International Game Technology PLC

Thank you, and thank you all for joining us on IGT's first quarter 2021 conference call, which is hosted by Mark Osala, our Chief Executive Officer, and Max Chiara, our Chief Financial Officer. After their prepared remarks, we'll open the call up for your questions. We are, again, presenting results from multiple locations, so please bear with us if we encounter any technical difficulties. During today's call, we'll 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 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 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'll turn the call over to Marco Sala.

Marco Sala Thank you, Jim, and hello to everyone. As you have seen from today's announcement, we had an outstanding quarter. Strong player demand drove improved momentum across all our main activities in Q1. This translated into 25% revenue growth from the prior year period and a 6% increase from Q1 2019. Lottery reached record levels with same-store sales up over 30%, including double-digit gains across games and regions. The land-based slot business nearly recovered to prior year levels thanks to strong yields on the active install base and a 40% increase in machine units sold in the U.S. and Canada. Growth accelerated significantly for our digital and banking activities, where revenues nearly doubled in Q1. We continue to monitor costs as the top line recovers, and we are making excellent progress on structural cost reductions with the Optima program, which Max will discuss later. You can see this in the over 70% increase in EBITDA and 44% EBITDA margin for the first quarter. It was an outstanding performance and among the highest levels ever achieved. With such strong Q1 results and an expectation of progressive recovery for land-based gaming as we move through the year, we believe we can return to pre-pandemic revenue, profit, and leverage levels this year. This swift recovery from the impact of the pandemic is due to the unique and resilient nature of our business model across products and regions. I'd like to spend some time on Q1's lottery performance. The 32% same-store sales increase was fueled by 52% growth in italics and 28% in North America and the rest of the world. Even without the benefit of strong multi-jurisdiction jackpot activity, same-store sales for North America and the rest of the world were up over 20%. Compared to 2019, global same-store sales were up 24%. The sustained strength in lottery same-store sales for the last three quarters confirms a complete recovery from the pandemic. This is supported by the highest segment revenue and profit levels we have ever achieved. And the momentum continues. Global same-store sales are increasing. trending up over 20% for the Q2 to date period compared to the second quarter of 2019. We must acknowledge that some of the recent strength comes from the relative lack of other entertainment alternatives. In the U.S., higher disposable income, which includes the benefit of government stimulus, is another factor. But Lottery has always maintained a steady growth profile. This is because it is a content-driven business. The games have high entertainment value with broad player appeal. A consistent stream of new games offers fresh opportunities for player engagement. Throughout the pandemic, Lottery has become a valued and routine activity in the new normal. We expected that to continue. According to our research, many intend to play lottery at higher levels than they did before COVID. This is an encouraging sign. Innovation is another important contributor. In the draw-based arena, add-on and progressive jackpot games are fueling double-digit growth in the U.S., while the new 10-and-lotto extra is an important driver in Italy. Instant ticket sales are benefiting from higher average ticket prices as well as player interest in second chance and free ticket games. Multi-jurisdiction jackpot games were almost double the prior year, thanks to 1 billion megamillions and 750 million powerful jackpots in the U.S. and strong euromillions sales in Europe. It is reasonable to expect sales to moderate from current levels as other entertainment options become more widely available, especially in Italy. We believe we will see a return to more normal steady increases after we cycle through the pandemic-related peaks and valleys over the next several quarters. Our expectation is that when the restrictions of the pandemic will be largely over to see some stickiness to the recent increased play levels, particularly in North America, and the market will resume a more normal growth rate, mid-single digit in the U.S., but starting from a higher individual consumption. The recovery for our global gaming segment is progressing well in the U.S., which accounts for about 70% of the segment revenues. U.S. casinos are open for business as the pace of vaccination is driving confidence among players and operators. This has led to a substantial improvement in slot GGR since January, not only in the regional U.S. markets where most of our business is conducted, but also in Las Vegas. Core players have returned and new players, mostly younger, are entering the market as other entertainment options are limited. This is translating into a swift recovery in our business. Recurring revenues are improving month over month thanks to a stable install base and more of those units being activated. Even as more units are powered up, ease on active U.S. units wear up high single digits sequentially. New multilevel progressives, such as Dragon Lights, Gong Chifa Kai, along with Wheel of Fortune franchise, are driving these strong results. We also had good unit sales in the quarter, fueled by a 40% increase in the U.S. and Canada units, including double-digit growth in replacement, which were not far from Q1-19 levels. The resilience speaks to the diversity in our customer mix across regional, tribal, and commercial casinos, as well as VLTs. Regal Riches and Lion Dance were among the top-selling core video titles, while Wildlife Extreme and Big City Fives were the