Brightstar Lottery PLC (BRSL) Q1 2023 Earnings Report, Transcript and Summary

Good morning. My name is Rob and I'll be your conference operator today. At this time, I'd like to welcome everyone to the International Game Technology First Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. James Hurley, Senior Vice President of Investor Relations, you may begin your conference.

Hello. And thank you for joining us on IGT's Q1 2023 conference call hosted by Vince Sadusky, our 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, the 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 Sadusky.

Thanks, Jim. And hello to everyone joining us today. As you've seen in our announcement this morning, we're reporting a great start to 2023. Q1 revenue exceeded expectations on good momentum across all operating segments. Net of FX and the sale of Italy commercial services, revenue was up 10% from the prior year. In Global Lottery, same store sales were up a percent, marking another quarter of accelerated growth. The Global Gaming and PlayDigital segments each achieved high teens revenue growth in the period, fueled by strong key performance indicators. Q1's 24% operating income margin came in at the high end of our outlook, primarily due to better-than-expected Global Gaming performance. Although it's worth noting all three segments have strong profit margins in the quarter. We generated $449 million in EBITDA, which is among the highest level in company history. That was achieved even without any contribution from Italy commercial services in the first quarter of this year. We also generated significant cash flow and our financial condition has never been stronger, with leverage improving to 3 times, the lowest level ever. I'd like to spend some time on the operating performance of each segment, beginning with Global Lottery. Q1's 8% same store sales increase was the fastest growth in the last six quarters. Italy same store sales were up over 10% as new game innovation and portfolio optimization strategies drove sales higher for both draw games and instant tickets. 10eLotto, our largest draw game in Italy, is benefiting from players returning to their pre-pandemic behaviors. And Gong, the fourth add-on game for 10eLotto launched late last year, is also driving growth. We recently enhanced Italy's scratch and win portfolio with the introduction of a €0.25 and €0.50 tickets. Both are performing well and appear to be generating incremental sales volume. The scratch and win player base has increased by over 1 million players from pre-pandemic levels, which has supported sustained category growth. Turning to North America and the rest of the world, same store sales increased 7%, reflecting solid growth for core instant tickets and draw base games that was driven in part by elevated mega million sales related to the $1.3 billion jackpot in the period. Our expanding portfolio of instant games elevated US multi-jurisdictional jackpot activity and the contribution from new international markets, with iLottery sales up over 80% in the first quarter. This performance helped maintain the accelerated growth profile we experienced in the second half of last year. The Global Gaming segment is executing on all fronts, evidenced by the 17% revenue increase and 34% operating income growth achieved in Q1. Our global product positioning has never been stronger, and key performance indicators continue to reach new heights. We shipped nearly 8,300 gaming machines, the highest ever for a Q1 period. The sustained success of MLP titles such as Wolf Run Eclipse and Egyptian Link is being complemented by a pipeline of exciting new MLP games, like Magic Treasures, Raise the Sails and Cats Wild Serengeti. The combination of compelling games and hardware has enabled us to maintain the leading US and Canada ship share for the last few years, complemented by record ASPs for the region in Q1. The install base was up year-over-year and sequentially for both the US and Canada and rest of world, and it is high quality growth that is evidenced by the 7% year-over-year increase in global yields. The success of new WAP games and MLP games is an important factor sustaining our momentum. In a recent Eilers research report, IGT had 15 of the top 25 WAP games, highlighting the strength of the Wheel of Fortune and Megabucks franchises. Since 2020, we've greatly expanded the number of MLP games offered on our leased machines, and the MLP install base has grown by over 30%. Prosperity Link is a recent success story and we launched two new game titles in April to support its momentum. We have an exciting lineup of new MLPs, including Mystery of the Lamp, which will be launched later this quarter on our new PeakCurve 49 cabinet. And we expect to build the rest of world install base in the balance of the year as we focus on increasing our lease game presence in Latin America. We've made good progress with our cashless solutions, entering into a multi-year agreement to enable cashless gaming with our Resort Wallet and IGTPay solutions at the Graton Resort & Casino, one of California's largest slot floors. Turning now to PlayDigital, where our focus on key initiatives has resulted in double-digit top line growth. iCasino, which represents about 80% of the segment's revenues, had a strong quarter, thanks to an improved cadence of new game launches in the US and Canada, where player demand was heavily concentrated in progressive jackpot games during the period. We also had the benefit of contributions from our iSoftBet acquisition coming in this year. In March, we launched Wheel of Fortune online casino in New Jersey through our longstanding relationship with BetMGM and Sony Pictures Television. It's a unique omnichannel offer, leveraging one of the most successful and iconic slot brands, and we are exploring opportunities to expand the concept into additional jurisdictions. Our expanded iCasino IP portfolio and accelerated pace of new game development provides new ways to add value for our customers. This includes developing custom games and game assortments to drive a more engaging player experience and create a win-win-win proposition for IGT, our customers and the player. Sports betting was up in the first quarter on an expanding footprint in new and existing markets. We executed new contracts in Mississippi, Nevada, New Mexico and Ohio in the period and recently signed a three year contract extension in Rhode Island. We're pleased with the growing adoption of our turnkey solution. To conclude, the compelling innovation we've been bringing to market, coupled with strong customer and player demand, is providing momentum across our Global Lottery, Gaming and PlayDigital segments. The better-than-expected first quarter performance puts us on track to achieve our full year goals. We have a strong balance sheet and access to significant liquidity to support investments in our strategic objectives. We believe this provides an opportunity to create significant value for our shareholders as we progress towards our 2025 targets. Now I'll turn the call over to Max.

