Q3 2022 International Game Technology PLC Earnings Call
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[music].
Good morning, My name is Devon, and I will be your conference operator today at this time I would like to welcome everyone to the International game Technology Q3 of 2022 earnings call.
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After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again press Star and then the number one on your telephone keypad.
Thank you James Hurley Senior Vice President of Investor Relations you May begin the conference.
Thank you and thank you all for joining us on Igt's Igt's third quarter 2022 conference call hosted by Vince Sadosky, Chief Executive Officer, and Max Chiara, Our Chief Financial Officer. After some prepared remarks, Vince and Max will be available for your questions.
During today's call, we will be making some forward looking statements within the meaning of the federal Securities laws forward looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward looking statements based on a number of factors and uncertainties, including those related to the effects of the COVID-19 <unk>.
The.
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 our SEC filings.
During this call we will 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 on our Investor Relations website, you'll find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measure.
And now I'll turn the call over to Vince Sadowski.
Thank you, Jim and Hello to everybody joining us here today, we delivered accelerated revenue and profit growth in the third quarter with nice momentum for each of our business segments.
Revenue rose, 14% in constant currency led by over 30% growth for both global gaming and digital embedding.
The 20% operating income reached the high end of our expectations on strong lottery margins and a substantial increase in gaming profitability.
Adjusted EBITDA increased 7% at constant currency, even as we continue to invest in several key growth initiatives and contend with higher supply chain costs.
Our strategic focus on driving growth through innovation and optimizing our processes and scale is paying off.
When the company reorganized around three main business segments with global product responsibility. It enabled our teams to focus on delivering best in class products and services more efficiently and profitably.
This is evidenced in a year to date EBITDA margin that is over 350 basis points better than the full year of 2019 level and.
And there is still more opportunity as our 2025 targets include further profit improvement.
Solid cash flows and proceeds from strategic asset sales were used to reduce debt improving our leverage to three one times the lowest level in igt's history.
And we continued to return capital to shareholders.
Through mid October we returned over 220 million via dividends and share repurchases, which marks a record level and our fiscal year period.
At the current share price, our annualized dividend implies about a 4% yield and we've repurchased approximately 6% of our float since last November .
It's a compelling returns profile for a company with a clear growth trajectory and where most profits and cash flows come from recurring revenue streams.
By long term contracts.
That's a good segue into global Lottery, where same store sales were up 3% in the quarter.
Mostly Australia multi jurisdictional jackpot activity.
I lottery sales nearly doubled from the prior year on strong E instant performance in Georgia, and Kentucky, and new game launches in Belgium.
Cleopatra clusters jackpot, new E instant game based on our popular slot title became our most successful launch to date.
Italy same store sales improved greatly as we anniversary significant discrete benefits in the prior year.
Instant ticket sales remained strong and draw games are progressively improving now tracking only modestly below 2019 levels.
Taking a longer term view the multi year same store sales growth accelerated in Q3 across all game types.
The increase in North America is especially noteworthy with Q3 same store sales up more than 30% from Q3 of 19.
That implies an average annual growth rate of about 10%, which is significantly greater than pre COVID-19 growth rates.
But are we a strong multiyear sales expansion is fueled about 500 basis points of operating margin improvement from 2019.
This highlights the significant profit flow through of an elevated sales base, even as we've increased our investment in the business.
Those investments were on full display at the recent World Lottery summit.
Our theme of future forward results driven showcased our industry leadership with a compelling suite of land based and digital solutions.
The scope of Igt's capabilities is unique and it is grounded in our expertise and player insights from operating some of the world's largest and most successful lotteries.
There was a lot of excitement around our launch of Omnia. The industry's first truly player centric Omnichannel lottery system.
It's a concept to our customers are eager for as their portfolio is expand into digital.
Omnia provides the capability to manage the whole enterprise from a single point.
Lotteries can easily gain insights into their entire portfolio and player base as data is integrated from all sales points in ways that improve our lotteries ability to market launch and enhance games to meet player preferences.
It also provides unprecedented opportunity to strengthen responsible gaming programs. We think it is the future of the lottery industry.
