Intralot Integrated Lottery Systems and Services SA
ATHEX:INLOT
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Ladies and gentlemen, thank you for standing by. I'm Konstantinos, your Chorus Call operator. Welcome, and thank you for joining the INTRALOT conference call to present and discuss the third quarter 2018 financial results. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Andreas Chrysos, Group Finance, Budgeting and Controlling Director. Mr. Chrysos, you may proceed.
Good afternoon, ladies and gentlemen, and welcome on this conference call for INTRALOT's 9 months 2018 financial results. Mr. Kerastaris, Group CEO of INTRALOT; Mr. Koliastasis, Group CFO; Mr. Pavlakis, Group Tax and Accounting Director; Mr. Sfatos, Group Corporate Affairs Director; and Mr. Tsagalakis, Head of Capital Markets, are next to me and we will briefly review INTRALOT's financial results for the 9 months ended on September 30, 2018.
As always, we would like to remind you that this is only a summary of our results, so please refer to the IFRS report and the MD&A analysis available in our website for further details if required. After the short presentation, INTRALOT team will be at your disposal for any questions you may have.
Starting our presentation with segmental sales analysis on Pages 4 to 7, highlighting on the main contributors that have affected our top line performance of the 9 month 2018. This shall be followed by a short analysis on the financial results by Mr. Koliastasis, providing some further insights on the metrics that affected them.
So summarizing the findings on Page #4. We see that during the 9-month period, INTRALOT systems handled EUR 15 billion of worldwide wagers, posting a 3.2% year-on-year decrease. Geographically, we see that Europe and Americas are the main contributors of INTRALOT's group top line performance, accounting for 73% of the total turnover, with Lotteries and Sports Betting activity lines representing nearly 90% of our total sales for the 9 months of 2018.
In terms of GGR, the growth in the non-payout-related GGR attributed primarily to the one-off items of 2017, software license sale in Australia in Q2 2017 and Powerball effect in Q3 2017 in the U.S. as well as the impacts of South Carolina discontinuation and the smaller new contract this year accompanied also by FX turmoil in the markets of Turkey and Argentina, growth overall GGR lower versus a year ago both in Q3 and 9-month periods.
Reported consolidated revenues for the 9-month period of 2018 increased marginally versus a year ago, with the main contributor for this increase being the B2C segment and more specifically, the markets of Bulgaria, Poland and Azerbaijan, supported mainly by higher than previous year Sports Betting activity but also from the virtual games in the first 2 countries. On the contrary, our Argentinian operation continues to be certainly affected by FX headwinds, fully offsetting the strong performance in local currency terms nearly 45% in the 9-month period year-over-year.
The suspension of the Sports Betting license in Cyprus also affected negatively our B2C activity in terms of revenue. All in all, the revenue from our B2C activities posted an increase of 2.7% or EUR 14.8 million for the 9-month period year-over-year and a marginal increase in Q3 versus a year ago.
Moving on to the next Page #6. We see that the revenues from our game management contracts remained relatively stable year-over-year. The enhanced product offering in Morocco Sports Betting fully absorbed the deficit in our Turkish operations. Related, however, to FX turmoil with euro being appreciated versus Turkish lira by almost 40% while, at the same time, in local currency terms, revenue showcased a shelf increase of more than 30% year-over-year.
Lastly, in Slide #7, we see that our technology and support services activity line contracted by 6.7% or EUR 11 million. The main driver behind this adverse performance has been the software license sale in Australia in Q2 2017 amounting at EUR 4 million coupled with an adverse FX movement with euro being appreciated by 8.4% against the local currency, thus explaining the overall decrease of EUR 5.2 million.
In addition to that, lower sales in Greece by EUR 4.4 million related to the transition to the new lower-valued OPAP contract as well as adverse FX movements in the key markets of the U.S. but also Argentina, although both markets posted a positive year-over-year performance in local currency terms. Especially in the U.S., it's worth mentioning that year-over-year performance in U.S. dollar terms was higher by 5% despite the fact that in Q3 2017, there was a substantial effect of [indiscernible] with the same positive event affecting the results of Q4 in current year.
Excluding this effect as well as the South Carolina discontinuation effect, the 9-month year-on-year increase well above 10% -- worth well above 10%. The 2 markets combined presented a year-over-year 9-month decrease of EUR 4.6 million. However, the positive performance of Chile partially counterbalanced the above-mentioned negative effects.
And at this point, I would like to introduce our CFO, who will present briefly the financial results of 9 months 2018. Following that, our CEO will make a brief comment for the year and then the Q&A session will follow. Please, Mr. Koliastasis, go ahead.
Thanks, Andreas. Hello, everybody. Thank you for participating in our 9-month results presentation. Please turn to Page 8 on the presentation. Consolidated revenues for the quarter decreased by 3.5%, reaching EUR 251 million and remained flat for the 9 months [ financial results ] 2018 at around EUR 799 million. Gross gaming revenue for the quarter compared to prior year declined by 7.2% due to the FX impact of the revenues in Turkey and Argentina, OPAP revenue shortfall, U.S. last year's Powerball jackpot effect in South Carolina discontinuation, partially counterbalanced by the increase in the payout related to revenues. Gross profit margin decreased in the quarter by 2.9 percentage points, driven by the margin erosion of our B2B/B2G businesses. Other operating income contracted by EUR 1.7 million in the 9 months 2018 compared with the respective period of 2017, stemming from the adverse U.S. dollar movement and the lower lease income in the U.S.
EBITDA for the quarter is EUR 35 million close to 15% lower than same period a year ago, driven mainly by the adverse FX movement, the variance from the OPAP contracts, U.S. Powerball jackpot in last year, South Carolina discontinuation in 2018, Illinois startup expenses and administration cost increases. Adverse foreign exchange fluctuations compared to the same period a year ago are expected to affect Q4 results at a slower pace compared to what was previously anticipated. Though [ when count ] with projected operational performance deterioration adjusted early EBITDA adversely. Worsening margins in the B2G segment on top of worsening OpEx trends are the contributing factor for the EBITDA margin erosion of our sales and growth revenue. Net income after tax minority interest stands at EUR 7.9 million loss in Q3 the current year compared to EUR 7.1 million loss in the last year.
Now turning to Slide 9. We'll see on top of LTM figure revenue to remain almost flat compared to the first semester LTM revenue and EBITDA to contract by 3.6%, respectively. LTM operating cash flow did impact the aftermath of the non-operation of the sports businesses. EBITDA shortfall in the adverse working capital movement driven by the inventory impact of [ removed ] projects on top of a long-due liability payment. Decrease of the operating cash flow in the quarter is attributed largely to inventory impact in the U.S. and EBITDA erosion. Net CapEx for the period is higher by around EUR 6 million compared to same period a year ago, driven by the investments in the U.S.
Turning to the next slide, you'll see the movement of our net debt position since the beginning of the year. Working capital worsening, the investment in the U.S. and the new Sports Betting platform as well as on shelf repurchases are the main contributors in the EUR 87.8 million increase of net debt. The EUR 26 million increase of net debt in the quarter is affected by the U.S. CapEx, inventory creation mainly for U.S., onset purchases and the net effect of the both IFRS treatment and normal course of business needs.
In Slide 11, we see that Bulgaria has the biggest contribution in the revenues by around 31% followed by Azerbaijan, Malta and U.S.A. In terms of EBITDA contribution, the top 3 countries are Turkey, Bulgaria and U.S. The weight of the partnerships has increased to 62% in 9 months 2018 from 61% in the same period last year, driving INTRALOT's portion of the consolidated EBITDA to 61%. And now, I'm passing to Mr. Kerastaris, INTRALOT Group CEO, for his concluding remarks.
Good afternoon, everybody. We as INTRALOT has managed to win 3 new projects and announced 3 new projects since we last spoke. Remember that 3 months ago, during the call for the 6 months, I told you that we are in the process of finalizing at least 3 contracts by the end of the year. So we have managed, as of today, to have 3 new customers, Lotto Hamburg, Croatian Lottery and to extend our New Mexico contract to 2025, adding Sports Betting to it. So what we announced 3 months ago for the period between then and the end of the year has already materialized, and I'm happy to say that we have a couple more in the pipeline to announce by the end of the year.
We -- all those projects obviously will apply our new technological solutions, meaning our new LotosX platform, which is the transaction engine and our new Orion platform, which is our new integrated retail and online Sports Betting platform, reflecting the positive prospects created by significant investments in the last 2 years, investments in new technologies and platforms.
We're always -- we're also looking forward to the commencement of our operation in Illinois, which will happen in January 2019 and more -- a significant project in the U.S. and a project that has heavily impacted our financials in the 9 months '18 both in CapEx for the creation of the technological infrastructure for the project as well as OpEx as startup expenses and payroll has already affected our 9-month results and will continue to do in the next few months.
