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

Ladies and gentlemen, thank you for standing by. I'm Constantinos, your Chorus Call operator. Welcome, and thank you for joining the INTRALOT conference call and live webcast to present and discuss the full year 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, Deputy Group CEO of Petrol. Mr. Sfatos, you may now proceed.

Thank you. I'd like to welcome you all at this call for the financial year 2020 results. I'm joined by my colleagues, Mr. Nikolaos Nikolakopoulos; and Mr. Konstantellos and the financial team, Mr. Chrysos, Mr. Pavlakis; Mr. Mulas and Mr. Tsagalakis. And I would like to pass the microphone to Mr. Chrysos for his remarks.

Good afternoon, ladies and gentlemen. First of all, I would like to start with a brief update of our performance against the operational targets that we have set for the year 2020. The main financial targets for 2020 were: one, maintain the same operational metrics as in 2019, depending also on the impact of the pandemic by replacing the lost EBITDA from Bulgaria and Turkey with new EBITDA mainly from reverse and other projects assisted also by the savings on the Opex; two, reduce the CapEx by at least 10% to 15%, again, depending also on the COVID-19 impact; three, maintain our liquidity in spite of the pandemic impact; and fourth, to secure 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 in relation to the first target, the full year reported EBITDA for 2020 was EUR 66 million, while reported EBITDA of 2019 was EUR 88 million, when Bulgaria was also consolidated. The COVID-19 impact estimation for the year was EUR 25 million. So the target to reach the same operational performance was met on the one hand, but of course, it was heavily impacted by the pandemic on the other. However, EBITDA was strongly supported by the performance of the U.S. in addition to the OpEx savings of more than 20%. In relation to the second target, CapEx. So CapEx for 2020 ended at EUR 36 million, lower by 35% versus a year ago, exceeding the target of 10% to 15% that we have set. The drivers behind this were the containment of CapEx spending that was not contracted worldwide and also the renegotiation of commitments with clients such as Argen and Desiro, both of which acting as mitigants to the COVID-19 impact. In relation to the third target, our cash position stood at EUR 100 million at consolidated level versus EUR 107 million in September 2020 in a period that included extraordinary costs related to the capital structure optimization exercise with the outcome indicating the prudency in our [indiscernible]. And lastly, in relation to the fourth target, U.S. EBITDA for the year ended at EUR 53 million or $60 million overcoming the target of $50 million that we have set. The last quarter was the better-performing one of the year after a difficult half one due to COVID-19 implications and a sharp recovery in the third quarter. In addition to this, in EBITDA terms, the fourth quarter of 2020 was also much better compared to the expected period of last year. The fourth quarter of 2019 was negatively affected by the high minimum state guarantee set in advance in Marocaine, referring to the previous contract, while the fourth quarter of 2020 was assisted by the stronger performance of our U.S. business. As an overall assessment, for the year 2020 financial performance, we were on track with the commitments we were announcing throughout the year when publishing our quarterly results as well as with our projections in the business plan we shared with the market when announcing the lockup agreement back in January. As regards to 2021, we expect a recovery to pre-COVID levels, because we see that after the difficult and, to a less extent, third quarter in 2020 the fourth one left a very clear mark of rebound in spite of the second COVID wave in the North Hemisphere. Although there were some small-scale implications in the first quarter of 2021 in some of our markets due to COVID-19, too. Currently, all restrictions are lifted in major revenue and EBITDA contributor countries. Markets are operating in a normal course of business, and we feel confident that in 2021 we will manage to recover fully from the pandemic indications and be able to deliver as per our commitments to the market included in our announcement dated 14th of January. Moving on to the presentation. Our results on the revenue line presented in detail in slide number 6 to 8 have been heavily impacted by the Turkish entity developments, the Marocaine business and also by COVID-19 pandemic in all geographies. More specifically in the licensed operations presented in Slide #6, the deficit of EUR 40 million was entirely attributed to the COVID-19 pandemic mainly in the first half of 2020, reflected in the markets of Malta and in Latin America. In Page #7, we present the revenue results in our game management contracts. The recent developments in the Turkish and in the Moroccan market, but also the pandemic impact were the primary reason for the revenue deficit year-over-year. What needs to be highlighted here, however, is the performance of our electronic agent Bilyoner in Turkey, which showed a total recovery in the second half of the year 2020 after first half that we launched related to the options of athletic events, performing even better compared to the respective half of last year by 30%. Regarding Marocaine, the pandemic hit the market, to a large extent, changing substantially the dynamics in this market and resulting to the unsustainability of the new contract that was activated at the beginning of 2020, the management of the group and close collaboration with the client, the renegotiated this agreement, as already announced recently, and mutually agreed to shorten the period of the contract currently effective until the 31st of December 2022 by maintaining existing infrastructure with only some small necessary improvements. Lastly, in the page, we see the first signs of the performance of our sports building contracts in the U.S., which already mentioned previously had a delay in their pickup, mainly due to the implications of the pandemic in this segment. Page #8 shows the performance of our technology contracts where our U.S. lottery contracts fully counterbalanced the deficit in the rest of the markets due to COVID-19 implications. Lastly, in the fourth quarter