Brightstar Lottery - Earnings Call - Q1 2025

Transcript

Operator (participant)

Thank you for standing by, and welcome to the Brightstar Lottery First Quarter 2025 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 during this time, simply press STAR, followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again, press STAR 1. Thank you. I'd now like to turn the call over to James Hurley, Senior Vice President of Investor Relations. You may begin.

James Hurley (SVP of Investor Relations)

Thank you, and thank you all for joining us on Brightstar Lottery's Q1 2025 Earnings Conference Call, which is hosted by Vincent Sadusky, our Chief Executive Officer, and Max Chiara, our Chief Financial Officer. After some prepared remarks, both Vincent 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. I will now turn the call over to Vince.

Vince Sadusky (CEO)

Thank you, Jim, and good morning to all. Our Q1 results confirm sustained global player demand for instant and draw games. Reported year-to-year variances reflect elevated U.S. multi-state jackpot activity and associated LMA impacts in the prior year, in addition to calendar shifts that affect comparability. Instant ticket and draw games are the core of our business, representing about 95% of our annual wager-based revenue and nearly 80% of total revenue. Normalizing calendar shifts, global instant ticket and draw games, same-store sales rose nearly 1.5% in the quarter. This included growth in Italy, stability in the U.S., and a 26% increase in iLottery sales. We delivered $250 million in EBITDA at a 43% margin in the period, notwithstanding jackpot and LMA impacts. This highlights the attractive and resilient profit structure of the pure-play lottery business.

We converted 67% of that EBITDA into cash in the quarter, and we maintain a strong financial condition with pro forma net debt leverage below three times. Consistent innovation is the driving force behind the underlying growth in instant and draw games. In Italy, 2% normalized same-store sales growth included increases for both scratch-and-win and lotto games. The EUR 20 extra 2do by 2do, a new addition to the 2do by 2do franchise, and the new EUR 10 instant ticket games were among the top performers in the quarter. Lotto wagers were up on the continued success of Tennilotto special draws and the numero option for the Joko Del Lotto game. U.S. sales were impacted by the significantly lower multi-state jackpot activity, which is a function of the variability and the timing of very large jackpots. Normalized same-store sales for U.S. instant and draw games were stable.

Large jurisdictions such as California and Florida experienced nice instant growth thanks to the success of new game launches there, including new $25 and $40 games in California and the impact of additional $20 and $30 tickets in Florida. That was offset by a lack of comparable new game launches and offerings in other states. We are encouraged by the stability of the very high sales levels achieved in the U.S. over the last few years. iLottery sales maintained their excellent momentum in Q1, rising 26% on strength across geographies. iLottery penetration continues to climb, especially in the U.S., with Kentucky and Georgia achieving significant increases in the last six months. These gains are fueled by new e-instant game launches. The success of titles such as Cats, Elephant King, and Super Nova Nines drove over $100 million in iLottery sales in Georgia during March, its highest ever in a month.

In Italy, games like Joko Pio and an expanding Tennilotto player base are driving iLottery sales. We are making good progress with key areas of our strategic focus that we expect will drive sustainable, long-term growth. One of the most exciting developments in product innovation is the Mega Millions move to a $5 price point in early April. This is the first game change in eight years and was the result of a multi-year process where Brightstar Lottery led project management and game implementation on behalf of the Mega Millions Consortium. It required extensive planning and impeccable execution, including updating approximately 400,000 lottery terminals in the week leading up to going live. A big congratulations to the Brightstar Lottery team and the Mega Millions Consortium for this exciting evolution of the game. The change is more than a simple increase in price.

It reflects new features that create good value for the new price point, including bigger prizes at every non-jackpot prize tier, better odds to win, larger starting jackpots, and faster growing jackpots. The enhancements are expected to drive increased sales and revenues for lotteries and the good causes they serve. Another area of focus is the expansion of retail touchpoints and the optimization of the point-of-sale network. There are three main initiatives here. First is growing the network of self-service lottery vending machines. We have a broad array of self-service solutions to bring lottery games closer to where players shop, which has proved effective in generating incremental sales. Over the last few months, we began rolling out our Gemini Touch 28 to popular malls across Italy. Second is in-line purchasing, which is live in just a few states at a range of retailers such as Kroger, CVS, and Winn-Dixie.

