International Game Technology PLC

NYSE:IGT

Earnings Call Transcript 2020-Q3

[Jim Hurley, Senior Vice President of Investor Relations]

Thank you, and thank you all for joining us on IGT's third quarter 2020 conference call. Once again, we are presenting the results from multiple locations, so please bear with us if we encounter any technical difficulties. Participating on today's call are Marco Sala, our Chief Executive Officer; and Max Chiara, our Chief Financial Officer. After their remarks, we'll 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.

With that, I will turn the call over to Marco Sala.

[Marco Sala, Chief Executive Officer]

Thank you, Jim, and thank you to you all for joining us today. I hope you and your loved ones are keeping safe and well. Our third quarter revenue, profit and cash flow demonstrated the extraordinary resilience of our business and the unique circumstances that COVID-19 has brought upon our industry and the world in general. You can clearly see in our results or the value that comes from offering customers around the world a diverse portfolio of gaming solutions. For example, our Global Lottery segment achieved the strongest same-store sales growth and adjusted EBITDA in seven quarters, led by considerable momentum in North America.

Global Digital & Betting revenue, which we will now report on an ongoing basis, was up 41%, including an over 70% increase from our B2B activities. The emerging areas of opportunity are particularly relevant for IGT in the current context. The results also reflect the diligent operational management of the IGT. We identified $500 million in temporary cost savings this year to mitigate the impact of the pandemic. With $375 million achieved by the end of Q3, we are firmly on track to meet our objective.

The strong rebound in activity, combined with the cost savings, drove robust cash flow, including nearly $400 million in free cash flow since the beginning of the year. I would like to acknowledge the incredible determination of the IGT team around the globe, who continue to go above and beyond for our customers, our shareholders and each other in these unprecedented times.

Since the onset of the pandemic, we are proving our ability to be very nimble in driving operational leverage, and we remain committed to doing so. IGT is well positioned to benefit from a global recovery as we focus on bringing the richest player experience and compelling solutions to market, while adhering to strict capital allocation disciplines. This is the first time we report under new – our new organizational structure with two main operating segments; Global Lottery and Global Gaming, supported by a streamlined corporate support function. The simplified structure enhances IGT's growth potential by increasing effectiveness and competitiveness and leveraging the economy of scale. It will also improve our understanding – sorry, it will also improve your understanding of our strategic performance and intrinsic value.

Importantly, our new organization provides better insight into the unique attributes of our Global Lottery business. Lottery has consistently provided stability to IGT's quarterly revenue and profit. In fact, Lottery demonstrated the substantial resilience and contribution throughout the pandemic. As I mentioned, third quarter same-store sales growth and EBITDA were the best in seven quarters. Lottery tends to have higher fixed costs than Gaming, which is why you see the very high profit flow-through of strong same-store sales growth in the third quarter. As expected, the Gaming segment was more affected by the pandemic, but the third quarter with a sequential improvement in revenue and profit confirms a strong player interest in slots as casino and gaming halls reopen.

Moving on to specific segment highlights from the third quarter. Let us begin with Lottery. Global same-store sales increased an impressive 9% in the third quarter. Performance in North America was especially good, with same-store sales growing at a high-teens rate, fueled by double-digit increases for both instant and draw-based games. While to some extent, lotteries may have benefited from a lack of other gaming and the laser alternatives, player interest remained robust as other entertainment options became available again. According to our research, players are enjoying the games and many expect to continue playing Lottery at higher levels than before COVID.

Italy same-store sales delivered an impressive rebound on strong player demand. The low decline in same-store sales is largely due to the impact of social distancing measures on the 10eLotto game. More recently, 10eLotto wagers started benefiting from the launch of a new game called Extra. The Global Lottery market has always enjoyed a steady growth profile. Over the next five years, we expect sales to increase at a low to mid-single-digit rate. Our current performance is stronger and certainly support this view. This is because it is a supply-driven business, and there are many drivers supporting growth. We focus on optimizing game portfolios in each jurisdiction by introducing new games, layering in higher price gains and improving the price structures.

