Brightstar Lottery PLC (BRSL) Q3 2022 Earnings Report, Transcript and Summary

Good morning. My name is Devin, and I will be your conference operator today. At this time, I would like to welcome everyone to the International Game Technology Q3 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer. [Operator Instructions] Thank you. James Hurley, Senior Vice President of Investor Relations, you may begin the conference.

Thank you, and thank you all for joining us on IGT's third 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. 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 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 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. In our press release, slides accompanying this webcast and our filings with the SEC each of which is posted on our Investor Relations website, you’ll find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. And now I’ll turn the call over to Vince Sadusky.

Thank you, Jim, and hello to everybody joining us here today. We delivered accelerated revenue and profit growth in the third quarter with nice momentum for each of our business segments. Revenue rose 14% at constant currency, led by over 30% growth for both Global Gaming and Digital & Betting. The 20% operating income reached the high end of our expectations on strong lottery margins and a substantial increase in gaming profitability. Adjusted EBITDA increased 7% at constant currency even as we continue to invest in several key growth initiatives and contend with higher supply chain costs. Our strategic focus on driving growth through innovation and optimizing our processes and scale is paying off. When the company reorganized around three main business segments with global product responsibility, it enabled our teams to focus on delivering best-in-class products and services more efficiently and profitably. This is evidenced in a year-to-date EBITDA margin that is over 350 basis points better than the full year 2019 level. And there is still more opportunity as our 2025 targets include further profit improvement. Solid cash flows and proceeds from strategic asset sales were used to reduce debt, improving our leverage to 3.1 times the lowest level in IGT's history, and we continue to return capital to shareholders. Through mid-October, we returned over $220 million via dividends and share repurchases, which marks a record level in a fiscal year period. At the current share price, our annualized dividend implies about a 4% yield and we've repurchased approximately 6% of our float since last November. It's a compelling return profile for a company with a clear growth trajectory and where most profits and cash flows come from recurring revenue streams backed by long-term contracts. That's a good segue into Global Lottery, where same-store sales were up 3% in the quarter mostly on strong multi-jurisdictional jackpot activity. iLottery sales nearly doubled from the prior year on strong eInstant performance in Georgia and Kentucky and new game launches in Belgium. Cleopatra Clusters Jackpot, a new eInstant game based on our popular slot title became our most successful launch to date. Italy same-store sales improved greatly as we anniversaried significant discrete benefits in the prior year. Instant ticket sales remained strong and draw games are progressively improving now tracking only modestly below 2019 levels. Taking a longer term view, the multi-year same-store sales growth accelerated in Q3 across all game types. The increase in North America is especially noteworthy with Q3 same-store sales up more than 30% from Q3 of ‘19. That implies an average annual growth rate of about 10% which is significantly greater than pre-COVID growth rates. Lottery strong multi-year sales expansion has fueled about 500 basis points of operating margin improvement from 2019. This highlights the significant profit flow through of an elevated sales base even as we've increased our investment in the business. Those investments were on full display at the recent World Lottery Summit. Our theme of Future Forward results driven showcased our industry leadership with a compelling suite of land-based and digital solutions. The scope of IGT's capabilities is unique, and it is grounded in our expertise and player insights from operating some of the world's largest and most successful lotteries. There was a lot of excitement around our launch of OMNIA, the industry's first truly player centric omni-channel lottery system. It's a concept to our customers are eager for as their portfolios expand into digital. OMNIA provides the capability to manage the whole enterprise from a single point. Lotteries can easily gain insights into their entire portfolio and player base as data is integrated from all sales points in ways that improve a lottery’s ability to market, launch and enhance games to meet player preferences. It also provides unprecedented opportunity to strengthen responsible gaming programs. We think it's the future of the lottery industry. Speaking of the future, we've had some important strategic developments, including long-term contract extensions with the New York and Georgia Lotteries, as well as a new 10-year instant ticket printing contract with the Texas Lottery. In addition, the sale of our Italian Commercial Services business not only helped us reduce debt, but it should have about a 200 basis point beneficial impact on the Lottery segment's margin structure. It also reduces our Italy and euro exposure. Global Gaming had another terrific quarter with revenue up over 30% and operating profit more than doubling, thanks to broad-based momentum across all main KPIs. The increase in profit is