International Game Technology PLC (NYSE:IGT) Q2 2023 Earnings Call Transcript

International Game Technology PLC (NYSE:IGT) Q2 2023 Earnings Call Transcript August 1, 2023

International Game Technology PLC beats earnings expectations. Reported EPS is $0.45, expectations were $0.33.

Operator: Hello and welcome to the International Game Technology Q2 2023 Earnings Call. [Operator Instructions] All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, [technical difficulty] I will now turn the conference over to Jim Hurley, Senior Vice President of Investor Relations. Please go ahead.

James Hurley: Thank you for joining us on IGT’s Q2 2023 conference call hosted by Vince Sadusky, our 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. 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’ll find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP 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. And now, I’ll turn the call over to Vince Sadusky.

Vincent Sadusky: Thanks, Jim. Before we begin, I would like to take a moment to honor Fabio Cairoli, who led our Global Lottery business until his untimely death a few weeks ago. Fabio was part of the IGT family for over a decade. He was an outstanding executive distinguished by his passion drive sincerity and commitment to results in innovation. He led an incredible team of world class talent and IGT’s global lottery leadership expanded under his stewardship. Fabio left an indelible mark on IGT and the industry and he will be missed. Turning to the news of the day, our Q2 and first half results reflect solid momentum across all business segments. Reported revenue was up 2% in the first half of the year, but up an impressive 10% when we adjust for the sale of Italy commercial services.

This includes 5% growth for global lottery, a 15% increase for global gaming, and 27% play digital growth. We delivered over $500 million in operating income in the first 6 months. The 24% operating margin achieved in both the second quarter and the first half met the high-end of our outlook fueled by nice margin expansion for each segment. We are at approximately $900 million in EBITDA in the first half, and the EBITDA margin expanded 140 basis points to 42%. Based on the strength of our first half results, we are raising our outlook for the year. We strengthened our global lottery leadership in the year-to-date period with a focused execution of key strategic initiatives. 5% same-store sales growth highlights the vital impact of game on innovation and portfolio optimization on lottery growth.

There’s no better proof than the 9% Italy same-store sales expansion in the first half, a remarkable achievement considering the scale and scope of our Italy lottery business. Sustained success of the new €25 Vinci in Grande game, in addition to the popularity of the €0.50 game is helping to grow the player base and drive a double-digit increase in ticket sales. Draw games were also up on 10eLotto performance and the contribution from new game mechanics such as Gong and the addition of a second draw for million day. Outside of Italy, 4% same-store sales growth reflects low single-digit expansion for instants and draw games and over 20% growth for multi jurisdiction jackpot games. Last quarter, we mentioned the impact that several large jackpots were having on North American same-store sales in April.

Notably North America monthly same-store sales trends improved progressively during the second quarter, and have improved further in July. We bolstered our industry leading contract portfolio over the last few months. We went live in Connecticut as the lotteries new FM provider. In addition, an ITT consortium won an exclusive 20-year concession to operate instants & passive lottery games in the state of Minas Gerais in Brazil. Our reentry into the Brazilian market represents an important foothold in what we hope to be a more significant long-term opportunity, and we continue to make excellent progress in iLottery. Global iLottery sales are up over 70% in the first half reflecting strong trends around the world, especially for eInstants. Compelling new games such as reef Riches, a multi-level progressive jackpot launched in North America during Q2 is building on the sustained success of key franchises like Cleopatra Clusters.

Italy iLottery sales are also benefiting from the WAP upgrades and the synchronized launch of games across digital and land-based channels. We recently executed an eInstant cross licensing agreement with FDJ, operator of France’s National Lottery. The focus is to leverage FDJ’s full suite of eInstant games in Italy, and IGT’s full suite of eInstants in France. We also won an 8-year contract with the Connecticut Lottery in a competitive procurement process to launch its first ever a lottery system to sell Keno and draw-based lottery games. We expect to be live in late fall this year. Turning now to global gaming where momentum in our business continued across all KPIs. This drove strong revenue and profit growth in the first half, up about 15% and 30%, respectively.

We shipped over 16,500 units in the first half, a 15% increase in the prior year, including record levels for the first half period in the U.S and Canada where we maintain the leading ship share. Global ASPs were up 13%. Our focus on multilevel progressive games including popular new titles such as Raise the Sails and Cats Wild Serengeti on the PeakSlant49 cabinet is an important driver of the strong results. There is a growing demand for our DiamondRS cabinet, especially for Legend of the Phoenix and Double Chili Mania, which is among the top ranking games in the new core mechanical real segment. And we bolster to our VLT market leadership with recent contract awards in Western Canada and Alberta. Focused product strategies are also driving improvement in the installed base which was up 9% from the prior year, complemented by higher yields.

