Jim Hurley - Investor Relations Marco Sala - Chief Executive Officer Alberto Fornaro - Chief Financial Officer.

Barry Jonas - Bank of America Chad Beynon - Macquarie Domenico Ghilotti - Equita Danny Valoy - Deutsche Bank Joe Stauff - Susuehanna Federico Rossini - Nomura.

Good day, ladies and gentlemen and welcome to the IGT Third Quarter 2017 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jim Hurley, Investor Relations. Sir, you may begin..

Thank you and good morning. Thanks for joining us on IGT’s third quarter 2017 conference call, which is hosted by Marco Sala, our Chief Executive Officer and Alberto Fornaro, our Chief Financial Officer. After some prepared remarks, we will open the call for your questions.

Our speakers are in different locations today, so we are trusting that the technology will work without a glitch. During today’s call, we will be making some forward-looking statements within the meaning of Federal Securities laws.

Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our SEC filings.

Now, I will turn the call over to Marco Sala..

Thank you, Jim and welcome everyone. The strong third quarter results we are reporting today showcased the scope and diversity of our business. Lottery performance was especially good in North America and for our largest games in Italy. Global gaming revenues were above the prior year when adjusted for the DoubleDown disposal.

We benefited from significant growth in product sales led by systems and software for both gaming and lottery. Adjusted EBITDA was in line with prior year period, which included contributions from DoubleDown and significant late numbers activity in Italy.

Excluding those items, adjusted EBITDA was nicely above the prior year’s level, thanks a high margin produce sales and disciplined expense management. Lottery same-store revenues expansion was very good in the third quarter driving 9.4% in North America on above average growth for draw games and instant tickets as well for multi-state jackpots.

During the period, we secured a 7-year expansion for our facilities management contract with the California lottery, one of our largest and most important customers. We will recall we had similar success with two other large customers, Texas and Georgia last year.

These strategic expansions of secure predictable revenue and cash flow streams and improve visibility into our earnings for years to come. I am also very pleased with the results of the 10eLotto game in Italy which continues to perform at high level with ranges up over 15% from the prior year.

Scratch & Win wagers achieved their strongest increase in over 2 years rising 5% in the quarter. In addition, some lottery game innovations have been introduced. In October, we launched Doppio Numero ORO, an evolution of the popular Numero ORO game and an extension of the successful 10eLotto franchise.

Initial player acceptance has been strong – sorry....

Bear with us one moment while we resolve a technical issue..

Sorry for that. Initial player acceptance has been very positive and we expect this to be an important driver of the future lotto performance. We had strong product sales for both our lottery and gaming business in the period.

The nearly 20% increase was mostly related to a mix of central system of our VLTs and commercial casino customers and software-related game content. Recently, we were awarded the central casino management system for some major new casino projects, including Resorts World Catskills and MGM Cotai in Macau.

We shipped over 6,400 gaming machine units worldwide in the third quarter, mostly replacement. Total unit shipments were below the prior year, which included a significant new and expansion casino activity and substantial VLT replacement shipment.

Looking exclusively at our North American commercial casino customers, our total replacement unit shipments were up double-digit in the third quarter. This was supported by demand for new video reel games, especially on the CrystalCurve cabinet. Year-to-date, we have doubled the number of video units shipped.

We expect the North America commercial casino demand for video reel games to remain strong in the fourth quarter. This is based on favorable customer response at G2E and the improved availability of games. These are important signs of progress, a direct result of our investment in new hardware and more rigorous R&D process.

Our global installed base of gaming machines was up nearly 6% year-to-year, reflecting international growth in casino games and VLTs. In North America, we experienced a sequential decline in the casino installed base, almost entirely due to units converted to sale in the period.

As you know, we expect to see improved trends in the North America installed base as we bring our most important new titles to market in the fourth quarter. We began rolling out the Fort Knox and MultiLink progressive games on the CrystalCurve in October.