Thank you, Vince. Good morning, everyone. And thank you all for joining us today. The strength of our various businesses were on full display in the first quarter financial results reported this morning. We generated revenue of more than $1 billion, slightly ahead of our outlook, driven by 8% same store sales growth in global lottery and high teens revenue growth in Global Gaming and PlayDigital. And more specifically, while reported revenue was stable year-on-year, if we adjust our performance for the sale of the Italy commercial service business executed last September and for foreign currency translation, revenue was actually up 10% year-on-year. Operating income of $255 million was also relatively stable, while adjusted EBITDA grew 4%. Again, net of the Italy business sale and FX, OI grew 6% and adjusted EBITDA was up 8%, more in line with organic revenue growth. I want to mention right away that we absorbed higher SG&A and R&D expenses of about $29 million year-over-year. About half of the increase is primarily related to the conscious decision to further invest in talent to support the growth of our business, in addition to returning to more normal trade show participation. The other half was primarily driven by the timing of certain items, such as costs associated with consolidating iSoftBet as well as some VAT expense and legal accruals. Operating income margin of 24% was at the top end of the outlook range on strong global gaming performance. The effective tax rate in the quarter was impacted by evaluation allowance on non-deductible interest in the US and non-cash foreign currency losses. When we adjust for these items, the effective tax rate was in the mid-30s percent range, which is in line with our expectations for the quarter and the full year. We delivered fully diluted earnings per share of $0.11 and adjusted EPS of almost $0.50 per share, with the year-over-year difference all attributable to higher tax rate. Now let's turn to our business segments, starting with Global Lottery. First quarter revenue of $624 million was down 8% as reported, but up 4% if we adjust for FX and for the sale of the Italy commercial service. Global same store sales increased 8% as strong player demand drove growth across geographies and game types, accentuated by robust sales related to the $1.3 billion megamillion jackpot that hit in January. Product sales were lower year-over-year due to large terminal and system deliveries in Poland in the first quarter of 2022. $240 million in operating income and a strong OI margin of 38% reflect the high profit flow through of same store sales growth, including the elevated jackpot activity I just mentioned, and the positive contribution from higher sales in Italy. As a reminder, in our current outlook, lottery says in the first half of the year are expected to be stronger than in the back half, given the very strong jackpot productivity we had in the second half of 2022, which we aren't planning to recur at this time. Compelling product offerings in Global Gaming continued to drive strong results. Revenue of $381 million increased 17% during the first quarter, with sustained double-digit growth in both service and product sales category. Global unit shipments was 15% year-over-year to almost 8,300 units, the highest ever for a Q1 period, primarily driven by a 23% increase in the US and Canada. Global ASPs were up 12% to a record $15,900, thanks to a more favorable mix of content and new hardware as well as the early impact of recent pricing actions. The global install base and yields increased both year-over-year and sequentially, with growth in the US and Canada and rest of world. The US and Canada install base increased 804 units sequentially due to an almost 1,500 unit contribution from the Rhode Island JV, partially offset by almost 200 units in Rhode Island that were temporarily removed in Q1 due to casino floor renovations, which are expected to come back in Q2. Removal of older unsupported units, unit converted to sales and planned WLA market