Q2 marks the fourth consecutive quarter of sequential installed base growth, including in the U.S. We expect to maintain this momentum with a strong and growing suite of MLP games. Prosperity Link success continues to expand. There are now over 2,500 units in the field and it’s been an important driver of the more than 25% increase in our MLP installed base over the last 2 years. And excitement is building for Mystery of the Lamp on our new PeakCurve 49 cabinet. In fact, Mystery of the Lamp themes secured the top 2 spots for new premium lease games in a recent Eilers survey. The Rest of World installed base is up 19% in the last year fueled by progress in Latin America and EMEA. That’s having a beneficial impact on Rest of World yields, which are up nearly 25% in the same period.

Our IGT ADVANTAGE central casino management system was selected to power the recently opened Santan Mountain Casino in Arizona. It has also gone live at the Potawatomi Casino Hotel Carter and will power the Rio Hotel and Casino in Las Vegas beginning in Q4 this year. In both instances we replaced a competitor system which is a true statement to our powerful expanding suite of system solutions. During the quarter, we announced the new 10-year licensing agreement with Sony, extending our 25-year partnership for the Wheel of Fortune brand through 2034. IGT’s Wheel of Fortune slot is the most successful licensed slot theme of all-time, and this agreement grants us exclusive brand rights across gaming, lottery iLottery and iGaming. Moving to PlayDigital where growth accelerated in Q2.

GGR momentum for PlayDigital’s games is supported by a proven core strategy, affording [ph] top performing land-based games to the digital channel. In fact, our Fortune Coin, Cash Eruption, and Cleopatra games scored the top three spots on EGR North America’s June 2023 U.S slot ranking. PlayDigital has a unique historic spin assortment of progressive jackpot and omni-channel web games. This includes Wheel of Fortune Triple Gold, Gold Spin in New Jersey, the first ever omni-channel WAP game in the United States that launched during the second quarter. IGT is the only company with the true omni-channel WAP offering where multi — multiple games across multiple channels share a common jackpot. We launched our first omni-channel game in the Canadian market 7 years ago with our highly successful Powerbucks franchise, which was recently extended to Alberta along with several other popular mega jackpot games.

It’s an exciting area of incremental opportunity for us, one that is unique to IGT. In the balance of the year, we plan to launch a host of new game features to advance our core iCasino strategy, in addition to introducing a slate of top performing iSoftBet games to the U.S market. We expanded our long-term relationship with Rhode Island Lottery with the recent approval of iGaming in the state. Beginning next year, we will be offering iCasino games in Rhode Island through a joint venture with Bally’s. In addition we extended our sports betting contract with the state for 3 years. We continue to grow our sports betting customer base with our market leading turnkey solution and were recently recognized as Sportsbook Supplier of the Year at the 2023 SBC Awards North America.

IGT has made important strategic progress over the last few years. We reorganized the business by global product responsibility, simplifying our organizational structure and our financial disclosures. We monetized noncore assets at attractive valuations and significantly reduced structural costs. At the same time, we made important investments in growth, especially in the B2B iCasino and iLottery space. Our actions coupled with the strong cash flow generation of the business enabled us to reduce our debt and leverage, greatly improving our credit profile. We’ve also enhanced shareholder returns by establishing the company’s first ever share repurchase program. These changes have transformed IGT into a company with higher growth prospects and a better profit profile.

We convey that at our November 2021 Investor Day when we issued 2025 goals that we believe can create significant value for shareholders. In June, we announced the Board is evaluating potential strategic alternatives for the Global Gaming and PlayDigital segments. While there is no update to offer at this time, the goal is to unlock the full value of IGT’s market leading assets, which we don’t believe is accurately reflected in the share price. We are fortunate to be undertaking this exercise from a position of strength. There is good momentum across lottery, gaming and PlayDigital and a clear path to achieving our 2025 targets for each segment. I’ll turn the call over to Max now, who will provide more insight into Q2 performance and how we’re tracking to those 2025 targets.

Massimiliano Chiara: Thank you, and hello to everyone joining us today. Before I start, I also would like to join Vince in the honoring of Fabio, a close colleague and a friend. Moving to our financial review now. IGT reported very strong second quarter 2023 results this morning, meeting the high-end of expectations for both revenue and profit. Revenue of $1.06 billion increased 3%, driven by strong key performance indicators and player demand trend. Revenue grew 11% when we adjust our results for the sale of the Italy commercial service business last September. Operating income rose 10% to $251 million and adjusted EBITDA increased 8% to $443 million. Net of the commercial service sale, OI and adjusted EBITDA grew 17% and 12%, respectively, driven by solid contributions from Global Lottery, Global Gaming and PlayDigital.

