Brightstar Lottery PLC

Thank you, and good morning, everyone. Thanks for joining us on IGT's fourth quarter and full year 2020 conference call, which is hosted by Mark Osala, our Chief Executive Officer, and Max Chiara, our Chief Financial Officer. After their remarks, we'll open the call for your questions. We are presenting results from multiple locations, so please bear with us if we encounter any technical difficulties. During today's call, we will be making some forward-looking statements within the meaning of the 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 based on a number of factors and uncertainties, including those related to the effects of the COVID-19 pandemic. 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. And now I'll turn the call over to Marco Sala.

Thank you, Jim, and hello to everybody. Thank you. Today we are reporting a strong finish to 2020, supported by excellent Q4 lottery performance, sequential stability for our global gaming, and continued momentum for our fast-growing digital and betting activities. 2020 was a remarkable year in many ways. Like many companies, we were tested. Nevertheless, the dedication and agility of our people and the diversity of our portfolio, combined with disciplined operational management, drove us to achieve solid results. Throughout the pandemic, Lottery proved to be resilient. Global same-store sales were stable for the year. Accelerated North American growth in the second half offset the impact of game closures and restrictions in other markets. Global gaming revenue and profits were impacted by operating restrictions implemented in varying degrees since March of 2020. These constraints drove many customers and regulators to look to digital solutions to meet player demand. The growing acceptance of digital across iGaming, sports betting and iLottery propelled a nearly 50% increase in service revenue for our B2B digital and betting activities in 2020. Market dynamics cause us to think differently about how we manage day-to-day operations. In April, we set an ambitious target to preserve cash with a 500 million program in temporary cost saving and avoidance for the year, and that goal was achieved. The experience enabled us to rethink our cost structure in a way that has opened additional opportunities. In fact, we have already identified programs for over 200 million structural cost reductions. The combination of strong lottery performance and disciplined cost capital management enabled us to deliver 576 million of combined free cash flow for the year. This is among the highest levels of free cash flow generation in the last five years. During this time, we have remained true to our core values. Our commitment to environmental, social, and governance matters remains a priority and was recognized as being among the highest in the gaming industry by Fuzzi Russell and MSCI during the year. And our work in this area continues. I want to acknowledge the tremendous contributions of the IGT team for all we achieved in 2020. Considering what the world was facing a year ago, it was not an easy task. Focusing now on the pandemic, we responded swiftly. We implemented safety and business continuity measures that enabled us to protect our employees while maintaining service standards. As customers looked to us for guidance and support, we emphasized innovative solutions. As I mentioned, we preserve cash through $500 million in temporary cost savings and avoidance. These ads improve our cash position while still maintaining access to abundant liquidity throughout the pandemic. Building on our short-term action, we made some important changes to the business. These initiatives provide us with an improved business profile and financial outlook. To begin, the company was reorganized by product line, establishing global responsibility for lottery and gaming. The simplified structure enhances IGT's growth potential by increasing our competitiveness and leveraging economy of scale. It will also help to improve your understanding of our strategy, performance and intrinsic value. Benefits from the new structure materialize quickly. In a matter of months, we identified over 200 million in structural cost savings. We expect to realize those savings in 2021, an acceleration from the original two-year time frame. Another important change is the announced agreement to sell our Italy B2C gaming machine and sports betting activities for 950 million in cash. The transaction is expected to close in the first half of this year. The sale is compelling. The mix of our business will be better balanced and the representation of lottery as a percent of our overall revenue and profit mix will grow. Our exposure to Italy will be reduced, thereby removing businesses with the highest regulatory volatility and profit erosion over the last few years. As a result, we will have a simplified gaming portfolio concentrated on our core competencies as a B2B provider of land-based gaming, sports betting and digital solutions. The transaction improves our financial profile. It will provide for a stronger revenue and profit growth outlook as well as an improved margin structure for our business. It also reduces capital intensity, as we will be avoiding between 200 and 300 million euros for gaming license renewals over the next few years. This reduced capital intensity, in addition to the substantial cash proceeds, enable us to optimize our capital structure by reducing debt and the average cost of borrowing. Moving on to more specific operational highlights for the year, let's begin with global lottery. Same-store sales were stable in 2020, even with restrictions at certain points of sales. North American trends accelerated in the second half, achieving the strongest annual growth for instant and draw gains in many years. The recovery in Italy is also