Good day and thank you for standing by. Welcome to International Game Technology Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, James Hurley, Senior Vice President of Investor Relations. Please go ahead..

Thank you for joining us on IGT's first quarter 2022 conference call, hosted by Vince Sadusky, Chief Executive Officer; and Max Chiara, our Chief Financial Officer. After some prepared remarks, Vince and Max will be available for your questions.

We are presenting from multiple locations, so please bear with us if we encounter any technical difficulties. During today's call, we will be making some forward-looking statements within the meanings of the Federal Securities Laws.

Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements based on a number of factors and uncertainties, including those related to the effects of the COVID-19 pandemic.

The principal risks and uncertainties that could cause our results to differ from our current expectations are detailed on our latest earnings release and in our SEC filings. During this call, we may discuss certain non-GAAP financial 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, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. And now, I will turn the call over to Vince Sadusky..

Thanks Jim and hello to everyone for joining us today. 2022 is off to a strong start with a terrific first quarter. Our strategy to grow, innovate, and optimize is delivering results as revenue grew 7% at constant FX, above the targeted 22% to 25% range disclosed on Investor Day, driven by the strong gaming and lottery product sales.

Operating margin of 24% exceeded expectations bolstered by a 37% lottery margin, which is also above the 2025 target range of 33% to 36%. At constant currency, EBITDA matched the prior year's record level and was among the highest quarterly margin ever.

This is a remarkable achievement considering the significant discrete lottery benefits we had in the first quarter of 2021 and incremental Omicron impacts and higher supply chain costs that we had this year. And importantly, we returned a record $80 million to shareholders through dividends and share repurchases for the second consecutive quarter.

Let's delve a bit deeper into our operating segments, beginning with lottery, which represents most of our revenue and over three quarters of IGT's total profit. As expected, lottery same-store sales were down from the prior year's record levels that benefited from pandemic-related restrictions.

Nevertheless, the Q1 2022 results confirm a strengthening in the multiyear compound annual growth rate and the attractive margin profile of this business. Instant ticket games, which account for most of the lottery wagers in our portfolio, grew at a 7% compound annual rate from Q1 2019 to Q1 2022, up from about 4% in the 2015 to 2019 period.

This is consistent with our research, which indicates that players intend to play lottery games at higher levels than the pre-COVID period. It also supports our long-term outlook for the lottery segment. We will work with our customers to drive player demand through continuous innovation as we have done in the past.

One exciting example is ITT's proprietary draw-based game Cash Pop. For a new draw-based game, it is a significant accomplishment to carve out a distinctive place in the market as Cash Pop has.

The games easy to understand strategic play experience, something that can be enjoyed across retail and digital channels has shown staying power since its 2019 launch. In Q1 the Florida, South Carolina, Virginia and West Virginia lotteries became the latest all for Cash Pop, bringing the total number of US lotteries with the game to seven.

Missouri is slated to launch the game in late May. Let me turn now to instant ticket printing, an area of incremental growth opportunity for IGT. Infinity instance, a product that incorporates a unique, ultra-high resolutions in ticket printing technology is an example of exciting innovation that differentiates IGT.

The Infinity process provides full color variable printing on the ticket front, back and on play and price symbols. This technique affords designers and lottery product managers the capability to create game mechanics and customize graphics that significantly enhances product value and the player experience.

Even Infinity Instant Games are now available in four US jurisdictions. We hope and expect the success that the Infinity tickets are ensuring; we’ll continue to drive further adoption. ILottery is another important area of focus and opportunity for us.

IGT's iLottery sales increased over 20% in the first quarter, including over 40% growth in North America. Today, all our US iLottery customers have successfully transitioned to our cloud-based ESM platform. We are rolling it out to international customers over the next 12 months.

Just like the land-based business game innovation and portfolio optimization are important drivers of wager growth. We have invested in talent to increase new game production and to leverage our unique mix of strong creative game content and digital know-how.

For the current library of 130 games, IGT's newly launched ES are performing stronger than ever, based on their increased quality and complexity of gameplay. The Georgia lottery launched its first progressive jackpot game in Q1 and it became the strongest first month performer by a wide margin.

Global Gaming segment was a clear standout in the quarter, with revenue increasing by more than 40%, propelled by higher unit shipments average selling prices, IP royalties and active installed base units. Our product positioning around the world is the strong as it's been in a long time.

We've invested heavily in key hardware and content initiatives over the last three years and are seeing the benefits in the success of recent launches. This sets us up very well for 2023 and beyond.

Momentum behind the peak family of gaming machines is accelerating and broad-based from the newly launched large-format Peak65 cabinets to the industry-leading Peak49, PeakBartop and PeakSlant32 that has consistently held the number one spot for a multiscreen cabinet in North America for more than a year.

