Q4 2019 Earnings Call
Dead dead dead dead dead.
Dead dead dead. Good morning everyone and welcome to the inspired entertainment fourth quarter and fiscal year end 2019 conference call. All participants will be in listen-only mode. So do you need assistance, please signal a conference specialist by pressing the star key followed by birth.
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Today's presentation there will be an opportunity to ask questions. Please note today's event is being recorded. I'll begin today's conference call by referring you to the company's Safe Harbor statement that appears in the fourth quarter and fiscal year end 2019 earnings press release which is available at the investor section of the company's website at ww.w wage i n s e i n c the Safe Harbor statement also applies to today's conference call as the company's management will be making certain statements that would be considered forward-looking under Securities Law Securities laws and rules of the SEC. These statements are based on Management's current expectations or beliefs and are subject to risks uncertainties and changes in circumstances. In addition. Please note that the company will discuss both gaap and non-gaap financial measures.
A Reconciliation is included in the earnings press release with that completed. I would like to now turn the conference call over to Lauren wheel the company's executive chairman Mister Wilcox, please go ahead. Thank you operator. Good morning everyone and thanks for joining our call this morning. We're living in interesting times to say the least and needless to say it's never fun coping and competing for attention with a potential pandemic, but it's particularly not fun for us when unfortunately, but for obviously critically valid reasons, it eclipses a quarter like the one we just have faith that our team has been working on really non-stop for the last two years.
As many of you know, I've been in this industry in doing what I do for maybe forty-five years. I think I was about twelve when I went to work with a company called General instrument in the seventies where by the way coincidentally actually not coincidentally. I worked very closely hand-in-hand with the father of our president and CEO Brooks Pierce, and I never ever have seen anything like what our team has been able to do in a way forced to do in the last couple of years. So, if I may let me beg your Indulgence for a few minutes and review a little of this recent history since reviewing history is what companies seem to do in your own conference calls anyway,
In February 2018. So almost exactly two years ago. We began talking seriously with novomatic about buying their UK technology business office a business larger, but somewhat less profitable than ourselves. We signed to definitive agreement in June 2019 after a very comprehensive due-diligence package this and we enclosed in October 2019 following a lengthy and also complicated regulatory review in the six months since we've entered the two companies. We work in progress in centralizing manufacturing rationalized content development streamlined to field service organizations begun to really exploit additional significant revenue and cost synergies as if we weren't busy enough in the middle of this project.
Yes, of course.
The UK regulatory authorities have to announce in May 2018 as a reduction in the maximum fob case take the two pounds which struck the industry more like a lightning bolt. It was originally intended to take effect in October 2019. And then as most of you know, the eleventh hour it was accelerated to April 2019. So in parallel with novomatic acquisition and integration process, we undertook to completely restructure our own UK operations team to mitigate the triennial impact the results of which I hope are apparent today and and indeed actually the results of both of the mitigation of the train and the the impact at least the beginnings of the impact of the Millermatic acquisition.
When we did the original Hydra inspired acquisition back in December 2016, those of you who were around and know that we inherited a debt facility off with Ares that initially we had no alternative but to extend in August of 2018. We refinanced the Ares facility with HG warm. And then when we completed the novomatic acquisition, we completely refinanced all of our debt both our original The Inspired acquisition debt off the
And the nomadic acquisition dead again this time with the help of nomura and we significantly lowered our cost of capital in April 2018 Brooks Pierce joined us as president and C after several months as a consultant Brooks, you know had been Chief Revenue officer of Scientific Games and subsequently president of Aristocrat North America in Fall 2018. So not long after joining Brooks team began working on the development of the Valor cabinet off to spearhead our entry into the North American market and then November 2019. We took our first orders without question a time-to-market record in terms of design and development and production very importantly regulatory approval and marketing.
Similarly in May 2019. Excuse me, Steve Gleason who had also been a consultant to us for several months and previously CTO wage Gtech. Now I GT and Scientific Games joined us as CTO and almost immediately launched our development facility in India Baptist initially on supporting and driving our online and interactive businesses which in 2020 and we'll get into this a little more later. We expect will account for nearly a third of our adjusted ebitda and provide us with a critically valuable cushion as we watch the evolution of the coronavirus. So those are some of the things we managed to do in the last couple of years. I think actually remarkably for a company of our size and rails limited resources.
