International Game Technology (IGT) Q2 2020 Earnings Call Transcript

International Game Technology (IGT 0.15%)
Q2 2020 Earnings Call
Aug 04, 2020, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the IGT 2020 second-quarter results. [Operator instructions] Please be advised that today's conference may be recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Mr. Jim Hurley, SVP of investor relations.

Sir, you may begin.

Jim Hurley -- Senior Vice President of Investor Relations

Thank you, and thank you all for joining us on IGT's second-quarter 2020 conference call. We're presenting the results today from multiple locations, so please bear with us if we encounter any technical difficulties. On today's call are Marco Sala, our chief executive officer; and Max Chiara, our chief financial officer. After introductory remarks from Marco and Max, we'll open the call for your questions.

During today's call, we will be making some forward-looking statements within the meaning of federal securities laws. Forward-looking statements are not guarantees, and our actual results may differ materially from those expressed or implied in the forward-looking statements. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our latest earnings release and in our SEC filings. During this call, we may discuss certain non-GAAP financial measures.

In our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our Investor Relations website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. And now I'll turn the call over to Marco Sala.

Marco Sala -- Chief Executive Officer

Thank you, Jim, and hello, everyone. I hope you and your loved ones remain safe and healthy in these uncertain times. Our second-quarter results clearly reflect the world being in varying stages of lockdown, especially in April and May. With casinos and gaming also closed, foot traffic reduced, and lotto retail outlets and sports events canceled, the shutdown impacted all operations in our key markets.

That said, our performance proved better than we expected back in May at the time of our Q1 call. This is a result of adding a diverse global portfolio of product and solution across the regulated gaming spectrum. We also had an important benefit from the swift cost-saving measures we implemented to manage the pandemic. The $168 million of EBITDA we generated in the period include the positive contributions from our North America gaming and lottery segments, as well as from Italy.

We delivered over $100 million in positive free cash flow in the second quarter. It is a significant achievement and a clear indication we are executing well. Our better-than-expected results demonstrated the high engagement maintained by IGT team and our customers. I know it is not easy in the current environment, and I'm grateful for their incredible dedication and partnership.

Financial performance aside, we have had a chance to appreciate the importance of diversity, equity, and inclusion among our employees and the community we serve. These have always been core values for us, and they are critical in this current context. IGT stands with our employees, customer, players, and communities in the fight for racial justice, equality, and equity. As I highlighted in May, we are executing on key priorities to navigate the new normal.

The health and safety of our employees have always been at the center of those priorities. Today, about 75% of our team is working from home, and we have adopted our policies and procedures accordingly. Customer service levels have not missed a beat. IGT has developed a smart technology to provide remotely system monitoring, upgrades, and new installations for our customers.

This has become even more crucial to their success in the current environment. Aggressive actions on fixed and discretionary costs are helping to ease the impact of global lockdowns. While many of the cost initiatives are temporary in nature, we are also driving more structural savings. Cash flow and liquidity remain the top financial priorities.

This is clear in Q2's positive free cash flow and improved liquidity position. By focusing on these priorities, we find ourselves in a much stronger place than we expected to be at this time. They also position us well for the future. I would like to provide more specific insights on trends during the quarter, beginning with lottery, whose resilience is evidenced in our results.

Same-store revenues was up 6% in North America, including an over 10% increase for instant and draw-based games and despite a significantly lower jackpot activity. Trends improved progressively throughout the quarter. On the contrary, international same-store revenue was down 27% in the quarter, reflecting the shutdown of several games around the world, including Colombia, Mexico, Trinidad and Tobago. Sales have recovered with European same-store revenue now essentially in line with the prior-year levels.

Latin America is still lower as COVID-19 affected that region later. Italy lottery wagers were down 40% in the quarter, reflecting the complete shutdown of draw-based lotto games during the month of April and the closure of bar, restaurants, which represent about 25% of Scratch & Win wagers for most of the period. As with the rest of the world, wagers posted substantially progressive improvement throughout the period, especially as 10eLotto monitors were turned back on in late May. Scratch & Win is now broadly in line with the pre-COVID levels.

Lotto wagers are slightly below the prior year as social-distancing protocols are affecting 10eLotto play. We had some important business developments for lotteries. This includes multiyear contract extensions in Tennessee, a customer since 2004, and Czech Republic, a partner for 27 years. We were also awarded the primary instant ticket printing contract for Virginia, displacing the incumbent.

Going forward, IGT will print approximately 90% of Virginia's instant tickets. It is a high-profile endorsement of our printing capabilities, a key area of investment and opportunity for us. It also builds on a progressively deeper relationship we have had with Virginia over the last 20 years. Let's move on to gaming where the impact of a global lockdown was most acute during Q2 as most casinos and gaming halls were closed for a large portion of the period.

