, and the Netherlands contributing substantially and the partnerships representing on a small part of our activity after the recent developments in Turkey and Bulgaria. The latter is also depicted in the next slide, #13, where we see that the EBITDA contribution of the partnerships is substantially lower in comparing against last year's respected period. Since it is only Bilyoner and Argentina that contribute in group's consolidated metrics, and at this stage the presentation of the 9 months results of 2020 is finished. And the internal objective team is at your disposal for any questions you may have.

[Operator Instructions] The first question is from the line of Wolfgang Felix with Sarria Asset Management.

I was wondering, first of all, with respect to the ongoing negotiations, what sort of time plan do you think being on as bondholders?

As we have announced in our press release yesterday, we feel that we have made a lot of progress in our discussions with the creditor groups. Unfortunately, I wouldn't like to comment to a specific time frame at this point. However, we feel comfortable that we are very close to an agreement, and we will make this announcement when we are able to make something specific known to the investment community when it's something binding and committed. But we have said that so for the time line, we already have restricted creditors. We are not trading anymore who have access to nonpublic information, which means the businesses we are in them and the creditors themselves are directly involved. And this group represent substantial percentages of the issues, especially the 2021 issue, which is the immediate maturity, which will allow us to implement a transaction in the time frame that is required.

Okay. And in its current permit, I know last year, you felt your minimum cash balance that you were comfortable with at central/corporate level was around EUR 55 million, I think, was the -- was sort of the mark then. In light of the sort of somewhat reduced parameter of the group has that cash level somehow changed or would you still be looking for a minimum of that?

Okay. Let me take this one. I think this was a point which was misinterpreted in the previous discussion we had. So the minimum level that is required as for our companies to operate is in the region of EUR 18 million to EUR 20 million, not EUR 55 million, not EUR 80 million, as it was mentioned the other day, it's around EUR 18 million to EUR 20 million. So the cash position that we are currently sitting on is far more than that. So we feel pretty comfortable with the cash reserves that we are currently having and offering us the ability to move on with all the discussions that we are having and also running our business and interrupted without the problems.

Unfortunately, Mr. Wolfgang line has been dropped. We're moving on to the next question. And the next question is from the line of time, Stam Joy with CQS.

So I have 4 quick questions. The first one is relating to your Gamenet stake. So in your bond document, there was a clause relating to the sale of certain assets where you're saying that any net proceeds from sales would have to be used within 360 days, either towards CapEx or redeeming your note. So if I understand, you completed the sale on the 16th of December, so that 360-day mark should be coming soon. So I was wondering what your plans were in terms of that. And then maybe I'll follow next question after.

Well, as you know, there is a period in which the 360 days, where there are some permitted uses of this asset proceeds. So when the time comes and when the question is asked by the potential beneficiaries of the excess cash, we will give the full account. We don't have a specific plan about allocated excess cash at this point, if that's what you're asking.

Okay. So you're saying that the EUR 78 million of net proceed is out of that, there wasn't much excess cash. Is that...

No, this is not what I'm saying. I'm saying that but when we are asked, we will make a full account of this cash that we receive.

Okay. So -- but am I right to think that the timing should be around now in terms of the 360-day?

Yes, yes, of course.

Okay. Understood. So we will -- we might see some information on that in your next reporting? Okay. So I can jump on to my next question. So just in terms of your headquarters cost reduction of EUR 7 million to EUR 8 million that you mentioned in your previous call. Can I just get a sense on how that's going in terms of implementation?

Yes, yes. Okay, this is a number that we are already there as of the 9-month period, which was our commitment when the year started. We are already -- okay, excluding, of course, the extraordinary costs that related to the capital optimization exercise, if excluding these costs because they are extraordinary. On the normal course of business, we are already around EUR 7.5 million less so we are -- we have foresees target. And until year-end, we expect it maybe to increase slightly, but the answer is yes. We are already there. This target is already succeeded.

Understand. And my next question was in terms of CapEx, you did mention you spent EUR 9.6 million towards business development as well as project pipeline delivery. I was wondering if you could elaborate more on that.

Which one? CapEx?

Yes, CapEx. So you mentioned there was a EUR 9.6 million CapEx that was spent in R&D as well as project pipeline delivery. So I was wondering if you could elaborate more on that.