noteworthy since Global Gaming has had to sustain higher supply chain costs than our other businesses. Our roster of core video and multi-level progressive games on award-winning new hardware drove record unit shipments in the U.S. and Canada for a Q3 and year-to-date period. This resulted in the highest U.S. and Canada ASPs ever in the third quarter. We continue to maintain the leading North American ship share, a spot we've held for close to four years. We also marked an important milestone with sequential improvement in the installed base, expanding footprints for new WAP and MLP titles such as Prosperity Link, Money Mania and Wheel of Fortune High Roller are fueling the installed base growth and also driving higher yields and our success is being recognized. Prosperity Link won best slot product at the 2022 GGB Gaming and Technology Awards. Most importantly, we believe the strength of current titles and what we have in the pipeline can drive continued improvement in the installed base. Our confidence is bolstered by excellent feedback from G2E where our product strategy is resonated with customers. In the premium category, our focus is on three key areas: building on MLP strength, expanding our video WAP presence, and supporting the iconic Wheel of Fortune franchise. We intend to drive gaming machine unit sales with four main initiatives. First, we're expanding the Peak Cabinet family with the launch of the PeakDual 27 and the Peak Curve; second, we will leverage player favorite brands like Cats to expand our MLP portfolio; third, we will grow unit sales of the top performing DiamondRS cabinet; and finally, we will support the DiamondRS with a robust roster of classic and new games. All in all, it is a compelling strategy that we are confident will continue to produce results. In systems, cashless continues to attract a lot of attention and IGT is leading the cashless gaming transformation. Our Resort Wallet and IGT pay solutions are making it easier for players to activate cashless functionality and are integrating cashless add more places throughout the casino. Operator adoption is progressing well with an enterprise-wide rollout of IGT's cashless solution at Station Casinos and the recent deployment at Indigo Sky Casino. Global Gaming's strong top line and profit momentum is a product of being a leaner, more focused and more nimble organization. We have centralized global product responsibility that enables better decision making and allows us to leverage our scale across game and hardware development and deployment. It is also helping us manage through supply chain challenges more effectively. Strong operating leverage is evidenced by a Q3 operating profit margin that is 370 basis points higher than 2019. There is still a lot of opportunity for further margin improvement as we work towards our 2025 goals. Turning to Digital & Betting, increased investments are delivering accelerated top line growth. The integration of iSoftBet during the quarter was an important driver of the more than 30% revenue expansion at constant currency in the period. GGR was up for our existing North American iCasino and Sports Betting operations, which account for most of the segment's revenue. With the addition of iSoftBet, our iCasino offer is now live in over 25 jurisdictions and there are a number of new market launches in Europe and Latin America planned for next year. We are also on pace to double the number of new game launches to about 50 per year. Omnichannel games are a key area of focus and competitive advantage as we look to leverage the success of land based titles such as Prosperity Link and Money Mania in the digital arena. The expansion of our game development capabilities along with our newly acquired aggregation platform enables us to develop exclusive selections for our customers who are always looking for ways to differentiate themselves in the market. IGT's proposition becomes even more compelling with world class data analytics and user engagement tools that can create a real time personal offering and recommendations for individual players. For Sports Betting, IGT solutions are powering over 80 sports books and the portfolio of turnkey customers continues to expand. The new PeakBarTop with Sports Betting cabinet we just introduced to the G2E is getting a lot of attention, including winning the Land-Based Product of the Year Award at the 2022 Global Gaming Awards in Las Vegas. The Digital & Betting segment is already profitable even as we are making outsized investments for future growth. The SaaS like business model means that profit margin should expand as we gain scale. You should see that dynamic unfolding beginning next year as we continue to work on the iSoftBet integration for the rest of 2022. Our year-to-date results highlight good momentum across each business segment. With revenue and profits up in constant currency, we have successfully anniversaried the substantial discrete benefits in the prior year and we've overcome around $180 million in revenue and $140 million in operating profit headwinds and from FX, higher supply chain and project costs and Omicron (ph). It is an impressive achievement and I want to thank the IGT team for their passion and dedication to delivering it. Current customer player demand trends remain strong. IGT has a diverse and resilient business model. As I noted, most of our profits and cash flows are generated by recurring revenue streams backed by long term contracts. This puts us on a solid path to delivering on our fiscal year 2022 commitments. It also enables us to deliver compelling shareholder value with capital returns at record highs. Now, I'll turn the call over to Max.

