Ladies and gentlemen, thank you for standing by, and welcome to the IGT Fourth Quarter 2020 Results Conference Call. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Mr. Jim Hurley, SVP of Investor Relations. Sir, you may begin..

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 Marco Sala, our Chief Executive Officer; and Max Chiara, our Chief Financial Officer..

Thank you, Jim, and hello to everybody. 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 the 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 gross iGaming, post-betting and iLottery propelled a nearly 50% increase in service revenue for our B2B digital and betting activities in 2020.

Market dynamics caused us to think differently about how we manage day-to-day operation. In April, we set an ambitious target to preserve cash with a 500 million program in temporary cost savings and avoidance for the year, and that goal was achieved.

The experience enabled us to retain our cost structure in a way that has opened additional opportunities. In fact, we have already identified programs for over 200 million in structural cost reductions..

Thank you, Marco, and hello, everybody. A summary of fourth quarter and full-year 2020 results, 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 this prepared remarks, unless noted otherwise.

Our fourth 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..

Thank you And our first question comes from Carlo Santarelli from Deutsche Bank. Your line is open..

Good afternoon and thank you for all the color. Acknowledging, obviously, with the discontinued ops and the Italy sale there is a little bit of apples and oranges here. But if I were to think about kind of 2021 and your 2019 business, I believe your reported adjusted EBITDA at the time was about 1.7 billion.

Extracting the 225 million, 230 million for the sale of the Italy business, you would be looking at like a 1.48 in number or something along those lines. If we were to think about the fourth quarter, and kind of run rate the fourth quarter may be - obviously, the change for the 19 million that you guys referenced, you are kind of in the 1.2 range.

You obviously have the cost implementation, the cost program that you are embarking or you have embarked on and expect to see obviously more flow-through from that in 2021, off to a strong first quarter on the lottery side, and I would anticipate that the lottery business will remain strong for most of this year.

Is that kind of 2019 adjusted results, something you guys think is reasonable as we think about a run rate in the back half of 2021, obviously, depending on the return on the gaming side..

Max?.

Hi, Carlo, good afternoon. Good morning. Yes, I will take this question, Marco. So given the uncertainty associated with the restrictions, pandemic-related, as we said, mainly affecting our Global Gaming segment. It is really difficult at this point to provide the full-year outlook.

But I definitely, I understand the need you guys have to start rebuilding our models based upon the split between continuing ops and discontinued ops. So let me offer some high-level qualitative perspective here. So obviously, with a big premise at the beginning, barring any unforeseen changes in the trajectory of the pandemic.

We would say that for Global Lottery, we expect revenue and profit higher than both 2020 and 2019 levels, right. This would be a complete recovery from the pandemic impact last year and the return to a consistent growth profile for the business.

On the Global Gaming instead, revenue and profit should definitely be above 2020 levels, but we don't expect a full recovery to the pre-pandemic levels in this segment until probably later in 2022 or; 2023. As a partial offset to that, obviously, we have our digital and betting business, where we expect momentum to continue.

And we think that we will be able to continue to pursue double-digit growth in 2021. And Carlo, I would stop at that and don't provide any more color at this point, given the uncertainties that are still around the pandemic..

That did help tremendously, thank you. If I could, guys, just one follow-up. One of your competitors last night had talked a little bit about iLottery in the United States and mentioned as many as 10 states were currently looking at kind of the expansion of iLottery.

Could you guys share perhaps your perspective on that business and perhaps what you foresee as the opportunity that, that could provide?.

No, I will take this, Carlo. I think iLottery represent a great opportunity overall for our company because we are already well-established with nine WLA customers, three of which are in the United States and the rest, international. We are appreciating in higher receptors of iLottery.

As we said in our prepared remarks, we enjoyed an increase of over 50% in 2020. And we expect that to maintain double-digit iLottery growth over the next several years. And this is driven by an expanding player base in existing jurisdiction and new jurisdiction as well.

As you know, it is very difficult to predict when I will start regulating this part of the business. But we are seeing an incremental interest on it, and we are pretty sure that it will happen over time. And for that, tend to invest in many iLottery initiatives, we are investing in expanding the portfolio of games.

We are enhancing our plate and by the way, some of our current customers will transition to our U.S. platform in the next several months. And we are also increasing our marketing activities to support player acquisition and retention for our customers.

So we are expecting solid growth for sure, double-digit growth over the next five-years, and we consider iLottery in the future as one of the drivers for the overall growth of the lottery segment..

Great. Thank you very much guys. I appreciate the color this morning..

