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spk08: Thank you. I'd now like to turn the call over to James Hurley, Senior Vice President, Investor Relations. You may begin.
spk01: Thank you, Rob, and thank you all for joining us on IGT's second quarter 2024 conference call, which is hosted by Vince Sadusky, our 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 on our investor relations website. And now I'll turn the call over to Vince.
spk03: Thank you, Jim, and welcome everyone on the call. We are reporting strong first half results today with over $2 billion of revenue and an operating margin of 23%, in line with the upgraded outlook provided in May. Net of separation to best your costs, we achieved a record operating income and adjusted EBITDA, reflecting strong performance from both the global lottery and gaming and digital segments. We are delivering these results while maintaining a solid commitment to good corporate citizenship, including the publication of our 17th Annual Sustainability Report. IGT has firmly established itself as a leader in global sustainability through environmental, social, and governance initiatives. We look forward to continuing to build on our achievements. As many of you know, last week we announced the sale of our gaming and digital business to Apollo in a transaction that supersedes the spin and merger transaction originally contemplated with Every Holdings. Apollo's $4.05 billion cash offer is a positive evolution of our previously announced every transaction in many ways. This simple, straightforward transaction provides a clear-cut separation of global lottery from gaming and digital for IGT shareholders. There is a substantial increase in cash, nearly $1.5 billion, which provides a quicker realization of value upon closing, thereby eliminating IGT shareholder exposure to execution risk, regarding integration efforts and synergies. The all-cash structure also eliminates the tax timing impact to IGT shareholders from the previously contemplated equity distribution. We intend to allocate the cash proceeds in a balanced manner with significant portions being used to repay debt and for returning capital to shareholders. Upon the successful completion of the transaction, IGT's remaining operations will be comprised of its current global lottery business and corporate support functions. This establishes the company as the premier pure play lottery business with a diversified contract mix, broad global reach, and strong positions in important markets. IGT's lottery industry leadership is supported by unmatched capabilities, a high-performing suite of products and value-added solutions, and a proven ability to maximize proceeds for lottery customers. The global lottery segment has a compelling business model with infrastructure-like characteristics, including recurring revenue streams backed by long-term contracts and long-standing customer relationships. It's relatively unique to find a business that offers such good visibility into the future. That visibility is bolstered by attractive fundamentals. Lottery is a large, consistently growing, and resilient industry with recession-proof characteristics. It also has significant tailwinds from potential lottery adoption especially in the US. This ultimately establishes a financial profile characterized by strong profit margins, significant free cash flow generation, a solid balance sheet with substantial liquidity, and focused capital allocation. This puts us in a good position to extend and secure our contract portfolio over the coming years. Moving on to the results we are reporting today, we continue to see high levels of lottery play around the world. The 2% increase in revenue for the first six months comes on top of a 5% increase in the prior year. Global same store sales were up modestly, consolidating significant growth in the underlying sales base experience in the last four years. 3.5% growth in Italy's same store sales has been well balanced between instant and draw games, thanks to a steady stream of innovative games. In Q2, the fourth lotto draw introduced last summer, and 10 Elana special draws introduced last fall were important drivers of increased retail and digital sales. For Italy instance, the new 25 euro super gold instant ticket game and the launch of several tickets at different price points under proven franchises fueled growth. Same store sales outside of Italy were slightly below prior year as 7.5% growth in multi-jurisdiction jackpot games mostly offset lower instant ticket sales. We did see sequential improvement in trends in the second quarter, again fueled by strong Powerball and EuroMillion jackpots in the period. There are a dozen or so more higher-priced games that will launch over the next several months compared to last year. That should support better instant ticket sales trends in the second half of 2024. Global high lottery sales are maintaining excellent momentum, rising 27% in the first half, with strong growth across regions, especially in the US and Italy. Over the last few months, we've bolstered our global lottery portfolio and advanced some key strategic initiatives with important multi-year contract wins