Q1 2022 International Game Technology PLC Earnings Call

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Good day and thank you for standing by welcome to the International team Technology Q1, 2022 earnings Conference 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 to ask a question during the session.

You will need to press star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star zero, although like to hear the conference over to your Speaker today, James Hurley Senior Vice President of Investor Relations. Please go ahead.

Thank you for joining us on Igt's first quarter 'twenty two conference call hosted by Vince The dusky Chief Executive Officer, and Max Chiara, Our Chief Financial Officer.

After some prepared remarks, then to Max will be available for your questions. We are presenting from multiple locations. So please bear with us if we encounter any technical difficulties.

During today's call, we'll 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 based on a number of factors and uncertainties, including those related to the effects 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 slides accompanying this webcast and our filings with the SEC each of which is posted to our Investor Relations website, you will find disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

Now I will turn the call over to Vince Sadowski.

Thanks, Jim and Hello to everyone for joining US today 2020 is off to a strong start with a terrific first quarter, our strategy to grow innovate and optimize and delivering results as revenue grew 7% at constant FX above the targeted 22% to 25 range disclosed on <unk>.

Mr Day, driven by the strong gaming lottery product sales.

Margin of 24% exceeded expectations bolstered by a 37% lottery margin.

So above the 2025 target range of 33% to 36%.

At constant currency EBITDA matched the prior year's record level and was among the highest quarterly margin ever.

It's a remarkable achievement considering the significant discrete lottery benefits, we had in the first quarter of 2021, and incremental omicron impacts and higher supply chain costs that we had this year.

And importantly, we returned a record $80 million to shareholders through dividends and share repurchases for the second consecutive quarter.

Let's delve a bit deeper into our operating segments, beginning with lottery, which represents most of our revenue and over three quarters of IGT total profit.

As expected lottery same store sales were down from the prior year's record levels that benefited from pandemic related restrictions.

Nevertheless, the Q1 'twenty results confirm a strengthening in the multi year compound annual growth rate and the attractive margin profile of this business.

Instant ticket games, which account for most of our lottery wagers in our portfolio grew at a 7% compound annual rate from Q1 19 to Q1 'twenty two.

Up from about 4% in 2015 to 2019 period.

This is consistent with our research, which indicates that players intend to play lottery games at higher levels.

The pre Covid period.

Data also supports our long term outlook for the lottery segment.

We will work with our customers to drive player demand through continuous innovation as we have done in the past. One exciting example is igt's proprietary drug based game cashbox.

Our new draw based game. It is a significant accomplishment to carve out a distinct place in the market as cash pop has.

The game is easy to understand strategic play experience something that can be enjoyed across retail and digital channels has shown staying power since its 2019 launch.

In Q1, the Florida, South Carolina, Virginia, and West, Virginia Lottery became the latest offer cash Bob bringing the total number of U S lottery with the game to seven.

Missouri is slated to launch the game in late May.

Let me turn now to instant ticket printing in the area of incremental growth opportunity for IGT.

Infinity instance, a product that incorporates a unique ultra high resolution and ticket printing technology is an example of exciting innovation that differentiates IGT.

Infinity process provides full color variable printing on the ticket front back and Im play in price symbols.

This technique of Ford's designers and lottery product managers, the capability to create game mechanics, and customized graphics that significantly enhances product value and the player experience.

Kevin Infinity instant games are now available in four U S jurisdictions.

We hope and expect the success that the infinity tickets are enjoying will continue to drive further adoption.

Hi, Lottery is another important area of focus and opportunity for us igt's out by lottery sales increased over 20% in the first quarter, including over 40% growth in North America.

Today, all our U S lottery customers have successfully transitioned to our cloud base platform.

We're rolling it out to international customers over the next 12 months.

Just like the land based business game innovation and portfolio optimization are important drivers of wager growth.

We have invested in talent to increase new game production and to leverage our unique mix of strong premium game content and digital Knowhow.

So the current library of 130 games Igt's newly launched E. Since are performing stronger than ever based on their increased quality and complexity of gameplay.

The Georgia Lottery launched its first progressive jackpot game in Q1, and it became the strongest first month performer by a wide margin.

Yeah.

Global Gaming segment was a clear standout in the quarter with revenue increasing by more than 40% propelled by higher unit shipments average selling prices IP royalties and the active installed base units.

Our product positioning around the world is the strongest it's been in a long time.

We've invested heavily in key hardware and content initiatives over the last three years and are seeing the benefits and the success of recent launches that sets us up very well for 2023 and beyond.

Momentum behind the <unk> family of gaming machines is accelerating and broad based from the newly launched large format <unk> 65 cabinets to the industry, leading peak 49 peak bar top antique slide 32 that has consistently held the number one spot for multi screen cabinet in North America for more than a year.

