Brightstar Lottery - Q1 2024

Transcript

Operator (participant)

Thank you for standing by. My name is Krista, 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 speaker's remarks, there will be a question-and-answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw that question, again, press star one. Thank you. I will now turn the conference over to James Hurley, Senior Vice President of Investor Relations. James, you may begin your conference.

James Hurley (SVP of Investor Relations)

Thank you, Krista, and thank you all for joining us for IGT's First Quarter 2024 Conference Call, which is hosted by Vince Sadusky, 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. 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. Now I'll turn the call over to Vince.

Vince Sadusky (CEO)

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 $1.1 billion 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's same-store sales and strong North American jackpot activity in late March, in addition to the timing of separation and transaction costs. The company delivered record operating income of $273 million, excluding separation and transaction costs. 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 six 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.. multi-state jackpot activity towards the end of the quarter, thanks to billion-dollar-plus jackpots for both Powerball and Mega Millions. Italy's more than 4% same-store sales growth reflects similar trends for both instants and draw games, and it 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.

Global iLottery sales continue to expand at a fast clip, up over 20% in the period, led by a growing portfolio of high-performing e-instant games like Ghostbusters in the U.S. and Ultra Numerissimi 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 a nine-year term and minimum EUR 1 billion upfront license fee, which will be payable in three tranches. 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 to maintain the existing joint venture structure for the new bid.

As the only operator of this license for three 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. In Italy, the team has done a fantastic job delivering compelling game innovation, including revitalizing core franchises across draw and instant games. They are successfully amplifying the impact of this innovation with coordinated launches across both retail and digital channels. In fact, our multi-dimensional omnichannel games won Lottery Product of the Year at February's International Gaming Awards. In instants, updated graphics and new price points and payout structures have maintained the success of iconic games like Numerissimi. We launched the EUR 20 Ultra Numerissimi extended play game in Q1, which helped drive incremental sales in the period.

We are executing a similar strategy with the Doppia Sfida 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 MillionDAY draw introduced in the second quarter of last year, a fourth weekly Lotto draw launched in Q3, and new 10eLotto special draws occurring between 4:00 P.M. and 6:00 P.M. each day that began in Q4 of last year. Outside of Italy, the mid-March launch of 500X The Money, Georgia's second $50 instant ticket game, is currently driving improved sales in that category. New Jersey's $50 million 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. The highly customized gameplay and multiple daily draw times creates an engaging player experience, which explains Cash Pop's popularity and success in helping to drive lottery sales growth. Georgia's multi-channel Quick win game, launched in September, currently has eight iterations in the market. The retail and iLottery games share a progressive jackpot, and sales are well balanced across channels. Based on the strong results, there are another six 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-over-year profit margins expanded for the 12th consecutive quarter. The global install base grew to over 54,000 units in the quarter. This includes the seventh consecutive quarter of growth for U.S. and Canada premium units.

In fact, the U.S. and Canada installed base of multilevel progressive games was up 6% from year-end levels on the continued success of Prosperity Link and Mystery of the Lamp, which was named the top-performing new premium game at this year's EKG Slots Award Show. Gaming machine unit sales have been on a strong multi-year growth trajectory, thanks to a consistent pipeline of exciting new games. Rising Rockets is one of the latest in that roster, securing the number three and number five spots in top indexing new core video games. Our new cabinets, in particular the PeakCurve49, remain among the top-performing North American cabinets, and this helped drive record U.S. and Canada average selling prices in Q1. iGaming revenue grew 10% in the quarter, with GGR reaching an all-time high in March, driven by strong IGT game performance in the U.S.

That momentum was supported by the top-performing Cash Eruption, in addition to our popular video poker and table game offerings. We continue to see success with our bespoke game program and recently launched Wheel of Fortune Triple Extreme Spin with BetMGM and Fort Knox Cats with FanDuel. IGT has had consistent success bringing gaming additional games to market through focused R&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 link 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.

Four of our non-WAP premium games are in the latest Eilers 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 one and number three spots, with Megabucks, Double Diamond Deluxe, and Wheel of Fortune Double Diamond. We've got exciting new titles on the horizon with Whitney Houston and Prosperity Link Blessings. We've made significant inroads in the core video category, which represents the largest portion of industry sales and is the 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.

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 Link are among the top 10 core games in Latin America. The encouraging land-based results are also evident in our iGaming business. IGT has three of the top five performing U.S. 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 investment costs. Our upgraded full-year 2024 revenue and profit outlook reflects broad-based momentum across key performance indicators in the balance of the year.

