Brightstar Lottery PLC

Thank you, and thank you all for joining us on IGT's third quarter 2020 conference call. Once again, we are presenting the results from multiple locations, so please bear with us if we encounter any technical difficulties. Participating on today's call are Marco Sala, our Chief Executive Officer, and Max Chiara, our Chief Financial Officer. After their remarks, we'll open the call 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 comparable GAAP measures. With that, I will turn the call over to Marco Sala.

Thank you, Jim, and thank you all for joining us today. I hope you and your loved ones are keeping safe and well. Our third quarter revenue profit and cash flow demonstrated the extraordinary resilience of our business under the unique circumstances that COVID-19 has brought upon our industry and the world in general. You can clearly see in our results the value that comes from offering customers around the world a diverse portfolio of gaming solutions. For example, Our global lottery segment achieved the strongest same-source sales growth and adjusted EBITDA in seven quarters, led by considerable momentum in North America. Global digital and betting revenue, which we now report on an ongoing basis, was up 41%, including an over 70% increase from our B2B account. The emerging areas of opportunity are particularly relevant for IGT in the current context. The results also reflect the diligent operational management of the IGT team. We identified $500 million in temporary cost savings this year to mitigate the impact of the pandemic. With $375 million achieved by the end of Q3, we are firmly on track to meet our objective. The stronger rebound in activity combined with the cost-saving drove a robust cash flow, including nearly $400 million in free cash flow since the beginning of the year. I would like to acknowledge the incredible determination of the IGT team around the globe, who continue to go above and beyond for our customers, our shareholders, and each other in these unprecedented times. Since the onset of the pandemic, we are proving our ability to be very nimble in driving operational leverage, and we remain committed to doing so. IGT is well positioned to benefit from a global recovery, as we focus on bringing the richest player experience and compelling solutions to market while adhering to strict capital allocation disciplines. This is the first time we report under our new organizational structure with the two main operating segments, global lottery and global gaming, supported by a streamlined corporate support function. The simplified structure enhances IGT's growth potential by increasing effectiveness and competitiveness and leveraging economy and scale. It will also improve your understanding of our strategy, performance, and intrinsic value. Importantly, our new organization provides a better insight into the unique attributes of our global lottery business. Lottery has consistently provided stability to IGTs quarterly revenue and profit. In fact, Lottery demonstrated substantial resilience in contribution throughout the pandemic. As I mentioned, third quarter same-store sales growth and EBITDA were the best in seven quarters. Lottery tends to have higher fixed costs than gaming, which is why you see the very high profit flow through of strong same-store sales growth in the third quarter. As expected, the gaming segment was more affected by the pandemic, but the third quarter's swift sequential improvement in revenue and profit confirms strong player interest in slots as casino and gaming goals reopened. Moving on to specific segment highlights from the third quarter, let us begin with lottery. Global same-store sales increased an impressive 9% in the third quarter. Performance in North America was especially good, with same-store sales growing at a high teens rate, fueled by double-digit increases for both instant and pro-based games. While to some extent lotteries may have benefited from a lack of other gaming and leisure alternatives, player interest remained robust as other entertainment options became available again. According to our research, players are enjoying the games and many expect to continue playing lottery at higher levels than before COVID. Italy's same-store sales delivered an impressive rebound on strong player demand. The small decline in same-store sales is largely due to the impact of social distancing measures on the ten-and-lotto game. More recently, ten-and-lotto wagers started benefiting from the launch of a new game called Extra. The global lottery market has always enjoyed a steady growth profile. Over the next five years, we expect sales to increase at a low to mid-single-digit rate. Our current performance is stronger and certainly supports this view. This is because it is a supply-driven business, and there are many drivers supporting growth. We focus on optimizing game portfolios in each jurisdiction by introducing new games, layering in higher-priced games, and improving price structures. On the distribution side, we look to increase the retailer footprint and provide incremental access points, such as self-service vending machines and in-line purchasing. iLottery is another area of opportunity. Global iLottery sales nearly doubled in the third quarter, with large increases across all genres. We strengthened our industry leadership with recent new contracts awarded to us, including a seven-year facilities management contract with Poland's National Lottery, in addition to a new seven-year contract with the Nebraska Lottery. We also secured a two-year extension with the New York Lottery, one of the world's biggest and most successful lotteries, and the largest in the US. Moving on to gaming, where encouraging