International Game Technology PLC (IGT) Q3 2019 Earnings Call Transcript

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International Game Technology PLC (NYSE: IGT)
Q3 2019 Earnings Call
Nov 14, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the IGT’s 2019 Third Quarter Results Conference Call. [Operator Instructions]

I would now like to turn the call over to Jim Hurley, Senior Vice President of Investor Relations. Sir, you may begin.

Jim HurleySenior Vice President of Investor Relations

Thank you and thank you all for joining us on IGT’s Third Quarter 2019 Conference Call. Marco Sala, our CEO, will provide an overview

Marco Sala, our CEO, will provide an overview of the quarter and comment on our broader strategic initiatives. Then, Alberto Fornaro, our Chief Financial Officer, will provide operational and financial perspective on the results. After our prepared remarks, we’ll open the call for your questions.

During today’s call, we’ll 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 SEC filings.

And now, I’ll turn the call over to Marco.

Marco SalaChief Executive Officer

Thank you, Jim, and welcome everyone. The momentum of our core businesses is evident in the third quarter’s solid key performance indicators. Global gaming machine unit sales were especially strong in the period. Free cash flow was a robust reaching a record of $456 million for the first nine months in making the important inflection point we expected this year. Lottery same-store revenue outside Italy rose 2% in the third quarter as 4% growth for instant and draw games offset the lower jackpot activity in the United States.

In Italy, total lottery wagers as well stable, higher Scratch & Win wagers made up for a slight decline in lottery. It is worth highlighting the strength of our North America Lottery product sales in the last two quarters. Our expanding suite of self service machines draw great interest from our customers at the recent trade shows. Our GameTouch 20 self-service sales mix of draw based games, instant tickets and multi-state jackpot games, and is meant to serve a big-box national retailers. So far about 1200 units have been deployed across 10 states with additional states expected to roll it out next year.

Our GameTouch Draw cabinet inspired by device we use for sports betting in Italy and Rhode Island provides self service for draw based games with a focus on Keno, it was developed to facilitate retailer adoption in restaurants, bars and other social spaces. Channel expansion is key to driving future lottery revenue growth and that is what these products are all about. We have had some significant lottery contract wins and extensions over the last several months. IGT was selected

IGT was selected to provide both lottery technology and instant ticket printing for the new Mississippi lottery. We also secured multi-year extensions in Colorado, Minnesota and Kentucky and we just signed a five-year facilities management and product sales contract with the Oregon lottery. In the significant lottery development, our 50-50 joint venture was a recently awarded the 15-year Brazilian Lotex license. This is a major step toward the privatization of lottery instant games in Brazil, the world’s eighth largest economy. It’s also an important window into other opportunities as Brazil further opens regulated gaming. Instant can develop into a meaningful driver of growth over the license term, given the relatively modest capital investment required, we expect that this business to generate in above average return on investments for us.

Now let me focus on gaming, it was a strong quarter for our global gaming business, unit sales of gaming machines were 44% greater than the prior year period, driven by a 62% increase in replacement units. North America replacement units rose 38% led by top performing titles such as Fortune Coin and Griffin’s Throne. International replacement units increased nearly 90% benefiting from larger Sweden VLT shipments in the period. Commercial gaming replacements were up double digits with demand well balance between the CrystalCurve and Crystal 27 cabinets. We have begun rolling out our new Cobalt cabinet developed to raise our profile in Eastern Europe and we are seeing interest for other regions as well. The North American installed base remains stable and is generating higher yields and we look forward to Cash Link & 4D titles continue to command incremental placements.

The early indications on our recently launched The Price is Right games are good. We have just had successful showing at the G2E where our team was player-driven performance, the cornerstone of our gaming strategy. We have continued to expand our test programs, which are driving player satisfaction on a broader number of product lines. There was a

There was a lot of excitement around our Core video offer, which has been an important driver of the 38% increase in year-to-date global unit shipments. IGT has the industry’s leading portfolio [Phonetic] of intellectual property, which we are upgrading with a proven new game mechanics Wolfram [Phonetic] and Hexbreaker are good examples. In fact, the Hexbreaker 3 is widely recognized as one of the most anticipated titles coming out of the show. We are complementing these franchises with a new batch of proven performance including Lucky Buddha and Magic of the Nile. We are increasingly leveraging our strength in product sales with our leased games. This is especially true in the growing the multi-link progressive segments where IGT has traditionally been under-represented. We showcased nine MLPs at the G2E to drive a better penetration. We are further supporting the third quarter with new family of peak cabinets. We are launching the PeakSlant with extensions of two proven brands, Scarab Link and the Wheel of Fortune Mystery Link [Phonetic].

