International Game Technology PLC

NYSE:IGT

Earnings Call Transcript 2022-Q2

[Operator]

Good day and thank you for standing by. Welcome to the International Game Technology Q2 2022 Earnings Conference Call. [Operator Instructions]

I will now turn the conference over to James Hurley, Senior Vice President of Investor Relations. Please go ahead.

[James Hurley, Senior Vice President of Investor Relations]

Thank you and thank you all for joining us on IGT's second quarter 2022 conference call which is hosted by Vince Sadusky our Chief Executive Officer; and Max Chiara our Chief Financial Officer. After some prepared remarks, Vince and Max will be available for your questions. Once again, we are presenting 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 will discuss certain non-GAAP financial measures. In our press release, the slides accompanying this webcast and our filings with the SEC each of which is posted on our Investor Relations website, you’ll find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.

And now I’ll turn the call over to Vince Sadusky.

[Vince Sadusky, Chief Executive Officer]

Thank you, Jim and hello to everyone joining us today. Our second quarter and first half results confirm strong operating fundamentals across the portfolio. This includes accelerated multiyear same-store sales growth for lottery, continued sharp recovery in gaming and important strategic progress for digital & betting.

Q2 revenue was up 11%, net of FX and discrete lottery benefits in the prior year, led by 23% growth in Global Gaming. Operating income and EBITDA as the prior year at constant currency has a substantial improvement in gaming profits mitigated about $60 million in discrete lottery benefits that, as expected, did not recur this year. Operating margin of 22% was at the high end of our expectations for the quarter, while EBITDA margin of 40% remains among the highest in company history. In addition to significantly improved global gaming profitability, strong global lottery margins were an important contributor to our overall consolidated results. We continued our shareholder capital return policy. Year-to-date, this includes $81 million in dividends which annualized implies above a 4% yield at the current share price. In addition, $54 million was returned through share repurchases. It's a compelling return profile both in absolute and relative terms.

Let me take a moment to give you some perspective on our business that I think is particularly relevant at this moment in time. IGT has leading positions in each market segment where we participate and about 80% of our total revenue is recurring in nature. The Global Lottery segment accounts for most of our profits in the range of 75% to 80%. We -- this isn't always appreciated by the market. It is important to highlight because Lottery is an attractive business. It is infrastructure-like characteristics with steadily growing and predictable revenue, profit and cash flows that are backed by long-term contracts. Our lottery contract portfolio currently has an average remaining life of six years. It's an enviable foundation to build on as we execute our long-term growth objectives.

Historically, the lottery indeed has demonstrated low economic sensitivity and proved to be incredibly resilient to macro challenges. You can see from the data here that in the U.S. and Italy, our two main lottery markets accounting for 85% to 90% of IGT's total lottery revenue held up very well during past recessions. IGT defines and drives the global lottery industry with our extensive and distinctive expertise and vast portfolio of contracts. We compete in all market segments, providing us with the entire spectrum of growth opportunities and unique and comprehensive market knowledge. We are the only lottery solutions provider with both B2B and B2C capabilities. We service over 80 customers, including the world's largest and most successful lotteries.

Our solutions power 8 of the Top 10 lotteries in the world. In aggregate, our systems process over $150 billion in annual sales, including 75% market share in the U.S. and over 90% share in Italy. In fact, IGT is the world's largest operator of lotteries, six across three continents, representing $30 billion in sales. This is valuable experience and we use our unique sales development team to help our B2B customers succeed and deliver steady growth.

In Q2, Lottery achieved an accelerated multiyear growth profile. Average annual same-store sales growth from Q2 of 2019 was over 5%, fueled by instances. We expect the trend of accelerated growth to continue in the second half and that mid-single-digit growth can be maintained over the next several years. Our conviction is based on extensive player research and knowledge and the unique role we play in driving industry growth. Lottery is a supply-driven business and we have a recurring revenue model that is perfectly aligned with customer and market expansion opportunities. Innovation across many dimensions, including game mechanics, game themes, pricing and payout, distribution and retail execution are all important catalysts to drive demand.

A few compelling examples of recent innovation include the launch of MillionDay EXTRA in Italy, where we've used proven game mechanics to build on an existing franchise. In May, the Texas Lottery launched the first ever $100 instant ticket game with over $800 million of prizes available at a top prize of $20 million and Florida introduced a $50 instant ticket a few months ago. Sales for both games have consistently been strong.

