Brightstar Lottery Plc Q3 FY2024 earnings call

• The company's Q3 and year-to-date results highlighted the scale and attractive margin structure of the business, with adjusted EBITDA of $880 million for the first nine months and a margin of 47.3%.
• Launched OPtiMa 3.0 to rightsize costs by realigning and optimizing general and administrative activities while supporting long-term growth objectives. Reallocated resources and invested in new talent for areas like iLottery, instant ticket printing, international sales development, and field services.
• Lottery industry leadership was evident with systems processing nearly $80 billion in lottery wagers under operator and FM contracts worldwide. Italy had new game launches such as EUR50 and EUR100 instant games, and the fourth Lotto draw with Numero ORO option. US had improved instant game sales in large customers like Texas, New York, etc.
• iLottery continued high growth with sales up over 26% in Q3 and YTD, fueled by expanding game portfolio. Secured 10-year facilities management contract extension in North Carolina.
• Won new instant ticket printing business, including contracts with Portugal's lottery and FDJ, and scheduled to operationalize a new state-of-the-art press to increase production capacity by over 50%.

In the first nine months of the year, IGT generated revenue of $1.9 billion. Continuing operations, including the lottery business, was a key part. Italy wages grew approximately 3% in both the third quarter and year-to-date periods. Instant ticket and draw games in the US saw improved trends, with Q3 sales up about 1% from being down 0.5% in the first six months of the year. iLottery sales were up over 26% in the third quarter and year-to-date. Product sales included new printing contracts, like the three-year primary printing contract with Portugal's lottery and the three-year printing contract with FDJ operator of the French National Lottery. Revenue contribution: Continuing operations generated two-thirds of the year-to-date cash flow from operations and over 85% of consolidated free cash flow.

• Fourth quarter revenue expected to be $640 million to $690 million, with adjusted EBITDA of $280 million to $300 million. Full year revenue expected to be $2.5 billion to $2.55 billion with adjusted EBITDA of $1.16 billion to $1.18 billion.
• Mega Millions is set to increase from a $2 price point to a $5 price point likely in April 2025, which is expected to be a positive catalyst.
• Adjusted EBITDA is provided as it is a more reliable forward-looking proxy for cash profit, removing volatility from non-ongoing operational activities.

• Volatility in US multi-state jackpots, which impacted revenue and EBITDA. For example, the 6% decline in Q3 global same-store sales was due to unfavorable US multi-state jackpot comparisons.
• Inflationary impacts on payroll and benefit costs, affecting gross margins.
• Regulatory approvals required for the sale of the gaming and digital business to Apollo, which could impact the closing timeline.

Q: Could you just talk a little bit about your post-deal capital allocation strategy and touching on how you're thinking about the dividend and share repurchases moving forward? Also, what would or could an M&A strategy look like for just a lottery focused company?

A: Max Chiara mentioned that through the proceeds of the sale, they expect to repay $2 billion of debt. The preponderant portion of remaining cash proceeds after transaction costs, tax leakage, and cash conveyance to the buyer will be allocated to shareholder returns. It's preliminary to be specific about dividend and share repurchase details, but they are focused on a balanced capital allocation. On M&A, Vince Sadusky said their portfolio and capabilities are solid, and they would consider M&A if there's an opportunity with a good ROI.

Q: Focusing on the North American lottery business, how much mix shift into higher price point gains has contributed to the overall rate of growth in instant tickets more recently? And have you seen any deceleration or noteworthy change in terms of trade-ups into higher price point tickets?

A: Vince Sadusky said there are many variables. Higher price points have been a driver, but it's not the only thing. Proper launch cadence of different price points at high and low ends, along with refreshing the instant ticket portfolio, has sustained growth. In Italy, a mature market, they've seen good growth through innovative games and portfolio management.

Q: On the Italian Lotto updates, what's the expectation for the partnership structure? And about the US market, is the large jackpot volatility something to expect in the next one to three years?

A: Vince Sadusky said they have a memorandum of understanding with existing partners with the expectation the joint venture will continue. On US market jackpot volatility, Vince mentioned it's hard to predict, but the organization is doing what's needed to sustain higher jackpot levels. Max Chiara added that the multi-state jackpot part of the business is volatile but represents up to 10% of total sales, and long-term innovation in games can create excitement.

Q: In terms of the close of the gaming sale, is there any change in timing? And on capital intensity for renewing the lottery portfolio?

A: Vince Sadusky said the closing is still expected by the end of the third quarter of 2025, with no modification to the date. Max Chiara mentioned that pure CapEx for renewing the lottery portfolio runs around $200 million to $250 million per year, but in the next couple of years, it's likely to be 2x that, then return to the average. They expect to be below current leverage levels after the transaction to absorb incremental CapEx.