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 and Live Webcast to present and discuss the 9 months 2021 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. Chrysostomos Sfatos, Deputy Group CEO of Intralot. Mr. Sfatos, you may now proceed.

Good afternoon. Thank you for joining us for the third quarter results and the 9-month results of 2021. The whole management team is joining me. My colleagues, Mr. Sotiropoulos and Mr. Konstantellos; together with Group CFO, Mr. Chrysos; Budget and Financing Controller, [indiscernible] and Director of our Consolidation department, Mr. [indiscernible]. Welcome, and I turn the floor to Mr. Chrysos for his presentation.

Good afternoon, ladies and gentlemen. Our results announcement for the third quarter last week confirmed the trend that we saw in the first 6 months of 2021 and makes us confident that we will end the year according to the guidance we have been giving throughout 2021, consistent with the main areas of focus in the last few years. Before presenting the 9-months 2021 financial results in detail, I would like to make an overall assessment of the performance of the group against the targets that we have set. There are 2 areas of focus for our group and more specifically, in the operational performance enhancement and secondly, the improvement of our capital structure. Moreover, down the road towards these 2 strategies achievements, we wanted to maintain our liquidity strong. With regards to the first target, our main focus is the strengthening of our EBITDA to restore the lost profitability that affected our results in the last few years, both from the top line and the bottom line by targeting mostly on strengthening our performance in developed markets and by optimizing our cost base through development of synergies and continuous rounds of cost adjustments on all expenses lines. Secondly, we have to handle the maturity of September 2021 bond, considering the interest of all involved parties, note holders and shareholders. Both these targets should be accompanied by a strong liquidity position of the group to the extent possible. The performance metrics and achievements of the 9 months of 2021 show that: number one, our EBITDA outlook for 2021 is shedding for a level of over $100 million when the respective metric in 2019 with Turkey and Bulgaria included was EUR 88 million, strongly supported by the performance of our U.S. subsidiary and fueled by the strong top line rebound globally. Secondly, OpEx outlook for the year for the whole group is in the vicinity of EUR 90 million to EUR 92 million with respective reporting metric in 2019 was more than EUR 130 million. And in 2020, it was slightly above EUR 400 million. The effects both on top and bottom line resulted to a strong operating cash flow performance of EUR 84 million already in the 9 months of 2021, which is almost 200% better compared to the respective metric of last year. It is worth mentioning here that operating cash flow in the 9 months is already close to the level it was for the whole year of 2018 before this difficult period for the group started. With the 2 following years of 2019 and 2020 being at much lower levels, EUR 61 million and EUR 44 million, respectively. CapEx, also in line with our expectations, heading for a EUR 20 million to EUR 25 million level for the year as a result of the maturity of our products as well as to the optimum handling of our project renewals from EUR 55 million in 2019 and EUR 36 million in 2020. Third, during August, we completed successfully the 2 exchange offers that resulted to a deleveraged capital structure by EUR 163 million while extending maturities at least until 2024, this effect has partially passed through the income statement, supporting strongly the EBITDA line. And fourth, the liquidity, which stood at EUR 90 million from EUR 100 million at the beginning of 2021, including, however, EUR 17 million of one-off costs related for the capital structure exercise. Moving on to the 9 months 2021 financials. Our results on the revenue line presented in detail in Slide #5 to 7 of the presentation that we have in presentation. We see an upward trend in all activity lines compared to the respective period of 2020, fueled mainly by the strong recovery of the pandemic impact as well as the strong momentum in the U.S. in the lottery segment and the gradual uptake of our sports betting projects in the company. More specifically, in the licensed operations presented in Slide #5, we see an increase of EUR 26 million coming from both markets in this activity line. the rebound of the markets in both geographies after the strong shift last year, mainly in the second quarter due to the lockdowns and restrictions were the main contributor. Turning to the next page, number 6. We see the revenue results in our technology contracts. And the major highlights here are the strong performance of our U.S. operation, which continued its positive trend in the lottery segment for 1 more quarter after the first 2 quarters of the year. Although the first quarter was supported by a significant output, this positive trend was continued in the second and third quarter as well, although there was no jackpot indicating a shift towards more traditional playing habits such as the lotteries in that market, which is very encouraging for the performance of the market and the new reality in the U.S. Australia, although it continue to experience some turbulence from COVID-19 as a result of the new wave of the pandemic would hit this part of the world in wind in interim, was certainly affected less than previous year and lockdown restrictions were at lower scale, therefore, managing to reduce the impact to a large extent. Lastly, in rest jurisdictions, the successful go live of our contract in Croatia and the better performance in Argentina, only partly managed to mitigate the lower merchandise sale in Q3 2021 compared to the respective quarter of last year, that was impacted by such a sale in the market of the Netherlands. In the last page of the revenue analysis, Page #7, we see that the performance of our game management activity line with 2 -- with the third quarter, indicating the stabilization of performance in Turkey and Morocco, landing at the same levels where it was in the third quarter of 2020 when the pandemic impact in these markets have been contained to a large extent. Finally, the U.S. sports betting market continue to grow, which after the turbulence in their commencement, mainly due to COVID-19 implications, finally went live in late 2020 and continues to pick up. Turning to the next page, number 8. We see the overall P&L performance metrics for the 9 months of 2021 and for the third quarter versus a year ago. Highlights on the operational front are: number one, the growth in the revenue line year-over-year being overall higher by 24.4% and 8.2% quarter-on-quarter, which have been analyzed in detail in the previous slides; number two, the GGR line, which followed the same trend as the revenue and was higher by 21.2% year-over-year and 8.4% quarter-on-quarter; thirdly, the gross profit line, which was higher by 76% year-over-year and 38% quarter-on-quarter. Equivalently important that the gross profit margin was higher by 8.3% and 6.2 percentage points year-over-year and quarter-on-quarter, respectively. Since a large part of our activity, mainly in technology and management activity lines does not incur proportionately increased costs with a revenue increase resulting to higher gross profit margins that go straight down to the EBITDA. Fourth, the OpEx line performance, which was at the same level on a like-for-like basis, with a much higher revenue, though indicating efficiency as a result of the efforts undertaken by management in the last few years and in 2021 as well for a streamlined business and a lower cost base that also supported the EBITDA line in Greece. And fifth, all the above that were reflected to define EBITDA margin of our sales by 8.7 and 7.8 percentage points year-over-year and quarter-on-quarter, respectively, which clearly indicates a much more efficient operation. The third quarter of 2021 was also, to a large extent, positively affected by the capital structure optimization exercise that was completed during the summer and heavily affected the metrics below EBITDA. Therefore, the better operating performance as described above, in addition to the lower depreciation and amortization, the nonexistence of burdens that hit our P&L in 2020 from participation in associates mainly due to COVID-19. And all this in combination with the benefits of the capital structure optimization exercise of EUR 88.5 million hitting positively the income statement that resulted to a positive trajectory performance at the EBITDA and the income tax after tax and the net income after tax and minority interest level. As the last comment on this slide, we see a clear upward trend depicted in the operational and the financial metrics in the last 12 months column, which is representative for what to expect for the full year results. Turning to Page #9. The upper graphs have been analyzed in detail already. Focusing on the bottom left of the slide, we see the mirroring of the operating performance analyzed in detail in previous slides, is being reflected on the operation -- on the operating cash flow, which reached EUR 100 million in September LTM and EUR 84 million in the 9-month period were examined last 12 months. Net CapEx, on the other hand, has been substantially reduced and has landed at EUR 18 million, in line with our commitment for a substantially a reduced CapEx following optimization of our spending post investments and important renewals, especially in the U.S. On the bottom right of the slide, we see the results of our capital structure optimization exercise with the net debt materially reduced to EUR 500 million after the deleveraging effect of EUR 163 million in nominal value. The reduction of the net debt in combination with the operational improvement reflected in the EBITDA has led to a net debt-to-EBITDA ratio below 5x, showcasing the success of the group in the actions it has undertaken in the last 2 years to adopt its capital structure to the new reality that has been shaped for our group in the last few years. Lastly, in Page #11, we see the contributions per region in our revenues and EBITDA, where we see that almost 80% of our revenues and 85% of our EBITDA are produced in the more developed parts for the world, in North America, Europe and Oceania as part of our strategy in the last few years to shift our activity towards more developed markets. For more details, I would like to mention at this point that after the presentation, the management and discussion analysis will be available in our website. And with this final comment, our presentation 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 Asset Management.

