Good day, ladies and gentlemen, and welcome to the IGT 2019 Third Quarter Results Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded. I would now like to turn the call over to Jim Hurley, Senior Vice President of Investor Relations. Sir, you may begin..

Thank you, and thank you all for joining us on IGT's Third Quarter 2019 Conference Call. Marco Sala, our CEO, will provide an overview of the quarter and comment on our broader strategic initiatives; and then Alberto Fornaro, our Chief Financial Officer, will provide operational and financial perspective on the results.

After our prepared remarks, we'll open the call for your questions.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.And now I'll turn the call over to Marco Sala..

Thank you, Jim, and welcome, everyone. The momentum of our core businesses is evident in the third quarter's solid key performance indicators. Global gaming machine unit sales were especially strong in the period.

Free cash flow was robust, reaching a record of $456 million for the first 9 months in making the important inflection point we expected this year.Lottery same-store revenue outside Italy rose 2% in the third quarter, as 4% growth in, for instance in draw games, offset lower jackpot activity in the United States.

In Italy, total lottery wages were stable, higher Scratch & Win wages made up for a slight decline in lotto.It is worth highlighting the strength of our North American lottery product sales in the last 2 quarters. Our expanding suite of self-service machines drive great interest from our customer at recent trade shows.

Our GameTouch 20 self-service sells a mix of broad-based games, instant tickets and multi-state jackpot games and is meant to serve the big box national retailers.So far, about 1,200 units have been deployed across 10 states, with additional states expected to roll it out next year.

Our GameTouch draw cabinet, inspired by a device we use for sports betting in Italy and Rhode Island provides us a service for broad-based games with a focus on Keno. It was developed to facilitate retailer adoption in restaurants, bars and other social spaces.

Channel expansion is key to driving future lottery revenue growth, and that is what these products are all about.We have had some significant lottery contract wins and extension over the last several months. IGT was selected to provide both lottery technology and instant ticket printing for the new Mississippi lottery.

We also secured multi-year extensions in Colorado, Minnesota and Kentucky, and we just signed a 5-year facilities management and product sales contract with the Oregon lottery. In a significant lottery development, our 50-50 joint venture was recently awarded the 15-year Brazilian Lotex license.

This is a major step towards the privatization of lottery instant games in Brazil, the world's 8th largest economy. It's also an important window into other opportunities as Brazil further opens regulated games.Instants can develop into a meaningful driver of growth over the license term. Given the relatively modest capital investment required.

We expect this business to generate an above-average return on investment for us. Now let me focus on gaming. It was a strong quarter for our global gaming business. Unit sales of gaming machines were 44% greater than the prior year period, driven by a 62% increase in replacement units.

North America replacement units rose 38%, led by top-performing titles such as Fortune Coin and Griffin's Throne. International replacement units increased nearly 90%, benefiting from large Sweden VLT shipments in the period.

Commercial gaming replacements were up double digits, with demand well balanced between CrystalCurve and Crystal 27 cabinets.We have begun rolling out our new Cobalt cabinet developed to raise our profile in Eastern Europe, and we are seeing interest for other regions as well.

The North American installed base remains stable and is generating higher yields. The Wheel of Fortune Cash Link and 4 B titles continue to command incremental placements. The early indications of -- on our recently launched The Price is Right games are good.

We have just a successful showing at G2E, where our team was player-driven performance, the cornerstone of our gaming strategy.We have continued to expand our test programs, which are driving player satisfaction according to the broader number of complaints.

There was a lot of excitement around our core video offer, which has been an important driver of the 38% increase in year-to-date global unit shipments. As it is -- as the industry's leading portfolio of intellectual property, which we are upgrading with proven new game mechanics. Wolf Run and Hexbreaker are good examples.

In fact, the Hexbreakers 3 is widely recognized as one of the most anticipated titles coming out from the show.We are complementing these franchises with a new batch of proven performance, including Lucky Buddha and Magic of the Nile.

We are increasingly leveraging our strength in product sales with our lease games.This is especially true in the growing multilink progressive segments, where IGT has traditionally been underrepresented. We showcased 9 MLPs at the G2E to drive better penetration.We are further supporting that effort with a new family of Peak Cabinets.