Such developments confirm our positive outlook after the current transition year according to our business plan and according to the announcements we made also almost 12 months ago -- almost 14 months ago during the issue of our latest bond in September '17. So as far as the management is concerned, we are executing the plan as announced in September 2017 in the bond issue and later confirmed by announcements of the company between then and today.
And with this, I would like to thank you for participating. And myself and the team are ready to take any question you may have.
[Operator Instructions] The first question comes from the line of [indiscernible] with Barclays.
I had a couple, please. Just some clarification on the Turkish situation on the bidding process. So I understand that basically, INTELTEK was the sole bidder. Does it mean that they are now called the preferred bidder? And what's -- in terms of -- is that process closed with regards to the bid or will they open it back again or extend it? So some clarity there would be quite helpful. And then secondly, just on the RCF, any updates with regards to your negotiations there?
Sorry, second question?
On the RCF, please, any updates would be great.
So let me give you, first of all, a brief presentation on what Turkey and this tender is all about. As you know, we are operating -- we, with our partners in Turkey, are operating Sports Betting for the last 16 years. We currently operate on an extension of our contract until August 2019. So our current operation is based on an extension of the original contract until August '19. In April 2018, a new law was voted in Turkey, increasing the payout from 50%, 5-0, to 70%, 7-0. So the new contract will have a payout of 70%. Now Sports Betting in Turkey historically has been 0.3% of GDP on 50% payout. The European average is 1.3%. So you can understand what is the potential of the Turkish market, provided that we have a new contract with 70% payout. So the turnover on which our fee is calculated, if it is adjusted to the European average, will more -- increase to more than 4x of what it is today. This is the potential of the Turkish market. Turkey is an 81 million-people country with 31 years average age. It is the most dynamic in terms of demographics country in the world -- in Europe, sorry. Now this new tender and the tradeoff, if you like, for increasing the payout from 50% to 70% is that the state has requested the bidder to guarantee the revenues of 2017 for the state. So the state said, I will increase the payout but the operator has to guarantee state revenues of 2017 indexed for the next 10 years. This is the guarantee we gave to the Turkish state on Tuesday when we participated in the tender. And I think we were the only bidders because we were the only bidders confident enough to guarantee the performance and to guarantee the revenues for the state. The way this tender is designed is that the state has the rights to evaluate the offers, and it has the right to decide on who is the best offer for the state. As there is only one bidder, this has become an easier task for the state. So for us, this is an opportunity where we could significantly increase our revenues and EBITDA from this market. There is no competitor. In that sense, there is no downside for us so it cannot be that we can lose this tender to somebody else because there is nobody else. Obviously, the tender process is a process and the committee has up to 20 days from the date of posting our bid until making a final decision. I am not sure what the committee will do, but in the next 20 days, 18 days now, we will have clarity on what will happen in the tender. What we know is that we are the only bidders and that our bid was according to the regulation. So this is a race for one. If there is a winner, the winner will be the joint venture between Turkcell and INTRALOT. If there is no winner, the joint venture between Turkcell and INTRALOT will continue to manage Sports Betting as it has for the last 16 years. So just to give some clarity on the size of the opportunity and on the current status, this is exactly what we're talking about. We're talking about a business that will grow at least to double the size of what it is today. If it reaches the European average, it will increase 4x what it is today. This is the potential for our business. It is a race for one. Worst case scenario, we end up with what we have today. And obviously, we're talking about the next 10 years, so we're not talking about a short-term solution like the one we have today. So for everybody to have clarity on the prospects of Turkey, this is the idea. Now on the RCF, I will let George comment.
First of all, we don't have a syndicated RCF facility since 2017. We have bilaterals. We have 2 RCF bilaterals loaded in place, and we are in compliance with the covenants as of September 2018. What we have already in place is that we have a committed term seat by one of the banks with a better -- with much more headroom in terms of covenants. And we are under final discussions with a second bank for a similar covenant increase. And this is the status as we speak.
The next question comes from the line of Jeffrey Cope with Stifel.
So just quickly on Turkey. Has that bidding period closed now or is there any potential that there would be another bid in the future?
Currently, there is this bid that we're talking about. This bid is not finalized. It is in the process of being finalized. We feel that it will be -- it will come our way. That's what we expect and that's why we're confident about building the next day in our Turkish operation. And if -- before it is finalized officially, there is no -- nobody knows what will happen if this does not happen. But there is no reason for this tender not to be finalized when there is a legit offer from the incumbent.
Okay. And then on the last conference call, I believe you said that the second half would be CapEx of about EUR 76 million. You did EUR 20 million in Q3. Are you still on in line for that? Do you expect there to be, I guess, EUR 56 million or EUR 60 million of CapEx in Q4?
Okay. The expectation of CapEx in Q4 is around EUR 40 million to EUR 45 million. However, in terms of your calculations for the net cash effect, you have to take into consideration that in Q3, there was an increase in the working capital, which will be transferred to CapEx in Q4 of around EUR 8 million. The CapEx guidance for the year will be around from between EUR 105 million to EUR 110 million depending on an accounting treatment of a portion of CapEx that will be acquired through lease. So in other words, what I said about being in line with the focus we gave back in 2017, our view then and our announcement was that CapEx for 2018 would be in the range of EUR 100 million. And I think it is clear that there is no variation from that number.
Okay. And then just finally, I think at the end of the quarter, you had EUR 91 million of cash kind of outside the JV level. Obviously, you guys are aware of where the bonds are trading now. Do you expect to need this liquidity? Or maybe you can kind of give us the rationale for not buying back bonds again at these levels if you guys have the positive outlook that you seem to have?
We think that at this level where the bonds are trading, they are a significant investment opportunity. The company, especially at its current development mode and business development mode, I mean, is not in the business of investing in financial products. We think that it will make, long term, far more business sense for the company to continue to invest in growing the business. This said, as an investor, I would see a significant opportunity in buying INTRALOT bonds at current trading levels.
The next question comes from the line of Clark Nicholls with AXA.
Three questions. The first one's related to the Turkey contract without any...
Sorry, the line is not very good. Can you repeat, please?
With the Turkey contract and considering there's no other bidders, is it a case that the margins are a lot lower going forward? I know that you've highlighted there could be good growth prospects, but I just wanted to understand, is there anything that would meaningfully change your margins? That's the first question.
So very quickly, obviously, the tender has not concluded so nobody knows the final price. What I can tell you is at this point is that if anything, our margins and our overall contribution from Turkey will increase. I would even dare to say will increase significantly going forward.
Okay. The second question, and sorry, I can't think of the name offhand just because we delayed the call from yesterday. I don't know, I'm not in the office. But related to you had a recent asset sale, and I think it was circa -- was it EUR 20 million worth of EBITDA in the asset sale? Can you help me -- remind me exactly what that was sold recently, it was something like Azerbaijan but it wasn't Azerbaijan. I can't remember what the asset was sold.
Okay. So it was our company in Azerbaijan.
Yes. And with that, I was told that this is maybe inaccurate but I just wanted to clarify, maybe it was recorded as about EUR 20 million EBITDA in your earnings, and then you may have received circa EUR 9 million also cash in and the sale price is about EUR 40 million. In other words, about 2 turns of EBITDA but I'm just trying to verify that. In other words, just trying to get a better sense of what the model for that was sold for; and two, how you recognize that revenue or earnings beforehand.
Okay. So first of all, our participation in Azerbaijan was through our Turkish subsidiary. So the shareholder of Azerbaijan was INTELTEK, our Turkish JV with Turkcell. So this subsidiary owned 51% of the company in Azerbaijan. We sold through again our Turkish holding, we sold the stake for EUR 38.2 million. So the EV of the company that we sold was EUR 38.2 million. The company had an EBITDA in the range of EUR 19 million. So in that context, the EBITDA multiple of the EV was 2. However, if we adjust this for the dividends as our holding there was indirect, we sold the asset for 6.8x 2017 dividend. The license that our company in Azerbaijan had for Sports Betting expires in 2025. So what we did is we sold the asset for the net present value of the future dividends for the next 7 years. This is an asset where we, as management, have received significant criticism about operating and about the economic environment and/or FX risks in a country like Azerbaijan. So with our Turkish partners, we decided that exiting a market like Azerbaijan, ensuring the dividends for the next 7 years, which by the way, is a value -- is the life of the license, was the right investment thing to move -- to do. Please keep in mind that we continue to have a technology and support contract with the company as INTRALOT, not as INTELTEK, until the end of the contract. So we sold our stake in the company, but we will continue to have a technology contract with the Azeri company and with the new owners. The period that the new buyer has in order to pay for the consideration is 6 months. So between today and 6 months, we will continue to manage the company and hand it over to the new buyers once they pay the full amount. So summary, a country where both FX and operating environment is risky. JV, we decided to exit the JV by ensuring the net present value of our future dividends for the duration of the license. We managed to keep a technology contract between today and 2025. All of the proceeds will be paid by the buyers to our Turkish subsidiary. And through the Turkish subsidiary, they will be given to INTRALOT. So...