and extensions. We secured a new seven-year contract with the Colorado Lottery to install a full suite of our newest products and solutions that will offer players enhanced retail and mobile experiences. We also executed a three-year extension with the Mississippi Lottery Corporation, where we will continue to provide online gaming systems and instant ticket services, in addition to deploying a mobile convenience app and expanding the network of self-service vending machines. We signed a five-year contract to launch cloud-based iLottery solutions, including our RGS platform, and a vast array of eInstant games for Canada's Atlantic Lottery, which is the nation's largest digital instant market. We also recently went live with our iLottery platform in Connecticut, enabling digital draw-based gameplay there. On the printing front, we entered a five-year contract with ONCE, the operator of Spain's lottery, building on our 20-year history with ONCE as the provider of its lottery central system and software maintenance services. A robust pipeline of new games is driving gaming and digital performance. The global installed base continues to expand with Q2 marking the eighth consecutive quarter of sequential growth led by premium games. In fact, IGT has nine of the top 25 new premium games based on the latest ILR survey data. Among them is Tiger and Dragon, which secured its third month as the number one new premium leased in WAP game. Generating productivity of about three times zone average, Tiger and Dragon has already established itself as one of the best game families in the market. Mystery of the Lamp is another, and demand remains high. In June, we launched Whitney Houston Web Game on our new Skyrise cabinet. Initial performance is excellent, and we are planning a broader rollout over the next several months. We sold over 14,000 gaming machines in the first half of the year, thanks to the top-ranking MLPs such as Rising Rockets, Magic Treasures, and Golden Link. The progress we are making in core video is evident, with seven spots in the top 25 new core game rankings. With approximately 80% of gaming and digital revenue coming from the US and Canada, there is considerable opportunity for IGT to grow in the EMEA, Asia Pacific, and Latin American regions. We have targeted initiatives in each and have made some good progress recently, such as expanding into the Spanish AWP market, launching HHR games outside of the US for the first time ever, and rolling out the largest peak bar top video poker installation in Europe. On the digital front, our cash eruption and blackjack games continue to maintain their spots as the number one slot in table games in the U.S., supporting 20% growth in U.S. iGaming GGR in the first half of the year. Earlier this month, we launched our highly successful land-based Prosperity Link into five U.S. iGaming markets. Providing customers and players with multi-channel game content is a cornerstone of our global content strategy. The record first half operating income and adjusted EBITDA we achieved before the separation divestiture costs confirms we are very much on track with our core operational and strategic objectives. At the same time, we are working through separation activities for digital and gaming to support our goal of unlocking the intrinsic value of IGT's best-in-class business. Now I'll turn the call over to Max.
spk00: Thank you, Vince, and hello to everyone joining us today. IGT reported second quarter 2024 results this morning, solidly meeting expectations for both revenue and profit. Revenue of $1.05 billion was in line with the prior year as growth in gaming and digital was offset by elevated global lottery product sales in the prior year. We delivered operating income of $230 million, including $26 million in separation and divestiture costs. compared to $251 million in the prior year. Excluding those costs, operating income margin improved 40 basis points to 24.4%. Adjusted EBITDA was $420 million versus $443 million in the prior year period. Net of separation and divestiture costs adjusted EBITDA was $446 million, and the margin expanded 30 basis points to 42.5%. We generated diluted earnings per share of $0.20 and an adjusted EPS of $0.36. On a six-month basis, our adjusted EPS, excluding separation and divestiture expense, reached $1 per share, a record for the company. Now let's take a look at the results of each business segment, starting with Global Lottery. Revenue declined 2% in the second quarter to $613 million, primarily due to elevated product sales from a multiyear software license sale in the prior year period. Service revenue was in line with the prior year as a global increase in same-store sales of about 1% and revenue generated by the new facilities management contract in Connecticut were offset by a one-time benefit from the resolution of a customer contract dispute recognized in the prior year. Operating profitability was strong with operating income of $212 million and a 35% to high margin. Year-over-year operating income comparisons reflect the impact of the software license and the customer contract resolution I just mentioned. Lottery profitability reflects resilience of demand