players' demand trends combined with IGT's strong portfolio on games solutions helped drive sharp sequential improvement in Q3 revenue and profit. Over 70% of our premium North America install base is currently active. As I noted in August, productivity of IGT's active wide area progressive has been strong, with ease more than 20% above prior year levels. We are closely monitoring the impact of recent COVID restrictions imposed in certain parts of the world. In Italy, dedicated gaming halls and sports betting shops have been closed since October 25th and will not reopen until at least December 3rd. We appreciate that we are still in the midst of the pandemic, and there is a possibility of additional casino closures. There are a few product portfolio highlights worth noting. IGT won three awards, the most of any gaming supplier, as part of Casino Journal's Top 20 Most Innovative Gaming Technology Awards. Our X-Breaker three-slot game, Peak Bartop Cabinet, and Play Sports Bank and Play Sports Pod were all winners. We are seeing the strong momentum for our electronic table games, a new area of focus for us. We just secured a greatly expanded footprint for our Dynasty ETG at the Anchor Boston Harbor. And there is a lot of interest in our new Peak ETG cabinet coming out of G2E. We are also gaining traction with our cashless gaming solutions, which are designed to increase casino liquidity, safety, operational efficiencies, while delivering more compelling and convenient experiences for players. IGP has always been a leader in cashless technology, being the architect of ticket-in and ticket-out technology. We first showed our cashless technology for casino customers four years ago and have won many awards for it since then. We took a decision a couple of years ago to integrate our existing IGP payments solution that was already used in our lottery and digital activities into Advantage, our casino management system. This integration allows players the ability to fund their wagering accounts or digital wallets directly from external funding sources. In fact, IGT is the only casino management system provider that has a fully integrated cashless solution that incorporates external funding capabilities. It is also important to note that IGT has a very strong IP portfolio in this area. Today in the U.S. alone, IGT has one casino cashless solution that is live, one in a Nevada field trial, and four others under contract and planned to commence in the first half of the year. This activity confirms our status as the leading system cashless provider in the industry. Our resort wallet cashless solution recently went live at a Result World testing, marking the introduction of cashless gaming in the state of New York. Earlier this year, IGT deployed a custom cashless solution for Svenska Spells VLTs, which has driven an uptick in the new player registration, mostly among younger demographics. Cashless activity is already driving nearly 20% of Svenska's spends revenue only four months after launch. Let's transition to our digital embedding activities. We had a global revenue of over 100 million, was up 41% in the third quarter. We are making the scale of this business clearer now by disclosing the digital embedding revenue inclusive of high lottery in our press release. A little over half of our revenue comes from Italy B2C activity, with the remainder from our B2B activities. B2B revenues was up over 70% in the quarter, led by growth in North America, which accounts for 80% of our B2B business. iGaming represents about 60% of B2B digital and betting revenue and is a fast-growing business. There is no question players are eager for access to digital wagering and in the U.S. is the most important emerging market opportunity. New Jersey and Pennsylvania are the largest U.S. iGaming jurisdictions where we have a combined 25-30% share of market. We expect to have similar market share in new jurisdictions that regulate iGaming in the future. Regarding sports betting, IGT is powering over 40 U.S. sportsbooks across 15 states. During the quarter, we expanded our B2B sports betting prominence on many directions. We have grown our offer for the U.S. sports betting market with the formation of our own full-service trading team based in Las Vegas. This important addition enhances the appeal of IGT's PlaySport offering, enabling us to deliver an all-in-one solution for operators seeking a single sports betting provider. We signed a long-term sports betting technology agreement with Boyd Gaming for their mobile and retail sports book throughout Nevada, building on our existing partnership in Pennsylvania, Ohio, Indiana, and Mississippi. In other significant endorsement, IGT was selected as the first B2B sports betting platform provider in the U.S. to bring official NBA data and logos to regional casinos and sportsbooks. It is worth noting that these high growth B2B digital embedded businesses have margins that are accretive to our existing portfolio. Those margins should become even stronger with more scale in the business. I'm very pleased with what we achieved in Q3. The diversity of our business has provided extraordinary resilience throughout the pandemic. We have also demonstrated that we can be agile with cost and capital decisions while still making good progress on emerging new businesses. The simplified organization we put in place enabled us to focus on our core competencies and to identify opportunities to rationalize costs. So far, we have identified over 200 million in structural savings over the next two years, with over 80% of that benefiting the global gaming segment. We continue to work on additional opportunities as we create a leaner, stronger IGP. With that, I will turn the call over to Max.

