Ladies and gentlemen, thank you for standing by and welcome to the IGT 2021 First Quarter Results Conference Call. Thank you. It is now my pleasure to turn the call over to Mr. Jim Hurley, Senior Vice President of Investor Relations. Sir, the floor is yours..

Thank you and thank you all for joining us on IGT’s first quarter 2021 conference call, which is hosted by Marco Sala, our Chief Executive Officer and Max Chiara, our Chief Financial Officer. After their prepared remarks, we will 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..

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 ‘19.

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 installed base and a 40% increase in machine units sold in the U.S. and Canada.

Growth accelerated for our Digital & Betting 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 as with recovery from the impact of the pandemic is due to the unique and resilient nature of our business model across products and regions. I would like to spend some time on Q1’s Lottery performance. The 32% same-store sales increase was fueled by 52% growth in Italy 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 3 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 trending up over 20% for the Q2 to-date period compared to the second quarter of 2019..

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 jackpot activity 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, multistage 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 multistage jackpot activities.

And outside of same-store sales, Lottery service revenue includes approximately $60 million in performance-driven incentive accruals from our U.S. lottery management agreement. This $80 million in total in Q1 benefits flow through almost entirely to profit..

Your first question comes from the line of Carlo Santarelli from Deutsche Bank..

Hey, guys. Good morning. Max, maybe this one is best for you as you kind of talked about it a lot in your prepared remarks. But as you guys have started to see kind of the revenue tick back and obviously acknowledging the $200 million run-rate that you set forth for expenses.

Clearly, when you guys put those targets out, there was probably some ambiguity as to what costs would need to return as revenue started to ramp. Given the result here, it doesn’t look like a lot of them have returned and obviously, a lot of it’s on the Lottery side and you spoke to some of the incremental flow-through drivers.

But have you noticed perhaps maybe that estimate of costs that were returning could perhaps be lower than what you were previously articulating as you have seen revenues start to ramp across the business?.

Hi, Carlo. Look, at the end of the day, we have been able to bank on actions that we have executed throughout 2020 in the early part of the year. So we are continuing to enjoy the same kind of benefit in nature than last year in terms of reduction on discretionary cost.

As the year will unfold, and eventually, revenue, particularly on the Gaming side, will start to pick up, we will probably experience a shift into cost-saving programs away from those discretionary cost savings more into structural, permanent long-term savings as we have been announcing since the beginning of the year, with these operational excellence initiatives and the product simplification coming to fruition.

So we expect to still be able to beat our $200 million target for the full year, but the mix of the savings will change over time..

Great. That’s super helpful. I appreciate that. And then secondly, acknowledging there is some seasonality in the business.

But when you look at the Digital & Betting revenue business right now, I mean, you’re kind of run rating $230 million to $240 million, if we were to just annualize the $58 million in the first quarter given the attention paid to kind of those streams, obviously, iLottery, iCasino and your OSD platform business.

How much do you guys contemplate perhaps maybe breaking that business out even further down the road to give investors – obviously, with the revenue disclosure, that’s great. But obviously, that business is profitable for you guys as well.

But how much have you thought about kind of featuring that a little bit more on the disclosure and maybe providing a little bit more granular color on kind of exactly how that business is doing from a profit perspective as well?.

So this is a very good question, Carlo. Obviously, we enhanced the visibility of our fast-growing Digital & Betting activities since we launched the new organization back in Q3 of last year.

And we have also dedicated more time to talk about our business activities in Digital & Betting over the last few earnings calls, based on the success that we have been able to track across the verticals, in Gaming and Lottery and sports betting, which is driving, as you mentioned, phenomenal revenue growth.

The number we generated last year in digital betting revenue of $170 million is in front of everyone. And the further growth experienced in Q1 is very – speaks by itself. Obviously, if the business continues to expand at the rapid pace, we expect at a certain point, it may make sense for us to consider breaking out as a standalone segment..

Great, Max. Thank you very much. Take care, guys..

Your next question comes from the line of Chad Beynon from Macquarie..

Hi, good morning. Thanks for taking my question. I wanted to start on the gaming improvement, Max. You said in the second quarter, you’ll start to see this business starts to come in. I wanted to focus on your installed base. I believe you said 75% of the units are currently active. And I’m sure this differs across many jurisdictions where you have units.

But how should we think about when more of these units will be turned on and then by the end of the second quarter, do you think we can get closer to 100%? And then finally on that, how should we think about the incremental costs that are needed as this comes back on? Should this mostly flow through to the bottom line? Thanks..