G2E was also a big show for video poker where we featured a total of four different form factors, including the new PeakBarTop and Cobalt cabinets providing world-class solutions to all types of venues around the world. The response is very good, especially for the PeakBarTop and we are well positioned to maintain our leadership in this area. As an aside, let me say that after a lot of hard work and investment, it is very gratifying to be able to report on the progress we have made in our machine gaming business.

Now let me turn to sports betting. A year and half after the US Supreme Court passed the ruling, IGT is powering 35 casino-based sportsbooks in 11 states. Our mobile offer is active in seven states. IGT PlaySport [Phonetic] technology accounts for nearly half of New Jersey and Pennsylvania total sports betting gambling, which is a testament to the stability and scalability of our technology. Speaking of scalability, at the G2E, we showcased our PlaySports Bank and PlaySports Pod. The first ever completely self-standing sportsbook in a box, which can be integrated to any part of a casino floor. These solutions enables small to medium

These solutions enables small to medium size casinos to provide a capital efficient Vegas-style sportsbook experience. Today, there are over 200 self-service IGT’s PlaySport machines deployed in sportsbook around the United States. Pearl River Resort in Mississippi is the first to feature our crystal betting terminal, which is in field trial there.

A few words on the Italian budget law, the current proposal includes higher taxes on gaming machines and higher taxes on certain player winnings. The parameters for the next standard of gaming machines licenses and also bill outlined, I can appreciate that this annual process has been a point of frustration for many of you. I think it is important to stay grounded in our historical ability to navigate through this challenge. We have been dealing with higher gaming taxes for the last several years. In that time frame, our Italy EBITDA has grown despite the headwinds, including the year-to-date 2019 period. We have managed that through consistent innovation and disciplined cost management while maintaining or improving our market position across all gaming verticals. The true impact will not be known until the budget law is approved at the end of the year. We are working on a set of initiatives in Italy and I am confident can offset the entire impact of the proposed taxes. I’m pleased with the momentum of our core businesses for the third quarter and the year-to-date. And with the positive feedback, we received from the customers at the recent lottery and gaming trade shows, our focus on player driven performance will support continued progress for our gaming and lottery business across all our markets.

Now I will turn the call to Alberto.

Alberto FornaroChief Financial Officer

Thank you, Marco, and hello to all of you on the call today. Our third quarter results are summarized on Slide 13. The continuous strength of the US dollar against the Euro had a notable impact on reported results again this quarter. The average Euro-dollar rate was 1.11 versus 1.16 in the prior year period. At constant currency, revenue grew 3% compared to prior year. Strong North American gaming and lottery product sales coupled with solid international gaming product sales

product sales, more than overcame the impact of the large multi-year Finland software license in the prior year and higher gaming machine taxes in Italy. The constant currency adjusted EBITDA of $407 million declined $23 million or 5%. Adjusted operating income was also lower. There was a significant differential in the profit flow-through year-over-year primarily attributable to the Finland software transaction in the prior year. In addition, we incurred higher R&D and SG&A cost in the quarter, primarily related to timing.

Let’s now turn to our operating segments. Starting with the North American Gaming and Interactive on Slide 14, we had a very strong quarter with revenue growing 11% and operating income up 38%. Total revenue from product sales rose 36% on the strength of new cabinet and games, which helped to drive higher average selling prices. Product sales also benefited from the execution of a multi-year technology license. Service revenue was essentially flat when compared to the prior-year period as a positive contribution from sports betting helped to offset the treatment of multi-year poker contracts in prior year period. The change in the installed base from recent Oklahoma conversion was mostly offset by higher yields. On an underlying basis, the installed base was stable. Operating income was up 38% on increased unit shipments and the high margin technology license.