best VLT titles. We expect continued progressive improvement throughout the year across all aspects of our global gaming segment. It is clear from our meetings over the last few months that digital embedding is of great interest to you. It is for us, too, as IGT plays an important role in the iGaming, sports betting, and iLottery ecosystems. During Q1, GGR across the portfolio was 2 to 3 times the prior year levels. Most of that growth came from an expanding player base in existing markets. There are no signs of the digital channel cannibalization in the land-based business. Digital embedding revenue nearly doubled in Q1, posting the strongest quarterly increase in the last year. We expect the business to maintain a strong double-digit growth profile for the next several years. through a combination of organic growth including the contribution from new jurisdictions. We are investing to support this growth and maintain leadership positions in all three verticals. In iGaming, we are expanding our content portfolio through a combination of internally developed games and those developed with third-party studios. There is additional opportunity for IGT to act as a distributor of third-party content, and this is an emerging area of focus for us. All this should result in IGT having 20-30% share of the North American high gaming market. Outside North America, there is also opportunity to penetrate emerging international markets such as Germany, Greece, and the Netherlands. We intend to maintain a leading role in the high lottery industry, leveraging the long-standing relationship we have with the world's leading lottery today, and through our commitment to investing in three main objectives. First, expand the portfolio of games. Second, to enhancing our platform capabilities. And third, by increasing marketing and other activities to support player acquisition and retention for our customers. As we look out over the next three to five years, we see the potential for the number of U.S. jurisdictions authorizing iLottery to double from current levels. Today, our presence in the U.S. sports betting market spans 16 states, representing over 40 sportsbooks. IGT's land-based sports betting platform is the most widely used in the country. We see the greatest opportunity for us in offering turnkey sports betting solutions to commercial and tribal casino operators. Since the launch of our in-house trading team last summer, we have made good progress assigning customers, including Maverick Gaming, Snoqualmie, and Emerald Queen, among others. We have many more deals in the pipeline. There are 17 states where legislation is pending this year, and four more where legislation has been passed, but sports betting is not yet operational. We are proactively securing partnership in jurisdictions where regulatory approval is pending, ensuring our customers a swift launch as markets go live. Our first quarter results mark a strong start to the year, and illustrate the compelling foundation IGT can build on over the next several years. This is especially true for our global lottery segment, where record sales and profits confirm the high entertainment value and broad player appeal of the games, bolstering our favorable long-term growth outlook. The fast recovery in our land-based U.S. gaming activities is accentuated by by accelerating momentum for high-growth digital and betting businesses. Stronger revenue trends are further enhanced by significant structural cost reductions that improve our outlook for profit margins and cash flows. With the proceeds of the recent sale of certain Italy B2C gaming businesses that will be used for debt reduction, our leverage profile should be significantly improved by year-end. Now, I'll turn the call over to Max.

Thank you, Marco, and hello everyone on the call today. Similar to our last call, in my prepared remarks, I will be speaking primarily to continuing operations due to the recent sale of our Italy B2C gaming business. The financial performance exhibited in the first quarter of 2021 displays the strength of the IGT portfolio, with our lottery business running at a fast pace, both on a core basis and supported by exceptional jack productivity in the early part of the period. Our gaming unit is on an accelerated path to recovery with a strong contribution from our Optima program, as well as a sustained robust growth in our digital platform, Verticals. These trends brought a performance of over $1 billion in revenue, and $450 million in adjusted EBITDA. Our profitability showcases the dynamic margin leverage of our lottery business, as well as disciplined cost-saving actions throughout the company. We achieved roughly one-third of this year's over $200 million Optima savings target during Q1, mainly through product simplification and margin improvement efforts. As gaming volume gradually improved throughout the year, we expect to see an increasing benefit from our operational excellence initiatives. Compared to the prior year, we saw the expected reoccurrence of certain normal running expenses in the first quarter, primarily employee-related costs. Continued healthy cash conversion and capex discipline drove over $200 million in free cash flow, which is high for a first quarter performance. Interesting to note, we returned to profitability at net income level this quarter, generating $0.38 per share. Turning to our lottery segment on slide 13. Revenue increased over 40% to $749 million. Global same-store sales rose over 30% on broad-based growth across instant tickets, draw-based games, multi-stage jackpots, and iLottery. Same-store sales grew double-digit in January and February, where there were no prior year impacts from the pandemic, highlighting the strong underlying player demand. In fact, the comparison to Q1 2019 in terms of top line is showing an astounding 20% plus growth. Part of the same-store sales growth includes roughly $20 million in revenue from higher multi-stage output activity. And outside of same-store sales, lottery service revenue includes approximately $60 million in performance-driven