Thank you, Vince, and thank you all for joining us today. The third quarter results highlight strong underlying growth and accelerating momentum across the company. Our investment in innovation and focus on optimizing processes and our cost structure is generating strong cash flow. We are deploying that cash flow in a balanced manner to drive future growth, reduce debt and return capital to shareholders. On Slide 14, you will see a summary of key financial highlights. Revenue in the third quarter was $1.1 billion growing 14% over the prior year at constant currency with contributions from all segments. Global Gaming grew 34% at constant currency due to strong player demand for our products and services. The Global Lottery business grew 4% at constant currency driven mostly by strong multi-jurisdiction jackpot performance and Digital & Betting revenue, which includes contributions from iSoftBet was up an impressive 34%. Operating income of $211 million grew 9% over the prior year at constant currency driven by significant operating leverage in gaming and the operating income margin of 20% came in at the top of expectations. This included about 150 basis point impact from project related costs and step up amortization associated with the iSoftBet acquisition. Adjusted EBITDA of $402 million was up 7%, while adjusted EBITDA margin was 38% reflecting significant improvement in Global Gaming profitability and a robust lottery profit margin. Year-to-date, revenue of $3.1 billion grew 8% at constant currency. Operating income of $691 million and adjusted EBITDA of $1.2 billion were up 4% and 2% at constant currency, respectively. Operating margin of 22% and adjusted EBITDA margin of 40% reflects structural improvement versus 2019 despite increased investment in growth initiatives and inflationary and supply chain challenges impacting our industry and businesses throughout the year. Year-to-date results showcase our ability to deliver profit while investing in strategic initiatives and navigating macro headwinds and with KPI momentum accelerating across each segment, we are on track to achieve our full year financial objectives. Let's now move to the segments, starting with Lottery. Third quarter Lottery revenue totaled nearly $630 million, up 4% at constant currency. Same-store sales grew 3.3% versus the third quarter of 2021 fueled by strong multi-jurisdiction jackpot activity in the U.S. and for Europe million (ph) jackpot. Same-store sales growth for all game types improved versus first half trends. Compared to 2019, global same-store sales growth was up over 20% in the third quarter with strength across geographies and game categories. North America same-store sales growth was up over 30% and Italy same-store sales increased low-double digit with over 20% growth for instant ticket sales, partially mitigated by lower draw game sales. Italy draw game sales are progressively improving and are approaching pre-COVID levels. iLottery continued to be an area of growth and exciting opportunity. iLottery sales nearly doubled year-over-year on new game launches in Belgium and robust eInstant ticket sales growth in North America. Global Lottery operating margin of 34% was strong and already at the midpoint of our 2025 target. This was achieved even with low Italy representation, especially from draw games. Global lottery trends are off to a good start in Q4 on strong sales for the historic Powerball jackpot in the U.S. and improved draw game sales in Italy. Turning to Global Gaming. We continue to see remarkable growth and broad-based improvement with revenue up over 30% supported by increased player activity and customer excitement for IGT Products and Solutions. Product sales were especially strong, rising about 70%. Total units shipped approached 9,000 in the third quarter, up nearly 60% from the prior year period, fueled by replacement unit demand, especially in the U.S. and Canada, where our leadership in the casino and VLT space translated into a record ASP of $15,900. Product sales also benefited from higher