of 2020, there was a positive delta in the U.S. of EUR 6 million by the revenue recognition in our Canadian contract with BCLC. Turning to Page #9. We see overall P&L performance metrics for full year 2020 and for the fourth quarter versus a year ago. In relation to the full year metrics versus a year ago, what needs to be highlighted here is the deficit in the revenue line year-over-year analyzed already in the previous slides. The gross gaming revenue line declined by 14% year-over-year attributed to the same reasons mentioned in the revenue analysis. Third, the better OpEx performance counterbalancing fully the top line deficit, resulting to an EBITDA slightly better versus last year's respective period. The improved EBITDA margin is an important fourth point that we need to say, reflecting the performance of our U.S. operations and the strong pay bound of our business in Bilyoner in Turkey in the second half, but also the cost containment measures, both at headquarters and interaction of the markets. And fifth, although the D&A impact was smaller, there was performance in EBITDA line compared to previous year, was affected mainly by strong FX headwinds, impairments of intangible assets and associates investment recorded in 2020. As a result of the COVID-19 pandemic, the nonexistence of the positive effect in 2019, resulting from the sale of our participation in noncore assets and the bond buyback program in the second half of 2019 and the extraordinary capital structure optimization fees. And lastly, the net income after tax and minority interests from continuing operations was almost at the same level year-over-year. In focusing on the fourth quarter metrics versus a year ago, the highlights are: number one, the better performance in revenue and gross gaming revenue, metrics, mainly coming from the U.S. performance and, to a less extent, Bilyoner's absolute figures; secondly, the better OpEx line year-over-year mainly due to the nonexistence of the one-off settlement of the previous contract in Marocaine that affected the fourth quarter of 2019; thirdly, the combined effect of the above that resulted to a much better EBITDA in this quarter, versus the second period last year; and fourth, the positive effects that were only in part down to the EBT and the net income after tax and minority interest lines, mainly due to the nonexistence of the benefit recorded in the first quarter of 2019 from the bonds buyback program and the capital structure optimization expenses that affected the fourth quarter of 2020. As a last comment on the slide, the reduced D&A, both in full year and in the fourth quarter comparisons, which has been the result of the increased impairments and Enedis liquidation as well as end of useful life of older assets that occurred last year, reducing substantially the current run rate level of depreciations and amortization. Let's move to Page #10. The other graphs have already been analyzed in the previous slides. On the bottom left of the slide, we see that the net CapEx for the full year 2020 period landed at EUR 36 million, lower by EUR 19 million versus respective period in last year as a result of the absence of major contract implementations compared to the previous years, mainly in the U.S. but also due to the mitigation measures in relation to COVID-19 with the group evaluating carefully and on meeting noncontracted CapEx with low or no impact on the business. Out of the EUR 36 million, EUR 14 million was spent in the U.S., mainly for the new sports betting contracts as well as some additions related to increased capacity in Ohio, EUR 12.5 million towards research and development and project pipeline delivery, and EUR 9.5 million towards other necessary additions to maintain the proper state of business. Operating cash flow decreased by around EUR 23 million and stood at EUR 38 million versus EUR 61 million in 2019 with the main drivers behind this decrease being the discontinuation of our businesses in Bulgaria and in Turkey, affecting positively 2019 results and the COVID-19 implications analyzing the P&L analysis above, affecting negatively 2020. The deficit at operating level has been mitigated largely by the reduced spending on the CapEx front as a result of our business maturity, a tapering of our product development associated costs and the close monitoring of CapEx needs as a mitigation measure to the pandemic. More details on the cash flow can be found in the management and discussion analysis which is available on our website. Turning to Page #11 and focusing on the net debt. It stood at EUR 651 million at the end of the year, up by EUR 57 million versus December 2019. The main reason for this increase were the renewal and growth CapEx, mainly in the U.S. by EUR 14 million and the tax license discontinuation impact of around EUR 6 million, which also includes the dividend paid for partners in INTRALOT as a result of the contract discontinuation, tax payments at parent level by EUR 9.5 million, referring to tax audits for the years 2011 to 2015. However, it is well worth mentioning here that the company won the appeals against the tax control seeds, resulting to a return of EUR 5.2 million at the beginning of 2021, therefore, reducing the final net tax paid to EUR 4.3 million. The rest items that affected the net debt increase were the capital structure payments of around EUR 6 million, with a negative impact in the normal course of business by EUR 17.3 million, which, of course, was the result by the COVID-19 impact, but also by the coupon payments for the year. And lastly, the last 2 pages. Page #12. We see that the contributions to AGM in our revenues and EBITDA was almost 80% in terms of revenue and 90% in terms of the EBITDA. That shows that the greatest part of our business now comes from the more developed parts of the world, namely North America, Europe and Oceania as part of our strategy in the last few years, to shift our activity towards more developed markets. One important finding is also depicted in the next slide, #13, where we see that the EBITDA contribution of the partnerships is substantially lower if compared against last year's respective period, since it is only Bilyoner and Argentina, that contribute in group's consolidated metrics. And at this stage, the presentation of the full year 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. ]

