International Game Technology PLC

NYSE:IGT

Earnings Call Transcript 2021-Q2

[Operator]

Good day and thank you for standing by. Welcome to International Game Technology, Q2 '21 Earnings Call. At this time all participants are in a listen only mode. [Operator Instructions]

I would now like to hand the conference over to your speaker today, James Hurley, Senior Vice President of Investor Relations. Please go ahead, sir.

[James Hurley]

Thank you. And thank you all for joining us on IGT second quarter 2021 conference call, which is hosted by Marco Sala, our Chief Executive Officer, and Max Chiara, our Chief Financial Officer. We are presenting results from multiple locations. So, please bear with us if we encounter any technical difficulties.

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 based on a number of factors and uncertainties, including those related to the effects of the COVID-19 pandemic. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our latest earnings release and in our SEC filings. During this call, we 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 to everyone. The impressive second quarter results we are reporting today highlight the vitality of our portfolio. Outstanding lottery performance or the progressive recovery in land based gaming and a strong increase in digital embedding activities drove our revenues up more than 70%. Profit growth was even stronger, adjusted EBITDA of $442 million was over 2.5 times the prior year [0:02:28] and among the highest that we have ever recorded in a quarterly period. In addition to the natural operating leverage in lottery, structural cost reductions from our Optima program contributed to improve global gaming performance, which returned to positive operating income in the quarter.

In the first six months of the year, we generated a $380 million of free cash flow, a record level for a first half period. Our focus on executing with excellence is grounded in good corporate citizenship. We recently published the 14th annual sustainability report and improving the quality of the information we disclose about the sustainable activities and solution we have in place across the company. Highlighted in the report are our efforts at the diversity and inclusion, which have been recognized the further scope and impact. We firmly believe our dedication to well being and developing of our employees and high standards of corporate citizenship creates a value for our stakeholders throughout the world.

The value is tangible in our strong first half results, enabling us to raise expectation for 2021. At this time, we now expect to exceed 2019 levels for key financial metrics this year. This is an important achievement considering the impact of the pandemic as I said on the global gaming industry, it validates the unique attributes of IGT portfolio and the dedication of the IGT team around the world while I want to thank for their resilience, responsibility, and good corporate citizenship.

Our lottery business continues to perform at a very high level. Broad base player demand across games, geographies and channels, drove the same store sales at 35% or higher in the second quarter. Lotteries consistent a multi-year growth profile is fueled along several dimensions. First, with continuous innovation in game content, add on to popular drove [ph] games, franchises Such as [0:05:02] Italy and double play cash five, cash for live in the US have been especially successful. The recently loans [0:05:14] game in Italy is performing very well out of the gate.

Second, through improve the retail penetration and sales execution, including the optimization of game portfolios and improve logistics. The distribution of games especially around convenience options such as self service in lane purchasing, and cashless solutions have experienced I player acceptance. The Washington state lottery, a leader in the development of self service model will soon deploy our next generation cash less lottery technology as part of a recent multiyear contract extension.

And third by increasing player acceptance in a lottery, I will expand on these a little later. As we look at the second alpha, we expect the global same store sales to be up mid single digits to last year, and up low double digits compared to the second half of 2019. This is at the upper end of historical trends and applies to higher levels of consumption. It is a compelling outlook for a business with an attractive margin structure and steady growth profile that has proven to be highly resilient to macro dynamics.

For the global gaming segment, most markets are open today. Our business is concentrated in the US whereas lot GGR has largely recovered to 2019 levels in many jurisdictions. Regarding revenue streams ever rebounded quickly more than doubling a priori of levels and up double digit sequentially on iron terminal service revenue and stronger digital impacting growth. Sequentially, there are more active installed base units generating stronger [0:07:24]. Top performing games include several Wheel of Fortune titles, and a new multi level progressive Dragon light Jing Chi Shen [ph] and Gong Xi Fa Cai.