Okay. One quick question given that [indiscernible] when you talk about the EBITDA, EUR 19 million and obviously, 7 years worth of dividend at EUR 38 million or so, it's roughly say, EUR 5.5 million per year dividend. So broadly you're saying, on your -- I'm just trying to understand the [indiscernible] but then you say you get the EUR 5 million dividend. Just want to understand the difference between that [indiscernible] figure [indiscernible]? Or was it their own tax that took it away. What's the difference in amount in the EUR 5.5 million?
Yes, yes. In Azerbaijan, the tax regime is as follows. Tax is paid at 6% of the top line so the tax is 6% of the revenue as a figure and it is under the EBITDA line. So the main difference between EBITDA and net earnings is the gaming tax, which is calculated at 6% of the turnover. And this is amongst the highest tax rates in Europe. Is it clear? Hello? Yes?
Your next question comes from the line of Stephen Lienert with Jefferies.
Yes, just 3 questions. I understand the -- in America, there was no Powerball Jackpot in the third quarter '18, thank you for explaining that. But I understand there was a massive jackpot in the fourth quarter or this quarter. So can you give us some magnitude of the uplift in U.S. Powerball for the fourth quarter this year?
Indeed, we had the massive jackpot, $1.6 billion. Actually, it was a combination. We had both the Powerball and the Mega Millions jackpot in Q4. The effect is in the range of $3.5 million.
Okay. And then how do I think about the timing of the EBITDA contribution that comes from your new contracts of Illinois and Ohio? When do we see those in the...
Illinois is a new contract. The effect will be immediate the minute we turn the key in January 2019. In Ohio, there is no new contract, it's an extension of the existing contract. So more or less, apart from our organic growth, the revenue will be the same. We have given the guidance that the Illinois contract annualized EBITDA effect is in the range of USD 20 million a year.
Yes. I've got that, USD 20 million. And then lastly, the status of other U.S. states. Is there anything you can update us on that? What's your bidding for what's coming up in other American states outside [indiscernible].
So we mentioned that we extended our contract until 2025 with New Mexico, adding Sports Betting. Now Sports Betting, as we have a number of times said, is by far, the single biggest opportunity in the U.S. There are 4 more of our existing customers who are in the process of finalizing regulation for Sports Betting in their states, including the state of Ohio and the state of Illinois. The other 3 are Washington, D.C., Montana and Idaho. So we have 5 of our existing customers in the final stages of regulating Sports Betting, which we think, at least 3 of them will go to the next phase of a signing or tendering within Q1 2019. Now these are existing customers so CapEx associated with implementing Sports Betting are very small. In terms of tenders for lottery business, there is obviously the Pennsylvania contract, which at some point in early '19, will go out for bid, which is a significant chunk of business. And that is the main lottery contract up for renewal in the next 12 months. But we think that simply the Sports Betting opportunities in the U.S. will have our plate full for the next 2, 3 years and will drive the growth in the country.
And just on that, when you look at the 3 other states, Washington, D.C., Montana and Idaho, do you imagine that is a New York -- excuse me, a New Mexico style contract of Sports Betting or is it more TAB style?
Sorry, TAB? FOB, you mean? Fixed odds.
Yes, exactly.
Okay. So depending on the regulation, it seems that D.C. will definitely be fixed-odds with live. I think, Ohio and Illinois will be fixed-odds with live betting. Idaho will most probably be fixed odds. Montana, not really sure, a bit more conservative there. But just to give an indication, if we're talking about an Ohio fixed-odds betting product, this is a $5 billion turnover a year fixed-odds betting opportunity in terms of revenue. On a 70% EBITDA -- sorry, payout, that's more than $1 billion of GGR. So we're talking about a significant contract that in itself is a game changer. So one of these states or a combination of 2 smaller states for our performance in the United States are game changers.
The next question comes from the line of Felix Wolfgang of Sarria.
I was wondering, first of all, if you could give us perhaps the proportionate EBITDA and cash for Q3 and perhaps a guidance for the year-end on each of those.
Proportionate EBITDA is expected in the range of -- for Q3, we have the numbers. So we have the proportionate EBITDA, that's EUR 78 million for 9 months -- EUR 71 million for 9 months ended on December and we have definitely -- we gave that -- the EUR 90 million. The proportionate net debt in that shelf, it is at EUR 635 million as of September. We expect this figure to go at around a proportionate net debt of around EUR 660 million at the end of the year and the proportionate EBITDA at around EUR 90 million.
Okay. And I understand that OPAP contracts for -- in Q3 ran on effectively for another month before you switched to the new regime. Can you tell us what about the incremental contribution was from that 1 month?
The delta in the revenues of the OPAP contract per month is around EUR 2 million. Sorry, the new contract is around EUR 2 million lesser revenues per month.
Revenue. And I'm not sure I know what -- how to translate that into the EBITDA now.
It's -- in terms of gross margins, it's around EUR 1.2 million, EUR 1.3 million less per month in terms of gross margin.
And finally, just back to the covenants quickly and to your RCFs. If I've read your report correctly, your covenant on the term loan C I believe it is the EUR 15 million, I think, it's running quite low. What would happen if -- I mean, correct me if I'm wrong, but if it's as tight as I thought it was, what would happen if you were to breach that covenant? What kind of -- what's the nature of that covenant?
Okay. This is a maintenance covenant, so we are already in discussions -- we are discussing about the EUR 15 million, EUR 1-5 million term loan that we are discussing to our -- the covenants and to repay the loan or to adjust the covenants at a different level that will give enough comfort.
And if you repaid, you could draw on any one of the other facilities, I suppose?
Correct.
And -- but the second facility, the EUR 30 million facility, it wasn't yet signed when you issued the report [indiscernible]
We have a committed term sheet from this bank and we are under contract document finalization.
Okay. So that's not falling apart anymore. They've -- okay, good. And finally, sorry, I believe that -- you wouldn't have a proportionate cash figure for third quarter. I realize you've given us net debt and I probably would be able to back it out if I got the right numbers.
We have -- in Q3, we have the proportionate cash and cash equivalent, EUR 113.4 million.
The next question comes from the line of Peter Allan with PGIM.
Just a couple of points of clarification about Turkey. Would it be right that you would maintain exclusivity as the sole operator of Sports Betting for the full term of the contract? That's one question. Another one is you talked about guaranteeing the revenues and then being indexed for 10 years. So would you guarantee the -- your proportionate 45% of that? I suppose you're looking to recover inflation through pricing and benefit from the market growth. Is that the logic behind why you're happy to proceed on that basis?
Two things. First of all, exclusivity is a given since there is one license that belongs to an institution that is owned by the Turkish state. So yes, there is one license. We would be operating the single Sports Betting license. In terms of guaranteeing the revenues, we are guaranteeing the revenues of the state. So at the end of the day, the Turkish state would, as a floor, as a minimum, receive the same amount in Turkish lira that it received in 2017 indexed with Turkish inflation for the next 10 years. This is the quality of the guarantee that we give. Now in terms of how do we feel confident about the guarantee, putting aside the growth from the new product, I think Andreas, in the beginning, mentioned that in 2018, our business grew in Turkish lira terms by 31%. So in a year where we had significant FX changes and resulting inflation, we managed to grow the business by a percent, that is in Turkish lira, by a percent that is higher than the adverse FX and inflation. So we've been working in this country long enough to understand how the market works and to be able to manage the business level to feel confident about giving such guarantee. So summary, yes, exclusivity, B, the prospect of the business itself is so significant that we feel very confident with providing such a big guarantee for the Turkish state.
The next question comes from the line of [ Kip Osovitz ] with [ RNC Capital ].
Just a couple of clarifications on the EBITDA. So first, you have mentioned that you see a number of new products in pipeline. Can you please maybe comment a bit more on how advanced those products are, when do you expect to be able to announce them and maybe -- well, whether any of them has been awarded and what EBITDA on an annualized basis contribution do you expect from them.
Okay. So I guess, you mean new projects, not new products?
New projects, yes. You mentioned that there was a number in the pipeline, so yes.
There was a number in the pipeline that is obviously, I cannot -- as they're not yet contracted, I cannot give a lot of details on that. The estimate is that those new projects will be size-wise equal to the contribution of the 3 projects that we announced the last 3 months. So we're talking ballpark figures, numbers in the range of EUR 10 million EBITDA contribution going forward, ballpark figures. Please -- next time when we have this call, I will be able to confirm name of the projects and return.
Got it. And what is the status of those projects? I mean, have they been already awarded and you're waiting for confirmation or is the bidding ongoing?
There is no bidding process ongoing. We're in the process of finalizing those projects.
So basically, they're in the -- just to be clear, they're in the same -- at the same stage as the 3 projects you announced before where -- was on your second quarter call?
So they are now when -- at the same point where the 3 projects were in August.