Good morning, Chad, I think while speaking, in April, we had already 80% of our installed base active, and we think we will progressively grow till the end of the year when we believe we will reach almost the totality of our installed base active, and we do not anticipate much additional costs in order to get it done..

Perfect. Thank you.

And then just now that the free cash flow picture and your recovery to previous free cash flow levels is in sight, how are you thinking about inorganic Lottery growth opportunities? Are there other opportunities that you have your eye on or tuck-in acquisitions, either on the digital side or any of your other segments that could help position you guys for the future? Thank you..

No, for the time being, we are not working on any acquisition. I think we have – all we need to grow on all the digital verticals. And regarding Lottery, in general, we do not expect anything to be acquired short-term..

Thanks, Marco. Congrats on the quarter. Best of luck..

Thank you..

Thank you, Chad..

Your next question comes from Barry Jonas from Truist Securities..

Hey, guys. So if you think you’ll get back to 2019 EBITDA levels, and I guess that’s with cost cuts netting with the sale of the Italy gaming B2C, I have a bit lower than your historical 4x net leverage target by year-end.

So I guess the question is, how are you thinking about capital returns, like share repurchases and dividends here?.

I will take this Marco. Obviously, returning capital to shareholders is an important objective for us for now, although the priorities for capital allocation are still maintenance CapEx and paying down the debt until we achieve our 4x leverage target.

Having said that, since we expect leverage to return to pre-pandemic levels by the end of this year, there is potential for the Board to reconsider restarting dividend payments as those results materialize towards the end of the year..

Got it, got it. Okay.

And then just a quick one on the New York sports betting market, we’ve got a couple of inbounds from clients, just curious how you are thinking about potentially bidding there as a platform provider?.

For New York, you said?.

Yes. For the New York sports betting – mobile sports betting market..

No. I think the visibility on New York is not as big, as you know, but we are preparing ourselves to take advantage of any opportunity we might have there. So we will learn more details on the potential opportunity, but we are still thinking that there will be compelling opportunities for us..

Got it. Alright. Thanks so much, guys and congrats on a great quarter..

Thank you..

Thank you..

Your next question comes from the line of Domenico Ghilotti from Equita..

Hi, good morning. And a couple of questions. The first is on the Italian lotteries. If you can give us the contribution of Scratch & Win because if I’m not wrong, it has been extremely, extremely strong.

And so if you can elaborate on the performance and if you see any mismatch between sell-in and sell-out or any, say, one-off contribution? And the second question is on the savings.

I’d like to understand how much of the savings have been flowing to the P&L, in particular, to the Gaming compared to the Lottery business?.

Hi, Domenico, I will take the first question, and Max will elaborate on the second one. The first question, we do not see any mismatch on Scratch & Win in Italy. It is doing great, and we have a great sell-in and great sell-out. And of course, we are taking advantage by the closure of gaming houses and sports betting shops.

But the business is doing very well with a high level of satisfaction from players accordingly to our research..

So it continues, basically, we can take it as, say, sustainable level at least for this part of the year?.

Yes. I think the trend is continuing. It is quite solid, and I think we can expect a very solid performance until the reopening of the point of sales I’ve just mentioned..

Okay..

On the second question, Domenico, this is Max. So I was – as I was elaborating before with Carlo, our OPtiMa program, combination of initiatives will shift over time.

Right now, we see a little bit more contribution coming from Lottery then what should be the run rate and a little bit less from Gaming in terms of percentage of the total, but we are ahead of our – we are in line and slightly ahead of our target so far.

The Gaming will ramp up as soon as these operational excellence initiatives will come to fruition, starting with the second part of the year and more so going forward..

And just a follow-up, a clarification on the guide, on the indication of being back to 2019 level, so should I take it on a reported number, not on adjusted for pro forma for the disposal?.

We have recast our historicals to run the continuing of ops through all the financials. So we are comparing apple with apple. That’s what we should be doing..

Okay, yes. Thanks..

Okay. Thank you..

Your next question comes from the line of David Katz from Jefferies..

Hi. Good morning everyone. Max, and I guess everyone appreciate all the commentary. I wanted to – looking at Slide 16, which has the maturity schedule out there. And trying to think about the degree to which there could be more opportunities in there, given how well you did on the most recent raise.

Clearly, there is some bank debt and some bonds in the next few years.

Have you gone through any sort of thoughts or math as to what those opportunities might look like to save some interest and drive some cash flow?.