noteworthy, with positive same-store sales growth in Q4. Strong player demand during the second half translated into record revenue and profit levels for global lottery business in the last two years. This drove a big margin expansion for the year. 2021 is off to a good start. Q1 to date, same-store sales for core instance and draw games are up double digits, reflecting strong momentum in North America and Italy. This is before the added benefit of elevated North American jackpot activity in the period. We are encouraged by a steady growth profile and the outlook for our global lottery segment, which is supported by a remaining average contract term of 6 years. For the global gaming segment, most venues around the world are closed. Those that are open, such as in the US, have some form of operating restrictions in place. With that backdrop, Q4 results were essentially in line with Q3 levels, supported by a stable global install base, and increased replacement unit demand with a resilient average selling price. In the US, player demand is good. This is validated by improving January GGR trends in many local markets, and the strong yield we are seeing on our active units. But operators are still enforcing strict capital and cost controls. This will have an impact on revenue and profits for the global gaming segment in the near term, as it has for most of 2020. We are focused on the way forward, investing in our product offer to build on our leading market position and to bring compelling new solutions to market. Along these lines, our growing family of Peak Cabinets is rolling out and having an impact across the franchise. One area is with our expanded portfolio of multi-level progressive games, including Dragon Lights, Gong Shifakai, and Wheel of Fortune Mystery Link on the Peak 49 land. Another is NVIDIA Poker, where our long-standing market leadership continues to expand with the new Peak bar top. Riga Riches, Xbreaker 3, and Wolfram Gold are among the top-performing 4-6 games. We continue to emphasize safe solutions that provide reduced contact and more cost-effective gaming. Electronic table games are one example as they have the dual benefit of facilitating social distancing while helping to reduce operating costs. We have grown our ATG presence during the pandemic with the launch of the Peak Dynasty Cabinet, which allows for blackjack, roulette and baccarat all to be played on the same terminals. Our growing suite of innovative system solutions is grounded in a digital and mobile-first mindset to drive smarter casino floor management and greater player engagement. Best-of-breed applications, such as our bonusing suite of products and mobile responders, among others, are proven drivers of higher floor productivity and operational efficiencies. Resolve Wallet, which encompasses all our cashless capabilities, recently achieved a major milestone with Nevada regulatory approval. Several deployments are planned for this year. Yesterday, we announced a cross-licensing agreement for patents related to cashless slot machine technology in the U.S. with Scientific Games that has a significant IP in this area. This enables IGT to monetize many years of R&D investment in building a robust IP portfolio in this space. It should also support accelerated industry adoption of cashless. Players are embracing iGaming, sports betting and iLottery offerings, fueling an extraordinary increase in GGRs. IGT's solutions are widely recognized among the most reliable in the context of such rapid growth. This is driving substantial revenue increases for us, including nearly 50% growth in digital embedding service revenue in 2020, mostly led by expanding player base in existing markets. Increased regulation, especially in the U.S., will be an important driver of continued growth for our digital and betting activities. According to H2 Gambling Capital, the number of U.S. jurisdictions with a legal high gaming, sports betting, and high lottery is forecasted to expand a lot in the next few years. IGT expects to remain a market-leading B2B provider of technology and other solutions in all three main verticals. We are confident that our gaming content library will continue to support a 20-30% share of the North America iGaming market. In Michigan, the newest iGaming jurisdiction, we are already live with 7 customers. We intend to maintain the broadest land-based presence of any B2B sport betting platform in the U.S., Our ability to do so is enhanced by the addition of a proprietary trading service team last year, enabling us to offer turnkey sports betting solutions to customers of any size. We are well positioned for high lottery expansion given our long-standing relationships with the most successful lotteries around the world. While much of the recent interest in iLottery has been in the US, we see a compelling opportunity to grow iLottery in Italy and other international markets as well. 2020 provided an opportunity for IGT to highlight the distinct advantage of having a diverse portfolio of businesses and broad geographic presence, in addition to a highly seasoned management team. Our global lottery leadership and significant focus on cost saving and avoidance provided extraordinary resilience to our consolidated performance, including some of the strongest cash flow ever. It was also a year of significant strategic and operational progress. We built up leadership position across the enterprise and amplified solutions for the new normal. We reorganized the company with a focus on core competencies that enabled us to unlock substantial structural cost saving and yielding a stronger revenue and profit growth outlook. This, coupled with the reduced capital intensity of the business, provides us a clear path to reducing debt and enhancing shareholder value. To Max now for a discussion of our financial achievements.

