International Game Technology PLC (IGT) 2023 Q4 法說會逐字稿

Hello, and welcome to the International Game Technology plc Q4 '23 and fiscal year 2023 earnings call. (Operator Instructions) I will now turn the call over to Jim Hurley, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Sarah, and thank you all for joining us on IGT's Q4 and full year 2023 conference call, which is hosted by Vince Sadusky, 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 to our Investor Relations website.

And now I'll turn the call over to Vince Sadusky.

Thank you, Jim and hello to everyone joining us today. We delivered a strong finish to 2023 with Q4 operating income growing 11%, yielding 160 basis points of operating margin expansion and strong free cash flow generation. This enabled us to meet our fiscal year 2023 financial goals, which were raised two times during the year. In fact, the growth across our Global Lottery, Global Gaming and PlayDigital segments contributed to record-breaking achievements of $1 billion in operating income, $1.8 billion of EBITDA and a 41.3% EBITDA margin.

This translated into significant cash generation in the period, including record cash from operations of over $1 billion, bringing the company's net average net debt leverage to the lowest level ever. It's an impressive set of accomplishments that confirms we are on track with our long-term strategic and financial goals across the portfolio.

I'd like to acknowledge the hard work of the entire IGT team and delivering them. We have a culture grounded in responsibility, collaboration and passion. These values are not only the key drivers of our success, but also make IGT a great place to work.

So thank you to all my IGT colleagues around the world. In fact, IGT was recently recognized as a top employer in the US, Italy and Canada by the top employers Institute, which is the global certification company, recognizing excellence and conditions employers create for their people.

I'd like to spend some time on the operating performance of each segment, beginning with global lottery. We maintained our leadership position in 2023 through a combination of organic growth, portfolio expansion and contract extensions. That's clear in the 7% revenue growth achieved in Q4 as well as the 6% growth for the full year period net of the Italy Commercial Services sale.

These are impressive numbers for a business of this scale. Same-store sales rose a little more than 2% in the year, consistent with the steady low-to-mid-single digit growth for the lottery industry. Italy same-store sales increase of nearly 7% is especially noteworthy, Lotto and Scratch & Win Games we operate in Italy are among the largest and most successful in the world.

Italy, strong momentum during 2023 reflects IGT's expertise in understanding player behavior, developing compelling new games, managing a broad distribution network and efficiently conducting day-to-day operations. The low single digit same-store sales increase in North America and the rest of the world was achieved on top of accelerated growth in the last few years.

ilottery sales continued to expand at a fast clip up over 40% in 2023, mostly driven by organic growth in existing markets. During the year, we bolstered our contract portfolio with multi-year extensions in some of our largest jurisdiction just as California. In addition to other key markets like Kentucky and Virginia, we also added some new business to the mix. We went live with a new facilities management contract in Connecticut and large instance, in passive games in Brazil, state of Minas Gerais an important foothold in a market with significant potential. We were also awarded an iLottery platform contract in Connecticut, where we expect to go live with draw based games later this year.

Lottery profitability improved in 2023 with operating margin expanding 100 basis points to 36%. Lottery is a large, steady, growing and resilient industry with recession proved characteristics. Growth accelerated during the pandemic. And our 2023 results confirm that we are successfully maintaining these higher play levels with significantly improved margins.

Operating margins are up 600 basis points from their pre-pandemic level. We expect the industry to expand at more customary low-to-mid single digit rate off this higher sales base fueled by organic growth and growing our lottery adoption, especially in the US. There are some new opportunities in the horizon such as Brazil where many states are looking to launch lottery games.

Now onto gaming. The focused execution of key product and operational strategies is fueling strong growth for our Global Gaming segment. This is especially evident in profit performance with Q4 operating income up 17% and full year operating income up approximately 30%.

9% revenue growth for the year reflects broad-based strength across several key performance indicators. We shipped over 35,000 gaming machines in 2023, up 7% from the prior year and achieved record average selling prices. Unit growth was fueled by a double-digit increase in casino units led by replacement demand. We continue to release high performing new games such as Magic Treasures, which has two titles ranking in the top 10. We also have three of the top 10 new mechanical real games PeakCurve 49, DiamondRS and PeakSlant 32 continue to rank among the top North American cabinets in their categories.

Our global installed base grew 9% to nearly 54,000 units, reflecting strong premium unit expansion in the US and Canada, and considerable growth in Latin America, we delivered six consecutive quarters of installed base growth in the US and Canada led by premium units and nine consecutive quarters in the rest of the world.

Premium growth is fueled by the continued success of prosperity link and has accelerated with launch of mystery of the lamp, which was recently named top performing new premium game at the EKG slot award shelf. We have an exciting pipeline of new for sale and lease games planned for 2024, including the launch of the much anticipated Whitney Housten slots on IGT's new Skywise cabinet this spring. It was another record year for both revenue and profit at our PlayDigital segment

9% revenue growth was fueled by double-digit increase in casino GGR across key geographies. Operating profit rose over 30%, yielding 500 basis points of margin expansion, highlighting the powerful leverage inherent in this business.

