Q1 2020 Earnings Call
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I would not like they had the conference over to your first speaker today, Jim Hurley Senior Vice President Investor Relations. Thank you. Please go ahead Sir.
Thank you and thank you all for joining us on AI Jie cheese first quarter 2020 conference call.
Given the exceptional circumstances created by the Cobot 19 outbreak, we're presenting the results from multiple locations. So please bear with us if we encounter any technical difficulties.
On today's call, our Marco Sala, our Chief Executive Officer, and Max Chiara, our newly appointed Chief Financial Officer.
After introductory remarks from Marco and Max We will open the call up for your questions.
During today's call, we will be making some forward looking statements within the meaning of federal securities laws forward looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward looking statements.
The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our latest earnings release and in our FCC filings.
During this call we may discuss certain non-GAAP financial measures in our press release slides accompanying this webcast in our filings with the FCC each of which is posted on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures put the comparable GAAP measures.
Now I'll turn the call over to Marco Sala.
Thank you gene and good day to everyone on the corn first.
Let me say that I hope you and you ought loved ones I, just think C and keeping has peaked in these uncertain times.
My up a goes out to $2 a lot of dealing with the called it the 19.
I'm grateful for the frontline watkinson their data has been guys or not to these funding and the for the IGBT theme web Atlanta lead the tremendously over the last several weeks.
No led me to not to the first quarter.
Our focus has shifted the lobby Cody as coffee tonineteen that turned into a global pandemic late in the P. It.
I would it be isn't this was off to a good startup in January and February building on the momentum over the coming out of up to 18 19 lots cities same store revenues brought eastham tickets and grow games are went up a mid single digit <unk>.
Replacement do you need shipments of gaming machines that increases the little bit therapy, but it's saying and the installed to be east west strong.
But since late February when divided began to add to see this impact oneq I'd, the safety and well being go about what people on our customers and communities are little bit of the war that became our money on it.
The first think or we need that was created cross functional global CLO called me. The 19 client his management team comprised of senior leaders that go out of the organization.
Groups, we dedicated the waters Threems amicus between should do we out as acute and going out what priorities.
Robot business continuity plans were implemented quickly and we went bad as baby sprint.
In fact that we proactively increasing engagement with customers, who had to them and navigate the crisis.
We also too because we actions Oh now what caused that shut in cash, but it's sort of nation wide being careful and not the twin dangerous. That's what other elements are supportive being long term of value creation.
Combined the we there is either nature of many aspects of our business and the nobody was solutions. We have you now up before.
These actions food ties into good position for Gary Coleman.
I just use the business is a relatively evenly split between lottery and gaming and largely come symphony the in the United States and Italia, which together account for 80%, though about what I knew what revenue.
Most of the jurisdictions began implementing this threed that containment measures the much in many of those measures intensified the net.
Italy has and the salmon than most of this three people regulations, given the severity of the crises yeah.
Why that is still a good deal of uncertainty around the trajectory of depending me, including the potential for the second wave that we see three phases impacting activities in our main markets.
We expect gossiping met and play as mindset, then behavior to be different each phase.
Today, we are mostly stealing phase one handling the outbreak and as emergency.
Facing stay you'd go Mondays and social decency measures, we are managing the business with many channels in the look down or hopefully you can get we'd stringent that looks to be trends.
[noise] feast to a period of glad to allow the opening is just beginning in some jurisdictions social distancing protocols that remain largely in place for us. This phase we have the cat will require a can fool scaling up of cost to accommodate that growing demand.
Finally, we see article that he sees and new normal requiring ideally D or not what bought back though we also see plenty of opportunity at that stage, what I said to leverage our investments in innovative system solutions and digital capabilities.
Our business continuity plans out of grounded in clear priorities that how long got three my main dimensions people cost.
Liquidity.
Let's start with people.
Protecting yes, and safety allow people to our customers in the communities that we operate team has guided that all our actions.
In mid March we implemented a walk from whom standouts globally to be 90% of our stuff. He is working remotely.
For those of who cannot work from home, we implemented the stringent the policies and protocols to Ed, but keep them see.
I would have business contingency plan have enabled us to maintain high customer service levels and I'm the one.
The beauty of the where many of stepping back IGBT is stepping up for our customers, helping them become fans condiment environment and prepare for they had a business to yours.
Moving on cost, but when I want to ask or how to focus on better aligning our expenses that we the lower revenues. Our actions are brought in school and.
Most of the difficult as being the C. johnsen related to two employees.
We have not the making these are lightly.
Our approach is grounded in finding an equitable ways that to share the burden of the current environment with the goal of bringing things they disclosed to normal as soon as possible.
Today.
We have introduce a temporary base salary reduction of ranging from 10% to 50% across the company concept that twentytwenty salary increases and short term incentive compensation programs, we instituted the hiring freeze and made the difficult decision.
To implement the short term afford log programs for employee groups that have not the primarily involved that you know operations and customer support.
We continue to pay for had benefit so for all four loop employees and look forward to will calming them back to work soon.
We also made the that drastic cuts in discretionary spending and defer all nonessential capital expenditures in total we identified approximately 500 million in cost savings and copies of spending of all the dose in twentytwenty wed mitigated the.
Yep.
The all below what revenues.
Our execution priorities are now shifting to structural cost reduction initiatives to maintain the company's fitness as business at least.
