Q4 2022 International Game Technology PLC Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the IGT 2020, Q4th quarter and full year results.

I would now like turn the call over to James Hurley Senior Vice President Investor Relations. Please go ahead.

Thank you and thank you all for joining us on Igt's Q4, and full year 2022 conference call hosted by been Sadosky, Chief Executive Officer, and Matt <unk>, Our Chief Financial Officer.

After some prepared remarks, Vincent Max will be available for your questions.

During today's call, we will be making some forward looking statements within the meaning of the federal securities laws.

Forward looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward looking statements.

The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our latest earnings release and in our SEC filings.

During this call we will discuss certain non-GAAP financial measures you will find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in our press release slides accompanying this webcast and our filings with the SEC each of which is posted on our Investor Relations website.

Now I'll turn the call over to Vince Sadowski.

Thank you, Jim and Hello to everyone joining us today.

We are reporting a strong finish to 2022 with profit growth and free cash flow generation accelerating in the fourth quarter.

We achieved all financial goals for the year, mostly at the top end of our outlook and we returned a record $276 million to shareholders through dividends and share repurchases.

We end the year with revenue and profit margins comfortably above pre pandemic levels and leverage at its lowest level ever.

We strengthened our leadership positions across all our main activities. During 2022, we remain the world's largest BDC operator of lotteries with a footprint that spans Europe , North America, and Latin America, as well as the leading provider of BTB lottery services and solutions for both land based anti lottery channels.

Our E instant content is currently driving some of the strongest I lottery growth in the market and our progressive instant games recently won the lottery product of the year at the International Gaming Awards.

The American Gaming Association recently reported 2022 was a record year for commercial gaming in the U S. Our largest market.

Total revenue grew 14% to 60 billion with growth across all segments, including a 5% increase in slide <unk>.

Our global gaming team maintained a leading north American slides ship share in 2022 for the fourth consecutive year and we steadily gained share in each of those years.

This momentum is supported by the leading game feature patent portfolio that gets stronger every year as recognized by the global Gaming Awards casino supplier of the year for the third consecutive time.

We also won four categories at last weeks, either slots Award show.

Yeah.

That land based success is fueling our strong position in the North American gaming market, which we expect to build on with newly expanded capabilities and opportunities for our play digital division.

We also enhanced our industry, leading ESG profile in the last year with improved scores from several rating agencies and our commitment to the science based targets initiative.

I'd like to spend some time in the operating performance of each segment beginning with global lottery.

Same store sales strengthened progressively in 2022, reaching 7% global growth in Q4, an elevated power ball sales in the United States. In addition to nice growth in Italy for both instant and draw games.

Lottery sales were up an impressive 60% in the year with even stronger growth in the second half driving a 300 basis point increase in our USA lottery market share.

Total lottery same store sales have increased 6% CAGR since 2019.

Our 2022 results confirm the market has successfully maintaining the outsized sales levels experienced during the pandemic.

We believe this is directly attributable to the steady stream of innovation that we in partnership with our lottery customers continually bring to market.

Some recent examples include the launch of Gong in Italy, and add on game to the successful Tenney Lotto franchise that drove meaningful sales increases during Q4.

We also achieved record, Italy instant ticket sales in the fourth quarter. Thanks to a steady lineup of new game launches, including the highly successful launch.

10 Euro Super near Mercy game, it's a good proof point that our strategy to innovate with higher price points is working.

The velocity of lottery growth is fueled by a rapidly expanding <unk> portfolio that is getting better with each new game launch.

During the year bank posture and clear Patrick clusters established themselves as true blockbusters and our investment in R&D should support about 40, new game launches in 2023 up from 30% in 2022.

The robust performance of our expanding <unk> portfolio opens an exciting new opportunity via third party distribution arrangements.

Our E instant games, our live with 12 customers worldwide, and we expect to add a half dozen more in 2023.

This should maintain double digit I lottery growth, even without any new market legislation.

On the technology front, we launched Omnia. The Companys first truly player centric Omnichannel lottery system as well as Infinity instance, a revolutionary digital instant ticket printing technology during 2022.

We believe omnia in Infinity, our transformational innovations that offer powerful growth potential for the lottery industry.

We also secured important new contract wins and extensions during the year, including a new 10 year instant ticket printing contract in Texas as well as a multi year facilities management extensions in New York, and Georgia, which are among our top 10 lottery customers.

The elevated lottery play levels achieved over the last few years have fueled about 500 basis points of operating margin expansion since 2019.

