Q2 2021 Scientific Games Corp Earnings Call
[music].
Hello, and welcome to the scientific games 2021 second quarter Investor Conference call. At this time, all participants are in listen only mode.
The question and answer the session will follow the formal presentation to ask a question you May press. The Star then 1 on you touched on the phone.
To withdraw your question. Please press Star then 2 please.
Please note today's event is being recorded now I'll turn on the conference over to Jim Bob Bassi, Senior Vice President of Investor Relations for scientific games is from Betsy you may begin.
Thank you operator, and good morning, everyone during.
During today's call, we will discuss our second quarter of 2021 results and operating performance followed by a question and answer period.
With me. This morning are Barry Cottle, our CEO and Mike <unk>, our CFO our call today will contain statements that include forward looking statements under the private Securities Litigation Reform Act of 1995 of.
These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call for information regarding these risks and uncertainties. Please refer to our earnings release issued earlier. This morning, the materials relating to the call posted on our website and our filings with the SEC.
We'll also discuss certain non-GAAP financial measures of description of each non-GAAP measure and a reconciliation of each stock at measured for the most directly comparable GAAP measure can be found on the earnings press release as well as the investors section on our website.
On July 15th we made a proposal to acquire the remaining 19% interest from Si play and scientific games does not currently on.
We cannot comment further on the proposal at this time.
As a reminder of this conference call is being recorded a replay of this webcast and accompanying materials will be archived in the investors section of our website the scientific games Dot com.
Also supplemental reference slides are available on our Investor Relations website the.
Slides of meant to facilitate your review of the Companys results now, let me turn the call over to Barry.
Thanks, Jim.
Good morning, everyone and thank you for joining us.
We're excited to be here today to talk to you about our great progress, including what we've achieved over the past year.
And our path forward to unlock significant value.
What a difference of the year mix.
A year ago with the onset of Covid, we experienced significant headwinds in our business.
But with the focus and dedication of our great teams, we emerge from the pandemic of much stronger company.
With significant momentum across all of our businesses together with our New Board, we recently announced the strategic action plan to transform our company.
Decisive steps to move from a holding company to a company singularly focused on building great games Cross platform.
People love to play games, and there is a huge Tam, which we are uniquely positioned for.
We're moving rapidly with plans to divest our lottery and sports betting businesses streamlining the organization and accelerating our efforts to deleverage and invest for growth No company will be able to match our ability to build great games and franchises fully cross platform.
On our last earnings call, we outlined for you our 3 strategic pillars, and we're making great progress executing on them to unlock significant shareholder value and become a sustainable growth company.
First we're moving quickly and thoughtfully to optimize our portfolio.
We're very encouraged by the discussions and the strong interest we're seeing across the board for lottery and sports betting businesses.
We continue to believe the tremendous value in these businesses is the best unlocked by divesting them and we see multiple avenues available to do so.
And as you know on July 15th we made a proposal to acquire the remaining 19% equity interest inside play the scientific games does not currently on an all stock transaction.
Second we are investing in our largest growth opportunities, both organically and inorganically and content and digital markets to accelerate growth.
In gaming, we focused our R&D spend enabling us to build great games like monopoly money grab coin combo and dancing drums of prosperity.
Which of helped propel our north American game ops revenue to surpass 2019 levels and.
And also helped fuel our performance outside play in digital this year.
We recently made smart targeted investments to accelerate our strategy from lightning box to <unk> to our new Las Vegas, I gaming studio and you should expect more of these investments over the coming months.
And third we're focused on significantly delevering and transforming our balance sheet as we continue to make great progress organically.
We reduced our net debt leverage from 10, 5% to 7.2 times or by nearly 1 third in just 6 months.
We're confident that we're on the path of continued significant delevering as we pursue strategic alternatives for lottery and sports betting businesses.
We did what we said we were going to do and we're just getting started.
Now turning to the results what an amazing quarter, we had we delivered the nominal growth with total company revenue increasing 63%.
EBITDA of more than tripling versus last year and strong sequential growth.
Remarkably we generated a number of all time company records, including our highest quarterly EBITDA ever and our highest year to date free cash flow ever.
And we delivered progress in important areas of demonstrated clear structural turnaround that gaming and clear momentum across our businesses.
Now, let's turn to our businesses and gaming we continue to see great progress with another successful quarter building on our momentum and growing share in our largest profit pool for the North America premium ops market North America for sale market and the Australian for sale market, while continuing to maintain a leading market position.
And systems and tables.
This success was driven by the strength of our new product roadmap the strong recovery in the U S market, including record G. G R and rebounds in UK and Europe following their market reopening.
The foundation for the success is built on our strategy of having the best talent and enhancing our existing talent with executives like rich Schneider, who will help champion our vision and drive collaboration across our businesses.
The strategy is already paying huge dividends.
There's no better proof point of the enormous progress, we're making on what we saw this past quarter and gaming operations.