In iLottery, the instant performance is improving with each new game launch. This is driving record player spend in Georgia and Kentucky thanks to games such as Bank Buster, Prize Potion and Beach Bonanza. Soon, we will expand our eInstants distribution in Michigan, one of the country's largest iLottery markets. It's always nice when our lottery expertise is recognized as it was with the Lottery Supplier of the Year award at the 2022 SBC Awards, North America.

Turning now to Global Gaming. This segment had another terrific quarter, thanks to the strength of our offerings and the broader global market recovery. Revenue increased over 20% on impressive momentum across several KPIs and that translated into even stronger profit growth. We sold nearly 7,200 machines in Q2, led by strong replacement demand in the U.S. and Canada. In fact, total U.S. and Canada shipments were 8% higher than the pre-COVID Q2 2019 levels. We could have shipped even more units if we weren't constrained by supply chain challenges. I think it's important to note that IGT has steadily gained ship share in North America over the last three-plus years, reaching 27% in Q1 which is the latest data available. Average selling prices were also higher in the quarter, building on the positive trajectory of the last 2.5 years.

The new DiamondRS mechanical real cabinet game hitting casino floors in June. So reported by an extensive game library featuring new renditions of proven legacy themes and a host of exciting new titles. The early performance indications are encouraging and we expect the DiamondRS to build on IGT's decades-long grain in the mechanical reel segment. Yields on leased units were up across the board in the quarter. WAP and MLP performance has been especially good. Prosperity Link, one of our newest multilevel progressive games is among the top-performing new premium games in the North American market with productivity almost 3x for average. And several new wide-area progressive vans from IGT are dominating that category, led by Wheel of Fortune High Roller on the P65 cabinet and Money Mania, whose frequent second-level jackpot payouts are resonating with players and customers.

In systems news, the IGT Advantage casino management system was selected to power new star resort casino, the Philippines most anticipated new casino featuring 15,000 slots and 250 table games. IGT Advantage will enable NUSTAR to build Patron loyalty, optimize its casino operations and access valuable real-time performance analytics. It also positions NuStar to offer cashless gaming in the future via IGT's Resort Wallet systems technology. IGT has won the central system for every large new Asian casino over the last several years.

We have a pipeline of compelling new games supported by a robust sales funnel for the balance of the year. Customer sentiment is strong, bolstered by solid casino visitation and GGR trends across major markets. About 70% of the revenue in our Global Gaming segment is generated in the U.S. 85% of our U.S. revenues are generated in regional markets and about half of that comes from tribal customers. And while the gaming segment is somewhat more sensitive to economic cycles and lottery, U.S. GGR trends have been reasonably resilient, especially among tribal customers during recessionary periods. Right now, the big challenge we have is being able to meet strong customer demand given continued supply chain challenges. On balance, it's a good problem to have and a clear reflection of the positive momentum in our business.

Looking now at digital and betting. The segment continues to benefit from double-digit iGaming GGR growth in the U.S., primarily a function of new market expansion and IGT's leading position of video poker, table game themes and slots. Total Q2 revenue growth was lighter than expected due to weaker trends outside the U.S. We attribute this to three main factors. The slower pace of new game launch is partially because we were focused on closing the iSoftBet acquisition, to stricter gambling laws in the U.K. and to challenging comparisons in the COVID-related benefits iGaming had last year when lockdowns and other restrictions were still in effect in certain regions. We expect better trends in the balance of the year.

Our game portfolio significantly expands with the iSoftBet acquisition which closed on July 1. iSoftBet provides us considerable scale and broadens our capabilities to advance our market positions. It greatly enhances our library of proprietary digital native games. The aggregation platform will enable us to provide hundreds of other game titles, allowing IGT to develop exclusive assortments for our customers. Integration efforts are well underway, an acceleration of IGT content distribution into more European jurisdictions using the iSoftBet platform is expected during the fourth quarter.

The North America game aggregation platform launch is on track for early 2023. It's an exciting evolution of this high-growth market opportunity. With six months into the year, we are on track to deliver on the 2022 outlook initially provided in November of last year. The team has done an excellent job identifying incremental sales and cost savings opportunities to offset nearly $200 million in unanticipated profit headwinds from Omicron, higher supply chain and project costs and significant FX movements. At the same time, we proactively managed the capital structure to drive the meaningful improvement in leverage and overall financial condition.