removals in New York and Delaware make the difference. Global yields rose 7% on the continuation of strong performance across the portfolio, with yields in the international markets marching toward closing the gap versus 2019. Higher productivity from the install base and a leaner cost structure drove operating income up 34% to $69 million and operating income margin to 18%. On the back of the strong first quarter performance, we see a path to achieving an operating income margin of around 20% in the second half of the year, primarily reflecting the expected easing of supply chain costs that are starting to be visible in the material and components procured in the current period. PlayDigital revenue increased 17%, or 20% at constant currency, to $55 million. iCasino was up on strong organic growth and contributions from the expanded content and distribution network realized from the acquisition of iSoftBet in July 2022, partially offset by unusually high jackpot expense, which increased $10 million year-over-year. Jackpot expense is a contra revenue item that can have high variability based on the timing of when jackpots are won. Sports betting revenue was up on expansion into new jurisdictions through a customer diversification effort that is starting to show results, as well as preeminent organic growth from our stronghold markets. We're very pleased with the recent performance and reiterate our conviction in an improved market penetration, thanks to the recent announcement of newly acquired customers. Operating income rose 9%, 15% at constant currency, to $14 million. Operating margin of 26% was up modestly on a sequential basis, despite significantly higher jackpot expense. When we normalize the severe impact of jackpot expense experienced in Q1, we see a further margin improvement of about 2 points that would move this business closer to the 2025 target of 30% plus OI margin sooner than originally expected. Cash flow generation was strong during the first quarter, with cash from operations of over $300 million and nearly $220 million in free cash flow. The resulting EBITDA to cash conversion rate of 69% included a benefit from the timing of certain Italy working capital items, but it demonstrates we are making good progress toward the 2025 cash conversion target of 65%. Strong profit generation drove net debt leverage down to 3 times, the lowest level we have ever achieved. From a balance sheet perspective, we are nicely positioned with total liquidity of $2.1 billion, including unrestricted cash of $700 million and $1.4 billion in additional borrowing capacity from undrawn credit facilities. Recent progress in our cash flow performance and net leverage trajectory reinforces our conviction in achieving the lower end of our 2.5 times to 3.5 times target net leverage ratio by 2025. This achievement is central and integral to our balanced approach to capital allocation. We are reaffirming the full-year 2023 outlook with an even greater level of confidence in our ability to deliver against this financial target, given the strong first quarter performance. In summary, at this point in time, we prefer to keep a prudent approach for the full year in light of the current macroeconomic uncertainties. Specifically, the full-year outlook range encompasses a somewhat cautious view on the second half of the year, including the potential for an economic slowdown in the US. Finally, we are introducing our guidance for the second quarter, where we expect to achieve revenue of around $1 billion and operating income margin of around 22% to 24%. In summary, we're off to a very good start in 2023, given the strong first quarter results that met or exceeded the high end of our expectations and set us on a solid path to achieving our 2023 financial goals. We continue to generate solid cash flows and have secure financial flexibility with the lowest net debt leverage level in company history and significant liquidity. With that, I would now like to ask the operator to please open the line for questions.

