International Game Technology PLC (IGT) 2019 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the IGT 2019 Fourth Quarter and Full Year Results Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. I would now like to turn the call over to Jim Hurley, Senior Vice President of Investor Relations. Sir, you may begin.

Thank you, and thank you, everyone, for joining us on IGT's fourth quarter and full year 2019 conference call hosted by Marco Sala, our Chief Executive Officer; and Tim Rishton, Interim Chief Financial Officer. After some introductory remarks, we'll open the call up 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 Sala.

Thank you, Jim. Good day, everyone. We had a strong finish to 2019. Adjusted EBITDA of $1.71 billion was in the upper half of our outlook. We had a solid fourth quarter, building on our momentum in the first 9 months of the year. Cash flow generation was also robust. $1.1 billion in cash from operation translated into approximately $650 million of free cash flow and $500 million of adjusted free cash flow. This was also at the top end of our expectation and confirms the inflection we flagged at our Investor Day 18 months ago.

The full year 2019 EBITDA results were achieved despite over $130 million in headwinds compared to 2018. This included FX, higher gaming Italia -- Italy gaming machine taxes, the conclusion of the Illinois lottery contract and strong North American Multistate Jackpot activity in 2018. Net of these items, our profits were up nicely, led by stronger results for our North America Gaming and Italy segment. Globally, lottery same-store revenues and wager also grew in the year.

We are particularly pleased with the over 20% growth in gaming product sales in 2019 to a record level. It was driven by a 29% increase in global unit shipments, including a 35% increase in replacement unit shipments. In North America, replacement unit shipments rose 13%, the third consecutive year of growth, fueled by such titles as Fortune Coin, Griffin's Throne and Scarab. We achieved the highest average selling price in 12 years based on the quality of our games, coupled with the broad acceptance of our Crystal Series cabinets. We expect these positive trends to continue in 2020.

Hexbreaker 3 and Lucky Buddha, 2 of the most highly anticipated titles at the G2E, were among the top-selling games in the fourth quarter and are maintaining good momentum into this year. International replacement unit shipments were up 63% in 2019. In addition to large Sweden VLT shipments, growth was fueled by replacement sales to commercial gaming customers, which were up more than 20% on broad-based geographic strength. As in North America, the Crystal Series cabinets and games like Guardian of the Rose and DragonSphere drove much of the growth. Our new Cobalt cabinet also made good early inroads in Eastern Europe and Latin America during the fourth quarter.

In North America, year-end installed base was essentially in line with prior year when adjusted for Oklahoma, where we have adopted a new market strategy. Yields were higher due to the strong performance of new games, especially Wheel of Fortune Gold Spin and the MEGATOWER and Cash Link titles. In the fourth quarter, we rolled out the Price is Right Showcase Showdown, an anchor of the broader Price is Right assortment, which is performing very well.

The international installed base was more or less unchanged year-on-year as conversion sales at casino customers were offset by placement of Greece VLTs. We are excited about the launches of Wheel of Fortune Mystery Link and Scarab Link on the new pink cabinets later this year. This is part of a global strategy focused on MultiLink progressives where we are leveraging popular existing brands with proven game mechanics.

In the fourth quarter, we launched a few new MultiLink progressive, including 2 Candy Bars titles. We are confident we have the content and the funnel to further penetrate this growing segment of the market.

Our strong game performance was recently recognized by International Gaming Awards, where IGT won Slot Provider of the Year; and at the British Casino Awards, where Fortune Coin was selected as Best Slot Game.

We had a great year in the system business with 8 Advantage installations in North America. This includes the central system for Wynn Encore Boston Harbor, the highest profile new casino opening of 2019. Even more impressive, we replaced an incumbent provider in 6 of the other 7 instances.

Italy gaming machine performance was resilient in 2019 with VLT wagers down 3% and AWP wagers down less than 1%. Wager trend became more challenging in the back half of the year as the market reduced the return to player in order to help mitigate the impact of new taxes. Those trends intensified in the current year-to-date period with introduction of age verification readers, in addition to higher taxes on player winnings at the beginning of the year.