In Europe and in the U.S., venues began to gradually reopen in mid-May, while Italy gaming halls did not reopen until June. Across the board, I would characterize the early gaming trends has been better than expected. In the U.S., where over 85% of casinos are now open, strong machine productivity is helping to compensate for fewer active machines and capacity restrictions. Approximately 60% of our install base is active, and yields on those active units are up from prior-year levels.

Wide area progressives, tried-and-true player favorites, are the main driver with yields up double digit. Outside of the U.S., there is a lot of variation by region. EMEA and APAC have been mostly opened since June. Central America is open, but South America is mostly closed.

In Italy, while wagers are still below the prior-year period, VLTs are performing in line with January and February levels. AWPs are a bit weaker as social distancing is harder to maintain in more generalistic point of sales. Despite the global shutdown, we continue to make good progress on several strategic initiatives. One is our entry into the U.S.

historical horse racing arena. We shipped nearly 1,000 units to Churchill Downs for the Kentucky market during the quarter, leveraging our top-performing Crystal Series hardware and highly popular game teams, such as Fortune Coin and Griffin's Throne. We are pursuing an additional historical horse racing opportunity in Virginia. Early last month, we launched our highly anticipated PeakBarTop cabinet, featuring an assortment of our top-performing video poker, slots, Keno and roulette content.

The new cabinet builds on IGT's case of leadership in video poker by integrating a range of highly relevant, technologically advanced features such as cashless wagering, USB mobile device charging ports, and player level indicator for service staff. The new Emerald Queen I-5 Casino in Tacoma, Washington that opened in June is being powered by our Advantage central casino management system. IGT also secured a majority of the Class 3 floor share at the casino. Interest in our cashless system solutions continues to expand around the world, and we are in the final stages of negotiating several deployment over the next few months.

Customers are increasingly looking to IGT to provide the digital solutions players desire. We are seeing this strong growth for our digital business around the world. Digital as a channel represented a mid-single-digit percent of 2019 revenue and was double that rate in Q2. It grew double digits last year, and the increases are much stronger since COVID, including 35% growth in Q2.

Momentum remains strong even as casino reopened and mobility restrictions eased. Our B2C digital business in Italy accelerated in the second quarter, with wagers increasing about 33% despite a lack of sporting events until late in the period. Growth for iGaming, and iLottery wagers was strong, helped by a growing number of new players. Revenue for our global B2B iGaming platforms increased 75% in Q2.

In North America, which represents about 75% of our B2B iGaming business, revenue more than doubled on strong Canadian trends, including a growing number of new players. In Pennsylvania, where GGR is now exceeding New Jersey's levels, we are live with eight operators and have over 50% market share. In Sweden, Svenska Spel recently signed up for an expanded suite of IGT's digital solutions, including our extensive library of play casino content served via our remote game server, in addition to IGTPay, a cashless solution to fund land-based VLT from mobile devices. We continue to make great progress in the U.S.

sports betting market. In terms of volume of wagers handled, a number of states where it is approved, our PlaySports platform is the most widely used B2B sports betting platform in the U.S. In 2019, IGT processed over 30% of total U.S. sports betting wagers.

And we are currently present in 14 states, with Colorado being the most recent. Additional states are looking at legalizing sports betting, and IGT is well-positioned to meet that demand. We recently deepened our relationship with FanDuel, the market-leading U.S. sportsbook operator through a multiyear sports betting and high gaming partnership.

IGT's PlaySport platform and hardware will power all FanDuel's new and existing retail sportsbook across the U.S., and FanDuel will leverage a vast assortment of our PlayCasino digital games for its iGaming activities. We have enjoyed a strong partnership over the last two years, pioneering the development of the U.S. sports betting market. We look forward to remaining their trusted growth partner.

Last month, we announced an important reorganization of the company into two global business units: one dedicated to lottery, run by Fabio Cairoli; and the other to gaming, led by Renato Ascoli. They will handle all functions previously assigned to our International, Italy, North American gaming and North American lottery business units, but with a global view that enables each operation to maximize how its product and services are positioned to meet the expectations of customers and players around the world. By focusing on our core businesses, we will better able to promote the exchange of expertise and best practices among IGT employees around the world. And we will enhance our ability to provide greater responsiveness to customers and players.

Another important aspect of our new structure is that it will make easier for you all to understand and value our business. While pro forma 2019 revenue was evenly split between lottery and gaming, lottery accounts for a much higher percentage of our profits, reflecting our global leadership position in this business. We are still working on realigning into the new design. But for context, lotteries account for about two-thirds of our profits, while gaming activities are about one-third.

Lottery has historically maintained a steady growth profile and proved to be remarkably resilient in weaker macroeconomic conditions. You can see that in the results we are reporting today. It is supported by long-term contracts that provide good visibility to future revenue and cash flow streams. A transition to product line reporting will make this clearer for you.