Strong iCasino GGR growth is a direct result of new games and creative solutions designed deliver a rich player experience. Innovation is a vital growth driver in the absence of current new market regulation, especially in the US. Our top-performing games leverage IGT's unique capabilities, Wheel of Fortune Triple Gold Gold Spin been as the first and only omnichannel jackpot game in the US inspired by our highly successful PowerBucks franchise in Canada.

These games are effective player acquisition tools to engage players across platforms for large-scale wins with combined jackpot liquidity between land-based mobile and online formats. In addition, our customers have had success with bespoke games that tailor IGT's leading IP for a specific customer. Examples include Cleopatra, Fort Knox and Blackjack go for FanDuel casino, and Caesars Cleopatra for Caesars Palace Online Casino.

We've also begun deploying our unique suite of user engagement analytic tools. These are designed to provide real-time player insights for our customers and drive player productivity. We've seen great results with early adopters, and we look forward to rolling these out more broadly.

In sports betting, we entered four new jurisdictions in 2023 and had 26 new installations, including 20 new casino retail locations, three on-premise mobile launches and three statewide mobile launches. We also introduced sports betting functionality with the capability to live stream sports on our PeakBarTop and CrystalFlex terminals.

PlayDigital growth is dependent on new gaming legislation, which has been slower than expected. This appears to be the case in 2024 as well. In that context will be focused on driving cost efficiencies to stay on track with our margin expectations for the business. We're pleased to have achieved record-breaking profits for the year. The IG team executed with excellence. You see this in the momentum we had across segments.

Our 2024 outlook, which Max will walk through later, primarily reflects organic growth for the existing businesses. Recently, we announced the transaction to spin-off our Global Gaming and PlayDigital businesses and merge them with every existing operations.

The decision was the result of a strategic evaluation with the goal of unlocking the value of our portfolio. IGT shareholders will retain 100% ownership of the predictable growth and resilience of a global lottery pure-play while owning 54% of a faster-growing gaming, digital and FinTech business.

We believe the creation of two stronger, more focused companies, each with top-notch teams and simplified business models, better positions each company to service its customers and create significant value for stockholders. It allows for more focused operating and capital allocation strategies, capital structures that are optimized for different business models and increased flexibility to pursue organic and inorganic growth strategies.

It also provides the opportunity for investors to better appreciate the intrinsic value of each standalone business. For context, Lottery peers trade between 12 and 18 times EV to EBITDA compared to IGT at just 6 times and unmatched IGT's scope of capabilities. The new gaming business will have a similar scale and growth trajectory as its peers and that's before the benefit of potential revenue synergies.

These gaming peers trade between 11 and 13 times EV to EBITDA. IGT has a broad global product offering across Class III, VLTs, iGaming, and casino management systems. Every business is focused on North America, primarily with Class II games and extensive FinTech capabilities. Combination of the two companies with complementary capabilities and geographic footprints creates an integrated omni-channel one-stop shop, addressing all aspects of the gaming ecosystem that we believe will provide a superior value proposition of best in class and efficient solutions.

Together, we can generate touch points across the entire player journey from the casino floor to mobile. The business has an attractive recurring revenue model with recurring revenue streams from gaming operations, iGaming and FinTech solutions, representing over 60% of pro forma revenue. We expect revenue to grow at a mid-single digit compound annual growth rate through 2026, with adjusted EBITDA increasing at an even stronger, high single digit rate.

That's through a mix of organic top line growth for the existing businesses, enhanced by significant cost synergies, mostly from straightforward supply chain and real estate optimization initiatives. These synergies on their own are worth over $500 million of value for the combined business. Given the minimal business overlap between the two companies, there are some compelling revenue synergies across product and geographies that are not yet factored into our outlook.

We expect to manage the business with a strong balance sheet and conservative leverage profile and improved conversion of adjusted EBITDA to cash flow should allow for investments in both organic growth and M&A, significant debt repayment and share buybacks.

The company will be made up of a best-in-class team across both organizations with long-standing industry knowledge relationships and a proven track record in B2B Gaming and fintech. The executive team has over 20 years average experience across M&A integration. Needless to say, we're very excited about the opportunity for long-term value creation for the stand-alone lottery and gaming business.

Now I'll turn the call over to Max.

Thank you Vince and hello to everyone joining us on the call today. Our fourth quarter and full year 2023 financial performance was strong, achieving the upgraded outlook provided on our Q3 earnings call on all key financial metrics. We delivered record profit on a full year basis despite a comparison to prior periods affected by significant divestitures like Italy, gaming in 2021 and commercial services in 2022. These results confirm that most of our long-term targets have already been achieved or are confidently in sight with a clear trajectory to get there.

