U.S. markets closed

Edited Transcript of AGI.AX earnings conference call or presentation 24-Feb-20 10:00pm GMT

Half Year 2020 Ainsworth Game Technology Ltd Earnings Call

NSW Mar 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Ainsworth Game Technology Ltd earnings conference call or presentation Monday, February 24, 2020 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Lawrence Levy

Ainsworth Game Technology Limited - CEO & Director

* Mark L. Ludski

Ainsworth Game Technology Limited - CFO & Company Secretary

================================================================================

Conference Call Participants

================================================================================

* David Fabris

Macquarie Research - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Ainsworth Game Technology FY '20 Half Year Results Investor Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Lawrence Levy. Thank you, and please go ahead.

--------------------------------------------------------------------------------

Lawrence Levy, Ainsworth Game Technology Limited - CEO & Director [2]

--------------------------------------------------------------------------------

Thank you, Alvaro. Thank you, operator. Good morning to everyone, and thank you for joining me on the Ainsworth results conference call. With me this morning is Mark Ludski, our CFO.

We will be presenting the results for the first half year FY '20. With the results, we have released an investor slide pack to ASX, which we will refer to in this presentation. At the end of the presentation, we will be pleased to answer any questions as usual. I appreciate your busy and reporting season. So rather than take you through a page turn, I will concentrate my remarks on Pages 4 and 5. Mark will take you through the financials and regional review.

On Page 4. Before we get into the detail, I would like to start with the key messages from today's presentation, as shown on Page 4. First, our whole strategy at AGT centers around strengthening the company for improved results. Our current level of sales and profitability is too low. We are moving through a transition period and making good progress as we develop and launch new hardware and games to improve long-term performance.

My other key point is that these strategic -- these strategies to strengthen AGT are beginning to show some encouraging early signs of improvement. Adjusted profit before tax and currency for the first half year of FY '20 was a disappointing loss, but it was ahead of guidance. We also expect to return to profitability in H2 FY '20, and we reaffirm profit for the full year FY '20. We have a lot more work to do. But as I say, the early signs are positive.

Let me turn to Page 5 to summarize the results. For the first half of FY '20, we reported an audited loss before tax, excluding currency impacts, of $3.8 million. Excluding currency and one-off nonrecurring costs of $3.6 million, the normalized loss was far lower at just $0.2 million. The guidance we provided at the 2019 AGM in November was for a $4 million loss.

Revenues for the half year were $107.3 million, down 9%. Reported EBITDA was $14.6 million. Underlying EBITDA, adjusted for currency and significant items outside ordinary business activities and the $1.3 million benefit from the adoption of the new accounting standard for leases, was $17.2 million. This was a decline of 28% on the prior corresponding period. However, AGT's international business delivered a resilient contribution in competitive markets. Revenues did decline by 6% in North America and 8% in Latin America. International sales account for 82% of the group total.

A highlight of the results was that AGT sold more machines in Australia in H1 FY '20 than in the prior corresponding period with an increase of 2%. Revenues were down 1% in the run-up to the new product releases. However, intense competition and product mix changes caused a reduction in gross margins and overall profitability. In line with the strategy to increase the quality of earnings, as we have talked about before, AGT delivered growth in the number of machines on participation. These units generate recurring revenues. Total units under operation were 6,604, an increase of 6% on the prior corresponding period.

I'll now move to the strategic priorities I mentioned earlier. You will remember that we laid these out at the AGM. I'm pleased to report we're making good progress on each of these measures. I'll start with R&D and game development, which is at the very core of AGT's business. We are reevaluating our strategy across the board. We're in the progress of upgrading our game development capabilities to accelerate the timely release of a greater number of quality titles. We listen to customers and we strive to deliver new product to meet the needs of the market. Research and development investments increased in the half to 20% of revenue compared to 16% in the prior corresponding period.

In December, we signed an agreement with Ingenuity Gaming, an industry-respected creative game studio based in India, to assist in the developing -- to assist in developing new titles and game derivatives based on successful historic Ainsworth mathematics. We already have a pipeline for the first 18 titles mapped out. Ingenuity provides dedicated, competitively priced talent that will enable Ainsworth's internal game development team to focus on new game concepts.

We have hired a renowned and experienced game designer to lead on product strategy and innovations for the domestic market. We have also engaged game design specialists in Sydney with a proven track record of success, creating a new innovation studio. In addition, in the Americas, we have engaged an experienced resource from the casino industry to lead product marketing and strategy. This increase in capacity, product capability and development experience will enable us to produce more quality titles and deliver them to market faster.