[Operator Instructions]. And your first question comes from the line of Carlo Santarelli from Deutsche Bank.

Max, appreciating the commentary that you just provided as to the guidance, I was wondering in an environment where perhaps you didn't look at the second half and assume a macro slowdown, would you be thinking more about simply the high end of the guidance from a revenue and operating income margin perspective? Or would you be comfortably above that high end of the guidance, should economic conditions kind of remain stable through the back half of this year?

Look, with this strong backdrop in Q1, we definitely are looking more positive towards the upper end of the guidance, absent a recession, a mild recession or a slowdown. But it is also worth mentioning that the second half of the year, right now in our guidance, does not have any benefit from jackpot activities, which were very relevant last year. Just as a reminder, we achieved a net benefit of incremental $30 million a year ago in the second half. So, again, it's a prudent approach both ways and I think creates a solid ground for our future progress.

If I may, just one follow-up. As it pertains to replacement demand in the US and Canada, you guys obviously off to a strong start. I think your US replacement is up about 7% or so. As you look at on the horizon based on the content, the hardware that you guys have coming out, and obviously your conversations with your customers, do you feel like 2023 US and Canadian replacement activity can be akin to at least 2022? Or do you sense that kind of back half comparisons there get fairly challenging as well, and that that might level off?

You all have seen the our customers, the operators, a bunch of them report very strong results, a lot of them record results. And a lot of that growth that they've experienced, again, has been driven from gaming machines, slot machines in particular. Demand remains very high, as we mentioned, setting another record for a particular quarter in shipments. Signs are signs are good. Our visibility into the second quarter is good. Demand is where we were we expect at this point. I think IGT has benefited from having a strong game portfolio right now with a lot of hardware and software releases that our customers are excited to deploy and replace. If you recall, the cycle of replacement in our casino customers floors, although it was a good year last year, there's still a lot of old machines out there in need of replacing. So we feel we feel good about that. The percentage increases in the back half of the year for IGT, for sure, get more difficult, as I think fourth quarter we set a record in that quarter for units shipped. So I think you would expect, and built into our plan and to our guidance, is a reduction in the percentage increase. But in terms of absolute numbers, we feel very good about the continued demand.

Your next question comes from the line of Benjamin Chaiken from Credit Suisse.

Margins in gaming were particularly impressive, improving year-over-year and sequentially. Can you talk about some of the initiatives driving that growth? Is this organizational structures, the type of games you're selling, just help us better understand the margin expansion? And then one quick follow-up.

I would say that, starting from the top line, we see a better mix of fresher, higher content products that are driving higher price points naturally. We have the initial sign of some of the repricing actions that we announced mid of last year. I would say that about a third of our daily deliveries in Q1 were affected by positive pricing, so there is more to come in the next few quarters. But again, we continue to maintain a cautious outlook vis-à-vis the supply chain. The supply chain, which is expected to significant provide a significant tailwind in gaming in the second half of about a third of the total impact of last year, if you remember, we mentioned $60 million of impact last year in gaming, probably $20 million come back this year and then another $20 million potentially next year. So there is additional kind of carryover impact into the 2024 period from that. So, again, it's a combination of top line growth, improved productivity of our gaming machines, lower cost, and also some benefit from the reorganization that we have achieved. Particularly when we moved away from the regional organization into the global product lines, we were able to really reduce some of the overhang that we had in our cost structure. So all in all, we feel good about our margin trajectory. And we think that we have a path to get to our 2025 target of 28% to 30% in gaming.

I'll just add quickly a quick sidebar to what Max mentioned. So what we've seen is the install base on our premium games that we lease, the yields are better to significantly better from the games that they replace. So that has the kind of double impact of benefiting IGT financially, but of course, it makes these games very attractive and very desirable to our customers as well. And that certainly helped.

I appreciate the thoughtful answers. You actually got my second question as well. So I'm all set.

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

Really appreciate the commentary on leverage targets into 2025. I guess as we think a little farther out, is there a max level you would target as we think about the potential outflows in Italy with those two large contracts up for renewal at some point.

Again, someone may argue that our leverage target is a little spread out. So in theory, someone could look at that and say, which band would you prefer to be in. And if I look, if I sit here today and see how much progress we have made, I would naturally tend to say 2.5 to 3 times. But again, let's see where the rest of the year brings us. And I think we aspire to continue to improve our target towards that lower end.

So that band could potentially even hold factoring some of those renewals at some point.

Yep.

Just to follow-up, Q1 product sales were nicely ahead of our model. Any large orders you would call out there? I guess, how meaningful were some of those more unique markets like Canada, Oregon, or maybe Georgia?

Look, we had this debate internally, and I think we have seen some structural changes in that demand in Canada that comes now to fruition more regularly. From time to time, we announce awards of orders from the different provinces as you have – if you go back to last year. And we continue to look very positively into the Canadian market. We think that we have a pretty good grasp at the market penetration. And we think that that market will continue to provide tailwind to our trajectory as well.

In terms of Q1, though, it sounds like there was there was some more recurring…

Q1 had more deliveries associated with the orders we won in the early part of last year. There are more deliveries that are intrinsically part of our global program. I would say that it's a low-double digit number in terms of total deliveries that are going to the VLT market, all in all. Obviously, it's primarily US and Canada.

Your next question comes from the line of David Bain from B. Riley.

I guess my first question would be on the lottery, maybe you can speak to the potential new structural lottery growth that seems to be taking place. It seems like we're in the early innings, although I'd like to hear your opinion of structurally higher growth profile for iLottery, just on draws, numbers, higher price points, just things that are driving – even Cash Pop, which you've innovated, that are driving new lottery growth. And I'm wondering if the international is also following a similar concept path to what North America is doing?