Total North American gaming ops revenue exceeded 2019 levels with an improved installed base mix as we benefited from the cause Scott of cabinets and higher average daily revenue.
Our North American premium installed base grew for the fourth consecutive quarter and is also now above 2019 level.
The success of cost kind of continues to build with great games like coin combo ultimate fire link and monopoly money grafts.
The SCADA has reached over 1000 active units in our gaming operations installed base and less than half the time of our most successful cabinet in recent history the <unk>.
<unk> 43.
The SCADA is already in nearly 50% of our customer base.
And on the back of the successful launch of the SCADA and late Q2, we launched the Bureau of cabinet with games like really want the dream of dreams, and 88 fortunes and per clients.
With our 3 year plan, we have a strong pipeline of cabinet launches scheduled throughout 2022 and 2023 non.
On top of this north American sales accelerated with improved capital cycles in the U S market and our new products like the SCADA, enabling us to sell over 3200 units and grow our class III ship share meaningfully in the second quarter.
The success is carrying over to the Australia market, where we are seeing early momentum underpinned by an improved product portfolio with the cracking unleashed family, which is our best performing franchise since 88 fortunes.
Turning to our systems business, we have embarked on a modernization program to enhance the success of our cross platform strategy and provide a seamless player experience.
In our table business, we're continuing to focus on innovative products.
Success in growing our balt offering which is of subscription based bundled service, enabling our customers' access to unlimited world class table games content.
Gaming is a key part of our new organization and strategy going forward and its demonstrated success. This quarter is confirmation of the great opportunity that lies ahead for this business and its ability to drive shareholder value.
Moving to lottery the team delivered another record quarter of revenue and EBITDA, along with strong sequential growth fueled by record instant retail games sales in the U S and a number of markets globally strong draw games performance and continued momentum in lottery.
The instant lottery business continued its strong run with the U S calendar year to date instant game sales up 21% over last year and up 30% versus 2019.
Internationally, our Italy instant product JV achieved record performance up over 20% year to date versus last year.
Which was the previous best year to date sales ever.
Our lottery business continues to be the market leader and importantly, we have preeminent market position and long term client relationships with our largest customers having been with us for more than 30 years on average.
We've been able to build on our success and accelerate our growth with our unique technology and IP, enabling us to provide unparalleled products and services that are revolutionizing the way lottery products are sold globally across retail and digital.
This leadership position was strengthened with the number of key games in the quarter.
First we were announced the winner of both the instant games and lottery systems contract for Pennsylvania.
This is a huge win they are 1 of the top performing lotteries globally, and we couldnt be more excited to continue to partner with them for the next 10 years as we've done for nearly 50 years.
Second we extended our new Hampshire lottery partnership for 6 more years, and importantly upgraded them to the scientific games enhanced partnership.
Which brings our U S. S. T E P partners to 14, and our global partnerships to over 20. In addition, we secured 3 European instant contracts and the countries of Bosnia Denmark in Georgia.
In our lottery, we continue to be a leader and innovator as partner to 'twenty, 1 I lottery globally.
The Great example of this is our Pennsylvania Lottery program, which continues to evolve and thrive hitting over $2 billion in Q2 in total wagering since inception.
The fastest I lottery program to reach that milestone.
We went live with the new I Lottery program in Germany for lot of Raymond fall launching digital instant games with a shared price pool, creating a great cross platform experience with our retail and instant games.
For the U S. I lottery market estimated to grow fourfold, the $11 billion by 2025 hour I lottery business has many years of high growth ahead.
During the pandemic over 20 million new players in the U S tried instant scratch games for the first time.
For the average instant selling price climbing to all time highs.
More consumers of playing instant lottery than ever before and they're spending more each time they play.
With lottery is long term customer relationships. It's strong recurring cash flows of demonstrated resilience in down markets and with multiple growth drivers ahead lottery is a truly unique business.
Poised to deliver outsized returns for many years to come.
Now turning to <unk> on.
On the back of the strong Q1 side play delivered sequential growth in the second quarter on both the top and bottom line.
For the second highest quarterly revenue ever trailing only the Covid impacted Q2.2020.
Si play continues to execute extremely well in of social casino business hitting another record performance for goldfish and launching a new version of quick hits, while continuing to improve payer metrics.
Type place payer focus on live op strategy powered by the side play engine enabled us to achieve record opt out of 72.
And record per version of 8.5% the.
Sixth quarter in a row of increasing payer conversion and importantly monthly paying users on average monthly revenue per user remains well above pre COVID-19 levels.
Si play is accelerating its evolution moving aggressively to expand in the $20 billion casual genre with the launch of Solitaire pets adventure and the development of the new casual games project ex.
For the acquisition of <unk> games project ex will have a full team with years of casual game development experience driving ex expected launch in the latter part of 2022.
Switching to our I gaming and sports betting businesses, our strong momentum continued as we delivered another record quarter of digital revenue and EBITDA, while enhancing our capabilities in scaling our offering further differentiating us from the competition.