We will start reporting in the new structure next quarter. The COVID pandemic is teaching us a lot about new ways of working and how we serve our customers. We are focused on leveraging these learnings to operate more efficiently in our new organizational design. Along those lines, we are executing several initiatives to enhance our operational flexibility, enabling us to be more responsive to market conditions.

We have identified over $200 million in structural cost savings from pre-COVID levels across four main workstreams, including eliminating duplicative functions and streamlining back-office activities, optimizing our global investment in technology to focus on value-accretive and know-how, rationalizing R&D based on disciplined risk-return priorities and optimizing our supply chain for maximum cost efficiency. Current trends suggest that the global gaming market is recovering. We are hopeful the progress and growth we are seeing will continue, but we need to be prudent with expectations given the economic impact of the pandemic. The actions that we have taken to protect the business are working, and we are prepared to take additional measures if the situation gets worse.

For now, we continue to innovate to deliver the unrivaled gaming experience IGT is known for. As always, our goal is to focus on initiatives that create value for all our stakeholders. At this point, I will turn the call over to Max.

Max Chiara -- Chief Financial Officer

Thank you, Marco, and hello to everyone on the call today. Our second-quarter results have been severely affected by the COVID-19 pandemic, so comparability on a year-over-year basis is less meaningful. Anyhow, I will walk you through the major highlights by segment to provide a perspective of where business is parsing well and where we have been mostly affected by the pandemic. On a significant revenue decline of almost 50%, our profitability has been particularly affected.

The early kick in of the cost-saving actions swiftly implemented at the end of Q1 and beginning of Q2 are starting to materialize, mitigating the impact to the bottom line. In addition, we have been focusing our efforts on transitioning from temporary cost-reduction actions to more structural savings. Several programs were implemented during Q2, and we remain laser-focused on finding additional opportunities to permanently reduce our fixed cost structure. On Slide 12 now.

We generated consolidated revenue of $637 million. Global gaming revenue fell 72%, driven by the closure of casinos and gaming halls, fewer unit shipments, and lower systems and software sales than in the prior year. Global lottery revenue was down 26% on reduced traffic to points of sale and the complete shutdown of the lotto game in Italy for several weeks. Regard the second quarter, we saw improving trends month after month in each operating segment and across all primary revenue streams.

In the first six months, revenue declined 34% to $1.6 billion, with gaming revenue down 50% and lottery down 21%. Operating loss of $94 million in the quarter, compared to operating income of $224 million in the prior year. Lower business volume had a significant impact on profitability, particularly from product sales. In addition, the prior-year quarter included the strategic transaction in Oklahoma, as well as high-margin items such as a multiyear poker site license and significant system sale.

In the second quarter, we also incurred $43 million in restructuring charges related to projects designed to drive longer-term structural cost savings and the reorganization of the company. Lastly, we saved about $170 million from COVID-related cost containment actions compares to the prior year, not including CAPEX savings in this number, which helped mitigate the impact of lower revenue. In the first six months, we incurred an operating loss of $291 million, which included $343 million in impairment and restructuring charges. Net of these costs, our operating profitability would have been around $50 million.

This compares to operating income of $402 million in the first half of 2019. During the second quarter, we achieved an adjusted EBITDA of $168 million and a positive free cash flow of $107 million, delivering very strong results in a very difficult operating environment and well above our expectations laid out during our last earnings call. We experienced an accelerated pace of reopening in casinos and gaming halls and a more resilient demand in lottery across the board. In the six-month period, EBITDA was $477 million, and free cash flow a positive $165 million.

Now let's turn to our operating segments, starting with North America Gaming and interactive on Slide 13. We generated $96 million in revenue, compared to $274 million in the prior-year period. About two-thirds of the decline was related to the direct impact of casino closures on service revenue with the remainder related to contributions from higher unit shipments and large transactions in the prior year. The install base declined by about 250 units sequentially as some operators are focused on reducing costs and looking for ways to facilitate social distancing in this environment.

In most jurisdictions, social-distancing protocols mandate that only a portion of the slot machines on the casino floors can be operational. Overall productivity on active units was higher, driven by double-digit increases in the WAP yields. The increase in new and expansion unit shipments was primarily driven by the sale of 977 historical horse racing machines in Kentucky. Despite lower replacement unit demand driven by COVID-related budgetary constraints, we shipped just over 1,300 units in the quarter with a relatively equal split between commercial casinos units and VLTs.

Higher system sales in the prior year, most notably the installation of our Advantage system at Encore Boston Harbor, also contributed to the reduction in product sales revenue. Operating loss of $20 million compares to $85 million in operating income in the prior-year period. The results for the North America lottery segment are shown on Slide 14 and clearly demonstrate the resilience of the lottery business. Revenue declined 12% to $273 million as significant growth in instant ticket and draw games helped mitigate VLT venue closures and lower jackpot activity.