Before switching to our lottery business, let me say a word on Italy in general. At constant currency, total Italy operating income in 2019 was 2% above the prior year. These are strong results considering the profit impact of higher gaming machine taxes during the year. The drop in gaming machines was more than offset by growth in lotteries, plus betting and interactive. This is a testament to the resilience of the overall market, the scope of our offer and the strength of our Italian organization who are driving results through innovation and expense management.

Turning to Lottery. Same-store revenue outside Italy was up once again in 2019, overcoming very challenging North America Multistate Jackpot comparisons. Same-store revenues for Instant and Draw games rose 4.5% outside Italy, marking the sixth consecutive year of at least mid-single-digit growth. During 2019, Florida, Michigan, Texas and the United Kingdom, all among the largest lotteries we serve, achieved some of the strongest growth rates.

Total Italy lottery wagers have increased 1%, led by 10eLotto and revitalization of core wagers which experienced their first period of growth in over 15 years, thanks to the launch of the new Simbolotto game. Scratch & Win wagers were flat with the prior year, which had benefited from the relaunch of popular Multiplier franchise in 2018.

In the fall, we deployed our new Cash Pop game available for both retail and digital distribution. Today, versions of the game are active in New Jersey, Georgia and Trinidad and Tobago. Several additional jurisdictions are planned for this year. Cash Pop differentiates itself from other broad-based game by letting players select a single number that can be worth up to 250x their wagers. Like Keno, there are multiple draws per day.

In November, I spoke our channel expansion is an important driver of future lottery growth, and though we were leveraging our suite of game-touch cabinets to improve convenience and reach new players. During the fourth quarter, the Texas Lottery began piloting an exciting new distribution strategy for lottery games. The Texas Lottery became the first in the nation to enable the purchase of preprinted Powerball and Mega Million tickets in the checkout lanes of big-box retailers without the need for a dedicated lottery terminal. By integrating national lottery products with a retailer's point-of-sale system in lane purchases represents a cost-effective way of increasing revenue for our customers while maximizing convenience for players. Other big-box retailers are expected to adopt in line over the next few months.

Simbolotto, Cash Pop and in-lane purchasing are good examples of how IGT is leading the industry forward by creating the new retail experiences, enhancing purchase convenience and identifying teams and game-play mechanics that engage existing players while attracting newcomers.

I also want to acknowledge the successful launch of the Mississippi Lottery less than 90 days after winning both instant tickets and online lottery service contracts for the brand-new state lottery. It was a big success and a demonstration of our team's expert execution. Of course, we are looking forward to the launch of the new instant ticket lottery in Brazil, which is planned for the second half of the year.

It was a year of great progress for our North America Sports Betting operations. Customer in 6 new states went live with IGT's Sport Betting platform, bringing our presence to 10 jurisdictions. In a short period of time, we have established ourselves as the leading B2B sports betting platform for land-based and online operators. We are currently powering retail sports book in over 2 dozen customer location nationwide as well as online and mobile sports betting in 7 jurisdictions. We look forward to building on the strong partnership we have in place today and adding new relationships as more states regulate sports betting.

Our 2019 results confirm the vitality of IGT's main businesses. They also demonstrate the advantage of having such a diverse mix of business across products and geographies.

In 2020, we expect operating profits to grow at mid-single-digit rate, net of FX and 2019's goodwill impairment. Our outlook assumes we will full offset the impact on new Italy gaming machine taxes and lower VLT wagers as a result of the new age verification procedures and higher taxes on player wins.

I should note that our outlook does not factor in any impact from coronavirus, which is a very dynamic situation right now. We are monitoring its evolution closely, in Italy in particular, and our priority has been to ensure the well-being of our people and customers. This week -- the weeks ahead will be crucial in assessing its impact on our businesses.

Cash flow generation should remain strong in 2020, supporting the framework of -- for adjusted free cash flow that we provided at our 2018 Investor Day. I'm confident we are well positioned to build on the leading positions we enjoy across the global regulated gaming landscape. And now I will turn the call over to Tim.

Thank you, Marco, and hello to everyone. On Slide 10, we've summarized the full year results. Revenue was down 1% as reported but increased 2% at constant currency. We had significant growth in Gaming Product Sales, Sports Betting and Italy commercial services. This more than offset lower global gaming and lottery service revenue, which was impacted by high gaming machine taxes in Italy, the conclusion of the Illinois lottery contract and exceptional North America Multistate Jackpot activity in the prior year.

