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-month 2022 financial results. [Operator Instructions] The conference is being recorded. The presentation will be followed by a question-and-answer session. [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 our 9 months financial results call. I would like to pass the microphone to the CFO, Mr. Andreas Chrysos, for his presentation.

Good afternoon, ladies and gentlemen. The first 9 months of 2022 presented stable revenues and improved EBITDA compared to the respective period of 2021, indicating a stabilization of the business on the one hand and an efficiency on the cost side on the other. Major highlights for the period on the operational front are: #1, the accumulation of the efforts that the management has undertaken on the cost side in the last few years, especially at the headquarters perimeter; secondly, full rebound from the effects of the pandemic that had an impact in the respective period of 2021 in Australia; third, the ramp-up of projects that went live in 2021, mainly in Croatia; fourth, the better performance in some entities in the rest of the world such as Morocco, Ireland, Argentina and Turkey; fifth, the positive impact from the FX, primarily from the strengthening of the U.S. and the Australian dollar against the euro. These effects were partly counterbalanced by the correction in the performance of the U.S. following primarily the positive COVID bumps effect of 2021 first half performance, as well as higher merchandise sales in 2021 that positively affected last year's comparable results. And secondly, the negative implication from the license expiration in Malta in early July 2022. From a cash flow perspective, strong operating results described above, along with the implications from the credit positive financing restructuring projects that were completed during 2021 and 2022 led to strong cash flow generation, depicted on group cash balance, remaining high at a level of EUR 100 million from EUR 107 million at the end of 2021 after the group used around $25 million from the U.S. balance sheet cash to repay the 2025 [ PIK toggle ] notes during the summer. On the contract renewals front, we extended our cooperation with OPAP SA for 1 additional year from the 31st of July 2024 to 31st of July 2025, with the possibility of further expansion for additional year in the field of numerical lottery products and services. As regards to the future, we expect continued good performance in the fourth quarter, especially in the U.S., where we had a historical Powerball jackpot in November. We are now moving to the 9 months of 2021 financial presentation. So if we go in Page #5, we see the results of our licensed operations, which have contracted by 13.3% or EUR 12.6 million negative as a result of the license expiration in Malta in early July, affecting the third quarter results negatively by around EUR 22 million and the 9-month period by around EUR 25 million, in part counterbalanced by a better performance in Argentina, driven by the considerable local market growth. Turning to Page #6. We will notice a material improvement in the performance of our technology contracts. The key takeaways in this activity line is the slightly negative revenues in the U.S. for the period, mainly due to lower merchandise sales and the correction of the positive COVID-19 effect in 2021. With a positive variance in the third quarter, however, materially affected though by a strong U.S. dollar versus the euro. In Australia, we see a much better performance since last year's respective period result and a much better third quarter since this part of the world was negatively affected by lockdown restrictions last year. Same trend in Croatia, following the go-live of the lottery contract solution that commenced after the first quarter of 2021 and up throughout the remaining months of 2021. Lastly, on this page, a better performance in other jurisdictions due to higher service sales. Finally, turning to Page 7. We see an almost stable performance of our management contract activity, with Morocco performing slightly better year-over-year and Turkey in the third quarter counterbalancing the negative variance of the first half of 2022 compared to last year's respective period, favored substantially by the growth in the online segment. Turning to Page #8. We see the overall profit and loss performance metrics for the 9 months and for the third quarter of 2022 versus a year ago. Takeaways on the operational front are: Stable performance in the revenue line year-over-year analyzed in detail in the previous slides; the GGR line, which was better by 5% due to a lower average payout ratio versus respective period of last year; a gross profit line at equal levels year-over-year; the OpEx line performance worse by EUR 2.2 million, but equal at EUR 60 million year-over-year if excluding the depreciation; and all the above resulted to a better EBITDA performance of EUR 88 million in the 9-month period, 6.6% better compared to the respective period of 2021. And finally, a healthy EBITDA margin over sales at around 30%, better by 1.9 percentage points versus last year. Moving down to the EBT line, it stood at EUR 19.4 million, lower by 66% year-over-year. Last year's respective figure was positively affected by the one-off benefit of the refinancing exercise that took place in 2021. Focusing on the reasons for this performance, the main drivers are: First of all, the lower interest income of around EUR 45 million, arising mainly from the balance sheet optimization transaction that concluded within the third quarter of 2021; the lower income from participation and investments of, again, around EUR 45 million, significantly affected by the gain from the balance sheet optimization transaction during the third quarter of 2021; the higher depreciation and amortization by EUR 5.5 million versus the 9 months of 2021, mainly in Turkey Bilyoner; and the negative impact from the FX results by EUR 1.9 million versus the 9-month period of 2021. The decrease of earnings before tax line was partially counterbalanced by the lower interest expenses by around EUR 22 million versus the 9-month period of 2021, which was a direct effect of the debt restructuring process. The lower reorganization expenses by around EUR 16 million versus the 9-month period of 2021, following the successful conclusion of our capital structure optimization process. The gains on the net monetary position by around EUR 13 million versus the 9 months of 2021, arising mostly from Turkey due to IAS 29, which now is considered a hyperinflationary economy since June 2022. And the positive impact from the EBITDA by EUR 5.5 million versus the respective period of last year. And lastly, the absence of impairments and write-offs by around EUR 5 million versus the 9-month period of 2021 that took place in the first half of 2021. Turning to Page #9. The other graphs have been analyzed already in detail, focusing on the bottom left of the slide, we see the operating cash flow at EUR 68 million in the 9 months of 2022 versus EUR 84 million in 2021, because 2021 was positively affected by the one-off income tax returns received by the parent in the first quarter. Net CapEx, EUR 3 million lower versus a year ago. On the bottom right of the slide, we see the net debt and the leverage ratio being at EUR 510 million and 4.4x, respectively, as of the 9-month period of 2022. Turning to Page 10. If we see the net debt movement bridge that depicts the elements that affected this ratio in the 9-month period. Strong free cash flow generation and completion of the restructuring actions, namely the buyback of the minority sales of the U.S. subsidiary through the latest share capital increase and the U.S. debt refinancing had a positive impact on the net debt. However, gross debt movement was adversely impacted by the weakening euro that fully offset the benefits from the reduction in our U.S. denominated gross debt. Lastly, if we go to Page #11. We see the contributors per region in our revenues and EBITDA, with North America, Europe and Oceania contributing the major portion, in line with our strategy in the last few years to shift our activity towards more developed markets of the world. And at this stage, the presentation of the 9 months of 2022 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 Kourtesis with Bureau Securities.