towards elevated play levels despite moderation in certain markets. Our ability to innovate and sequence compelling new games represent a solid support to demand conditions via new launches of high price point tickets in the second part of the year. Turning to gaming and digital, revenue increased 1% year-over-year to $436 million as growth in the install base, resilient yields, and higher IP and software license sales were partially offset by lower terminal unit shipments. After the recovery from the supply chain delays that characterized some of the excellent performance of last year, we're ready to continue to pick up momentum in product sales going forward as we expect to reap the benefit of recent core video game launches. The global install base increased over 2,100 units year over year, primarily due to the popularity of our multilevel progressive games. The success, coupled with resilient yields and higher software sales, led to a 2% increase in service revenue in the quarter. On the product sales front, revenue was up 1% compared to the prior year. We continue to leverage our broad portfolio of intellectual property with the licensing of game feature patents helping to drive non-terminal revenue up 45% in the second quarter. Global terminal unit shipments of 7,600 units declined 640 units year over year, reflecting a return to more normal levels following a multi-year period of pent-up demand due to supply chain challenges. Stronger gaming performance in the U.S. was offset by game mix and timing of jackpots in Canada. Operating income increased 16% to over $100 million, with the high margin improving 300 basis points to 24%, driven by high margin IP and software sales and easing of supply chain costs, partially offset by lower terminal sales. This is the highest operating income margin achieved by the gaming and digital segment since providing long-term targets at the November 2021 Investor Day. In the first half of the year, we generated $463 million in cash from operations, representing a solid 54% cash conversion. We invested about $200 million in capital expenditures and license obligations, resulting in free cash flow of around $264 million. Net debt leverage was confirmed at 2.9 times the lowest level in company history. Liquidity of $1.7 billion consisted of $400 million in unrestricted cash and $1.3 billion in undrawn capacity under our credit facilities. This, coupled with manageable near-term debt maturities, puts us in a very strong financial position. I'd like to highlight some of the key financial impacts associated with the gaming and digital sale. As with the initial average transaction, tax leakage from the sale is expected to be modest, up to 100 million, or less than 50 cents per IGT share. This is because, as a UK company, IGT PLC has the benefit of the participation exemption regime upon sale of assets. Total transaction-related cash outflows continues to be estimated at approximately $400 million, including the tax leakage I just mentioned, $200 million in transaction-related costs, and about $100 million of other items, primarily cash, within the gaming and digital business that will convey upon closing. The $405 billion of gross proceeds significantly improves our performance net debt leverage compared to the prior average transaction. using the 1.2 billion of Remainco LTM EBITDA as a reference point. While we aren't yet specifying the amount of capital we expect to return to shareholders, we're targeting to maintain our leverage around current levels, enabling us to maintain strong financial condition through the lottery investment cycle, primarily around the Italy lotto bid and certain other large contract rebids. We deliver strong revenue, profit, and cash flow performance in the first half of the year, all while making excellent progress on key strategic objectives. In light of the planned sale of gaming and digital to Apollo, we expect to classify and report gaming and digital results as discontinued operations beginning in the third quarter of this year. As a result, we are withdrawing the full year financial outlook we provided in May. I'd like to emphasize this decision is not related to a change in underlying KPI or margin expectations for the business. It is simply a matter of a change in accounting treatment as we expect to classify the sole business as discontinued operations from Q3 onwards. I will now ask the operator to please open the line for questions.
spk08: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question comes from the line of Jeffrey Stanchel from Stiefel. Your line is open.
spk02: Hey, great. Thanks. Good morning, Vince, Max. Thanks for taking our questions. Maybe starting off here on last Friday's announcement, Vince, can you just walk us through how you're thinking about timing and process to receive various antitrust and regulatory approvals? I would think having just cleared HSR and with Apollo being licensed currently as an operator and historically as a manufacturer, the process should prove quicker than some historical transactions. But just curious to get your thoughts here as it relates to the Q3 2025 closing timeline that you laid out in the merger talks. Thanks.