Full year operating income decreased 2% as reported while increasing 3% at constant currency, primarily due to lower noncash goodwill impairment. The impairment charge of $99 million recorded in the fourth quarter reflects an adjustment to the carrying amount of goodwill in our international segment. Adjusted EBITDA of $1.71 billion for the full year was down 1% as reported. At constant currency, it rose 2%, reaching the upper half of our outlook range, driven by profit growth in the North America Gaming & Interactive and Italy segments.

Moving to Slide 11, where we summarize our fourth quarter financial results. Consolidated revenue was down 1% as reported and in line at constant currency. Strong growth in global Gaming Product Sales and North America Lottery product sales as well as contributions from Sports Betting in Italy and North America offset lower service revenues. As in the full year results, service revenues in the fourth quarter also reflect the higher gaming machine taxes in Italy, the Illinois contract conclusion and very strong Multistate Jackpot activity in the prior year period.

Operating income was positively impacted by product sales mix, reduced goodwill impairment and lower bad debt expense. Adjusted EBITDA of $436 million rose 5% as reported and 6% at a constant currency. Profits were up year-over-year in every operating segment, except for North America Lottery, which had a tough comparison to the significant jackpot activity in the prior year.

Now let's turn to our operating segments, starting with North America Gaming & Interactive on Slide 12. Product sales rose 25%. The increase was evenly split between machine unit shipments and sales of software and systems. The significant growth in new and expansion units was largely driven by the shipment of over 1,000 units to Emerald Queen Casino in Washington state. Replacement units were down about 500 units on lower Canada VLTs. Average selling prices were up, marking the sixth consecutive quarter of year-over-year increases.

Nonterminal product sales rose on positive contributions from a software sale and the installation of our Advantage system at Emerald Queen. Service revenue primarily reflects the impact of several multiyear poker site licenses executed in prior periods. Terminal service revenue was only slightly below the prior year. Higher yields from improved game performance mostly offset the lower installed base, which primarily reflects the Oklahoma transaction executed earlier in the year. The sequential decline in the installed base was a function of removals of unsupported games and hardware, additional Oklahoma removals and the impact of corporate customer actions.

I'd also like to point out that we do anticipate a sequential reduction in the North American installed base in the first half of 2020 as corporate customer actions are typically concentrated early in the year.

We are also working with certain customers to reduce the volatility in the installed base. While this negatively affects the installed base in the near term, it provides more stability and better economics for us over the long term. We expect the installed base to stabilize in the following quarters. Operating income rose on the strength of our terminal, software and system sales.

On Slide 13, we have the results of North America Lottery segment. Excluding jackpot activity, revenues and profits continued to grow despite the conclusion of the Illinois contract. As you remember, in the fourth quarter of 2018, both service and LMA revenue benefited from an exceptional $1.5 billion Mega Millions jackpot, the second highest Multistate Jackpot ever as well as a $688 million Powerball jackpot. This, coupled with lower jackpot activity in the current year, accounts for the decline in both service and LMA revenue.

Same-store revenue from instant tickets and draw games was solid, up nearly 4% in the quarter, thanks to broad-based geographic strength. Product sales were driven by strong demand for our Game Touch self-service machines and increased instant ticket printing activity. Operating income reflects the impact of lower jackpot activity.

Now let's turn to the International segment on Slide 14. Replacement unit shipments rose 23%, primarily driven by approximately 1,600 Sweden VLTs and strong demand for the Crystal Series of cabinets, which more than offset the large 1,500-unit South Africa conversion sale in December of 2018. Overall, lottery same-store revenue growth of 6.1% was largely driven by strength across Europe. Gaming service reflects conversions in prior periods and lower interactive revenue. Operating income rose sharply on gaming machine mix and lower bad debt expense.

Italy is on Slide 15. Total revenue declined 3% as reported but was in line at constant currency as increased Sports Betting and commercial services revenue offset the impact of higher gaming machine taxes.