intellectual property and multi-year poker site license revenue. The global installed base was up sequentially by over 600 units with growth across geographies and categories. U.S. and Canada yield rose 7% to almost $44, among the highest in company history, supported by a growing roster of more productive WAP and MLP games. Operating income of EUR65 million more than doubled on significant operating leverage that drove operating margin up about 600 basis points to 17%, which is comfortably above the full year '19 level. There is a lot of momentum in the Global Gaming business on the heels a successful G2E. We believe the combination of compelling new games and exciting new hardware offer opportunities to improve our global prospect as we focus on growing share in areas where we are currently underrepresented. Digital & Betting revenue of $54 million was up 34% at constant currency. iGaming drove most of the growth in three key areas. The contribution from iSoftBet new markets such as Connecticut and West Virginia and organic growth. We're excited about the opportunities arising from iSoftBet alignment with our long term goals. Operating income of $12 million which was stable at constant currency and an operating income margin of 22% were better than we expected in light of iSoftBet integration cost and increased R&D investments. We expect to realize returns on these investments beginning next year as we leverage a growing content portfolio on an expanded and more robust global distribution network. Now turning to cash flow and capital allocation. Year-to-date cash from operations totaled $621 million, with free cash flow of almost $400 million. As a reminder, interest payments are concentrated in the first and third quarter, while tax payments are concentrated in the third and fourth quarter. In the current quarter, we started to see some of the unwinding of the investment in working capital from the first part of the year. We expect this to continue in Q4. We also realized a sizable net cash inflow from recent asset divestitures and acquisitions. This enabled us to opportunistically reduce debt in the quarter, while maintaining our balanced approach to capital allocation. Through mid-October, the company has returned $224 million to shareholders, including $103 million in share repurchases at an average share price of $21.52, $156 million of share repurchase authorization remains in our program. We exited the third quarter with a greatly enhanced credit profile. The partial tender of certain senior secured notes during the quarter including $400 million of 6.5% notes due 2025 and EUR200 million of 3.5% notes due 2024 brought our outstanding debt and leverage to the lowest level in company history. Net debt leverage of 3.1 times is better than our ‘22 target and is approaching the midpoint of our long term goal. $2.2 billion in total liquidity includes $1.8 billion in additional borrowing capacity from undrawn credit facilities. This allows us to be operationally and strategically nimble as we pursue our long-term objectives. The vast majority of our debt is fixed and the debt retirement done so far this year represent another milestone toward interest expense reduction. As shown on Slide 20, we are introducing guidance for the fourth quarter of around $1 billion in revenue and an 18% to 19% operating income margin. This assumes euro dollar parity and an impact of around 150 basis points to 200 basis points to operating margin from iSoftBet acquisition step up amortization, project-related costs and restructuring expenses. We are also reaffirming our 2022 full year guidance, targeting the upper half of the ranges. In summary, IGT is on track to achieve full year 2022 financial targets. We generated very strong financial results in the third quarter significantly enhanced our credit profile, deliver compelling returns to shareholders through dividends and share repurchases, and reaffirm our full year '22 outlook. This concludes our prepared remarks. Operator, would you please open the line for questions?