This is despite increased R&D investment to support important initiatives like I lottery.

And while the 35% operating profit margin is aligned with our 2025 target there is room for more margin expansion with continued industry growth.

Moving on to global gaming focused product and market strategies drove significant revenue and profit gains during 2022.

A nearly 30% increase in revenue drove operating profit five times higher on improved service margins and disciplined cost control despite significantly higher supply chain costs.

2022, O y and EBITDA margins each exceeded 2019 levels.

We ended the year with record levels on important kpis, including global Asp's and U S and Canada unit shipments much.

Much of this progress came from an expanding portfolio of successful MLP games with Royal Wolf clips and Egyptian link being some of the top performing titles.

There is further opportunity for IGT to achieve increased share of the MLP market.

And we have an exciting pipeline of new games coming to market. This year.

The broad acceptance of our new peak dual 32 P explained 49 and Diamond Rs cabinets. In addition to our new Poker cabinet offerings is another important driver of the leading U S and Canada ship share we maintained for the fourth consecutive year.

Demand for the Diamond S is outpacing our ability to build units reflective of the substantial stepper replacement cycle. This cabinet offers.

The global installed base achieved annual growth for the first time in several years.

Outside of the U S and Canada. The installed base has been on an upward trajectory for some time.

That momentum accelerated in 2020 to an expansion in Latin America in Greece.

In the middle of the year, there was an inflection that drove the U S and Canada installed base higher marking what we believe is an important milestone for IGT.

The improvement was fueled by the success of new Wap and MLP games, such as wheel of Fortune high roller prosperity link and money mania and was complemented by stronger yields.

We expect continued installed base growth as we look to the future both for the U S and Canada and for the rest of the world.

Today, we believe our go global gaming segment has never been stronger.

There are many avenues of growth over the next several years across product categories and geographic regions.

Those topline opportunities should drive continued operating leverage as we progress towards our 2025 margin goals.

There is a lot of excitement at play digital the new name and brand for our digital and bedding segment.

The change is reflective of the seamless eyesore that integration and the expanded capabilities and future opportunities for this segment.

Play digital delivered over 25% revenue growth and a 50% increase in operating profit in 2022.

This is a great achievement, considering the elevated investment in talent and R&D. We made during the year. In addition to absorbing ISR integration costs.

The nearly $70 million in EBITDA and 32% EBITDA margin generated in 2022 are impressive levels for a relatively new business with a compelling growth outlook.

We are on pace to double new online casino game launches to over 65 per year.

In 2023, those new launches will include digital versions of our most popular land based swaps and MLP games, such as prosperity link and money mania.

We will also introduce several top performing eyesore that games in the U S and Canada over the next few weeks.

Soon we will launch wheel of Fortune casino. The first brand led online casino in the U S through our long standing relationships with that MGM and Sony Pictures television.

It is an exciting and unique omnichannel offer leveraging one of the most successful and iconic slot brands.

With a greatly expanded portfolio of over 250 proprietary games and a world class aggregation platform able to distribute thousands more we can now develop exclusive game assortments and targeted marketing campaigns for specific customers and markets.

We launched the first two eyesore that games in Ontario in Q4, two great player acceptance and are working our way through the regulatory process in the U S.

The first launches of IGT gaming titles through our our more robust global distribution network, we'll begin with Greece and Romania later this year.

In sports betting we had 16 new installations across 11 jurisdictions in 2022, and we're now powering over 80 sports books.

Van dual and Rhode Island, our two largest sports betting customers had their best years, and we just came off record Super Bowl betting with smooth operational performance for our customers.

There is a lot more opportunity for us to expand our customer base with our best in class hardware technology and trading service solutions, especially as new States go live.

Play Digital's SaaS like business model means that profit margin should expand as we gain scale.

You can see the attractive margin dynamics into 2022 results a period that included elevated investments to support our growth objectives.

The strength of our 2022 performance is a result of important strategic transformation at IGT over the last three years.

In that time, the company recognized by global product responsibility or Im sorry reorganized by global product responsibility simplifying our organizational structure and financial disclosures, we monetize noncore assets at attractive valuations and significantly reduce structural costs.

At the same time, we made important investments in growth, especially in the B to B I gaming and lottery space.

Our actions coupled with a strong cash flow generation of the business enabled us to reduce our debt and leverage greatly improving our credit profile, which now stands at crossover investment grade with the recent Fitch rating.

We have also enhanced shareholder returns by reinstating a dividend and establishing the company's first ever share repurchase program.

