Brightstar Lottery PLC

Ladies and gentlemen, thank you for standing by, and welcome to the IGT First Quarter 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you would need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your first speaker today, Jim Hurley, Senior Vice President, Investor Relations. Thank you. Please go ahead, sir.

Thank you, and thank you all for joining us on IGT's first quarter 2020 conference call. Given the exceptional circumstances created by the COVID-19 outbreak, we are presenting the results from multiple locations, so please bear with us if we encounter any technical difficulties. On today's call are Marco Sala, our Chief Executive Officer, and Max Chiara, our newly appointed Chief Financial Officer. After introductory remarks from Marco and Max, we will open the call up for your questions. During today's call, we will be making some forward-looking statements within the meaning of federal securities laws. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our latest earnings release and in our SEC filings. During this call, we may discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures including reconciliations of these measures with the comparable gap measures. Now I'll turn the call over to Marco Sala.

Thank you, Jim, and good day to everyone on the call. First, let me say that I hope you and your loved ones are staying safe and keeping healthy in these uncertain times. My heart goes out to those who are dealing with COVID-19, I'm grateful for the frontline workers that are helping us all through this pandemic and for the IGT team who have rallied tremendously over the last several weeks. Now, let me turn to the first quarter. Our focus shifted radically as COVID-19 turned into a global pandemic late in the period. Our business was off to a good start in January and February. building on the momentum we had coming out of 2019. Lottery same-store revenues for instant tickets and draw games were up mid-single digits. Replacement unit shipments of gaming machines increased over 30%, and installed base yields were strong. But since late February, when the virus began to have a serious impact on Italy, The safety and well-being of our people, our customers, and communities all over the world became our top priority. The first thing we did was create a cross-functional global COVID-19 crisis management team comprised of senior leaders throughout the organization. Groups with dedicated work streams meet daily to ensure we are executing on our priorities Robust business continuity plans were implemented quickly, and we were prepared as the virus spread. In fact, we proactively increased engagement with customers to help them navigate the crisis. We also took swift actions on our cost structure and cash preservation, while being careful not to endanger structural elements supporting long-term value creation. Combined with the resilient nature of many aspects of our business and the innovative solutions we have in our portfolio, these actions put us in a good position for the recovery. IGT's business is relatively evenly split between lottery and gaming and largely concentrated in the United States and Italy, which together account for 80% of our annual revenue. Most jurisdictions began implementing strict containment measures in March, and many of those measures intensified in April. Italy has had some of the most restrictive regulations given the severity of the crisis here. While there is still a good deal of uncertainty around the trajectory of the pandemic, including the potential for a second wave, we see three phases impacting activities in our main markets. We expect customer and players' mindsets and behavior to be different in each phase. Today, we are mostly still in phase one, handling the outbreak and health emergency. Facing stay-at-home mandates and social distancing measures, we are managing the business with many channels in lockdown or operating with stringent restrictions. Phase two, a period of gradual reopening, is just beginning in some jurisdictions. Social distancing protocols remain largely in place. For us, this phase will require a careful scaling up of costs to accommodate a growing demand. Finally, we see a recovery phase, a new normal, requiring agility on our part. But we also see plenty of opportunity at that stage for us to leverage our investments in innovative system solutions and digital capabilities. Our business continuity plans are grounded in clear priorities along three main dimensions. People, cost, and liquidity. Let's start with people. Protecting the health and safety of our people, our customers, and the communities we operate in has guided all our actions. In mid-March, we implemented work-from-home standards globally. Today, 90% of our staff is working remotely. For those who cannot work from home, we implemented stringent policies and protocols to help keep them safe. Our business contingency plan has enabled us to maintain high customer service levels around the world. In a period where many are stepping back, IGT is stepping up for our customers, helping them contend with the current environment and prepare for their business to reopen. Moving on to costs, where our efforts are focused on better aligning our expenses with lower revenues. Our actions are broad in scope. The most difficult have been decisions related to employees. We are not making this lightly. Our approach is grounded in finding equitable ways to share the burden of the current environment, with the goal of bringing things as close to normal as soon as possible. Today, we have introduced a temporary base salary reduction ranging from 10 to 50% across the company, canceled 2020 salary increases and short-term incentive compensation programs. We instituted a hiring freeze and made a difficult decision to implement short-term furlough programs for employee groups that are not primarily involved in operations and customer support. We continue to pay for health benefits for all furloughed employees and look forward to welcoming them back to work soon. We also made drastic cuts in discretionary spending and deferred all non-essential capital expenditures. In total, we identified approximately $500 million in cost savings and capital spending avoidance in 2020 to help mitigate the near-term impact of lower revenues. Our execution priorities are now shifting to structural cost reduction initiatives that to maintain the company's fitness as business restarts. Liquidity is our third main area of focus. The entire organization is focused on cash flow generation and cash preservation. With 2.2 billion in liquidity at the end of Q1, we are confident we have sufficient flexibility to weather the pandemic. And we achieved a major milestone regarding our bank facilities last week, securing a period of relief and additional flexibility on our financial covenants. All our actions are focused on providing the flexibility to manage through and be well prepared for operating in these new norms. Now I would like to give you a sense of the current market situation for our main businesses, beginning