[Operator Instructions] Our first question comes from Carlo Santarelli with Deutsche Bank.

Hey, everybody. Good morning. At the end, Vince, obviously, a lot of moving parts, iSoftBet coming in. The Italian B2C business going out or with postpaid. You guys have overcome a lot this year. As we think about kind of the bridge to 2023, obviously building -- continuing to build momentum on the gaming side, lottery comps, a little bit more reasonable this year than in ‘23 than they were in ‘22. When you put it all together, how do you think about kind of the prospects for growth both kind of on a revenue line and on the adjusted EBITDA line?

Yeah. So I'll give you some qualitative thoughts. Of course, we're still kind of finalizing our thoughts around 2023. But I think it's pretty clear the underlying KPI trends in Lottery and Gaming for IGT have been really encouraging through the third quarter. Just some kind of high level data points to think about lottery same-store sales continue to grow. Italy, which has been down in 2022, given the discrete benefits in 2021, you saw in the third quarter has made significant progress and the decline from the prior year has been -- the gap has been reduced significantly. And then when you think about the gaming industry, you all obviously cover the casino operators and I've spent a fair amount of time with the casino operator CEOs prior to leading up to G2E and they continue to have great success, record cash flows and room rates and most importantly for us -- as far as slides go really record returns. We have not seen or heard any indication of anticipated slowdown in investment in their slot floor. If you take a look at the kind of market forecasters at the moment, they expect good growth in unit sales next year, both in North America and internationally. And I think IGT is in really good spot. Our games are better. I think we've had really good success, really good encouraging feedback from our customers. And again, our greatest struggles through the third quarter of 2022 and going into the fourth quarter has been keeping up with demand. So I think overall signs at the moment are good. And then you switch on over to Digital & Betting, you mentioned iSoftBet, I think we've got good momentum in that regard with iSoftBet helping us to, I think, provide incremental capabilities both on the platform basis to be able to be best-in-class in producing digital-first games as well as having a best-in-class system that makes it easy for third-party games to connect and integrate with us and take advantage of our significant distribution network. And I think that really helps to increase our capabilities in a period where the opening of iCasino’s through legislation in North America is a bit slower than we originally anticipated. So I think all those things feel pretty good in terms of our current view on 2023.

Great. Thank you, Vince. And then, if I could just one follow-up. You guys talked a little bit about the record ASPs in the U.S. and Canada and obviously margins within gaming or were up 320 basis points or so year-over-year. But clearly a lot of moving parts, clearly, you guys have taken a bunch of cost out of that business in general. So my question was more along the lines of, has the increase in pricing been enough on an apples-to-apples basis to kind of cover the supply chain increases in cost?

Hi, Carlo, this is Max speaking. I'll take this one. So the significantly improved ASP in Q3 still comes on the heels of really an improved mix of product, primarily is product with higher content that obviously have enhanced features that drives higher price points. Obviously, as we have said previously, we have also touched our prices, but the impact -- the true impact of pricing is not expected to come into fruition until later in Q4 and more vividly into 2023. And again, there have been actions that have come up on the heels of a significantly increased supply chain cost. And we have targeted about an up to a mid-single-digit price increase with some product categories of our own.

Again Q3, which makes (ph). [Multiple Speakers] Thank you.

Our next question comes from Barry Jonas with Truist Securities.

Hey, guys, good morning. Last quarter you talked about $10 million or so of EBITDA upside from the $1.3 billion jackpot. Is that about what was recognized? And then as a follow-up, what kind of upside are you assuming in guidance for the current Powerball?

Yes. So you recollect correctly. We estimated the Mega Million, $1.3 billion jackpot that hit in July to give us a favorable impact of about $10 million sales flow through to profit. Obviously, the jackpot running right now is much higher. It's $1.9 billion as everyone knows. So the benefit is expected to be higher than that. It could get up to $20 million, but we also need to see how much fatigue post Powerball hit, jackpot hit, will be in the market. So again, high level is probably up to $20 million right now for the fourth quarter.

Great. And then just relative to the lottery extensions that you announced, how should we think about the economics relative to the prior contracts?

Yes, I think we were happy to report that our New York contract got renewed. There is typically some incremental capital expenditures commitment associated with the renewal. So we can help our customers to upgrade their point of sales machines for the most part and take advantage of some of the great new technology that our team has designed and get that out into the marketplace. On the Georgia front, again, that was a seven-year renewal. And I think that continues to have very attractive returns, and that includes an upgrade of a bunch of their retail terminals as well and then Texas was a printing contract. And we renewed that for 10 years and we don't really talk about the financial terms associated with that. But of course, on printing, there's no capital commitment.

Perfect. All right. Thank you so much, guys.