We are launching the PeakSlant with extensions of 2 proven brands, Scarab Link and the Wheel of Fortune Mystery Link. G2E was also a big show for video poker where we featured a total of 4 different form factors, including the new PeakBarTop and Cobalt cabinets, providing world-class solutions to all types of venues around the world.

The response is very good, especially for the PeakBarTop. And we are well positioned to maintain our leadership in this area.As an aside, let me say that after a lot of hard work and investment. It is very gratifying to be able to report the progress we have made in our machine gaming business. Now let me turn now to sports betting.

1.5 years after the U.S. Supreme Court's past ruling, IGT is powering 35 casino-based sportsbooks in 11 states. Our mobile offer is active in 7 states.

IGT PlaySports technology accounts for nearly half of New Jersey and Pennsylvania's total sports betting angle, which is a testament of -- to the stability and scalability of our technology.Speaking of scalability, at G2E, we showcased our PlaySports Bank and PlaySports Pod, the first-ever completely self-standing "Sportsbooks in a box", which can be integrated to any part of the casino floor.

These solutions enable small- to medium-sized casinos to provide a capital-efficient vegan-style -- Vegas-style Sportsbook experience. To date, there are over 200 self-service IGT's PlaySports machines are deployed in Sportbooks around the United States.

Pearl River Resort in Mississippi is the first to feature our CrystalBetting Terminal, which is in field trial there.A few words on the Italian budget law. The current proposal includes higher taxes on gaming machines and higher taxes on certain player winnings. The parameters for the next tender of gaming machines licenses have also been outlined.

I can appreciate that this annual process has been a point of frustration for many of you. I think it is important to stay grounded in our historical ability to navigate through this challenge. We have been dealing with higher gaming taxes for the last several years.

In that time frame, our Italy EBITDA has grown despite the headwinds, including the in -- the year-to-date 2019 period. We have managed debt through consistent innovation and disciplined cost management while maintaining or improving our market position across all gaming verticals.

The true impact will not be known until the budget law is approved at the end of the year.

We are working on a set of initiative in Italy and I'm confident can offset the entire impact of the proposed taxes.I'm pleased with the momentum of our core businesses for the third quarter and the year-to-date and with the positive feedback we received from customers at the recent lottery and gaming trade shows.

Our focus on player-driven performance will support continued progress for our gaming and lottery business across all our markets.Now I'll turn the call over to Alberto..

first, the extraordinarily high North American jackpot activity in last year's fourth quarter, which contrasts with the unusually low multi-state jackpot activity so far in the fourth quarter this year; second, we are actively monitoring trends in gaming machine wagers in Italy following recent payout adjustments; and finally, we had nice momentum in global gaming machines unit shipment in the first 9 months and the sales funnel for the balance of the year is robust.

The fourth quarter is typically significant in terms of product sales, but there's also ways there could be some variability in time. We are updating our CapEx outlook to $450 million to $500 million from $450 million to $550 million previously primarily due to shifts in timing of certain expenditure.To summarize, third quarter results were solid.

We generated a remarkable year-to-date cash flow and paid down debt while significantly announcing our financial flexibility.Now we would like to open the call for your questions..

[Operator Instructions]. And our first question comes from Chad Beynon from Macquarie..

Guys, I wanted to start with free cash flow because I think that was a bright spot in the quarter. Alberta you highlighted year-to-date trends and now with the reduced CapEx.

Can you just give us an update in terms of what your leverage targets are and just remind us any near-term major cash outflows that could come in 2020 that I guess would more be in kind of the project CapEx category?.

Yes. Chad. Regarding the cash flow, let's say that we are basically marching according to our expectation. As you are aware, for this year, we added these -- provided an outlook -- of a range of the adjusted free cash flow to be between $410 million and $510 million, and we are on trend.

And actually, this quarter is confirming what already in the second quarter we showed that is progressing that -- in that direction. So the only update I can say is that we confirm what we have said in the past.Regarding CapEx, the only big news that I can say has been Brazil, the low tax, that it's a growth OpEx for the new initiatives.

