Q2 2019 Earnings Call
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Scientific games.
Thank you can I have your name please.
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First name Michael last name Bitch, VI C H.
Okay.
Thank you very much intercompany.
Era spelled A.I.E.R.A.
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Yes.
Thank you.
Our thing.
[laughter] and we generated 109 million improvement in free cash flow to $38 million for the quarter.
We have strong new leaders, who are best in their industry, leading gaming lottery digital and social Weve been lifted Jamie Odell gaming industry icon and Matt Wilson, former aristocrat managing director, who will join next year as our gaming CEO to help us build the best gaming company in the World.
These appointments reflect a very strategic combination of experienced industry leaders supplemented with great talent from outside of our industry, who are focused on leveraging new technology to challenge the status quo and push us to innovate and advance our business. We are thrilled to add such capable and proven leaders to work with a great team we've already have in place.
Yes. This is yet another huge step forward as we build the best talent team and culture in the industry focused on delivering the best gaming experiences across any platform a player wants to play.
We stabilized North American game ops, our most strategic core market. We achieved this by keeping players at the heart of all we do.
By creating best in class game franchises enhance our product roadmap leverage our scale and market analytics to deliver energy to deliver content interoperability and maximize deployment ROI. This approach is yielding results both on the topline and through improves Capex. A great example of this of the results. This focus has created is the Shinji bouncing franchise.
The game was developed in Australia for land based customers has been wildly successful in Macau is success and is successfully rolling out in the us across multiple cabinets has now moved to digital and is delivering well above the house average on all fronts.
The recent launch of months can land, our first new Wizard of Oz title in four years was the top indexing new game in the Eilers Kruczek report dancing Troms explosion is among the top three games and is now delivering four times the house average.
In game sales, our Twinstar, Jay 43 continues to deliver excellent results and in fact was the top indexing cabinet in the Eilers Kruczek report.
We began selling our new wave XL cabinet in the first quarter with three of our top internal brands and initial results are encouraging internationally that to Alf X was approved in two of the largest Australian states and the sales process is just now ramping up.
Looking ahead, we are excited about the potential growth created by new legislation in the state of Illinois and potentially other jurisdictions.
We enjoy a leading ship share of Pgts in Illinois, and expect to continue to grow as that state expanses gaming footprint.
This legislation our market leading share position in Illinois, BG cheese, and the substantial ship share we received at the new Wynn Encore in Boston provide clear indications that as she is and will continue to be a significant player as we capitalize on new domestic and international gaming opportunities.
The lottery group is consistently increasing its revenue and profitability. We saw a 12% increase in revenue driven by strong year over year growth in systems and significant sequential improvement in instant products, including double digit growth across five states, who are SG enhanced partnership customers.
Our ilottery launch in Pennsylvania, the most successful ilottery launch ever exceeding $400 million in handling the lotteries fiscal year ending June 2019 gives us a scalable I lottery platform. We can deploy worldwide. In fact, our lottery division is delivering its best ever win rate of 90% and prioritized markets, including 100% win rate when rebidding existing contracts and 22 of our instant products and lottery systems participation contracts achieved record sales in the last year.
The lottery industry reached a record $50 billion in retail sales of instant tickets in their last fiscal year and as the market share leader. We are poised to continue to deliver strong results in this key business.
To better serve our lottery partners. We also advanced our lottery instant ticket manufacturing technology, allowing us to meet the increasing demand for innovative instant ticket products and deliver improved speed to market capabilities. Also we're really excited about launching our new multi state James bond linked instant game, which is another demonstration of our ability to leverage our great brands across our business units.
Our side Q product is driving 12% to 15% increase in our customers' instant game sales.
Virtually eliminating shrinkage at retail locations in fact, Walmart is seen in over 30% increase in sales across our 10, Florida pilot locations and our new site Q Slim line has launched at 711 store of the future.
As this program is just rolling out we're excited about the growth potential.