May I just ask, I've noticed you've made some rearrangements with respect to leases that you've paid down in the U.S. Can you speak a little bit more about that and the rationale behind it?

Lease in the U.S., the arrangement?

Yes. If I'm not entirely mistaken, you've been paying down the leases in the year, correct? Or maybe I've misunderstood something.

You mean -- yes, yes, with regards to the financial.

I understood it to be an arrangement of lease finances. I'm not sure you...

You mean to say the same impact in the U.S. Yes, this has been an arrangement with the bank that was explained. As part of our discussions with the Bank of America, you also know that we also closed the RCS there. So this was part of the agreement as well.

The next question is from the left [ Wolford Daniel ] with Morgan Stanley.

Congratulations on this nice set of results. It's good to see the progress you're making. Question on your business plan and the growth initiatives and cost savings initiatives that underpin your projected EBITDA growth. Obviously, your run rate EBITDA is looking a lot better in Q3 and Q4. Wanted to see what, in addition to that, we will see in terms of new projects that will start-up in 2021 like in Croatia, for example. If you could help us bridge a little bit what the growth components to your EBITDA are.

Actually, this is Chrys Sfatos. I will try to give you a quick answer. As you know, we released the data of our business plan in January in a cleansing statement. Of course, they are in a form that's different from the IFRS full group consolidated but the predictions we made at that time were fully confirmed for 2020. And we believe we are on track for 2021. Specifically for the cost saving effort, we are fully on track we have delivered the cost savings we have scheduled for 2020, and we have already locked the savings we had scheduled for 2021. And hopefully, we will deliver something better in that area. Now in terms of performance, obviously, we had a big setback of the COVID effect in Oceania, Malta, Latin America and, to a lesser extent, to other markets, and the delayed onset of the sports betting activities in the U.S., that creates a lag in the business plan. Thankfully in the U.S., we had very good performance in the lottery segment, so we caught up with whatever we lost from the delayed onset of sports betting. And I hope you all realize that sports betting was the hardest hit in the first half of the year because of the lack of athletic events rather than the ability or inability of the players to access the product. So that was a very serious setback for the sports betting business. Anyway, with all these uncertainties with Australia food line and with Malta back with some more initiatives and with the sports betting unfolding as well as Croatia, which went live. And so our forecast for the maturity of that project remains and will be very substantial. This is overall the picture that we have going forward. Is there anything specific in which you would like something in addition? Let me also get a little comments from Mr. Nikolaos Nikolakopoulos.

