Scientific Games Corp

Good morning. Welcome to the Scientific Games 2021 First Quarter Investor Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. There will be an opportunity for questions later. Please note this event is being recorded. I would now like to turn the conference over to Jim Bombasi, Senior Vice President of Investor Relations for Scientific Games. Mr. Bombasi, you may begin.

Thank you, Operator, and good morning, everyone. During today's call, we will discuss our first quarter 2021 results in operating performance, followed by a question and answer period. With me this morning are Barry Cottle and Mike Eklund. Our call today will contain statements that include forward-looking statements under the Private Security Litigation Reform Act of 1995. These statements involve certain risks and uncertainties that can 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 this 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 in the investor section on our website. As a reminder, this conference call is being recorded. A replay of this webcast and accompanying materials will be archived in the investor section on 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 are extremely pleased with our progress this quarter, delivering another quarter of strong execution, which enabled us to return to year-over-year growth on both the top and bottom line. We were able to achieve this despite continued restrictions and closures, particularly in UK and Europe, building on the strong progress we made in 2020. These results speak to the strength of our portfolio of businesses our execution, and focus on delivering compelling content and solutions, all enabled by best-in-class technology and talent, and in particular recognition to our talented team with their continued passion and dedication. I could not be more proud of what they've achieved thus far, and I'm excited about the foundation we are building for our success going forward. I also want to share with you the great progress we're making on the strategic review with our board. But first, let me turn to the quarterly results. In the quarter, we are very pleased to deliver strong financial results, as well as key operational progress across our portfolio businesses, demonstrated by double-digit growth at lottery, digital, and side play, as well as continued gaming momentum in North America, enabling us to grow a very strong 35% in A-EBITDA year over year. We continue to be extremely disciplined in managing our balance sheet with an eye on enhancing cash flow, growing free cash flow to 80 million in the quarter and enabling us to pay down 250 million in debt, delivering on our ongoing commitment to deliver. Now turning to the businesses. In gaming, we're seeing great progress. And while continued restrictions and closures, particularly internationally, impacted the business in Q1, we are starting to see a strong sense of recovery in the U.S. market. Given the success and cadence of our new product roadmap, we see gaming poised for growth in second quarter, both year over year and sequentially. In particular, we're seeing strong success from our strategy of bringing in great talent and executing against our new global R&D and product roadmap, focusing on the largest profit pools to capture share. We're also growing and expanding our proven game franchises and our marquee licensed brands. In our North American gaming operations with the success of Cascada, the first global cabinet launched under the new strategy and games like Coin Combo and Monopoly Money Grab, we have grown our North American premium game ops install base for the third consecutive quarter. Cascada is performing at 2.3 times the house average and impressively, It is on pace to achieve 1,000 units in half the time of our most successful cabinet in recent history, the J43. And this is despite the backdrop of continued restrictions and closures. And in early Q3, we will launch the mural cabinet with games like Willy Wonka Dreamer of Dreams and 8-8 Fortune's Emperor's Coins with premier casinos in the major U.S. markets. 8-8 Fortunes is a great example of one of many scientific games franchises where we have leveraged its success across all our markets. It is a top-performing game in land-based, one of the top games on our iGaming platform, including ranking number one in the U.S., a consistent performer for our instant lottery business, and it is one of Sideplay's core social casino games. Now turning to the North American for sale market. We grew our ship share two percentage points to 25% last year. Dancing Drums Prosperity is performing great out of the gate at 1.9 times the house average on Eilers. And in our internal data, we're seeing performance as high as 2.7 times, which should lead us to continued success in this market segment. In Australia, a key profit pool outside of North America, we're seeing positive momentum in our ship share off the back of successful launch of Kraken Unleashed. which is performing at 1.5 times the house average. Another sign of our real momentum is our competitive position in Eilish rankings. We have the number one share of top new games in both the WAP category and the for sale category. In fact, in the new games WAP category, we have four of the top five ranked games and all three titles launched on Cascada are registering in Eiler's top new premium leased games list. This continued progress is a validation of the broader strategy and operating structure that our new gaming team has implemented. Moving to lottery. We're off to a very strong start to 2021 with exceptional top and bottom line results, driven by record industry growth, elevated jackpot activity, and our market-leading portfolio of products and services. The instant lottery business shined this quarter, and we continue to be the clear market leader with our