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Edited Transcript of AGI.AX earnings conference call or presentation 27-Aug-19 11:00pm GMT

Full Year 2019 Ainsworth Game Technology Ltd Earnings Presentation

NSW Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Ainsworth Game Technology Ltd earnings conference call or presentation Tuesday, August 27, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lawrence Levy

Ainsworth Game Technology Limited - CEO

* Mark L. Ludski

Ainsworth Game Technology Limited - CFO & Company Secretary

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Conference Call Participants

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* David Fabris

Macquarie Research - Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Ainsworth Game Technology 2019 Full Year Results Investor Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Lawrence Levy, Chief Executive Officer. Please go ahead.

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

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Thank you, Justine. Good morning to everyone, and thank you for joining me on my first Ainsworth results conference call. With me this morning is Mark Ludski, our CFO. We will be presenting the results for the full year FY '19.

With the results, we have released an investor slide pack to ASX, which we will refer to in this presentation. Given I'm new in the role having commenced as CEO on July 1, 2019, I'll just focus on the key points and Mark will go through the financial detail. At the end of the presentation, we will be pleased to answer any questions as usual.

Please turn to Page 6. Now let me run down some of the key financial results on Page 6. First, let me say upfront our results are clearly not as strong as we would have liked to report. While we compete in challenging markets against strong competition, these results do not reflect Ainsworth's earning potential. We have the capacity and the capability to deliver better results in the future.

Second. Our strategy to increase our international footprint and grow in the key North American market is progressing well. The results for North America are excellent with sales up 8% and profit up 16%. International sales now account for 85% of the group total.

Three. We also continue to make good progress in building our recurring revenues. These revenues provide consistency and predictability. They are high-quality earnings. While some of our customers choose to buy units from the fleet that are performing well, as we saw in North America, the total number of units under gaming operations increased by 16% to 6,806 at the end of the year.

My fourth point is that our balance sheet and capital position is strong. Our net operating cash flow increased by $42 million to $61 million. We repaid over $20 million of debt and we closed the year with net cash of $6 million.

Five. The relatively weak results from our Australian operations demonstrates why this financial strength is so important. The strong balance enables us to re-evaluate our R&D strategy and increase investment. This is the key to long-term sustained performance. We spent over $40 million on R&D in FY '19. We have recently launched some important new games and we expect to re-energize our performance in the domestic market. The balance sheet also enables us to make selective acquisitions to complement our organic performance. Ainsworth has bought well in the past and we will continue to pursue acquisition opportunities that are on strategy and make financial good sense.

Finally, before I hand over to Mark, I will touch on my initial observations of Ainsworth as the new incoming CEO. What do I think of the business and what have I inherited. We have put a slide in the deck on Page 5 to list these points. My overriding view is that AGT can deliver long-term profitable growth. We can leverage our excellent industry reputation, focus R&D and complement organic performance with selective acquisitions to drive improved returns and more value for all shareholders.

I've been in this industry for over 35 years and have admired Ainsworth's ability to innovate, compete and outperform for some time. The company is well regarded and recognized across all global markets. We have scale and the ability to leverage products across all geographic regions. We do need to re-evaluate R&D as game performance is critical. It is the key to long-term success. By doing these points well, we can achieve growth in both established and new markets. We will be disciplined in our strategy and execution as well as our capital management.

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

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

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Thank you, Lawrence. I will start my presentation on Page 8. The audited profit after tax for the 12 months ended 30 June 2019 was $11 million. On a pre-currency basis, PBT was $9 million. While we did well in North America and we increased our total units under gaming operations, these positives were offset by the results in Latin America and Australia, causing a decline in results for the group overall.

Sales revenue for the year was $234 million, a decrease of 12%. International revenues were broadly similar at $198 million while domestic revenues were disappointing at $36 million. As Lawrence said, we can do better than this.

Turning to profitability. Gross profit was down by 11% to $140 million with gross margin up slightly at 60%. Group EBITDA was $45 million, a decline of 34% on the pcp.

Before I discuss the regions, you will see for the first time in this deck, in Pages 18 to 21, that we have provided you with more details on each regions' profitability. We show gross profit and EBITDA by region. We hope this additional disclosure helps your analysis.

North America delivered an excellent result increasing revenue by 8% to $114 million. This growth was mainly due to the increased sales of the high-performing Quick Spin product family on the A640 cabinet. Latin America was affected by weak economic conditions and reported revenues down 8% at $73 million.

In North America, profitability was up by 16% to $47 million as we enjoyed some operating leverage. Unit sales there are similar at 2,952 compared to 3,021 last year. I would remind you though that FY '18 included the sale of 900 historical horse racing machines, inflating the base. Excluding this substantial order, underlying sales increased by 39% this year. The sales growth and cost controls helped segment profits to climb to 41%.