I gaming as record quarter was driven by the strong performance of our original content offering.
The record U S G G or the.
The successful launch in Michigan, and a growing share of the U S market.
In the second quarter, we grew our U S revenue of 106% year over year, while growing our U S share to 25% in the states we are live.
A key differentiator is the breadth and quality of our content offering providing our partners with over 3000 titles and an unparalleled level of high quality must have content.
The integration of our I gaming platform with the market leaders increasingly makes us an essential partner for both operators and the content studios.
Our recent deal with Playtech is a great example.
In terms of must have content players have an affinity for land based franchises, they know and love and we have an unparalleled offering led by our original land based franchises, including things like a portion of the number 1 game in the U S free.
Rainbow riches, which is a standout in the UK market and our monopoly themed games, which drive performance globally.
To underscore this point, we recently launched <unk> balance sheet in Michigan and it has been our most successful game launch since our initial entrance in the market.
In fact, our original games generated close to 40% of our <unk> in the U S. In the second quarter.
The demand for great gaming content is growing and we are expanding our studio capacity to meet this demand.
We recently acquired Lightning box, which is the top performance studio in the U S market and just launched a new I gaming studio in Las Vegas, which will be focused on developing games from our land based franchises.
And we see continued opportunities of scale.
With the recent launches of our I gaming platform in West, Virginia and in Latin America.
In Pennsylvania with the recent integration with Vandal and with more integration is planned in the state in the back half of the year, including Barstool and Golden Nugget and with further opportunities on the horizon in Connecticut and Ontario.
With the growing pipeline of opportunities as we integrate with new customers secure partnerships with more third party studios and had a strong roadmap of land based titles going live in the back half of the year, we feel great about the path forward.
Turning to our sports betting business, we have an unparalleled position with tier 1 operators around the world for the most advanced sports betting tech platform and content able to support volume and uptime that are unrivaled in the industry.
Our business continued to build on the strong momentum from Q1 with record second quarter results as we grew our U S revenue by 205% and.
And we've powered over 100 million bets at the European Soccer Championships.
We continue to rapidly scale, our U S footprint deploying 8 sports books in the U S in the second quarter.
This included the points sports books with band dual in 5 states and with the win in 2 states.
And post quarter end, we launched 3 additional sports books, with Vandal, and New Jersey, Pennsylvania, and Virginia, all on the same day.
We now power of <unk> across all of their U S States.
This momentum continues with more than 30 U S sports book deployments anticipated for the full year 2021.
We're also leaning into sports betting content, and adjacency, where we see tremendous opportunity for growth and a real differentiation.
We recently acquired sport cast and the award winning bet builder product with sport cash Vance can create their own bets and define the story of a game.
We are moving quickly to integrate sport cast with leading operators and are already live in 9 U S States.
Looking ahead, we see continued momentum of sports with recent legislative progress in the U S and with a growing pipeline of opportunities around the world.
We have over 40 opportunities globally that we're pursuing with deals advancing in Africa, and South America as we look to expand our footprint in these fast growing territories.
So before I turn it over to Mike I want to reinforce that we are uniquely positioned with a number of significant catalysts.
We are currently seeing continued momentum in our businesses.
And over the coming years, we see meaningful growth on both our top and bottom line.
1 thing that has been consistently reinforced over the past year is that people love to play games.
And we will be clear beneficiaries.
And now Mike will speak to the financial results.
Thanks, Barry and good morning, everyone. It was great for will be speaking with you today.
Before I get started today I'd like to just quickly Echo Barry's comments, what a difference of your mix and what is your this is Ben.
As an organization, we have accomplished a tremendous amount operationally financially and strategically.
Our teams around the globe have instilled a new level of discipline and focus across all of our businesses, it's very encouraging to see.
It is this commitment to excellence that enabled scientific games to deliver the great results. We are sharing with you today.
Now before we get into the quarterly results I wanted to share some thoughts on the intended divestitures for lottery and sports betting businesses.
We continue to move these deals forward at a rapid pace and there are progressing nicely.
I have been lucky enough to be involved in a number of these deals over the course of my career and I've rarely seen the level of interest that we're seeing on these assets.
Speaks to what great businesses. They are the leading positions they hold on the market from the opportunities that they have in front of them.
We continue to believe that there is of tremendous value on these businesses that is best unlocked by divesting them. That's the results of this quarter further confirm.
While we are moving quickly we are also being thorough and thoughtful in the process. These intended divestitures will enable us to continue the materially and quickly de lever the balance sheet.
While providing us with the dry powder to invest to grow both organically and inorganically.
We look forward to share more specific updates with you soon but the process and the interest we're seeing from the outside confirm we are on the right path to unlock value for our shareholders.
With that let's turn to the quarterly results. There are 4 things I want to highlight for you to the <unk>.
Our strong momentum that we saw on Q1 continued on into Q2.