We're also excited about the upcoming launch of the DiamondRS cabinet, our first new mechanical real cabinet in many years. The success of the new hardware is also a function of compelling game content.

You've heard us talk a lot about our focus on multilevel progressive games, an area where IGT has historically been underrepresented, especially in the US. Our efforts are paying off. Our North American MLP installed base has increased by nearly 20% since the end of 2020.

On the lease side of the business, Money Mania is maintaining strong productivity of 2.5 to three times house average. And Prosperity Link launching soon is among the strongest test bank titles we've had to date. Wolf Run Eclipse, our first MLP offered for sale in the US is performing strong out of the gate at about two times house average.

Apart from MLPs, Regal Riches and Stinkin Rich, Skunks Gone Wild and other high -- are very popular for sale titles. Continued strength in the US GGR trends, which remain about pre-pandemic levels in local and destination markets is very encouraging. The potential player base has expanded with the younger demographic increasingly visiting casinos.

This gives us confidence that with the Q1 unit sales momentum, the recent win of nearly 1,400 VLTs for the Atlantic Lottery Corporation and the strength of our sales funnel US and Canadian shipments have the potential to reach 2019 levels this year. Our good progress is being recognized.

IGT was named Casino Supplier of the Year for the second year in a row at the Global Gaming Awards in London. We won several top prizes at the Casino Awards 2022 and we were named Multichannel Supplier of the Year at the International Gaming awards for our leadership in cross-platform content and technology.

That's a nice segue into digital embedding where our first quarter revenue rose over 20%, primarily on strong US iGaming and sports betting trends. During the period we went live with our iGaming content in West Virginia, bringing our US iGaming footprint to five states serving a record 56 operators.

In addition, since April we've gone live with several commercial operators in Ontario as market opportunities open there. We also added new customers for our sports betting platform and turnkey solutions during the first quarter and are currently live in over 20 states powering more than 70 sportsbooks.

The turnkey pipeline remain strong in the next year. Perhaps the biggest digital embedding news is the recently announced acquisition of acquiring iSoft Bet, a leading iGaming content provider and third-party game aggregator. This is a unique opportunity to add significant complementary scale to our PlayDigital business.

The high quality management team is a very good cultural fit. The transaction advances several strategic initiatives much faster than we could do on our own, which greatly enhances our talent pool, digital native content library and global reach, including the opportunity to distribute proprietary IGT content in regulated European markets.

For context, the transaction more than doubled our PlayDigital content library to approximately 225 proprietary games and should enable us to create up to 70 new game titles per year, once again more than doubling PlayDigital's historical rate.

In this business, the velocity of new game launches is an important growth driver and iSoftBet brings us more of a digital-first mentality. iSoftBet's aggregation technology should greatly simplify the integration of new studios and content and enable faster and more impactful entrants into new markets.

It also provides a robust data analytics platform that will help our customers make focused, strategic decisions on their game portfolios.

We expect to launch iSoftBet content and the aggregation platform in the US and Canada in the second half of 2022 and to bring IGT's proprietary content via iSoftBet's platform in the European regulated markets in the same time frame. Over the last few months, I spent a lot of time meeting with employees.

I'm encouraged by the high integrity and incredible energy of our people. They exhibit the qualities of true leaders. The priority they place on creating and nurturing an inclusive culture and good corporate citizenship is truly inspiring. This has always been a part of IGT's DNA and it is important to me personally.

I'm impressed with the team's efforts to consistently raise the bar here. There are several recent examples such as joining the science-based targets initiative and issuing a formal human rights policy statement. The broad scope of our effort is being recognized.

Earlier this year IGT earned the Best Place to Work for LGBTQ+ Equality designation from the Human Rights Campaign Foundation and was also named the Best Diversity and Inclusion Employer at the, The Casino Awards. The power of our portfolio is clear.

The strong first quarter results and progress on key strategic initiatives gives us confidence in delivering on our financial outlook for the year. I'm pleased with the momentum and outlook for the long-term recovery of the gaming business as well as increased levels of lottery play from pre-COVID periods.

The strong margin profile highlights the attractiveness of the lottery business and the success of structural cost reductions even as we continue to invest in product development and other growth opportunities. The company is in a great operational and financial shape as we focus on executing our long-term goals.

And now, I'll turn the call over to Max..

Thank you, Vince, and good day to everyone. We had a strong first quarter, notably with better revenue and profit at constant currency versus the previous year. This was achieved without the lottery discrete benefits we enjoyed last year in an outstanding first quarter performance, and despite some Omicron impacts and cost inflation this year.