incentive accruals from our U.S. lottery management agreements. This $80 million in total in Q1 benefits flowed through almost entirely to profit. Product sales, which are naturally lumpy and represent about 5% of annual lottery revenue, were down $10 million on large software license sales in the prior year, partly offset by an increase in instant ticket printing revenue. The margin leverage from lotteries' largely fixed cost structure is particularly evident this quarter as our revenue growth translated into incremental margins of over 80%. and we also had the benefit of the $80 million in Q1 revenue items indicated before. Operating income more than doubled from the prior year period to $337 million, with adjusted EBITDA growing 74% to $447 million. So all in all, an excellent performance by our vibrant and pandemic-resilient lottery business. Turning to global gaming, revenue of $266 million was down 14% over the prior year, We continue to see sequential improvement in this business with higher revenue and adjusted EBITDA and lower operating loss compared to the fourth quarter. KPIs are improving and the contribution from digital and betting continues to accelerate with revenue growing over 80% from the prior year. Sequentially, the global install base was stable. Over 75% of our U.S. casino install base was active and service revenue is close to prior year levels due to higher productivity on the active machines. In North America, yields on active units increased double-digit compared to the previous year period. We sold just over 4,400 units globally in the quarter, up 20% over the prior year and up 2% sequentially. Unit shipments were driven by VLT replacement sales in the U.S. and Canada, and the casino openings at Resort World Las Vegas and Hard Rock Indiana. Overall product sales are down due to a multi-year strategic agreement booked in Q1 last year and AWP upgrades in the prior year as well. Operating loss and adjusted EBITDA reflect a lower base of revenue, partially offset by the benefit of cost savings actions. Margin leverage improved in the quarter as expenses have come down. On slide 15, you can see that the recovery of top-line trends and diligent cost savings initiatives are driving strong cash flow in the quarter. Cash from operations was $251 million, despite the concentration of interest payments in first quarter. Free cash flow was $204 million. And you can see the direct impact to net debt and leverage, which was down a full turn versus year-end 2020. We now expect leverage to return to pre-COVID levels by the end of this year, highlighting the unique resilience of IGT business. On the next slide, we can see our debt maturities. In the last year, we have made significant improvements to our capital structure as we have paid down debt, extended maturities, and reduced interest costs. Each of our most recent debt transactions in euros and dollars were at the lowest coupon rate in company history. Since our last earnings call, there have been two additional improvements. First, in late March, we successfully refinanced approximately one billion of notes due in 2022, with a combination of new notes and bank debt, and extended the maturity date to 2026. Second, the 630-plus million in net proceeds from the sale of the Euro, 630-plus million Euro in net proceeds from the sale of the Italy gaming business will contribute to the full redemption of our Euro-denominated 2023 notes through the exercise of the make-all. As you can see, these two changes meaningfully reduce our net near-term debt maturities, and will allow us to save, going forward, about $60 million in annual interest costs, with the full run rate of savings starting to materialize in Q3 this year. In summary, our strong first quarter performance was driven by a combination of global lottery growth, progressive recovery in U.S. gaming, and optimal cost savings initiatives. We are on track to structurally reduce our cost structure by more than $200 million this year, with each segment contributing according to plan. We continue to convert adjusted EBITDA to cash flow at a healthy rate, and the free cash flow we generate is used primarily to reduce debt, allowing us to reach pre-pandemic levels of leverage by the end of the year. Now, I'd like to share our perspectives on the second quarter of slide 18. Quarter to date, global lottery same-store sales growth is over 20%, so our second quarter revenue should be higher on a year-over-year basis. though we do not expect the $80 million in Q1 lottery revenue benefits related to jackpot activity and LMA contract incentive to recur. We expect continuous sequential improvement in the gaming business in line with what we have seen in the last few quarters. While second quarter profitability will be lower sequentially, we expect second quarter operating income and adjusted EBITDA will be higher than prior year, even without the benefit of the drastic temporary reductions in cost savings during the second quarter of 2020. Depreciation and amortization should be relatively stable. And for the full year, let me reiterate that we expect all relevant key financial metrics to return in line with 2019 trends. The meaningful progress on vaccination campaigns in our core markets and overall has convinced us that it is time to update the market on our long-term targets, in line with sentiments echoed by several market participants we have interacted with recently. I'm excited to announce we will be hosting an investor day later in the year where we can elaborate and update you on our strategic priorities, long-term financial targets, and capital allocation plans. We will have many opportunities to connect before that, including second quarter earnings in early August, G2E in early October, and our normal conference and roadshow participation. Then on November 9th, we will report our third quarter earnings as well as host our investor day. Hopefully, it will be in person in New York City. So please mark your calendars. That concludes our prepared remarks. Operator, can you please open the call for questions?