Liquidity is I want to two main sabadell Falk use.
That organization is focus on cash flow generation and cash preservation we.
We the 2.2 billion in liquidity at the end of Q1, we are confident we have sufficient flexibility to wed have the funding.
And we achieved a major milestone I forgot to being our bank facilities last week, securing a period of relief and additional flexibility well not what a financial covenants.
All our actions are focused on providing the flexibility to manage through and to be well repair the photo operating in these new norm.
Now I would like us to give you any sense of the kind of end market situation for our main businesses beginning with gaming.
In March because he knows and gaming or was that the water, but were shut down and most remain close to be.
Why some jurisdictions that are preparing to reopen we expect that they process to be gradual.
About 65% of our global gaming revenues come from recurring service revenue most of which is tied to the productivity of our machines.
With the casinos close that we have not doing revenues on those machines.
The pandemic is forcing our customers like ties to focus on cash preservation, reducing operating costs and cutting capital expenditures. These impacts seats of gaming machines and systems, which accounts for most of the remaining at 35% the whole lot luxury.
Mobile gaming revenue.
Well casinos, a duty open social distancing gruza could involve a limiting the number of gasoline location, reducing the number of operation on machines and the in house that cleaning protocols. These a safety measures should impact to the piece of it accordingly.
Local in tribal casinos account for about 85% of the North American gaming and interactive segments revenue.
We expect that these markets to recover quicker than the destination markets are like of the Las Vegas, three and Atlantic City.
We also must consider that the likely impact over a broader micro and macro economic as low down home consumer spending and play a behavior.
Lot of GE out it will be an important but alternative monaco to business trends across jurisdictions.
Footlocker isn't the situation is different.
Why is the main channels of distribution remains largely open around the war that stay yet on measures that led to lower traffic at the point of seats.
As a result, the same store revenue trends body greatly I could also jurisdictions.
In Italy, the impact has been significant given the severity of the restrictions during the month of appetite the Italian government spend that old games under the law to license, which represent about all of our Italian lottery wages.
That business is now gradually returning to normal as the games wellness store in a phase the opening strategy in Maine.
Heading gaming, we need to concede that allow the broader macroeconomic backdrop and change in play their behaviors might affect lottery wages historically.
They have been I hear is eat again for two economic cycles as you can see in that shot here, both the Italian and go Lamusica lottery wages were stable during the global financial crisis.
Early indications from jurisdictions that at ease the mobility of US putting shows suggested that the lottery trends can bounce back relatively quickly.
We are constantly seeking it uniquely in Europe, and the most box over the United States.
These bring Gaza to where do we are to be.
And yet to them or revenue outlook for main activities in our main markets remains depressed, especially for the second quarter of the.
With a gradual recovery expected the in the second.
They see it goes that you see on there's lives are meant to illustrate a view of overall market activity. They have not meant to represent any kind of revenue or profit guidance.
Based on these perspective, we are using it totals zero base cost assessment to identify structural in contingent cost reductions. In addition, a we ought to be prioritizing our capital investment decisions and the team is focused on disciplined working capital management.
Uh huh.
Looking to the future we ought to be droving, our previous outlook for the yen due to the uncertainty related to go over 19.
Having said that we do expect to the second quarter to be the most challenging period before revenue profits and cash flow, assuming a sustained and relaxing restrictions and no second wave of outbreaks, we expect trends to improve pretty aggressively in the second out.
The with the lottery recovering faster than gaming.
Our cost initiatives that are expected to that even 500 million in cost reduction or copy those spending avoidance vessels out what a regional twentytwenty plan.
Our focus is not only on costs.
We are approaching how we manage the business differently to be nimbler, leveraging on innovation and flexing our business to adapt to changes in customer and play a behaviors.
As we all adjust to the new normal I want to customers need the partner they can class and they can support because in that and that can support the Dan meats.
Many dimensions IGBT is that button.
Over the years that we have invested in our digital and systems capabilities investments at that point, but equally well suite that to the current environment.
Hi, just these these digital solution is stand across a lot three gaming and sports betting.
We offer one of the most comprehensive digital content before adjusting the award the with more than 180 teams.
That's a operators and players in the lead to pecan trees in Italy, we provided full suite of digital games that directly to plays across all product because.
While digital it still represents a small portion of total Italy wages I lost the and interactive because you know games with wages are increasing over 40% scenes said the corona vehicles outbreak.
Let the rate of growth is significant is stronger than the pre coffee lenders in the rest of the war. The we at a b to b provide that of digital content and platforms as in Italy, we have seen a substantial increase in digital wagering on I want to beat to be digital platforms include include.
INGAA triple digit the increases in North America, I love any.
I should the noted that the much of this growth is driven by in expanding base of new players.
The opportunity extends beyond that the digital war IGDSS sophisticated the CRM tools and cashless solution not unlike our intelligent Gulf fed and the resort wallet applications are likely to become even more essential to land base because customers in fact.
Our core advantage the system already as functionality that the notifies because you know when the machine has been the Keith.
And needs that cleaning we.
We are working on additional innovations for the New war, though we are leaving.
As challenging as the current operating environment eases IGBT is well positioned to emerge for the cut from the crises is stronger leaner and more competitive organization, our solid balance sheet Foundation provides us with significant liquidity and flexibility to manage the impact the.