We believe Lottery Link will be another driver of in-line purchasing. It is the first-ever solution enabling the sale of instant and draw games from a retailer's own POS device and without the need for any software changes to the retailer's POS system. Lottery Link won Lottery Product of the Year at ICE in January. There is a lot of interest in it, and we intend to begin offering it to customers later this year. Third is investing to optimize the POS network. We are currently transitioning from satellite to cellular communications, which should provide improved bandwidth and reliability, access to a broader range of retailers, and reduce the time needed to set up new POS. It should also be more adaptable to new technologies and provide greater flexibility to accommodate emerging solutions like cashless transactions.

We went live with our new printing press in April, expanding our capacity by over 50%. This should enhance our ability to service customers and improve our production efficiency. It is a well-timed addition given the increased production volumes we have secured with several large customers, including France's FDJ, Portugal's Santa Casa, and New York State. We are also investing in several areas to increase iLottery adoption. One is a faster pace of new e-instant game developments and launches. Another is transitioning all iLottery platform customers to our cloud-based solution. This has many benefits, including a more streamlined and faster player experience, increased scalability and stability, and new promotional features. In the week following Kentucky's transition, sales reached an all-time high. In January, we launched the My Lottery site in Italy, where it is possible to play both Lotto and scratch-and-win in the same place.

The site is designed with a mobile-first player experience in mind and a scalable backend that makes it easy to integrate new content. In a matter of three months, My Lottery has already increased Italy's iLottery market share by several percentage points. As you all know, the world is currently faced with significant macroeconomic and geopolitical uncertainty. The impact of tariffs and declining consumer confidence and spending are fueling fears of a recession. We feel good about the things we can control and the long-term prospects for our business, but we're not immune to these challenges. However, history has shown that lottery sales in the U.S. and Italy have proved to be resilient in both absolute and relative terms during recessions. We have some important milestones on the horizon. The Italy Lotto license process is well underway.

The Italian gaming authorities have informed the participants that the economic proposals they submitted in the Lotto concession tender will be opened on May 19th. We also understand that the evaluation of the technical proposals is complete, and we expect the results of the technical evaluation to be announced prior to May 19th. The sale of our gaming and digital assets remains on track to close in Q3. We intend to communicate our capital allocation strategy after the Lotto outcome is known and around the gaming and digital closing. While we are contending with a high degree of macroeconomic and geopolitical uncertainty, we are excited about the strategic initiatives we are working on to drive sustainable, long-term growth. Now I'll turn the call over to Max.

Massimiliano Chiara (CFO)

Thank you, Vince, and hello to everyone joining us today. Brightstar Lottery delivered adjusted EBITDA of $250 million in the first quarter, in line with expectations at constant currency and demonstrating the profit resilience of the lottery business and good cost discipline, even as we invest in the business. This was achieved despite lower-than-expected revenue related to the continued lack of large U.S. multi-state jackpot and the associated impact on LMA incentives and the timing shift of certain instant ticket product sales within the year. As expected, while positive trends in instant ticket and draw games continue, Brightstar Lottery's first-quarter revenue of $583 million was down from $661 million generated in the prior year, primarily due to higher levels of jackpot activity and the associated positive impact on LMA incentives in the prior year period, resulting in a year-over-year impact of about $45 million on this particular matter alone.

There were no billion-dollar level jackpots in the first quarter compared to $1.1 billion Mega Millions and $951 million Powerball jackpots in the prior year. Elevated levels of jackpot and LMA incentive revenue are highly dependent on the timing of very large multi-state jackpots, which occur sporadically, causing period-to-period variability. Calendar shifts also created a headwind, with Leap Year providing an extra day of sales in the U.S. and rest of the world in 2024, and Italy having additional instant ticket selling days

and lotto draws in the prior year. On a normalized basis, instant ticket and draw revenue grew $4 million, and global same-store sales rose 1.4%. Product sales reflect higher multi-year central system software licenses and terminal sales in the prior year.