We're also excited about the upcoming launch of the Diamond RF cabinet, our first new mechanical reel cabinets in many years.

The success of the new hardware is also a function of compelling game content.

You've heard us talk a lot about our focus on multilevel progressive games and area, where IGT has historically been underrepresented, especially in the U S.

Our efforts are paying off.

Our North American MLP installed base has increased by nearly 20% since the end of 2020.

On the lease side of the business money, mainly is maintaining strong productivity of two five to three times house average and prosperity Lang launching soon is among the strongest testban titles, we've had to date.

We will finally cliffs, our first MLP offered for sale in the U S is performing strong out of the gate at about two times House average.

Apart from Mlps, Regal wrenches, and stinking rich skunks gone Wild and other high park are very popular for sale titles.

Continued strength in the U S GTR trends, which remain above pre pandemic levels and local and destination markets is very encouraging.

The potential player base has expanded with a younger demographic increasingly visiting casinos.

Gives us confidence that with the Q1 unit sales momentum the recent win of nearly 1400 VLT through the Atlantic Lottery Corporation.

Given the strength of our sales funnel.

In Canadian shipments have the potential to reach 2019 levels. This year.

Our good progress is being recognized IGT was named casino supplier of the year for the second year to grow at the Global Gaming Awards in London, we.

We won several top prizes at the Casino Awards 2022, and we renamed multichannel supplier of the year at the International Gaming Awards for our leadership in cross platform content and technology.

That's a nice segue into digital embedding, where first quarter revenue rose over 20%, primarily on strong U S gaming and sports betting trends.

During the period, we went live with our gaming content in West, Virginia, bringing our U S gaming footprint to five states, serving a record 56 operators.

In addition, since April we've gone live with several commercial operators in Ontario as market opportunities open there.

We also added new customers for our sports betting platform in turnkey solutions during the first quarter and are currently live in over 20 states powering more than 70 sports books.

The turnkey pipeline remain strong into next year.

Perhaps the biggest digital embedding news is the recently announced acquisition of acquire ISO off debt.

Leading our gaming content provider in third party game aggregator.

This is a unique opportunity to add significant complementary scale to our play digital business.

The high quality management team is a very good cultural fit.

The transaction advance several strategic initiatives much faster than we could do on our own to grow.

Greatly enhances our talent pool digital native content library, and global reach including the opportunity to distribute proprietary IGT content and regulated European markets.

For context, the transaction more than doubles, our play digital content library to approximately 225 proprietary games and should enable us to create up to 70, new game titles per year once again more than doubling play digital historical rate.

And this business the velocity of new game launches as an important growth driver.

I saw that brings us more of a digital first and tally.

I thought thats aggregation technology should greatly simplify the integration of new studios and content and enable faster and more impactful entrants into new markets.

Also provides a robust data analytics platform that will help our customers make focused strategic decisions on their game portfolios.

We expect to launch a salt that content and the aggregation platform in the U S and Canada in the second half of 2022.

And to bring Igt's proprietary content via ISO fast platform the European regulated markets in the same timeframe.

Over the last few months I've spent a lot of time meeting with employees I am encouraged by the high integrity and incredible energy of our people.

They exhibit the qualities of true leaders.

Priority, they place on creating and nurturing and inclusive culture and good corporate citizenship is truly inspiring.

This has always been a part of Igt's DNA and it is important to me personally.

I'm impressed with the team's efforts to consistently raise the bar here.

Several recent examples such as joining the science based targets initiative and issuing a formal human rights policy statement.

The broad scope of our effort is being recognized.

Early this year IGT earned the best place to work for LGBTQ plus quality designation from the Human Rights campaign Foundation and was also named the best diversity and inclusion employer Ethics INO Awards.

The power of our portfolio is clear the strong first quarter results and progress on key strategic initiatives gives us confidence in delivering on our financial outlook for the year I.

I am pleased with the momentum and outlook for the long term recovery of the gaming business as well as increased levels of lottery play from pre Covid periods.

The strong margin profile highlights the attractiveness of the lottery business and the success of structural cost reductions, even as we continue to invest in product development and other growth opportunities.

The company is in a great operational and financial shape as we focus on executing our long term goals.

And now I'll turn the call over to Max.

Thank you Vince and good day to everyone.

We had a strong first quarter, notably with better revenue and profit at constant currency versus the previous year.

This was achieved without the nonrecurring discrete benefits, we enjoyed last year and an outstanding first quarter performance and despite some omicron impact from cost inflation. This year. So all in all we're very pleased with the performance our team delivered.

In a nutshell, we generated over $1 billion in revenue up 4% year over year, 7% higher at constant currency and in line with our expectations.

As evident our net our cost structure is benefiting from the strategic actions, we took as part of the Optima cost savings program.

On changes we made to the business. In addition to ongoing rigor around cost and invested capital.