Outride sales [ph] more than double than the prior year and were up over 40% sequentially on strong replacement sales. We expect a sustained improvement in unit demand in the second half of the year, both for casino and VLT customers as operators return to increase the levels of investment. Sales will be supported by the [0:08:05] 49 cabinet, which is now offered for sale with proven high performing games such as [0:08:13]. Adoption of IGT best in class cashless solution is expanding. Later this year [0:08:23] that we will implement our resort wallet cashless solution at all three of his California casinos. Included in the offering will be the proprietary IGT pay full service funding solution for cashless wagering via credit and debit cards, bank accounts and the wallets. And there are more deals in the pipeline.

The industry is also taking notice of our accomplishments. Our ability to consistently bring excitement and innovative products and services to market was recognized at the 2021 global gaming awards at London where IGT won casino supplier of the year. It also supports our expectation of a progressive improvement in global casino gaming in the balance of the year.

We continue to build on our leadership position in AI gaming, lottery and sports betting. We are investing along many dimensions to bring the most compelling digital games to market. In addition to leveraging our deep and proven land base portfolio, we are also developing the new digitally native games. Cash eruption [ph] is a recent example and as quickly become our top performing game in Michigan in a central European markets if we launch in New Jersey soon.

We are also creating partnerships that provide access to new and innovative games features as we did with the Wheel of Fortune mega ways. These arrangements enable our partners to develop their own and new game content using IGT platform, enhancing the value of IGT iGaming ecosystem. Distributing third party contents provides another opportunity for incremental market share, we expect to be distributing over a dozen third party titles in the second half of the year. Later this quarter, we will deploy our next generation ilottery platform beginning in Georgia. We expect that this leading edge solution will greatly enhance our competitiveness.

Notably, it is the first cloud based ilottery solution to go live for WLA customers enabling faster delivery of game content while reducing costs. We are also expanding the portfolio of games that feature and reach audio visuals and enhanced bonus play features. VIP gold grand and triple platinum are our recent new Eastern games that are generating all time [0:11:18].

Multi price Eastern games like [0:11:25] have been very successful in Italy. The deployment of our play sports platform continue to expand at a fast clip. It is currently powering approximately 50 US sports books for 18 customers across 15 states. One of the more recent edition is resort awards Las Vegas retail sportsbook as well as its statewide mobile betting up. These development announced that our Nevada presence we established with the [0:12:01] gaming earlier this year. We delivered a strong first half. Thanks to robust player demand and disciplined execution supported by innovative product launches and the overall cost in capital control.

At the same time, we significantly reduce our debt, improving our financial condition and the leverage profile. With a tailwinds alike attractive long term lottery industry trends, the global gaming recovery and fast growing digital and betting businesses, we expect that these positive trends to continue. As always, our growth initiatives remain grounded in our commitment to sustainability, building on the important progress we have already made.

Now, I'll turn the call over to Max.

[Max Chiara, Chief Financial Officer]

Thank you, Marco and hello to everyone. Like last call, I will be primarily speaking to continuing operations in this presentation due to the sale of our Italy B2C Gaming business which closed in May. Before doing that I want to highlight where we stand on our recovery path to pre pandemic levels.

Q2 was another outstanding quarter from both an operating and financial perspective, as we see markets across our industries recovering at a faster pace than originally expected. This combined with our cost savings initiatives being well ahead of plan drove the outstanding results we are reporting today. And importantly, we have accelerated the pace of our cash generation, allowing us to return to pre pandemic leverage six months ahead of our target. The details of our results continued to showcase the unique strength of the IGT portfolio.

Year-to-date net income improved by over $1 billion from the prior year period and we generated $194 in earnings per share. This increase was a result of three main drivers, sustained improvement in operating profitability. The capital gain recorded on the sale of our discontinued operations and an impairment charge in the second quarter of last year that was triggered by the beginning of the pandemic downturn.

On the next Slide number 11. You can see that our results were impressive across all key financial metrics. During the second quarter IGT generated over $1 billion in revenue, $244 million in operating income and $442 million in adjusted EBITDA. Revenue grew over 70% from the prior year and while EBITDA was up 170%. Like last quarter, we can see the impressive operational leverage of our lottery business and the benefit of structural cost saving sections. We achieved over two thirds of our $200 million Optima savings target versus 2019 by the end of the second quarter, having accomplished over 70% of our product simplification and margin improvement efforts. The operational excellence piece is driven by the pace of the gaming recovery. And we expect to benefit more from the savings in the second half of the year.