As you know, the vast majority of our business on the lottery financials relates to North America and to Italy. We mentioned we saw really good growth in both markets, which I think was an acceleration from growth we've seen even last year. And of course, that growth is off of a higher base. So even though we'll see, I'm sure with no doubt, quarter to quarter volatility up and down around play levels, when you compare that to 2019, kind of pre-pandemic, the play levels across the world are higher to significantly higher. So we do think that that is the most important long term trend. And, sure, we've talked about it in the past. We think some of that has to do with economics, but also the incremental players that we've seen come into the lottery during the pandemic. I think the pandemic was a unique opportunity to introduce players to lottery or kind of get them reacquainted with lottery. And fortunately, they seem to really like the activity. They like to play. And I think for anyone who hasn't played the lottery for a long time, or traditionally only played the lottery when they were big multi-state jackpots, I think they were pleasantly surprised by the game innovation that's taken place. There's a lot of ways to play scratch and win. I think if you play for some time, both our daily draw games, our weekly draw games, multi-state jackpots, all the different alternatives that our team has worked with lottery directors for years to develop, I think the pace of innovation has been pretty significant. And I think there's kind of a game or two for everyone. So, so far, the play levels are sustaining quarter after quarter now, at levels significantly greater than 2019. And our job is to keep working with our customers to continue to innovate. I think one of the most interesting reaffirmations of the attractiveness of lottery was the situation in Italy, where we saw, last year, a decline first half of the year, in particular, in play levels. And I think that was – we speculated that was driven by the unique scenario in Italy, where players were a bit slow to get back to their routines of spending time at their local tobacconist, and especially with lotto games. But, ultimately, that's – came back. And this year, in particular, we're seeing very strong play levels in in Italy. So I think that was a really good kind of affirmation that playing is attractive and can continue this type of higher level.

I know you cited the $30 million jackpot benefit in the back half of last year. But just given what you've just reviewed, and again, some of the structural changes that have been made with additional numbers that have led to higher jackpots, is it more likely that we begin to see a recurrence of higher jackpots versus your baseline assumption? Or is that something not to think about at this point?

Look, the odds have not changed in terms of the game per se, but what has changed is the frequency of the number of draws that happens and the addition of additional add-on games, which makes the game per se more exciting to play. And that's what drives probably additional demand. In terms of the future, we'll see what happens. Obviously, if the jackpot grows, that will potentially provide additional tailwind on our business.

Your next question comes from the line of Jeff Stantial from Stifel.

Starting off here on Global Lottery, same store sales nicely really across the business. I was hoping you could provide some color on more recent monthly growth trends. What are you seeing in March and in April in terms of same store sales, in particular in the US and in Italy?

If we really just have a look at April since the quarter is wrapped up, and we continue to see good growth in Italy. We're seeing same store sales – above average growth on both draw and instant games. In North America, we're seeing same store sales trend a bit below prior year. And we think that's a natural phenomenon given some jackpot fatigue that we've had a really strong level of play in the first quarter with that high jackpot. And we do expect that that will moderate and those are the trends that we've generally seen over time.

Just sticking on the lottery business, really strong EBITDA margin. Some of that is going to be jackpot tailwind and other tailwind. Some of this is more structural. Just curious as to what you see is the right baseline for segment margins moving forward, putting aside some of that quarter-on-quarter volatility in multi-state jackpots or product sales or things of that nature?

Yes. This is Max. With the exit of commercial service from our portfolio last year, we have structurally improved our margin, call it 150 bps to 200 bps. And so, the margin is always kind of affected by the mix of geographies performance. And as you know, the margin build up is stronger where we operate, as with the full service, versus where we have a lower presence. So, effectively, depending on the geographic mix development, our margin may spike up or down. But again, we feel comfortable saying that, from an EBITDA perspective, we're probably going to be in the low 50s. And from an OI perspective, we're probably kind of targeting the mid to the upper end of the 2025 target range, which I remember was 33% to 36%.

[Operator Instructions]. Your next question comes from the line of David Katz from Jefferies.

Congrats on your quarter. I wanted to just go back to one of the earlier questions about cash generation, leverage, the needs that you expect to have in the next few years. And where would you have to get to in order to broaden some of the capital return alternatives? It's a question that comes up and is debated quite a bit. What would make you comfortable and how should we think about that?