We have a multiyear plan targeting mid-single-digit compounded annual revenue growth and mid-teens compounded annual operating income expansion for the '21 to '25 period. That plan also targets about $2.4 billion accumulative free cash flow in the next four years. Executing these goals should drive meaningful value creation for all stakeholders and I have every confidence in our ability to achieve them. We'll do it with a clear focus on sustainable practices and good citizenship as well. Last month, we issued our 15th annual sustainability report, highlighting our commitment to operating as an industry-leading sustainable business and consistently reporting on our progress. We recently received a gold metal rating from EcoVadis, putting us in the top 5% of global companies assessed by the firm. We take great pride in this achievement as we continue our journey of contributing to a more sustainable future. Our mission is simple. We are investing responsibly to generate profits and cash flows that consistently deliver compelling returns for shareholders.

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

[Max Chiara]

Thank you, Vince and hello to all of you joining us today. We continue to be pleased with our resilient performance despite the tough comparison with the prior year due to some lottery discrete benefit. As anticipated and reflected in our guidance for the second quarter, our team has been able to deliver strong results in the gaming business that has effectively allowed us to entirely offset the impact of the prior year discrete benefit items in lottery.

Our business segments are performing at a high level while executing on their strategic objectives with lottery delivering operating income margin at the high end of the 2025 target range, gaming recovering swiftly and exceeding the full year 2019 OI margin and digital and betting executing on growth initiatives, including the acquisition of iSoftBet.

Moving on to some financial highlights. Second quarter revenue of over $1 billion was up 3% year-on-year at constant currency, led by 20% growth in Global Gaming with Global Lottery down 4% and as the prior period benefited from the impact of gaming hall closures in Italy. Digital and betting grew 4% at constant currency. Operating income of $228 million and adjusted EBITDA of $409 million were in line with the prior year at constant currency. This was achieved without $70 million in revenue and $60 million in profit, primarily from the prior year gaming hall closures in Italy.

We delivered operating income margin of 22% in the second quarter at the high end of our outlook and adjusted EBITDA margin of 40% among the highest in company history. Year-to-date, revenue increased 5% at constant currency to $2.1 billion, with operating income of $480 million and adjusted EBITDA of just over $840 million in line with the prior year. Operating income margin of 23% exceeded the high end of our expectations, primarily due to diligent cost management. All in all, we are very pleased with the financial performance in the second quarter and first half of 2022 and we are making good progress towards delivering on our full year financial targets.

As you have seen from our press release this morning, during the quarter, we accrued $150 million related to ongoing social gaming disputes stemming from Double Down Interactive. That business was sold in 2017. Adjusted EPS for the first half of the year was $1.17, the highest level in company history, reflecting some of the good work that is being done to rationalize interest and income tax expense.

Now let's move to a review of our operating segments, starting with Global Lottery where second quarter revenue totaled nearly $650 million. As expected, global same-store sales were down 7% year-over-year due to the discrete benefit in prior year but underlying growth is up mid-single digit. And the trend is progressively improving with same-store sales declining 10% in the first quarter, 7% in the second quarter and 4% in the month of June alone. We expect continued improvement in this trend with stable performance in the back half of the year. Recent player excitement around the elevated Mega Million Jackpot should also contribute to some growth in the third quarter.

As Vince mentioned, instant ticket gains are the main driver of growth in both North America and Italy. Our two primary markets and play levels for these gains have trended slightly better than we expected. In Italy, this is helping to compensate for draw games that have experienced this lower-than-expected recovery. iLottery sales rose 35% in the quarter, primarily driven by instant games in the U.S. We continue to invest in game development and cloud-based system solutions to drive growth in this exciting area. The profit profile of the lottery segment is very strong and resilient, delivering $20 in operating income with 36% OI margin already at the top end of the 2025 target of 33% to 36%. Also notable is that this was achieved despite a less favorable game mix in Italy and cost inflation.

Global Gaming delivered significant increases in revenue and profit year-over-year driven by customer and player demand for IGT innovative products. Revenue of $330 million grew over 20% and solid increases in the number of machine units sold, ASPs and installed base yield. Nearly 7,200 units were shipped globally in the second quarter. North America casino replacement unit led the growth, increasing over 30%, while international unit shipments were down slightly due to lower new and expansion activity. North America ASPs of $15,200 were among the highest level in company history on an improved product mix. International ASPs were also higher. Product sales benefited from the execution of a multiyear patent portfolio licensing agreement.