The increase you see in the lottery service revenue bucket on this slide was the result of solid 6% same-store revenue growth during the quarter. This is despite mobility restrictions and sharply lower jackpot activity. The over 10% same-store revenue increase in instant ticket and draw games reflects year-over-year growth in markets like Texas and Florida, partly offset by the clients in New York and California, two of the states hit particularly hard by COVID-19 during the quarter. The results are impressive even under normal circumstances.

We expect future growth to remain consistent with more normalized levels of low to mid-single-digit increases. LMA primarily reflects reduced activity in New Jersey, as well as lower amounts of associated pass-through revenue. Gaming service revenue was down on the closure of VLT venues, partly offset by increased iGaming activity in Canada. The decrease in product sales revenue is due to a large system sale in Massachusetts in the prior year.

Operating income of $75 million was roughly in line with the prior year as same-store revenue growth offset the reduction in higher-margin LMA incentive and the lack of contribution from gaming machines was largely offset by cost-saving actions. On Slide 15, you have the results from the international segment where revenue was $84 million, down 64% from the prior-year period, primarily driven by lower product sales. Prior year also included higher software sales in Italy and VLT shipment to Sweden. Service revenue was also impacted by casino closures and mobility restrictions.

Operating loss of $20 million compares to $30 million in operating income in the prior year as lower unit volume and revenue mix were partially offset by cost-savings effort. Now let's turn to the Italy segment on Slide 16 where revenue of $184 million was down 56% from prior-year levels. Lottery revenue declined 55% due to strict mobility restrictions, the closure of bars and restaurant and the shutdown of the lotto game for several weeks. In addition, about 25% of the Scratch & Win tickets are sold in bars and restaurants which didn't reopen until mid to late June.

Overall, lottery wager trends showed progressive improvement throughout the quarter with growth of 6% in June, compared to a decline of 81% in April. This once again highlights the resilience of the lottery business. The drop in machine gaming revenue reflects the impact of gaming hall closures during the quarter. These venues did not reopen until June.

Notably, interactive wagers grew 44% during the quarter as players continue to gravitate to our full suite of digital games. Other service revenue includes growth in commercial services, which was more than offset by lower sports betting revenue due to lack of event. Meaningful sport activity only restarted in June with the European football league resuming play toward the end of the month. The sports betting payout of 88% reflects the higher mix of digital versus retail wagers in the period.

Operating loss of $7 million, compared to operating income of $133 million was primarily due to COVID-19 restrictions, partially offset by cost-saving actions. Moving now to Slide 17. As we highlighted last quarter, we are focused on reducing our cash cost to adapt to lower market demand trend. A summary of our cost savings achievement during the quarter is included on the slide.

Prior to the COVID-19 crisis, our average monthly fixed cost and maintenance CAPEX were approximately $235 million combined. During the quarter, we reduced debt to about $155 million, primarily driven by employee-related actions and strict discipline around discretionary expenses. We are on track to achieve the targeted $500 million in cost savings and capital spend avoidance for the full year. While expenses should begin to normalize in the back half of the year, we should still achieve our average monthly run rate of $185 million from March through the end of 2020.

We continue to focus on delivering longer-term structural cost savings to make our organization even stronger. We currently estimate that we will be able to deliver over $200 million in structural P&L savings compared to pre-COVID levels, mostly in 2021. I would like to now turn to cash flow and net debt on Slide 18. Despite a very challenging operating environment, in the first half of the year, we were able to deliver $325 million in cash from operations and $165 million in free cash flow.

This resulted in our ability to reduce net debt by almost $100 million since year end. Last quarter, we said that we expected the second quarter to be the most challenging for cash flow and that we anticipated burning cash in the period. In fact, we generated over $107 million in free cash flow during Q2. Given the better-than-expected result, I'm confident that we will be able to deliver positive free cash flow for the full year, including a modest contribution in the second half, barring a second wave of restrictions related to the pandemic.

Leverage of 5.5 times increased from 4.3 times at the end of the prior year, primarily driven by the impact COVID-19 had on EBITDA in the first half of 2020. Turning to Slide 19. We ended the quarter with approximately $2.3 billion in total liquidity comprised of about $1.3 billion in unrestricted cash and $1 billion in additional borrowing capacity under our credit facilities. This is more than enough to cover debt maturities through 2022.

You can also see that we are well-diversified in terms of our sources of debt. During the quarter, we issued $750 million, 5.25% notes due in 2029. This was the lowest U.S. dollar-denominated coupon ever issued by the company or its predecessors and represents the longest duration issuance since 2015.

We used $500 million of the net proceeds to fund a partial tender of our 6.25% notes due in 2022. We are laser-focused on reducing cost, and we're pleased to successfully refinance a portion of our 2022 notes with a lower coupon instrument. The balance of the proceeds was used to enhance our liquidity. Lastly, turning to Slide 20.

