Q1 2022 PlayAGS Inc Earnings Call
Space more broadly than ever before.
We have dramatically improved our capex and cabinet deployment process as we also stay focused on slot real estate optimization.
And last but not least we have consistently grown unit sales over the last five quarters, while not compromising our average sales price per cabinet, which is one of the strongest in our competitive set.
Turning the tables the trends are equally as encouraging.
Supported by our commitment to providing our customers with innovative value added products, which without question or improve the profitability of their casino floors.
I will briefly highlight some of the recent trends what are consistently growing table products segment.
Order momentum continues as <unk> or bonus spin extreme continues to Wow, our customers with the ability to link just about every table game type to a single progressive which is a one time offering in the industry.
Another highlight for <unk> was a recent installed nearly 40 units at the <unk>.
Grand reopening.
Our largest single site installed to date.
<unk>, our latest card Shuffler, which was recently launched has been very client, which upon is intended as a machine is client and so are the service calls are coveted combination and the shukla product space with.
With the smooth launch, we expect orders to build and install to steadily increase over the coming quarters.
Lastly, our Ags Arsenal site license offerings that combine nicely with Pax MBS X the eight and the continuing momentum we've had over the past year.
Finally in the interactive segment, we have been able to achieve relatively consistent performance as we continue to strategically reposition the business to better take advantage of our strong land based product portfolio and the North American online.
Although we expect our interactive business rate remained stable in the near term. We are currently investing in additional resources to expand our pipeline of games from our land based business into the online space.
We are confident that our customer relationships along with the proven performance of our games will lead to a new period of growth when were able to place more games.
And our operators.
Andy and I am encouraged by our consistent performance over the last year that said Im most excited about what lies ahead in 2023 and beyond and while I'm, saying that you might be asking why are you. So excited.
The answer is tied to the overall theme of my prepared remarks, and that is an investment and the related returns that we expect to see as we look into the future.
The reality is that R&D investments require some patients.
And with the time it takes to initiate staff and begin production for multiple new studios, we end you'd have walk down the path of patients together.
Now that those studios are online we are seeing returns and we'll continue to see leverage contributions as we layer in new productivity for team members, who started 12 to 18 months ago.
All of which will further accelerate the growth of our slot business.
This growth coupled with <unk>.
Our table game momentum and a promising interactive segment should provide accelerated growth increased cash flow and in turn continue to delever our balance sheet.
Summary of outcomes, which feel heavily discounted in the context of our current share price.
With that I will turn the call over to chemo to walk you through our first quarter results in greater detail.
Thank you David and good afternoon, everyone I would like to start off today's call by reviewing some highlights from the first quarter and offer a perspective on how we see the business trending as we look ahead to the second quarter.
I will also address a few items related to the balance sheet and close by sharing some thoughts on our capital allocation priorities for the remainder of the year.
It is important to note my forward looking commentary assumes no material change in prevailing global macroeconomic conditions.
Turning first to our domestic ECM business first quarter domestic AGM RPT increased 2% on a quarterly sequential basis topping $30 for the fourth consecutive quarter.
The sustained positive momentum in our domestic AGM RPT performance reflects continued successful execution of our premium game growth initiative, the improving depth and breadth of our core game content offering.
Compounding effect benefit of our installed base optimization efforts and consistent industry wide GTR trends.
We expect to further benefit from these trends and initiatives throughout the second quarter, which should allow us to continue our string of $30 plus domestic AGM RPT performance for a fifth consecutive quarter.
Shifting to our domestic <unk> installed base, we had a total of 15950 units installed at quarter end.
Relatively consistent with the prior sequential quarter.
Supported by growing demand for our high performing premium game products. We believe we could achieve modest sequential domestic AGM installed base growth in the second quarter.
As a reminder, we continue to target cash on cash payback of less than 12 months on all new machine placements at threshold, which we believe will allow us to continually strengthen our per unit economics increase our returns on invested capital accelerate our free cash flow generation and ultimately maximize.
A long term shareholder value.
Looking at AGM sales, we sold a total of 955 units globally in the first quarter, an increase of nearly 20% relative to the 815 units sold in Q4 of 2021.
The first quarter marked the fifth consecutive quarter in which we are able to grow <unk> unit sales on a quarterly sequential basis.
Four items allowed us to sustain a consistent unit sales growth trajectory in the quarter first as David mentioned, our decision to accelerate investment into our R&D franchise continues to broaden and strengthen our core game content portfolio as our growing team has been able to produce a higher volume of game theme.
