Exhibit 99(b)
GTECH
Bruce Turner Q1 FY04 Conference Call
Final - 19 June 2003
Good morning, everyone, and thank you for joining us. Before Jaymin discusses
our quarterly results, I would like to give you my perspective on GTECH's
performance in the first quarter of fiscal year 2004 ... as well as a brief
update on lottery-related legislative action here in the US ... and how it may
impact our future.
I'm pleased to report that our business performed better than anticipated in the
first quarter, primarily due to continued strength in same-store sales -
particularly in international markets - as well as favorable foreign exchange
rates against the US dollar.
Same store sales increased more than 5% over the first quarter of last year,
with domestic same store sales up approximately 3% and international same store
sales up more than 9%. This marks the fifth consecutive quarter of same store
sales growth in excess of 5%, a trend we find very encouraging.
Our strategy remains on course and we are proceeding according to plan.
At the top of the list of first quarter highlights was the signing of a 25-month
extension to our online lottery and financial services contract with Caixa in
Brazil.
This extension ensures that GTECH will continue to provide all the services we
currently provide our largest customer under the existing contract until May of
2005 in exchange for a total contract service rate reduction of 15 percent. That
translates to somewhere between $120 million and $140 million dollars in service
revenues, depending upon what exchange rate assumptions you make. And given that
the system was fully depreciated by the end of fiscal 2003 and there is no
incremental capital required under the terms of the extension, the total returns
on this contract increase substantially as a result of this new deal.
As was noted in a recent filing, we have been made aware of a determination by
the Brazilian Federal Court of Accounts. As we stated in this mornings' press
release, the premise of the determination is that some of the payments made to
us under the terms and conditions of our contract with Caixa were not in
accordance with applicable Brazilian law and were overpayments. The proceedings
are in initial stages and there has been no suggestion of impropriety. We intend
to defend our contract vigorously, including a preliminary defense based on the
absence of due process of law, as we were not afforded a fair chance to address
the issues raised by the Court prior to the determination.
In the first quarter, we also finalized a new master contract with the state of
Rhode Island. Under its terms, GTECH will be the exclusive provider of online,
instant ticket, and video lottery central systems and services to the Rhode
Island Lottery for the next 20 years at a fixed rate.
In addition, as part of this deal, Rhode Island will serve as a test bed for all
of our new product and service developments, including lottery, non-lottery
government services and commercial services. The first of these new products is
e-scratch, an innovative web-based interactive suite of scratch and reveal games
offered exclusively by GTECH. Rhode Island will also pilot the first US-based
Electronic Instant Lottery offering, or EIL. This product has been successfully
deployed in Switzerland by the Loterie de la Suisse Romande, where 550 machines
are generating approximately $50 million per year. That translates into
approximately $400 per machine, per day.
Assuming that Rhode Island's lottery sales grow moderately, which we believe is
conservative, this contract will generate more than $700 million in revenues to
GTECH over 20 years, making Rhode Island one of our top 5 global accounts. We're
very pleased to strengthen our partnership with our home state, and we look
forward to remaining a Rhode Island-based company for many years to come.
And just yesterday, we were chosen as the apparent successful vendor in the
Wisconsin rebid. Although GTECH's proposal was priced at a substantial premium
to the lowest bid, the evaluation committee believed our total solution offered
the best overall value to the state in the long-term. Over the course of the
next few months, we will negotiate a new five-year contract with this
longstanding and valued customer.
With the signing of these three contracts, we have essentially locked in all our
current major lottery contracts through fiscal year 2005. This has enabled us to
shift our strategic focus from defending our current business to vigorously
pursuing new business opportunities.
The first of those opportunities is the Florida lottery. We submitted a proposal
to Florida in late March and we expect a decision some time this summer.