The global installed base of around 48,000 units was relatively stable sequentially. North America declined about 500 units on three main dynamics, expected changes in the WLA markets of Delaware and New York, removals of old and supported games and cabinets which we were inhibited in being able to backfill due to supply chain challenges and lastly, conversions to sale. In the Rest of the World, the installed base was stable and we think there is good opportunity for growth from current levels in the back half of the year. North America yields increased 11% on elevated performance in WAP and MLPs and a more productive installed base due to the removal of older and supported units over the last few quarters.

Operating income was $57 million versus breakeven in the prior year. Operating income margin of 17% represent nice improvement in the margin for this segment as we continue to drive toward pre-COVID revenue levels and reflect the benefit of structural cost savings actions taken as part of our OPtiMa program and despite higher supply chain costs. Digital and betting revenue of $43 million was in line with the prior year and up 4% at constant currency, driven by iGaming expansion into Connecticut and West Virginia partially offset by softness outside of the U.S.

Sports betting GGR was impacted by lower hold levels. Operating income of $8 million and operating income margin of 19% are stable with the prior year. While we expect revenue to reaccelerate to double-digit growth in the second half of 2022, profit margins are expected to moderate as we absorb cost to integrate the recently acquired iSoftBet business and continue to invest in talent and resources to fund future growth. We expect a strong return on these investments in 2023 and beyond.

Cash flow generation during the first half of the year was solid with $385 million in cash from operations and over $230 million in free cash flow with some lottery timing items driving weaker working capital performance. This is expected to reverse in the second half of the year. Year-to-date, capital allocation was heavily weighted towards net payment to minority partners. As a reminder, these payments are generally concentrated in the first half of the year and are a bit higher this year due to the exceptional lottery performance in 2021. We invested around $150 million in CapEx and returned $135 million to shareholders, $81 million dividends and $54 million in share repurchases. Year-to-date, we have repurchased 2.2 million shares at an average price of shy of $25 per share.

We recently amended and extended our revolving credit facilities which enhanced our financial flexibility by increasing the size of the facilities by about $150 million and raising the annual amount of permitted dividends and share repurchases from $300 million to $400 million with the potential to increase the amount of $550 million based on our credit ratings. The amendment also lowered our cost of debt by reducing the interest margin and adding a provision that provides for further changes in the margin based on IGT ESG rating. Lastly, the maturity date was extended to July 27, enhancing our debt maturity profile.

IGT liquidity remains very strong with $2.1 billion at the end of the second quarter and increasing by about $150 million with the larger size credit facilities I just mentioned. We currently have a very manageable debt portfolio with no large near-term maturities and a fixed-to-floating rate debt mix that is favorably structured in the current market environment. The strategic capital management initiatives we have executed over the last few years are reaping real dividends as evidenced by a 25% reduction in our quarterly interest expense run rate from 2019 levels.

Net debt leverage at 3.5x remains at the low end of our 2022 target range. The announced sale of our Italy commercial service business is expected to close in mid- to late September with net proceeds to primarily be used for debt reduction. Net debt leverage is expected to improve by around 1/4 of a turn, exceeding our 2022 target after applying the net proceeds from the sale of the Italian Commercial Services business, the acquisition of iSoftBet and the final installment from the sale of the Italy B2C Gaming business which was received in July.

In summary, we are in a very solid position to be able to weather potential changes in economic cycles. We are tightening our 2022 full year revenue outlook to $4.1 billion to $4.2 billion lowering the high end of the previous range by $100 million, solely to account for changes in currency and the impact of the pending sale of our Italy commercial service business. The updated outlook assumes a euro-dollar rate at parity for the second half of the year, down from 118 when we first presented our outlook last November.

Operating income margin is reconfirmed at 20% to 22% despite significant currency and macroeconomic headwinds and 150 to 200 basis points in project-related and restructuring expenses in the back half of the year. We are reducing the high end of our outlook for cash from operations by $50 million to a range of $850 million to $950 million, primarily driven by working capital investment and higher inventory levels to proactively manage supply chain disruptions. CapEx is also being reduced by $50 million to around $350 million due to updated timing of CapEx spend resulting in no change to estimated free cash flow for the year.

As I just mentioned, we are reconfirming our full year operating income margin outlook of 20% to 22%, mitigating the impact of around $200 million or 400 basis points of currency movement and various headwinds. We are able to maintain our outlook, thanks to the hard work our team has done to identify incremental sales opportunities, our continued cost discipline and lower depreciation and amortization. For the third quarter, we expect revenue of $1 billion to $1.1 billion and operating income margin of 18% to 20%, reflecting 150 to 200 basis points in higher project-related expenses.