Of the funding.
The diversity of our businesses could also geographies and the Providence is something that provides a high degree of stability and predictability to our whatever is on.
This is especially through for the Eataly segment, and our global lottery business I suspect that those characteristics to your mood in the Pos pandemic here.
Finally, the team.
As I mentioned at the outset, everyone at IGBT has done a remarkable job over the last several weeks and I'm grateful to get for their dedication.
The management level menu advise as Steve These business.
Through difficult times, including the global financial crisis, and Theyve adopted that too many changes coming from a new regulations political instability and changes in block in play a taste and preferences.
We are all extremely motivated and dedicated to executing our action plans to navigate through the crisis.
Speaking of the team I'm very happy to welcome Max key I'd like to IGBT as our new CFO and member of the board of directors.
Max as a stronger bed ground in corporate finance operations in capital markets as well as the east 30 of building and leading high performing teams.
Six week seen under particularly challenging should come stances.
As you could get out the van ingot and provided to be Italy, but.
With that I will turn the call over to Max.
Thank you Marco afford introduction and Hello to you all on the call. Today. This is my first earnings call. We Digest de since I took office on April six and I'm very excited to have joined the company.
I look forward to being a contributor to the future success of uneconomic iconic name in the global gaming industry.
I also look forward to meeting or emitting as the carbon 19 situation will permit many of you over the next few weeks and months.
My plan today's to give you an overview of our financial results for the first quarter provide an update on our balance sheet and highlight the framework, we would like to adopt going forward, what you know financial priorities.
Now, let me jump right into the financial review, our first quarter starting on slide 14.
You unfolding of Koby, 19, pandemic and the correlated governmental lockdowns to contain the spread of the virus have impacted our performance starting with the last month over the quarter.
Prior to that the business was trending well.
We generated consolidated revenue of 940 million down, 18% not reported basis and 16% at constant currency compared to the pretty busier.
The widespread closure of casino and gaming hosts in addition to reduce traffic to lottery points of sale significantly impacted robust service revenue.
Total product sales were slightly above the prior year on strong non terming out product sales, which more than offset lower unit shipments of gaming machines.
Operating loss of 197 million compares to operating income of 178 million in the prior year period, primarily reflecting 296 million of non cash non tax deductible goodwill impairment charges.
Adjusting the carrying amount of goodwill for our North America gaming and international segments.
No where near term forecasts as a result of Koby 19 were the drivers behind the goodwill impairment calculation.
Apart from impairment revenue mix, particularly lower service revenue was another driver of lower operating income and there was some benefit from initial actions taken to reduce operating costs across the company in the quarter.
Adjusted EBITDA of 309 million was also lower down 25% at constant currency.
Now, let's turn to our operating segments, starting with North America gaming and interactive on slide 15.
The decline in service revenue reflects casino closures and the contribution from a multi air pocket contract executed in the priority.
Overall product sales revenue decline as a result of fewer terminal unit shipments largely on lower new and expansion activity.
And to a lesser extent delays caused by koby 19.
The lower the only shipments were partially offset by non terminal sales related to a multiyear strategic agreement, which includes guaranteed revenue on leased units over the contract period.
System product sales, what assurance essentially in line with a priority or.
Operating income reflects the impact of the casino closures, partially offset by lower operating costs.
On Slide 16, you have the results from the North America Lottery segment, beginning in March widespread stay at home or they're significantly affected lottery sales.
Lower Ellamay revenue is the primary driver of the segments, 15% declining revenue.
We'd actually now that may reflects accruals for penalties due to lower jackpot activity over the past three quarters and overall reduce laundry activity due to koby 19.
Although the service revenue was only modestly below the prior to you.
The 1.6% same store revenue growth for instance, and draw games for the quarter includes a strong 6.7% increase in the combined January and February period.
The closure of via LTE advanced drove the decline in gaming service revenue.
Operating income reflects the other may dynamics, and the closures of VLP benyus, partly offset by lower operating costs.
Turning to the international segment on Slide 17 at constant currency total revenue was in line and operating profit more than doubled.
Overall product sales revenue grew 25% software license sales related to the extension of a long term lottery contract in the Czech Republic, and they W.P. upgrades in Italy overcame fewer unit shipments of gaming machines.
Service revenue reflects casino closures impacting gaming service revenue and mobility restrictions entering the other assays.
Other revenue was lower due to the sale of the Poland commercial service business implicit in prior period.
Strong operating income growth was driven by the said softer licensees and by lower operating costs. Despite early covered 19 impacts in late March.
It was that's for each of you have shown on slide 18 for the first quarter already wagers declined 20% due to mobility restrictions implemented in March.
Machine gaming reflects the impact of gaming Hong closures and higher gaming machines taxes.
Notably interactive wagers grew 20% to during Q1, although from a low share of total business as play as gravitated to our full suite of digital games confirming to high performance of our offering there.
Other service revenue reflects growth in commercial services as a reminder, a large portion of the commercial service revenue is passed through in nature.
Operating income primarily reflect koby 19 restrictions on should offset by lower operating costs.
As Michael mentioned, we're focused on reducing our cash cost to adapt to lower market demand trends.
Slide 19 highlights some of the progress made to date.
Prior to the Kobin 19 crisis, our average monthly fixed costs.
And maintenance Capex.
