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spk03: Ladies and gentlemen, thank you for standing by and welcome to the IGT 2022 fourth quarter and full year results. I would now like to turn the call over to James Hurley, Senior Vice President, Investor Relations. Please go ahead.
spk07: Thank you and thank you all for joining us on IGT's Q4 and full year 2022 conference call hosted by Ben Sadusky, Chief Executive Officer, and Max Chiara, our Chief Financial Officer. After some prepared remarks, Vince and Max will be available for your questions. During today's call, we will be making some forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our latest earnings release and in our SEC filings. During this call, we will discuss certain non-GAAP financial measures. You'll find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures, in our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our Investor Relations website. And now I'll turn the call over to Vince Tedeschi.
spk11: Thank you, Jim, and hello to everyone joining us today. We are reporting a strong finish to 2022 with profit growth and free cash flow generation accelerating in the fourth quarter. We achieved all financial goals for the year, mostly at the top end of our outlook, and we returned a record $276 million to shareholders through dividends and share repurchases. We end the year with revenue and profit margins comfortably above pre-pandemic levels and leverage at its lowest level ever. We strengthened our leadership positions across all our main activities during 2022. We remain the world's largest B2C operator of lotteries with a footprint that spans Europe, North America, and Latin America, as well as the leading provider of B2B lottery services and solutions for both land-based and iLottery channels. Our e-instant content is currently driving some of the strongest iLottery growth in the market, and our progressive e-instant games recently won lottery product of the year at the International Gaming Awards. The American Gaming Association recently reported 2022 was a record year for commercial gaming in the U.S., our largest market. Total revenue grew 14% to $60 billion, with growth across all segments, including a 5% increase in slot GGR. Our global gaming team maintained the leading North American slot ship share in 2022 for the fourth consecutive year, and we steadily gained share in each of those years. This momentum is supported by the leading game feature patent portfolio that gets stronger every year, as recognized by the Global Gaming Awards Casino Supplier of the Year for the third consecutive time. We also won four categories at last week's Eiler Slots Award Show. That land-based success is fueling our strong position in the North American iGaming market, which we expect to build on with newly expanded capabilities and opportunities for our Play Digital division. We also enhanced our industry-leading ESG profile in the last year with improved scores from several rating agencies and our commitment to the science-based targets initiative. I'd like to spend some time in the operating performance of each segment, beginning with Global Lottery. Same-store sales strengthened progressively in 2022, reaching 7% global growth in Q4 on elevated Powerball sales in the United States, in addition to nice growth in Italy for both instance and draw games. iLottery sales were up an impressive 60% in the year, with even stronger growth in the second half, driving a 300 basis point increase in our US iLottery market share. Total lottery same-store sales have increased at 6% CAGR since 2019. Our 2022 results confirm the market is successfully maintaining the outside sales levels experienced during the pandemic. We believe this is directly attributable to the steady stream of innovation that we, in partnership with our lottery customers, continually bring to market. Some recent examples include the launch of Gong in Italy. an add-on game to the successful 10-E lotto franchise that drove meaningful sales increases during Q4. We also achieved record Italy instant ticket sales in the fourth quarter thanks to a steady lineup of new game launches, including the highly successful launch of a 10-euro Super Numeracy game. It's a good proof point that our strategy to innovate with higher price points is working. The velocity of iLottery growth is fueled by a rapidly expanding e-instant portfolio. that is getting better with each new game launch. During the year, Bankbuster and Cleopatra Clusters established themselves as true blockbusters, and our investment in R&D should support about 40 new game launches in 2023, up from 30 in 2022. The robust performance of our expanding e-Instant portfolio opens an exciting new opportunity via third-party distribution arrangements. Our e-Instant games are live with 12 customers worldwide, and we expect to add a half dozen more in 2023. This should maintain double-digit iLottery growth even without any new market legislation. On the technology front, we launched Omnia, the company's first truly player-centric omni-channel lottery system, as well as Infinity Instance, a revolutionary digital instant ticket printing technology during 2022. We believe Omnia and Infinity are transformational innovations that offer powerful growth potential for the lottery industry. We also secured important new contract wins and extensions during the year, including a new 10-year instant ticket printing contract in Texas, as well as a multi-year facilities management extensions in New York and Georgia, which are among our top 10 lottery customers. The elevated lottery play levels achieved over the last few years have fueled about 500 basis points of operating margin expansion since 2019. This is despite increased R&D investment to support important initiatives like iLottery. And while the 35% operating profit margin is aligned with our 2025 target, there is room for more margin expansion with continued industry growth. Moving on to global gaming, Focused product and market strategies drove significant revenue and profit gains during 2022. A nearly 30% increase in revenue drove operating profit five times higher on improved service margins and discipline cost control, despite significantly higher supply chain costs. 