Outside the US, there is a major opportunity on the horizon in Thailand. The
national lottery in Thailand issued an RFP last week seeking bids for a 6,000
terminal network that will augment the current $800 million off-line lottery. We
are currently working on our proposal, which is due in August. A decision from
the Thailand National Lottery is expected in early fall.
There is also a significant VLT opportunity coming up in Norway. On June 12th,
the Norwegian Parliament voted to change the Norwegian Lottery Act to give
lottery operator Norsk Tipping exclusive rights to operate video lottery
terminals in that country. As a result, we understand that Norsk Tipping will be
issuing an RFP for the purchase of a video lottery system and terminals in the
near future.
In addition to these new-business activities, we are continuing to work with our
customers to grow same-store sales through the implementation of new games ...
changes to existing games ... as well as the development of new distribution
channels and add-on applications.
As we've discussed before, many jurisdictions in the United States are seeking
to minimize the impact of tax revenue shortfalls by instituting new lotteries or
expanding existing ones.
In fact, since the first of the year, legislatures in 30 states have been
considering such steps ... and to date, six GTECH customers have expanded their
lottery game offerings:
Texas has authorized a multi-state game and implemented a matrix change to
its in-state lotto game.
Michigan has authorized keno. The Michigan State Lottery and GTECH will
install 3,000 terminals in age-controlled retailer locations throughout the
state in response to this change.
Washington, D.C. has authorized and implemented keno in all 500 of their
lottery retailer locations.
Nebraska has authorized higher prize payouts for instant tickets.
New Mexico has passed legislation that allows Mexico to join Powerball, a
step that paves the way for the 22-state consortium to open its membership
to international jurisdictions.
And Rhode Island has authorized the installation of 1,800 additional video
lottery terminals at the state's two pari-mutuel facilities. Under the
terms of our new 20-year master agreement, GTECH has the right to supply
1,000 of these new machines, bringing our total number of machines in this
state to 1,860, or roughly the size of a small casino.
All of these initiatives will increase lottery revenues and provide immediate
benefits to these states. They will also contribute approximately $320 to $330
of incremental service revenues to GTECH over the life of the contracts.
Three other states have taken steps to establish new lotteries:
The Tennessee General Assembly passed legislation to create a Tennessee
state lottery. We expect them to issue an RFP in early fall.
Oklahoma passed legislation recently that will place a referendum question
on establishing a state lottery before voters in November of 2004.
In addition, North Dakota has approved Powerball as its primary lottery
offering.
Meanwhile, 8 states have efforts underway to expand their lottery offerings with
VLT programs, keno, multi-jurisdictional games, and increases in prize payouts.
The majority are GTECH customers.
And another 13 states have opted to advance consideration of lottery expansion
in 2004.
All of these developments bode well for GTECH over the course of the next
several years.
In order to ensure GTECH maintains and enhances its position of market
leadership --- and to better serve our customers' needs at this critical time in
the lottery industry --- we have accelerated our investment in research and
development. One of the many benefits to emerge from the cost containment and
restructuring initiatives we've implemented over the past few years is an R&D
platform that is totally aligned with our long- growth strategy. Today, we have
a deliberate and methodical approach to the development of new technologies and
solutions that will drive online sales.
Some of our most recent developments, such as Enterprise Series and our new
Altura terminal, have won overwhelming market and customer acceptance since
their introduction ... and represent the most important benchmarks of the
success of our strategy.
That acceptance was driven home last month when we hosted our customers from
around the world at our biannual World Leaders Forum. We showcased several new
technologies and solutions, such as the latest generation of Enterprise Series
central system software, an array of integrated systems that broaden player
access, and our newest player venue solution, ES Interactive.
These and many other value-based solutions received a tremendous, positive
response from the attendees. This reinforced our belief that lotteries
throughout the world are embracing GTECH and consider our new technologies as
key drivers for changing their business models.
It also reinforced our decision to continue to invest aggressively in the
further development of these important new technologies. Throughout the course
of this fiscal year, we will invest approximately five to six cents of every
dollar we generate in ideas and solutions that drive customers sales.
