International Game Technology PLC

NYSE:IGT

Earnings Call Transcript 2021-Q4

[Operator]

0:05 Good day and thank you for standing by. Welcome to International Game Technology Q4 ’21 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. 0:31 I would now like to hand the conference over to your first speaker today, Jim Hurley, Senior Vice President, Investor Relations. Sir, please go ahead.

[James Hurley, SVP, IR]

0:42 Thank you and thank you all for joining us on IGT's fourth quarter and full year ’21 conference call, which hosted by Marco Sala, Executive Chair; Vincent Sadusky, Chief Executive Officer; and Max Chiara, our Chief Financial Officer. After some prepared remarks from the team, Vince and Max will be available for your questions. We are presenting from multiple locations so please bear with us if we encounter some technical difficulties. 1:11 During today's call, we will be making some forward-looking statements within the meanings of the Federal Securities Laws. Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements based on a number of factors and uncertainties, including those related to the effects of the COVID-19 pandemic. 1:33 The principal risks and uncertainties that could cause our results to differ from our current expectations are detailed on our latest earnings release and in our SEC filings. During this call, we may discuss certain non-GAAP financial measures. In our press release, the slides accompanying this webcast, and our filings with the SEC, each of which is posted on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. 2:06 And now, I will turn the call over to Marco Sala.

[Marco Sala, Executive Chair]

2:11 Thank you, Jim, and hello to everybody. Earlier this morning, we issued the 2021 financial results that reflect our strongest revenue, profit and cash flow performance in the last 4 years. We met and in many instances exceeded the financial targets, so we said for the year. We also made important progress on several strategic objectives and re-initiated that returning capital to shareholders. As we enter 2022, the company is in a very strong place with a solid financial condition and the strong foundation to build off. We recently made some leadership changes that best position the company to realize its long-term growth initiatives and create a significant shareholder value. 3:09 I have moved into a new role as executive chair of IGT and Vincent Sadusky was named the company's new CEO. In June, I will be proposed as the next CEO of De Agostini, IGT’s majority shareholder. As you can imagine, I've been in parallel discussions regarding the leadership evolution at IGT and there De Agostini for some time. This was happening while we were managing through the pandemic. It making important progress or sharpening IGT is a strategic focus and growth objectives. We outline a new longer range plan at our Investor Day and the time is right for a strong leader to deliver on it. We are very fortunate to have a Vince [Indiscernible] executive and long-time IGT board member, to be IGT’s CEO. I have enjoyed working with him over the last 7 years and there is every confidence, he is the right person at the right time to lead the company in an exciting year of growth. He has an impressive track record of creating shareholder value. 4:27 Obviously, I'm not leaving IGT. I will remain engaged the Executive Chair, working with Vince on IGT as a strategic direction, serving as a resource on customers and regulatory matters and focusing on corporate governance. Vince will be responsible for establishing the company's priorities, managing day-to-day operations and delivering on strategic and financial goals. 4:55 Before I turn the call over to Vince, I would like to say that I greatly appreciated getting to know you over the years. We also enjoyed – we always enjoy the constructive dialogue and I have valued that your support of the company. Thank you for that. And now to Vince?

[Vincent Sadusky, CEO]