2022 OI and EBITDA margins each exceeded 2019 levels. We ended the year with record levels on important KPIs, including global ASPs, and U.S. and Canada unit shipments. Much of this progress came from an expanding portfolio of successful MLP games, with Wolfram Eclipse and Egyptian Link being some of the top-performing titles. There is further opportunity for IGT to achieve increased share of the MLP market, and we have an exciting pipeline of new games coming to market this year. The broad acceptance of our new Peak Duel 32, Peak Slant 49, and Diamond RS cabinets in addition to our new poker cabinet offerings, is another important driver of the leading U.S. and Canada ship share we maintain for the fourth consecutive year. Demand for the Diamond RS is outpacing our ability to build units, reflective of this substantial stepper replacement cycle this cabinet offers. The global install base achieved annual growth for the first time in several years. Outside of the U.S. and Canada, the install base has been on an upward trajectory for some time, That momentum accelerated in 2022 on expansion in Latin America and Greece. In the middle of the year, there was an inflection that drove the US and Canada installed base higher, marking what we believe is an important milestone for IGT. The improvement was fueled by the success of new WAP and MLP games, such as Wheel of Fortune High Roller, Prosperity Link, and Money Mania, and was complemented by stronger yields. We expect continued install-based growth as we look to the future, both for the US and Canada, and for the rest of the world. Today, we believe our global gaming segment has never been stronger. There are many avenues of growth over the next several years across product categories and geographic regions. Those top-line opportunities should drive continued operating leverage as we progress towards our 2025 margin goals. There is a lot of excitement at Play Digital. the new name and brand for our digital embedding segment. The change is reflective of the seamless iSoftBed integration and the expanded capabilities and future opportunities for the segment. Play Digital delivered over 25% revenue growth and a 50% increase in operating profit in 2022. This is a great achievement considering the elevated investment in talent and R&D we made during the year, in addition to absorbing iSoftBed integration costs. The nearly $70 million in EBITDA and 32% EBITDA margin generated in 2022 are impressive levels for a relatively new business with a compelling growth outlook. We are on pace to double new online casino game launches to over 65 per year. In 2023, those new launches will include digital versions of our most popular land-based WAF and MLP games, such as Prosperity Link and Money Mania. We will also introduce several top-performing iSoft bet games in the US and Canada over the next few weeks. Soon, we will launch Wheel of Fortune Casino, the first brand-led online casino in the US through our long-standing relationships with BetMGM and Sony Pictures Television. It is an exciting and unique omnichannel offer leveraging one of the most successful and iconic slot brands. With a greatly expanded portfolio of over 250 proprietary games and a world-class aggregation platform able to distribute thousands more, we can now develop exclusive game assortments and targeted marketing campaigns for specific customers and markets. We launched the first two iSoftBed games in Ontario in Q4 to great player acceptance and are working our way through the regulatory process in the U.S. The first launches of IGT iGaming titles through our more robust global distribution network will begin with Greece and Romania later this year. In sports betting, we had 16 new installations across 11 jurisdictions in 2022, and we're now powering over 80 sportsbooks. FanDuel and Rhode Island, our two largest sports betting customers, had their best years, and we just came off record Super Bowl betting with smooth operational performance for our customers. There is a lot more opportunity for us to expand our customer base with our best-in-class hardware, technology, and trading service solutions, especially as new states go live. Play Digital's SaaS-like business model means that profit margins should expand as we gain scale. You can see the attractive margin dynamics in the 2022 results, a period that included elevated investments to support our growth objectives. The strength of our 2022 performance is a result of important strategic transformation at IGT over the last three years. In that time, the company recognized by global product responsibility, or I'm sorry, reorganized by global product responsibility, simplifying our organizational structure and financial disclosures. We monetized non-core assets at attractive valuations and significantly reduced structural costs. At the same time, we made important investments in growth, especially in the B2B iGaming and iLottery space. Our actions, coupled with the strong cash flow generation of the business, enabled us to reduce our debt and leverage, greatly improving our credit profile, which now stands at crossover investment grade with the recent Fitch rating. We have also enhanced shareholder returns by reinstating a dividend and establishing the company's first-ever share repurchase program. These changes have transformed IGT into a company with a higher growth prospect and better profit profile than before the pandemic. It's required a lot from the team who has remained intently focused on the task at hand. We've increased investment in our team by hiring new talent, especially in critical digital and technology functions, and by funding important initiatives such as career development, DEI, and other recognition and engagement programs. Results are encouraging with attrition down significantly and the advancement of a winning culture. I want to thank the team for all their efforts to build a stronger IGT. This strategic transformation puts us on a solid path to deliver on our long-term goals. This is clear in the 8% constant currency revenue growth we achieved in 2022. We expect to build on that momentum this year and are entering 2023 from a position of strength with good trends across business segments. Q1 23 is off to an encouraging start for lottery with accelerated growth in Italy lottery sales and elevated U.S. jackpot activity. For gaming, we have a robust Q1 unit sales funnel, and we also expect continued installed base growth. Play digital momentum should be maintained even in the absence of new iGaming jurisdictions as we leverage our newly expanded game development and distribution capabilities. Now I'll turn the call over to Max.