Enabling us to drive exceptionally strong results with revenue growing 63% and the EBITDA more than tripling year over year.
Accordingly, all 4 of our businesses delivered sequential growth on the quarter with total company revenue, excluding a $38 million 1 time VAT recovery benefit was up 16% sequentially.
EBITDA was up 27% sequentially with both lottery and digital achieving another quarter of record results.
And our EBIT this quarter was the highest quarterly EBIT in our company's history, even after excluding the benefit from the onetime VAT recovery.
Our total company EBITDA margin, excluding the $38 million about recovery climbed to 41% exceeding our margins in 2019.
This speaks to what has been a real priority for me and the teams around the world to ensure that more of every dollar that comes on the door drops through to the bottom line.
Second we continue to be laser focused on managing our balance sheet, delivering 133 million of free cash flow in the quarter EBIT. Excluding the VAT recovery. This was a very healthy free cash flow conversion rate. The real Testament to how we are focused on delivering value for our shareholders.
Third we are making tremendous progress delevering, reducing our net leverage to 7.2 times a reduction of over 3 turns in just 6 months.
During the quarter, we paid down $150 million on our revolver and another $150 million in July that makes now $500 million in total since October.
And fourth and finally, we continue to be diligent in managing our cost base and are on track for our target of $50 million of additional run rate savings as we exit the year keeping in mind. This is in addition to the $50 million of permanent savings we achieved last year.
Now, let's turn to the quarterly business unit results games.
We saw strong growth on the quarter, both year over year and sequentially with revenue tripling year over year, and EBIT of rebounding to a $196 million from the decline in <unk> of last year.
On a sequential basis, the business accelerated with revenue improving by $123 million and the EBIT of about $88 million compared to the first quarter of 2021 the <unk>.
Business benefited from the strength of the reopening, particularly on the U S.
The increased traction with our new product roadmap and the $38 million of onetime VAT recovery items that we talked about.
It is very encouraging that the momentum is broad based with all business lines of year over year and sequential growth as markets continue to open up globally.
From a productivity standpoint, taking out the VAT benefit which impacted both the top end of the bottom line.
Team's continued focus on driving productivity and efficiency delivered EBIT margins of 48% on the quarter.
Now of digging into the trends, we're seeing in gaming a bit more we continue to see markets open up globally with nearly 90% of our North American installed base pack of with our U K installed base of approximately 60% of active and now with the 95% accuracy in July.
With our European installed base, we were 2 thirds of active in the quarter and again post quarter end of July we are now approaching 90% assets.
Looking ahead, while we're keeping an eye on the recent rise in Covid cases, and the potential for renewed restrictions. We see continued strength on our kpis and momentum in the business ongoing through July.
With that let's turn to the lottery.
The strong momentum on the business continued with revenue growth of 27% and the EBITDA, increasing 42%, enabling the lottery business. The posted another all time record quarter. The business grew sequentially with revenue up 7% in the EBITDA of 16% on the back of what was already a very strong first quarter the.
The margin improvement for the quarter was fueled by the strong top line growth and very strong performance from our joint ventures around the world.
This accelerating revenue growth on margin expansion underscores the tremendous value of the lottery business as Barry mentioned with the industry tailwind, we're seeing and lottery. We believe there of long term growth outlook is fundamentally improve taking into account the difficulty of predicting how long we will continue to benefit from the Covid specific dynamics, we have seen over the course of the last year.
Now turning to cycling the continued to execute extremely well on the social casino business growing revenue, 2% on EBIT of 4% sequentially and producing our second highest revenue quarter ever.
Accordingly side plays an integral part of our strategy and with the ability to scale and grow meaningfully we see a pipeline of opportunities ahead.
We invest in the business, both organically and Inorganically.
Now turning to digital the busy.
This continues to outperform delivering another record quarter with revenue growth of the 27% of on the EBIT growth of 55% as compared to the second quarter of last year.
As a reminder, last year, we had certain 1 time items in the numbers that impact of the underlying performance of those businesses from the comparison standpoint, if we normalize for the sports platforms and I gaming revenues grew 46% year over year and 8% sequentially.
The segment Kpis page on our earnings release as the normalized numbers for your reference.
While our I gaming of sports betting businesses continue to benefit from the industry tailwind and our increasingly differentiated offerings in the marketplace.
We anticipate there will be some impact of the business of restrictions on closures continue the east now.
Now, let's turn to net leverage debt and cash flows. This is an area that is a major focus and where we continue to make tangible and meaningful progress. We continued on our path of strengthening and derisking the balance sheet ending the second quarter with net debt of $8.2 billion of net leverage of 7.2 times, which compares for the peak net leverage at the end of the fourth quarter of last.
Year of 10.5 times.
We expect to continue to make steady progress deleveraging organically given the increasing strength of our business on a focus on productivity or.
Our weighted average cost of debt was 5% and we ended the quarter with $1.4 billion of available liquidity compared to $943 million from the second quarter of last year.
