International Game Technology PLC

NYSE:IGT

Earnings Call Analysis

Strong Q3 Results and Optimistic Q4 Outlook

This quarter showcased a steady march towards achieving full-year financial goals, underpinned by a commitment to sustainable corporate practices. Revenues for the quarter hit over $1 billion, equivalent to the prior year, and excluding certain divestitures, actually showed a 6% uptick. Operating income increased by 13% reaching $239 million, while EBITDA climbed by 8%, a result buoyed by robust performance in the Global Gaming and PlayDigital segments. Operating income margin also expanded significantly to more than 22%, marking a record for third-quarter performance. Looking ahead, fourth-quarter revenues are projected around $1.1 billion, anticipating low to mid-single-digit growth in Global Lottery revenues and stable figures in Global Gaming and PlayDigital. The year's strong performance allows for a tightened full-year revenue outlook and an unchanged profit margin forecast. Strategically, the company is evaluating its gaming and digital segments, envisaging a solid stance for the future with net debt leverage comfortably within target range.

Maintaining a Positive Trajectory: Q3 Highlights and Year-to-Date Growth

Reporting robust Q3 results, the company showcased an 8% year-to-date revenue increase, adjusted for the sale of Italy Commercial Services. The Global Lottery, Global Gaming, and PlayDigital segments all posted growth, with PlayDigital leading at a 17% expansion. Profit growth followed suit, with Q3 operating income climbing by 13% (or 20% net of Italy Commercial Services), securing a record operating margin for the quarter. Year-to-date operating income rose 8% (or 13% net of Italy Commercial Services), with a notable operating margin expansion of over 100 basis points to 23%. An impressive EBITDA margin advancement to 42% was also realized, propelled by all operating segments, aligning the company with its full-year 2023 revenue and margin objectives.

Segment Strength: Global Lottery and Gaming Partnerships

The Global Lottery sustained growth with a 3% bump in same-store sales for Q3, based on a solid multiyear upward trend. In Italy, same-store sales spiked by 8%, thanks to scratch and win and lotto games. The key to this success lies in continuous game innovation and deep player insights. U.S. same-store sales also climbed over 3%, powered by strong Powerball and Mega Millions sales. Prominent partnerships in California and Kentucky, both lasting 10+ years, reinforce IGT's position as a preferred technology provider. The segment's focus on expanding digital lottery sales (up over 50%) and introducing cutting-edge retail solutions, like LotteryLink, will drive future growth.

Innovation and Growth: New Technologies and Partnerships

Stepping up in the Global Gaming sphere, the company introduced live streaming and sports betting functionalities, harnessed by innovative terminal designs. The expansion of the sports betting customer base to nearly 100 casino books in North America signifies the company's growing presence in this segment. Furthermore, strategic explorations are under evaluation for the Global Gaming and PlayDigital units while continuing to lay the groundwork for 2025 financial targets with innovative solutions presented at trade shows.

Quarterly financial Results: Robust Performance and Margin Expansion

Q3 saw over $1 billion in revenue, with a 6% growth rate excluding the effects of prior-year sales from the sold Commercial Service business. The period featured a 13% increase in operating income to $239 million, along with an 8% surge in adjusted EBITDA to $433 million. Margin expansion was a notable achievement, with an operating income margin rise of 250 basis points to over 22% and an adjusted EBITDA margin increase of 270 basis points to 41%. Adjusted EPS rose 21% from the prior year to $0.52, underscoring the company's ability to surpass its outlook through resilient performance across all business segments.

Future Outlook: Revenue Targets and Strategic Planning

With the year’s strong performance, the company is narrowing its full-year revenue outlook to approximately $4.3 billion, at the higher end of the previous range. They're also targeting an operating income margin of around 23%, capitalizing on rotations to reach key 2025 financial targets. Their strategy includes broadening the North American reach in lottery sales and increasing the global installed base for gaming, alongside maintaining profitability growth in segments like iLottery, where same-store sales leaped by 24% in Q3. The company expects continued robust cash flow generation in the fourth quarter, complemented by working capital benefits, reinforcing a solid financial position for future growth endeavours.

Earnings Call Transcript 2023-Q3

[Operator]

Hello, and welcome to the International Game Technology Q3 2023 Earnings Call. [Operator Instructions]I will now turn the conference over to James Hurley, Senior Vice President of Investor Relations. Please go ahead.

[James Hurley, executive]

Thank you, and thank you all for joining us on IGT's Q3 2023 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. We are presenting from multiple locations today, 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. 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. You'll find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP 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.And now, I'll turn the call over to Vince.