Thank you, Marco, and hello, everybody. A summary of four quarter and full year 2020 results is shown on slide 14. Due to the pending sale of our Italy B2C gaming business, the financial results, cash flows, and balance sheet items attributable to those businesses have been classified as discontinued operations in our consolidated financial statements. Combined adjusted EBITDA and free cash flow results are presented on this slide to help you compare our results with your current estimates. Going forward, our focus will be on continuing operations, which is what I will be speaking to throughout the rest of these prepared remarks, unless noted otherwise. Our four-quarter results reflect the combination of a very resilient global lottery business, which achieved the highest level of quarterly revenue and adjusted EBITDA in two years. and our global gaming operations, which continue to be severely impacted by pandemic-driven casino closures and operating restrictions. Global gaming performance was relatively stable with Q3 levels. We generated $885 million in total revenue in our continuing operations in the fourth quarter, driven by growth in global lottery across all revenue streams. Digital and betting service revenue increased nearly 55%, helping to partially offset the impact of COVID-related restrictions on global gaming revenue. Operating income of 96 million and adjusted EBITDA of 295 million benefited from the high profit flow-through of same-store sales growth in global lottery and disciplined cost-saving actions, partially offset by a 19 million catch-up adjustment that I will describe in more detail in a minute. Combined adjusted EBITDA, which includes a 26 million contribution from discontinued operations, totaled 321 million and would have been 19 million higher without the catch-up. We continue to convert a higher percentage of adjusted EBITDA to operating cash flow, achieving an 85% conversion rate in the quarter, compared to 76% in the prior year. These, along with CapEx discipline, resulted in free cash flow that exceeded prior year levels. Our 2020 full year results delivered $3.1 billion in revenue and an adjusted EBITDA of $1 billion, with a significant contribution from our resilient global lottery business. As a reminder, our operating loss of $107 million includes a goodwill impairment charge of $296 million, accounted for in the first quarter of the year at the start of the pandemic. Cash flow generation was solid, with $595 million in cash from operations and $340 million in free cash flow. Robust cash flow in the back half of the year was supported by lottery performance, cost saving initiatives, and management of invested capital. Combined free cash flow of 576 million was among the strongest in the last five years. Now let's turn to the results from our global operating segments, starting with global lottery. Revenue increased 11% to 630 million. Global same store sales rose 8% in the quarter. Strong demand from core players and the launch of higher price point games in states such as Florida, Virginia, and Tennessee helped drive continued double-digit same-store sales growth in North America. In Italy, same-store sales were up modestly as growth in scratch and win was partially offset by lower lotto contributions, which were impacted by renewed mobility restrictions and social distancing mandates. Italy's same-store sales trend improved month over month with double-digit growth achieved in December. The advertising ban implemented in Italy in 2018, stemming from the dignity law decree number 87, prevented us from fulfilling certain marketing commitments related to the Italy scratch and win contract. The regulator has requested reimbursement of the unspent amount, resulting in a 90 million catch-up adjustment that affected both revenue and profit. Absent this adjustment, lottery service revenue would have been up 7% and better aligned with the same-store sales growth. Strong momentum continued in iLottery, where same-store sales increased over 100%. Other service is higher on growth in commercial services, which is primarily a convenient bill payment processing service. Product sales revenue doubled, driven by Oregon Terminal sales and a system sale delivered to Swiss Loro. Operating income of 195 million was up 26% on strong flow through of same store sales growth and the benefit of cost savings actions and would have grown 39% X the said advertising adjustment. Adjusted EBITDA of 313 million rose 17% from 268 million in the prior year period. 