As a reminder, we don't have any maturities that come due until 2024.
Now moving to free cash flow, we generated a very impressive $133 million of free cash flow in the quarter and $213 million year to date the can.
Testament to how the organization of intently focused on driving value for our shareholders.
The growth in free cash flow was driven by the strong year over year EBIT performance, partially offset by lower accounts payable balances this year.
In closing today, but just the emphasize we're well underway on this journey to unlock value for our customers for our employees and for our shareholders.
Growth in the near term as we continued to deliver exceptionally strong results and on the long term as we execute on our new vision and strategy.
The path forward for scientific games of differentiator.
With the singular focus on building great games and franchises that are fully cross platform and with a more streamlined and simplified organizational structure.
While we are transforming the company. We are also executing with a high degree of operational excellence driving productivity that is enabled by our extremely talented teams around the world and the high performance winning culture I'm very proud of what we've accomplished with the company not only with the magnitude of the change, but also with the pace at which we're moving things forward I'm excited about the opportunity set.
1 of the head.
With that we will be happy to take your questions. Operator can you open the line.
Yes. Thank you at this time, we will begin the question and answer session.
The question you May Press Star then 1 on your Touchtone phone.
Speakerphone, please pick up your handset before pressing the keys.
All of your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.
And the first question today comes from Barry Jonas with true of Securities.
Guys good morning.
I know Youre limited in what you can say, but can you give any additional color on how the sales process for lottery and sports betting.
Sort of the interest you have seen.
Thanks Barry.
Before Mike jumps in on that let me just first start by saying.
We are extremely happy with where we are.
And we are.
We're executing extremely well and delivering record results in Q2 and on the backend of 4 quarters of growth with continued momentum into Q3.
We are progressing well on our strategy and vision to become a leading cross platform of global Gaming Company and also we're seeing strong interest in our divested assets Mike.
Barry good to chat with you again the day by the way.
I just want to quickly say something that very soon because it is pretty amazing what our digital and lottery teams are doing there.
Running a very very quality process at pace and also continuing to deliver record results for the quarter. The results for both of them. This quarter just fantastic on the divestiture side itself.
Encouraged by the discussions we're having externally right now.
Very fortunate in our mind to have multiple viable options to monetize both of these assets and based on what we're seeing we believe we are going to be able to unlock some real value for our shareholders and doing so as we've talked about over the course of the quarter were well along in the process. They are all moving at a very rapid pace as you might imagine.
Given the market position of the leading businesses, we're seeing a lot of interest from.
From the outside in those businesses.
We're going to be very thoughtful and thorough on the process of course.
Nice competitive pension, which we're excited about as well.
Ultimately, we have high confidence in the ability to make these things happen and bring them to a quick resolution.
It should allow us to quickly realize our longer term strategic vision of that period has been talking so much about and quickly de lever the balance sheet create a bunch of dry powder to reinvest in growth.
Organically.
That's great. Thanks for that and then just for a follow up question.
Clearly there has been a resurgence of Covid cases, with the Delta Varian can you just give maybe a little more color on what youre seeing in the business in July and beyond.
Yes, Jimmy jump in the Alright, I'll grab that 1 too this is Mike again.
It's interesting.
It's an interesting question to ask right now we've had 4 straight quarters of growth. We just had company level of records in the EBITDA and revenue for the quarter.
Lottery of digital both have record quarters on the 5 way of businesses posted the second highest revenue quarter ever only following Q2 of last year. So the business is doing really well at the time.
It's tough to speculate on Covid and know exactly what's going to happen, but what I can say is through July we just haven't seen the slowdown yet. The fact, if you look at a lot of the kpis, including against the gaming with point in an active units in the U S. Europe and UK. They are all expanding and July was actually higher than the average for all of Q2, So we feel pretty good about.
We are now I guess, what I would say is.
In the short term the good news is we found that we've got 3 businesses that are very resilient and do well even ahead of COVID-19 related environment right and on the gaming side, we took some pretty tough measures last year to reposition that business from a cost standpoint, great new products that we think we think short term they are well positioned to handle whatever the market throws Adam.
If we were to see restrictions reinstated what we've also seen is on our players love to play our games and demand bounces back very very very rapidly and we're seeing that demand on the point of the numbers that we've talked about so many times before so longer term I would just point you to we think we're uniquely positioned with a lot of significant catalyst so that over the coming year.
We're going to expect meaningful top and bottom line growth.
Perfect. Thank you so much.
Thank you and the next question comes from adjusted <unk> with Stifel.
Hey, good morning, everyone. Thanks for taking my questions and congrats on another strong quarter.
I wanted to start on the gaming ops business, specifically international yields picking up nicely sequentially here during the second quarter could you talk broadly on how you see the recovery cadence progressing and your international off relative to the U S. Specifically, if you look at land based gaming ops and products sales.
Yeah, absolutely I think the.
The Great News here is we are seeing the international markets open up and.
As Mike said people of the play games and similar to what we saw on the U S.