As a reminder, the timing of product sales can vary quarter to quarter, but we do expect year-over-year growth for the full year period, primarily due to growth in instant ticket services. As I mentioned, we achieved first-quarter adjusted EBITDA of $250 million, in line with expectations at constant currency. The solid profit generation was, despite a higher-than-expected year-over-year headwind of about $40 million related to the higher jackpot and associated LMA incentive in the prior year, and includes a portion of the $25 million in temporary cost related contract extensions and rebids, enhancements of cloud-based solutions, and point-of-sale network optimization that are expected to drive growth and CapEx efficiencies in the future. We also had costs associated with rebranding the Pure Play Lottery business.

To put things in perspective, through the last 10 months of the lottery fiscal year, which ends on June 30, 2025, there has only been $1 billion jackpot. That compares to five $1 billion-plus multi-state jackpots in lottery fiscal year 2024 and three in lottery fiscal year 2023. This is currently an exceptionally low level of jackpot activity. We are confident that once this activity normalizes, we will see a positive impact on our profit margins. For example, after adjusting for a more normal level of jackpot activity and LMA incentives, our first-quarter adjusted EBITDA margin would have been around 46%, which once again highlights the attractive profit profile of the Pure Play Lottery business.

First-quarter cash generation from continuing operations was strong, with a cash conversion ratio of 67%, in line with the average of fiscal year 2023 and fiscal year 2024, delivering $168 million in cash from operations and free cash flow of $92 million. In preparation for the award of the Italy Lotto license, we successfully issued a new EUR 1 billion term loan. The first EUR 500 million tranche was drawn and used for debt repayment under existing credit facilities, resulting in reestablishing a significant liquidity buffer at the end of the first quarter of $2.2 billion. The second EUR 500 million tranche is committed but currently undrawn to be utilized only if we are awarded a Lotto license to preserve maximum flexibility. In addition, a $4.05 billion gross cash infusion is to be received upon the completion of the gaming and digital sale.

Net debt rose $270 million from the end of December 2024 to $5 billion, with about half of the increase coming from foreign currency translation. Net debt leverage pro forma for the committed $2 billion debt reduction following the sale of gaming and digital was 2.8 times, in line with our target. Given incremental jackpot and LMA headwinds in the first half of the year, in addition to the worsening macroeconomic environment and uncertainty around the ultimate impact on consumer spending, we now expect full year 2025 revenue of approximately $2.55 billion and adjusted EBITDA of $1.1 billion, at the low end of the outlook ranges we provided on our last earnings call back in February.

Cash from operations, inclusive of the first two tranches of the Lotto upfront fee, totaling EUR 800 million, is now expected to be a use of cash of about $350 million, primarily reflecting the incremental FX impact on the first two installments of the Italy Lotto upfront license fee, since they are denominated in euros. Second quarter 2025 revenue is expected to be flat to up slightly, as higher product sales offset the impact of lower LMA incentives, and adjusted EBITDA is forecasted to be down approximately $30 million due to the high flow-through of LMA incentives and investments we are making in the business.

In the second half of the year, we expect profit to reflect the full impact of the $5 Mega Millions game and the normalization of multi-state jackpot activity, in addition to optima savings, bringing EBITDA for the Q2 through Q4 period in line with the prior year. As a reminder, this outlook does not include any potential benefit from large U.S. multi-state jackpots in the second quarter, given actual quarter-to-date trends. Brightstar Lottery is well-positioned as we head into the future. Player demand for instant ticket and draw games is growing and demonstrating resilience. We're making investments in the future to drive sustainable, long-term growth, and we have a strong balance sheet with ample liquidity ahead of the Italy Lotto award and other important upcoming contract renewals. This concludes our prepared remarks. Operator, would you please open the line for questions?

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. Your first question comes from the line of Jeff Stangel from Stifel. Your line is open.

Jeff Stantial (Managing Director of Equity Research)

Hey, great. Good morning, everyone. Thanks for taking our questions. Maybe starting off here on the guidance revision, which is where we've been getting the most questions this morning. Max, you call it two things, really explaining the revision: jackpots and the worsening macro, maybe just drilling into the latter. We just want to better understand, is there anything that you're seeing in real time that you would attribute to the macro environment, or is this really more of a cautionary move just given the uncertainty? If it is the former, is the sequential weakness, is that specific to any geographies? Is it more of a product sales impact? Just any additional color on this would be helpful, given that it seems a bit dislocated from the historical resilience that you called out in lottery. Thanks.

Massimiliano Chiara (CFO)

Yeah, absolutely. Look, the situation from a macro standpoint is very fluid. We have to watch out how particularly the tariff discussion is evolving. We continue to see stability in our core players in terms of total demand, and obviously the volatility is primarily associated with the jackpot performance and the related LMA impact. Again, we were projecting higher growth originally, particularly in our core U.S. markets. The situation is relatively stable right now, and we expect some growth to come to fruition in the second half, but we continue to keep a cautionary outlook going forward.

Vince Sadusky (CEO)

Yeah, and I'll add a little bit of color to that, to Max's comments as well. Yeah, the quarter was anticipated that we were going to have some negativity associated with the prior year, given, as Max said, the multi-state jackpot comparison was very difficult. We had some really bad luck with multiple hits and no big run-ups during the quarter, which contrasts to last year. That was significant. Also, we have this impact of our operating the lotteries in Indiana and New Jersey, where for years we've enjoyed an incremental benefit from overperforming the baseline. Some of that was driven by the jackpots. Quite a bit of that was driven by core growth.

Unfortunately, with the run that we've had, and they have these LMAs have a fiscal of June to June, and as you know, really for the tail end of 2024 as well, we had a lot of hits on the jackpot and not as many significant runs. You kind of get the incremental negativity associated with a benefit for many, many years and then a detriment on the scoring. If you take a look at that and you take a look at the timing of product sales, which, as Max mentioned, we anticipate will be positive based upon what's in our pipeline, it resulted in a quarter that was certainly down from last year. When you peel back the normalization for calendar days and you look at the underlying core business, we did expect more growth.

Again, a lot of this was driven as a result of fewer people coming in and buying jackpots. I think overall our normalized growth we had commented was about 1.5% for the quarter. Pretty good considering the top line was really challenged compared to the prior year. When you look at a normalization of Italy, where the team continues to innovate, we were up more like 2% and very good growth in our lottery. When we look out to the second quarter and we look at our sales pacing information, fortunately we've seen more hits on the jackpot. We do not see a great second quarter driven by both the purchase of jackpot tickets and the incremental activity associated with the casual player buying lottery tickets. Nonetheless, we're seeing a second quarter in the U.S. ex the jackpots flattish.

Italy is doing really well. Italy is up about 4% or so. I think that's what led us to be somewhat cautionary in our guide for the year. As Max mentioned, we expect easier comparisons and more of a normalization in the back half of the year and expect better growth in overall lottery sales and some of the timing-related issues to abate in the back half of the year.

Jeff Stantial (Managing Director of Equity Research)

That's great. Thank you for all the color. Maybe if I could just summarize just to make sure I got the net net of that correctly. If you think about the impact to date since you last reported, it's been really felt more in jackpots, which I assume you would chalk up mostly to the jackpot fatigue that we've talked about for several quarters.

Given the macro uncertainty, you're revising the assumptions embedded in for the back half as well a little bit more broadly, but less of a real-time impact witness there. Is that sort of a fair summary of everything you just laid out? Okay.

Massimiliano Chiara (CFO)

Yes, it is.

Jeff Stantial (Managing Director of Equity Research)

Okay, perfect. And then just one quick clerical follow-up. Max, can you confirm the assumptions that are baked into guidance for the euro and then what was assumed back at Q4? Just the euro has gone to EUR 1.05-EUR 1.11.

Massimiliano Chiara (CFO)

Yeah, right now we're assuming 110.

Vince Sadusky (CEO)

110 right now?

Massimiliano Chiara (CFO)

Right now we're assuming 110.

Jeff Stantial (Managing Director of Equity Research)

110 right now. What was in guidance when you established at Q4?

Massimiliano Chiara (CFO)

I believe it was 107.

Jeff Stantial (Managing Director of Equity Research)

Understood. Okay, great. Thank you both very much. I'll pass it on.

Operator (participant)

Your next question comes from the line Barry Jonas from Truist Securities. Your line is open.

Barry Jonas (Managing Director)

Hey, guys. Wanted to dive a little bit more into the Mega Millions $5 shift. Is this really, in your view, kind of just a waiting game, or are you seeing any resistance to the higher pricing from players?

Vince Sadusky (CEO)

Yeah, it's a great question. As we've mentioned in the past, we're very optimistic about the potential impact for the increase to $5 for Mega Millions. It gives players a great choice, a lower price point with Powerball at $2 and $5 Mega Millions. As we've commented in the past, when we've seen price point changes, the net impact of the overall dollar sales volume has been a very good increase, and we're hopeful that'll be the result from Mega Millions. Yeah, unfortunately, there's not much to report right now. We really have no trending information since that multi-state jackpot got hit very, very quickly after the price change took place in April. I think the key is the transition was very smooth. The technical team did, I mean, truly an amazing job of updating all of these point of sales around the U.S.

The game enhancements with the higher jackpot, the built-in Mega Player, the fact that the odds of winning have gone up and the prizes are bigger, et cetera. We believe folks who play multi-state jackpot games will come to recognize these trends over time. Unfortunately, it is still too early to assess the impact, and players are playing and beginning the process of learning and understanding what the positive impact is. We hope to have more data to be able to share with you all when we report our second quarter results.

Barry Jonas (Managing Director)

Got it. Understood. Just for my follow-up, we've definitely been getting a lot of inbounds about Texas. Maybe talk about the renewal process, where it stands as of now, and how investors should think about potential risks to Brightstar Lottery, given some of the noise coming out of the state government there as it relates to the lottery. Thank you.

Vince Sadusky (CEO)

Yeah, it's been, as you know, there's been an amazing amount of press and scrutiny around the Texas Lottery. Yeah, so the legislature is in session. They're currently evaluating the future of the Texas Lottery during this review process. The same thing took place, I guess, about 12 years ago or so when it was last up for review. The legislative session is in. It'll wrap up. The state of Texas legislatures will adjourn on June 2, and we'll have, I think, more clarity at that point. All we know right now is the last communication that the vendors received regarding the procurement. The state let us know that the process is still proceeding, and we expect a decision sometime later this year.

Barry Jonas (Managing Director)

Understood. Thank you.

Operator (participant)

Your next question comes from a line of Chad Beynon from Macquarie. Your line is open.

Chad Beynon (Analyst)

Hi, good morning. Thanks for taking my question. I wanted to start with margin. Max, I believe you said excluding some of the items in the first quarter, margin would have been closer to 46%. The print was a little under 43%. For Q2, you're also guiding to below 43%, and then that'll pick up in the back half of the year. I know last quarter you talked about some additional costs that could hurt margin that would be front half weighted. Can you update us on that? The guide for the year at 43.5%, I'm assuming that could eventually creep up higher if we're seeing higher jackpot activity. Just a little bit more clarification on that. Thank you.

Massimiliano Chiara (CFO)

Yes. Yeah, so I can confirm everything you said. The one-time costs are running almost rapidly as we speak. As a reminder, primarily project expense related to the new contract, so the rebids and extensions that we got granted recently, about 60% of that total cost. I would say the balance is split equally between the transition to cloud and the transition to, sorry, to sell mobile from satellite and the cloud investment in a lottery. As Vince was alluding to, we recently completed the transition to cloud in Kentucky, and the infrastructure is very stable there. We have been able to lift sales and achieve great results since the implementation of the new platform. We continue to look favorably into this technological evolution in our lottery solution.