spk03: Yeah, no, I think that's good observations. Apollo is in the gaming business, so they have experience with regulators. We had our transaction, as you know, our original transaction with Every, that combination was evaluated by the the DOJ. So, you know, we were in good shape there. So we think it's, you know, it's logical that the focus from an antitrust perspective would be on, you know, Apollo's business since the, you know, both the Every and the IGT business have already been evaluated. And, you know, they really, you know, they're not in the equipment manufacturing business and, you know, own a casino. So, you know, We're hopeful that that will move along pretty quickly on both fronts. But, you know, we've estimated, you know, roughly a year just given the timing. And, of course, per the agreement, it could be as far out as 15 months.
spk02: Okay, perfect. Thanks for that, Culler. For my follow-up, turning to the lottery business, Max, I appreciate the comment that you just made. related to guidance and no changes to the underlying KPIs or margins assumptions. I guess I want to be crystal clear on this. I think previously you had guided, if I'm not mistaken, same store sales, flattish, excluding jackpots, low single digits for the year. I believe that implied some acceleration in the back half of the year. I guess does this, you know, does this guidance for the lottery business still hold? Does anything change incrementally since you last updated it at mid-May? Just any color there would be great. Thanks.
spk00: Yes, very good, Jeff. So for lottery, we don't expect any change in our outlook assumptions. We expect it to be up low single digit X jackpot function. in terms of the remaining part of the year. As you know, we tend not to project large jackpot events. So if they come, they represent an upside to our outlook. And right now, again, the underlying business conditions are slated to be slightly better than the first half, partially aided by a sequencing of higher price point launch expected in North America. in the second part of the year and the continuation of a successful new game launch campaign in both games in Italy, similarly to what we have generated in the first half of the year. So all in all, the underlying market conditions for Lotteria remain very solid. We are consolidating elevated play levels and we don't project significant jackpots between now and the end of the year.
spk02: Okay, great. Very helpful. Thank you both. I'll pass it on.
spk08: Your next question comes from the line of Barry Jonas from Truist. Your line is open.
spk04: Hey, guys. Good morning. Big change for you personally going from running the gaming entity to now the lottery business. Maybe walk us through that change and just generally how you think about your strategic goals for lottery over the next few years.
spk03: Yeah, great question. I think both businesses have terrific upside potential. I was excited to help the company in the separation and integration activities associated with the combination and the time it would take to execute that. That would have necessitated finding a CEO to run RemainCo, the public lottery company. Now that this is a different transaction with Apollo acquiring both entities, both Every and our gaming and digital entities, going private, it provided the opportunity for me to stay with RemainCo, with the public company. and help to drive our goals there. So I'm very excited about the prospects for both businesses. Unfortunately, I can't be in both places, and I think they've both got very different profiles, and I really believe both are terrifically undervalued, which really was the driving force behind this entire strategic alternative initiative that we undertook with the board Boy, a year and a half ago or so, beginning it in earnest. So definitely excited about the opportunity for both, and in particular now the opportunity to remain with the public lottery company. You know, of course, as we kind of get close to the closing, we'll have a pretty detailed and pretty thoughtful long-range plan and activities and goals, cash flows that, you know, we'll take the investment community through to try to, present our case as to why we think it's a very good business. But when I step back and think about where the business has been over the last three or four years, there are certainly some ups and downs in the business, just given the timing around multi-state jackpots, both in Europe and the U.S., as well as things like Scratch and win, game launches, different price points, especially in significant jurisdictions that really move the needle, like Florida, Texas, California, New York. But overall, the business has grown at something around a 4% CAGR since if you go back to 2019 through the first half of 2024. And the research that we've looked at has supported the fact that there's more players that got introduced to to lottery and enjoy the game and then when you take a look at the digital opportunity you know it's unfortunate that states have been slow to slower than than we would have hoped uh... to to approve uh... i lottery uh... the nonetheless the ones who have uh... you know the the numbers are up uh... significantly and and we're significant player having just watch the connecticut lottery as i mentioned uh... getting our content in more and more approved jurisdictions where we don't run iLottery. So there's several opportunities for revenue growth in that, and we've seen no decline in play in retail as a result of digital as well. So it's been slower than we expected in North America in terms of the rollout, the approval, but we think that will pick up over time. And meanwhile, you know, you've had the courier services continue to show that the digital activity for their businesses continues to grow and that benefits us when we are the provider of the of the system in these markets. So I'm excited about it. I think it's a very good growth business, and I think it's a great yield story in particular for something that's very solid. I think it's been hampered by the conglomerate discount that our company received. We heard from all of you and our investors, certainly long before I got here, but certainly since I got here, that we're We're not one thing or another. We're effectively primarily a lottery company that is trading at the low end of an equipment supplier business. And so we think this separation activity will be a step in the right direction. And as I say, we're excited to get out and tell our lottery story as to why it's a compelling investment.
