Scientific Games Corp

Hello, and welcome to the Scientific Games 2021 Second Quarter Investor Conference Call. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. To ask a question, you may press star then 1 on your touchstone phone. To withdraw your question, please press star then 2. Please note, today's event is being recorded. Now, I'll turn the conference over to Jim Bombassi, Senior Vice President of Investor Relations for Scientific Games. Mr. Bombassi, you may begin.

Thank you, Operator, and good morning, everyone. During today's call, we will discuss our second quarter 2021 results and operating performance, followed by a question and answer period. With me this morning are Barry Cottle, our CEO, and Mike Eklund, our CFO. Our call today will contain statements that include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call. For information regarding these risks and uncertainties, please refer to our earnings release issued earlier this morning, the materials relating to the call posted on our website, and our filings with the SEC. We will also discuss certain non-GAAP financial measures. A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings press release as well as the investor section on our website. On July 15th, we made a proposal to acquire the remaining 19% interest in SidePlay that Scientific Games does not currently own. We cannot comment further on that proposal at this time. As a reminder, this conference call is being recorded. A replay of this webcast and accompanying materials will be archived in the investor section of our website at scientificgames.com. Also, supplemental reference slides are available on our investor relations website. These slides are meant to facilitate your review of the company's results. Now let me turn the call over to Barry.

Thanks, Jim. Good morning, everyone, and thank you for joining us. We're excited to be here today to talk to you about our great progress, including what we've achieved over the past year and our path forward to unlock significant value. What a difference a year makes. A year ago, with the onset of COVID, we experienced significant headwinds in our business. But with the focus and dedication of our great teams, We emerged from the pandemic a much stronger company with significant momentum across all of our businesses. Together with our new board, we recently announced a strategic action plan to transform our company, taking decisive steps to move from a holding company to a company singularly focused on building great games cross-platform. People love to play games, and there is a huge TAM which we are uniquely positioned for. We're moving rapidly with plans to divest our lottery and sports betting businesses, streamlining our organization, and accelerating our efforts to deleverage and invest for growth. No company will be able to match our ability to build great games and franchises fully cross-platform. On our last earnings call, we outlined for you our three strategic pillars, and we're making great progress executing on them to unlock significant shareholder value and become a sustainable growth company. First, we're moving quickly and thoughtfully to optimize our portfolio. We're very encouraged by the discussions and the strong interest we're seeing across the board for our lottery and sports betting businesses. We continue to believe the tremendous value in these businesses is best unlocked by divesting them, and we see multiple avenues available to do so. And as you know, on July 15th, we made a proposal to acquire the remaining 19% equity interest in SidePlay that Scientific Games does not currently own in an all-stock transaction. Second, we are investing in our largest growth opportunities, both organically and inorganically, in content and digital markets to accelerate growth. In gaming, we focused our R&D spend, enabling us to build great games like Monopoly Money Grab, Coin Combo, and Dancing Drums Prosperity. which have helped propel our North American GameOps revenue to surpass 2019 levels and also helped fuel our performance at SidePlay and Digital this year. We recently made smart, targeted investments to accelerate our strategy from Lightning Box to Kukoi to our new Las Vegas iGaming studio, and you should expect more of these investments over the coming months. And third, we're focused on significantly delevering and transforming our balance sheet. as we continue to make great progress organically. We reduced our net debt leverage from 10.5 to 7.2 times, or by nearly one-third in just six months. We are confident that we're on the path to continued significant delevering as we pursue strategic alternatives for our lottery and sports betting businesses. We did what we said we were going to do, and we're just getting started. Now, turning to the results, what an amazing quarter we had. We delivered phenomenal growth with total company revenue increasing 63%, AevaDA more than tripling versus last year, and strong sequential growth. Remarkably, we generated a number of all-time company records, including our highest quarterly AevaDA ever and our highest year-to-date free cash flow ever. And we delivered progress in important areas that demonstrate a clear structural turnaround at gaming. and clear momentum across our businesses. Now let's turn to our businesses. In gaming, we continue to see great progress, with another successful quarter building on our momentum and growing share in our largest profit pools, the North America Premium Ops Market, North America For Sale Market, and the Australian For Sale Market, while continuing to maintain a leading market position in systems and tables. This success was driven by the strength of our