In summary, strong operating fundamentals across our business segments are driving compelling capital returns. We achieved solid financial results, a margin outlook despite negative currency movement and significant headwinds.

That concludes our prepared remarks. Operator, will you please open the line for questions.

[Operator]

[Operator Instructions] Your first questions comes from the line of Carlo Santarelli with Deutsche Bank.

[Carlo Santarelli, Deutsche Bank]

Max, I was just hoping, as it pertains to the guidance, if you could perhaps maybe kind of break out or to the best of your ability or whatever you guys are willing to do kind of look at the moving parts in buckets. Obviously, now factoring in the July 1, iSoftBet acquisition, extracting the commercial services business at some point and just kind of the net effect of those things relative to when you last provided guidance at the end of 1Q.

[Max Chiara]

Yes, sure, Carlo. Effectively, not a lot has changed versus when we provided guidance last time. We're just clarifying that mathematically to get to the 20% to 22% and overachieving in the first half, you have to have a second half with some lower margins. And the way we would like to highlight the trend is that, in effect, the underlying business continued to perform at more or less at the margins you have seen in the first half. The difference is that we have to take some cost in Q3 associated with those mention project particularly cost acquisition cost related to iSoftBet transaction that closed on July 1 as been said and so we are in the early innings of the integration phase and obviously that will also have some effect in terms of purchase accounting with some potential for some step-up amortization that will also kind of have an impact, a small impact in our OI estimate for the second part of the year.

While in the fourth quarter, the expectation despite the fact that we don't want to give a specific guidance for the fourth quarter right now. But you can probably actually mathematically infer -- the fourth quarter will have very likely an estimate -- it has an estimate for a second restructuring program -- early retirement program in Italy that we announced last year And so those two items combined have kind of an underlying 150 to 200 basis point headwinds into the margins for the second part of the year. But again, the underlying run rate is more or less in line with what we have seen in the first half, if that makes sense to you.

[Carlo Santarelli, Deutsche Bank]

Yes, that does. And then just maybe more simplistically from a revenue perspective as it pertains to the Italy sale. Do you have an estimate of kind of what the revenue is coming out as you take that out in September?

[Max Chiara]

Yes, absolutely. You may assume about $100 million of revenue coming out all in the fourth quarter. As we assume right now, the transaction to close in the second part of September. So for simplicity you could just do that .

[Carlo Santarelli, Deutsche Bank]

Okay. And then just lastly, as it pertains to the large jackpot which I didn’t win, obviously, as I’m on this call, do you guys have a sense for kind of the magnitude of perhaps the EBITDA that would stem from that in the 3Q

[Max Chiara]

So the jackpot at those levels is something that we don't estimate ahead of time. So if it comes, it comes and we take it. Last time we had such a high jackpot was actually in combination with the second game that also was experiencing high elevated level of award and we mentioned $20 million last time this time since there is only one, you may probably ground yourself towards the $10-ish million in terms of impact. Absolutely. You're welcome.

[Operator]

Your next question comes from the line of Chad Beynon with Macquarie.

[Chad Beynon, Macquarie]

I wanted to ask about the Italian lottery specifically, maybe the differing offerings, the [indiscernible] and the instant ticket business. You noted that there were some trends that had kind of changed during the quarter. Can you just talk a little bit in the market if that’s more difficult comps, kind of a beginning of a softer consumer in Italy and again, kind of how that feeds into the back half guidance?

[Vince Sadusky, Chief Executive Officer]

Yes, sure. This is Vince. I'll give you a little bit of color. I was actually in Italy, early this summer and part of the time that I spent there and visited with operators in Italy. And it does not seem as if there is an impact as a result of consumer weakness. It seems as if the habit that many consumers had of spending time in the tobacco shops and the retailers is coming back slowly in this post-COVID period as they had a much longer period where they were -- they had restrictions versus the U.S. And I think, in particular, we've seen that drug-based games have been slower to recover from COVID as a result of those restrictions at the retail point of sales. I think the -- a couple of important things that give me confidence going forward and optimism around continued recovery is we did see during COVID that there was an expanded player base, especially in the area of instant ticket sales which continue to trend very well. And that's an area where you probably have a more direct benefit of all the innovation and the marketing and the good work in that particular line.