My question has to do with your share capital, your balance sheet. I can see there is a positive effect from the share capital increase by EUR 129 million approximately due to the share capital increase that you proceeded in the third quarter. But on the other hand, I can see there is an effect due to change in participation that stands at a negative effect to EUR 125 million. Could you please further elaborate on this? Because this resulted to have a negative equity again. So would you be kind enough to elaborate on this, please?

Yes. As you correctly point out, there is an increase in the share capital and the premium. So the parent equity has increased. That is the big debt in the notes is the parent equity of EUR 143 million. But as you correctly point out, the change in participation reflects the historic sort of acquisition price, the accounting price of the assets that were acquired with the procedure of the share capital increase, which is our percentage to INTRALOT Inc., our U.S. subsidiary, that we did not control in the previous year. So -- and this historic value has a different accounting price than the fair market price. So there is a negative effect in the retained earnings. And this is something that will require a further accounting treatment on our part in order to repair this. So we want to plan this further in order to accomplish the desired result. This can be done through many strategic initiatives that we have in mind, which are a little bit behind due to the volatility in the markets. But we will do the necessary moves in order to tie this up with our strategic initiatives, and we certainly see a lot of opportunities ahead. And as in the past couple of years, we had no [ sorted ] ideas and designing and executing complex transactions. This will require some further accounting treatment.

Okay. If I could elaborate further, if I understand correctly, you had a price for the INTRALOT Inc. in your books and you acquired the remain percent, that's the 35% from the -- that was held by the bondholders at a higher price, which resulted in losses in your retained earnings. Is this correct?

The problem in this treatment has to do with the fact that we acquired something that we already consolidate. This is why you have the negative impact on the equity. However, this asset, now leaving the accounting treatment aside, this is a very important asset for us, and this transaction has been a game changer for the group. This gave us access to the liquidity, and that's why we did it. So the real benefit from this transaction, as we have explained many times, is very significant. Now there is an accounting treatment that we need to complete.

Okay. But just a follow-up on this. As far as I understood, the initial plan you had in your mind was that you're going to turn positive in your share equity by the end of the year. And through the retreatment, you would go out of surveillance status that you currently are, which would release the share price in the, well, relief -- provided relief for the share price in the stock market. Is this still in place? Because you referred to that several clients related to INTRALOT Inc. are going behind due to the current situation of the market.

Yes, correct. And these plans are very important plans. And I think while, at the same time, we are delivering good operational results. This would create the assurance necessary that we are moving on the right path.

