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

Ladies and gentlemen, thank you for standing by. I am Gelly, your Chorus Call operator. Welcome, and thank you for joining the INTRALOT conference call and live webcast to present and discuss the first half 2022 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.

Thank you. Welcome to the earnings call for the first half of 2022. I would like to pass the floor to the group CFO, Mr. Andreas Chrysos, for his report.

Good afternoon, ladies and gentlemen. The first half of 2022 was characterized by the stabilization of the business, evidenced by the stable top line performance and EBITDA compared to the previous year. Major highlights on the operational front are the accumulated effects of the efforts that the management has undertaken on the cost side in the last few years, especially at headquarters perimeter; the full rebound from the effects of pandemic that had an impact in the respective period of 2021 in some of our markets, such as Argentina and Australia, smaller though compared to 2020; and thirdly, the ramp-up of the projects that went live in 2021, such as Croatia. On the financing front, after the completion of the capital structure optimization of the '21, the first half of 2022 was marked by INTRALOT's continuous efforts to further optimize its capital structure and create value for our stakeholders as committed by the management. As you are aware, INTRALOT completed a share capital increase of up to EUR 129 million in July with a full subscription with cash payment and preemptive rights in favor of existing shareholders. As part of this process, a new cornerstone investor has entered the shareholding structure of the group. So this new group, Standard General, and its wholly owned subsidiary, City Holding Company, acquired 32.9% for the stake of INTRALOT S.A. by injecting EUR 71 million. The proceeds of the share capital increase were used to buy back shares from the minority shareholders of INTRALOT Inc. Also on July 28, INTRALOT Inc. signed a credit agreement with KeyBank National Association Inc. as administrative agent and issuing lender and the syndicate of U.S. financial institutions for a 3-year term loan of $230 million, plus a committed revolving facility of $50 million, the proceeds of which were used to fully refinance the 2025 PIK toggle notes, which subsequently were canceled. Apart from the repayment of the 2025 notes, the new credit agreements bear lighter terms and covenant packets compared to the previous notes, while the revolving credit facility provides flexibility for the company in relation to its liquidity needs. Apart from the strategic importance of all those actions that put INTRALOT in a stable cost for new opportunities in the future, the effect of the recent restructuring exercise that was completed successfully in August 2021, also affected positively the P&L with the debt servicing cost being materially lower versus a year ago, while the leverage ratio of the group was also improved substantially as a result of both better net debt but also EBITDA metrics. On the contract renewals front, during the first half of 2022, INTRALOT extended its current contract with for 1 more year, which is now due to expire at the end of 2023 and the [ Smartron ] Corporation in Malaysia for 2 more years, which now expires in June 2024. Furthermore, a 5-year extension option has been exercised with the [ Wyoming ] Lottery, according to which, INTRALOT Inc., our subsidiary in the U.S., will continue to provide its lottery operating system and services for the operational lottery through August 2029. And with this said, we are moving on to the first half of 2022 financial presentation. So turning on to Page #5. We see the results of our licensed operations, which have been improved by 6.5% or EUR 4 million. Performance attributed to our better performance of business in Argentina, partly counterbalanced by a lower performance in Malta. Turning to Page #6. We see a stable performance in the revenues generated by our technology contracts. The key takeaways in this activity line are, first of all, the high revenue in Australia since last year's respective quarter was still affected by lockdown restrictions and were fully lifted in the next month of 2021. Same trend in Croatia following the go-live of the lottery contract solution that commenced after the first quarter of 2021 and ramped up throughout the remaining months of 2021. In the United States, we had a deficit of EUR 5.9 million or 7.5% compared to the respective period of 2021. The nonexistence of jackpot in the first quarter of 2021, the higher merchandise sale in the first half of 2021 and the anticipated correction in the lottery segment performance were the primary reasons for the lower revenue of 2022 compared to the respective period of last year. By nature, of course, the frequency and magnitude of jackpots cannot be predicted, so being the main reason for the seasonality and peaks of the lottery top line movements. Lastly, moving to Page #7. We see the performance of our management contracts activity, which was reduced by 10.2% or EUR 2.5 million, which was solely in effect coming from the Turkish market, attributed to the foreign exchange currency implications. Though in local currency, current year results posted an increase of 49.4%. All other effects were minor and counterbalanced its color. Turning to Page #8. We see the overall P&L performance metrics for the first quarter of 2022 versus a year ago. Takeaways on the operational front are the following: stable performance in the revenue line year-over-year, which has been analyzed in the previous slides. Secondly, the GGR line's slightly better due to a lower average payout ratio versus respective half of 2021. Thirdly, the gross profit line, slightly lower compared to previous year performance, but better by EUR 2 million, if excluding the depreciation, which is included in this line. Fourth, the OpEx line performance, worse by EUR 4 million. And if excluding the depreciation here as well, it's EUR 2.8 million, primarily attributed to some cost [ variance ] in the U.S. And fifth, all of the above resulted to a stable EBITDA performance of EUR 55.1 million in the first half of 2022, slightly better compared to the first half of 2021. Lastly, the EBITDA margin of sales remained at the same high levels as it was in 2021, at around 27%. Moving down to the EBT line. It was better by EUR 18.4 million year-over-year. So focusing on the main reasons for this performance apart from the slightly positive EBITDA variance, the rest positive variance in this line were the following: first of all, the nonexistence of the reorganization expenses that hit the first half of 2021. So being better in this line by EUR 10.9 million. The second thing was the gains by EUR 9.1 million on the monetary position arising from the first-time application of IAS 29 due to a hyperinflationary economy in Turkey, which is a noncash item. Thirdly, the lower interest expense directly affected by the debt structuring, which was better by EUR 3.9 million. And lastly, the absence of impairments and write-offs that took place in the first half of 2021. So this line being better by EUR 3.9 million. On the negative variance side, we have the following: First of all, the negative impact from the FX results, which was lower by -- was by EUR 3.9 million. The higher depreciation and amortization by EUR 4.6 million. And lastly, the recognition of losses versus gains from participations and investments, primarily due to the sales of Peru that took place in the first half of 2022 -- 2021, I'm sorry. Turning to Page #9. The other graphs have already been analyzed in detail. So focusing on the bottom left of the slide. The operating cash flow stood at EUR 41 million in the first half of 2022 versus EUR 51 million in 2021. And this was because 2021 was positively affected by a one-off income tax returns received by the parent company in the first quarter, specifically. So net CapEx at slightly higher absolute figure versus last year, but almost similar. On the bottom right of the slide, we see the implication of the net debt and the leverage ratio being EUR 509 million or 4.6x respectively, which is a direct effect of the restructuring exercise that took place in 2021. Turning to Page #11 (sic) [ 10 ] lastly, we see the contributions by region in our revenues and EBITDA. As always, and in line with our strategy in the last few years to shift our activity towards more developed markets, most of our revenues and EBITDA are produced in the more developed parts of the world, namely North America, Europe and Oceania. And with this said, at this stage, the presentation of the first half of 2021 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 Walther, Daniel with Morgan Stanley.