5:16 Thank you Marco and hello to everyone. I am really excited to be here leading IGT in the next chapter of its evolution. I've been a keen observer an advocate of the company's progress for more than a decade, in my role as a board member, including as chair of the audit committee. I've admired the way Marco and team have led the company especially over the last few years, navigating a highly disruptive pandemic, while making important strategic decisions to position the company for the future. There are many parallels between IGT and the media companies I've run in the past. Both operate in regulated markets with high barriers to entry. Expertise in content and technology, a culture of innovation and distribution power are critical to success, and each generate strong cash flows and a face both disruption and opportunity with the emergence of digital. Given similarities I see opportunity to create great value for all IGT stakeholders. 6:18 I'm excited to build on a strong foundation I am inheriting. The company laid out some long-term financial and strategic goals at the November Investor Day and I intend to deliver on them. I signed off on them as a board member and I'm doubling down as CEO. Our mission is to strengthen IGT’s global leadership position in the regulated gaming industry by offering innovative content services and solutions. That is the foundation of our strategy to grow top line and margins across all segments, while increasing operational efficiency and optimizing capital allocation. 6:56 And we're in a great position to do so. Our core activities are in markets with secular tailwinds and accelerating digital growth. We have set aggressive but achievable financial goals that include impressive cash flow generation over the next several years and we have a discipline strategy to allocate that cash flow to maximize value for all stakeholders. We have a powerful, diverse portfolio that not only offers compelling growth prospects, but also provides significant resilience. This was clearly on display during the pandemic, where strong lottery and digital embedding growth helped to mitigate the impact of widescale casino and gaming hall closures. 7:37 The collection of assets also provides unique and sustainable competitive advantages, including a best in class management team with extensive global industry experience. From an industrial perspective, the content, technology and management of our operations are highly complementary and are leverageable across slots, lottery, Sports Betting and iGaming. In the quest to sharpen our focus on core operations, we recently announced the sale of our Italy commercial services and payments business at a very attractive multiple, over 15 times 2021 EBITDA. Net proceeds will primarily be used to reduce debt and potentially for strategic M&A if we see compelling opportunity. 8:22 I'd like to highlight some of the progress we're making in our goals. Beginning with Global Lottery segment where same-store sales were up over 20%, compared to both 2020 and 2019 levels. IGT has unique insights on game innovation, portfolio optimization, and sales and distribution strategies are helping to drive record level wagers for our customers. The broad appeal and high entertainment value of lottery games is clear. In the last 2 years, we have established a much higher baseline to grow from and it is important to highlight the tremendous operating leverage in the business, as operating income increased at more than double the top line growth rate in 2021. 9:08 ILottery and instant ticket services are two areas of incremental opportunity for us. We are making good progress on both evidence by strong KPIs for the year in the market served by IGT’s iLottery platform, iLottery same-store sales increased over 60% in 2021, including nearly doubling in the US where iLottery penetration reached 12% in the fourth quarter. Our innovative new E-instant games are consistently delivering higher average revenue per user for our iLottery customers. 9:44 Instant ticket services had a record year fueled by a more than 35% increase in standard units produced. The multiyear outlook for our lottery business is compelling. We expect innovation, higher average player consumption, increased iLottery adaption and market share gains in instant ticket services to fuel sales growth. We have a favorable contract renewal cycle ahead of us and our investments here have attractive returns. Focused product strategies and the global market recovery are driving a strong rebound in sales and profits for the global gaming segment, which continues to see sequential improvement in sales and profits. 10:26 The expansion of our multi-level progressive game portfolio on the new peak (ph) cabinets is strengthening our lease game portfolio and generating some of the strongest sales funnels ever. Our award winning resort wallet cashless gaming technology recently received regulatory approval in Nevada. With this achievement IGT’s entire cashless gaming solution, which includes the option for one-step external funding via IGT pay on personal mobile devices is approved for deployment throughout the State. It is an important milestone for this emerging technology as Nevada is widely viewed as a future forward gaming jurisdiction. 11:08 Continued execution on well-defined product strategies is expected to drive market share gains in key categories for us over the next several years. This should translate into double digit revenue growth that is further enhanced at the profit level, thanks to the large structural cost savings implemented in the last 18 months. The digital embedding segment continues to grow at a fast clip, propelled by our strong leadership positions and new iGaming and sports betting regulations in the US. 11:39 We are investing in R&D and talent to build a solid foundation to support the high revenue and profit growth trajectory we expect over the next several years. New leadership for both the iGaming and sports betting verticals are already making an impact. This year, we expect to significantly increase the number of new iGaming titles and we will also begin distributing our first third party games. 12:04 Our play sports solution powers over 60 venues in more than 20 states and was recently recognized as the platform provider of the year at the SBC Awards North America. The turnkey sports betting solution is gaining traction, including new partnerships with Morello gaming and Cliff Castle Casino. We also have a robust pipeline of new turnkey customers teed up for 2022. We are making progress on creating strategic optionality for the digital betting segment. 12:38 The separate legal entity and organizational realignment is underway along multiple work streams. It's an exercise that will likely last until year end. Like many others, we are facing some incremental near-term challenges in 4 main areas. The impact of the Omicron variant in certain markets, labor shortages, increased supply chain pressure, and cost inflation. Omicron has impacted Italy lottery sales, especially venue-based draw games, like lotto (ph) since late December. It has also led to incremental casino restrictions mostly outside the US. We found that negative COVID related impacts on lottery sales proved to be short lived. 13:24 In addition, casino GGR trends, and our sales funnel remain strong in North America, which represents about 70% of our global gaming segment. Low unemployment and higher attrition are impacting our ability to fill open positions as quickly as we'd like. We are investing in our people and have made talent acquisition and retention a top priority. IGT is culture of innovation and commitment to diversity and inclusion have proved to be important advantages in attracting and retaining talent. We are also experiencing increased pressure on product deliveries due to longer lead times and availability of certain components. We are mitigating this by prioritizing key product and customer deliveries. A sustained focus on cost discipline and avoidance is also helping to mitigate inflationary pressure, things like components, freight and wages. It is hard to know if we will experience any impact from the conflict between Russia and Ukraine. We have minimal direct exposure to those countries. But the repercussions throughout Europe and the rest of the world are difficult to assess at this time. 14:38 Net-net, based on what we know today, we expect to offset the impact of the incremental headwinds and maintain the 2022 outlook provided in November, 6 weeks in, I get more and more excited about what we can achieve in the next few years. The team is extremely motivated to deliver on the plan to take IGT to the next level and I have tremendous confidence that we will do just that. And now over to Max for some insight into our financial results.