Speaking of the future we've had some important strategic developments, including long term contract extensions with the New York, and Georgia lotteries as well as a new 10 year instant ticket printing contract with the Texas Lottery.
In addition, the sale of our Italian commercial services business, not only helped us reduce debt, but it should have about a 200 basis point beneficial impact on the lottery segments margin structure.
It also reduces our Italy and euro exposure.
Global gaming had another terrific quarter with revenue up over 30% and operating profit more than doubling thanks to broad based momentum across all main kpis.
The increase in profit is noteworthy since global gaming has had a sustained higher supply chain costs than our other businesses.
Our roster of core video and multilevel Progressive games on award winning new hardware drove record unit shipments in the U S and Canada for our Q3 and year to date period.
This resulted in the highest U S and Canada asps as ever in the third quarter.
We continue to maintain the leading north American ship share spot, we've held for close to four years.
We also marked an important milestone with sequential improvement in the installed base.
Expanding footprints for new Wap and MLP titles, such as prosperity link money mania and wheel of Fortune <unk> high roller are fueling the installed base growth and also driving higher yields.
And our success is being recognized prosperity link one best slot product at the 2022 GB gaming and Technology Awards.
Most importantly, we believe the strength of current titles and what we have in the pipeline can drive continued improvement in the installed base.
Our confidence is bolstered by excellent feedback from <unk>.
Our product strategy has resonated with customers.
In the premium category. Our focus is on three key areas building on MLP strengths, expanding our video presence and supporting the iconic wheel of fortune franchise.
We intend to drive gaming machine unit sales with four main initiatives first we're expanding the peak cabinet family with the launch of the peak dual 27 and a P curve.
Second we will leverage player favorite brands like cats to expand our MLP portfolio.
Third we will grow unit sales of the top performing Diamond RF cabinet.
And finally, we will support the diamond RF with a robust roster of classic and new games.
All in all it is a compelling strategy that we're confident will continue to produce results.
And systems cashless continues to attract a lot of attention in IGT is leading the cashless gaming transformation.
Our resort wallet and IGT pay solutions are making it easier for players to activate cash cashless functionality and are integrating cashless add more places throughout the casino.
Operator adoption is progressing well with an enterprise wide rollout of Igt's cashless solution at station casinos and the recent deployment at Indigo Sky Casino.
Global gaming strong top line and profit momentum as a product of being a leaner more focused and more nimble organization. We have centralized global product responsibility that enables better decision, making and allows us to leverage our scale across game in hardware development and deployment.
It is also helping us manage through supply chain challenges more effectively.
Strong operating leverage as evidenced by our Q3 operating profit margin that is 370 basis points higher than 2019.
There is still a lot of opportunity for further margin improvement as we work towards our 2025 goals.
Turning to digital embedding increased investments are delivering accelerated top line growth.
The integration of ice off bad during the quarter was an important driver of the more than 30% revenue expansion at constant currency in the period.
<unk> was up for our existing North American Casino and sports betting operations, which account for most of the segment's revenue.
With the addition of ISR Byrd, our I Casino offer is now live in over 25 jurisdictions and there are a number of new market launches in Europe , and Latin America planned for next year.
We are also on pace to double the number of new game launches to about 50 per year.
Omnichannel games are a key area of focus and competitive advantage as we look to leverage the success of land based titles such as prosperity link and money mania in the digital arena.
The expansion of our game development capabilities, along with our newly acquired aggregation platform enables us to develop exclusive selection for our customers who are always looking for ways to differentiate themselves in the market.
Igt's proposition becomes even more compelling with world class data analytics and user engagement tools that can create a real time personal offering and recommendations for individual players.
For sports betting IGT solutions are powering over 80 sports books and the portfolio of turnkey customers continues to expand.
The new peak bar top with sports betting cabinet, we just introduced the <unk> is getting a lot of attention, including winning the land based product of the year Award at the 2022 Global Gaming Awards in Las Vegas.
The digital embedding segment is already profitable, even as we are making outsized investments for future growth the.
The SaaS like business model means that profit margin should expand as we gain scale.
