Thank you for standing by, and welcome to the Ainsworth Game Technology results six months ended 30th June 2023 general investor conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press the star one again. For operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants this call is being recorded. Thank you. I would now like to welcome Harald Neumann, Chief Executive Officer, to begin the call. Harald, over to you.
Thank you, operator. Good afternoon, everyone, and thank you for joining me for the Ainsworth conference call for our results for the six-month period ended 31st of June 2023. Lynn Mah, our CFO, and Mark Ludski, the Company Secretary, are also on the line today. On the call today, I will concentrate on the key points and the regional review, and Lynn will take you through the financials. At the end of the presentation, we will be pleased to answer any questions. All the numbers Lynn and I quote throughout the call are denominated in Australian dollars, unless otherwise specified. Let's make a start on page five with some highlights of the results. Firstly, I'm pleased to report that Ainsworth has maintained and delivered a solid result, with revenue increasing to AUD 143.6 million in the six months period.
This represented a 20% increase from the prior corresponding period, and 16% on the second half of calendar 2022. Underlying EBITDA for the period was AUD 29.4 million, similar to the prior period, and an increase of 11% on the AUD 26.4 million in the prior half, ending 31st December 2022. Profit before tax, excluding currency impacts and one-off items, was AUD 23.3 million in the current period. This result was in line with the guidance outlined by the company. It's a further improvement on the profit reported in the prior period of AUD 18.8 billion, an increase of 24%.
The profit after tax reported of AUD 4.2 million, including currency losses of AUD 4.4 million, and net one-off items of AUD 11 million relating to the uplift in profit by amendments to the game exclusivity agreement and provision for the full write-off, investment in Argentina. As we have disclosed, the company has provided in the current period for the full write-down of the carrying value of investment held in Argentina. Following a notification by the investment company that a reorganization petition has been filed by the trustor of the investment. Administrative delays in court proceedings relating to the proposed reorganization petition filed by the trustor and minimal access to information to reliably assess the recoverability of these investments necessitated the write-down, despite preliminary legal advice indicating the likelihood that recoverability is high.
The macroeconomic uncertainties and political instability in this region, which has continued since the reporting date, have contributed to the Argentine peso experiencing significant devaluation against the U.S. dollar, which would have adversely impacted the company in coming periods. Ainsworth cash flow and balance sheet continue to be key priorities of the company. Operating cash flow in the period improved by AUD 17.4 million from the deficit of AUD 5.3 million in the previous half year period ended 31st December 2022. Net cash at the reporting date was AUD 24.6 million, compared to AUD 29.3 million at 31st December 2022. AGT continues to invest in product development, so people and technology, while supporting required levels of working capital to satisfy customer demands. The global economic conditions for componentry have progressively improved.
However, to ensure commercialization of hardware initiatives and more supply chain disruption are encountered to projected customer demand. Inventory levels remain consistent at AUD 89 million, compared to 31st December 2022. I would note that strategies to diversify any supply chain risk have been implemented, so we can continue to source critical components for machine assembly and ensure no disruption. The board has decided not to declare a dividend, given the company's priority to maintain a strong financial position at the present time. Given the ongoing investment in research and development being undertaken, the working capital necessary to ensure no production disruption to supply chain shortages and continuing inflationary cost pressures, dividends continue to be suspended at the present time. The board confirms its commitment to recommend paying dividends when considered appropriate.
Let me now turn to the results on page eight. It is encouraging to see the momentum that started last year has continued into the first half of calendar year 2023. Revenue increased to AUD 143.6 million, up 20% on the AUD 119.5 million in the prior period. Revenue increases were achieved across the key regions in both North and Latin America. Reflecting the momentum offshore, international revenue increased to AUD 125.7 million, a 29% increase compared to the prior period, and now represents 88% of the group's total revenue.... The gross margin achieved in the period was 61%, a decrease on the 64% reported in the prior half. Despite strong average selling price, the margin decline was primarily attributable to a lower proportion of high marginal recurring revenue compared to prior periods.
Cost pressure on direct materials also impacted the gross margin in the current period. As outlined on page 10, underlying EBITDA was AUD 29.4 million, compared to AUD 26 million in the prior period. Currency losses in the current period were AUD 4.4 million, compared to gains of AUD 4.7 million in the prior period. One-off items outside normal operations included a loss of AUD 11 million, resulting from the profit uplift of AUD 1.9 million on the amendment to the game exclusivity agreement and the write-down in investment in Argentina of AUD 12.9 million. The company has commenced pursuing legal avenues to challenge the Mexican Tax Administration Service audit and review findings.