Drive $252 million in operating income and $433 million and adjusted EBITDA, which at constant currency matched the record level achieved in the prior year.

We achieved a 24% operating income margin in the quarter, making good progress toward our 2025 target of 26% to 29%.

And 200 basis points above the high end of our outlook for the quarter.

Adjusted EBITDA margin was 41%, which was among the highest quarterly level achieved in company history.

This was despite the current challenges I, just mentioned and which we referenced in our year end call that total close to $50 million in headwinds in the quarter.

Fully diluted earnings per share of <unk> 39 was.

It was in line with the priority of exam for as well.

Growth in the quarter was primarily due to a 78% increase in global gaming product sales revenue with digital banking delivering stronger 24% revenue growth.

As expected global luxury was down as the prior period had about $95 million in benefit from the impact of.

Gaming Hall closures in Italy, higher multi state jackpot activity and incentive accruals related to LMI agreements in the U S.

Net of those items global lottery revenue grew 4% year over year.

Focusing more intensely on lottery, the $680 million in revenue highlights sustained strength in underlying player demand.

Global same store sales were down 10% year on year of 32% growth in the priority of period driven by the discrete items I just mentioned elevated jackpot activity in the priority here is having an outsized impact on same store sales in the quarter, but keep in mind that this is a relatively small part of the overall revenue mix.

If you step back and take a longer term view you will see that global same store sales grew at a mid single digit CAGR over the multiyear period from 2019 better than the pre Covid long term trend.

Product sales revenue nearly doubled to $45 million, primarily driven by <unk> and system deliveries related to the contract renewal with the Poland lottery.

Highly resilient profit profile of this business helped drive operating income up to $252 million and operating income margin of 37% the third highest level in over three years and slightly above the 2025 target of 53% to 36%.

Demand for <unk> related products and solutions as well as the continued recovery in the gaming market drove significant increases in revenue and profit in global gaming compared to the previous year.

Revenue of $325 million was up 42% on solid increases in the number of machines units sold ASP.

ASP IP royalties and active units.

Global unit shipments rose, 63% year on year to over 17, Andrew.

Even at the highest for the first quarter period for Us we.

We saw particular strength in North America, where we sold around 5300 units in the quarter.

Casino replacement units tripling.

International unit shipments were also higher versus the prior year North America Asp's of $14800 were 6% higher than the prior year previous year on an improved product mix internationally asp's reflect a higher mix of used units and <unk> compared to the previous year, which we do not expect to.

Occur at the same level going forward, one so our ASP mix should improve.

IP royalties rose in the quarter as a result of our continuing efforts to leverage our market, leading IP portfolio and the recent execution of a broad multi year patent portfolio licensing agreement related to our game features and lgs technologists.

The global installed base of over 48000 units is relatively stable down 1% sequentially North America declined 665 units with about 60% related to removal of a few isolated customers and the balance coming from changes in the W. La markets and Delaware and New York We.

We expect additional W. Later mobiles in the balance of the year.

Rest of the world the installed base increase close to 200 units driven by placements in South Africa.

Operating income of $52 million was up significantly from the progress of the previous year.

High margin of 16% was the highest level in two years and exceeded the full year of 2019 level, reflecting the benefits realized from the structural cost savings actions taken as part of our Optima program and high margin IP royalties.

The margin is expected to improve in the balance of the year, putting us on track towards the achievement of our 2025, one margin target of 28% to 30%.

The digital embedding segment continued its double digit topline growth trend generating record $47 million in revenue of 24% increase over the prior year.

55% of the increase came from new markets and organic growth as I gaming expanded interconnect and saw strong performance in Michigan and sports betting was adopted in seven additional states with strong performance in the existing Rhode Island market.

The balance was related to the timing of jackpot accruals, which can be lumpy and more difficult to predict.

Profitability reached record levels in the quarter with the delivery of $13 million and operating income more than doubled the priority amount and a 28% operating income margin nicely approaching the 25 target of 30% plus.

These results reflect the high profit flow through from top line growth, partially offset by increased investments in talent and resources to fund future growth.

We're very pleased with the progress of this segment and are increasing our investments in talent infrastructure and new market expansion. In addition to integrating ice alphabet to support our long term growth brands as a result margins for the balance of the year will be lower than Q1, we expect a strong return on these investments in <unk>.

'twenty three and beyond.

We generated nearly $190 million in cash from operations and $115 million in free cash flow during the first quarter.

Cash flows were impacted by the timing and collection cycles in Italy due to specific cutoff dates and higher cash outlays for short term incentives, which were suspended in the previous year due to the pandemic.

In terms of capital allocation payments to minority partners totaled just over $100 million in the first quarter. As a reminder, this payments are generally concentrated in the first half of the year and then a bit higher this year due to the exceptional lottery performance in 2021.

