Intralot Integrated Lottery Systems and Services SA
ATHEX:INLOT
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Ladies and gentlemen, thank you for standing by. I'm Mirda, your Chorus Call operator. Welcome and thank you for joining the INTRALOT conference call to present and discuss the first quarter 2020 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. Christos Dimitriadis, CEO for INTRALOT. Mr. Dimitriadis, please go ahead.
Thank you. I would like to welcome everybody on this call in which we will be discussing INTRALOT's financial results for the first quarter of 2020. The agenda of this call consists of 3 parts. First of all, I will start with a business review of Q1 2020, and I will briefly present INTRALOT's strategy as presented in detail during our Annual General Meeting that took place a week ago. I will also present the first results of the execution of the new strategy. The second part of the agenda, we'll have our CFO who will proceed to a more detailed presentation of the financial figures for Q1 2020. And the final part is about Q&A where INTRALOT executive team will be at your disposal for answering questions.
Starting with the financial results of Q1 2020. We saw our business in the United States performing very well and according to our expectations, excluding the COVID-19 impact in the second half of March. A second positive highlight relates to the adaptability of our group as showcased during the pandemic and as it relates to the handling of our expenses. This is demonstrated by the low level of CapEx compared to any other recent period. A third and certainly most important qualitative highlight has to do with the resilience that our organization presented in this difficult period that we navigate through, and I'm referring to the pandemic. Our people continued to work hard and uninterrupted despite the unpleasant situation we were all facing, resulting to a significant number of launches during the period of the pandemic.
There were 2 main factors that affected Q1 results. The first one is the continuation of the aftermath effect of the change of regulation in Bulgaria as well as the developments in Turkey. The second one was the pandemic itself, which impacted INTRALOT mainly in the second half of March where most of the countries took restriction measures to protect their citizens from COVID-19.
Now going beyond Q1, INTRALOT has refreshed its strategy, defining 5 objectives. The first one to introduce business innovation, attract new customers and optimize costs with digital technology as an enabler in the industries that we serve. The second one is about quality improvement in service provision and the achievement of economies of scale.
The third objective is about achieving growth through business-to-government and business-to-business sales in targeted geographies, and this refers to technology and game management contracts. The fourth objective is to establish partnerships towards increasing licensed operations or what we call business-to-customer. And the final objective is about the optimization of our capital structure.
Now the implementation of this strategy has already started to provide positive results, which are fully aligned with the operational focus area that I have referenced in our previous call. As a reminder, last time, we have promised the successful start of our Sports Betting contracts in the United States, the control of the OpEx as we return to the $50 million EBITDA trajectory for U.S. lottery business, the second wave of cost containment at HQ perimeter to support liquidity from the bottom line and the preparation of a fertile ground for several identified opportunities in North America and worldwide as well. Today, I'm in the pleasant position to say that we have made good progress on all those areas, more specifically.
We have announced the successful launch of our Sports Betting solution in Montana and Washington, D.C. U.S.A. OpEx for the lottery business has been restricted at lower levels in relation to 2019, thus leading the business towards a target of $50 million EBITDA trajectory, excluding COVID-19 impact. HQ perimeter recurring costs have been reduced by more than 10% compared to the same period of 2019, while CapEx overall remained at very low levels, demonstrating that the group manages to handle its finances effectively during the pandemic.
On top of the above, we have also managed to bring results by executing our fresh strategy as follows. The company managed to deliver new digital solutions within a very short time period, like the eSports betting solution at INTRALOT de Peru. We have also made 2 agreements for introducing eSports, one in Asia and one in the European Union. We have developed a brand-new product called LOTOS Xi for Internet lottery. We have made 4 agreements to implement LOTOS Xi, 3 in the United States and 1 in the European Union. We have also made an agreement to implement KINO in 1 U.S. state.
Finally, we have come to an agreement to renew our Sports Betting contract in the Netherlands. The above are just the first signs of the effectiveness of our new strategy, and most importantly, the effectiveness of our new organizational structure as our teams have managed to deliver digital solutions very rapidly and have also signed new agreements with customers in record time as well.