[Max Chiara, CFO]

15:09 Thank you, Vince and hello to everyone joining us today. The figures we reported today demonstrate the highly resilient nature of our business, as we not only deliver meaningful revenue and profit growth year-over-year, but also exceeded pre pandemic levels on all key financial metrics. A high level summary of our 4 quarter financial results with comparisons to both the priority and in 2019 is shown here on slide 14. In the quarter we generated over $1 billion dollar in revenue up 19% year-over-year on solid global same-store sources growth in lottery, high replacement unit shipments and ASP in gaming and 25% growth in digital in betting propelled by continued market expansion and customer demand for our products and technology. 15:58 Strong profits flow through and operating leverage drove adjusted EBITDA to $387 million and the associated margin to 37%, up 31% and 400 basis points respectively. It is important to mention that this substantial increase in profit already incorporates higher cost related to the reestablishment of incentive comp programs and favorable supply chain impact and work associated with establishing Digital & Betting as a separate legal entity. 16:33 The solid financial performance and our rigorous approach to investor capital led to record level cash flow generation, with cash from operations of nearly $400 million and free cash flow totaling $326 million, inclusive of favorable working capital performance or to wages timing with Q1. 16:53 I would now like to shift the focus to full year results to provide perspective relative to the multi-year outlook we provided during our Investor Day in November. In 2021, we deliver over $4 billion in revenue was significant growth across segments versus the prior year. Strong operating leverage, bolstered by structural cost savings drove significant increases in profit, with over $900 million in operating income and nearly $1.7 billion in adjusted EBITDA, exceeding both prior year and 2019 results as we continue to recover from the extreme measures taken during the pandemic, our cost structure is benefiting from the execution of our optimal program, where we overachieved our $200 million cost savings target. 17:40 As a reminder, about 3 quarters were achieved in our P&L, while one quarter of that was achieved with structural efficiency in our capital expenditure. The overachievement piece to our cost savings target primarily comes from temporary actions that are an important mitigant to the increase supply chain costs primarily in logistics that have impacted our ’21 performance and we'll continue into 2022. More on that later when we speak about our outlook for ’22. 18:12 Cash flow generation exceeded our expectations with cash from ops of over $1 billion and free cash flow more than doubling to over $770 million, both record levels. Now let's review the results of our 3 business segments. Global Lottery achieved record financial results during the year, revenue increased 30% to $2.8 billion as strong customers demand drove global same-store sales up over 20% year-on-year and versus 2019. As a reminder extremely high play levels in the first half of ’21, were bolstered by certain discrete items, including gaming hall closures in Italy, elevated multistage productivity and LMA performance in the US. His items contributed about $165 million in revenue and around $140 million of profit. The high flow through of same-store sales growth and a positive geographic mix also led to record profit levels with operating income raising nearly 70% to $1.1 billion. 19:20 Adjusted EBITDA increasing over 40% to $1.5 billion and operating income and adjusted EBITDA margins of 39% and 55% respectively. Global Gaming return to profitability during the year with significant increases in revenue and profit compared to the prior year. Revenue rose 33% to $1.1 billion, driven by solid increases in active units, yields number of machine units sold and ASPs. The installed base in North America reflects changes in the WLA markets of Delaware, New York and Rhode Island. 19:57 Unit reductions in this market of about 840 units year-over-year and 650 units sequentially, were partly offset by increases in the balance of the portfolio. In the rest of the world, the installed base rose over to 380 units year on year, and 180 units sequentially, primarily driven by increases in Latin America and class two units in South Africa. Global unit shipments increased 62% year-on-year as operators began increasing capital budgets in the midst of the market recovery, shipments totaled 57% of pre-pandemic levels during 2021, indicating there is still some runway to a full recovery in this area, which we don't expect to happen completely until 2023. Although, we expect North America unit shipments will get close to 2019 levels in 2022. 20:56 IGT sold over 23,800 units globally during 2021, compared to about 14,700 units in the prior year and at higher average selling prices. 2021 ASP of over $14,000 exceeded both prior year and 2019 levels on an improved mix of products and new cabinet. Strong operating leverage, which was accentuated by savings realized from the optimal program drove a substantial recovery in operating income and adjusted EBITDA, with contributions of over $40 million and $170 million, respectively. 