On the distribution side, we look to increase the retailer footprint and provide incremental access points, such as self-service vending machines and in-line purchasing. iLottery is another area of opportunity. Global iLottery sales nearly doubled in the third quarter, with large increases across all geographies. We strengthened our industry leadership with the recent new contracts awarded to us, including the seven-year facilities management contract with the Poland's national lottery in addition to a new seven years contract with the Nebraska lottery. We also secured a two-year extension with a New York Lottery, one of the world's biggest and most successful lotteries and the largest in the U.S.

Moving on to gaming. We were encouraging players' demand trends combined with IGT's strong portfolio in games solutions helped drive sharp sequential improvement in Q3 revenue and profit. Over 70% of our premium North American installed base is currently active. As I noted in August, productivity of IGT's active wider progressive has been strong. It is more than 20% above prior year levels. We are closely monitoring the impact of our recent COVID restrictions imposed in certain parts of the world. In Italy, dedicated gaming halls and sports betting shops have been closed since October 20 and will not reopen until at least December 3. We appreciate we are still in the midst of the pandemic, and there is a possibility of additional casino closures.

There are a few product portfolio highlights worth noting. IGT won three awards, the most of any gaming supplier as part of Casino Journal's Top 20 Most Innovative and Gaming Technology Awards. Our Hexbreaker 3 slot game, PeakBarTop cabinet and PlaySports Bank and PlaySports Pod were all winners. We are seeing the strong momentum for our electronic table games a newer area of focus for us. We just secured a greatly expanded footprint at – for our Dynasty ETG at the Encore Boston Harbor. And there is a lot of interest in our new Peak ETG cabinet coming out of G2E.

We are also gaining traction with our cashless gaming solutions, which are designed to increase casino liquidity, safety, operational efficiencies while delivering the more compelling and convenient experiences for players. IGT has always been a leader in cashless technology, being the architect of ticket-in and ticket-out technology. We first showed our cashless technology for casino customers four years ago and have won many awards for it since then. We took a decision a couple of years ago to integrate our existing IGT payments solution that was already used in our lottery and digital activities into advantage our casino management system. This integration allows players the ability to fund their wagering accounts and digital wallets directly from external funding sources. In fact, IGT is the only casino management system provider that has a fully integrated cashless solution that incorporates external funding capabilities.

It is also important to note that IGT has a very strong IP portfolio in this area. Today, in the U.S. alone, IGT has one casino cashless solution that is live, one in Nevada field trial and four others under contract and planned to commence in the first half of the year. This activity confirms our status as the leading system cashless provider in the industry.

Our Resort Wallet cashless solution recently went live at Resorts World Catskills, marking the introduction of cashless gaming in the state of New York. Earlier this year, IGT deployed a customer cashless solution for Svenska Spel VLT, which has driven an uptick in the new player registration, mostly among a younger demographic. Cashless activity is already driving nearly 20% of Svenska Spel’s revenue only four months after launch.

Let’s transition to our Digital & Betting activities, where our global revenue were of over $100 million, was up 41% in the third quarter. We are making the scale of this business clearer now by disclosing the Digital & Betting revenue, inclusive of high Lottery in our press release. A little over half of our revenue comes from Italy B2C activity, with the remainder from our B2B activities. B2B revenues was up over 70% in the quarter, led by growth in North America, which accounts for 80% of our B2B business. iGaming represents about 60% of B2B Digital & Betting revenue and is a fast-growing business. There is no question players are eager for access to digital wagering and in the U.S. is the most important emerging market opportunity. New Jersey and Pennsylvania, the largest U.S. iGaming jurisdictions, where we have a combined 25%, 30% share of market, we expect to have similar market share in new jurisdictions that regulate iGaming in the future.

Regarding sports betting, IGT is powering over 40 U.S. sportsbooks across 15 states. During the quarter, we expanded our B2B sports betting prominence on many directions. We have grown our offer for the U.S. sports betting market with the formation of our own full full-service trading team based in Las Vegas. This important addition enhances the appeal of IGT’s play sports offering, enabling us to deliver an all-in-one solution for operators seeking a single sports betting provider.

We signed a long-term sports betting technology agreement with Boyd Gaming for their mobile and retail sportsbook throughout Nevada. Building on our existing partnership in Pennsylvania, Iowa, Indiana and Mississippi. In other significant endorsement, IGT was selected as the first B2B sports betting platform provider in the U.S. to bring official NBA data and logos to regional casinos and sportsbooks. It is worth noting that this high-growth B2B Digital & Betting businesses and margins that are accretive to our existing portfolio. Those margins should become even stronger with more scale in the business.