Players are coming back we're seeing active units revenue per day.
The point and continue to improve just like again as we saw in the U S.
Yes, the considerable.
Pent up demand for our products.
You probably remember back in Q1, UK was completely shut down.
Got it built up through the quarter and landed at about I would say, 95% active by June which is great for us as you know because we of around 50% market share there Europe was approaching 90% active by June So we're seeing.
Q1 was challenging internationally in Q2, we saw.
Good recovery in the market and now we're set up to see the full quarter of that in Q3 as well.
Its strength.
And we expect that we expect to see continued gains as restrictions are starting to loosen.
Perfect. Thanks, that's very helpful color and then for my follow up I wanted to touch on the margin outlook for the remainder of the year, specifically, we have heard from commentary from some of your peers around supply chain issues is that the trend you're seeing or any other potential cost inflation that we should be contemplating for the back half of the year.
Yes.
I'll take that 1 Geoff this is Mike and Gary feel free to jump in on the back into I think Theres 2 questions. In there 1 was the supply chain and then 1 was just kind of the margin outlook for the back end of the year.
On the supply chain piece I think what I would say is this we're obviously aware of all the issues that are out there in the marketplace.
Not just in our industry a lot of industries quite frankly, but we think we're well positioned we are well positioned to meet the demand. So.
So far we haven't really missed any revenue or margin.
Because of the supply chain issues as you might recall.
Late last year, we were talking a lot of productivity operational excellence on those kinds of things and we really went after the supply chain.
The hard and I think Thats got a set of well coming into this year, we've got a new team running the supply chain within our gaming operations business are doing a fantastic job, we have high confidence in them.
Theyre not seeing any issues in Q3, we think the able to meet all of the revenue on all of the margin demand that comes through there and then even on the on the lottery side, what I would say of the lottery guys.
The demand off the charts versus historical levels.
The strip the supply chain need all of that demand hit these record results that we're talking about it so.
Knock on wood, we feel good with where we are on the supply chain right now we don't see any issues on the back half of the year for the on the margin side, we had a great quarter in margin.
This quarter 1 thing just to remember we did have the onetime $38 million good guy for VAT running through the P&L that was in revenue of the margin and it was the cash flow so that won't repeat itself, but the underlying business is performing well on margin.
As you know we've been focused on the $50 million of cost out we've been focused on another 50 million that we already took out last year. We've been focused on productivity operational excellence all of those things are really helping the margin profile. I think Q1 is a good place to look for what the trends look like for the rest of the year. There is always going to be some fluctuations quarter to quarter.
<unk>, depending on the mix of business units for the mix of products that we're selling et cetera, but Q1 of the better baseline to look at for the full year.
I hope that kind of optimal.
That was very helpful. Thank you Mike I'll pass it on I appreciate all the color.
You bet.
Thank you and the non.
Question comes from John decree with CBRE.
Good morning, everyone.
Barry I wanted to revisit your prepared remarks, I think you talked a little bit about the north American premium installed base and how that.
On a couple of metrics had exceeded 2019, it's obviously been a focus of yours and the team for a while I was wondering if you could help characterize how you think that business is ramping how much is the the demand we're seeing on reopening vs.
How much youre seeing from strategic initiatives that you've put in place already.
Thanks for your question I'm actually glad you asked that because we're really proud of the team and the.
The amount of effort they've done over the last year to put it in the great game plan, which includes new road map of based on large profit flow that we've talked about it.
The commercial rather than just the tremendous progress, we're making in that and.
It's driven by and puts the Annapolis and the inputs of great New cabinets, great New games that we just launched per.
Perfect time in the marketplace as the market starting to recover.
And so.
It's early in the journey, but youre seeing the points on the scoreboard right. So youre seeing the outputs of it.
It is a function of both the function of the kind of riding the wave of the Mark.
But it's also.
Taking share. So if you look at North America premium game off the G E.
Stated.
For the fourth consecutive quarter now above 2019 levels on the North American side.
We achieved meaningful ship share selling over 3200 unit.
Because of the products right just got it continues to break new records for the new cabinet out there.
The active use of users in units excuse me in less than half the time of the <unk> 43, and as you kind of remember G..43 was our most successful cabinet in recent history and.
It's outperforming that it's layered on with incredible games going combo of ultimate finally monopoly of Moneygram and on the heels of that we launched neuro, which kind of in a soft launch at the end of Q2.
The big robust pipeline for orders on that and we've got again, the amazing games like Willy Wonka Dreaming of dreams any portion of the Denver clients. So on a whole.
All host of healthy.
Games, Kevin on board so it's.
It really is a function of this new incredible team coming in with approach focused on the large pieces of the market concentrating on doing what is right, which is building great products that the players love to play and so we couldnt be more confident in our pipeline of cabinet of the game launches that we have planned throughout the rest of the year.
As well in 'twenty 2 'twenty 3.