So all in all, we are very pleased with the performance our team delivered. In a nutshell, we generated over $1 billion in revenue up 4% year-over-year, 7% higher at constant currency and in line with our expectations. It is evident that our cost structure is benefiting from the strategic actions we took as part of the optimal cost savings program.

The structural changes we made to the business in addition to ongoing rigor around cost and invested capital helped drive $252 million in operating income and $433 million in adjusted EBITDA, which at constant currency matched the record level achieved in the prior year.

We achieved a 24% operating income margin in the quarter making good progress toward our 2025 target of 26% to 29% and 200 basis points above the high end of our outlook for the quarter. Adjusted EBITDA margin was 41%, which was among the highest quarterly level achieved in company history.

This was despite the current challenges I just mentioned, and which we referenced in our year-end call that totaled closed to $50 million in headwinds in the quarter. Fully diluted earnings per share of $0.39, was in line with the prior year results as well.

Revenue growth in the quarter was primarily due to a 78% increase in global gaming product sales revenue with digital and betting delivering strong 24% revenue growth.

As expected, global lottery was down as the prior period at about $95 million in benefit from the impact of gaming hall closures in Italy, higher multistage jackpot activity and incentive accruals related to LMA agreement in the US. Net of those items, global lottery revenue grew 4% year-over-year.

Focusing more intensely on lottery, the $680 million in revenue highlights sustained strength in underlying player demand. Global same-store sales were down 10% year-on-year, up 32% growth in the prior year period driven by the discrete items I just mentioned.

Elevated jackpot activity in the prior year is having an outsized impact on same-store sales in the quarter, but keep in mind that this is a relatively small part of the overall revenue mix.

If you step back and take a longer-term view, you will see that global same-store sales grew at a mid-single-digit CAGR over the multi-year period from 2019 better than the pre-COVID long-term trend.

Product sales revenue nearly doubled to $45 million, primarily driven by terminal and system deliveries related to the contract renewal with the Poland lottery.

The high resilient profit profile of this business helped drive operating income of $252 million and operating income margin of 37%, the third highest level in over three years and slightly above the 2025 target of 33% to 36%.

Demand for IGT innovative products and solutions, as well as the continued recovery in the gaming market drove significant increases in revenue and profit in global gaming compared to the previous year. Revenue of $325 million was up 42%, on solid increases in the number of machine units sold, ASPs, IP royalties and active units.

Global unit shipments rose 63% year-on-year to over 1,700 units, the highest for a first quarter period for us. We saw particular strength in North America where we sold around 5,300 units in the quarter, with casino replacement units tripling. International unit shipments were also higher versus the prior year.

North America ASPs of $14,800 were 6% higher than the previous year on an improved product mix. International ASPs reflect a higher mix of used units and VLTs compared to the previous year, which we do not expect to recur at the same level going forward, so our ASP mix should improve.

IP royalties rose in the quarter as a result of our continuing efforts to leverage our market-leading IP portfolio and the recent execution of a broad multi-year patent portfolio licensing agreement related to our game features and LGS technologies. The global installed base of over 48,000 units is relatively stable, down 1% sequentially.

North America declined 665 units, with about 60% related to removals and a few isolated customers and the balance coming from changes in the WLA markets in Delaware and New York. We expect additional WLA removals in the balance of the year. In the rest of the world, the installed base increased close to 200 units, driven by placements in South Africa.

Operating income of $52 million was up significantly from the previous year. OI margin of 16% was the highest level in two years and exceeded the full year 2019 level, reflecting the benefits realized from the structural cost savings actions, taken as part of our Optimum program and high-margin IP royalties.

The margin is expected to improve in the balance of the year, putting us on track towards the achievement of our 2025 OI margin target of 28% to 30%. The Digital and Betting segment continued its double-digit top line growth trend, generating a record $47 million in revenue, a 24% increase over the prior year.

About 55% of the increase came from new markets and organic growth, as iGaming expanded into Connecticut and saw strong performance in Michigan and sports betting was adopted in seven additional states, with strong performance in the existing Rhode Island market.

The balance was related to the timing of jackpot accruals, which can be lumpy and more difficult to predict. Profitability reached record levels in the quarter with a delivery of $13 million in operating income, more than double the prior year amount and a 28% operating income margin, nicely approaching the 2025 target of 30% plus.

These results reflect the high profit flow-through from top line growth, partially offset by increased investments in talent and resources to fund future growth.

We're very pleased with the progress of the segment and are increasing our investments in talent, infrastructure and new market expansion in addition to integrating iSoftBet to support our long-term growth plans. As a result, margins for the balance of the year will be lower than Q1. We expect a strong return on these investments in 2023 and beyond.