[Vincent Sadusky, executive]

Thanks, Jim, and hello to everyone, joining us. Well, we're reporting strong Q3 and year-to-date results today. Excellent momentum in key performance indicators across all segments drove year-to-date revenue up 8% when adjusted for the sale of Italy commercial services. That includes 5% growth for our Global Lottery segment, a 12% increase for Global Gaming and 17% expansion for PlayDigital. Q3 was aligned with year-to-date trends with revenue up 6% net of Italy commercial services. That translated into good profit growth.Q3 operating income rose 13% or 20% net of commercial services and achieved a record operating margin for a third quarter period. Year-to-date operating income was up 8% or 13% net of Italy commercial services and the operating margin expanded over 100 basis points to 23%.We delivered 200 basis points of EBITDA margin expansion to 42% in the first 9 months with each operating segment contributing to the improvement. This puts us firmly on track to achieve our full year 2023 revenue and margin goals.Moving on to segment level performance. Global Lottery same-store sales were up 3% in the third quarter, in line with the 4% growth for the year-to-date period and building on a strong multiyear growth trajectory. Italy performance in the first 9 months continues to impress with 8% same-store sales growth, fueled by increases for both Scratch & Win and Lotto games. A consistent flow of game innovation complemented by our unique player insights and strategic portfolio optimization initiatives have been the key drivers of Italy's growth this year.In the U.S. and the rest of the world, same-store sales were up over 3% on robust Powerball and Mega Millions sales in the U.S. During the quarter, IGT extended several long-standing business partnerships. California is the second largest lottery in the U.S. and IGT's relationship there spans more than 3 decades. Over that time, our solutions have powered over $41 billion in support for California's public schools. A 7-year extension in California secures this important partnership through at least October of 2033. We also secured 2 10-year contract extensions with the Kentucky Lottery Corporation, where IGT will remain the primary technology provider for both retail and iLottery solutions through 2036. It's another 30-plus year partnership to fund higher education throughout Kentucky. Our current lottery contract portfolio has a revenue-weighted 6 years remaining with extension options. The California and Kentucky extensions speak to the confidence and trust the world's premier lotteries have in IGT's best-in-class modern lottery solutions. This includes our cloud-based systems platforms and OMNIA, our new player-centric omni-channel solution. iLottery sales continue to expand at a brisk pace, rising over 50% in the first 9 months, reflecting broad-based momentum around the world. We continue to deploy IGT's latest cloud-based iLottery platform and remote game server for customers in Lithuania, Paraguay, Poland and Switzerland. In addition, we are installing new platforms in markets like Connecticut, where we'll launch iLottery later this year.Today, I'm joining you from the annual North American Association of State and Provincial Lotteries Conference in Milwaukee, where IGT is demonstrating its global lottery industry leadership. This includes the launch of the retailer Pro S2, a sequel to the most popular lottery terminal in the U.S. We'll also be showcasing the industry's first 48 [ inch ] self-service vending machine, as well as additional menu board that is modern, sleek way for retailers to highlight instant ticket games and other promotional content at the point of sale.LotteryLink is another exciting innovation. It's the first and only solution to enable instant and draw game sales without a dedicated lottery terminal or software changes to the retail and point of sale. And it's a key enabler of our focus to expand in laying lottery purchases at big-box retailers nationwide.Let's move on the Global Gaming where compelling games and innovative new cabinets are driving strong results. Q3 revenue growth of 8%, fueled over 40% increase in operating income. The year-to-date performance is equally impressive, with revenue up 12% and operating, increasing -- operating income increasing 34% on a broad-based momentum across the business. Year-to-date global unit shipments were up 10%, complemented by a 7% increase in average selling prices. We maintain the leading North American ship share for 4.5 years and we have some terrific new games and hardware that we believe can maintain our momentum. The new DiamondRS mechanical reel stepper has been well-received, claiming about 40% share of North American mechanical reel stepper shipments over the last year. We have another multi-level progressive success story with Magic Treasures, whose 2 game themes secured the top spots in a recent New Core