International Game Technology Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 14, 2024

There are 10 speakers on the call.

Operator

Thank you for standing by. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Game Technology First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I will now turn the conference over to James Hurley, Senior Vice President of Investor Relations. James, you may begin your conference.

Speaker 1

Thank you, Christa, and thank you all for joining us for IGT's Q1 2024 Conference Call, which is hosted by Vince Sadowsky, our CEO 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.

Speaker 1

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.

Speaker 2

Thank you, Jim, and welcome everyone to the call. Fiscal 2024 is off to a strong start with Q1 results that exceeded our outlook. Revenue of nearly $1,100,000,000 was better than expected, primarily on Global Gaming and iGaming performance. The 24% operating margin was 400 basis points higher than anticipated, mostly on better lottery results from Italy same store sales and strong North American jackpot activity in late March, in addition to the timing of separation and divestiture costs. The company delivered record operating income of $273,000,000 excluding separation and divestiture costs.

Speaker 2

Based upon Q1 performance exceeding expectations, we've upgraded our full year 2024 revenue and profit goals, which Max will walk you through later. Focusing on the operating segments, global Lottery revenue rose 6%, driven by Italy game innovation and strong product sales growth. Global Lottery has now achieved 6 consecutive quarters of operating margin expansion. Global same store sales were better than expected largely on strong Italy instant ticket performance and significant U. S.

Speaker 2

Multistage ad pod activity towards the end of the quarter, thanks to $1,000,000,000 plus jackpots for both Powerball and Mega Millions. Italy's more than 4% same store sales growth reflects similar trends for both instance and draw games and was achieved on top of 10% growth in Q1 of 2023. This performance is a true testament to IGT's unique market knowledge and player insights that create compelling game innovation and go to market strategies. Same store sales in North America and the rest of the world were slightly below prior year, mostly due to differences in the year to year cadence of new instant ticket game launches, especially for higher priced games. GlobalEye Lottery sales continue to expand at a fast clip, up over 20% of the period, led by growing portfolio of high performing e instant games like Ghostbusters in the U.

Speaker 2

S. And Ultra Numurisame in Italy. IGT's best in class lottery hardware and software solutions drove another quarter of strong product sales growth. We've had some meaningful updates on the upcoming Italy lotto license tender. A recent government decree confirmed the 9 year term and minimum €1,000,000,000 upfront license fee, which will be payable in 3 tranches.

Speaker 2

In addition, the effective rate will remain 6%, which is consistent with the current license. In preparation for the upcoming tender, IGT and our current partners have entered into memorandums of understanding maintain the existing joint venture structure for the new bid. As the only operator of this license for 3 decades, we are confident in our ability to compete for the next license term. I'd like to spend some time on the key product strategies driving Global Lottery's consistent growth. Broadly, they are new game launches, increased play frequency and a multi channel focus.

Speaker 2

In Italy, the team has done a fantastic job delivering compelling game innovation, including revitalizing core franchises across Dror and Insta Games. They are successfully amplifying the impact of this innovation with coordinated launches across both retail and digital channels. In fact, our multidimensional omni channel games won lottery product of the year at February's International Gaming Awards. In instance, updated graphics and new price points and payout structures have maintained the success of iconic games like Numerisame. We launched the €20 Ultra Numurisomy extended play game in Q1, which helped drive incremental sales in the period.

Speaker 2

We are executing a similar strategy with the Dopias Fetus franchise, renewing it with updated graphics and an enriched game experience that will be supported by several new retail and e instant games as well as expanded price points over the next few months. Increased play frequency is helping drive growth in Italy draw games. This includes a second million day draw introduced in the Q2 of last year, a 4th weekly lotto draw launched in Q3 and new Tenney lotto special draws occurring between 4 p. M. And 6 p.

Speaker 2

M. Each day that began in Q4 of last year. Outside of Italy, the mid March launch of 500 Times the Money, Georgia's second $50 instant ticket game is currently driving improved sales in that category. New Jersey's $50,000,000 explosion launched in the end of Q1 with a $20 price point and that's having a similarly positive impact. Cash Pop, a proprietary IGT draw based game recently expanded to a 13th jurisdiction.