spk05: Thank you Vince and hello to everyone joining us on the call today. Our solid revenue and profit growth in 2022, in addition to robust cash flow generation, is a testament to our ability to overcome significant headwinds, most notably from adverse currency rate movements and significant supply chain constraints. The results are even more impressive on a constant currency basis. As a result, we were able to meet the high end of our outlook on all key financial metrics for the full year with a strong finish to the year as Q4 came in above expectations. On slide 11, we have provided a high-level summary of our fourth quarter and full year 2022 financial results with comparisons to the prior year. In the quarter, we generated over a billion dollars in revenue, up 4% as reported, and 8% at constant currency, driven by strong global same-store sales growth in lottery, record US and Canada unit shipments, and global ASP in gaming, and a 56% increase in play digital revenue, fueled by growth in both iGaming and sports betting activities. Strong operating leverage drove operating income up 24% or 30% at constant currency to $230 million. These yielded an operating income margin of 21%, 200 basis points above the high end of our outlook, primarily due to stronger performance across segments. For the full year, we generated $4.2 billion in revenue, up 3% as reported, and 8% at constant currency on significant year-over-year growth in gaming and play digital. A robust and resilient margin profile in Global Lottery, coupled with very strong operating leverage in global gaming and play digital, drove operating income to $922 million up 2% as reported and 9% at constant currency. Changes in some below operating income items, including reduced interest expense and the normalization of the tax rate, contributed to significant accretion in adjusted EPS to almost $2 per share. This is reflective of the company's considerably improved earnings power. During 2021, we realized over $200 million in structural cost savings, versus 2019 under Optima 1.0. At our investor day in November 21, we introduced Optima 2.0, a program designed to deliver an incremental $150 million in structural profit improvement by the end of 2023 compared to 2019. I'm pleased to report that we have already achieved two-thirds of the target at the end of 22, with over $50 million realized in lower interest expense and improvement to the effective tax rate dropping to 30%. Going forward, the effective tax rate, net of effects, and discrete items is expected to remain in the low-mid 30% range. The additional savings from operational excellence and margin improvement initiatives should fully materialize once supply chain headwinds and inflationary cost increases normalize. Now, let's review the results of our three business segments. Global lottery generated $639 million in revenue in the fourth quarter, down 7% as reported, but up 8% at constant currency if we adjust the perimeter for the sale of Italy commercial services in September 2022. Global same-store sales grew 7% on strong sales for the record $2 billion Powerball jackpot in November and a nice recovery in Italy, where same-store sales increased 3%. High lottery sales rose 84% with strong growth in existing markets as well as contributions from Belgium. Terminal sales in West Virginia and robust instant ticket sales, including the popular cash blitz game in Texas, drove higher product sales. Operating income rose 6% at constant currency to $216 million in the four quarter. Operating income margin of 34% in the four quarter and 35% for the full year are already aligned with the 2025 target range. Global gaming continues to deliver strong financial results with significant year-over-year increases in revenue and profit in both the four-quarter and full-year periods. Q4 revenue of $389 million rose 21% with double-digit gains across service and product sales categories driven by demand for IGT game offerings, new cabinet solutions, and add-on services. Product sales were especially strong in the quarter with global unit shipments up 29% to about 9,500 units. Record US and Canada shipments of nearly 7,500 units were propelled by a 73% increase in unit ship to casino customers. Q4 marked the four consecutive quarter of US and Canada unit shipment exceeding pre-pandemic levels. We also achieved record global ASPs of $15,500. The global install base rose over 1,000 units sequentially in the fourth quarter, predominantly driven by higher placements in Latin America and Greece. The US and Canada install base was up slightly, but underlying growth, including the placement of over 370 units in Absalom Valley, was offset by the conversion to sale of about 500 units to Valles in advance to the launch of the Rhode Island VLT joint venture. Those units were part of the 1,500 units contributed by Bali to the joint venture on January 1, 2023. Performer for the Rhode Island JV, IGT's global installed base of more than 51,000 units has recovered to its pre-pandemic level. We have included more details on the scope and accounting treatment of the Rhode Island JV in the appendix of today's presentation. Significant operating leverage drove operating income up nearly 90% to $68 million and operating income margin to 17.6%, a record for a quarter period. On a full year basis, operating profit rose over five times to 242 million, exceeding 2019's level. On increased service margin and high margin IP royalties in the first half of the year, and despite higher supply chain cost. In the absence of those supply chain headwinds, the margin would have been about 450 basis points higher. Play Digital achieved record financial results in the four-quarter and full-year periods. Revenue increased 56% to $65 million in Q4, propelled by organic