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

Max Chiara (CFO)

Thank you, Vince, and good morning, everyone. We generated strong revenue and operating income margin in the first quarter, exceeding the outlook we provided in March. We deliver record operating income when you exclude $18 million separation and transaction cost related to the planned spin and merger transaction for gaming and digital. Revenue of $1.07 billion increased 1% year-over-year, reflecting continued growth in global lottery, partially offset by the timing of product sales in gaming and digital. We deliver operating income of $256 million and an operating margin of 24%, in line with the prior year, as strength in global lottery and improvements in R&D and SG&A costs were offset by the lower revenue contribution from gaming and digital and separation and transaction cost.

Excluding separation and investiture cost, operating income rose to an all-time quarterly record of $273 million, and operating margin expanded 150 basis points to 25.6%, propelled by strong Italy same-store sale and higher product sales margin in global lottery and easing of supply chain cost and R&D profit improvements in gaming and digital. Adjusted EBITDA was $443 million, in line with the prior year, but up 3% to $461 million, excluding the separation and investiture cost. We generated EPS of 0.40 per share as a result of the strong operating performance indicator 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 investiture cost. I will now turn to a segment-level review of first-quarter results.

Global lottery delivered solid revenue and profit growth in the first quarter. Revenue rose 6% to $651 million, driven by strong product sales and continuing Italy same-store sales growth. First-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. 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 of experience in the prior year. Robust Italy same-store sales, coupled with contributions from a 2023 contract with Win in Connecticut, helped drive service revenue up 3%.

Operating income rose 8% to $258 million, and operating margin expanded 60 basis points, propelled by strong Italy same-store sales and product sales margin. High multi-stage effort 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 a profit in line with prior year, despite lower revenue related to the timing of product sales. Revenue of $406 million declined 7% versus the prior year. The global install base continues to expand on the strength of high-performing games and cabinets, particularly in the area of multilevel progressives. Terminal service revenue rose 2% year-over-year on growth in the global install base.

On a sequential basis, the rest of the world installed base added over 230 units, while the U.S. 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. 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 million 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 cost and R&D process improvement. We have decided to pull the investor-day target margin reference from this quarter onward, as the two-segment combinations have rendered the comparison with the previous margin view less relevant. However, we are maintaining our outlook for 250-400 basis points of margin progression expected to occur in 2024. Following the closing of the merger transaction, the new management team will provide their thoughts around appropriate long-term aspirational targets for the new combined entity.

In terms of the specific forces behind 2024 operating margin improvements, 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 cost, 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 gaming 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 million in the quarter, which included around $195 million in cash outflows, primarily related to the timing of cash taxes and AR/AP dynamics.

The timing impacts were expected, and we are confident in our ability to achieve our full-year target of at least $1 billion 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, manageable near-term debt maturities, and $1.7 billion in liquidity. 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 $4.4 billion, with an operating margin of around 21%. We continue to expect about $130 million in pre-closing separation and integration costs related to the planned spin and merger transaction. Excluding those event-specific costs, operating margin would be about 24%, a record level for the full-year period.

More immediately, for the second quarter, we expect to deliver revenue of approximately $1.05 billion and operating income margin of around 22%, which includes about a 250 basis points impact from the pre-closing separation and integration cost. We believe that the current run rate on the separation and integration costs will continue in the short term and see the balance of those costs backloaded towards the closing date. Before moving to Q&A, we would like to spend some time on key areas of investor interest regarding the spinoff of IGT gaming and digital assets and subsequent merger with Everi.

We believe the creation of two separate pure-play companies has the potential to create significant value for IGT shareholders through the delivery of cash proceeds to RemainCo, the issuance of MergeCo shares in exchange for units of SpinCo, and the potential re-rating of the two companies, as well as the synergies expected at MergeCo. Many of you have asked about the path to closing the transaction. 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 seven more high-caliber financial institutions. The deal was more than 2x oversubscribed, with the revolver successfully upsized by 50% to $750 million.

The strong interest in the IGT Everi combination 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 million in separation and transaction cost, we expect to pay about two-thirds before closing, with the remaining portion incurred upon closing. 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 two transactions in one: a carve-out spinoff of one 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 one. We have had many questions about the taxable nature of the transaction.