21:39 Operating margins in the fourth quarter reach 11%, nearly matching the 12% pre-pandemic level achieved in the fourth quarter of 2019 and are expected to continue to improve in 2022. The digital investing segment continues to grow at a fast PACE, generating revenue of $165 million in 2021, with double digit growth achieved in both iGaming and sports betting. This growth is propelled by new market adoption, new customers and organic growth. We completed the successful launch of iGaming in both Michigan and Connecticut and so our sports betting footprint expand to over 16 sports books. 22:22 Operating income grew to $33 million, and the operating margin reached 20% is solid profit contribution from an emerging business and a nice profit flow through even with increased investments in talent and resources to fund future growth. Adjusted EBITDA increased to $48 million more than doubled the prior year level. As I mentioned earlier, exceptional operational performance and discipline capital management led to a record level of cash generation, which in addition to approximately $900 million in net proceeds from the strategic sale of our Italy gaming business, allowed us to reduce net debt by $1.4 billion. 23:06 Leverages down to 3.5 times, the lowest leverage in company history, and reaching the 2022 year end leverage target 12 months early. With improved risk profile, we now have a more balanced capital allocation framework that once again, includes shareholder returns. In Q4, we reinstated the quarterly dividend and implemented a $300 million share repurchase program, the first in company history. We deliver over $80 million to shareholders during the quarter, including about $40 million in the purchase 1.5 million shares at an average price of just above $27 per share. Based on recent SEC filings, you can see we continue to repurchasing shares in Q1 with another 570,000 shares repurchase through February 9. 23:56 Productive management or capital structure continued during the year, as evidenced by the redemption of nearly $1 billion of euro notes, the refinancing of another billion in US dollar notes at a lower interest rate and the successful amendment and extension of our term loan facility. That reduced that increase liquidity and extended maturities have greatly improved your credit profile and lower interest expense by about $60 million during the year. We also recently accomplished the goal of raising our credit ratings restoring our pre pandemic levels. Last month, S&P and Moody's upgraded our corporate credit rating to BB+ and Ba2 respectively, citing the strong performance, improve leverage, EBITDA margin improvement and the use of assets a proceeds to reduce that. This latest actions position us very well in the fixed income market going forward and strengthen our conviction in pursuing our long-term leverage objective. Our debt portfolio is favorably structured in the current market environment with a heavily weighted mix of fixed to floating rates and no large near term maturities. 25:08 In conclusion, let me summarize by saying 2021 was a very successful year, with compelling progress made on many growth initiatives and the successful achievement of our financial goals with all key financial metrics exceeding 2019 levels. We reduce debt and leverage to record levels and increase capital returns to shareholders. More broadly, over the past couple of years, we've built a solid foundation for profitable growth in the future as we drove an accelerated recovery from the pandemic readied our company to capture potential portfolio opportunities and realign our portfolio to high growth opportunities. 25:46 Based on the strong performance of 2021 and despite the recent headwinds, we are reaffirming the 2022 full year guidance, we provided at the recent Investor Day. We currently expect to deliver revenue of approximately $4.1 to $4.3 billion, operating income margins of 20% to 22%, cash from operations of between $850 million and $1 billion, and capital expenditures ranging from $400 million to $450 million. Leverage is expected to remain around 3.5 times in ’22 with somebody's ability quarter-to-quarter. The leverage outlook excludes any positive impact from the recent – from the receipt of proceeds from the recently announced the sale of our commercial service and payment operations in it. On a pro forma basis, we see a further improvement in our leverage ratio to the tune of one quarter of a turn. That transaction is expected to close in the third quarter of 2022. 26:49 As Vince mentioned earlier, we are managing through some headwinds caused by near-term market dynamics. We're confident we can mitigate the impact of these items with incremental product sales, financial regrown cost, and lower depreciation and amortization related to the CapEx efficiency as well as timings of spending. It is fair to mention that our outlook does not factor at this point, any material consequence from the recent conflict in Ukraine, given our limited direct exposure to the affected region, although we continue to monitor events very closely, and we'll adjust our posture accordingly, as events unfold. 27:27 In order to provide some indications with respect to the first quarter of 2022, we expect to achieve revenue of $1 billion to $1.1 billion and operating income margins of 20% to 22% in the quarter. This outlook implies a sequential improvement in profits from Q4 ’21. 27:47 That concludes our prepared remarks. Operator, would you please open the line for questions?

