International Game Technology PLC

NYSE:IGT

Earnings Call Transcript 2018-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the IGT 2018 Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to turn the conference over to Mr. Jim Hurley, Senior Vice President of Investor Relations. You may begin.

[Jim Hurley, Investor Relations]

Thank you for joining us on IGT's second quarter 2018 conference call. Marco Sala, our CEO, will provide an overview of the quarter and comment on boarder strategic initiatives. Then Alberto Fornaro, our Chief Financial Officer, will provide operational and financial perspective on the results. After our prepared remarks, we will open the call for your question.

During today's call, we'll 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 SEC filings.

And now, I'll turn the call over to Marco Sala, CEO of IGT.

[Marco Sala, Chief Executive Officer]

Thank you, Jim, and welcome, everyone. We are the reporting a strong second quarter today. Adjusted EBITDA rose 4%, supported by strong Lottery same-store revenues grow and Lottery product sales. North America and Italy, our largest regions, each contributed to sales and profits improvement. The results built on a trend of consistent profit improvement at constant currency and scope over the last four quarters and confirm a strong start to 2018.

Once again Lottery results were good around the world. Outside of Italy Lottery same-store revenues were up 3.5%. North America was particularly stronger rising 4.2% on continued momentum in instant ticket sales. We're encouraged by the fact that much of that growth is coming from the largest Lottery, such as California, Texas and Michigan. This is the fifth consecutive quarter of at least the mid-single-digit same-store revenue expansion for instants and draw games in North America, confirming the vitality of the business.

In addition, we have earned incentives for the Lottery management agreements we have in New Jersey and Indiana. In Italy, lotteries also performed extremely well. 10eLotto achieved another quarter of double-digit wager growth as Numero ORO and Doppio Numero ORO expand the franchise to new levels of success.

MillionDAY, a daily draw game launched in February, is performing nicely essentially compensating for the lower late-number activities so far this year. Scratch & Win wages were also up in the period lead by the Miliardario family of tickets.

We had a substantial product sales to the Massachusetts Lottery in the period, representing the highest level of North American Lottery products sales in the last three years.

Massachusetts is widely recognized as one of the world's most successful lotteries. Having chosen IGT technology for its such a significant investment is an important endorsement of our solutions. We look forward to expanding on our extensive Lottery capabilities and opportunities for incremental growth at our Investor Day on Thursday, August 2, in New York City.

Turning to the gaming business. The global installed base grew 5% from the prior year to over 63,000 machines. It was also up sequentially with increased for both commercial casino and government-sponsored VLTs. International expansion remains the most important driver of our higher installed base. We grew the North America Casino installed base by nearly 170 units compared to the first quarter. It is up 2% in the year-to-date period both due to the new casino openings and improved demand from existing customers. We’re encouraged by this trend, and we aspect the North American installed base to be higher at year-end. New games and cabinets are driving improvement and is remain strong about the prior year levels.

We shipped just under 7,700 gaming machines units worldwide during the second quarter. While new and expansion activity was higher, replacement demand was softer. This is true for both the North America and international segments. In the past two years, our replacement unit sales has been skewed towards the second semester. This year again we are anticipate an increasing replacement sales in the back half, amplified by the recent launch of Crystal 27 cabinet in Northern America. The cabinet was launched with two of our highest-performing test-bank titles, Scarab and Solar Disk.

Italy gaming machine performance is also not worthy in the period. Revenue was up. Thanks to the higher productivity of both VLTs and AWPs, we were able to more than offset the impact of a 26% decline in the number of AWP units.

Let me offer a few comments on the situation in Italy. The new Italian government has proposed some restriction on the gaming sector. The Parliament is considering a low calling for increased machine gaming taxes and for the government to propose reforms to be put in place within the next six months to eliminate problem gaming and fight illegal gaming. It is the expectation that the reforms, along with increased taxes on gaming machines, will maintain the contribution to the government from gaming at its current and anticipated levels. Clearly, the government is seeking to reinforce responsible gaming programs while strongly acknowledging the ongoing need for revenues.

