International Game Technology PLC

NYSE:IGT

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the IGT 2020 Second Quarter Results. At this time all participants lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference maybe recorded. [Operator Instructions].

I would now like to hand the call over to your speaker today, Mr. Jim Hurley, SVP of Investor Relations. Sir, you may begin.

[James Hurley, Senior Vice President-Investor Relations]

Thank you. And thank you all for joining us on IGT’s second quarter 2020 conference call. We

We are presenting the results today from multiple locations. So please bear with us if we encounter any technical difficulties.

On today's call are Marco Sala, our Chief Executive Officer, and Max Chiara, our Chief Financial Officer. After introductory remarks from Marco and Max, we will open the call for your questions.

During today's call, we will be making some forward-looking statements within the meaning of 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 may 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 will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

And now, I will turn the call over to Marco Sala.

[Marco Sala, Chief Executive Officer]

Thank you, Jim and hello everyone. I hope you and your loved ones remain safe and healthy in these uncertain times. Our second quarter results clearly reflect - of being varying stages of a lockdown, especially in April and May. With casinos and gaming goals closer through traffic reviews at the lottery, retail outlets and sporting events are canceled the shutdown impacted all operations in our key markets.

That said our performance proven better than we expected back in may at the time of our Q1 call. This is a result of adding a diverse global portfolio of product and solution across the regulated gaming spectrum.

We also had an important benefit from this weak cost saving measures that we implemented to manage the pandemic. The $168 million of EBITDA we generated in the period includes a positive contributions from our North America gaming and lottery segment, as well as from Italy.

We delivered at over $100 million in positive free cash flow in the second quarter. It is a significant achievement, and a clear indication we are executing well. Our better than expected results demonstrated the higher engagement maintained by IGT team and our customers. I know it is not easy in the current environment, and I'm grateful for their incredible dedication and partnership.

Financial performance aside that we have had a chance to appreciate the importance of Diversity, Equity and Inclusion among our employees and the community we serve. These have always been core values for us. And they are critical in these current context.

IGT stands with our employees, customers players and communities in the fight for racial justice, equality and equity. As I highlighted in May, we are executing on key priorities to navigate the new normal.

The health and safety of our employees has always been at the center of those priorities. Today, about 75% of our team is working from home and we have adopted our policies and procedures accordingly.

Customer Service levels as not missed a beat. IGT has developed a smart technology to provide the remotely system monitoring, upgrades and new installations for our customers. This has become even more crucial to their success in the current environment.

Aggressive actions on fixed and discretionary costs are helping to ease the impact of global lockdowns. While many of the cost initiatives are temporary in nature, we are also driving more structural savings.

Cash flow and liquidity remains the top financial priorities. It is clear in the Q2’s positive free cash flow and improved liquidity position. By focusing on these priorities, we find ourselves in a much stronger place than we expected to be at this time. They also position us well for the future.

I would like to provide more specific insight on trend during the quarter beginning with lottery whose resilience is evidenced in our results. Since the revenues was up 6% in North America including an over 10% increase for instance and board based games and despite a significantly lower jackpot activity.

Trends improve the progressively throughout the quarter. On the contrary international same-store revenue was down 27% in the quarter reflecting the shutdown of several games around the world including Colombia, Mexico Trinidad & Tobago.

Sales as record with the European same-store revenue now is section in line with the prior year levels. Latin America is still a low well as COVID-19 affected that region later. Italy lottery wages were down 40% in the quarter, reflecting the complete shutdown of draw based lotto games during the [indiscernible].

And the closure of bars and restaurants, so we should represents about 25% of Scratch & Win wages for most of the period. And with the rest of the award wages posited a substantially progressive improvements throughout the period, especially as [indiscernible] were turned back on in late May. Scratch & Win is now broadly in line with the pre-COVID levels. Lotto wages are slightly below the prior year as the social distancing protocols are affecting - lotto play.

We had some important business developments for lotteries. These include the multiyear contract extensions in Tennessee [indiscernible] 2004 and Czech Republic partner for 27-years. We were also awarded a primary instant ticket printing contract for Virginia displacing incumbent.

Going forward IGT will print approximately 90% of Virginia's Eastern tickets. It is a high profile endorsement of our printing capabilities. A key area of investment and opportunity for us. It also builds on a progressively deeper relationship we have had with Virginia over the last 20-years.

Let's move on to gaming. When the impact of a global lockdown was the most acute during Q2, as the most casinos and gaming doors were closed for a large portion of the period. In Europe and in the U.S., venues began to gradually reopen in mid-May, while Italy gaming goals do not reopen until June

Across the board, I would characterize the early gaming trends as being better than expected. In the U.S., where over 85% of casinos are now open stronger machine productivity is helping to compensate for fewer active machines and capacity restrictions.