I'm also pleased to report that our recently announced acquisitions are
proceeding according to plan. A few weeks ago, we cleared all regulatory hurdles
and completed our acquisition of PolCard. This marks the first significant step
in our efforts to further our strategy to profitably drive top-line revenue
growth through commercial, online transaction services. We expect PolCard to
generate aggregate revenues of $40 to $45 million dollars in fiscal 2004,
starting in the second quarter. Due to costs associated with the acquisition, we
do not expect Polcard to have an impact on GTECH's earnings-per-share until next
fiscal year.
Our planned acquisition of Interlott is also on course. We recently passed
Hart-Scott-Rodino review ... and we are currently in the process of completing
our SEC review. If all goes according to plan, we should be able to close on the
acquisition by the end of the second quarter.
[PAUSE]
I would now like to discuss a very important announcement that we made this
morning.
[PAUSE]
On behalf of my colleagues on the Board of Directors, I am pleased to announce
that the Board has approved the payment of an annual cash dividend of
sixty-eight cents per share, payable quarterly beginning in the second quarter.
Based on yesterday's closing price, this represents a dividend yield of
approximately 1.75 percent.
One of our key shareholder value objectives is to return a portion of our excess
free cash flows to our shareholders in a balanced and tax efficient manner. In
view of the recent change in tax legislation, we believe that paying an annual
cash dividend, combined with continuing our open market share repurchase
program, is an effective way of meeting our shareholder's total return
objectives.
Over the next three to five years, we believe that GTECH will generate in excess
of $150M in annual average free cash flows. This level of expected free cash
flow generation, combined with our substantial cash position and financial
flexibility gives us confidence that we can continue to fund our strategy for
profitable growth, maintain our open market share repurchase program and return
cash to our shareholders through a dividend program.
[PAUSE]
Finally, before I turn the call over to Jaymin, I'm pleased to announce that we
are once again increasing our earnings guidance for the fiscal year, based on
the continuing strength in same-store sales, favorable foreign exchange trends
and the recent positive developments I just mentioned. Based on our current
outlook, we now expect to earn between $2.55 and $2.65 per share, on a fully
diluted basis. This compares to earlier guidance of $2.40 to $2.50 per share,
adjusted to reflect the full impact of the convertible bonds, which represents
approximately twenty cents per share this fiscal year.
And with that, I would like to turn the call over to Jaymin.
[JAYMIN SPEAKS, THEN INTROS Q&A]
Jaymin: Thank you Bruce. Good morning, everyone.
I would like to start by reviewing GTECH's first-quarter performance. As Bruce
mentioned, we are very pleased with the continued improvement in the underlying
performance of the business ... particularly with the strength of international
same store sales.
Service revenues in the first quarter were comparable to the same period last
year, when a three hundred and twenty-five million dollar ($325M) jackpot caused
a significant spike in customer sales and GTECH revenues.
A closer review of the underlying dynamics of the domestic and international
lottery business will help to illustrate the key drivers of improvement in our
lottery services revenues.
In the U.S., same store sales increased approximately three percent (3%), with
the majority of our domestic jurisdictions enjoying improved sales, driven by
the introduction of new games, modifications to existing games, such as matrix
changes and more frequent drawings, expanded distribution channels and the
marketing efforts of our customers.
We also benefited from the launch of new service contracts in Kansas, Minnesota
and Virginia.
The increase in service revenues from existing customers and new contracts was
offset by lower jackpot activity, particularly in the Mega Millions states, and
contractual rate changes, resulting in domestic service revenues of one hundred
twenty-five million dollars ($125M), in line with last year.
We enjoyed a significant increase in first quarter international lottery sales,
which grew by more than nine percent (9%) on a constant currency basis. This
increase reflects both the addition of new games and the more rapid growth rates
typical of new lottery jurisdictions. Factoring in contractual rate changes and
the impact of foreign exchange rates, our international lottery service revenues
increased five percent (5%), to eighty - seven million dollars ($87M).