Turning to a lottery segment on Slide 12, revenue impressively increased over 50% to $725 million. Global same store sales rose 35% from the prior year, and were up 24% from Q2 2019, which highlights the strong player demand. Italy lotteries had an incredible performance in the quarter with sales more than doubling from the prior year. Some of this is due to an easy comparison since lottery points of sale were heavily impacted by the pandemic restrictions last year. And there was an outsize benefit in the second quarter of this year because gaming halls in Italy were closed until June. In North America and the rest of the world lottery momentum continued from Q1 with same store sales growing 21% in Q2 over the prior year, with broad based trends across game categories, and the benefit from higher discretionary income in the US.

Strong same store sales as well as the higher mix of Italy business, we generate more revenue per wager, letter margins well above the normal range. Operating income more than doubled from the prior year period to $300 million with adjusted EBITDA growing at 87% to $414 million. Last quarter, we recognize $80 million in revenue from LMA incentives and outsize jet productivity that flow through almost entirely to profit. While we did not have those benefits this quarter, our strong same store sales growth translated into an EBITDA incremental margins of over 70%.

Turning to our global gaming segment on Slide 13, revenue more than doubled from the prior year driven by an improvement in recurring service revenue and higher unit shipments. We saw 19% sequential revenue growth versus Q1. Sequentially, the global install base was relatively stable, with terminal service revenue growing on higher productivity from more active machines. Currently, over 90% of our US casino install base is active and yields continue to be higher than they were pre pandemic. Given the positive trends in overall gaming service revenue, which includes strong digital embedding growth, we expect to be back to Q4 ‘19 levels by the fourth quarter of this year.

We sold roughly 6300 units globally in the quarter, doubling our priority of shipments and growing 44% sequentially. Unit shipments were driven primarily by strong replacement demand from casinos and VLT customers. We also saw higher shipment on our replacement units internationally, particularly in Australia and New Zealand. The gaming business returned to operating profitability in the quarter as top line trends continue to improve and our optimal cost savings actions benefited results. Adjusted EBIDTA of $49 million is a sequential improvement a trend we expect to continue for the rest of the year.

On Slide 14, you can see that continuous healthy cash conversion and CapEx discipline drove $176 million in free cash flow. We have generated $380 million in free cash flow in the first half of 2021, which is the highest reported amount for the first half in company history. Along with roughly $750 million in net proceeds from the sale of our Italy gaming business, we can see the direct impact to net debt. Leverage is 4.3 times is back to pre pandemic level six months ahead of our targets.

The next slide shows our debt maturities which have improved significantly over the last year. The proceeds from the Italy gaming business were used towards the full redemption of the 475% 2023, €850 million bonds. And we recently amended and extended our term loan with our strong financial position allowing us additional liquidity and extended maturity and lower interest costs. We now have a weighted average debt maturity of roughly five years. Since the beginning of the year, our combined capital markets actions have reduced annual interest costs by $65 million compared to 2020 levels, of which almost half we started accruing through the second half of this year, and a bit more than half in 2022. Over 80% of our debt is fixed, and the variable piece is pre payable with minimal costs, allowing us to effectively manage our exposure to interest rate volatility.

In summary, we have delivered an impressive financial performance in the second quarter and year to date periods. Strong player demand in lottery progressive recovering gaming and our structural cost savings initiatives have all contributed to this, these results. We continue to generate robust free cash flow and reduce that. And our balance sheet shows improve liquidity and a more favorable debt structure.

On Slide 17, we have our outlook for the back half of this year. We currently expect revenue of approximately $2 billion and operating income of about $300 million in the second half, which implies strong year-over-year growth for both metrics. Global lottery is expected to return to more normal growth rates apply to higher levels of consumption. Q3 to date, same store sales are up double digits versus 2019, which is at the high end of the historical trend. Global gaming should maintain its plan of progressive recovery. There are some important differences between the first half and the second half.