On Slide 15, you have the results for North America Lottery segment, increased customer demand for self-service vending machines fueled growth in product sales revenue, which was up 54%. Kentucky, Virginia and Missouri all had the notable purchases in the quarter. The higher product sales compensate for the lower service revenue for lower jackpot activity and the conclusion of the Illinois supply contract, but at a lower margin. Solid same-store revenue growth of just under 4% for instant ticket and draw games was the result of broad-based strength, particularly for larger lotteries such as Texas and Florida. This was partially offset by lower multistate jackpot activity. Operating income reflects the impact of Illinois lower jackpot activity, which also affected the LMA revenue and additional expenses for Rhode Island

Rhode Island, all of which was partially offset by the higher product sales.

Now let’s turn to the International segment on Slide 16, while revenue was up 3% of constant currency, operating income was down 40%. As I mentioned, the third quarter last year included a large high margin multi-year Finland software license, which makes for a difficult year-over-year profit comparison, excluding the Finland transaction, constant currency revenue was up 18% and operating income increased 12%. Higher Lottery service revenue was driven by 6.5% growth in same-store revenue. Replacement units grew by 88% on broad based geographic demand, including 1,547 Sweden VLT units. Excluding Sweden, replacement units were up 30%. Average selling price were lower due to product mix. Product sales also benefited from recognition of the Sweden VLT system in the quarter. Gaming service revenue reflects a decline in the installed base due to conversion sales in prior period and lower interactive revenues.

The results for Italy are shown on Slide 17. At constant currency revenue was relatively stable despite increased gaming machine taxes. Total lottery wagers were in line year-over-year as growth in Scratch & Win wagers offset the slight decline in the lotto wagers. Lower late numbers activity was mostly offset by wager on core games, which grew 10% following the Simbolotto launch in July. 10elotto wages were impacted by increased taxes on player winnings as of July 1. Machine gaming revenue was down year-on-year due to higher gaming machine taxes. AWP wagers remain steady in the quarter as player excitement around the new games helped offset the reduction in payout percentage. The decline in VLT wagers is driven by the market reaction to newly introduced adjustment to pay out percentages. Other service revenue reflects growth in commercial services, which more than overcame the lower sports betting payout in the prior year. As a remainder, a large portion of the commercial service revenue is pass-through in nature. Operating income was impacted by higher gaming machine taxes and sports betting payout percentage.

On Slide 18 you can see that the net debt has improved by approximately S200 million in constant currency compared to year-end levels. Leverage

Leverage was 4.34 times compared to 4.47 at the end of December.

Now let’s turn to Slide 19 where we show our debt maturity schedule as of September 30. During the quarter, we issued EUR500 million of 2.38% senior secured notes due in 2028. This is the lowest coupon bond we have ever issued. EUR320 million of the net proceeds were used to prepay the term loan amortization due in January 2020 and the remainder were used to repay all the borrowings under our revolving credit facility. This leaves us with liquidity and cash flow generation that are more than sufficient to cover debt maturities through 2022.

On Slide 20, we show year-to-date cash flows, we delivered record operating cash flow of nearly $800 million and the free cash flow of over $450 million over the last nine months. This is clear confirmation of the cash flow inflection we expected to realize this year.

On Slide 21, we have included our outlook for 2019. The outlook for adjusted EBITDA remains unchanged at $1.675 billion to $1.735 billion based on a full year average euro-dollar rate of 1.12.

There are a few items to keep in mind for the fourth quarter. First, the extraordinarily high North American jackpot activity last year’s fourth quarter which contrast with the unusually low multistate jackpot activity so far in the fourth quarter this year. Second, we are actively monitoring trends in gaming machine wagers in Italy following recent payout adjustment. And finally, we had a nice momentum in global gaming machines unit shipment in the first nine months and the sales funding for the balance of the year is robust.

The fourth quarter is typically significant in terms of product sales, but always there could be some variability in time. We are updating our CapEx outlook to $450 million to $500 million from $450 million to $550 million previously, primarily due to shifts in timing of certain expenses.

