Intralot Integrated Lottery Systems and Services SA
ATHEX:INLOT
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Earnings Call Analysis
Q3-2023 Analysis
Intralot Integrated Lottery Systems and Services SA
Intralot's journey through the third quarter of 2023 was marked by a combination of strong operating performance and beneficial strategic initiatives. The company's operating profitability saw a solid boost, with the EBITDA for the first nine months and the third quarter each growing by approximately 15%. This increase in efficiency has pushed the EBITDA up to roughly EUR 136 million over the last 12 months, a substantial jump compared to the full fiscal year of 2022, indicating an upward trend in profitability.
Steering away from low-margin markets and doubling down on more lucrative contracts paid off for Intralot, as evident from the improved EBITDA margin, hovering around 36-36.5%. Simultaneously, operating cash flow soared by 44%, amounting to EUR 97.6 million, which hints at an enhanced liquidity status with the cash position being superior by EUR 20 million, settling at EUR 122 million in contrast with the end of 2022.
The successful raising of EUR 135 million through a share capital increase in October 2023 underscored the investment community's faith in Intralot's results and future prospects. This move not only improved the capital profile of the group but also demonstrated investor confidence, as the fundraising was entirely supported by rights holders and pre-subscriptions. The successful capital increase led to a positive turnaround in the group's equity and lifted the company's shares from the surveillance segment to the main market of the Athens Stock Exchange.
Looking forward, Intralot is set on clearing the remainder of its outstanding notes due September 2024. To achieve this, the group is launching a two-pronged plan involving the issuance of retail bonds and a syndicated bank loan. With the processes well underway, the goal is to raise enough capital to fully settle the outstanding bond balance, solidifying Intralot's financial foundation for upcoming ventures.
Intralot faced a revenue contraction in its licensed operations by about 60%, largely due to the non-renewal of the Malta license. However, the shift from B2C to higher-margin B2B contracts is a promising sign that the company is optimizing its business mix for better profitability despite the initial dip in revenues.
The company's decision to fine-tune its operations reflected positively, as technology contracts saw a 6% improvement. Growth in the U.S. from numerical i-Lottery and Instant games, coupled with a successful expansion in Croatia, led to earnings that surpass budget expectations, painting a picture of strategic success and solid execution within this sector.
Intralot's management contracts segment, particularly its online business in Turkey, enjoyed substantial growth, more than doubling in the sports betting segment year-over-year. While currency fluctuations posed challenges, the strong performance in this domain contributed significantly to a 46.9% improvement in revenue, signaling a robust response to evolving market opportunities.
Despite experiencing fluctuations in revenue, Intralot managed an improved gross profit margin, an increase in operating expenses in favor of future growth, and a robust EBITDA growth. This comprehensive financial revival, boasting a bottom line outlook of EUR 9 million for the period and over EUR 20 million on a twelve-month basis, suggests a sustainable improvement in the company’s operating and financing landscape.
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Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call operator. Welcome, and thank you for joining the Intralot Call and Live Webcast to present and discuss the third quarter 2023 financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions].
At this time, I would like to turn the conference over to Mr. Chrysostomos Sfatos, Deputy Group CEO of Intralot. Mr. Sfatos, you may now proceed.
Hello. Good afternoon. Welcome to the earnings call for the third quarter of Intralot. I'm happy to welcome you all. And I would like to pass on the microphone to the group CFO, Mr. Andreas Chrysos for his comments.
Ladies and gentlemen, good afternoon. The first 9 months of the year and particularly the third quarter have been characterized not only by an outstanding performance, as indicated by operational metrics depicted in the P&L and in the cash flow statement, but also by continuous improvement. In terms of operating profitability, the 9-month EBITDA grew by around 15%, which was also the growth of the last quarter versus respective period last year, while the last 12 months EBITDA reached around EUR 136 million, better by EUR 13 million compared to the full year of 2022 performance.
In addition to this, it is clear now that the group is reaping the fruits of the strategic choice to exit from markets with lower margins and engage further in higher profit margin contracts end markets since the EBITDA growth has been accompanied by a continuously improved EBITDA margin, which was in the vicinity of 36% to 36.5% both for the 9 months and the third quarter periods. Apart from the P&L metrics, the performance of the operating cash flow also marked the operational improvement reaching EUR 97.6 million, a 44% better performance compared to last year's respective period performance and a much better cash position, which was higher by EUR 20 million standing at EUR 122 million compared to the end of 2022.
The successful completion of the share capital increase in October 2023, marked an important step in the sequence of strategic initiatives planned and executed by the management to reinforce the capital profile of the company and the group. The raising of EUR 135 million signaled the investments -- the investment community's confidence in Intralot results and prospects, while the strong interest was evident also in the execution process as the increase was fully subscribed by rights holders and pre-subscriptions, leaving no shares available for [ private ] placement. Immediately following the completion of the share capital increase with the introduction and commencement of trading of the new shares on the main market of the Athens Stock Exchange, the listing -- the listings and Market Operations Committee proceeded to the lifting of the decision of company shares to be traded in the surveillance segment, which have now returned and are traded alongside with the new shares on the main market of the Athens Stock Exchange.