I’m very pleased with what we achieved in Q3. The diversity of our business has provided extraordinary resilience throughout the pandemic. We have also demonstrated that we can be agile with cost and capital decisions while still making good progress on emerging new businesses. The simplified organization we put in place enable us to focus on our core competencies and to identify opportunities to rationalize costs. So far, we have identified over $200 million in structural savings over the next two years, with over 80% of that benefiting the Global Gaming segment. We continue to work on additional opportunities as we create a leaner, stronger IGT.

With that, I will turn the call over to Max.

[Max Chiara, Chief Financial Officer]

Thank you, Marco, and hello to everyone on the call today. Before reviewing our third quarter results, I’d like to spend a few minutes on the recent change in our organizational structure. Marco discussed the benefits we expect from the new organization, and I want to show you how it translates into our numbers.

On the next few slides, we have laid out the changes to our financial statements based on 2019 actual results. And we also included recast historical financial data, KPIs and reconciliations of non-GAAP measures in the appendix to this presentation. You will also find a recast data available in both presentations and spreadsheet form on our Investor Relations website.

The mapping on Slide 13 indicates how we have moved each revenue category from our prior four business segments to the two global divisions under the new structure.

Slide 14 shows how full year 2019 revenue, operating income and adjusted EBITDA look under the old and the new organizations. You will be happy to see we have added adjusted EBITDA by segment, which represents a new layer of disclosures. This is intended to provide greater visibility into the performance and intrinsic value of each of our businesses. The reorganization also presented an opportunity to revisit our cost allocation methodology and align it with market-best practices.

On Slide 15, you can see that we are now allocating a larger portion of corporate support expenses to the two operating segments, increasing the percentage from about 50% to around 75%. Support expenses that exclusively benefit one of the segments are directly assigned to that segment, while the remainder is generally allocated based on the segment’s respective revenue contribution.

Moving to Slide 17. Our third quarter results clearly demonstrate the remarkable resilience of our business portfolio and a sharp sequential recovery from the acute onset of the pandemic in the second quarter. Year-over-year comparisons are tougher as they are still impacted by actions taken by public authorities across all our markets to slow the spread of the virus. We delivered consolidated revenue of $982 million in the third quarter. Global Lottery revenue exceeded the Q3 2019 pre-COVID level, thanks to solid growth in same-store sales. Global Gaming revenue was impacted by COVID restrictions. That was partially mitigated by strong growth in Digital & Betting.

In the first nine months, we generated $2.6 billion in revenue, with nearly 40% realized in the third quarter. We delivered operating income and adjusted EBITDA of $129 million and $354 million, respectively, in the third quarter. This was achieved, thanks to high profit flow-through in lottery and disciplined cost savings across the board, while continuing casino closures and social distancing protocols impacted the gaming contributions. The net result is a stronger EBITDA margin compared to the prior year.

Now let’s turn to our operating segments. Starting Global Lottery on Slide 18 where revenue of $570 million was up 3%, marking a rebound to pre-COVID levels. Global Lottery revenue, operating income and adjusted EBITDA were all at or near the highest level achieved in seven quarters. Historically, same-store revenue growth outside of Italy and wager growth in Italy, where the KPIs used for our Lottery business. Beginning this quarter, we are transitioning to same-store sales as we believe this is a better indication of player demand. You will find same-store sales data for the prior periods in recast slide section of our presentation.

While the impact of COVID still varies greatly by geography on a global basis, service revenue benefited from an 8.7% increase in same-store sales. Double-digit growth in instant ticket and draw games in North America was driven by the popularity of new games and higher price point tickets across multiple states, including Michigan, Texas and Indiana. Same-store sales in Italy declined 3.5% during the quarter. Scratch & Win nearly recovered to the prior year level, while lotto was down 5.4% as 10eLotto play levels were impacted by social distancing protocols.

Sales in Latin America were down high single digits and remained volatile as COVID-19 affected that region later and several games were closed during the quarter. Same-store sales in EMEA declined 3.3%, with the United Kingdom and Czech Republic sales a bit stronger than the overall region. LMA revenue was impacted by lower jackpot activity. Significant terminal and printing sales in the prior year are reflected in the year-over-year decline in product sales revenue.