Approximately 60% of our installed base is active and is on those active units are up from a prior year levels. While area progressives drive improved player favorites are the main driver which is up double digits.

Outside of the U.S., there is a lot of variation by region. EMEA and APAC have been mostly open seems June, Central America is open, but South America is mostly closed. In Italy, while wages are still below the prior year period VLPs are performing in line with January and February levels. AWPs are a bit weaker as a social distancing is harder to maintain in more generally speaking point of sales.

Despite the global shutdown we continue to make good progress on several strategic initiatives. One is our entry into the U.S. historical horseracing arena. We shipped the nearly 1000 units to [Indiscernible] for the Kentucky market during the quarter, leveraging our top performing Krystal Series Arduous and highly popular game themes such as Fortune Coins and Griffin's Throne. We are pursuing an additional historical horseracing opportunity in Virginia.

Early last month we launched our highly anticipated the Peak Bar Top Cabinet featuring an assortment of our top performing video poker slots, Keno and roulette content. The new cabinet built on IGT case of leadership first in video poker by integrating a range of highly relevant technologically advanced features such as cashless wagering, USB mobile device, charging port and player level indicator for service task.

The new Emerald Queen Hi5 casino intercom in Washington that opened in June is being powered by our advantage Central Casino Management System. IGT also secured a majority of the class three pro share at the casino.

Interest in our cashless system solutions continues to expand around the world and we are in the final stages of negotiating several deployment over the next few months. Customers are increasingly looking to IGT to provide the digital solutions players desire. We are seeing these strong growth for our digital business around the world.

Digital as a channel that represented in mid-single digit percent of 2019 revenue and was double that rate in Q2. It grew double-digits last year, and the increases are much stronger since COVID, including 35% growth in Q2.

Momentum remain strong even as casino reopen and mobility restrictions eases. Our B2C digital business in Italy accelerated in the second quarter with wages increasing about 33% despite a lack of sporting events until late in the period.

Growth for iGaming and iLottery wages was strong held by growing number of new players. Revenue for our global B2B iGaming platforms increased 75% in Q2. In North America, which represents about 75% of our B2B iGaming business, revenue more than doubled on strong Canadian trends, including a growing number of new players. In Pennsylvania where GGR is now receiving New Jersey's levels, we are live with eight Operators and over 50% market share.

In Sweden Svenska Spel recently signed up for an expanded suite of IGT's digital solutions including our extensive library of play casino accounted served via our remote game server. In addition to IGT ping, cash less solution to find that land base VLT from mobile devices.

We continue to make great progress in the U.S. sports betting market. In terms of volume of wagers handled and number of space where it is approved. Our play sports platform is the most widely used a B2B sports betting platform in the U.S.

In 2019 IGT processed over 30% of total U.S. sports betting wages and we are currently present in 14 states with Colorado being the most recent. Additional states are looking at legalizing the sport betting and IGT is well positioned to meet that demand.

We recently deepened our relationship with the FanDuel. The market leading a U.S. sport book operator through a multiyear sports betting and iGaming partnership. IGT is a place for platform and hardware will power all FanDuel new and existing retail sport book across the U.S.

And FanDuel will leverage a vast assortment of our play casino digital games for each iGaming activities. We have enjoyed a strong partnership over the last two years of pioneering the development of the U.S. sports betting market. We look forward to remain their trusted partner.

Last month we announced an important reorganization of the company into two global business unit, While dedicated to Lottery ran by [indiscernible] and the others to gaming led by [indiscernible].

They will end that whole functions previously assigned to our international Italy, North American gaming and North American lottery business units. But with a global view that enables each operation to maximize how its product and services are positioned to meet the expectations of customers in places around the world.

By focusing on our core businesses, we will better able to promote the exchange of expertise and best practices among IGT employees around the world. And we will enhanced our ability to provide greater responsiveness to customers and players.

Another important aspect of our new structure is that it will make easier for you all to understand and value our business. While pro forma 2019 revenue was evenly split between lottery and gaming, lottery accounts for a much higher percentage of our profits.

Reflecting our global leadership position in this business. We are still working on realigning into the new design. But for context, lotteries accounts for about two-thirds of our profits, while gaming activities are about one-third.

Lottery has historical maintained a steady growth profile, and proved to be a remarkably resilient in weaker macroeconomic conditions. You can see that in the results we are reporting today is supported by long-term contracts that provide good visibility to future revenue and cash flow streams. A transition to product line reporting will make this clearer for you. We will start reporting in the new structure next quarter.