Video Games survey.Progress is equally good for our lease games, where the global installed base grew for the fifth consecutive quarter. Prosperity Link continues to perform strongly with over 3,500 units deployed worldwide. We are building on that momentum with Mystery of the Lamp introduced in June on our new PeakCurve 49 cabinet, which was recently recognized as the leading Portrait Upright cabinet in North America. We already have over 600 Mystery of the Lamp units in the field generating productivity over 2.5x floor average. The 2 base games continue to be amongst the top new premium leased and WAP games in a recent Eilers survey.We just came back from a strong showing at G2E, where our product strategies were clear. For lease games, we intend to drive our success in MLPs and secure our fair share of that category with 5 new concepts, including 2 new Prosperity Link-based games. We expect to enhance our presence in the video WAP category with 6 new concepts, including the launch of Whitney Houston slots on the new SkyRise cabinet. And we intend to expand our stepper leadership with the introduction of the DiamondRS premium cabinet building on the success we've had with sales of the DiamondRS.On the for-sale side of the business, we plan to build on our leading North American ship share by making the PeakCurve 49 available for sale. We're doing this with a library of proven game families, such as Magic Treasures, Samurai 888, and Kitty Glitter supported by player-centric game features. Until now, the PeakCurve 49 was exclusive to lease games.Video poker and mechanical reel steppers are areas where IGT has very strong market leadership positions. In many cases, our new video poker content is outperforming legacy content by over 2x, and we've expanded the cabinet to offer -- cabinet offer to maximize our global opportunity. The PeakBarTop is one of the most impactful new video poker hardware introductions in the category and CrystalCurve and Cobalt cabinets offer new ways to grow our domestic and international video poker presence. As I mentioned earlier, the DiamondRS has revitalized our mechanical reel offer and presents a compelling replacement opportunity for us. At G2E, we expanded our for-sale offer with the DiamondRS 27 developed for high limit rooms where IGT typically enjoys outsized shares.Profit expansion is the main story of PlayDigital in the third quarter, with operating income up 32%. In the first 9 months of the year, PlayDigital revenue rose 17% and operating profit increased 46%. iGaming growth has been fueled by key content strategies and the incremental contribution from iSoftBet in the first half of the year. We expect to launch about 60 new games this year, more than double our historical pace. This expanded capacity in addition to some unique capabilities enables us to provide compelling value to our customers and players alike. One example is, with the development of bespoke games, such as Caesars Cleopatra for Caesars Palace Online Casino and Fort Knox Cleopatra for FanDuel. Another example is the launch of Wheel of Fortune Triple Gold Spin in New Jersey, the first-ever omni-channel jackpot game in the U.S., leveraging the success of our popular Powerbucks game in Canada. We're looking to expand omni-channel games to new U.S. markets this year and launched Money Mania as a new omni-channel link in Canada this quarter.We are just starting to deploy our sophisticated user engagement tools that offer real-time personalized player recommendations and promotions. We expect this unique leading-edge technology to drive productivity through a richer player experience and build a strong and sustainable competitive advantage for our content.We continue to expand our sports betting customer base and now power nearly 100 casino sportsbooks across North America. We recently introduced live-streaming sports and sports-betting functionality on the PeakBarTop and CrystalFlex terminals. Players can now watch a sporting event, bet on sports, and play video poker or slots, all at the same terminal. Both generated a lot of interest at G2E.We had a great third quarter and it's been a productive first 9 months of the year. Our results place us firmly on track to achieve our full year 2023 financial goals. We are doing this with a steadfast commitment to being a good corporate citizen, evidenced by momentum with key ESG initiatives, including the validation of our SBTi targets and improved ratings from several third-party agencies.As many of you know, we are evaluating strategic alternatives for the Global Gaming and PlayDigital segments. That work is underway and progressing. At the same time, we have established a strong foundation for achieving our 2025 financial targets. The innovative new solutions featured at recent trade shows will be important catalysts in reaching our goals and in creating significant value for all stakeholders.Now, I'll turn the call over to Max.

