Q2 2022 International Game Technology PLC Earnings Call
Good day and thank you for standing by welcome to the International game Technology Q2, 'twenty two earnings conference call.
All lines have been placed on mute to prevent any background noise should you require any assistance. Please press star zero on your telephone keypad and an operator will assist you.
After the presentation, there will be a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad I will now turn the conference over to James Hurley Senior Vice President of Investor Relations. Please go ahead.
Okay.
Thank you and thank you all for joining us on Igt's second quarter 2022 conference call, which is hosted by Vince <unk>, Our Chief Executive Officer, and Max Chiara, Our Chief Financial Officer.
After some prepared remarks, Vince and Max will be available for your questions.
Once again, we are presenting from multiple locations. So please bear with us if we encounter any technical difficulties.
During today's call, we will be making some forward looking statements within the meaning of 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.
Nick.
The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our latest earnings release and in our SEC filings.
During this call we will discuss certain non-GAAP financial measures 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 will 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 Vince Sadowski.
Thank you, Jim and Hello to everyone joining us today.
Our second quarter and first half results confirm strong operating fundamentals across the portfolio.
This includes accelerated multi year same store sales growth for lottery.
<unk> sharp recovery in gaming.
And important strategic progress for digital embedding.
Q2 revenue was up 11% net of FX and discrete lottery benefits in the prior year led by 23% growth in global gaming.
Operating income and EBITDA matched the prior year at constant currency as substantial improvement in gaming profits mitigated about 60 million in discrete lottery benefits that as expected did not recur this year.
Operating margin of 22% was at the high end of our expectations for the quarter, while EBITDA margin of 40%.
Among the highest in company history.
In addition to significantly improved global gaming profitability strong global lottery margins were an important contributor to our overall consolidated results.
We continued our shareholder capital return policy.
Year to date this includes $81 million in dividends, which annualized implies above a 4% yield at the current share price.
In addition, $54 million was returned through share repurchases.
It's a compelling return profile, both in absolute and relative terms.
Let me take a moment to give you some perspective on our business that I think is particularly relevant at this moment in time.
IGT is leading positions in each market segment, where we participate and about 80% of our total revenue is recurring in nature.
The global Lottery segment accounts for most of our profits in the range of 75% to 80%.
This isn't always appreciated by the market.
It is important to highlight because lotteries and attractive business. It is infrastructure like characteristics with steadily growing and predictable revenue profit and cash flows that are backed by long term contracts.
Our lottery contract portfolio currently has an average remaining life of six years.
It's an enviable foundation to build on as we execute our long term growth objectives.
Historically, the lottery industry has demonstrated low economic sensitivity and prove to be incredibly resilient to macro challenges.
You can see from the data here in the U S and Italy, our two main lottery markets accounting for 85% to 90% of Igt's total lottery revenue held up very well during past recessions.
IGT defines and drives the global lottery industry with our extensive and distinctive expertise and vast portfolio of contracts.
We compete in all market segments, providing us with the entire spectrum of growth opportunities and unique and comprehensive market knowledge.
We are the only lottery solutions provider with both <unk> and <unk> capabilities.
We service over 80 customers, including the world's largest and most successful lotteries.
Our solutions power eight of the top 10 lotteries in the world.
In aggregate our systems process over 150 billion.
In annual sales, including 75% market share in the U S and over 90% share in Italy.
In fact, IGT is the worlds largest operator of lotteries six across three continents, representing $30 billion in sales.
This is valuable experience and we use our unique sales development team to help our BTB customers succeed and deliver steady growth.
In Q2 lottery achieved an accelerated multiyear growth profile.
Average annual same store sales growth from Q2 of 2019 was over 5%.
Fueled by incidence.
We expect the trend of accelerated growth to continue in the second half and that mid single digit growth can be maintained over the next several years.
Our conviction is based on extensive player research and knowledge and the unique role we play in driving industry growth.
Lottery is a supply driven business and we have a recurring revenue model that is perfectly aligned with customer and market expansion opportunities.
Innovation across many dimensions, including game mechanics game themes pricing and pay out distribution and retail execution are all important catalysts to drive demand.
A few compelling examples of recent innovation include the launch of million extra in Italy.
We've used proven game mechanics to build on an existing franchise.
In May the Texas Lottery launched the first ever $100 instant ticket game with over $800 million in prizes available in a top prize at $20 million and Florida introduced a 50 dollar instant ticket a few months ago.
Sales for both games have consistently been strong.
Lottery instant performance is improving with each new game launch. This is driving record player spend in Georgia, and Kentucky, Thanks to games, such as Bank Buster Cry poaching and Beech Bonanza.