SPHINX 4D installations begin this month, with the first installation completed at the Seminole Hard Rock Casino in Tampa yesterday. And The Voice on the CrystalCurve ULTRA cabinet is scheduled for December. We recently participated in the leading North American lottery and gaming tradeshows, and I’d like to share some key takeaways.

At NASPL, our Aurora system platform remained a highlight as was our suite of mobile and cashless solution that help our customer address retail modernization, which is one of the lottery industry’s top priorities. Recently, our PlaySpot mobile solution went live in Rhode Island. We will also be rolling out a PlaySpot in New York and Virginia.

Customer interest is high as PlaySpot helps them to introduce mobile, expand into non-traditional retail environments and reach new players. At G2E, we showcased our comprehensive lineup of new cabinets, supported by new and exciting content that is progressively coming to market this year.

We focused a lot of our attention on the video reel offerings, where we have made a significant progress. Most importantly, our market readiness was evident. We launched a big portfolio of new games. Most of the games have already been through our test bank process and are ready to be shipped.

This is a real advantage and distinction for us that customers appreciated. We continue to solidify our position as leading casino industry innovator. Building on the excitement for 4D, we extended it to Wheel of Fortune franchise.

By combining the most successful slot title of all time with the most innovative technology, we are writing another chapter in the success story of Wheel of Fortune. And to underscore the excitement about 4D, SPHINX 4D was honored as the land-based gaming innovation of the year. Our 3D library also continues to gain momentum.

Customer interest in 3D and 4D gives us confidence that the casino industry has a strong appetite for new and innovative products. Our systems and interactive offerings were another show highlight. I think we very effectively demonstrated our omni-channel view of the future of gaming.

PlaySpot, Cardless Connect, Resort Wallet and Mobile Responders are cornerstones of this work. We are fully operational now and interest is high and growing. In fact, Station Casinos will be introducing our Cardless Connect mobile technology at several Las Vegas properties by the end of the year, as will Resorts World Catskills.

We are positioning ourselves well for the future. In securing the remaining of our largest and most important lottery contracts, we have increased the long-term visibility we have on a significant portion of our future sales and profit streams and improved North American trends are beginning to materialize. Now, I will turn the call over to Alberto..

Thank you, Marco and hello to everyone on the call today. A summary of our third quarter financial results is presented on Slide 9. Constant currency revenue decreased 6% from the third quarter of 2016. Adjusting for the DoubleDown disposal and the amortization of the lotto upfront fee, it was a good quarter with revenue up 2% at constant currency.

In addition, I remind you that in the third quarter last year, we recorded a $30 million incentive from the New Jersey Lottery. The New Jersey incentive we earned this year was mostly recognized in the second quarter. If we consider this as well, revenue would have been up 4% over the prior year.

Results were driven by strong global lottery performance and higher product sales from system and software in both gaming and lottery. Adjusted EBITDA was roughly in line with the prior year. Excluding DoubleDown contribution last year, adjusted EBITDA was up 2% at constant currency.

We were able to offset the timing of the significant New Jersey incentive and higher late number activity in Italy in the prior year with higher product sales and lower operating expense. Adjusted EPS includes increased distribution to minority partner.

The adjusted figure do not reflect the $714 million non-cash impairment charge that was recorded in the quarter, which reduced the carrying amount of goodwill in our North American Gaming & Interactive segment.

As you know, we have been working to stabilize the North American business, the gaming business, in the context of very highly competitive and low growth industry backdrop.

We have made good progress in putting the right talent and product development process in place, but the turnaround is taking longer than initially expected and the impairment charge reflects this. However, as Marco mentioned earlier, we expect transfer product sales and installed base to improve as we bring our new games and cabinets to the market.

We are beginning to see sign of that improvement now. Let’s now look at our operating segments. Beginning with North America Gaming & Interactive on Slide 10. You can see the DoubleDown sales had a significant impact on the year-over-year comparison.

Adjusting for DoubleDown, it was a strong quarter for North America Gaming & Interactive segment, with total revenue up 4% over the prior year and operating income growing double-digits mainly on higher software and systems sales in addition to lower operating expenses.