You should see that dynamic unfolding beginning next year as we continue to work on the ISR that integration for the rest of 2022.
Our year to date results highlight good momentum across each business segment.
With revenue and profits up in constant currency, we are successfully anniversaried the substantial discrete benefits in the prior year and we've overcome around $180 million in revenue and $140 million in operating profit headwinds from FX higher supply chain and project costs and omni crowd.
It is an impressive achievement and I want to thank the IGT team for their passion and dedication to delivering it.
Current customer and player demand trends remained strong.
<unk> has a diverse and resilient business model.
As I noted most of our profits and cash flows are generated by recurring revenue streams backed by long term contracts.
This puts us on a solid path to delivering on our fiscal year 2022 commitments.
It also enables us to deliver a compelling shareholder value with capital returns at record highs.
I will turn the call over to Max.
Thank you Vincent Thank you all for joining US today, the third quarter results highlight strong underlying growth and accelerating momentum across the company our investment in innovation and focus on optimizing processes and our cost structure is generating strong cash flow, we are deploying that cash flow.
<unk> manner to drive future growth reduce debt and return capital to shareholders.
On Slide 14, you will see a summary of key financial highlights revenue in the third quarter was $1 1 billion growing 14% over the priority at constant currency with contributions from all segments.
Mobile gaming grew 34% at constant currency due to strong player demand for our products and services.
Our global Lottery business grew 4% at constant currency, driven mostly by strong multi jurisdictional jackpot performance and digital embedding revenue, which includes contributions from myself Beth was up an impressive 34%.
Operating income of $211 million grew 9% over the prior year at a constant currency driven by significant operating leverage in gaming and the operating income margin of 20% came in at the top of expectations. This included about 150 basis point impact from project related costs and step up amortization.
Nation associated with the <unk> acquisition.
Adjusted EBITDA of 402 million was up 7%, while adjusted EBITDA margin was 38%, reflecting significant improvements in global gaming profitability and the robust lottery profit margin.
Year to date revenue of $3 1 billion grew 8% at constant currency operating income of 691 million and adjusted EBITDA of $1 2 billion were up 4% and 2% at constant currency respectively.
Operating margin of 22% and adjusted EBITDA margin of 40% reflect structural improvement versus 2019, despite increased investment in growth initiatives and inflationary and supply chain challenges impacting our industry and businesses throughout the year.
Year to date results showcase our ability to deliver profit while investing in strategic initiatives and navigating macro headwinds and we've kpis momentum accelerating across each segment. We are on track to achieve our full year financial objectives.
Let's now move to the segments, starting with luxury third quarter lottery revenue totaled nearly $630 million a 4% at constant currency same store sales grew three 3% versus the third quarter of 2021 fueled by strong multi jurisdictional jackpot activity in the U S and four Euromillions jackpot.
<unk> store sales growth for all game types improved versus first half trends.
Compared to 2019 global same store sales growth was up over 20% in the third quarter with strength across geographies and game categories. North America same store sales growth was up over 30% and Italy same store sales increased low double digits with over 20% growth for instant ticket sales, partially mitigated by lower.
<unk> game sales, Italy draw game sales are progressively improving and at approaching pre COVID-19 levels.
I'll now turn it continued to be an area of growth and exciting opportunity I lottery sales nearly doubled year over year on new game launches in Belgium, and robust E instant ticket sales growth in North America.
Global Lottery operating margin of 34% was strong and already at the midpoint of our 2025 target.
Was achieved even with lower Italy presentation, especially from drill games.
Global lottery trends are off to a good start in Q4 on strong sales for the historic Powerball jackpot in the U S and improve draw game sales in Italy.
Turning to global gaming, we continue to see remarkable growth and broad based improvement with revenue up over 30% supported by increased player activity and customer excitement for IGT products and solutions.
Sales were especially strong rising about 70% total units shipped approached 9000 in the third quarter up nearly 60% from the prior year period fueled by replacement unit demand, especially in the U S and Canada, where our leadership in the casino and VLT space translated into a rec.
The ASB.
<unk> $15900.
Product sales also benefited from higher intellectual property and multi year poker poker site license revenue.