We generated nearly $190 million in cash from operations and $150 million in free cash flow during the first quarter. Cash flows were impacted by the timing and collection cycles in Italy due to specific cutoff dates and higher cash outlays for short-term incentives, which were suspended in the previous year due to the pandemic.

In terms of capital allocation, payments to minority partners totaled just over $100 million in the first quarter. As a reminder, these payments are generally concentrated in the first half of the year and are a bit higher this year due to the exceptional lottery performance in 2021.

We returned $80 million to shareholders in the form of dividends and share repurchases with 1.4 million shares purchased in the quarter and invested over $70 million in the business in the form of CapEx.

A small portion of our capital allocation was funded by short-term borrowings, as we continue to optimize the mix of funding sources in our capital structure. We currently have a very manageable debt portfolio with no large near-term maturities and our mix of fixed to floating rate debt is favorably structured in the current market environment.

IGT's liquidity profile remained very strong with total liquidity of $2.3 billion and debt leverage at 3.5x already at the low-end of our 2022 target range. During the first quarter, S&P and Moody's upgraded our corporate credit rating to BB+ and BA2 respectively.

This puts us in a solid position in the fixed income market and strengthens our ability to achieve our long-term leverage objectives. As a reminder, proceeds from the announced sale of the Italy commercial service business will primarily be used for debt reduction. This transaction is expected to close during the third quarter of 2022.

Vince highlighted the €160 million acquisition of iSoftBet and the many strategic benefits this brings to our business. This transaction is expected to close in the second quarter of 2022. The combination of these two transactions is expected to have a net positive impact on leverage of about a quarter of a turn.

We are reaffirming our 2022 full year revenue and profit outlook based on our solid first quarter results. This includes absorbing a two point move in the euro-dollar rate and approximately $10 million in higher digital and betting separation project-related costs.

We are lowering our CapEx estimate to around $400 million from the previous $400 million to $450 million. This change is a result of the iSoftBet acquisition as we previously expected to invest organically, but now we'll receive world-class content and advanced platform upon the closing of the transaction.

Our outlook excludes the deconsolidation impact from the sale of the Italy commercial service business, which generates monthly revenue of $20 million to $25 million and operating profit of about $4 million to $5 million.

While the transaction is expected to close in the third quarter, the exact timing is uncertain, making it difficult to update the outlook at this time. Given supply chain constraints and recent volatility in the euro-dollar rate at this time, it is prudent to be anchored at the midpoint of our outlook range.

We're actively managing these dynamics to the extent we can and we'll continue to look for cost savings opportunities to offset any negative impact. Keep in mind that, changes in currency rates result in translation adjustments to the income statement and balance sheet, and had no cash impact.

For the second quarter, we currently expect revenue of $1 billion to $1.1 billion, essentially in line with the Q1 level and operating income margin of 20% to 22%. Now, I would like to wrap-up by summarizing the main points of my presentation.

We are executing on our financial and strategic plans, delivering solid financial results, enhancing our capital structure, improving our risk profile, and delivering meaningful returns to shareholders, with our balanced capital allocation execution on full display. That concludes our prepared remarks.

Operator, would you please open the line for questions. Operator, we are ready for Q&A. Bare with us one second, while we find our operator..

Hi. Max to clarify, so within the context of the guidance you guys are not including, or sorry, the guidance does not include the impact of the sale.

But – and also I imagine does not include the impact of the acquisition?.

Sorry, your line is breaking up. No, the acquisition is – Carlo, the acquisition of iSoftBet is included for the simple reason that is; one, less material; and two, is closer in terms of timing of happening.

Instead, we didn't want to pollute our original guidance, with the impact of the deconsolidation of commercial service sale, because the time of the closing is still uncertain in the third quarter – within the third quarter. And I gave you indications of the monthly kind of revenue and profit, so that you can run your own math, if you want.

But again, the bottom line is, we are anchoring to the midpoint of the guidance and so you can easily kind of reflect that – your estimate of the commercial sales into that..

Yeah, okay. That makes total sense. And then just obviously – and I know, it's hard to predict and I think that's probably the answer. But obviously, the FX rates have moved thus fare materially and clearly as you guys have said for years, whenever this issue has come up, it's a translation impact and not a cash flow impact.

But the decision to quarterly, the bench posted guidance as they were despite kind of the negative headwind that comes from the – a little bit more pronounced move in the US euro rate, should that be taken as kind of an indication of your confidence within the post of that range?.

Look, just to speak about our position vis-à-vis, the guidance and the outlook. As you know, this outlook came out last November in connection with Investor Day.