We have launched our exciting new slot machine hardware. The design of AGT's new A-Star dual and curved screen cabinets has been completed and already in production. The A-Star incorporates the company's experience and extensive knowledge of the industry into a new product for its customers with best-in-class reliability. It is a meticulously crafted cabinet with a sleek, modular design and spectacular new curved and dual screen formats. In a synchronized global release, new sales have already commenced across global markets.

Our second key priority is to make AGT more efficient and profitable. In the U.S., our second-largest market, we have streamlined AGT's sales and marketing structure to improve agility and reduce costs. With regional-specific sales strategies, including tailored pricing and terms and market-entry promotions, we are focused on driving growth in both Class II and Class III markets. We also manage our headcount carefully. Total staff numbers are 565 for the group compared to 583 in the prior corresponding period.

And finally, as I also outlined at the AGM, we are working on leveraging our strategic partnership with Novomatic. Discussions are underway to enter new markets together, identify game product to port to AGT cabinets, share content on online platforms, explore common technology solutions and utilize shared distribution outlets. This partnership has the potential to deliver significant benefits for shareholders.

Let me conclude by saying the transition to strengthen AGT to deliver improved results is well underway. My first 6 months as CEO was used to evaluate the company's strengths and weaknesses in order to prioritize strategic changes that would deliver short-, medium- and long-term objectives. We are making good progress in building these foundations. We expect to turn -- to return to profitability and deliver a positive net result in the second half of FY '20 with even better results in FY '21.

I will now hand over to Mark, and I will be pleased to answer questions later.

--------------------------------------------------------------------------------

Mark L. Ludski, Ainsworth Game Technology Limited - CFO & Company Secretary [3]

--------------------------------------------------------------------------------

Thank you, Lawrence. Good morning, everyone. I will start my comments on Page 8. As Lawrence highlighted, the audited loss before tax, excluding currency impacts, for the 6 months ended December 31, 2019, was $3.8 million. The result includes the $3.6 million of nonrecurring costs associated with the settlement of all outstanding legal matters. On a pre-currency basis and adjusting for the nonrecurring costs, the loss before tax was $0.2 million.

Sales revenue for the half year was $107.3 million, a decrease of 9% on the pcp. International revenues were down by 11% to $87.8 million. Revenue in the Americas fell by 7% for the 6 months with North America 6% lower and Latin America 8% lower. Domestic sales were resilient as we transition to the new hardware and product suite. Sales were down by 1% to $19.5 million.

Gross profit was down by 8% to $66 million with gross margins up slightly at 62%, reflecting ongoing efficiency improvements. Operating costs were marginally lower at $64 million on a constant currency basis compared to $64.2 million on the prior corresponding period. We are investing more in R&D with an increase to $21 million compared to $19 million. Sales and marketing expenses were broadly stable at $33 million.

Headcount in Australia and the Rest of the World was carefully controlled at 305, a reduction of 17 full-time employees on the prior corresponding period. Headcount in the Americas was consistent at 260 compared to 261 on the prior corresponding period. Group EBITDA was $14.6 million, a decline of 51% on the pcp. EBITDA margins were 14% compared to 25% in half 1 FY '19.

On Page 10, we show the reconciliation to underlying EBITDA. Starting with the reported EBITDA of $14.6 million, the adoption of the new accounting standard for leases gave a $1.3 million benefit. Then to calculate underlying EBITDA, we add back foreign currency of $0.3 million. There is also the one-off $3.6 million cost to resolve all outstanding legal matters. Therefore, underlying EBITDA, excluding AASB 16, currency and one-offs, was $17.2 million.

The balance sheet is on Page 14. This is a strong balance sheet, which will assist in funding our growth strategies. As at 31 December, we had net cash of $13 million, excluding lease liabilities. The leverage ratio was a conservative 0.88x with an interest ratio of 19x. The receivables closing balance was $142.5 million, which is a 4% reduction compared to June 30.

Page 15 shows our cash flow. We generated $17.9 million of operating cash flow. The decrease in net cash from operating activity is due to the reduction in profitability. AASB 16 also reclassified some items from operating to finance -- financing cash flow. As this table shows, we reported an underlying net cash from operating activities of $16.6 million.

CapEx and development expenditure increased to $9.1 million in total compared to $4.6 million. The increased cash used in investing activities is a result of the development work and tooling costs for the A-Star. We also repaid $26.8 million of loans during the period and closed the half with cash and equivalents of $42.3 million.