That's helpful. Barry maybe of a tuck in follow up on that related to your content studio acquisition.
For the allowance lightning box.
Does that how does that fit into the strategy specifically.
That support the premium.
The category and is that the <unk>.
Content studio M&A tuck in something that Youll continue to look to deal with you.
The focus on content.
Yes.
Our vision to become the global game, leading global game company in the World, we are going to take a franchise approach.
Building great games, great franchises, and then deploying them across land based digital and social.
<unk>, so it's really about.
Yeah.
Looking at it from the perspective of <unk>.
Building. These games that then we can.
Leverage across these different groups and <unk>.
As we talked about we want to lean in on digital and content and.
Lightning box does for us it gives us a incredibly.
The talented studios that really built authentic what I would call kind of land based type of games.
Effectively in the digital space and they've had very good success.
In the U S because of that and so if you think about our M&A strategy, we're really well positioned today of the major pieces are in place to achieve it but that said, we're looking at content and digital focus acquisitions to help us accelerate because you've got a $50 billion digital Tam out there that we can.
Average these great franchises, we know players love to play so we're already executed like the box was 1 example, Cooper is another example of it so really focusing on investing in high growth areas.
The ability to bringing in talented great studios to help us drive and get there.
Thanks, Greg it's great to see the strategy really come to the fruition congratulations on the quarter. Thanks for taking my questions.
Thanks.
Thank you.
The next question comes from Ryan Macdonald of Craig Hallum Capital Group.
Good morning, guys. Congrats on the results of.
1 of them and it actually segways nicely off of that last question you just answered, but as you consider potential I gaming content acquisitions, and you can even speak to lightning box as well, but how much of an advantage is having ods and access to see real time game performance player engagement et cetera for not only your own <unk>.
<unk>, but also third party aggregated content.
Yes, great question.
Let me start by saying Oh Gee. This is actually the incredible assets that provide tremendous value to everybody on the value chain right. So if you think about it we sit in the middle of the digital gaming space almost at the kind of that Netflix right. So for us we deploy of GFS to the top tier 1 operators globally and that gives the.
Access to 3000 plus games studio providers.
Get great value because they get access to those operators.
Of that having to build their own <unk> and trying to do individual distribution deals and so we provide tremendous value to them for us it really helps us.
Great insight to what's going on in the marketplace. The great. It gives us an early relationships with these new studios where.
We're working together to bring their games to market and so gives us great insight, but then it also gives us an advantage on the M&A for us because you always look for when you're making acquisitions the ability to provide upside synergy upside synergies because of that distribution that we have we can plug the studios in and give them massive.
The abuse right away as a part of the equation and rationalization around our acquisitions and so <unk> is a tremendous asset for us.
And then just a quick follow up on any financial metrics, you can share of round of Lightning box acquisition.
Yeah.
No we're not right now we're not disclosing the terms of it is obviously the.
Immaterial from a from a company organization perspective.
Thanks, guys.
Thank you and the next question comes from David Katz with Jefferies.
Hi, good morning.
Mike.
I know you can't really comment on the process, but I'm wondering how you're thinking about where you might be able to land qualitatively speaking in terms of leverage.
Are we thinking that we can land.
Tactically or actually.
<unk> grade.
Or do you have.
Target in mind that you can help.
Help us.
It seems like I've heard that 1 from you before some of our David but I'm happy to do it always happy to do it now the <unk>.
Headline that we've been talking about again just to go back to it is we want to move this quickly from a debt story to an equity story.
We're not waiting until the acquisitions are done for.
On that point of get focused on it we're already making pretty decent progress on leverage just to recap what Barry said, we've got 3 turns reduction so far this year.
We paid down another 150 million of.
Debt in the quarter of another $150 million of July 500 billion since October.
If you look at the consensus out there for 2021 and 2023 just organically, we're just down low 6 and then low 5 respectively. All of that's before the accurate ex.
Divestitures on the backend et cetera.
Given how well advanced we are on the process on both lottery and sports on the high confidence we have on our ability to execute and unlock.
The real value for our shareholders on just the interest we're seeing we're obviously going to be on a go materially below that and then once we get materially below that what I promise barriers I'm going to give them a war chest of dry powder and cash to go spend on organic and inorganic growth, allowing us to really get the topline humming again.
The gift that digital mix, where we'd like to see it over a period of time. So that's the game plan. We're executing 2 we have high confidence on our ability to do that I would probably think about it as a range more than the specific number just given where we are in that M&A pipeline at any given time, but we're going to do all of that in the context of maintaining of transferring on balance sheet. Once we get there.
The keeping those leverage levels, where they need to be.
Alright.
If you have not given a range at any point through this process.
I have not.
Okay, and if I may just quickly follow up in the spirit that we repeat ourselves for a living.
I know that you've talked about the the installed base on on the game ops and just looking back in my model It has been.
More than 4 years since we've seen an increase in that installed base and obviously the win per day.
It was driven by a lot of the volumes, we're seeing across the industry at this point.