The profile from CapEx is fairly moderate because with the upfront fee to be paid over 8 installment, it has significantly reduced the impact and over several years, and we are planning that, so far in Q3 2020 potentially, that could be the payment -- that could be the start of this initiative. So the impact overall is going to be moderate in 2020.

And other than that are the usual EBITDA and extension that we have talked in the past. So no big news on the CapEx front..

Okay. And then switching to Italy. Alberta, you mentioned that the VLT wagers were a little bit weaker in the third quarter. I think in the second quarter you really didn't see a decline just in terms of player pay.

So could you maybe talk about if some of these players are moving over to the AWPs? And then could you also just kind of high level what the Italian impact has been year-to-date, given the different changes in the gaming market?.

Chad, I'll take your question. As a matter of fact, the VLT wagers were up in the first half, and we plan for them to be down in the second half as they were in Q3. In reality, the players are still playing. The GUI was up in September, but the wagers are affected by a lower payout.

As we were anticipating, it is exactly the situation we anticipated in the previous calls saying that we would have faced a more challenging situation in the second half of the year. It's not a matter of particular switch on AWPs, but what I can add is that there is no change to our view on the full year impact on new taxes.

It remains the $40 million we anticipated at the beginning of the year.And what it is important, Chad, to elaborate a little bit more on it, is to understand the wager trends over the next few months in order to understand how the wager will be in 2020. That is what we have to do in the next weeks and months..

Our next question comes from Barry Jonas from SunTrust..

I wanted to ask a question on Italy.

Given the potential AWP and the VLT tender coming, just how do you think about hurdle rates given the risks in that market? And then just related to that, assuming the tender proceeds, do you see a scenario where the industry could consolidate and would IGT potentially look to grow via M&A in that scenario?.

Barry, it's Marco. I take your question, and I'll try to provide our point of view regarding the tender that is embedded in the proposed budget law.

First of all, let me say that the timing -- the time line of the tender will be challenging to achieve for the government, and let me tell you why I think so.The draft budget law requires a uniform nationwide regulation for gaming machine distribution. And the regions have some autonomy in these matters.

As a matter of fact, today, there are many different regional laws in place. The government has been working on this harmonization of the -- of this -- so the harmonization of these laws, and let me put in this way, for real without reaching an agreement.

As a consequence of these, this post betting tender has been delayed, notwithstanding the licenses expired a couple of years ago.

This is why I think that the proposed time line of the tender will be very difficult to achieve.Having said that, when it comes to what it is contained in the budget law, I can tell you that, for VLTs, which account for most of our gaming machine profits, what it is in the proposed law is totally aligned with our expectation.For AWPs, the license fees are new.

AWPs, as you know, are less important contributor to our profits, and there is a wide range of productivity across our network. As a result, we will be the only machines that provide solid returns. In January, we expect the new fees will result in fewer AWP units in market -- in the market because some of the margin on machines will be eliminated.

Therefore, I agree with you. If this will happen, there will be probably some reduction in the offering and possibly some consolidation.Having said that, it's quite premature to make any assessment because we do not know about what it will be, the final decision of the government in terms of the budget law.

And we need to wait the next quarters of 2020 to understand the, well, willingness of the government that we issue a tender under the conditions that I try to explain..

Great. That's really helpful, Marco. Maybe just one on terms of what the tender is talking about in terms of new taxes. I think it's very encouraging that you guys think you may be able to offset that.

Just to be clear, is that mostly through cost efficiencies? Just curious, especially as we're potentially starting to see some friction with the reduction return to player.

And with that, as we think about the targets, the original target of free cash flow for next year, should we also think that may still be intact, the $450 million to $550 million? Or is there a potential similar to this year that may be slightly reduced?.

Barry, I try to give a very precise answer regarding the impact of the increased taxation for 2020.

We expect that the gross EBITDA impact of the new proposed gaming machine taxes is around $30 million, and we are working on a set of initiatives, some in the gaming machines, but some across the rest of the Italian portfolio, to offset the impact of the gaming machines.