Since then, we have absorbed – when you count the exchange to the spot rate today close to $200 million of revenue and $150 million of OI headwinds, right? Between Omicron impact in Q1 and Q2 supply chain incremental impact of another $30 million right on top of what we already had in the budget of $30 million last year and then an FX impact again non-cash of total $50 million.

So $30 million to the 112, which is our official guidance plus another $20 million looking out to the remaining part of the year to the $105.5 million. And then on top of it you've got also about $10 million of project costs associated with the separation of the D&B business.

So again, its a big impact and that speaks highly vis-à-vis our ability to offset those headwinds and also kind of our confidence in the outlook. .

For sure, thank you. That's super helpful Max. And then if I could, just lastly you guys have obviously shown progress and we kind of -- we're all aware of kind of a leverage thresholds and kind of the credit agreement thresholds in the baskets of buyback and repurchase authorization.

With the stock kind of where it is today and obviously you guys aren't alone and seeing what the market has done.

But how do you think about the buyback if those parameters did not exist just given the difference in the ROI of repurchases today versus maybe where the stock was two, three months ago?.

Hey, Carlo. Yes -- no I would be a very strong buyer of our securities. There's no question. I know we're -- as you point out we're not alone, but we're so close to it and we feel very good about the plan. You all have listened to the story for multiple quarters.

I think you're hearing some genuine excitement on behalf of the management team about the first quarter and about the outlook. So personally I believe we would be buying back a terrific amount of shares as I believe that's the most accretive thing we can do at these -- at these trading levels. .

Understood. Thanks, Vince. Thanks, Max. .

Yes, and Carlos speaking about that we just concluded the second quarter in a row with record amount returned to shareholders of $80 million split 50-50 between dividend and buyback. So that testifies our approach to our -- our balanced approach to our capital allocation. .

For sure..

For sure..

Thank you, guys..

And your next question comes from the line of Chad Beynon with Macquarie. Your line is open..

Vince, Max good morning. Thanks for taking my questions. Wanted to focus on the strength in the gaming industry or the gaming segment, particularly, in the US. Since you mentioned that replacements were I believe triple what you saw last year I think we're all trying to get a sense of how the operators are going to manage their budgets this year.

I think this was a nice positive surprise just in terms of the timing the order flow clearly shows that you're holding share.

But wondering if you could talk about your conversations with operators given the strength in the US business if you think these CapEx budgets could last -- continue to last or if it was kind of a pull forward for the first quarter? Thanks. .

Yes, sure thing. So you all have heard from the operators they had a very strong first quarter feel good about their outlook for the -- for the next quarter and for the most part the remainder of the year.

The conversations I've had with our customers very much so represent that increased velocity of customers coming through their doors, higher gameplay, several have observed younger demographic included. And all that is primarily individuals without having to – the full benefit of the business and convention business back.

So we saw 2021 was a record year for US casinos momentum appears to be good as far as the industry you can see going into 2022. As you know, several of our casino customers have new projects either spending capital expenditures around redoing facilities or building new facilities.

The first quarter saw GGR versus 2019 kind of our last kind of benchmark "normal year" is up somewhere in the range of 15% and even more on the Las Vegas strip. So I think the sense right now is very good.

For us, we've seen in these numbers and in our sales funnel for Q2 and even out into Q3 that we've been gaining momentum through a combination of that pent-up demand the stronger GGR trends as well as fortunately the strength of our product for a lot of good work that's been done over the last several years.

And I think we had somewhere in the range of – Max you can correct me, if I'm wrong over 7000 maybe 7200 units shipped in the first quarter, which is the strongest ever for the first quarter period. And the vast majority of that I think 95% or so is in replacement units, mostly in the US and Canada. So I think these signals are good signals.

And I think the operators have a need to upgrade to be competitive and they're highly competitive marketplace.

If you spend time walking the floor of our various casino customers and of course, the strip is the easiest place to do it, you can recognize pretty quickly the refreshed areas of the gaming floors that look terrific, have the latest games, very exciting graphics and cabinets and the areas that are not.

And I think that there's a lot of areas that – on the floor that do need to be upgraded. And I think at times of good demand in momentum and I haven't heard anything from our customers other than they expect the momentum and recovery of gaming to continue over many periods.

As long as that thesis holds up, I think there's a willingness to continue to upgrade in order to remain competitive..

That's great. Thanks. And then we've heard a lot about the monthly cadence from the gaming operators with January being impacted from Omicron.

I was wondering if the Lottery segment experienced a similar type of phenomenon maybe with January being slightly softer, or was that pretty consistent throughout the quarter? And we're also getting a lot of questions regarding the cadence in Italy as well, given that we're not as close to that market. Thank you. .