This development was based on the fact that the following the successful completion of the share capital increase, the group's equity returned to positive territory. And consequently, there are no longer grounds for the company's shares to remain in the aforementioned category. Furthermore, as company committed in the prospectus in relation to the use of the risk capital, EUR 126 million of the proceeds were directed towards the partial repayment on November 14 of the bonds maturing in September 2024.
Subsequently, the outstanding balance of these bonds is approximately EUR 230 million, while net debt after the completion of the share capital increase stands at EUR 328 million, and the consolidated net leverage ratio is at 2.4x. For the next certain period, we are focused on the execution of our next refinancing plans, which will allow the group to fully redeem the remaining outstanding notes maturing on September 2024. These plans are [ two-folded ] and will include the issuance of retail bonds and syndicated bank loan. More specifically, the process of preparing the prospectus for the issuance of a retail bond that will be traded in the Athens Stock Exchange has commenced and is expected to be submitted to the Hellenic Capital Markets Commission for approval in December.
As for the bank loan, we have been in discussions with the syndication of 5 Greek banks and all prerequisites set by the banks have been completed, and the terms and the agreement are in the final step of the approval process. The total amount to be raised by these 2 financial products will be sufficient to fully repay the outstanding bonds maturing on September 15, 2024.
And after this introduction, we are now moving to the 9 months of 2023 financial presentation. In Page #5, we see the results of our licensed operations which have contracted by around 60% or EUR 49.2 million due to the license expiration in Malta in July 2022 affecting negatively 9 months of 2023 revenue by EUR 43 million, as a result of our transition from B2C to B2B contracts with higher margins. In Argentina, although in local currency terms, there was a substantial increase. Headwinds in the FX resulted to a lower performance in Euro terms by EUR 5.3 million.
Turning to Page #6, we will notice a material improvement in the performance of our technology contracts, which have been improved by around 6%, and the key takeaways in this activity line are the following: the higher revenue in the U.S. for the 9-month period organically driven by the growth in the numerical i-Lottery and Instant games. And secondly, a better performance of our business in Croatia due to the local market growth. This new contract, which commercially commenced its operation in April 2021, but unfolded its potential in the next 2 years is now performing very well, exceeding our budget expectations for this year.
Finally, turning to Page #7. we see a significantly improved performance of our management contracts, which have improved by EUR 16.6 million or 46.9%, attributed mainly to the momentum of our online business in Turkey and the growth of the respective sports betting segment by 2x year-over-year in the country. Strong performance has been partially mitigated by the headwinds in the local currency, mainly in the second quarter.
Turning to Page #8. We see the overall P&L performance metrics for the 9 months and the last quarter versus a year ago. Takeaways from the operational front are: first of all, the lower performance in the revenue line, which has been analyzed in detail in the previous slides, primarily affected by the lines of expirations in Malta, but better quarter-on-quarter by 8%. This indicates the improved performance of the top line on an apples-to-apples comparison of the 2 quarters without the Maltese contract, which has ended its operation at the end of the first half of 2022.
Secondly, the gross profit line, as already mentioned, was strongly affected by the shift of the business to more profitable line of activities and therefore was better by 24% or EUR 20.6 million, accompanied by a better margin by 9.6 percentage points versus respective period of 2022. The last quarter also presented a much better performance compared to previous year, while the gross profit margin for the last 12 months period reached 40%.
Thirdly, the OpEx line, it was higher by 9% or EUR 6.3 million and around EUR 9 million higher quarter-on-quarter. The reason behind this increase relates to the necessary adjustments on the cost side in order to support the top line growth as well as future business developments in areas that drive the growth.
Fourth, as a result of all the above, we have a healthy EBITDA improvement, which landed at EUR 101 million, almost 15% higher compared to last year with a similar percentage growth in the last quarter too. Last 12 months EBITDA, as mentioned in the introduction, also improved compared to the previous periods, standing at EUR 135.8 million, indicating a good strength and the positive outlook of our performance. In line with the gross profit margin, the EBITDA margin of sales was higher by 6.9 percentage points versus last year standing in the vicinity of 36% to 37%. As a result of all the above metrics, but also due to the lower depreciation and amortization, a result of EUR 5.2 million. The EBITDA line was strongly positive and much better compared to previous year, standing at EUR 32.1 million versus EUR 19.4 million in 2022 and EUR 42.5 million on last 12 months basis. And the bottom line result was EUR 9 million for the period and over EUR 20 million on a last 12-month basis, indicating the improvement on the operational as well as on the financing front.
Turning to Page #9. The upper graph -- the upper 2 graphs have already been annualized in detailed in the previous slides focusing on the bottom left of the slide, as commented in the introduction, the operating cash flow stood at EUR 98 million for the 9 months of 2023, which was higher by 44% compared to the respective period of 2022. As a direct effect of the higher EBITDA and above better working capital. CapEx was higher by EUR 7 million versus a year ago, mainly due to higher CapEx needs in the U.S. and the payment partially of the license in Bilyoner, in Turkey. On the bottom right of the slide, we see the implications of the continuously improved performance on the financing and on the operating front with the net debt and the net debt-to-EBITDA ratio for the 9-month period of 2023 standing at EUR 458 million and 3.4x, respectively, at the end of September, considerably improved not only versus a year ago, but also compared to the respective performance 9 months ago at the end of 2022.