Also included in the law under consideration is a ban on advertising for all gaming segments and the inclusion of image verification program. The government advertising restrictions will manage some of the strongest franchises of any retail brand in Italy. The brands are some of the most reputable and recognized throughout the country. We are confident that the strength of our franchise and brands should sustain us through the meeting term. From a profitability standpoint, we believe that the elimination of advertising expenses will compensate for any impact on wages.

The government has put forth a multi-year road map through 2023 that provides a phased implementation of the gaming machine tax that not only makes it more manageable, it gives us time and visibility to consider actions to mitigate it. So in the near term, we expect the effect of these restrictions to be relatively modest while the gaining machine taxes will likely result in a EUR 10 million to EUR 15 million impact on EBITDA when fully implemented by 2021. The strength and consistency of Italy’s performance over the last several years clearly demonstrate the resilience of the business. In fact, all the main lines of business contributed to Italy’s higher second quarter results. The broad scope of improvement shows that player interest in gaming is sustained.

Turning to sports betting. Our two decades of global experience in this business are paying dividends in the early development of the US market. IGT’s sports betting solution have been up and running in Nevada for 18 months and are now operational in New Jersey and Mississippi as well. The first two states regulate sports betting since the Supreme Court ruling. We were also the only bidder for the state of Rhode Island’s sports betting platform. The rapid deployment of IGT’s sports betting solution demonstrates that we can deliver the product, technology, support and service to make retail and mobile sports betting a reality as soon as any state legalizes this activity.

We have established some important strategic partnership too. In New Jersey, Paddy Power, BetFIRST and Dual has selected IGT’s platform to power their sports betting business. It is a significant progress in a short time for this compelling new growth opportunity. It validates IGT’s proven history in sports betting around the world and demonstrates the reliability and flexibility of our offers. So it is a good start to the year on many dimensions. Adjusted EBITDA growth of 10% in the first half is translating into an improved outlook for our underlining business for the full year. The increased contribution from our core operations enables us to mitigate the headwind from foreign currency exchange.

Now, I will turn the call over to Alberto.

[Alberto Fornaro, Chief Financial Officer]

Thank you, Marco, and hello to everyone joining us on the call today. A summary of our second quarter results are presented on Slide 7. Revenue was flat at constant currency and scope, which adjusted for the sales of DoubleDown, reflecting strong lottery performance in North America and in Italy. As we explained last quarter, the implementation of ASC 606 impacts the timing of certain revenues and the classification of jackpot expenses as contra revenues. These added 33 million negative impact on consolidated revenue in the quarter.

Adjusted EBITDA grew 4% over the prior year, which more than compensated for the differential timing of the LMA incentives. Adjusted operating income was up 2% at constant concurrency and scope, reflecting improvements in operating expenses. Adjusted earnings per share was $0.28 compared to $0.15 in the priority. The main driver of these year-over-year difference was related to an accrual for tax litigation in Mexico in the prior year period.

Let's now review the results of each of our opening segments beginning with North American Gaming and Interactive on Slide 8. The decline in revenue is entirely due to the sales of DoubleDown and to the ASC 606 classification of jackpot expenses as contra revenue.

Gaming service revenue at constant scope and adjusted for jackpot expenses was up 10%, primarily due to the upfront recognition of some revenue from a large multi-year pocket contract. Installed base grew about 170 units sequentially as a result of the new casino openings at Ocean Resort and Hard Rock Atlantic City as well as incremental placement on existing customer demand for our new product offering.

This is the second consecutive quarter of sequential growth. On a year-over-year basis, the installed base declined entirely due to larger conversion in Maryland and Oklahoma in the second half of 2017. These increased as a result of better WAP performance.

Product sales revenue was down year-over-year, primarily due to large replacement sale most notably to Oregon and Washington in the prior year. The new and expansion unit increase reflects shipments to MGM Springfield, Hard Rock Atlantic City and Ocean Resort. At constant scope, operating income was stable with the priority.

Turning to North American Lottery on Slide 9. Total revenue increased 5%. Same-store revenue grew 4% on solid instant ticket sales and draw-based games with particular strength in California and Texas.