Revenue and operating income will be lower versus H1, on the normalization of lottery growth trends. Cash from operations is expected to be lower than H1, as the elevated lottery revenue quickly converted to cash in the period. In addition, cash tax payments are concentrated in the second half of the year. And while working capital was a source of cash during the heat of the pandemic. It is now expected to return to more normal levels, we estimate capital expenditures will total about $175 million in the second half sequential increasing the support growth, but remaining below 2019 levels for the full year. Depreciation and amortization should be in line with first half levels. I should know that this current expectations do not factor in any potential impact from additional COVID-19 restrictions.

That concludes our prepared remarks. Operator, can you please open the call for questions? Thank you. Operator, we're ready for the questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Carlo Santarelli of Deutsche Bank. Your line is open.

[Carlo Santarelli, Deutsche Bank]

Hey, everybody, good morning. If you guys wouldn't mind just kind of as you think about a lottery business and the expectation for the back half of the year. And obviously the growth rates, which are lower than what you've experienced in the first half, but provide [ph] some color on the 3Q. So my question really is, is there anything that you're seeing in the current trends that is materially different than what you've been experiencing here over the last several months? Or is it just more of a comp stack issue that that kind of has that that growth decelerating from what you experienced in the 2Q?

[Marco Sala, Chief Executive Officer]

Good morning Carlo its Marco. This is a good question. I think the good news is that as we said that during our remarks, our expectation is to grow in the second half of the year to grow single digit against last year that by the way, was growing overall in 8% to 9% versus ‘19. And to be up low double digit compared to the second half of ‘19. So what are we are experiencing is some stickiness of player. As at what the higher level of consumption they have experienced during the pandemic, we have seen that this business benefited from the lack of other entertainment options in Italy more specifically benefited from the closure of the gaming goals and this for betting shops. But what we are seeing that even after the reopening, we have a quite a good performance, especially of scratch tickets in Italy.

That is a summary of firming [ph] of what the consumer result is were telling Gaza [ph], that players overall appreciated very much the portfolio of lottery games, they enjoyed it and they are stating that they will have an average consumption higher than what they had pre pandemic. From that level, I guess that we will get back and going forward to more secular trends, but from a level of personal consumption.

[Carlo Santarelli, Deutsche Bank]

Great, that's super helpful. Thank you. If I could just ask one more, as it pertains to your capital return philosophy at this point with leverage, what are your latest thoughts?

[Max Chiara, Chief Financial Officer]

Hi, Carlo this is Max speaking. So as we are approaching our four times, leverage goalpost obviously we have accelerated our strategic thinking around the next phase of our posture is, [0:26:46] the capital allocation priorities. And again, in front of our investor day coming up in November, I will not preempt our thinking right now. The only thing I want to tell you is that we are right now we're gravitating towards moving to a range of leverage ratios that we would look into, to maintain over the full cycle. And as you know, for us cycle means years of low upfront fees payments versus years of higher upfront fee payments, which as you know, they may be coming to fruition in a couple of years out. So that's where we currently sit in terms of our high level thinking. And I will defer to the investor day to more precise answer. But again, we're very happy that we are able to get closer to that four times faster than we originally anticipated.

[Marco Sala, Chief Executive Officer]

To complete it, the next year, we do not have a major upfront fees. So the good news is that we are generating a strong cash flow but the major capital required for the biggest contrast of our portfolio will start in 2025.

[Carlo Santarelli, Deutsche Bank]

Great, thank you, Marco, thanks for the clarity on that. I appreciate it.

[Operator]

Your next question comes from the line of Chad Beynon of McQuarrie, your line is open.

[Chad Beynon, Macquarie]

Hi, thanks for taking my question and congrats on the results. Max, you noted that you guys plan to be back to gaming levels in the fourth quarter of 2021, as you saw in the fourth quarter of 2019. Could you just expand a little bit in terms of if you were thinking revenues, or EBITDA? And then related to that, how are you thinking about some of the more cyclical items like product sales, and how operators plan to purchase slot machines? How that's trending? Thank you.