spk04: That's extremely helpful. Thank you for that. And just as a follow-up, any updates on the Italian lotto in terms of process timing? And then I guess just related to that, as we think about ROI on any new potential lotto renewal deal, assuming you're successful, how do you see the growth potential for lotto in what's already, I guess, a developed market?
spk03: Yeah. Yeah. So, you know, a lot of the lot of, to me in Italy is really remarkable. You know, it's one of the oldest lotteries in the world. Uh, it's, you know, you could argue the penetration is higher than almost any lottery in the world. Uh, yet because we run it, you know, we actually operate it. We've had the team has had the, the amazing ability and it's continued to perform and, and continue to, to drive growth, which is what makes, I think that lottery a, a good business. It also makes it a difficult business for an unproven competitor to come into the marketplace and invest a billion-plus dollars in upfront fee and then significant capital investment. I think, as we mentioned last time, we've got pretty good insight now into what the new license terms would be, nine years, non-renewable. It's consistent with the existing license terms. billion-dollar minimum upfront fee, and we're currently working on things like what the technology plan would be, et cetera. So things are on track, and I think that, you know, again, we've said over and over again, you know, we're pretty confident in our capabilities, obviously, given the expertise we bring and the results being as effective as they have been. It's been truly a win-win for Italy as well as certainly we benefited as well. Really, the increase in fee is something that we experienced last time around as well, and the ROI was fine. The reason is the team, we bet on our team to be able to assist in making games more interesting and innovative and and continuing to develop games that would be compelling to players. And fortunately, they've done that. So the level of play has gone up something like a billion dollars or so in sales from when we first got this latest renewal to today. So that's really, again, you've got to have a high level of confidence in your capabilities to be able to continue to drive these these ROIs. I'm not sure if I was a third party coming in, I would have that level of confidence. It's a big bet. For us, we've got the experience and we do have the confidence. So we think we can maintain a good ROI on this business despite the fact that the fee is increased over the previous renewal.
spk04: Great. Thank you for that and congrats on the transaction.
spk03: Yeah, thank you.
spk08: Your, oh, Excuse me. Your next question comes from the line of Chad Bannon from Macquarie. Your line is open.
spk06: Hi. Good morning. Congrats on everything and thanks for taking my question. Wanted to start on the gaming business. You mentioned some opportunities outside of North America, a few different avenues in terms of where you can increase your presence. Can you just talk about, A, maybe the timing around this, if this is more of a back half 24 or more something further into 25? And then more importantly, what was kind of the genesis of this? Was it getting games approved? Was it implementing kind of a local sales team or just maybe something that the customers have asked for, just trying to size up what these opportunities could be? Thanks. Thanks.