The COVID pandemic is teaching us a lot about new ways of working and how we serve our customers. We are focused on leveraging these learnings to operate more efficiently in our new organizational design. Along those lines, and we are executing several initiatives to enhance our operational flexibility, enabling us to be more responsive to market conditions.

We have identified over $200 million in structural cost savings from pre-COVID levels across the four main work streams, including eliminating duplicative functions and streamlining the back office activities, optimizing our global investment in technology to focus on value accretive NOL, rationalizing R&D based on disciplined risk return priorities and optimizing our supply chain for maximum cost efficiency.

Current trends suggests that the global gaming market is recovering. We are hopeful of the progress and growth that we are seeing will continue. But we need to be prudent with expectations given the economic impacts of the pandemic.

The actions that we are taking to protect the business are working and we are prepared to take additional measures if the situation gets worse. For now, we continue to innovate to deliver the arrival the gaming experience IGT is known for. As always our goal is to focus on initiatives that create value for all our stakeholders.

At this point, I will turn the call over to Max.

[Massimiliano Chiara, Chief Financial Officer]

Thank you, Marco and hello to everyone on the call today. Our second quarter results have been severely affected by the COVID-19 pandemic. So compatibility on a year-over-year basis is less meaningful. Anyhow, I will walk you through the major highlights by segments to provide a perspective of where business is approaching well, and where we have been mostly affected by the pandemic.

On a significant revenue decline of almost 50%, our profitability has been particularly affected. The early kick in of the cost saving actions swiftly implemented at the end of Q1 and beginning of Q2 are starting to materialize mitigating the impact to the bottom line.

In addition, we have been focusing our efforts on transition from temporary cost reduction actions to more structural savings. Several programs were implemented during Q2 and we remain laser focused on finding additional opportunities to permanently reduce our fixed cost structure.

On Slide 12 now. We generated consolidated revenue of 637 million, global gaming revenue fell 72% driven by the closure of casinos and gaming halls, fewer unit shipments and lower systems and software sales than in the prior year. Global lottery revenue was down 26% on a reduced traffic to point of sale and the complete shutdown of the Lotto game in Italy for several weeks.

Throughout the second quarter, we saw improving trends month-after-month in each operating segment and across all primary revenue streams. In the first six months, revenue declined 34% to 1.6 billion with gaming revenue down 50% and lottery down 21%.

Operating loss of 94 million in the quarter compares to operating income of 224 million in the prior year. Lower business volume had a significant impact on profitability, particularly from product sales. In addition, the prior year quarter included the strategic transaction in Oklahoma, as well as high margin items such as a multiyear poker side license and significant system sales.

In the second quarter, we also incurred 43 million in restructuring charges related to projects designed to drive longer term structure of cost savings, and the reorganization of the company. Lastly, we saved about $170 million from COVID related cost containment actions, compared to the prior year, not including CapEx savings in this number, which helps mitigate the impact of lower revenue.

In the first six months, we incurred an operating loss of 291 million, which included 343 million in impairment and restructuring charges. Net of this cost, our operating profitability would have been around 50 million. This compares to operating income of 402 million in the first half of 2019.

During the second quarter, we achieved an adjusted EBITDA of 168 million and the positive free cash flow of 107 million delivering very strong results in a very difficult operating environment and well above our expectations - laid out during our last earnings call.

We experienced an accelerated pace of the reopening in casinos and gaming halls and the more resilient demand in lottery across the board. In the six month period EBITDA was 477 million and free cash flow, a positive 165 million.

Now let's turn to our operating segments. Starting in North America gaming and interactive on Slide 13. We generated 96 million in revenue compared to 274 million in the prior year period. About two-thirds of the decline was related to the direct impact of casino closures on service revenue, with the remainder related to contributions from higher unit shipments and large transactions in the prior year.

The installed base declined by about 250 units sequentially, as some operators are focused on reducing costs and looking for ways to facilitate social distancing in this environment. In most jurisdictions, social distancing protocols mandate that only a portion of the slot machines on the casino floors can be operational.

Overall productivity and active units was higher, driven by double-digit increases in the WAP yield. The increase in new and expansion unit shipments was primarily driven by the sale of 977 Historical Horse Racing machines in Kentucky.

Despite lower replacement unit demand driven by COVID related budgetary constraints, we shipped just over 1300 units in the quarter, with a relatively equal split between commercial casinos units and VLTs.

Higher system sales in the prior year, most notably, the installation of our Advantage system at Anchor Boston Harbor also contributed to the reduction in product sales revenue. Operating loss of $20 million compares to $85 million in operating income in the prior year period.