We chose this path since there is minimal tax leakage to IGT, and it allows both new companies full freedom to pursue strategic M&A and other capital allocation initiatives from day one. 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 20-F filed in March 2024. 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 RemainCo upon closing of the merger has a very favorable impact on the leverage profile of the standalone lottery company. We intend to allocate about $2 billion of net distribution to paying down debt.

That puts RemainCo 2023 pro forma net debt leverage at about 2.5x, strengthening the company financial conditions. Based upon that, the pro forma adjusted EBITDA figure for RemainCo sits at around $1.2 billion. At this point, we'd like to open the call for questions. Open it when you have the best fit.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad to raise your hand in the queue. If you would like to withdraw your question, again, press star one. We'll pause for a moment to compile the roster. Your first question comes from the line of Barry Jonas with Truist Securities. Please go ahead.

Barry Jonas (Managing Director and Equity Research)

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

Vince Sadusky (CEO)

Yeah, good question. Both the IGT commercial teams and the Everi commercial teams have spent a lot of time with customers. They both have good-sized sales forces, especially in North America. I've spoken with customers as well. 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&D resources focused in the right areas. I'd say over the last couple of years, in particular, IGT has been very competitive. We've got our cabinets, our PeakCurve49 cabinets, ranked number two. 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, etc. We've had really good momentum.

The infrastructure side of the casino, centered around cash access, has been a real strength of Everi and really integral to the operation, best in class as well. So we've not had any customers concerned around competitive 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 II 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. 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, just I think a real testimony to the service orientation of, after units are sold, the support that takes place on the Everi 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 one unit.

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.

Yeah. 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 three or four years. 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. 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.

Barry Jonas (Managing Director and Equity Research)

Perfect. Thank you so much.

Operator (participant)

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

Jeff Stantial (Managing Director and Equity Research)

Great. Good morning, everyone. Thanks for taking our questions. Maybe starting off on the announcement 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. So just curious what led you to decide to incorporate funding partners again this time around.

Vince Sadusky (CEO)

Yeah. 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. We think the partnership between Allwyn, Arianna, 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. 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. Quite simply, we decided we would we and our partners desired 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.

Jeff Stantial (Managing Director and Equity Research)

Right. That makes sense. Thanks for that, Colbert. 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. 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 it driving your expectation for more back half-weighted 2024? Thanks.

Vince Sadusky (CEO)

Yeah. I mean, I'd say on the lottery side, when you look forward, we expect a 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 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 multi-state jackpot has been so attractive to consumers. 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 billion-dollar or close to billion-dollar 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 billion-dollar-plus jackpots. So that's, I think, a good encouraging sign. On the gaming side, we 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, 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's 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 three and number five, close to two and a half times house average in early days. So that's something that's new for us and pretty exciting. 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 in chatting with our customers, some got off to a bit of a slow start with capital expenditures, but the conversations have gone well. 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 both the purchasing and install-based replacements that are projected to take place this year. So as we look out, we do see, for the second quarter, unit shipments, I'm sorry, kind of the sales funnel building kind of around similar levels to prior year.

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. I'll hand it over to Max for any other.

Max Chiara (CFO)

No, 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 install base and all of that, we think that we can continue to achieve positive revenue momentum in the balance of the year.

Jeff Stantial (Managing Director and Equity Research)

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

Max Chiara (CFO)

Thank you.

Operator (participant)

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

David Katz (Managing Director and Equity Research Analyst)

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. 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.

Vince Sadusky (CEO)

Yeah. 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 and steps that take 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 at the beginning of April, a governmental decree has been issued in Italy, which basically highlighted the key features that 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 opinion of compatibility with EU tender rules. Once the tender is issued, then interested parties make their assessments, offer a bid. The bids get assessed. All the offers get assessed by the ADM. So all in all, we expect that the time is still to be around 12-18 months to full execution of this process. 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 has been said, we have extended the memorandum of understanding with the existing consortium for the upcoming bid.

David Katz (Managing Director and Equity Research Analyst)

Understood. 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 2020-2021, 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? So there is a bit of improvement, but I just want to make sure we're all perfectly clear on what the change is and what the update is.

Vince Sadusky (CEO)

Yes. All right. So effectively, when you take the midpoint of the original margin guidance range, we're moving the margin up 50 basis points 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 cost. 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 obviously underlying strength in our performance as a combination of the different markets that came to fruition. Obviously, a strong Italy 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.