2020 full year revenue was $2.2 billion driven by the sharp recovery in the back half of the year and higher commercial service revenue. Operating income and adjusted EBITDA for the full year were $642 million and $1.1 billion respectively. Turning to global gaming, revenue of $255 million was down 46% with difficult year-over-year comparisons due to the pandemic. Sequentially, revenue, operating income, and adjusted EBITDA were stable despite widespread closures and restrictions, supported by stable to slightly improving KPIs. Digital embedding service revenue continued its strong momentum, increasing nearly 55%. Overall, digital embedding revenue rose 4% as the double-digit growth in service revenue was partially offset by lower product sales due to a non-recurring software sale in the prior year. Sequentially, the global install base was stable. In North America, yields on active unit increased double digit compared to the prior year period. They were down modestly in the rest of the world. On a global basis, we sold just over 4,300 units in the quarter, a sequential increase of 17% with replacement unit sales up 28% led by demand in North America. Operating loss and adjusted EBITDA reflect a decline in revenue, partially offset by the benefit of cost-saving actions. Revenue and profit drivers for the full year are essentially the same as in the quarter. On our last earnings call, we mentioned, moving now to slide 19, we mentioned that we had identified over 200 million in savings relative to 2019 levels to be achieved through 2022. We referred this set of efficiency initiatives as OPTIMA, and are pleased to report that we now expect to realize the savings by the end of 2021 as a result of good momentum on our initiatives. Optima is comprised of three main initiatives. The first is operational excellence, which includes the optimization of procurement and assembly processes, as well as the supply chain and logistics. These represent about 30% of the savings at run rate, with a ramp-up phase that depends on the level of production volume we will achieve during the year. Second is an effort aimed at reducing the complexity of our product offering and geographic mix. This will include a return-driven ranking assessment of products and markets, a reassessment of structural support cost, and a reallocation of resources from high- to low-cost jurisdictions. Another 30% of the savings at run rate should come from this effort. The third initiative relates to other margin improvement initiatives such as reducing our global facilities footprint and continuing with discipline cost controls we implemented in 2020. These accounts for the remaining 40% of the savings at run rate and of the three initiatives will be the category with the quickest implementation time as it will build on the robust initiatives delivered in 2020. About 75% of the savings will benefit the P&L and the balance for CapEx. On the P&L, about 50% of the savings should benefit gross profit with 30% for SG&A and the balance for R&D. At the segment level, about 85% of the expected savings accrue to global gaming with the balance split between Global Lottery Incorporated. We also expect to incur a total of 60 to 80 million of charges associated with this structural improvement About $50 million of that amount was already booked in 2020. We expect to update you on the progress of the Optima program throughout 2021. Moving to slide 20, we deliver strong cash flow in the year, including $595 million in operating cash flow and $340 million in free cash flow in our continuing operations, among the highest level in five years. As a result, when combined with discontinued operations free cash flow, we reduced net debt by over 430 million net of effects, and after distributing a combined over 200 million figure in dividends to shareholders and minority interests. Leverage was elevated at the end of 2020 compared to the end of the prior year due to the pandemic's impact on adjusted EBITDA. We expect leverage to return to pre-COVID levels over the next 12 to 18 months. On slide 21, we have our liquidity and debt position. At the end of 2020, total liquidity was 2.72 billion, an increase of over 300 million from the previous year. This provides ample liquidity to cover our debt maturities through 2022. Our sole debt obligation in 21 was a 393 million term loan amortization, which was paid in January 2021. Proceeds from the announced agreement to sell certain Italy B2C gaming activities will primarily be used to reduce debt. In summary, 2020 was a challenging year for the gaming industry. We were able to deliver solid financial results with particular strength from Global Lottery in the back half of the year and continued momentum in digital and betting revenue. We launched Optima, an extensive business efficiency program expected to deliver over 200 million in structural cost savings in 2021. helping to drive near-term margin expansion. Strong cash flow enabled us to reduce net debt by over 430 million net of effects and increase our liquidity by 300 million to 2.72 billion. Moving to slide 23. Given the uncertainty associated with pandemic-related restrictions, mainly on our global gaming segment, we're not providing a full year outlook at this time, but instead some perspectives on the first quarter. For Q1, revenue and operating income should be higher on both a year-over-year and sequential basis, even excluding the goodwill impairment in the previous year. Global lottery revenue and profit are expected to increase on strong double-digit same-store sales growth trends for instant ticket and draw games, coupled with an exceptional contribution from high jackpot levels in January in North America. In global gaming, results are expected to be relatively in line with Q4, amid the ongoing COVID restrictions. Depreciation and amortization, as well as CAPEX, are expected to remain relatively stable year over year. I concluded my remarks, and now we would like to dedicate some time to answering your questions. Back to the operator. Thank you.