I would like to summarize the key points in today's presentation. Once again, our businesses have demonstrated their solidity with lottery particularly resilient and the value that comes from geographic and product diversification. We are on track to meet our target of $500 million in cost savings for 2020 and have shifted our focus to initiatives that will drive longer-term structural savings. We have strong liquidity and ample resources to manage debt maturities over the next few years and provide a bit of a safety net should it be needed.

And we delivered positive EBITDA and free cash flow in the quarter even though a large portion of our business was not operating on severely handicapped -- or severely handicap for most, if not all, of the quarter. This allows us to continue to execute on our deleveraging strategy. Now I would like to open the line for your questions. Operator?

Questions & Answers:

Operator

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

Carlo Santarelli -- Deutsche Bank -- Analyst

Hey, guys. Good morning and thank you for the --

Max Chiara -- Chief Financial Officer

Good morning.

Carlo Santarelli -- Deutsche Bank -- Analyst

-- color. I would just -- Max, you talked about it a little bit here in terms of the cost savings. And obviously, looking at Slide 17, the 2Q run rate of $155 million. And you guys mentioned that March through December, the average monthly run rate is about $185 million.

Just obviously, that implies a pickup in the back half of the year. But if you then just extrapolated that run rate of what's implied for the back half across 2021, it would appear there's kind of more than $200 million there in terms of the annual cost saves on a permanent 2021 basis. Are there other costs that then would have technically come back in 2021 that you're contemplating in addition to kind of how you exit this year?

Max Chiara -- Chief Financial Officer

Hi, Carlo. So first of all, if you do the math, the assumption is that in the second half of the year, we would run at about $200 million per month versus the $185 million average that we called out for the entire period. That is because we front-loaded the savings with some temporary swift actions early, starting from the end of March onwards. That may fade in the latter part of the year.

And that's why the cost will start to pick up a little bit toward the end of this year. Going into 2021, we have laid the foundations for those structural savings, as Marco clearly highlighted with those four initiatives. Could there be more? Who knows? Maybe. But at the end of the story, we also need to watch very carefully what trend the revenue will have into the second part of the year, early 2021 because some of those discretionary costs that we were able to take out may well come back.

And so net-net, we are confident right now with the $200 million in P&L savings. Obviously, that number does not include CAPEX reductions that we have achieved for 2020, and some of those will probably stay in place also for 2021.

Carlo Santarelli -- Deutsche Bank -- Analyst

Got it. That's helpful. Thank you for the clarification on that. And then you guys provided some color on kind of the cadence of how things progressed.

And obviously, I think that the wide-area progressives, you mentioned, were up double digits. If you look at kind of the base on a whole and maybe just looked at the month of June isolated where I would assume a significant portion of the machines that have been turned back on were on, could you kind of give a holistic picture of maybe what the apples to apples, year-over-year yields would have looked like during that period for the entirety of the base?

Marco Sala -- Chief Executive Officer

Good morning, Carlo. It's Marco speaking. But I think that I'm going to repeat what I said during my prepared remarks. In reality, the number regarding the active machines are referring mainly to the month of June, that we are talking about around 60% of our install base active.

And the comment we were making was regarding the higher productivity. And the high productivity was, for the most important part, focused on the performance of our WAP. That, as I said, was doing on the active machines, of course, double digit up versus last year. That somehow is reflecting good demand that the operators found at the time they reopened the casinos, and that is where we are.

Now how we can imagine the future is hard to predict. But the starting point is positive when it comes to the demand that we have seen, especially for local and travel casinos and for the VLTs part of the business.

Carlo Santarelli -- Deutsche Bank -- Analyst

Great. And then just one last follow-up, if I may. Any chance -- of the $168 million of EBITDA that you guys did in the 2Q, as we think about modeling kind of the back half of this year in '21, any sense you can give in terms of -- any way you could couch it, the EBITDA generated in June when things were more functional from both the lottery and gaming perspective?

Marco Sala -- Chief Executive Officer

Max?

Max Chiara -- Chief Financial Officer

Definitely, if you look at the -- although we don't want to give out monthly performance at this point, the month of April has been the worst of the quarter with a very low number in terms of EBITDA. That number started to pick up in May and in June with -- allowed us, obviously, to get to that stronger finish. Again, going forward, we need to assume that the trajectory of reopening kind -- especially on the gaming side has plateaued at this point. You may have some further openings, but at the same time, you may have some casinos that will be forced to close for a period of time.

So our position right now is to continue to maintain a prudent approach down the road into the second half of the year.

Carlo Santarelli -- Deutsche Bank -- Analyst

Understood. Thank you, guys.

Max Chiara -- Chief Financial Officer

Thank you, Carlo.

Operator

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

Chad Beynon -- Macquarie Research -- Analyst

Good morning. Thank you for taking my question, and congrats on the strong results and positive free cash flow. Wanted to start with lottery. I wanted to start with lottery.