new product roadmap the strong recovery in the U.S. market, including record GGR, and rebounds in UK and Europe following their market reopenings. The foundation for this success is built on our strategy of having the best talent and enhancing our existing talent with executives like Rich Schneider, who will help champion our vision and drive collaboration across our businesses. This strategy is already paying huge dividends. There's no better proof point of the enormous progress we're making than what we saw this past quarter in gaming operations. Total North America gaming ops revenue exceeded 2019 levels with an improved install base mix as we benefited from the Cascada cabinets and higher average daily revenue. Our North American premium install base grew for the fourth consecutive quarter and is also now above 2019 levels. The success of Cascada continues to build, with great games like Coin Combo, Ultimate Firelink, and Monopoly MoneyGraph. Cascada has reached over 1,000 active units in our gaming operations install base in less than half the time of our most successful cabinet in recent history, the J43. Cascada is already in nearly 50% of our customer base. And on the back of the successful launch of Cascada in late Q2, we launched the mural cabinet with games like Willy Wonka, Dreamer of Dreams, and 88 Fortunes, Emperor's Coins. With our three-year plan, we had a strong pipeline of cabinet launches scheduled throughout 2022 and 2023. And on top of this, North American sales accelerated with improved capital cycles in the U.S. market and our new products like Cascada. enabling us to sell over 3,200 units and grow our Class III ship share meaningfully in the second quarter. This success is carrying over to the Australian market, where we are seeing early momentum underpinned by an improved product portfolio with the Kraken Unleashed family, which is our best-performing franchise since 88 fortunes. Turning to our systems business, we have embarked on a modernization program to enhance the success of our cross-platform strategy. and provide a seamless player experience. In our tables business, we're continuing to focus on innovative products, seeing success in growing our vault offering, which is a subscription-based bundled service, enabling our customers access to unlimited world-class table game content. Gaming is a key part of our new organization and strategy going forward, and its demonstrated success this quarter is confirmation of the great opportunity that lies ahead for this business. and its ability to drive shareholder value. Moving to lottery, the team delivered another record quarter of revenue in A.E. Vedat, along with strong sequential growth, fueled by record instant retail game sales in the U.S. and a number of markets globally, strong draw games performance, and continued momentum in iLottery. The instant lottery business continued its strong run, with US calendar year-to-date instant game sales up 21% over last year, and up 30% versus 2019. Internationally, our Italy instant product JV achieved record performance, up over 20% year-to-date versus last year, which was the previous best year-to-date sales ever. Our lottery business continues to be the market leader, And importantly, we have preeminent market positions and long-term client relationships, with our largest customers having been with us for more than 30 years on average. We've been able to build on our success and accelerate our growth with our unique technology and IP, enabling us to provide unparalleled products and services that are revolutionizing the way lottery products are sold globally across retail and digital. This leadership position was strengthened with a number of key gains in the quarter. First, we were announced the winner of both the instant gains and lottery systems contract for Pennsylvania. This is a huge win. They are one of the top performing lotteries globally, and we couldn't be more excited to continue to partner with them for the next 10 years, as we've done for nearly 50 years. Second, we extended our New Hampshire lottery partnership for six more years. and importantly, upgraded them to a Scientific Games Enhanced Partnership, which brings our U.S. SGEP partners to 14 and our global partnerships to over 20. In addition, we secured three European instant contracts in the countries of Bosnia, Denmark, and Georgia. In iLottery, we continue to be a leader and innovator as partner to 21 iLotteries globally. A great example of this is our Pennsylvania iLottery program. which continues to evolve and thrive, hitting over $2 billion in Q2 in total wagering since inception. The fastest iLottery program to reach that milestone. We went live with a new iLottery program in Germany for Lotto Rheinland Fall, launching digital instant games with a shared prize pool, creating a great cross-platform experience with our retail and instant games. With the U.S. iLottery market estimated to grow fourfold to 11 billion by 2025, our iLottery business has many years of high growth ahead. During the pandemic, over 20 million new players in the U.S. tried instant scratch games for the first time. And with the average instant selling price climbing to all-time highs, more consumers are playing instant lottery than ever before, and they're spending more each time they play. With Lottery's long-term customer relationships, its strong recurring cash flows, a demonstrated resilience in downed markets, and with multiple growth drivers ahead, Lottery is a truly unique business, poised to deliver outsized returns for many years to come. Now turning to SidePlay. On the back of a strong Q1, SidePlay delivered sequential growth in the second quarter on both the top