Operating income margin increased 150 basis points to 24%, achieving the high-end of the outlook range on strong margin expansion across segments. As a reminder, reconciliations of operating income to adjusted EBITDA are provided in the press release and appendix of this slide presentation. We deliver diluted earnings per share of $0.23 and an adjusted EPS of $0.45. The year-over-year difference is primarily attributable to a higher quarterly effective tax rate, which is expected to normalize in the back half of the year. Now let’s review the results of each business segments starting with Global Lottery. Revenues declined 4% in the second quarter to $624 million, but increased 8% adjusting for the sale of Italy commercial service. Global same-store sales increased 2%.

Breaking that down geographically, Italy same-store sales rose a nice 8% with continued momentum in both instant ticket and draw games. While North American and Rest of World were relatively flat year-over-year, impacted by lower jackpot activity to the comparable period. Product sales rose 30% primarily from a multi-year lottery central system license in Switzerland. Operating income of $229 million and a 30% OI margin, which improved 120 basis points from the prior year were driven by profit flow through of Italy same-store sales growth, the high margin software license and increased LMA incentives trued up at the conclusion of the lottery fiscal year in June. As I mentioned last quarter, we expect lottery sales and margins in the first half of the year will be stronger than in the back half, giving the normal cadence of the business.

In addition to the very strong jackpot activity we have both in Q3 and Q4 of last year, which we aren’t planning to recur with the same intensity at this time. Although we anticipate the recent positive development of the multistage jackpot in July, we’ll be providing a relevant support to the Q3 dynamics. Switching to gaming, continued demand for IGT innovative products and services generated strong global gaming second quarter results. Revenue rose 13% to $373 million propelled by robust product sales for both unit shipments and systems. Global unit shipments increased 15% year-over-year to almost 8,300 units. U.S and Canada shipments of 6,300 units set a record for a second quarter period on 20% growth [indiscernible] replacement units. Global ASP rose 13% to a record $16,500 with about 60% of the increase due to mix and the remaining 40% related to pricing as well system sales were nearly 3x the prior year level, primarily on the back of new installations executed during the second quarter.

The global installed base grew 9% year-over-year and 2% sequentially with higher unit placement, especially for MLP games across geographies. Sequentially, the U.S and Canada installed base rose nearly 380 units on higher casino placements, while the Rest of World increased about 875 units, primarily driven by growth in the Latin America and EMEA regions. Global yields were relatively stable, maintaining productivity at historically high levels. Operating income for the segment was up 25% to $71 million with OI margins improving 190 basis points to 19%, demonstrating the strong operating leverage of this business and tracking nicely to the 20% plus OI margin expected in the back half of 2023. As many of you know, we undertook meaningful operational initiatives to remove structural costs from the business and made IGT more efficient and profitable with our OPtiMa program.

Specifically for global gaming, we were able to structurally lift its run rate operating profit margin from the low teens in 2019, to the high teens in the first half of 2023, with a goal to get above 20% in the second part of this year. As a result of the underlying structure of progress being made in our product development processes and operations under U.S GAAP, some of these operational initiatives are requiring the capitalization and amortization of costs that were historically being expensed as incurred. For example, enhancements to our approach to software development now requires the capitalization of certain development costs. Additionally, to ensure continuous exclusive access to certain intellectual property, we have engaged with key vendors to enter into multiyear agreements at compelling prices.

These changes mainly impact the global gaming segment, but there are also some impact to PlayDigital. This process changes are more in line with industry practice making us more comparable to peers. The financial impact includes about $30 million to $35 million benefits to operating income in both fiscal year ’23 and fiscal year ’24. The benefit is mostly neutralized by fiscal year ’25, as we expect to achieve a balanced run rate of capitalization net of D&A within the next 2 years, resulting in non-significant impact to the ’25 OI margin target that we set out as our November 2021 Investor Day. Adjusted EBITDA is also expected to benefit by about $18 million plus and about $100 million plus in fiscal year ’23 and ’24, respectively. Conversely to why the EBITDA improvement is structural in nature as D&A cost is not captured in the EBITDA formula.

Moving to Digital. Strong North America GGR trends and the contribution from the iSoftBet acquisition help drive PlayDigital revenue up 38% in the second quarter to $59 million. Organic iCasino growth was driven by the strength of our game portfolio, and a strategic focus to expand on IGT unique omni-channel and wide area progressive gain offerings. Sports Betting revenue rose and continue with expansion of our customer base and organic growth in our established footprint. Operating income increased on strong gross margin expansion and despite higher investments in R&D and talent to support future growth. The Q2 and year-to-date operating margin of 31% and 29% respectively, demonstrate we are making good progress toward a 2025 target of 30% plus.

We generated very strong cash flow in the first half of the year with cash from operations totaling $345 million. This includes the $205 million after tax impact of the final settlement of the DDI/Benson matter. Adjusted for this payment, cash from operations was $550 million. And we generated over $350 million in adjusted free cash flow year-to-date, a very strong result for a half year period. I’d like to point out the definition of free cash flow has been amended to include deferred [ph] license payments, which represent capital invested in game development and are a component of financing activities on the cash flow statement. In addition, the adjusted free cash flow metric adjust for the after tax cash payments associated with material litigations, such as Benson.