spk03: Yeah, yeah, sure thing. So, uh, you know, we've, we've recognized over the years that, uh, when you have games that perform very well in North America, they have a tendency to perform well internationally, especially in Europe and in, in LATAM. And that's been the case for, for our, our games. Uh, so this, this really good run that the companies experience, especially in the, in the premium space, uh, has created demand. in international markets. We've been increasing our install base pretty steadily in Latin America, for example, and when you look at the titles that have done really well in the U.S., such as Magic Treasures, Prosperity Link, Mystery of the Lamp, those are all growing really well, and that's allowed us to continue to grow our install base footprint, and we think that can continue. In places like EMEA, very similar. Magic Treasures, Mystery of the Lamb, Prosperity Link have all been really strong performers, and I think recently the teams did a good job of convincing operators to take things like video poker and mechanical real games, some things that really weren't consumed all that highly in EMEA, and early signs are good. And then in Australia, it's a market that we've really struggled to get our fair share. I'll be down there in a couple of weeks, and we feel like we've got the right organization, we've got the right game developers, and it's early days in terms of our reorganization. But we've had a combination of good early signs, both from North American games like Prosperity Link, which are doing very well down there, and some locally produced games as well that are starting to get some traction. But the other area really, in addition to the premium space and the install base, is in-game sales. And the fact that we've now benefited so much from our good premium game production, we've been able to focus on core games as well. You heard, we've got seven of the top 25 ranked games in core now, which is, I don't know about an all-time high, but for the last 10-plus years, certainly a high for IGT to be doing so well in that category. And those games we're beginning to introduce into international markets as well. So we do believe that our growth, at the back half of your fourth quarter, in particular going into 2025, a lot of that growth is going to be driven by international.
spk06: That's great. Thanks, Vince. And then on iLottery, given some state deficit changes here and some of the conversations that were had, particularly in the last six months with legislators, Has the temperature changed at all in terms of acceptance towards iLottery? In our conversations with, you know, state lottery executives or potentially legislators picking up, could that be an opportunity or a catalyst for 25? Or in your conversations, are these groups kind of looking at other areas in terms of raising revenues for their states?
spk03: Yeah, I think as we've seen historically, when states are challenged with their budgets, they certainly look towards gaming and lotteries as a potential opportunity. As you know, states ran a budget surplus for many years post-COVID, and lottery sales did particularly well, and a lot of the focus was on sports betting. So now sports betting has done fine. In some places, it hasn't done great in terms of meeting state revenue projections and and states are certainly struggling now to fill budget gaps. So we're hopeful that that accelerates legislation being brought to the various legislators to be able to pass iLottery in those states. In the meantime, we continue to refine our business. As I mentioned, we were up, I think, 27% for the first half of 2020 and we've added, you know, a bunch of new customers. And even I think one of the most interesting things that the team's been able to accomplish is in states where we don't have the iLottery platform, we've been able to add content customers, and our content is doing very well. So, you know, we've got the opportunity to participate. But, you know, overall we've got 12 platform customers live, We're getting, you know, better and better at this, especially with the diversity of customer needs and requirements, both internationally and in the U.S. So, you know, our focus is to continue to grow this business, to continue to make great content, to continue to, you know, answer RFPs. Many of those are international and improve our product so that as the states do open up, you know, we're considered a premier player.
spk06: That's great. Thank you very much.
spk07: again if you'd like to ask a question press star then the number one on your telephone keypad your next question comes from a line of david katz from jeffries your line is open hi good morning everyone and congrats on all the hard work which i'm sure is not it should not be unnoticed um thank you look with respect you're welcome with respect to the italy process that we go through. You know, you mentioned earlier that you have some insight and you're working through on some of the technology. You know, I just want to make sure in your prior release, I think it was a quarter ago, you gave us the sense that the sort of economics or the partnership structure was going to remain the same as last time. How firm is that today? And should we still consider that to be the case?
spk03: I mean, we mentioned previously that we did execute a memorandum of understanding to maintain our joint venture with each one of our joint venture partners. And I think everyone is positively inclined to move forward with the partnership. And as we get closer to the actual renewal, the RFP process, that becomes, I think, even more But I have no update to that other than, you know, we've, we're in agreement with our partners and the intention is to, the intention is to move ahead together.