A high-level summary of our financial results is included here on slide 13, including comparisons to the prior year. In the fourth quarter, we generated revenue of over $1.1 billion, up 3% year-over-year, driven by a 7% increase in global lottery on strong product sales and continued momentum in Italy.

Operating income rose 11% to $256 million and operating income margin increased 160 basis points to 23%, reflecting stronger performance across business segments. Adjusted EBITDA of $454 million increased 9% over the prior-year period, and adjusted EBITDA margin expanded 190 basis points to 40%.

Adjusted EPS rose 40% to $0.56 per share, driven by the strong increase in operating income. For the full year, we generated revenue of $4.3 billion, up 2% or 7% net of the Italy commercial service sale on mid to high single digit growth across business segments. Strong Italy, same-store sales in global lottery, easing of supply chain costs and R&D process improvements in Global Gaming and strong operating leverage in PlayDigital drove operating income up 9% to $1 billion, which is a record profit in our company history. Operating income margin rose 140 basis points to 23%.

Full year adjusted EBITDA of $1.8 billion and adjusted EBITDA margin of 41% also achieved the highest levels in company history. Reported EPS was $0.77 and adjusted EPS was over $2 per share, a 2% increase year-over-year, driven by higher operating income, partially offset by some tax headwinds.

Now let's review the results of our three business segments. Global Lottery delivered $681 million in revenue in the fourth quarter, an increase of 7%, driven by strong product sales and Italy, same same store sales growth. Global same-store sales declined 3%, reflecting the impact of strong US multistate jackpot sales in the prior year that were bolstered by the record $2 billion Powerball jackpot that hit on November 7, 2022. Same-store sales in Italy rose 3%, with growth in both in both instant ticket and draw games. Customer demand for IGT's innovative hardware drove fourth quarter product sales revenue up 94% year-over-year, propelled by large GameTouch 28 self-service terminal sales in Michigan and Ontario, and the sale of a central a iLottery system in Poland.

Operating income rose 10% to $238 million in the fourth quarter. Operating income margin expanded 110 basis points to 35% on continued strong momentum in Italy and increased high-margin per sales and despite lower benefits from jackpot activity. For the full year, revenue of $2.5 billion was 2% lower year-over-year, but increased 6% excluding the Italy commercial service businesses.

Operating income of $913 million was in line with the prior year despite a $34 million contribution from Italy commercial services last year, operating income margin increased 100 basis points to 36%. Global Gaming revenue of $390 million in the fourth quarter was slightly above the prior year, despite unusually high jackpot expense associated with a higher than normal frequency of jackpots on the Nevada Megabucks wide area progressive game. Increased terminal process revenue and higher IP fees were offset by lower system sales. We shipped nearly 9400 units in the fourth quarter, driven by continued strength in casino replacement units, which grew 6% year-over-year.

Global ASP were $15,900 with North American ASP increasing 4% to $16,300, confirming the expected positive trajectory following a blip in the third quarter due to mix. The global installed base expanded to over 53,900 units with significant increases across geographies momentum in the business accelerated in the fourth quarter as the US and Canada installed base grew 1% sequentially and 6% year-over-year on continued success in multilevel progressive games. While the installed base in rest of world rose 4% sequentially and 14% year-over-year, reflecting growing demand for high performing games in Latin America and parts of Europe.

Fourth quarter operating income rose 17% to $80 million and operating income margin expanded 290 basis points to 21% as easing of supply chain costs and R&D process improvements were partially offset by the higher jackpot expense dynamics I explained earlier. On a full-year basis, revenue of $1.6 billion increased 9% on broad-based strength across key performance indicators. Operating income rose 29% to $330 million and operating income margin expanded 320 basis points to 20%. PlayDigital generated $59 million in revenue in the fourth quarter, down 10% from $65 million in the prior year due to a benefit related to jackpot expense in the prior year and lower sports betting volume and unfavorable hold rates in Rhode Island. iGaming GGR trends remained strong with increases across geographies, including double-digit growth in the US and sports betting GGR in line with the prior year.

Operating income increased to $17 million and operating margin rose 360 basis points to 29%, primarily driven by disciplined cost management and reduced variable compensation costs, continuing to proactively manage the cost structure is a priority in 2024, given the expected slower progression on new legislation expected in the next year. Record revenue and operating income levels were achieved in the full year period. Revenue increased 9% to $228 million on iGaming growth across geographies. Strong operating leverage drove operating income up 32% to $65 million, with OI margin expanding 490 basis points, 29%.