Yes Chad, this is Max speaking. Correct. Omicron – the toughest month for Omicron was probably early in the year January into the first part of February. The decline has kind of subdued since then.

We're still probably looking into the second quarter that has a difficult comp year-on-year because last year we still had the gaming or closures in Italy that lasted until June. So – but definitely the situation is improving out there..

Thank you both. Congrats on the results..

Thank you. A - Max Chiara Thank you..

Your next question comes from the line of Barry Jonas with Truist Securities. Your line is open..

Great. Thank you. You guys conducted research on this last year. Given the volatility in the market, can you talk a little more about what gives you confidence of the sustainability of higher lottery play levels? A lot of concerns on the macro environment, so we'd just love to get more color there..

Yeah, sure, thanks. So, we had mentioned at the year-end call, that we've done some multi-decade analysis to determine a correlation between inflation, and CPI and lottery sales. And there is some level of correlation, but it does not seem to be incredibly strong.

And we think the reason is the value, that people get the entertainment value of lottery relative to disposable income is very high. And therefore, it's not a significant amount of out-of-pocket that's required to play a relatively inexpensive form of entertainment. So that's a good trend when we were excited to discover.

The other thing as well, we've talked about this, we believe and now the results of the first quarter support this that our U.S. customers are really kind of consolidating a lot of the elevated play levels that we saw in 2020 and 2021.

And we think a lot of that has been a result of the evolution of innovation that we've worked hard to consult with our lottery partners for example, The Third Powerball Weekly Draw, Second EuroJackpot Weekly Draw, add-on games to existing Draw-Based Games, increased price point of Draw-Based Games.

So, of course the introduction of not only new draw-based games but innovation around scratch-and-win and incremental game titles being offered. So, we're doing our part. We've got the best team in the business that's constantly thinking about, an innovating a game content.

And I think because we have such a massive footprint around the world, we're able to generate creative ideas around both draw and instance and share those ideas and concepts around the world through our various studios. And the only concern there of course would be any impact on the consumer in a very significant way around disposable income.

But we have not seen that. And again, we think relative to other businesses it's -- the lottery business is less sensitive, on a per capita basis and we – again, so far through the first quarter, we've -- that thesis has been supported..

Great. That's really helpful. And then, just as a follow-up and sorry, if I missed this but what exactly drove the beat for lottery margins in the quarter? Was it just revenue mix was different than what you modeled or were cost savings better? I know was a very strong beat. I just wasn't clear what exactly drove it..

Yeah, I think it was across the board, I would say, both in revenue and as well as in better cost management. Keep in mind that, on a sequentially quarterly view Q4 to Q1, we tend to have a bulk of advertising spending in Q4 that obviously doesn't repeat itself in Q1. And that's the reason why we were also able to lift that profit up. .

Got it, all right. Thanks guys. .

And your next question comes from the line of Ben Chaiken with Credit Suisse. Your line is open. .

Hey how's it going. Just one quick clarification.

I may be mistaken but did you say Max -- did you say you'd find cost saves to offset the FX impact, I might have misheard you, but just wanted to?.

No, we said that we have a series of headwinds that we have to manage in the current year.

And the way we manage those headwinds including the FX is through incremental product sales a higher funnel and delivery of products in gaming rigor on cost so continuing to look for ways to save money on the cost side, as well as lower D&A as a result of let me say, a low cycle of CapEx in gaming in the last two years. .

Okay. Thank you very much. That's all from me. .

Your next question comes from the line of Domenico Ghilotti with Equita. Your line is open. .

Good morning. I have a question on the contribution in Q1 from the intellectual property sale in terms of sales and profitability? And then the second question related to your Q2 guidance.

So, if I understand properly, so you see strong momentum quarter-on-quarter in the gaming business, while on the lottery side we should still expect some say more balanced more flattish trend given the tough comparison? Is it correct?.

Yes correct. .

Okay. And in the intellectual property are you giving any....

So on the intellectual property this is a regular -- this is a regular business of us. We have this activity ongoing. Obviously, the activity can be lumpy, but within a certain magnitude of amount, right? So, we have been a little bit higher than normal this quarter. We may be again above or below the threshold.

But again, this is a recurring business of us. .

So, on a full year basis you don't see like I say extraordinary contribution?.

Going forward, no. Not extraordinary contributions. .

Okay thanks. .

And your next question comes from the line of Jeff Stantial with Stifel. Your line is open. .

Hi good morning, Vince. Thanks for taking the questions. Congrats on a nice quarter here. I wanted to hang on and maybe drill into some of your comments on CPI disposable income. A hot topic obviously this earnings season has been the state of the low-income consumer.