[Operator Instructions] Next, we have Ben Chaiken with Credit Suisse.

Hey, everyone. Thanks for taking my questions. Just a quick one first. I'm not sure if you covered it. The 150 basis points to 200 basis points in 4Q, how much of that -- does that hit EBITDA those operating OI impact you guys called out? And then my second question, in the presentation, you talked about significant opportunity for margin improvement in gaming. I know in response to Carlo's question, you just talked about some pricing initiatives in '23 that should flow through. Should we see those margin enhancements in '23 based on the pricing increases? And then are there other opportunities as well on the cost side within gaming? Thanks.

Hi. This is Max speaking. I'll take this one. So in terms of the EBITDA specific impact of the 150 to 200, if you use the 150 as a point of reference, I would say, 150 bps EBITDA, 150 bps to OI (ph). So it's one-third hitting EBITDA. In terms of the gaming margin progression, we have displayed our target for 2025 to be on OI margin to be between 28% and 30%. We closed the quarter at 17% so there is some way to go. But we think that over the next three years, we will be able to get up to that target. So we expect the margin to sequentially improve year-on-year.

Okay. Thanks.

Our next question comes from Chad Beynon with Macquarie.

Hi. Good morning. Thanks for taking my question. Wanted to start on the gaming side. The installed base growth was pretty strong, particularly outside of the United States. I believe a lot of this business is probably concentrated in north and for -- I guess, South in Latin America and Africa and maybe even Australia, some markets that are a little harder for us to kind of get our finger on the pulse. But can you kind of help us dial into what's been going on in those regions? And if the installed base growth is really a factor of things just kind of reopening up or if you're taking market share and if that's kind of in your forecast to continue to grow that installed base in rest of world? Thank you.

Yes, sure things. So we saw sequential growth quarter-over-quarter in our installed base, and that was really driven by our WAPs and our MLP games on our new cabinets. And coming out of G2E, I can just say there is a terrific amount of interest and excitement around our new hardware and of course, our newest software game, especially based upon the kind of early success we've had with titles like Prosperity Link and Money Media, Cleopatra. I think it's important to first off, focus on North America and the significantly improved trends, the company has had in installed base in the North American market. For example, we all know the MLP space has been the most significant growth category for many years and an area where IGT was not nearly as competitive as it's been in all the other categories. But from 2020, IGT's MLP installed base has grown over 20%. And we feel like we've got continued opportunity for further growth in that category for sure based upon achieving, I think, good success in the MLP game space after many years of effort. I'd say also our Class II installed base has grown as well as we've focused on producing really good games in that category. And then on top of that, we're seeing continued improving yields as well. So when I speak with casino operators, they're clearly reaffirming the strength of IGT's game performance, which is the kind of the ultimate scorecard in terms of driving continued gains in North America. Yeah. I think if you look at the rest of the world, yeah, we've had good strength in our installed base in the rest of the world, primarily in Latin America. We've been underrepresented in Latin America, and when we look at our long-term growth plan, EMEA and Latin America are significant drivers of what we think is a great installed base opportunity for us. And Greece as well was also a significant contributor to our international installed base increase in the third quarter.

Makes sense. Appreciate it. And then, Max, with respect to the balance sheet leverage, you mentioned it's down to 3.1 times. Can you remind us where you want this to be from just kind of an operational standpoint? And as it continues to tick down, how you're thinking about plans for excess capital, whether it's repurchases, dividend increases or more tuck-in M&A? Thanks.

Yes, Chad. As you know our long-term target is to be in the range of 2.5% to 3.5% leverage. So we feel right now we are in a good spot. Obviously, we would like to be in the low end of the buffer to protect ourselves for potential bad times coming. So there is still work to be done. In terms of the capital allocation, we continue to master our approach towards a balanced capital allocation. And you will see that in full fruition in the year-to-date period as well. There are 156 million remaining under the existing authorization on share buyback. So in conjunction with those strategic pillars of us we expect to continue to execute on the program going forward. But again, the milestone is to continue to take care of the leverage and bring it down to the lower half of the long-term target.