Record level operational performance and a 58% cash conversion rate drove cash from operations to over $1 billion, the highest level in company history. With capital expenditures and deferred license fees of about $420 million, free cash flow of around $620 million exceeded our expectations. Adjusted free cash flow was over $800 million. We've been executing on our balanced approach to capital allocation over the last two years, generally tracking very much in line with what we presented at our Investor Day in November of 2021,

We returned $160 million to shareholders in 2023 in the form of cash dividends. And we have $145 million outstanding under the current share repurchase authorization after having use about half of the $300 million program. Total liquidity remains robust at $1.8 billion at year end, which includes $1.2 billion in additional borrowing capacity from undrawn credit facilities.

In the last three years, we have progressively strengthened our credit profile with significant debt reduction of over $2.2 billion and net debt leverage improving 3.5 turns to a record low 2.9 times. This leaves us well within our target leverage range of 2.5 to 3.5 times and in a nice position with no meaningful near-term debt maturities. This improved credit profile was also reflected in credit rating actions taken early in the year by rating agencies with Moody's upgrading our rating to Ba1 from Ba2 with a stable outlook.

And Fitch assigning an issuer rating of BB+ with a stable outlook, and an investment grade senior debt rating of BBB-. In addition, last week, following the announcement of the planned spin and merger transaction, both S&P and Fitch placed IGT on a positive credit watch.

Let me now introduce our 2024 outlook in an effort to provide a simpler view on underlying business expectations for the year. We are assuming the transaction closes in early 2025. This eliminates the need for complex accounting adjustments to the outlook. If we were to achieve a 2024 closed, we believe this approach also helps you assess our progress toward the long-term targets provided at our last Investor Day.

For the full year, we currently expect to generate revenue of $4.3 billion - $4.4 billion, implying year-over-year growth of between 0% and 2%. Operating income margin is expected to be between 20% to 21%, which includes a 300 basis point negative impact from $130 million in pre-closing separation and divestiture costs related to the planned spin and merger transaction.

Those costs are expected to be incurred ratably due throughout the year, excluding the separation and divestiture costs of view that we believe offers a better assessment of underlying business performance. Our outlook calls for an operating margin between 23% and 24%, up to 100 basis point higher than in 2023. Operationally, this outlook assumes Global Lottery same-store sales will be flat to slightly lower year-over-year due to the strong jackpot activity experienced in 2023.

While large jackpots do tend to happen from time to time, the timing is unpredictable and therefore, we don't plan for them in our forecast. If you exclude the impact of jackpots, same-store sales are expected to increase low single digits across jurisdictions on the back of consolidating much higher play levels. In order to facilitate a clear understanding of the split between RemainCo activities and the businesses that will merge with Everi. We have decided to aggregate Global Gaming and PlayDigital into a single segment named "Gaming and Digital", starting with our Q1 2020 for results. The new segment is a simple aggregation of the numbers of the two previously reported segments with no change to our central cost allocation policy, we will continue to provide the same level of KPI and revenue disaggregation as in the past. So we expect minimal impact from the modifications.

Speaking about that, we expect "Gaming and Digital" revenue to increase at high single digit rate. This comes from continued growth in the installed base unit shipments and ASPs for gaming and growth in existing market for Digital as the pace of new legislation has slowed. Operating income margin is forecasted to improve 250 to 400 basis points on the back of the favorable KPI trends, continued improvement in supply chain and focus on cost discipline, moving us one notch closer to our long-term target of 28% to 30%.

Turning to our cash flow, we expect cash from operations of at least $1 billion, which also includes the impact of separation and divestiture cost. Capital expenditures of approximately $500 million includes about a $75 million increase from 2023 related to recent contract wins and multi-year contract extensions in our Global Lottery business.

For the first quarter, we expect to deliver revenue of approximately $1 billion and operating income margin of around 20%, which also includes a 300 basis point impact from pre-closing separation and divestiture costs I just mentioned. Global Lottery same-store sales are expected to be down year-over-year as same-store sales growth in Italy is offset by tough North American jackpot comps, gaming and digital revenues likely to be lower than the prior year on a return to more normal seasonality in unit shipments against pent-up demand in the prior-year period. In addition to elevated IP and software licenses flat licences last year.

Yes, we are very excited about the significant value-creation potential of separating IGT into two stand-alone pure-play companies. The combination of IGT, Global Gaming and PlayDigital with every existing operations creates a podium position player with the scale diversification, cash flow generation and growth outlook that is on par with other gaming peers that trade a significantly higher valuation multiples.

I would now like to spend a few minutes reviewing some of the key financial aspects of the planned spin and merger transaction, as well as the remaining steps that will need to be completed to close the transaction.

Upon closing the newly created combined gaming entity will raise financing of $3.7 billion, which will be used to fund a $2.6 billion distribution to IGT PLC and refinance every existing debt. IGT PLC plans to use the proceeds from this distribution to repay $2 billion of existing indebtedness and fund about $400 million in transaction related cash outflows.