So I think we've got a long history, I think, of innovation in the content and optimizing our portfolio and payout structures. We will also continue to expand our distribution even more so in Italy. And I think that we will see -- we're hopeful that we'll see continued improvement, especially in the -- we've seen continued, I think, support for the elevated play levels that we've experienced post COVID which gives us a lot of confidence, I think, in the -- and what's important to me which is the long-term outlook, can continue, yet we now have another quarter same-store growth in the mid-single digits versus 2019 supporting our thesis of higher play levels post-COVID. But a lot of that, again, we've delineated in the past. I think a lot of that has to do with consumers actually having more greater income as has been a negative in terms of the cost of things but also a positive in terms of real wage growth.

And then, of course, all the active engagement that our incredible team has done around working with lottery directors throughout North America and increased number of draws and providing more opportunities for win, multistate games, add-on games, all the higher price points that have been introduced. So I think all of these things, net-net, are a positive for our overall lottery operation and the long-term estimates and assumptions that we built into our plan and we believe that the one area that has been a little behind has been specific to draw-based games in Italy and we think we're optimistic that, that will improve as we get further and further away from this COVID restricted period of time in Italy

[Chad Beynon, Macquarie]

Great. And then on the gaming business, you mentioned the quarter experienced some removal of some older unsupported units that was kind of offset by your continued growth in MLP. Could you just say again, I believe you said you’re looking for back half growth. I think you were referring to international but I just wanted to clarify that comment. And then I guess just to kind of round that out, are there still opportunities to kind of remove older own supported games and replace them with newer lease games or MLPs in the back half of the year and into ‘23 ?

[Vince Sadusky, Chief Executive Officer]

Yes. I think what we've seen is in the installed base is and our overall KPIs is very, very encouraging. In the second quarter, we saw a real strong replacement gently led by the U.S. and Canada. We've seen high single-digit average selling price increase on a really good product mix and very, very high demand across of our peak series of cabinets. Our ship share continued increase in our ship share through the first quarter of the last reported period. And with the global installed base improvement as well. As you mentioned, it's been relatively stable sequentially, down year-over-year. But again, that was expected on WLA market and removals of old, unsupported games. I think what -- probably one of the most important data points around installed base has been the increase, the significant increase in installed base yields I think, up around 11% year-on-year.

And that’s, I think, really driven by the improvement across our entire portfolio of our better games, in particular, our WAF and MLP games. And our MLP base, as you know, that’s been an area that we’ve struggled historically to deliver great gains in this category is up very significantly double digits since 2020. And importantly, the new games continue to be in demand. And to be honest, we believe we could have provided even more games into the marketplace had in up for our supply chain issues. So the absolute number, as I described, has several components within it. But I’m excited as, again, the proof the games are performing, I think, is in the yield, the significant yield improvement, the demand for the new games. – and the fact that we actually had an increase sequentially quarter-to-quarter in our most important games, our web titles.

[Operator]

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

[Barry Jonas, Truth Securities]

Can you maybe give a little more specific color on the supply chain issues and how that’s impacting your ability to ship? We’ve certainly heard about bill validator issues in the market but anything else to call out? And I guess more importantly, is there an end in sight?

[Vince Sadusky, Chief Executive Officer]

I'll give a little bit of color and then happy to have Max provide any additional detail. But we really haven't seen much relief in the second quarter. It seems from week-to-week, we've had issue for us, primarily sourcing components. One week, it's the actual screens, the next week, it's video cards. The next week, it's chips, wire harnesses. So this has been something that we've really been juggling and our workarounds, the teams achieved have been remarkable but there's also a cost associated with those workarounds as well. I'd say the team has done a very, very good job of these workarounds. And when you think about -- when I think about the third quarter and the fourth quarter, I've seen the production numbers for July, those look good. And of course, factored into our third quarter guidance and targets. We think we're getting smarter and better in our workarounds, including the distribution of manufacturing which doesn't -- you can't move very quickly. but we've been able to do some of that good work.

And also, as Max mentioned, we’ve built up some inventory supplies as well out of necessity to be able to deliver a greater volume of games to meet our customer demand. And that is also helping us and going to help us in the back half of the year to deliver a greater percentage of the gains that are ordered. So it’s really across the board. Again, I think we’ve gotten smarter and better as we’ve been learning around incremental sourcing options and reducing our dependency on certain individual suppliers. And then as far as the overall opportunity going forward, of course, a lot of that’s going to have to do with what percentage of these costs are remain in the system, what percentage we can come down. And I’ll let Max comment on those data points.