Soon we will expand our <unk> and distribution to Michigan, one of the country's largest lottery markets.
It's always nice when our lottery expertise is recognized as it was with the lottery supplier of the year Award at the 2022 SBC Awards North America.
Turning now to global gaming this segment had another terrific quarter, thanks to the strength of our offerings and the broader global market recovery.
Revenue increased over 20% an impressive momentum across several kpis and that translated into even stronger profit growth.
We sold nearly 7200 machines in Q2 led by strong replacement demand in the U S and Canada.
In fact, total U S and Canada shipments were 8% higher than the pre Covid Q2 2019 levels.
We could have shipped even more units, if we werent constrained by supply chain challenges.
I think it's important to note that IGT has steadily gained ship share in North America over the last three plus years, reaching 27% in Q1, which is the latest data available.
Average selling prices were also higher in the quarter building on the positive trajectory of the last two and a half years.
The new Diamond RF mechanical reel cabinet began hitting casino floors in June .
Courted by an extensive game library, featuring new renditions of proven legacy teams and a host of exciting new titles.
Early performance indications are encouraging and we expect the diamond Rs to build that Igt's decades long reign in the mechanical reel segment.
Yields on leased units were up across the board in the quarter.
While up an MLP performance has been especially good.
Prosperity link one of our newest multilevel progressive games is among the top performing new premium games and the North American market with productivity almost three times floor average.
And several new wide area progressive games from IGT are dominating that category led by wheel of Fortune high roller and the $2 65 cabinet and money mania, whose frequent second level jackpot payouts are resonating with players and customers.
In systems news the IGT advantage Casino management system was selected to power New Star resort and casino the Philippines, most anticipated new casino, featuring 1500 slots and 250 table games.
IGT advantage will enable new star to build patron loyalty optimize its casino operations and access valuable real time performance analytics.
It also positions new star to offer cashless gaming in the future via Igt's resort wallet systems technology.
IGT is one of the central system for every large new Asian casino over the last several years.
We have a pipeline of compelling new game supported by a robust sales funnel for the balance of the year cut.
Customer sentiment is strong bolstered by solid casino visitation and GTR trends across major markets.
About 70% of the revenue in our global gaming segment has generated in the U S.
85% of our U S revenues are generated in regional markets.
About half of that comes from travel customers.
And while the gaming segment is somewhat more sensitive to economic cycles, and lottery USTR trends have been reasonably resilient, especially among tribal customers during recessionary periods.
Right now the Big Challenge, we have is being able to meet strong customer demand given continued supply chain challenges.
On balance it's a good problem to have and a clear reflection of the positive momentum in our business.
Looking now with digital embedding. This segment continues to benefit from double digit I gaming GTR growth in the U S.
Primarily a function of new market expansion and IGT is leading position in video poker table game themes and slides.
Total Q2 revenue growth was lighter than expected due to weaker trends outside the U S.
We attribute this to three manufacturers.
The slower pace of new game launches, partially because we were focused on closing the <unk> acquisition to stricter gambling laws in the U K.
And to challenging comparisons in the Covid related benefits I gaming had last year when lockdowns.
The restrictions we're still in effect in certain regions.
We expect better trends in the balance of the year.
Our game portfolio significantly expands with the isos that acquisition, which closed on July one.
I took that provides us considerable scale and broadens our capabilities to advance our market positions.
It greatly enhances our library of proprietary digital native games.
The aggregation platform will enable us to provide hundreds of other game titles, allowing IGT to develop exclusive assortments for our customers.
Integration efforts are well underway.
And the acceleration of ITT content distribution into more European jurisdictions, using the ice up that platform is expected during the fourth quarter.
The North America game aggregation platform launch is on track for early 2023.
It's an exciting evolution of this high growth market opportunity.
About six months into the year, we are on track to deliver on the 2022 outlook. Initially provided in November of last year.
The team has done an excellent job of identifying incremental sales and cost savings opportunities to offset nearly $200 million in <unk>.
Anticipated profit headwinds from omicron.
Your supply chain and project costs and significant FX movements.
At the same time, we proactively manage the capital structure to drive the meaningful improvement in leverage and overall financial condition.
We have a multi year plan targeting mid single digit compounded annual revenue growth and mid teens compounded annual operating income expansion for the 21 to 25 period.
That plant also targets about $2 4 billion in cumulative free cash flow in the next four years.
Executing these goals should drive meaningful value creation for all stakeholders and I have every confidence in our ability to achieve them.
We will do it with a clear focus on sustainable practices and good citizenship as well.