Yes. So thank you for the question, David. I would first acknowledge the fact that with the two significant actions that we have taken and the second is of today with the make-whole on the euro 2023 debt, we’re basically taking away towers – fundamentally public market towers we had in ‘22 and ‘23 now for good.

The next chapter is probably looking more into the bank situation, the bank debt situation. We have a term loan that will come due in ‘22 and ‘23. And then obviously, we have the revolver expiring in 2024. On the bonds, obviously, we can always opportunistically look at tendering some of those bonds.

We actually are now a couple of years out in terms of recalls that we started to create into the structure as we mature our issuance program in the last few years. So I would say long story short, bank debt first and then bonds later on.

But I think we’re pretty happy now with the situation that we have achieved by lowering the total amount of debt by a significant amount and also reducing the leverage by one full turn versus year-end..

Yes. Okay.

And I mean, is it fair – I mean, maybe this is not the right forum, but is there a fair sort of thought that those interest costs are going to wind up being lower than where they were, directionally, at least on the bank debt?.

Definitely, the bank debt is the low-cost liability of – financial liability for us. So changing in the mix definitely improves our average cost of debt, which has come down probably 0.25 point in the last year or so.

Obviously, we continue to look opportunistically at the capital market to see if there is any chance to construct the transaction that is effective. But again, I would really bank on the $60 million that we have now generated through the last two actions.

That will start to come to fruition on a quarterly basis, obviously, one quarter of that amount starting with Q3 of this year..

Perfect. Okay, thank you very much..

And we will take our last question from John DeCree from Union Gaming..

Hi, everyone. Thanks for taking my questions..

Hi, John..

Marco or Max, I wanted to ask a question on the iGaming business and where you’re seeing your revenue lift. Obviously, you have a lot of content to provide. So I’m curious if you could help us unpack that revenue a little bit.

Is mostly your slot content available on iGaming or are there other B2B services that you’re providing iGaming customers, I guess, specifically in the U.S.

related to technology? And the follow-up question is, is that business, iGaming in general, tied to revenue in terms of getting a revenue share? Or is it maybe fixed fee cost of services? How do we think about as the market – the iGaming market grows, how should IGT grow with that market?.

John, I think I can elaborate on this question. Let me start by saying that over 80% of our iGaming revenues is in North America, where we enjoy a 25% share in the U.S. based on the first quarter and 50% share in Canada, and – so our performance is very good. We expect for the full year to double our GGR as we expect market will double.

And the base of our strength, that we expect will be maintained as the market grows, stays on our game offering because our success is driven by the success of our games. For the time being, our share is driven by our proprietary games.

We are working on our strong franchises, Cleopatra, Wheel of Fortune, Da Vinci Diamonds that are truly working well across all channels. Yes, the point is, you cannot adjust porting from the land base to the digital space, the games. But you have to rework them significantly to better attune them to the digital space.

And this is where we devoted a lot of effort and energy in order to build up from solid brand and franchises very good digital games. In some cases, we have to change the mechanics. So in some cases, we change the payout because we need to make them stronger digital contents.

Sometimes in order to develop some specific feature, we ask the contribution from third parties studios. A recent example has been a collaboration for Wheel of Fortune Megaways that we have launched in New Jersey in Q4, and now is in Michigan, Canada, and it would be launched in Italy, too. It means that we take features.

We work the product with the third-party studios in order to enhance the quality of our offering. Third, we are also thinking about distributing – to become a distributor of third-party content. This is an emerging area of focus for us that can also bolster our market share. So it’s all about content.

And with that said, we are very well prepared to wave the solid growth profile of this business, considering the number of jurisdictions that might decide, especially in the United States to regulate this segment. And business model is revenue sharing.

So you have to look at that to think about this business in terms of revenue sharings accordingly to the performance of our content..

Excellent. Thanks, Marco. I think you answered a number of my questions in there. So, I appreciate all to help. Congratulations on the quarter..

Thank you very much..

And I show no further questions at this time. I will now turn the call back to management for any closing remarks..

Thank you for joining us today. The outstanding Q1 results we delivered give us confidence that we can return on to key pre-pandemic financial measures this year. The swift recovery reflects the unique and resilient nature of our business model across products and regions and the tremendous efforts of the IGT team around the world.

We are building for the future of a stronger foundation of each of our core business activities. We look forward to speaking with you about this over the next weeks. Have a great day..

Ladies and gentlemen, this does conclude today’s conference. Thank you again for your participation. You may now all disconnect..