We returned $80 million to shareholders in the form of dividends and share repurchases with one 4 million shares purchased in the quarter, but.

And invested over $70 million in the business in the form of Capex.

A small portion of our capital allocation was funded by short term borrowings as we continue to optimize the mix of funding sources and our capital structure.

We currently have a very manageable debt preferred portfolio with no large near term maturities and our mix of fixed to floating rate debt is favorably structure and the current market environment.

IGT is liquidity profile remained very strong with total liquidity of $2 3 billion.

And debt leverage at three five times already at the low end of our 2022 target range.

During the first quarter, S&P and Moody's upgraded our corporate credit rating.

That would be plus NBA two respectively. This puts us in a solid position in the fixed income market and strengthens our ability to achieve our long term leverage objectives.

As a reminder, proceeds from the announced sale of the Italy commercial service business will primarily be used for debt reduction.

This transaction is expected to close during the third quarter of 2022.

Vince highlighted the $160 million acquisition of ice of BEC and the many strategic benefits. This brings to our business. This transaction is expected to close in the second quarter of 2022.

The combination of these two transactions is expected to have a net positive impact on leverage of about a quarter of a third.

We are reaffirming our 2022 full year revenue and profit outlook based on our solid first quarter results. This includes absorbing a two point move in the euro dollar rate and approximately $10 million in higher digital investing separation project related costs.

We are lowering our capex estimate to around $400 million from the previous 400 to $4 50. This change as a result of the ice of that acquisition as we previously expected to invest organically, but now will receive world class content.

Advanced platform upon the closing of the transaction.

Our outlook excludes the deconsolidation impact from the sale of the Italy commercial service business, which generates monthly revenue of 20% to $25 million and operating profit of about $4 million to $5 million.

While the transaction is expected to close in the third quarter. The exact timing is uncertain, making it difficult to update your outlook at this time.

Given supply chain constraints and recent volatility in the Euro dollar rate at this time it is prudent to be anchored at the midpoint of our outlook range. We're actively managing these dynamics to the extent, we can and we will continue to look for cost savings opportunities to offset any negative impact.

Keep in mind that changes in currency rates, resulting translation adjustments to the income statement and balance sheet and had no cash impact.

For the second quarter. We currently expect revenue of one to $1 1 billion essentially.

Essentially in line with the Q1 level and operating income margin of 20% to 22%.

Now I would like to wrap up by summarizing the main points of my presentation.

We're executing on our financial and strategic plans delivering solid financial results enhancing our capital structure, improving our risk profile and delivering meaningful returns to shareholders with our balanced capital allocation execution on full display.

That concludes our prepared remarks.

<unk> would you please open the line for questions.

Operator, we're ready for Q&A.

Bear with US one second while we find our operator.

As a reminder, if you would like to ask a question. Please press <unk>.

One on your telephone keypad, if he would like to withdraw your question press the pound key.

Your first question comes from the line of Carlo Santarelli Deutsche Bank. Your line is open.

Max to clarify so within the context of the guidance you guys non.

<unk> or the <unk>.

Guidance does not include the impact of the sale.

But and also I imagine does not include the impact.

Sure.

Sorry.

Your line is breaking up.

The issue is the equity Carlo the acquisition, our vice of bat is included.

For the simple reason that is one less material and two is closer.

In terms of timing of ethane.

Instead, we didn't want to pollute, our original guidance with the impact of the deconsolidation of commercial service sale.

Because.

At the time of the closing is still uncertain in the third quarter within the third quarter and I gave you indications of the monthly.

Kind of revenue and profit. So that you can you kind of on your own math, if you want but again the bottom line is we are anchoring add to the midpoint of the guidance and so you can you can easily.

Kind of reflect that your estimate of the commercial sales into that.

Okay that makes total sense and then just obviously.

And I know, it's hard to predict and I think that's probably the answer but obviously the FX rates have moved.

That materially and clearly you guys have said for years whenever this issue has come up it's a translation impact and not a cash flow impact, but the decision to <unk>.

The bench posted guidance as they were despite the negative headwind that comes from.

<unk>.

More pronounced move in the U S euro rate.

Should that be taken as kind of an indication of your confidence within that post of that range.

So just to speak about.

Our position vis vis the guidance and the outlook as you know this outlook came out last November in connection with Investor Day. Since then we have absorbed when.

When you count the exchange to the spot rate today.

Close to $200 million of revenue and $150 million of Hawaii headwinds right between omicron impacting Q1 and Q2.

Our supply chain incremental impact of another $30 million right on top of what we already had in the budget of $30 million last year.

And then FX impact again noncash of.

Total $50 million, so $30 million to the 112, which is our official guidance plus another 20 million looking out to the remaining part of the year to the 105 five and then on top of it you've got also about $10 million of project cost associated with the separation of the Dnb business.