Overall lottery wagers were slightly down. For lotto games, the wager impact of higher player taxes on 10eLotto winnings was mostly offset by growth in core Late wagers due to innovative products. Scratch & Win also matched strong wagers in prior year, thanks to performance of new games.

Sports Betting rose on a 9.1% increase in wagers and commercial services continues to grow on the Postpay offering we introduced earlier this year. Lower gaming machine wagers reflect reductions in return to player implemented to mitigate higher taxes. Operating income includes higher contributions from Sports Betting, which nearly offset the impact of increased gaming machine taxes.

Our debt and leverage profile is included on Slide 16. During the year, we reduced net debt by approximately $380 million as reported and over $300 million at constant currency, with leverage improving to 4.31x from 4.47x at the end of the prior year. During 2019, we refinanced over $1.3 billion of debt, extending maturities, lowering interest costs and significantly derisking our exposure to capital markets.

Cash flow for the full year is shown on Slide 17. We generated cash from operations of $1.1 billion and CapEx of $442 million was better than the expected range of $450 million to $500 million. We delivered $650 million in free cash flow and approximately $500 million in adjusted free cash flow, which includes the cash proceeds from the Oklahoma transaction we did midyear. As a reminder, adjusted free cash flow is free cash flow after minority distributions, and it does not include growth CapEx of approximately $50 million.

Dividends and return of capital payments to minorities totaled $234 million and included an accelerated return of capital to Lotto JV partners of approximately $20 million. Nonrestricted cash totaled $663 million at the end of the year, a portion of which will be used to retire a $435 million, 4.75% eurobonds that mature later this week.

Our outlook for 2020 is included here on Slide 18. I'd like to first point out that the outlook we are providing today does not factor any potential coronavirus impact. Historically, we have provided our outlook for adjusted EBITDA. We are now providing our outlook for operating income and depreciation and amortization. We have been discussing this internally for several months and feel this change better reflects market best practices that are grounded in U.S. GAAP measures and SEC guidance.

For the full year, we currently expect operating income of $740 million to $790 million and depreciation and amortization of $870 million to $880 million. The underlying euro-USD rate assumption is 1.10. We will continue to report and comment on adjusted EBITDA results, and you have our view on the 2 most important parts with OI and D&A.

Our operating income outlook assumes mid-single-digit constant currency growth, net of 2019's goodwill impairment. We are more than overcoming the contribution from the Oklahoma transaction in 2019 and significant lower LMA incentives in the first half of 2020, which is based on unusually low jackpot activity over the last several months.

Profits are expected to be below the prior year in the first half with growth coming in the second half. There are 3 main reasons: first, the expected timing of global Gaming Product Sales, including extremely limited North America new and expansion activity in the first half; second, the impact of recent weakness of VLT wagers in Italy, which we can more effectively mitigate later in the year; and third, lower LMA incentives in the first half. Capital expenditures in 2020 are expected to be between $400 million and $500 million, of which $350 million to $450 million is maintenance CapEx.

Our overall 2019 results highlight the strength of a diverse business portfolio. Substantial contributions from global Gaming Product Sales and Sports Betting more than overcame the significant headwinds faced by the North America Lottery and Italy gaming businesses. We delivered on all of our financial objectives, reduced our debt and returned cash to shareholders. Now we'd like to open the call for your questions. Operator?

(Operator Instructions) We will now take our first question from Carlo Santarelli with Deutsche Bank.

For starters, would you guys mind kind of discussing, as you think about 2020, obviously, there's some puts and takes to thinking about kind of the cash flow generation and some things that will be a little bit harder for you to obviously quantify with the situation in flux in Italy right now as it is. But as you think about your uses of capital going through the year, acknowledging the $400 million to $500 million of CapEx and the expected free cash flow generation, what do you kind of see as the priorities for discretionary free cash flow use?

Carlo, look, first of all, the good news is that we are focused on cash flow and we are positive on the results because we still see in 2020 our cash flow generation in line with our expectation and in the framework we presented at our 2018 Investor Day. And in terms of capital allocation, our priorities have not changed. And there are -- that we have to fund the CapEx necessary to maintain our existing portfolio of business, to pay down the debt, to selectively invest in new growth initiatives, where there are available and remunerate our shareholder. And so we are currently allocating capital to all 4 of these areas. But if we have to pick up a priority, it is to reduce the debt.