[Max Chiara, Chief Financial Officer]

Yeah, so first of all clarification. That comment was made in regard to the service recurring revenue business portion, which we expect to continue to improve quarter after quarter. And right now we see potentially Q4 of '21, seeing a trend in the service parts of the business similar to what we were left with at the end of ‘19 pre pandemic. On the product sales side is going to be much longer curve to get back to the ‘19 levels. We probably will need to see a full year of development. We have started to see some of the operators willing to come back at the table. But we're still in the very early innings for that dynamic to really take hold and allow us to bring back product sales to the level of 2019, which we don't anticipate, until probably late ‘22, or ‘23.

[Marco Sala, Chief Executive Officer]

If I can elaborate on it to the sentiment of operators is becoming more and more positive. Now to end we will see a progression in terms of prophecies over the next quarters. As a correctly, Max said, it will take next year to recover the pre pandemic level button. If you talk about the sentiment, definitely the sentiment has changed. The GGR operators are experiencing, are making them more relaxed in discussing about capital expenditure for the next month. One thing is to discuss about it and one thing is to cut deals. But it's already a very good news and I'm rather excited about the possible accelerated velocity in terms of product, again, not reaching the priority or level. But if we elaborate on the second quarter, it was in North America 11% below 19. So this is, I think, a good a point.

[Chad Beynon, Macquarie]

Perfect. Thanks, Marco. And then regarding ilottery, you noted your new cloud based technology that you'll be rolling out in Georgia. Can you talk about just the overall ilottery education process with state legislators in the US? If they're better understanding the benefits and the technology that comes with this and if you still believe that the markets could double in the near term, just any update from a legislative standpoint?

[Marco Sala, Chief Executive Officer]

No, I think definitely that the market can grow and can double in the foreseeable future. We see that there are legislation authorizing ilottery just approved in Arizona and Connecticut. And but what I think is that the jurisdictions there when they will, seeing that the importance of ilottery in the other jurisdictions that have already regulated, they will get more motivation out of it. I give you an example. For example, for among the jurisdictions that are already ilottery, we were talking about the importance of an [0:32:45] in ilottery to drive the growth of the business.

And, for example, our customers in Kentucky and Georgia now has decided to increase the payout of the new products because they realize they can grow faster. I give these as an example of the motivation of the jurisdictions regarding these segments that, by the way, is getting the consumer attention. And we are working a lot on our portfolio in order as I said in previous calls, investing in talent, in technology and contents, and the next generation platform you have reference is a good example. As well as with all the investments that we are doing in content in order to strengthen our offering and to be prepared for when other jurisdictions will regulated the space that in my opinion definitely will happen over the next years.

[Chad Beynon, Macquarie]

[0:33:57] appreciate it.

[Operator]

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

[Barry Jonas, Truist Securities]

Great, thank you. Hi, guys. We're seeing increased COVID cases and restrictions from the Delta variant. Aside from the comments you gave around Italy, I'm wondering if you've seen or maybe would you expect any other positive or negative impacts to your businesses?

[Marco Sala, Chief Executive Officer]

Thank you, Barry and good morning. Regarding the Delta variant unfortunately, we are all experiencing an increased number of cases when it comes to the consequences to our business. Let's focus on gaming because we have seen that lottery has been rather resilient, I would say, more than resilient as a matter of fact, we got traction out of the overall situation digital benefited out to be gaming. Regarding gaming, we expect that we do not expect that these giants are closing measures in Europe and you were referring to Italy The only debate we have here in Italy is regarding the fact of showing what we call green pass that is a document that says that you got the two level of vaccinations or an alternative that you have to demonstrate that you have been successfully tested the 48 hours before entering a gaming goal.

Regarding what we see in the United States, the only measure that for the time being we are seeing is in Nevada in several other jurisdictions request, for players that wear the face mask. So all in all, I do not see that at this stage, we should see something truly warring regarding the gaming business, but we are in the stage where we have put together look at the evolution. But I do not see in the government's attitude, the approach to get back to lock downs.