These changes have transformed IGT into a company with a higher growth prospect and better profit profile than before the pandemic.

It's required a lot from the team has remained intently focused on the task at hand.

We've increased investment in our team by hiring new talent.

Especially in critical digital and technology functions and by funding important initiatives such as career development.

<unk> and other recognition and engagement programs.

Results are encouraging with attrition down significantly and the advancement of a winning culture.

I want to thank the team for all their efforts to build a stronger IGT.

This strategic transformation puts us on a solid path to deliver on our long term goals.

This is clear in the 8% constant currency revenue growth we achieved in 2022. Please.

We expect to build on that momentum this year and are entering 2023 from a position of strength with good trends across business segments.

Q1, 'twenty three is off to an encouraging start for lottery with accelerated growth in Italy lottery sales and elevated use jackpot activity.

For gaming, we have a robust Q1 unit sales funnel and we also expect continued installed base growth.

Play digital momentum should be maintained even in the absence of new gaming jurisdictions as we leverage our newly expanded game development and distribution capabilities.

Now I'll turn the call over to Max.

Thank you, Vince and Hello to everyone joining us on the call today.

Our solid revenue and profit growth in 2022. In addition to robust cash flow generation is a testament to our ability to overcome significant headwinds, most notably from adverse currency rate movements and significant supply chain constraints.

The results are even more impressive on a constant currency basis. As a result, we were able to meet the high end of our outlook on all key financial metrics for the full year with a strong finish to the year as Q4 came in above expectations.

On slide 11, we have provided a high level summary of our fourth quarter and full year 2022 financial results with comparisons to the prior year in the quarter, we generated over $1 billion in revenue up 4% as reported and 8% at constant currency driven by strong global same store sales growth in lottery.

Record U S and Canada unit shipments and global ASP being gaming and 56% increase in play digital revenue fueled by growth in both our gaming and sports betting activities.

Strong operating leverage drove operating income up 24% or 30% at constant currency to $230 million.

This yielded an operating income margin of 21% 200 basis points above the high end of our outlook, primarily due to stronger performance across segments.

For the full year, we generated $4 2 billion in revenue up 3% as reported and 8% at constant currency on significant year over year growth in gaming and play digital.

A robust and resilient margin profile in global lottery, coupled with very strong operating leverage in global gaming and play digital drove operating income to $922 million.

Up 2% as reported and 9% at constant currency.

Changes in some below operating income items, including reduced interest expense and the normalization of the tax rate contributed to significant accretion in adjusted EPS to almost $2 per share. This is reflective of the company's considerably improved earnings power.

During 2021, we realized over $200 million in structural cost savings versus 22019, and the optimal one.

At our Investor Day in November 21, we introduce Optima two point or a program designed to deliver an incremental $150 million in structural profit improvement by the end of 2023 compared to 2019 I.

I am pleased to report that we have already achieved two thirds of the target at the end of 'twenty, two with over $50 million realized in lower interest expense and improvements to the effective tax rate dropping to 30% going forward. The effective tax rate net of FX and discrete items is expected to remain in the low mid 30% range.

The additional savings from operational excellence and margin improvement initiatives should fully materialize once supply chain headwinds and inflationary cost increases normalized.

Now, let's review the results of our three business segments.

Global lottery generated $639 million in revenue in the fourth quarter down, 7% as reported but up 8% at constant currency, if we adjust the perimeter for the sale of Italy commercial services in September 2022.

Global same store sales grew 7% on strong sales for the record 2 billion power Powerball jackpot in November and a nice recovery in Italy, where same store sales increased 3%.

Lottery sales rose, 84% with strong growth in existing markets as well as contributions from Belgium.

Terminal sales in West, Virginia, and robust instant ticket sales, including the popular cash bleed gaming, Texas drove higher product sales.

Operating income rose, 6% at constant currency to $216 million in the fourth quarter operating income margin of 34% in the fourth quarter and 35% for the full year are already aligned with the 2025% target range.

Global gaming continues to deliver strong financial results with significant year over year increases in revenue and profit in both the fourth quarter and full year periods Q4 revenue of 389 million rose, 21% with double digit gains across the service and product sales categories, driven by demand for IGT game offerings.

New cabinet solutions and add on services.

Product sales were especially strong in the quarter with global unit shipments up 29% to about 9500 units record U S and kind of the shipments of nearly 7500 units were propelled by a 73% increase in units shipped to casino customers Q4 marked the fourth consecutive quarter of U S and Canada.