So we will pay attention on the mitigating action we will implement in the gaming machines because we have to pay attention on the reduction of payout or because it is impacting wagers, but we have a solid set of additional initiatives that I think we will disclose at the time of presenting the guidance for next year that will allow the Italian team to completely offset the $30 million headwind that we will have for next year.

I will leave to Alberto to talk about our expectation in terms of cash flow for next year..

Okay. It's a little bit difficult, obviously, because with the guide -- the full guidance will be March. But so far, we are not seeing anything that should call for a change for next year. Marco has just explained about the $30 million. We said we were going to recover the $40 million.

Now the important thing is what has happened to the digital -- the VLT. And we have said it. So far, it's down, but it's according to expectations. So overall, I don't have an element to change what we have said.

And certainly, we will provide more details in March when we get there and more data points and better information, but no change for the time..

Our next question comes from Domenico Ghilotti from Equita..

First question is a follow-up on the comments on the -- on 2020 for Italy. So I'm trying to understand if the $30 million headwind that you are mentioning is already including some payout mitigation. And well, we had, clearly, the $40 million for this year that was expected to be recovered, thanks to the lower payout.

So I'm trying to understand if this $30 million is the net impact that then you want to offset further with the initiatives that you were talking about. So simplification on that.If you want -- well, my second question is on Brazil.

So I'm trying to understand what's -- well, first of all, what are the -- if you can guide us on the CapEx embedded for the rollout and hopefully also on the prospects that you see over the medium term?.

Okay, Domenico. I try to put together '19 and '20 when it comes to the impact of the budget law. When it comes to the '19 budget law EBITDA impact, this remains $40 million. We had factored in a reduction on VLT wagers in the second half.

We will recover some of these in 2020, but how much we recover will depend on VLT wager trends in the next few quarters, as I said, articulating my answer to Barry.When it comes the 2020 gross EBITDA impact of the proposed gaming machine taxes, we are saying the gross impact is $30 million.

And we are working on a set of initiatives, some in gaming machines. And so they are implying some fine-tuning on the payout in order to recover part of it. But we are also working on some new initiatives on the rest of the Italian portfolio.

The combination of the 2 set of actions will make us confident that we will offset the impact of the 2020 tax increase.

Is that clear?.

Yes. Okay, perfect. Are you -- just to be sure, last point, just to be sure on this topic.

Are you including the $30 million gross impact, both the increase in taxation and the taxes on wins? So both?.

Yes, yes. Regarding Brazil, I mean, we, at this point in time, apart from providing you a general very positive attitude that we have on this opportunity in Brazil. For us, it's a little bit too early to elaborate on -- more specifically, on the kind of expectation we have on this business. We expect to finalize the contract.

And the time we will present our guidance for next year, I think, we will be in the position to give you some better outlook. Now I ask Alberto to provide you the answer regarding the CapEx for the Brazil tender..

Domenico, so as you know, this is a 50-50 percent joint venture with Scientific Games for 15 years. The total CapEx at current exchange rates is around $200 million. So we will have the 50% of it. And there is a first installment that is due.

And if everything goes according to expectation, it should be in 2020, and it's around current exchange rate, 20 -- $24 million. So let me, for a second, be clear, the $200 million is for the upfront fee that has been divided into 8 installment. The first one is $24 million, and we expect to pay it in 2020.

The JV receives around 18% of the wager for all of our services that we are going to provide. And obviously, you can imagine that we are targeting interesting results, given also the jurisdiction that is Brazil. That has certain specific type of risk that needs to be taken into consideration.Having said that, this is the first step.

There are other opportunities in Brazil. And so the fact that we are having this presence there, in case there are developments, particularly on sports betting and gaming, we will have already a presence there that we can leverage for further business opportunities..

And the CapEx figure that you provide is just on the upfront, is not including -- so the rollout?.

number one, when we start; and second, how quickly we'll be able to deploy. So we will be more specific in the next call, where we will have all the elements. But again, it's going to be a gradual implementation..

[Operator Instructions]. And our next question comes from David Katz from Jefferies..

I wanted to just go back and be a little clearer about one of Marco's answers around the gaming machine business in Italy. It sounds as though we should not expect that there would be an outcome and therefore any CapEx allocated in 2020 toward deploying a meaningful number of gaming machines.