Speaker 2

The highly customized gameplay and multiple daily throughout times creates an engaging player experience, which explains Cashbox popularity and success and helping to drive lottery sales growth. Georgia's multi channel quick win game launched in September currently has 8 iterations in the market. The retail and I lottery games share a progressive jackpot and sales are well balanced across channels. Based on the strong results, there are another 6 quick win games planned for 2024. Broad based demand for games and cabinets is driving sustained profit momentum for our gaming and digital segment where year to year profit margins expanded for the 12th consecutive quarter.

Speaker 2

The global installed base grew to over 54,000 units in the quarter. This includes the 7th consecutive quarter of growth for U. S. And Canada premium units. In fact, the U.

Speaker 2

S. And Canada installed base of multi level progressive games was up 6% from the year end levels on the continued success of Prosperity Link and Mystery of the Lamb, which was named the top performing new premium game at this year's EKG Slots Awards Show. Gaming machine unit sales have been on a strong multiyear growth trajectory, thanks to a consistent pipeline of exciting new games. Rising Rockets is one of the latest in that roster, securing the number 3 and number 5 spots in top indexing new core video games. Our new cabinets, in particular the pCurve 49, remain among the top performing North American cabinets and this helped drive record U.

Speaker 2

S. And Canada average selling prices in Q1. IGaming revenue grew 10% in the quarter with GTR reaching an all time high in March, driven by strong IGT game performance in the U. S. That momentum was supported by the tough performing cash eruption, In addition, our popular video poker and table game offerings.

Speaker 2

We continue to see success with our bespoke game program and recently launched Wheel of Fortune Triple Extreme Spin with BetMGM and 4 Dogs Cats with FanDuel. IDT has had consistent success bringing gaming and digital games to market through focused R and D investment, including process improvements and more discipline in game and hardware development. Backed by a strengthening portfolio of terrific IP, IGT is currently enjoying the most success we've had in game development in over a decade. In the premium space, we've consistently delivered high performing Linked Progressives. Tiger and Dragon, which was just released in April, is one of our top scoring test bank titles and is off to a strong start.

Speaker 2

4 of our non WAP premium games are in the latest Tyler's top 25 new premium games and we expect Tiger and Dragon to make its way to that list soon. In the WAP arena, IGT has 11 of the top 25 indexing games, including the number 1 and number 3 spots with MegaBucks Double Diamond Deluxe and Wheel of Double Diamond. We've got exciting new titles on the horizon with Whitney Houston and Prosperity Lake Blessings. We've made significant inroads in the core video category, which represents the largest portion of industry sales and is a space where IGT is underrepresented. I already mentioned the recent success of Rising Rockets, but it's worth noting the longevity of titles like Magic Treasures and the growing library of new games such as Golden Eagle and Golden Phoenix.

Speaker 2

The success of our games in North America is translating to the rest of the world. Magic Treasures and Mystery of the Lamp are among the top 10 indexing premium games in the EMEA region, while Magic Treasures and Egyptian Lake are among the top 10 core games in Latin America. The encouraging land based results are also evident in our iGaming business. IGT has 3 of the top 5 performing U. S.

Speaker 2

Online games. We've had particular success with a multi channel focus, leveraging strong land based franchises in the digital arena. Later this year, we'll be rolling out new digital games under the successful Cash Eruption, Cleopatra and Fortune Coin franchises. So 2024 is off to a strong start with record operating income, net of separation and divestiture costs. Our upgraded full year 2024 revenue and profit outlook reflects broad based momentum across key performance indicators in the balance of the year.

Speaker 2

We continue to make progress in separating global gaming from gaming and digital and preparing for the proposed transaction with Everest. Now I'll turn the call over to Max.

Speaker 3

Thank you, Vince, and good morning, everyone. We generated strong revenue and operating income margin in the Q1, exceeding the outlook we provided in March. And we delivered record operating income when you exclude $18,000,000 separation divestiture cost related to the planned spinoff merger transaction for gaming and digital. Revenue of $1,070,000,000 increased 1% year over year, reflecting continued growth in global lottery, partially offset by the timing of product sales in gaming and digital. We delivered operating income of $256,000,000 and an operating margin of 24% in line with the prior year.