To summarize, third quarter results were solid. We generated a remarkable year-to-date cash flow and paid down debt while significantly announcing our financial flexibility.

Now we would like to open the call for your questions.

Questions and Answers:

Operator

[Operator Instructions]

Thank you. [Operator Instructions] And our first question comes from Chad Beynon from Macquarie. Your line is open.

Chad BeynonMacquarie — Analyst

Hi, good morning. Thanks for taking my question. Guys wanted to start with free cash flow because I think that was a bright spot in the quarter. Alberto, you highlighted year-to-date trends and now with the reduced capex, , can you just give us an update in terms of what your leverage targets are, and just remind us any near-term major cash outflows that could come in 2020 that I guess would more be in kind of the project capex,, category? Thanks.

Alberto FornaroChief Financial Officer

Yeah, Chad, first of all, good morning to you. Regarding the cash flow, let’s say that we are basically marching according to our expectation, as you are aware, for this year, we had provided an outlook in the range of the adjusted free cash flow to be between $410 million and $510 million and, you know, we are on-trend and actually this quarter is confirming what already in the second quarter we showed this progress in that direction. So the only update, I can say is that we confirm what we have said in the past.

Regarding capex, , the only big news that I can say has been Brazil. The Lotex — that is growth capex, for a new initiative, the profile from capex, is fairly moderate because with the upfront fee to be paid over eight installments, it has significantly reduced the impact and over several years and we are planning that so far in Q3 2020 potentially that could be the payment — that could be the start of these initiatives. So the impact of the roll is going to be moderate in 2020 and other than that our — the usual — be the expansion that we have talked in the past. So, no big news on the capex, front.

Chad BeynonMacquarie — Analyst

Okay, thank you. And then switching to Italy, Alberto, you mentioned the VLT wagers were a little bit weaker in the third quarter. I think in the second quarter you really didn’t see a decline just in terms of player pay.

Player pay. So could you maybe talk about if some of these players are moving over to the AWPs? And then could you also just kind of high level what the — what the Italian impact has been year-to-date given the different changes in the gaming market? Thank you.

Marco SalaChief Executive Officer

Good morning, Chad. I take your question. As a matter of fact, the VLT wagers went up in the first and we plan it for them to be down in the second half as they were — they were in Q3. In reality, the players are still playing [Indecipherable] was up in September. But the wages that affected by a lower payout.As we were anticipating is revenue situation, we anticipated in the previous calls that saying that we would have faced more challenging situation second half of the year. Its not a matter particulars reach on AWPs but what — what I can add there is that — there is no change to our view on the full-year impact on new tax [Indecipherable] remains the 40 million we anticipated at the beginning of the year. And therefore, it is important that said that to elaborate a little bit more on it is to understand that the wager trends over the next few months in order to understand how the wager will be in 2020. That is what we have to do in the next weeks and months.

Chad BeynonMacquarie — Analyst

Okay, thank you very much. Nice quarter guys.

Alberto FornaroChief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Barry Jonas from SunTrust. Your line is open.

Barry JonasSunTrust Robinson Humphrey — Analyst

Hey guys, good morning. Wanted to ask a question on Italy given the potential AWP and the VLT tender coming, just, how do you think about hurdle rates given the risks in that market? And then, just related to that, assuming the tender proceeds, do you see a scenario where the industry could consolidate and would IGT potentially look to grow via M&A in that scenario? Thanks.

Marco SalaChief Executive Officer

Good morning, Barry. It’s Marco, I will take your question, and I’ll try to provide our point of view regarding the tender that is embedded in the proposed budget law. First of all, let me say that the timing, the timeline of the tender will be challenging

be challenging to achieve for the government. And let me tell you why I think so. The draft of budget law requires a uniform nationwide regulation for gaming machine distribution and the regions have some autonomy in these matters. As a matter of fact today, there are many different regional laws in place. The government has been working on this amortization [Phonetic] of these laws — the amortization of these laws, let me put in this way, for years without reaching an agreement. As a consequence of these, the sports betting tender has been delayed notwithstanding the licenses expired a couple of years ago. This is why I think that the proposed timeline of the tender will be very difficult to achieve.