This debt reduction is expected to drive RemainCo PLC pro forma net debt leverage down to around 2.5 times shortly following the closing of the transaction, putting us in an even stronger balance sheet position. I'd like to address the taxable nature of the transaction since it has been an area of focus for some of you. Most RMT transactions in the US have done as tax-free distributions followed by tax-free merger. Since IGT PLC has the benefit of the participation exemption regime, tax leakage from the transaction is expected to be modest up to $100 million or less than $0.5 per equity share.

The other important benefit of a taxable transaction is that it provides maximum flexibility on strategic initiatives like M&A and share buybacks for both entities from day one. The transaction is also taxable to IGT shareholders. We have provided additional disclosure on this matter in our 20-F to be filed with the SEC at the end of the day.

Achieving the closing in late '24 or early '25 is predicated upon the successful completion of regulatory and licensing approvals as well as approvals from IGT plc shareholders on the spin of the Global Gaming and PlayDigital segments and every shareholder approval on the merger transaction.

To summarize, we delivered strong financial performance in 2023, with results that met upgraded financial targets. We generated significant cash flows and improved net debt and net debt leverage to the lowest level in company history. We're heading into 2024 on a solid foundation with clear prospects for profitable growth, significant liquidity and no material near-term debt maturities.

We have laid out the milestones to deliver the spin and merger transaction with every as expeditiously as possible. And we are excited about the prospects for two stand-alone global pure-play companies to create significant value for share for stakeholders. That concludes our prepared remarks. So operator, would you please open the line for questions?

(Operator Instructions)

Barry Jonas, Truist Securities.

Hey, guys. Good morning. I wanted to start with gaming. Can you give a little more details on the path and key components hitting that 25, 20% to 30% [RP1]OI target and then help us understand how much of that could be transferable to Everi business for the NewCo, what's embedded in the synergies and maybe what's upside?

Thanks.

Sure. Hi, Barry. This is Max. So again, we closed the year at 20% and we expect a margin accretion in '24 of between 250 and 400 right.

And the which is effectively at the upper end, mid of the way to the minimum of the 2025 targets. So with a year to go, we have another similar trajectory to achieve so rapidly we are in a seat in a logical sequential to get there. The tailwinds to get there are primarily it related to the positive momentum we have gained in our installed base, which reflects successful launches of games such as Prosperity Link, Mystery of the Lamp and more new games coming, especially in 2024 with the Whitney Houston on the high-rise cabinet. That is the first item that impacts the positive margin trajectory.

The second item is finally expectations on an expansion on international sales and to walk in tandem with the successful expansion of the installed base so far achieved, I remind you, of the 14% increase in the installed base in 2023 for international markets, which we expect to continue again based on the solid foot of the successful games.

And then lastly, we continue to expect positive momentum on supply chain easing of cost which will be a positive contributor to the margin accretion in 2024.

Got it. Got it. Okay. And then just as a follow-up, wanted to touch on the Italy lotto renewal process. Any updates there on timing? And maybe just talk about how you see your positioning there as the incumbent.

Thanks.

Yes, sure. Recently, there was a news in Italy that a draft online gaming decree was introduced by the Finance Committee and then outline some of the terms of the tender for for the upcoming lotto license. What we know coming out of that was there would be a start to the to the tender process. The terms would be a non-renewable nine year concession and in a minimum upfront license fee of $1 billion, which could be divided into multiple installments part would be paid upon winning the tender and part with the start of the of the new concession.

So considering the news that that's come out, we'd say the regulator has set a high bar for interested parties willing to commit to such a significant amount of capital, which we believe similar to the past likely limits the field of qualified candidates. And then, of course, potential bidders will need to demonstrate their strategy and prove there execution capabilities in order both to, I think, convinced the Italian authorities that they can they can execute and then also internally to be ensure that they can achieve an appropriate ROI on such a significant commitment. For us, we, of course, have operated the lottery for three decades, and we're excited about the potential to continue to do so.

As far as the process goes, it's a lengthy process, by the government has to codify and finalize the economics that they have to draft the tender and they have a legislative process that needs to take place as well, which we've seen in the past is quite quite lengthy. And once Of course, all that is done once the formal tender is issued. And then there's some time for interested parties to make their assessments of a bid then of course, there's the assessment of all the offers and ultimately make an award. So we think the timeframe for all this is probably a year or two to a year and a half and our best our best estimate.

Perfect. Appreciate the color and congrats on a nice quarter and year.

Chad Beynon with Macquarie.

Morning. Thanks for taking my question and nice quarter. Vince, Max, wanted to ask about the kind of the January softness that we've heard from a lot of your operating partners that affected business and in January was that also the case in lottery? And then more importantly, after we got past some of that increment weather, those weekends have we seen more consistent, stable trends in both your businesses, gaming and lottery. Thanks.

Yes, I'll start off with with lottery and then touch base on gaming. Yes, I think what we saw what we saw in -- I'll go from 2023 into 2024 because, of course, reminding everybody of the components of the 2023 growth puts 2024 in perspective, as we saw over 2% same-store sales growth and in 2023 and a very good year in product sales.