I'll now turn to Page 17 and give you a review of the regions, starting with North America. AGT delivered a consistent profit performance in North America with profitability at $21.3 million, a slight decrease of 1% on the pcp. Revenues declined by 6% to $50.7 million due mainly to the lower number of unit sales at 1,104, down 18%. ASP declined by 6%, although there was a mix change which had affected this average.

Some machines were converted from game operations and were sold at lower prices, although we maintained the same profit margin. We expanded the Quick Spin portfolio into the linked and persistent state game segments. Turbo Charged 7s and Super Lit Vegas delivered solid performances. We secured new approvals, including the Loaded with Loot and Electric Cash game series and we rolled out the Lucky Break brand in the period.

The number of units on participation increased modestly to 2,336, a rise of 1%. Yield per day was USD 25, reflecting the mix of premium product in the fleet. As we announced, AGT's U.S. management structure has been reorganized. The role of President, North American Operations has been combined with the role Senior Vice President, Sales and Marketing to ensure a more agile and customer-facing focus.

Moving to Page 18. In the transition period to new hardware and software in Latin America, AGT's revenues were $32.8 million, a reduction of 8%. We continue to face challenging economic conditions in several of the larger markets in the region, including Argentina, Peru, Colombia and Chile. Profitability declined by 33% to $8.9 million.

There are several factors to call out here. Unit volumes were 13% lower to 1,205. There was an increase in cost relating to Mustang Money, which affected margins. Units under gaming operation increased to 4,268. While this is a 9% rise on the pcp, I will flag the size of the fleet is a little lower than as at the end of June last year. The fee per day is also lower in the first half at USD 10 versus USD 12 due in part to local currency devaluations. This also contributed to the profit decline.

As you can see on Page 19, Australia delivered a resilient performance in this transition period. Domestic revenue was effectively consistent at $19.5 million. Profit was $1.4 million. Unit volumes increased to 556, which is a rise of 2% compared to the pcp. As at 31 December, 369 A-Star units had been manufactured and shipped to Las Vegas facility for sales in the Americas. The A-Star was launched in Australia last Thursday with new sales having commenced. A new-look, regionalized website has been completed and is expected to be launched during half 2.

Moving to Page 20. Our Rest of the World segment delivered a disappointing result with revenue down 51% to $4.3 million. We recorded low results in Asia, Europe and New Zealand. Profit was down by 56% to $2.2 million. Unit volumes fell to 73 from 409, noting that the pcp includes 300 kits sold to Novomatic.

As Lawrence outlined, our strategy is to leverage our strategic partnership with Novomatic. We are looking to drive additional revenues in new markets in the region. South Africa is a good opportunity for a joint approach. Research is also underway to assess new market opportunities in Europe for AGT's market-leading Historical Horse Racing and Class II games.

Thank you all for joining us this morning and we will be pleased to take any questions. And I will now hand you back to our operator, Alvaro.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We'll take our first question today from the line of David Fabris from Macquarie.

--------------------------------------------------------------------------------

David Fabris, Macquarie Research - Research Analyst [2]

--------------------------------------------------------------------------------

Look, I'm just trying to understand the Historical Horse Racing machine opportunity beyond FY '20 in North America. Can you just talk through the recent agreement with Sci Games as announced last week and how that supports earnings? And then can you also talk about the growth opportunities for gaming ops installed and outright sales as well, please?

--------------------------------------------------------------------------------

Lawrence Levy, Ainsworth Game Technology Limited - CEO & Director [3]

--------------------------------------------------------------------------------

Okay. I'll start with the historic horseracing. Our relationship with Churchill Downs remains extremely strong. They have expansion projects underway in their pipeline. And we are obviously a part of every expansion that goes with them. We did announce last week that Scientific Games has integrated their first machines through our system. So this is monetized through an integration fee per unit that goes in. And then we have a daily connection fee in perpetuity going on. So this is the first deal that we're doing with another manufacturer.

We do not believe it's -- it will affect our ongoing strength in this market. We're still market leaders. Our games are performing better than anybody else's at the moment, number one. And I think the opportunities moving forward are obviously for the operators of each HHR unit is to just expand their games and the variety for the customers. So we're very comfortable with this moving forward, and it still is a very high margin business for us. Mark?