with gaming. In March, casinos and gaming halls around the world were shut down and most remain closed today. While some jurisdictions are preparing to reopen, we expect the process to be gradual. About 65% of our global gaming revenues come from recurring service revenue, most of which is tied to the productivity of our machines. With casinos closed, we are not earning revenues on those machines. The pandemic is forcing our customers, like us, to focus on cash preservation, reducing operating costs, and cutting capital expenditures. This impacts sales of gaming machines and systems, which accounts for most of the remaining 35% of our global gaming revenue. When casinos do reopen, social distancing rules could involve limiting the number of guests in a location, reducing the number of operational machines, and enhanced cleaning protocols. These safety measures should impact the pace of recovery. Local and tribal casinos account for about 85% of the North American gaming and interactive segment's revenue. We expect these markets to recover quicker than the destination markets like the Las Vegas Strip and Atlantic City. We also must consider the likely impact of a broader macroeconomic slowdown on consumer spending and player behavior. Slot GGR will be an important barometer to monitor business trends across jurisdictions. For lotteries, the situation is different. While the main channels of distribution remained largely open around the world, stay-at-home measures led to lower traffic at the point of sales. As a result, same-store revenue trends vary greatly across jurisdictions. In Italy, the impact has been significant given the severity of the restrictions. During the month of April, the Italian government suspended all games under the lotto license, which represents about half of our Italian lottery wagers. That business is now gradually returning to normal as the games were restored in a phased reopening strategy in early May. As in gaming, we need to consider how the broader macroeconomic backdrop and change in player behaviors might affect lottery wages. Historically, they have been highly resilient to economic cycles. As you can see in the chart here, both Italian and American lottery wages were stable during the global financial crisis. Early indications from jurisdictions that have eased mobility restrictions suggest that lottery trends can bounce back relatively quickly. We are currently seeing in Italy, in Europe, and in most parts of the United States. This brings us to where we are today. The near-term revenue outlook for main activities in our main markets remains depressed, especially for the second quarter of the year, with a gradual recovery expected in the second half. The circles you see on the slide are meant to illustrate a view of overall market activity. They are not meant to represent any kind of revenue or profit guidance. Based on this perspective, we are using a total zero-based cost assessment to identify structural and contingent cost reductions. In addition, we are reprioritizing our capital investment decisions, and the team is focused on disciplined working capital management. Looking to the future, we are withdrawing our previous outlook for the year and due to the uncertainty related to COVID-19. Having said that, we do expect the second quarter to be the most challenging period for revenue, profits and cash flow. Assuming a sustained relaxing of restrictions and no second wave of outbreaks, we expect trends to improve progressively in the second half of the year, with lottery recovering faster than gaming. Our cost initiatives are expected to deliver 500 million in cost reduction or capital spending avoidance versus our original 2020 plan. Our focus is not only on cost. We are approaching how we manage the business differently to be nimbler, leveraging on innovation and flexing our business to adapt to changes in customer and player behaviors. As we all adjust to the new normal, our customers need a partner they can trust and that can support their needs on many dimensions. IGT is that partner. Over the years, we have invested in our digital and systems capabilities, investments that prove particularly well-suited to the current environment. IGT's digital solution extends across lottery, gaming, and sports betting. We offer one of the most comprehensive digital content portfolios in the world with more than 180 teams that serve operators and players in nearly 30 countries. In Italy, we provide a full suite of digital games directly to players across all product verticals. While digital still represents a small portion of total Italy wages, high lottery and interactive casino games wages are increasing over 40% since the coronavirus outbreak. That rate of growth is significantly stronger than the pre-COVID levels. In the rest of the world, we are a B2B provider of digital content and platforms. As in Italy, we have seen a substantial increase in digital wagering on our B2B digital platforms, including triple-digit increases in North America iLottery. I should note that much of this growth is driven by an expanding base of new players. The opportunity extends beyond the digital world. IGT's sophisticated CRM tools and cashless solutions like our intelligent offer and resort wallet applications are likely to become even more essential to land-based casino customers. In fact, our core advantage system already has functionality that notifies the casino when the machine has been vacated and needs cleaning. We are working on additional innovations for the new world we are living in. As challenging as the current environment is, IGT is well positioned to emerge from the crisis a stronger, leaner, and more competitive organization. Our solid balance sheet foundation provides us with significant liquidity and flexibility to manage the impact of the pandemic. The diversity of our businesses across geographies and products is something that provides a high degree of stability and predictability to our results. This is especially true for the Italy segment and our global lottery business. I expect those characteristics to re-emerge in the post-pandemic year. Finally, the team. As I mentioned at the outset, everyone at IGT has done a remarkable job over the last several weeks. and I'm grateful for their dedication. At the management level, many of us have steered this business through difficult times, including the global financial crisis, and have adopted too many changes coming from new regulations, political instability, and changes in player tastes and preferences. we are all extremely motivated and dedicated to executing our action plans to navigate through the crisis. Speaking of the team, I'm very happy to welcome Max Chiara to IGT as our new CFO and member of the Board of Directors. Max has a strong background in corporate finance, operations, and capital markets, as well as a history of building and leading high-performing teams. Six weeks in, under particularly challenging circumstances, he has hit the ground running and provided two big partners. With that, I will turn the call over to Max.