Speaker 3

As strength in global Lottery and improvements in R and D and SG and A costs were offset by the lower revenue contribution from gaming and digital and separation and divestiture costs. Excluding separation and divestiture costs, operating income rose to an all time quarterly record of $273,000,000 and operating margin expanded 150 basis points to 25.6%, propelled by strong Italy same store sales and higher product sales margin in Global Lottery and easing our supply chain cost and R and D profit improvement in gaming and digital. Adjusted EBITDA was $443,000,000 in line with the prior year, but up 3% to $461,000,000 excluding the separation and divestiture costs. We generated EPS of $0.40 per share as a result of the strong operating performance indicated above and the tax rate normalization. Adjusted EPS was $0.46 per share compared to $0.49 per share in the prior year and would have been $0.04 higher year over year to $0.53 excluding the after tax impact of separation and divestiture costs.

Speaker 3

I will now turn to a segment level view of first quarter results. Global Lottery delivered solid revenue and profit growth in the Q1. Revenue rose 6% to $651,000,000 driven by strong product sales and continuing Italy same store sales growth. 1st quarter product sales revenue nearly doubled bolstered by the delivery of GameTouch 28 self-service terminals in Canada and system software upgrades in Singapore and Germany. About 20% of this increase is due to a planned acceleration of sales, originally expected to occur later in the year.

Speaker 3

As a reminder, the timing of product sales in this segment can be lumpy and we expect to see some moderation on a full year basis given the high levels experienced in the prior year. Robust digital incentive per sales coupled with contributions from a 2023 contract with win in Connecticut helped drive service revenue up 3%. Operating income rose 8% to $258,000,000 and operating margin expanded 60 basis points propelled by strong Italy same store sales and product sales margin. IMO's stage act of activity late in the quarter helped neutralize a previously expected year over year decline. In Q1, Gaming and Digital delivered the 12th consecutive quarter of year over year operating margin expansion and achieved the profit in line with prior year despite lower revenue related to the timing of our sales.

Speaker 3

Revenue of $406,000,000 declined 7% versus the prior year. The global installed base continues to expand on the strength of high performing games and cabinet, particularly in the area of multilevel progressives. Terminal service revenue rose 2% year over year on growth in the global installed base. On a sequential basis, the rest of world installed base added over 2 30 units, while the U. S.

Speaker 3

And Canada was relatively stable as growth in premium casino units mostly offset expected removals in the New York WLA market. We shipped over 6,600 units in the quarter and U. S. And Canada ASPs hit a record at nearly $17,000 However, as anticipated product sales revenue declined year over year as the prior year benefited from more new and expansion opportunities and pent up demand for replacement units in the U. S.

Speaker 3

And Canada and elevated IP and software licenses. IGaming revenue increased 10%, primarily driven by strong performance in the U. S, coupled with favorable timing of jackpots. Despite lower revenue, operating income of $81,000,000 was in line with the prior year and profit expansions continued with operating margin increasing 80 basis points to 20%, driven by easing of supply chain costs and L and D process improvement. We have decided to pull the Investor Day target margin reference from this quarter onwards as the 2 segments in combination surrender the comparison with the previous margin view less relevant.

Speaker 3

However, we are maintaining our outlook for 250 basis points to 400 basis points of margin progression expected to occur in 2024. Following the closing of the merger transaction, the new management team will provide our thoughts around appropriate long term aspirational target for the new combined entity. In terms of the specific forces behind 2024 operating margin improvement, we can consider the following: an expected revenue growth backed by favorable KPI momentum, primarily in the international market, the continued moderation of supply chain costs, which is mostly an H1 event, and a consistent approach focused on diligent cost management with increased operating leverage as revenue flexes upward in the balance of the year. On the back of giving demand stabilization in North America and continued expected recovery and expansion in international markets, we remain positive on our margin improvement trajectory going forward. Turning to the balance sheet now, we generated cash flow from operations of $120,000,000 in the quarter, which included around $195,000,000 in cash outflows primarily related to the timing of cash taxes and ARAP dynamics.