Yes. This relates to the development of our main products, which, by the way, has been reduced substantially, and we have set up this will be declining due to the maturity of our products. And also, to a less extent, refers also to some smaller scale, renewal in the U.S., again, here, this is something that we have said many times, but ahead of us, we do not have any material, let's say, renewals in the U.S., allowing us to maintain a quite small amount of CapEx. Overall, it has been EUR 28 million for the 9-month period. And as for the future, we have said already that we do not have any major. Renewal show we shall be able to save some money on the CapEx as well. But R&D in the region of around EUR 8 million to EUR 10 million is something that we shall be spending on a continued base taking course of the nature of our business.

Okay. I understand. And so that's on top of the maintenance CapEx that you would also incur?

Yes, of course.

Okay. And I just have 1 more last questions -- question, sorry. Do you have any significant contracts that are in the pipeline for the 2021 period?

We are looking at quite a few contracts. That could materialize in terms of this development. That we are looking for some of them to moralize in 2021. But we are remaining very focused on what we are looking on, don't know the bids we are following the investments we are planning. So yes, there is a solid pipeline, which is focused on EUR 5 million to EUR 6 million on in the U.S. and Canada, but also in Europe.

Next question is from the line of [ Affley Deck Erwan with SC Lowy ].

I have 2 questions. I think you may -- I apologize, if those questions have been asked in your previous earnings calls. The first one is in relation to the state fees with your people and on your bet. Do you have any update on the appeals and the amount, if it has changed and how you plan to pay those fine if the appeal is lost? And then I will reserve my second question.

Yes. We have said also in previous calls that, first of all, these state fees are not executable penalties still they are debated in the courts. But also, there is no recourse between the limited liability company to which these penalties have been presented and the investment company, which is our company in Bulgaria or furthermore, the group. So we don't anticipate that these penalties will be traced back to -- will come back to the group. But they have not been paid. No portion of it has been paid.

Understood. And then my second question in line with CQS. For FY '21, I know it's early stage with COVID, but do you have a round estimate or range of what you will try to achieve at an EBITDA target, please?

Actually, in this call, I wouldn't like -- currently, we're in the process of preparing our budgets with -- we are in discussion with all our local GMs and the teams. So I would refrain from providing any guidance regarding 2021. We'd rather do this in our next call when we present the financial results of 2020. At that point, we shall be able to shed some more influence and light on the targets of 2021.

There's a follow-up question from the line of Wolfgang Felix with Sarria Asset Management.

I dropped out earlier on in the middle of asking my question. IT was on minimum cash. I don't know if you've answered it at all. Can you just repeat the number?

So yes, yes, yes, of course. It's okay. So we said that this was a question around which there was a turbulence also in our previous call. So the minimum cash necessary for our companies to operate is EUR 18 million to EUR 20 million, not to EUR 55 million, not EUR 80 million as it was wrongly mentioned in the previous call. It's EUR 18 million to EUR 20 million. So our current cash reserves are more than enough, as I said, in order to execute our business plan as well as run the big exercise that we are having currently with the bondholders.

Okay. Terrific. And I'm sorry to have you repeat this. And on the Netherlands one-off, can you just tell me a little bit more about that I wasn't quite prepared for it.

In the Netherlands, this one-off was in the -- during Q3, it was EUR 8.5 million. I think this is something that we are saying. I would like to provide more in from relation to the EBITDA because it is commercially sensitive. So it refers to the implementation of our new contract, which will be on from next year onwards.

The next question is the line of Kandalam Jayanth with Lucror.

Actually, I'm not very sure if -- because you earlier mentioned you wouldn't want talk much about 2021 until the next call. But maybe if you could just give a little bit of an idea in terms of what is the run rate EBITDA or a full -- or rather full period EBITDA you're expecting from some of the new contracts in the U.S. FY '21. The contracts you've already entered into, but probably in 2020, there will be only a very small impact?

Okay. The new contracts in the U.S., primary, we are the sports betting ones. We have provided some -- we have given some call already that although at the beginning of this year, we were expecting them to start unwinding before the summer. The COVID-19 pandemic created turbulence there. So we saw the ramp-up being slower than originally anticipated. Having said that, the first one, which is the watch on the C1, this is something that I already said, is performing very well. Actually, it is more or less on the targets that we have set when we were preparing the business plan. The Montana one, this has a small ramp up. But again, this is gradually winning ground. We have said already in the past these contracts during their maturity will be in the region of EUR 10 million of EBITDA. Of course, this is not something that we can expect in 2021. In 2021, we will have a much smaller amount than this. But we would like to focus on this in our next call, please allow us.

[Operator Instructions] Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

Ladies and gentlemen, thank you very much for your time, for your questions, and really hope that we will be able to provide substantial news pretty soon. Thank you.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.