As I mentioned previously, LMA revenue reflects the timing associated with recording incentive per ASC 606. As a reminder, LMA incentives are now recorded on a more ratable basis, while in the prior year the incentive were primarily recognized in the second quarter. These had a $17 million negative impact on Lottery service revenue in operating income in the quarter. LMA revenue was also impacted by lower pass-through revenue. As a reminder, the pass-through revenues has no associated profit.

Product sales more than doubled over the prior year, primarily due to an elevated level of Lottery point-of-sale terminals and hardware sales in Massachusetts. This marks the highest level of product sale revenue for the North American Lottery segment in the last three years. I would also like to mention that the timing of these sales shifted forward the beat as they were originally expected to occur in the second half of the year.

Opening income was up modestly on same-store revenue growth, product sales mix and operating expenses basically, despite differential timing of incentive and higher deprecation associated with recent contract wins and expansions.

Let’s turn our international segment on Slide 10. Revenue declined $12 million or 6%. While revenues declined 6% in the second quarter on a year-to-date basis, they increased 2%. This demonstrates the volatility that can occur both with timing of jackpots as well as the lumpy nature of international product sales.

In lottery, overall same-store revenue grew 1.4%, as the strong instant ticket and draw-based games more than offset significantly lower jackpot activity. We also saw lower non-wager-driven revenue compared to the prior year. Gaming service revenue declined reflecting the exit from certain legacy interactive businesses and the jackpot expense reclassification.

Gaming product sales declined as a result of fewer replacement shipped primarily in Latin America. In total, we shipped 3,120 units in the quarter compared to 3,591 in the prior year period. We believe this is primarily a matter of timing. Operating income was impacted by lower revenues and mix, partially offset by lower operating expense.

It was a very strong quarter for Italy, whose results are on Slide 11. The revenue increase 9% on a reported basis and 3% at constant currency on continue lottery momentum and increased gaming result, despite the state mandated the reduction in AWP machine.

Total lotto wages increased by about 8% resulting from double-digit growth in 10eLotto, primarily from the continuous trends in Doppio Numero ORO. MillionDAY, which was just releasing in February, generated EUR 54 million wages, which offset the lower wages from late numbers. Scratch & Win wages increased 2% on the sustained momentum of Miliardario.

Machine gaming revenues were up on continued strength in the underlying performance of both AWP and VLTs. This increase is impressive despite the state mandates in reduction in AWPs, which are down about 15,400 units or 26% year-over-year. The World Cup has contributed to an 8.4% increase in sports betting wages, which was partially offset by slightly higher payout percentage. Operating income was up 8% at constant currency, reflecting the high profit flow-through of lottery growth and disciplined cost management.

Our debt and leverage profile is on Slide 12. Net of FX, leverage was stable, despite the upfront fees and payments to minority partners. This quarter also marks the first full-year dividend payment to our minority partners related to their interest in the lotto concession.

Cash flow for the first half of the year is show here on Slide 13. Cash from operation was $120 million and capital expenditure were $259 million. During the quarter, we had the second installment of the upfront payment related to the Italian Scratch & Win license, totaling $366 million. This lead one final payment of EUR 450 million during the fourth quarter.

We also executed a couple of capital market transactions this quarter. We successfully issued €500 million senior secured note with a 3.5% coupon due in 2024. Approximately EUR 400 million of the net proceeds were used to fund a partial tender of EUR 700 million 4.125% and €500 million 4.75% notes, both during 2020. And the remaining net proceeds were used to pay down our revolving credit facility.

We made a distribution to our minority partners of approximately $180 million and received proximity $135 million from them as their contribution to fund their share of the Scratch & Win upfront installment payment that occurred during the quarter.

Our outlook for 2018 is included on Slide 14. We normally disclose the euro-dollar exchange rate at which the EBITDA outlook is anchored, because changes in FX rate are unpredictable and can be wide. Therefore, we normally do not expect to recover any adverse impact as well as we don't incorporate favorable swings from currency movements.

However, the strong underlined performance of our business year-to-date will absorb the assumed negative impact from foreign currency translation. So thanks to the business improvement, we are therefore maintaining our adjusted EBITDA outlook of $1.7 billion to $1.78 billion, while adjusting the euro-dollar full year rate assumption to 1.19 from 1.22 in the previous outlook. These assumes the euro-dollar rate to 1.17 for the balance of the year, which is a negative impact of approximately $26 million.