With this final point, I would like to ask our CFO to present more details on the financial figures of the first quarter.
Thank you, Chris. Good afternoon, ladies and gentlemen. Before presenting the numbers, I would like to give a short brief in relation to the guidance we have given 1 month ago, considering [ before ] that the pandemic situation is still here and continues to affect the performance of our companies worldwide.
Our primary target is to minimize or partially offset the negative impact of the pandemic supported by our strong liquidity while preserving it to the maximum possible extent. Having this in mind, our cash position, excluding partnerships, landed at EUR 135 million from EUR 152.5 million at the end of 2019, lower by EUR 17.5 million and higher by EUR 4 million, if excluding the coupon payment of EUR 21.5 million in March. The respective number as of the end of May is in the vicinity of EUR 130 million, indicating the prudent handling of our liquidity.
On the operational front, the performance of our U.S. operation will gradually replace the lost EBITDA from the Bulgarian business, although it is difficult to have this shift already in 2020 because mainly of 2 reasons. The first one is the impact of the pandemic, either in the existing lottery business or in the commencement of the newly introduced Sports Betting contracts, which will require some more time to unwind given the postponement of sporting events and the overall [ health ] of the Sports Betting activity.
Secondly, it is the inherent nature of all new contracts that require some time to mature. In addition, all other major projects that we are currently implementing, such as the new lottery contract to be shared through our company in Croatia, are progressing well and are also expected to start contributing positively in our revenues within current year.
The important thing that we need to keep is that all projects in our pipeline are progressing as per schedule and will contribute positively short to medium term. Of course, part of our liquidity support measures also include the second wave of OpEx control, either in the U.S. or at the HQ level, as already mentioned by our CEO by -- in his opening statement.
On the investing front, we have already said that part of our CapEx will be either deferred or even waived if we assess that this will not have a substantial negative impact in our growth in the medium term as part of our strategy to support our liquidity. To this end, CapEx was kept at minimum levels within the examine period, and we will continue to handle our CapEx spending in a prudent way, having always in mind the cost benefit analysis in relation to the difficult period that we are currently facing. This strategy is feasible given the fact that the major spending in the U.S. for the new projects or renewals have been performed already and there are no such major requirements moving forward.
For the U.S. especially, apart from the actions on the cost side related to the lottery segment, our strong focus remains the Sports Betting activity contribution in the top line after the successful launch of the 2 projects in Montana and Washington, D.C. and of course, the support of our liquidity and generation of positive cash flows even in 2020, depending, however, on the pandemic evolution in the market. The latter will be succeeded both from the top line contributions but also from the cost containment in the OpEx and CapEx lines. Having said that, the Bank of America facility for the time being is 0, and the intention is to keep it at the lowest levels and use it only for working capital purposes.
So after this short introduction, moving on to the Q1 2020 financials. Our results of the revenue line presented in detail in Slide 6 to 8 of the presentation have been heavily impacted by the Bulgarian and Turkish entities, developments as well as the Moroccan business. 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 71.4 million out of the EUR 91 million overall deficit.
The other important impact comes from the Turkish market where we had a negative variant of -- variance of EUR 11.9 million, primarily from Inteltek, EUR 9 million, but also from Bilyoner by EUR 2.9 million. These impacts are attributed both to the new Sports Betting era in the country but also from the COVID-19 since the absence of Sports Betting events affected the performance of our electronic agent in the market, Bilyoner.
A smaller scale impact due to COVID-19, primarily in the markets of Malta, Chile and Morocco, the latter accompanied also by the revised commercial terms of the new contract, also affected the revenue line by EUR 10.5 million. On the positive side, U.S. performance performed better by EUR 5.1 million, positively affected by the full impact of the Illinois contract versus respective period last year when the contract was running only for 45 days but also from the revenue recognition related to our new contract in Canada with BCLC, fully absorbing the negative variance from the expiration of the Ohio CSP contract that ended in June 2019 but was running for the respective period last year as well as a Powerball Jackpot that affected positively last year Q1 revenues.