and bottom lines. with the second highest quarterly revenue ever, trailing only the COVID-impacted Q2 2020. SidePlay continues to execute extremely well in its social casino business, hitting another record performance for Goldfish and launching a new version of QuickHits, while continuing to improve payer metrics. SidePlay's payer focus and live ops strategy, powered by the SidePlay engine, enabled us to achieve record ARPDAU of 72 cents and record payer conversion of 8.5%, the sixth quarter in a row of increasing payer conversion. And importantly, monthly paying users and average monthly revenue per user remain well above pre-COVID levels. SidePlay is accelerating its evolution, moving aggressively to expand in the $20 billion casual genre with the launch of Solitaire Pets Adventure, and the development of a new casual game, Project X. With the acquisition of Kukoi Games, Project X will have a full team with years of casual game development experience driving its expected launch in the latter part of 2022. Switching to our iGaming and sports betting businesses, our strong momentum continued as we delivered another record quarter of digital revenue in A.E. Bada, while enhancing our capabilities and scaling our offerings further differentiating us from the competition. iGaming's record quarter was driven by the strong performance of our original content offering, record US GGR, the successful launch in Michigan, and a growing share of the US market. In the second quarter, we grew our US revenue 106% year-over-year, while growing our US share to 25% in the states we are live. A key differentiator is the breadth and quality of our content offering, providing our partners with over 3,000 titles and an unparalleled level of high-quality must-have content. The integration of our iGaming platform with the market leaders increasingly makes us an essential partner for both operators and content studios. Our recent deal with Playtech is a great example. In terms of must-have content, Players have an affinity for land-based franchises they know and love, and we have an unparalleled offering, led by our original land-based franchises, including games like 8-8 Fortunes, the number one game in the U.S., Rainbow Riches, which is a standout in the U.K. market, and our Monopoly-themed games, which drive performance globally. To underscore this point, we recently launched Gingy Bougie in Michigan, and it has been our most successful game launch since our initial entrance in the market. In fact, our original games generated close to 40% of our GGR in the US in the second quarter. The demand for great iGaming content is growing, and we are expanding our studio capacity to meet this demand. We recently acquired Lightning Box, which is a top performance studio in the US market, and just launched a new iGaming studio in Las Vegas. which will be focused on developing games from our land-based franchises. And we see continued opportunities to scale with the recent launches of our iGaming platform in West Virginia and in Latin America. In Pennsylvania, with the recent integration with Bandool and with more integrations planned in the state in the back half of the year, including Barstool and Golden Nugget, and with further opportunities on the horizon in Connecticut and Ontario. With the growing pipeline of opportunities as we integrate with new customers, secure partnerships with more third-party studios, and have a strong roadmap of land-based titles going live in the back half of the year, we feel great about the path forward. Turning to our sports betting business, we have an unparalleled position with tier one operators around the world, with the most advanced sports betting tech platform and content, able to support volumes and uptime that are unrivaled in the industry. Our business continued to build on the strong momentum from Q1 with record second quarter results as we grew our U.S. revenue by 205%, and we powered over 100 million bets at the European Soccer Championships. We continued to rapidly scale our U.S. footprint, deploying eight sportsbooks in the U.S. in the second quarter. This included deploying sportsbooks with FanDuel in five states and with Wynn in two states. And post-quarter end, We launched three additional sportsbooks with FanDuel in New Jersey, Pennsylvania, and Virginia, all on the same day. And we now power FanDuel across all of their U.S. states. This momentum continues with more than 30 U.S. sportsbook deployments anticipated for the full year 2021. We are also leaning into sports betting content, an adjacency where we see tremendous opportunity for growth and a real differentiation. We recently acquired SportCast and their award-winning BetBuilder product. With SportCast, fans can create their own bets and define the story of a game. We are moving quickly to integrate SportCast with leading operators and are already live in nine U.S. states. Looking ahead, we see continued momentum at sports with recent legislative progress in the U.S. and with a growing pipeline of opportunities around the world. We have over 40 opportunities globally that we're pursuing. with deals advancing in Africa and South America as we look to expand our footprint in these fast-growing territories. So before I turn it over to Mike, I want to reinforce that we are uniquely positioned with a number of significant catalysts. We are currently seeing continued momentum in our businesses, and over the coming years, we see meaningful growth on both our top and bottom lines. One thing that has been consistently reinforced over the past year is that people love to play games, and we will be clear beneficiaries. And now, Mike will speak to the financial results.