When approximately 235 million combined over.
Over the last two months the team has successfully reduced that to 185 million.
The monthly around rate for March through December expected for this year.
As a result in approximately 500 million in cost savings or capital spending avoidance compared to your regional 2020 plan for the full year.
First we defer all non essential capital projects refocusing, our capex investments on the highest return initiatives that offer the shortest payback period.
His work has led to an over one third reduction in the 2020 maintenance Capex plan.
Cuts, where deepest for gaming activities as most already capex is contractual in nature.
Regarding our fixed operating expenses the biggest savings are the employee related cost actions as Mark mentioned before.
Discretionary expenses, such as trial that marketing and outside service fees have been dramatically curtailed.
And we are investigating the applicability of government sponsored relief programs that have been activated around award.
Apart from apart from these near term cuts were also working on longer term structure cost savings initiatives to make our organization, even more to Giles and competitive in the new Norman.
Turning to the balance sheet, our debt leverage profile are included on slide 20.
Net debt of 7.2 billion was below both the 2019 year end and first quarter 2019 levels. During the quarter, we generated 157 million in cash from our operating activities and reduced net debt by 111 million at constant currency.
In terms of financing activity, we redeemed our four points, 75% senior secure euro notes in early March.
Leverage of 4.47 times increase from 4.31 times at the end of the priority here, primarily driven by the impact called the Koby 19 had on EBITDA in the first quarter of 2020, but is below the corresponding period last year.
Turning to slide 21, we ended the quarter with approximately 2.2 billion in liquidity comprised of about a billion and a half you're not restricted cash and 743 million additional borrowing capacity under our credit facilities.
This provides us with ample resources to cover a modest amount of debt maturities through 2021.
Average maturity of our that is 40 years.
Regarding other liquidity initiatives, we established a working capital task force led by several members of the senior management team focus is on receivable collections and inventory and payables optimization.
This point, we're targeting receivables and payables to balance out.
During the course of the.
Now, let's move to slide 22.
Last week, we successfully amended our revolving credit facilities and term loan providing us with some degree of flexibility to operate safely during the hates of the pandemic.
But litigations to financial covenants include the temporary covenant holiday through the second quarter of Twentytwenty one.
With revise covenant levels thereafter.
There is a new medium and liquidity covenant for the interim period.
Financial covenants to return in Q3 of 2021 device profile through the maturity of the facilities.
Dividends and share repurchases are not allowed during the covenant holiday period.
Dividends and share repurchases are allowed after the covenant holiday it flat it its leverage is less than five times.
The amendment demonstrates the strong support that the company has from its Rcs and long term banking group.
Finally, turning to slide 23, let's wrap up the key take away Seph today's presentation.
Our business.
Businesses have demonstrated resiliency in Pos crisis, and we expect this time to be no different.
The cost reduction measures and the innovative solutions, we offer the market puts us in a solid position to confront the post crisis environment.
We have strong liquidity and are absolutely focused on cash preservation.
And we have a balance philosophy on capital allocation.
Effecting our credit rating through the prudent management of our leverage ratio, while maintaining access to ample liquidity. Our key pillars of this philosophy, returning capital to shareholders to remain a key medium term focus, but it ought to be manage in sync with a gradual strengthening of our credit profile.
With that we'd like to open the line for questions.
Thank you Sir.
As a reminder to ask a question you would need to press star one on your telephone to withdraw your question press the pound key.
Please standby, while we compile the came in a roster.
I show our first question comes from Carlos Santarelli from Deutsche Bank. Please go ahead.
Hey, guys. Thank you very much for for all other color in the opening remarks and good to hear from both of you up.
Michael and I, just wanted to dig in a little bit on now on the cost cuts and 85 run rate.
If you think about maybe what the business looked like in April and including some of the almost close to zero revenue on the sale side.
What does that or how can we think about second half of the year, whether that 185 potentially goes to in terms of kind of burn rate as bringing revenue back online E. The variable component. So the cost that are kind of spore present in today's more subdued environment relative to kind of what you're anticipating.
The back half of the year as business does start to pick up a little bit.
Thank you Carlos I I provide the overall outlook I have a for the Q2 as you mentioned and for the reminder.
Of the.
It's clear that the as we said in our prepared remarks side the acute Pete the Q2 is the most challenging one.
For our revenues on a profit and cash flow.
As you know most of casinos and getting goes there remain close around the world.
And we are just now seeing some duties bhiksha now the open by the way adopting.
Great social and eastern thing distancing guidelines.
The lottery has been impacted by state or more bidders and some others to reach shows in certain markets.
And.
Mainly for these reasons or not.
We expect that ER to burn cash in Q2.
Having said that.
Our view is that the with this as stena relaxing of restriction or the opening of businesses and hopefully no second wave of outbreaks respect the train so to prove to progressively improve in the second downside ultimately returning to positive cash flow that is our view.
At this point in time and the cost that option will be a line in the second part of the yet and you can consider that quite a well spread over the whole that'll be the quarters and them on so they important point I want to raises that though.
We expect that data we will then.
Derek already over the business are going for the mainly on a lot thirtys add that we've put a ride ons.
Hey, good it grew the out Luca if again no as second wave of outbreaks for.
The second the second half of the.
Great. That's helpful and then if I could just one follow up.
Clearly, Italy has has had a.