Just to add that because we referred in Croatia, we are live in Croatia from last week. So we are on track also on this project, and we are planning to deliver the other in Germany and Canada, the one shot that we have projected. So as Mr. Sfatos said, all in all, we are optimistic that we are going to be on target on 2021.

That's wonderful. Very good to hear. As a follow-up, may I ask sort of EBITDA numbers for Croatia as well as sort of EBITDA impact from additional savings initiatives, maybe as well as Oceania. I mean, just to help us sort of build that bridge to your plan. Is there anything sort that you could give?

We are on track with what we have announced already. In Croatia, we have said already that this contract while it matures, will be in the order of $7 million to $8 million annually. Of course, this is not going to happen within this year or next year. It should have an horizon of 3 to 4 years. And what other projects you mentioned?

Australia.

Australia? Australia is a quite stable business. I mean, okay, last year, it was extraordinary year due to the pandemic impact, but Oceania, in total, the whole region, there is a $13 million to $14 million of EBITDA annually. This is what we expect for 2021 as well. I mean, it's a pretty stable business. Was there any other question? Any other...

That's extremely helpful. Maybe just on the cost savings. I know you've done a lot there, but in the central costs, is there more kind of savings to be expected in 2021 versus 2020?

On our business plan, we were committed to delivering $10 million of savings every year progressively, and we are on track with that. Actually, already, our run rate for the year will bring us to savings already booked for 2021 are about that order, and we have the space to deliver more. We adopted -- during the COVID period, we adopted, and we actually made also some changes that mainly permanent in terms of our cost structure. So we are very, very confident in that area that we are on track.

The next question is from the line of [ Manchanda Sahin ] with UBS.

I have a couple of questions really regarding your restructuring process. I was wondering, I mean, you seem to have sort of hit a bit of a wall with stakeholders in your discussions, given you're still some way off the 90% approval threshold you need to implement your proposals. While in your latest financial report, you stated that our U.K. scheme is something you may not need to implement after all, so I was only wondering how do you propose to arrive at a resolution here?

We're very actively working to deliver and execute the deal that we have announced. This is our scenario, and we have done a lot of work in the background to finalize the documentation. And we are preparing to implement the deal in the most efficient way. At this point, we would not like to comment in any further detail about how this will be done. But we have done a lot of work and a lot of analysis, and we believe that we have the tools available and the path to deliver with it.

Okay. Does that -- I mean, have you had engagement with the ad hoc committee of the 2024 bondholders through this process?

We've had a lot of discussions with all groups of stakeholders. And as we said from the beginning, the company and the management are committed to delivering a deal that is in the interest of all stakeholders, taking into account that this is, of course, a very complex deal, a very complex situation, a lot of stakeholders and trying to find the best common denominator.

Okay. Are you able to give us some sort of a time line here with respect to when we can expect any announcements?

No, I'm afraid I will not want to comment on this at this time.

The next question is from the line of [ O' Hagan Ryan ] with Atlantic Capital.

Congrats again on a very solid set of results. Just 2 questions from me. First one is on the kind of one-off items that were booked for revenue and EBITDA in 2020, if you could give us a little bit of extra color on anything substantial that maybe presents in the numbers this year, and just generally touch on the liquidity outlook for the business. I know the position going into the year-end is really solid at $100 million, with that additional tax refund that you alluded to earlier in the remarks. Just wanted to maybe give a little bit of color on how you guys are thinking about liquidity for the remainder of the year, be that from a cash gen perspective within the business? And any kind of CapEx for contract renewal that we should be thinking about in our models here?