Gaming service revenue from terminals was down primarily on a lower installed base. The sequential decline you see in the installed base include approximately 600 units converted to sale in the third quarter, mostly in Maryland.

Gaming product revenues benefited from a large high-margin software sales in Oregon and multiple advantage system installation. We shipped 3,597 gaming machines in the third quarter compared to 5,238 units a year ago.

Last year, shipments included several large replacement VLT sales as well as considerably higher new and expansion units, particularly at MGM National Harbor, although the revenue for those units was recognized in the fourth quarter of 2016.

Overall, ASP were higher and our casino replacement sales were up on growing customer demand for new cabinets and game. Our North America lottery results are on Slide 11. Total revenue was in line with prior year despite the difference in timing of the New Jersey Lotto incentive.

Adjusted for the timing of the incentive, revenue and operating income were up 9% and 28%, respectively, on high profit flow-through of strong same-store revenue growth. Same-store revenue rose an impressive 9% in the quarter on top of solid mid-single-digit expansion in the prior year.

Instant ticket and draw-based games grew over 6%, with broad-based strength, particularly from our larger customers in Texas, New York and California.

Multistate games benefited from a large Powerball jackpot that reached $758 million in late August, driving 26% same-store sales growth on top of last year’s 41% increase, which had 2 good-sized jackpot. Product sales were significantly above the prior year on larger sales in Oregon, California and Massachusetts.

Turning to our International segment on Slide 12. You can see we achieved strong revenue growth, up 8% at constant currency over the prior year. Gaming service revenue was the largest driver of third quarter growth.

Operationally, we saw a positive contribution from a higher installed base, which now includes roughly 2,000 video bingo machine from a recent tuck-in acquisition.

We also benefited from nonrecurring items in the quarter, including an adjustment to jackpot reserves in our interactive operation, which represents about half of the increase in gaming service revenue. Lottery service revenue was in line with the prior year as a higher effective rate was offset by a modest same-store revenue decline.

Encouragingly, we are seeing signs of stabilization in the U.K. lottery. Product revenue increase in the third quarter was driven by the VLT Central Systems sales in Greece and strong lottery terminal sales in Argentina. We shipped 2,809 gaming machine units in the period compared to 3,742 in the prior year.

Year-to-date, international gaming machine shipments are in line with the prior year. International operating income was up 7% at constant currency. Higher revenues and disciplined cost management were partially offset by product mix. Our Italy results are on Slide 13.

Consistent with the last 2 quarters, amortization of the upfront lotto fee has the biggest impact on reported figures. Adjusting for that, Italy results were very good.

Revenue and operating income were essentially stable year-over-year at constant currency, demonstrating strong underlying profit improvement that offset lower Late Number activity and higher gaming machine taxes. Excluding the Late Numbers, lotto wager increased 7%, driven by double-digit 10 a Lotto growth.

Scratch & Win wagers grew 5%, the highest amount in over 2 years, on demand for multiplayer tickets and the Miliardario franchise fee. The drop in Machine Gaming revenue was entirely due to the impact of the new gaming machine taxes, although this was partially offset by 2% growth in VLT wagers.

Sports betting revenue was up on double-digit wager growth despite higher payout. On Slide 14, you can see net debt was $7.3 billion at the end of the third quarter, more than $200 million lower at the end of 2016. This is despite the final lotto concession payment and $400 million of negative FX impact.

Our perspective, net debt is aligned with our regional outlook using a euro-dollar exchange rate of $1.10. The leverage ratio you see here reflects net debt end of September and euro-dollar exchange rates of $1.18 while last 12 months EBITDA incorporates a lower blended euro-dollar exchange rate of approximately $1.11.

Our year-to-date cash flow dynamics are on Slide 15. So far, we have generated $600 million in cash from operation, and this is after $557 million in cash tax and interest paid. Capital expenditures are trending in line with our expectation. And you can also see the Double Down proceeds were used to pay down debt.

Our outlook for the year is summarized on Slide 16. Based on year-to-date results and current exchange rate, we expect to achieve adjusted EBITDA of $1,640,000,000 to $1,680,000,000. Net debt will likely end the year around the third quarter level, and our outlook for capital expenditure is unchanged.