Congratulations on the successful capital raise. Well done. Looking forward, in regards to your outlook, I mean, you are around this EUR 110 million EBITDA level. Do you feel like you have growth potential from there? And if so, what are some of the areas of growth that you see?

Yes. This is Chrys Sfatos. We are definitely looking and evaluating our options and opportunities right now, basically starting from the areas where we are already active. United States and Australia will be the primary countries where we have the strongest base. Right now, we don't have much to share in terms of quantitative targets. We are very happy that in the midst of this environment and especially the pandemic that we are able to maintain this level of EBITDA of around EUR 100 million at group level. And definitely, certain growth opportunities from the areas that I mentioned, we will be able to quantify more specifically in the coming period. But basically, now the company has the runway that we sought for in order to address all these opportunities.

And then one quick follow-up question. I mean with your new debt facility in the U.S., which obviously also is very cheap, do you have the flexibility to move cash freely around from the U.S. into headquarters?

Well, first of all, we now have 100% of the U.S., which significantly increases our access to the dividend. So our plan is to collect the dividend, which is now possible from the United States and definitely follow a prudent cash management. First of all, as you realize, we have a revolving facility, which gives us tremendous flexibility in the U.S. to open and close it and definitely meet any CapEx needs through that, that also minimize the expenses on the debt servicing. But yes, the answer, I mean, the bottom line to your question is, we do have now plenty of capacity to move the cash from the United States to the parent structure, if there are such needs. At the same time, you should notice that the cost structure at parent level is significantly lower and therefore, the needs for cash pulling from the United States are much more limited than in the past couple of years.

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

Also congratulations on getting the transaction done. A couple of questions from me. I think, first of all, given your exposure as well to Europe, I was just wondering if you could provide some color on any sort of change in consumer sentiment that you're seeing across the board. And secondly, your EBITDA of around ballpark EUR 110 million, any guidance going into year-end? And then just finally, given your net leverage of 4.6x, could you remind us if you have or had provided any sort of leverage target in the past?

I think the leverage right now is 4.6x, right? Is that what you said? Or -- okay.

Yes, that's what I said.

Yes. Well, it's significantly better than in the past. And of course, obviously, we're trying to reduce it. But that's -- the other question was about the EBITDA. If we have any guidance, do you mean for 2022?