In digital revenue increased 3% and we're winning in new and existing markets. Our I gaming business as the market leader in New Jersey, with approximately 50, 50% market share and we've added nine new customers are putting key players in the market such as Draftkings Penn National and parts just to name a few with more on the way and while sports gets the lion's share of the press I gaming is a very attractive business thats, gaining its own momentum in the U.S.
And as sports betting legislation in North America accelerates faster than most people predicted we acquired Don best to strengthen our capabilities and have launched with key partners like Caesars, when Delaware Lottery, Turkish lottery, Danish lottery, and an Ida Indian nation with others on the way. We're also launching in additional states with Caesars, including digital sports in Pennsylvania, Indiana, Iowa and others.
We're adding these great partners in North America, while maintaining our market leading position in the UK processing over 55% of our mobile bets in over 75% of our retail bets placed.
With our robust reliable igaming solution, we help new Jersey grow 57% to $217 million year over year as the market leader in New Jersey, We played a major role in that success. In fact, we saw an increase of 400 million wagers placed on our Otiose platform with over 9.3 billion wagers placed this quarter as I gaming continues to grow and then use our global experience.
And expertise position us to gain significant share.
We are investing now to be the preeminent player in in the emerging 20 billion plus digital market with key wins materializing in firm and firmly believe we are poised to best support operators with a robust reliable and comprehensive sports and gaming platforms.
As we look at our social business I'm happy to say side play is off to a strong start.
In Q2 sides to outperform the market with 18% growth, including 24% growth in June our growth would have been even better as we were negatively impacted in the first two months of the quarter by a third party defective software issue that weve since transitioned away from as evidenced by the incredibly strong growth in June the issues behind us and we're back to the performance we expect.
This above market growth has come across the majority of our game portfolio and not just jackpot party, which continues to grow nicely.
As has consistently been the case ARPDAU payer conversion rate mobile penetration and average much monthly revenue per payer were up we effectively manage our variable operating expense structure, which enable us to deliver a 44% EBITDA growth for the quarter.
The site play IPO enabled us to raise cash unlock the value of this fast growing assets, while maintaining a majority stake we believe that operating independently the scientific games business.
And with scientific games business support and access to intellectual property side play will continue on this mission of becoming the number one casual mobile gaming company in the world.
And finally, we are winning awards and being recognized in the industry. In June we won the platform of the year award for up for Opex, EPS and OTI asset the GRP to be awards and synergy balancing received the best electronic gaming solution at the 2019 GTV Asia Awards. This recognition is a signal that our.
Forward thinking reliable gaming systems, and our focus on creating world class game franchises will amplify our growth throughout 2019 and beyond.
In closing we're excited by the near term opportunities we have in front of us as well as our best in class positioning for future profitable growth across existing and emerging markets. As you can see scientific games and some of it is the most well positioned player in the market to deliver best in class games lottery and sports betting players across any channel or platform. They want to play with a vision to deliver a seamless player experience at only saw gains can deliver this positioning along with our commitment to delivering outstanding games innovation and a more efficient enterprise across our diversified portfolio of businesses set us up for profitable growth.
And significant cash flow generation to reduce debt and continue on our deleveraging path.
Now, let me turn the call over to Mike to provide his review of the second quarter results.
Thanks, Barry Good afternoon, everyone. As you just heard from Barry the entire organization is committed to delivering outstanding content innovation and operational excellence across our diversified portfolio of businesses.
This continued focus allows us to deliver profitable growth and generate cash flow to continue our deleveraging path.
With that let's move on to the second quarter results.
For the quarter consolidated revenue was consistent with the prior year period, while operating income increased 29%.
Net loss was $75 million, primarily driven by a 60 million dollar debt financing expense related to the successful notes offering that lower cash interest costs and extended debt maturities and EBITDA decreased slightly by 1%.
We expect overall results to be stronger in the second half of the year driven by strength in game sales and continued growth in our other lines of business.
In our gaming business revenue in EBITDA declined 9%.
Items impacting the comparability of this quarter include the two sizable openings in the northeast last year the implementation of the two pounds stake limited in the UK in April 2019.