Operating income of $196 million was up 22%, fueled by high profit flow-through from increased revenue and the benefit of cost saving actions. Adjusted EBITDA rose to $309 million compared to $270 million in the prior year period, up 14% year on year-on-year. The results of the Global Gaming segment on Slide 19 clearly reflect the ongoing impact of casino closures and social distancing protocols. Revenue of $412 million, was up $234 million sequentially and adjusted EBITDA was $90 million higher, showing the extent of the rebound from second quarter levels. We had solid growth in Digital & Betting revenue, with a $30 million increase over the prior year period, as sporting events return and momentum continued in digital gaming. Sequentially, the installed base remained relatively stable.

Turning to product sales. ASP were stable year-over-year, and we sold nearly 3,700 units globally in the third quarter. Replacement units were nearly double the Q2 level. Operating loss was $8 million in the quarter, with $58 million in positive adjusted EBITDA. These results include $36 million of higher bad debt and inventory obsolescence charges, primarily reflecting the pandemic’s impact on certain markets.

An update on our cost-saving initiatives is on Slide 20. We are on track to achieve the targeted $500 million in temporary cash cost savings and capital spend avoidance for 2020 to weather the storm caused by the pandemic. This includes a reduction in expenses of about $360 million, and the remaining $140 million is related to CapEx. The new global product organization provides us an opportunity to optimize our portion of the value chain across businesses and regions. We expect our initial work to yield over $200 million in structural cost savings, CapEx and OpEx related over the next two years relative to the 2019 run rate.

We expect to realize most of these savings in 2021. Over 80% of the savings will come from the Global Gaming segment as we focus on operational excellence initiatives in areas like supply chain, manufacturing and logistics. There is also opportunity to reduce the complexity of our product and geographic mix that will benefit product development and capital expenditures in future years. Other margin improvement initiatives include opportunities with our real estate footprint, workforce migration and discipline on discretionary cost and structural reductions in SG&A.

On Slide 21, we have summarized year-to-date cash flow and net debt. In the first nine months of the year, we achieved $610 million in cash from operations and $384 million in positive free cash flow. We are pleased to report that we are converting a higher percentage of adjusted EBITDA to operating cash flow with a 73% conversion rate in the first nine months of the year compared to 62% in the comparable prior year period.

In the third quarter, we delivered $220 million in positive free cash flow compared to $95 million in the prior year period. The strong free cash flow generation was driven partly by solid financial results and partly by a beneficial shift in timing from Q4 of certain working capital items, Italy gaming taxes and CapEx. Our strong cash flow generation has allowed us to reduce net debt by over $300 million at constant currency on a year-to-date basis and $140 million as reported.

Turning to Slide 22, we improved our liquidity during the quarter to approximately $2.6 billion, comprised of about $950 million in unrestricted cash and $1.6 billion in additional borrowing capacity under our credit facilities. Thanks to solid cash flow generation, we repaid borrowings on our revolving credit facilities made at the beginning of the pandemic, reestablishing full capacity under those facilities including as recently as last week.

In addition, let me remind you that earlier in the year, we successfully renegotiated our covenant package through the second quarter of 2021. Cash flow generation and debt reduction is our top priority, and we are aiming to restore our credit ratings to pre-pandemic levels. We believe the resiliency of our business, the strong cash flow generation and the solid liquidity position demonstrated in the third quarter, if maintained, should help us achieve this objective in the not-too-distant future.

Lastly, turning to Slide 23. I would like to summarize the key points of today’s presentation. The resilience of our business was clearly evident in our third quarter results. First, Global Lottery achieved remarkable growth, delivering the highest level of same-store sales and adjusted EBITDA in seven quarters. Second, Digital & Betting revenue is increasing rapidly, and we are seeing positive sequential improvements in the Global Gaming segment. Third, strong cash flow generation allowed us to increase our liquidity and reduce debt, bolstering our financial flexibility.