The same 3 regions, namely Bulgaria, Turkey and Morocco, were also the main contributors that affected the GGR line collectively by minus EUR 33 million since all other variances counterbalanced each other. EBITDA for the quarter landed at EUR 15.8 million, lower by EUR 16 million versus a year ago. EUR 17.2 million was the negative contribution of the 3 regions. And more specifically, Bulgaria was negative by EUR 6.3 million, Turkey by EUR 7.8 million, Morocco by EUR 3.1 million, while the positive U.S. by EUR 2 million, only partly managed to counterbalance the deficit. EBITDA margin of sales decreased by 1 percentage point, affected by the loss of the high-margin contract of Inteltek accounting in last year's numbers and the lower top line performance of Bilyoner and the new contract in Morocco.
Moving on to the EBT line. The result for the quarter was minus EUR 14.8 million from plus EUR 2 million, lower by EUR 16.8 million versus a year ago. Apart from the EBITDA negative contribution of EUR 16 million, EBT was also affected by worse FX results by EUR 4.2 million, largely driven by the impact of the favorable U.S. dollar movement against other currencies in Q1 2019 since high portion of cash in our Turkish entity was held in dollars and the worst net interest results by EUR 1 million versus Q1 '19 with the effect partially counterbalanced by the lower impairment of assets for the period by EUR 2.4 million versus Q1 2019, mainly due to the impairments recorded in Q1 2019 for Inteltek's contract and the decreased D&A, depreciation and amortization, by EUR 1.1 million due to the increased impairments last year, improving depreciation and amortization of current year.
On the bottom left of Slide #10, we see that the net CapEx for the quarter stood at around EUR 6 million, lower by EUR 11 million versus a year ago as a result of the absence of major contract implementations compared to the previous year, mainly in the U.S. Operating cash flow decreased by EUR 10 million -- around EUR 10 million and stood at EUR 9.5 million, impacted mainly by the lower EBITDA, the high tax payments counterbalanced partly by improved working capital versus last year, driven by favorable receivables balance position, mainly in the U.S. due to the negative effect last year by the Illinois starting Q1.
Net debt stood at EUR 611 million, up by EUR 17 million versus December 2019, affected by the dividends of EUR 6.5 million paid to our partners in Inteltek as a result of the contract discontinuation and tax payments at the parent level by EUR 5 million but EUR 36.5 million better compared to the respective period of 2019 when this metric was EUR 647.5 million.
Lastly, in Page #12, we see that the main contributors to our revenues and EBITDA are the U.S. operations primarily but also the markets of Oceania, Malta and the Netherlands contributing substantially and the partnerships being only 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 if comparing against last year respective period.
And at this stage, the presentation of Q1 2020 results is finished, and the INTRALOT executive team is at your disposal for any questions you may have.
[Operator Instructions] The first question comes from the line of Felix Wolfgang with Sarria.
I meant to ask about your savings programs. I, over the last year, earmarked a number of places where you were looking to save costs. First of all, there were EUR 10 million earmarked in the U.S. on OpEx, and you said something about that already. There are -- there were another EUR 6 million presumably coming from up to 6 new contracts, and we've spoken about a few of them.
Illinois was supposed to bring another EUR 6 million in the first 2 months here, EUR 5 million to EUR 6 million, which you've also spoken about that. And you had identified cost reductions -- other cost reductions of EUR 10 million. So altogether, more or less EUR 30 million.
And could you sort of summarize where you are perhaps with respect to these 4 areas, the U.S. OpEx, the new contracts, Illinois, I guess, we've got that now, the annualization, but then also the other cost reduction program, and how much you think of that might be coming in this year away from [ COVID ], away from everything else, purely execution of what you're working on?
Okay. First of all, thank you for the question. It's -- the EUR 10 million that you referred at the beginning of the question was not for the U.S. The EUR 10 million was the expenses that we were targeting and succeeded at the headquarters perimeter in 2019. This is something that we succeeded already.
Having said that, we have already communicated that there were some expenses in the U.S. related to the beginning of the contract in Illinois, as you correctly stated, but also in -- from the Ohio renewal. This OpEx was in the vicinity of $6 million to $7 million. And actually, this is the target for this year, we are expecting and up to now, we are successfully executing in the U.S. Let me tell you that the U.S. currently on the OpEx side is performing exceptionally well and as per our expectations.