I just have one question because you haven't got the MD&A out. What is your proportionate EBITDA from the point of view of the part?

The proportion of EBITDA that you will see in the MD&A, which will be uploaded shortly is for the 9-month period, it's EUR 66 million.

The next question is from the line of Permalloo Jemma with JPMorgan.

I have 3 questions. So the first one, thank you for confirming your EBITDA guidance for the full year. Can I just check if you have any adjustments or real cost that you you're thinking of booking in Q4? And then my second question is on the 2025 notes that are callable. Any sort of guidance or maybe color there in terms of refinancing or calling them back? And then just finally, you mentioned sort of potential update on the U.S. business on the last call. I was just hoping for some color or an update on this?

In relation to the EBITDA guidance, first of all, let me tell you that the EBITDA excludes any real costs. So these amounts are on the EBIT line, so they're not in the EBITDA line. And as I said during the presentation, the LTM figure of the EBITDA is very representative of what we expect more or less for the year-end metric. So, on the issue of the '25 notes, your question was about company considering refinancing it. Of course, it is an option that we have. And definitely, we believe that we can achieve a better rate because this rate was a result of a restructuring process. And now the company is very solid. It already has a B2 rating for this instrument. And under these circumstances, we believe that we can improve within the time that we have available, we can improve on the rate, and we can refinance these notes earlier. And what was the third question, please?

My third question was on your U.S. business. I think you had some commentary on your last call. I was just hoping for some color there in terms of potential plan or maybe a sort of partial sale of that business.