Pretty pretty dramatic kind of closer of some of your key businesses in that market going back to March.
You commented on it a little bit in terms of what you're seeing.
I had kind of a two part question just in terms of of how you foresee things coming back online via the E. W. Ell key games as well as kind of instant tickets and your lotto gains primarily and some of the points of sale. There. What you foresee is how that those will cadence as they come back online and then just briefly if you.
Could touch a little bit on kind of the upcoming renewals for for the on the gaming side, there and how you guys are currently thinking about that.
Yeah, Okay, let's less.
With a with a lot better because.
Do you need fairly they trends.
Improved very matson wages were down beyond a 80% in April and the last week were down 42% there's lot of games at least the in early May and we expect.
These trends to continue today the distribution of scratching, we in that can be in large two bars, we expect the internet access the the pneumonia goes up more than a lot so to be.
Opened the and the Florida, we expect the military pod to grow a over the next weeks.
But moving from a plus 80 more than 80% down too.
42 minus 42 in a few weeks, it's an important the Seguin then regarding.
The other part of the portfolio for the time being at the activity of gaming goes as far betting shops is suspended the as for our social gathering spaces.
We believe that that will not be open before made me. The June it will be open up but I can now to indicate a the week.
I think also that sports betting uniquely at least that for the digital distribution as soon as a this at the live sports events will be startup.
We'll now who will take off and so I think disease. The outlook I can provide you, Florida HIV positive on a lot Terry waiting for the opening of the.
They are retailers are doing well.
In general or for the digital distribution.
Great. Thank you very much appreciate it.
Well, thank you Ken.
Thank you.
Next question comes from Chad Bennett from Macquarie. Please go ahead.
Hi, good morning, Thanks for the remarks in a Max welcome nice to millions on sticking with with lottery wanted to talk about I guess some of the existing new business wins, such as Brazil can you kind of help us think about.
The rollout of that if that's still in place and then on potential business like.
Pennsylvania, which we've talked about on recent calls is there any update there and kind of what the state as planning for.
The adjusted timeline and than anything else that that is kind of on the horizon or New York or any other big contracts should we expect that.
Maybe the RF piece or the timing of the renewals gets pushed back or are there opportunities for you to I guess for new These you know just given the uncertainty of the of the tax revenues and how governments might be thinking about this a multipart earn lottery. Thank you.
Thank you Chad so before entering to the several questions regarding beat the let me give you the overall perspective on a lot that he because.
With Govloop fourq use on that it called an awful lot that he neatly, but they want to offer you a lie that perspective, because we are encouraged by lottery trends in the U.S. that we've seen a progressive recovery during the month event.
In the first two weeks of May yet of the same store revenues are up mid single digit. So we have seen a peak then a constant that I called letting them on developing and in the last two weeks.
Of of me, we added over there.
To meet the single DG in Europe, lotteries, only slightly below the priority.
And this is a in other important indicator of the situation is a little bit more complicated in Latin America, because some a lot that is as being the shut down but the most part of our business is showing encouraging trends and that you have also to keep in mind talking about the lottery that to the business as a potential.
And to 43% of our total turnover, but now you Madison page of our profit there having said that that provides as a good.
Hey, good the sentiment that they've got to being that core video lottery I go giving the answers to the question you raised regarding Brazil, we do not have anything to change we expect that to two sorry to say that is different from the previews ER.
Discussion that we expect that launches anticancer games in Q4, we are on track with that and.
We still consider notwithstanding the challenging environment, great opportunity for our company.
You mentioned regarding Pennsylvania, the B, the four DFM contracts, where some meet the last June.
And the best and final offers that were submitted the INAP real and that we are waiting to hear back.
New York, New York, Our New York Lottery contract expires in August them.
And though we expect that yet a fee for a new contracts to be showing the SEC on behalf of de Alba. So that is the situation regarding the values a debate is gone.
Okay. Thank you very much Marco and then.
On the just you're you're.
On the T. side.
Theres been a lot to talk about.
Cashless options I know you guys have shown us the cardless connect at the past few.
Due to ease.
Do you expect for some of these products to just.
Gain more attention you know what are the opportunities for for these products have they been tested can you just kind of help us think about some of your options that are a little bit more.
Social distant or sanitary friendly that you're offering thanks, nor did it isn't very good Chris uncharted, because we're not expecting.
That today there is interest because we are experiencing in that as the fit on from our customers because we invest the in thing said thats out of area of an event in general, but specifically India's a period of time, we have solutions to take out of the cash from a cash.
He knows that is the there does seem Paula this simple statement that because you can do everything we the yard immobile, we ever solutions or whatever you can play in that he may casinos or with the automobile while as a lot of games sports betting games a table games.
These solutions school the play spot we have some out on the system capabilities alike, immobile responder, which provides an OLED when a machine and needs to be sanitized, meaning Glenn so when someone is a cashing got their money.
Uh huh out from the machines or that is another matter that can seeking out too because you know.
They they cannot provide a sanitizing their machines those.
His set of solution that we have been investing gone that that you would have been at full in any moment, but at this point in time. They they are very important for casinos.
Helping them in reopening gadahn activities in a safe.
Way.
Thank you very much appreciate it.
Thank you Chad.
Thank you.
Your next question comes from Barry Jonas from Suntrust. Please go ahead.