[Max Chiara]

Very good. So further elaborating on this point by First of all, from a pure economic impact, the second quarter had a sort of a similar impact than the first quarter of around $70 million of supply chain costs. What we have done in the second quarter to try to improve going forward is obviously we are looking forward and increased production program in the back half of the year versus the first half of the year. So -- and that's explained a portion of that increased inventory at the end of the second quarter. The other portion is obviously related to the inflationary impact of those procurement actions, including some spot buy that we are forced to do as a result of components not being available when required. And so you have to look around and see for the best offering available at that very moment which is not ideal.

So going forward, what you may expect is as we unwind that inventory is probably a push into the P&L of a little bit more cost, especially in the third quarter. But again, against those higher costs, we expect to also ship probably more units than what we have done so far inclusive of shipping more units into the installed base in terms of production program. So the mix that we have on hand right now is very healthy, as Vince was mentioning during his remarks. And so we anticipate also that a portion of that inflationary impact is going to be offset by a better mix, hence, higher price points, all in all, from our global offering. So that would conclude my incremental comments.

[Barry Jonas, Truth Securities]

That’s great. I appreciate those comments. And then just as a follow-up, for the lottery, are there any new jurisdictions or potential RFPs you’re focused on now we could see some nice inorganic growth? Interested in the iLottery but really any other large subsegments of the lottery.

[Vince Sadusky, Chief Executive Officer]

I would say on the lottery front, the world is pretty well exploited our I think the beauty of the business is the long-term relations that we, in particular, being in more jurisdictions than any other lottery company have enjoyed and that's clearly based upon us being experts in this area and we believe the best in the world. From time-to-time, there still are some jurisdictions that are discussed and I think one that could be a significant opportunity that's been out there for some time is Brazil. But I think we've got to get through the -- or Brazil has to get through the Brazilian elections and we'll see how things play out. But clearly, for large -- the few large jurisdictions that are remaining, it's pretty compelling to the benefits of lottery for good causes. And when we look at those markets, again, we don't emphasize those. But we are certainly quite capable of being competitive in those markets.

On the iLottery front, that is one that's pretty exciting going forward. I think we've seen that we've got real capabilities in this particular area, especially over the last several years as we've significantly ramped up our teams, resources and our capabilities. And we've seen in the markets that we've been involved with, very significant growth at double-digit rates. We announced we're not live in Michigan in iLottery yet but we will be participating in Michigan as well. We've got state-of-the-art cloud-based instant platform. and we've got world-class content as well. And in all of the lotteries, I think we provide our instant content to 14 lotteries or so in the combination of the U.S. Canada and the Rest of the World. And our performance has been very strong. So the opportunity there continues to be in North America.

Unfortunately, the various states have been slower to pass legislation, allowing for iLottery. But as the states do pass the legislation over time which we think will inevitably happen just given the way that people interact in their enjoyment of playing iLottery on their phones and PDAs, I think we will definitely be a significant player, not only given the history and strength and credibility we have in land base but pretty clearly the success that we’ve had in our 14 jurisdictions with iLottery specifically.

[Operator]

Your next question comes from the line of Ben Chaiken with Crédit Suisse.

[Ben Chaiken, Crédit Suisse]

The margin performance in lottery is really impressive. I think as you called out at the high end of the 2025 goal. I guess all else equal, is that a good sustainable level? And I’m asking that question prior to making any adjustments for the payment sale which is dilutive to EBITDA margins – or meaning like – yes, I mean, it’s accretive when it comes out but I’m curious how you think about it.?

[Max Chiara]

Yes. So Ben, this is Max speaking. I'll take this one. So we have historically seen lottery performing at high 40s. Since a few quarters now, we have been at or above 50% in Obviously, some of that has come from this discrete benefit performance last year. But I would say, for once, I mean, the -- between the elevated players' level and a high degree of fixed cost of this business, higher sales are translated into more significant flow-through of profit. So if the play levels remain elevated and we see constant growth going forward, we think that we can continue to perform at these levels. One thing to mention, particularly on the commercial service business, when that business comes out, it's actually -- that business is actually dilutive to the average margin. So our margin will kind of get another small improvement going forward. But it's not significant in the great scheme of things, as you know.

[Ben Chaiken, Crédit Suisse]

Yes. No, I appreciate that. I said that in a confusing way project but I appreciate your clarification. And then on your – switching gears a little bit on the restricted payment basket, I think the limit was raised to 400 – the size was raised to 400 [ph]. And it seems like you have a line of sight to $550 million I guess when you kind of reflect on the year, you’ve repurchased $54 million of stock. Your annual dividend is around $160 million. Do you – I guess, do you plan on using all this restricted payment basket or is your focus more on leverage?