I think we are on the same page in our last call that we intend to leverage the U.S. business in the best possible way in terms of improving the group's financial position in the best possible way. So absolutely, it is an option for us to think various ways either through listing other through partnerships. Certainly, our main strategic element is that we intend to grow through partnerships.

The next question is from the line of [indiscernible] Daniel with Morgan Stanley.

Two quick questions. One, could you talk a little bit about your pipeline in terms of new projects, with the sort of EBITDA potential and CapEx requirement is. And then the second question, you just mentioned partnerships for the U.S. Just wondering what -- how such a partnership could look.

On the second question, in business partnership, in cooperation with various areas that we need various different kinds of technology and other opportunities or going into the area of sports betting licenses, et cetera. On the first question, yes, I think we do have built a strong pipeline, especially in the U.S., but also in the rest of the world. And we are evaluating every opportunity in order to make sure that we are going to deploy the necessary capital in the best possible way. So there is both in the sports betting and in the lottery sectors, a series of opportunities that we are looking. And when we find that practically this is going to be a look of the case, we are going to beat or go after this opportunity.

Any particular contracts that stick out that are sort of up for tender?

We have already been, for example, [indiscernible] We are waiting for that. We don't know yet when this is going to be announced. At least for the time being, we hope that this is going to -- we are going to have new contention March next year. This is something that could be a game changer. And this is something that we are focusing on. The other thing is that also in the U.S., there are a couple of strong business in the pipeline on the sportsbook mainly that we are waiting either for RFPs to issue or we are waiting to see if we are going to start in the next -- in the first quarter of 2022, again, a couple of projects from the sportsbook area.

[Operator Instructions] The next question is from Kogge Maxime of ODDO BHF.

Yes. And I had a first question regarding the contract in Malta that you -- finally, it appears you didn't submit any bid for the renewal of this contract and this was won by your competitor. So you did tell us in the previous call that you plan to submit a bid. So can you provide us perhaps with more color on that? And does the business plan for 2022, notably already incorporate the discontinuation of this contract the business plan that you had submitted that you had presented to bundles in January? And second question is about your contract in Vermont. I understand that this was also lost to a competitor and what impact of this one on your EBITDA?

Mark, you have seen the outcome of the tender. We thought that the CapEx required for that, so the license in particular was not to be repaid and given the strong interest in the competition. Eventually, the bid went up to EUR 105 million. Now how this better intends to generate this money, it's -- they have probably another business model. Under our business model, there was no way that we could follow up on that. But that being said, our company in Malta is a very strong trademark and brand name. Up until now, only half of our EBITDA was coming from the licenses that we didn't bid for and we are currently in the process of evaluating our future presence in the country with the rest of our activities or maybe some more interactors to be economical. So on the other hand, cash flow-wise and debt-wise, the profile will look better without this contract. In Vermont, it's a small contract. It's coming over a couple of extensions. It seems that it will be with us until almost the whole year 2022. And yes, it's a small contract. Some contracts we lose, some contracts we gain. It's not going to affect the EBITDA, especially under the current conditions. And the strong growth that we have seen in instance, in less big markets like Ohio and Illinois and the growth in the U.S. speaks for itself. So Vermont does not really substantial effect or make it end to our U.S. EBITDA and the other. So the last question was about the business plan of 2022. What's the last?

Yes, actually, I wondered whether, I mean, because your planning for -- you had previously guided to around EUR 107 million of EBITDA for '22. And I wondered whether we should deduct around EUR 10 million from that amount coming from the Malta contract. Or if that was already incorporated at the time, the probability that you will not...

We will need to revise our model regarding Malta but we will also need to revise in comparison to a better performance in the U.S. So overall, we will not make any dramatic change. The possibility is for an upward move certainly not downward move in concern to the Malta contract.

Okay. So I mean, basically, the EUR 107 million figure still stands, more or less?

More or less, there are a lot of headwinds in the market. It's an Internet of high unpredictability due to COVID due to ForEx movements due to many parameters, we will see how this plays out.

[Operator Instructions] We have a follow-up question from the line of Permalloo Jemma with JPMorgan.

I just had a follow-up question, and I just asked if you see with the new variant, it's a bit of early days and there's still research ongoing. I just wanted to check in for your thoughts here given that if there were to be -- and again, I appreciate this. It is still early days. But if there were to be further lockdown wave restrictions, how do you see that panning out for your business, especially going into your [indiscernible] and Q1 2022? Do you see any concern there? Or do you think you have enough contingency and liquidity as well in place to sort of navigate any further restrictions.

Right now, we are not particularly alarmed, especially because the biggest part of the impact in the past waves has been from Australia, which is now entering in the summer months and doesn't seem any sign of higher, vis-a-vis, the new variant. Otherwise, in the rest of the territories and especially in the U.S., the way the model works, it does not depend on lockdowns because the network remains open, received to self-service machines and all of that helps -- I mean, it doesn't impact our top line in the U.S. So the U.S. works in a completely different phase, vis-a-vis, COVID. So we don't expect any picture dramatically different than this year. And hopefully, we will not have the minimal impact that we had this year.

[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 very much, everyone, for your attendance and our best wishes for the holidays and stay safe.

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