Thank you, Marco, and hello to everyone on the call today. Before reviewing our three-quarter results, I'd like to spend a few minutes on the recent change in our organizational structure. Marco discussed the benefits we expect from the new organization, and I want to show you how it translates into our numbers. On the next few slides, we have laid out the changes to our financial statements based on 2019 actual results, and we also included recast historical financial data, KPIs, and reconciliations of known gap measures in the appendix to this presentation. You will also find the RECAS data available in both presentations and spreadsheet form on our investor relations website. The mapping on slide 13 indicates how we have moved each revenue category from our prior four business segments to the two global divisions under the new structure. Slide 14 shows how full year 2019 revenue, operating income, and adjusted EBITDA look under the old and the new organizations. You will be happy to see we have added adjusted EBITDA by segment, which represents a new layer of disclosures. This is intended to provide greater visibility into the performance and intrinsic value of each of our businesses. The reorganization also presented an opportunity to revisit our cost allocation methodology and align it with market best practices. On slide 15, you can see that we are now allocating a larger portion of corporate support expenses to the two operating segments, increasing the percentage from about 50% to around 75%. Support expenses that exclusively benefit one of the segments are directly assigned to that segment, while the remainder is generally allocated based on the segment's respective revenue contribution. Moving to slide 17, our third quarter results clearly demonstrate the remarkable resilience of our business portfolio. and a sharp sequential recovery from the acute onset of the pandemic in the second quarter. Year-over-year comparisons are tougher as they are still impacted by actions taken by public authorities across all our markets to slow the spread of the virus. We delivered consolidated revenue of $982 million in the third quarter. Global lottery revenue exceeded the Q3 2019 pre-COVID level thanks to solid growth in same-store sales. Global gaming revenue was impacted by COVID restrictions. That was partially mitigated by strong growth in digital embedding. In the first nine months, we generated $2.6 billion in revenue, with nearly 40% realized in the third quarter. We delivered operating income and adjusted EBITDA of $129 million and $354 million, respectively, in the third quarter. This was achieved thanks to high-profit flow-through in lottery and disciplined cost savings across the board, while continuing casino closures and social distancing protocols impacted the gaming contributions. The net result is a stronger EBITDA margin compared to the prior year. Now let's turn to our operating segments, starting with global lottery on slide 18, where revenue of $570 million was up 3%, marking a rebound to pre-COVID levels. Global lottery revenue, operating income, and adjusted EBITDA were all at or near the highest level achieved in seven quarters. Historically, same-store revenue growth outside of Italy and wager growth in Italy were the KPIs used for our lottery business. Beginning this quarter, we are transitioning to same-store sales as we believe this is a better indication of player demand. you will find same-store sales data for the prior periods in the recast slide section of our presentation. While the impact of COVID still varies greatly by geography on a global basis, service revenue benefited from an 8.7% increase in same-store sales. Double-digit growth in instant tickets and draw games in North America was driven by the popularity of of new games and higher price point tickets across multiple states, including Michigan, Texas, and Indiana. Same-store sales in Italy declined 3.5% during the quarter. Scratch and Win nearly recovered to the prior year level, while Lotto was down 5.4%, as 10 eLotto play levels were impacted by social distancing protocols. Sales in Latin America were down high single digits and remained volatile as COVID-19 affected that region later, and several games were closed during the quarter. Same-store sales in EMEA declined 3.3%, with the United Kingdom and Czech Republic sales a bit stronger than the overall region. LMA revenue was impacted by lower jackpot activity. Significant terminal and printing sales in the prior year are reflected in the year-over-year decline in product sales revenue. Operating income of $196 million was up 22% fueled by high-profit flow-through from increased revenue and the benefit of cost-saving actions. Adjusted EBITDA rose to $309 million compared to $270 million in the prior year period, up 14% year-on-year. The results of the global gaming segment on slide 19 clearly reflect the ongoing impact of casino closures and social distancing protocols. Revenue of $412 million was up $234 million sequentially and adjusted EBITDA was $90 