So again, it's a big impact and that speaks highly.

Vis vis our ability to offset those headwinds and also kind of our confidence in the outlook.

For sure. Thank you that's super helpful. Maxine if I could.

Just lastly, you guys have obviously shown progress and we kind of we're all aware of kind of a leverage thresholds and kind of the credit agreement thresholds on the baskets.

Buyback and repurchase authorization with the stock kind of where it is today and obviously you guys arent alone in seeing what the market is done but.

How do you think about the buyback.

If those parameters did not exist.

Just given the difference in the ROI of repurchases today versus maybe where the stock was two three months ago.

Hello.

Yes.

It'd be a very strong buyer of our of our securities there is.

There is no question I know.

You pointed out we're not alone.

But we're so close to year end.

We feel very good about the plan.

You all have listened to the story for multiple quarters, I think youre hearing some.

Some genuine excitement on behalf of the management team about the first quarter and about the outlook.

So.

Personally.

I believe we would clearly be dialing back our terrific about a share of space I believe that's the most accretive thing we can do with these at these trading levels.

Understood. Thanks, guys.

Yes, and Carlo speaking about that we just concluded the second quarter in a row with record.

Amount returned to shareholders over 2 million.

Split 50, 50 between dividend and buyback so that testify as our approach to our balanced approach to our capital allocation.

For sure for sure. Thank you guys.

And our next question comes from the line of Chad Beynon with Macquarie. Your line is open.

Vince next.

Morning, Thanks for taking my question wanted to focus on the strength in the gaming industry or the gaming segment, particularly in the U S. Since you mentioned that replacements were I believe triple what you saw last year I think we're all trying to get a sense of how the operators are going to manage their budgets. This year I think this was a nice.

Positive surprise just in terms of the timing the order flow clearly shows that you're that you are holding share, but wondering if you could talk about your conversations with operators given the strength in the.

In the U S business. If you think these capex budgets could last continue to last or if it was kind of a pull forward for the first quarter. Thanks.

Yes sure thing.

So you all have heard from the operators they had a very strong first quarter.

Do you feel good about their outlook for the.

So the next quarter and for the <unk>.

Part of the remainder of the of the year.

The conversations I've had with our customers very much so represent represented.

Yes.

Increased velocity of.

Of customers coming through their doors higher game play.

Several have observed younger demographic included and all of that is primarily individuals.

Without having that.

Full benefit of the business can convention.

Business back so.

We saw 2021 was a record year for <unk>.

Our U S casinos momentum appears to be good as far as the industry can see going into 2022 as you know several of our casino customers have new projects either.

Spending capital expenditures around redoing facilities or building new facilities.

First quarter <unk> versus 2019.

Kind of our last kind of benchmark quote unquote normal year.

Is that somewhere in the range of 15% and even more on the Las Vegas strip.

So I think the.

Our sense right now is very good.

For us we.

Seeing.

Numbers and in our sales funnel for Q2, and even out into Q3 that we've been gaining momentum through a combination of debt pay.

Tent up demand is stronger GTR trends.

As well as Fortunately the strength of our products for a lot of good work that's been done over.

The last several years.

And I think we had somewhere in the range of.

Max you can correct me if I'm wrong seven over 7000, maybe 7200 units shipped in the first quarter.

Which is the strongest ever for a first quarter period.

The vast majority of that I think 95% or so is in replacement units, mostly in the U S and Canada.

So I think these signals are good signals.

And I think.

The operators have a need to.

To upgrade to be competitive and they're highly competitive.

Marketplace.

You spend time walking the floor.

Our various casino customers and of course, the strips easier place to do it.

You can recognize pretty quickly.

Our refreshed areas of the of the gaming floors at look terrific have the latest games very exciting.

Our opex and in cabinets.

And the areas that are not in.

Think that Theres a lot of areas that.

The floor that they do need to be to be upgraded and I think.

In times of good demand above that terminates.

Haven't heard anything from our customers other than.

They expect the momentum and recovery came in you continue over over many periods.

As long as that thesis holds up I think there is a willingness to continue to to upgrade in order to remain competitive.

That's great. Thanks, and then we've heard a lot about the monthly cadence from the gaming operators with January being impacted for a moment I was wondering if the lottery segment experienced a similar type of phenomenon, maybe with January being slightly softer or was that pretty consistent throughout the quarter.

And we're also getting a lot of questions.

Regarding the cadence in Italy, as well given that we're not as close to that market. Thank you.

Yes, Chad this is Max speaking.

Correct Omicron.

Sure.

The toughest months ceramic was probably early in the year to January into the first part of February .

The decline is kind of subdued since then we're still probably looking into second quarter that has a difficult comp in EMEA because last year was still at their gaming or closures in Italy that lasted until June so, but definitely the situation is improving out there.