Okay, that's very helpful. And can you just let us know whether this is Europe or the U.S.?
One is in Europe. The other is across the Atlantic. In the U.S. It's a vast ocean.
Americas, understood. And moving on, you mentioned that you -- in Azerbaijan, it's probably a small bid, but you mentioned that you retained the servicing contracts there. What is the EBITDA contribution of this?
I think that this is a bit too sensitive in terms of our pricing. It is a typical service contract, which is a percent on the size of the business. So it's a typical technology contract as one would sign with an operator.
Got it. And given the adverse tax regime in Azerbaijan, is this contract cash generative or no?
This contract is quoted in euros as all of our technology contracts.
Right, but do you pay -- I mean, does it generate cash, given the high tax you pay in Azerbaijan?
No, no, no. High taxes for the operator.
For the dividends.
High taxes is for the operation. It is not for service provision.
Okay. So can you please confirm that this is generating cash?
Yes, I confirm.
And lastly, on the Powerball, you mentioned EUR 3.5 million EBITDA. I just wanted to make sure that this is -- are you referring to the EBITDA to INTRALOT in Q4 or this number means something else?
This is EBITDA for our U.S. subsidiary for Q4, yes. Incremental obviously, over and above normal. This is the effect of an abnormal -- what is abnormal? This is the effect of a specific jackpot over and above our base business.
Okay. okay, understood. And so you also gave a bit of a guidance regarding the size of the U.S. Sports Betting opportunity. Does this guidance still hold or do you have any updated views?
The guidance that was provided by international firms that have done studies in the size of the U.S. continues to be in the range of USD 20 billion of GGR, gross gaming revenue, per year.
The next question comes from the line of Donald Phillips with Liontrust.
Can I just ask -- you're speaking very confidently about all the opportunities that you see ahead in the projects that you're going for. Is that the simple question? Can you afford to bid for these projects? Put that in the context of EUR 90 million increase in net debt in 2018. And for a number of years, people have been hearing the opportunity that INTRALOT faces, but the balance sheet leverage has continued to increase over multiple years. So what confidence can we have that you can afford these project opportunities? And how are you thinking about the 2021 maturity within all of that?
First of all, we are confident about bidding. That is why we are bidding. So in order to bid for any tender, you need to be able to prove that you have the resources either in terms of bank guarantees or other resources in place to be able to bid. This is judged by a bidding committee. So for example, when we bid for Turkey on Tuesday, we have our bid complemented by 4 different bank guarantees for a total amount of USD 120 million or TRY 850 million. So whether -- when we bid for a project, we obviously have the resources to bid for the project. And obviously, there is a committee judging on whether we have the resources to bid or not and whether we're a credible bidder. The fact that we managed to secure competitive bids versus mostly international, global competitors means that we are competitive enough to win. So I think that this company has demonstrated its ability to compete and its ability to win projects in a global arena. That, I think, covers the first part of your question. Now on what is this -- the company going to do when they will think of refinancing the 2021 bonds. We think that 2021 is not that far away. We are already starting to evaluate alternatives as to the options that we will have to refinance the existing bond of EUR 250 million that has a '21 date. And I think that very quickly, within the next year, we will have a very clear strategy as to how to approach this.
[indiscernible] do you think you'll be free cash flow positive in 2019?
We think that in 2019, with all of the projects that we have in place today and with what we know today, this company will be cash positive, yes.
The next question comes from the line of [ Menila Ozack ] with Imperial Capital.
Just to get back to a few things that were said. You mentioned that your net debt figure for the end of the year would be at EUR 660 million and that you wouldn't raise any additional debt up to the end of the fourth quarter. Is that correct?
No, no. The question was on the proportionate net debt that we mentioned this figure. The net debt for the end of the year, it is the same as we had communicated in the prior call which is within EUR 625 million to EUR 630 million. It's the same expectation as we had communicated a couple of quarters ago. This has not changed. And we do not intend to raise incremental debt. Obviously, we may use some of the lines that we have in the U.S. in order to finance the CapEx investment there. The working capital financing or lease lines which tells you what is more appropriate for our business.
Okay. So that's what we were getting to because we expect CapEx for the fourth quarter to be around 50 -- or EUR 40 million, let's say. You've had about EUR 65 million for the first 9 months. And with your guidance today, you guided towards EUR 105 million roughly for the full year.
Correct, correct. But you have to take into consideration as we have also working capital that will be shifted to CapEx so this will be at around EUR 8 million. And then there is something between EUR 5 million to EUR 10 million of lease that we are discussing and evaluating whether this is a valid option.
Okay. So you will utilize some of the RCFs but that will allow you to keep a minimum cash balance on the balance sheet, right? That's...
This asset is totally local. So it's not the RCFs that's at the current level. It is a local line in the U.S. that we may utilize.
Okay. So it's not EUR 70 million that...
Correct. It is on top of [indiscernible], so we have some local lines as well that we may utilize. This is the point.
Okay. And you -- could you guide us roughly what to expect when it comes to proportionate EBITDA for full year '19, taking into account all those contracts that will start ramping up in the beginning of 2019?
Too many moving parts. Wouldn't like to do that now, especially the most significant moving part obviously is Turkey. As soon as we have clarity on that, we will provide an initial guidance, I guess, with 2018 final results.
Fair enough. And then the last one would be, would you expect -- 2018, there was a negative free cash flow impact because of high CapEx because you're investing in growth in a very strong market. But would you expect to have any large one-off capital expenditures coming on in 2019? Or...
No.
No, nothing in terms of those? Okay. That's very helpful.
The next question comes from the line of Ian Neill with Alchemy.
If we do get Pennsylvania, Pennsylvania will be a significant CapEx, yes. But with what we know today, with today's run rate and with the projects that we have committed today or we expect that we will have in 2018, there is no significant CapEx outflow in 2019.
The next question comes from the line of Ian Neill with Alchemy.
Just to clarify the position around the group level RCF, are you expecting to need to draw down those RCFs during 2019?
Sorry. Could you repeat the question, please?
Yes. Are you expecting to have to draw down the group level RCF during 2019?
Both RCFs are as standby facilities. We do not expect that we're going to utilize them in 2019.
Okay. And I just have 2 more questions, if I may. First of all, in Turkey. If I understand that correctly, I think you -- in order to -- in order for earnings and revenue for INTRALOT to remain flat, you need to assume a growth in the market, a change in the payout ratio. So exactly what growth in the market do you need to believe for INTRALOT's earnings to remain flat?
I did not mention about INTRALOT's earning. I mentioned about the guarantee to the state. INTRALOT's earnings are a percent of the turnover. So the more the turnover increases, regardless of what happens to state revenues, the revenues of the JV of the INTRALOT subsidiary will increase and so will the profits of INTRALOT in Turkey -- of the JV of INTRALOT in Turkey. So if, for example, we assume that our fee as a percent of turnover remains the same, if the turnover doubles, our revenues will double.
And turnover is your [indiscernible] here. Is that the amount state or is it the GGR?
This is the turnover, not the GGR. We are not paid on the GGR. We are paid on the turnover. So you need to understand that the correlation between increase in payout and increase in turnover is direct and exponential. If we were talking about an incentivization on the GGR, it will be a different -- it will be a completely different story. In this country, [indiscernible] or in that case, [indiscernible] it is a direct link to the turnover.
Okay, great. And just roughly, I know you've given the proportionate cash number at the end of Q3. Do you have a proportionate cash -- I'm sorry, an average proportionate cash number during Q3 that you can share with us?
No, I don't have it. I mean, please drop us an email and we will send you or we'll give you the details.
Next question comes from the line of [ Nicolas Valence ] with River Bridge Capital.
I've got a few questions. First one is about the contract extension in New Mexico. Could you tell us roughly the EBITDA at least that you're expecting from the Sports Betting component of the contract? Because -- so I think you previously guided to EUR 10 million of additional EBITDA from the 3 contracts that you announced recently, including New Mexico. But presumably, this did not include the impact of a new Sports Betting component, but perhaps you can explain.
For reasons that have to do with the nature of the contract, I am not going to reveal what is the contribution of Sports Betting, one, because this is a contract between the state and INTRALOT. What I can tell you is that our fee from this contract, and this is public knowledge, is 3% of the turnover, to be exact, 2.99% of the turnover of this additional games of Sports Betting. So our fee is 3% of the turnover. Now the size or the success of this new game in New Mexico, I think, is something that because it has never happened in the past, it was very difficult to calculate. My personal view is that this sports lottery, as they call it in New Mexico, has the potential to be a significant contributor, more than 50% increase on the existing base business. That's my personal view. The most important thing though about this contract is that this contract is the first in the United States wide area sports product in 42 states. So if this contract or if this product is a success, it will be the best argument for any other lottery to go ahead with increasing their product offering with a sports product. So if New Mexico, which, by the way, will start in the first 4 months of 2019, if New Mexico is a success, the talk of the town will be how did the New Mexico lottery manage to increase their revenues significantly by adding Sports Betting? And that will be, I think, the turning point for the rest of the lotteries to follow because they will see that within a period of 3 to 4 months, a lottery can increase their base offering and the revenues significantly. For me, the biggest gain is not how much can we add in terms of EBITDA to the New Mexico contract. By the way, New Mexico is one of the smallest states in terms of contribution in the United States. But it is the first wide area network Sports Betting product in all of the U.S. And I think this will have more of -- will act as more of an example than a natural EBITDA contributor.