--------------------------------------------------------------------------------

Mark L. Ludski, Ainsworth Game Technology Limited - CFO & Company Secretary [4]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Lawrence Levy, Ainsworth Game Technology Limited - CEO & Director [5]

--------------------------------------------------------------------------------

The second part of the question, David, sorry?

--------------------------------------------------------------------------------

David Fabris, Macquarie Research - Research Analyst [6]

--------------------------------------------------------------------------------

Yes. Just if you could talk through what expansion opportunities seen beyond FY '20 on both gaming ops and outright sales?

--------------------------------------------------------------------------------

Mark L. Ludski, Ainsworth Game Technology Limited - CFO & Company Secretary [7]

--------------------------------------------------------------------------------

Well, David, it's all part of the strategy, where we're focusing on a dedicated gaming operation...

--------------------------------------------------------------------------------

Lawrence Levy, Ainsworth Game Technology Limited - CEO & Director [8]

--------------------------------------------------------------------------------

Product.

--------------------------------------------------------------------------------

Mark L. Ludski, Ainsworth Game Technology Limited - CFO & Company Secretary [9]

--------------------------------------------------------------------------------

Product that is not available for sale. It is purely on -- for a participation basis. We have signed up George Lopez. And we're currently developing a product that we expect to release in coming periods. It will only be on -- for gaming operation.

--------------------------------------------------------------------------------

Lawrence Levy, Ainsworth Game Technology Limited - CEO & Director [10]

--------------------------------------------------------------------------------

Yes. We have continued collaboration with BANDAI NAMCO, also with another studio in Japan. So these are all going to be IP products that we'll release in the U.S. purely on a revenue share basis, so growing that participation business.

--------------------------------------------------------------------------------

David Fabris, Macquarie Research - Research Analyst [11]

--------------------------------------------------------------------------------

Got you. And just on Slide 24 of the investor presentation, you noted 8 proprietary titles to support the new A-Star cabinet. How many of those are currently approved or licensed for sale in Australia? And how many titles do you expect to have in the market over the next 15 months under the new road map?

--------------------------------------------------------------------------------

Lawrence Levy, Ainsworth Game Technology Limited - CEO & Director [12]

--------------------------------------------------------------------------------

Okay. So at the moment with the new A-Star, we have 2 of the titles with 2 games on each approved, Queensland, New South Wales, Victoria and moving forward. So we expect to have all of the 8 titles released in this half year. They will be approved in this half year and released by end of April, we hope. And at the moment, we have, just in the domestic market, since Scott joined us and we've pulled everything together, trying to rework a little bit of the mathematics, we've got 40 games in our road map for the next 15 months. And that's just now. So actually, we hope to expand on that.

--------------------------------------------------------------------------------

David Fabris, Macquarie Research - Research Analyst [13]

--------------------------------------------------------------------------------

Okay. Great. And just one final question for me. Just comments on the acquisitive strategy to accelerate the earnings recovery. Are you guys looking at complementary acquisitions or something larger and transformational? I guess I'm just trying to understand whether you can just leverage the balance sheet for these opportunities or whether you need to think about equity as well.

--------------------------------------------------------------------------------

Mark L. Ludski, Ainsworth Game Technology Limited - CFO & Company Secretary [14]

--------------------------------------------------------------------------------

Well, we're at currently in a net cash position. And David, the view of the Board is that they'll look at any proposals in relation to any complementary acquisitions that will accelerate growth earnings. So we are looking at opportunities and consider any opportunities within that.

--------------------------------------------------------------------------------

David Fabris, Macquarie Research - Research Analyst [15]

--------------------------------------------------------------------------------

And the Board will be comfortable going back to a net debt position in the current environment?

--------------------------------------------------------------------------------

Mark L. Ludski, Ainsworth Game Technology Limited - CFO & Company Secretary [16]

--------------------------------------------------------------------------------

Yes. The right opportunity.

--------------------------------------------------------------------------------

Lawrence Levy, Ainsworth Game Technology Limited - CEO & Director [17]

--------------------------------------------------------------------------------

Exactly. So the right opportunity, yes.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

(Operator Instructions) It looks like there are no further questions at this time. I'd now like to hand the conference back to Lawrence Levy for any closing remarks.

--------------------------------------------------------------------------------

Lawrence Levy, Ainsworth Game Technology Limited - CEO & Director [19]

--------------------------------------------------------------------------------

Thank you, Alvaro. Thank you for joining us today on the call. I appreciate your time and interest, and I look forward to seeing some of you over the coming days and weeks. Thank you very much.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.