Speaker 3

The timing impacts were expected and we are confident in our ability to achieve our full year target of at least $1,000,000,000 in cash from operations with about 40% of the target generated in the first half and 60% in the second half of the year. We are in a solid financial position with net debt leverage of 2.9 times, matching the lowest level in HD history, manageable near term debt maturities and $1,700,000,000 in lippidis. Based on the strong first quarter results, we are upgrading our full year outlook to the upper end of the previous range, increasing revenue expectations to approximately $4,400,000,000 with an operating margin of around 21%. We continue to expect about $130,000,000 in pre closing, separation and divestiture costs related to the planned spin and merger transaction. Excluding those event specific costs, operating margin will be about 24%, at record level for fiscal year period.

Speaker 3

More immediately, for the Q2, we expect to deliver revenue of approximately $1,050,000,000 and operating income margin of around 22%, which includes about a 2 50 basis point impact from the pre closing separation and divestiture cost. We believe that the current run rate on the separation and divestiture cost will continue in the short term and see the balance of those costs backloaded towards the closing date. Before moving to Q and A, we would like to spend some time on key areas of investor interest regarding the spin off of our Inti Gaming and Digital Assets and subsequent merger with Evert. We believe the creation of 2 separate pure play companies has the potential to create significant value for HDT shareholders through the delivery of cash proceeds to Remenco, the issuance of Mergeco shares in exchange for units of SpinCo and the potential as well as the synergies expected at Mergeco. Many of you have asked about the path to closing the transaction.

Speaker 3

As you can see here, there are various work streams and milestones required. We're making progress on each and we expect closing to occur in late 2024 or early 2025. Speaking of progress, we have advanced in the financing portion of the transaction We see this strong support through the extension of bank financing commitments to 7 more high caliber financial institutions. The deal was more than 2 times oversubscribed with the revolver successfully upside by 50% to 750,000,000 dollars The strong interest in the IGTF recombination that we have seen from the banking side during this process is a testament to the strength of the proposed transaction. Regarding the timing of the estimated $200,000,000 in separation and divestiture costs, we expect to pay about 2 thirds before closing with the remaining portion incurred upon closing.

Speaker 3

These costs are aligned with those of similarly complex transactions and here you have some perspectives on the scope of the various work streams behind them. It is important to recognize we are executing 2 transactions in 1, a carve out spin off of 1 segment from a publicly listed company and a merger with another publicly listed company. That also explains partially the time needed to close the transaction as the new entity will need to be SOX ready from day 1. We have had many questions about the taxable nature of the transaction. It shows this path since there is minimum tax leakage to IGT and it allows both new companies for freedom to pursue strategic M and A and other capital allocation initiatives from day 1.

Speaker 3

We currently expect the distribution to be treated as dividend. There are tax consequences to shareholders and we have provided some insight on implications for U. S. Holders as a reference here. Also please refer to additional tax disclosure in IGT 20F filed in March 2024.

Speaker 3

In general, the tax impact to shareholders can be viewed as a matter of timing as shareholders will receive a fair market value tax basis in the new stock. The cash distribution to be paid to remain upon closing of the merger has a very favorable impact on the leverage profile of the standalone law to the company. We intend to allocate about $2,000,000,000 of net distribution to paying down debt. Debt puts Remancor 2023 pro form a net debt leverage at about 2.5x, strengthening the company's financial condition. Based upon that, the pro form a adjusted EBITDA figure will remain consistent at around $1,200,000,000 At this point, we'd like to open the call for questions.

Speaker 3

Operator, can you help with that, please?

Operator

Your first question comes from the line of Barry Jonas with Truist Securities. Please go ahead.

Speaker 4

Hey, guys. Good morning. Vince, what's the reaction been from customers regarding the proposed transaction? I guess, what are they most excited about? And are there areas of concerns you've had to address?

Speaker 4

Thanks.