Is that a correct assessment?.

Yes..

Okay. And second, if we look at the domestic premium installed base, it's one of the areas we've been watching carefully, obviously, for an inflection, which I think we've talked about.

What is the latest information you're getting about your game placements, particularly in the premium participation games, of which we saw many out of G2E? And help us paint a picture of the next several quarters on what you can reasonably expect there, including, should it accelerate -- there could be some CapEx associated with that, too..

Regarding the installed base, as you appreciate, also this quarter, our installed base remain stable, confirming the trend of the last 2 years.

As I anticipated in the last calls, we feel that the installed base remains under pressure from competition and from customers and looking to reduce the expenses and so also from the consolidation of operators. But we are very positive of what we are having in the Florida in this period of time and the things that are coming.

.Because elaborating, as you have asked, with the Fortune franchises benefited from, I think, the highest performing and most diversified lineup we have had. We are covering all the segments. We are improving also our yield. The machines are performing very well. So the most important franchise we have is in a great shape.

We are also rolling out a suite of games under the Price is Right franchise, and that was something we have been working on quite hardly. And the early indications are good.I think we have to improve our multilink progressive offer. We have significantly improved data. We have been presenting 9 new titles at G2E.

But in this regard, it's clear that we have to see how we are performing on it. And as i]-- we have also launched a new cabinet, the PeakSlant with the two proven franchises, Scarab Link and Wheel of Fortune mystery link. So I mean, considering that also in the same period of time, our yield is 2% -- or the premium yield is 2% up.

I think we are improving in that area, notwithstanding all the challenges. I do not hide..

[Operator Instructions]. And our next question comes from John DeCree from Union Gaming. ..

In your prepared remarks, Marco, you talked about generating significant cash flow year-to-date, on track for your target. You've mentioned that you've just issued one of your lowest coupon bonds ever.

As you look at 2020, it's a conversation that we have often, but wanted to get the latest thinking if there's been any discussions about use of cash in 2020 now that you're hitting that inflection point..

John, this is Alberto. There is no change so far regarding utilization of cash. I think we are basically confirming the trend in the debt reduction and generation of cash flow and so on. And so far, there is no change for 2020..

Okay. I'll ask a question on the game ops business. I guess to follow on David's question from before, the consolidation in the casino industry, as companies look to harvest synergies, so the slot floor is a place they target. I was wondering if you could talk about what you've seen recently and if you have any expectations.

Is that a headwind? Is it something that you've always been dealing with and just part of the business? If you could provide a little bit of color on your outlook, given the consolidation in the U.S. casino space..

As I was saying, John, in the previous answer, I mean, this is one of the challenges that we have in front of us. I mean, talking, for example, about El Dorado and the Caesar consolidation, it's clear that it will have an impact on us, and there is no doubt on it. But having said that, we have the best quality of our offering.

Or better said, the -- our offering is the best in the last few years. And we feel that what we have on one side and the lineup of the products that we will bring to market will offset -- or will try to offset some of the headwinds that you have described that are a reality. I mean there is nothing to be surprised about that.

We have been working and evaluating the challenging and competitive environment for the last 4 years. We are start -- we start seeing a stabilization of our installed base and improvement of our product sales. So we feel better keep than before in taking these challenges..

Marco, there's a lot of focus on your corporate casino customer, but equally large tribal casino customer.

I was wondering if you could, as a follow-up to that, kind of talk about the trends there? Are they the same, better or worse than what you see in terms of demand relative to the casino customer, the corporate casino customer? And that's all for me..

No. I do not see a major difference. They are both working quite efficiently from their perspective, and they are challenging us to bring good products that are performing in the floor, increasing the satisfaction of their peers.

In other words, I do not see a major, major difference in terms of the way they are trying to improve the satisfaction of -- for their customers..

Our next question comes from Joe Stauff from Susquehanna..

Just a couple. North American gaming continues to ramp nicely. I was wondering if you can help us with respect to the reported EBIT in the quarter.