Understood. And then Marco, you had talked a little bit about kind of the Italy outlook for this year and acknowledging that kind of the first half will be challenging, given some of the remediation efforts won't kick in until the second half. You also mentioned kind of in the outlook for 2020 that your expectation was to offset the taxes and the lower volumes. In your view, given everything that's going on and maybe inclusive of the COVID-19 situation, do you believe that from an Italy perspective, you guys will be able to hold adjusted EBITDA relatively firm in 2020?

This is a very complex question. I have to divide it up into 2 parts. One part that regards the outlook we have in front of us without coronavirus, and then I can offer to everybody at this point in time our view about coronavirus in Italy. Let me start trying to summarize how we see the outlook without factoring coronavirus. As you might remember, on our Q3 earning call, we estimated that the gross impact of the budget law proposal at the time to be approximately $30 million on 2020 EBITDA. In reality, the final budget law ended up being a little better than expected as the regulator further reduced the minimum payout threshold for both AWPs and VLTs.

On the other hand, as I said during my remarks, the implementation of age verification and higher taxes on players winning for VLTs is having a greater-than-expected impact on wagers. Now the net impact of the budget law and VLT wagers is now about $35 million at the EBITDA level. And we still believe we can offset this in 2020 through a combination of cost management opportunity, growth in other part of Italian portfolio and with some other opportunities we believe we can exploit. So all in all, when I look at this situation regarding the business as usual, we think we are still in the position to offset the impact of both, budget law as well as the more negative than expected trend, mainly on VLTs. Is that answering to this part of the question?

Yes. No, that's more than sufficient for that part. I guess, maybe -- and acknowledging this is very difficult and it's still very early days, could you comment at all about maybe what you're seeing in terms of the more recent kind of last few weeks here, as obviously, the headlines have gotten a little bit incrementally, I would say, more worrisome? How that's impacted some of your volumes, et cetera?

Yes, I can try. I can try to -- I mean it's very unpredictable, as all the CEOs are saying to everybody. And as we are saying within our management team, we are well prepared to control what we can control. And that is, first of all, about people. Let me spend a couple of minutes on people because it's important that our priority being our people. I want to say that we have taken immediate measures, including restricting travels, encouraging telecommuting, creating centralized people resource center and preparing contingency plan, where appropriate. And we continue to monitor the situation in Italy and across all regions because we feel that the health and well-being of our people and the community we operate in is our utmost concern.

Now let me focus on Italy first. I have to provide you a little bit of background and give you a little bit of framework. Because regarding Italy, we should divide the country into 3 areas: first, a dozen of small towns that are considered the red zone where significant restrictions are in place; second, 3 large regions in the north where a number of restriction had been in place but as of yesterday, were harmonized and generally less restrictive. Lombardy, that is the bigger region around Milan, had implemented the most restrictive measures, including limiting hours of operation for some point of sales with our product. But operating hours are back to normal as of yesterday; and third, we have the rest of Italy where no particular restriction has been imposed. So now we have to judge the single week of -- we have experienced in -- of coronavirus in Italy, considering the initiative I've just described. And it's clearly very preliminary, so not a reliable sample set to use, to draw any definitive conclusion. However, I can elaborate qualitatively on what we are seeing.

The first comment is outside the northern regions, we have seen very little change in player behavior. Second point is, in general, lotteries has been modestly impacted, mostly in Lombardy and largely due to the severe restriction that has been now moderated. On the other hand, gaming machines were affected more because of the restriction of operating hours for point of sales and other public space. But again, mostly in Lombardy. You have to keep in mind that the Lombardy, close the shops at 6:00 p.m., and most part of the player, especially for VLTs are playing after 10:00 p.m. -- sorry, 6:00 p.m.

In the rest of Italy, talking about gaming machines, the impact has not been so significant. So that is what I can offer after 1 week. The situation is fluid. Certain restrictions are being eased, but I mean, this is what we are comfortable providing at this time. It's obviously an issue we will continue to monitor very closely and this is the situation about Italy.

Our next question comes from Barry Jonas with SunTrust.