Thank you very much. Nice results.

Our next question comes from Domenico Ghilotti.

Yeah. Good morning. I have three questions. The first is on the [indiscernible] instant ticket business in Italy was quite impressive in terms of performance. Can you comment on the driver and the sustainability of the current trend? And the second question is on the gaming business. As usually, seasonality in Q4 is quite strong. But clearly, you have this supply chain or you had the supply chain issue. So can you give us some more color if this is a seasonality that can be seen also in Q4? And last on the cash generation, there are several moving parts. Max, you were mentioning net working capital, that is the legal dispute and cash taxes or if you can provide an indication of where do you expect to see the net debt by year-end, that would be great.

Yeah. I'll start off and then let Max help out and answering the rest of the question. So what we've seen in Italy is, as we mentioned earlier, stronger-than-expected scratch and wind sales, which has really helped us to offset slower-than-expected recovery in draw game sales. I think the opportunity for us going ahead is continued improvement in draw games. As we said, third quarter improvement was very significant versus the first two quarters. And we've seen really good improvement in progression such that draw based games were only slightly below 2019. I think we saw multiyear growth versus 2019 improved to 10% from mid-single digit growth in the first half of 2022, and that was really driven by scratch and win games. And I think so much of that has been a direct effort of the team since we, of course, operate the lottery in Italy, we're able to directly impact the quality of the games, the number of game introductions, I think the interesting titles and concepts that we've come up with. And I think the team has been very, very focused and we're pleased to see, I think, really good progress through the third quarter.

So Domenic, in terms of the seasonality on gaming, historically, Q4 has been among the strongest quarters in gaming as a result of kind of the finishing of the year on product sales and deliveries. This year, obviously, is a little bit different because of the supply chain in these locations. It remains a dog fight out there on a daily basis, but it's much better than it was in the first half of the year. We have increased visibility on deliveries of components. We have been able to resource some of the components with different suppliers, reengineer some of the product to make them simpler, and easier to complete. So net-net, we are confident that we can deliver on an increased production schedule into Q4, although, we obviously need to watch it out on a daily basis. And in terms of cash generation, just to keep it simple. When you look at the full year guidance versus the year-to-date, there is definitely a big quarter in front of us in terms of cash generation. When you use Q3 as a pivot, you should assume that there is probably about $100 million more cash in Q4 coming from lower interest and tax payments. And then it's all about the working capital delivery. We were able to deliver about $100 million of cash from working capital in Q3. So again, it depends how much efficient we can be at the end of the year. But if everything goes in line with our expectation, you should see another cash inflow from working capital into Q4. And that should drive us home the guidance.

And just a follow-up on the potential payment for the Benson (ph) matter. So when should we assume the cash out.

Yeah. So the terms of that settlement only takes effect after final court approval of the proposed class settlement. So the preliminary approval is expected sometime soon, but the final approval will likely take more than six months. So we're still, again, in -- within this time frame right now.

Okay. Thanks.

Our next question comes from Jeff Stantial with Stifel.

Great. Thanks. Good morning, Max. I was hoping you could talk a bit more about international trends. We've heard some anecdote this earnings season, some softening in the European consumer related to cost of living pressures, at least more so than in the U.S. Curious if you're seeing anything in your business, whether a lottery or game ops or otherwise that suggests a similar trend?