You mentioned that North American lottery, FMC and instant, it improved throughout the quarter, particularly in markets that weren't facing as high restrictions, and you expect for this business to continue low to mid-single digits. Can you talk about, if you think there was an inflated benefit from the government checks? Or was it pretty consistent as these checks started to become a little less important? And then secondarily, are you hearing or speaking with legislators who could be pushing for more online or iLottery-type options. I know it's not a big piece of the business in the U.S., but just wondering if that could become a larger piece given what you're seeing in other online divisions? Thanks.

Marco Sala -- Chief Executive Officer

Chad, lottery performance is truly doing very well. No doubt that the mobility restriction has a meaningful impact on global lottery sales in April, May. But we saw a swift recovery as restrictions eased and returned to growth in June. Let me give you some general numbers.

I'm not focusing on the U.S. for a while. But I think it is important to understand the progression. And I'm talking about wagers.

In April, overall wagers were down 28%; in May, 7% down; in June, plus 10%; and July is between 7 and 10 -- 7% and 8%. So the recovery has been quicker and stronger than expected. And as you were saying, the performance is particularly strong in the U.S. where is well above last year, and the trends are keeping on.

I think that more than the state checks, the benefit that the lottery benefited from the closure of casinos. We started investigating internally some trends. And we are now pretty convinced that, for sure, there are areas where the closure of casinos have turned into an improved sales for lotteries. And I personally feel that this has been a unique circumstance where the pandemic provides an opportunity to appreciate the entertainment value of the lottery games because at the end of the day, we see these trends keeping on.

That is what I see. Regarding the debate on the online, it's always on. But I cannot anticipate anything concrete at this point in time. After many years, I'm quite prudent in predicting the decisions and the behaviors of the various jurisdictions.

Chad Beynon -- Macquarie Research -- Analyst

OK. Thank you. Nice results for lottery. Appreciate it.

Operator

Thank you. [Operator instructions] And our next question comes from Barry Jonas from Truist Securities. Your line is open.

Barry Jonas -- Truist Securities -- Analyst

Hey, guys. So with the new segmentation of the business, do you still see the same level of synergies between gaming and lottery as when the original IGT transaction was announced?

Marco Sala -- Chief Executive Officer

This is a very good question. The answer is yes, we still believe that the two segments are complementary and cover all regulated gaming space. They both enjoy a global coverage, and they are providing the company with the possibility to take advantage of any opportunity around the world. And there are some attributes that benefit more than others, that are innovation because content and technology are leverageable across the various segments, and also regulation because when it comes to regulation, often, the overall gaming activities are regulated by a single agency where we enjoy a deep, long-standing relationship both operator and a B2B or B2B provider.

So this is a competitive advantage that we have the possibility to have because of the combination of the two businesses.

Barry Jonas -- Truist Securities -- Analyst

Great. That's really helpful. And then I wanted to touch on Italy. Just what has been the tone from the government given the stress that the business, I guess more specifically, the machines business has felt, and do you think we could see any changes to how they have historically interacted with the industry?

Marco Sala -- Chief Executive Officer

I think I see some changes. I see some changes because for the first time, regardless of the pandemic, the government have seen the wagers negatively affected by the impact of lower payouts, the higher taxes of player winnings, in addition to the implementation of the age verification. So I think that this might change the approach, understanding that further increases in taxation can drive further rate reduction in wagering, affecting a very important revenue stream for the Italian government.

Barry Jonas -- Truist Securities -- Analyst

Great. Great. And then just last one for me. I think minority dividends and returns of capital for the year, down about $100 million or so.

How should we be thinking about modeling those line items for the remainder of this year and next year?

Marco Sala -- Chief Executive Officer

Max?

Max Chiara -- Chief Financial Officer

So first of all, the dividend is part of our restricted payments definition in our bank facility. So with the recent bank amendment, we kind of put a stop on the dividends until Q2 of 2021 included. After that, it's going to depend upon our ability to stay below five in terms of leverage, which is a hard limit, hard threshold that we need to beat in our agreements. With respect to the minority payments, you have seen from our material that we published today that there were about $75 million of payments linked to the JVs this quarter.

This is lower than the normal distribution based upon the last year results. But again, the boards of the JVs determined that it was not wise to make the full distribution early on in the spring due to the impact and the associated uncertainties around COVID-19 pandemic. Obviously, this is a moving target. So the board will reevaluate the distributions of any remaining undistributed earnings if and when the market backdrop improves later on in the year.

Barry Jonas -- Truist Securities -- Analyst

Great. That's all for me. Thank you.

Marco Sala -- Chief Executive Officer

Thank you very much.

Operator

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

Domenico Ghilotti -- Equita Group -- Analyst

Good morning. Two questions. The first, just a follow-up on the free cash flow. So you were commenting that you expect some moderate positive free cash flow also in the second half.

Is the number including any -- so are you including any minority distribution in your free cash flow number?