Speaker 2

Yes. Good question. Both the IGT commercial teams and the average commercial teams have spent a lot of time with customers, both have good sized sales forces, especially in North America. And I've spoken with customers as well and universally, we've not received negative feedback. I think the opportunity for customers is to have a competitor that has a greater collective amount of R and D resources focused in the right areas.

Speaker 2

I'd say, over the last couple of years in particular, IGT has been very competitive. We've got our cabinets, our T Care 49 cabinets ranked number 2. We've had a string of hit games in the MLP space. We've revamped our mechanical reel. We've come out after more than a decade, a new very effective video poker product, etcetera.

Speaker 2

So we've had really good momentum. The infrastructure side of the casino centered around cash access has been a real strength of Everies and really integral to the operation best in class as well. So we've not had any customers concerned around kind of market pressure or any of those types of things since we're complementary in those areas. And then when you think about the various regions, you have some regions are VLT markets, some are AWP markets, some are Class 2 markets and each one of us has strong offerings in one of these respective areas. So the opportunity to, over time, be able to bring game themes that individually we're producing on a standalone basis into those markets is something that operators understand and are excited about.

Speaker 2

So they see us as a better equipment supplier with a more fulsome offering. And I think anecdotally, we've got a good amount of cheerleaders on the casino side for just, I think a real testimony to the service orientation of after units are sold, the support that takes place on the Emery side and on the IGT side with our amazing field services group and ability to constantly upgrade and service these machines in the field being best in class. So I think overall, it's been met with really, really positive response. So we can't wait to get this closed and we're excited to get together and be able to be 1 unit.

Speaker 4

That's great. And then just as a follow-up, while you guys are working on your separation, a gaming competitor just closed on an acquisition of an iLottery competitor. So I'm curious how you see that transaction impacting your iLottery positioning given your proposed separation? Thanks.

Speaker 2

Yes. I mean, combinations, right? It's all about execution. So it'll be interesting to see how that plays out. But that competitor has a good ILottery product and we've competed against that product effectively with our iLottery products over the last 3 or 4 years.

Speaker 2

So again, iLottery enjoys good growth, right, still being kind of early days of customer uptake. And we've continued to enjoy really good double digit growth in the iLottery space. And we've been successful in continuing to bring more iLottery, both platform and content customers to IGT Lottery. So as you'd imagine, any high growth space has competition. And again, I have no idea what the plans are for that entity.

Speaker 2

But on a standalone basis, they've been a good competitor and they help to keep our team sharp and we constantly rank our games versus our competition games performance. And we've got many of the top performing iLottery games as well as benchmarking platforms. So again, we welcome the competition.

Speaker 3

Perfect. Thank you so much.

Operator

Your next question comes from the line of Jeff Stanatow with Stifel. Please go ahead. Great.

Speaker 5

Good morning, everyone. Thanks for taking our questions. Maybe starting off on the announcement around the around the Lotto JV structure. Vince, can you just expand a bit further on the strategic rationale for leaving the JV structure intact? Obviously, the balance sheet looks a lot different than the last time you went through this process.

Speaker 5

So just curious what led you to decide to incorporate funding partners again this time around?

Speaker 2

Yes. We'd say, when you look back at partnerships over the duration of the term, you have the ability, of course, and with the advantage of hindsight to evaluate how successful the partnership has been. And we think the partnership between Alwin, Aeryon and Novomatic, we think it's been a successful partnership. The team has worked, I think, as good partners. Of course, we operate it, we run it.

Speaker 2

The joint venture has advantages in terms of funding and also the ability to bring in incremental folks with lottery experience in different areas. So again, it operated well. And so quite simply, we decided we would we and our partners desire to continue it, and we're moving ahead with this. We think the stability of what we've had for many years is beneficial to all and no reason to upset that.

Speaker 5

Right. That makes sense. Thanks. Thanks for that color. And then turning to the guidance revisions, if you back out Q1 and your Q2 guidance from the full year guidance, it looks like you're expecting about 52% of revenues to come in the back half of the year.