At this point, we would like to open the call for your questions. Operator, could you please proceed with the instruction..

[Operator Instructions] Our first question comes from Barry Jonas with Bank of America. You may begin..

Hi good morning guys or good afternoon. Just a couple of questions. First, North American gaming product sales, they came in stronger than we were thinking.

Did some of that growth you were guiding did some of the strong growth you were guiding in Q4 just move to Q3? Or was the customer response to your newer cabinets just stronger than you had expected?.

Good morning Barry, we had a good quarter for our product sales. That was driven by system and software. And we know that those sales can actually be lumpy. But in this respect, we have a global pipeline of important Central System installation in the next several months.

Regarding gaming machines unit, the third quarter comparison in North America reflects significantly lower new and expansion and VLT replacement activity, which can be highly variable.

But we are making good progress on casino replacement unit sales, which were up strongly on the asset console of our new video reel product, where we have focused much of our attention. And we expect further improvement in casino replacement unit sales in the fourth quarter, resulting in what we believe will be a growth for the full year..

Great. And then just a question on margins, they came in nicely ahead of where we had modeled. Both SG&A and R&D appear to be trending down.

Can you maybe just talk a little bit about how we should think about the cost structure going forward?.

Barry, this is Alberto here. We have taken some action during this year regarding, in particular, SG&A, and so you can see reflected here part of this action. As part of our normal program, we control costs and, obviously, we monitor, and when it is needed, we make some adjustments. Regarding R&D, most of the programs are still in place.

Probably, there, the reduction is relatively smaller than SG&A. But even there, there is a small improvement. And as we have said in the past, this is an area that we will look in the future to understand what the optimal size for the R&D expenses is..

Great. And then last one for me.

Can you just spend a minute, talk about the Italian Scratch & Win renewal? Maybe just reiterate timing any potential changes to the structure and any potential incremental CapEx?.

The current terms, as you all know, runs through September ‘19. As part of the decrease setting out the upcoming budget package, the Italian government has chosen the option of renewing the concession under the existing terms and with the current operator.

The terms of the renewal are €800 million upfront concession payment, which the decree proposes €50 million in this year and the balance in 2018 with a 3.9% fee on wages, and the existing joint venture structure would remain in place. Now the next step is for the senate to review and to adopt the decree, which we expect in the coming days.

After that, it will be the turn of the Chamber of Deputies, and the matter should be settled by mid-December at latest. We do not anticipate a huge CapEx on this business..

Great. Thanks so much, guys..

Thank you, Barry..

Thank you. Our next question comes from Chad Beynon with Macquarie. You may begin..

Hi, good morning. Thanks for taking my question. Wanted to switch gears to North American lottery, which you noted in the quarter grew 9% on same-store basis.

And in the prepared remarks, you called out Texas and New York and California, some of the bigger population and kind of wealth states moving the needle there, and I know some of the bigger states had lower consumption per caps kind of heading into the year.

Wondering if you could provide some color if you are starting to see this trend improved and if maybe this is something that we could expect over the next couple of years, if you are able to pull up some of these bigger, lower consumption per cap states, just getting them in the right direction? Thank you..

Chad, in general, we do not link as we probably even discussed sometime in the past we don’t link the demand for lottery to economic trends. But more importantly, we have seen in the past that the demand respond to changes in the offer, games that are more interesting and so on.

I would probably say that in the first half, the trend that we experienced, especially if we compare to the first half of 2016, where there is a larger jackpot, they were good, there was growth. But definitely, there was there were not big jackpots and so on.

So I think that when you look at the entire 9 months, growth rate for the lottery is more or less what we normally expect for lottery, just we had the first 6 months a little bit weaker and a quarter now that is pretty strong..

Yes. If I can elaborate a little bit on it, as always, this is a business driven by the offer. We see that the various jurisdictions are providing comprehensive new ideas to the players. And we have seen across all the segments of the lottery a good growth. It happened in the last years, and we expect this will continue to happen over the next years..