Net debt leverage of 3.1x is up slightly on a sequential basis, but is in line with the prior quarter level of 3x if you adjust for the 10 basis point impact of the DDI/Benson payments. Shareholder returns continue with $80 million in cash dividends paid to shareholders on a year-to-date basis. Total liquidity remains solid at $1.8 billion, with unrestricted cash of $500 million and $1.4 billion in additional borrowing capacity from undrawn credit facilities. Given the strong financial performance in the first half of the year, we’re raising the full year 2023 outlook, increasing revenue expectations to $4.2 million to $4.3 billion, reflecting the upper half of the previous range, and operating income margin to approximately 23%, the high-end of the previous range.

Consistent with the expectations communicated during the fourth quarter 2022 earnings call, the full year operating income margin includes about 100 basis point negative impact from higher depreciation associated with returning to more normal investment in the gaming installed base and restructuring charges which are mostly expected in the back half of the year, and which we identified already at the beginning of the year as part of our guidance. And about $25 million in project costs, comprised of [indiscernible] financial statements and other advisory costs associated with the exploration of strategic alternatives for the Global Gaming and PlayDigital business. Those larger project costs should largely be offset by the capitalization benefits I mentioned earlier.

We’re also introducing our outlook for the third quarter where we expect to achieve revenue of around $1 billion and operating income margin of 22% to 23%. As we are cruising towards the [indiscernible] of our long-term plan, we would like to provide now a status update on our long-term targets. In fact, we’re progressing nicely towards the 2025 financial targets outlined at our November 2021 Investor Day. As Vince mentioned, we are laser focused on achieving these targets and driving the shareholder value that should naturally occur with this accomplishment. Several targets have already been achieved over 2 years in advance, and we believe we are on track to successfully meet or beat all of the stated financial goals. The one metric where we are relentlessly working towards is the Global Gaming operating income margin.

We reported 19% Global Gaming OI margin in the first half of 2023, with a 2025 target of 28% to 30%. The approximately 10 points of improvement, roughly split 50-50 between self help items and market driven items. The self help items relate to the easing of the COVID-19 in U.S supply chain challenges, and to additional continued improvements in operating efficiencies we have targeted to reach within the next 2 years. This should add approximately 5 percentage points in our margin again, with a 50-50 split from each of the two actions. The market driven items relate to favorable mix and pricing in North America, providing another 2 percentage points of margin uplift at full execution and to a full recovery in international markets contributing about 3 percentage points in the margin.

In addition, all other items representing high operating expense absorption meaning the amount of SG&A and R&D costs that get absorbed by operating leverage, offset by other items could be a swing factor of plus minus 1 percentage point, bridging the rest of the gap to the targeted margin range. As you can see, a large chunk of these improvements are self help related, and this gives us good comfort that we are on a feasible and realistic path to get to a margin target by 2025. In summary, very strong first half 2023 performance has allowed us to confidently raise our full year 2023 revenue and operating margin outlook. We have a solid foundation to build from as we continue to invest in our growth objectives, further reduce debt and return capital to shareholders.

I will now [technical difficulty].

James Hurley: Operator, we’re ready for questions.

Q&A Session

Q – Barry Jonas: Hey guys. To start, I just wanted to send my condolences for Fabio. So maybe wanted to start with Gaming. Just curious, if there’s been any change in visibility since Q1. Many gaming operators seem to be dealing with tougher comps in the U.S at least, curious if that influences purchasing behavior at all.

Vincent Sadusky: Thanks, Barry. Thanks for the comments. So when it comes to Gaming, I think it’s the demand for slot machine games continues to be strong. And in addition to the market remaining robust, I think our teams have done a really outstanding job over the last several years of maximizing the return on our R&D spend, and creating games that are very popular and very well received. We’re very excited, of course, at performance of Prosperity Link to have that number of games in the market so quickly with further demand throughout the rest of the year is truly terrific. That’s really a blockbuster game. And what we’re equally as excited about is that Mystery of the Lamp game themes that we mentioned, these games have been in development by — our top ranked teams had also helped to bring us Prosperity Link.

And having those ranks so high in test bank has created demand for those games prior to the launch. So I think that that’s really exciting. The marriage of software and hardware is critically important in our industry, and to have the PeakCurve 49 ranked as the #1 new premium video real cabinet, as well is pretty exciting. So we think there are real good reasons to remain optimistic about the potential to sell and lease games into the market. And in general in the second quarter, I think that — the slot GGR held up well. I think we all knew at some point, the high growth levels would plateau with moderate, but we’re coming off of records. And I think the fact that the play levels in yields are holding up is pretty, pretty impressive. And one, anecdote as well, I know there’s a lot of data points around the various regions, and it’s hard to kind of absorb it all.