Again, in broader stroke, as you know, our philosophy is around a balanced capital allocation. And that leverage target is integral to that approach. So once we feel good about that target, even in the face of incremental investment expected as our CapEx cycle is expected to start back again, primarily in the lottery business, next year and even more in 2025, we have to be cautious in terms of how we allocate our available cash flow generation from the business. Having said that, I would say that, in terms of capital return to shareholders, we continue to execute on the dividend payout of about $0.20 per share per quarter. And also, I think I would say we are well ahead of the game in terms of the share repurchase authorization that was launched at our Investor Day in November 2021 of $300 million. We have executed, in the last 18 months, a little bit more than 50%. So we are ahead of the plan. And again, we feel comfortable about the position where we are right now. But again, we are willing to continue to generate dry powder in case of future developments and be able to allocate that cash to the different usage, in line with our philosophy.

Look, I think it's fair to call it successful retooling of MLP business. It was an area that you talked about going back the last G2Es. What would be kind of the next area of focus to continue the positive momentum in the gaming side?

I think we're at a unique point in time. A lot of the hard work that's been done over many years, the R&D investment, the team's ideation, I think is playing out right at this moment. When I spend time with the development folks and the product folks, we've got a lot of new hardware that's recently been introduced and some new hardware that's coming out this year as well. We're in, I think, a really good cycle of game development. We've never really competed all that much in Class 2 space, we have a pretty impressive Class 2 offering. I think our games that we've designed specifically for Latin America and Europe are doing well. And I think as those economies continue to improve, we've got the best offering that we've ever had in those markets. In the US, we really didn't talk, for example, about our DiamondRS cabinet, the stepper space where the company has traditionally been very, very strong and has ceded some share over the last couple of years. That cabinet and those games are very highly anticipated. And I think you'll start to see those roll out in large numbers. We haven't produced them in large numbers yet as we continue to retool our manufacturing facility. I think if you look at our poker offerings, which is oftentimes taken for granted since we have such a large market share and just industry leading games, the modifications that have been made, the PeakBarTop hardware in particular, I think there's very, very strong demand for that. And there's a bit of an enhanced pricing structure there as well. I think deservedly so, given all the money we've invested to make that industry leading game even better. And then, in particular, in the MLP space, that's really been, as you know, a significant driver of our recent success, having game titles and machines that have really resonated. So we're excited to really build off of that pipeline of successes in the MLP space. And as I had mentioned, games like Magic Treasure, Mystery of the Lamp, these games are out in test now. And they're performing very well. So I think the studios are really excited. We had a global studios offsite about a month and a half ago with all of our game producers and studio leaders. And people are feeling very good. And I think they feel like they've got models, math models and graphics models for success to continue to build off of, given the success in the MLP space, and specifically the title Prosperity Link, which continues to be in very high demand. So we feel good across all of our competitiveness in all of our categories. We've heard from our customers and from our commercial team, and our commercial team is usually our most difficult customer, and they say, this is the best suite of games that they've seen IGT produce in recent memory.

And your next question comes from the line of Domenico Ghilotti from Equita.

I have just one question remaining related on labor costs. So you, Max, mentioned the fact that you are hiring new talents and this is driving some operating costs higher. And can you give us a sense on how much is, let's say, the increase in labor costs that you expect this year and how much is that the cost per capita? So how much is inflation and how much is it related to units?

Effectively, we are looking to hire people in the areas where we can deploy them to further develop our games, our technology, expand our market presence. So these are jobs that are attached kind of to revenue generation. The second point I would like to make is that we have seen a similar pressure on wages, like many other industries have seen in the last few years with the sticky inflation. And I think we are adequately adjusting our average wages, in line with what we have seen out in the marketplace. Finally, I would say the inflation continues to be a problem because it's sticky. But we have been able to eliminate that extra cost that we had to expense last year in regards to spot buys, ocean freight rate increases that have really generated the excessive cost pressure that we have seen coming to fruition to the P&L. Again, I think we are in the midst of the de-escalation of this inflation process. And we expect to start seeing some benefit out there in the second half of the year.

A clarification on the comment that you make are made on the pricing impact. It was probably on the gaming business. So you were saying one-third coming from price actions and…

One-third of the machines delivered in Q1 had the benefit of a target price improvement. So there is still more to come in the next few quarters.