Having said that, we have also announced that there will be a second wave of expenses containment at the headquarters perimeter. This is something that again we are on track. The target for this year is around 10%, which is translated into another EUR 5 million to EUR 6 million. We are progressing really well on this front as well.
And of course, this is a process -- a never-ending process as our products mature. And it's always a thing that is in our spotlight. But the targets for this year is summarizing what I just said, is around $6 million to $7 million in the U.S. and around EUR 5 million to EUR 6 million at HQ perimeter. So we are looking to another EUR 10 million to EUR 11 million savings, adding up to the EUR 10 million that we have last year.
Okay. All right. And that brings me sort of to the next question. Your current central cost being approximately, I believe, EUR 50 million or so. Obviously, that now looks relatively large versus the remaining business in its current size. And I don't suppose you could share with us what -- you're looking to save another 10%, but I guess that would be it. Is there a sort of minimum size beyond which you wouldn't be competitive out there if you try to shrink it any further?
Sure. Thank you for the question. This is Chris Dimitriadis. So we prefer to see this more as an investment and less asset cost. And this is because INTRALOT is in a growth trajectory with many opportunities ahead. I had a chance to present those opportunities during the Annual General Meeting of the company a week ago. And what we currently do is to make sure that INTRALOT has the capability and the capacity in order to target at very optimistic growth targets that we are setting. Having said that, we always have in mind into cost optimization, but we prefer to call this as an investment optimization in terms of redirecting our resources to opportunities, which bring -- are strictly related to profitability.
Just to give you a few ideas or a few examples. During the AGM, I have presented the fact that we are currently discussing about 6 big projects in the INTRALOT lottery sector worldwide. We are discussing about 5 big projects as far as Sports Betting is concerned in the United States. We are discussing about a JV with the Greek telecommunications operator, as I have also described during the previous call. We are discussing with customers about 6 big projects in the lottery sector about the further penetration of our video lottery solutions in the market, about the eSports establishment in -- at a very great extent and at an international level and above the evolution of our technology contracts together with opportunities to obtain licenses in the B2C sector.
So having said that, we are set up for growth. And we want to make sure that we have the appropriate [ settings ] in terms of investments in order to achieve that rather than try and see this as -- truly as a cost issue to resolve.
Appreciate that. Yes. And maybe one more question. With respect to any state aid or so, I mean, INTRALOT should truly be a very attractive company for Greece overall in the technology sector. Is there any chance -- or how far are you at this point with attracting any cash? And at what level would that be, any sort of COVID-19 related cash? At what level would that potentially be able to enter your legal structure?
You mean in terms of bailout programs from the government as far as COVID is concerned?
Yes, something like that, bailout or however, aid programs from government.
Aid is a more appropriate term. Absolutely. So we are in the process of starting this at a global level, not just Greece. We are looking into all the aid programs in the United States very closely through our subsidiary, INTRALOT Inc., in the United States. We are also monitoring the evolution of aid programs in Greece as well. And we are also looking into aid programs in the -- in Australia and in Malta as well. Those are just a few examples. So what I'm trying to say is that we are trying to take advantage to benefit from this aid provided by the government at a global level on top of Greece, of course.
And have you established a sort of overall basket size that you think you can use here or fill with these kinds of lines?
So far, we are using those programs in order to support the posing in a number of operations in terms of having the ability to cover labor cost for our employees. Nevertheless, in terms of the baskets, the truth is that the industry will operate in -- still under discussion by several governmental authorities around the world, and we're also trying to conclude on the size of those baskets. But this strictly is not in our control. It relates to the governmental initiatives, and we're still putting the effort in order to analyze this without having a final conclusion yet.
Okay. And then a final question. Final question, CapEx for 2020. Did you -- I didn't ultimately hear you name a target figure or anything that you may be loosely aiming at for this year. It used to be -- I mean you've come in lower than expected. Is EUR 40 million, EUR 45 million now, a reasonable target for the year? Or do you think it may be lower than that?
CapEx, you said?
Yes, just CapEx.