Hey, guys I'm just curious so their costs that have been removed that may not need to come back I mean, I guess ultimately do you believe you will emerge from this more efficient overall.
Yes, I think I think we have learned by disguises as everybody has to learn to win is facing difficult times as Matt said the in.
His remarks our savings.
Being concentrated in employee related expenses, opex reduction or the fab as and that discretionary costs.
We believe that that some of the changes that we put in place. So we'll become permanent then we will work on better so now.
We can maintain that.
Hiring and over time, the freezer, we intend to extend.
Beyond the crises that they work from home plaque diseases that kind of that use our real estate.
Cost as always we will.
We focus our attention on sum up but also cesar assessing the possibility to local marketing some of them and assessing also the span of control of our organization. So I think at that this is an area, where we will learn from what we're doing.
These days.
And when he comes to out of India supply chain Capiq, So it's clear that that.
All these costs needs to be aligned with market.
Yes.
I think at that they can be optimized for the new normalized and that we feel that out opportunities.
Streamline our protocol for that and we will be working on anything different about Asia now.
Budget for the for next year and the Sema.
Regards.
Does that answer about it cost.
I think that after these experience globally, we will travel less.
We will fall queues are more out of marketing investments and we will review very carefully the outside services. So all in all without defining exactly at this point in time, which will be there. These of our cost structure, we will be working quite seriously inaudible.
Looking to from what we're doing all that were they more Jain organization that going forward.
Great and then mark or there's been talk about more U.S. states legalizing online gaming or sports betting as a result of the crisis. How realistic is this and what sort of timing would you expect.
Are you talking about the U.S., Sir yes, the U.S.
Look I do not have much visibility accordingly to my colleagues are they feel that everybody should realize that protiviti coming from.
The digital offering gained is a period of time and I think all the government shoe the looking to eat them or ER with them being more attention.
Going forward, but if the question is I, if I have more visibility the answer no I do not Dave or more visibility I know that that automotive debates.
Very is.
States are looking gave to eat the but I can not anticipate that oh.
We'll evolve going forward.
Got it. Okay, then maybe just switching to Italy can you give us some perspective, how you think the government may respond to this crisis from the perspective of gaming in the past, we've seen tax increases or accelerated.
Tenders are requiring cash outlays quicker on the flip side is there potential we can see some relief from the government for gaming or maybe opportunities to offer more products and any perspective, there I think would would be incredibly helpful for investors.
No I understand the and for the time being it's a it's a it's important to understand though and they will open.
The point of sales and a truly old but that will.
We will open in in June, but what that what.
I can say is very difficult is always to predict the decision on the government that but at this point in time I have.
To remind that that the even before the coffee to 99.
Equally VLP wages were negatively impacted by lower pay out there and I have taxes are playing a winning and that's in addition to the implementation of the age of verification these will impact or their proceedings of of the government.
And for the first time that they're seeing that they had actions.
As such a significant impact on wages, so they might be inclined to look at that these business differently going forward. Because this is an important source.
For for the Italian government them and I think they noise.
That's a great point. Thanks, so much Marco Thank you guys.
Thank you bye.
Thank you as a reminder to ask a question you would need to press star one on your telephone to which are your question press the pound key.
I show next question comes from Domenico Ghilotti from Equita. Please go ahead.
Good money and a few questions. The first is a very very preliminary.
Thoughts on Twentytwenty, one decides that they understood that said you are quite confident on the recovery on the lottery side I would love to understand what is your view on the opportunity for recovery also on the replacement units in North America International markets and second the.
He is on the cats in a in Capex.
Could you elaborate on that yet as whether youre cutting capex and what it.
Fluctuation in terms of a medium term perspective for the business, what you're cutting and third the is on the leverage and what's your view on the leverage in the new enormous what do the sustainable level.
And then.
Between 220 to 22 and the last is on the Q2.
That you gave before so you were saying that basically wish you find distant properly we should expect some cash burn some deterioration in the and then that net debt.
Yes, it's driven by the working capital or do you really see also the bid that level of some negative contribution.
At the medical let's start from the last why not.
No I think they the issue of the second quarter is.
The revenues if you add because you know clause.
I had a Italy shut down and see less shut down that for a sound fanta leaves it anyway, even though it at covering lofty as being down everywhere in every year. So the main and main.
Reasons for having.
The second quarter.
Comes from from from the business from from revenues and should expect them.
So its until after so we should expect some a negative EBITDA, even given the very very poor topline.
Yes, I mean have you ever consider that the.
Thank you are burning cash and so that is the answer that I'm, providing but also providing you are saying sort of.
Oh, whereas the is.
These are these situation is coming from.
If you look across the various businesses.
Is there.
As I said that.
Most of the casinos and gaming all remain close and I, you know that they need fairly they asked the close of the gaming goes lottery opened in May So you add the feeling of yield level.
Revenues.
So that the guys or the second quarter.
I will leave them accelerate that on to elaborate on the the leverage with what were the other two questions capex. So the impact on the Capex. So.
Well, you're cutting and the third.
The last was on the replacement units business. So if you see what's I actually I don't know yet so I mean, let's let's let me let me start let me start from a they gaming five of the business covering a in the late in the gaming.
Over the business.
We'll be a low where are we seeing that it will be gradually throughout Q2 in Q3.