And the ramping down of system launches in Canada.
Game Ops revenue was down 2 million on a quarter sequential basis due to the impact of the two pound stake limit in the UK.
Our us in Cambodia revenue was constant with our yields grew 52 cents.
Driven by strong gain performance from our bond franchise, Genji biology, and Munchkin land.
Which was offset by a decline in the installed base of roughly 900 units, primarily driven by a receivable closure in New York and the removal of lower yielding legacy products.
Revenue from gaming machine sales decreased $20 million or 12% in the second quarter versus last year.
We shipped 7401 machines globally.
Including 3443 replacement units in the Us and Canada and 1228 opening an expansion unit.
Which includes shipments to the Illinois BGT market.
Internationally shipments totaled 2730 compared to 2492 units a year ago.
Year over year, our average selling price for the quarter was down 1%.
We are pleased with the performance of the wave excel with over 500 units sold in its first full quarter.
In addition, we continue to see great results from our industry Best Cabinet. The Twinstar, Jay 43, which has sold roughly 16500 units to date, including nearly 4000 units a year to date.
Internationally dwell effects was approved in the two largest state in Australia in the second quarter and we expect to have approvals in the remaining Australian states by the end of the third quarter, we expect better results in the back half of the year related to the near term opportunities with the market expansion in Illinois.
The continued strength of the Twinstar Jay 43 cabinet.
And the ramp up of waivers sell domestically and wireless ex internationally.
Gaming systems revenue was down $17 million from the prior year, primarily driven by lower hardware sales for major site installs.
The major site installations in Canada are ramping down throughout 2019 and are expected to be completed by in early 2020, we are working aggressively to offset this with new business, including I view four units of which we sold nearly 11400 this quarter.
Table products revenue was up $3 million from the prior year to 62 million driven by the continued strength of our product portfolio.
Turning the lottery.
Our second quarter revenue increased $24 million to $231 million, and EBITDA was up $4 million to $103 million compared to the year ago quarter.
Within our lottery business, our systems revenue increased $24 million or 42% year over year, driven largely by $27 million in equipment sales from new contracts internationally and increased domestic sales.
We continue to work with lotteries and major retail chains. So it's a 711 circle K, Walmart and Kroger on launches and pilots aside Q.
Retailers on lotteries using the site Q system continue to experience an average increase of 12% to 15% in instant game sales and the virtual elimination of shrinkage.
In instant products, we are in the process of rolling out the James Bond Multistate game as Barry mentioned this really highlights the power of our strong band, we can leverage across our businesses.
For our side by segment, we generated strong growth with revenue up 18% year over year to 118 million and EBITDA was up 44% to 33 million. These results were driven by increased monetization of paying players with ARPDAU up 14% from the prior year or an increase from 42 cents to 48 cents.
Following the resolution of the third party issue, we generated a 24% increase in revenues in the month of June year over year.
In digital we've generated $69 million in revenue and 12 million in EBITDA.
We recently launched open sports in the US our unparalleled suite of sports betting technology, which gives our customers a modular portfolio of products to meet their specific needs.
In gaming, we launched a number of great games this quarter and continue to win new business.
The combined market potential for domestic sports and gaming isn't an excess of $20 billion with our unparalleled platform and clear market leadership position in New Jersey gaming.
We view the broader adoption of sports and gaming across the us as a tremendous opportunity moving forward.
Moving to our cash flow and balance sheet, we generated $95 million in operating cash flow and 38 million in free cash flow in the quarter, which was $109 million increase from the prior year.
At quarter end, we had $369 million in cash and cash equivalents and our net debt leverage ratio was down to 6.5 times as we continue our deleveraging efforts.
Capex was $65 million compared to $112 million in the prior year, which included the capital investments in highly accretive long term projects in Maryland, Kansas and Pennsylvania.
We now expect capital expenditures to be in the range of 340 to 360 million for 2019.