Okay, understood. And so just to confirm your previous guidance of EUR 10 million of contribution from the 3 contracts that you were to announce so which included New Mexico, that was not including Sports Betting component of the contract?
It was. The Sports Betting is part of the new contract.
Okay. I see. And so -- and the -- so it's EUR 10 million includes the increment that you see from this contract because of Sports Betting and perhaps other things.
Sports Betting, not other things. There are no other things.
Yes. Okay. And is there any CapEx required in connection with that contract?
No terminals, no central system. I think 40 or 50 months behind developing the application to adjust, so minimum CapEx, I don't know, EUR 300,000, EUR 400,000.
Okay. Understood. And on Illinois, I think you previously said that the contract was going to start in December, but I think you've just said that it's January now. I know this is a small delay, but can you explain the reason for the delay?
Yes. I think that the state lottery would rather do the change after the Christmas holidays and business -- peak of the business, rather than do a major changeover in early December. This -- I think that is how the lottery viewed the transition. Other than that, in terms of operations, in terms of terminals, in terms of availability of the system, we have delivered the system. And the system is in testing mode for the last 2 months. So for all intents and purposes, the INTRALOT side is ready. I think the lottery took a conservative approach to wait until the holiday season and do the transition afterwards.
Okay. Understood. Just to go back to the current tender in Turkey for INTELTEK, I think you said the worst case would be that things would remain as they are today. So did you mean to say that the increase in the payout rate potentially is something that could go away? Is it dependent on the outcome of the tender? Or is it something that's already set in stone because of the law that was passed earlier in 2018?
It is set in stone in terms that it is voted in the Turkish parliament, and it has been ratified by the president of the country. It is currently linked to the new tender. So the law says that the new increased payout will take effect once the new system, and provided by the new technology provider, meaning the new contract, will be in place. Now if there is no new contract or no new provider, I think we don't yet know what will that mean in terms of how does the 70% apply. Like I said, currently, there is no indication that there is something wrong with the tender or that the tender will not proceed as planned. We have no indication to that, quite the contrary. And like I said before, this is a race for one. We are not racing against anyone.
Yes. That's a good race to be in. Okay. And then just another point on Turkey. You recently announced that you would open a new global software development center. What's the timing for that? And what do you envisage the ongoing annual cost of running that center to be?
Okay. So first of all, this center will be operated by our Turkish subsidiary, so by INTELTEK. This -- so it will not be an INTRALOT development center. It will be an INTELTEK development center. It will be focused on the gaming space. Gaming space will include social games and fantasy games. So on top of Sports Betting, it will also include the social gaming space, which is an area where also INTELTEK has invested in the last 12 months and already has 700,000 customers in Turkey. So this new development center will work both for our Turkish subsidiary as well as any other customer in Turkey or outside Turkey in the gaming and social gaming space. The plan is to start -- we're in the process of finalizing the location, so meaning the office space. I think recruitment will start in Q1 2019. And obviously, there will be a ramp-up.
Okay. And what sort of cost do you think that might translate into on an annual basis because I'm thinking, broadly, that could be EUR 6 million to EUR 7 million of annual running cost for INTELTEK? Is that a fair assumption? Or...
So the idea is that this -- the start -- this development center will have up to 100 in Phase 1 staff. And also, the idea is that this development center will be able to support itself financially, so the cost of the material that it will produce for either INTELTEK or other customers in Turkey and outside Turkey will be enough to sustain its operation. We don't see this as a cost center. We see this as a development center that will create enough revenues to sustain itself. And I think your calculation of EUR 6 million is relatively accurate.
Okay. And just to confirm, the -- that center, that's not dependent on the outcome of the tender that's currently going on. It's completely separate.
Correct.
Okay. And just, I need to go back to your guidance on CapEx and working capital for this year. So you said earlier, EUR 105 million to EUR 110 million of CapEx for 2018. And in terms of working capital, I think you had previously guided to about EUR 20 million of outflow. Is that changed given your new CapEx guidance?
Yes because it might be at around minus EUR 25 million, EUR 26 million by the end of the year.
The next question comes from the line of Clark Nicholls with AXA.
And the third question I had earlier was to do with the quality of the earnings and just to get a better handle on that. And to follow up, was that assets that we talked about where you have the EUR 90 million of revenue and about, say, 5.5, 6 in terms of net income, and there was 6% of, let's say, gross betting, let's say, with your tax amount. And to me that's a bit unusual because, typically, I've had that within your sort of gross wins, should be a net win sort of number. In other words, in one way of looking at it could be that EBITDA may be looking a bit higher relative to actually what cash is received. In other words, typically, what's underneath EBITDA, the tax element would be the tax on earnings, not the tax on what is gained per se. And that similarly, use that same analysis across the board for your other businesses, are you using this approach where your gross games played let's call it and the tax level there is actually recognized underneath EBITDA? Or what amount in total will be sort of moved from, let's say, gross revenues to -- or net revenues down to below EBITDA?
I understand the question. This is an Azerbaijan thing, so it is like you said. It is not typical in the rest of the states. The way that...
Can you give an example of it elsewhere at all?
No, no, not at all. The way...
Okay, only in Azerbaijan.
Excuse me?
Is it only in Azerbaijan you've done this, if it's...
Correct. And this is -- this has to do with the way the specific tax is booked in Azer. We have had the same questions and the same concerns, both ourselves and Turkcell, on the handling of the accounting, handling of this tax. We have requested from our auditors -- both as INTRALOT and Turkcell from our auditors their opinions on how to handle this. And we have been guided that the way to do it in Azerbaijan is to book it below the EBITDA line. I agree with you that this is not usual, and it's only done in all of the countries where we operate. It is only done in Azer.
Okay. So the only thing, in my assessment, then that maybe you'd go view you could view as quality of earnings questions would be to do with your rent expense or leases that may well be capitalized that EUR 5 million to EUR 10 million and your working capital, that typically might be an expense may be capitalized also. So those 2 elements might be EUR 13 million to EUR 18 million support the EBITDA if you capitalize. But otherwise, there's no other thing that really supports your EBITDA on a sort of accounting basis. Is that correct?
So if I interpret it properly, we capitalize some close to EUR 8.5 million per annum in terms of...
In terms of capital. And then rent expense or the leases that you're capitalizing also, you said EUR 5 million to EUR 10 million lease expenses or rent expenses, I assume?
So will you please -- so it is at the headquarter is at around EUR 8.5 million. We have another development center, which is close to EUR 2 million, which is the Maltese company called Bit8. And there are -- on top of this, there are various risks, which are in the range of 7 -- EUR 6 million to EUR 8 million, I think, is the proper number.
I guess what I'm trying to understand is how much of the leases and rent expense are you capitalizing in the total number.
So we are not capitalizing with the leases. There are some leases that are treated as the sale and leaseback treatment, unless you have things some that are -- or do not...
No, no, no. I was wondering with the sale and leaseback I thought you're just recategorizing some rents or leases into being a capitalized element, not doing it at the sale process, just recategorizing. So it's just -- you do -- if you do the sales process that's fine. It's a 2-way exchange. That's fine. So it's only the EUR 8 million working capital that's getting potentially capitalized.
The working capital is not capitalized.
I think you said you'd be making -- you're going to potentially [indiscernible].
We are creating inventories that then -- so sorry, this is -- we are creating inventories the current year, so this is a working capital deterioration. And the inventories will be used in the projects in the next years. This part, it's -- is around EUR 8 million, which has happened only for the current year, so it's only the treatment in the current year. And EUR 8 million of the working capital deterioration will be reversed by the end of the year. And there is a residual value that will reverse -- will be reversing in the next year as well.
Okay. I apologize for being unclear. But in essence, you're saying, on the earnings, it will be a wash. It won't be any different. In other words, if they do get capitalized, they are going to be, for a better word, [indiscernible] to earnings expense.
Correct.
The next question comes from the line of Eric Morris with Caspian Capital.
Earlier in the call, you mentioned that Turkey was growing 31%. Is that over inflation? I mean, what has that growth rate been over the past few years? That's the first and for the Turkey contract and revenues. And second, if the -- when the new contract is awarded, is -- will that new kind of payout start in August 2019, even if it's just you guys? Or will it immediately begin in -- let's say, in 18 days if you guys receive a positive response? And what's the average payout rate -- European -- and lastly, what's the average payout ratio of European lotteries?