And that brings us to the main reason we're here which is to talk about the fourth quarter of 2019 as we described in the press release Revenue with $66 four million for the fourth quarter an increase of 150% sequentially from 26.6 million in the third quarter and the hundred and 16% year-over-year wage compared to December 2018 quarter adjusted ebitda for the quarter was 17.7 million and then freeze up 103% sequentially from that point seven million in the third quarter and 69% year after year of year-over-year as noted in the press release the overall adjusted ebitda margin and the fourth quarter was 27% compared to 34% in the December quarter last year the adjusted ebitda margin of the Legacy inspired business actually increased to Thursday.
36% this year from 34% a year ago indicating among other things that we've done a pretty good job of mitigating the impact of the triennial which way to effect in April 2019. As I mentioned before by comparison, the margin on the acquired business was about 17% which average of the combined money down to 27% The positive news is that we see very significant runway for margin Improvement as the acquired business continues the shift from analog to digital which drives both revenue and reduce costs. And as we realize very significant anticipated synergies,
Revenue for the full year 2019 was a hundred and fifty three point four million increase of 9% year-over-year and adjusted ebitda for the full year was $49 million wage increase of 10% compared to the 12 months ended December 31st, 2018, 2019 Revenue included a full year of the Legacy inspired business plus bath and seasonally below-average quarter for the novomatic acquisition. Well adjusted ebitda for 2019 absorbed the impact of three full quarters of the triennial. In fact, I bought a 2018 had not yet experienced. Any so once again demonstrating are successful efforts to mitigate the triennial by your end.
We are very pleased with our results in the fourth quarter the strongest quarter by far in the company's history and it was the strongest quarter notwithstanding that weird not quite finished with our plans to mitigate the triennial. The fourth quarter is a seasonally below-average quarter for the acquired business and we're only partway through implementing our Synergy plan. So this was suggest at this point that we use successfully created a platform that should support significant can assist you in the future driven in turn by four fundamental vectors one continued mitigation of the effects of the triennial through operational restructuring and cost reduction efforts to generation of new business in rvlt Virtual Sports and interactive businesses to recapture birth.
the adjusted ebitda lost to the triennial and then
And some three integration and profitability Improvement and the newly acquired businesses through both growth and digital conversion in the UK Ledger segment off and then finally maximization of Revenue and cost synergies between the complementary businesses. All of these are things that Brooks we'll talk more about in a moment off after which Stewart will cover the financials for some time. We've been forecasting that the fully mitigated adjusted even the impact of the triennial would be 10:00 to 11 million dollars a year in the fourth quarter, which was the third quarter following the implementation of the triennial. We estimate that our adjusted ebitda was negatively impacted by one point eight million or about seven point two million on an annualized basis with suggest that we were actually well ahead of the ten or eleven a.m.
Estimate but I should mention that in the fourth quarter. We we generated some non-recurring revenue from the sale of machines that were removed from the field following customer shop closures and at some point shop closures will stop and there will no longer be any machines to remember to sell. Obviously we continue to see a steady Improvement in the sequential year-over-year Trend in Gross win per unit per day, which was down about 44% off immediately following the April implementation, which needless to say was not fun. It was then thirty seven and half percent on average in the third quarter off and about 21% in the fourth quarter of last year and the first quarter of this year along the way we seen the the closure of approximately 850 shops dead.
Supporting our previously outlined places that a substantial portion of the revenue loss due to shop closures would be recovered throughout our remaining estate and antique shops close would on average be at the lower end of the cash box distribution. And so all of these factors have combined to give us off. I think the excellent result
that we saw in the fourth quarter given the positive sequential Revenue Trends. We're seeing and the continued progress on Cox Focus operational initiatives. We continue to feel that the impact will be at most ten to eleven million a year on a steady-state basis. We said early on that we expected that by the end of this year with our overall adjusted ebitda. Our run rate would be back to where it was going into the triennial. In other words that by the end of the year. Our other business initiatives such as the launch of a gaming machine business in North America growth and virtual Sports.
and the additional
Through active customers will together be generating at least two and half million of incremental adjusted even the upper quarter. If not more enough to offset the impact of the triennial and take us back to a level of even that prevailed before the triennial went into effect or around 12. Thursday 13 and 1/2. So 50 52 or 53 million dollars as we saw in the press release the adjusted ebitda from the Legacy inspired business in the fourth quarter worth 12.2 million. So we're pretty much in that range up from 10 and 1/2 million in the year prior and the adjusted ebitda margin increased to 36% from 34% which illustrates the two fundamental things. We've been talking about the mitigation of the triennial itself because the Legacy business was dead.