Last month, we issued our 15th annual sustainability report highlighting our commitment to operating as an industry, leading sustainable business and consistently reporting on our progress.
We recently received a gold medal rating from Echo Venus, putting us in the top 5% of global companies assessed by the firm.
We take great Pride in this achievement as we continue our journey of contributing to a more sustainable future.
Our mission is simple we are investing responsibly to generate profits and cash flows that consistently deliver compelling returns for shareholders.
Now I will turn the call over to Max.
Thank you Vince and Hello to all of you joining us today, we continue to be pleased with our resilient performance. Despite the tough comparison with the prior year due to some luxury discrete benefits as anticipated and reflected in our guidance for the second quarter. Our team has been able to deliver strong <unk>.
<unk> and the gaming business that has effectively allowed us to entirely offset the impact of the priory, a discrete benefit items in lottery our.
Our business segments are performing at a high level, while executing on our strategic objectives with lottery delivering operating income margin at the high end of the 2025 target range gaming recovering swiftly and exceeding the full year 2019, Oi margin and digital and betting executing on growth initiatives.
<unk>, including the acquisition of ISO fast.
Moving on to some financial highlights second quarter revenue over $1 billion was up 3% year on year at constant currency led by 20% growth in global gaming with global luxury down 4%.
I hope that you benefited from the impact of gaming Hall closures in Italy.
Digital embedding grew 4% at constant currency.
Operating income of 228 million and adjusted EBITDA of $409 million were in line with the prior year at constant currency. This was achieved without $17 million in revenue and $60 million in profit primarily from the prior year Gaming Hall closures in Italy.
We delivered operating income margin of 22% in the second quarter at the high end of our outlook and adjusted EBITDA margin of 40% among the highest in company history.
Year to date revenue increased 5% at constant currency to $2 1 billion with operating income of $480 million and adjusted EBITDA of just over $840 million in line with the prior to you.
Operating income margin of 23% exceeded the high end of our expectations, primarily due to diligent cost management.
In all we are very pleased with the financial performance in the second quarter and first half of 2022, and we're making good progress towards delivering on our full year financial targets.
As you have seen from our press release. This morning during the quarter, we accrued $150 million related to ongoing social gaming disputes stemming from double down interactive that business was sold in 2017.
Adjusted EPS for the first half of the year.
$1 17.
The highest level in company history, reflecting some of the good work that is being done to rationalize interest and income tax expense.
Now, let's move to a review of our operating segments, starting with global Lottery, where second quarter revenue totaled nearly $650 million.
As expected global same store sales were down 7% year over year due to the discrete benefit in prior year, but underlying growth is up mid single digits.
And the trend is progressively improving with same store sales declining 10% in the first quarter, 7% in the second quarter and 4% in the month of June alone. We expect continued improvement in this trend.
Stable performance in the back half of the year.
Recently at excitement around the elevated Mega millions jackpot should also contribute to some growth in the third quarter.
As Vince mentioned instant ticket gains out of the main driver of growth in both North America, and Italy, Our two primary markets and play levels for these gains have trended slightly better than we expected.
Italy. This is helping to compensate for draw games that have experienced the slower than expected recovery.
I lottery sales rose, 35% in the quarter, primarily driven by E instant games in the U S. We continue to invest in game development and cloud based system solutions to drive growth in this exciting area the.
The profit profile of the lottery segment is very strong and resilient delivering $202 million in operating income with 36% Oi margin already at the top end of the 2025 target of 33% to 36%.
Also notable is that this was achieved despite a less favorable mix in Italy and cost inflation.
Global gaming delivered significant increases in revenue and profit year over year, driven by customer and player demand for IGT innovative products.
Revenue of $330 million grew over 20% on solid increases in the number of machine units sold asp's and installed base yields.
Nearly 770 200 units were shipped globally in the second quarter North America Casino replacement unit led the growth increasing over 30% while international unit shipments were down slightly due to lower new and expansion activity.
North America Isps of $15200 were among the highest level in company history.
On an improved product mix internationally Asps were also higher.
Product sales benefited from the execution of a multiyear patent portfolio licensing agreement.
The global installed base of around 48000 units was relatively stable sequentially North America declined about 500 units on three main dynamics.
Expected changes in the W. La markets of Delaware, and New York Removals of old unsupported games, and cabinets, which we were inhibited in being able to backfill due to supply chain challenges and lastly conversions to sales.
In the rest of the World and installed base was stable and we think there is good opportunity for growth from current levels in the back half of the year.
North America yields increased 11% on elevated performance in Wap and Mlps and the more productive installed base due to the removal of older and supported units over the last few quarters.