Thank you Bob Congrats on the results.

Thank you.

Your next question comes from the line of Barry Jonas with tourists Securities. Your line is open.

Great. Thank you you guys conducted research on this last year, but given the volatility in the market could you talk a little more about what gives you confidence.

<unk> ability.

Higher lottery play levels.

And a lot of concerns on the macro environment. So we just love to get more color there.

Okay.

Yes sure thing so.

We mentioned at the year end call that we.

We've done some some multi decade.

Analysis to determine a correlation between.

Inflation and CPI in lottery sales and.

There is some level of correlation but it does not seem to be incredibly strong and we think the reason is.

The value that people get the entertainment value.

Of lottery relative to disposable income.

Is is very high and therefore, it's not a significant amount of of out of pocket. That's required to play a relatively inexpensive form of entertainment. So thats.

That's a good a good trend we were over <unk>.

Excited to see.

Discover.

The other thing as well we've talked about because we believe and now the.

The results of the first quarter support this.

Our U S customers are.

Really kind of consolidated a lot of the elevated play levels that we saw.

In 2020 one.

And we think a lot of that has been a result of the evolution.

Of innovation that we've worked hard to.

And consult with our our lottery partners for example, the third Powerball weekly draw.

Second.

Hiro jackpot weekly draw add on gains to existing draw based games increased price point of draw based games and of course, the introduction of metal and you draw based games, but innovation around around scratching to win an incremental game titles.

<unk> being offered so.

We're doing our part.

Best team in the business, that's constantly thinking about and innovating our game content and I think because we have such a massive footprint around the world.

To generate creative ideas around both draw an instance, and share those ideas and concepts around the world through our <unk>.

Various studios.

And.

The only concern there of course would be any impact on the consumer.

In a very significant way around disposable income, but we have not seen that and again.

We think relative to other businesses.

The lottery business is less sensitive.

Per capita basis.

And we.

So far through the first quarter.

That thesis has been supported.

Great. That's really helpful. And then just as a follow up.

Sorry, if I missed this but what exactly drove the beat for lottery margins in the quarter was just revenue mix was different than what you modeled or cost savings better I know it was a very strong.

Wasn't clear what exactly drove it.

Yes, I think it was across the board I would say both in revenue and as well as our embedded cost management keeping.

Keep in mind that on a quarter to sequentially quarterly view Q4 to Q1, we tend to have.

<unk>.

Advertising spending in Q4 that obviously doesn't repeat itself in Q1 and Thats. The reason why we were also able to lift that profit up.

Got it alright, thanks, guys.

And your next question comes from the line of Ben Chaiken with Credit Suisse. Your line is open.

Hey, How's it going just to just one quick clarification.

Maybe im mistaken, but did you say, Matt did you say you would find cost saves to offset that.

The FX impact can they have misheard you, but I just wanted to know we said that we have a series of headwinds that we have to manage in.

The current tier.

And the way, we manage those headwinds, including the effects is true incremental product sales a higher final delivery of products and gaming.

Three grow on Costa so continuous continuing to look for ways to save money on the cost side as well as lower DNA as a result of that.

Let me say a low cycle of Capex in gaming in the last two years.

Okay. Thank you very much that's all for me.

Thank you.

Your next question comes from the line of Domenico <unk> with <unk>. Your line is open.

Good morning, and I have a question on the.

Contribution in Q1 from the intellectual property sales in terms of sales and profitability and then the second question.

To your.

Q2 guidance, so if I, if I understand properly so you'll see strong momentum quarter on quarter in the gaming business.

On the lottery side, we should expect some.

The more balanced.

More flattish trying to given the tough comparison is it correct.

Yes, correct.

Okay.

And in the intellectual property are you, giving any so on the intellectual property. This is irregular.

The business of US we have this activity ongoing obviously the activity can be lumpy, but within a certain a certain magnitude of amounts right. So we have been a little bit higher than normal this quarter, we may be again.

Bob or below this threshold by the gain does that are cutting business for us.

Mhm.

So on a full year basis, you don't see the extraordinary contribution.

Going forward now.

<unk> extraordinary contributions.

Okay. Thanks.

And your next question comes from the line of tangible with Stifel. Your line is open.

Hi, Good morning, guys. Thanks for taking my questions Congrats on a nice quarter here.

I wanted to hang on and maybe drill into that some of your comments.

On.

CPI disposable income.

Obviously this earnings season has been the state of the low income consumer we focused a lot on this call domestic trends and trends for lottery, but just curious what youre seeing here internationally.

Heard some comments.

Across other gaming and leisure sectors, maybe some softness in international countries.

In the lower end of that could see of our curious if youre seeing that across any of your geographies.

Yes, I'd say.

What we've heard from our customers and you've heard it as well from the casino operators.