<unk> offering more diverse feature sets with a more consistent release cadence.
Second our sales team continues to identify opportunities to strategically expand our customer penetration, particularly with several larger corporate buyers.
Third we continue to leverage our exceptional game performance to command, an outsized share of the growing historical horse racing market, both in new and existing jurisdictions.
Finally, we have continued to command our fair share of sales opportunities within the steadily improving north American slot replacement market.
Looking ahead to the second quarter, we expect to further benefit from each of the four previously discussed themes, which should allow us to deliver Q2 2022 EDM unit sales that are in line with to slightly ahead of Q1 levels.
First quarter domestic average selling price or ASP.
<unk> 19 for the second consecutive quarter supported by growing demand for our premium priced Orion per cabinet and continued implementation of our price integrity program.
We expect these two items to positively influence our ASP performance in the second quarter, allowing us to maintain our industry leading ISP.
Shifting to our international <unk> segment, we continue to witness a consistent recovery within our Mexico business.
To that end the first quarter marks the seventh consecutive quarter in which we are able to improve our international AGM, our PD performance on a quarterly sequential basis.
We estimate approximately 80% of our international recurring revenue units were active and playable at the end of the first quarter with RPT on the active units relatively in line with pre pandemic levels.
Consistent with our expectations entering the year, we believe our international UGI RPT should further recover throughout 2022 with full retracement to pre pandemic levels likely occurring sometime in 2023.
During the first quarter, we executed our first AGM unit sales into international markets since Q2 2020.
Looking ahead, we have identified additional opportunities to further leverage our gli approved for sale products in international markets.
Eventual table products revenue growth to continue in the second quarter.
Trends within our interactive business remained consistent throughout the first quarter.
With the segment delivering over $2 million of quarterly revenue for the fifth consecutive quarter and positive adjusted EBITDA for the ninth consecutive quarter.
Segment level results continue to benefit from the strong performance of Ags content within the online channel and further broadening of our real money gaming or RMG, operator partner relationships.
With respect to our online content. We recently recently achieved a top five supplier indexing ranking in the April 2022, Eilers online game performance report with our capital gain theme recording a top 10 slot game ranking.
Additionally in April we successfully launched with 25 operators into the Ontario, privatize market, including our first contracted arrangements with the two most prominent daily fantasy sports brands currently operating within the online space.
Looking ahead, we continue to refocus our interactive business around broadening our penetration of regulated North American RMG market.
Additionally, we have started to leverage additional resources to allow for a more consistent game release cadence into the online channel.
While these new customer wins and content initiatives should support revenue growth in the back half of the year. We believe second quarter revenues could look similar to those achieved during the first quarter as these growth accelerators take time to fully ramp.
Turning to margins first quarter adjusted EBITDA margin was 45% in line with the expectations articulated on our fourth quarter call.
We estimate transitory costs related to global supply chain and logistics disruption impacted the year over year margin comparison by approximately 90 basis points.
Looking ahead, although we are starting to see wage pressures global logistics disruption and the price of certain raw materials moderate we continue to navigate anomalistic inflationary pressures on a handful of electronic components. As a result, we expect to incur higher average material costs in the second quarter the impact of <unk>.
<unk> will likely be accentuated by the anticipated growth in our AGM sales revenue mix.
Additionally, we plan to host our annual game on customer summit in June which will contribute to a seasonal increase in our SG&A expense. These two items are likely to contribute to a modest sequential decrease in our second quarter. Adjusted EBITDA margin that said given the moderation we are starting to see in our production.
Added costs, we expect second quarter margins to serve as the low watermark for the year and believe we should be able to achieve sequential margin expansion throughout the back half of 2022.
Additionally, our production team continues to do an excellent job mitigating these challenges where possible, allowing us to maintain our pre pandemic lead times on new orders and fulfill the full extent of our demand in our pipeline.
Finally supported by the growing demand. We are currently seeing for many of our products. We believe we should be able to mitigate a significant portion of the higher dollar weighted cost helping to neutralize the net impact to our adjusted EBITDA performance before closing I would like to offer some perspective on our current thoughts around capital allocation.
And the balance sheet.
First quarter capital expenditures totaled $12 million.
Over half of which is related to new machine placements.
For the full year, we expect to incur consolidated capex of $56 million to $62 million.
First quarter free cash flow defined as net cash flow from operating activities less capex was approximately a negative $4 million.
Costs associated with our debt refinancing impacted free cash flow by approximately $6 million.