growth, market expansions, and high soft bet acquisition. Sports betting also increased on strong fund dual and Rhode Island performance. Operating income increased to $17 million, and operating margin rose to 25.5%, helped by strong top-line growth, lower than expected jackpot expense, and despite integration cost and continued investment in talent and R&D to fund the future of this high-growth business. For the full year, revenue increased 27% to more than $200 million. Strong operating leverage resulted in 51% profit growth, with operating income reaching $50 million and the margin expanding almost 400 business points. Cash flows were very strong in 2022, with nearly $900 million in cash from operations and $582 million in free cash flow generated from outstanding operational performance and ongoing discipline around capital management, including increased investment for future growth of about $80 million year over year. Cash from operations included a $50 million escrow payment related to the DDI Benson matter. Excluding this payment, we achieved the high end of our outlook for cash from operations. And with capital expenditures lower than expected, at $317 million, free cash flow exceeded our expectations. We expect to pay the remaining $220 million for the DDI-Benson matters sometime this year, pending final court approval of the agreement. This settlement is anticipated to have an after-tax impact on 2023 cash flow, of about $155 million. We delivered a record $276 million to shareholders in 2022, including over $160 million in cash dividends and $150 million for the repurchase of 5.4 million shares at an average price of about $21 and change per share. $145 million remains outstanding under the current repurchase authorization. We strengthened our credit profile in 2022 with debt reduction of over $770 million, net debt leverage improving nearly half a turn to a record low 3.1 times, and we increased our liquidity. This work continues in 2023 with a redemption of $61 million in the 5.35% notes due in 2023, and the today announced May call redemption of 200 million of the 6.5% US dollar notes due 2025, and 188 million euros of the 3.5% euro notes due 2024. This leaves us in a nice position with no meaningful near-term debt maturities. Our good progress is reflected in the BBB Plus issuer credit weighting with a stable outlook and an investment grade BBB minus weighting on our senior debt from Fitch, who highlights our conservative leverage and leading share in core gaming and markets, specifically in lottery. Total liquidity improved to $2.4 billion at year end, which includes $1.8 billion in additional borrowing capacity from undrawn credit facilities. Our outlook for the full year and first quarter of 2023 is here on slide 18. For the full year, we currently expect to generate revenue of approximately 4.1 to 4.3 billion, operating income margins of 21 to 23%, cash from operations of between $900 million and $1 billion, and capital expenditures ranging from 400 to 450 million. Our outlook assumes low single-digit same-store sales growth in global lottery, as sales are now growing off a higher base. Same-store sales are expected to be stronger in the first half of the year, given the large multi-jurisdiction jackpot activity we had in the back half of 2022. While large jackpots can certainly happen again, we don't plan for them in our forecasts. Global gaming is expected to continue its momentum, supported by higher year-over-year unit shipments, ASPs, and install base units. Double-digit top-line growth is forecasted for Play Digital as well. The full-year operating income margin includes about 100 basis point negative impact, half of which is from higher depreciation associated with returning to more normal investment in the gaming install base. The other half relates to the previously disclosed Italy restructuring program, which is mostly expected in the back half of the year. We also have about a $25 million increase in DNA associated with a new multi-year IP license agreement, which we capitalized in our asset base. This does not affect operating income, but does impact EBITDA positively. Cash from operations is expected to increase year over year, on improvements in working capital, including lower interest and cash tax payments, despite an estimated after-tax cash outflow of about $155 million related to the DDI Spencer method. Given broader macroeconomic uncertainty and expectations of a potential recession or economic slowdown, our outlook is consistent with a somewhat cautious view on the back half of the year, including the potential for a weaker U.S. economy. We have a resilient business with high recurring revenue streams that are mostly backed by long-term contracts, and we maintain an agile cost structure. For the first quarter, on the back of positive early trends across our three business verticals, we expect to deliver revenue of approximately $1 billion and operating income margins of 22% to 24%. This outlook implies a sequential improvement in operating income from Q4. Moving quickly to the conclusion of my prepared remarks, let me summarize by saying 2022 was another year of significant accomplishments with strong financial results that met the high end of our expectations. We greatly enhanced our credit profile with debt and leverage reduced to the lowest level in company history and we return record capital to shareholders. As Vince mentioned, we have good momentum heading into 2023 across business segments with enhanced prospects for profitable growth. We have increased our financial strength and flexibility, which positions us well for the future as we continue to advance toward achieving our 2025 goals. That concludes our prepared remarks. Operator, would you please open the line for questions?