We are on track to meet our target of $500 million in temporary cost savings and cash avoidance actions for 2020. Further, we have identified over $200 million in structural cost savings versus the 2019 run rate to be achieved over the next two years. We expect to realize most of those savings in 2021. We have continued focus on disciplined capital allocation. We are working toward an improved margin profile for the business. While there is still a lot of uncertainty surrounding the pace of recovery around the world, we’re managing through this global pandemic and have demonstrated our ability to adapt to these challenges and deliver solid results.

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

[Operator]

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

[Carlo Santarelli, Deutsche Bank]

Good morning. If you were to mind as you kind of navigate through this environment domestically on the slot front and acknowledging that a lot of operators, a lot of newer customers have kind of changed their strategy a little bit and are obviously earning even more from kind of their slot floor as a percentage of their overall casino footprint. How’s the discussions around replacement activity, spend allocation towards new content, et cetera, changed over the last kind of several months as most of these assets have started to see stability in some of their trends?

[Marco Sala, Chief Executive Officer]

Good morning, Carlo. Can you hear me?

[Carlo Santarelli, Deutsche Bank]

I could you hear you, yes.

[Marco Sala, Chief Executive Officer]

Thank you very much. It has been a very particular period of time because generally speaking, we consider what happened in the Q3 better-than-expected because with casino that became open, we have seen a strong demand, strong GGR, especially in regional and travel markets, where most of our business is concentrated. It’s clear that it’s a period of transition. We know that operators remain focused on disciplined capital allocation and operating costs. Having said that, they will definitely need fresh compelling content to keep players engaged. And that is where there will be the challenge.

In general, I think there will be, again, some pressure on product sales. But on the lease part of the business, I think that with the recovery of the situation in terms of active machines, we’ll see the development of the offer more important. And I think that they will look for good games. And as always, it will be a matter of our ability to bring good games to the market, both for sales gains and for the lease gains. And in this period of time, we feel that we have a quite strong lineup of products, combined with new cabinets that are, I think, able to have them increasing their offering and their flows.

[Carlo Santarelli, Deutsche Bank]

Thank you. That’s very helpful. And then if I could just follow-up with one kind of on the iLottery. Obviously, there’s been a lot of talk domestically in the U.S. around state budget deficits and whatnot and potential for gaming expansion across numerous verticals to kind of help fill those budget deficits. iLottery, obviously, has been something that’s been successful in some of the states where it’s rolled out. Obviously, the state gets a pretty considerable percentage of those raised funds. Have you guys noticed any change in the tenor of those discussions to the extent that lottery officials and the likes of yourselves are having any conversation around the potential for a broader rollout of iLottery across the U.S.?

[Marco Sala, Chief Executive Officer]

No. I think going forward, this had to present a great opportunity for our customers first and for ourselves. It’s always very difficult, Carlo, to predict the decision of the governments going forward and the timing of it. But in general, I’m pretty positive about their willingness to integrate the iLottery offering in the iLottery business.

[Carlo Santarelli, Deutsche Bank]

Great. Thank you very much.

[Operator]

Thank you. Our next question comes from Chad Beynon from Macquarie. Your line is open.

[Chad Beynon, Macquarie]

Good morning, thanks for taking my question and appreciate all the disclosure that you gave to us. I wanted to start with your strength in B2B iGaming, particularly in the U.S. or North America. You talked about the growth year-over-year and also your market share of 25% to 30%, I believe. Can you elaborate a little bit just in terms of what’s leading to the success? Are the players attracted to many of your known content – land-based content games? Do you have different jackpot features? And then lastly on that, do you have agreements with all of the major players in the iGaming space? Thanks.

[Marco Sala, Chief Executive Officer]

Yes. Let’s start from the last one. We serve all of them. And so – and the reason for that is the strength of our gaming offering. That is the reason for our success that we are enjoying and the perspective that we see in this business with the future regulation of other states. So the reason of the success is the solidity of our games and the appreciation of our games by the players.

[Chad Beynon, Macquarie]

Great. And then on the weakness that we’ve seen in North American jackpots, do you believe that, that’s benefiting instant and other draw-based games? And how should we think about when this can kind of return to more normalized levels that we saw in prior years? Is the player just not as drawn to this game as they have in years past? Or is it just hitting much earlier? And that’s just kind of a random thing to forecast? Thank you.