Speaker 5

Could you just expand a bit more on the expected seasonality or I guess acceleration? Is this mostly casino slot purchasing seasonality or what else is driving your expectation for more back half weighted 24? Thanks.

Speaker 2

Yes. I mean, I'd say on the lottery side, when you look forward, we expect kind of low single digit same store sales growth as we look with the limited visibility we have given the momentum we've got in Italy and what we're seeing in North America and the rest of the world. We've had several of our markets have launched new instant tickets, which is which I think will be super helpful given the strong high priced instant ticket launches in some significant jurisdictions in the early part of last year. So we think that's super helpful. The multistage jackpot has been such a so attractive to consumer.

Speaker 2

We saw towards the end of last year and into the beginning of this year, a bit of jackpot fatigue in that area as there's been a lot more frequent $1,000,000,000 or close to $1,000,000,000 advertised jackpots. But then that accelerated and we actually saw on a weekly basis sales towards the large jackpots improve at the end of the run-in 2024 for these last couple of Powerball and Mega Millions, dollars 1,000,000,000 plus jackpots. So that's, I think, a good encouraging sign. On the gaming side, we've had just an incredible amount of pent up demand going into 2023, So a bit of a difficult comp. However, when we look forward and it's really all about how well the games are performing now and the upcoming game launches.

Speaker 2

We're really excited. Again, as I mentioned, I think not just myself, but the team would say that we're in the best shape we've been in a decade with consistent high ranking launches of not only MLP games, premium games, which are critical and evidenced by the continued expansion of the installed base on the premium side in North America. But now in core as well, the team has been able to put together some core games that look pretty exciting. Again, I think I mentioned Rising Rockets is one of them premiering at number 3 and number 5, close to 2.5 times house average in early days. So that's something that's new for us and pretty exciting.

Speaker 2

And so we're looking ahead at unit shipments. And we know from what our casino customers have reported some mixed results, but again they had a very challenging January with weather as well as record setting numbers for last year. So I'm actually encouraged. I see the continued performance at or around last year's level as really good. And chatting with our customers, some got off to a bit of a slow start with capital expenditures, but the conversations have gone well.

Speaker 2

And again, I think as long as we're in a position where our games are performing, we're entitled to get our fair share of the both the purchasing and installed base replacements that are projected to take place this year. So as we look out, we do see, for the 2nd quarter unit shipments I'm sorry, kind of the sales funnel building kind of around similar levels to prior year. And we think that throughout the course of the year, that will continue to improve for us through a combination of both the industry and the performance of our games. And I'll hand it over to Max for any other

Speaker 3

I would say that the only item I'd like to add is that on the back of the strong KPI momentum we have been experiencing in the last few quarters in gaming, including ASP installed base and all of that, we think with that we can continue to achieve positive revenue momentum in the balance of the year.

Speaker 5

Great. Thanks Max. Appreciate all the color and congrats on a strong quarter.

Speaker 2

Thank you.

Operator

Your next question comes from the line of David Katz with Jefferies. Please go ahead.

Speaker 6

Good morning. Thanks for taking my questions. I appreciate it. I wanted to, Vince, just talk about sort of the update on the Italy concession. I'm a bit curious how that came about.

Speaker 6

I don't recall sort of getting this early insight last time. Obviously, is there any potential for it to change as we move down the road since there is a fair amount of time. And I guess to the degree that you can plan or provide for it ultimately being resolved that obviously is a pretty good thing, right? Any insight there would be helpful. Thanks.

Speaker 2

Yes. So going back to the years ago, the last renewal, I think the process of the announcement of the term and the rate and the fee is the first step. And then of course, there's multiple approvals, the steps that takes place, including the drafting of a formal RFP and then the bid and award process, which will take some time. And I'll let Max take you through more of the details of the process. So on the beginning of April,

Speaker 3

governmental decree has been issued in Italy, which basically highlighted the key features of the new bid will include. Now the ADM, the appropriate agency needs to draft the tender. There are a few steps in the legislative agenda to follow the drafting of the tender, including the opinion of compatibility with EU tender rules. Once the tender is issued, then interest parties make their assessment offer a bid, the bids get assessed and all the offers get assessed by the ADM. So all in all, we expect that the time is still to be around 12 to 18 months at full execution of this process.