Thank you Carlo..

Thank you. Our next question comes from Chad Beynon from Macquarie. Your line is open..

Hi good afternoon, thanks for taking my questions. Marco, I wanted to go back to lottery. You gave great guidance and talked about all the successes throughout 2020. Wanted to focus on the manufacturing of the instant tickets. I know from a facility management standpoint, your contracts are very long, nothing coming up from a renewal standpoint.

Are there more opportunities to manufacture and print tickets in the future? I know those contracts are sometimes shorter-term rolling in states include multiple manufacturers. Just trying to understand how you are viewing your market share over the next couple of years in that segment? Thanks..

Sure. Thank you. We are making good progress with instant ticket printing, and we consider it growing our area of opportunity for us. In the last 18-months, we have been awarded three of the four primary printing contracts. Two of these were incremental.

We have invested in a greater printing capacity that has better positioned us to be from instant market growth in 2021 and beyond. So all to say that over time, in the last years, we kept on investing in this area. We have invested on innovative products.

We are getting good response from customers, and we rely on this area as one of the additional drag, together with iLottery I mentioned before, to grow our overall lottery business overtime..

Great, thanks.

And then on the iGaming market share that you alluded to, can you talk about the success? Are players just comfortable and familiar with your games, are your placements of the games on their user interface better and then is this a share that we could expect for you guys to achieve going forward, somewhere up in the 20%, given players' familiarity with your content?.

This is what we think. We think that this is the market share we can handled between 20% and 30% considering that the players are starting playing the games that they are used to play in the floor.

But apart from that, we are investing in order to develop new games, but also enhancing our portfolio with introduction of third-party contents in order to keep our offering update and to keep and possibly increase our market share.

But when we look at the iGaming overall, we see the opportunity of a very important growth, and we see that as soon as one jurisdiction is opening, our objective is to reach on average market share in excess of 20%..

Thank you very much. I appreciate the help..

Thank you..

Thank you. Our next question comes from Barry Jonas from Truist Securities. Your line is open..

Hey thank you so much. So maybe just following up on Carlo's first question. A few years ago, you issued adjusted free cash flow guidance. I think it was 450 million to 550 million.

Can you maybe just give us any additional puts and takes to think about if and when you could get back to those levels?.

Max?.

So I would not respond directly to your questions in terms of the long-term trajectory of the cash flow, I would rather stay focused on the short-term. And obviously, as you noticed, we generated a good performance of cash flow in 2020. We see cash flow obviously going up from here next year that is primarily going to be supported by higher profits.

Although I would warn you that with our profits obviously comes higher taxes. And there is another important driver of the 2020 cash flow that was associated with our tight invested capital management, both for working capital and CapEx.

So in order to support the full recovery and facilitate the future revenue growth, we will naturally need to invest more capital in 2021 than we did in 2020. So with this in mind, I think you can probably formulate your own assumptions around the 2021 expectations. But as I said at the beginning, we expect 2021 cash flow to be higher than 2020..

Great. Great. And then Marco, maybe just more a high-level question. The world returns to more normalcy, it sounds like you guys think the business could eventually return to prior levels. But I'm curious if you think there are any permanent structural changes you or your customers may face as a result of COVID..

That is a very good question. I mean, looking at our for sure. The digital part of our portfolio will continue growing at a very solid rate over time because players are getting used with that because new jurisdictions will regulate it.

And by the way, for this business is a very good news because have seen in the various markets where the digital offering is already well established. It carries a very, very minor level of cannibalization, if any. So this is a very good news.

As I said, a lot - we are doing very well, and we see the appetite of our customers to find even more sharper way to increase their revenues. And they are now really asking us to innovate their portfolio in order to steadily grow. And I think this in terms of attitude, is a very important evolution.

On gaming, of course, it will be very much related to the player demand. We see generally that once the venues are reopening once the restrictions are removed, the pent-up demand is strong.

And so I expect the business to get back, and we have invested in order to provide our customers also with innovative solutions, such as the cashless we have discussed also previously about in order to better serve players. So I think overall, the outlook for our part of the portfolio is generally speaking positive..

Great. Thank you so much..

Thank you..

Thank you. And our next question comes from Domenico Ghilotti from Equita. Your line is open..

Few questions. The first is on the digital business. You were mentioning 50% growth year-on-year. Can you try to give a sense of how much is today the iLottery and what is the size that we are starting from in 2020? The second question is on the global lotteries, you were mentioning in Q1.