But, of course, Las Vegas Strip GGR is a great barometer of the health of the industry. And I know June’s results just came out last week, and even though GGR was down a little bit, I think it was down like 1% or less than 1%. But slot GGR was up around 4% as well. So I think the slot market remains really strong. I think the cash flow of our customers, of our casino operators remains at record high levels. And I think, as a result, they continue to invest in their facilities. And that’s resulted, I think, in a sales funnel as we look out to the third quarter as pretty — pretty good, pretty strong. So we do feel good about the opportunity. And as a result of mix and also some sales price increases to help pay for all this R&D and all this new great gear that we’re releasing, we’ve that’s continues to — we continue to experience increases as well.

So I think that’s all points really, really well. If there’s any weakness for us, it’s been — we’ve seen it in the international markets. And that has more to do, for sure, with our own macroeconomic issues not rebounding as quickly as North America. We’ve seen EMEA continues to perform below pre-pandemic levels. I think in Latin America, there continue to be macro issues, high inflation, et cetera. But we view those as delayed recovery. And at some point those markets certainly will turn the corner. And I think that creates the potential for growth in future quarters internationally. But for now, we feel very good about what we’re seeing in demand in — primarily in North America.

Barry Jonas: Great. And then — look, I know you’re probably limited in terms of what you can say about the strategic alternatives process, but I guess I’ll just throw out there, if there’s anything you can comment about the process, about the interest level, and maybe just how you sort of weigh the synergies between the three business units versus the case or the market, not appreciating the true value of each.

Vincent Sadusky: Yes. In terms of just doing the math around not appreciating the true value, I think that there’s a limited subset of public companies in the supplier space, fewer in the lottery space. Quite a few in the digital space. And I think if you — I think we’ve tried to over the last several years, draw a perimeter around the three businesses and clearly delineate — and disclose the performance of those. So I think it’s — we’re clearly convinced that when you measure us up against the average, or you take another measure, just simply take cash flow yield up against other industries, I think, a similar risk factor and credit profile. We’re convinced that we’re behind. So we covered all that off back in June when we announced, we’re — ourselves and the Board have decided to move ahead with evaluating strategic alternatives.

Not much we can say, of course, until we have something to say, but we are fully engaged in the process. We’ve got a team. That’s been very busy. And, again, we’re — we feel very strongly about the performance of our three businesses, as evidenced again by another strong quarter. I think the only comment, I would say around the assets that we’ve mentioned in the past, is we think Gaming and PlayDigital, there’s a lot of synergies and those businesses belong together. And are in terms of synergies between Lottery and Gaming, not that many. So easy — I think an easy — fairly easy separation.

Operator: Thank you. Your next question comes from line of David Katz of Jefferies. Please go ahead.

David Katz: Hi, good morning. If I may, just anything with respect to the timing on this process, and how we might think about this if we’re back here 90 days from now where we might be? And then second, with respect to the Gaming business, there are specific aspects, or lines where you’re having some strength of momentum, some others a bit less. So can you just update us on any sort of forthcoming with GTV [ph] coming up, what we might look for in terms of how those lines may continue, or shift or change your mix? Thank you.

Vincent Sadusky: Yes, sure thing, David. No real comment on the timing of when we’ll have something to publicly disclose on our strategic alternative review process. With regard to Gaming, I’d say, the second quarter performance we are pleased with that the KPIs were really strong. I’ll remind everyone for the first half of the year, we had record North American shipments. We’ve shipped more units and the company’s ever shipped before. In North America, we also had record ASPs, both in North America and we had record global ASPs as well. Again, I think, as I mentioned, the second quarter of this year was another consecutive quarter of sequential installed base growth. I think it was up around 9% or so. And we had quite a few systems wins as well, which I think demonstrates the superiority of our product.

And we think we’ve got continued opportunity to grow our installed base both in North America and the rest of the world. I think yields for our machines based on their performance are close to records. And I also think that the sales that we’ve experienced in North America is a true reflection of the popularity of the games. When you think about the game categories, I would say it’s the strongest the company has been in a long time, maybe ever. As we take a look at things like the PeakBarTop with our award winning poker games, there’s a very strong demand. For those, that game doesn’t get refreshed very often, It was a multiyear project to make a game that was really a very popular game better. There’s good demand for that. I think with our DiamondRS cabinet, we’re in a similar situation, a classic stepper game that was very popular.