[Marco Sala, Chief Executive Officer]

I think, Chad, is there is a combination of two things. The one is that the jackpot is more frequently than in the past, and that is related to the statistic standpoint. Then there is a sort of jackpot fatigue from the player. I know that both the consortium, Powerball, Mega Millions and are actively studied in order to cope with this situation. And now we are helping them in providing good ideas to innovate good games on those games.

[Chad Beynon, Macquarie]

Thank you Marco, appreciate it.

[Marco Sala, Chief Executive Officer]

Thank you, Chad.

[Operator]

Thank you. Our next question comes from Barry Jonas from Truist Securities, you line is open.

[Barry Jonas, Truist Securities]

Hey, guys, good morning. I wanted to start with COVID, separate from where you've seen closures in Italy or wherever, are you seeing any softness in participation revenues as we're starting to see rising COVID cases or maybe just generally hearing any real-time new concerns from your customers?

[Marco Sala, Chief Executive Officer]

I'm not aware of it in the last weeks. I think the performance of our games was in line with the previous weeks, I don't know, the last few days. But generally speaking, I'm not aware of a softness in that area.

[Barry Jonas, Truist Securities]

Great. That’s really helpful. And then just generally speaking, Marco, how are you thinking about capital allocation priorities here? Seems like the Lottery is recovering quicker than a lot of people expected, gaming is sequentially seeing improvement. So just from a pure capital allocation, and that also include any thoughts on when you'll reinstitute the dividend. Thanks.

[Marco Sala, Chief Executive Officer]

I think Max can take these questions.

[Max Chiara, Chief Financial Officer]

Yes, yes. So Barry, so in terms Of capital allocation, our priorities have not changed as we have reestablished them in the past few quarters. So obviously, we continue to be very focused on our CapEx discipline. So we have even strengthened our discipline towards the investment that delivers highest return and lowest payback, especially to conserve cash in this very difficult environment.

Secondly, obviously, our priority is around deleveraging the company. So with the important message of the quarter is, obviously, the strong cash generation, which will help us managing our target, our goal of reducing leverage going forward. And then last but not least, on the dividends, you may remember that when we renegotiated our covenant package and substantially achieved a sort of a standstill on the leverage covenant and interest coverage ratio until the second quarter of 2021 included, in exchange, substantially, we basically put a halt on dividends until after that period. And there will be a five times leverage target that will kick in starting in Q3 of 2021, that will be the threshold to allow the company to resume dividend payments going forward.

[Barry Jonas, Truist Securities]

Great. Thanks so much guys. And thanks for the segmental EBITDA disclosures.

[Max Chiara, Chief Financial Officer]

You’re welcome.

[Operator]

[Operator Instructions]And our next question comes from Domenico Ghilotti from Equita. Your line is open.

[Domenico Ghilotti, Equita]

Good morning. First question is on the cash generation. Typically, you have a good cash generation in Q4, but you were referring in the call to some, say, movements in the working capital from one quarter to another. So I'm trying to understand that we can expect another deleverage in Q4. And the second question is on your structural savings. You were referring to the big chunk in 2021 But most of all, can you give us a sense on what – how much is, say, CapEx related, how much is cost related also on your structural savings, not just on your total $500 million? And last question is on the current situation that we are seeing, well, in Italy, in particular with the lockdowns you were referring to. I'm trying to understand how much are they affecting, particularly your Lottery businesses? So if it is still up and running and if you are still seeing some activity, in particular, if you can elaborate on instant tickets and draw games?

[Marco Sala, Chief Executive Officer]

Okay. Domenico, I take the last question, and I leave Max to elaborate on the first two and I will interject again. Anyway, regarding the impact of COVID, I can summarize the situation in Italy as follows. As you are aware, currently, gaming halls and sports betting shops and corners throughout the country are closed at least until December 3. And we evaluated that the impact of this for us would represent around $20 million per month.

Regarding the situation on lotteries, this is a little bit more complex to predict. Because if I take the situation as it is today, with some red zone but with more, let me say, less severe restrictions in the rest of Italy, we expect to have a minor impact. We did an exercise trying to understand what is going to happen, if under the current conditions, meaning that lotto is – and lotteries, in general, are up and running. There are no restrictions on tobacconist shops.