Okay. In terms of the one-off items, so 2 were the main one-off items of 2020. The first one was related to our Canadian contract with BCLC. I said already that this contributed around EUR 6 billion revenue. And the second one refers to our project in the Netherlands, which was around EUR 10 million in revenues. I would like to provide details on the EBITDA because this is commercial sensitive info. But just to give you color on the contribution of those 2 on the top line of our P&L. Of course, regarding the U.S. You may have realized that even without the BCLC contract with Canada, the company outperformed this year open compared to the expectations. So these are the main 2 elements in relation to the one-off.

Yes. And also, you asked about the liquidity. Obviously, we are -- we have been very prudent with the liquidity this year as well. We have about EUR 100 million with March 31 closing. And some of it is restricted on certain uses as collateral. But overall, we managed to -- by decreasing the CapEx and by making significant reductions in the Opex, we had promised a 50-50 mix actually during 2020. The mix was, 65% was OpEx and 35% was Capex. So we are confident that this will be the mix also in 2021. And we have already done some salary reductions in the senior management and higher management and so this is -- in terms of liquidity, we are progressing with prudency.

The next question is a follow-up question from the line of [ Felix Wolfgang ] with [ Sarria. ]

So I have a second question -- or rather, it's largely been asked before, but I was hoping I could maybe ask it again from a different perspective. That might help me a lot. And I'm going back to the -- to your business forecast for 2021. You had sort of anticipated an EBITDA there for the non-U.S. world of EUR 33 million. And then if I add to that, the -- what I think the Greek expenses will be about EUR 35 million. And then I should presumably have some kind of contribution that I'm looking for in terms of EBITDA from your various businesses, right, of which you said EUR 12 million, roughly, I think, would come from your new contract, EUR 13 million Oceania and EUR 12 million from Malta. That leaves, therefore, EUR 30 million to come from your other contracts, where we -- which this year have made 14. So I'm trying to bridge -- I'm trying to double these somehow. And I was wondering, therefore, so we've covered the new contract. We've covered odds. We've covered, Malta. The U.S. are not involved. However going to -- there's Marocaine, there is the Netherlands, and a few smaller existing items. How am I going to double that effectively?

There are some additional contracts that maybe you did not refer to in your analysis. First of all, we have a lot of hard one, which is winding during the summer. And also the old years contract and do not forget also the creation one, which has started by the end of April. So -- and also the MAR open one, which again, with a new agreement, it's a quite hard one. It is expected to have some contribution in the EBITDA. And of course...

Down for EUR 2 million positive. Is that EUR 1 million miles away from where it should be?

Yes, more or less, it's going to be a reach. And also, please do not forget that we do not expect to have the COVID impact in 2021. So Malta, Oceania are going to contribute much better compared to what they contributed in last year. So...

I understand. But these are already in the figures effectively with EUR 13 million and EUR 12 million of contribution, right? So I'm putting in Marocaine with another EUR 2 million. I don't know. I'm just keeping Netherlands constant at EUR 8 million. I'm not sure that's correct. And then I'm -- yes, I'm looking at trying to find or substantially more revenues effectively, another EUR 20 million, even if I keep the Netherlands at EUR 8 million.

Why you're missing EUR 20 million?

So what I've done is I've taken your EUR 33 million forecast, and ending up with -- yes.

Go ahead, go ahead.

I'm ending with a headquarter kind of figure of minus EUR 34 million. So if I add that, if I add these 2 figures, I should have the whole contribution of all your various businesses, except for the U.S., right? And I subtract from that the EUR 12 million that you've given us that would come from new contracts. That leaves me the EUR 55 million that I need to find, of which you've given us EUR 13 million for Oz. and EUR 12 million for Malta. So I'm coming out there, EUR 25 million, EUR 55 million, minus EUR 25 million. And now, I'm still looking for EUR 30 million, EUR 30 million to be split over Morocco, which is EUR 2 million. Netherlands -- I don't know if I should assume EUR 8 million there. And even if so, then I'm still looking for EUR 20 million.