spk03: The floor is now open for your questions. To ask a question at this time, please press star 1 on your telephone keypad. At any point you'd like to withdraw from the queue, please press star 1 again. You'll be provided with the opportunity to ask one question and one further follow-up question.
spk02: We'll take a moment to render our roster. Our first question comes from the line of Carlo Santorelli.
spk03: from Deutsche Bank. Please proceed.
spk06: Hey, everyone. Good morning and thank you. Guys, if you wouldn't mind, could you talk a little bit about how you foresee margins across primarily the lottery and gaming segment as we move into 23? Obviously, supply chain issues, costs played a role last year, scale revenue levels kind of back to pre-pandemic levels at least or moving in the right direction, especially on the gaming side. Um, just talk a little bit about the puts and takes and maybe max, if you could kind of quantify the totality of the jackpot benefits for 2022, just to get a sense of, of kind of what we're looking at from a comparison perspective in, in 23.
spk05: Yes. Hi, Carlo. Good morning. Let me start from, from the end. So, uh, and take the jackpot impact out of the way. So effectively, we got now three consecutive quarters of more than a billion dollar jackpot. In Q3, we got 10 million of positive impact. In Q4, we got about 20 million of positive impact. And now we expect for January, actually Q1, a positive impact of between 5 and 10 million. As you know, the advertised level of jackpot has increased as a result also of the significant interest rate hikes. happened during 2023, so that obviously facilitates increased momentum into that game. But please keep in mind that jackpot represent only 10% of total US sales in lottery, and we earn our regular 1% to 1.5% on those sales. Having said that, when we look into the margin progression towards our 2025 goals by segment, so we said several times during the year that lottery is already sitting well in between that range, 33% to 36%. In insight, the sale of the commercial service business in Italy, which was running at a lower average margin, will have a positive impact to our margin all in all. And so we expect to continue to make progress on that figure. as far as lottery is concerned. And again, keep in mind that we don't project high jackpot achievement in our forecast. As far as gaming is concerned, the progression in the margin is kind of assumed as a result of two phenomena. One, our increased penetration in the different markets where we compete as a result of the strong game offering. And two, as We anticipate the supply chain headwinds to start a bait in 2023, not completely, but meaningfully to improve the margin. So we expect the margin to be probably up a couple of points year on year in 2023, but what I will mostly focus on is the exit margin of 2023, which in our ideas is probably going to be above 20% on OI. So we expect an improvement during the year to basically continue to march toward our 2025 target of 28% to 30%. And finally, for DMV, this business has continued to surprise us on the upside quarter after quarter. It now has a meaningful $70 million EBITDA generation on a full year basis. We have an OI margin that sits right about in the mid-20s, and we expect that margin to continue to improve towards our target of 30-plus, and we anticipate to be able to hit the 30-plus well ahead of 2025. Thank you.
spk06: Great. Thank you very much. I appreciate it.
spk03: Our next question comes from the line of Chad Bainan from Macquarie. Please proceed.