The number of machines under gaming operation in North America fell by 15% to 2,190. There is an important feature here that we also called out at the half year. The decline in gaming operations install base is a result of customers preferring to purchase top-performing titles from the fleet and reduce nonperforming titles to optimal floor mix. This is very logical and quite predictable. If a game is outperforming, we are happy to sell the machine. We then work to increase the size of the fleet overall with new titles.

Yield per day increased slightly to $26. Despite the market being very competitive, this yield has been climbing steadily. You will remember it was $22 in 2017. The rise is mainly due to our game performance.

In Latin America, political elections and the introduction of new gaming taxes adversely affected local economies and the industry spend. They created uncertainty which impacted our results. Revenues were down by 8%. Profitability was 22% lower than last year. These are still solid results in a challenging environment. Mexico is our largest market in the region. And encouragingly, we continue to deliver profitable growth and gain market share there. Units under gaming operation increased strongly, up 41% to 4,616 units. This is one of the highlights of the results. I would note though that average yield per day did fall to USD 10 per day due to local currency devaluation. This lower price point drove growth and reflects the challenging economic conditions.

In our Rest of World segment, revenues fell by 35% to $12 million. We had a reduced contribution from Novomatic compared to the prior corresponding period. Kit and other part sales to them did generate $2.5 million of this revenue. Online contributed $4 million, a similar level to last year. Revenues declined in Asia and in New Zealand. Unit volumes were down by 64% to 438 units with the weak second half.

Turning to Australia. Domestic sales were poor for the year at $36 million. We had minimal sales to corporates and casinos, and our performance was disappointing across all states. It was a relatively weak result caused by intense competition and lower-than-expected product performance in the period.

We are in a significant product transition to re-energize this performance. The recent launches of Loaded with Loot, Electric Cash and Crazy Jackpots are gaining positive customer feedback. That is encouraging. We expect these results to re-energize our Australian performance and make a larger contribution in FY '20.

On Page 9, we show the breakdown of revenue by type for the last 5 years. This shows our revenues come from 3 sources: sale of goods, gaming operations and additional services. Revenues from gaming operations have grown steadily over the period and have more than doubled since 2015. The increase from rendering of services includes connection fees for historical horse racing products supplied in FY '18. Revenue from the sale of goods reflects our unit sales performance in the international and domestic markets.

Turning to Page 10, I would like to highlight foreign exchange in these results. In the statutory results, we had a $6 million net currency gain. After tax, this was a $4.4 million benefit. While this is material, we focus on profit before tax, excluding currency impacts, to assess our business performance.

Moving to Page 11, the reconciliation of EBITDA to profit before tax. I would call out the 3 impairments we have taken in the year totaling $5.2 million. They are laid out on that slide. Given the reduction in unit volumes in Australia, we have impaired our New South Wales service goodwill by $2.4 million. We have written off the final remaining value in the 616 Digital asset with a $1.9 million charge and we have taken a $1 million charge against our receivables to be prudent. Depreciation and amortization also noticeably increased by 19% to $33 million in the year. This is mainly due to the increased size of the gaming operations fleet where we own the assets on balance sheet.

On Page 12, I will talk you through our operating costs. Total operating cost increased by 11%, although as we also saw at the half year stage, the true underlying rate for the year is much lower, 6%, let me explain. Sales, service and marketing expenses increased by $5 million and adverse foreign currency translation contributed $4 million to this. The balance of the increase was mostly increased depreciation given the growth in the gaming operations fleet.

R&D expenses increased by $6 million. That is strategic although, again, currency had an adverse effect of $1 million here. We increased our third-party contractors and technical compliance costs. We also decreased the value of the development costs we capitalized and prudently increased amortization cost from previously capitalized projects.

Finally on this page, headline administration expenses increased by $2 million. Foreign currency made up $1 million of this. $2.4 million of this was the reversal of previously recognized long-term incentive payment expense in FY '18. Overall, operating cost at constant currency basis was $125 million compared to $117 million in FY '18, resulting in a modest increase of 6%.

Page 3 shows our head count by region -- oh, Page 13 shows our head count by region and role. Head count is our main OpEx cost. Given our results, we had carefully managed and contained head count. You can see here, total head count for the group fell by 19 full-time employees in FY '19.

In Australia and the Rest of World segment, head count fell again down to 315, reflecting the competitive market and our performance. Head count in the Americas where our performance is strong increased slightly by 3 more heads to 263. Our priority continues to be more productive and efficient with the resources we have.

Page 14 shows the net profit waterfall. Lower unit sales had an adverse $34 million impact on product sales in the bridge with the associated reduced cost of goods sold contributing $15 million.