The global installed base was up sequentially by over 600 units with growth across geographies and categories U S and Canada yields rose 7%.
Almost $44.
Along the highest in company history supported by a growing roster of more productive Wap and MLP games.
Operating income of 65 million more than doubled on a significant operating leverage that drove operating margin up about 600 basis points to 17%, which is comfortably above.
Full year 19 level.
There is a lot of momentum in the global gaming business on the heels of our successful <unk>. We believe the combination of compelling new games and exciting new hardware offer opportunities to improve our global prospects as we focus on growing share in areas, where we are currently under represented.
Digital and betting revenue of $54 million was up 34% at constant currency I gaming drove most of the growth in three key areas. The contribution from myself Beth new markets, such as Connecticut in West, Virginia, and organic growth. We're excited about the opportunities arising from myself better alignment with our long term.
Goals.
Operating income was $12 million, which was stable at constant currency and an operating income margin of 22% were better than we expected in light of ice of better integration cost and increased R&D investments we.
We expect to realize the returns on these investments beginning next year as we leverage our growing content portfolio on an expanded and more robust global distribution network.
Now turning to cash flow and capital allocation year to date cash from operations totaled $621 million with free cash flow of almost $400 million. As a reminder, interest payments are concentrated in the first and third quarter, while tax payments are concentrated in the third and fourth quarter.
In the current quarter, we started to see some of the unwinding of the investment in working capital from the first part of the year. We expect this to continue in Q4.
We also realized a sizable net cash inflow from recent asset divestitures and acquisitions has enabled us to opportunistically reduce debt in the quarter, while maintaining our balanced approach to capital allocation.
Through mid October the company has returned $224 million to shareholders, including one $103 million in share repurchases at an average share price of 21 five.
<unk> $52.
$156 million of share repurchase authorization remains in our program.
We exited the third quarter with a greatly enhanced credit profile the partial tender of certain senior secured notes during the quarter, including 400 million of six 5% notes due 2025, and you're a $200 million of three 5% notes due 2024 brought our outstanding debt.
And leverage to the lowest level in company history net debt leverage of three one times is better than our 'twenty two target and is approaching the midpoint of our long term goal.
Two 2 billion and total liquidity includes $1 8 billion in additional borrowing capacity from Undrawn credit facilities. This allows us to be operationally and strategically nimble as we pursue our long term objectives.
The vast majority of our debt is fixed and the debt retirement done so far this year represents another milestone towards the interest expense reduction.
As shown on slide 20, we are introducing guidance for the fourth quarter of around $1 billion in revenue and an 18% to 19% operating income margin.
This assumes a euro dollar parity and an impact of around 150 to 200 basis points to operating margin from ICF bet acquisition step up amortization project related costs and restructuring expenses.
We are also reaffirming our 2022 full year guidance targeting the upper half of the ranges.
In summary, IGT is on track to achieve full year 2022 financial targets, we generated very strong financial results in the third quarter significantly enhanced our credit profile deliver compelling returns to shareholders through dividends and share repurchases and reaffirm our full year 'twenty two outlook.
This concludes our prepared remarks, operator would you. Please open the line for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Our first question comes from Carlo Santarelli with Deutsche Bank.
Hey, everybody good morning.
In snacks.
Obviously, a lot of moving parts I saw that coming in.
Italian b to B to C business going out with post pay.
You guys have overcome a lot this year as we think about kind of the bridge to 2023, obviously building continuing to build momentum on the gaming side lottery comps a little bit more reasonable. This year then in 'twenty three than they were in 'twenty two when you put it all together.
How do you think about kind of the prospects for growth both kind of on a revenue line and on the adjusted EBITDA line.
Yes, so I'll give you some qualitative.
<unk>.
Now of course, we're still kind of finalizing our thoughts around 2023, but I think it's pretty clear the underlying kpis trends in lottery and gaming for IGT.
I have been really encouraging through the through the third quarter.
Just some kind of high level data points to think about lottery same store sales continued to grow.
Italy, which has been.
Which has been down in 2022, given the discrete benefits in 2021, you saw in the third quarter has made significant progress and.
The decline from the prior year has been the gas has been reduced significantly.