spk07: Perfect. And in some of your remarks you mentioned, you know, an LTM EBITDA on remain total of about a billion two. And I just wanted to walk through that a little bit, right. But what we, you know, what we're thinking about, and this is a discussion with investors since the deal announcement and ongoing, is there's a minority interest, you know, back out that's neighborhood 175. And then there should be some corporate, you know, considered in there also. You know, any sort of qualitative help you can give us around, you know, what those pieces remain for, you know, is a corporate number of 75 a decent place for us to estimate? you know, when we do our math?
spk00: Yeah, so David, this is Max speaking. So I'll pick this one up. So on the minority interest, as you know, majority of that item is covered by the two Italian contracts, JVs that we have, consortium that we have down there. So that's unchanged. And I think your number is a good proxy going forward. It's something in the neighborhood of 200 million per year. Obviously, with the consideration that in the year of renewal, that number is affected by their own contribution of funds to the new bid from a cash flow perspective. So obviously, you have only to take the pro rata portion of our piece of the bid going forward. As far as the corporate costs are concerned, the 1.2 is an all-in number for Remainco right now. as we have discussed last quarter. And as a matter of reference, what we are expecting is an amount of stranded cost net of TSA contributions of about 20 million that we expect to absorb in the next 12 to 24 months so that to take into account the TSA period and then an extra, call it a year extra, until we are able to absorb this 20 million of stranded cost that effectively comes back to us helpful thank you your next question comes from a line of joe self from susquehanna your line is open uh thanks good morning vince good morning good morning max uh just maybe a quick
spk05: you know follow up on the Italian lotto renewal process is it fair to say that you know we all know everything say in the first quarter of 25 if not later this year is there any I'd say tighter sense of timing you can give us on that and then I just want to go back I believe Barry asked it earlier on the lottery business and, you know, kind of your outlook and how you think about the strategy. Can you also discuss maybe the competitive landscape and how that has changed, you know, over the last couple of years in particular and the advantages that you have? Obviously, you know, part of the exercise here is to try to figure out what naturally the right trading multiple is for the lottery business. They're or a number of international comps, and so I was looking if you could help, you know, kind of beef up some of that discussion, please.
spk00: I'll start with the process on the Italian lotto. So as we said last time, early in April, the Italian government issued a decree that established the rules for the new bid. Since then, the process has kicked off in terms of preparing the new bid document that has to go through a couple of legislative steps to confirm is in sync with European Union rules for public bids, and also it's consistent with Italian principles. So all in all, we expect that the tender... may be issued by the end of the year, worst case early next year, then it's a matter of the typical step-after-step process. So all in all, we don't expect to have a definitive outcome until probably the second quarter of next year, with obviously some time left beyond that for the integration from the existing contract run to the new period. So all in all, again, we expect 12 months probably to get an outcome and then maybe 18 months up to the run rate of the new contract.
spk03: Yeah, then I would pick up on the, you know, kind of the opportunity going forward for lottery. Again, we'll have plenty more time to talk about, you know, our thoughts in detail. But, you know, we expect to maintain kind of low mid-single-digit long-term growth profile for lottery over time. And that's really based upon a combination of innovation and the greater number of people that have discovered the lottery is fun and enjoyable post-COVID, coupled with high lottery as well. So again, we've had really, really good growth since going back to to 2019, when you take a look at the current elevated levels of play in our areas, the first half of 2024, we had 2% revenue growth, but that was on top of 5% in the prior year, putting aside product sales, which is kind of a lumpy, spiky business. And we've had terrific growth in North American instance. That's now moderated. We don't see any structural issues associated with that. And we do think the improved focus and new game launches, higher price points, et cetera, that we're working with states on will have a positive impact, as well as the really nice CAGR and growth trajectory in Italy. So when you take a look at all of that, coupled with iLottery, which has grown something like 60% or so over the last four years, and the number is becoming more meaningful and has the opportunity to become even more meaningful as more states eventually approve some type of iLottery play, I think all of that is pretty attractive. And then you had asked about the competitive set, assuming you meant worldwide. As you know, it's... It's an interesting industry. It's not that big in terms of the revenue opportunity for the B2B providers. There's a few international players that are primarily focused on B2C, so there's not that many players that have both the B2C experience as well as the B2B expertise, the ability to be able to consistently help jurisdictions to not only improve sales, but consistently deliver a high-quality product with virtually no disruption and have the ability to offer up anything on the product suite from instance to various draw games to multi-jurisdictional games. There's just not that many players out there, and the ones that are out there, and even fewer are public, you know, most of those public ones are focused in one or two jurisdictions and certainly don't have the broad-based expertise. And also on top of that, in many cases, those particular providers, their expertise is B2C. And, you know, in some cases, we're actually the technology provider to some of these players. So I really think as we get out and have the ability to tell our story, you know, investors will recognize the uniqueness of our product offering. You know, certainly we're heavily, we have a lot of cash flow coming from Italy, a lot of cash flow coming from the North American jurisdictions. But, you know, relative to our competition, we think, you know, our diversification is outstanding and our product capabilities is, you know, is unparalleled. Thanks a lot.