[Massimiliano Chiara, executive]

Thank you, Vince, and welcome to everyone joining us today. Once again, we're very pleased with the results on display today. We've been able to achieve or exceed our outlook as a result of a resilient performance in Global Lottery, fueled by elevated play levels and a persistent jackpot performance. The continuation of the Global Gaming turnaround story with a further acceleration on its profitable growth trajectory and a PlayDigital performance, continuing to deliver substantial profit flow-through.We generated more than $1 billion in revenue in the third quarter, consistent with the prior year, driven by strong key performance indicators across our 3 business segments. Revenue grew 6% excluding prior year contributions from the Italy commercial service business that was sold in September 2022.Q3 operating income rose 13% to $239 million and adjusted EBITDA of $433 million was up 8% led by double-digit increases in Global Gaming and PlayDigital. These growth rates are even higher when you exclude $12 million in profit, that was contributed by the commercial service business in the prior year. Profit margin expansion was also a notable achievement with operating income margin growth of 250 basis points to more than 22%, the highest level for a third quarter period in company history. And adjusted EBITDA margin up 270 basis points to 41%.As we mentioned last quarter, along with good organic performance driven by solid KPI improvement, we benefited from some operational process improvements in our product development that now require capitalization and amortization of certain costs that were historically expensed as incurred. The resulting impact was a financial benefit of about $10 million to operating income and approximately $20 million to adjusted EBITDA.The effective tax rate in the quarter was 35% in line with our expectations that it would normalize in the second half of 2023. On a year-to-date basis, the effective tax rate adjusted for unusual or non-recurring items is in line with our full year estimate in the mid-30s percent range.We delivered $0.46 in diluted earnings per share versus $1.30 in the prior year, as the prior year included some large non-operating items, such as the gain on the sale of the commercial service business and the accrual of the DDI/Benson matter settlement. Adjusted diluted earnings per share of $0.52 was up 21% from $0.43 in the prior year, primarily driven by the higher operating income performance.Now, I would like to review the results of each business segments beginning with Global Lottery. Third quarter revenue of about $600 million was down 4%, but up 5% adjusting for the sale of Italy commercial service to underscore the underlying business performance more properly. Global same-store sales rose 3%, driven by a nearly 5% increase in Italy with strong contributions from both instant ticket and draw games and a nearly 3% increase in North America and Rest of World, which benefited from elevated jackpot activity.Double-digit growth rates continue in iLottery where same-store sales grew 24% in the quarter on broad-based strength across geographies and game types. Penetration in IGT served territories continue to expand at a rapid pace, reaching double digits in the U.S. and growing. Profitability was very strong with operating income of $206 million and OI margin of 34%, up 60 basis points compared to the prior year. At this point, we have been cruising well within the 2025 target range established at our 2021 Investor Day for at least the last 7 quarters in a row. Adjusted EBITDA margin was 51%, up 150 basis points and maintaining a level in excess of 50% for the third consecutive quarter. In Q4, we expect to maintain low-single-digit same-store sales growth for instant ticket and draw games. Keep in mind, we have difficult North American and Rest of World jackpot comparisons as the prior year included a $2 billion Powerball jackpot, which contributed about $20 million in revenue and profit. Instead, most of the benefit from this October Powerball jackpot was realized in Q3.Turning to Gaming. We generated strong revenue and profit growth during the third quarter, with broad-based contributions across the product portfolio. Revenue of $409 million increased 8% over the prior year, propelled by growth in the installed base and higher system and software sales. The global installed base rose more than 470 units sequentially to over 52,600 units with balanced growth across U.S., Canada, and Rest of the World, and yields continue to hold at nice levels. Global unit shipments exceeded 9,100 units led by a 23% increase in U.S. and Canada casino replacement. Global ASPs were down slightly due to a higher mix of VLT and poker games as we continue to ramp up our efforts in delivering the new successful games and cabinets in the core video category. In fact, ASPs can vary quarter-to-quarter due to cadence of new product launches, and at this juncture, we expect Q4 ASPs to be more aligned with the levels we saw in the first half of the year.Higher system sales were primarily related to enhancements and upgrades to our Advantage casino management system from existing customers, and software revenue grew on strong customer and player demand for IGT leading portfolio of poker products.Operating income of $93 million, increased 42%, including about $10 million in benefits coming from the capitalization of R&D costs from the process improvement previously discussed. Operating income margin expanded 550 basis points to 23%, fueled by the easing of supply chain challenges, the higher margin system sales and the said R&D process improvements.In PlayDigital, iGaming GGR trends remained strong with double-digit increases across geographies. iGaming revenue was up year-over-year even in the absence of new jurisdictions coming online, driven by strong player demand for wide area progressive games. However, overall PlayDigital revenue was flat year-over-year as iGaming growth was offset by the cessation of operations in certain legacy iSoftBet jurisdictions, and sports betting was lower primarily due to unusually high hold levels in the prior year along with unusually low levels this quarter. Operating income rose 32% to $16 million on increased operating leverage and iSoftBet acquisition cost in the prior year. Operating income margin expanded 660 basis points to 28%, progressing nicely towards the 2025 target of 30-plus percent.We continued to deliver solid cash flows with year-to-date cash flow from operations, totaling approximately $640 million, which includes an after-tax impact of the final settlement of the DDI/Benson matter of about $185 million. Cash from operations was $825 million when you adjust for this item. We expect robust cash flow generation to continue in the fourth quarter as strong profit contribution is accentuated by working capital benefits. We amended the definition of free cash flow last quarter to include the deferred license payments, which represent capital invested in IP for game development and are a component of financing activities on the cash flow statement. Year-to-date, CapEx and payments on deferred license fee totaled around $315 million, resulting in free cash flow of $324 million. Adjusted free cash flow, which excludes payments on legal settlements is a better measure of the operational cash generated by these businesses and exceeded $500 million for the first 9 months of the year.Net debt leverage has improved to 3x as we have been able to fully absorb the impact of the DDI/Benson matter in just 2 quarters. Excluding that item, net debt leverage would have been slightly below 2.9x, which is a new record.On a year-to-date basis, $120 million in capital has been returned to shareholders in the form of cash dividends.Late last week, we announced a make whole call of the remaining EUR 112 million of the 3.5% Eurobond due in 2024. The repayment of this bond is scheduled to occur in November, as we expect to build incremental free cash flow from our business operations during the quarter.Financial flexibility remains high, backed by total liquidity of $1.9 billion comprised of about $600 million in unrestricted cash and additional borrowing capacity from undrawn credit facilities of approximately $1.3 billion.We are tightening our full year outlook for revenue to about $4.3 billion at the top end of the previous range based on the strong year-to-date financial performance. The outlook for operating income remain -- margin remain at about 23% with cash from operations of $900 million to $1 billion and CapEx of $400 million to $450 million. The full year outlook coupled with year-to-date results implies a revenue target for the fourth quarter of around $1.1 billion. This assumes Global Lottery revenue growth -- grows low- to mid-single digits, including higher planned product sale revenue with Global Gaming and PlayDigital revenue in line with prior year. As a reminder, fourth quarter operating income is expected to include a total of about $25 million from restructuring costs in Italy and project costs related to the exploration of strategic alternatives for Global Gaming and PlayDigital segments. Year-to-date, we have spent about $14 million on project costs.To summarize, we are pleased with the financial results we delivered in the third quarter, which included revenue growth, margin expansion, and strong cash flow generation. We are tightening our full year revenue outlook to the top end of the previous range and maintaining our profit margin outlook, given the strong year-to-date performance. We are well-positioned for the future with net debt leverage already comfortably within our long-term target range, no meaningful near-term debt maturities and access to significant liquidity.And now, I would like to ask the operator to open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Barry Jonas of Truist Securities.