Great, thanks. And then just kind of moving on to the guidance and kind of the implied 4Q guidance, obviously, increasing guidance after a huge quarter is impressive to see.

Could you kind of help us just think about the range of the low end versus the mid end? You did tighten it quite significantly, but is the range mainly based on late numbers and lottery and then just kind of the timing of the gaming turnaround? Any color there would be helpful? Thank you..

But I would say that in general obviously, the performance of the lottery has been pretty good, and that helped a lot in consolidating the guidance. Obviously, as you heard, we are talking about current exchange rate. So it seems that the exchange rate is helping us, in this case, to position our self in higher part of the guidance.

I would say that probably these are the two major positive components that have helped overall the full year guidance to improve..

Okay and thank you very much and congrats on the result..

And let me add that the costs also helped a little bit because, in Q3, you have already seen the benefits of costs..

Thank you..

Thank you. Our next question comes from Domenico Ghilotti with Equita. You may begin..

Good afternoon. I have a question sorry, a follow-up on the guidance. Because if I look at your revised numbers and if I look at the current euro-dollar rate, well, it seems to me that really most of the revision is really driven by just FX.

So I don’t see reflected in the guidance the very good third quarter and the actions that you are commenting on the cost and also on the lottery performance that was particularly strong.

So first of all, if you can elaborate a little bit more on how much did you how conservative do you think is the guidance or if you see any reason for, for example, different phasing in of the costs that could lead to some prudence in Q4? Second question is on the Scratch & Win performance in Italy.

I am trying to understand if this 5% is just linked to some specific actions, so not really a trend that is inverted up to – say to the low to mid-single digit. So if you still see Scratch & Win as a stable business. Third question on the opportunity to refinance your debt.

So how do you want to proceed and what timing do you see in terms of refinancing?.

Alberto here, Domenico. Let me answer question number 1 and number 3, and Marco will talk about this [indiscernible] I think that the contribution of the FX is quite clear because we have also provided sensitivity.

So we will be probably – depending on where the fourth quarter will be, we will have a positive impact compared to the prior guidance between 30 million and 40 million.

So when we look at what you have mentioned, certainly, the fact that the performance of the North American lottery in particular and the Italian lottery, plus the costs helped us to position on the higher part of the guidance. So again, I believe that there is a contribution coming from the business and the contribution coming from the FX.

Otherwise, we wouldn’t be in the higher part of the guidance. Regarding the question number 3 and the refinancing, you know that we monitor the market constantly. I think that we are in a good position because we have 2 billion of credit line [indiscernible] and not utilized.

We don’t have any major maturity in ’18 and ’19 because I consider the ’18 €500 million already taken care through the additional term loan that we have negotiated in the second quarter. And in 2019, we have the remaining of the bond issued by legacy IGT for 150 million, so we have time. Obviously, the condition of the markets are quite good.

So when we will – if it’s the right moment for us, then we can also manage the trade-off between good rates in the market and the cost of carry with it [indiscernible].

Domenico, regarding Scratch & Win, we keep on saying that this business is driven by innovation. Also, in this case, the good growth we are experiencing is related to some new initiatives we taken – we are taken today in Miliardario family of our Scratch & Win offering.

Therefore, I do not expect this trend can continue over the next quarters with this kind of growth. But as always, we see there the possibility to keep this business stable or growing at a very moderate pace..

Okay. And just – if I may, another question just for housekeeping. After the write-down on the asset that we saw in Q3, should we expect a decline also in the PPA going forward? Any indication on that – on the purchase price allocation then last time, you – when you sold the DoubleDown, you also gave us an update on that..

We will communicate the overall impact for the new year, but I suspect that there will be – the quantum will be defined. But there will be an impact on EPA for [Indiscernible]..

Okay. Thank you..

Thank you. [Operator Instructions] Our next question comes from Danny Valoy with Deutsche Bank. You may begin..

Hi, guys. Congrats on the quarter. Thanks for taking my question.