The results for the North America Lottery segments are shown on Slide 14 and clearly demonstrate the resilience of the lottery business. Revenue declined 12% to $273 million as significant growth in instant ticket and draw game as mitigate VLT venue closures, and lower jackpot activity.

Increases in the lottery service revenue bucket on this slide was a result of solid 6% same-store revenue growth during the quarter. This is despite mobility restrictions and sharply lower jackpot activity.

The over 10% same-store revenue increase in instant ticket and draw games reflects year-over-year growth in markets like Texas and Florida, partly offset by declines in New York and California, two of the states hit particularly hard by COVID-19 during the quarter.

The results are impressive even under normal circumstances. We expect future growth to remain consistent, with more normalized levels of low to mid-single digit increases. LMA primarily reflects reduced activity New Jersey as well as lower amounts of associated pass through revenue.

Gaining service revenue was down on the closure of VLT venues partially offset by increased iGaming activity in Canada. The decrease in product sales revenue is due to a large system sale in Massachusetts in the prior year.

Operating income of $75 million was roughly in line with the prior year as same-store revenue growth offset the reduction in higher margin LMA incentive, and the lack of contributions from gaming machines was largely offset by cost saving actions.

On Slide 15, you have the results from the International segments where revenue was $84 million down 64% from the prior year period, primarily driven by lower product sales. Prior year also included higher software sales in Italy and VLT shipment to Sweden.

Service revenue was also impacted by casino closures and mobility restrictions. Operating loss of $20 million compared to $30 million in operating income in the prior year as lower unit volume and revenue mix were partially offset by cost savings efforts.

Now let's turn to the Italy segment on Slide 16 where revenue of $184 million was down 56% from prior year levels. Lottery revenue declined 65% due to strict mobility restrictions, the closure of bars and restaurants and the shutdown of the lotto game for several weeks.

In addition, about 25% of discretion and tickets are sold in bars and restaurants, which didn't be open until mid to late June. Overall lottery wager trends showed progressive improvement throughout the quarter with growth of 6% in June, compared to a decline of 81% in April. This once again highlights the resilience of the lottery business.

The drop in machine gaming revenue reflects the impact of gaming hall closures during the quarter as venues did not reopen until June. Notably interactive wagers grew 44% during the quarter as players continue to gravitate to our full suite of digital games.

Other service revenue includes growth and commercial services which was more than offset by lower sports betting revenue due to lack of events. Meaningful sports activity only restarted in June with the European football league resuming play towards the end of the month.

The sports betting payout of 88% reflects a higher mix of digital versus retail wagers in the period. Operating loss of seven million compared to operating income of 133 million was primarily due to COVID-19 restrictions partially offset by cost saving actions.

Moving now to Slide 17. As we highlighted last quarter, we are focused on reducing our cash cost to adapt to lower market demand trends. A summary of our cost savings achievement during the quarter is included on the slide. Prior to the COVID-19 crisis, our average monthly fixed costs and maintenance CapEx were approximately 235 million combined.

During the quarter we reduced that to about 165 million, primarily driven by employee related actions and strict discipline around discretionary expenses. We are on track to achieve the targets at 500 million cost savings and capital spend avoidance for the full-year.

While expenses should begin to normalize in the back half of the year, we should still achieve our average monthly run rate of 185 million from March through the end of 2020. We continue to focus on delivering longer term structural cost savings to make our organization even stronger. We currently estimate that we will be able to deliver over 200 million in structural P&L savings compared to pre-COVID levels, mostly in 2021.

I would like to now turn to cash flow and net debt on Slide 18. Despite a very challenging operating environments. In the first half of the year, we were able to deliver 325 million in cash from operations and 165 million in free cash flow. This resulted in our ability to reduce net debt by almost 100 million since year-end.

Last quarter we said that we expected the second quarter to be the most challenging for cash flow, and that we anticipated burning cash in that period. In fact, we generated over 107 million in free cash flow during Q2.

Given the better than expected results, I'm confident that we will be able to deliver positive free cash flow for the full-year, including a modest contribution in the second half, barring a second wave or restrictions related to the pandemic. Leverage of 5.5 times increase from 4.3 times at the end of the prior year, primarily driven by the impact COVID-19 head on EBITDA in the first half of 2020.

Turning to Slide 19, we ended the quarter with approximately 2.3 billion in total liquidity comprised of about 1.3 billion in unrestricted cash and one billion in additional borrowing capacity under oxide facilities. This is more than enough to cover that maturities to 2022. You can also see that we are well diversified in terms of our sources of debt.