[Barry Jonas, analyst]

There have been some talk about potential competition for the Italian Lotto contract when it comes up for renewal in a few years. Just curious if you can talk about your positioning there overall.

[Vincent Sadusky, executive]

Yes. Sure thing. It's -- I'll take it. We've had -- we've run the Italian Lotto concession for a very long period of time. You heard the results, I think, as a result of the team are being absolutely outstanding. We've taken a very old lottery and continue to innovate and drive incremental sales. This is a very mature marketplace with very sophisticated players. And I think the ability to innovate, both on the retail side and on the game development side has generated great results for all the stakeholders. Certainly, the state, the Tobacconists, or the IGT. Yes, I think ultimately, we'll see what the competition is. We feel very confident with our opportunity, the -- our knowledge and ability to work very closely with the regulator as well in growing the games. And we really don't have more insight to offer up at this point. But we believe our leadership and our tenured position is clearly an advantage for us.

[Barry Jonas, analyst]

Got it. Got it. That makes sense. And then just as a follow-up. You mentioned the strategic evaluation continues to progress. Just curious if you can give any more color there. I know folks are wondering if the financing environment is influencing the review at all. And then I'm also curious to get your thoughts on how the gaming and digital businesses are performing relative to your expectations when you actually started this process. It seems like they're doing quite well.

[Vincent Sadusky, executive]

Yes, sure thing. Great question. I mean, we -- when we talk about this internally, we're talking about the things you can control, the things you can't control. The most important thing for our business internally when entering into 1 of these processes is to ensure that we've done what we can do from a management perspective to keep our teams focused on the business of growing Lottery and on growing Gaming, and fortunately, that's gone very well. The market continues to be good from an industry perspective, but more importantly, I think the innovation -- innovative products we brought to market continue to resonate as you're with us now for the third quarter for all of our divisions, most particularly the opportunity for distraction would certainly be greatest in gaming and the team has done a great job. And we like to say, I mean, nothing keeps people focus on operations better than having success and we've had really good success.On the strategic process, as we mentioned in the past, just taking you back to kind of the origination of the process, right? It was not done because of a dissatisfaction with any 1 of the businesses. In fact, the company has been at these businesses of Lottery and Gaming for many, many years. And certainly, over the last several years, post-COVID, we've been really excited about the performance of the teams, the products and the market. So it was purely done from a perspective of being frustrated with the valuation we were receiving in the public marketplace, and thought it was a good opportunity from a position of strength and momentum to take a look at potential other alternatives to increase shareholder value. So purely done from that perspective.As far as the market conditions go, we're clearly in a environment now, later in 2023, the expectation of a higher interest rate environment for a longer period of time. But when you think about the market from a economic perspective in the first half of this year, there were significant concerns around a recession and a decline in the overall economy in the back half of 2023, which fortunately for us and so many other businesses has not occurred and the businesses we operate in remain very robust and high personal demand for entertainment services, which is great for our business and certainly, for our customers business. So we think there's always a market for assets that are high-quality. There's not a lot of high-quality assets in the marketplace and the capital markets are open. So when thinking about kind of our strategic alternatives, the alternative of a transaction for gaming, we believe is still valid and still potentially available and we'll go through the process, obviously, in a very -- we feel very strongly about the value of these businesses. We'll go through the process and we'll make a determination, ultimately as to what we think is the best alternative for our sole goal, which is to maximize shareholder value.

[Operator]

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

[Chad Beynon, analyst]

Nice quarter, Vince and Max. I wanted to start with the guide, I guess, the Q4 guide coming in at the top end. It seems like the biggest component of that is the low-single-digit growth for Lottery that you're expecting on a same-store basis in Q4. That's kind of where that was in Q3, but just wanted to kind of focus a little bit more on that, given the ever-moving consumer. Have you seen any changes in North America or in Italian sales maybe throughout the third quarter? And then, if you're willing to kind of talk about some near-term trends into the fourth quarter? Has anything changed, given that we're all keeping an eye on that consumer?