[Operator]

27:53 [Operator Instructions] Your first question comes from the line of Carlo Santarelli from Deutsche Bank. Your line is now open.

[Carlo Santarelli, Deutsche Bank]

28:16 Hey, good morning, everyone. Thanks for taking my question. And Vince welcome. If you don't mind, Marco, you talked a little bit about how you were seeing the 2022 and I believe Vince mentioned it as well. But when you think about kind of the product sales replacement environment out there, obviously you said I believe the comment was you could get levels to approaching 2019 for sale levels. When you look at operator CapEx budgets, some of the larger ones that have reported thus far, they seem to have expanded somewhat materially and I'm just wondering, is the demand and the order flow kind of what you see right now, roughly in line with 2019 and are there any kind of hindrances related to some of the supply chain issues or anything else? Or is it just kind of a market facility to the product is there, it's just kind of a little bit of waiting to see how everything flows through?

[Vincent Sadusky, CEO]

29:18 Hey, Carlo, thank you very much. It's Vince, so I'll take the question. Look, I just spent a couple of weeks in Las Vegas, a meeting with our largest casino customers as I've been learning the business have spent quite a bit of time with our internal team really dug into our supply chain issues and our sales funnel and I guess just a couple of observations that I've had one is, 2021 was clearly a record year for casinos, anecdotally, and some conversations with some of our largest customers, they had mentioned, they've had some of their, their greatest days and weeks, specifically in their slot business than they've had, in some cases ever. So that's incredibly encouraging for us, of course, and there is absolutely pent up demand, given the disruption that took place with casino closures and then kind of slow re-openings throughout the entire COVID disruptive period. 30:29 I think that the recovery was somewhat impacted by Omicron, more internationally as all US jurisdictions remained open but certainly in Europe and in Latin America, I'd say that our customer sentiment is really excellent and it's very clear that that they need and want to invest in the [Indiscernible]. Many are talking about how their average yield per game has gone up significantly and they've – I've really not seen something like this since my association with the IGT side of the business for more than a decade. So that's – that's very exciting. Yeah, as we mentioned, our challenges are really in – in delivering, we are experiencing increased supply chain component parts shipping challenges. I think our casino customers understand that that's going to affect, or it has affected and will continue to affect lead times and, and it is adding a cost element as well. However, this company, I think, as you've seen, and my exposure to the company, over the years of being a board member has done an excellent job, and constantly looking to work and refine costs and find opportunities to help to offset what we all hope and believe is a short-term and temporary situation on the supply chain and component part manufacturing front. But the reality is, you know, none of us none of us really know. So we think we can – we can manage through that. But it's a very good situation having demand stronger than I think we've – we've – we've seen in a in a long, long time.

[Carlo Santarelli, Deutsche Bank]

32:25 That's helpful, Vince, thank you very much. And then it's been about three and a half months, since you guys hosted your Analyst Day and provided the – the outlook for not just 2022, but for the longer-term and speaking specifically to 2022. Obviously, that the ranges that you guys put forth, whether it was operating margins or revenue ranges. You reaffirm them this morning, and I'm just wondering if you – if you think about some of the things that you talked about whether it was the labor, whether it was the supply chain issues, inflation, that are creating some headwinds, if you had to and I know this probably won't be an easy question. But if you had to try and think about the impact of all that stuff, and how much it's maybe changed within your thinking over the last three and a half months, is that a significant number in terms of maybe the worsening of some of those factors over that period from the Analyst Day to today?

[Max Chiara, CFO]

33:26 Carlo, hi, this is Max speaking. So we identified in our material, some of the headwinds that we have been experiencing recently and when we compare the situation today versus the situations we had at the beginning of November, I would say that probably the biggest one, which really has made an impact is Omicron. The expectation though, is that this impact is only temporary nature. So we started to see some weakening in December, primarily in the European markets, and obviously, also continuing into the first part of the quarter. But as you are seeing out there, the situation is improving. So we expect that impact to kind of hopefully mitigate. We have mitigation actions in place, as we mentioned as well, in our remarks, increased product sales, which are happening right now across the board in different jurisdictions, both from the – primarily from the lottery business, but also, as Vince just said, strong pipeline of product sales coming also to fruition in gaming. The supply chain deserves a slightly different comment, it is true that we are affected by higher supply chain costs, versus our original estimates. As you may remember, we said about $10 million in ’21 and maybe double in ’22. I think we are running higher than that, but with our ability to hold costs back on top of the structural OPtiMa savings, I think we have a buffer we can play with to kind of fend off those costs, especially in the first part of ’22 where we expect those costs to be biting the most. 35:15 And then lately there is a slight deterioration in effects versus the assumption use at the plan period of 118. Now, it’s effects is about $113 million, $114 million that has also some implications but not material. So net-net with our offset capacity, we felt confident to hold the guidance – to hold the line on the guidance for 22 vis-a-vis what we provided at the Investor Day.

[Carlo Santarelli, Deutsche Bank]

35:44 Great, thank you both very much.

[Operator]

35:51 Your next question comes from the line of Chad Beynon from Macquarie. Your line is now open.