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

I have 3 questions. To start with, I seem to remember that you had indicated on the previous calls that for the full year 2022, you could probably have an EBITDA print of about EUR 100 million to EUR 110 million and that you were basing that off based on 2021 EBITDA being around 110 million. So just looking at year-to-date, EUR 88 million, and even if we were to consider the upper end of that range in, call it, EUR 22 million of EBITDA in 4Q, and looking at last year's 4Q reported numbers. Do you think there's actually room for sort of EBITDA guidance beat here going into year end and based on what you're seeing in terms of no changes in investors or in consumer sentiment? My second question is on your upcoming contracts, if there's anything else that's material, didn't seem like so from the bond logs, but I just wanted to check, given that, obviously, you had the Malta contract that did expire and that you didn't bid for in the past? And then finally, now that you do have access to the INTRALOT Inc. liquidity, what are your thoughts on the outstanding bonds? And given the recent refi that got down at 3%, is there any similar facilities that you could consider to have a sort of better refinancing for the outstanding bonds?

On the EBITDA forecast guidance, yes, we believe that we will be north of last year's EBITDA, given the 8-month results and given -- 9-month results and everything that we know about the fourth quarter so far. As Mr. Chrysos mentioned here, we expect a better Q4, much stronger Q4 in the U.S. And overall, the performance in the rest of the world continues to be strong. So I think -- we believe that we will have EBITDA growth for the entire year. So at year-end, we definitely expect to be north of EUR 110 million, maybe significantly more. So the 9-month performance, we expect maybe not so strong as the 9 months. But we definitely expect positive variance for the EBITDA compared to last year for the full year. On the second question, yes, we have some developments in the United States. We were hoping that we will be able to announce something on this call. But the formalities have not been completed in a significant Sports Betting contract that has been on our pipeline for a while. Hopefully, soon, we will be able to give you some more details, color or specifics with the announcements. But we are confident and strong about this. In general, we are kind of very pleased with our development in our performance in Croatia. So because you asked about Malta, we think that we will be able to recover the Malta EBITDA from the other contracts that are coming on stream right now. And finally, for the -- I guess, your third question relates to the outstanding bonds and the refinancing. Actually, of course, we're having a lot of discussions, and recently, we've been in London as part of the Athens Stock Exchange roadshow a couple of days ago, and we had some discussions. So we understand the dynamics in this market since there are a lot of maturities coming up in '24, '25. There are ideas floating around. But the volatility in the markets would require a little bit more patience before we rack up our minds and come up with some plan, not very long. But definitely, with all the experience that we have now in this area, we believe that we can have the planning -- so definitely by our next call in the annual results, we will have some more color to provide. We expect that the volatility in the markets will subside in the first quarter of 2023, and that would be the right time for us to make our plans. But given the fact that the company has stabilized its EBITDA, has reduced its expenses and we are now generating free cash flow, we are positive in free cash flow. This year, we were able to partially repay debt. So we think that it's going to be a much more streamlined exercise than in the past. And given the time horizon and all the conditions, we think that in 3 months' time, we'll be able to provide you some more color on this.

And if I may just follow up on that one. I thought the refi for the '25 at the sort of term loan that you had there, that was great in terms of the 3% pricing there. For the outstanding bonds, is your intention to still be in the bonds market? Or would you consider, call it loans or other sort of facilities to take out these bonds?

Yes. I cannot answer this question definitively. The fact that we have started a good relationship with the banking consortium in the United States definitely provides more optionality. So we will consider both avenues. In 3 months, we will be able to give you more information on that. So yes, both options are on the table. It could be a combination. But our relationship with the bank is very good in the U.S., and the bond markets are what they are. So both options are available.

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

Great to see nice results and positive development around the company overall. That's great. question. You actually had pretty strong EBITDA growth in this quarter also versus the last quarter. What was actually driving this?

Surprisingly, it was the performance in the developing markets. And of course, there was a strong rebound in Australia, which is a significant market for us. So the Australian rebounds was very significant. But Argentina and Turkey also gave very good results. In spite of the inflation regime there, the performance is very strong in actual numbers. Now the other fact that is very important in the year-on-year improvement of the EBITDA is a significant reduction of our costs. So we have in the 9-month period that you see there is about EUR 7 million improvement on the EBITDA based on cost containment, mainly in rest of the world. So that's also a very important factor. That's how you see the revenue stable and the EBITDA increasing.

Okay. Great. Last question, how does your sort of new contract pipeline look these days?

Like I said earlier, we have something quite mature in the United States. Unfortunately, I cannot give the full details here. But in very little time, we will be able to make that announcement. Overall, we are very upbeat about opportunities of iLottery in the United States, plus looking at -- we have still a lot of time until our maturities of the contracts or the big contracts, but there are opportunities floating around, even in the rest of the world, and we will be sharing some color soon.

[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 for attending the call. I would like to close by saying that we are very encouraged by the 9-month results and by this performance, strong performance in the rest of the world. And as I mentioned in the question earlier given what we know about Q4, this will be another good year for our results. That gives us confidence about the future. Thank you.

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