[Vincent Sadusky, executive]

Yes, specific to Lottery, we saw amazing growth in the first half of the year, both in North America and in Italy, our 2 largest markets by far, a lot of that was driven by instants, as well as a refreshing of the portfolio and the go-to-market strategy for Lotto in Italy. We got into the third quarter, we had some pretty tough comps given jackpots in North America were significant several multi -- more than a $1 billion jackpots last year. Fortunately, in the third quarter, we had the same phenomenon take place. So we're able to drive incremental growth there. And in the fourth quarter, we had very significant jackpots again last year, multi-state jackpots. So we don't -- we're certainly not planning on that for this year.In the back half of the year, we've seen outside of the multi-state jackpot, a moderation of the growth for both Scratch and Lotto. But again, we anticipated that normally, new product launches, new price points are -- if we've done a good job with the product, it drives incremental sales, and a lot of that took place in the first half of the year. And then in the back half of the year, there was a lot of consumption of multi-state jackpot purchases in the United States. So, as far as what we are seeing, the trends in October same-store sales for Italy, we're seeing up in the mid-single digits. We think we'll probably end up somewhere in the neighborhood of low-single-digit growth in the fourth quarter, which we think is in line with the longer-term outlook for Italy. And again, as we launch new products we'll have certain quarters will -- where we expect significant increases and then those product play levels moderate.But I think on the U.S. side, again, the multi-state jackpot has driven a significant amount of sales for the third quarter, in particular. We're not counting on that for the fourth quarter. And on the instant and draw side, we think that will be in line with the prior year, given we had significant product launches in larger states, especially in the area of Scratch in 2022. So overall, we think the health of the business is very good. And I think the most important data point is, our thesis that play levels would continue at these elevated levels that we experienced post-COVID, that continues to play out and be true.

[Massimiliano Chiara, executive]

And to complement what Vince was alluding to. We also have a slew of product sales expected to execute in Q4 in various countries as we deliver terminals, both in North America and in Europe, that will represent a significant increase to last year. That will obviously round up the performance from a top line perspective.

[Chad Beynon, analyst]

And then on the Gaming margin or the Global Gaming margin goal that you kind of laid out at the Investor Day and you've talked about the last several quarters, it seems like that's kind of according to plan. In our recent meetings, you talked about half of that being supply chain and then half being just from scale. It looks like a lot of the supply chain and the scale kind of came in, in this quarter. Max, can you just give us an update in terms of where you are, kind of what the upcoming opportunities are for further margin improvement to stay on the path for the 2025 margin goal?

[Massimiliano Chiara, executive]

Yes, sure. So, obviously, the '25 number is not in the bag as of yet, but we have a couple of good carryover impacts that will continue to progress along the way into next year as well. We anticipate supply chain to continue to be -- to have a tailwind on our margins for 2024, as well as the situation has fully normalized and we expect now to be able to bring home those efficiency measures that we have put in place during the post-COVID years.Another area where we expected some tailwind is the improved mix of products in North America with the various launches of new cabinets, the Peak 49, and the new games, we expect that the strength of our product offensive to really be a tailwind on our margin progression going forward. And then, obviously, we continue to enjoy the benefit from the increased scale. Those are the items that we control, items that we have less of a control are more related to the geopolitical situations and the macroeconomic issues around the globe, and obviously, we have to watch them carefully. But definitely, those markets -- the international markets in general are still running behind the pre-COVID period. And so, as the market -- the individual market stabilize, we expect to be able to have improved progression in those individual markets as well. That would round up our performance on a margin journey trajectory.

[Operator]

Your next question comes from the line of Jeff Stantial of Stifel.

[Jeffrey Stantial, analyst]

Starting off here, I wanted to follow up on 1 of Barry's questions earlier on the upcoming Lotto renewal. Obviously, you're coming at it this time around from a position of financial strength, just given where the balance sheet is. But I guess, my question is, are there other reasons, I guess, besides financial that you might look to incorporate a minority partner, again, this time around?

[Vincent Sadusky, executive]

Yes, I would say, the partnership, the consortium that we put together last time has gone fine. But I think it's benefited -- served the intended purpose and benefited all parties to have a very strong offering. We obviously can't comment on the development of that for this next lotto tender. But as we pointed out before, the company's certainly, its capital structure is the best ever. It's got the lowest leverage level ever. So the company has a lot of flexibility to be able to think about and determine the best pathway forward. And as I said, it's hard to really comment beyond that at this point.

[Jeffrey Stantial, analyst]

Okay, great. That's helpful. And then turning to the Gaming business, replacement sales in North America were well ahead of, kind of where we were thinking about things up more than 1,000 units quarter-on-quarter. I was just hoping you could sort of bucket out some of the sequential growth drivers here. And what I mean by that specifically is how much of the sequential growth was driven by VLTs versus poker versus steppers, video, et cetera? Just any color there to help kind of frame this out would be appreciated.