So for the record, let me repeat this point. Thanks to business improvement, so we are maintaining our adjusted EBITDA outlook of $1.7 billion to $1.78 billion, while we are adjusting the euro-dollar full rate assumption to 1.19 from 1.22 in the prior outlook; and this assumes, therefore, for the balance of the year a euro-dollar of 1.17.

Given our year-to-date performance, we now expect our results to be more evenly distributed between the first half and second half of the year rather than being more heavily backed half-weighted as originally anticipated. Also given the timing of certain product sales, we expect Q4 results to be much stronger than Q3.

With regard to the increase in gaming taxes in Italy, there will be a 25 basis point increase on gaining machine effective September 1, 2018. An incremental increase of 50 basis point will be implemented gradually from May 1, 2019 to January 1, 2021. In addition in 2023, there will be a slight reduction of 15 basis point. As Marco told you, we expect this to be manageable. The 2018 impact is modest and is included in our updated outlook. Our outlook for capital expenditure remains unchanged.

At this point, we'd like to open the call for your questions. Operator, could you please start the Q&A?

[Operator]

Thank you. [Operator Instructions] Our first quarter comes from the line of Carlos Santarelli of Deutsche Bank. Your line is now open.

[Carlos Santarelli, Deutsche Bank]

Alberto, you talked a little bit about the first half and the second half being a little bit more evenly distributed now. But if you go back and look at the beginning of the year, your guidance range has remained the same. Obviously the $26 million of an FX headwind is now in there. You also had $10 million to $15 million of some other expenses that were called out on the first quarter. Is it safe to say then given all of that and obviously looking at the full year, so we’re not really taking any conic stuff in the consideration coupled that with, obviously, the Italy tax that obviously is not going to be that big a deal or all that material, you guys would have been comfortably at or above the high end of your guidance from an operating perspective, ex all of this stuff.

[Marco Sala, Chief Executive Officer]

I mean, that’s exactly the point we are making here. I mean, if we look without the currency, we probably would be towards the center and upper level of the guidance, other things being equal.

[Carlos Santarelli, Deutsche Bank]

Great, thank you.

[Marco Sala, Chief Executive Officer]

And consider -- sorry, just the to give you the full information, that part of what you have seen in the first half always reflect the fact that we were able to pull some of the deals in the first part of the year. So not all the improvement that you see in the first half is coming from improved performance but is also timing compared to our initial outlook. This means that the second half is going to be more balanced. And consider always that we still have a couple of deals in Q4 that in terms of products sales they could materialize or not, and so therefore we are factoring as usual when it is related to the fourth quarter the potential risk that is slide into Q4 to next year.

[Carlos Santarelli, Deutsche Bank]

Then obviously we’re being cognizant of the fact that you have another payment coming for Scratch & Win in the fourth quarter of this year. But if you just look at your first half cash flow, ex the upfront payment, obviously a healthy number for the first half of this year, and as we kind of get through the second payment, the visible kind of large lottery contract payments will be in the rearview mirror for some time. Could you talk a little bit about kind of the free cash flow utilization as we look ahead?

[Alberto Fornaro, Chief Financial Officer]

Yes. I mean, we will have a conversation, Carlos, at the investment day on this topic. Let me say that regarding -- the cash flow utilization is relatively consistent with prior years when we eliminate mostly the impact of the big renewal, particularly the one in Italy. Again, at this stage, we still want to deleverage and approach particularly after the earlier renewal of the Scratch & Win, which will increase our debt by year end, we would like to continue to deleverage and maintain - again, we don’t have a formal policy, but we are paying a dividend and we would like to maintain it. So for the time being, I would say no change.

[Carlos Santarelli, Deutsche Bank]

Understood. Thank you very much, guys.

[Operator]

[Operator Instructions] Our next question comes from Chad Beynon of Macquarie. Your line is now open.

