INTERNATIONAL-GAME-TECHNOLOGY-PLC Earningcall Transcript Of Q2 of 2024

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.

Vince Sadusky -- Chief Executive Officer

Thank you, Jim, and welcome to 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  divestiture  costs,  we  achieved  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  and  a

transaction  that  supersedes  the  spin  and  merger  transaction  originally  contemplated  with  Everi

Holdings. Apollo's $4.05 billion cash offer is a positive evolution of our previously announced Everi

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 import 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  artery  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 iLottery adoption,

especially in the U.S.

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  experienced  in  the  last  four  years.  3.5%  growth  in  Italy  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 new other special draws introduced last fall

were important drivers of increased retail and digital sales.

For Italy instance, the new Euro25 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 we'll 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  iLottery

sales  are  maintaining  excellent  momentum  rising  27%  in  the  first  half,  with  strong  growth  across

regions, especially in the U.S. and Italy. Over the last few months, we've bolstered our global lottery

portfolio  and  advanced  some  key  strategic  initiatives  with  important  multiyear  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  in  a  vast

array  of  e-instant  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 Eilers survey data.

Among them is Tiger & Dragon, which secured its third month as the No. 1 new premium leased and

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 WAP 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 U.S. 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 U.S. for the first time ever and

rolling out the largest PeakBar Top video poker installation in Europe.

On the digital front, our cash Eruption on Blackjack games continue to maintain their spots as the

No. 1 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 multichannel game content is a cornerstone

of  our  global  content  strategy.  The  record  first-half  operating  income  and  adjusted  EBITDA  we

achieved before the separation and 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.

Max Chiara -- Executive Vice President, Chief Financial Officer

Thank you, Vince, and hello to everyone joining us today. IGT reports 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

onetime  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% OI 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

toward  elevated  play  levels,  despite  moderation  in  certain  markets.  Our  ability  to  innovate  and

sequence compelling new games represents 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  installed  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 characterize some of the excellent

performance  of  last  year,  we  are  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 installed

base  increased  over  2,100  units  year  over  year,  primarily  due  to  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 our 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

multiyear period of pent-up demand due to supply chain challenges. Stronger gaming performance

in the U.S.

was offset by gain mix and timing of jackpots in Canada. Operating income increased 16% to over

$100  million,  with  OI  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 sales.

As  with  the  initial  average  transaction,  tax  leakage  from  the  sale  is  expected  to  be  modest,  up  to

$100 million or less than $0.50 per IGT share. This is because as a U.K. 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 pro forma net debt leverage,

compared  to  the  prior  every  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 conditions through the latter investment cycle, primarily around the Italy Lotto, bid,

and  certain  other  large  contract  rebids.  So  we  delivered  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.

Operator

Questions & Answers: