Q4 2021 International Game Technology PLC Earnings Call
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Good day and thank you first funding by welcome to International game Technology Q4, 'twenty one earnings call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. So.
So I'll ask a question during the session you will need to press star one on your telephone.
Do you require any further assistance please press star zero.
I would now like to hand, the conference over to your first speaker today, James Hurley Senior Vice President Investor Relations. Sir. Please go ahead.
Thank you and thank you all for joining us on Igt's fourth quarter and full year 'twenty. One conference call hosted by Marco Sala Executive Chair, Vince <unk>, Chief Executive Officer, and Max Chiara, Our Chief Financial Officer.
After some prepared remarks from the team Vince and Max will be available for your questions.
We are presenting from multiple locations. So please bear with us if we encounter some technical difficulties.
During today's call, we will be making some forward looking statements within the meanings 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 based on a number of factors and uncertainties, including those related to the effects.
<unk> of the COVID-19 pandemic.
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 may discuss certain non-GAAP financial measures in our press release, the slides accompanying this webcast and our filings with the SEC each of which is posted on our Investor Relations website, you'll find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable.
GAAP measures and now I'll turn the call over to Marco Sala.
Okay.
Thank you, Jim and Hello to everybody.
This morning, we issued a 2021 financial results reflect our strongest revenue profit and cash flow per four months in the last four years.
We met and in many instances exceeded the financial targets, we set for the year.
We also made important progress so I will say that on the strategic objectives, and reinitiate that returning capital to shareholders.
As we enter 2022 the company is in a very strong are pleased with the solid financial condition and the stronger foundation to build off.
<unk>.
Saudi we recently made some leadership changes that best position the company to realize its long term growth initiatives and create significant shareholder value.
Are you ever move into a new role as executive chair of IGT and win some lose Keith was named the company's new CEO .
In June I will be proposed as the next CEO of Douglas D. Igt's majority shareholders.
As you can imagine I've been in parallel discussions regarding the leadership evolution at IGT and Douglas D nickel sometime.
This was happening while we were managing through the pandemic and making important progress on sharpening IGT is a strategic focus and growth objectives.
We outlined a new longer range of claim at our Investor day, and the time is right for a strong leader to deliver on it.
We are very fortunate that whoever wins his season at the C suite executive and long aside IGT board member to be Igt's seal.
I have enjoyed working with him over the last seven years and that's every confidence he's the right person at the right time to lead the company he had a exciting year at all.
<unk>.
Yeah.
He has an impressive track record of creating shareholder value.
Obviously, I'm not leaving the IGT I will remain engaged and gives us equities Chad working with Vince on IGT is a strategic direction, serving as a source of customers regulatory matters and focusing on corporate the gauntlet in house.
Vince It would be responsible for establishing the company's priority is managing the day to day operations and delivering on strategic and financial goals.
Before I turn the call over to Vince I would like to say that I greatly appreciate that they're getting to know you over the years. We also enjoyed the we always enjoy the constructive dialogue and I value your support of the company.
Thank you for that and now two wings.
Thank you Marco and Hello to everyone.
I'm really excited to be here, leading IGT in the next chapter of its evolution.
I've been a keen observer, an advocate of the company's progress for more than a decade in my role as a board member, including as chair of the audit Committee I've admired the way Marco and team have led the company, especially over the last few years navigating a highly disruptive pandemic, while making important strategic decisions to position the company for the future.
There are many parallels between IGT in the media companies I've run in the past.
Both operate in regulated markets with high barriers to entry.
Expertise in content and technology, a culture of innovation and distribution power are critical to success.
And each generate strong cash flows and have faced both disruption and opportunity with the emergence of digital.
Given the similarities I see opportunity to create great value for all igt's stakeholders.
I'm excited to build on our strong foundation I am inheriting the company laid out some long term financial and strategic goals at the November Investor day, and I intend to deliver on them.
I signed off on them as a board member and I'm doubling down as CEO .
Our mission is to strengthen Igt's global leadership position in the regulated gaming industry by offering innovative content services and solutions.
That is the foundation of our strategy to grow top line and margins across all segments, while increasing operational efficiency and optimizing capital allocation.
And we're in a great position to do so our core activities are in markets with secular tailwind and accelerating digital growth we.
We have set aggressive but achievable financial goals that include impressive cash flow generation over the next several years and.
And we have a disciplined strategy to allocate that cash flow to maximize value for all stakeholders.
We have a powerful diverse portfolio that not only offers compelling growth prospects. But also provides significant resilience. This was clearly on display during the pandemic, where strong lottery and digital embedding growth helped to mitigate the impact of wide scale casino and gaming Hall closures.
The collection of assets also provides unique and sustainable competitive advantages, including our best in class management team with extensive global industry experience.
From an industrial perspective, the content technology and management of our operations are highly complementary and our Levered your ball across slots lottery sports betting and gaming.
In our quest to sharpen our focus on core operations, we recently announced the sale of our Italy commercial services and payments business at a very attractive multiple over 15 times 2021 EBITDA.
Net proceeds will primarily be used to reduce debt.
And potentially for strategic M&A, if we see a compelling opportunity.
I'd like to highlight some of the progress we're making in our goals bigger.
Beginning with global Lottery segment, where same store sales were up over 20% compared to both 2020 and 2019 levels.
T. His unique insights on game innovation portfolio optimization, and sales and distribution strategies are helping to drive record level wagers for our customers.
The broad appeal in a high entertainment value of lottery games is clear.
In the last two years, we have established a much higher baseline to grow from.
And it is important to highlight the tremendous operating leverage in the business as operating income increased at more than double the topline growth rate in 2021.
I lottery and instant ticket services are two areas in the incremental opportunity for us.
We are making good progress on both evidenced by strong kpis for the year.
In the markets served by Igt's lottery platform.
Or what your same store sales increased over 60% in 2021, including nearly doubling in the U S, where I lottery penetration reached 12% in the fourth quarter.
Our innovative new E instant games are consistently delivering higher average revenue per user for our I lottery customers.
Instant ticket services had a record year fueled by a more than 35% increase in standard units produced.
The multi year outlook for our lottery business is compelling we expect innovation higher average player consumption increased I lottery adaption and market share gains in instant ticket services to fuel sales growth.
We have a favorable contract renewal cycle ahead of us and our investments here have attractive returns.
[noise] focused product strategies and the global market recovery are driving a strong rebound in sales and profits for the global gaming segment, which continues to see sequential improvement in sales and profits.
The expansion of our multi level progressive game portfolio on the new P. Cabinets is strengthening our leased game portfolio and generating some of the strongest sales funnels ever.
Our award winning resort wallet Cashless gaming technology recently received regulatory approval in Nevada.
With this achievement Igt's entire cashless gaming solution, which includes the option for one step external funding the IGT pay on personal mobile devices is approved for deployment throughout the state.
It is an important milestone for this emerging technology is Nevada is widely viewed as a future forward gaming jurisdiction.
Continued execution on well defined product strategies is expected to drive market share gains in key categories for us over the next several years.
This should translate into double digit revenue growth that is further enhanced at the profit level. Thanks to the large structural cost savings implemented in the last 18 months.
The digital and bedding segment continues to grow at a fast clip propelled by our strong leadership positions and new I gaming and sports betting regulations in the U S.
We are investing in R&D and talent to build a solid foundation to support the high revenue and profit growth trajectory, we expect over the next several years.
New leadership for both the I gaming and sports betting verticals are already making an impact.
This year, we expect to significantly increase the number of new I gaming titles and we will also begin distributing our first third party games.
Our play sports solution powers over 60 venues in more than 20 States and was recently recognized as the platform provider of the year at the SPC Awards North America.
The turnkey sports betting solution is gaining traction, including new partnerships with Morello gaming and clip Castle casino.
We also have a robust pipeline of new turnkey customers teed up for 2022.
We are making progress on creating strategic optionality for the digital and bidding betting segment.
The separate legal entity and organizational realignment is underway along multiple work streams. It's.
It's an exercise that will likely last until year end.
Like many others, we are facing some incremental near term challenges in four main areas.
The impact of the omni crown Varian in certain markets labor shortages and increased supply chain pressure and cost inflation.
I'm the Crown has impacted Italy lottery sales, especially venue based draw games like Lotto since late December it.
It has also led to incremental casino restrictions, mostly outside the U S.
We have found that negative COVID-19 related impacts on lottery sales proved to be short lived.
In addition, casino G G our trends and our sales funnel remains strong in North America, which represents about 70% of our global gaming segment.
Low unemployment and higher attrition are impacting our ability to fill open positions as quickly as we'd like.
We are investing in our people and I've made talent acquisition and retention a top priority.
Igt's culture of innovation and commitment to diversity and inclusion have proved to be important advantages in attracting and retaining talent.
We are also experiencing increased pressure on product deliveries due to longer lead times and availability of certain components.
We are mitigating this by prioritizing key product and customer deliveries.
A sustained focus on cost discipline and avoidance is also helping to mitigate inflationary pressure things like components freight and wages.
It is hard to know if we will experience any impact from the conflict between Russia and Ukraine.
We have minimal direct exposure to those countries, but the repercussion throughout Europe and the rest of the world are difficult to assess at this time.
Net net based on what we know today, we expect to offset the impact of the incremental headwinds and maintain the 2022 outlook provided in November .
Six weeks in I get more and more excited about what we can achieve in the next few years. The team is extremely motivated to deliver on the plan to take IGT to the next level and I have tremendous confidence that we will do just that.
And now over to Max for some insight into our financial results.
Thank you, Vince and Hello to everyone joining us today.
The figures we reported today demonstrate the highly resilient nature of our business as we not only deliver meaningful revenue and profit growth year over year, but also exceeded pre pandemic levels on all key financial metrics.
A high level summary of our fourth quarter financial results with comparisons to both the prior year in 2019 as shown here on slide 14 in the quarter, we generated over $1 billion in revenue up 19% year over year on solid global same store sales growth in lottery high replacement unit shipments and ASP in gaming.
And 25% growth in digital I'm betting propelled by continued market expansion and customer demand for our products and technology.
Strong profit flow through in operating leverage drove adjusted EBITDA to $387 million and the associated margin to 37%.
31% and 400 basis point, respectively.
It is important to mention that this substantial increase in profit already incorporates higher.
Cost related to the re establishment of incentive comp programs unfavorable supply chain impact and work associated with establishing digital I'm betting is a separate legal entity.
The solid financial performance and our rigorous approach to invest the capital led to a record level of cash flow generation with cash from operations of nearly $400 million and free cash flow totaling $326 million inclusive of favorable working capital performance part of which is timing with Q1.
I would now like to shift the focus to full year results to provide perspective relative to the multi year outlook. We provided during our investor day in November .
In 2021, we delivered over $4 billion in revenue with significant growth across segments versus the prior year.
Strong operating leverage.
Ulster by structural cost savings drove significant increases in profit with over $900 million in operating income and nearly one $7 billion in adjusted EBITDA exceeding both prior to year end 2019 results.
As we continued to recover from the extreme measures taken during the pandemic our cost structure is benefiting from the execution of our Optima program, where we over achieved our $200 million cost savings target as a reminder, about three quarters were achieved in our P&L, while one quarter of that was achieved with structured.
Efficiency in our capital expenditure.
The over achievement piece to our cost savings target primarily comes from temporary actions did that an important meet again to the increased supply chain costs, primarily in logistics that have impacted our 'twenty one performance and will continue into 2022.
More on that later, when we speak about our outlook for 'twenty two.
Cash flow generation exceeded our expectations with cash from ops of over $1 billion and free cash flow more than doubling to over $770 million both are record levels now.
Now, let's review the results of our three business segments.
Global Lottery achieved record financial results during the year revenue increased 30% to $2 $8 billion is strong customers demand drove global same store sales up over 20% year on year and versus 2019.
As a reminder, extremely high play levels in the first half of 'twenty, one were bolstered by certain discreet items, including gaming Hall closures in Italy elevated multi state jackpot activity in early May performance in the U S. These items contributed about $165 million in revenue and are out.
And around $140 million of profit.
The high flow through of same store sales growth and a positive geographic mix also led to record profit levels with operating income rising nearly 70% to $1 $1 billion adjusted EBITDA, increasing over 40% to $1 5 billion and operating income and adjusted EBITDA margins of 30.
Three 9% and 55% respectively.
Global gaming returned to profitability during the year with significant increases in revenue and profit compared to the prior year revenue rose, 33% to $1 $1 billion driven by solid increases in active units yields number of machine units sold and ASP.
The installed base in North America reflects changes in the W. La markets of Delaware, and New York and Rhode Island.
Reductions in these markets of about 840 units year over year, and 650 units sequentially were partly offset by increases in the balance of the portfolio.
And the rest of the world the installed base rose over 213 hundred 80 units year on year, and 180 units sequentially, primarily driven by increases in Latin America and class II units in South Africa.
Global unit shipments increased 62% year on year as operators began increasing capital budgets in the midst of the market's recovery shipments totaled 57% of pre pandemic levels. During 2021, indicating there is still some runway to a full recovery in this area, which we don't expect to happen.
Completely until 2023, although we expect North America unit shipments will get close to 2019 levels in 2022.
IGT sold over 23800 units globally during two.
2021, compared to about 14700 units in the prior year.
And at higher average selling prices.
2021, ESP of over $14000 exceeded both prior to year end 2019 levels on an improved mix of products and new cabinets.
Strong operating leverage which was accentuated by savings realized from the Optima program drove a substantial recovery in operating income and adjusted EBITDA contributions of over $40 million.
And $170 million respectively.
Income margin in the fourth quarter reached 11% nearly matching the 12% pre pandemic level achieved in the fourth quarter of 2019 and are expected to continue to improve in 2022.
The digital banking segment continues to grow at a fast pace generating revenue of $165 million in 2021 with double digit growth achieved in both I gaming and sports betting.
This growth is propelled by new market adoption, new customers and organic growth. We completed the successful launch of a gaming in both Michigan, and Connecticut, and so our sports betting footprint expand to over 60 sports sports books.
Operating income grew to $33 million and the operating margin reached 20% as solid profit contribution from an emerging business and a nice profit flow through even with increased investments in talent and resources to fund future growth.
Adjusted EBITDA increased to $48 million more than doubled the priority of 11.
As I mentioned earlier exceptional operational performance and disciplined capital management led to a record level of cash generation, which in addition to approximately $900 million in net proceeds from the strategic sale of our Italy gaming business allowed us to reduce net debt by $1 4 billion.
Yes.
Leverage is down to three five times, the lowest leverage in company history, and reaching the 2022 year end leverage target 12 months early.
With the improved risk profile, we now have a more balanced capital allocation framework that once again include shareholder returns in Q4, we reinstated our quarterly dividend and implemented $300 million share repurchase program. The first in company history.
We delivered over $80 million to shareholders during the quarter, including about $40 million in the purchase.
One 5 million shares at an average price of just above $27 per share.
Based on recent SEC filings you can see we continued repurchasing shares in Q1 with another 570000 shares repurchased through February nine.
Proactive management of our capital structure continued during the year as evidenced by the redemption of nearly $1 billion of Euro notes the refinancing of another billion in U S dollar notes.
At a lower interest rate and the successful amendment and extension of our term loan facility.
The reduced debt increase liquidity and extended maturities have greatly improved our credit profile and lower interest expense by about $60 million during the year.
We also recently accomplished the goal of raising our credit ratings, restoring our pre pandemic levels last month, S&P and Moody's upgraded our corporate credit rating to double B, plus NBA two respectively, citing the strong performance improve leverage EBITDA margin improvement and the use of asset sale proceeds.
Leads to reduce debt this latest actions position us very well in the fixed income market going forward and strengthen our conviction in pursuing our long term leverage objective.
Our debt portfolio is favorably structure in the current market environment with a heavily weighted mix of fixed to floating rates and no large near term maturities.
In conclusion, let me summarize by saying 2021 was a very successful year with compelling progress made on many growth initiatives and the successful achievement of our financial goals with all key financial metrics exceeding 2019 levels, we reduce debt and leverage to record levels and increase capital returns to.
Rogers.
More broadly over the past couple of years, we've built a solid foundation for profitable growth in the future as we drove an accelerated recovery from the pandemic readied our company to capture potential portfolio opportunities and realign our portfolio to high growth opportunities.
Based on the strong performance of 2021 and despite the recent headwinds we are reaffirming the 2022 full year guidance, we provided at the recent Investor day.
We currently expect to deliver revenue of approximately four 1% to $4 3 billion operating income margins of 20% to 22%.
Cash from operations of between 850 million and $1 billion in capital expenditures ranging from $400 million to $450 million.
Leverage is expected to remain around three five times in 'twenty, two with somebody ability quarter to quarter.
The leverage outlook excludes any positive impact from the recent from the receipt of proceeds from the recently announced sale of our commercial servicing payment operations in it.
On a pro forma basis, we see a further improvement in our leverage ratio to the tune of one quarter of a turn.
That transaction is expected to close in the third quarter of 2022.
As Vince mentioned earlier, we are managing through some headwinds caused by near term market dynamics. We're confident we can mitigate the impact of these items with incremental product sales and financial rigor around cost and lower depreciation and amortization related to the capex efficiency as well as timing of spending.
It is fair to mention that our outlook does not factor at this point any material consequence from the recent conflict in Ukraine, given our limited direct exposure to the affected region. Although we continue to monitor events very closely and will adjust our poster accordingly as events unfold.
In order to provide some indications with respect to the first quarter of 2022, we expect to achieve revenue of one to $1 1 billion and operating income margins of 20% to 22% in the quarter.
This outlook implies a sequential improvement in profit from Q4 'twenty one.
That concludes our prepared remarks, operator would you. Please open the line for questions.
As a reminder to ask a question you will need to press star one on your telephone.
Your question press the pound key.
Standby, while we compile the Q&A roster.
Your first question comes from the line of Carlo Santarelli from Deutsche Bank. Your line is now open.
Hey, good morning, everyone. Thanks for taking my question and welcome.
If you don't mind, Mark you talked a little bit about how you were seeing two.
2022, and I believe Vince mentioned, it as well, but when you think about kind of the product sales replacement environment out. There. Obviously you said I believe the comment was you could get levels to approaching 2019 for sale levels when.
When you look at operator can.
Capex budgets.
Some of the larger ones that have reported thus far.
They seem to have expanded somewhat materially and I'm. Just wondering is is the demand and the order flow kind of what you see right now roughly.
Roughly in line with 2019 and are there any kind of hindrance is related to some of the supply chain issues or anything else or is it just kind of a mark isolate the product is there, it's just kind of a little bit of a.
Waiting to see how everything flows through.
Hey, Carlo Thank you very much it's Vince I'll take the question.
I just spent a couple of weeks in Las Vegas meeting with our largest casino customers.
I've been learning the business I've spent quite a bit of time with our internal team.
Really dug into our supply chain issues.
Our sales funnel and I guess just a.
A couple of observations.
That I've had one is 2021 was clearly a record year for casinos anecdotally in some conversations with some of our largest customers. They had mentioned they've had some of their their greatest days.
And weeks, specifically in their slot business than they've had.
In some cases ever.
So that's incredibly encouraging for for us of course, and there is absolutely pent up demand given the disruption that took place with casino closures and then kind of a slow reopening.
Throughout the.
The entire COVID-19 .
A disruptive period.
I think that the recovery was somewhat impacted by by omni chron.
More internationally as all U S jurisdictions remained open.
But certainly in in Europe , and in Latin America.
I'd say that our customer sentiment is really excellent and it's very clear that they need and want to invest in the in the slot floor.
Many are talking about how they're they're average yield per game has gone up significantly.
And they've really not seen something like this since my association with the.
The IGT side of the business for more than more than a decade.
So that's very exciting yeah, as we mentioned our challenges are really in in delivering we are experiencing increased supply chain component parts shipping challenges.
I think our casino customers understand that that's going to affect it.
Has affected and will continue to affect our lead times in and it is adding a cost element as well. However, this company I think as you've seen in and my exposure to the company over the years.
Of being a board member who has done an excellent job and constantly looking to work and refine costs and find opportunities.
To help to to offset.
What we all hope and believe is a short term and temporary situation on the supply chain and component part manufacturing front, but.
The reality is you know none of us none of us really knows so we think we can we can manage.
Through that but it's a.
A very good situation of having demand stronger than I think we've we've seen in.
And in a long long time.
That's helpful and thank you very much and then it's been about three five months. Since you guys hosted your analyst day and provided.
The outlook for not just 2022, but for the longer term and speaking specifically to 2022, obviously.
The ranges that you guys put forth, whether it was operating margins or revenue ranges.
You've reaffirmed that this morning and I'm just wondering if you think about some of the things that you talked about whether it was the labor.
Whether it was the supply chain issues inflation.
Alright that are creating some headwinds if you had to and I know, there's probably won't be an easy question, but if you had to try and think about the impact of all of that stuff and how much. It may be changed within your thinking over the last three and half months is that a significant number in terms of maybe the worsening of some of those factors over that piece.
<unk> from from from the analyst day to today.
I don't know Hi, this is Max speaking so.
We identified in our material some of the headwinds that we have been experiencing recently and when we compare the situation today versus the situations. We had at the beginning of November I would say that probably the biggest one.
Which really has made an impact as omicron the.
The expectation, though is that this impact is only temporary in nature. So we started to see some weakening in December .
In the European markets, and obviously also continuing into the first part of the quarter, but as you as you are seeing out there. The situation is improving so we expect that.
Impact to kind of hopefully mitigate we have mitigation actions in place as we mentioned as well in our remarks.
<unk> product sales, which are happening right now across the board in different jurisdictions.
Both from the primarily from the lottery business, but also as Vince just said.
Strong pipeline of products sales coming also to fruition and gaming.
The supply chain deserves is slightly different.
Comment.
It is true that we are affected by higher supply chain costs versus our original estimates.
You May remember, we said about $10 million in 'twenty, one and maybe double in 'twenty. Two I think we are running higher than that but.
With our ability to hold cost back on top of the structural Optimus savings I think we have a buffer we can play with to kind of fend off those costs, especially in the first part of 'twenty, two where we expect those costs to be biting. The most and then lately there is a slight deterioration.
As shown in effects.
Versus the assumption used at the planned period of 118 now ex FX is about 113 114 that has also some implications, but not materially so net net with our offset capacity.
We felt confident to two.
To hold the guidance to hold the line on the guidance.
For 'twenty two vis vis what we provided at Investor day.
Great. Thank you both very much.
Your next question comes from the line of Chad Beynon from Macquarie. Your line is now open.
Good morning, Thanks for taking my question.
Wanted to start with the commercial service sale announcement can you talk about why now was the right time was it just really kind of a coming together of your future vision and there was an offer on the table and then also related to that I know that the margins of this business were lower than.
The rest of <unk>.
You report in lottery can you talk about anything else that affects the model were there any other shared services in the Italian lottery segment as well thanks.
So I'll start and let Max make a few comments as well.
Getting my arms around this particular part of the business.
This business had been around for quite some time it was always viewed as non core.
It really doesn't isn't critical to our growth plans going forward and so over the last several years the company's done a great job of separately identifying this business within its internal operations and I think as the company has demonstrated from several trans.
Actions over over the last few years.
It remains opportunistic when there is the opportunity to monetize it.
At a very attractive multiple.
Operations at our that are non non strategic.
So I think the company felt as if this was a great opportunity to take advantage of.
The multiple very accretive transaction for the company the ability to pay down debt and and refocus or continue to focus.
On its core operations of lottery gaming and digital.
And just to complement on what Ben said, yes.
Youre right Chad the the margin was below our average so effectively the impact.
Going forward is probably accretive to the margin of our lottery business, but.
You have seen also in the press release, we issued yesterday are what the numbers are that are generated by this business.
They have been in that ballpark for some time.
So I think you can you can extrapolate from that.
The impact to the plan that is definitely going to be material.
In any circumstance and so I think we are confident that we are still within those ranges also long term that we provided back then the important thing as Vince mentioned is that we will be able to.
Put this net proceeds at work right away as soon as we close the transaction and further our our leverage journey.
Two our ultimate target.
Great. Thank you and then is there any update on lottery contracts in the U K or in New York I believe those were kind of the big ones that we had on our on our list of potentially in the first half of 2022. Thanks.
Yeah with regard to the U K as I'm sure you know Camelot see the incumbent operator, and we are we are part of that group by providing our technology and products and services.
The current contract was extended but.
Competition for the fourth license is.
Is underway and we're not able to publicly comment.
On the process at this point, but.
And award of the New license is expected to take place soon.
And New York are a lottery supply contract was extended through August of 2022, and we expect that RFP for the next contract to be to be issued pretty soon.
But given the time left on the contract.
And in the process.
Well, we'll likely get another extension.
Great. Thank you very much guys I appreciate it.
Okay.
Your next question comes from the line of Barry Jonas from Toby Securities. Your line is now open.
Thank you very much.
Marco I'm, assuming this is her last regular call. So just wanted to say, it's been a true pleasure and congratulations on your new roles.
Vince welcome.
Just to be clear.
Should we expect any changes as you settle into the CEO role.
Yes. Thank you.
No.
You really should not.
Yeah, I've been associated with companies in the past.
I've come in and the companies have been.
Struggling and really it was a complete redefine our strategy and purpose.
Execution and personnel.
This is the exact opposite scenario being very familiar with the company being involved in its annual strategy and goal setting.
Budgeting and strategic planning.
And having a great familiarity with with the team and the changes that have been made structurally.
And breaking the business into clearly defined segments and the definition around value creation that I think the company did an excellent job of laying out at Investor day are those.
Those are all things that are there.
As I mentioned in my comments and you know when I need it I'm very very much very comfortable with that.
And I.
I really am here, because I feel as if there is terrific value creation capabilities from this company based upon the planned it laid out by pretty much any metric any comparable you can.
You can take take a look at so I'm excited to be here and help to to execute on the plan that I think is very well laid out a very a very strong combination of of shareholder returns growth opportunities cash flow.
These are things that are I think over time, you know with with with good description of of of what the objectives are coupled with with of course performance I think will will definitely become evident and I'm excited about that and feel very fortunate to.
In this operating role at this juncture in the company's evolution.
That's great and then just a.
Follow up question I know the process is moving moving along but as recent market conditions affected your digital and betting lifting or spinoff review process and I guess, what are the decision tree points from here.
Yes, I think the exercise of separating the.
The I gaming and sports betting business.
Makes perfect sense.
The timeline.
Is is one that just simply takes some time not not just kind of the physical separation of the financial and legal separation, but.
It takes to gain regulatory approval and you know this company. It's very critical that this company continues to.
<unk> be incredibly focused on the regulatory environment.
Its gaming licenses give it the right and opportunity to be competitive in this space and that's something the company has has always taken with the utmost sincerity and focus and so we as you would expect given that DNA at the company is being incredibly thoughtful around.
Ensuring that it does the separation.
Perfectly.
That it is an incomplete compliance that I think over time will also be a key differentiator for IGT versus companies that.
I don't have that same that same focus and attention.
Having said that are.
There was a very very strong valuations for I gaming and digital betting companies as we all know that.
That those multiples contracted significantly.
Going into the fourth quarter and are perpetuating today in a down market. So I think the nice thing about the time, it's taking to to actually physically enabled this separation will give us plenty of time to think through that strategic alternative as to whether or not it's a separate listing or.
Continues to be a standalone operating subsidiary, 100% owned by by IGT. So I like the fact that we don't need to make any any quick decisions our approach to it would not enable that anyway and I do believe the.
The focus here should be and is by the company.
The industrial strength and whether or not this makes good business sense, but I think the key differentiator with our business is the fact that we you know we are 100% compliant we operate in legal markets. We are we have great expertise here.
We're sticking to our strategy and our knowledge of being a trusted b to b providers. So I think we've carved out a very specific niche in.
In something that is very very core to our our competencies and in land based gaming.
And I do think that we've grown the business or you know when I say, we the the company and I know I'll get to take credit for.
For the company growing the business in a profitable and responsible way. So I'm excited about this business I think this is something that is tremendously undervalued and for purpose of this conference call I'll stop there, but but at some point you know happy to share more thoughts around around the value of this operation.
Perfect. Thank you so much.
Im Sorry reminder, if you would like to ask a question you will need to press star one on your telephone again Thats Star one if you would like to ask a question.
Our next question comes from the line of Ben Chaiken from Credit Suisse. Your line is now open.
Hey, How's it going.
You mentioned on the call you reached three five times leverage.
The early and that including the sale announced yesterday youre going to further delever another quarter of a turn or more.
And get closer to your 2025 leverage target range does that change how you think about your repurchase cadence or the pace of other investments.
So thank you for the question Ben.
The point here is the following first of all when we launch day.
Feedback program, we were very clear that this was a multiannual initiative.
We have since then we have started executing.
We have accumulated about 2 million shares so far so we are along the way with the program, but we should not dismiss the fact that.
Our credit agreement configurations has a structural.
Limit on our payments to restricted payments, which are dividends and buyback a part of it.
$2 million to $300 million per year. So.
With the dividend underway and around eight I may say of buyback I think we are kind of hitting that threshold. So.
The next move really ease to strengthen our credit rating.
Further, particularly on the Moody's and <unk> to be able to kind of.
Lift up that limit from 300 to 400 million as as already prescribed by our credit agreement and so that's why I think accelerating on the deleveraging and retiring some debt down the road would probably help us getting there faster.
Got you that's Super helpful. And then can you are you able to are there any kind of Kpis, which you would think are can you just remind us of what those might be to increase that restricted payment basket.
That you are mentioning about 300 like what do we need or is it a leverage target what does it start.
No the only API that is relevant to increase debt limit from three to 400 is.
To have two ratings in the crossover space one notch below investment grade. So we are there with S&P already a double b plus.
We are one notch below with Moody's at <unk>, we need to be eight one.
So that's why the deleveraging and the reduction in gross debt is the mainstream approach to be able to increase that.
Debt limit.
Okay, great. Thank you very much.
Yeah.
Our next question comes from the line of Chad.
From Stifel. Your line is now open.
Great. Thanks, Good morning, everyone, Margo, Vince let me Echo everyone's sentiment ear and also say congratulations to both of you on the new role.
First off I wanted to follow up on some of the questions here on the sale of the commercial services business. As you look across your portfolio are there any other remaining non core assets that you would consider fully monetizing or does it.
<unk> remain co portfolio feel about right given the remaining cross product synergies.
Yeah.
No I would say.
The portfolio at at this juncture is reflective of our key operating segments.
And I think that the opportunities to monetize non core assets.
Have been taken the companies.
I think done a terrific job of that has been really focused on things that we're business as they've built up over the years or acquired.
Then ultimately I think we are.
Very smart and very patient around the ultimate monetization of these waiting for a really.
Terrific opportunity, but I think at this point going forward. We the operations. The material operations are are important to the business and are important to achieving our operating goals.
Okay perfect. That's helpful. Thank you and then for my follow up you talked to some potential opportunities for tuck in M&A I am guessing that fits more on the digital and betting front I just wanted to follow up on that are you seeing any interesting studios, our technologies up for sale and what our general seller expectations like these days in light of rising interest rates and the general macro.
NT.
Yeah, again I think.
In order to grow the digital and bedding business and have it become a more material contributor to our future cash flow.
There is an opportunity for us to continue to invest in people and technology and I think that we have.
We've proven we have a right to win in this business as the company has done a very good job of porting its land based games over to a digital environment and when you look at the data as each one of these jurisdictions opens.
Immediately there is great brand recognition from having these titles and these beloved games in the marketplace in casinos for decades.
Next is the growth opportunity beyond the initial titles, which is has a lot to do with the velocity of introducing new games into the marketplace and it's an area that we are we are very focused on.
And that's an area you could envision we could accelerate.
Improve and increase our market share.
Through some M&A help and that would clearly be focused on the combination of the technology and the content side.
Having said that I think the value evaluation.
<unk> digital entities in any industry.
Is relative to a certain point in time market sentiment and I think the company has done a great job to this point.
Of not writing big checks for unprofitable businesses.
Justified based upon an operating need I think the company did the right thing focused on its internal capabilities for a long period of time proved out the model that it actually could be profitable early days.
And it's gotten to a very good place.
<unk> forward I'd say that the marketplace has gotten.
Much better and much more reasonable in terms of value of these companies and that.
That has made it more attractive to consider.
M&A assistance to help us in the areas.
Where we really want to grow around technology and content. So that's that's the way I view it at the moment.
Perfect. That's very helpful. That's all I have thanks very much.
We will take our last question from David Katz. Your line is now open.
Good morning, everyone. Thanks for taking.
Taking my question.
Okay.
Marco very much appreciate and enjoyed all the time and attention. So good luck.
I wanted to just talk about the premium installed base.
Yeah.
No.
It's an area that we've sort of focused on it I know Vince you it sounds as though you're.
Just diving into that.
What are your impressions, so far and what.
It needs to happen for that start to assume.
In an upward trend line.
Both in units and.
And the win per day, obviously, it was very good in the quarter, but.
Given it's given its outsized impact on earnings accretion I'd love your impressions on it so far.
Sure sure so.
But my view early on into the process is.
The.
Participation games are really driven by the by the largely by the marketplace.
Both as you mentioned yield.
I think has a lot to do with it.
And players preference for a particular type of game.
Within the within the lease space. So the good news is yield is very strong some of the strongest yields a.
Casino operators have seen in certainly in the last several several years and the expectation is that will that is sustainable and can continue so that helps the market considerably.
As these games are incredibly attractive too.
To casino operators.
Of course, the other piece of it is having games that are in the kind of subcategory of lease games that are attractive in that and that perform I mean at the end of the day. That's that's our job. That's our team's job is to produce great games based upon our.
Oracle knowledge, our knowledge of game mechanics are our creative content, We've got studios all around the world.
And ultimately there has been a trend of of casino operators.
Moving more and more of their floor towards wide area progressive.
And I think they are.
Or I'm, sorry, two mlps from from Wap machines, and I think that that's an area where the company has.
<unk> performed as well as it.
As it could have and I'd say early signs are not early signs, but signs over the last year or so are very encouraging where we've gotten a lot of games under the casino floors.
They've performed well and what I've seen in the pipeline is pretty exciting.
These games take some time to actually develop and bring to market go through a regulatory process.
So the process began long before I got here in.
In the in the focus and investment in R&D.
In this particular area and it's an area that I've spent quite a bit of time really challenging.
The team from the studio's perspective, and and digging into the data on the on some of our trials and some of the test banks, we've done and I'm very encouraged I believe that we have products that are very competitive on the floor as well as new products coming out that.
So great signs of continuing that that momentum. So that's that is absolutely an area that the company is very very focused on and directing a lot of its creative and technical talent.
Okay. Thank you very much.
There are no further question at this time I will now turn the call over to Vincent <unk> CEO . Please go ahead Sir.
Well I'd just like to say a couple of closing remarks, I think the 2021 results clearly highlight the vitality of the company's portfolio I think we're in great operational and financial shape as we look to execute on our long term goals and.
And personally I enter my role with a high level of comfort.
With confidence in the company and confidence in the leadership team.
And of course with the strategy to grow innovate and optimize thank you all for your time. This morning, I look forward to meeting you at conferences and road shows we have planned this year.
This concludes today's conference call. Thank you everyone for participating you may now disconnect.
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