We saw an increase in instants and draw games and a very significant increase in jackpot activity and somewhere just under 6% or so driven by by Powerball and Mega Millions, of course. So as strong as I have here is that as the jackpots were in 2022, they ended up being even stronger in 2023.

In 2023 in the fourth quarter, we saw we saw instance in draw were down slightly about 1% from the from the prior year and but again made up for by pretty strong. I'm pretty strong multistate jackpots. And if you think about this over multiple years, there's been a pretty significant increase from going back to pre pandemic.

Yeah, I'd say the growth has actually been really remarkable and to continue to have that play level at these elevated levels is was our thesis, and that's held up really, really well.

Looking at the first quarter trends and of course, you have to take Italy and North America separate in Italy, we continue to have very strong growth up mid single digits. So we expect that a lot of that was due to continued innovation and product launches. The team's done an outstanding job over the last several years, in particular in stimulating demand and making the games constantly fresh and enjoyable We think as those new launches moderate throughout the course of the quarter, we'll probably end up somewhere in low low single digit growth in the first quarter in Italy.

In North America and the rest of the world, sales are down high single, low double digits. And of course, so much of that has to do with the timing of the multistate jackpots in particular Powerball and Mega in North America. We think that will moderate. The negative impact of that will moderate just again, given the timing of the of the growth of those jackpots that were hit in the first quarter last year. And so we think we'll probably on a same-store basis, be down low to single digits in North America and the rest of the world.

And as Max provided, we believe that it will be in kind of the low to mid single digit long term growth outlook. We think we can we can maintain that as a result of innovation as well as kind of the expansion of our game portfolios to some of that.

Yeah, I won't go into through a bunch of detail on that, but but a bunch of the activities and efforts that you've seen IGT perform and over the last several years, in particular.

On the gaming machine side, we're in really great shape in terms of our outlook product portfolio. I'll take a minute just to kind of remind everybody of that we have five games that rank amongst the top 20 new web games in the most recent February Eilers report, and we've got to several of our Mystery of the Lamp games are in the top 15 new premium leased games. Our Magic Treasures franchise, new franchise ranked in the top 10 new core video games, our stepper.

We have 13 of the top 25 games and in our fairly recent hardware launches over the last year or so have ranked number one or number two in there in their categories to speak, specifically about the industry, Chad, '23, of course, was a was another record year for the gaming industry coming off of an incredible 2022. The estimate in the industry was slight. GGR was somewhere around 2%. And when you think about the started the year, the concern around recessionary pressures and the concern around disposable income for consumers.

And none of that really played out, at least in terms of the People's affinity for entertainment and in particular casino play. In fact, in the fourth quarter, slot GGR held right in there with the with the annual estimate up around 2% or so and yes, there was a really strong December for sure.

And we start off the year, as you've heard our casino customers discuss in the and the research that that that's been that's been published. The January trends are softer. I question how much of that is potentially weather? Not not really sure, of course, but but overall, as you've heard our casino customers report. The customer sentiment remains remains really good. And of course, slot play is the most profitable item for our casino customers. And we're seeing kind of a more normalized sales funnel which is kind of returning to historical levels. We certainly went into 2022 with a lot of pent-up demand as a result of not being able to deliver product because of our supply chain lead times.

And so I would say things are more normalized, right. Right now, when you look at the markets outside of the US for for gaming EMEA, a LATAM and Australia. EMEA is behind pre-pandemic levels. We've seen kind of it a very clear line between Western and Eastern Europe, Western Europe it's pretty much back and we compete very well in that market. Eastern Europe has been has been hurt by by kind of the sociopolitical situation is taking place there and some other specific challenges like our Romanian tax and regulatory challenges.

In Latin America, the recovery has been really strong and in particular, IGT games play well there. You've seen a pretty significant increase in installed base. At the moment, though there are some some macro-related weaknesses in places like Argentina and the new import restrictions imposed by the Mexican government, how that impacts all suppliers, and we hope that gets resolved throughout the course of the year.

And then in Australia, New Zealand, the macro environment continues to be a challenging, but but it's growing and we've not competed as well in that market, but we've got a slate of new games that the team is confident can very, very much increase our share, and we've done well with systems is that in that market. And so overall, I'd say the start of the year, it is definitely slower than last year. We think it's for very specific reasons. Again, in gaming, a lot of pent-up demand from kind of that unnatural supply chain restrictions. And then in lottery, very specific to the timing of very strong jackpots going into last year. Versus the start of 2024.

Great, thank you. And then on the CapEx, just just a housekeeping follow-up to the $500 million of guidance for 24. Can you help us think about what should go to gaming and digital versus lottery? And then can you also just kind of help us with a maintenance CapEx number for lottery ex new contracts going forward post SpinCo. Thank you.