Vis-à-vis the marginality, again, we think that the three percentage points plus of difference to the adjusted number is all related to the very low jackpot performance. Again, if you look at the last three years, this year we got one. Last year we got five, one billion plus, and the year prior we got three. Maybe five is an extreme on the upper end. Definitely one is an extreme on the lower end. Somehow in the middle is probably where we should land on a normalized basis. It is not only the billion plus jackpot that matters. It is really how many runs you can get through and get to kind of at least the $500 million ranges, because at that point you got incremental sales coming through more casual players that start to be attracted by the advertised jackpot level.

We feel relatively strong about that kind of earmark profit margin in terms of normalized performance. As far as the balance of the year is concerned, as you said, we expect Q2 to, again, be a bit weak vis-à-vis the average expected for the year, the 43.5 that you mentioned. The reason is primarily by the evidence of the latest 40 days, the early 40 days on the quarter with very low jackpot activity to report so far. The situation may change, but again, we are half in and still we have not had any significant jackpot activity. We stay very positive on the Mega Millions. We believe that there is definitely a positive trend associated with that innovation. We just need the run on the jackpot to come to manifestation.

Chad Beynon (Analyst)

That's great. Thanks for running through all that. That's really helpful. As a follow-up, I know the rest of the world is under 15% of total revenue contribution, but that was a highlight in the quarter. Are those markets, I guess, collectively just less exposed to the macro? Are there tech and pricing initiatives broadly across those markets? Given a mid-single-digit increase in Q1, is that something that you expect to be more of an anomaly, or could we continue to see that if trends persist here? Thank you.

Vince Sadusky (CEO)

Yeah, that activity was really driven by very strong Euro Millions jackpots. The exact opposite of North America. We see, all over the world, we see when the jackpot builds, the multi-jurisdictional jackpot builds, it has a significant impact on sales. That was the primary driver. I think those trends are consistent with North America and other parts of the world.

Jeff Stantial (Managing Director of Equity Research)

Thanks, Vince. Appreciate it.

Vince Sadusky (CEO)

Sure thing.

Operator (participant)

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

David Katz (Managing Director)

Morning.

Morning. Thanks for taking my questions. Apologies if I'm overbeating on an issue, but, and I think you may have talked about this a bit. Vince, you said that you get the results of the technical assessment in May. Since it comes up so often, can you just walk us through what might be the next steps in that process or put some historical perspective around it that may be helpful? Again, just because it comes up so often with respect to Brightstar Lottery, of course, is what I'm asking.

Vince Sadusky (CEO)

Yeah, yeah. Sure thing, David. So yeah, these, as you know, do not come up very often. Nine years ago or so, when it came up, it took some time for the commission to do their technical evaluation and overall make their determination and issue their preliminary award. In this particular case, the bids were submitted on March 17. As I recall, the commission formed. We confirmed that there were two bidders. We found out this week that the economic proposals will be opened on May 19, on Monday. A much shorter timeframe than our experience nine years ago. We also understand the evaluation of the technical proposals is complete. As I mentioned, we believe that we will find out the results of the technical evaluation scoring at or prior to May 19 as well. Early next week, we should know.

David Katz (Managing Director)

That's an outcome of just the technical, but not the financial aspects? Or do we have sort of a final answer on the evaluations of everything by the 19th?

Vince Sadusky (CEO)

Yeah, what I described is what the commission has communicated, which is we anticipate the technical scoring will be done, and they will open up the envelopes, if you will, around the economic bids for ourselves and our competitors. When they actually do the math on the two pieces, we anticipate we'll be sometime shortly after the opening of the economic letter. We don't know exactly whether it's that day, several days, and how long to issue a preliminary award. When the two pieces are disclosed, we should all be able to do the math and anticipate a preliminary award pretty shortly thereafter.

David Katz (Managing Director)

Open up and disclose means to us, to everyone, just to be clear.

Vince Sadusky (CEO)

Yes, correct.

Jeff Stantial (Managing Director of Equity Research)

Perfect. Thank you very, very much.

Vince Sadusky (CEO)

Sure thing.

Operator (participant)

Your next question comes from of Domenico Chiara from Ecuador. Your line is open.