Years and years of research went into how do you not negatively impact the players joy associated with that game, but you have come up with refresh game themes and a refresh cabinet. We find that that’s very good demand. And in fact, yields are higher on the new cabinets than the old cabinets, enough so that if you’re a casino operator, you’d like to experience some of that yield increase. And then of course, in the multilevel progressive space is where we’ve — I think we’ve had some success, where historically the company hasn’t had a lot of success. And we are excited about some of the new titles coming out. In addition to the games I mentioned, Raise the Sails, for example, and Cats Wild Serengeti have performed very well in test bank and we’ve got good demand in the marketplace.

So I think those are when you think about all of our product categories. We’re performing really well. Again, I think, best we’ve done in a long time, maybe ever in or at least in recent memory in all these categories. I’d say the area of weakness is around international. And again, I don’t think we don’t believe that has much to do with popularity of the games as it does with a macro. And I think you’ve seen that, at least last quarter with some of our competitors, our public competitors reporting, as well. And again, we view that as an opportunity. We think that’s got opportunity going forward as at some point those economies will improve. But nonetheless, we have still increased our installed base internationally. And we do a lot and we take a lot of that — its our ability to overcome the macro with the popularity of our games right now.

David Katz: Perfect. Thank you very much.

Operator: Thank you. [Operator Instructions] Your next question comes from the line of Chad Beynon of — excuse me, Macquarie. Please go ahead.

Chad Beynon: Thank you. Thanks for the question. Condolences for Fabio as well. Max, Vince, good morning. I wanted to ask about your guidance. Obviously, you’re raising the guidance for the year. I think last quarter, you talked about some macro conservatism in the back half. So on the Q2 beat, are you still assuming some macro slowdown? Vince, you’ve touched on some international markets that just haven’t come back. But I’m just wondering if your change towards the back half has really changed, or your view towards the back half has really changed, or if this is just kind of a carry through with the Q2 results. Thanks.

Massimiliano Chiara: Hi, Chad. Can you hear me? It’s Max here.

Chad Beynon: Yes, perfect. Thanks, Max.

Massimiliano Chiara: Okay, very good. So as you know from when we first came out with the guidance for ’23, we maintain a level of conservative as we were kind of looking around what expectations were from a macroeconomic standpoint. At this point, I mean, with half of the year past and pretty decent environment around us, at least for the upcoming quarter, we grow more confident that at least for 2023, particularly the North American market could continue to close nicely and really avoid that significant slowdown that was at times anticipated. So again, we were growing more confidence for ’23 and if there is any further slowdown coming early next year, I think we got time to adjust for that in the second half of the year.

Chad Beynon: Okay, perfect. Appreciate that. And then just a broader question on Lottery. It’s been about a year since one of your lottery competitors was sold, and you’ve announced a number of things on the iLottery side, on the FDJ, cross licensing, Brazil et cetera. Has there been any change from a competitive standpoint in terms of pricing or anything else? Or is it kind of steady as she goes in terms of running the business getting new deals and new partners? Thank you.

Vincent Sadusky: Yes, I don’t believe so. I think the one of the amazing competitive advantages of IGT is its truly global footprint, and the competitiveness of its products and services and its long standing reputation in the industry. And I think the company is very flexible in its approach to winning business. So, for example, in Connecticut, that was a competitive situation and we won that business from a competitor. I think a lot of that has to do with our reputation and our historical performance. In Minas, for example, that is a consortium of a local company as well as scientific games and IGT decided to come together in a venture that we thought could best service that that particular customer. So I think the company has great flexibility and we do not see an increase in competition.

I think it’s — when you think about the business, it’s a relatively small industry. When you add up worldwide revenues associated with lottery B2B providers and I think that in the past we’ve talked about this, there have been some efforts by certain companies looking to expand their footprint wanting to get international, compete in North America and they have been overly aggressive in bidding for business. And so in many cases, where they’ve won business, they’ve actually not had a profitable operation. So I think those experiments have been tried, many, many times over many, many years. And I think there’s a — we have confidence that that’s not sustainable and doesn’t make sense. But I think in terms of overall competition, we don’t see a perceive [ph] in increase.

Chad Beynon: Thank you. Your next question comes from the line of Jeff Stantial of Stifel. Please go ahead.

Jeff Stantial: Great, thanks. Good morning, everyone. First off, I just want to echo some of my peers and offer my condolences to everyone on this call and IGT for your loss. For my first question, starting off on the Global Gaming business, specifically game ops, fourth consecutive quarter of sequential growth in the installed base in North America, can you just expand on the growth drivers here a bit more. And specifically, what I mean by that is how much of this net growth relates to some of those strategic or those bulk removals starting to taper off versus how much of it reflects more of, we’ll call it the growth side of the equation. And then it would seem that growth has been a function of both market wide growth as well as share gains more recently. So just curious to get your perspective on the sustainability of the outlook for I guess each of those trends individually. Thanks.