[Chad Beynon, Macquarie]

35:58 Hi, good morning. Thanks for taking my question. I wanted to start with the commercial service sale announcement. Can you talk about why now was the right time was it just really kind of a coming together of your future vision and there was an offer on the table and then also related to that I know that the margins of this business were lower than the rest of what you report in lottery. Can you talk about anything else that affects the model? Were there any other shared services in the Italian lottery segment as well? Thanks.

[Vincent Sadusky, CEO]

36:32 I'll start and let Max make a few comments as well. Getting my arms around this particular part of the business, this – this business had been around for quite some time, it was always viewed as non-core, it really doesn't, isn't critical to our growth plans going forward. And so over the last several years, the company's done a great job of separately identifying this business within its internal operations and I think, as the company's demonstrated from several transactions over the last few years, it remains opportunistic, when there is the opportunity to monetize that – at very attractive multiple operations that are that are non-strategic. So I think the company felt as if this was a great opportunity to take advantage of the multiple very accretive transaction for the company, the ability to pay down debt and refocus or continue to focus on its core operations of lottery, gaming and digital.

[Max Chiara, CFO]

37:49 And just to compliment on what Vince said, yes, you're right, Chad, the margin was below our average. So effectively, the impact going forward is probably accretive to the margin of our lottery business. But you've seen also in the press release, we issued yesterday, what the numbers are, that are generated by this business, they have been in that ballpark for some time. So I think you can extrapolate from that impact to the plan that is definitely not going to be material in any circumstance and so I think we're confident that we are still within those ranges, also long-term that we provided back then. The important thing, as Vince mentioned, is that we will be able to put this net proceeds at work right away as soon as we close the transaction, and further our leverage journey to our ultimate target.

[Chad Beynon, Macquarie]

38:51 Great, thank you. And then is there any update on lottery contracts in the UK or New York? I believe those were kind of the big ones that we had on our – on our list of potentially in the first half of 2022. Thanks.

[Max Chiara, CFO]

39:08 Yeah, with regard to the UK, as I'm sure Camelot, the incumbent operator and we are – we are part of that group by providing our technology and products and services. The current contract was extended, but competition for the fourth license is -- is underway. And we're not able to publicly comment on the process at this point, but an award of the new licenses is expected to take place soon. 39:40 On New York, our lottery supply contract was extended through August of 2022, and we expect an RFP for the next contract to be – to be issued pretty soon. But given the time left on the contract, and the process, we'll – we'll likely get another extension.

[Chad Beynon, Macquarie]

40:02 Great. Thank you very much, guys. Appreciate it.

[Operator]

40:09 Your next question comes from the line of Barry Jonas from Truist Securities. Your line is now open.

[Barry Jonas, Truist Securities]

40:17 Thank you very much. Marco. I'm assuming this is your last regular call. So I just want to say it's been a true pleasure and congratulations on your new roles. Vince welcome and just to be clear, should we expect any changes as you settle into the CEO role?

[Vincent Sadusky, CEO]

40:42 Yeah, thank you. No, I – you really should not. Yes, I've been associated with companies in the past where I've come in and -- and the companies have been struggling and really it was complete redefining of strategy and -- and purpose, execution and personnel. This is the exact opposite scenario being very familiar with a company being involved in its annual strategy and goal setting, budgeting and strategic planning, and having a great familiarity with -- with the team and the changes that have been made structurally and you're breaking the business into clearly defined segments and, and the definition around value creation, that I think the company did an excellent job of laying out an investor day. Those are all things that, I'm, as I mentioned in my comments, and when I need it, I'm very, very much very comfortable with that. And, I really am here because I feel as if there is terrific value creation capabilities from this company, based upon the plan, it laid out by pretty much any metric any comparable, you can take a look at so, I'm excited to be here and help to execute on the plan that I think is very well laid out a very – very strong combination of -- of shareholder returns, growth opportunities, cash flow, and these are things that I think, over time, with – with -- with good description of what the objectives are coupled with of course, performance. I think we will – will definitely become evident. And I'm excited about that and feel very fortunate to be in this operating role at this juncture in the company's evolution.

[Barry Jonas, Truist Securities]

42:42 That's great. And then just as a follow up question, I know the process is moving -- moving along, but as recent marking conditions affected your Digital & Betting listing or spin-off review process, and I guess, what are the decision tree points from here?