Okay. I think...

I don't know if I'm doing this right, but this is sort of the arithmetic.

Okay. I think you can not do it in this slide because, first of all, the EBITDA in the classic material, the EUR 33 million already includes the expenses of the headquarters. So...

That's why I'm adding them to -- adding them back, and that's subtracting them, adding them back. So EUR 33 million, plus EUR 34 million, so to speak, of -- or call it, EUR 35 million of expenses. So together, I'm looking for EUR 67 million of contribution from all your businesses, right? EUR 67 million minus EUR 12 million for the new contracts, EUR 12 million for Malta, EUR 13 million for Oz is EUR 30 million. So it's EUR 30 million for -- in terms of contribution before any headquarter, without the U.S., without Oz, without Malta and without the new contracts. That only leaves me with Morocco, Netherlands and bits and pieces that I don't know well enough. And so that's EUR 30 million I'm trying to allocate here. EUR 10 million across Morocco and Netherlands, if I'm if the EUR 8 million for Netherlands are correct, and then that still leads me trying to find EUR 20 million. So you've managed to deliver EUR 8 million so really, I'm looking for a EUR 12 million pick up in businesses that aren't related to Morocco, the Netherlands or any of the other businesses we've discussed so far.

Okay. Let's take this off line, please, because -- okay, we'll get back to you on this. But the numbers are on there, okay, we can assure you.

Thank you very much. I'd just be curious. I don't know, maybe I'm not looking at it the right way.

We'll take it offline.

[Operator Instructions] The next question is from the line of [ Casari Antonio ] with [ Northlight. ]

Going back to the EBITDA target for rest of the world for 2021, EUR 33 million, then the plan assumes that it drops to EUR 21 million in '22, and then goes back to EUR 28 million towards '24. Would you be able to explain again what is driving the drop in '22, and if there are any one-off items that are going to disappear in -- from '21 and going into '22? Then I guess the growth from '22 to '24, driven by new opportunities with [indiscernible]. But it would be interesting to understand the bridge.

Okay. First of all, the EUR 33 million in 2021 includes EUR 12 million from new opportunities, which, to a large extent, are one-offs. However...

Sorry, just for clarity, the new opportunities are not accumulated. So the EUR 12 million are a one-off relating to...

Mostly one-off. It's not a timely one-off. You see that next year, the opportunities go down to EUR 3 million. So this is why you have the drop. And then they start unwinding as we move on to '23 and '24, reaching the EUR 26 million and EUR 28 million. So the 2021 refer to one-off items in relation to opportunities, and from '22 onwards, it's more of recurring business that gradually start to unwind and grow the EBITDA carry.

Okay. Can you please give us a little bit more visibility and detail around what these EUR 90 million of one-off of new opportunities in '21 that are not going to be recurrent?

No, no, no. We cannot provide -- this is commercially sensitive, and we cannot provide more details on that.

Okay. What level of visibility do you have around them, and which quarter should they materialize?

Listen, this is Nikolaos Nikolakopoulos. What I would like to emphasize here is that we are in the process of negotiation in some of those. So that's why Mr. Chrysos said this is commercial info. We do not want to give publicly now any information. What I can tell you is that we are on those -- on some of those on good track. On others, we have some work to do. But in general, as we said, we are pretty confident that we are going to deliver on the 2021 plan.

[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.

Thank you very much. I will just conclude by the statements of our Chairman and CEO, was included in the announcement. We think that during this year, we faced the adverse effects and disruptions of the COVID-19 pandemic, which had significant impact on the lottery and sports betting industries. This impact was only partially offset by mitigation measures, operational improvements and cost containment efforts. We remain focused on developed markets seeing significant growth in the U.S. and the luxury operations. And we launched 2 new sports betting operations in Malta and Washington, D.C., while we renewed very significant contracts in Georgia and the United States as well as New Zealand, Australia and the Netherlands. The company management also dedicated significant effort, as you know, in negotiations with the bondholders to optimize the capital structure through a transaction that is expected to be completed during the first half of 2021. So we would like to thank you, and I close this call at this time.

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