unique solutions, helping to drive record performance for our customers. In fact, 43 of 45 U.S. instant game lotteries experienced double-digit sales growth in the quarter, and we are the primary provider to nine of the top 10. We have a unique proposition for our customers with our innovative retail and digital products. Lotteries with our innovative solutions, including Scientific Games Enhanced Partnership, or SGEP, continue to lead the industry in performance, both in the U.S. and at our top international accounts, including Italy and the U.K. Our retail solutions continue to lead the lottery industry's modernization with checkout line, cashless, and self-service solutions. This quarter, we signed a deal to provide SciQ in-lane at Kroger Stores in Kentucky. It's a game changer for expanding instant ticket distribution into grocery store checkout lanes, allowing shoppers to add games to their grocery purchase in one convenient transaction. And more rollouts are planned with Kroger and other major grocery retailers in other states. We've also been strengthening our global pipeline. In Q1 alone, we signed and extended more than 30 years of instant lottery contracts. including a new contract in Portugal, which is a top 20 market globally. In terms of our digital and iLottery business, our flagship Pennsylvania program saw iLottery sales grow 50% year over year. And iLottery is not just a U.S. story. We provide iLottery to 21 customers globally with new iLottery expansions in Canada and Hungary in Q1. With at least 10 additional U.S. states anticipated to authorize iLottery over the next couple years, we are very well positioned to benefit. Now turning to SidePlay. We are very excited about both the strong performance in the quarter and the long-term outlook as we invest for the future by expanding in the $20 billion-plus casual game market with the soft launch of Solitaire Pets Adventure in April. In the quarter, SidePlay delivered strong revenue and A EBITDA growth of 28% and 32% respectively. Impressively, we were able to build on the momentum from last year, growing both year-over-year and sequentially. The strength was broad-based, with growth across the game portfolio as we continued to outperform the market. The basis for this strength continues to be our payer focus and live-op strategy, powered by our SidePlay engine. we achieved another record with payer conversion hitting 8.1%, while both monthly paying users and average monthly revenue per user continue to be well above pre-COVID levels. With the strength of our core social casino games and growing presence in the casual gaming space, we are very optimistic about the evolution of SidePlay and its path going forward. Strong momentum continues in both our iGaming and sports businesses, with a record quarter for digital revenue and AEDA. We have the largest high-quality offerings of must-have iGaming content and one of the most reliable and flexible set of tech solutions in the industry, powering leading Tier 1 operators around the world for both iGaming and sports betting. In iGaming, we saw accelerating growth in the quarter, driven by 226% growth year-over-year in the U.S. This success was driven by our broad content offerings, led by our original land-based franchises, including 8-8 Fortunes, our successful launch in Michigan, and supported by continued strength in the UK and Europe. Our results this quarter clearly demonstrate the strength of our strong franchise offerings, our innovative original content, and our market-leading distribution platform, OGS. We had a leading market share at quarter end of 24% in the three U.S. states where we are live, maintaining our strong share in New Jersey, continuing to grow our share in Pennsylvania, and increasing our share in Michigan in the month of March by 500 basis points to 22%. Our original content, in particular our land-based franchises, play an important role in fueling this success. 8-8 Fortunes is the top-performing game on our iGaming platform in every state in which we operate. In fact, in the U.S., of the top-performing games on our iGaming platform in Q1, our original content accounted for 11 of the top 20 games in Michigan, 12 of the top 20 in New Jersey, and a remarkable 15 of the top 20 in Pennsylvania. the affinity players have for original franchises is not just a US story. Taking a look globally, in 2020, our original land-based franchises generated approximately 30% of the 2.2 billion in total GGR on our iGaming platform and accounted for seven of the top 10 performing titles. While the R&D investment to create these original franchises is largely incurred at our gaming business, we're able to leverage that investment monetizing our franchises across gaming, lottery, social, and our iGaming businesses, enhancing our returns, and engaging players with these franchises wherever they want to play. Looking ahead, we will be launching in West Virginia soon, and we see tremendous opportunity in iGaming as more U.S. states legalize, as we continue to grow our footprint, and as we expand internationally. In our sports betting business, we continue to build on our momentum, driven by 94% revenue growth in the U.S. As a market leader powering premium sports books and fan engagement on a global basis, we are a proven choice for Tier 1 operators. And we're poised to benefit from our continued growth in the total addressable market, both in the U.S. and globally. We are a partner to 24 operators on four continents. with a demonstrated track record of success and unmatched capabilities. On the back of a number of renewal and deal wins in 2020, we deployed four sportsbooks in the U.S. in the quarter and launched in Michigan and Virginia. And post-quarter end, we launched in Indiana, Illinois, and Tennessee, bringing our U.S. total to 24 sportsbooks. We are rolling out