Unit shipment exceeding pre pandemic levels. We also achieved a record global asps of $15000 or 500.

The global installed base rose over 1000 units sequentially in the fourth quarter predominantly driven by higher placements in Latin America in Greece.

U S and Canada installed base was up slightly but underlying growth, including the placement of over 370 units announced some valet was offset by the conversion to sale of about 500 units to BIOLASE in advance to the launch of the Rhode Island VLT joint venture those.

Those units were part of the 1500 units contributed by ballot to the joint venture on January one 2023 pro forma for the Rhode Island JV Igt's global installed base of 50 of more than 51000 units has recovered to pre pandemic levels.

We have included more details on the scope and accounting treatment of the Rhode Island JV in the appendix of today's presentation.

Significant operating leverage drove operating income up nearly 90% to 68 million and operating income margin to 17, 6% a record for a quarter period on a full year basis operating profit rose over five times to $242 million in.

Exceeding 2019 level, an increase service margin and high margin IP royalties in the first half of the year and despite higher supply chain costs and the absence of those supply chain headwinds the margin would have been about 450 basis points higher.

<unk> achieved record financial results in the fourth quarter and full year periods revenue increased 56% to $65 million in Q4 prepared by organic growth market expansions and ice of best acquisition Sports betting also increase on strong fund you will and Rhode Island performance.

Operating income increased to $17 million and operating margin rose to 25, 5% helped by strong topline growth lower than expected jackpot expense and despite integration cost and continued investment in talent and R&D to fund the future of this high growth business.

For the full year revenue increased 27% to more than 200 million strong operating leverage resulted in 51% profit growth with operating income, reaching $50 million and margin expanding almost 400 basis points.

Cash flows were very strong in 'twenty two.

With nearly $900 million in cash from operations and $582 million in free cash flow generated from outstanding operational performance and ongoing discipline around capital management, including increased investments for future growth of about $80 million year over year.

Cash from operations included a 50 million escrow payment related to the DDI Benson matter. Excluding this payment we achieved the high end of our outlook for cash from operations and with capital expenditures lower than expected at $317 million free cash flow exceeded our expectations.

We expect to pay the remaining $220 million for the DDI Benson matter sometime this year pending final court approval of the agreement. This settlement is anticipated to have an after tax impact on 2023 cash flow.

$155 million.

We delivered a record $276 million to shareholders in 2022, including over $160 million in cash dividends and $115 million for the repurchase of five 4 million shares at an average price of about $21.

And change for sure.

$145 million remains outstanding under the current repurchase authorization.

We strengthened our credit profile in 2022 with debt reduction of over $770 million net debt leverage improving nearly half a turn to a record low of three one times and we increased our liquidity.

And this work continues in 2003 with the redemption of 61 million in the five and 35% notes due in 2023 and.

Today announce make whole redemption of 200 million of the six 5% U S. Dollar notes due 2025, and 188 million euros of the three 5% Euro notes due 2024. This leaves us in a nice position with no meaningful near term debt maturities.

Our good progress is reflected in the double B plus issuer credit rating with a stable outlook and in investment grade.

Triple B minus rating on our senior debt from Fitch will highlights our conservative leverage and leading share in core gaming end markets specifically in lottery.

Total liquidity improved to $2 4 billion at year end, which includes $1 8 billion in additional borrowing capacity from Undrawn credit facilities.

Yeah.

Our outlook for the full year and first quarter of 2023 is here on slide 18 for the full year and we currently expect to generate revenue of approximately four 1% to $4 3 billion.

Operating income margins of 21% to 23%.

Cash from operations of between $900 million and $1 billion in capital expenditures ranging from $400 million to $450 million.

Our outlook assumes low single digit same store sales growth in global lottery as sales have now growing off a higher base same store sales are expected to be stronger than the first half of the year given the large multi jurisdictional jackpot activity, we had in the back half of 2002.

'twenty two.

While a lot of jackpots can certainly happen again, we don't plan for them in our forecast.

Global gaming is expected to continue its momentum supported by higher year over year unit shipments Asps.

Asps.

And installed base units.

Double digit topline growth is forecasted for <unk> digital.

As well.

The full year operating income margin includes about 100 basis point negative impact half of which is from higher depreciation associated with returning to more normal investment in the gaming installed base. The other half relates to the previously disclosed Italy restructuring program, which is mostly expected in the back half of the year.

We also have about a $25 million increase in DNA associated with a new multi year IP license agreement, which we capitalized in our asset base.

It does not affect operating income, but does impact EBITDA positively.