Able to outperform the year before despite absorbing the impact of the of the triennial and it was the organic growth initiatives that we've been talking about it over the fact that the adjusted ebitda of our Legacy inspired business crew 16. 5% Largely from non-uk lbo growth specifically took charge of the VLT business in the US and continued growth and virtual and interactive now clearly shows that we're in a very strong upward trajectory finally in October 1st wage pleaded the acquisition of Nova Mattox UK gaming Technology Group, which I discussed before and which at least for the time being we will refer to separately as a quote acquired businesses in order to allow us to demonstrate focus on the synergies coming from the merger and the important and obvious opportune time.
These remarks an improvement. Once this process has run. Its course. The acquired businesses will be for reporting purposes fully integrated. And what will then be three business segments a gaming segment a virtual is interactive segments and Leisure segments. These acquired businesses are experiencing positive Trends bolt internet Standalone revenue and profitability in the integration Synergy work we continue to do indeed the underlying trends of and stronger that we had originally anticipated off pieces that the profitability of the pub segment would improve in line with the conversion to digital as being born out by both improving cash box for a gaming device and wage reduce costs in a moment. Brooks will discuss how it is this apparent Paradox that increasing Revenue actually off.
hand-in-hand with lower costs as
As of these machines in this field convert from analog to digital very importantly Trends in the UK plug them in itself are improving as the number of jobs increased in 2019 for the first time in a decade there quite a few other positives were seeing in the acquired businesses that Brooks will discuss in more detail on the basis of the foregoing we expect that the 2020 adjusted ebitda coming from the acquired business will grow nicely over what it was in 2019. And at the same time, we now think that the total and July synergies will be closer to fifty million by the end of 2020 greater than our prior projection of twelve to thirteen million.
As many of you know, we are not in general wildly enthusiastic about guidance, but because there's so much going on in both the Legacy inspired and the acquired business office is I do think we need to offer some direction and had to think about our business in the near-term a consensus of research analysts that follow us seems to be around $73 million of adjusted ebitda for 2020 and I think we're pretty comfortable with that or or at least we certainly were prior to June 2nd of the coronavirus situation. We feel that the fourth quarter performance. This year is quite consistent with that range though as we look ahead over the edge of the next year. We should expect that there will be variation from quarter-to-quarter. We expected declined sequentially in the first quarter both because of the timing of
One-time sales, and because the first quarter seasonally is the weakest of the four quarters of the acquired businesses that this will be followed by very strong significantly above average second and third quarters and then a somewhat moderate seasonally in between driven fourth-quarter with all that being said this does not take into effect the potential impact of the coronavirus so far. We haven't seen any impact in our UK or Greek businesses. We've seen a close all of the wedding shops and live sports events. They have not closed the shops known as coroners basically small convenience or agents. Tobacco shops et cetera. These are very important for a virtual Sports things.
Italy altogether retail virtuals and online makes up less than 5% of our total company revenue and quarter-to-date. The impact has been dead. We have been told to expect the betting shops in Italy to open back up on April 2nd and in theory wage, but in the meantime see an uptick in our online business from the quarantine, it's a fluid situation and we're monitoring it very closely and all the geographies in which we operate. It's reasonable to assume that if there is a prolonged in material impact from coronavirus. There's going to be an impact on our growth, but we've got a very profitable business model. Well as I mentioned earlier on a third of our adjusted ebitda comes from our online businesses, which should not only not be subject to the coronavirus but wage
conceivably could increase
As the opportunities for retail play are diminished. We have made very detailed very comprehensive internal contingency plans wage based on what we're seeing today and we will continue to monitor this and with that I'll now hand it over to Brooks. Okay. Thank you, Lauren Berg. I'm happy to add a little bit of color to some of the points that you touched on in particular benefits and integration plans for the acquired businesses as well as the business developments that you spoke of them the Legacy Inspire business. So in terms of the acquired businesses the the conversion of analog to digital and the pub Market is going faster than originally projected primarily due to the success. We're off we're seeing in performance in that segment and the demand from our Pub customers. So from the beginning to the end of the quarter just 90 days digital machines as a percent of our total cats e machines in the club.