We've focused a lot on this call on domestic trends and trends for lottery, but just curious what you're seeing here internationally? We've heard some comments across other gaming and leisure sectors and maybe some softness in international countries in the lower end of the consumer here, if you're seeing that across any of your geographies?.

Yes, I'd say, what we've heard from our customers and you've heard it as well from the casino operators that any decreases that they've seen as a result of the kind of the lower income player has been offset by older and kind of mid to high-income players who are coming back as well. So that's been positive and encouraging.

And from our vantage point the direct data we have is yields on premium games and we've seen a nice increase in yields both in North America and internationally. Internationally has been slower to come back. And I think a lot of that of course has to do with the various restrictions in different parts of the world.

But we have seen an improvement, especially as now EMEA is mostly open still with a few restrictions like Green Pass in certain markets. But for the most part open and almost all of our installed base is active. I'd say, in Latin America, we're seeing something very similar.

Most of the installed base active not 100% yet, but still a few capacity restrictions, but for the most part coming back. In Australia and New Zealand, you've seen Australian life restrictions New Zealand is relaxing the restrictions, et cetera. So, I think, overall, the customer sentiment is good.

We've seen strong demand in the sales funnel, which is one of the primary data points that we have as well and our visibility around our sales funnel is amongst the strongest that we've seen.

And so we think now the assessment of perhaps the player internationally versus the player in North America being slower to come back had a lot to do with restrictions. And again, with our data points the signals are good..

Understood. That's helpful. Thank you Vince. And then on the supply chain disruption, so you talked a bit on the call about the incremental headwinds on the cost side, but just curious more on the demand side.

Are you able to fill call it a 100% of the orders as they come in? Are you forced to kind of prioritize certain demand over others? And then maybe if you could just frame kind of lead times and where you kind of sit today given some of the supply chain constraints versus how things kind of trend in 2019 that would be great..

Yes. Look this is the biggest challenge we have right now. We need to achieve all of that you said and more in terms of ideas and actions to be able to fulfill the committed -- the orders at the end of the day. So we have a strong funnel. The visibility of the funnel as Vince was saying is the highest we have ever had.

But again, I think, we think in our outlook we can absorb some of that funnel slipping into the subsequent quarter as a result of the difficulties that are -- that exist in certain areas. It could be in pocket of deliveries. It could be in availability of components.

So our teams are really focused on trying to get the funnel over the fence and deliver to the best of our abilities. And again, we have probably a little bit of flexibility in that as well..

Great. That's helpful. Thank you Max. And if I -- I might just slip in one more kind of housekeeping one.

I believe if memory serves the restriction the capacity restrictions in Italy that are impacting lotto sales should roll off here in May; A am I correct in that? And B is that still on pace on time given what you're hearing in the market?.

Yes, I mean based on the recent legislative actions and regulations effectively, there are some -- there is some easing coming into play starting in May in Italy. But again we need to continue to watch out carefully and see how the situation evolves in general..

Understood very helpful. Thank you both..

Your next question comes from the line of David Katz with Jefferies. Your line is open..

Hi good morning everyone. Thanks for taking my questions. I wanted to just go back to the domestic installed base. And just reset -- or think about what our expectations should be, should we be expecting at some point that the units will go up? Obviously, the yield was up really, really nicely in the quarter.

But what is the vision specifically for that US premium installed base and what can we reasonably expect?.

Yes, I'll comment on that. So, a couple of things. First off the vast majority of our installed base was active in the first quarter higher than it's been throughout the entire COVID period including just about 100% in the North American market.

I think a lot of the stability that we've been seeing in casino installed base is a result of the great gains that the company has been able to develop and begin to get out into the market. We mentioned the awards and the acceptance of the fabulous new peak cabinets and great content that we've introduced into the marketplace.

That's been driving a big part of what's been driving demand for us and our visibility into 2022. And also specifically in the MLP space. As we mentioned that's an area where the company needed to be more competitive.

And that installed base in addition to the excitement around the new titles and the very, very good performance we've seen in test bank and we're about to release several those titles into the marketplace. The installed base has grown nearly -- in the MLP category nearly 20% since the end of 2020.

And I think offsetting some of that has been really a couple of things like we've seen some operators looking to reduce operating expenses which we've talked about. So, certain casinos have reduced some of the wide area progressive units.

And then also in the WLA markets where the company had a historically disproportionate very high percentage of the market in certain states, we're seeing a change there, which are typically lower yield units. And then we've also had -- as our operators are generating a lot of cash for the conversion of some lease units to sale as well.