Having said that, when it comes to what it is contained in the budget and all I can tell you that for VLTs, which account for most of our gaming machine profits, what it is in the proposal law is totally aligned with our expectation. For AWPs, the license fees are new. AWPs as you know are less important contributor to our profits and there is a wider range of productivity across our network as a result of that we will be the only machines that provides solid returns. In general, we expect the new fees will result in a fewer AWP units a market — in the market, because of some of the marginal machines will be eliminated — eliminated. Therefore, I agree with you if this will happen, there will be probably some reduction in the offering and possibly some consolidation. Having said that it’s quite premature to make any assessment because we do not know about what it will be the final decision of the government in terms of the budget law and we need to wait the next quarters of 2020 to understand the willingness of the government that issue a tender under the conditions that I tried to explain.

Barry JonasSunTrust Robinson Humphrey — Analyst

Great, that’s really helpful, Marco. Maybe just one in terms of what the tender is talking about in terms of new taxes. I think it’s very encouraging that you guys think you may be able to offset that. Just to be clear, is that mostly through cost efficiencies. Just curious, especially as we’re potentially starting to see some friction with the reduction in return to player

Return to player. And with that, as we think about the targets, the original target of free cash flow for next year, should we also think that may still be intact, the $450 million to $550 million or is there a potential similar to this year that may be slightly reduced? Thanks.

Marco SalaChief Executive Officer

Barry, I will try to give a very precise answer regarding the impact of the increased taxation for 2020. We expect that the gross EBITDA impact of the new proposed gaming machine taxes is around $30 million and we are working on a set of initiatives, some in the gaming machines, but some across the rest of the Italian portfolio to offset the impact of the gaming machines. So, we will pay attention on the mitigating action we will implement in the gaming machines, because we have to pay attention on the reduction of payout because it is impacting wagers. But we have a solid set of additional initiatives that I think we will disclose at the time of presenting the guidance for next year that will allow the Italian team to completely offset the $30 million headwind that we will have for next year. I will leave to Alberto to talk about our expectation in terms of our cash flow for next year.

Alberto FornaroChief Financial Officer

Okay. It’s a little bit difficult to obviously, because the guide — the full guidance will be March. But so far, we are not seeing anything that should call for a change for next year. Marco has just explained about the $30 million. We said we were going to recover the $40 million. The important thing is what has happened to the wagers on the VLT and we have said it, so far it’s down, but it’s according to expectation. So, they’re all — I don’t have element to change what we have said and certainly we will provide more details in March when we get there, having more data points and better information, no change for the time being.

Barry JonasSunTrust Robinson Humphrey — Analyst

Got it. Okay, thanks and nice quarter.

Marco SalaChief Executive Officer

Thank you, Barry.

Operator

Thank you. Our next question comes from Domenico Ghilotti from Equita. Your line is open.

Ghilotti DomenicoEquita SIM — Analyst

Good morning. First question is a follow-up on the comments on 2020 for Italy. I’m trying to understand if the $30 million headwind that you are mentioning is already including some payout mitigation and well, we have clearly the $40 million for this year. It was expected to be recovered, thanks to the lower payout

Thanks to the lower payouts, I’m trying to understand if this $30 million is the net impact that you want to offset further with the initiatives that you were talking about. So simplification [Phonetic] on that. Thanks. If you want, well, my second question is on Brazil. So, I’m trying to understand what’s — first of all, what are the — if you can guide us on the capex, for the rollout and hopefully also on the prospects that you see over the medium term?

Alberto FornaroChief Financial Officer

Okay. Domenico, I try to put together ’19 and ’20 when it comes to the impact of the budget law. When it comes to the ’19 budget, low EBITDA impact, this remains $40 million. We had factored in a reduction on VLT wagers in the second half. We may recover some of these in 2020. But how much we recover will depend on the VLT wager trends in the next few quarters as I said articulating my answer to Barry. When it comes the 2020 gross EBITDA impact of the proposed gaming machine taxes, we are saying the gross impact is $30 million and we are working on a set of initiatives, some in gaming machines and so they are implying some fine-tuning on the payout in order to recover part of it. But we are also working on some new initiatives on the rest of the Italian portfolio. The combination of the two set of actions will make us confident that we will offset the impact of the 2020 tax increase. Is that clear?