What we said in the last 9 months that our business in Turkey has grown 31% in Turkish lira. So in local currency, in the last 9 months, we grew the business by 31%, which is ahead -- way ahead of inflation -- local inflation in Turkey. And if we try to adjust it for currency sliding or currency devaluation, it is still ahead of the devaluation. So the important thing, as a KPI, when you run a local business is how do you perform in local currency because that's actually what you can influence as an operator. Now in terms of new contract in Turkey, when this new contract comes in place with the increased payout, our revenues will start the day the new contract applies. So there is no period of maturity. There is no period of waiting for something to be implemented. Over a day, we will switch from the old contract to the new contract from the old product to the new product. And we think that the revenue increase will be significant. Now will the Turkish players be familiar with the new product in day 1? Or will be a learning curve in the players going from fixed odds pregame to live betting? What will be the learning curve of the Turkish players? We can argue experience tells us that players tend to adapt very quickly to new opportunities in Sports Betting in the world. So...
And what's the average European payout ratio? And to my understanding, it looks like the contract that could be renewed was about EUR 10 million of your EBITDA on an LTM basis. So should we be thinking about that and then multiplying that by 4 if going from 0.3% of GDP to 1.3% of GDP? Is that right?
So the average payout in competitive markets, like Italy, for example, is in the range of 81% to 82% in retail and close to 87% in online. In the U.K., which is also a competitive market, the numbers are similar. In monopoly markets, like East -- like Malta, where we operate, the payout is in the range of 70%. The percent of Sports Betting as a percent of GDP that I mentioned, the 1.3%, is the European average. So not each country is the same. That's why we're taking averages and that's why we say up to each times. I think that the Turkish market will surprise us all. It is a market where there is a culture for sports. There is a habit for betting. And I think that, obviously, because of the demographics as well, the Turkish market will be one of the highest performing markets in Europe going forward.
Okay. And so is it right to think about it as kind of that EUR 10 million times 1, a multiple between 1 and 4? And what is the local Turkey inflation? Because I know that the new contract will have that step-up according to inflation, like, 2017, plus some inflation number.
So the inflation in 2018, which is an abnormal year because of the crisis in the middle of the year, is on average 20%. This number is not the last 4 years' average. We think that '18 was an extraordinary year for Turkey because of the pressure, because of the elections, because of a number of the war with Syria. So it is an extraordinary year for Turkey. We think that the average -- and the average inflation that we are incorporating in our plans going forward is in the range of 12% to 14% a year, which is very close to the last 10 years' average.
And your growth at 31%, that's -- so -- and if you think about 2017 tax revenues to Turkey, we should be thinking that, if in this year, this was in place, you'd take 2017, you'd plus the 20% and that would be like your obligation to Turkey and -- but you'll be, like, 11% above that because you have 31% growth. So you benefit like 11%, right, if you had that.
This is with the existing payout, not the increased payout. With the increased payout, the market will grow significantly. That's the rationale.
The next question comes from the line of Giovanni Visentin with Nomura.
I have a couple of questions on Turkey. Could you clarify -- can you disclose the amount in million euros or Turkish liras that you will provide as guarantee to state's revenues for 10 years? And what kind of security or pledge, if any, you have provided to the Turkish state for that? And the second is given the existing contract in Turkey, I understand it's profitable and there is also upside related to the new payout, could you give us your view on why you were the only bidder? And were the conditions of the auction particularly onerous or difficult? Or how come you have been the only participating player?
Okay. So like I said, there is a bank guarantee that guarantees the revenue of the state. The bank guarantee -- guarantees is 120 -- around TRY 850 million or around USD 120 million going forward. This guarantees a portion of the state revenues. Why we were the only bidders is a good question. Obviously, I cannot speak about other possible competitors. But you need to understand that in a country that requests a specific guarantee on the revenues of the state for the next 10 years, a risk between the incumbent and an outsider is not the same. We feel confident because we know the market and we know the business, and we've been doing it for 16 years. I would guess that our competitors evaluated the risk in a different perspective -- with a different perspective. So I can't say why the others did not appear. What I can tell you is that this is a bid that we have participated for 3 times, and we have been very successful in operating for 16 years. So why no other competitor appeared is not a good question for me. What I can tell you is that we feel confident, both for the business and the prospects of the business and a significant increase that this new product will bring as well as our commitment to the state. And we did that also with a Turkish partner that understands the Turkish market probably better than anybody else because Turkcell has 40 million, 4-0 million, customers only in Turkey. So between the 2 of us, our knowledge of the Turkish consumer and of the Turkish market is unprecedented. Now would anybody bid against this JV? I don't know. You have to ask the others. But we felt very comfortable with both committing and with being in a position to grow our margins and our EBITDA contribution for the next 10 years.
Okay. That's helpful. On Azerbaijan, could you just confirm, whether in Q4, you will already deconsolidate the operations or -- and you will show them as discontinued or you will give us pro forma figures? And also what has changed and what had made you change your mind about the operation in that country because, I believe, in the last quarter you said you were pretty pleased with the operating performance there and that -- those operations were not for sale anymore. What has made you change your mind?
So this is George. Let me take on the consolidation. The consolidation will happen once there will be a share transfer, but we have provided in the IFRS accounts what will be the effect on the -- of the Azeri business in our consolidated result -- results. You can see there, and we will continue to demonstrate the effect of the Azeri business in many results from now onwards until the completion of the sale. Now why this has happened? I think Antonios will take this.
On the decision, first of all, to sell the business was a common decision with our Turkish partners, so with Turkcell. The risk assessment that we made with both the economic environment and the monetary environment in the country, we concluded that it would be to the best interest of both of us to secure our dividends until the current license expires, take them in advance and exit the market. That was the business decision behind it. It was a common decision between Turkcell and INTRALOT that was implemented.
The next question comes from the line of Senan Kiran with Muzinich & Co.
On disposals, you have talked about them in the past. And at that point in time, the valuations -- or the share price of Gamenet was not attractive enough. How are you thinking about disposals going forward?
Good question. First of all, Gamenet, we have repeatedly said that it is an asset that we would be looking to dispose of our 20% share. It is not a strategic asset, as we do not manage the asset. Obviously, the share price performance has been very volatile. The market has been very volatile in Italy. With the recent acquisition of Goldbet, Gamenet is now the #1 retail sports book operator in the country. Our combined business has a pro forma EBITDA of EUR 145 million a year. And if I am correct today, it was trading at below EUR 8 a share, which means a net EUR 7.6. So that implies an equity value of less than EUR 230 million and EV, which is less than EUR 500 million and a multiple that, I think, does not reflect the dynamics of the company. So we've decided not to sell in the IPO for EUR 7.5 per share. We think that with the current conditions, EUR 7.6 is still not the right price. But given all of that, I think the fundamentals of the business of Gamenet are very strong. I think Gamenet, like INTRALOT and like all of gaming, shares, especially in Italy, but also across the Atlantic, are being undervalued for the wrong reasons maybe. But definitely, this is the case for Gamenet. That's how we feel about the asset, but it is clear that this asset is for sale. We, in the past, have mentioned that we are looking at a number of other assets that, for us, are either not strategic or are assets that do not fit with our development and expansion strategy in the globe that we're looking to dispose of. We have mentioned in the past that Poland was one of them. It is clear that we will try, at the right price, to dispose of assets that do not fit to our global development plan and focus on the assets that make both financial and business sense for the group going forward. So for us, there is no change. Had the share of Gamenet continued to be in the north of EUR 9 per share region, I think we would have made the transaction already. For us, it's a matter of timing and price, clearly.
Did you ever do the analysis of -- and I understand that, for example, you wouldn't sell Gamenet at the current valuations. But as it stands today, wherever these assets are valued at, did you calculate the current value of these noncore assets in total?
So for us, depending on fair valuation, the noncore assets, where we either have a minority stake or are not strategic going forward, the assets in Italy, in Peru and in Poland, now a fair value for all those 3 assets -- the fair value of all those 3 assets will be in the range of EUR 100 million.
Okay, fair value. Okay. And then a couple of people asked this question a bit of like indirect way. Let me ask a bit more directly. The CapEx for 2019, what do you know as of today? What do you need to spend? What's the budget for next year compared to the EUR 105 million for 2018?
So the CapEx for 2019 will be in the range of EUR 70 million, 7-0 million.
EUR 70 million, okay. Great. And then the refinancing, you talked about that and you wouldn't wait until the last minute to take care of that maturity and you would look at your options next year. So am I right to infer that making another bond, obviously, depending on where the bond prices go to next year, but you can look at other sources of other structures, other debt opportunities other than a public bond?
We would not wait until 2021 because that's the prudent thing to do. And we would evaluate all options to refinance our 2021 bond, and that includes the things that you described.
Okay. Again, in the last call, you have mentioned a possibility of an IPO of your U.S. business, but I don't know what sort of timing you were thinking or what sort of developments you needed after for -- to make that sort of decision. Any update on that?