During the quarter, we issued 750 million, 5.25% notes due in 2029. This was the lowest U.S. dollar denominated coupon ever issued by the company or its predecessors and represents the longest duration insurance since 2015.

We used 500 million of the net proceeds to fund a partial standard of our 6.25% now during 2022. We are laser focused on reducing costs and we are pleased to successfully refinance a portion of our 2022 notes with a lower coupon instrument. The balance of the proceeds was used to enhance our liquidity.

Lastly, turning to Slide 20, I would like to summarize the key points in today's presentation. Once again, our businesses have demonstrated their solidity with lottery particularly resilient and the value that comes from geographic product diversification. We are on track to meet our target of $500 million in cost savings for 2020 and has shifted our focus to initiatives that will drive longer term structural savings.

We have strong liquidity and ample resources to manage debt maturities over the next few years and provide a bit of a safety net should it be needed. And we deliver positive EBITDA and free cash flow in the quarter even though a large portion of our business was not operating on severely handicapped - or severely handicapped for most, if not all of the quarter. This allows us to continue to execute on our deleveraging strategy.

Now we would like to open the line for your questions. Operator.

[Operator]

Thank you. [Operator Instructions] And our first question comes from Carlo Santarelli from Deutsche Bank. Your line is open.

[Carlo Santarelli, Deutsche Bank]

Hey, guys. Good morning. Thank you for the prepared remarks and the color. Max you talked about a little bit here in terms of the cost savings. And obviously looking at Slide 17, the 2Q run-rate of 155 and you guys mentioned that March through December the average monthly run rates about 185. Obviously that implies a pick up in the back half of the year, but if then just extrapolated that run-rate what is implied for the back half across 2021. It would appear there is kind of more than 200 there in terms of the annual costs on a permanent 2021 basis. Are there other costs that then would hypothetically come back in 2021 that you are contemplating in addition to kind of how you exit this year?

[Massimiliano Chiara, Chief Financial Officer]

Hi, Carlo. So first of all, if you do the math, the assumption is that in the second half of the year, we would run at about $200 million per month versus the 185 average that we called out for the entire period.

That is because we front loaded the savings with some temporary swift actions starting from the end of March onwards. That may fade in the latter part of the year. And that is why the cost would start to pick up a little bit towards the end of this year.

Going into 2021 we have lay the foundations for those structural savings, as Marco clearly highlighted with those four initiatives. Could there be more? Who knows, maybe. But at the end of the story, we also need to watch very carefully what a trend revenue will have into the second part of the year, early 2021. Because some of those discretionary costs that we were able to take out, may well come back.

And so net-net we are confident right now, with the $200 million in P&L savings. Obviously, that number does not include CapEx reductions that we have achieved for 2020 and some of those will probably stay in place also for 2021.

[Carlo Santarelli, Deutsche Bank]

Got it, that's helpful. Thank you for the clarification on that. And then you guys provided some color on kind of the cadence of how things progressed. And obviously, I think that the wide area progresses is you mentioned were up double digits. If you looked at kind of the bass on a whole and maybe just looked at the month of June isolated where I would assume a significant portion of the machines that have been turned back on where on. Could you kind of get a holistic picture of maybe what the apples to apples year-over-year yields would have looked like during that period for the entirety of the day?

[Marco Sala, Chief Executive Officer]

Good morning, Carlo. It is Marco speaking. But I think that I'm going to repeat what I said during my prepared remarks, in reality the number regarding the active machines was adding mainly to the month of June where we are talking about around 60% of earnings will be active, and the comment we were making was regarding the higher productivity, and the higher productivity was for the most important part focus on the performance of our work.

That as I said was doing the active machines, of course, double digit [indiscernible] a was last year that somehow is that reflecting a good demand that operators found at the time they have opened the casinos and that is where we are.

Now, all we can imagine the future is harder to predict, but the starting point is positive and when it comes to the demand that we have seen, especially for local and tribal casinos and for the

[indiscernible] part of the business.

[Carlo Santarelli, Deutsche Bank]

Thanks. And then just one last follow-up if I may. Any chance of the 168 million of EBITDA that you guys did in the 2Q? As we think about modeling kind of the back half of this year 2021, any sense you can give in terms of any way you could catch it, the EBITDA generated in June when the things were more functional for both Lottery and gaming perspectives?

[Massimiliano Chiara, Chief Financial Officer]

Definitely if you look at the - although we don't want to give out monthly performance at this point. The month of April has been the worst of the quarter with a very low number in terms of EBITDA, that number started to pick up in May and ending June. Allowed us to obviously to get to that stronger finish.