Cash from operations is expected to increase year over year.

On improvements in working capital, including lower interest and cash tax payments.

Despite an estimated after tax cash outflow of about $155 million related to the DDI pension matter.

Given broader macroeconomic uncertainty and expectations of a potential recession or economic slowdown our outlook is consistent with a somewhat cautious view on the back half of the year, including the potential for a weaker U S economy.

We have a resilient business with high recurring revenue streams that are mostly backed by long term contracts and we maintain an agile agile cost structure.

For the first quarter on the back of positive early trends across our three business verticals, we expect to deliver revenue of approximately 1 billion and operating income margins of 22% to 24%.

This outlook implies a sequential improvement in operating income from Q4.

Moving quickly to the conclusion of my prepared remarks, let me summarize by saying 2022 was another year of significant accomplishments with strong financial results that met the high end of our expectations.

Greatly greatly enhanced our credit profile with debt and leverage reduced to the lowest level in company history, and we return record capital to shareholders.

As Vince mentioned, we have good momentum heading into 2023 across business segments with enhanced prospects for profitable growth.

We have increased our financial strength and flexibility, which positions us well for the future as we continue to advance toward achieving our 2025 goals.

That concludes our prepared remarks, operator would you. Please open the line for questions.

The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad at any point you'd like to withdraw from the queue. Please press star one again, you'll be provided with the opportunity to ask one question and one further follow up questions. We will take a moment to render our roster.

Okay.

Our first question comes from the line of Carlo Santarelli from Deutsche Bank. Please proceed.

Hey, everyone. Good morning, and thank you guys.

If you wouldn't mind could you talk a little bit about how you foresee margins across primarily the lottery and gaming segment as we move into 'twenty three obviously.

Apply chain issues costs played a role last year scale revenue levels kind of back to pre pandemic levels at least or moving in the right direction, especially on the gaming side.

Just talk a little bit about the puts and takes and maybe Max if you can kind of quantify the totality of the jackpot benefits for 2022, just to get a sense of kind of what we're looking at from a comparison perspective in 'twenty three.

Yes, Hi Carlo.

Good morning, let me start from the end so.

Take the jackpot impact out of the way so effectively we got now three consecutive quarters of more than $1 billion jackpot.

In Q3, we got $10 million positive impact in Q4, we got about $20 million a positive impact and now we expect for January and Q1.

A positive impact of between five and $10 million.

As you know the advertised level of jackpot has increased as a result also of significant interest rate.

Rate hikes happened during 2023, so that obviously facilitates increased momentum into that game, but please keep in mind that jackpot represent only 10% of total U S sales in lottery and we earn our regular one to one 5% on those sales.

Having said that when we look into the margin progression towards our 2025 goals.

By segment.

As we said several times during the year that lottery is already sitting well in between that range, 33% to 30% to 36%.

In insight D.

The sale of the commercial service business in Italy, which was running at a lower average margin will have a positive impact to our margin all in all.

And so we expect to continue to make progress on that.

Figure as far as lottery is concerned and again keep in mind that we don't project Hi, Jackpots achievement in our forecast.

As far as gaming is concerned.

Progression in the margin is a kind of assumed as a result of two phenomena one hour increased penetration.

The different markets, where we compete as a result of the strong game offering and two as we anticipate the supply chain headwinds.

Headwinds to abate in 2023 not completely.

But meaningful lead to improve the margin. So we expect the margin to be probably up a couple of points year on year in 'twenty three but were mostly focused on is the exit margin of 23, which an hour.

Ids is probably going to be above 20% on oi.

Okay.

So we expect an improvement during the year to basically continue to March toward our 2025 target of 28% to 30%.

And finally for Dnb at this business as continuing to surprise us on the upside quarter after quarter.

It now has a meaningful $70 million EBITDA generation on a full year basis.

We have an oi margin that sits.

Right about in the mid <unk>, and we expect that margin to continue to improve towards our target of 30, plus and we anticipate to be able to hit the 30, plus well ahead of 2025.

Great. Thanks, Thank you very much I appreciate it.

Our next question comes from the line of Chad Beynon from Macquarie. Please proceed.

Good morning, Thanks for taking my question.

A nice quarter and outlook first wanted to ask about play digital and your 'twenty three outlook, you talked about double digit revenue growth.

I'm wondering if you could talk about some of the bigger market opportunities and then I was wondering now that you've had this business under your belt.

Some of your other global relationships could help benefit this business.