Additionally, net working capital was a consumer as we experienced a slight build of inventory to ensure that we are positioned to fulfill the growing demand we see for our products in a timely fashion.
Looking out over the remainder of the year, we do not expect working capital changes to prove as impactful to our full year free cash flow performance.
Looking at the balance sheet, we ended the first quarter with net leverage of four two times and approximately $73 million of total available liquidity.
In February we successfully completed the refinancing of our total debt outstanding, allowing us to simultaneously lower our borrowing costs extend key debt maturities reduce our total principal amount of debt outstanding and expand our revolver capacity.
Supported by the operational momentum, we continue to see within the business the approximately $10 million of annualized cash interest savings. We have started to realize as a result of the refinancing transaction and our organizational commitment to maximizing free cash flow, we remain confident in our ability to deliver on our year end 2000.
22, net leverage target of less than four times.
While achieving our net leverage target remains our highest priority we are committed to allocating our excess capital in a manner that create the greatest value for the company and its stakeholders to that end. We believe the meaningful disconnect that exist between the momentum we are witnessing in many facets of our business and the current levels, which are.
Shares trade presents a compelling opportunity to drive long term returns well above our internal capital deployment hurdle rates.
Accordingly to the extent that dislocation in our equity valuation persist, we could look to opportunistically repurchase our own shares all else being equal.
Importantly, based upon the demand trends, we are seeing within the business today, we do not view executing share repurchases and achieving our net leverage target as being mutually exclusive.
As a reminder, at March 31, 2022, we had approximately $47 million available for repurchases under our existing authorization.
Operator. This concludes our prepared remarks, we would now like to open the lineup for questions.
Thank you if you'd like to ask a question. Please press star followed by the number one on your telephone keypad now.
Your question. Please press star followed by Jay and then preparing to ask your questions. Please ensure your devices on mutual.
Yes.
Our first question today comes from Barry Jonas of Shire.
Your line is open.
Thank you.
Given the strong commentary on the gambling gamblers, resiliency, which has really been mirrored so far by by operators this earning season.
I was hoping to get more color on your views on the replacement cycle. I believe you said in the prepared remarks that you expect to see some growth, but how sensitive do you think your customers will be especially with the stock market performance and we've been seeing across the board here. Thanks.
Hey, Barry Thanks, So the last comment I don't really know how we've ever seen the stock market in particular.
<unk> or impact capital expenditures with our customers.
Go back quite some time to really track that and say Oh. It was the stock market performance that drove that I think so far we continue to see the consumer show up if you were to try to get a room in Vegas here going out quite a few months you will see that.
Vegas performance and room pricing its not cheap to come here, it's not easy to get a room.
The indications we get across the board as the consumer is still there or let's say the players still there.
Last time I commented on the call that I don't necessarily believe that gamblers are tuned into CNN every day.
They seem to this is there are a form of entertainment and so long as they keep coming and the trends continue to be strong within gaming themselves. We believe that the capex spend is going to be there and we believe that that replacement market is going to be in line with what we're seeing around that eilers numbers.
Will.
That's great to hear and then just as a follow up.
Historically, I believe theres been a belief that native American tribes, we'll maybe spend a little more than commercial operators I'm just curious if that trend.
To be consistent today.
I mean, I think that there is times, where that certainly true.
I think.
I hate to say during the pandemic during the heat of the pandemic I think that.
Canada.
Bits of Canada, and our travel customers.
Is where the strength really resided.
I think that generally speaking we've seen that I think that this year.
We might see a little bit of an uptick in the commercial side. So I think it's a little bit more balanced.
Travel customers always been great in our commercial under awesome too.
I don't know that Theres enough differentiation, there to say that <unk> carrying the day.
I will say that in tough times and tougher times historically travel has carried the day.
Okay.
Great. Thanks, so much.
Thanks Barry.
Our next question today comes from Jeff <unk>.
Stifel Your.
Your line is open yes.
Hey, good afternoon, everyone. Thanks for taking our questions.
First off just on the strategic pruning initiatives. It will take some more cabinets hold in the quarter should we expect more activity throughout the year, though more than offset by organic growth.
So how many more quarters do you feel that you can hit we'll call it normalized attrition rate if that makes sense.
Hey, Jeff It's Brad here.
The base.
For all intensive purposes was relatively flat on a quarterly sequential basis, I think as we sort of messaged in the prepared materials, we do expect that base to grow.
In the second quarter really on the backs of the momentum we're seeing with our premium product a.
Rick and Bacon Deluxe game continued continues to perform quite well in the market.
Leading to the.