Again, going forward, we need to assume that the trajectory of reopening, especially on the gaming side has plateaued at this point, you may add some further openings, but at the same time, you may add some casinos that will be forced to close for a period of time. So, our position right now is to continue to maintain a prudent approach down the road into the second half of the year.

[Carlo Santarelli, Deutsche Bank]

Understood. Thank you guys.

[Marco Sala, Chief Executive Officer]

Thank you Carlo.

[Operator]

Thank you. Next question comes from Chad Beynon from Macquarie.

[Chad Beynon, Macquarie]

Good morning. Thanks for taking my questions and congrats on the strong results and positive free cash flow. Wanting to start with lottery. You mentioned that North American lottery, FMC and instant improved throughout the quarter, particularly in markets that weren't as facing as high restrictions. And you expect for this business to continue low to mid-single digits. Can you talk about - if you think there was an inflated benefit from the government checks, or was it pretty consistent? You know, as these checks started to become a little less important? And then secondarily, are you hearing or speaking with legislators who could be pushing for more online or iLottery type options? I know it is not a big piece of the business in the U.S., but just wondering if that could become a larger piece given what you are seeing in other online divisions. Thanks.

[Marco Sala, Chief Executive Officer]

Chad lottery performance is truly doing very well. No doubt that for the mobility restriction has a meaningful impact on global lottery sales that in April and May. But we saw as we've already as restriction ease return to growth in June.

Let me give you some general numbers. I'm not focusing on the U.S. or for a while. But I think it is important to understand the progression. And I'm talking about wages. In April, overall wages that were down 28%, in May 7%down, in June plus 10% and July is between 7% and 8%.

And so the recovery has been weaker and stronger than expected. We tend as you were saying that the performance is particularly strong in the U.S. where is well above last year and the trends that are keeping gone. I think that more than the status takes the advantages the lottery benefited from the closure of casinos. We started investigating internally some trends.

And we are now convinced that for sure, there are areas where the closure of casinos have coming to improve things for lotteries. And I personally feel that these has been a unique circumstances where the pandemic provides an opportunity to appreciate the entertainment value of the lottery games because at the end of the day, we see these trends keeping on. That is what I see,

Regarding the debate on the online is always on, but I cannot anticipate anything concrete at this point in time. After many years, I'm quite prudent in predicting this year and the behaviors if there is restrictions.

[Chad Beynon, Macquarie]

Okay, thank you. Nice results for lottery. Appreciate it.

[Operator]

Thank you. [Operator Instructions] And our next question comes from Barry Jonas from SunTrust Robinson Humphrey. Your line is open.

[Barry Jonas, SunTrust Robinson Humphrey]

Hey guys. So with the new segmentation of the business do you still see the same level of synergies between gaming and lottery is when the original IGT transaction was announced?

[Marco Sala, Chief Executive Officer]

This is a very good question. The answer is, yes. Certainly we still believe the segments are complimentary and cool where they will regulated gaming space. They both enjoy a global coverage and they are providing the company with the possibility and take advantage of any opportunity around the world. And there are some attributes that benefit more than others. We've have innovation, content and technology are leverageable across the various segments.

And also regulation because when it comes to regulation often, the overall gaming activities are regulated by a single agency where we enjoy a deep longstanding relationship are both as operator and as B2B or B2B provider, so this is a competitive advantage that we have the possibility to win because of the combination of the businesses.

[Barry Jonas, SunTrust Robinson Humphrey]

And then wanted to touch on Italy. Just what is the tone from the government, given the stress that the business I guess more specifically the machines businesses felt? And do you think we could see any changes to how they have historically interacted with the industry?

[Marco Sala, Chief Executive Officer]

I think I see some changes. I see some changes because for the first time, regardless of the pandemic, the government have seen the region are negatively affected by the impact of lower payouts, higher taxes of a player winnings. In addition to the implementation of the age of verification.

So I think that this might change the approach or understanding that further increases in taxation can drive further reduction in wagering affecting a very important value stream for the Italian government.

[Barry Jonas, SunTrust Robinson Humphrey]

Great. And last one for me. I think minority dividends and returns of capital for the year are down about 100 million or so. How should we be thinking about modeling those line items for the remainder of this year and next year?

[Massimiliano Chiara, Chief Financial Officer]

So first of all, the dividend is part of our circuit payments definition in our bank facility. So we, with the recent bank amendment, we kind of put a stop on the dividends until Q2 of 2021 included. After that is going to depend upon our ability to stay below five in terms of leverage, which is harder our limit, our threshold that we need to beat in our agreements.

With respect to the minority payments, you have seen from our material that we published today that there were about 75 million of payments linked to the JVs this quarter. This is lower than the normal distribution based upon the last year results.