Was increased from 61% to 66% We've talked about this before but the conversion of analog to digital has the ability to improve revenue and increase our margins for some reasons that I'll outline. Number one. We don't have to physically move machines every twelve weeks like you do in the analog model second the ability to download games and update them remotely June 3rd, the refreshing of game content more frequently higher daily cash box driving higher rental rates and our plans in the future to be able to implement cashless off the pub Market which will significantly increase our margins in The Ledger second segment, which includes both holiday Parks Motorway services and hecs adult gaming centers the results for the quarter we're better than we were originally in even in a seasonally low quarter. We're anticipating an even better season this year, but that really starts to manifest manifest itself in, New Jersey.
Camcorder is Loren outlined as for the synergies. Our teams have been working very hard on the integration plans and we see a number of opportunities in both cost savings and revenue growth during the course of the annualized costs energies from the acquired businesses were tracking at a 3 and 1/2 million dollar run-rate mainly driven by savings and Technology followed by service operations and gaming sales office and that doesn't include the revenue Synergy opportunities and let me let me touch on that for a second. So novomatic is leading arcade operator in the UK, but they also have the B2B business that wage quired and what is often the case when you're both in the B2B and b2c in the same Market you actually penalize your B2B business because in certain instances, your customers are also your competitors off. This could have been part of Nova Mattox rationale and investing the business, but we're now beginning to see is that we're able to generate business from b2c customers that used to be competitors of novomatic dead.
we're also starting to see the
If it's of having three Design Studios the Astra Bell fruit and our existing inspired Design Studio, we strongly believe that the combination of these three groups position as well as we execute on our omni-channel strategy across multiple geographies of food and ask for example or producing content to the UK pubs Market that's growing that business significantly and is producing industry-leading results. This content combined with the leading Prismatic cabinet is the key to success in that segment of the business and as we've discussed on previous calls will also be leveraging this new content plus the six key novomatic titles that we acquired in the transaction within our UK lvo business to both Drive increase cash box as well as reduce our Reliance on third-party content to increase both our margins and our Revenue.
The combination and addition of all this content creation will drive not only are server-based gaming business, but will also serve as a catalyst for our interactive remote gaming server business as we develop contracts for the multiple markets. We serve we're seeing significant growth in that space and expect that to continue as we expand further into existing markets like North America Sweden and Italy and then move into new markets for inspired like Spain needless to say, we're very pleased with this acquisition, which is starting to come through in the results. Clearly. We're getting more financial synergies than expected. We have more capacity G terms of our Design Studios where in segments that are growing we have positive momentum in the conversion from analog to digital and then we're seeing improving results and the other channels which we expect to continue age. Let's move on to the Legacy inspired business is Lauren talked about the impact of the triennial is continuing to mitigate every quarter and that trend is continuing into the first quarter dead.
We saw a meaningful growth in our virtual segment in the UK retail sector, which is helping to offset the lower handle from the triennial. We're also seeing significant growth in interactive or both Europe and North America. So quarter-to-date, we have six interactive clients live in North America Mohegan Sun Resorts Caesars and gold nugget in New Jersey and Canada both bclc British Columbia Corporation and Loto-Quebec and the results. We're seeing across the whole North Americans estate are are frankly quite encouraging off we talked about this before but in the North America virtuals business, we rolled out our new Derby cash game in Pennsylvania in November and supported by extensive marketing from the Pennsylvania Lottery. And what we think is significant ramp-up in the sales almost immediately growing week by week on a very consistent basis. It's not yet where we want it to be and we certainly like to add another channel in time.