We paid down another $155 million in debt during the quarter, bringing our year to date total to $300 million. The cash proceeds from the social IPO will continue to enable us to reduce our outstanding debt.
We are working to enhance our balance sheet and reduce costs, while efficiently deploying our resources to generate the returns needed to enhance our free cash flow and continuing our delivery deleveraging efforts.
This concludes our prepared remarks, operator, you can open up the line for questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Barry Jonas with Suntrust. Please go ahead.
Thank you.
Just to start can Barrick can you maybe walk through some of the key drivers.
To hit your leverage target I think I think last year, you had some one timers impact free cash flow, but.
How should we think about the.
Should we think that you're going to hit your target more about free cash flow pacing higher from say the one half rate this year or maybe more of a pick up on your LTM EBITDA growth rate would love to just get some thoughts on on some of those drivers and composition. Thanks.
Yes, absolutely.
Thanks for the question by the way, yes. So.
As I mentioned at the top of my remarks. This from a financial goal perspective. This is our top priority.
And.
And really its to be beyond the range of 5.5.
Look to get there, it's really a combination of free cash flow debt pay down and growth in the business.
Firmly committed to improving the balance sheet beyond just to achieving that 5.5 goal.
When.
We laid out a strategy to to to really go after what it would take to do this in order to drive the top and bottom line growth too.
You know to fund that and ill.
And that strategy has started out with.
It basically setting the right company direction strategy and getting the right people in place and you heard some of the kind of core personnel moves that we've made that we really think will strengthen our ability to deliver on what we need to do but at the top of the list in terms of a core strategy was to stabilize and grow the traditional markets that we're in and then prioritized by number one North America game ops is one.
And as also mentioned, our North America game Ops afterward.
Coming in in mid last year.
Looking at reworking the roadmap.
Reward doing some resegmenting from a market perspective.
No and allocating R&D appropriately.
Moving to a content first.
Approach with content interoperability.
I think we've made.
Significant strides here that you are just now seeing in the marketplace today it starts with.
Reversing again the trend that we had seen of the prior years to see this stabilization and now seeing basically the content that's coming out.
That that shift thats hitting the marketplace.
With really strong signs of outperformance in the marketplace.
It starts with that one two punch that we talked about lusinchi bouncy and bond both.
Continuing to pour perform extremely well at over a two X performance and starting to get deployment across the.
The Universal LNG balances up to 568 plate placements across 28 states now more than double.
Since we had our last call and.
We have content interoperability now and officially in full swing there too.
75% of our new content now works across multiple cabinets, which has enabled us to achieve this game ops kind of stabilization turnaround, while also decreasing game ops, capex, which we've done by 35% from.
Up their first half 2019 over first half 2018.
And since you bought is a great example of that where essentially we have 50% of the units out on the J 43, and 50% out on way back sell and I think I mentioned in the last call that we have launched this gain a year ago, we would have been.
Only gone out on the on the high price cabinet. This a label that enabled us to get Floorspace faster.
And now at lower cost, but not.
Hurt any of the of the performance. In addition to those two we I think I mentioned also in the last call. We had a couple of games coming up that we thought would be good and and thats bearing out in the marketplace. We got.
Munchkin land, thus delivering a three X performance and dancing Troms explosion, which is at Fourx.
So and we've got a kind of a sleeper product that call. It with ultimate buyer language has been out in the marketplace, but just continues to get better and better and better in performance and is now performing over two x. and we've got.
Additional two additional games being released now and another two later on this year and that that is just really moving nicely and game ops. So we're super bullish about where we are seeing game aasco and we think thats going to contribute a lot.
You know to to the bottom line on Hello.
Hit those targets that.
That we talked about and so that that's super exciting for us.
On the.
The other thing is that I mentioned to you is is kind of what what we did last year was this re segmentation and reworking the roadmap and we went out and we looked at where we saw.
Marketplace opportunities, where we were lower index, then and things that were emerging and what popped up there was obviously, we things like class to historical horse racing and other markets, where we see we have a real opportunity and then obviously also mentioned earlier, the Illinois, BGT expansion, where we have a leadership position so.