[Barry Jonas, Truist Securities]

Great appreciate that. Marco and just as for my follow up question, scientific games just announced they're selling their lottery and sports betting business. Got a few questions concerning that as a relates to IGT. So I guess first, how meaningful is bundling across your business lines? And two, is selling off any part of the company something you would consider exploring if the price was right.

[Marco Sala, Chief Executive Officer]

This is a very good question. Overall I think we have a consistent portfolio to start with our businesses are focus on delivering content and solution to [0:37:20] are regulated the real gaming market and this is in my opinion, what binds them together. And we are focused on serving governments and licensed private operators as a B2B provider. And this role can expand that to comprise a full house lottery operation where appropriate. This is just to say that we see a consistency of our portfolio and by the way, each business in our portfolio is profitable, and there's a good growth perspective, it will generate strong cash flow, enabling a significant leverage in the next years. Having said that, our new organizational structure gives us more flexibility to evaluate value creating portfolio initiatives if compelling opportunities materialize.

And by the way, just to give a little bit more flavor only to talking about the portfolio flexibility, I should add as we did in the previous call that we are considering the possibility of creating a digital segment going forward the performance will be maintained at this level. So I think, I tried to provide you what where we feel we are and but also providing the sense of our flexibility going forward.

[Barry Jonas, Truist Securities]

Great, thank you, Marco. Thanks, guys.

[Operator]

All right. So next question comes from the line of David Katz of Jeffery, your line is open.

[David Katz, Jefferies]

Good morning, everyone. Thanks for taking my questions. I wanted to just go back to the discussion about lottery demand and lottery sales levels in the back half of the year. And how much of that is predicated on the reopening of land based halls? And I suppose I'm wondering, you know whether that reopening getting pushed out on a little bit of COVID resurgence would prospectively, you know drive upside to what you're guiding today. If that were to occur, you know how much of it is land based, open or closed driven.

[Marco Sala, Chief Executive Officer]

Now, we are talking about land base and providing these figures. I can tell you that now the situation of the reopening in our main geographies is not included in our outlook, because we were considering all of the gaming alternatives and in general the entertainment, alternative options up and running. So the performance you offer [0:40:26] for the second half of the year is based on all reopening, I do not expect that the measures I was commenting regarding the resurgence of the delta variance of COVID will influence very much, the lottery at this juncture.

[David Katz, Jefferies]

Okay, perfect. Thank you. And as my follow up with respect to the premium, or the US installed base, in particular, we've been sort of looking for that base to be flat and maybe even start to go up over time. Just how are you thinking about kind of the addition of units there and the yield that they generate and is it reasonable for us to expect at some point that the US installed base would flatten or even turn up at some point in the near term?

[Marco Sala, Chief Executive Officer]

I think, first of all, as we were saying in our prepared remarks, things are progressing quite positively, because now the active view is above 90% and the yield are truly very strong, and they are getting stronger notwithstanding the increased number of active units. Regarding your question, our goal is for sure to stabilize the install base and going forward over the next quarters, mainly next year, take advantage from the launch, especially the MLPs products, where we are devoting most part of our investments. I think that the pipeline of products, we have is the assuring, we see that over last year we got an almost stable install base. We think that going forward, not in the short term necessarily, but our goal is definitely to stabilize that increase the install base, and we are investing the indirect part of the portfolio in my opinion, to achieve that goal. Thank you very much.

[David Katz, Jefferies]

Thank you, David.

[Operator]

Your next question comes from Domenico Ghilotti of Equita. Your line is now open.

[Domenico Ghilotti, Equita]

Good morning. My question is related to the cost saving initiative. Let's understand how much of the cash P&L contribution you add in the first semester. And my question is related to the fact that basically for the second budget projecting a very [0:43:22] $2 billion is not far away from the system, but a much lower $200 million lower EBITDA or EBIT despite the higher contribution from synergies. And the follow up on this is if you see additional opportunities going forward, so for 2022. And last, based on your say or the projection, your indication for the second half, we should expect also a tough comparison. So a non sequential year on year decline in the first semester of 2022.