Speaker 3

But definitely, we welcome the announcement of the KPIs, the key indicators for the bid as it provides a lot of clarity. And on the back of that, as Ben said, we have extended the memorandum the memorandum of understanding the existing consortium for the upcoming bid. Understood.

Speaker 6

And if I can just follow-up quickly on the margin side and make sure we're perfectly clear. I mean, the margins are very, very good. I want to make sure that I'm comping what you've said today with what was last time. And if I'm reading correctly, right, it was 20 to 21 including roughly 300 basis points of impact from the pending deals. And now, right, we're excluding those and going to a top end of 24%, right?

Speaker 6

So there is a bit of improvement, but I just want to make sure we're all perfectly clear on what the change is

Speaker 3

and what the update is. Yes, correct. So effectively, when you take the midpoint of the original margin guidance range, we're moving the margin up 50 bps with this upgrade. So again, we think that that improvement is solid and is backed by a very strong Q1, which came in better than expected. Some of that was timing related, so timing of separation costs.

Speaker 3

The catch up on the jackpot was not originally expected on a year over year basis. So that also helped fill the gap. And then there is always the underlying strength in our performance as a combination of the different markets that came to fruition, a strong obviously a strong internally market in lottery helps our margin a lot. So again, going forward, we believe that we'll continue to stay focused on improving our margin. And again, we need to watch out the impact of the separation and divestiture expenses because I think it's appropriate for the market to appreciate what is the organic earnings power of this group of assets versus obviously the reported number, which includes those costs, those one time costs.

Speaker 6

Agreed. Congrats. Thanks. Appreciate it.

Operator

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

Speaker 7

Good morning. Thanks for taking my question. I wanted to focus on some of the underlying North American trends. You guys both mentioned the impact that a lot of your clients, the operators saw in January given the inclement weather. But as it relates to Lottery, did you see that in that segment as well in North America, meaning lower kind of same store demand in January and then that picked up?

Speaker 7

And then second part of the weather related question is around yields. So did you see revenue per unit or the yields for the gaming ops business start to inflect positively in any month when we got past the weather? Thanks.

Speaker 3

Yes. So absolutely, Chad, this is right. We have seen as well a very slow start of the year in January, which probably is due to that weather situation, which impacted a little bit over all the activity. But we saw also a pickup momentum in February March, which realigned the trends correctly during the quarter. Again both in North America for gaming and Lottery.

Speaker 3

The one thing that is more important to mention for Lottery is the year over year difference in the game, new game launch cadence. So last year, we were on the verge of having launched new high ticket games, so that initial momentum was very strong. Obviously, this year, the launch cadence has a different tempo and we expect that to happen later in the year. So we're confident that we will be able to recover that game launch impact for the balance of the year in London. And as far as gaming is concerned, the yields the recent yields dynamic has been very strong.

Speaker 3

We continue to make good progress on our stand alone unit. And by the way, by default, replacing stand alone units coming in with VLT going out, there is a net positive impact to the margin mix in the portfolio.

Speaker 2

That's great. Thank you.

Speaker 7

On the digital business, any updated views in terms of potential impact from the white paper implementations in the back half of the year? Is that factored in the guidance? I know it's not a huge contributor, but has anything changed from that respect?

Speaker 2

No, nothing. We can't think of anything that has impacted our projections for the rest of the year and our business plan as a result of that. Okay, great. Thank you both. Appreciate it.

Speaker 2

Thanks.

Operator

Your next question comes from the line of Joe Stauff with Susquehanna. Please go ahead.

Speaker 8

Great. Good morning. I wanted to ask about the Italian results, lottery results, really strong organic growth over 4 percent on a tough comp. I was wondering if you could maybe disaggregate or discuss was this product specific? Was it newer products?

Speaker 8

Was it across the board? And then I had maybe 2, say, more deal specific questions. Maybe, Max, when do you expect the carve out portion of the transaction to be done? Is that would you expect everything in terms of the various org chart boxes that you have to move around to be done by the Q3 or whatever? And when would you expect the S-four to be filed?