And then when you think about the gaming industry.
You all obviously cover the casino operators and I've spent a fair amount of time with the with the casino operators Ceos prior to leading up to <unk> and they continue to have great success record cash flows and room rates and most importantly for us.
For as far as slides go really record returns.
We have not seen or heard any.
Any indication of of <unk>.
Anticipated slowdown in investment in there in their slot floor. If you take a look at the.
Market forecasters are at the moment they expect good growth in unit sales next year, both in North America and internationally.
And I think.
<unk> is in really good spot.
Games are are better.
I think we've had really good success really good.
Encouraging feedback from our customers and again, our greatest struggles through the third quarter of 2022 and going into the fourth quarter has been keeping up with with demand.
So I think overall signs.
At the moment are good and then you switch over to digital embedding you mentioned I saw that.
I think we've got good momentum in that in that regard with with ice off debt.
Helping us to I think provide incremental capabilities both on the platform basis to be able to be best in class in producing digital first games as well as having a best in class system that makes it easy for third party games too to connect and integrate with us and take advantage of our significant.
<unk> network and I think that really helps to increase our our capabilities in a period, where the opening of casinos through legislation in North America is a bit slower than we originally we originally anticipated.
So I think.
All of those things feel feel pretty good in terms of our current view on 2023.
Great. Thank you Vince and then if I could just one follow up.
You guys talked a little bit about the record asps in the U S and Canada, and obviously margins within gaming, we're up 320 basis points or so year over year, but clearly a lot of moving parts. Clearly you guys have taken a bunch of cost out of that business in general. So my question was more along the lines of has the increase in pricing.
Been enough on an apples to apples basis to kind of cover the.
The supply chain increases.
In cost.
Hi, Carlos this is Max speaking I'll take this one.
So.
Dean.
Significantly improved ASP being Q3 still comes on the heels of really an improved mix of product.
Primarily as a product with higher content that obviously.
And have enhanced features that drives higher price points.
Obviously as we as we as we have said previously we have also touched our prices, but the impact the true impact of pricing is not expected to come into fruition until later in Q4 and more vividly into 2023 and again there's been action.
<unk> that.
Have come up on the heels of the.
Significantly increased supply chain cost and we have targeted about and up to a mid single digit price increases with some product categories of our loans.
Again, thank you all today to mix. Thank you.
Our next question comes from Barry Jonas with.
Securities.
Hey, Hey, guys. Good morning last quarter, you talked about $10 million or so of EBITDA upside from the $1 3 billion jackpot.
Is that about what was recognized and then as a follow up what kind of upside are you assuming in guidance for the current powerball.
Yes, so youre correct correctly.
We estimated the Mega million $1 3 billion jackpot that hit in July .
<unk> gave us a favorable impact of about 10 million.
Sales flow through to.
To profit.
Obviously, the jackpot grinding right now is much higher as $1 9 billion as everyone knows so David benefit is expected to be higher than that it could get up to $20 million, but we also need to see how much fatigue post.
Power ball jackpot hits will.
We will be in the market. So again high level, it's probably up to $20 million right now for the fourth quarter.
Great Great and then just.
Relative to the lottery extensions.
That you announced how should we think about the economics relative to the prior contracts.
Yes, I think yes.
We were.
Happy to report that our New York contract got got renewed.
Yes, there is typically some incremental capital expenditures commitment associated with the renewal.
So we can help our customers to upgrade their point of sales.
Machines for the most part and take advantage of some of the some of the great New technology that our.
Our team has designed and get that out into the into the marketplace.
On the Georgia front again that was a seven year renewal and I think that continues to have very very attractive returns and that includes an upgrade of a bunch of their retail terminals as well and then Texas was a printing.
Contract in.
We renewed that for 10 years, and we don't really talk about the financial terms associated with the with that but of course on printing Theres No theres no capital commitment.
Perfect Alright, thank you so much guys.
And just as a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Next we have.
Ben Chaiken with credit Suisse.
Hey, How's it going thanks for taking my questions.
Quick one first I'm not sure if you covered it.
150 to 200 basis points in <unk>, how much of that does that hit EBITDA.