As -- you know the markets better than I do. I don't think that this is the right time for an IPO in the U.S. Our competitors that are listed in the U.S. in New York Stock Exchange, and I'm talking about SciGames, Scientific Games, Scientific Games has moved from $62 a share in May to $17 a share in November without a significant deterioration on their performance. So I think that the market condition, with what we know today for end of 2018 and at least for the first 2 quarters of 2019, are not favorable conditions from an IPO. In terms of preparing the company to make the process easier, if and when we decide to go the -- along this path, we are already preparing the results of the company in both IFRS and U.S. GAAP, with all the reconciliations and with all the things that potentially would be requested from a public offering. But I think -- we think, and our advisers think, that the time for an IPO in the U.S. in the gaming sector, especially, is not right.
Okay. Last question. If I can summarize the different moving parts in EBITDA for next year, so on the additions, you said $20 million for Illinois in terms of incremental EBITDA.
Correct.
And then -- and the EUR 10 million for the 3 contracts that you have signed already, meaning Croatia, Hamburg and, I think, the Sports Betting element of New Mexico, that's an incremental EUR 10 million.
That would be phased within 2019, so we will not see the full effect of that in 2019. So for example, Croatia will be in September. New Mexico will be in March. And Hamburg will be Q2 or early Q3 in 2019. So this will be the full effect and not a '19 effect.
Okay. So run rate EUR 10 million incremental EBITDA, but not reaching the run rate until, I guess, Q3 2020. And then another EUR 10 million run rate for the -- these other 3 contracts you are working on at the moment.
Correct. And that excludes the number that -- the numbers that you mentioned excludes a new contract in Turkey.
Yes, exactly. I was going to come to that. And then on the negative side, you are losing the Azeri EBITDA except for the management -- the technical service contract because you used to fully consolidate it. But now, this will be deconsolidated when the share transfer happens. And then the OPAP contract, as well, will be a decline as well year-over-year.
Correct. The only changes that you would lose -- we would lose a consolidated EBITDA of EUR 19 million in Azer, of which the cash effect, meaning our dividend, was a very small portion of, while as all of those new businesses have higher attributable cash in the INTRALOT perimeter. And that is the reason why if we add the numbers up, you heard that I did not hesitate on the question of what has -- what will '19 mean cash-wise for the group.
Okay, okay. And the Turkish contract, currently, the regulator is reviewing the only bid, which came from you. And the deadline for bidding was on Tuesday, so no more new bids. And if you were to be awarded that contract, the new payout, the 70%, kicks in as soon you get the new contract. Is that right?
Correct.
Okay. Because I thought the law said that the 70% payout would be effective from 1st of March, but maybe it was earlier of 1st of March or the new contract.
1st of March or the new contract, you are absolutely right. So provided that there is a new contract by the 1st of March, which means new contract and new system, 70% will -- would kick in with the new contract. Also the reason for that is that with 70%, you can offer live betting. With the current system, you cannot offer live betting. So anyway, a prerequisite would be to be able to offer live betting, meaning the new product in the market. So it's March or new contract, which ever comes last.
The next question comes from the line of Thomas Doerane with Oak Hill Advisors.
On the Turkish contract, if I understand correctly, you mentioned at some point that if turnover doubles, your revenue double. I think in the previous contract, one in 2008, you had 1.4% commission built in. So directionally, I guess, that number stayed the same, right? But then link to that, I just wanted to understand the dynamics typically in the new contract. Given that you don't have the upfront CapEx, is that, normally, you have a lower commission as a percentage or you maintain it generally?
Listen. It's a different product altogether. First of all, it is a product where you will have to guarantee a higher percent for the state, so that's a complication. The second thing is that if the game doubles or triples, you would have to handle more wagers or a multiple of the wagers in terms of the complexity. And there is -- the third is you would have to offer from a fixed odds pregame, so very simple product. You would have to go to a more sophisticated live betting offering, which is, operationally, a completely different ballgame. So there is a benchmark of 1.4%, but it's a benchmark on a completely different game, completely different size of the game and different market. So -- and I also think that it would be a different set of players that will be involved. So the players that are currently going to the illegal market to find a live Sports Betting product, and I'm not even bothered with your 50% offering, will -- either all of them or most of them come to play with a legit operator. So I don't think we can compare the benchmarks. The 1.4% is the current benchmark. But I think that the new tender will be a completely different ballgame in terms of the offering, in terms of the risk and in terms of the handling of the size of the business that is being handled. So it will be relevant in the sense of the past, but we would be talking about a completely different ballgame altogether.
Okay. And generally, for new contract, this percentage comes on, right? What's the typical magnitude?
It is -- all of -- or most of the renewals we have done in the U.S. are either with better terms or with the same terms as before. So obviously, I'm not allowed to disclose what our offer to the Turkish State is. But please, the reason why I'm saying it's a different product altogether is because I don't want to go along the line of renewal means lower, how much lower, et cetera. It's a completely different product. It's a completely different risk profile. It's a completely different game. So 1.4% is the benchmark. What I'm saying to you is that in the new contract, the Turkish state will make significantly more money, the Turkish players will make significantly more money and the INTRALOT JV will make significantly more money in Turkey.
Just to come back on that percentage of system-wide sales, particularly in the U.S. Hasn't the Ohio contract went from 1% to 0.82% when you renewed it in June 15?
Sorry, which contract?
The Ohio.
No, no, no, not at all. Not at all. Ohio were renewed with exactly the same terms.
Okay. And then moving on to the Turkish R&D center. You mentioned 100 engineers in Phase 1. What's the target for the later phases?
Listen, this development center, like I said will have to be a development center that covers its costs. So it's not for us. We don't want this to be something that we subsidize obviously. So according to the success of the business there and according to how many customers on top of the INTRALOT and Turkcell universe they can attract. They will have their own business plan and they will grow as a company as long as they can continue to fuel their own growth. So we have estimated that in the first phase, working for Turkcell and INTRALOT, we will need, give or take, 100 software engineers. Now if the business is there, if they can attract the business, if they can be competitive for both the Turkish market and international market, then this development center will grow on its own merit.
Okay. And the IP will not be -- that will be developed in that center will not be used by any other countries within INTRALOT, right? And could it even be sold to competitors?
Listen. Would we make a development center to sell to our competitors? I don't see why. It is obvious that the IP that is created by this development center will be the property of the development center. The development center will be a subsidiary of INTELTEK where we have a joint control with Turkcell. So...
Okay. And then moving on to Poland. You mentioned earlier in the call that along with payroll in other countries, it was not a strategic country. Can you confirm that? And then second is, I think, revenues were down 7% or 8% in Q3 in local currency and I understand that you think this is due to increasing competition. So can you expand a little bit on that and what has changed.
The problem with Poland are not the revenues. The problem with Poland is the tax. So currently in Poland, there is a tax of 12% on revenue. So with 12% on revenue, there is no room for growth and there is no room for profit. So yes, Poland is the market that is growing. Yes, there is an opportunity in Poland in general. We are not in a position where we would continue to support financially a company that is operating in an environment where practically nobody is making money because with 12% tax on the top line, nobody is making money. We're not in a state in our business plan where we can support operations like that. So we don't have the time, the resources to wait for when or if Turkish -- the Polish tax regime will be reformed and be aligned with European taxes on gaming. So for us, Poland, the way things stand now is not a strategic asset and is considered as an asset for sale.
Okay. And obviously, this effect will have to annualize, I guess, throughout the rest of the year and going into 2019, right? Not everything? You still generate a profit from Poland?
We are not generating profit from Poland. We're generating revenue from Poland.
Okay. But for Q3, there was no shortfall in the EBITDA due to Poland?
In Poland, in the 9-month period, we have a negative EBITDA of 500k. So it's a negative EBITDA.
Okay. And then I wanted to talk quickly about Argentina. You stated that in local currency, over the first 9 months of the year, it posted a plus 45% year-on-year increase. And this obviously came after 2 consecutive years of plus 25%. So I was just wondering, could you help explain what contributed to that? Was it all due to the local inflation? Was it due to the change in payouts? And then when I look at Q3 specifically, it seems like this has even accelerated to 60% in local currency.
Argentina, as already communicated to the beginning of this call, in local currency terms, we have a growth of circa 45%.
But I guess, I mean, the country product consumption is down, I think, 1% in Argentina. I guess, not all of it can be down to strong fundamentals, right? So how much of that is just local inflation? And how much of that is just the change in payout that happened last year?