The Pennsylvania Lottery, but as I said, we we're seeing it grow every week and that's supporting our thesis on this Market stock a little bit about the North American VLT Market in Illinois are bespoke content specifically designed for that market has been performing exceedingly well and a few short months we've had trials with nearly every operator and all completed dragon and follow on orders as mentioned in the release and the fourth quarter. We sold a hundred sixteen Terminals and. To date and the first quarter we've sold 144 month. So we've seen nothing that would tell us this momentum is going to change in Illinois because our performance has been outstanding the six machines are still being added to the market and increased wages and prices are creating drive and demand for the customers to replace machines. We're very comfortable with the volume of North American vlts assumed in Lawrence comments about 20 20 and we're dead.
Are excited to be able to report soon on progress in a second Market. It's nice to have.
We're to talk about all the positive Trends with everything else going on in the world. And we're very happy to see that throughout our business with the triennial pretty much in our rearview mirror the future looks very good for us. So I Echo Lawrence comments regarding seasonality of the business and the timing of business developments, but it's rewarding to see the strategy that we outlined off. The last couple of years is actually delivering the results that we anticipated. So now let me pass it over to Stewart to discuss the financials.
Thank you Brooks. Good morning goal. Let me spend a few minutes talking through the high-level numbers. I'm trying to add a bit of color and trying to help you make sense of what was a busy but we believe or really successful quarter clearly the results of the acquisition on the first day of the. Do play a large part on variances to the same quarter in 2018. And as I go through I'll try to make it clear if I'm talking about the results or organic only. Are you considering just the Legacy business? Uh, it's also worth noting for the first time in a long time. The courts had very similar u.s. Dollar to GBP pound rates to the perfect vehicle to so at least there's minimal FX differences, which certainly makes it easier to understand those Trends. So overall as we see Revenue grew 116% off to sixty six point four million over the same quarter in the prior year included a large part of this was due to the acquisition, but even excluding this Revenue grew 9% of 13% including sales to the quad.
And we saw growth across both the SPG and the virtual Sports segments. So despite the triennial in SPG Revenue grew 11% I think it's worth emphasizing three key objectives that we hit a quarter firstly as mentioned by above Brooks and Allan. We sort of first terminals into the market secondly rolled out all of the nearly 9,000 contracted faith in the Greek market by the end of December and thirdly as I said, we improve the training position in the UK Market. It was also a very strong quarter for Hardware Sales with sales are betting terminals sales increasing nearly two million. You don't need an electronic table games increasing 1.3 million over the prior-year quarter.
The virtual sports segment which incorporates interactive grew 17% to just under ten million dollars due to three main reasons firstly you cane Island Retail Group home. Um, no point six million dollars primarily due to a number of new channels across most operators. Typically we saw growth in online virtuals of not point four million dollars, uh, particularly now, uk-based customers as well as interactive Slots of North Point three million the latter increasing by more than 50% year-on-year do to work new customers and some high-performing contents. And we also had a strong quartering virtuals for project work.
It says that the acquired businesses. They also performed well during the quarter all be in one of the quieter two quarters of the Year given the number of leisure parks are closed for the majority of the. Know from experience. We don't show the prior. Numbers. However, based on representation of previous ownership. We believe this quarter would have shown an increase in revenue of about 9% off and adjusted to leave it. About 22% and part of this came from an increase in revenue of 15% But the majority came from increased Pub digital Revenue just quoting a few statistics. So the number of digital machines in the UK put Market was up 44% on the prior-year to approximately 5400 the revenue for the terminal per week had increased 11% in a time frame and as mentioned before the percentage of the total capsi estate digital machines has increased from under 50% to nearly two-thirds.
You want to say too?
Level adjusted ebitda grew 69% to Seventeen point seven million dollars, uh, including an impact at five and half million from the acquired businesses. This means that the Legacy business groups 17 Bots some relation to the races as well as the revenue increases described. We also continued benefit from cost reduction measures including those linked to the train. He'll uh, and the both the line i g n a cost reduced 6% below the income statement net lost increased from 4.7 billion last year to 12.8 million this year, but the majority of this was caused by one off car simulation refinancing is prepaid costs relating to the old depth of 7.3 million dollars were written off and we also serve a non capitalized will cost of the new death of just under two million. So the total interest expense in the cult of $15 only five point four million related to ongoing coupon costs. So turning attention to cash and cash flows. We ended the last quarter with just under Thirty month.