million higher, showing the extent of the rebound from second quarter levels. We had solid growth in digital and betting revenue with a $30 million increase over the prior year period as sporting events returned and momentum continued in digital gaming. Sequentially, the install base remained relatively stable. Turning to product sales, ASP were stable year over year, and we sold nearly 3,700 units globally in the third quarter. Replacement units were nearly double the Q2 level. Operating loss was $8 million in the quarter, with $58 million in positive adjusted EBITDA. These results include $36 million of higher bed debt and inventory obsolescence charges, primarily reflecting the pandemic's impact on certain markets. An update on our cost saving initiatives is on slide 20. We are on track to achieve the targeted $500 million in temporary cash cost savings and capital spend avoidance for 2020 to weather the storm caused by the pandemic. This includes a reduction in expenses of about $360 million, and the remaining $140 million is related to CapEx. The new Global Product Organization provides us an opportunity to optimize our portion of the value chain across businesses and regions. We expect our initial work to yield over $200 million in structural cost savings CAPEX and OPEX related over the next two years relative to the 2019 run rate. We expect to realize most of these savings in 2021. Over 80% of the savings will come from the global gaming segment as we focus on operational excellence initiatives in areas like supply chain, manufacturing, and logistics. There is also opportunity to reduce the complexity of our product and geographic mix that will benefit product development and capital expenditures in future years. Other margin improvement initiatives include opportunities with our real estate footprint, workforce migration, and discipline on discretionary cost and structural reductions in SG&A. On slide 21, we have summarized year-to-date cash flow and net debt. In the first nine months of the year, we achieved $610 million in cash from operations and $384 million in positive free cash flow. We are pleased to report that we are converting a higher percentage of adjusted EBITDA to operating cash flow with a 73% conversion rate in the first nine months of the year compared to 62% in the comparable prior year period. In the third quarter, we delivered $220 million in positive free cash flow compared to $95 million in the prior year period. The strong free cash flow generation was driven partly by solid financial results and partly by a beneficial shift in timing from Q4 of certain working capital items, Italy gaming taxes and CAPEX. Our strong cash flow generation has allowed us to reduce net debt by over $300 million at constant currency on a year-to-date basis and $140 million as reported. Turning to slide 22, we improved our liquidity during the quarter to approximately $2.6 billion, comprised of about $950 million in unrestricted cash and $1.6 billion in additional borrowing capacity under our credit facilities. Thanks to solid cash flow generation, we repaid borrowings on our revolving credit facilities made at the beginning of the pandemic, reestablishing full capacity under those facilities including as recently as last week. In addition, let me remind you that earlier in the year, we successfully renegotiated our covenant package through the second quarter of 2021. Cash regeneration and debt reduction is our top priority, and we are aiming to restore our credit ratings to pre-pandemic levels. We believe the resiliency of our business, the strong cash regeneration, and the solid liquidity position demonstrated in the third quarter, if maintained, should help us achieve this objective in the not too distant future. Lastly, turning to slide 23, I would like to summarize the key points of today's presentation. The resilience of our business was clearly evident in our third quarter results. First, Global Lottery achieved remarkable growth, delivering the highest level of same-store sales and adjusted EBITDA in seven quarters. Second, digital and betting revenue is increasing rapidly, and we are seeing positive sequential improvements the global gaming segment. Third, strong cash flow generation allowed us to increase our liquidity and reduce debt, bolstering our financial flexibility. We are on track to meet our target of $500 million in temporary cost savings and cash avoidance actions for 2020. Further, we have identified over $200 million in structural cost savings versus the 2019 run rate to be achieved over the next two years. we expect to realize most of those savings in 2021. With a continued focus on disciplined capital allocation, we are working toward an improved margin profile for the business. While there is still a lot of uncertainty surrounding the pace of recovery around the world, we're managing through this global pandemic and have demonstrated our ability to adapt to these challenges and deliver solid results. Now, we would like to open the line for your questions. Operator?