[Vincent Sadusky, CEO]

43:02 Yes, I think the exercise of separating the iGaming and sports betting business makes perfect sense. The timeline is one that just simply takes some time, not just kind of the physical separation, the financial and legal separation, but the time it takes to gain regulatory approval. And this company, it's very critical that this company continues to be incredibly focused on the regulatory environment, its gaming licenses, give it the right and opportunity to be competitive in this space. And that's something the company has -- has always taken with the utmost sincerity and focus. And so we -- as you'd expect, given that DNA, the company's being incredibly thoughtful, around ensuring that it does the separation perfectly, and that it is in – in – in complete compliance, that I think over time will also be a key differentiator for IGT versus companies that don't have that that same -- that same focus and attention. 44:20 Having said that, there was a very, very strong valuations for iGaming and digital betting companies as we all know, that those multiples contracted significantly, going into the fourth quarter and are perpetuating today and in a down market. So I think the nice thing about the time it's taking to, to actually physically enable the separation, will give us plenty of time to think through that strategic alternative as to whether or not it's a separate listing or continues to be a standalone operating subsidiary 100%, owned by IGT. So I like the fact that we don't need to make any quick decisions. Our approach to it, would not enable that anyway. And I do believe the -- the focus here should be and is by the company, on the industrial strength and whether or not this makes good business sense. But I think the key differentiator with our business is the fact that we are 100% compliant, we operate in legal markets. We are -- we have great expertise here. We are sticking to our strategy and our knowledge of being a trusted B2B provider. So I think we've carved out a very specific niche in something that is very, very core to our competencies in in land-based gaming. And I do think that we've grown the business, or you know, but I say we the – the company and I now get to take credit for the company growing the business in a profitable and responsible way. So I'm excited about this business. I think this is something that is tremendously undervalued and for purpose of this conference call I'll stop there but at some point you know happy to share more thoughts around -- around the value of this operation.

[Barry Jonas, Truist Securities]

46:21 Perfect. Thank you so much.

[Operator]

46:38 [Operator Instructions] Our next question comes from the line of Ben Chaiken from Credit Suisse. Your line is now open.

[Ben Chaiken, Credit Suisse]

46:46 Hey how's it going? As you mentioned on the call, you reached 3.5 times leverage a year early and then including the sale amounts yesterday, you're going to further deliver another quarter of a return or more and get closer to your 2025 leverage target range. Does that change how you think about your repurchase cadence for the pace of other investments?

[Vincent Sadusky, CEO]

47:11 So thank you for the question, Ben. The point here is the following. First of all, when we launched the -- the buyback program, we were very clear that this was a multi-annual initiative. We have – since then we have started executing, we have accumulated about $2 million shares so far. So we are along the way with the program. But we should not dismiss the fact that our credit agreement configurations has a structural limit on our payments to -- the state the payments, which are dividends and buybacks are part of it to $300 million per year. So with the dividend underway and a run rate, let me say, of buyback, I think we are kind of hitting that threshold so that the next move really is to strengthen our credit rating further, particularly on the Moody's and to be able to kind of lift up that limit from $300 million to $400 million as already prescribed by our credit agreement. And so that's why I think accelerating on the deleveraging and retiring some debt down the road would probably help us getting there faster.

[Ben Chaiken, Credit Suisse]

48:34 Gotcha. That's super helpful. And then – can you are you able to – are there any kind of KPIs which you'd think of – can you just remind us of what those might be to increase that restricted payment basket? That you're mentioning about $300 million? Like, what do we need? Is it a leverage target? What is that?

[Vincent Sadusky, CEO]

48:52 No, the only KPI that is relevant to increase that limit from $300 million to $400 million is to have 2 ratings in the crossover space, one notch below investment grade. So we are there with SMP already BB+, we are one notch below with Moody's at the BA2, we need to be BA at one. So that's why the deleveraging and the reduction in gross debt is the mainstream approach to be able to increase that limit.

[Ben Chaiken, Credit Suisse]

49:23 Okay, great. Thank you very much.

[Operator]

49:30 Our next question comes from the line of Jeff Stantial from Stiefel. your line is now open.

[Jeff Stantial, Stifel Nicolaus & Company]

49:37 Great, thanks. Morning, everyone. Marco, Vince, let me echo everyone's sentiment here and also say congratulations to both of you on the new roles. First off, I wanted to follow up on some of the questions here on the sale of the commercial services business. As you look across your portfolio, are there any other remaining non-core assets that you would consider fully monetizing? Or does the good the current remain co portfolio feel about right, given the remaining cross product synergies?

[Vincent Sadusky, CEO]

50:07 Now, I would say, the portfolio at -- at this juncture is reflective of our key operating segments and I think that the opportunities to monetize non-core assets have been taken the company's, I think, done a terrific job of that has been really focused on things that were businesses they've built up over the years, or acquired. And then ultimately, I think we're, very smart and very patient around the ultimate monetization of these waiting for a really terrific opportunity. But I think at this point going forward, we – the operations that the material operations are -- are important to the business and are important to achieving our operating goals.

[Jeff Stantial, Stifel Nicolaus & Company]

51:03 Right, perfect. That's helpful then. Thank you. And then for my follow up, you talk to some potential opportunities for tucking M&A, I'm guessing it's -- it's more on the digital betting front. I just want to follow up on that. Are you seeing any interesting studios or technologies out for sale and what are general seller expectations like these days in light of rising interest rates and the general macro uncertainty?