Vincent Sadusky: Yes, I would say it’s all of the above, right. It’s the — I think the key is the [indiscernible] works out, which means we must be gaining share — foot share of floor, which is of course great. I think one of the areas where the company has historically not done as well as it would have liked to as in the MLP space. And that has been the highest growing part of the casinos slot machine footprint over the years. And the great news is that we experienced a 25% increase in our MLP installed base over the last several years. So clearly, that the new games have had an impact. I think we’ve got around 2,500 Prosperity Link units, our most popular MLP in the market right now. And again, we see continued demand based upon the superior performance.

I think renewing our wheel of fortune franchise was very important again, that is the greatest slot, arguably the greatest and most recognized slot machine title in the industry. And we’ve developed many, many games off of that theme and that continues to belong with Megabucks drive our top performing web games in the market as well. So, we’ve seen both a sequential and a year-over-year increase in North America and worldwide. And I think that’s really driven by game performance, creating a good amount of demand. Internationally, most of that has come from Latin America where the game has continued to do really well. And in this business, of course, it’s all about performance in order to be able to improve your installed base. And we’ve been able to do very well on performance.

I mean, for example, our Mystery of the Lamp game is doing almost 3x house average. So we’re very excited for that launch. That’s an incredible — incredible statistic. So we think we’ve got it. We’ve got the opportunity for to continue to increase our installed base in North America with these new games, and we think we’ll continue to get increases in the Rest of the World installed base primarily, again, continued expansion of Latin America, despite some of the challenges that we’ve seen internationally in the macro.

Jeff Stantial: Great. That’s really helpful. Thanks, Vince. And then for my follow-up, Max, Vince, whoever wants to take this, can you just help frame for us the potential upside here from some of the recent jackpot activity or sort of how it’s piecing thus far recognizing that it’s still escalating? And then, just to be clear, Max, is this fully factored into the Q3 and the full year ’23 guidance or partially factored? Or just how should we think about that? Thanks.

Massimiliano Chiara: Yes, look, Jeff, it’s factored through what we know today, right. But having said that, I think there is one important factor that we all need to take into consideration as interest rates have continued to increase over the last 12 months by more than 250 bps, the same level of advertised jackpot does not generate an identical level of lottery sales. So we believe there is upside. We probably would contain the upside between 5 million and 10 million at this point. And because of that higher weight of the annuity factors that obviously has to be taken into account when determining the level of the jackpot.

Operator: Thank you. [Operator Instructions] Your next question comes from the line of Domenico Ghilotti of Equita. Please go ahead.

Domenico Ghilotti: Good morning. Few question. I would start with the talent [ph] lottery performance that’s been, once again, quite impressive and particularly instant tickets. So if you can give us a sense of, say, of the sustainability, the current performance, also do you expect any kind of moderation in the growth? I’ve seen that also any additional many other verticals in a gaming and betting had been quite strong. So I’m surprised to see the performance of the Italian market in general, and I wonder if it is really sustainable. Second question, if you can give us some call in terms of timing and opportunity related to Brazil, still related to the lottery [indiscernible]. And then just a clarification on the capitalization topic. If I understood properly we will see so the EBITDA structural improvement and then a temporary improvement in EBIT and then higher CapEx going forward because of this capitalization. So just to check.

Vincent Sadusky: Okay. Domenico, I’ll take the first couple of questions on lottery focused on Italy, and particular in Brazil and let Max touch base on capitalization and EBITDA impact. Yes, so there was — I think last year we saw a decline in Italy, as anticipated given the spectacular results during the COVID period, and of course, the closure of the gaming halls and it really being the only gaming opportunity, the only betting opportunity. Throughout the course of the year, we did a lot of work to identify how we could potentially not simply rely on the return of the Italian player back to their old habits, but also tried to stimulate some demand. And I think the team did a really wonderful job of new product launches, both on kind of the higher dollar euro ticket as well as kind of the lower denomination, adding some more draws to the draw game.

And the results have really, really shown themselves and very strong performance in the first half of the year. I think one of the things that’s really, really exciting is, from pre-pandemic times, we think we estimate there’s been about a million new players added in Italy, which is really exciting that the games are appealing to an expanded player base that people have found the lottery games during COVID, enjoyed them and continued to play them. And we don’t have — we never have great visibility lottery. But so far, in July, Italy same-store sales are up roughly mid single-digit. So we see the increase over the prior year continuing into the third quarter. With regard to Brazil, the Brazilian market is one of the untapped, potentially significant markets in the world, it’s clearly underdeveloped.