spk08: Your final question comes from a line of David Hargreaves from Barclays. Your line is open.
spk09: Hi. I hope this isn't nitpicking at all, but just looking back to your monologue, it said that you plan to maintain leverage at current levels. And I'm just looking back to prior announcements. I'm just wondering, so that looks like around three times depending on net or gross. Is that a bit of a revision from what you were – previously revealing?
spk00: No, absolutely not. It's a different perspective. I mean, right now the leverage is around 2.9, so below 3. What we said today, just a few minutes ago, is that we like where we are today, all in all, and we have to consider that in the next 12 to 18 months we are going to have to put a significant amount of money on the table for upfront fees, for contract rebid, and also significant investment amount in the lottery business for some contract rebid in the U.S. So when you consider everything, including the cash proceeds from the transaction, the cash to be used to pay down debt and provide the shareholder remuneration, and fund the future business of lottery all in all, we think that below three targets is where we would like to be. So again, I gave you an all-in perspective, which is a different way to look at this number versus the pro forma exercise that we did when we issued the announcement on the every transaction originally, which was a purely pro forma calculation for the transaction. So I think we believe the information today is more helpful for investors going forward because they understand where the company is expecting to be on the long run when you consider everything.
spk09: Okay, and when you talk about repaying $2 billion of debt, does that assume that the bank debt rolls and then that's just $2 billion of bonds, or should we be thinking $2 billion of bonds and bank debt combination?
spk00: Look, in the disclosures that have been provided to the market between deal one and deal two, there are sufficient information to understand that we have some requirements to repay a portion of the bank debt on the term loan only. So the revolver is not going to be touched. It's just a voluntary decision if we want to apply some of that money to reducing the revolver instead of paying down bond, which is part of our flexibility. So we expect to pay down half of the term loan remaining at the time of closing. Everything else will be of the $2 billion will be allocated to either bonds or reduction in the revolver usage. Besides the $2 billion, there are obviously we have to fund the $400 million in transaction-related cash outflows that I mentioned during the call. And then the balance will be used for capital returns to shareholders plus some amounts will remain for corporate general purposes. But again, I think at the end of the day for investors, the most important thing is to understand the mindset of the company in terms of net leverage going forward, including the round of investments, including the upfront fee for the lottery renewal that we will have to entertain between the second part of 24 and 25 and early 26. Thank you.
spk09: Really appreciate the clarification and congrats on everything. Thank you.
spk08: That concludes our question and answer session. I will now turn the call back over to CEO Vince Sadusky for closing remarks.
spk03: Yeah, thank you. So just to sum it up, the record first half operating income and adjusted EBITDA we achieved before the separation divestiture costs we think confirms we're very much on track with our core operational and strategic objectives. Consistent investments in our technology, our game content, and innovative solutions provide us a really good foundation to build from. The recently announced sale of gaming and digital businesses for $4.05 billion in cash is an important step in unlocking the intrinsic value of IGT's best-in-class business. So thank you all today for joining us, and we always appreciate your interest in IGT.
spk08: This concludes today's conference call. Thank you for your participation. Hear me now.
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