[Chad Beynon, Macquarie]

Hi. Good morning. Nice result and outlook there. Thank you. First question, just wanted to go into North American gaming. You’ve spent some time talking about the installed base growth. And, Alberto, I believe you also noted that WAP performed nicely in the quarter, which was good to see. And we've seen in your maintained guidance that that may imply that you're still investing in this business. Could you elaborate a little bit more in terms of what you're seeing with some of the game performance? I know you delayed some of the products later in the year. Kind of where these games are and their life cycle? And then maybe a preview into G2E, if we should expect to see a lot of the new products that you showed up in the last couple years? Or if the products that you have out there will just have legs that could potentially reduce the spending or the attention on the business? Just a little bit more color that would be helpful. Thanks

[Marco Sala, Chief Executive Officer]

Good morning, Chad. Look, you're right. Our global installed base continues to grow in North America. Operators seems to have appetite for compelling products. We had sequentially growth in North America installed base in the second quarter, and we increase 544 units to-date. To elaborate a little bit on it, this was a largely achieved under lot of the new games contents, such as Harley Davidson and the Fort Knox on the CrystalCurve cabinet. The Voice, The GOONIES on the CrystalCurve ULTRA and the SPHINX 4D. Special mention is also to be devoted to the Wheel of Fortune and MEGATOWER that is another important contributor.

In the second half we have a roster of games coming to market that are like Fortune Gong and for me the most important of being the Wheel of Fortune 4D. So the feedback we're getting from our customers on both the new line of cabinets and the new game is positive and is also evidenced by an improved yield. So we expect that both in the North America and the international businesses, there is still base to grow moderately in the 2018 based on performance we are getting. It's clear that our focus will be on developing contents. I think our effort is to try to be totally concentrated in this development. We feel more comfortable with the new organization that is in place since the beginning of the year, and the results are materializing and rely on that to confirm our original view that was to stabilize the installed base first and then based on the developments we can deploy to the market to have, let me say, a modest but constant growth.

[Chad Beynon, Macquarie]

Okay, great. Thanks. My follow-up is related to just a couple of the cost items in the quarter, you had a nice margin improvement year-over-year and sequentially. Just looking at SG&A and R&D, it does look like from a dollar standpoint it came down here. Just wondering if that's further refinement of the cost of the business or if maybe there was a slight benefit in the quarter because of FX or anything else that’s worth highlighting there just on the cost side? Thanks.

[Alberto Fornaro, Chief Financial Officer]

Chad, this is Alberto. On the R&D side, it is basically coming from the mentioned -- we mentioned before that in the fourth quarter of 2017 we took some action, and from those actions we are still seeing the benefits positively impacting the quarter. Regarding SG&A, I would say that is more our normal attention to costs and activity that we perform in order to maintain and control our cost base. So there is some impact due to the currency but also there is some small improvement due to the performance in the first half of the year.

[Chad Beynon, Macquarie]

Okay, thank you very much.

[Operator]

Thank you. Our next question comes from the line of Domenico Ghilotti of Equita. Your line is now open.

[Domenico Ghilotti, Equita]

Good morning. My question is on your revised guidance. So I am trying to understand if you could recap on which segment you were above expectations or excluding the contribution from phasing of some project that worth mentioning. So while you’re really above in terms of underlying performance. And second question. Well, we talked on the previous call about the potential of the transfer of spending from AWP to VLPs and looking at your Q2 numbers really quite aggressive performance in VLP spending. I wanted to have some more visibility and some more to comment on the trend. And the third question, well on the sports betting in the US. I would like to have some more follow on the potential contribution that could come at least the next year from the development and the joint venture versus signed. So any additional things would be welcomed. And last question. You were referring to the changes introduced -- to the regulatory changes introduced by the recent decree and I didn’t catch what is your view on the possible introduction of the -- and the ID card recognition on the gaming business.

[Alberto Fornaro, Chief Financial Officer]

Okay, Domenico, I’ll start from question one of the questionnaire. The revised guidance. Regarding the drivers, it’s basically the lottery both in North America and in Italy. Italy is clearly the performance of the lotto that has been very good since the beginning of the year. And also I would say that the sports betting is performing quite well, but it’s mostly the lottery. When we look instead to North America, lottery you can see that both in the first and in the second quarter, our same-store revenues were up significantly and also these has positively impacting the size of the incentive that we are receiving. For example, we were able to book incentives in Indiana for the first time this year; and second, also in terms of New Jersey incentive towards way higher than what we expected. So overall these are two main areas that have the improvement in our outlook. I will leave Marco to follow on the other questions.