Ghilotti DomenicoEquita SIM — Analyst

Yes. Okay, perfect. Are you, just — just to be sure — last point, just to be sure on this topic, are you including the $30 million gross impact both the increase in taxation and the taxes on wins, so both?

Alberto FornaroChief Financial Officer

Yes.

Ghilotti DomenicoEquita SIM — Analyst

Okay.

Marco SalaChief Executive Officer

Regarding Brazil, I mean we — at this point in time apart from providing you a general, very positive attitude that we have on this opportunity in Brazil for us is a little bit too early to elaborate on more specifically on the kind of expectation we have on this business

this business, we expect to finalize the contract and at that time we will present our guidance for next year. I think we will be in the position to give you some better outlook. Now I ask Alberto to provide you the answer regarding the capex, for the Brazil tender.

Alberto FornaroChief Financial Officer

Domenico, so as you know, this is a 50%-50% joint venture with Scientific Games for 15 years. The total capex, at current exchange rates is around $200 million. So we will have the 50% of it and the — there is a first installment that this due and if everything goes according to expectation, it should be in 2020 and it’s around the current exchange rate $24 million [Phonetic]. So let me for a second be clear, the $200 million is for the upfront fee that has been divided into eight installments, the first one is $24 million and we expect to pay it in 2020. The JV receives around 18% of the wager for all of our services that we are going to provide, and obviously, you can imagine that we are targeting interesting results given also the jurisdiction that is Brazil, that has a certain specific type of risk that needs to be taken into consideration. Having said that, this is the first step. There are other opportunities in Brazil and so the fact that we are having this presence there in case there are developments particularly on prospecting and gaming, we will have already presence there that we can leverage for further business opportunity.

Ghilotti DomenicoEquita SIM — Analyst

And the capex, figure that you provide is just on the upfront, is not including so — the rollout?

Alberto FornaroChief Financial Officer

It is just on the upfront and it will depend on when — that impact on 2020 will depend on, number one, when we start, and second, how quickly we will be able to deploy. So we will be more specific in the next call where we will have all the elements, but again is going to be a gradual implementation.

Ghilotti DomenicoEquita SIM — Analyst

Okay, thank you.

Operator

Thank you. [Operator Instructions] And our next question comes from David Katz from Jefferies. Your line is open.

David KatzJefferies — Analyst

Hi, good morning everyone. I wanted to just go back and be a little clearer about one of Marco’s answers around the gaming

around the gaming machine business in Italy. It sounds as though we should not expect that there would be an outcome and therefore any capex, allocated in 2020 toward deploying a meaningful number of gaming machines. Is that a — is that a correct assessment?

Alberto FornaroChief Financial Officer

Yes.

David KatzJefferies — Analyst

Okay. And second, if we look at the domestic premium installed base, it’s one of the areas we’ve been watching carefully obviously for an inflection, which I think we’ve talked about. What is the latest information you’re getting about your game placements particularly in the premium participation games of which we saw many out at G2E and help us paint a picture over the next several quarters on what you can reasonably expect there including should it accelerate, there could be some capex, associated with that too?

Marco SalaChief Executive Officer

Good morning. Regarding the installed base as you appreciate also this quarter our installed base remained stable confirming the trend of the last two years. As I anticipated in the last calls, we feel that installed base remains under pressure from competition and from customers are looking to reduce their spaces, as also from the consolidation of operators, but we are very positive of what we are having in the floor in this period of time and the things that are coming. Because elaborating as you have asked, Wheel of Fortune franchises have benefited from, I think the highest performing and most diversified lineup we ever had. We are covering all the segments, we are improving also our yield, and the machines are performing very well. So the most important franchise we have is in a great shape.

We are also rolling out a suite of games under the Price is Right franchise and that was something we’ve been working on quite hardly and the early indications are good. I think we have to improve our multi-link progressive offer, we have significantly improved it. We have been presenting nine new titles at G2E. But in this regard, its clear that we have to see how we are performing

How we are performing on it. We have also launched a new cabinet the PeakSlant with two proven franchises, Scarab link and Wheel of Fortune Mystery Link. So I mean considering that also in the same period of time, our yield is 2% — the premium yield is 2% up. I think we are improving in that area, notwithstanding all the challenges, I do not hide.