Are there any -- can you give us the D&A? And if not, is the D&A, again, just trying to reconcile to the EBITDA production? Is it comparable versus the previous period? In the last couple of quarters, it hasn't been. And so I was just trying to understand that..

This is Alberto. Regarding that -- but what you see in the overall profitability that the increase is mostly driven by the product sales. And so therefore, there shouldn't be any significant change compared to -- there is no change compared to what it was in the past.

We will provide, as usual, all this information in a structural way on a yearly basis. But specifically on this quarter, there is nothing significant to report..

Okay. Fair enough. On the Italian business, you certainly had talked about the VLT wagers and how they had softened, at least relative to your expectations, in line with your expectations.

I would imagine and maybe you can kind of help me understand, but I would imagine it's most likely a result of just kind of lower payouts and the overall sort of adjustment to that. This certainly isn't the first time that payouts have been lowered.

How long of a period does that take, at least based on historical analogs, before the customer kind of stabilizes and sort of accepts it, if my premise is accurate?.

No, no, Joe. Yes, it's accurate. And in the previous year, we didn't see a declining wages related to the decline in the payout. One of the reasons for that has been that all the operators were trying to innovate the products in a way that was making less visible the reduction of payout of the machines.

After a few waves of a payout reduction, and now players are seeing it, even though -- I mean, as I said before, if you look at their spending, they are increasing their spending. The point is, the wagers are declining and because the payout is declining.It will take us some time to stabilize it. And we will, for sure, monitor very closely.

We also expect that some new products can bring the kind of innovation in the market that can try to offset the product, the impact of wagers of payout and pretty positive that over a period of time, the wagers will stabilize again. But it's clear that it's always challenging in our business when you're able to keep on reducing the payout..

Yes. Okay. Makes sense. And then just one last question, largely on the International segment. There certainly was a negative surprise out of Latin America in the fourth quarter of last year. I know that business, as you had previously described, it shows up kind of later in the quarter.

And I was wondering if there would be any incremental impact to be expected this quarter. Certainly, a lot of countries in South America are struggling to say the least. And I was wondering if that has any regional impact again on your expectation for that portion of your international business that's affected..

Joe, this is Alberto. Well, what happened last year is relatively simple because it was mostly a timing effect. So at the time, we reported in the fourth quarter, as certain sales moved to the next year -- and actually, so far, the unit sales in Latin America have been quite good.

So now again, this is -- these are markets that are -- have a certain volatility. So something can happen, but we are not aware at the moment anything the -- specifically that could impact our fund.

While last year, there were, in a couple of countries, some action taken, particularly in terms of gaming machines, regulation and taxes that put the operator in an uncertain -- in a state of uncertainty that -- and meant a delay in the purchase. So, so far, there is nothing like that in the your eyes..

And we will take our last question from Domenico Ghilotti from Equita..

Can I ask two questions? First, relating -- related to the Italian situation, VLTs. Could you provide us what was the level of payout in VLTs in Q3, just to understand how large was, say, the reduction of payout? And second question is, well, on the consolidation, we have been talking about consolidation among the clients.

What about consolidation among the suppliers? So are you looking, do you see opportunity for some transformational deals, so some large deals strategic deals among suppliers? So are you involved as the buyer or consolidator?.

Domenico, this is Alberto. You understand the [indiscernible] purposes, we cannot pay out. This is one of the areas in which we compete. And so therefore, we will not elaborate that. Regarding your question on consolidation, obviously, there have been -- in the recent past, there have been some transaction and so on, on our side.

As Marco said, we're trying to understand the regulatory environment, what is going to be eventually for the bid, our approach. We think there are going to be some structural changes, but this is where our analysis stops. And Marco said clearly that, that's where we are focused..

Thank you. And that does conclude our question-and-answer session for today's conference. I'd now like to turn the call back over to Marco Sala for any closing remarks..

Thank you for joining us today and for your interest in IGT. I'd just like to highlight that the record free cash flow generation we achieved in the first 9 month is a testament to the diversity of that products we offer and our global reach.

We are committed to driving growth and value creation for our shareholders and customers alike by consistently delivering content and technologies that offer unparalleled gaming entertainment experience. Have a good day..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day..