spk09: Morning. Thanks for taking my question. Nice quarter in Outlook. First, I wanted to ask about Play Digital. In your 23 Outlook, you talked about double-digit revenue growth. Wondering if you could talk about some of the bigger market opportunities. And then I was wondering, now that you've had this business under your belt, if some of your other global relationships could help benefit this business more. to maybe even be higher than that. I know you talked about some of the game launches, but just trying to get a sense of what markets we should focus on and kind of where the upside could be. Thanks.
spk11: Yeah, I would say with regard to Play Digital, the legalization of iGaming in incremental jurisdictions in North America is likely slower than we would have thought a couple of years ago. And that's why we think it was really a great sign and really important for Play Digital to make so much progress in 2022 around the games. It's really all about the games and the platform. And having our deep library on the land-based side, I think, allows us to continue to have success on Play Digital. Our incredible market share that that business has developed has largely been based off of the success we've had with our deep library on the land-based side. With the success of titles like Prosperity Link and Money Mania, you'll see those games poured over to the digital environment, and we believe those will continue to have great recognition by consumers, as well as the investment we've made in our platform. I think we're a very valuable provider to our digital casino customers with our aggregation capabilities for third parties. We've got so many games, so much content that we're working to make available to our customers through iSoftBets, both library and their ability to produce current games, and the integration of their class-leading platform, enables us to provide analytics and I think great feedback and customer tools. So I do think that our growth will continue to come through the production of great games and the increase in digital play, in particular in North America. When you look at the sports betting side, We've had good success there as well as a B2B provider. You've read about several, I think, B2B systems providers that have struggled with the technology, the acceptance of bets, the odds making, especially in big game days like the Super Bowl. Our system performed flawlessly. Our trading service customers are very happy. We've got the advantage of the hardware and the software side. I think we have over 800 kiosks deployed on the hardware side as well as powering our mobile platform. And clearly the pace of expansion of sports betting legislation in North America has slowed, but there are plenty of markets that are open. And I think there will be convergence and focus on the quality operators. So those, when we think about the drivers of the Play Digital business over the next year or two, those are the things that we're focused on.
spk09: Great. Thank you very much. Appreciate that. And then on the CapEx, the 400, the 450 for the year, can you help us think about the rough breakdown there?
spk05: terms of where the the money is going and is there any uh you know what we would call growth capex in there on any new contracts or you know i guess growth for the installed base but maybe just some details there thank you yes so um while in 2022 the increase in capex was almost in the gaming division as a result of our efforts to increase our install base 23 will be more balanced we will start Slowly, the long cycle of lottery contracts renewals on the back of the recent extensions. So there will be some money allocated to Georgia and New York, some of the contracts that we recently extended. And that will make a big part of it. The other part will continue to be on the gaming side as we continue to invest in our growth projects. and to further develop our install base.
spk02: Great. Thank you very much.
spk03: Our next question comes from the line of Barry Jonas from Truist Securities. Please proceed.
spk10: Hey, good morning, guys. Was hoping to get more color on the difference between the high and low end of the guide for 23. And I'd ask if the economy stays at current levels, could you hit or even exceed the high end? Thanks.
spk05: So the way we structured our outlook thinking this year was kind of pretty balanced between a scenario where the situation stays as it is And all the bad stuff is kind of further delayed out into 24, which would probably speak for us to be able to stay in the upper end. And a scenario where we see a weakening of the economy up to the verge of a potential moderate slowdown. And so we are protected on the downside, our outlook with the lower half. I would leave it at that for now, and we'll see how we progress during the year.
spk10: Okay, great. And then just as we think about the pipeline for new or competitive contracts on the state or country level, I'm curious if you could just give us any color on anything you're targeting.
spk11: With regard to lottery?
spk08: Lottery, yeah, sorry.
spk11: Yeah, yeah. Yeah, we've got a good contract cycle over the next couple of years. As we mentioned, we've secured, extended, or secured some of our largest contracts over the last couple of years, and this year in particular. A couple we have coming up, we're going live in Connecticut, which we won from a competitor that will be towards the back half of this year. um you know we do have the majority of the fm contracts in north america but uh but but there are some that are managed by others and uh you know we constantly work those and then as we've said we think that uh you know we potentially have a greater opportunity on the printing side as you know we don't have significant share of that business um and there are some some printing contracts coming up and you know that business is interesting there are typically shorter duration contracts, as well as there's been a trend for multi-vendor contracts on the printing side, unlike FM, which would be impossible to administer. So we think we've got some opportunity coming up both in 2023 and 2024. In fact, I was a few weeks ago just in Lakeland, our printing facility, we had a worldwide conference with all of our print folks and going through our long-term business plan over the next couple of years and looking at our capacity and automation. And I think with the significant investment we've made in our print line, as well as our patent and technology like Xfinity Instance, we've got the ability to earn some business. And again, I think that was an area that wasn't a significant focus for the company many years ago. And now that we've got the capability of making the investment, we think We think that's a nice incremental opportunity going forward.