Max Chiara -- Chief Financial Officer

Hi, Domenico. So the point I'd like to make here is -- so first of all, as a general rule, we tend to collect our EBITDA with a quarter delay. So in Q3, we will be collecting the lowest EBITDA probably in the year. And so that Q3 number is significantly affected by, let me say, a lower-than-normal profit collected in that period.

On top of that, we also were able to overachieve on our $500 million because of some deferrals on CAPEX, which will have to happen before the end of the year, in line with our agreement. So that CAPEX number will probably pick up a little bit in the second half. As well as there were some timing variances on -- primarily on working capital and taxes that again will reverse versus the first half -- in the second half, particularly in Q3. So that's why we came out prudently with this modestly positive cash flow in the second half, which is probably going to be skewed toward the latter portion of the six-month period.

Domenico Ghilotti -- Equita Group -- Analyst

OK. While you are not assuming any -- so the dividend distribution to minorities, in any case, it's not including that cash flow?

Max Chiara -- Chief Financial Officer

That is not -- let me say, the decision will be on the Board of the respective JVs. And obviously, they will have conversations in the second part of the year, but we don't know at this point.

Domenico Ghilotti -- Equita Group -- Analyst

OK. And the other question is just a review on the Italian business. So you were commenting that, if I'm not wrong, Scratch & Win, basically flattish. Lotto still down.

I would presume that betting would be probably stronger due to the activity that has resumed. Not clear to me, what is the trend that you are seeing in VLTs and AWPs as well, affected not just by the pandemic, but also by other situation like the card readers?

Marco Sala -- Chief Executive Officer

Sure. Sure, Domenico. And the VLTs, you're right. If I have to summarize the deposit lines you mentioned, we feel we are broadly in line with Scratch & Win.

We are below last year on lotto mainly because of the issue in lotto, mainly that is a Keno-type of product, and that implies a length of stay in the point-of-sale that in this period of time is not allowed. Sports betting resume with the reopening of the various championships. Regarding VLTs, I can tell you that the performance now is aligned with the performance over the first two months. So being impacted by the age reader or a combination of various things, including the age reader.

But at this point in time, the performance went back to the level it was in January and February. Regarding the AWPs, they are slightly below the performance we were having in the first two months, and therefore, they are below last year for the same reasons I mentioned for lotto, those are for 10eLotto. Those are machines that are installed in a generalistic point of sales, and therefore, the players cannot stay in the shop as long as they were used to. And that's the reason why the wagers of AWPs, for the time being, are still affected.

Domenico Ghilotti -- Equita Group -- Analyst

One, in terms of, say, network operation, you are --

Marco Sala -- Chief Executive Officer

So the network is up and running. The network is up running. Therefore, VLTs is marginally down versus last year. AWPs is down.

But in terms of operating machines, probably 10% less. But I think this is not why the performance is down. It's more like 10% of the machines is not a big number. The rest of the network could improve the productivity.

I think the issue is the issue I've just explained, the possibility for the players to spend more time in the point of sales.

Domenico Ghilotti -- Equita Group -- Analyst

And just a last follow-up. You're referring clearly in terms of wagers when you're commenting year-on-year performance. Should we assume that the lower payout that in the meantime you have applied is a little bit supportive year on year in terms of sales and profitability or there is no big difference?

Marco Sala -- Chief Executive Officer

No. I do not see big differences at this point in time.

Domenico Ghilotti -- Equita Group -- Analyst

OK. OK. OK. Thank you.Thank you.

Operator

Thank you. Our next question comes from David Katz from Jefferies. Your line is open.

David Katz -- Jefferies -- Analyst

Hi. Good morning or good afternoon, everyone, depending on where you're sitting.

Marco Sala -- Chief Executive Officer

Hi, David.

David Katz -- Jefferies -- Analyst

Hi. I wanted to ask two questions. Number one, with the new disclosure structure where gaming is its own bucket, should we expect that the digital aspects of gaming will be something we'll be able to break out? Just given -- not to make a short-term decision, but given way the market is focused on all things digital, do you expect we'll have enough for the tools to break that out for earnings and value purposes?

Marco Sala -- Chief Executive Officer

Max?

Max Chiara -- Chief Financial Officer

Right now, our plan is to provide the disclosures around the two segments, lottery on one end and gaming on the other side. Gaming will include also the digital business. So the expectation, I would say, is that we will continue to provide qualitative information around the digital business progression for the foreseeable future as to allow the market to, let me say, verify the trajectory that the company is into for the gaming business or in the digital space. But right now, we don't have plans to break down the digital as a separate segment.

David Katz -- Jefferies -- Analyst

Got it. Sorry. Please finish.

Max Chiara -- Chief Financial Officer

I was just saying which may change in the future depending how the digital business develops. Right? But if it comes a material part of our portfolio, we may reassess that decision at the future point.