Was on the balance sheet and then the discourse a little over twenty nine million dollars so little difference on the face of it, but quite a bit going on with the need there. So we acquired eight point four million dollars cash including floats with the businesses and there's movement for a new debt and the Acquisitions equities acquisition costs integration fees resulting in outflow of about fifty million dollars. We reduced the level of revolver draw in the quarter of 6 and 1/2 million dollars. And then from a trading point of view. There was Cash utilization of it just under $3000000 but we had a large quarter of capital expenditure of $11, um, including both Grease the LT roll out in the Legacy business and as we talk about digital control out in the acquired businesses, so as a reminder post to refinance, we have a hundred forty million pounds of borrowings at Libor plus 75 and ninety million euros wage.
We'll for six seventy-five with the zero floor post the quarter-end. We entered into an interest rate hedge covering approximately two-thirds of the variable element and now play it pay a blended coupon rate as a bath 7.7% on top of the term loan. We have a 20 million-pound revolving credit facility of which two million pound or two point six million dollars withdrawn at the quarter-end off briefly to the quarter in now so the first quarter of 2020 and it's worth liking a couple of points. Um, and these observations do exclude any impact of coronavirus, which as we said has been minimum wage and so in terms of the first quarter, we we see that the acquired business has its lowest quarter of the Year primarily due to less you Parts being closed for the majority of the time in a search. I would expect less than 10% of the acquired business is adjusted ebitda of 20/22 achieved in quarter one. Um, but at the same time we have a uh, yep.
large proportion of the acquired business Capital spend
And takes place in this quarter before the the pox open for the year and in Italy even including any coronavirus impact in surveys gaming we have seen some reductions in Gross win money to get to another round of increased taxes and they have also been some reductions as yet. I'm sure you've read about elsewhere due to the new card reader and and finally in Greece. I was twenty twenty will be a year of estate optimization, which I do think will be beneficial to us in the medium to longer-term in the short-term. We have seen our estate size on an average basis reduced by a month a few hundred is machines taken out of one location to put into another so finally just quickly on synergies, you know, we've heard that we're increasing our steady-state run raised to Fifteen dollars of savings by the year-end. These savings are coming across most areas of the business and by the quarter we were about three and half million with approximate time.
No point eight million is a benefit in quarter. I think it's it's worth you knowing that we have a very clear line of sight to get to the $15 that we talked about and by the end of the first quarter or sooner. We hope to have been more than doubled the room rate position that we saw at the end of 2019. So hopefully that adds some context the numbers so with that I'll hand back too long.
think Stewart
Operator I guess if you can let us know open the program to Q&A.
We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset off before pressing the keys to withdraw your question, please press * then two.
Our first question comes from the Quarry, please go ahead with your question.
Good morning. Good afternoon. Thanks for taking my question really thorough prepared remarks. So I think you probably hit on most of my questions already. But wow, maybe if we can start with U.S. Obviously very strong unit sales in the fourth quarter and the first quarter nice to see that that's continued. Can you just help us understand how long it's taking for trials to be converted to sales how pricing has been in that market and then just from a title perspective if all of these are on the lower cabinet with the multiple titles thanks sure will answer the last question first. Yeah, all of the the titles all of it off on on Valor in terms of the trials. It really runs the gamut we've had some people that have literally taken the machines for a week and pay and we've had some that go up.
Well, you know kind of the full 30.
The to 45 days but as I think we said in the release all of the all of the trials have converted and and nicely we've been rewarded with a number of customers making their their second and even some third of orders. So the you know, the Illinois results are are certainly very positive for us at validates wage is I think one of the interesting things chat is is you know of our ten games on the cabinet. There's a very equal distribution of all the game play which is which is pretty unique most most suppliers would have one or two titles that generate the large volume. So I think it validates our strategy of having gone into the market and developed page content for the market and and obviously from our customers perspective. They've love to see their players playing kind of all types of games.