And there’s been a lot of false starts historically in Brazil. But we do believe given Brazil’s economic situation, the need for tax revenue and the fact that a lot of people are betting inside of Brazil, and they’ve done so for decades anyway, we think potentially now is the — is the right opportunity, the right regulatory framework, and that there is potentially opportunity there. This opportunity in Minas, one of the larger states in Brazil, we think is a great way for IGT and its partners to establish a venture, begin doing business there. And I think that this potentially create an opportunity for us to plant our flag in the sand. And we hope that this is the start of creating a very effective joint venture, administering a lottery that that does all the things that we’ve historically done that works, that is regulatory compliant, that meets the demand and the needs of the market and ultimately leads to us having a good competitive opportunity as more states become available and decide to also follow in what Minas has done.

And Max, I’ll let you take the EBITDA question.

Massimiliano Chiara: Yes, thank you, Vince. So, Domenico, you got the mechanics, right. So we expect a slight improvement in the OI margin in gaming between ’23 and ’24, or between 1 to 2 points, which is on top of what we anticipated already in terms of performance improvement at the beginning of the year, as we have evolved the capitalization avenue during the course of ’23. And by 2025 that impact should probably go back net to zero so that the target margins is kind of fully added with a performance improvement. Obviously, the EBITDA margin improvement is structural and is offset by an equivalent amount of CapEx. So EBITDA less CapEx equals zero in terms of capitalization impact.

Operator: Thank you. And your last question comes from the line of Joe Stauff of SIG. Please go ahead.

Joseph Stauff: Good morning, Vince, Max. Two questions, please. I did want to ask Max, if there’s any way you can give us the tax basis for the gaming segment, in particular? And then I had a — just a follow-up question on lottery competitive environment.

Massimiliano Chiara: Yes, so on the tax basis, we don’t want to jump the gun here. So we have — we would like to see how the process unfolds, which direction is going to take and at the appropriate time we will provide the adequate disclosures, because obviously it depends on what kind of transactions we are going to execute on this strategic alternative. So I would stop at this for now. And we’ll provide more insight when we feel ready.

Joseph Stauff: Okay, understood. Vince, I wanted to follow-up just on I believe Chad’s earlier question, just on the competitive environment with respect to lottery. I guess it’s certainly easier for us to keep much closer tabs in terms of the United States. But it does seem say the international market is heating up, and just in terms of competition, whether it be kind of the all win dislodging U.K incumbent or Flutter now owning one of the Italian licenses or even FDJ, I was wondering if you could maybe just give us a kind of a reassessment of your views of the competitive market for lottery?

Vincent Sadusky: Sure. Yes, I mean, as you know, the composition, the commercial opportunity for B2B providers, such as IGT, varies pretty significantly from jurisdiction to jurisdiction, whereas the U.S market is largely a facilities management market, one that as you mentioned, we’re all very familiar with. Internationally, it’s largely a product sale environment. And oftentimes consortium, whereby the system provider is the most significant opportunity for IGT. So for example, when we think about the U.K., that is Camelot has the relationship or had the relationship with the U.K Lottery Commission. And we are — you can think of us really as a subcontractor, that we were selected by Camelot decades ago based upon their assessment of our capabilities, and we participated in the consortium.

This latest rounds were Camelot did not win. I think our evaluation was they had the best opportunity to remain the incumbent. And so we agreed to continue to be the system provider with that bidding consortium, and obviously that did not play out in that way. With regard to FDJ, I’d say, that entity for sure has historically been a kind of a one country entity hasn’t — doesn’t manufacture product to sell product into other markets, or a lot of the functionality that IGT provides on a B2B basis. But they — have a stated goal of trying to participate in more lotteries around the world, and the opportunity to be the provider, there’s not that many of them, again, given the uniqueness of the international markets. But Camelot, we believe, is a unique situation in that they ultimately — once they did not win, the renewal, the tender for the U.K., they struck a deal to sell their operations to all win.

And then they made their decision that they were no longer going to operate the lottery in Ireland and decided to sell, put that up for bid as well. So, in my mind, that’s a very different scenario from having capabilities to be able to launch into a market like Brazil, for example. That was simply buying an existing contract, writing a check to buy something versus winning, winning the business. And it’s a different way to, I think, approach the business. Everyone will make their own conclusions around the price that was paid for that business, and the capabilities of potential — improvements to the business. But that was clearly their decision and we view that very different. But I’d say, with regard to our overall competition and the competitiveness, the competitive set, we don’t believe much as has changed in the international market as well as the North American market.

Operator: Thank you. There are no further questions at this time. I would now like to turn the call over to Vince Sadusky for closing comments.

Vincent Sadusky: Okay, great. Well, thank you all for joining us today. We think our year-to-year results, along with the improved outlook for the full year period reflect really solid momentum across all of our business segments. We are executing our key strategic initiatives, have a solidly on track to deliver on our 2025 objectives. And we remain focused on unlocking the intrinsic value of IGT’s market leading business. As always, we appreciate your interest in the company. Have a great day, and I hope you all enjoy the rest of the summer.

Operator: This concludes today’s conference call. You may now disconnect.