But again and the boards of the JVs determined that it was not wise to make the full distribution early on in the spring due to the impact and the associated uncertainties around the COVID-19 pandemic. Obviously, this is a moving target so the board will reevaluate the distribution of any remaining undistributed earnings if and when the market vector improves later on in the year.

[Barry Jonas, SunTrust Robinson Humphrey]

Great, that's all for me. Thank you.

[Marco Sala, Chief Executive Officer]

Thank you very much.

[Operator]

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

[Domenico Ghilotti, Equita SIM SpA]

Good morning. Two questions. First, just a follow up on the free cash flow. So you were commenting that you expect some moderate positive free cash flow in the second half. And is the number including any minority distribution in your free cash flow number?

[Marco Sala, Chief Executive Officer]

Hi Domenico. So the point I would like to make here is, so first of all, as a general rule, we tend to collect our EBITDA with a quarter delay. So in Q3, we will be collecting the lowest EBITDA probably in the in the year. And so that that Q3 number is significantly affected by let me say, a lower than normal profit collected in that period.

On top of that, we also were able to overachieve on our $500 million because of some deferrals on topics which will have to happen before the end of the year in line with our agreement, so that CapEx number will probably pick up a little bit in the second half. As well as there were some timing variances primarily on working capital and taxes that, again will reverse versus the first half in the second half, particularly in Q3.

So that's why we came out prudently with this modestly positive cash flow in the second half, which is probably going to be skewed towards the latter portion of the six months period. While you are not assuming any, so the dividend distribution to minority in any case is not is not included in that because that is not including free cash flow.

That is not let me say - the decision will be on the board of the respective JVs. And obviously, they will have conversations in the second part of the year but we don't know at this point.

[Domenico Ghilotti, Equita SIM SpA]

Okay. And the other question is just a review on the accounting business. So you're recommending that if I'm not wrong, but question being basically like lot of those still down I would presume that that things would be probably stronger due to the activity that has resumed. And not clear to me what is the trend that you are seeing [Indiscernible] as well affecting not just by the pandemic but also by other situation like the cap leaders?

[Massimiliano Chiara, Chief Financial Officer]

Sure, Domenico. Good afternoon, first of all. The VLTs you're right. If I had to summarize the front lines that you mentioned. We feel we are broadly aligned with scratch and win. We are below last year, on a lotto mainly because of there is a lotto maybe that is a [Keno] (Ph) type of product. And that implies length of sales of stay in the point of sales better in this period of time is not allowed.

Suppose that being resumed now with the reopening of the various championships regarding VLTs, I can tell you that the performance now is aligned with the performance over the first two months. So, being impacted by the page readers or a combination of those things including the reader, but at this point in time or the performance went back to the level it was in January and February.

Regarding the AWP, they are likely below the performance we were adding in the first two months and then further below last year. For the same reasons I mentioned for lots of those for defending lots of. Those are machines that are installed in generalistic point of sales and therefore the players cannot stay in the shelter as long as they were used to, and there's no reason why they wages of these for the time being are still affected.

[Domenico Ghilotti, Equita SIM SpA]

Right in terms of say network operation you are.

[Marco Sala, Chief Executive Officer]

So the network is up and running for VLTs is marginally down versus last year. On AWPs is valid in terms of operating machines, probably 10% less. But I think this is not wide performance in value is more equal 10% of the machines is not a big number that the network could improve the productivity. I think as an issue is the issue [indiscernible] the possibility for the players to spend more time in the point of sales.

[Domenico Ghilotti, Equita SIM SpA]

And just the last follow-up. You already fairly clearly in terms of wagers when you're commenting year-on-year performance. Should we assume that the lower payout that in the meantime you are applied is a little bit supportive year-on-year in terms of sales and profitability? Or there is no bit different?

[Marco Sala, Chief Executive Officer]

I do not see big differences at this point in time.

[Domenico Ghilotti, Equita SIM SpA]

Okay. Thank you.

[Marco Sala, Chief Executive Officer]

Thank you.

[Operator]

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

[David Katz, Jefferies]

I wanted to ask two questions. Number one with the new disclosure structure where gaming is its own bucket? Should we expect that, the digital aspects of gaming, something we will be able to break out? Just given not to make a short-term decision, but given the way the market is focused on all things digital, do you expect we will have enough for the tools to break that out for earnings and value purposes?

[Marco Sala, Chief Executive Officer]

Max.