Can you talk about your view on the 4Q ’17 installed base stability now that we’re a few weeks removed from G2E? And my second question is just on Brazil, wondering if you can discuss the current state of the gaming and lottery opportunities there as there seems to be momentum on both fronts into year end?.

Yes, Danny. I will take your questions. Regarding North America, you have seen, in the third quarter, the sequential reduction in the installed base is due to conversion of sales, mostly in Maryland. Apart from conversion, the installed base was relatively stable, largely on the rollout of new CrystalCurve and CrystalDual+ separate cabinets.

And we expect improved performance by the end of the year because the rollout of our most high-profile participation titles, Fort Knox, The Voice, SPHINX 4D, is concentrated in the fourth quarter. So we expect the fourth quarter with some growth in our installed base.

Regarding Brazil, we are working on our due diligence for the instant concession now. In reality, there is not much more I can add since this is a live competitive tender. In general, there is a positive momentum around the broader gaming opportunity in Brazil, which includes opportunity for video bingos, sports betting and casinos.

But there are no former of regulations in place at this time, so we don’t have clarity around the timing of those potential opportunities and also about the structure of those opportunities. So I cannot elaborate much more than that..

Understood. Thank you very much..

Thank you, Danny..

Thank you. Our next question comes from Joe Stauff. Your line is now open..

It’s Joe Stauff from Susquehanna. I wanted to ask you – you have described, and you had done this in the previous call as well, a slower turnaround in gaming than expected.

Now I was wondering if you could just maybe kind of review over the past 3 to 4 quarters and just kind of help us deconstruct some of the things that maybe didn’t go your way that you have addressed in terms of accelerating this turnaround that obviously is underlying in the context of your gaming unit..

Let me say that we were a little bit late in delivering the new cabinets, and that for sure, didn’t help us. And we skewed the launch of all our major initiatives regarding – I’m talking about the installed base in the back end of the year. As I was commenting before, most part of our most promising content are going to be delivered in this quarter.

So there is this delay that I would mention. On the other hand, we work hard in developing, on product sales, new content, in testing this new content. And nowadays, we start experiencing good feedback from the customers. G2E was a good show for us because we demonstrated our comprehensive new offering, and customers were appreciating it.

And in fact, the orders that we are getting from our customers in the fourth quarter are mainly focused on the titles we have recently presented to the market. So that is our view regarding this delay, and we expect this to be improved over the next quarters on the base of what I’ve just said..

Okay, I appreciate that. Thank you.

And one follow-up basically is, can you just, I guess, more – inform me, maybe remind others of the concession payment? In the event, basically, that the Italian scratch-off contract goes as expected, as you said, by middle of December, €50 million out of the €800 million for you and your partners get paid before year-end, how does that subsequent payment, the larger one, get paid in theory in 2018? Is it a onetime? Is it proportionally through the year? Can you just help me understand that, please?.

No, I would love it, but I cannot because I don’t know. That – it will be something that will be part of the discussion with the regulator once the Italian Parliament will definitely approve the renewal. We know for sure the €50 million. That is a given because it is a law provision. But we do not know about the split of the remainder.

That will be due in 2018, but we do not know how they will be – ask us to split it..

Okay. Thank you very much..

Thank you..

Thank you. [Operator Instructions] Our next question comes from Federico Rossini with Nomura. You may begin..

Hello.

Can you hear me?.

Yes, hello..

Hello..

We can hear you. Please go ahead..

I mean it looks like we have no – I think we lost the line. It looks like we have no further questions at this time. I’d like to turn the call back over to Marco Sala for closing remarks..

Thank you all for joining us today. Our year-to-date results are consistent with our plans, and I am looking forward to the future. We have secured large and important lottery contracts and our North America gaming business is making encouraging progress.

We intend to build on this momentum by consistently bringing the innovative solution to market, reinforcing our existing positions and entering into new territories. We appreciate your interest in the company, and I wish you a nice day..

Thank you. Ladies and gentlemen, this concludes today’s conference. Thanks for your participation. Have a wonderful day..