Maybe even be higher than that I know you talked about some of the game launches, but just trying to get a sense of what markets, we should focus on and kind of where the upside could be.

Yes, I would say with regard to play digital.

The legalization of of I gaming in incremental jurisdictions in North America is likely is slower than we would have thought a couple of years ago.

And Thats why we think it was it was really a great sign and really important for a play of digital to make so much progress in 2022 around the game. So it's really it's really all about the games and the platform and having our deep library on the land base side I think allows us to continue.

You too have success play digital or <unk>.

Incredible market share that that business has developed has largely been based off of the success. We've had with our our deep library on the land based side and with the success of titles like prosperity, Lincoln and money Mania Youll see those games port over to the digital environment and we believe those will.

Continue to have great great recognition by by consumers.

As well as the investment we've made in our platform. So now.

We are a very valuable provider to our digital casino customers.

Our aggregation capabilities for third parties.

We've got so much so many games so much content that.

That we're working to make available to our customers through ISR Thats, both library and their ability to produce current games and the integration of their class leading platform.

<unk> enables us to provide analytics and I think great feedback.

Feedback and customer tools.

So I do think that.

Our growth will continue to come.

Through through the production of Great games, and the increase in digital play.

In particular in North America.

When you look at the sports betting side, we've had good success, there as well as a <unk> provider.

You've read about several I think <unk> systems providers that have struggled.

With the technology, the acceptance of beds, the odds, making especially in big game days like the Super Bowl.

Our system performed flawlessly, our trading service customers are very happy we've got the advantage of the hardware and the software side I think we have.

Over 800 kiosks deployed on the hardware side is as well as as powering our mobile platform.

And clearly the pace of expansion of ice.

Sports betting legislation in North America has slowed but there are plenty of markets that are that are open and I think there will be convergence in and focus on the quality on the quality operators.

When we think about the drivers of the play digital business over the next year or two those are the things that we're that we're focused on.

Great. Thank you very much I appreciate that and then on the on the Capex. The $404 50 for the year can you help us think about the rough breakdown in terms of where the money is going and is there any.

What we would call growth capex in there on any new contracts or I guess growth for the installed base, but maybe just some details there. Thank you.

Yes so.

While in 2022, the increase in Capex was almost in the gaming Division as a result of our efforts to increase our installed base.

23 will be more balance will start.

Slowly this the long cycle of lottery contracts renewals on.

On the back of the recent extensions so there will be some money allocated to <unk>.

George on New York some of the contracts that we recently extended.

That will.

Make a.

A big part of it the other part will continue to be on the gaming side as we continue to invest in our growth.

To further develop our installed base.

Great. Thank you very much.

Yeah.

Our next question comes from the line of Barry Jonas from tourists Securities. Please. Please proceed.

Hey, good morning, guys.

I was hoping to get more color on the difference between the high and low end of the guide for 'twenty, three and I would ask if the economy stays at current levels could you hit or even exceed the high end.

So the way we structure our outlook thinking this year was.

Kind of pretty balanced between a scenario where the situation stays as it is and.

All the bad stuff is kind of further delayed out into 'twenty four.

Which would probably speak for us to be able to stay in the upper end and a scenario where we see.

The weakening of the economy.

Up to the verge of a potential moderate as slow down.

And so we are protected on the downside our outlook with the lower half.

I would leave it that for now and we'll see how we progress during the during the year.

Okay, Great and then just as we think about the pipeline for new <unk>.

Our competitive contracts or the state or country level curious if you could just give us any color on anything youre targeting.

With regard to lottery lottery, yes, sorry, yeah yeah.

Yes, we've got we've got a good contract cycle over the next couple of years as we mentioned.

We've secured extended or secured some of our largest contracts.

Over the last couple of years and this year and protect cooler.

A couple we have coming up where we're going live in Connecticut, which we won from a competitor that will be towards the back half of this year.

We do have the majority of the FM contracts in North America, but.

But there are some that are managed by others.

We constantly work those and then as we've said we think that we potentially have a greater opportunity on the printing side as we don't have significant share of that business.

And there are some some printing contracts coming up and that business is interesting there are typically.

Typically shorter duration contracts as well as there is there has been a trend for multi.

<unk> contracts on the printing side, I'd like FM, which would be impossible to administer so we think we've got.

We've got some some opportunity coming up both in 2023 and 2024 effect that was a few weeks ago, just in Lakeland and our printing facility, we had a worldwide.

Conference with all of our print folks and going through our long term business plan over the next couple of years and looking at our capacity and automation and I think with the significant investment we've made in our print line as well as our patented technology like Xfinity instance, we've got the ability to to earn some some business in.