Great. Thanks. And then in the UK just on the the the Legacy business. So sub two million dollar impact on the fourth quarter is certainly better than anybody was expecting wage. Could you update us on I guess non-customer closures where that's been a recall last quarter. I feel like you know some of the the other shops where you didn't have product issue and open a little bit longer than yours and then also in the ten million number just so I'm clear on this or the hardware sales netting against that or is that like a separate item to think about? Okay? Well, I'll answer the part about the shop closures and I'll let Stewart answer the the second part of your question. So in terms and I think G BC m a release came out and said that so so from our customers perspective, we're not seeing any more shop closures pretty much William Hill and Paddy Power and Bedford have done all Thursday.
They're going to do GVC had a number of closures in the quarter and it's probably too early for us to see the impact but I think the thesis based on what we've seen with our own is that there will be redistribution from the GVC shops. And because we have such a large proportion of non GVC business. We you know, we fully expect to agent seeing the benefit of that going forward and we'll we'll probably talk about that after the first quarter.
So Steward, you want to answer the second question? Yes. It's a good question Chad. So in terms of what we're seeing in the this place terminals added probably about half a million of ebitda in the fourth quarter. Um, but but more importantly if you look at the the correlation that to the 10:00 to 11 million in the first year 15 months or so long will get the benefit of that which which brings us within that range but then afterwards well, we don't have the benefit of being able to sell those we will have the benefit of you know, continually increasing crows win. And that's the trend that we're seeing. So if it if you look at the first 12 months, uh, or kind of a long-term that steady-state, um, you still get back to roughly 10:00 to 11 million, um, and that the the pessimistic end of that forecasts. Okay, great. Perfect. And then the last one is Stuart just on the the cash flow statement now that the debt refinancing
The merger cost and a lot of that.
Is in the fourth quarter, how should we think about cash flow from operations as a percentage of of eBay or another way to think about it for twenty twenty or could you just I think you mentioned this in repaired remarks, but given the current debt situation. What's the annual expected interest expense? Just trying to bridge all that together given all the moving parts. Thank you. So, I mean in terms of um cap expend to flow into capillaries gives you have seen in the release that we talk around 50% of ebitda as a Max of the Carfax then in terms of on ongoing interest expense, um in an annual basis will be around 17 million pounds. Um, so. Twenty-four twenty-five million dollars. I mean we will in the first quarter next second quarter of the Year. Oh, so you're going to have some coughing.
Of implementation implementing the synergies. So I think uh, if you look at the industry Norms the cost of implementing synergies tend to be in the range of 60 to 80% off of the the annual impact of those. So hopefully those moving pieces together give you give you a sense of cash flow on an ongoing basis.
Okay, perfect. Really nice set of results guys can graph.
Thanks, Jim. Our next question comes from David Bain Capital, please go ahead with your question.
Great. Thank you. And yes congrats on the fourth quarter results encouraging definitely in prepared remarks helped a lot with my questions, but if I could Stewart, I think you touched on this for sure, but our office is that William Hill close about 7 our stores in September and has done well is closing a few hundred more this quarter. I mean, so is that to say that William Hill is just now focusing on kind of options using what they have and can you confirm that they're looking to increase the density of games in their shops?
So I mean in terms of winning, he'll you're right 700 closed on the very last day of the the third quarter and you know, they've said publically they wanted to do that job and um in one big swoop rather than I think as they called it Rock and lots of salami slicing. Um, we have seen a a few shop closures recently from TVC wage, you know, as we mentioned before something on the SPG side of things only benefits us as some of that Revenue Finds Its way back into William Hill vet Fred or Paddy Power stores, in terms of density. The the amount is capped at four terminals her shop and as it was before any triangle impact, okay, I thought that they were under that black cap in general. But if I got that wrong, okay, and then the the lay of the land from a regulatory perspective in the UK in terms of forty cents a minute for any further restrictions credit cards betting duties or otherwise
Yeah, I'll take that. I mean it's it's you know, it's always difficult to handicap these things. We're not seeing anything more than what we've talked about or what's been.
Announce publicly And in regards to the credit card side of things which won't we're we don't think we'll have a material impact on us. Um, I guess perversely maybe one of the wages benefits of this crazy Corona thing is that maybe the government will not be as focused on the betting laws as they are with everything else but quite frankly, we're not hearing or seeing anything that would would change our view on the UK Market from a regulatory standpoint.