The incremental demand that we're seeing we've also recently rolled out some additional gameplay mechanic features forward curve premium.
That is helping to stimulate demand there. So I think if I look at the first quarter.
Its generally in line.
Commentary provided on the last call of being flattish.
And we looking forward.
To see some growth there the only other thing that I would throw out there is that.
We did mention and as you all are aware obviously some of the supply chain situations that are going on out there. It does require you to rationalize your supply and so when you see an upswell in demand for product sales, sometimes that causes you to allocate capital.
Cabinets differently to different channels.
So I think we've done an exceptional job of getting ahead of the supply chain stuff.
And I think as you look to <unk> and beyond.
I think I think that really becomes a driver as well to help us support growth there in the domestic installed base.
Okay, Great. That's helpful. Thanks, Brad and then on the international shipments modest contribution, but as chemo mentioned. This is the first time, you're selling anything internationally in about six or so quarters. Just curious what markets you are targeting here moving forward and if we should think about this.
One of several key growth drivers are really more of we'll call. It a logical low investment adjacency to some of the things you are already doing domestically.
Yes, I think.
You pegged it pretty well and the last one there we've always.
Ben in the Latin American Caribbean et cetera markets.
We will continue to focus in those areas.
I don't know if youre sort of leaning towards Haynes is Asia or Europe going to be in the cards for us or Australia at the moment and the answer to that in the short term is now our focus is North America and then.
Some folks forget Max Mexico, as part of that but Mexico being part of North America, and then of course, Latin America as a whole and we sell into a number of different countries. There. We believe that as they continue to fall out of the pandemic. Our efforts increase there that we'll see some modest contributions there.
I refer to them as modest contributions at this point and just something that will keep hammering away at.
Alright, very good thank you both.
Thanks, Joe.
The next question today comes from David <unk> of B Riley.
Please go ahead.
Great. Thanks, so much so I guess my first one would be.
Based on the ROI that you are seeing in <unk>.
From the game refresh.
Youre doing with the <unk>.
Iron content.
Improved content and the new premium mix are you seeing an increased opportunity within the existing footprint versus maybe a quarter or two ago or is all going as planned with regard to the kind of the optimization roadmap.
I think it's been rather consistent I think David if I were to refer to anything in your question, whether we see anything different than we did before I'd really just sort of lean on our staff and I think that we're just getting better at it and as we get deeper into the process.
What I would refer to as like that real estate optimization, where we go in and we're able to identify.
A piece of real estate or a location, where we think adds value go in there and put in a new unit or a refurb unit or anything of the like I think it's just something that over time, we improve upon everything we've done in the past, there's obviously various learnings that we have in the past but.
We're always bringing in new folks I think we've got the best talent that we've ever had in our product management in game ops team and I think that if anything is getting quote unquote better. It's just because we're really improving our our way that we conduct business there.
Okay, Awesome and then I'll.
Inside of that like the content and cabinets and execution there.
There is an opportunity for linked progressive within your footprint in the relative near term.
While were again a product catalog today alright.
Like Progressives are always an opportunity we have we have most of the technology. If you will David.
At this point.
We've always taken I'd say, we've taken a look at in the past.
As far as linked Progressive Gov. We certainly are very close on a technology front I think that if we were to enter that market at any point, we've probably lean into the travel market first and I would say in our key markets to begin with if we were to ever go there, but the opportunity for a linked progressive it's clear.
There for us.
Because of the technology isn't a big leap.
Okay, great. Thanks, so much.
Thanks, Matt.
Next in Mckee and Roth Capital's Edward Engel Your line is open.
Hi, Thank you for taking my question and apologies if you addressed this already because I have.
I know you are not trying to give guidance beyond 2022, but I guess just bigger picture.
In order for the domestic installed base to start to return to consistent growth.
The function of the premium in the class III segment outpacing declines in class II or do you think that eventually youre going to get to a point, where the class II installed base.
<unk> stabilizing and even potentially start to grow again.
So no.
No.
Got that perfectly there but.
The class II install base is solid.
I wouldn't refer to class II.
Declining and as far as quality or anything of the like or necessarily rps or anything. So we believe that not only as class II solid, but it's something that again I'll use the term install base optimization over time, we can make every piece of real estate within reason more prop.
Although the company right. So I think layering on top of that the things that are obviously going well for us is our core games, which some quarter games are end up leasing and obviously core game sales on top of that helps us grow, but clearly premium and then premium being sort of that mix shift into a higher <unk>.