The company continues to defend its position that both software, including game and hardware, should be considered as a whole for the calculation of regional value, content, and U.S. origin under the North American Free Trade Agreement. I will now go through the regional review, starting on page 17 with North America. North America revenue in the current period was AUD 68.5 million, an increase of 13% on the prior period, representing 54% of total international revenue. As traditional plans are well advanced to increase the company's market share within this region through low and mid-denomination product offerings, high denomination games continue to exhibit strong product performance in the United States. The ongoing success of MTD games in South Dakota, and the launch of these new games in Louisiana, have seen similar success, with 450 units sold in the current period.
Agreement has been finalized to extend the previous exclusive distribution agreement of MTD products within Montana for an additional 12 months period, commencing first on November 1st, 2023, at a significant increased license fee for the extended period. Machines under operation in North America at the reporting date were 3,073, an increase of 20% on the 2,571 compared to the prior period. Continued expansion within Alabama, New Hampshire, and Texas, with new placement occurring in the current period. Machines under operation, including HHR connection fees, which generate recurring revenues, contributed 53% of segment revenues. HHR products continue to expand with 6,811 units, prior period 3,425 units, connected to AGT's HHR system as of June 2023.
Further growth is expected as new installations occur in Kentucky, Virginia, and Alabama in coming periods. Higher cost of sales of products due to changing product mix, mix impacted gross profit. However, we are partially offset by strong average selling price, along with disciplined cost controls, resulting in segment profit of AUD 29.5 million. Turning to page 19. Revenues in Latin America, Europe increased during the current year by 50% compared to the prior period, and 37% on the second half of 2022. Unit sales in the current period were 1,277, an increase of 27% from the prior period. This increase was driven by demand and the utilization of import licenses in Argentina, which accounted for 52.52% on unit sales.
It is not expected that this level of activity in Argentina will be replicated in the second half of 2023. However, continued opportunities in other regions within Mexico, Peru, and the Caribbean are expected. Demand continues to grow for the A-Star range of cabinets and top-performing game themes like Xtension, Pan Chang, Cash Stacks, and Multi-Win games. As of June 2023, a total of 3,550 units were under operation, generating $11.3 million in recurring revenue, an increase of 22% of the prior period. Despite a reduction in units under operation at the reporting date due to similar regulatory changes in Mexico, the average yield was maintained at $12 per day, which assisted to offset the reduced number of machines under operation. Page 20 outlines the region of Asia Pacific.
As you will note, we have now consolidated Australia, New Zealand, and Asia under the, under one region as a result of change management responsibilities introduced in the period. Asia Pacific revenue was AUD 21.2 million in the current period, a reduction of 7% on the AUD 22.7 million in the prior period. Domestic revenues overall were impacted by minimal corporate sales in competitive market conditions. Increased revenues in the current period of AUD 3.3 million within Asia and New Zealand assisted to partially offset the lower revenues within Australia. Recent product launch at the Australian Gaming Exhibition, including the new A-100 cabinet, that positively received a strong performance from installation on the newly released Grand Fortune titles. Average selling price improved despite competitive market conditions. However, segment profit was affected by increased marketing and trade show costs.
Production costs and material costs in the current period compared to prior periods. On page 21, we outlined the digital segment, which reported revenues of AUD 8.4 million, which included a one-off profit uplift of AUD 1.9 million, resulting from the game contract amendment. These high-margin online revenues resulted in segment profit of AUD 8.1 million in the current period. It is expected that when game exclusivity contract terminates in March 2024, the group will be able to directly explore further opportunities with U.S. operators. I will now ask Lynn to outline the financials.
Thank you, Harald. Operating costs increased to AUD 66.1 million in the current period, compared to AUD 54.3 million in the PCP, an increase of 22%. Group operating costs in constant currency terms were AUD 62.1 million, 14% higher compared to the PCP. The increase in operating costs was mainly attributable to variable selling costs on higher revenue, an increase in overall headcount, primarily within research and development, to ensure talent retention, to support business growth and implemented strategies. Global inflation also contributed to the increase in operating costs, with measures introduced to mitigate inflationary cost pressures through streamlining processes to achieve greater efficiencies. R&D expenses increased by 26% compared to PCP and 12% compared to the prior half, reflecting the company's continued focus on product development investments to produce competitive products.
R&D expenses represented 15% of total revenue in the current period. An increased level of investment in R&D is expected to continue as the company expands its studios in both Sydney and Las Vegas by adding new talent, along with the new game studios based in Austin, Texas, Monterrey, Mexico, and Reno, Nevada, led by experienced gaming veterans. Turning to page 12, AGT's global headcount was 546 employees at the reporting date, with 57% increase within the Americas. This represented an increase of 14%, 69 employees, compared to the PCP, with increased R&D resources accounting for 43% of the overall increase. The previously initiated changes in the global organizational structure, which provides new product leadership and clear lines of accountability, is expected to provide efficiencies and an exciting range of diverse and new product offerings.