David Katz -- Jefferies -- Analyst

Understood. My second question, and I know this was discussed a bit earlier, is around maintenance CAPEX and the decision to reduce in the near term, some of which will come back. Could you provide just a bit of color as to what that maintenance CAPEX is for? It does say in the deck that it's more gaming-oriented. Obviously, what I'm getting at is the notion that there may be a need to catch up later on in the future.

Max Chiara -- Chief Financial Officer

No. Actually, the maintenance CAPEX is typically -- yes. The maintenance CAPEX is typically correlated to the lottery contracts. As we win new contracts, obviously, we have to reestablish the footprint of machines, the new systems.

And that introduction requires typically an upfront investment. So that CAPEX is considered contractual in nature, and that's why it's called maintenance. There is some maintenance CAPEX in gaming as well, but it's not the predominant portion of that number.

David Katz -- Jefferies -- Analyst

I see. So the reference on Slide 17 around cuts are deepest for gaming activities is more cost-oriented than it is maintenance CAPEX-oriented?

Max Chiara -- Chief Financial Officer

Yes. I mean, it's cost-oriented, and it's also growth-oriented, right, because we have been able to time out CAPEX associated with new initiatives more aggressively than what we were allowed to do on the maintenance one. Right? The maintenance just follows through what the new timing is for the implementation of the new projects and you kind of adjust the time line of your investment. On the growth, you have the ability to assess, is that project worthwhile to launch in this current environment, or do I need to delay the launch for -- in a future period, hence, you've got a little bit more flexibility to act upon that CAPEX.

David Katz -- Jefferies -- Analyst

Thank you for the color. Appreciate it.

Marco Sala -- Chief Executive Officer

Sure, David.

Operator

Thank you. And we'll take our last question from John DeCree from Union Gaming. Your line is open.

John DeCree -- Union Gaming -- Analyst

Hi, everyone. Thanks for all the additional color. Two questions for me. Going back to the cost savings, the 200 million of expected structural cost savings.

Is there any way you could help us think about the allocation of that between the new reporting segments, a mix between gaming and lottery or corporate support? Is there a way you can kind of break that out generally?

Max Chiara -- Chief Financial Officer

I'll take it. So we don't even have the two segments ready yet. So this question is a little bit early on. But basically, obviously, the savings are structural in nature in the sense that we have identified opportunities to really reduce costs structurally.

A portion of that reduction is, let me say, employee-related. A portion of that is really a different way of delivering the same service performance in a much more efficient way. And so I would defer, let me say, a further discussion about the split of the savings once we have the segments later on in the future.

John DeCree -- Union Gaming -- Analyst

Sure. Sure. That's helpful. And last, a different topic.

With Brazil specifically and then any other kind of new contracts that are expected to come online this year or were expected to come online this year or early next year, is there any visibility? Obviously, the pandemic has disrupted governments. If you still have any expectations on when Brazil or some of the other maybe contracts in the pipeline either coming or not coming this year given bigger priorities that the governments had to focus on?

Marco Sala -- Chief Executive Officer

So regarding Brazil, I do not see at this point in time an attitude of the government that keep suggesting that they are considering to delay the contract. We are supposed to sign the contract in September for launching in the fourth quarter. And I didn't see any attitude that is changing the view on the perspective of this development. And I do not see in any other jurisdictions something that is, especially for the lottery side, that is impacting the pace of the development.

U.K. is going on. The government decided to give a six-month extension to Camelot, but the delay was accumulated before the pandemic. So I do not have any case to report that is suggesting that the pandemic is delaying the programs that were planned.

John DeCree -- Union Gaming -- Analyst

Thanks, Marco. Thanks, Max. Appreciate it.

Marco Sala -- Chief Executive Officer

Thank you, John.

Operator

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

Marco Sala -- Chief Executive Officer

Thank you for joining us today. Once again, I would like to express my gratitude for the patience and dedication the IGT team is demonstrating in these unprecedented times. We are executing well. Our speed and agility allows us to restart operations as swiftly and safely as soon as market reopen and to function as effectively as possible wherever working conditions are constrained.

We are diligently managing expenses and our liquidity, and we are taking full advantage of the breadth and the depth of our global portfolio of solutions in lottery, gaming and digital. Our new organizational structure should enable us to leverage our leadership position in even more impactful way. I wish you all a nice rest of the summer, and I look forward to speaking soon. Stay well and be safe.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Jim Hurley -- Senior Vice President of Investor Relations

Marco Sala -- Chief Executive Officer

Max Chiara -- Chief Financial Officer

Carlo Santarelli -- Deutsche Bank -- Analyst

Chad Beynon -- Macquarie Research -- Analyst

Barry Jonas -- Truist Securities -- Analyst

Domenico Ghilotti -- Equita Group -- Analyst

David Katz -- Jefferies -- Analyst

John DeCree -- Union Gaming -- Analyst

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