Again, I think that was an area that wasn't a significant focus for the company many years ago and now that we've got the capability have made the investment we think we think thats.

A nice incremental opportunity going forward.

Great. Thanks, so much.

Our next question comes from the line of Benjamin Chaiken from Credit Suisse. Please proceed.

Hey, good morning.

If I if I heard you correctly within the gaming segment I think you mentioned at 20% exit rate in Oi within gaming, which suggests a progression through the year type time charter to <unk> right.

At a top line driven dynamic are just normal seasonality, we haven't had a normal.

12 months in a while so just wanted some clarity there and then related.

You are targeting at 28% to 30% alive by 'twenty five as you highlighted at the Investor Day and then.

Referenced in the call earlier can you help us think about the moving parts in that progression as we move into the 24 is it pretty smooth or is there some lumpiness we should consider.

Yes.

Hi, Ben Thank you for the follow up questions because allow it allow me to dig a little deeper into the supply chain issues and how we intend or we have planned for.

Offsetting those issues at both from an operational standpoint, and a commercial standpoint as well so effectively the short answer is a combination of topline and efficiency.

That will allow us to improve that margin to that exit level that I mentioned before the end of 'twenty three.

But speaking more.

Specifically about the supply chain.

We have done a tremendous.

Work this year to reengineer some of.

Our supply and supply chain value cycles, we have expanded our partnership with <unk>.

Vendors to guarantee safer supply and so what we anticipate next year is about a third of the impact to subside.

We said total year <unk> about $60 million in gaming.

The balance is going to fade out over the next two to three years, we have defined on structural cost increased piece of about $20 million, we expect that the structural increase of $20 million.

Remaining to be offset by our pricing actions that we announced mid of the year and are now effective in the market as we as we speak.

So all in all I think as a stronger.

Reaction from the operating team on the supply chain and then the continued progression on our topline as Vince elaborated during his prepared remarks and in the subsequent Q&A that we.

With that we are we are having.

Thank you Ben.

Thank you very much.

As a reminder, the floor is now opened for your questions to ask a question at this time. Please press star one on your telephone keypad.

Our next question comes from the line of David Katz from Jefferies. Please proceed.

Hi, good morning, everyone.

Congrats on your quarter.

I wanted to just talk Max a little bit longer term about kind of the cash flow dynamics, given the lower leverage.

To improve profitability, but at some point in the future.

Talia in contracts that start to come up for renewal and there has always been.

Need to keep powder dry to support those efforts.

Can you just kind of walk us out a few years is to sort.

Sort of how youre thinking about cashews.

So effectively from a pure.

Net leverage and the results standpoint, if you want to meet to summarize it is a race against time right. We need to continue to generate incremental cash. So that once that time comes and we have two front that payment we will not be negatively impacted on our.

Leverage trajectory going forward. That's in a nutshell is what is embedded with our plan. The other important aspect is the balanced capital allocation view, meaning that over the five years, we have.

To adhere to our three major pillars invest in the business to continue to steer.

<unk> growth.

De lever our balance sheet to create a more solid and and more resilient.

Structure, and last but not least remunerate our shareholders accordingly.

So in that regard we have initiated our $300 million buyback program very aggressively we have already achieved more than 50% over the first year and a half we still have three years to go. So I think we are in a very well positioned right now to manage our cash.

<unk> accordingly, with some degree of flexibility.

I hope that clarifies.

Yes.

Yes, so if I may just follow up with respect to just a target leverage range. I mean should we expect that you have your longer term sights on more like a two five times level or do you expect to ship right around that three level.

Where would you aspire to be yes. So.

Youre right.

Our plan.

Technically embeds, a low end of the range achievement of two and a half we.

We kept our outlook.

Outlook much larger.

In order to protect for the unknown.

Because we still want to be within the range in any circumstance during the period, but again if our plan continues to work in line with expectations, we should be able to get to the low end of the two and a half by when we get to 2025.

<unk>.

Ultimately what we are targeting is to be in that category of our ratios financial ratios debt.

Our respect and investment grade metrics.

I can't speak for the rating agency, but what I can control is the metric itself and that's what we want to aspire to.

Understood. Thanks, a lot.

You are not there already with some of them.

Thank you.

Our next question comes from the line of.

Gentlemen, sito Chalabi from Ecuador. Please proceed.

Good morning, I have a question on the cost inflation because you are mentioning so.