The main distribution channels are for lottery and bars which accounts approximately 25% of the Scratch & Win wagers must close at six in certain region and are only open for – technically in other regions. If the situation regarding both the games and the distribution remains in station, and even in the case where – let's assume that all the Italian regions turned to be red zone, if the situation remains as it is today under the restriction that I just mentioned, we expect to have an impact of $10 million, $12 million per month on the lotteries.

[Domenico Ghilotti, Equita]

On EBITDA? You mean EBITDA level?

[Marco Sala, Chief Executive Officer]

Yes, yes.

[Domenico Ghilotti, Equita]

Okay, thanks.

[Max Chiara, Chief Financial Officer]

Okay. Domenico, I will take the first and the second. So in terms of the question about the cash generation expectation through the balance of the year. Obviously, important to note that we generated the strong free cash flow figure in Q3 was a combination of much better-than-expected financial results in the quarter, which drove positive cash generation, but there was also a beneficial shift in timing from working capital items and Italy gaming taxes primarily that we will have due, coming due in Q4 as a result of the initial reprofiling of the tax payment that the Italian government has allowed when the pandemic first kicked in, in March, April.

So year-to-date, we generated about $400 million, just shy of $400 million of free cash flow for the nine months period. We think we are going to be able to maintain that figure through the end of the year. So Q4 probably is going to be a neutral quarter in terms of cash. We should also keep in mind that the current expectations are slightly deteriorating, taking into account the recent lockdown measures that were enforced in several jurisdictions where we compete. And obviously, those timing items that I discussed related to the Q3.

In terms of the structural savings, and I pass to the next question. So the $200 million, as we said, more than $200 million of structural savings identified going forward, the majority of it will come to fruition in 2021. But again, it's going to be a step-up in savings generation during the course of the year. I would say the majority will be related to P&L, OpEx, and there is a portion which will be affect CapEx that is probably roundabout is going to be one-fourth of that. The main area of the savings, I'd like to repeat, are kind of grounded around initiatives to achieve operational excellence in areas like supply chain, manufacturing and logistics, complexity reductions in our product geographic mix with savings that will come in this particular area from product development and from CapEx.

And then other margin improvement actions in areas such as our real estate footprint revision, labor arbitrage, high cost to low-cost countries, and a reduction in discretionary costs, such outside in consultants, marketing and traveling costs. And again, last but not least, 80% – about 80% of those savings will accrue to the Gaming segment.

[Domenico Ghilotti, Equita]

And do you envisage a significant cost for the integrations, cost for extracting the synergies?

[Max Chiara, Chief Financial Officer]

I mean, as a reminder, we booked in Q2 already $45 million of restructuring costs related to three different programs around those initiatives. So I think we are ahead of the game in this particular circumstance. Thank you.

[Domenico Ghilotti, Equita]

Thank you.

[Operator]

Thank you. Our next question comes from Joseph Stauff from Susquehanna. Your line is open.

[Joseph Stauff, Susquehanna]

Good morning, Marco. Good morning, Max. Two questions, please. I wanted to ask about now that you have effectively reorganized the company's entire sort of operating structure, and I know you talk about the synergies to be realized going forward as a result of that. I wonder if you could share with us maybe your thinking, Marco, about whether or not you think the business even in – again, sort of the reorganized structure, is – if you're flexible about possibly separating lottery, whether it be in a spinout or a separation. I know it's a difficult question, but I wonder if you could share with us how you think about that and if you are flexible, regarding that possible scenario that I outlined.

[Marco Sala, Chief Executive Officer]

This is a difficult question, no doubt. But let me say that the focus of the time being is in creating the best condition to operate both segments because we feel, as Max very clearly described, we have an opportunity to reconsider, especially the Gaming business. We can make this business a more effective, more efficient. And we can work over time to create value for our shareholders, enjoying the growth of the Lottery business and the recovery of the Gaming business.

With the time, I mean, you can always consider opportunities that are creating value for our shareholders. But if you are asking me short term, are we thinking about that, it's not what we have been discussing with the Board when we were discussing the new organization. The organization was focused on improving our effectiveness, take advantage of synergies or efficiencies, we could have extract it. And that was the spirit of the new organization more than preparing the pieces of the business for a different perspective and that what happened.