Yeah. Sure. Thanks. So of course, the most significant market for us is Italy. I think the company over the years and most recently, through the sale of our Italian payments business has been very focused on reducing our exposure to Italy in particular. So really, we've got our lottery operation in Italy. And certainly, the Italian consumer has been impacted by the economic conditions that have been taking place over in Europe. They really had the high inflation driven primarily through higher energy prices for a good part of this year already. And those improving lottery trends that we've seen and the strong growth over 2019, kind of really runs against the grain of that inflation. So we have not seen any significant impact on lottery sales. Again, as we've really shown progressive improvement in the lottery business versus last year. And then, of course, Italy has been susceptible to a lot of market disruptions over the last couple of decades, both politically and economically. And we've -- being the lottery operator, the long-time lottery operator, we've got the data, and we've seen that the lottery has been very resilient throughout these difficult periods. And I think, again, it's kind of a high value, high reward, low cost form of entertainment. As far as the rest of Europe goes part of -- I mentioned earlier, part of our long-term opportunity, we believe, is greater market share and gaming presence in Europe now that we're making very good games and they are resonating in Europe. Europe has definitely been slower to recover coming out of the COVID recession, which the way I view it is actually okay. To be honest, we would struggle to meet demand with the supply chain challenges we've had in 2022. And so for North America to be the driver of growth is actually just fine. And we feel as if as Europe and the rest of the world recovers more slowly, but we'll be in a good position to grow market share.

Great. That's really helpful. And then, if I could follow up with a follow-up on one of Domenico's questions earlier on the Italian contracts. You called out some nice sequential improvement in the lotto contract as some of the consumers over there kind of revert back to, call it, normalized wagering behavior. Just curious if you're seeing any signs of lotto coming back closer to 2019 levels, starting to impact the strength you've seen in scratch and win, or if you think it should be effectively entirely additive as that lotto contract ramps back to 2019 levels? Thanks.

Yeah. It's always a challenge to try to determine if one area like scratch and win success is negatively impacting draw based games. But again, I think, the encouraging data point is scratch and win has been strong, and our draw based games have been improving, coming back towards 2019 levels. And again, we're hopeful through our expertise and terrific tenured team, we can continue along that trend and have both continue to be good drivers going forward.

Great. Very helpful. Thank you. I’ll pass it on.

[Operator Instructions] Our next question comes from David Katz with Jefferies.

Hi. Good morning, everyone. Thanks for taking my question. I think you've covered a lot of ground, and I don't want to reiterate too much. But Max, if we could just go back to the balance sheet for a minute, target range of 2.5% to 3.5%. And I wanted to -- with the drumbeat for a recession or slowdown coming, does that keep you closer to the lower end of that range in the sub-3 range potentially? And I wanted to just go back to the prospect of tuck-ins. And how you might characterize the likelihood that there is any out there for IGT in the near term that would sort of co-exist with that leverage level? Thanks.

Yeah. So the rationale for the one turn of leverage spend in our target range was exactly to kind of help the company offset potential downturns coming in the industry along the way. Are we low enough to withstand completely a recession. First of all, we don't know what kind of recessions we're going to face next year potentially. If it is a mild recession, probably we are able to continue to operate within that range. If it is a more depressed long-term recession, who knows, right? But again, the intent was to be able to absorb negative impact for a typical recession that could come at a certain point. I hope that answered your question.

Yeah. And just with respect to probability on any tuck-ins more or less likely, would you say near term?

Yeah, I'll jump in. I would say that we're always on the lookout for very talented studios, both on the land-based gaming side and on the iCasino side as well and even technology and content providers on the iLottery side that's -- there's a lot of talented individuals out there that have created studios. We work with a lot of them. So we get an opportunity to kind of take the games out for a test ride. We've got an opportunity to have their games on our platform and see how they perform. But if everything is right, that's an area that we continue to be attuned to in terms of potentially adding to our capabilities. But I wouldn't say that any of that outlook has changed and there's nothing imminent.

That’s perfect. Thank you very much.

There are no further questions at this time. I turn the call back over to CEO, Vince Sadusky.

Yeah. Thanks for joining us today. Our year-to-date results highlight good momentum across each one of our business segments. We think it's a clear indication that our strategic focus on driving growth through innovation and optimizing our processes and scale is paying off. Our net debt and our leverage are at their lowest levels ever and we returned a record capital to shareholders. Current customer and player demand trends remain strong, and we're on a solid path to delivering on our fiscal year 2022 commitments. We appreciate your interest, as always, in IGT and we look forward to meeting with many of you in the coming weeks. Have a great day.

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