If I understand properly a double-digit same-store sales before any jackpot, let's say, contribution that would be on top. And I wonder if this is a level, so the double-digit level that you think is sustainable compared to 2019 level to pre-COVID level.

That was really very, very strong message from Q1? And last question is on the structural savings that you were mentioning.

How much have you already book, let's say, on this at the end of 2021?.

Okay, Dominico. I will take the second question regarding lottery. I will leave Max to articulate on the numbers of iLottery and digital business and the savings. Regarding the lottery the fact is the momentum we had in the second half of 2020 has accelerated into 2021. And you perfectly understood what I said.

Q1 to-date, global same-store sales for the underlining business is up double-digit across the various regions. North America is doing well and continues to do well. In addition to that, we have enjoyed the upside coming from the jackpot. Italy is up strong in Q1.

The gaming gold closure as well as new game launches such as 10eLotto Extra and are supporting recent trends. The international part of the business is doing well and iLottery is doubling the prior year level in the U.S. and in Italy. I think at this point, lotteries have benefited from a lack of other gaming and leisure alternatives.

I do not believe that the double-digit trend or CAGR will be what we should plan for future years. But I think that we can, as we always done rely on steady growth between mid- single-digit growth over the years.

And this is the trend we have appreciated in the previous years, and this is something we believe will continue because the player interest has remained robust. Even when gaming goes reopened in some jurisdictions and all our information, research are telling us that players keep on enjoying our games.

And that is the reason why we are doing very well in this period of time, and it provides us comfort in considering the trajectory of the few - the next years positive, maybe even slightly better than we have planned in what we have seen in the previous years..

Okay..

Max..

Yes. So let me start with the digital. Hi, Domenico. So as you know, we provide a specific carve-out for the digital business on the revenue line that cuts across our segments. So for 2020, we booked 170 million plus revenue.

So of that number, slightly more than 50% is iGaming, of the remaining portion, more than half is iLottery and the balance is sports betting.

I urge you to consider that in sports betting, as we deliver software as a service so far, obviously, we are run with revenue recognition that kind of prorate the benefit overtime through the duration of those contracts. And some of the revenue effectively end up being delayed in terms of booking.

In terms of margin, obviously, we didn't provide a specific guidance on the margin. But what we said is that the margin, all in all, for our digital business is at par, at least at par with the global business, with the global company and is definitely accretive to the Global Gaming segment. And that would be it for digital.

Now on the structural program, the structural savings program, let me start with the charges first, and then I move to the savings. On the charges we already booked about slightly less than $50 million in 2020, primarily that was done in Q2. That was split in three initiatives.

Two of the three kind of are complete in terms of the charges relates to the operational excellence initiative and the lotto's reorganizations/the tertiary bucket in our cost savings program. So the operational excellence initiative has a slower ramp-up because it depends on the volume that we can deliver period to period.

But again, the charges have been taken. On the other margin improvements and the lotto's reorganization charges have been taken and savings are progressing well as anticipated. There is a little bit more longer tail on the third initiative that is still in progress of being complete and will probably require another one-year to two-years to finish.

But the majority of it will be spent this year. And so majority of the savings will accrue in 2021, for a total amount of 200 million expected for the full-year in terms of savings..

Have you already booked any savings in 2020 or, let's say, the end point. So at the end of 2020, the run rate of savings as we should consider..

So you need to see the two-years from a different perspective. The focus in 2020 was on cash preservation. So we kind of looked at ways to stop spending and made some haircuts to certain cost item, primarily personnel related. The savings we are talking about here going forward are more structural in nature.

So some of the cost-cutting initiatives that we deliver in '20 will continue over time. And will continue to accrue. So a portion of that has already been achieved, but is kind of not incremental in 2021 versus 2020. On the longer term initiatives, the savings are in progress of being achieved, and they will be all incremental versus 2020.

So that is the kind of difference between the two-years..

Okay, thank you. And just a follow-up on - you were mentioning 2021 to be aware that CapEx will go up compared to 2020. Do we have also significant - we should consider also some, say, relate deferred payment due to some initiative by the regulator to coverage. So do you have some things relevant to be taking into account..

So I will give you the answer on the CapEx, and then I will let Marco eventually comment on the last part of the question. So for CapEx in 2021, definitely, after the significant reduction that we run through in 2020, there will be a step-up in the CapEx number for 2021.

But we are comfortably convinced that we will be able to stay below the 2019 levels..

On our continued operations, I do not see any change regarding our relationship with the regulator..