[Marco Sala, Chief Executive Officer]

Regarding Italy, you're right. I mean VLTs are doing well on one side because of a stronger improvement of the offering that we have for our side release a number of good products, and in addition to that the reduction of the AWPs is somehow turning into an improvement of VLTs. Regarding the age verification, I mentioned the age verification during my remarks, but to elaborate a little bit more on it, what I can tell you is that is clear that Italian players will not be pleased with in age verification. But having said that, it is a program that is already in place with interactive. There are more than 2 million Italian players that are registered in order to play the digital offering. When I look also the experience in other countries, such as Greece, where recently the deployment of the VLT program has been carried out with the machine with the need to be identified by the machine itself before starting play, that didn't show an impact on the rollout or on the appreciation from the players. So all in all is just in age verification is not more than that accordingly to what is written in the decree will be a change, but a change Italian players are already used to and accordingly to international experiences shouldn't reduce the interest from the players to the game.

Sports betting, I mean, it will be - a very short answer is totally impossible for us at this point in time to make any evaluation regarding the contribution sports betting will provide to our P&L. As we are keeping on saying, it’s clear that it will depend on the kind of regulation will be in place. Quicker the regulation will allow the different states to deploy their businesses and which kind of position we will take in the various jurisdictions. In other words, we do not anticipate an outlook of the revenues that are related short term on this business.

[Operator]

Thank you. Our next question comes from David Katz of Jefferies. Your line is now open.

[David Katz, Jefferies]

Hi, good morning. Can I just ask one more detail about the guidance? If I look back to the 4Q earnings presentation when the guidance was given, it doesn't I don't think make specific reference to the ASC 606 impact, which I think has been $30 million year-to-date. When you initially gave that $1.7 billion or $1.78 billion, was that contemplated in there? Or is that a headwind that you’ve overcome also as we sit here today?

[Alberto Fornaro, Chief Financial Officer]

Let me recap what we did. The guidance we provide normally in March and only March we were able to fully complete the analysis of the impact of the AAC 606. In that specific call, we quantified the impact of AAC-606 as that was our estimate at that time, negative between $10 million and $15 million at an operating income level. So far the negative impact at an operating income level of the first half is around $4 million. I also at that time specifically mentioned that this estimate for the full year can change because we will be impacted by the transaction that will be part of our revenues for the years. Some of these transaction could have a different accounting treat. And so depending on what the transaction will be part of our revenues, that amount can change at the year end. So far we are not changing the initial view. We don’t have other elements to change that, and what we have included in our numbers is a $4 million negative to operating income level for the first half. The impact at the revenue level is obviously higher because there are some reclassification in terms of revenue. The jackpot expenses, as I mentioned, are not part anymore of the cost but our brought in reduction of revenue. And so overall the impact could be higher on the revenue side.

[David Katz, Jefferies]

Got it. That’s helpful. And then with respect to the domestic installed base, which clearly has stabilized to -- start to slightly improve, should we think about what you’ve done so far as primarily replacing your own footprint with better products? And is there some expectation that you can start to expand beyond that? What’s left out there as you looked at that total domestic installed base of your gains for you to that you think have the best shot at replacing before and/or is there some share gain opportunity that you can foretell?

[Marco Sala, Chief Executive Officer]

I am not sure that I got the second part of the question, but let me elaborate on the first part. For sure that we were replacing our installed base with better games. Now the positive balance is that the positive games are more than offsetting the games that were lagging behind and this is providing as a little bit more a comfort on the solidity of our installed base did. I am not here to say that this is the beginning of a ramp going forward with a big improvement in the installed base. We are more focused on keep on progressing modestly by bringing to the market solid games, performing games with wherever you see the cabinets I have to say because the cabinets that we launched have been well received. We are looking in the entire installed base. We are doing good progress in gaming. We are also doing good progress in the Class 2. So I think that we are looking at the overall installed base as an opportunity that quarter ending with a moderate growth over the next quarters.

[David Katz, Jefferies]

Great. Okay, thank you very much.

[Marco Sala, Chief Executive Officer]

Thank you very much, David.