In those markets as well we've got some.
Kind of market segment opportunities that layer on top of that the second piece in this.
Under our strategy is stabilizing and growing traditional markets gaming is.
Addressing game sales and getting game sales in a position, where we are going to see really strong growth from.
Through the second half of 2019, and again kind of this is a tale of domestic and international on the international front, we rolled out the dwell up actually now habit.
Passed in two major states in Australia, we've got the most amount of content, we've ever launched in Australia, as we call them.
Swim lanes behind.
Feeding the swim lines lanes behind those that cabinet and so which is set up for a nice.
Growth in the second half of the year.
And domestically.
We've we've also got.
You know on the game sales front, we've got the J 43, which continues to be the highest indexing cabinet continuing to sell well in the.
For us, but the just layering on top of that now is the ramp up of wave XL and so as we go into Q3, we have six games that we just launched and approve that our wave XL exclusive and includes some of our top brands like food only and the new quick hit Red and Blue games, and we have eight more games coming out after that and so the most excited I think what we're excited about is the drop in lock games. So we've got if you look at it Weve got again, a really strong performing Jay 43, we've got the way the excel that just.
Just really coming out and starting to two.
Hit the volumes that we want to see it hit and we've got now the content in the back half of the year that we think.
It's going to.
Give us the growth that we're expecting for the remainder of the year. So kind of number one is kind of core too when getting to that that 5.5 is.
Addressing that the core traditional market on top of that.
The other piece of of the 5.5 is.
Across the us.
The other business lines, and when I talk about lottery and the.
And that.
The momentum we have on that and I think we've got.
Side, Q and a few other and kind of what I call product enhancements lined out.
With continued strong sales of hardware.
That we believe will continue to help us get to that growth.
Syed play, which we just had our first earnings call just minutes ago.
At 18% year over year growth that was.
Basically somewhat dampened by a couple of months of a technology issue, but that is again also poised to continue to grow with at at a strong margin that will continue to contribute and then we have digital which we continue to launch new deals and.
And each and as these marketplaces are announcing and launching we are starting to.
We're still moving through the the going from the investment stage and getting the sports.
Platforms set up in these states to where theyre beginning to start generating revenue and the like and so the combination of.
Stabilizing and growing the core gaming space, which we spent a lot of time time prioritizing and working with the teams to revamp the roadmap get the right content in place to make sure we have the capex and the continent or op operability.
Set and then with the right investment and momentum behind the emerging digital businesses and the ancillary products on top of.
What we talked about we think there is a real.
A real opportunity to we think that will will drive the growth that we need in order for us to get to the to the 5.5 and beyond.
Great well thanks for that comprehensive answer just maybe one more for me.
I think if you could probably make the argument that scientific games stock doesn't necessarily reflect the full value of side play just would love to get your thoughts. How you think about this disconnect and could further side play equity sales potentially make sense down the road.
Thanks.
Yes, I mean, what I guess, what I'll tell you is look I think look we were we're extremely happy with and I would say, we we think that.
What we did with OSI play was.
Super Smart strong.
Strategy on it in the sense of what we created was an entity that we enable to be independent and then as you said unlock value.
On the marketplace.
Enabled us to raise immediate cash that we could use to pay down debt, but hold a.
The very high majority share of 82%.
In an asset we believe is strategically well positioned for high growth and so we got to raise I think historically that that business was putting off anywhere around 77.
$75 million to $80 million in cash we raised over 300 million. So we got three three X. What it was of the cash upfront we maintained the 82% we keep those strong strategic hold in it and we enable them to operate independently to compete in the marketplace and so.
It's hard to comment on.
The different relative valuations and the like but just from a strategic move perspective.
We feel still pretty is very strongly that that was the right thing for us for the organization and long term that will create the highest amount of shareholder value for both both organizations.
Got it and Mike I apologize if I missed this but capex guidance implies somewhat of a jump in the second half of the year can you talk about what's driving that.
