Brightstar Lottery PLC

Hello and welcome to the International Game Technology PLC Q423 and Fiscal Year 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, and if you would like to ask a question during this time, simply press star 1. I will now turn the call over to Jim Hurley, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Sarah, and thank you all for joining us on IGT's Q4 and full year 2023 conference call, which is hosted by Vince Sadesky, Chief Executive Officer, and Max Chiara, our Chief Financial Officer. After some prepared remarks, Vince and Max will be available for your questions. 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. 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 will discuss certain non-GAAP financial measures. You'll find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted to our investor relations website. And now I'll turn the call over to Vince Sedusky.

Thank you, Jim, and hello to everyone joining us today. We delivered a strong finish to 2023 with Q4 operating income growing 11%, yielding 160 basis points of operating margin expansion and strong free cash flow generation. This enabled us to meet our fiscal year 2023 financial goals, which were raised two times during the year. In fact, the growth across our global lottery, global gaming, and play digital segments contributed to record-breaking achievements of $1 billion in operating income, $1.8 billion of EBITDA, and a 41.3% EBITDA margin. This translated into significant cash generation in the period, including record cash from operations of over $1 billion bringing the company's net debt leverage to the lowest level ever. It's an impressive set of accomplishments that confirms we are on track with our long-term strategic and financial goals across the portfolio. I'd like to acknowledge the hard work of the entire IGT team in delivering them. We have a culture grounded in responsibility, collaboration, and passion. These values are not only the key drivers of our success, but also make IGT a great place to work. So thank you to all my IGT colleagues around the world. In fact, IGT was recently recognized as a top employer in the US, Italy, and Canada by the Top Employers Institute, which is the global certification company recognizing excellence in conditions employers create for their people. I'd like to spend some time on the operating performance of each segment, beginning with Global Lottery. We maintained our leadership position in 2023 through a combination of organic growth, portfolio expansion, and contract extensions. That's clear in the 7% revenue growth achieved in Q4, as well as the 6% growth for the full year period net of the Italy commercial services sale. These are impressive numbers for a business of this scale. Same store sales rose a little more than 2% in the year, consistent with the steady low to mid single digit growth for the lottery industry. Italy's same store sales increase of nearly 7% is especially noteworthy. The lotto and scratch and win games we operate in Italy are among the largest and most successful in the world. Italy's strong momentum during 2023 reflects IGT's expertise in understanding player behavior, developing compelling new games, managing a broad distribution network, and officially conducting day-to-day operations. The low single-digit same-store sales increase in North America and the rest of the world was achieved on top of accelerated growth in the last few years. iLottery sales continue to expand at a fast cliff, up over 40% in 2023, mostly driven by organic growth in existing markets. During the year, we bolstered our contract portfolio with multi-year extensions in some of our largest jurisdictions, such as California, in addition to other key markets like Kentucky and Virginia. We also added some new business to the mix. We went live with a new facilities management contract in Connecticut and launched instance and passive games in Brazil's state of Minas Gerais, an important foothold in a market with significant potential. We were also awarded an iLottery platform contract in Connecticut, where we expect to go live with draw-based games later this year. Lottery profitability improved in 2023 with operating margin expanding 100 basis points to 36%. Lottery is a large, steady-growing and resilient industry with recession-proof characteristics. Growth accelerated during the pandemic, and our 2023 results confirm that we are successfully maintaining these higher play levels with significantly improved margins. Operating margins are up 600 basis points from their pre-pandemic level. We expect the industry to expand at more customary low- to mid-single-digit rate off this higher sales base, fueled by organic growth and growing on lottery adoption, especially in the U.S., There are some new opportunities in the horizon, such as Brazil, where many states are looking to launch lottery games. Now on to gaming. The focused execution of key product and operational strategies is fueling strong growth for our global gaming segment. This is especially evident in profit performance, with Q4 operating income up 17% and full-year operating income up approximately 30%. 9% revenue growth for the year reflects broad-based strengths across several key performance indicators. We shipped over 35,000 gaming machines in 2023, up 7% from the prior year, and achieved record average selling prices. Unit growth was fueled by a double-digit increase in casino units, led by replacement demand. We continue to release high-performing new games, such as Magic Treasures, which has two titles ranking in the top 10. We also have three of the top 10 new mechanical real games. The Peak Curve 49, Diamond RS, and Peak Slant 32 continue to rank among the top North American cabinets in their categories. Our global installed base grew 9% to nearly 54,000 units, reflecting strong premium unit expansion in the US and Canada, and considerable growth in Latin America. We've delivered six consecutive quarters of installed base growth in the US and Canada, led by premium units, and nine consecutive quarters in the rest of the world. Premium growth is fueled by the continued success of Prosperity Link and is accelerated with launch of Mystery of the Lamp, which was recently named top performing new premium game at the EKG Slot Awards Show. We have an exciting pipeline of new for sale and lease games planned for 2024, including the launch of the much anticipated Whitney Houston slots on IGT's new Skyrise cabinet this spring. It was another record year for both revenue and profit at our Play Digital segment. 