[Operator]

Thank you. [Operator Instructions] Our next question comes from John DeCree of Union Gaming. Your line is now open.

[John DeCree, Union Gaming]

Good morning, everyone. I have two questions, one on Italy and then a quick one on North America. Marco, thanks for all your color on the Italian regulatory environment. I have just a question on clarity. It seems like most of the restrictions that the government has been implementing has been in debt retail or machine gaming. I just wanted to clarify that we haven't really seen any intake in that one of the larger piece of your business, which is the Lotto and Lottery business in Italy. Is that accurate?

[Marco Sala, Chief Executive Officer]

Yes, nothing has been even told regarding the Lottery part of the business.

[John DeCree, Union Gaming]

Great, thank you. And then in North America could you called out some strong terminal and hardware sales in the Lottery in Massachusetts, and I was wondering if you could give us a little color on that. Is that something that you typically see? I mean we've seen some strong mid-single-digit growth in North America in the Lottery business. Does that compel retailers to upgrade? And is there potentially more opportunities like that across the rest of your Lottery portfolio in the U.S.?

[Alberto Fornaro, Chief Financial Officer]

John, I think the product sales activity is very lumpy, depends on the plan. And it is Massachusetts, it's a very well-run Lottery. They have their own plan. So these are what I can say is that regarding the past is this is very high level of product sales. I would not extrapolate trends. But it's a good sign of the fact that one of the most important customer is continue to give us confidence through this important order for terminals and other equipment to be so.

[Marco Sala, Chief Executive Officer]

John, I want to be sure that I completely answer your question on the Italian action of the government. It's clear that the advertising ban includes lotteries. They are not taking any action regarding taxation fees and all these staff. It was never discussed any moment. It’s clear that when it comes to advertising, since the ban is across the segments, it includes also lotteries. Just to be sure that you've got this some of my answer.

[John DeCree, Union Gaming]

Okay. Thank you. That helpful. I appreciate the clarity. And thanks for the questions. Looking forward to Thursday.

[Marco Sala, Chief Executive Officer]

Thank you.

[Operator]

Thank you. And we do have a follow-up question from Domenico Ghilotti of Equita.

[Domenico Ghilotti, Equita]

Good morning. I have the Page 2 of the questioner and then start from the tax rate. The only disappointment from my perspective is that - well, with the tax rate going down in U.S. and in Italy, so cost of tax rate, you were extrapolating from your Q2 adjusted numbers are still able to be 40%? Or even though if it is right to extrapolate from single quarter, but I would like to have some more color on this?

[Alberto Fornaro, Chief Financial Officer]

Domenico, regarding the tax rate, there is an impact coming from the assessment that we achieved in Italy, and that is one of the major driver. But let me say in general again that when we look at the overall impact of the US tax, consider that we’re still working in it, normally a change in the tax that is too deep requires time to be first of all digested and also understand what our some of the criticalities that have been introduced but on the other side provide some opportunity also. So we are working through that. When we will have a better view, we will provide. Consider that for the US tax reform we have said for three years, ’17 and ’18 and ’19, we expect no impact or minimal impact in terms of cash taxing.

[Domenico Ghilotti, Equita]

Okay, just a last question. On the performance of your gaming business in Europe, so in particular I was trying to -- are you satisfied with the competitive trend and competitive performance of still in Europe? Or do you think you have to improve compared to your competitors?

[Marco Sala, Chief Executive Officer]

Overall, I think we are satisfied. We are now devoting energies in order to improve our position in Greece, whereas the beginning was not as good as we were anticipating. But I have to say that the product that we recently launched in Greece are improving our performance in comparison with the local float. So I think we are in a good position. What we’ve done in Italy by the way is very well because I think, as I was mentioning before, the contents that we have recently delivered on the VLTs segment of the market are doing very well and are improving our position also in the Italian market. So all in all, I’m positive and I look forward to seeing additional improvement.

[Operator]

Thank you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Marco Sala, CEO, for any closing remarks.

[Marco Sala, Chief Executive Officer]

Thank you for joining us today and for your interest in IGT. We look forward to seeing many of you on Thursday for our Investor Day in New York City. Have a good day and nice summer. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.