Yes, some planned investments that we have on the lottery side.
With our new press technologies that are coming through in the back half of the year.
As well as expected increases in our capex spend around least gaming machines as we push out more footprint now that we've got content. That's outperforming the market that we're seeing today that Barry outlined.
With.
Dancing drums explosions munchkin land.
New bond content, that's going out that's actually increasing the overall bond franchise footprint. So.
That's the plan spend for it.
Great all right. Thanks, so much guys.
Thank you got it thank you.
The next question comes from Brad Boyer with Stifel. Please go ahead.
Yes, Thanks for taking my questions guys first one is just an extension on on.
Barrys question and.
Q you might be able to provide some perspective here but.
Just curious as you guys look out and sort of a crystal ball question, but as you look out over sort of the next.
18 months to get to that 2020 level is there anything lurking out there today that could be like in Italy of years past where.
Theres, a onetime cash payment.
That could potentially sort of.
D. rail, you're you're de leveraging objectives, just any thoughts around that.
Yes, I will take it here.
It's kind of remarkable when you go back and you look at last year in the end the heavy capex level from last year. It was due to that abnormally higher number of new contracts and renewals that came through that year.
When you are looking at this year the contract renewal that was coming it was Pennsylvania.
But given the challenge that took place and the delay in that overall RFP process that capex spend isn't coming.
Anytime in 2019 to May get pushed into late 2020, it depends on what we see.
When the outcome of the RFP takes place.
But other than that Thats, if you looked at the Italy instant ticket concession thats actually a capex spend that was supposed to take place this year, but because the government wanted their funds quicker and were able to get the nine year extension on the same terms that payment got accelerated in the last year. So I don't see any large surprise payments that are going to be coming through the rest of this year and into 2020 that.
It's going to have that type of material impact.
Okay. That's helpful. And then another question just a high level question around slots.
I think there is this sort of building thesis out there today that that some of the large M&A that's taking place on the map on the operator side could potentially be going up the market a little bit on with respect to product sales and lease payments and lease placements and what have you.
You guys have any any color you can provide around that are you seeing anything to that effect.
That'd be helpful. Thanks.
No I mean look I think consolidation has been happening for a while.
So honestly this is not new.
So in general operators are willing to pay for the best content, they need a vibrant Florida any great content on the floor.
And so.
You know for US we're just.
And if you look at.
Most of the.
The ones that have been recently announce all of them really strong customers of ours, we have their systems business and so.
The.
Dan we haven't haven't really seen at this point or can speculated on on anything right now.
Okay. Thanks, and then last for me is just around sorry Q.
Obviously the numbers that you guys talked about are fairly impressive.
Just curious what are some of the limiting factors at this point that are.
Preventing.
More widespread rollout of that product.
I'll take it here.
You really think about it you got what you think your normal procurement process would be when you're dealing with a company if you're able to give them. This type of delivery on increase in sales controlling your shrinkage and what that could do to their bottom line. There is a much faster procurement process.
You got to set that aside and now realize that you're dealing with state governments and their processes are just remarkably different than what you would typically see in the company.
Plus when you look at the the way their budget process works July 1st was the start of their new fiscal year. So their funds have been now portioned out to the lottery from the state.
So we do expect to see an increase in sale activity in the back half of 2019, given that you've had enough time frame for these people to be able to see the value of sight Q. The constant delivery of the results and now they have a fresh amount of capital spend starting July onest and so therefore, we would expect to see that increase in sales coming through.
Back half at 19, and then moving forward into 2020.
Thanks, guys appreciate all the color.
You got it.
The next question comes from David Katz with Jefferies. Please go ahead.
Hi, good afternoon, everyone.
Our noon.
Hi.
I wanted to ask about the systems business.
Which historically as you.
Point out has been somewhat episodic and lumpy, but in particular.
Over the past few years, there have been a couple of customers that.
So larger category that.
Have have backed away a little bit.
And I thought I would ask if there are any.
Engagements are efforts so forth.
Bringing them back in the fold or if there are any other kind of larger customers out there globally that are kind of on.