Okay, and then just lastly Illinois ramping faster than we had. Can you speak to any sort of data points on play level post the increase takes and Max prise and January with leading to some of the accelerated game changes there and I know you spoke to a performance for competitors that performance Apples to Apples meaning it looks like you guys had changed that Max play a little bit wage or some of your competitors. And then finally just if you can give us any sort of framework as to you know, that second jurisdiction that you kind of hinted to any framework as to size type of Route Mark at what may or may not be similar than Illinois. Okay. Well, so in terms of the increase steak and and prizes. Yes that that clearly has has helped them, you know our technology enabled us to make the change almost immediately where some of our competitors have been taking some time doing it and they are doing it one game at a time where we
He immediately switched all our games all 10 games to that. So that certainly has helped us in terms of you know, you know, the the way it's reported in Illinois. You have to actually get the data from the router operator. So we're getting you know piecemeal some of that but one customer that we have that has shared data almost right from the get-go valid point where we see where we're essentially number one by a large margin in cash in and also significantly ahead of all other competitors in net win money. So clearly the the ordering from a number of customers who have taken a product. Hopefully even without the supporting data behind it would validate that that's that that's what we're seeing in terms of the next Market that we can talk about. We certainly have a number of markets that we're targeting. That would be the birth.
Market all of which are this is public information, you know, the Oregon's the Canadian provinces et cetera, et cetera, certainly the results in Illinois help validate for because for many people even though we've been very successful in the business overseas. We hadn't done it yet in North America. So this will validate that so we would expect to be able to have an announcement wage and the next quarter or two on our 2nd Market, but we will certainly be targeting every one of the route markets. Okay. Great. Thanks so much.
Welcome.
Our next question comes from Mike Maloof of craig-hallum, please go ahead great. Thanks for taking my question and well done on the corner very impressive if I could just focus a little bit on the on the acquisition. That sounds like you're doing just a a great job on getting the the digital transition going from basically sixty-one to sixty six and I'm just trying to get a sense of where do you think that will go over the next, you know, basically over 20 20 how fast can you get to 100% if that's where your Target and that when you look at twenty Twenty-One, you know, where do you expect just given the move to digitalization? What will be the impact on the margins?
Well, let me the the first part. I don't I don't think we'll talk about twenty Twenty-One and we I would suggest that that for the rest of the year, We would look to get to closer to 75% digital and everything that we talked about in the remarks and in terms of the margins part and most of that is is frankly be controlled by us. So it's a matter of of being proven in our Capital expansion. And as you can imagine as you get further and further down the down the chain of of pubs, there's some pubs that page just won't support the digital because they won't be able to pay the rental rates that that we ask so we won't get to 100% but I would say 75% is a good time for us this year.
Okay, great. And then with regards to Virtual specifically in Philadelphia in Pennsylvania what you know, obviously Derby cash is is out seems to be doing really well. Is there any other service you know new virtuals that you have plans specifically it may be a relaunch a football little yeah, we we made a presentation to the Pennsylvania Lottery with the license that we acquired that we mentioned before the NFL alumni. They were super excited about the game and we would expect that would be the next game to launch in Pennsylvania were just working out the details. It really takes three. It takes ourselves Scientific Games as the as the system supplier and the lottery themselves. So I would anticipate although they like the basketball game as well. But I would anticipate that the second channel will be either the NFL alumni game or the basketball game.
Okay, great. Thanks for the help.
You're welcome.
That's under the front. This concludes. Our question-and-answer session. I would like to turn the conference back over to Lord wheel for any closing remarks. Okay. Thank you operator. I don't really have anything to add to what we've discussed so far in the program. We appreciate all of you calling in life. We're obviously excited about where we've finally got to in this quarter. We're also post office about thinking about the immediate future because of the unknown impact of the coronavirus, but hopefully by the time we talk to you one quarter from now this situation will be resolved and we can get back to worrying about the the real issues involved in the birth.
so so, uh
Thanks for joining and we'll talk to you in a few weeks. Thanks.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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