Operating income was 57 million versus breakeven in the prior year operating income margin of 17% represents nice improvement in the margin for this segment as we continue to drive towards pre Covid revenue levels and reflects the benefits of structural cost savings actions taken as part of our Optima program.
And despite higher supply chain costs.
Digital embedding revenue of 43 million was in line with the prior year and up 4% at constant currency.
Bye I gaming expansion into Connecticut, and West, Virginia, partially offset by softness outside of the U S.
<unk> <unk> was impacted by lower hold levels.
Operating income of $8 million and operating income margin of 19% are stable with the priority.
While we expect revenue to reaccelerate, the double digit growth in the second half of 2022.
<unk> margins are expected to moderate as we absorbed cost to integrate the recently acquired <unk> business and continue to invest in talent and resources to fund future growth. We expect a strong return on these investments in 2023 and beyond.
Cash flow generation during the first half of the year was solid with $385 million in cash from operations and over $230 million in free cash flow with some lottery timing items driving weaker working capital performance. This is expected to reverse in the second half of the year.
Year to date capital allocation was heavily weighted towards net payments to minority partners. As a reminder, this payments are generally concentrated in the first half of the year and are a bit higher this year due to the exceptional lottery performance in 2021, we.
We invested around $150 million in Capex, and returned $135 million to shareholders $81 million via dividends and $54 million in share repurchases.
Year to date, we have repurchased two 2 million shares at an average price of shy of $25 per share, we recently amended and extended our revolving credit facilities, which enhance our financial flexibility by increasing the size of the facilities by about $150 million and.
Raising the annual amount of permit the dividends and share repurchases from $300 million to $400 million with the potential to increase the amount to $550 million based on our credit ratings.
The amendment also lower the cost of debt by reducing the interest margin and adding a provision that provides for further changes in the margin based on IGT ESG rating.
Lastly, the maturity date was extended to July 27, enhancing our debt maturity profile.
IGT liquidity remains very strong with $2 1 billion at the end of the second quarter and increasing by about $150 million with a larger size credit facilities I just mentioned.
We currently have a very manageable debt portfolio with no large near term maturities and a fixed to floating rate debt mix that is favorably structure in the current market environment. The strategic capital management initiatives, we have executed over the last few years are reaping real dividends as evidenced by a 25%.
<unk> in our quarterly interest expense run rate from 2019 levels.
Net debt leverage at three five times remains at the low end of our 2022 target range.
The announced sale of our Italy commercial service business is expected to close in mid to late September with net proceeds to primarily be used for debt reduction.
Net debt leverage is expected to improve by around a quarter of a turn exceeding our 2022 target after applying the net proceeds from the sale of the Italian commercial service business the acquisition of ISO fat and the final installment from the sale of the Italy B to C gaming business, which was received in July .
In summary, we are in a very solid position to be able to weather potential changes in economic cycles.
We are tightening our 2022 full year revenue outlook to $4, one to $4 2 billion lowering the high end of the previous range by $100 million solely to account for changes in currency and the impact of the pending sale of our Italy commercial service business. The updated outlook assumes a euro.
Dollar rate at parity for the second half of the year.
From 118, when we first presented our outlook last November .
Operating income margin is reconfirmed at 20% to 22% despite significant currency and macroeconomic headwinds and a 150 to 200 basis points in project related and restructuring expenses in the back half of the year.
We're reducing the high end of our outlook for cash from operations by $50 million to a range of $8 $50 million to $950 million, primarily driven by working capital investment and higher inventory levels to proactively manage supply chain disruptions.
Capex is also being reduced by 50 million to around $350 million due to update to timing of Capex spend resulting in no change to estimated free cash flow for the year.
As I just mentioned we are reconfirming, our full year operating income margin outlook of 20% to 22% mitigating the impact of around 200 million or 400 basis points of currency movements and various headwinds we are able to maintain our outlook. Thanks to the hard work our team has done to identify incremental.
Opportunities are continuing with cost discipline, and lower depreciation and amortization.
For the third quarter, we expect revenue of 1% to $1 1 billion and operating income margin of 18% to 20%, reflecting a 150 to 200 basis points and higher project related expenses.
In summary, strong operating fundamentals across our business segments are driving compelling capital returns, we achieved solid financial results in the first half of the year and hence our capital structure return meaningful capital to shareholders and reconfirm, our full year operating income margin outlook despite negative.
Currency moments and significant headwinds.
That concludes our prepared remarks, operator would you. Please open the line for questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad. If you would like to remove yourself from the queue. You May press star one again.
One moment. Please for your first question.
Your first question comes from the line of Carlo Santarelli with Deutsche Bank. Please go ahead.
Hey, everybody good morning.