Those operating.
Ally impact you guys called out and then my second question in the presentation, you talked about significant opportunity for margin improvement in gaming I know.
In response to Carla's question on you just talked about some pricing initiatives in 'twenty three that should flow through.
Should we see those margin enhancements in 'twenty three.
Based on the pricing increases and then are there other opportunities as well on the cost side within gaming. Thanks.
Yeah.
Hi, This is Matt speaking I'll take this one.
In terms of the.
EBIT the specific impact of them.
150 to 200, if you use the 150 as a point of reference I would say 50 bps EBITDA 100 bps 150 bps to Hawaii.
So its one third hitting EBITDA in terms of the gaming margin progression.
We have displayed our target for 2025 to be Oi margin to be between 28% and 30% we closed the quarter at 17. So there is some way to go but we think that over the next three years, we will be able to get up.
To that target.
So we expect the margin to sequentially improve year on year.
Okay. Thanks.
Our next question comes from Chad Beynon with Macquarie.
Hi, good morning, Thanks for taking my question.
Wanted to start on the gaming side the installed base growth was pretty strong, particularly outside of the United States I believe a lot of this business is probably concentrated in.
North and.
South and Latin America, and Africa, and maybe even Australia.
Some markets that are a little harder for us to kind of get our finger on the pulse, but can you kind of help us.
Dial into what's been going on in those regions and if the installed base growth is really a factor of.
Things, just kind of reopening up or if you're.
Taking market share and if thats kind of in your and your forecast to continue to grow that install base and rest of world. Thank you.
Yes sure. Thanks, So yeah, we we saw sequential growth quarter over quarter in our install base and that was really driven.
By our web and our MLP games.
Our new cabinets and coming out of <unk> I can just say there is a terrific amount of interest and excitement around our new hardware and of course, our new our newest software game, especially based upon the kind of early success, we've had with with titles like prosperity Lincoln and money Mania Cleopatra.
I think it's important to <unk>.
First off focus on North America.
<unk>.
The significantly improved trends the companies had an installed base and in the North American market for.
For example, we all know the MLP space has been the most significant growth category for for many years and an area, where IGT was not nearly as competitive as it's been in and all the other categories.
But from 2020.
<unk> MLP installed base has grown over 20% and we feel like we've got continued opportunity for further growth in that category for sure based upon.
Achieving I think good success in the MLP game space after many years of of effort.
I'd say also our class II installed base has grown as well as we've focused on producing really good games in that category.
And then on top of that we're seeing continued improving yields as well so when I speak with casino operators.
Clearly.
Reaffirming the strength of Igt's game performance, which is the kind of the ultimate scorecard.
In terms of of.
Driving continued continued gains.
In North America.
Yes, I think if you look at the rest of the World. Yes, we've had good strength in <unk>.
Our installed base and the rest of the world primarily in Latin America.
<unk> been under represented in Latin America, and when we look at our long term growth plan.
And Latin America are significant drivers of of what we think is is a great installed base opportunity for us and Greece as well was also a significant contributor to our international installed base increase in the third quarter.
Thanks, Dan I appreciate it and then Max with respect to the balance sheet leverage you mentioned is down to three one times can you remind us where you want this to be from just kind of an operational standpoint, and as it continues to tick down how you're thinking about plans for excess capital whether it's for purchases.
Dividend increases or more tuck in M&A.
Yes.
Yes, Chad.
Our long term target is to be in the range of two five to three and a half leverage.
So.
We feel right now we are in a good spot.
We would like to be in the low end of the buffer.
To protect ourselves for potential bad times coming so there is still work to be done.
<unk>.
In terms of the capital allocation, we continue to master our approach towards a balanced capital allocation and Youll see that in full fruition in the year to date periods as well.
There are 156 million remaining under the existing authorization on share buyback so in conjunction with those strategic pillars of us.
We expect to continue to execute on the program.
Going forward.
But again the milestone is to continue to take care of the leverage and bring it down to the lower half of the long term target.
Thank you very much less results.
Our next question comes from Dominique go Gilani.
Yes, good morning, I have three questions. The first is on <unk>.