Speaker 8

Thank you.

Speaker 2

I'll take the first question around Italy. So, yes, I mean, the continued growth in Italy, I think, is a real testimony to the team's capabilities when you think about the significant increase that was experienced in gameplay and sales in Italy in the Q1 of 2023 and then following that up with strong growth here in the Q1 of 2024. And I recently spent time with the team going through our strategic plan in Rome and it's a little bit of everything. They've got really good game innovation since we've been operating the lottery since its inception. The library of games and the knowledge of the proper games to evolve and refresh and deep franchises like Tenney Lotto, I think are things that are incredibly valuable.

Speaker 2

And the research and analysis is done around price points and various payout strategies and being aware and observing best practices around the world, I think, has all led to this, plus the retail distribution network, the partnership we have with the tobacconists and our point of sales teams that are constantly working with our point of sales operators is second to none. It's very, very impressive. And then when we look out going forward, the team has a very, I think, impressive slate of continued game launches and end game evolution with different price points. They're looking at lower end price points like €0.50 launches all

Speaker 3

the way up to kind

Speaker 2

of the very price points €15, €25 different payout structures and different gameplay. And all that's been all coupled really recently in the last really less than 2 years with much more effective game launches on the ILottery side as well, emulating a lot of the themes that we have developed on the retail side, but in a digital format, I think appealing to an even broader group of players. So we've seen really good growth on that front as well. So it's really, I think, a bit of everything, just great execution.

Speaker 3

Great. And in terms of the second part of your question, so we've been working on the carve out preparation for some time now. Obviously, we have to take into account that there are 3 years here that we need to complete. Plus, obviously, we have to follow through with the corporate decaters in 2024 as well depending on when the S-four gets filed. So again, work is in progress and we're making progress as expected at this point of the year.

Speaker 3

In terms of the S-four, it's in currently is in preparation as we speak. We expect probably to be in a good position towards the second half of the second quarter towards the end of the second quarter to be able to do the initial filing. And then obviously, it's the typical 30 to 60 days back and forth with the staff to finalize the document hopefully by the end of the summertime.

Speaker 8

Thanks Vince. Thanks Max.

Operator

Our last question today comes from David Hargreaves with Barclays. Please go ahead.

Speaker 9

Hi. I wanted to check the financing commitments you've announced. Are those all of the financing you're going to need for the transaction? And then secondly, is there any update on the disposition of the EVRI bonds? What's going to happen with those?

Speaker 9

Thank you.

Speaker 3

Yes, I'll take the first part of the question. So the financial commitments of DKK3.7 billion dollars before the revolver are going to be split between a note to be issued and a TLB instrument that also will be issued roundabout the closing time. We think we believe that that package is sufficient to get Mergeco going. On top of that, we have a revolver of $750,000,000 which was upsized from the original amount, which we think is sufficient to support the growth of merge cone and the financial needs of merge cone day 1. The good thing is that once we went out and promote the package, we got a superior response from financial institution, primary financial institutions and we were very pleased to kind of revise the commitments to the upside.

Speaker 9

That's helpful. I think there's just a little concern among investors. Are you able to say at this point if there's going to be a 101 change of control made for the Avery

Speaker 2

notes? That's really Avery's question.

Speaker 9

Evertz's okay. I see. Thank you so much. Sure.

Operator

That concludes our question and answer session today. I will now turn the call back over to Vince Sadowski for closing comments.

Speaker 2

Yes. Thanks for joining us today. As you heard, 2024 is off to a good start with record operating income, net of separation and divestiture costs. Our upgraded full year revenue and profit outlook reflects good momentum across key KPIs and balance of the year and the work to separate Global Lottery from gaming and digital is underway as we prepare for the proposed transaction with Evertie. As we've said before, we believe the creation of 2 more focused companies better positions them to service customers and create significant value for stakeholders.

Speaker 2

So thanks for your interest in IGT and have a great day.

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Earnings Conference Call
International Game Technology Q1 2024
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