I will now turn to Page 15 where we show our balance sheet. This is the highlight of the results for me as it creates growth opportunities and flexibility. As you can see, our balance sheet turned from a net debt position last year to a net cash position at the end of FY '19. We had good working capital controls through the year and collected more receivables, including the CDI payment for the 900 machines in September.

We increased our cash, having funded technology, increased sales and marketing resources. We repaid over $20 million of debt and finished with loans and borrowing at $55 million. Our debt was clearly exceeded by our closing cash reserves of $62 million, leaving a $6 million net cash position overall. As well as the cash, we have established debt facility to fund any inorganic addition. This was extended to September 2021 to allow more flexibility.

I'll finish on Page 16 with cash flow. As I mentioned, cash flow was also a strong feature of the results. You can see cash flow from operations increased to $61 million, a good rise from the $19 million in the pcp. CapEx was down at $6.5 million given the build of our new Las Vegas facility is now complete. We retired $21 million of debt, as I mentioned, and distributed $3.6 million of cash in the final FY '18 dividend. Given the product transition in Australia and the scope for growth investments to drive long-term performance, the Board has decided to suspend the final dividend for the year.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from David Fabris with Macquarie.

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David Fabris, Macquarie Research - Research Analyst [2]

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I just wanted to understand the R&D strategy a little bit more. I mean if we look at the amount of money you're spending. You spent about $35 million in FY '16. We think that's sort of approaching $50 million by FY '20. So can you sort of talk me through where the incremental money is being spent and how we should think about a return on this investment?

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

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I think, David, it's additional expenditure in relation to work by outside parties. Technical compliance costs have -- we've beefed up the resources and utilized additional third parties to facilitate the approval process. We extended the Las Vegas studio. We're now dealing with third-party game designers and who are accelerating additional, more creative and diverse products on our behalf that actually haven't come to market at this point.

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David Fabris, Macquarie Research - Research Analyst [4]

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So if we think about those comments with third parties, can you give us a feel for the mix of product over the next 12 months that's going to be built by Ainsworth and built by third parties?

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

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This is Lawrence here. I can answer a little bit of that, David. We've got 6 external studios that we're working with at the moment. Each of them really just 2 or 3 games that we've asked for. But I think this is only going to be around 15%, 20% of our total output, maybe a bit less than that. So we're still concentrating on our own game design, game development. But for a bit of variety and to speed things up a little bit, this is why we're going to the external sources.

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David Fabris, Macquarie Research - Research Analyst [6]

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Okay. And just to be clear on those comments to speed things up, can you give us a feel for how quickly a third-party studio can get you a product ready to go to market relative to something building yourself internally?

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Lawrence Levy, Ainsworth Game Technology Limited - CEO [7]

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Yes. We're working on a deal which we've not signed yet though with an external studio at the moment. And they can possibly deliver if we agree on the terms 10 games before the end of this calendar year. So that would be -- obviously, they come to us, then we still need to do our work on them, but it speeds up.

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David Fabris, Macquarie Research - Research Analyst [8]

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Got it. Okay. And just my next question, I'm just trying to understand your comments around the M&A strategy. Can you clarify whether you'd be looking to buy gaming ops fleets or you'd be looking to take on a new business to bolster R&D and would it be sort of complementary or transformational to the business?

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Lawrence Levy, Ainsworth Game Technology Limited - CEO [9]

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I think my initial thought is complementary but open to a variety of options at the moment. We're looking regionally, North America, Latin America. Of interest, the Class II, as you said, fleet distributions, online and other areas. So it's really open, but I don't think I'm looking to break out into new areas that we're not already in.

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David Fabris, Macquarie Research - Research Analyst [10]

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Got it. And just one last question for me, just around the balance sheet then. If you guys are to make an acquisition, how comfortable would you be levering up the business, again, given the low earnings visibility and the volatility we've seen in the business?

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Mark L. Ludski, Ainsworth Game Technology Limited - CFO & Company Secretary [11]

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Yes. I think the current strength of the balance sheet allows the flexibility. I think we're very comfortable in relation to our gearing and leverage ratios currently. We have further repaid a significant amount of the debt in -- subsequent to that. So I think we're comfortable in relation to -- and we believe the R&D and the refocused R&D will create a recovery in the domestic market and will continue our growth profile within the Americas.

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David Fabris, Macquarie Research - Research Analyst [12]

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I guess just to ask the question differently. I mean what sort of leverage would you guys go up to if you were to make an acquisition?

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Mark L. Ludski, Ainsworth Game Technology Limited - CFO & Company Secretary [13]

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Well, that's a Board decision. We have criteria to establish in relation to acquisitions. And we're looking at accretive earnings in relation to any leverage and any new business today that we're buying.

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Operator [14]

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(Operator Instructions) There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.