Good afternoon, as you saw the instant ticket business in Italy. It was quite impressive in terms of performance can you comment on the driver in the system the ability on the current trend.
And the second question is on the gaming business as usual so seasonality in Q4 is quite quite strong about particularly that you have.
Supply chain you had in the supply chain issues. So can you give us some more color. This is susan.
Seasonality does it can be seen also in Q4 and last on the cash generation. There are several moving parts are actually what I mentioned and Thats working cap because that is the legal dispute in cash taxes or if you can provide an indication of where do you expect to see that.
Net debt by by year end.
That would be great.
Yes ill start off and then let Max help out in answering the.
The rest of the question so.
Yes, what we've seen in Italy is as we mentioned earlier stronger than expected scratching wind sales, which has really helped us to offset slower than expected recovery in draw game sales.
I think the opportunity for US going ahead is continued improvement in and draw games as we as we said the third quarter improvement was was very significant versus the first two quarters and we've seen really good really good improvement in progression.
Such that.
Draw based games for only slightly below.
22019.
I think we saw multi year growth versus 2019 improved to 10% for mid single digit growth in the first half of 2022.
That was really driven by scratch and win games and I think so.
How much of that has been a direct effort of the team since we of course operate the lottery in Italy, we're able to directly impact the.
The quality of the games the number of game introductions I think that the interesting.
Titles and concepts that we've come up with and I think the team has been very very focused and we're we're pleased to see.
I think really good really good progress through the third quarter.
Yeah.
So domenico in terms of the seasonality on gaming.
Historically Q4 has been.
The strongest quarters in gaming as a result of the.
Kind of finishing off the year on product sales and deliveries.
This year, obviously is a little bit different because of the supply chain dislocations.
It remains a dogfight out there on a daily basis, but it's much better than it was in the first half of the year.
We have increased visibility on deliveries of components, we have been able to.
We saw some of the components with different suppliers reengineer some of the product to make them simpler and easier to them.
To complete so net net.
We are confident that we can deliver on and increase production scheduled into Q4.
Although we obviously need to watch it out on a daily basis and in terms of cash generation just to keep it simple when you look at.
The full year guidance versus the year to date that is definitely a big quarter in front of us in terms of cash generation. When you use Q3 as a fever.
Should assume that there is probably about $100 million.
More cash in Q4 coming from lower interest and tax payments and then he is all about the working capital delivery and we were able to deliver about 100 million of cash from working capital in Q3. So again it depends how much efficient we can be at the end of the year, but.
If everything goes in line with our expectation you should see another.
Cash inflow from working capital into Q4, and that should drive us home guidance.
And just a follow up on the potential payment for the banks on meta.
When should we assume.
The cash out.
Yes, so the terms of the settlement only takes effect after a final court approval of the proposed class settlement.
So the preliminary approval is expected sometime soon but the final approval will likely take more than six months. So we're still.
Again in within this timeframe right now.
Okay. Thanks.
Our next question comes from Jeff substantial with Stifel.
Great. Thanks, Good morning, Vince Max I was hoping you could talk a bit more about international trends. We've heard some anecdotes this earning season of some softening in the European consumer related to cost of living pressures at least more so than in the U S. Curious if youre seeing anything in your business, whether the lottery or game ops or otherwise that that suggest a similar trend.
Yes sure thing so of course, the most significant market for US is Italy, I think the company over the years and most recently through the sale of our Italian as payments business has been very focused on reducing our exposure to.
To Italy in particular.
So really we've got our lottery operation in Italy, and certainly the Italian consumer has been impacted by the economic conditions that have been taking place over over in Europe .
They really had the high inflation driven primarily through higher energy prices for a good part of this year already and.
Those improving lottery trends that we've seen in the strong growth over 2019.
Kind of.
Really runs against the grain of that.
At that inflation. So we have not seen any any significant impact on our lottery sales.
Again, as we've really shown progressive improvement in the lottery business versus versus last year, and then of course, Italy has been susceptible to a lot of market disruptions over the last couple of decades.
Both politically and economically and we've.
Being the lottery operator, the longtime lottery operator.