[Vincent Sadusky, CEO]

51:24 Again, I think in order to grow the Digital & Betting business and have it become a more material contributor to our future cash flow. There's an opportunity for us to continue to invest in people and technology. And I think that, we've -- we've proven we have a right to win in this business as the company's done a very good job of porting its land-based games over to a digital environment. And when you look at the data, as each one of these jurisdictions opens, immediately, there is great brand recognition from having these titles, and these beloved games in the marketplace in casinos for decades. 52:13 Next is the growth opportunity beyond the initial titles, which is – has a lot to do with the velocity of introducing new games into the marketplace and it's an area that we are -- we are very focused on and that's an area you could envision, we could accelerate and improve and increase our market share through some M&A help and that would clearly be focused on the combination of the technology and the content side. Having said that, I think the value – the valuation of digital entities in any industry, is relative to a certain point in time market sentiment and I think the company's done a great job to this point of not writing big checks for unprofitable businesses, justified based upon an operating need, I think the company did the right thing focused on its internal capabilities, for a long period of time proved out the model, that it actually could be profitable early days, and has gotten to a very good place. 53:29 Going forward, I'd say the -- the marketplace has gotten much better, and much more reasonable in terms of value of these companies. And that has made it more attractive to consider some M&A assistants to help us in the areas where we really want to grow around technology and content. So that's -- that's the way I view it at the moment.

[Jeff Stantial, Stifel Nicolaus & Company]

53:54 Perfect, that's very helpful. That's all I have. Thanks very much, Vince.

[Operator]

54:01 We will take our last question from David Katz. Your line is now open.

[David Katz, Jefferies]

54:09 Morning, everyone, thanks for taking my question. And Marco, very much appreciated, enjoyed all the time and attention. So good luck. I wanted to just talk about the premium installed base. And it's an area that we've sort of focused on and I no offense you it sounds as though you're, just diving into that, what are your impressions so far and what needs to happen for that start to assume an upward trend line, both in units and – and the wind per day, obviously was very good in the quarter. But, given its -- given its outsized impact on earnings accretion, I'd love your impressions on it so far.

[Vincent Sadusky, CEO]

55:07 Sure, sure. So, my view early on into the process is the participation games are really driven by the -- by the -- largely by the marketplace. Both as you mentioned yield, I think has a lot to do with it. And players preference for a particular type of game within the -- within the lease space. So the good news is yield is very strong, some of the strongest yields casino operators have seen in certainly in the last several -- several years. And the expectation is that will that sustainable and can continue. So that helps the market considerably, as these games are incredibly attractive to -- to casino operators. 56:09 Of course, the other piece of it is having games that are in the kind of subcategory of lease games that are attractive and that -- and that perform. I mean, at the end of the day that's -- that's our job, that's our team's job is to produce great games based upon our historical knowledge or knowledge of game mechanics or our creative content, he's got studios all around the world. And ultimately, there's been a trend of casino operators moving more and more of their floor towards wide area progressive. And I think -- I'm sorry, to MLPs from – from lab machines. And I think that that's an area where the company has not performed as well as it -- as it could have. And I'd say early signs are -- not early signs, but signs over the last year or so are very encouraging, where we've gotten a lot of games onto the casino floors, they've performed well. And what I've seen in the pipeline is, is pretty exciting, these games take some time to actually develop and bring to market go through a regulatory process. So, the process began long before I got here in the in the focus and investment in R&D, in this particular area. And it's an area that I've spent quite a bit of time really challenging the team from a studios perspective and digging into the data on some of our trials and some of the test banks we've done and I'm very encouraged, I believe that we have products that are very competitive on the floor, as well as new products coming out that show great signs of continuing that -- that momentum. So that's -- that is absolutely an area that the company is -- is very, very focused on in directing a lot of its creative and technical talent.

[David Katz, Jefferies]

58:12 Okay, thank you very much.

[Operator]

58:20 There are no further questions at this time. I will now turn the call over to Vincent Sadusky, IGT’s CEO, please go ahead, sir.

[Vincent Sadusky, CEO]

58:29 Well, I just like to say a couple of closing remarks, I think the 2021 results clearly highlight the vitality of the company's portfolio. I think, we're in great operational financial shape as we look to execute on our long-term goals. And personally, I enter my role with a high level of comfort with confidence in the company and confidence in the leadership team. And of course with the strategy to grow, innovate and optimize. Thank you all for your time this morning. I look forward to meeting you at conferences and roadshows we have planned this year.

[Operator]

59:07 This concludes today's conference call. Thank you everyone for participating. You may now disconnect.