[Max Chiara, Chief Financial Officer]

Hi, Domenica this is Max speaking. I'll take this one. So, as we have displayed, our Optima program in action is made up by three parts. So, there is in margin improvement action, which relates to our ability to contain cost, reorganized back offices, relocate our footprint initiatives. And this has been in full swing and motion in the first half and we have been able to kind of achieve almost 70% of those initiatives and they are up and running now going forward. The second portion is the product simplification. So we have looked into the combination of product geographies across the board. We have been able to reduce spending in certain of those and that initiative is also up and running to the tune of 70% of its potential. And it's kind of meant to stay there.

The last one, which is running a little bit behind, but it's consistent with our initial expectations is the operational excellence, because that requires the volume of new production to come up. As slowly moving forward quarter after quarter but again, until we get to full fruition of the gaming, the land base gaming demand, which as we said before, it's going to come probably towards the end of next year, is not going to get to full benefit.

So all in, we are ahead of our plan in terms of the savings, we have been able to count the hard savings on maintaining strict discipline on cost spending so far. The more dramatic supply chain reorganization benefits will come to fruition over time, and so there is a little tail that will come to fruition potentially next year. In terms of first half to second half, probably in the second half, there will be some of the supply chain constraints, generating some cost attrition, not to a significant magnitude, as we said in the last call, we're expecting something around 10 million, max 15 million this year. And we think we have enough power in our optimal program to be able to offset those incremental costs for the balance of the year. Does that respond your question?

[Domenico Ghilotti, Equita]

Okay, thank you.

[Operator]

[Operator Instructions] We'll take our last question from John DeCree of [0:47:15]. Your line is now open.

[Unidentified Analyst]

Hi everyone, thank you for taking my questions. I think most of them have been answered, but maybe just one on the US sports betting landscape. I think you've mentioned in your presentation that you've got about 50 play sports books up and running in a pipeline that, you know might be over 40 potential customers. Marco's wondering if you could elaborate a little bit on our pipeline and your expectations, and maybe high level, your current thinking and outlook for your business in the US sports betting arena would be helpful?

[Marco Sala, Chief Executive Officer]

For sure, good morning. We are very positive. regarding our positivity in sports betting, we see traction in terms of the number of jurisdictions that are expected to regulate in the next years, these segment and we expect that that we can play a role in this business, as I always say we are B2B providers in this part of the business, we see an opportunity for us mainly as a supplier of turnkey solutions for local operators, where we can leverage our commercial relationship and our end to end solution, the platform and the risk management service. Just to give you a little bit of color these end to end solution provides operators who don't have existing sports betting expertise, but wanted to have their own branded sports books, you know, invest in the opportunity to be the sports betting business. And we can enable them. They're doing it.

And those are the kind of the kind of customers that represent our target. We have already nine active or announced sports books across six jurisdictions Colorado, Washington State, Louisiana, and in this respect that we have 40 commercial leads that we are currently exploring. And in Nevada as I said during my prepared remarks, has been important for us powering the recently open resorts [0:49:48] Las Vegas. That follow what we've done with Boyd [ph] earlier during the year. So this is the way we see this opportunity for us. I don't know if it is clear or if you want to ask something else I'm ready to answer.

[Unidentified Analyst]

Yeah, that's perfect Marco. Thanks so much, and congratulations on another strong quarter. Thank you.

[Operator]

There are no further questions at this time, I will now turn the call over to Mr. Marco Sala, IGT CEO.

[Marco Sala, Chief Executive Officer]

Thank you for joining us today. We appreciate your interest in IGT. Q2 was another outstanding quarter from both an operating and financial perspective. In the first half of the year, we have accelerated the pace of cash generation, enabling us to return to pre pandemic leverage six months higher of schedule. With a tailwinds like attractive long term and lottery industry trends, the global gaming recovery and fast growing digital embedding businesses. We expect this positive trend to continue. We look forward to seeing you at the broker conferences this fall at our investor day in November. Have a great day.

[Operator]

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