So first of all, Argentina. Argentina is a country that has managed to operate with difficult macro -- in a difficult macro environment for years. I think that the sensitivity of macro changes and currency changes to the lottery business are smaller than anticipated. There is more resilience in those business. For me, in a country that is going through what could potentially be a bankruptcy situation in 2018 and increasing in local currency, obviously, the revenues by 45%, it means 2 things. One is that the operator knows how to adjust pricing to the local environment. And the second thing is that in countries like that, a 10% drop in GDP does not mean a 10% drop in the lottery revenue. And that, I think, is clear for us, having worked in Argentina for so many years. It is a country where despite the environment and despite the approach of the government towards the gaming sector in general, we have managed to still make money and continue to grow the business with a healthy pace. So for us, this is one of the countries where we have seen a completely different approach to the link between GDP growth or decline and our revenues than most of the other countries in the world.
Okay. And then for accounting purposes, Argentina is not considered as an [indiscernible] inflationary economy. Can you walk us through the impact on the income statement, including your cost base and then the balance sheet items, please?
I think we can do that separately off-line with an e-mail.
Last question from me then. Out of this that you own 100% so Morocco, Australia, et cetera, how much of that cash is trapped on there?
0.
We have a follow-up question from the line of [ Menila Ozack ] with Imperial Capital.
So all of my questions have been answered so far. So no follow-up for me anymore. Thank you very much.
We have a follow-up question from the line of Felix Wolfgang with Sarria Management.
Just a couple more questions, if I may. That U.S. facility that you were referring to, is that an overdraft facility? How large is it? What are its terms? And how much of it do you expect to draw?
The line is USD 20 million.
Okay. And you just said there's 0 cash trapped, I suppose. So what would be your -- in your 100%-owned perimeter, what would be your, say, minimum cash balance that you need to keep everything operating given [indiscernible]
So in all of our operations, including our own operations and JVs, the minimum cash to operate with payouts, with guarantees, with deposits, with the whole lot is in the range of EUR 30 million. That's for the whole INTRALOT perimeter, including the JVs. So from our consolidated cash balance, one would have to assume that EUR 30 million is the absolute bare minimum cash that we need to operate the businesses.
Okay. Obviously, you have a lot of cash piling up in Turkey now -- or at least last time, you had, I think, about a EUR 40 million-or-so balance there. Is that still the case there? Or have you been able to shift some of that? Divvy some of that? I don't think you have. And obviously, the Azeri cash is going to join that at some point. Will you and Turkcell agree on maybe divvying some of that up before you extend any Turkish contract? Or do you think you're going to have to or want to wait until you may have that contract for sure?
One is not linked to the other. So the contract is not linked with the cash. We have been distributing the last years a full dividend from our Turkish subsidiary. 85% of our cash in Turkey is in dollars anyway, and that is the common investment decision that we have taken with Turkcell. So the plan is -- so the 2 things are not linked. Distributing the cash and the tender are in no way linked. Obviously, we would have to keep cash to pay for the new terminals that are bought by INTRALOT. But this is a business as usual type of approach. We don't keep -- we have no reason to keep cash because of the tender in our Turkish subsidiary.
Okay. And then last time I checked, you had, I believe, plans of spending EUR 120 million of CapEx this year, and those plans are now down by EUR 10 million to EUR 15 million. Whereas I believe, your plan for next year seemed to be up by broadly the same amount. Is it a case of some delay in certain CapEx somewhere perhaps in Illinois or elsewhere? Or is it...
Exactly.
Okay. All right. And what would be the timing of your Azeri deconsolidation? Is it linked to when the cash is being transferred? Or do you have a particular date set?
There is a 6-month period on which the buyer can give us the money. Six months between the signing of it, which was 10 days ago, I think. So 6 months' period between November 15 when the SBA was signed and the confirmation of the transaction.
And it would be that date whenever they choose to do so that you would deconsolidate it from your records?
Correct.
We have a follow-up question from the line of Ian Neill with Alchemy.
I dropped off the line for a little while so I apologize if this question has been asked already. But in your view, under the terms of the 2024 bond document, how much senior secured or super-senior debt is the company able to raise?
EUR 120 million.
The next question comes from the line of [ Janus Kandalam ] with [ Lukor ].
Just quickly on FX. I know it's a very volatile situation and you did a good job giving us some kind of guidance for full year 2018 on the lira and the peso impact to EBITDA. But do you have any general thoughts on how FX is looking going into 2019? I mean, like anything general broad will be fine because I know that it's a moving parts. And the second question...
Obviously, we're in the process of finalizing our '19 plans. We feel that the Turkish lira will stabilize. So already in Q4, late Q3 and Q4, we see the Turkish lira stabilizing, reflecting also the changes in both the political environment and the macro environment in the neighboring country. I think the peso, once the IMF -- what's the right word?
[indiscernible]
Once the IMF assumes full control of the Argentinian economy, we think that the peso will also stabilize. I try to be politically correct when it comes to the IMF. So I think that both those currencies in 2019 will be a lot stabler than they were in 2018. We can discuss for hours your -- our dollar-to-euro view depending on the decisions for trade taxes, et cetera. But I think it will be a discussion that will be changed with a tweet. So your guess is as good as mine. But the overall feeling that we have is that we will move to -- '19 will be a lot smoother in terms of main currencies that will affect our EBITDA performance if we compare it to '18.
Okay. I think that's quite a bit of helpful comment. Just moving on a bit to the cash flow. You did provide about EUR 90 million of [indiscernible] EBITDA, which you have got, which you are expecting for 2018. Am I right in assuming that some of the additional EBITDA, which we detailed over the course of the call, the EUR 20 million from Illinois and the probably EUR 10 million, EUR 15 million from other additional sources, that will be entirely -- it's a lot, so that would be kind of like a come-over and above the EUR 90 million, assuming EUR 90 million stays?
Correct. All of this is 100% INTRALOT perimeter. So it's U.S., which is 100% owned. Mexico is obviously U.S.; Croatia and Hamburg are 100% INTRALOT perimeter.
I see. Okay, that's helpful. And so I'm just trying to reconcile your statement and I believe you probably made the statement in a consolidated -- taking a consolidated view that 2019 would be cash positive. But just trying to do a bit of reconciliation here. I'm looking at about EUR 50 million odd of cash interest and probably EUR 20 million negative working capital next year. Can you just give me an idea what will be proportionate CapEx if there is a term which you are using like that for on a proportionate basis, a CapEx spend? Did you mention [indiscernible]
I think the exercise for '19 is not for this call. Obviously, it's a complicated exercise. What I said is that we as the management of the company feel that 2019 will be cash neutral for the group. And I think we have to leave it at that.
Okay. And listen, I asked though that if do you have -- will you be having an initial view on the minority payments, which you will have to pay in 2019 or increase your [indiscernible] for cost? So initial view on that?
Like I said previously, the performance -- or the preliminary guidance for '19, we will put together as there a lot of moving parts when we announce the 2018 final results.
[Operator Instructions] The next question comes from the line of Brendan Breen with JPMorgan.
Most of my questions have been answered. I just had one. It was just regarding the recent contracts where you've guided for around EUR 10 million in EBITDA. I was just wondering how much of that do you think -- what percentage do you think will run through in 2019, assuming there will be 100% in 2020?
I would say roughly 60%.
Okay. And I'm sorry, just one more thing. So I think you guys in the last call said group EBITDA around EUR 150 million for the year-end. Maybe you already mentioned earlier in the call, but I was just wondering if you made any alterations to that guidance.
Excuse me. Can you repeat, please?
So I think in the last call, you guided towards a full year EBITDA of EUR 150 million. And I was just wondering is there anything that happened in the last couple of months that has made you change that view.
I think we should be a bit more optimistic because of the change in FX and also the jackpot in the U.S. and a couple of new things we're working on between now and the end of the year. So I would be a bit more optimistic than this number.
The next question comes from the line of [ Kip Osovitz ] with [ RNC Capital ].
I just wanted to clarify. It wasn't very clear from some of the previous answers. So when we talk about the new projects like the Croatia, Hamburg, New Mexico and those 2 other additional on top that you mentioned today that you cannot give us a lot of details yet. So should I understand that between all those 5 projects, you should be expecting how much of EBITDA? Because I understand that you announced EUR 10 million for the 3 previously announced and another EUR 10 million or in the ballpark for the another 2. So should we be thinking EUR 15 million to EUR 20 million in total or EUR 10 million to EUR 15 million, excluding [indiscernible]
We should be thinking about EUR 15 million to EUR 20 million in total in a full year model, in 12-month model.
And what is the total CapEx that you expect to spend on those projects between 2019 and 2020?
I need to -- I gave a guidance about the 3 projects that are already signed last time with the 3 new contracts, I think I gave an indication of what it would mean in the OpEx side. I think that before we sign that, that's already enough in terms of how much we can disclose on contracts that are not yet signed and with the confidentiality agreement that we have signed. So I gave you an indication of the value of the new contracts. I think we should stick to that for the time being.
Ladies and gentlemen, there are no further questions at this time. I will now hand the conference over to Mr. Kerastaris for any closing comments.
I would like to thank you all for a very long but, I think, a very productive call and hope to see you soon in our final results. My best wishes to all and your families for the festive season, and talk to you early next year. Thank you very much.
Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.