Management continues to implement measures focusing on technology, development, and culture to improve product performance, lift staff retention rates, and enhance AGT's ability to attract world-class development talent. As Harald has pointed out, it has been a key priority to ensure we maintain a strong balance sheet to protect the company and allow liquidity to pursue planned development initiatives. On page 14, you'll see we've closed the current period with a net cash position of AUD 24.6 million, with undrawn facilities in place for $32 million. The receivables closing balance of AUD 118.5 million, a slight increase of 3% on the AUD 115.5 million at 31st December 2022, reflecting positive cash collections in the current period.
Inventory closed at AUD 89.2 million, a decrease on the AUD 90.1 million at 31st December 2022, as Harald noted, to ensure no disruption to new hardware releases and supply chain disruptions impacting customer demand in the second half of calendar year 2023. The company has AUD 328 million of net assets with no facility drawdown following repayment of borrowings within financial year 2022. On page 15, operating cash flows in the period improved compared to 31st December 2022 by AUD 17.4 million, due to increase in cash received from customers. Net cash held at a reporting date of AUD 24.6 million, a decrease on the AUD 29.3 million at 31st December 2022. With 16% higher revenue reported in the current period, receivables increased only by 3% compared to 31st December 2022.
In conclusion, we have a strong capital base and are well-financed to go forward to execute on strategies established. Thank you, and I will now hand back to you. I will now hand you back to Harald for some concluding remarks. Thank you.
Thank you, Lynn. Now, I'm now concluding and can then summarize. AGT enters the second half of calendar year 2023 with good momentum and expects sustainable profitability. Trading conditions in both domestic and international markets have shown their resilience despite economic challenges in global markets. AGT's North American business continues to make progress in both Class Two and Class Three markets. Opportunities are continually being pursued for existing and new HHR markets. Despite more volatile market conditions in Latin America, the group expects to continue its trajectory of growth and profitability in this region. Domestic markets are expected to benefit from new A-100 hardware release at the recent Australian Gaming Exhibition, and improved game performance following the release of new game titles. With strong balancing and commitment to product innovation, AGT is well-placed to deliver improved performance.
As I said on the beginning, our sites are much improved on the prior periods, driven by the contribution from international markets. We can also look forward to further improvements in Australia, where we continue to leverage our key strengths of AGT trusted brand, our high capable staff, and the company's enduring commitment to develop superior game technologies. As I've previously communicated, for us to ensure continued growth and to sustain our performance, measures were introduced to improve the output of the R&D investments. This is expected to release the competitiveness of our product. We have expanded our capabilities and talents within R&D in both the Sydney and Las Vegas studios. In addition, three new R&D studios are now operating to provide more creativity and diversity to our current product offerings.
The ability to quickly deliver new product to market that can provide better results for our customers is critical to our long-term success. The infrastructure to achieve our product roadmap is in place, which we expect to translate into improved and sustainable long-term results across global markets. Quality initiatives are continually assessed to improve game design, mathematics, and graphical arts, to create a more diverse and targeted range of product offerings to our customers. Before I close, I would like to finish by thanking all my colleagues at Ainsworth for their contribution to the progress made and their dedication to our customers. I am incredibly proud of the way the team of AGT has taken on the challenges presented to them to ensure we are well placed to improve our financial performance over coming periods, and I want to formally thanks all, to all of them.
Thank you for your time today, and I will now hand back to the operator to open up the lines for Q&As. Thank you, operator.
At this time, I'd like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile any questions. Again, if you'd like to ask a question, please press star, then the one on your telephone keypad now. Our first question comes from the line of Ron Shamgar from TAMIM. Please go ahead.
Yes. Hi. How are you doing? I just have a couple of questions. The first one is, I recall at the, kind of, if it was the February or the AGM, conference call, but there were some questions in regards to, you know, potentially, you know, the, the property in Las Vegas, you know, you're listing on the ASX, whether it's suitable, listing elsewhere and so on, and potentially also capital management. You said that you would consider it over the next few months and maybe have something to say about the August results. Just wanted to get an idea of, have you considered those things?
Well, to answer your question, we are currently investigating the best options. We have not make any decisions yet, yeah? But we are coming closer to the, let's say, to the opinion what is good for the company and what is good for the investors. But currently there's no real change in comparison to the last information.
Yes. Okay. By when do you think, you know, you'll have an update, or do we have to wait until the next set of results in February?
Yes.
Okay. And then the other question that I have is, considering the majority of the business is in North America now, is there any much strategic sentiment of staying in Australia?
Well, the point is, this is quite easy to answer. Australia is the second biggest casino slot machine market in the world, yeah. So there's no reason to leave. We just have to optimize our structure. But one example, Australia has the best R&D talents globally, so there's always... Well, again, to a short answer, we will never leave Australia.