Hey, Max I was just hoping as it pertains to the guidance if you could perhaps maybe kind of break out or to the best of your ability or whatever you guys are willing to do kind of look at the moving parts in buckets obviously.
Now factoring in mid July one ice off bad acquisition extracting the commercial services business at some point just kind of the net effect of those things relative to when you last provided guidance at the end of <unk>.
Yes sure.
Effectively.
It has changed versus when.
When we provided guidance last time.
Just clarifying that mathematically to get to the 20% to 22% and over achieving in the first half you have to have second half with.
With some lower margins and.
The way, we would like to highlight the trend is that in effect the underlying business continued to perform at more or less at the margins you have seen in the first half the difference is that.
We have to take some cost in Q3 associated with those mentioned projects, particularly.
Cost acquisition costs related to.
As a pet.
Transaction that closed on July 1st as Vin said and so we are in the early innings of the integration phase.
And obviously that will also have some.
Perfect in terms of purchase accounting with some potential for some step up amortization.
That will also kind of.
Have an impact a small impact in our estimate for the second part of the year, while in the fourth quarter. The expectation. Despite the fact that we don't want to give a specific guidance for the fourth quarter right now, but you can probably actually.
Mathematically fair.
The fourth quarter will have very likely.
And estimate it as an estimate for a second tranche of our.
Restructuring program early retirement program in Italy that we announced last year.
And so those two items combined.
Have kind of an underlying.
150 to 200 basis point headwinds.
Into the margins for the second part of the year.
But again the underlying run rate is more or less in line with what we have seen in the first half.
It makes sense to you.
That does and then just maybe more simplistically from a revenue perspective as it pertains to the Italy sale.
Do you have an estimate of kind of what the revenue is coming out as you as you take that out in September .
Yes, absolutely you may assume about $100 million of <unk>.
Revenue coming out all in the fourth quarter.
We are assuming right now the transaction to close in the second part of September . So for simplicity, you can just do that.
Okay, and then just lastly, as it pertains to the to the large jackpot.
Which I didn't win obviously has them on this call.
Do you guys have a sense for kind of the magnitude of perhaps the EBITDA that would stem from that in this re queue.
Thank you.
No.
So the jackpot.
At those levels is something that we don't estimate ahead of time. So if it comes it comes and we take it.
Last time, we had such a high jackpot was actually in combination with the second game that also was experiencing high elevated level of awards and.
And we mentioned $20 million last time. This time since there is only one you may probably ground yourself towards the 10 10 ish million dollars in terms of impact.
Great. That's very helpful. Thanks, guys.
Absolutely you are welcome.
Your next question comes from the line of Chad Beynon with Macquarie. Please go ahead.
Good morning, Thanks for taking my question and nice quarter I wanted to ask about the Italian lottery specifically.
The differing offerings, so tiny lotto in the instant ticket business. You noted that there were some trends that had kind of changed during the quarter can you just talk a little bit more in detail in terms of what youre seeing in the market if that's.
More difficult comps.
A beginning of a softer consumer in Italy.
And again kind of how that feeds into the back half guidance. Thanks.
Yeah sure. Thanks, Yeah. This is Vince I'll give you a little bit of color I was actually in Italy.
Early this and part of the time that I spent there and visited with operators.
Italy and.
It does not seem as if.
There is.
<unk> as a result of.
Consumer weakness.
Seems as if the.
Habit that many consumers had of spending time in the tobacco shops in the retailers is coming back slowly in this post COVID-19 period as they had.
Much longer period, where they were they had restrictions versus versus the U S.
And I think in particular, we've seen that drove those gains have been slower to recover.
Covid as a result of those those restrictions at the retail point of point of sales.
I think the a couple of important things that give me confidence going forward in an optimism around continued.
Recovery is we did see during COVID-19.
There was an expanded player base, especially the area.
Instant ticket sales, which continue to trend very.
Well and that's an area where.
You probably.
Have a more direct benefit of all of the innovation and the marketing and the good work that the IGT is able to do.
And that.
In that particular particular lines. So I think we've got a long history I think of innovation in the content and.
Optimizing our portfolio and payout structures, we're also continuing to expand our distribution even more so.
Italy.
And I think that we will see we're hopeful that we'll see continued improvement, especially in the.
And the draw base game area.
Alright.
In the U S. We've seen.
Continued.
<unk>.
Support for the elevated play levels that we that we.
<unk> post post Covid, which gives us a lot of confidence I think in the.
What's important to me, which is which is the long term outlook continued yet we now have another quarter.
Same store growth in the in the mid single digits versus 2019.