We've got the data and we've seen that the lottery spin and very resilient throughout their use these difficult periods and I think again it's.
Kind of a high value high high reward low cost form of entertainment.
As far as the rest of Europe goes.
Part of I mentioned earlier part of our long term.
Opportunity, we believe is greater market share and in gaming presence in Europe now.
We're making very good games and they are resonating in in Europe .
Europe has definitely been slower to recover coming out of.
Out of the Covid recession.
Which the way I view it as actually okay.
To be honest, we would struggle to meet demand with the supply chain challenges. We've had in in 2022, and so for North America to be the driver of growth is actually just fine and we feel as if as Europe and the rest of the world.
Recoveries more slowly, but we'll be in a good position to grow market share.
Great. That's really helpful. Thank you Vince and then if I could follow up with.
As a follow up on one of <unk> questions earlier on the Italian contracts.
You called out some nice sequential improvement in.
In the Lotto contract as some of the consumers over there kind of revert back to call. It normalized wagering behavior, just curious if youre seeing any signs of lotto coming back closer to 2019 levels starting to impact the strength <unk> seen in scratch and win or if you think it should be effectively entirely.
It is.
That lotto contract ramps back to 2019 levels. Thanks.
Thanks.
Yes, it's always a challenge to try to determine.
So if one area like scratch and win success is negatively impacting.
Draw based games, but again I think the encouraging.
Data point is scratch and win has been strong and our draw based games have been improving coming back towards 2019 levels and again, we're hopeful through.
Our expertise in and.
And terrific tenured team. We can continue to continue along that trend and have both continued to be good drivers going forward.
Great very helpful. Thank you I'll pass it on.
As a reminder, if you would like to ask a question. Please press star and then the number one on your telephone keypad.
Our next question comes from David Katz with Jefferies.
Hi, Good morning, everyone. Thanks for taking my question I think you've covered a lot of ground I don't want to reiterate too much but Max if we could just go back to the balance sheet for a minute.
That range of two and a half to three and a half.
Okay.
Wanted to.
The drumbeat for a recession or a slowdown coming does that keep you closer to the lower end of that range in the sub free range potentially.
I wanted to just go back to the prospect of tuck ins.
And how you might characterize the likelihood that there is any out there for IGT in the near term that would.
Sort of co.
Co exist with that leverage level. Thanks.
Yes, so the rationale for the.
One turn of leverage band in our target range was exactly to kind of help the company offset potential downturns coming in the in the in the industry along the way.
Are we.
Low enough to withstand completely out of session first of all we don't know what kind of recession, we're going to face next year potentially.
If it is a mild recession, probably we are able to continue to operate within that range. If it is a more depressed long term recession, who knows right, but again the intent was to be able to absorb negative impacts for a.
Typical recession that could come at a certain point.
I hope that answered your question.
And just with respect to probability on any tuck ins.
More or less likely would you say.
Near term.
Yeah.
Yeah, I'll jump in I would say that we're always.
On the look out for.
Very talented studios both on the land based gaming side and on the casino side as well.
And even technology and content providers on the on the lottery side. Its there is there is a lot of talented individuals out there that have created studios.
We worked with a lot of them, so we get an opportunity to do.
Take take the games out for a test ride, we've got an opportunity to.
To have their games on our platform and see how they perform.
But if everything is right.
Yes.
That's an area that we continue to be attuned to.
In terms of potentially adding to our capabilities.
But I wouldn't say that any of that outlook has has changed and there's nothing imminent.
That's perfect. Thank you very much.
There are no further questions at this time I'll turn the call back over to CEO Vince Sidoti.
Yes, thanks for joining us today.
Our year to date results highlight good momentum across each one of our business segments, and we think it's a clear indication that our strategic focus on driving growth through innovation and optimizing our processes and scale is paying off our net average net debt and our leverage are at their lowest levels ever and we returned a record capital to shareholders.
Current customer and player demand trends remain strong and we're on a solid path to delivering on our fiscal year 2022 commitments. We appreciate your interest as always in IGT and we look forward to meeting with many of you in the coming weeks have a great day.
Yeah.
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