With the local in tribal casinos are expected to recover faster than a destination market.
And we have to assess the pace of the recovery considering the impact over the social distancing measures.
Cleaning protocols and that deal that although they stationary environments. So I'm expecting these business.
We.
With that we need more time.
To a cool that over the next over the next quarter is that in Indiana and regarding the topic. So I mean, we've tried to postpone five of our.
Capex and then you have to go see that ER we.
Save some money on the Capex.
The installed base because the market that is down.
He is a period of time and we started reviewing the priority in terms of a coupon investing in some specific product categories, having said that the from the lottery path is more difficult to do better because most part of our capex related contracts. So we have.
With with that with a lot and he's so all in all of those on.
Add as.
Follicular or what I think and the AD as in other was when we have.
More.
Flexibility to review reviewing our programs.
So Michael let me pick up from here the leverage.
Question so.
Domenico the Koby 19 pandemic has not changed your basic assumptions on our leverage target, which remains on course at around four times EBITDA leverage that we said in the past.
Is this target is also aligned with our goal to strengthen our credit profile.
The issue here is that we don't have a specific training timeframe to give you are right now for when we achieved this target obviously e. coli 19 pandemic has provided a lot of uncertainties and the expectation is for probably the leverage to go up.
Towards the end of this year and then start to decrease thereafter.
Okay. Thank you and just a follow up on the cash flow and should we expect payments of two to minority. This year or are also restraining from we act we executed payments in Q2, but at a much lower degree over the previous years.
That also will influence obviously, the net debt in Q2, and just to complete on what Michael said before.
Obviously based upon the timing of our lottery contracts. There is some locked in capex that we will have to pay for in Q2 that also.
Will depress our cash flow performance in the quarter Ah, but we expect then in the second half of they have to turn back to positive cash flow generation.
Okay. Thank you.
Thank you.
Next question comes from David Katz from Jefferies. Please go ahead.
Hi, good morning, everyone. Good to hear everyone's forces and what you're all well.
Hi, there.
Hi, I wanted to ask about specifically the North American.
Gaming installed base I see that there were.
Some ins and outs and what I'm trying to get a sense of is.
That installed base.
Even with the movements of games to long term leases.
Was down a little bit in the quarter.
The degree to which got installed base is impacted by the crisis versus whether.
There are other competitive forces that are sort of bringing that installed base lower and just thinking about how that curve should shape.
Irrespective of the crisis.
Yep.
I think the first quarter of the units sequential decline.
Reflects a more about anticipated the remove as of all the unsupported machines and the impact of corporate actions only partially related to call. The Dod 19, I think we always knowledge of the pressure on there's still days off from an intense competition.
And now even more that with customers looking to the two reviews or space is it is clear that.
We do not have spent that these are going away in the area thermos specialty given the cotton situation of bought that we also know that ER, our portfolio's livestrong and.
Very good games are performing very well at this point in time I think on the installed base that fourq is as to be considering it has to be with the cost them as.
Where are.
The best the best products at the time, they seem to Florida at the time of day reopened.
The casinos.
Considering that the very likely only a portion of their leaves a you need to units will be operation out due to the social these fencing mandates so it becomes a.
Very important watco with the cost them as to identified the most performing.
Among our machines to remain operation ally during the opening of the casinos.
Alright.
Thank you for that and then secondarily.
When we look at the Italian business from the perspective of the U.S.
Mark.
There's no there's really two ways that we've seen indications from the Italian government to to drive revenue.
One is obviously expansion and the other is you know.
Raising gaming taxes are increasing their take.
Of what exists what are you hearing or what you know what can we reasonably expect terms or behavior or disposition from the Italian government as it relates to your Italian business at this point.
Okay, then as I keep on saying guys very very difficult to predict Pete what I can say is that when it comes out to lottery that is.
The biggest bought the largest highland portfolio. They always a approve the innovation that allowed us to grow the business over and over the as and I do not see these changing in them. So by the possibility to innovate things can and should win and to innovate on the.
Lawful bought into on the local.
Family.
Regarding.
Regarding the sports betting.
Yes, I said that the business will continue to grow over time and.
Probably I mean there is.
Minor taxation that though will be add that bought that that the I mean, its usual they can CAMMESA fivefold.
Hey, decree that has not been issue the yet but that overall is something.
We can deal with the they is always are the most unpredictable five of the Diane portfolio is or the gaming machine bought that as I said before I think they are they the government.
As a has increased fixation of over the years, but.
It's the first time of that today as a analyzing that they increased taxation is a bringing.
There are revenues down so I'm expecting these factor.
We'll bring them.
To reconsider the approach on the has bounced off the business because of further increasing fixation.
He is.
He then or.
Reducing more their net proceeds having said that I want to make a pointer conceded that the beginning gaming machine machines.
He needs Sally.
Represents in terms of revenues.
About a 12% of outlet on 19 Ah figures for the company and in terms of EBITDA is less than 5%. So I mean, just to provide you a little bit of contest or whatever.
Opens up we will manage it the as we have been doing.
For many many as I think of there the approach of the government should be more prudent.
But the we have always keeping mind that that we are talking about less than 5% of.
The GDP that base of 19 numbers.
And so just to make sure im clear the focus in terms of gaming taxes and increasing the government's take is yeah.
Entirely or practically entirely on that less than 5% of EBITDA as it relates to Italy.