Any decreases that <unk> seen as a result of the kind of the lower income.

Player has been offset by older and.

And so kind of mid to high income players, who are coming back as well so that's been positive and encouraging.

<unk>.

From our vantage point the direct data we have is yields on premium games and we are seeing.

A nice increase in yields both in North America and internationally.

Nationally has been slower to come back and I think a lot of that of course has to do with the various restrictions in different parts of it.

Of the world, but we have seen it improve that especially as now EMEA is mostly open.

Still look a few restrictions like reading past in certain markets, but for the most part open and and.

And almost all of our installed basis is active.

I'd say in Latin America.

We're seeing something very similar.

Most of the installed base, if not 100% yet.

And still still some capacity restrictions but.

For the most part coming backing in Australia, and New Zealand.

<unk> seen Australia lift restrictions new Zealand's relaxing.

Restrictions.

Et cetera, So I think overall the customer sentiment is good we've seen strong strong demand in the sales funnel.

Which is.

One of the primary data points that.

That we have as well.

And our visibility around our sales funnel.

Is amongst the strongest that we've.

Yet that we've seen.

So we think.

Now the assessment, perhaps the player.

Nationally.

The player in North America being slower to come back had a lot to do with with restructuring.

And again with our data points.

The signals are the signals are good.

Understood. That's helpful. Thank you and then on the supply chain disruption. So you talked a bit on the call about the incremental headwinds on the cost side, but just curious more on the demand side are you able to fill call. It 100% of the orders as they come in are you forced to kind of prioritize certain.

Demand over others, and then maybe if you could frame kind of lead times in and where you kind of sit today, given some of the supply chain constraints versus.

If things kind of trended in 2019 that'd be great.

Yes look this is the biggest challenge we have right now.

We need to achieve all of that you said and more in terms of.

DSM actions to be able to fulfill.

The committed.

Orders at the end of the day.

So we have a strong funnel the visibility of the funnel as Vince was saying is the highest we have ever had.

But again I think we think in our outlook we can absorb.

Some of that final slipping into the subsequent.

The subsequent quarter as a result of the.

The difficulties.

Our.

That exists in certain areas it could be.

<unk>.

In pocket of deliveries it could be in availability of components.

So our teams are really focused on trying to.

Get the final.

Defense.

And deliver to the to the to the best of our abilities and again, we have probably a little bit of.

Flexibility in that.

Well.

Great. That's helpful. Thank you Max.

I might just slip one more kind of housekeeping one I believe if memory serves the restrictions the capacity restrictions in Italy that are impacting lotto sales should roll off here in May is am I correct in that.

Is that still.

On pace on time, given what youre hearing in the market.

Yes.

Based on the recent.

Legislative actions.

And regulation effectively there are some there is some easing coming into play starting in May in Italy, but again, we need to continue to watch that carefully and see how the situation evolves and Jennifer.

Understood very helpful. Thank you both.

Once again, if he would like to ask a question. Please press star one on your telephone keypad to ask question. Please.

One on your telephone keypad. Your next question comes from the line of David Katz with Jefferies. Your line is open.

Hi, Good morning, everyone. Thanks for taking my question.

I wanted to just go back to the domestic installed base.

<unk>.

Just reset.

Or think about what our expectations should be should we be expecting at some point that that the units.

We'll go up obviously the yield was up really really nicely in the quarter.

But what is the vision specifically for the U S premium installed base and what can we reasonably expect.

Yeah, I'll comment on that so.

A couple of things first off the vast majority of our installed base was active in the first quarter higher than it has been throughout the entire COVID-19 period, including just about 100% in the North American market.

I think the there are a lot of stability that we've that we've been seeing.

Casino installed base is a result of the great games that the company's been able to developing and begin to get out into the market. We mentioned the awards and the acceptance of the of the.

Fabulous, new <unk> cabinet and the great content.

That we've we've introduced into the marketplace, that's been driving a big part of what's been what's been driving driving demand for us and our visibility into 2022.

And also specifically in the MLP space.

As we mentioned Thats, an area where the company.

Needed to be more competitive and that installed base and in addition to the excitement around the new titles.

And the very very good performance, we've seen in test bank and we're about to release.

Several of those titles into the marketplace. The installed base has grown nearly any MLP category nearly 20% since the end of two.

2020.

And I think offsetting some of that.

Ben.

Really a couple of things I think we've seen some operators looking to reduce operating expenses, which we've we've talked about.

So certain casinos have to do some of the wide area progressive.

And then also in the W. La markets, where the company had a historically disproportionate.

Disproportion of that very high percentage of the of the market in certain states.

We're seeing we're seeing a change there, which I typically lower yield units and then we've also had our operators are generating a lot of cash for the conversion of some lease units to sale as well.

But I think all in all.

As you point out yields are higher largely as a result of not only higher play, but also I think a better mix of units that are in the marketplace.