Again, we need to watch out the impact of the separation and integration 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.

David Katz (Managing Director and Equity Research Analyst)

Agreed. Congrats. Thanks. Appreciate it.

Operator (participant)

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

Chad Beynon (Managing Director and Equity Research Analyst)

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? And then the 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.

Vince Sadusky (CEO)

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 overall the activity. But we saw also a pickup momentum in February and March, which realigned the trends correctly during the quarter, again, both in North America for gaming and lottery. The one thing that is more important to mention for lottery is the year-over-year difference in the 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 lottery.

As far as gaming is concerned, the recent yields dynamic has been very strong. We continue to make good progress on our standalone unit. By the way, by default, replacing standalone units coming in with VLT going out, there is a net positive impact to the margin mix in the portfolio.

Chad Beynon (Managing Director and Equity Research Analyst)

That's great. Thank you. 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?

Vince Sadusky (CEO)

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.

Chad Beynon (Managing Director and Equity Research Analyst)

Okay. Great. Thank you both. Appreciate it.

Vince Sadusky (CEO)

Thanks.

Operator (participant)

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

Joe Stauff (Managing Director and Equity Research Analyst)

Great. Good morning. I wanted to ask about the Italian results, lottery results, really strong organic growth over 4% on a tough comp. I was wondering if you could maybe disaggregate or discuss, was this product-specific? Was it newer products? Was it across the board? And then I had maybe two, say, more deal-specific questions. Maybe, Max, when do you expect the carve-out portion of the transaction to be done? Would you expect everything in terms of the various org chart boxes that you have to move around to be done by the third quarter or whatever? And when would you expect the S4 to be filed? Thank you.

Max Chiara (CFO)

I think the first question around Italy. So yeah, 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 first quarter of 2023, and then following that up with strong growth here in the first quarter of 2024. And yeah, 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 10eLotto, I think, are things that are incredibly valuable.

The research and analysis that's 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 impressive. Then when we look out going forward, the team has a very, I think, impressive slate of continued game launches and game evolution with different price points. They're looking at lower-end price points like EUR 0.50 launches all the way up to kind of these varying price points, EUR 15, EUR 25, different payout structures and different gameplay.

All that's been coupled really recently in the last really less than two 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. We've seen really good growth on that front as well. It's really, I think, a bit of everything and just great execution.

Joe Stauff (Managing Director and Equity Research Analyst)

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 three years here that we need to complete. Plus, obviously, we have to follow through with the quarterly cadence in 2024 as well, depending on when the S-4 gets filed. So again, work is in progress, and we're making progress as expected at this point of the year. In terms of the S-4, currently, it's 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.

Max Chiara (CFO)

And then, obviously, it's the typical 30-60 days back and forth with the staff to finalize the document, hopefully, by the end of the summertime.

Joe Stauff (Managing Director and Equity Research Analyst)

Thanks, Vince. Thanks, Max.

Operator (participant)

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

David Hargreaves (Managing Director in Credit Research)

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 Everi bonds? What's going to happen with those? Thank you.

Vince Sadusky (CEO)

Yeah. I'll take the first part of the question. So the financial commitments of $3.7 billion before the revolver are going to be split between notes to be issued and a TLB instrument that also will be issued roundabout the closing time. We believe that that package is sufficient to get MergeCo going. On top of that, we have a revolver for $750 million, which was upsized from the original amount, which we think is sufficient to support the growth of MergeCo and the financial needs of MergeCo on day one. The good thing is that once we went out and promoted the package, we got a superior response from financial institutions, primary financial institutions, and we were very pleased to kind of revise the commitments to the upside.

David Hargreaves (Managing Director in Credit Research)

That's helpful. Now, 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 Everi notes?

Max Chiara (CFO)

That's really Everi's question.

David Hargreaves (Managing Director in Credit Research)

Everi's question. Okay. I see. Thank you so much.

Max Chiara (CFO)

Sure.

Operator (participant)

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

Max Chiara (CFO)

Yeah. Thanks for joining us today. As you heard, 2024 is off to a good start with record operating income, net of separation and restructuring costs. Our upgraded full-year revenue and profit outlook reflects good momentum across key KPIs and the balance of the year. The work to separate global lottery from gaming and digital is underway as we prepare for the proposed transaction with Everi. As we've said before, we believe the creation of two more focused companies better positions them to service customers and create significant value for stakeholders. Thanks for your interest in IGT, and have a great day.