Okay. And, and last one, in terms of your current net cash on the balance sheet, how much of that would do you need for sort of working capital purposes, and, and how much is truly free cash for the company?
Lynn?
Yeah. So, based on the net cash that we've reported, AUD 24.6 million, that are all considered free cash flow.
I see. Okay. So you expect to generate further free cash in the second half of the year?
Yes, that is right.
Yes. Okay. Thank you.
Clearly, we have to take into consideration as well the settlement of the set provisions as well.
Yeah.
Yeah.
Yeah... Okay. Thank you.
Our next question comes from the line of Jim Devlin from Henley & Company. Please go ahead.
Yes. Hi, good morning to you guys. So, I mean, it's very apparent, you know, we're following the company's American LinkedIn page, and head of marketing, I guess, the gentleman's name is Mike Trask. He does very informative videos on the company and its products, right? So just looking at the increase in R&D, the increase in the number of studios, clearly the game plan is to increase total content. And there's a big game show coming up in Las Vegas in October, and we've been investing in the gaming industry for decades. And one of the people that kind of groomed me in this industry coined the term, shots on goal, right? So soccer, basketball, hockey, you can't score points if you don't take shots. So obviously, we applaud you for offering more shots on goal to the global gaming markets.
As it relates to this upcoming trade show in Vegas, and you mentioned it in the—I have the presentation, but it's 30-some-odd pages, I can't refer to the page. How many games would we expect to be at the G2E booth in October? And then how would we compare the number of games you're gonna show in October versus game, you know, the company's booth in the past? Is it a larger number, similar number, smaller number? How do we look at that?
Okay, I will answer this question. Look, the G2E in Vegas in two months, more or less, even one month, it's for us the most important show. And what you will see there is, besides a completely new cabinet, you will also see five to six new games. But we are bringing out approximately 36 new games per year for Latin America, US, and Australia, or game families. But you will see more games and better products and once again, also a completely new cabinet.
Okay, so you guys have increased the R&D substantially. If you go back to the recurring income component in North America, which clearly drives significant gross profitability, you're garnering about $33 a day right now. Clearly, the goal is to get that number up, and for me, it looks like you're taking the high -denom, the successful high -denom games that you have that make those top 25 gaming lists, and you're putting them in a new cabinet. But now you're not only offering those games at the high -denom increment, you're offering them kind of on a tactile interface, touchscreen, $0.01, $0.02, $0.05, $0.10, which I guess you guys had really not done before. How do we chart the progress that the company is achieving in that low -denom space?
Is there any way to delineate or to follow that?
Look, this is, as you, as you mentioned, yeah, Ainsworth was always one of the leading companies in the high-denomination games, but, in the low-denomination games, let's say we were a little bit less successful. This was the clear objective of the company, to have at least two to three games in the, under the top 20 in the Eilers Report. This is the clear target, and, you need approximately 12-18 months when you start a new, development of a new game. So you can expect the first, results of the increased R&D expenses to see at the G2E show in Las Vegas. There will be, further new titles in 2024.
2024 will be very important for us because we are bringing out new titles, especially for the low-denom market in the United States.
Okay, and then I had one last question. I appreciate your time. We've recently seen a bunch of... I mean, you know, it's content, content, content, right? And everybody's interested in jumping into the internet gambling market. So MGM, one of their divisions, just bought a business in Europe, called Push Gaming. And it, just doing a little bit of due diligence, they claim they make like 30 iSlot machine games, and MGM just bought that studio for $165 million in US currency. I go through your presentation, and it says that you now have 135 iSlot machine titles available for sale at this time? Scheme development in online compared to Push Gaming, if you know anything about that company?
I just, to be honest, no, I don't, I don't know anything about this company. But we have a separate online development group. Let's say also based on the game contract, which is ending in March 2024, we will concentrate more on direct contacts to the U.S. operator. And we are also expecting a higher revenue by bringing out new titles, titles which are successful in the land-based environment. Yeah, so online is for sure one of our target markets, even though we are quite small in comparison to other companies.
So just one follow-up to that. So you-- do we expect then the disintegration of the GAN relationship to be a net positive to the company?
I believe, yes.
Okay, great. Thank you again for your time.
We are also currently in the final negotiation phase with Novomatic's online company, Greentube, to increase our presence in the United States.
Fantastic. Well, we look forward to dropping by the booth in October.
Okay.
Really appreciate your time.
Hope I see you there. Thank you.
We look forward to it.
I would now like to turn the call over to Harald for closing remarks.
Yeah, the investor, thank you. Thank you for your participation, for your continuous trust in AGT, and I hope we could answer all your questions. Yeah, thank you once again for participating. It was a pleasure to speak with you, and thank you, operator, for guiding us through the conference call.
I would like to thank our speakers for today's presentation, and thank you for all joining us. This now concludes today's call. You may now disconnect.