Yes.
Okay. Thank you burned up against that a company, yes, yeah I understand.
Thank you you well and thank you yeah.
Thank you I'm next question comes from John Decree from Union Gaming. Please go ahead.
Hi, everyone. Thanks for taking my question just ones for me Marco.
Wanted to ask about M&A, and it's probably hard tend to think about elsewhere or think about preserving cash but.
Spend a couple of years building up the balance sheet and have.
Quite a bit of liquidity relative to a lot of your peers. So I was wondering your views on M&A for the lottery and gaming equipment sector.
If you expect some consolidation, particularly on the other side not the pandemic and if it's something I think he would look that to be opportunistic in the future. The next couple of quarters every year after we get past.
John I think I think a winning in the in any industry.
You are facing Aveed user demand.
And the increased commercial pressure add there is always.
The possibility for full consolidation and I think these.
It.
His.
Is visible in the gaming bottle viable on.
Second, especially if you add that to keep on investing.
To keep.
Your pipeline now products and solutions.
Having said that that when it comes up to IGBT I think of that we have already and broad and deep portfolio of compelling solutions.
Across.
All aspects of out a little gaming that by the way out a very consistent with our allies strategies.
So since I do not see any.
Any significant missing and.
In he now want to existing capabilities that I do not.
C level issue than a lot of appetite for M&A.
I now.
Got it thanks, Thanks, Marco that's all for me.
Thank you Joe.
Thank you.
And last question comes from Joseph Susquehanna. Please go ahead.
Good morning, everyone. Thanks for taking the questions I just.
You clarification if possible.
You had mentioned working capital.
For the year to be flattish or are you, assuming a higher bad debt provision associated with that.
So I'm working capital.
Expectations that we mentioned is for the full year, obviously in the short term, we see little some tensions on on the payments on the collection of our receivables.
And and so it's it's possible that our provisions would go up but we recently moved to the new <unk> and accounting stand up Cecil and so we have a very clear guidance on how to approach that issue.
And again, we we are we have as we said the during the car was that we set up a and control tower.
Task Force that is managing the three components of the working capital on a regular basis and we made a.
Additional efforts to make sure that the collection process.
Is that right on top of the agenda of the of the out of our segment teams.
Got it thank you.
I feel good morning.
I was wondering if you could just kind of fill in a couple of pieces, which.
You're already provided some good commentary on but in the U.S. you had mentioned U.S. lottery in particular, you had mentioned that may.
As up mid single digits kind of thus far in same store basis, what did April looked like for you guys.
Every love it but it has been a month or whether we increased the.
Week after week I, we moved away from my because of a minus I would say something around I'm not the now precise but around minus 25% that to minus 2% that resulting a positive in the first two week of me. So if there's been no.
Area visible progress on the negative peak has been mines, Turkey, but I'd love to remember if it was he near pre lower than last week of March but since then.
Progressively improve the performance of the last.
Week of.
Every lesbian mines to minus two manual screen and the first two weeks of.
Of May.
Rob.
May I made the single digits.
Pricing and.
You know asking.
Something similar just in terms of an analog.
Everyone's just trying to figure out.
How demand reflects and how quickly and I was wondering.
In your Italian business.
The tobacco shops or at least.
The large proportion tobacco shops have largely remained open throughout the entire quarantine pandemic and I was wondering.
If you can give us a sense maybe of the traffic flows to the tobacco shop subsea where you saw a lot of your products in April and May today, you know again similar to some of the commentary that you provided for us in terms of U.S. lottery business.
Got you ever to consider that a lot of will shut down and so a lot is entirely sold to pull back on is there and that was completely shut down and what I can tell you is that the lawful or in the in the overall a lot there is a.
In the last week was.
Minus 42% that with a lot duty opened at the beginning of.
Of me what's in this case it was down to more than 80 been saying that between the end of.
Mileage and beginning of April then it is improved especially for scratching when that kept on improving on the tobacco knees.
And if we look at last week.
Scratching winner was minus 35% about considering that.
Scratching, we need to distribute that the also two bonds that were closed so soon stopping these weaker or they will be open and so we expect ask mentioned we now.
To recall that over the next weeks as we expect a lot of will improve progressively over the next week. So because he is to be that also in terms of locked down there that that is being relaxation also for citizens because the usual was not very much related to that.
Going into that would open about that the people who have locked down at all so they they mobility of the people was very limited that now they go into that they could move of course and expecting the AD protocol that datacomm on throughout the war, but we as bank that.
The trend the considering these we improve over the weeks.
Understood Thanks very much.
Thank you.
Thank you.
This concludes our kinase session at this time I like to turn the call over to Marco Sala CEO for closing remarks.
Thank you all for joining us today I want to leave you with some key messages.
First a large part of our business, namely lots at the end Italia demonstrated that remarkable resilience in us good ideas and we are beginning to see positive progress in both areas.
Second that we have significantly reduce cost when coupled with our ample liquidity and the now has the financial flexibility we have the resources that we need to navigate the impact.
Coffee that 19 is having on our business.
Finally, we are emphasizing our innovative solutions, particularly well a suite at the to the cat event environment. The net of all our actions position I see two emerging from the crisis stronger leaner and even more competitive organization.
As always we appreciate your interest in IGBT and I wish you all good day and please state safe.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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