9% revenue growth was fueled by a double-digit increase in iCasino GGR across geographies. Operating profit rose over 30%, yielding 500 basis points of margin expansion, highlighting the powerful leverage inherent in this business. Strong iCasino GGR growth is a direct result of new games and creative solutions designed to deliver a rich player experience. Innovation is a vital growth driver in the absence of current new market regulation, especially in the U.S. Our top-performing games leverage IGT's unique capabilities. Wheel of Fortune Triple Gold Spin is the first and only omnichannel jackpot game in the U.S., inspired by our highly successful PowerBucks franchise in Canada. These games are effective player acquisition tools. They engage players across platforms for large-scale wins, with combined jackpot liquidity between land-based, mobile, and online formats. In addition, our customers have had success with bespoke games that tailor IGT's leading IP for a specific customer. Examples include Cleopatra Fort Knox and Blackjack Go for FanDuel Casino and Caesars Cleopatra for Caesars Palace Online Casino. We've also begun deploying our unique suite of user engagement and analytic tools. These are designed to provide real-time player insights for our customers and drive player productivity. We've seen great results with early adopters, and we look forward to rolling these out more broadly. In sports betting, we entered four new jurisdictions in 2023 and had 26 new installations, including 20 new casino retail locations, three on-premise mobile launches, and three statewide mobile launches. We also introduced sports betting functionality with the capability to livestream sports, on our Peak Bartop and Crystal Flex terminals. Play digital growth is dependent on new iGaming legislation, which has been slower than expected. This appears to be the case in 2024 as well. In that context, we'll be focused on driving cost efficiencies to stay on track with our margin expectations for the business. We're pleased to have achieved record-breaking profits for the year. The IG team executed with excellence. You see this in the momentum we had across segments. Our 2024 outlook, which Max will walk through later, primarily reflects organic growth for the existing businesses. Recently, we announced the transaction to spin off our global gaming and play digital businesses and merge them with every existing operations. The decision was the result of a strategic evaluation with the goal of unlocking the value of our portfolio. IGT shareholders will retain 100% ownership of the predictable growth and resilience of a global lottery pure play, while owning 54% of a faster-growing gaming, digital, and fintech business. We believe the creation of two stronger, more focused companies, each with top-notch teams and simplified business models, better positions each company to serve its customers, and create significant value for stockholders. It allows for more focused operating and capital allocation strategies, capital structures that are optimized for different business models, and increased flexibility to pursue organic and inorganic growth strategies. It also provides the opportunity for investors to better appreciate the intrinsic value of each standalone business. For context, lottery peers trade between 12 and 18 times EV to EBITDA compared to IGT at just six times, and none match IGT's scope of capabilities. The new gaming business will have a similar scale and growth trajectory as its peers, and that's before the benefit of potential revenue synergies. These gaming peers trade between 11 and 13 times EV to EBITDA. IGT has a broad global product offering across Class III, VLTs, iGaming, and casino management systems. Every business is focused on North America, primarily with Class II games and extensive fintech capabilities. The combination of the two companies with complementary capabilities and geographic footprints creates an integrated, omnichannel, one-stop shop addressing all aspects of the gaming ecosystem that we believe will provide a superior value proposition of best-in-class and efficient solutions. Together, we can generate touchpoints across the entire player journey, from the casino floor to mobile. The business has an attractive recurring revenue model with recurring revenue streams from gaming operations, iGaming, and fintech solutions representing over 60% of pro forma revenue. We expect revenue to grow at a mid-single digit compound annual growth rate through 2026 with adjusted EBITDA increasing at an even stronger high single digit rate. That's through a mix of organic top line growth for the existing businesses enhanced by significant cost synergies, mostly from straightforward supply chain and real estate optimization initiatives. These synergies on their own are worth over $500 million in value for the combined business. Given a minimal business overlap between the two companies, there are some compelling revenue synergies across product and geographies that are not yet factored into our outlook. We expect to manage the business with a strong balance sheet and conservative leverage profile. An improved conversion of adjusted EBITDA to cash flow should allow for investments in both organic growth and M&A, significant debt repayment, and share buybacks. The company will be made up of a best-in-class team across both organizations with long-standing industry knowledge, relationships, and a proven track record in B2B gaming and fintech. The executive team has over a 20 years average experience across M&A integration. Needless to say, we're very excited about the opportunity for long-term value creation for the standalone lottery and gaming business. Now I'll turn the call over to Max.