Just on the guidance, is it fair to say if we take operating income, add back D&A and then make some assumptions for stock-based comp, that will get us pretty close to where your expectations for EBITDA are? Or are there any other add-backs we should consider?

Barry, the 2020 EBITDA is expected to be relatively aligned with 2019, net of FX. And on one side, on the positive, we expect to fully offset the impact of the Italian budget law and weaker VLT wagers before any coronavirus impact. I keep on repeating because it is an important message.

On the other hand, we have to take into account the 2019 Oklahoma transaction and the lower North American Multistate Jackpot activity in the second half of calendar 2019 and the early 2020 that inhibits our ability to earn incentive on LMA contracts in the first half of calendar 2020. Net of those items, the EBITDA is expected to be up mid-single digits, which is aligned with our operating income outlook.

That's great. And then I appreciate some of the remarks real-time about Italy. Just curious, any way to quantify how big the northern region is that you're talking about? And then as you think about any potential hits to retail, could you see some substitution to interactive wagering?

For us, the northern part of the country represent, for VLTs, for gaming machines in general, 50% because we are proportionately more concentrated in the northern part of Italy. And for lottery, they represent less than 40%. Regarding the online, we didn't see anything spectacular on the online that is guiding us, saying that is going to offset what is happening at the retail level.

Got it. And then maybe just, in the guidance you've given, maybe talk about the difference between the high end and the low end, some of the assumptions built up? And if you could do that for CapEx as well, that would be helpful.

No. I think regarding the CapEx is -- we have a very disciplined approach here, and therefore, we provided the guidance that is already factoring our attention on that part of the business. In general, if I look at the -- what is really influencing the situation of our 2020 is jackpot. I kept on mentioning it, but we are experiencing something we didn't experience in the previous year. The jackpot is constantly hit at the very low level and this is affecting, quite significantly, our LMAs part of the business. As always, we have to take into account that part of our turnover relies on product sales that by nature, are always rather unpredictable. And having said that, the situation in Italy is a situation where we have to deal day-by-day, without considering coronavirus, to a landscape that is more challenging than before. Having said that, in the previous year, we were always able to fix it.

Our next question comes from Domenico Ghilotti with Equita.

The first question is a follow-up on the Italian outlook, excluding the COVID-19, so the underlying trend that is embedded in the guidance. I was wondering if you had seen or if you are seeing outside of the northern region a recovery compared to the minus 30% in VLT wagers that have been reported due to the age verification. So do you see any sign of improvement in that trend? And second, I saw also that 10eLotto was struggling a little bit in Q4 in terms of wagers, so I'm trying to understand if, say, the game has reached maturity.

Second question is on the COVID-19 implications. I'm trying to figure out if it is, as I say, it is correct to say that probably lotteries are the less affected in any case. And then probably on the other side, the VLTs can be the most affected part of the business due to the distribution network.

Last question on the free cash flow generation. Can you help us also in guiding on the cash taxes expected for this year so we can bridge the free cash flow for the year?

And very last -- sorry, it was not the last. Just to check because...

Domenico, I've finished the page. No, I'm sorry.

No. Fourth question. For the current situation, it's still limited. So the -- no, just the verification because D&A, if I'm not wrong, are declining year-on-year, so in your guidance, compared to '19, '18 -- is there any specific reason for the lower D&A in the guidance?

Okay. I keep the 2 questions regarding the performances, and I ask Tim to provide color on the other 2 questions.

Regarding VLTs, we do not see, for the time being, a recovery because it's also difficult at this point in time to identify in the last week what is related to the coronavirus or what is related to the performance of VLTs. But having said that, in the first 8 weeks, we have seen a quite stable performance.

Regarding 10eLotto, was the comparison with the previous year related to the increase in the taxation of winnings but the underlying lottery business is positive. What we are seeing at the beginning of the year, thanks to the innovation, thanks to the launch of the new products are giving us comfort that we are not facing the maturity of the lottery business.

Okay. I'll take the other 2 questions on free cash flow and cash taxes.

So we believe cash taxes will be comparable to the prior year with a moderate increase. And then D&A, I think was the second question. We believe it to be consistent with the prior year, except in purchase accounting, we will have less D&A.