our sports betting engine with FanDuel as a part of our recently expanded partnership. We became operational in two states in the quarter and another two so far in Q2. We will be rolling out in multiple additional states over the course of 2021. Overall in the US, we're now live in 12 states and have plans to launch in Nevada soon. With recent legislative progress in New York, Maryland, Arizona, and Florida to legalize online sports betting and unprecedented demand for our platform and products outside the U.S., including Canada, Latin America, EMEA, and Asia Pacific, we see tremendous momentum. Our success has been driven by our robust offering, providing customers with the broadest and most flexible set of tech solutions in the industry. Our deep tech staff continues to demonstrate its reliability, performing flawlessly at the biggest sporting events around the globe. And with our proven ability to scale quickly and launch in new markets, we couldn't be more excited about the opportunities ahead. And now, I want to provide some comments on our strategic review. This is an exciting time for scientific gains. Over the past seven months, we've been working hard on a strategic review of our businesses with the help of our board, particularly Jamie O'Dell and Tony Korsanis, who've already successfully led the kind of strategic transformation we are embarking on. I'm pleased to share that this review is nearly complete and has confirmed the value and growth opportunities of each of our businesses. Our vision is to become a content and digital led growth company focused on building great games that define the future of gaming supported by platforms that power the best operators in the world. We will achieve this vision through three core strategic pillars. that will deliver on our promise to unlock value for shareholders and position scientific gains for sustainable growth, portfolio optimization, growth opportunities, and de-levering. In terms of portfolio optimization, our strategic review has confirmed the value of our five market-leading businesses, which have strong momentum and are positioned for significant growth. In gaming, our outstanding new management team has positioned us to come out of the pandemic as a much stronger competitor and gain significant market share. For iGaming, our business is the market-leading content provider and is executing at a high level and benefiting from accelerating industry tailwinds and our strong original content offering. Growth opportunities are high in the U.S. with a long-term TAM estimated to exceed $15 billion. In Lottery, We are the market leader worldwide. Our largest customers have been with us more than 30 years on average, as we have driven increasing value for our customers through innovative systems and products. Lottery delivered outsized results during the pandemic, and again in this quarter. Our content-focused iLottery business has many years of high growth potential ahead, with the U.S. iLottery market estimated to grow fourfold to $11 billion by 2025. Our sports business offers the preeminent platform used to power sports betting around the world, and we are investing to create unique content for our customers. We see strong growth opportunities ahead in the U.S. as more and more states legalize online sports betting. And SidePlay outperformed the market last year and, again, this quarter, building off strong gains from 2020. With SidePlay's social casino business continuing to perform well, It has strong growth opportunities as it expands in the $20 billion casual marketplace and builds out its pipeline of gains. Our best path to delivering significant value is driving a higher mix of both content, which provides differentiation and margin, and digital across the portfolio. We will leverage our key strengths to unlock value. Talented teams across the company creating great games and franchises that engage players wherever they want to play. Market leading businesses that are well positioned to capture growth opportunities from emerging trends. Innovative technologies that enhance the player experience, power great platforms, and create value for our customers. Our second strategic pillar is to capitalize on our largest growth opportunities. We will become a sustainable growth company by making smart, organic, and inorganic investments in our portfolio, building on key growth opportunities, including gaming's winning new content and cabinets, iGaming's content, iLottery expansion in the U.S., the sports platform, and SidePlay's expansion into the booming casual market. We will make that happen across the portfolio by leaning in on content, which provides differentiation and margins, and high growth markets such as digital with large and growing TAMs. We recognize the incredible opportunity the digital transition in our industry presents, and we are seizing this opportunity. In fact, we are targeting our digital businesses to be comparable in size to our land-based gaming businesses within three years. Lastly, we remain committed to de-levering. Within two years, we expect to significantly reduce our leverage ratio to be in line with our public company peers, substantially enhancing our ability to invest in growth opportunities that drive value for our shareholders. So, as I began my remarks, I want to reiterate, this is an exciting time for Scientific Games. I've never been more optimistic and confident in our future. We plan to announce specific actions and milestones around our three strategic pillars, portfolio optimization, growth opportunities, and delevering by our second quarter earnings call. We expect that these actions will be executed over the next year, and we are confident you will share our excitement as you hear more about our plans. And now, let me turn the call over to Mike to speak to the financial results.