Hey, Chad. So in terms of the CapEx number, we effectively have increased our investment into our install base in gaming in the last 2.5 years. And so the CapEx figure of gaming has increased above $200 million, and we expect that to slightly moderate next year. And instead on the lottery side, we have been on a favorable cycle in the last couple of years and now we're starting to see that CapEx number picking up again as we are going to face some significant contract renewals in the next two to three years. But for next year, there is an expectation of an increase of about $75 million coming from lottery, which is primarily related to the three contracts that we mentioned during the call. So California, long extension plus Kentucky and Virginia. These are the early earlyy CapEx investments that we expect to spend on those contracts in '24.

And so in terms of long-term, in terms of maintenance versus growth or new contracts, again, this business has been running historically and I'm talking about the lottery business historically at a clip of about $200 million in CapEx per year, if you were to exclude the cycles. And again, so anything above that number kind of if you want, is really related to the upcycle in CapEx associated with large contract renewals, extensions or wins that we will have going forward.

Appreciate it. Thank you, Max.

But yes, once again, ladies and gentlemen, if you have a question, it is star one.

Your next question comes from the line of Jeff Van Heel with Stifel.

Hey, good morning and thanks for taking our questions. It's Vince or Max, whatever wants to take this, but you talked about the full year guide, assuming low single digit growth for Global Gaming lottery sale that you stripped out the impact of multi-state jackpots. This seems to reflect a reversion back to a more stabilized core trends after several quarters of jack up the peak, I guess what specifically in the data are you seeing that that gives you conviction and it's improving underlying demand?

Thanks.

Yes, I would say the week-to-week trends have been improving. And as we look in our more significant markets and where we have confidence, given the slate of game launches that they've got coming coming up and I think given our our past history, we've seen that that that play level again, kind of post pandemic has been maintained and has has grown some as well. So we certainly don't have perfect visibility given lottery is largely a impulse purchase. But we do believe that given the slate of games as well as and yes, the multistate jackpot ability to build again, unpredictable. But with the continued high interest rate environment, the calculation of the advertised multistate jackpot gives states the ability to continue to advertise a number that's that's exciting to players and we think that will help and you have to get folks to the infrequent players to continue to think about playing lottery.

Great. That's helpful. And thanks for that answer --

Sorry Jeff, from a more technical standpoint here. So again, as been said, we have seen steady increase in jackpot games for the last 18 to 24 months. And this has been likely attributable to the advertised jackpot that exceeds the $1 billion. And we can mention six in the last 18 months, at least. So advertised jackpot levels are helped by the rising interest rate environment as they are based on a 30-year annuity stream. So that means that it doesn't take the same level of underlying sales today to advertise a $1 billion jackpot as it did a few years ago before the interest the crept up.

And so keep in mind, although all of that, keep in mind that IGT's remunerated as a percentage of lottery ticket sales, not the advertised jackpot size. And so net-net, we generate higher revenue when there are large jackpot. We remain comfortable with this low low single digit long-term growth outlook for the lottery business when you exclude the impact of the jackpots. And lastly, on a full year '23 basis versus '22, the impact of jackpot in this in the financials was about [$15 million] for the full year.

Thank you. Great. That's helpful color. Thanks, Max. And then for my follow-up, turning to the gaming business, you talked about normalizing, it's not seasonality embedded in the Q1 guidance where it was at the end of the quarter. So I would assume that's informed by pretty accurate existing data here. I guess more specifically, what gives you comfort that the pullback you're seeing is more related to seasonality as opposed to kind of pull back in any kind of underlying purchasing behavior related more to the macro or sequential market share go to competitors? Just I guess what kind of informs your view that this is a this is mostly seasonality.

Yes, yes, sure. So a couple of a couple of data points. One is when you look at the estimate of the industry in North America for 2023, the installed base went up a couple of percentage points and unit sales was up. We somewhere in the 10% range. And compare to that, IGT grew grew share in 2024. The industry is calling for a slowdown in unit sales and probably about the same similar increase in installed base. So given the strength of our product, we feel we can. So we can continue to compete and grow some share in North America, but not at the same rate as we have done over the last several years as we've significantly increased, we think the growth for for IGT. A lot of the growth is going to come internationally and where we've had very good momentum in Latin America, good momentum in Europe and less so in Asia Pac. And when we look at the kind of the exciting pipeline of games that are performed very well in North America, the ability to penetrate and continue to penetrate international markets is an opportunity that we believe is achievable and important for for us.

Great. That's really helpful. Thanks. And thanks, Max. I'll pass it on.

Domenico Jean-Marie with Equita.

I have a question on the profitability on the lottery on the lottery business. First of all, just to be sure that I got the answer on the jackpot contribution as $15 million on EBITDA for 2023 and second. So in an environment that is maybe EBIT less less supportive. And with the business that is a very high fixed cost, should we expect say you have some room for keeping the profitability is above the and the level or at least the level that we have seen in Q4 went through? Or should we expect some some so a negative impact on profitability for the lottery business?