I mean all the payments have been regular, so you did not benefit on your continued operation from deferred payments or any relevant amount that should be taken into account?.

No..

Okay. thank you..

Thank you Domenic..

Thank you. And our next question comes from David Katz with Jefferies. Your line is open..

Hi, good morning everyone. Look, I appreciate all of the commentary around the games and the lotteries, which have done well. There is an awful lot of attention on the digital sports betting and iGaming aspects. Can you talk about what your kind of strategic vision is for that business.

And you obviously have sets of relationships, sets of key capabilities. What do you aspire that to really turn into overtime? And secondarily, I wanted to follow-up on the announcement of patent sharing that you have made with Scientific Games.

And just have you elaborate a bit on what that does, how it works and how we might think about that in the context of our forecast. Thank you..

Sure. Sorry, David, I didn't catch 1 thing.

Do you want me to elaborate on the overall digital offering or sports betting only?.

Primarily sports betting and iGaming..

Fine. Okay, fine. Look, Dave, I think in both areas, we intend to have our important role as a B2B provider, B2B provider of platforms, of games, of services, I think, have already elaborated on iGaming gaming. We have a very comprehensive portfolio.

We have the ability to distribute it, we have the possibility to cut bills with studios around the world to integrate going forward our offering. We are enjoying already a very good market share in jurisdiction that are regulated. And we do expect we will take benefit from the progressive regulation of iGaming in additional jurisdictions.

In reality, sports betting is not very much different because we have our very comprehensive offering. An offer that is based on our platform, that is reliable, scalable, we have our trading service team, and we have our market-leading hardware for the land-based distribution.

And all-in-all, this enables us to offer a turnkey possible solution to customers of any size. And as a matter of fact, we are in 16 states with a nearly 20 customers. We have a strong partnership with market leaders, such as NBA and Boyd. And the market, as you perfectly know, is expected to grow very fast over the next the five-years.

And we are proactively securing partnership in all the new jurisdictions that are thinking about this regulation. And the way we interpret our role year is to be the partner of any of our customers that intend to have sports betting offering from digital to land base with all the possible services that the customer can ask to a B2B supplier..

So if I can follow that up, is it fair to assume that it is not going to be in the instance where, let's say, larger integrated operators look to own their own enterprise it will be more for small and medium-sized operators who would prefer to, right?.

Yes, I think you are right, especially in the digital space, big operators then to integrate their platforms, and we can provide other services and very likely, our biggest opportunity going forward is with mid-sized operators. I agree on that. But on the other hand, our platform was able to bring to the success it is enjoying.

So anyone might require a digital offering we can provide them. Going forward, I think the opportunity will be more on mid-sized operator that wants to have a turnkey solution..

Perfect. And my second question was around the announcement for the patent sharing agreement and how you might elaborate on that..

Yes. I try to give my view, and my view is very simple. Through this agreement, each company will have immediate access to each other's (Ph) gaming patents.

While the commercial service will remain separate, both IGT and Scientific Games will enhance their respective solutions leveraging the two companies combined portfolio of patented cashless gaming technologies. Other players who are wanting to provide cashless solution will be able to take a license to the comprehensive IP portfolio too.

So this agreement enables IGT to generate value, not only from our products, such as reserved wallet. But also from our IP portfolio, where we have made significant investments over the years.

We think at the end of the day, that this will favor operators for a quicker adoption of the cashless technology to their benefit and at the end, to the benefit of their players as well..

I see.

So is the point ultimately that the offering becomes brand agnostic with respect to which casino management system you might be using yours or theirs, as long as you can get some third provider?.

No, I think the point is we will keep our separate offering, today, IGT can get and Scientific Games can get from this portfolio pool of IPs to enhance their own offerings. Going forward, if other operators are interested in taking some of those IP, there will be commercial conditions through which they will enhance their portfolio as well..

Okay. thanks very much. I appreciate it..

Thank you. thank you very much..

Thank you. And at this time, I’m showing no further questions in the queue. I would now like to turn the conference back over to Marco Sala for any closing remarks..

Thank you for joining us today. 2020 provided an opportunity to highlight the advantages of IGT's diverse portfolio of businesses and broad geographic presence. Our Global Lottery leadership and diligent focus on cost provide extraordinary resilience to our results.

We made important strategic and operational progress in the year, reorganizing the company with a sharpened focus on core competencies and unlocking substantial structural cost savings. With a stronger revenue and profit growth outlook, we have a clear path to reducing debt and enhancing shareholder value. Thank you, and have a great day..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day..