Percentage of premium this all will help us, but I don't want to say, it's like Hey, it's just premium and it's going to offset something that isn't healthy and collapsed you I'd say.
<unk> II is healthy and stable class II can get better with our core games class II will get better with our premium games and then of course in our commercial environments.
Premium will continue to sort of increase.
Our performance there and I think just to go back a little bit to.
Prepared remarks.
This really reflects this investment that we've made.
It's.
Clearly an investment in <unk>.
It's an investment in people and our team members and that's what we're starting to see pay off here really in the last couple of quarters and if you think about core games in the last five quarters, but we're seeing sequential growth in premium we're seeing growth now in five quarters in the core sales and we're seeing our team just really.
Pump out great games, and I'll, even go off Roading, a little bit here, but our investment in tables.
Hang off too I know, it's a smaller segment.
Don't look really hard at sometimes but if you look at the quality of the games the quality of the Shuffler, We just released and really the performance of BS acts or bonus been extreme.
We have a very very bright future there as well I hope that answer your question the right way.
Okay, great. Thanks for the color.
Okay.
Thank you.
As a reminder, if you'd like to ask a question followed by the number one on your telephone keypad.
Next question comes from Chad Beynon of Macquarie.
Your line is open.
Thanks, Thanks for taking my question Chemo, you mentioned that the second quarter should be the low watermark for margins.
I know previously you guys have talked about a range of 45 to 47 I think last quarter. You said, we should be kind of aiming towards that low end is that still a range that we can get back to for the back half of the year or given that equipment sales could become a bigger part of the mix is that something that we should just kind of remove.
Move in terms of near term targets. Thanks.
Yes, so Chad good good point I mean, I think it's the latter I mean, I think I would focus on.
What we said on our last call being lower ends at the lower end of the range of 45%, which is what we achieved in Q1, we called out some we'll call. It short to medium term pressures right. So in Q1, we had about 90 basis points of call. It elevated cogs right so mainly material.
<unk> and logistics costs and our expectation is that that will continue into Q2, I mean, I think on the flip side all of that is that.
Already we're starting to see some of that monitor on certain parts of our bill of materials or bond costs and our machines.
The other side is a real positive for us as well.
If you look at where our lead times were pre pandemic, we're able to maintain that today because of some of the things that Brad mentioned earlier, our supply chain team kind of getting in front of it and also being able to strategically wrestle through it.
So that has really helped us as well I think another thing we called out specific to Q2, and why we say Q2 sort of will be below all of our markets, but we feel that we do have our customer event that we're bringing back this year for the first time since pre pandemic, which is game on so there is the seasonality of that in Q2 as well.
But again the commentary being that we see a bom cost moderating we expect that in the back half of the year, we will be able to improve upon it but I would focus probably closer to that 45% range.
Okay.
Okay perfect. Thank you.
And then given your.
Your relationships with operators and the scale, particularly with.
Increased R&D and head count to kind of focus on output are there opportunities for you to acquire more adjacent businesses to kind of leverage what you've built here I know you've done a couple of small things over the past couple of years, probably more on the table game side recently.
But given the dislocation of some.
Some businesses are there opportunities for you to kind of bolt on something in the near term. Thanks.
Thanks, Chad Thanks opportunity is always there.
One thing that we probably pride ourselves in is that we continue to always look at.
It's more of a disciplined thing than a neat thing and if we're not disciplined to be out there and looking.
Might miss an opportunity at some point.
<unk> sort of like smaller acquisitions I think those are great theyre right in our wheelhouse, we do a great job with that in our table games team as a matter of fact does a fantastic job with sort of those tack on deals.
But in the slot space interactive or tables, we continue to sort of work that process be disciplined and should the opportunity arise to do something smaller we jump on it.
Thanks, David I appreciate it.
Thank you.
The next question comes from Sasha <unk> of Jefferies.
Please go ahead.
Hey, good evening guys.
The premium game installed base has grown well just wondering how do you how do you guys think about.
That base to grow kind of through 2023 is growth more expected.
In back half of this year or is it more consistent.
Love to hear your thoughts there.
We don't we don't really give specifics on this but I think that you know.
What youre talking about Theyre, just consistent growth we're not looking.
For anything to pop in a big way, but I think the potential for growth there and having some we could have some media quarters from time to time, right, where we could see that number modulate.
But I think our goal is good consistent growth be out therapy aggressive be smart not chase bad deals, but chase good.
Deals with fantastic.
Tastic Rois and so I think consistency is the word but our sales team, let's say they are aggressive as a whole we're consistent and we.