And we feel as if these trends will will continue going forward.

That's super helpful and if I can just follow it up.

And maybe get a little bit of maybe modeling health because.

Should we be modeling for revenue should we think about some of those units continuing to come down a little bit while the yield continues to grow notwithstanding any sort of macro outlook or anything like that right.

And how long should we sort of think about those curves.

Evolving.

But we think.

In this current year.

Based on the first quarter and the visibility that we have going into the year.

And we believe that that our yields will be higher than in 2021.

As a result of all of those things is.

It is typical to say.

Which component of the mix and duration.

Those things are pretty tough to estimate, but but we think as a result of having more active units out in the market.

Hi.

Coupled with.

Some of the pressure we've seen on on wide area progressive units.

Mitigated by the strong performance of <unk>.

Of our newer games and our MLP games that are in the marketplace will are the components that will that will drive those trends.

Very helpful. Thank you.

Alright, and your last question comes from the line of the factory silver.

From <unk> capital markets. Your line is open.

Sure.

Hi, good morning, Thanks for taking my question.

Just a couple of quick ones from me I mean can you talk about how youre thinking about using your balance sheet. If there's potential M&A on the table. I mean, you guys are at the low end of the three five to four times range could you potentially use any leverage too.

Have a strategic acquisition in the near future.

Okay.

Yes, I would say what we've.

Well, we've talked about in the past.

The portfolio being in very very good shape, we feel as it being.

So strong in the marketplace and both lottery and gaming.

<unk> got terrific amount of expertise and capabilities.

Worldwide Studios.

And development expertise.

The one area that we've signaled all along and then we ultimately consummated with the acquisition of <unk> that both the desire to potentially accelerate.

Our expertise and our product suite and our studio capabilities in the digital space.

You can expect us to be busy.

Busy.

Working with the ISO that team in Europe .

Integration and the closing and integration.

Of of that business with our play of digital business in fact.

Im here in San Francisco today at our new digital headquarters.

Getting time with with our team.

And we're talking through our strategic plans for the rest of this year and going out.

Several years. So we're excited about the progress the company's made an early leadership position, it's gotten off to.

The high Casino gaming jurisdictions that have opened up anything in North America.

Europe .

We have not been as competitive.

The long established market with a different set of dynamics and historically the digital first companies have done better in that marketplace and I saw that has been very competitive. There. So we think that helps to fill a niche for us and gives us a very strong set of competencies.

Capabilities and our goal overtime is to.

To become the leading casino company.

As we are in land based.

We have no plans at the moment for incremental M&A I'll, let Matt talk to our capital structure, but.

But we feel as if we've been able or we will be able to close this transaction and still <unk>.

Further reduce our leverage as a result.

Sale of our Italian payments business. So we feel like that's a very good balance of capital deployment to give us increased capabilities in a high growth gaming area. Yet continue to do what the company has done over time, which I think has been a very impressive reduction in debt and lower leverage.

Vastly improved capital structure.

Yeah.

Yes, My only addition bid.

My only addition.

At this point.

To reiterate.

Our long term view on the leverage.

It is true we are running at the low end of the guidance for this year three five times.

But again long term, we expect to.

To be in the range of two five to three and a half. So I think there is still work to be done.

And.

And hence we need to further maintain our focus on our leverage.

And at the same time continue to work around our balanced capital allocation approach.

Gotcha Super helpful and maybe just a quick one I might have missed this earlier, but could you just provide some color on the aristocrat cross licensing.

Deal that you guys structuring.

The early parts of this quarter.

Yes, so we were able to.

Closed is important.

License agreement.

We're very happy with that as a multilingual agreement.

We will reiterate one more time, our leading position in that respect and.

And we expect to be able to add a couple more in the balance of the year.

But probably not.

Same magnitude.

Thank you.

Thank you Jeff.

Yes, I would just add on that.

Some marketing for ITT over over the years, we've developed the largest portfolio of IP that we negotiate and share with with the industry. So we're very very proud of the innovation that has taken place and I think as Max mentioned earlier that's in.

Ongoing part of our business and our in our revenue stream of profitability, so with that I'll wrap it up.

We're out of time here folks I just like to say thank you all for joining US now you're all very busy jumping from call to call.

During this time and kind of a stressful time in the marketplace I think from our perspective.

As we've highlighted our strategy that we set out at Investor day to grow innovate and optimize is paying off we think we're at a compelling revenue and profit growth trajectory over the next couple of years, that's supported by a really strong team and a solid balance sheet and as we execute on our goals, we do see a really strong clear path.

To creating significant shareholder value. So thanks for your interest and we look forward to seeing many of you in the next few weeks and have a great day.

Thank you and back to includes International game Technology, Q1, 2017 earnings Conference call.

May now disconnect.

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