Okay, clear. Any comment on my -- on the COVID-19 impact or the higher impact on that?

Sorry, sorry, sorry. I missed the virus. No, no, I can elaborate on it for a second. I mean, yes, I can reiterate the point, lottery is not showing a big impact on it and VLTs more. And you have to expect that if you plan to stay in point-of-sales for some time and there is the coronavirus, probably you might think, if you want to spend the same time you are used to spend on this is, in addition to the fact that there were some restriction preventing people from entering the point-of-sale because they were simply closed. So I think the combination of these 2 things can explain why, for the time being, in VLTs, we are seeing an impact. And AWPs as well, an impact that is bigger of what we have seen on the lottery part of the business.

Our next question comes from Chad Beynon with Macquarie.

This is Jordan Bender on for Chad. How do you think the operator mergers have affected the installed base for the industry? And how should we think about this impact in North America during 2020.

Chad -- Jordan, sorry. I -- apart from the Eldorado and Caesar, we aren't really seeing significant consolidation. And commenting on the Eldorado, Caesar's, I mean, apart from the fact that they are valued customers, but it's clearly a part of the transaction synergies that they are announcing and coming from reducing this machine and see the properties. And as a matter of fact, that we are experiencing it. So it's something that we know. We have always knowledge there. And we feel that we are better positioned than ever to compete for our fair share of floor because we have a particularly strong lineup of products in this period of time. But as a matter of fact, it's clear that consolidation represent a challenge.

Awesome. And then back at your Investor Day about 1.5 years ago, you talked about lottery being a low to mid-single-digit grower with new Keno states potentially being incremental. Has anything changed in terms of how you see this business outlook?

For lottery, you mean? No, no, we have -- I mean, lottery, we are very positive. I mean, as I said in my remarks now, the number of years in a row are significant and I do not see anything that should prevent us to be positive looking into the future. I mean, again, the point is Keno, but all the other innovations we have discussed about. I mean, we keep on introducing innovation that allow us to imagine a moderate growth in Italy but also innovations that are giving us the possibility to continue to grow at mid-single digit in the U.S.

And I mentioned games, I mentioned distribution innovation, and we have a lineup of products, since we have a management team and marketing department that keeps on thinking about innovative ideas to be brought to our customers to keep on with the growth that we are enjoying.

Our next question comes from David Katz with Jefferies.

If we could just double back on one of the topics I know is important, and you've touched on some. But if we were to try and hypothetically walk down from what we would estimate to be an EBITDA level and the CapEx guidance that you've given, and I know you touched on cash taxes, et cetera, but could you help us sort of walk down to available free cash flow level and talk about what may or may not occur? Or what could get in the way of some of that free cash flow being either available to accumulate or return based on whatever decisions you might make down the road? But what would that number look like?

Yes. Maybe I ask Jim to answer this question because I'm not sure that I completely understood it. So I'm sorry for that.

David, I think that really, it's best to stay grounded in the framework that we provided at the Investor Day, which is a framework that is still valid for this year. So I think you've got an outlook for capital expenditures this year -- this -- for 2020, that is somewhat a little bit lower than what you're used to seeing from us and that's certainly an important component. But I would stay grounded in that framework. It's very difficult to do the back-end math from EBITDA to free cash flow.

Right. So let me -- I mean, I think normally speaking, what the quoted range has been $450 million to $550 million, based on your prior CapEx indications, so we can certainly make that adjustment. I think part of my question was, are there any potential capital needs of significance that may or may not occur that we could just talk through so we have an updated mindset on those, such as a new market coming online or a contract coming up, et cetera?

No. We do not have a specific capital requirements that are visible to us right now. But I want to reiterate what Jim said. In terms of free cash flow, I mean, we are fine what we are doing. It's a priority of the group, but we want to remain -- stick to what we have expressed back in 2018.

Our next question comes from John DeCree with Union Gaming.

Two for me. One, on the North America gaming business. I believe in the prepared remarks, you talked about just lower expansion and new openings in North America, but your replacement growth in 2019 was quite strong. I was wondering if you could talk about how you feel about the pace of replacements for 2020, kind of ex coronavirus.

And then the follow-up would be, have you seen any change in behavior from your customers in North America, if they're getting more cautious on coronavirus and perhaps influencing their purchasing decisions early in the year?