Domenico yes, that the number you repeated this right one five, $15 vmillion for the full year '23 versus '22 in terms of the margin expectation. So we expect we are at the at the high end of the margin target we quoted for our in our Investor Day for lottery. So again, holding that, that margin would be definitely a very good thing to do. And in order to do that, obviously, we have to work very hard to continue to earn the right to gain to award to gain new contracts and to remain efficient in the execution of the of the existing pipeline.

So again, and finally, vis a vis the Q4 margin, there wasn't a significant benefit, a one-time benefit, if you want on product sales, which were up almost 100% year-over-year because of the specific deliveries that we executed on a full year basis. Now we are slightly ahead in terms of product sales in lottery year-over-year. So it's worth it was really more of a quarterly impact. But again, long, long term, we expect to be able to hold the line on the margin within that the range that we quoted ourself for Danka.

Thank you.

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

And hi, good morning. Everyone. Thanks for taking my questions. Vince, I I wanted to just can I talk about the time period that we have between now and closing and just get a sense first strategically how you're thinking about the two gaming businesses continuing to push their momentum forward product wise, keeping people in place, right, because that that closing process can take awhile and how you think about the two gaming businesses together and some specifics around where their sort of standout streets could be and where the combination of their capabilities or assets could help you lead? What's the combination is done?

Yes. Hey, David, thanks for the question. So a couple of things. One is both companies have retention plans in place for for their top talent. And I will say, given the momentum in particular that IGT has had over the last couple of years, even prior to announcing this transaction, we've been able to recruit that we don't really talk about this or highlight this, but we've been able to recruit some top game developers that are responsible for have many games on iOS top game game list.

So we believe now that there's been resolution and I think excitement and anticipation to be associated with, it's essentially going to be a new combined entity. We feel very strongly in our ability to recruit top talent in the industry, much less keep our our talent, and we've had really good conversations with our with our teams. We had the benefit of having our IGT commercial team together just a few weeks ago last week, every happened to have their commercial team together. And we've discussed a lot of the messages and feedback that we've received from our customers at the highest level of the organization, switch really reactive with genuine excitement about the merger.

They really enjoy the commitment and the knowledge that both companies have and the fact that they are complementary in nature with very little overlap. So I think and that was really exciting. We have talked to our teams about the combined portfolio being a real standout. It'll absolutely differentiate us from our peers and our competitors. As we've said, we don't believe anyone would have such a comprehensive range of products and solutions, and we're going to have a really impressive global studio and creative footprint, which is really the key to continuing to generate top-performing games.

Everi has got expertise in several areas that IGT doesn't in particular fintech, and we've got good international experience. And we think these things in combination will absolutely be be complementary. And when we think about what we have to offer on a go-forward basis, both for our employees, recruiting new folks to the organization and for our customers. As we've said in the past, this is really an opportunity to create a podium position player with great scale, great product diversification and great cash flow all on par with with our competition.

We're looking at I think we've mentioned in the past, just from a pro forma basis revenue of $2.6 billion, EBITDA of more than $1 billion, roughly 60% of that recurring and an installed base of somewhere around 70,000 units. So we think that excitement around being a one-stop shop for land-based gaming and really being able to provide the complete player journey from Casino, the sports betting and fintech is something that is a very good value proposition to our customers. And one that folks associated with the new company are very are very excited about.

Perfect. And just one quick follow-up with respect to fintech and systems. Just putting those together, it strikes as something that's a much longer term, what opportunity are there shorter term singles and doubles and ways that you can leverage each other more immediately post closing, it's just a discussion we've had with a lot of investors' minds for past weeks since we learned.

Yeah I would say overall, again, the longer-term plays, as you point out, is to be the leading tech and content company in the in the B2B space. We've got a lot of work to do to get there. We're working on our detailed integration plans collectively with leaders from from both organization. And we think the combination has really strong operating and financial merit. So that's really our our focus. It's not on the on the short term. It's really on the on the long term.

Perfect. Thank you.

There are no further questions at this time. I'll turn the call to CEO, Vince Sadusky, for closing remarks.

Yes, look, thanks, everyone. Thanks for joining us today. As you've heard, 2023 was a good strong year with growth across our Global Lottery, Gaming and PlayDigital segments. We drove record operating income and EBITDA, and we brought the company's leverage down to the lowest level ever. We truly believe the recent decision to spin off our Global Gaming and PlayDigital businesses emerging with every existing operations creates a really exciting opportunity to unlock the full value of our portfolio. We think the creation of two or more focused or have two more focused companies, better positions them to service customers and create significant value for stakeholders.

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

This concludes today's conference call. We thank you all for joining Humana connect your line. [RP1]I believe this is in reference to Gaming segment 2025 target of 28% - 30%. Which can be found on slide 15 of earnings presentation