In addition, we recorded approximately twelve million dollars ($12M) of service
revenue from commercial transaction processing services, primarily in Brazil,
down three point two million dollars ($3.2M) quarter over quarter, primarily due
to fluctuations in foreign exchange rates.
Product sales in the first quarter were sixteen million dollars ($16M). This
includes the sale of additional terminals to China, Poland and Taiwan.
Gross profits increased by twenty-six million dollars ($26M) or thirty-three
percent (33%) quarter-over-quarter.
Service gross profits increased approximately twenty million dollars ($20M)
quarter-over-quarter. Approximately fifty percent (50%) of the improvement was
due to lower depreciation, with the balance resulting from the flow through of
actions taken during the value assessment initiatives.
Product sale margins were slightly higher than anticipated, and significantly
higher than the first quarter of last year, due to changes in the product mix
and improved efficiencies in the manufacturing process.
Operating expenses for the quarter were approximately thirty-nine million
dollars ($39M), or sixteen percent (16 %) of total revenue.
The one point four million dollar ($1.4M) increase in SG&A was driven by
expenses associated with our bi-annual users conference.
Our investment in research and development increased approximately eight million
dollars ($8M). This level of investment reflects our continuing efforts to
accelerate the development and deployment of industry-leading solutions into the
marketplace and to execute against our commercial services strategy.
The combined effect of higher revenues and gross profit expansion resulted in
operating income growth of approximately seventeen million dollars ($17M) or
thirty-four percent (34%).
The substantial growth in operating income, coupled with lower other expense and
a lower effective tax rate, drove our net income up twelve million dollars
($12M) or forty one percent (41%).
Our net income margin increased four hundred and sixty basis points to seventeen
point one percent (17.1%).
And earnings per share increased nineteen cents ($0.19) or approximately
thirty-nine percent (39%), based upon a slightly higher share count of sixty
point two million shares (60.2M). This increase in weighted average shares
outstanding was driven primarily by the impact of our convertible bonds, which
have been convertible into equity since May first. This impacted earnings per
share by approximately two cents ($0.02) in the quarter.
During the quarter, we generated sixty-three million dollars ($63M) in cash
flows from operations. This was twenty-eight million dollars ($28M) less than
the first quarter of last year, due to the timing of tax payments and the build
up of inventory relating to new contract deliveries.
The sixty three million dollars ($63M) of cash from operations financed sixty
million dollars ($60M) of capital expenditures [CA $24M; GA $17M], resulting in
free cash flows of three million dollars ($3M).
Those are the key financial highlights of our first quarter. Now I would like to
turn our attention to the outlook for fiscal year 2004.
As Bruce mentioned, based upon the strength of our first quarter performance, we
are now confident in our ability to deliver better-than-anticipated results for
this fiscal year.
Given our current outlook, we now expect service revenues to grow eight to ten
percent (8% - 10%) year over year. This growth level reflects the following key
assumptions.
1. Same store sales growth of five to six percent (5% - 6%),
2. The net effect of contract wins and contractual rate changes,
3. An average exchange rate of three point three Brazilian real (BRL 3.3)
to the US dollar, compared to three point eight real (BRL3.8) in our
previous outlook, and
4. the impact of our recently announced acquisitions.
We expect product sales in the range of one hundred and ten million to one
hundred and twenty million dollars ($110M to $120M).
We continue to expect service margins in the range of forty to forty-two percent
(40% to 42%) and we expect product margins in the range of twenty-six to
twenty-eight percent (26% to 28%).
We expect operating expenses to be in the range of one hundred and sixty to one
hundred and sixty-five million dollars ($160M - $165M), reflecting the impact of
the acquisitions and increased investments in research and development.