[Vincent Sadusky, executive]

Yes, I guess, it's interesting, from quarter-to-quarter, there is the demand for our machines changes. And it's really, I think a positive for IGT that we are now in a position where we are very competitive and market-leading, in fact, in several game categories. So I think one of the really cool things the team did at G2E, for example, was, we were the only ones to set up a high limit room, right? And so, all casinos aspire to have a high limit room as it's normally the highest yielding per capita by far and a big profit center, in fact, a lot of regional casinos don't have a high limit room because it just doesn't do all that well, but it's usually the premium casinos that have it. Anyway, we normally over-index in the high limit room and we were able to utilize that high limit room concept at G2E to visually show that you can outfit the entire room from mechanical stepper to video poker, to core games, to MLP games to WAP games with all of the latest new high-performing titles by IGT. I think it was very effective visualization.So, for example, in this quarter, Max had mentioned, one of the reasons that our ASP was a little bit lower than we expected was because we actually sold a lot of our new video poker cabinets into the marketplace. We mentioned our DiamondRS cabinet, for example, that cabinet we introduced several quarters ago. It took a little while to get some momentum for that cabinet. But once operators has got a chance to see it, to understand it, to build in replacements for mechanical steppers, which don't happen all that often, they're long-lived machines that players really enjoy and oftentimes you don't want to see it replaced. We ended up having very significant ship share. I think I had mentioned, we estimate somewhere around 40% of the replacement market for stepper cabinets or our DiamondRS, along with really good consistent deliveries of our MLP games and WAP games, et cetera.So rather than kind of comment specifically on the quarter, that experience for the third quarter was different from the second quarter, where a lot of MLP games really kind of drove a lot of our production capacity and deliveries, along with core games as well. So it definitely fluctuates from quarter-to-quarter. I think to takeaway is, we're competitive in all these game categories. And when you add up all the numbers, we have a terrific yield. We had terrific ship share, and we had a -- our fifth quarter in a row of increasing installed base that was really significant, and really nice. So that's the way we look at it. When we look at our overall KPIs, we're really pleased with the direction. And fourth quarter funnel looks good. And we have a lot of visibility going way on the future, as you all know, that the nature of the business, but fourth quarter looks like demand has remained strong for us.

[Operator]

[Operator Instructions] Your next question comes from the line of Ara Masias of Jefferies.

[David Katz, analyst]

I think it's David Katz. So I think we may have just logged in that way. I wanted to ask first about just Lottery volatility and jackpot volatility. I recall a number of years ago that that's become more of a thing. Can you help us just understand the degree to which lotteries year-to-date have had some one-time volatility? And then I have a quick follow-up.

[Massimiliano Chiara, executive]

Yes. So, David, this is Max speaking. So -- and I guess, in trying to interpolate your questions is volatility mostly has to do with jackpots in North America, I guess. Yes, so we have seen this steady interest in jackpot games for the better part of last year. That is likely attributable to the advertised jackpot that exceeded the $1 billion mark, 6 times in the last 18 months. Obviously, advertised jackpot levels have helped by the rising interest rate environment as the advertised jackpot levels are based on a 30-year annuity stream. That doesn't mean by the fall that the same level of underlying sales today to advertise a $1 billion jackpot is the same as it did a few years ago when interest rates were lower. So, for example, comparable jackpot levels above $500 million, both Powerball and Mega Millions underlying sales have decreased over time. In 2022, both games to generate over $600 million in sales for a $1 billion plus jackpot. Sales are now less than $300 million for similar jackpots.Another way to understand this is, with the lump sum payout, today, the lump sum payout is less than half of the advertised jackpot and is down from over 60% in 2016 before the significant rise in interest rates.And so, the last comment, I'd like to make is, obviously, IGT is remunerated as a percentage of Lottery ticket sales, not the advertised jackpot size. So, despite the high volatility in the advertised jackpot, our remuneration is based on the Lottery sales, the underlying Lottery sales that obviously goes up and down, but with a lower volatility than the advertised jackpot.

[David Katz, analyst]

Very helpful. And if you could just give us a quick comment also on your outlook for slot sales? We obviously are having periodic debates and active debates about slot sales being a bit elevated in North America this year and what the outlook for next year, could be like, please?