Supporting our thesis of higher play levels post close co, but in a lot of that again, we've delineated in the past I think a lot of that has to do with consumers actually.
Having more.
Greater income as.
Inflation has been narrowed.
A negative in terms of the cost of things, but also a positive in terms of real wage growth.
And then of course all the.
Active engagement that our incredible team has done around working with lottery directors throughout North America and increased number of draws in.
And providing more opportunities for win.
All of these state games add on games, all the all the higher price points that have been introduced.
All of these things.
Net net our.
A positive for our overall lottery operation and.
And the long term.
The long term.
Estimated and assumptions that we built into into our plan and we believe that believe that.
The one area that has been a little behind has been specific to draw based games in Italy, and we think we're optimistic that that will improve as we get further and further away from from.
This COVID-19 restricted period of time in Italy.
Great. Thanks, Vince.
And then on the gaming business you mentioned the quarter experienced some removal of some older on supported units that was kind of offset by continued growth in MLP.
Could you just.
Say again I believe you said youre looking for back half growth I think you were referring to international but just wanted to clarify that comment and then I guess just to kind of round that out are there still opportunities to kind of remove older unsupported games and replace them with newer lease games or mlps in the back half.
For the year and into 2003 thanks.
Yes, I think what we what we've seen is in the.
The installed bases and our overall kpis is very very encouraging.
Second quarter, we saw a real strong replacement.
Cycle on the on the sales side of significantly led by the U S and Canada.
Being a high.
High single digit average selling price increase on a really good product mix.
And very very high demand for our peak series of cabinets.
Our ship share continued.
The increase in our in our ship share through the first quarter of the last reported period.
The global installed base improvement as well as you've mentioned, it's been relatively stable sequentially.
Down year over year, but again that was expected on <unk>.
W La market.
And and removals of old unsupported games, I think what probably one of the most important data points around installed base has been that the increase the significant increase in installed base yields.
I think around 11% year on year.
Thats.
I think really driven by the improvement across our entire portfolio of our better gains in particular, our Wap and MLP gains.
And our MLP.
As you know thats been an area that we've struggled historically to deliver great games and this category is up.
30 significantly double digits.
Since 2020, and importantly, the new games continue to be in demand and to be honest. We believe we could have provided even more games into the marketplace had it not been for for our supply chain tissues. So.
So the absolute number.
As I've described there are several components within it.
But I am excited as again the proof the games are performing I think is in that.
As in the yield significant yield improvement the demand for the new games.
And the fact that we actually had an increase sequentially in quarter to quarter in our in our.
Most important games, our Wap games, our web titles.
That's great I appreciate it thank you very much.
Okay.
Your next question comes from the line of Barry Jonas with.
True Securities. Please go ahead.
Hey, guys good morning.
Can you maybe give a little more specific color on the supply chain issues and how thats impacting your ability to ship.
Certainly heard about bill validators issues in the market, but anything else to call out and I guess more importantly is there an end in sight.
Yes.
I'll give a little bit of color and then happy to have Max.
Provide any additional detail, but we really haven't seen.
Much relief in the second quarter.
It seems.
From week to week.
Had issue for us primarily sourcing components one week at the actual screens next week in video.
Video cards next week.
Tips wire harnesses.
So this has been something that we've really been.
Juggling in and our work around the teams achieved have been.
Remarkable but theres also a.
A cost associated with that with those workarounds as well.
I would say the team has done a very very good job.
<unk>.
Of these work Arounds and when you think about when I think about the third quarter and the fourth quarter.
<unk> seen the production numbers for July .
Good.
And of course factored into our third quarter guidance and targets, we think we're getting smarter and better in our in our work around including the distribution of of manufacturing, which doesn't you can't move.
Very quickly, but but we've been able to do some of that good work and also.
As Max mentioned, we built up some inventory supplies as well out of necessity to.
To be able to deliver a greater volume of games to to meet our customer demand and that is also helping us in going to help us in the back half of the year.
Deliver a greater percentage of the of the games that are there.
That are ordered.
So it's really across the board again, I think we've we've gotten we've gotten smarter and better as we have been learning around incremental sourcing options.
Reducing our dependency on certain individual suppliers.
Suppliers and then as far as the overall.
Opportunity going forward of course, a lot of that is going to have to do with.
With with.
What percentage of these costs are.
Remain in the system what percentage we.
Can come down and.
I'll, let I'll, let Matt comment on those on those data points.
Okay.
Very good so.
Further elaborating on this point.
Barry first of all from a pure economic impact the second quarter and the sort of a similar impact in the first quarter of around $17 million of supply chain cost.
What we have done in the second quarter to try to improve going forward is obviously.