[Joseph Stauff, Susquehanna]

And then again, as you think about sort of the portfolio, Lottery versus Gaming kind of going forward, look, I realize the fourth quarter and the lockdowns are like kind of are what they are. But assuming things normalize, hopefully, sometime in first half of next year, is there something within your product portfolio and your offering, whether it be in gaming, whether it be in lottery, that you feel though you need to add more to, how do you think about that – those prospects? And kind of where you'd like to add to in their respective portfolios?

[Marco Sala, Chief Executive Officer]

This is another good question. Reality is, if we look at the portfolio that we have right now, I think we have everything we need to grow our business over time. We do not feel that in this moment, we need something that or we are missing something significant in our existing capabilities. But of course, there are always the possibility that maybe some niches of – in some part of the business could be of interest going forward, but there is nothing that is in our plan for the next couple of quarters. But we constantly look at the – our portfolio, and we are always considering the kind of integration we might consider. For the time being, nothing major, I cannot say that going forward, we might be interested in some pieces of products or technology to enhance our current offering.

[Joseph Stauff, Susquehanna]

Thank you.

[Marco Sala, Chief Executive Officer]

Welcome.

[Operator]

And our next question comes from David Katz from Jefferies. Your line is open.

[David Katz, Jefferies]

Hi. Good morning, everyone. Thanks for all the color and detailed information. I wanted to just ask about the North American installed base, particularly the premium end of it. And my guess is you've made some comments in on it. But we continue to contemplate when we could expect or should expect that to start to rise. It's been sort of ticking down. And that can have some positive implications as well, but I'd love just a bit more color on that. And then I have one quick follow-up.

[Max Chiara, Chief Financial Officer]

Sorry, Dave. The point is very simple, and everything relies on our games. I think that we have proactively worked with our customers for the time being to ensure that we have our best product on their casino floors, and we have a lineup of good new content. And as you probably know, everything relies on our ability to bring to market products that are performing very well because we have already a very good product. We have done this exercise very successful on the product sales part of the business. The appreciation of our products over the last quarter has been very visible. We have to continue improving the products on the installed base because, as I said at the beginning, I truly believe that there is a very strong appetite of our customers to have compelling and performing products, and that is the challenge, and we are working very seriously on it.

[David Katz, Jefferies]

Okay. Thank you. And I wanted to ask one other sort of more strategic question. Given where the environment is today around all things digital, sports, iGaming, et cetera, and the value that's being assigned to that, not that it would be necessarily a short-term decision. I see that you've broken out some of your digital revenues in the quarter. How do you envision that continuing to grow? And are there ways that you might think about in terms of attracting or assigning or capturing more value from those?

[Marco Sala, Chief Executive Officer]

No. This is a good question. I can start from sports betting. We just announced the fact of having our team that will manage the books for our customers in sports betting. This is a way to capture more value in the value chain especially for small, medium operators that are part of the portfolio of our customers. Regarding iGaming, I think that we are in a very good position as long as we look at the development of the market. And accordingly, to the number of geographies that will allow it considering that we feel we can have once the decision opens between 25% and 30% market share, you can consider the kind of growth this will represent for us.

And we are also very well positioned to take advantage from any iLottery regulation around the world, and this is possible. We have a good presence in the U.S. as well as internationally. And we really believe that this will be another area where we can enjoy a quite solid growth. So I think the point here is, we are focused more than predicting how the market – what the market will achieve in the next five years to be sure that we will have solid positions in all these businesses when jurisdiction will open. Always trying to extend the – our offer to capture higher part of the value chain.

[David Katz, Jefferies]

Thank you very much.

[Marco Sala, Chief Executive Officer]

Thank you, David.

[Operator]

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

[Marco Sala, Chief Executive Officer]

Thank you all for joining us today. We hope our simplified structure and enhanced disclosures improve your understanding of our strategy, performance and increasing value. As you have just heard, our third quarter revenue, profit and cash flow demonstrated the extraordinary resilience of our business under the unique circumstances that COVID-19 has brought upon our industry and the world in general.

Once again, I would like to thank the IGT team for their passion and dedication. Since the onset of the pandemic, we have proved very nimble in driving operational leverage, and we are committed to continue doing so. We firmly believe and I think we have demonstrated that IGT is well positioned to benefit from a global recovery. We look forward to speaking with you over the next several weeks, and please stay well and be safe. Thank you.