Could you just give us a little bit more color on how you got that to grow this quarter and with respect to the win per day.
Much of that should we think about of sustainable versus just this sort of <unk>.
On that we're seeing across the industry and that's it for me. Thanks.
Yes. This is Barry I'm happy to jump in on that.
Again, when the new team came in they took the step back and look at our product roadmap for the year at all of the different markets. We were going after and we prioritized the largest profit pool of North America game Ops, North American sales guest failure in the market and really did a concerted effort.
Building products that would go at the heart of those spaces and we began the.
We did.
A commercial approach to that strategy as well as developing great products and.
What youre seeing is really the launch of our new products and games, having a real impact.
Coming out of that focus so the.
Scott of success.
<unk> led the way in <unk>.
Helping us drive.
Drive that growth that we're seeing the sequential quarter on quarter and so.
We're excited about it and we're extremely confident and optimistic.
That we're going to continue to build on.
Operating we have time for 1 more question for you very much.
Yes, Thank you and that comes from Chad Beynon with Macquarie.
Hi, good morning, Thanks for taking my question.
You guys have been a leader in the systems business for years, I think of time that business generated over $300 million of annual revenues based on your quarterly results. It looks like the recurring piece of that business is really starting to come back but can you help us think about the systems opportunity going forward.
And then related to that how the unified wallet on some of the cashless features are being accepted by your partners. Thanks.
Absolutely.
Ill jump in on that 1 so yeah as you talked about very similar to some of the other core pieces of our business. We came in that assessment of it.
Put some new leadership in.
Thinking in place the real thought the modernizing.
Modernizing the.
<unk>.
The business from a product of nation perspective, but also from a business model perspective, and we're leaning in on that again as I kind of said on the gaming side, we're still early in the journey, but.
We're seeing some good good progress the second piece of that is part of the modernization, but also really pushing toward what are the new world is going in terms of convergence in cash list.
<unk> heavy and we leaned in early on on cashless and so we're really really pleased where we stand there. There is a tremendous amount of momentum obviously that was initiated by COVID-19 as of today. We are live in 7 properties with about 13000 machines connected and anticipate another 7 additional partner deployments of the next 12 months.
We're also working towards the field trial in Nevada to get approval for cash flows as well, but the.
Core key point that I'll remind you on that 1 as we are in.
Really really well positioned here because because we're the leading systems footprint without the 50% of market share about 4 of 500000 interconnected slot and because of the deal we did with IGT to get the best collection of IP of technology, that's really required to build and.
And deploy the best solution.
Really puts us in a great position, because we kind of.
Or in that last mile of connecting the player to the cash as wallet and so we're in a prime position. There. We've got great team leadership in place that really like the approach we're taking to the business. So thank you for the question.
Perfect and then.
<unk> follow up Barry can you talk about the digital margin opportunities in that segment I guess once the sports business.
It's been divested.
Should we assume that the that the margins in that segment start to increase, particularly given what you've talked about with with bringing a lot of the content in house with with Lightning box in your in House studio.
Currently your margins in that business are right around 30% should we do.
A lot of the revenue generated in the years to follow a flow through to the bottom line. That's all for me. Thanks.
Yeah, I'll, just say at the high level and Mike can jump in as well, but I think to your point on in the gaming business 1 of the things we love about it is.
You build.
Leveraging this approach is the franchise approach that we talked about so we can take the R&D of building the game like a purchase and then amortize that across all of our businesses and.
And it is build once and then deploy globally and kind of.
Software recurring revenue model and so.
The margins on the on the <unk>.
The gaming business are healthy and.
And it's also differentiate it because games are not commodity people love of specific games that they love the plethora of Haiti fortunes of this number 1 in the marketplace of day, you build a great game and you could build that market position and so it all and so on.
At a high level.
We do expect healthy margins on the gaming business.
I'd only add to it exactly what Barry said that business already has a very healthy financial profile today.
Gross margin at the end of the EBITDA free cash flow.
We continue to grow and scale and we're obviously going to get some benefit there as well and then the real exclamation point, Barry said that I really like is that contract creates margin differentiation, which is why we're going after it for our strategy.
Great I'll turn it back over to Barry for some final comments.
Thanks, everyone really appreciate you joining us for today's call. We're very excited about the progress we're making on how much we accomplished in the past year. Our strong results demonstrates the clear momentum across all of our businesses and the focus and hard work of the talent the teams.
Moving quickly to execute on our strategic pillars on.
<unk> substantial value.
Optimize our portfolio and invest in high growth opportunities and significantly de lever.
Excited about our path forward as we transform our company and streamline our organization with the singular focus to become the leading cross platform Global game company.
With that I want to thank you for your support.
Great. Thank you everyone for joining us on our call I'll turn it back over to the operator.
Yes. Thank you as much on that does kind of phases on.
That does conclude today's teleconference. Thank you so much for attending today's presentation. You may now disconnect your lines.