Yes. Actually, the target we have said already is 10% to 15% lower compared to the number of 2019, which was EUR 55 million. So yes, this is in the area of EUR 45 million to EUR 50 million. However, since a big part of this is not contracted, we have the liberty, especially the U.S., we have the liberty to adjust the levels of this CapEx, depending also on the development of the pandemic.
So in a normal course of business, EUR 45 million to EUR 50 million would be fair. Under those circumstances that we are currently facing, we have the ability to go lower. And this is why you see such a level -- such a small level of CapEx within Q1, which was not more than EUR 6 million.
[Operator Instructions] The next question comes from the line of Mezzadri Nicola with Barclays.
We will move to the next question from O Sullivan, Brian with NatWest.
So just one clarification. Did I hear correctly, you said the cash at the end of May was EUR 130 million, is that correct?
EUR 130 million, 1-3-0.
And is there any drawings -- you mentioned regarding the BAML facility, which I think was undrawn at that time. What about the other facility in Europe? Was that drawn at all over the course of April and May? Or where do they stand at the end of May? Or is that a clean cash number?
This number includes -- first of all, the U.S. facility is fully undrawn still. A [ material ] change in the EFG compared to what we have said in our previous call, it is EUR 18 million, which was and is still fully drawn. So it's a purely like-for-like comparison compared to the end of March.
Okay. And just on that facility, is there -- I think you mentioned it's unsecured. So there's no recourse anywhere basically. Just to clarify, there's no recourse back to anything in the group. Or is there guarantees or anything for that facility?
Which facility?
EFG.
The EFG facility?
Yes.
Yes. It's -- it has a basket of securities -- liquid securities, namely shares, bonds and cash.
[ Borrower and new entries. ]
Shares, bond and cash. Presumably outside of the restricted group of the bond? Or is it with -- inside but utilizing the baskets that are existing?
[indiscernible]
I didn't hear any of that, mate.
It's under IGH. The borrower is INTRALOT Global Holdings.
Okay. It's [ over there ]. Okay. And then just very quickly regarding the U.S. Things are -- maybe I'm just trying to get ascertained in terms of one-offs for the U.S. for this year. So there was, I think, EUR 10 million or EUR 12 million or something last year aside from the delayed start in Ohio. What do you anticipate -- or what have you incurred today and what do you anticipate for the rest of the year regarding kind of one-off costs? Would be that legal or unexpected CapEx or other restructuring costs or anything like that?
Now in the U.S., currently, we have done with all the unexpected items that affected the performance of the business in 2019. The only impact, of course that is currently running in the U.S. as well is the COVID impact. So there are no extraordinary elements on the cost side that we were referring to last year in the 2020. However, there is an impact from the COVID and also the riots in Washington, D.C., for instance, currently.
It's -- I mean there are such elements that we do not control that are affecting the business, both on the lottery side. And of course, an important thing also is Sports Betting because we are also targeting at Sports Betting segment. And of course, current circumstances do not allow a quick, let's say, ramp-up of this activity. So this is the unexpected element of this year. No other unexpected elements like in 2019 in the U.S.
Okay. That's very clear. And then very quickly, lastly for me, you mentioned in your prepared remarks and also on your full year call regarding engaging with the bondholders regarding a capital structure solution. Perhaps you might give us a bit more of an update in terms of how that is progressing. And I guess more importantly, when we can expect to see a plan regarding a way forward?
As far as the optimization of the capital structure is concerned, we have -- as you very well know, we have engaged our advisers -- with our advisers, Evercore and A&O. Our advisers subsequently are in discussions with the advisers of the bondholders and we gradually see progress in those discussions.
So far, we cannot commit on a date. However, what we can commit on is that the strategy that we are following is about finding a solution that will serve the interest of all parties involved. And this is why this requires a very thorough analysis and a very diligent job to be done in that space in order to come into a result that will be satisfactory for all sides.
[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. I would like to say thank you to all of you that participated in this call. I hope that you have found the information that we have shared with you useful. And we're looking into forward updates and to talking with you soon during the announcement of our results for the next quarter. So thank you very much.
Ladies and gentlemen, the conference has now concluded today, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.