David KatzJefferies — Analyst

Got it. Thank you very much.

Marco SalaChief Executive Officer

Thank you, David.

Operator

Thank you. And our next question comes from John DeCree from Union Gaming. Your line is open.

John DeCreeUnion Gaming — Analyst

Good morning, everyone. Thank you for taking my questions. In your prepared remarks Marco, you talked about generating significant cash flow year-to-date on track for your target you’ve mentioned that you’ve just issued one of your lowest coupon bonds ever, as you look at 2020, it’s a conversation that we have often, but wanted to get the latest thinking if there’s been any discussions about use of cash in 2020 now that you’re hitting that inflection point?

Alberto FornaroChief Financial Officer

John, this is Alberto. There is no change so far regarding utilization of cash. I think we are basically confirming the trend in debt reduction and generation of cash flow and so on and so far there is no change for 2020.

John DeCreeUnion Gaming — Analyst

Okay. I’ll ask another question on the game ops business, I guess just to follow on to David’s question from before, the consolidation in the casino industry as companies look to harvest synergies, so the slot floor [Phonetic] is a place they target. I was wondering if you could talk about what you’ve seen recently and if you have any expectations, is that a headwind, is it something that you’ve always been dealing with, and just as part of the business, if you could provide a little bit of color on your outlook, given the consolidation in the US casino space?

Marco SalaChief Executive Officer

As I was saying, John, in the previous answer, I mean this is one of the challenge that we have in front of us. I mean talking for example about Eldorado and Caesar consolidation. It’s clear that it will have an impact on our asset and there is no doubt on it, but having said that, we have the best quality of our offering or but I will say that our offering is the best in the last few years and we feel that what we have on our side and

side and the lineup of the products that we will bring to market will offset, will try to offset some of the headwinds that you have described that are reality, I mean, there is nothing to be surprise about that. We have been working and navigating in a challenging and competitive environment for the last four years. We are start — we start seeing a stabilization of our installed base and improvement of our product sales. So we feel better equipped than before in taking these challenges.

John DeCreeUnion Gaming — Analyst

Marco, there’s a lot of focus on your corporate casino customer but equally large tribal casino customer. I was wondering if you could, as a follow-up to that, could talk about the trends there, are they the same, better or worse than what you see in terms of demands relative to the casino customer — the corporate casino customer? And that’s all for me. Thank you.

Marco SalaChief Executive Officer

No, I do not see a major difference. They are both working quite efficiently from their perspective and they are challenging us to bring good products that are performing in the floor, increasing the satisfaction of their players. In other words, I do not see a major difference in terms of the way they are trying to improve the satisfaction of their customers.

John DeCreeUnion Gaming — Analyst

Thank you.

Marco SalaChief Executive Officer

Thank you.

Operator

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

Joe StauffSusquehanna — Analyst

Good morning. Thanks for taking the question. Just a couple, North American Gaming continues to ramp nicely. I was wondering if you can help us with respect to the reported EBIT in the quarter. Are there any — can you give us the D&A, and if not, is the D&A, again, just trying to reconcile to the EBITDA production, is it comparable versus the previous period? In last couple of quarters, it hasn’t been and so I was just trying to understand that?

Alberto FornaroChief Financial Officer

This is Alberto. Regarding that, but what you see in the overall ability[Phonetic] the increase is mostly driven by the product sales and so therefore there shouldn’t be any significant change compared to — there is no change compared to what it was in the past. We will provide — we will provide as usual all this information

this information in a structural way on a yearly basis, but specifically on this quarter, there is nothing significant to report.

Joe StauffSusquehanna — Analyst

Okay, fair enough. Thank you. On the Italian business you certainly talked about the VLT wagers and how they had softened, at least relative to your expectations, in line with your expectations. I would imagine and maybe you can kind of help me understand, but I would imagine it’s most likely a result of just kind of lower payouts and the overall sort of adjustment to that. This certainly isn’t the first time that payouts have been lowered, how long of a period does that take at least based on historical analogs before the customer kind of stabilizes and sort of accepts it, if my — if my premise is accurate?