Based upon this outlook, we now believe that diluted earnings per share will be
in the range of two dollars and fifty-five cents to two dollars and sixty-five
cents ($2.55 to $2.65) for fiscal year 2004. This is fifteen cents per share
higher than our preliminary guidance of two dollars and forty cents to two
dollars and fifty cents ($2.40 - $2.50) per share, adjusted to reflect the
impact of the convertible bonds.
This guidance is based on a diluted share estimate of sixty- five million (65M)
shares, compared to fifty-eight point four million (58.4M) shares in fiscal
2003.
In fiscal year 2004, we plan to invest between three hundred and eighty and
three hundred and ninety million dollars ($380M - $390M). We expect to invest
two hundred and eighty to two hundred and ninety million dollars ($280M - $290M)
in new contract assets and growth opportunities within the core business and the
balance in the two previously announced acquisitions.
This investing activity will be funded by cash from operations and existing cash
balances.
In addition, in accordance with our new dividend policy, which we announced
today, we will pay an annual dividend of sixty-eight cents ($0.68) per share, or
approximately forty million dollars ($40M) to our shareholders, payable
quarterly, beginning in the second quarter of this year.
I would like to remind you that fiscal year '04 will be a fifty-three week
(53-week) year, an event that occurs every five or six years (5 or 6 years),
with the extra week falling into the fourth quarter.
Now let's look at the outlook for our second quarter, which ends August 23rd.
We expect service revenues to increase ten to twelve percent (10% - 12%) quarter
over quarter. This guidance assumes a full quarter of revenues from Polcard and
approximately one month of revenues from Interlott.
We expect product sales to be in the range of fifty to fifty-five million
dollars ($50M - $55M). This includes the sale of a system solution to the UK
that allows on-line games to be played over the Internet ... as well as two
video central systems sales to the Canadian provinces of Alberta and
Saskatchewan.
We expect service margins to be in line with the full year outlook and product
margins in the range of twenty-six to twenty-eight percent (26% to 28%).
Finally, we expect earnings per share to be in the range of sixty-five to
seventy cents ($0.65 to $0.70) per share on a fully diluted basis, after
considering the dilutive impact of our convertible debentures of approximately
six cents ($0.06). This compares to the sixty-six cents ($0.66) per share we
reported in the second quarter of fiscal year 2003.
To summarize ... we are encouraged by the positive trends we continue to see in
the business. We are pleased with the strength of our core business, we are
excited about the opportunities Polcard and Interlott offer - - - and we are
confident that this fiscal year will be another strong year for both
profitability and shareholder returns.
Thank you for your attention. Now Bruce and I would be happy to answer any
questions that you may have.
CLOSING REMARKS
If there are no further questions, let me wrap things up quickly. We continue to
be encouraged by the positive trends in our business. We are accelerating the
development and rollout of our Enterprise Series platform and we are vigorously
pursuing a number of new business opportunities.
Our acquisitions are proceeding on schedule and according to plan. And, based on
the continuing growth in same-store sales and favorable foreign exchange trends,
we are comfortable increasing our earnings guidance for the fiscal year.
Thanks again for joining us ... have an enjoyable summer ... and we look forward
to speaking with you again in September.
SafeHarbor Language
- -------------------
Good morning. And welcome to our first quarter conference call.
With me on today's call are Bruce Turner, our President and Chief Executive
Officer, and Jaymin Patel, our Chief Financial Officer.
Before we begin today's call, I would like to inform you that comments on this
call may contain forward-looking statements including, without limitation,
statements relating to the future operations and financial performance of the
Company and the Company's future strategies. Such forward-looking statements
reflect management's assessment based on information currently available, but
are not guarantees and are subject to risks and uncertainties which would cause
the results to differ materially from those contemplated in the forward-looking
statements. These risks and uncertainties include, but are not limited to, those
set forth here and in the Company's filings with the SEC, including our fiscal
2003 10K.
Now I would like to turn the call over to our host, Bruce Turner.