spk02: Great. Thanks so much. Our next question comes from the line of Benjamin Chaiken from Credit Suisse. Please proceed.
spk08: Hey, good morning. If I heard you correctly within the gaming segment, I think you mentioned a 20% exit rate in OI within gaming, which suggests a progression through the year, if I interpreted you right. Is that a top-line driven dynamic or just normal seasonality? We haven't had a normal 12 months in a while, so just wanted some clarity there. And then related, you know, you're targeting a 28% to 30% OI by 25, as you highlighted at the investor day, and then referenced in the call. Can you help us think about the moving parts in that progression as we move into 24? Is it pretty smooth or is there some lumpiness we should consider?
spk05: Thanks. Hi, Ben. Thank you for the follow-up questions because it allowed me to dig a little bit deeper into the supply chain issues and how we intend, how we have planned for offsetting those issues, both from an operational standpoint and a commercial standpoint as well. So effectively the short answer is a combination of top line and efficiency that will allow us to improve that margin to that exit level that I mentioned before for the end of 23. But speaking more specifically about the supply chain, we have done a tremendous work this year to re-engineer some of our supply chain value cycles We have expanded our partnership with vendors to guarantee a safer supply. And so what we anticipate next year is about a third of the impact to subside. We said total year about 60 million in gaming. The balance is going to fade out over the next two to three years. with the final structural cost increase piece of about 20 million. We expect that structural increase of 20 million remaining to be offset by our pricing actions that we announced mid of the year and are now effective in the market as we speak. So all in all, I think it's a strong reaction from the operating team on the supply chain. And then the continued progression on our top line as Vince elaborated during his prepared remarks and in the subsequent Q&A that we are having. Thank you, Ben.
spk02: Thank you very much.
spk03: As a reminder, the floor is now open for your questions. To ask a question at this time, please press star 1 on your telephone keypad.
spk02: Our next question comes from the line of David Katz from Jefferies.
spk12: Please proceed. Hi, morning, everyone. Congrats on your quarter. I wanted to just talk, Max, a little bit longer term about kind of the cash flow dynamics given the lower leverage, improved profitability, but at some point in the future, Italian contracts that start to come up renewal and there's always been some need to keep powder dry to support those efforts. Can you just walk us out a few years as to how you're thinking about cash use?
spk05: Effectively, from a pure net leverage and the results standpoint, if you want me to summarize it, it's a race against time. We need to continue to generate incremental cash so that once that time comes and we have to front that payment, we will not be negatively impacted on our leverage trajectory going forward. That, in a nutshell, is what is embedded with our plan. The other important aspect is the balanced capital allocation view, meaning that over the five years, we have to adhere to our three major pillars, invest in the business to continue to steer profitable growth, deliver our balance sheet to create a more solid and more resilient structure, and last but not least, remunerate our shareholders accordingly. So on that regard, we have initiated our $300 million buyback program very aggressively. We have already achieved more than 50% over the first year and a half. We still have three years to go. So I think we are in a very well position right now to manage our cash commitment accordingly with some degree of flexibility. I hope that clarifies.
spk12: Yeah, so if I may just follow up with respect to just a target leverage range, should we expect that you have your longer term sites on more like a two and a half times level or do you expect to sit right around that three level? Where would you aspire to be?
spk05: Yeah, so you're right. Our plan is technically embeds a low end of the range achievement of two and a half, we kept our outlook much larger in order to protect for the unknown because we still want to be within the range in any circumstance during the period. But again, if our plan continues to work in line with expectations, we should be able to get to the low end of the 2.5 by when we get to 2025. And ultimately, what we are targeting is to be in a category of ratios, financial ratios that respect an investment-grade metric. I can't speak for the rating agency, but what I can control is the metric itself, and that's what we want to aspire to.
spk12: Understood. Thanks a lot.
spk05: if you're not there already with some of them.
spk02: Thank you. Our next question comes from the line of Domenico Gelati from Equita.
spk03: Please proceed.