Looking forwards and increase production program in the back half of the year versus the first half of the year. So.
Thats explain a portion of that increased inventory at the end of the second quarter. The other portion is obviously related to the inflationary impacts.
All of those.
Procurement actions, including some sparked by that we are forced to do.
As a result of.
Components not being available when when required.
So you have to look around and see for the best offering available at the moment, which is not ideal.
So going forward. What you may expect is as we unwind that inventory is probably a push into the P&L of a little bit more costa.
Especially in the third quarter.
But again against those higher cost we expect to also shift probably more units than what we have done so far.
Inclusive of shipping more units into the installed base in terms of.
Production program.
So the mix that we have on hand, right now is very healthy as Vince was mentioning during his remarks and so we anticipate also that a portion of that inflationary impact is going to be offset by a better mix, hence higher at price points all in all.
From our global offering.
So that would conclude my incremental comments.
Yeah.
That's great I appreciate those comments and then just as a follow up.
The lottery are there any new jurisdictions or potential rfps, you're focused on now where we could see some nice inorganic inorganic growth.
<unk> and high lottery, but really any other large sub segments of the lottery.
Yes, I would say on the on the lottery front.
The world is pretty well exploited.
Our.
The beauty of the business is.
The long term relations that we.
We in particular being in more jurisdictions and any other lottery company have enjoyed.
And Thats clearly based upon.
Us being.
<unk> being experts in this area and we believe that the <unk>.
Best in the World.
From time to time, there still are some jurisdictions that are.
Discussed and I think one that could be a significant opportunity that's been out there for some time is Brazil.
But I think we've got to get through the Brazil has to get through the Brazilian elections.
And we'll see how things play play out but clearly.
For large.
You large jurisdictions that are remaining.
It's pretty compelling.
The benefits of lottery for good causes.
When we look at those markets.
So again, we don't.
Yeah.
Emphasize those but but we are certainly.
Capable of being competitive.
Those in those markets on the on the lottery front.
That is one that's pretty pretty exciting going forward.
I think we've seen.
Debt.
Got real capabilities in this particular area, especially over the last several years as we've significantly ramped up our teams.
Resources.
And our capabilities and we've seen in.
Markets that we've been involved with very significant growth.
Double double digits rates, we announced where we're not live in machine.
Lottery, yet, but but but we will we will be participating in Michigan as well.
Date of the yard.
Cloud based instant platform and we've got world class content as well.
All of the lotteries I think we provide our <unk>.
And it's been content to 14.
14 lotteries are so in the combination of the U S.
Canada and the rest of the World and our performance has been has been very strong. So the opportunity there continues to be in North America. Unfortunately, the various states have been slower.
You passed legislation, allowing for high lottery, but as the states to pass that legislation over time, which we think will inevitably happen just given the way that people interact and their enjoyment of.
<unk>.
Playing I lottery on their on their phones and TBA.
I think we will definitely be a significant player not only given this.
History, and strength and credibility, we have in land base, but pretty clearly that the success that we've had in our in our 14 jurisdictions with with high lottery specifically.
That's really helpful. Thank you so much.
Your next question comes from the line of Ben Chaiken with Credit Suisse. Please go ahead.
Hey, How's it going.
The margin performance in lottery is really impressive I think as you called out at the high end of the 2025 goal I guess all else equal is that a is that a good sustainable level and I'm asking that question prior to making any adjustments for the.
Payment sale, which is dilutive to EBITDA margins are meaning like what's accretive when it comes out.
Yes.
Curious, how you think about it.
Yes, so vendors, Matt speaking I'll take this one so.
So we haven't historically seen lottery performing at the high forties.
Since a few quarters now we have been.
At or above 50%, obviously some of that has come from this discrete benefit performance last year, but I would say.
For once.
Between the.
The elevated players level and a high.
Degree of fixed costs of this business higher sales translated into.
More significant flow flow through of profit so if.
The play levels remain elevated and we see constant growth going forward. We think that we can continue to perform at these levels.
One thing to mention particularly on <unk>.
On the commercial service business when that business comes out.
It's actually that business is actually dilutive to the average margin. So our margin will kind of get another.
As a small improvement going forward.
But it's no notice if we can't integrate scheme of things as you know.
Yes, no I appreciate that.
I think I said that in a confusing way prior but I appreciate the clarification.
And then switching gears, a little bit on the restricted payment basket.
Limit was raised 400 or the size was raised to 400 and it seems like you have line of sight to $5 50.
I guess when you when you kind of reflect on the year, you've repurchased $54 million of stock.
Your annual dividend is around $160 million.