In terms of the machines that have been sold, just part – one-third have been benefiting from the price increases?

Correct.

Well, my last comment, I was impressed by the performance of the Italian lottery, frankly speaking. So you have been mentioning many reasons why you have been able to deliver this kind of growth. I wonder if you can comment on – you were commenting on April, strong as well. And so, if you can comment on what can be the really underlying performance for this year because I was really surprised by the strength of the business.

The trend we have seen in the Italian lottery since late last year, phenomenal, especially in the instant ticket part of the business. But, again, both businesses are really growing phenomenally well this year. It's a combination of strong pipeline of new game that we have launched, starting with Gong in October, November last year in the draw based game, price point innovation and also favorable grow of the demand and the uptick in the price points. And last, but not least, I would also say a little bit of benefit from easy comp as the same period last year, we were still affected by Omicron in Italy, particularly in the draw based game. So we have seen players returning to more traditional social – traditional way to spend their time and socialize more, which have benefited the draw based games as well. All in all, we're very confident that this trend may continue for a while and we look forward for that development.

Do you think that these innovations can be – they can be moved, they can be expanded to other geographies? Are you leading this innovation in Italy and then you can move to other jurisdictions or it's something that's [indiscernible]?

I think in our restructuring, that's been a significant focus of the lottery team and our division that works on game innovation and development, is to ensure that we have really good communication across the entire company, so we could utilize innovation from one market to the other. And when you think about it, we believe IGT is in a bit of unique position, in that we actually run the lottery, right? So we have the direct relationship with the consumer, we get all the data in places like Italy and New Jersey, for example. And so, we're able to utilize that data immediately in the development of new games. For example, in Italy, we launched a €25 ticket that we mentioned, a scratch game, and there's obviously a lot to it. It's not just the denomination, but it's the math behind it, the payout, the frequency. And that game is doing very, very well. And it seems to be sustaining. So, we're utilizing and analyzing the data from that game play in thinking about the opportunity to roll out something similar in other markets. So, yeah, it's a great question. And I think our global footprint, and being in more jurisdictions than any other lottery, gives us that database and that opportunity to learn from these experiences and drive product innovation across all of our markets around the world.

And your final question comes from the line of Chad Beynon from Macquarie.

This is Aaron on for Chad. Sticking with lottery, with respect to lottery opportunities, in the past, you've talked about opportunities for increased lottery printing business. Have there been any recent contracts and any updates to your outlook there?

No, I would say that remains an opportunity for us without getting into the details of the markets where the printing contracts are terming out. We've, in general, seen a trend over the last several years towards, in North America in particular, lottery providing for incremental printers. Historically, when you won, you won all of the business. We believe this is a very, very good trend for lotteries to undertake, especially with the significant increase in demand for scratch tickets. So I think it provides an opportunity. And I think it's good risk management for the lotteries to utilize multiple vendors. And that's certainly something that we support, not being the incumbent in so many markets. We talk about being able to have the capacity and the quality to deliver. And I think those things take time. Given our investment in our facility in Lakeland and I think the satisfaction that our customers have gotten comfortable with in our quality, including our recent innovation, I think it's something that gives us a lot of credibility and the opportunity to grow that business over time.

And regarding M&A, just given your strong cash position and balance sheet and reduced valuations out in the market, how you're thinking about additional opportunities for M&A?

We've got a really great internal strategy team. So, we're very aware of what's out there in the marketplace. The areas that we continue to be focused on are around our high growth digital business, both on the iLottery side, as well as on the iGaming side. We're pretty selective. We feel as if we've got a pretty strong portfolio of games, and a very strong best-in-class operating platform in those areas. But we continue to look at studios, and we continue to look at technology to see if there is anything that potentially could be additive at the right value. So nothing to talk about here specifically. But we've said in the past, those are the areas that we're most focused in.

I will now turn the call over to Vince Sadusky for some final closing remarks.

Okay. Well, thank you all for joining us. As you've heard, 2023 is off to a great start with Q1 results experiencing good momentum across all of our operating segments. Our strategy to grow, innovate and optimize is achieving the results that we'd anticipated. And as a reminder, we've got a very strong balance sheet and access to great liquidity. So, we think we can continue to create great value for our shareholders as we progress towards our 2025 target. So thank you again and your interest in IGT. And have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.