On a pro forma basis, after the execution of the share capital increase, net debt stands at EUR 328 million and net debt-to-EBITDA below 2.5x at 2.4x.
Turning to Page #10, we see the net debt movement bridge for the 9 months from December 2022 through September 2023 indicating a strong free cash flow generation of EUR 56.3 million and an overall improvement of the net debt by EUR 32 million in the 9 months period. This metric was also positively affected by a gross net movement of EUR 12.6 million. That includes the capital repayments towards the term loan in the U.S. and the benefit from the lower interest accrued in comparison to December 2022, fully offsetting the slight adverse FX impact on our U.S. denominated debt.
Lastly, moving to Page #11. We see the contributions by region in our revenues and EBITDA and the key takeaway from this slide is that there is a balanced contribution on basic operational metrics between the North America and the rest of the world since around 44% of the revenues and 51% of our EBITDA comes from North America, with the rest coming from the rest of the world. The better performance in North America and in the rest of the world areas come from our businesses in the U.S. and in Turkey counterbalancing fully the loss in Europe region due to the Maltese with the Croatian contract counterbalancing partly the deficit in this part of the world, especially as well as the loss in South America, mainly attributed to the FX headwinds in Argentina.
And at this stage, the presentation of the results for the 9 months of 2023 is finished, and the Intralot executive team is at your disposal for any questions you may have. Thank you.
[Operator Instructions] One moment for the first question, please. The first question comes from the line of [indiscernible] with Ambrosia Capital.
Many thanks for your time and congrats on a strong quarter. I have 3 questions, if I may. Firstly, the expectations after a strong Q3, I was wondering if you could give us any color on Q4 EBITDA performance, whether we should expect a strong similar figure? Second question is, over the medium term, particularly for the U.S. market, what kind of EBITDA should we expect? And third one is if there's any update on the talks with TLC in Australia. Thank you.
Thank you. On the Q4, it's still were not even in the middle. So we only have a view of October, and it seems to be going according to the budget forecast. So I guess people should be wondering more about how the full year 2023 is going to close. And I cannot tell you now because we don't have the forecast on the FX, for example, which is very important, and we see a lot of movement there. Turkish lira, [ dirham ], peso and the U.S. dollar. But it all looks good, and we are meeting the targets. So now you see an LTM EBITDA very strong at around EUR 136 million. Except for any FX movement, we expect to meet the targets that we have set out.
So nothing unusual or adverse happening in Q4 of 2023. Regarding the U.S. market, we are expecting an EBITDA in euro terms for year-end, of course, north of EUR 70 million, probably around EUR 73 million or EUR 74 million depending on the FX. And finally, your question was about Australia?
Yes.
So you mean about the new contracts there.
Exactly.
Yes. There is -- there will be a tender going out. We are in contact with them. I don't have anything to share specific at this point. It's a significant opportunity there. There are other significant opportunities in other parts of the world. We are bidding in South Africa and in the United States, we intend to bid every contract that will come to tender in the next couple of years. There are other significant opportunities some very sizable ones where we would need to bid with the partnership. But a lot are in a range that we can bid and we feel confident that we can win some of these contracts coming into bid in the next 2 to 3 years.
[Operator Instructions] The next question is from the line of Carles Costantino with Europe Securities.
Yes. Just a strategic question. Have you examined in the past? Or are you looking for the next 1 or 2 years? Any kind of expansion to the Asian markets? I mean they are very let's say, I don't know if the Indian or the Chinese market. I think they have a very -- they have an increased propensity to met and all these. Thank you.
Sure. As you know, we -- this year, we won a tender in Taiwan, and we also have a tender that we are looking to renew in Malaysia. But to your question, we operate in an environment which we call the WLA environment, the World Lottery Association environment. So we work with state lotteries and I'm sure there are a lot of opportunities in Asia in the areas that you mentioned, but these are not the kind of opportunities that fit to our portfolio. But definitely, these are areas where we've been active before. And we are looking into all opportunities that fit within this WLA environment. And definitely, in Australia, which we just mentioned, we have a lot of activity there. We're looking to renew the existing contracts and we are looking into new opportunities there.
Again, our focus will be in -- mostly in developed markets. And U.S. is one of them.
[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.
Ladies and gentlemen, thank you very much for attending this call. I would like to close by conveying the thanks from our Chairman and the Board to all the shareholders who participated in the share capital increase recently. As you know, all of you who follow our company closely all these years, we've come a long way. Now the company has a very improved set of financial metrics and that's been reflected in the investor interest in the share price, and we are confident about developments in the near future as the company is now at a position to bid for new projects and the situation has been stabilized. And we have the new technologies that we've developed in the past years to compete and face all the challenges and tackle the opportunities. Thank you very much. I'm looking forward to the next call for the full year results in March.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a good afternoon.