Do you plan on I guess do you plan on using all of this restricted payment basket or is your focus more on multiple leverage.
Look the program is open I can't.
Talk ahead of time of how we're going to execute on it.
But again, we will continue to execute based upon a principle of balanced capital allocation with an eye to our long term leverage targets as you know when we came out with invest at Investor day with our targets. We said we want to be in a range of two five to $3 five we have now.
We're approaching the high end of that leverage range target, but again, we'd like to be well in the range and not at the upper end going forward. So again.
There are definitely attractive entry levels right now on the stock, but I need to kind of continue to weigh all options and the different allocations have different priorities and our capital structure.
But again what was important in that renegotiation was to create the conditions.
For less limitations on our activity going forward and we have achieved that.
Got you I appreciate it thank you.
Once again, ladies and gentlemen, if you would like to ask a question. It is star one on your telephone keypad.
Your next question comes from the line of Jefferies <unk> with Stifel. Please go ahead.
Hey, good morning. This is Max thanks for taking our questions.
I wanted to start until a bit more into recent business trends. Vince is there any color you can provide on the exit rate around July trends, maybe focusing more on the recurring revenue side of things, so they're really specifically lottery and gaming game ops. Thanks.
Yes sure thing.
Okay.
Yes, I'll go ahead and take it at Max We will let you add any comments you want to afterwards.
Yes, I would say.
<unk>.
As I mentioned earlier.
We have seen this elevated play level over 2019 supported.
In the first quarter in the second quarter and set.
I think our multiyear same store sales growth over 2019 and in the second quarter was actually a bit better.
Then the same store sales growth over 2019 in the first quarter.
Early signs for for July .
Sure.
I think support those levels and we actually think that the.
When we look back at 2021.
The discrete benefits start to wane in the back half of the year. So the comps get the comps get easier for us. So again I think strong growth we did enjoy the benefit in the early part of the third quarter.
Mega millions.
Great.
That's always great publicity around around the country.
In fact over here in Europe , there was actually even made perhaps over here in Europe .
One person in Illinois.
That would be worth $1 3 billion.
Before taxes.
And also I think something like 25, other millionaires oriented in that in that one drug. So that's the kind of thing.
Really really exciting and just just in valuable marketing and promotion and oftentimes really really raises the awareness.
Lottery in kind of that that dare to dream.
Tagline that somebody lotteries are utilized so I think we're off to a good start.
As far as our gaming business goes.
A similar story for the last several quarters in terms of.
The sales funnel for the third quarter is very strong.
And again, our challenge is just simply making enough machines as I mentioned.
We're up to.
A better start for the first month of the quarter.
Still very challenged by supply chain, but not as challenged.
Again as a result of I think a lot of the proactive.
Actions the company took in the first half of the year.
Around distributing production and inventory.
Supplies and equipment and components and things that we had a really difficult time.
In the first half of the year.
And then our business is of course also impacted on the gaming side based upon.
The health of our casino customers and.
Not a lot of folks have reported yet, but the few who have.
To note.
They're selling out there their rooms.
They are seeing very high levels of.
Consumption I think GTR.
It was published through June <unk>.
So good strong results again, maintaining the levels of.
A year ago.
So I think that things on the strip in particular are incredibly strong.
So all signs at the moment are continue to be very very good.
Sure.
For the gaming industry as well.
Okay, Great. That's very helpful. Thanks, and then maybe just one quick follow up I do believe the New York Lottery systems contract is coming up for exploration and I believe this month, if I'm not mistaken just a quick update there would be helpful. Given the size of that of that.
Opportunity.
Yes, that's correct.
He is.
As of this month.
As we reported in the past our team continues.
<unk> continues to to work with the.
New York Lottery upon an extension and we're in the midst of those conversations so we really can't comment further.
Understood that's all I had.
Thanks for the answers.
There are no further questions at this time I will turn the call over to Vince that husky.
Great well. Thank you all for joining us and for your interest in IGT, we really appreciate it.
We feel like our first half performance confirms our strong operating fundamentals across our portfolio.
And as I.
We want to really thank the team for doing a terrific job in pursuing incremental revenue opportunities.
Built on a very strong portfolio of products and solutions at this juncture and we continue to do it really really great job and again the team gets the credit for.
Managing discretionary costs as we contend with significant macroeconomic challenges our profit margins have exceeded our expectations.
We strengthened the balance sheet, our treasury team has done a great job on that front and we're on track to deliver record capital returns to our shareholders and.
And we think Theres a lot of opportunity on the horizon as we continue to execute on our multi level goals and the trends that we currently see so thanks again for your interest in IGT and I Hope you all have a great rest of summer.
This concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
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