Marco SalaChief Executive Officer

No, Joe, it is accurate and in the previous year, we didn’t see a declining wagers related to the decline in the payout. One of the reason for that has been that all the operators who are trying to innovate the products in a way that was making less visible, the reduction of payout of the machines after a few waves of payout reduction and now players are seeing it. Even though, I mean, as I said before, if you look at their spending, they are increasing their spending, the point is the wagers are declining because the payout is declining. It will take us some time to stabilize it and we will for true monitor very closely. We also expect that that some new products can bring the kind of innovation in the market that can try to offset the product, the impact of the wagers of payout and I’m pretty positive that over a period of time the wagers will stabilize again, but it’s clear that it is always challenging in our business when you have to keep on reducing the payout.

Joe StauffSusquehanna — Analyst

Yes. Okay, makes sense. And then just one last question, largely on the International segment, there certainly was a negative surprise out of Latin America in the fourth quarter of last year, I know that business as you had previously described, it shows up kind of later in the quarter

kind of later in the quarter. And I was wondering if there would be any incremental impact to be expected this quarter. Certainly a lot of countries in South America are struggling to say the least and I was wondering if that has any regional impact again on your expectation for that portion of your international business that’s affected?

Alberto FornaroChief Financial Officer

Joe, this is Alberto. Well, what happened last year is relatively simple because it was mostly a timing effect. So at design [Phonetic] we reported in the fourth quarter, certain sales moved to the next year. And actually, so far, the unit sales in Latin America have been quite good. So, now again, these — this is — these are markets that have a certain volatility. So something can happen, but we are not aware at the moment anything specifically that could impact our fun. While last year there were in a couple of countries some action taken, particularly in terms of gaming machines regulation and taxes that put the operator in an uncertain — in a state of uncertainty there and meant a delay in the purchase. So far there is nothing like that in the horizon.

Joe StauffSusquehanna — Analyst

Okay, thank you very much.

Operator

Thank you. And we will take our last question from Domenico Ghilotti from Equita. Your line is open.

Ghilotti DomenicoEquita SIM — Analyst

Last two questions. First relating — related to the Italian situation, VLTs, could you provide us what was the level of payout in VLTs in Q3 just to understand how large was, if any [Phonetic] the reduction in payout? And the second question is, well, on the consolidation, you have been talking about consolidation among the clients, what about the consolidation among the suppliers, so are you — are you looking, do you see opportunity for some transformational deals, some larger deals, strategic deals among suppliers, so are you involved as a buyer, consolidator?

Alberto FornaroChief Financial Officer

Domenico, this is Alberto. You understand [Technical Issues] we cannot payout. This is one of the area in which we compete, and so therefore, we will not elaborate on that. Regarding your question on consolidation, obviously, there have been, in the recent past there have been some transaction and so on our side as Marco said, we’re trying to understand — understand the regulatory environment, what is going to be eventually for the [Indecipherable] approach, we think there’re going to be some structural changes but

changes, but this is where our analysis stops and Marco said clearly that, that’s where we are focused.

Ghilotti DomenicoEquita SIM — Analyst

Okay, thank you.

Marco SalaChief Executive Officer

Thank you.

Operator

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

Marco SalaChief Executive Officer

Thank you for joining us today and for your interest in IGT. I’d just like to highlight that the record free cash flow generation we achieved in the first nine months is a testament to the diversity of the products we offer and our global reach. We are committed to driving growth and value creation for our shareholders and customers alike by consistently delivering content and technologies that offer unparalleled gaming entertainment experience. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Jim HurleySenior Vice President of Investor Relations

Marco SalaChief Executive Officer

Alberto FornaroChief Financial Officer

Chad BeynonMacquarie — Analyst

Barry JonasSunTrust Robinson Humphrey — Analyst

Ghilotti DomenicoEquita SIM — Analyst

David KatzJefferies — Analyst

John DeCreeUnion Gaming — Analyst

Joe StauffSusquehanna — Analyst

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