Good morning. Two questions. The first is on the Italian market. I wonder if you can elaborate a little bit more on the spending. We have seen some verticals, not referring to the lotteries, but for example, the iGaming business growing really very fast, mid-teens or even higher. I heard you commenting on the Q1, but also giving some highlight on April that is quite reassuring. I wonder if you think there is any kind of cannibalization between the verticals or not, or just was a matter of, let's say, working days and selling sellout? Second question is on the bridging net financial position. I understood that you had, say, almost a $300 million increase in debt coming from FX, if I'm not wrong. I wonder how can I bridge this number with the free cash flow generation that you have been reporting?

Vince Sadusky (CEO)

Sure. Yeah, I'll take the first part of the question, Domenico. I know you've been following the market for a long time, know that it's a very mature and robust gaming marketplace. We've had good growth in our lottery products for several years. I think, again, if you take out the calendarization of the days, as you pointed out, growth in the first quarter as well, and currently second quarter pacing of 4%. I think the ability for the pie to grow, for the market to grow alongside the growth that Italy has seen in sports betting and iCasino continues to occur for the lottery business. We keep mentioning the need for ongoing innovation, both on the retail products and on the iLottery products. We believe that's been attributing a lot of the growth.

We've seen growth in lottery, both land-based and digital, alongside the ongoing growth in sports betting and iCasino in Italy.

Massimiliano Chiara (CFO)

Hi, Domenico. This is Max speaking. With regard to the second question, yes, half of the impact was due to the translation on the FX. The other half is kind of split between EBITDA and working capital almost equally. In terms of how to look at the cash flow for the balance of the year, I think our performance in Q1 is definitely remarkable compared to the last two years. Cash conversion in the upper 60% is definitely where we should be on a normalized basis. We anticipate that we will continue to deliver positive cash flow, ex, obviously, the lottery upfront fee payments, where you exclude those payments for the balance of the year.

When you look at the normalization of that cash flow, you should expect, again, something in the range of $700 million-$750 million from a CFO point of view, cash from ops point of view, ex upfront fee. You have, obviously, this heavy CapEx balance that is coming to fruition this year because of the ramp-up in the CapEx cycle. The free cash flow is going to be below our normal run rate. We have highly advertised this period of time in the past. This CapEx cycle is going to stick with us probably for 2025 and 2026. We will be running at about $400 million-$450 million for each of the two years. We anticipate the CapEx to come down starting in 2027 to more normalized levels in the range of $200 million-$225 million per year. Thank you.

Operator (participant)

Your last question comes from the line of Joe Stauff from Susquehanna. Your line is open.

Joe Stauff (Equity Research Analyst)

Thank you. Good morning, Vince. Max. Just to follow up, Vince, on the lottery award, obviously a pretty significant catalyst. The economic weighting is about 60%, whereas the technical weighting in terms of the award is about 40%. Is that correct?

Vince Sadusky (CEO)

Yes, I think that's right.

Joe Stauff (Equity Research Analyst)

Okay. And then on the Italian growth that you had mentioned, up 4% thus far in the second quarter, is there a way for you to maybe describe is that more new product-oriented growth? Is it volume growth? Or is it most likely just a combination of both?

Vince Sadusky (CEO)

Yeah, it really is a combination. We've had good ongoing instant ticket innovation. We've relaunched some products in the second quarter. We mentioned a while back, we have our patented printing product, Xfinity. We've launched that in the market, and that seems to have very good attraction to players. Things like the special draws that we've done, we've had good success with Tennilotto and Numitoto for the core lotto game. It is coming across the board and continued really strong growth in iLottery sales as well.

Joe Stauff (Equity Research Analyst)

Understood. Good luck next week.

Vince Sadusky (CEO)

Thank you.

Operator (participant)

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

Vince Sadusky (CEO)

Yeah, thank you for joining us. Our first quarter results confirm sustained global player demand, for instance, in draw games and the good profit structure of a pure-play lottery business. As I noted, we have some really important milestones in the near-term horizon. While we are contending with a high degree of macroeconomic and geopolitical uncertainty, we're excited about the strategic initiatives we are working on to drive sustainable long-term growth. As always, we appreciate your interest in Brightstar Lottery and look forward to reconnecting with you soon, certainly following the news of the lottery outcome. Have a great day.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.