spk01: Good morning. I have a question on the cost of inflation because you are mentioning the supply chain disruption that hopefully can be more... temporary and can abate during 2023, while we see more structural cost inflation. So if you can comment if you see specific issues on some markets or some divisions. And then just a clarification on your guidance when you are saying that there is 100 bps of negative impact on oil high margin for 2023. So you're mentioning so higher DNA, from the investment in a stock base that is probably more structural, if I understand properly. And then you are mentioning also an ongoing restructuring in Italy that can be hopefully more a one-off. So if you can give us some color on the two contributions.
spk05: Yes, so Domenico, starting from the second part, and in order to help you deconstruct the numbers. So effectively, what we see is a transition 25 plus 25 million DNA increase year over year. The first 25 comes on the back of the install base growth. So it's structural, as you said. The second 25 is associated with this new IP license agreement we recently concluded that will allow us to effectively capitalize expenses. And so you have to capitalize first and then depreciate the expenses the first tranche of that depreciation comes into play into 2025. But effectively, this second item does not impact all in all the numbers because you have a positive 25 in the EBITDA and you have a negative 25 on the DNA, so net-net DUI stays unaffected year on year. The restructuring program in Italy is the third leg. It was a three-year program that was launched back in 2021. So we anticipate the final leg to materialize at the end of the year, and that's the remaining bulk of that number. Going back to the inflation instead, so I think here as well we have to deconstruct the numbers a little bit because otherwise you would come out with a wrong impression. I can tell you that the underlying structural inflation impact for both gaming and lottery for our business has been around 8% this year. On top of that, in gaming, we had about 20% of one-off costs. Some of those we expect to recede right away in 2023 because we have course-corrected our supply chain structure, and the other half is probably going to fade away in the following year. So that's in a nutshell where we are and what we expect in terms of inflationary impact. Obviously, there is some... inflation that will kind of escalate in some of our supply contracts because they have an adjustment in a year based upon the latest measurement but this is definitely expected covered by our outlook and again we're going to continue to watch very carefully the inflation metrics as they come to fruition month after month and we will have opportunities to affect eventual negative impact from either looking again at our pricing or finding additional efficiencies in the organization.
spk01: Just a follow-up or a clarification on when you were referring to the headwind from supply chain disruption, were you including the general cost inflation that you have seen, or more specifically, so the issues that we have seen?
spk05: The 62 is all in. So effectively is spot buy, last buy, purchase price variance, structural bill of material cost increases, inbound freight, outbound freight, all the different components that over the year have affected the cost. But again, In a nutshell, one-third is expected to fade in 2023, one-third is expected to fade out in 2024, and the remaining third is probably a structural increase in the cost. Very clear. Thank you. I couldn't detail even more.
spk03: Our final question comes from Gemma Permaloo from J.P. Morgan. Please proceed.
spk00: Hi, good morning, and congrats on the quarter. I just had one follow-up question. Going back to your comment about the financial ratios that would respect the data of an IG rating, and granted, I think some of your metrics are already there, but I remember in the past when I was the question, you commented that getting to an IG rating would be great, but it was not a priority for IGT. So I just wanted to understand if there's been a slight change in maybe your commitment to trying to get to an IG rating, because obviously that would mean a cheaper cost of capital as well. I appreciate your thoughts there. Thank you.
spk05: Yeah, look, I think at the end of the day it's a matter of where you land on the metrics. And if you have an ability to stay in that investment grade metrics, it's conaturate with it to target the investment grade rating. The truth of the matter is COVID has taught us a lesson. Low levered companies are probably better positioned to weather storms, unexpected storms than high lever companies. And so with that philosophy in mind, the importance of maintaining a tight control and on cost, and on cash, and target those metrics is definitely supporting our value generation trajectory. Thank you.
spk02: I would now like to turn the call over to Vince Sadowski for closing remarks.
spk11: Well, great. Thank you all for joining us today. As we've summarized, 2022 was a strong year for us, and we had really good momentum across the enterprise. A reminder that leverage is at its lowest level ever for the company, and we returned record capital to shareholders. I think importantly, over the last three years, we've successfully transformed IGT into a company with higher growth prospects and a better profit profile. In 2023, we're starting from a position of strength, and we feel we're on a solid path to delivering on our long-term goals. and our first quarter outlook reflects the good trends we're experiencing for all of lottery gaming and play digital. We appreciate your interest in IGT, and we look forward to meeting many of you in the coming weeks. Have a great day.
spk03: Thank you, ladies and gentlemen. This does conclude today's call. Thank you for your participation.
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