Flight changes adoption that hopefully can be more.

It's a temporary and can abate during 2023, while we see more structural cost inflation. So if you can comment if you'll see us putting a specific.

The issues on <unk>.

Some markets are some divisions and then just a clarification on your.

Guidance. When you are saying that there is a 100 bps of negative impact on <unk>.

<unk> margin for 2023, So you mentioned you saw higher DNA.

From say investment in installed base that is probably more structural if I understand properly and then youre mentioning also an ongoing restructuring, Italy that can be a pretty more of a one off. So if you can give us some color on the two contribution yes.

Yes, so domenico starting from the second part and in order to help you deconstruct the number so effectively what we see is a 25 plus $25 million on DNA increase year over year. The first 25 comes on the back of their installed base growth.

So is structural as you said the second 25 is associated with these new IP license agreement, we recently concluded.

That will allow us to effectively capitalize expenses and so youll have to capitalize first and then depreciate. The expenses. The first tranche of that depreciation comes into play into 2025, but effectively the second item does not impact all in all the numbers because you have a positive too.

95 million the EBITDA and you have a negative <unk> 25 on the DNA. So net net <unk> stays unaffected.

Yeah.

The restructuring program in Italy is the third leg was a three year program that was launched back in 2021.

So we anticipate the final leg to materialize at the end of the year and Thats the remaining bulk of that number.

Going back to the inflation instead, so I think here as well we have to deconstruct the numbers a little bit because otherwise you would.

Come out with a wrong impression I can tell you that the underlying structural inflation impact for both gaming and lottery in Florida for our business has been around 8% this year.

On top of that in gaming, we had about 20% of one off costs.

Some of those we expect to recede right away in 'twenty three because we have correct course corrected our supply chain structure and the other half is probably going to fade away in the following year. So that's in a nutshell, where we are and what we expect in terms of inflationary impact obviously there is some.

Inflation that will kind of escalate in some of our supply contracts.

Because they have an adjustment in our year based upon the latest.

Measurement, but this is definitely expected.

Covered by our outlook.

And again, we're going to continue to watch very carefully the inflation metrics as they come to fruition month after month and we will have.

Opportunities too.

<unk>.

Eventual negative impact from either.

Looking again at our pricing or finding additional efficiencies in the organization.

And just a follow up a clarification on when you were referring to the headwind from supply chain disruption, where youre, referring so youre, including the general cost inflation that you have seen or more specifically so the issues is aimed at 62 is all in.

So effectively is spot buy.

Last last buy.

Purchase price variance.

Structural bill of material cost increases.

Inbound freight outbound freight all the different components that over the year have affected the cost, but again in a nutshell.

One third is expected to fade in 'twenty three one third is expected to fade out in 'twenty four and the remaining third is probably a structural increase in the cost.

Very clear thank you.

I couldnt detail even more.

Our final question comes from Jimmy <unk> from Jpmorgan. Please proceed.

Hi, Hi, good morning, and congrats on the quarter I just had one follow up.

Question.

Thank you Bob.

Got it.

Thanks, so much.

But I remember in the past.

Good question.

Great.

Hi, Judy.

There's been a slight change.

And maybe you can comment.

Okay.

That would mean, a cheaper cost of capital as well.

Appreciate your thoughts thank you.

Yeah look I think at the end of the day is a matter of where you land on the metrics and if you have an ability to stay in that investment grade metrics.

It's cannot tolerate with it to target investment grade rating.

The truth of the matter is COVID-19 as taught us a lesson.

Yeah.

Low.

Low levered companies are probably better positioned to weather storms unexpected storms than high level company since so.

With that philosophy in mind, the importance of maintaining a tight control and on cost and on cash and target those metrics is.

Definitely.

Supporting our value generation trajectory.

Thank you.

Okay.

I would now like to turn the call over to Vince to dusky for closing remarks.

Well great. Thank you all for joining us today.

As we've summarized 2022 was a was a strong year for us and we had really good momentum across the enterprise.

Reminder, that leverage is at its lowest level ever for the company and we returned record capital to shareholders.

I think importantly over the last three years, we have successfully transformed IGT into a company with higher growth prospects and a better profit profile in 2023, we're starting from a position of strength and we feel we're on a solid path to delivering on our long term goals.

And our first quarter outlook reflects the good trends, we're experiencing for for all of lottery gaming and play digital we appreciate your interest in IGT and we look forward to meeting many of you in the coming weeks and have a great day.

Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.

Please wait the conference will begin.

Okay.

Okay.