[Max Chiara]

Look, the program is open. I can't talk ahead of time of how we're going to execute on it. But again, we will continue to execute based upon our principle of balanced capital allocation with NI to our long-term leverage target. As you know, when we came out at the Investor Day with our targets, we said we want to be in a range of 2.5 to 3.5. We are now approaching the high end of that leverage range target. But again, we like to be well in the range and not at the upper end going forward. So again, -- it's -- there are definitely attractive entry levels right now on the stock but I need to kind of continue to weigh all options and the different allocations different priorities in our capital structure. But again, what was important in that renegotiation was to create the conditions for less limitations on our activity going forward and we have achieved that.

[Operator]

[Operator Instructions] Your next question comes from the line of Jeffrey Stantial with Stifel.

[Jeffrey Stantial, Stifel]

It’s Max. I wanted to start and drill a bit more into recent business trends. Vince, is there any color you can provide on the exit rate around July trends, maybe focusing more on the recurring revenue side of things. So really specifically lottery in the gating game ops.

[Vince Sadusky, Chief Executive Officer]

Yes, Yes, I'll go ahead and take it. And Max, we'll let you add any comments you want to add towards. Yes, I'd say we've -- as I mentioned earlier, we have seen this elevated play level over 2019 supported in the first quarter and the second quarter. In fact, I think our multiyear same-store sales growth over 2019 and the in the second quarter was actually a bit better than the same-store sales growth over 2019 in the first quarter. Early signs for July were I think, support those levels. And we actually think that the -- when we look back at 2021, the discrete benefits start to wane in the back half of the year. So the comps get easier for us.

So again, I think strong growth, we did enjoy the benefit in the early part of the third quarter and may be millions and great, that's always great publicity around the country. In fact, over here in Europe, it was actually even made press over here in Europe that one person in Illinois is going to be worth $1.3 billion before taxes. And also, I think something like 25 other millionaires were minted in that one draw. So that's the kind of thing that's really, really exciting and just invaluable marketing and promotion and oftentimes really raises the awareness of lottery and kind of that there to dream tagline that so many lottery utilize. So I think we're off to a good start. As far as our gaming business goes, it's a similar story for the last several quarters in terms of the sales funnel for the third quarter is very strong.

And again, our challenge is just simply making it up machines. As I mentioned, we're off to a better start for the first month of the quarter, still very challenged by supply chain but not as challenged as again, as a result of, I think, a lot of the proactive actions the company took in the first half of the year around distributing production and inventorying supplies and equipment and components and things that we had a really difficult time in the first half of the year. And then our business is, of course, also impacted on the gaming side based upon the health of our casino customers. And not a lot of folks have reported yet but the few who have continue to know they're selling out their rooms. They are seeing very high levels of consumption. I think GGR was published through June and showed good strong results, again, maintaining the levels of a year ago.

So I think that things in the script, in particular, are incredibly strong. So all signs at the moment are -- continue to be very, very good for the gaming industry as well.

[Jeffrey Stantial, Stifel]

Okay, great. That's very helpful. And then maybe just one quick follow-up. I do believe the New York Lottery systems contract is coming up for expiration, I believe this month from not to speak. And just a quick update there would be helpful given the size of that opportunity.

[Vince Sadusky, Chief Executive Officer]

Yes, that’s correct. That battery is up this month. And as we’ve reported in the past, our team continues to work with the New York Lottery upon an extension. And we’re in the midst of those conversations so we really can’t comment further.

[Operator]

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

[Vince Sadusky, Chief Executive Officer]

Great. Well, thank you all for joining us and for your interest in IGT. We really appreciate it. We feel like our first half performance confirms our strong operating fundamentals across our portfolio. And as always, want to really thank the team for doing a terrific job in pursuing incremental revenue opportunities built on a very strong portfolio of products and solutions at this juncture. And we continue to do a really, really great job. And again, the team gets the credit for managing discretionary costs. As we contend with significant macroeconomic challenges, our profit margins have exceeded our expectations. We strengthened the balance sheet. Our treasury team has done a great job on that front and we're on track to deliver record capital returns to our shareholders. And we think there's a lot of opportunity on the horizon as we continue to execute on our multilevel goals and the trends that we currently see.

So, thanks again for your interest in IGT and I hope you all have a great rest of summer.

[Operator]

This concludes today's conference call. You may now disconnect.