[Vincent Sadusky, executive]

Yes. I think Eilers had estimated this year slot sales overall North America to be up a couple of percentage points. I think they are currently estimating next year up a little bit less than that. For us, we certainly outpace that as a result of good games and growing share. And I think that's really key for us. And I think one of the other keys is the increase in the installed base. So having a greater number of machines out on a lease basis with yields holding up close to record levels, I think is really positive.The economy, obviously, everyone has their own estimates as to what's going to happen in the consumer going forward. But all we know is that, slot GGR levels remain good. Customer sentiment remains good, and our challenges have really -- what we've seen is really outside of the U.S., we continue to do a great job in Latin America. Our installed base has increased significantly there. Demand is really good. But you've got some country concerns with the market like Argentina. EMEA is another marketplace where there's challenges. Western Europe, we've done really well. That market is back to pre-COVID levels. But Eastern Europe continues to have significant issues, geopolitical is probably the driver of that. But overall, that's kind of I think what the industry is saying and then what I think what we are seeing.

[Operator]

And your last question comes from the line of Joe Stauff of SIG.

[Joseph Stauff, analyst]

I had 2 questions, if I could. One, the gaming competitive landscape naturally is so fragmented, it's maybe tough for me, not others to kind of put the puzzle together. And I was wondering, coming from G2E, it seems as though in terms of your competition against specifically within gaming, some of the small players are much softer. And I'm wondering if that's what you see in terms of the competitive landscape and whatever you can share with us versus, obviously, you doing strong just based on results and obviously maybe your 2 bigger competitors. So that's number one.And then number two, Max, you had mentioned on the supply chain that it had normalized, and I was wondering if you could just kind of remind us of first quarter, second quarter, just sort of the cadence of where the supply chain was in terms of being normal and/or tighter relative to or sort of expecting the benefit in those margins as we sort of adjust your models going forward.

[Vincent Sadusky, executive]

Yes, I'll answer the first question and let Max take the supply chain question. So yes, I think it's a great observation. I felt the same way. I get to G2E a day early to meet with the teams and the setup and walk the floor quietly. And it's just remarkable the number of small players that are out there still. A lot of those companies are private. You don't know what their financials look like. Oftentimes, they've got a niche. That's made it a business, but not a significant business. And to be honest, being in this business for decades now, it's very hard to envision consistency of game performance over a long period of time when you don't have a large infrastructure and a very significant R&D investment on an ongoing basis as the larger companies, such as ourselves have. It's not to say that they haven't had and that they won't have individual game successes from time to time. But when you think about the opportunity to exploit a great game concept internationally, that's a unique area for just a handful of us. A lot of the smaller players design games for specific markets, let's say, it's Latin America or Eastern Europe or North America, and don't even have operations in other parts of the world and they aspire to that, but they have been aspiring to that for a long period of time. So I do think it's hard to really generate any significant scale consistently without having this big -- this large R&D investment.And I think something that probably similar that goes for the iCasino, the PlayDigital business as well. There is lots of competitors in that front because the barriers to entry are, of course, lower. However, I think we're seeing over time that the same phenomena is playing out that, if you're a significant operator in that space you've got scale, you've got huge tech teams, game development teams and your chances for success are greater, plus there is the customer interaction element of it as well, right? So as casinos consolidate under holding companies, it takes time to evaluate and listen to kind of one-off game developers, be it on the iCasino side or on the -- certainly, on the land base side and then there's the approval process and all of that. So, I just think that there is scale is really helpful and really matters, especially in an industry that requires a lot of R&D to be successful.

[Massimiliano Chiara, executive]

Very good. And Joe, in terms of the supply chain dynamics, just to keep it very simple. On the gaming side, the supply chain is easing. Last year -- in the second half of last year, we were running at about $20 million a quarter. We are less than half right now. But we're still having some supply chain costs in the system, baked into the system and we have had them since Q1 of this year. So, again, you see now the same benefit coming to fruition in Q3 and Q4 is supposed to continue next year because of that easing process getting to the final stage and now companies are able to get back in the pre-COVID period where we were looking for opportunities to really to find efficiencies in the supply chain organization. And so, we expect that benefit to continue into 2024 as well. That's what we -- why we have call it a tailwind in our margin progression going forward.

[Joseph Stauff, analyst]

I see. That makes sense. And is it fair to say that you would expected maybe to, say, the level of spending that you're doing now, call it, $10 million a quarter as you suggested, extra spending, that -- maybe that ticks down during the course of '24?

[Massimiliano Chiara, executive]

Yes, it may not be a regular tick down or constant tick down, and maybe a little bit less early on in the year and more towards the second half of the year. But yes, fundamentally, that's what we expect to happen.

[Operator]

There are no further questions at this time. I'll now turn the conference back to the CEO, Vince Sadusky for closing remarks.

[Vincent Sadusky, executive]

Yes, well, thank you all for joining us today. Our Q3 and our year-to-date revenue and profit results highlight the good momentum we have across each one of our business segments. It's a clear indication that our focus on driving growth, innovation, and optimizing our processes and scale is paying off. We're on a solid path to delivering on our full year commitments and are on track with our 2025 targets as we remain focused on unlocking the intrinsic value of IGT's market-leading businesses.We appreciate your interest in IGT, and we look forward to meeting with many of you in the coming weeks, and have a great day.

[Operator]

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