We will make sure that we're out there doing great deals.
Okay.
Got you that makes sense and then just lastly.
International <unk> installed base or other market you guys have seen that are coming back online faster than others.
Just curious as to what the expectations are for <unk> and <unk>.
The rest of the year.
Yes, that's all Mexico at this point and I think that we probably settled in.
At a number here that we will see sort of <unk>.
<unk> slowly, but steadily continued to increase.
Until it gets back to wherever the norm is for Mexico.
But most of what Youre seeing there from an installed base that you are tracking as all Mexico and as we've said Mexico has been a much slower recovery than the United States and Canada, We anticipate that it will continue to come back and then it will be healthy as it was.
In the past when it gets there.
I appreciate it thanks.
Thanks.
And finally, we have a follow up question from David Bain of B Riley.
Awesome. Thanks.
When I heard tables being mentioned I had to hop back in.
On the on the Pacs S rollout, maybe could you help us understand.
The cadence a little bit of that I mean, you are in six different jurisdictions with 14 machine. So I assume that these were I don't know if they were on a trial basis.
Before layering on to the rest of specialty tables within a certain casino or the other.
Multiple casinos I'm just trying to understand can we see that number accelerate from the existing footprint on top of.
No more placements.
With the new yes, so how should we view that right, yes, yes.
Yes, good question David.
So youre pointing out there is a lot of jurisdictions theres not a lot of units and really not ill jump too far into the weeds here on chocolate rollouts, but.
Our head of state there is his view in his aim is to get out there getting into a few different jurisdictions.
It's always get we go out and test and one but then we get into multiple jurisdictions. So we can get an idea how a shuffler, which is dealing with sort of like a living and breathing thing. When you talk about a card a planned card is not a piece of steel right and so we want to get a feel for what it's like in all the different markets. Once we're settled in and we know that.
Machines been consistent you sort of heard my commentary that its been client quiet machines quiet service calls are quite we're very happy with how it's performing so far then like you said, we'll roll out each one of those jurisdictions higher quantities.
And then move to additional jurisdictions beyond that very promising product line again homegrown on this one.
I think that we're really proud of the performance so far and we do look for sort of like an accelerated rollout of some at some point of course, so we have high hopes for that machine.
Okay Awesome and then maybe just a follow up on Chad's question, a little bit on M&A I mean, we saw a competitor get more heavily into HHR.
There are some evolving market opportunities as you know domestically and maybe even internationally.
Is that also an area you look too with M&A and maybe.
Maybe thinking about this way do you look at R&D allocation there.
Lee is that accelerates or.
The R&D that you are doing already captured.
When you're producing for class II and class III within that segment.
Yeah. So I'll start I'll start with the last question first and Ed Hhr's different work than class II and class III.
<unk>.
I wish that it was all at the same work, but it's not the same work it does require.
Additional manpower to do that that manpower is already worked out in our mix we've had.
Zero problems converting our class III or class II games into the HR space, So as far as an acquisition in that space to sort of deeper penetrate that market I would say the answer there is no I would say our market penetration and HHR.
Far exceeds our penetration in the other markets right. So we're actually in very healthy shape. There. There is no need to do a bolt on or anything to get the R&D work done.
We're.
Working really closely with our partners to rollout into new jurisdictions, and we continue to see.
Those goods sort of like initial market penetrations and in the existing markets down, Kentucky et cetera, we have a very very high penetration and David as you probably know extremely high performance. So in HHR, specifically, yes, we see that it's going into additional states and maybe into international markets.
But our our conversion into those that that sort of <unk>.
Pace is rather easy for us and we've been getting it done very efficiently.
David I would just add as well I think the root of your question is really oriented around capital allocation.
I think it was fairly clear in chemo is commentary that are under flying goal here is to allocate capital to its highest and best use along those lines I think we appreciate the degree to which.
Investors are focused on leverage today.
And so that is our highest priority and we feel good about our ability to achieve our leverage target for the year of less than four times at the same time.
Did mentioned that buybacks are part of the capital allocation puzzle and in the interest of maximizing <unk>.
Shareholder value, we evaluate buybacks along with debt repayment and M&A all in the same bucket and I think if you look at kind of how the stock is trading and the valuation relative to the group and the historical norms I think M&A would have to present, a fairly compelling return potential.
Sort of fit within that.
Prioritization, so I would just throw that out there as well.
Understood perfect. Thanks, guys.
Thanks, David.
Thank you we have no further questions. So this concludes today's call. Thank you for joining US you may now disconnect your line.