But I think all-in-all, as you point out, yields are higher, largely as a result of not only higher play, but also I think a better mix of units that are in the marketplace. And we feel as if these trends will continue going forward. .

That's super helpful.

And if I can, just follow it up and maybe get a little bit of maybe modeling health, right because -- should we be modeling to revenue, should we think about some of those units continuing to come down a little bit while the yield continues to grow notwithstanding any sort of macro outlook or anything like that, right? And how long, should we sort of think about those curves evolving?.

Well, we think in this current year, based on the first quarter and the visibility that we have going into the year, we believe that our yields will be higher than 2021, as a result of all those things. It is difficult to say, which component of the mix and duration. Those things are pretty tough to estimate.

But we think, as a result of having more active units out in the market, coupled with some of the pressure we've seen on wide area progressive units and mitigated by the strong performance of our newer games and our MLP games that are in the marketplace, will -- are the components that will -- that will drive those trends..

Very helpful. Thank you. .

And your last question comes from the line of Zachary Silverberg from Berenberg Capital Markets. Your line is open. .

Hi, good morning. Thanks for taking my questions. Just a couple of quick ones for me. I mean can you talk about, how you're thinking of using your balance sheet, if there's potential M&A on the table? I mean you guys are at the low end of the 3.5 times to 4 times range.

Could you potentially use any levers to have a strategic acquisition, in the near future here?.

Yes. I would say, what we've -- what we talked about in the past was the portfolio being in very, very good shape. We feel as if being so strong in the marketplace, in both lottery and gaming. We've got a terrific amount of expertise and capabilities, worldwide studios and development expertise.

The one area, that we've signaled all along, and then we ultimately consummated with the acquisition of, iSoftBet both the desire to potentially accelerate our expertise and our product suite and our studio capabilities in the digital space.

We -- you can expect us to be, busy working with the iSoftBet team, in the integration and first the closing and integration of that business with our PlayDigital business.

In fact, I'm here in San Francisco today, and our new digital headquarters spending time with our team and we're talking through our strategic plans for the rest of this year and going out several years.

So we're excited, about the progress the company has made and the early leadership position, its gotten off to in the high casino gaming jurisdictions that have opened up in North America. Europe, we've not been as competitive. That's a long established market, with a different set of dynamics.

And historically, the digital-first companies have done better in that marketplace and iSoftBet has been very competitive there. So we think, that helps to fill a niche for us and gives us a very strong set of competencies and capabilities. And our goal over time is to become the leading casino company as we are in land based.

We have no plans at the moment for incremental M&A. I'll let Max talk to our capital structure. But we feel as if we've been able -- or we will be able to close this transaction and still further reduce our leverage as a result of the sale of our Italian payments business.

So we feel like that's a very good balance of capital deployment to give us increased capabilities in a high-growth gaming area, yet continue to do what the company has done over time, which I think has been a very impressive reduction in debt and lower leverage and a vastly improved capital structure..

Yeah, and my only addition on this point to reiterate our long-term view on the leverage. It is true, we are running at the low end of the guidance for this year, 3.5 times. But again long-term we expect to be in the range of 2.5 times to 3.5 times. So I think there is still work to be done.

And hence we need to further maintain our focus on our leverage. And at the same time continue to work around our balanced capital allocation approach..

Got you. Super helpful.

And maybe just a quick one I might have missed this earlier, but could you just provide some color on the way for cross-licensing deal that you guys struck during the early parts of this quarter?.

Yeah, so we were able to close this important IP license agreement. We're very happy with that. There's a mutual agreement that will reiterate one more time our leading position in that respect. We expect to be able to add a couple more in the balance of the year, but probably not to the same magnitude..

Thank you..

Thank you, Zach..

Yeah, I would just add on that some marketing for IGT. Over the years we've developed the largest portfolio of IP that we negotiate and share with the industry. So we're very proud of the innovation that's taken place. And I think as Max mentioned earlier that's an ongoing part of our business and our revenue stream and profitability..

So with that, I'll wrap it up. I think we're out of time here folks. I'd just like to say thank you all for joining us. I know you all are very busy jumping from call to call during this time and kind of a stressful time in the marketplace.

I think from our perspective as we've highlighted our strategy that we set out at Investor Day to grow innovate and optimize is paying off. We think we're on a compelling revenue and profit growth trajectory over the next couple of years that's supported by a really strong team and a solid balance sheet.

And as we execute on our goals, we do see a really strong clear path to creating significant shareholder value. So thanks for your interest and we look forward to seeing many of you in the next few weeks and have a great day..

Thank you and that concludes International Game Technology Q1 2022 earnings conference call. You may now disconnect..