I start from the latter, and we do not see so far any change in the behavior of our customers.

Regarding the gaming machines performance when it comes to the product sales, I mean, we are very happy with the performance we are having because the overall market sentiment is very positive about our games and our cabinets. And this year, we did 29% improvement versus last year. But even taking out the contribution of the Sweden VLT, we are 14% and the North American part of the business is growing 12%. And this is the combination of very well-appreciated cabinets and very good games that, by the end, are leading to the fact that we are enjoying an ASP that is increasing quite constantly over the last years, and this year, we are reaching the highest level in 12 years.

By the way, also the International part of the business is doing very well because in -- apart from the Sweden VLTs, the replacement for the casino customer has been great in the combination again of the growing penetration of our Crystal Series cabinet and very good contents that are resonating in the different geographies.

That's helpful, Marco. If I could ask one more on Brazil. You mentioned it in your prepared remarks, I think, an expected second half launch. I was wondering if you could give us a little bit more detail on any milestones that we're waiting for. How much is in CapEx if you could remind us for this year, assuming things launch on time? And then is there any revenue or more profit contemplated in guidance this year? That's it for me.

No, there are not revenues and profits contemplated for this year. We start the operation in the second half of the year. We are on -- in the process to get all the formalities done with the Brazilian regulator, and we are working in order to be prepared to launch this initiative in the second part of the year. To give a little bit of color, this is a greenfield opportunity so it will take time to build out a distribution network and establish player awareness. But having said that, if we consider the draw-based part of the business that is already up and running and represents $3.5 billion in revenues. Over the years, should represent -- and represents a benchmark for the size of our business. I'm talking over the duration of the concession. I'm not making -- but more strategically, this is a point of reference we are internally using to set our expectations over the years.

Our next question comes from Joe Stauff with Susquehanna.

So 2 questions, Marco, please, on Italy. One is, as we think about sort of the EBITDA or EBIT improvement being back-half weighted, is it fair to assume that some of the mitigating factors you put in place last year are the same this year? That is, your ability to apply -- to lower the payout ratios and so forth? Is that the bulk of the kind of second half weighting as it relates to results from the headwinds this year?

I think yes, part of it is what you just said, but we see also some growth in other parts of the Italian portfolio. We are working -- or looking at the cost structure overall as we are doing regularly in order to extract additional efficiencies as well as other initiatives that can represent, for us, additional opportunities. So we have a very established set of initiatives that give us the confidence to offset the headwind I've just described.

Okay. And then strategically, I wanted to ask you about -- within Italy, you have a very strong Sports Betting brand and offering. And I was wondering how you view your -- or how you view a digital casino product offering? I -- is it something that's hard to invest in because of the advertising ban? Or is that something where you can use your strong sports offering to be able to cross-promote and build that bigger than it is?

But we have it, Joe. We have it. Most part of our digital offering in Italy in addition to Sports Betting are games. So I think it's already -- they are already included in our digital offering in Italy casino games and other kind of games are the backbone, together with the Sports Betting of our digital offering in Italy. That is, as you are saying, relying on our strong brand franchise.

And is it something I guess that -- I understand that you have it, but I guess, I was wondering if there's any capacity to invest more into that, to ramp it larger than it is? Or what is the capacity to invest in that? Are the -- is the advertising ban limit the ability to reinvest to grow that faster or to buy other brands? I guess, that was more my question.

No. Yes, I mean, the advertising ban is obviously not helping very much the business as are the digital one. For the rest, I think we are -- we have been investing appropriately in relationship with the returns that we were expecting of that part of business. So I think we have been always very balanced in investing in this part of the business. And in fact, we have enjoyed a good growth but I have also to say profitable growth. So that's the reason why I'm using the word balanced.

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

Thank you, everyone, for joining us on our call today and for your questions.

2019 was a good year for us. We delivered on all our financial objectives, meeting the top end of our profit and cash flow expectations. As we look forward to 2020, we are, of course, monitoring the coronavirus situation closely. Apart from that, there is a good underlying momentum for our main lottery and gaming businesses as we enter the year. We appreciate your interest in IGT, and have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.