[Massimiliano Chiara, Chief Financial Officer]

Right now, our plan is to provide the disclosures around the two segments, lottery on one end and gaming on the other side. Gaming will include also the digital business so the expectation, I would say is that we will continue to provide the qualitative information around the digital business progression for the foreseeable future as to allow the market to let me say verify the trajectory that the company is into for the gaming business or in the digital space. But right now, we don't have plans to break down the digital as a separate segment.

I was just saying which may change in the future, depending how the digital business develops. But if it becomes a material part of our portfolio, we may reassess that decision at the future point.

[David Katz, Jefferies]

Understood. My second question, and I know this was discussed a bit earlier is around maintenance CapEx. And the decision to reduce in the near term some of which will come back. Could you provide just a bit of color as for what that maintenance CapEx is for. It does say that it is more gaming oriented? Obviously, what I'm getting at is the notion that there may be a need to catch up later on in the future?

[Massimiliano Chiara, Chief Financial Officer]

No, actually the maintenance CapEx is typically - yes, the maintenance capital is typically correlated to the lottery contracts. As we win new contracts obviously we have to re-establish the footprint of machines, the new systems, and that introduction requires typically an upfront investment. So that CapEx is considered contractual in nature, and that is why it is called maintenance. There is some maintenance CapEx in gaming as well but it is not the predominant portion of that number.

[David Katz, Jefferies]

I see. So the reference on Slide 17 around cuts are deepest for gaming activities is more cost oriented than it is maintenance CapEx oriented?

[Massimiliano Chiara, Chief Financial Officer]

Yes, I mean, it is cost oriented and is also growth oriented. Because we have been able to time out topics associated with new initiatives more aggressively than what we were allowed to do on the maintenance one right. The maintenance just follows through what the new timing is for the implementation of the new projects and you kind of adjust to the timeline of your investments.

On the growth you have the ability to assess is that project worthwhile to launch in this current environment, or do I need to delay the launch in a future period. Hence you got a little bit more flexibility to act upon that CapEx.

[David Katz, Jefferies]

Thank you for the color. Appreciate it.

[Operator]

Thank you. And we will take our last question from John DeCree from Union Gaming. Your line is open.

[John DeCree, Union Gaming]

Hi, everyone. Thanks for all the additional color. Two questions for me. Going back to the cost savings, the $200 million of expected structural cost savings. Is there any way you could help us think about the allocation of that between the new reporting segments of mix between gaming and lotteries or corporate support? Is there a way to kind of break that out generally?

[Massimiliano Chiara, Chief Financial Officer]

I will take it. So we don't even have the two segments ready yet. So this question is a little bit early on. But basically, obviously the savings are structural in nature in the sense that we have identified opportunities to really reduce costs structurally, a portion of that reduction is me say employee related.

A portion of that is really a different way of delivering the same service performance in a much more efficient way. And so I would defer, let me say further discussion about the split of the savings once we have the segment's later on in the future.

[John DeCree, Union Gaming]

Sure that is helpful. And last, a different topic with Brazil specifically and then any other kind of new contracts that are expected to come online this year or were expected to come online this year or early next year. Is there any visibility obviously the pandemic has disrupted governments. If you have any expectations on Brazil or some of the other maybe contracts in the pipeline either coming or not coming this year give bigger priorities the government has focused on?

[Marco Sala, Chief Executive Officer]

Regarding Brazil, I do not see at this point in time in attitudes of the government is suggesting that they are considering to delay. The contractor we are supposed to sign the contract in September for launching in the fourth quarter, and I didn't see any aptitude that is changing, that you want, the perspective of the user development and I do not see in any other jurisdiction something that is especially for the lottery side that is impacting the piece of the developments.

UK is going on, the government decided to give a six month extension to [indiscernible] but the delay was accumulated before the pandemic. So I do not have any case to report that is suggesting that a pandemic is delaying the programs that they were playing it.

[John DeCree, Union Gaming]

Thanks Marco, thanks Max. I appreciate it.

[Marco Sala, Chief Executive Officer]

Thank you John.

[Operator]

Thank you. And that does conclude our question-and-answer session for today's conference. And I would like to turn the call back over to Marco Sala for any closing remarks.

[Marco Sala, Chief Executive Officer]

Thank you for joining us today. Once again, I would like to express my gratitude for the passion and dedication the IGT team is demonstrating in these unprecedented time. That executing well, our speed and agility allows us to start operations as swiftly and safely as soon as the market reopen to function as effectively as possible, wherever working conditions are constrained.

We are diligently managing expenses and our liquidity. And we are taking full advantage of the breadth and depth of our global portfolio of solutions, in lottery, gaming and digital. Our new organizational structure should enable us to leverage our leadership position in an even more impactful way. I wish you all a nice rest of the summer, and I look forward to speaking soon. Stay well and be safe.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.