Now on your whiteboard to to try and bring them in and obviously, we we can't necessarily talk about specifics on that second part of the question, but I'm just curious what kind of resources, you're putting around systems. These days.
Yes, I'll take that I mean, when you look at the system business right now a lot of our resources have been tied up on the very large, Alberta, and Ontario contracted as that comes to.
A close as I commented in early 2020.
A lot of those resources on the installs are starting to move off and go to.
In the other pieces of our business. So when you look at our portfolio across the board you're right. There are only a limited number of very large.
Transformational and highly accretive opportunities like the Alberta, and Ontario contract. So in order to drive that type of of a large scale business, it's either going to come from.
A large system conversion by taking away a customer from either an IGBT aristocrat or could Amit.
Or it's going to be through enhancements of our existing systems.
To our existing customers and to be honest, it's a heck of a lot easier to sell to your own customer and drive the value of what they want in the new products and the new.
Advancements that we can bring in that systems business. So the system business. We look at is although we got the benefit of Alberta and Ontario.
Thats going to be rolling off we're excited about the new opportunities and products that we can bring out to our existing customer base.
In order to generate additional revenues through them.
Okay. Thank you very much.
You're welcome.
As a reminder, please limit your questions to one with a single follow up. The next question comes from Chad Beynon with Macquarie. Please go ahead.
Good afternoon, Thanks for taking my question.
Wanted to ask about domestic.
Instant ticket product revenue would you guys are obviously the market leader and I think everyone believes this is one of the best categories and gaming and lottery.
Hi, GT, which manages your your products has has reported two straight quarters of mid single digit growth here and I believe they are just managing and distributing the tickets that your manufacturing.
Could you help explain the disconnect with what you're reporting because I believe you've had two straight quarters of.
Declines and I believe some of it might just be based on the contract types, but any other color there would be helpful. And then if we should expect this in the back half of the year any type of a disconnect. Thank you.
Yes, Hey, it's a great question and we'd like to thank the.
The Fas be for writing new rules out on revenue recognition that causes this type of disconnect to take place.
You don't you typically go through and look at and go back to.
Pre call it 2017 and prior.
Our contracts were based on the percentage of revenue. So the revenue was actually recorded when you have the retail sales take place.
Today with the new revenue recognition rules once that box of tickets leaves our control we record the revenue. So it causes a very much I hate to say the lumpiness of the business, which used to be a nice steady static piece of business for us and because we're such a market leader on the instant ticket side.
And on top of the fact that we've got the ESG Pete program, which is where we take over the actual lotteries warehouse and and truly run the entire supply chain and marketing function for the lottery itself.
Instances like that although the lottery used to control that warehouse now we've picked it up as an ESG peak client.
Yes that goal line as to when that inventory actually leaves our control gets pushed out further and further and therefore.
That causes the revenue recognition component for us to get strong out even further on longer so.
I think when I commented this on the on the Q1 call you really got to look at our instant ticket results over an extended period of time almost like on a trailing 12 month basis.
As that continues to work itself through so you will have fluctuations quarter to quarter, just based on the contract type itself.
In addition, if you looked at.
I'd say back in 17 and through early 18, we were.
Really right in the success of the Willy Wonka Golden ticket promotion.
Which was a remarkable game that generated almost nearly 900 million in retail sales and benefit.
To the various states that participated in that.
That type of.
Kind of incremental sales is also providing for a more tough comparable.
Over that extended period of time as well.
Thank you appreciate it.
Yeah, very comprehensive and then on just the balance sheet I know, obviously a lot of the call here is focused on getting to the leverage targets, but given where interest rates are.
Could you just talk about any opportunities to.
Call some of your your outstanding debt or rework some of the.
Some of the trenches, there, which would obviously come with maybe a onetime payment, but set you up for better free cash flow in the future are there still opportunities on the balance sheet given the current environment. Thanks.
Yes, sure absolutely I mean, if you look at the we still have the remaining 1.2 billion of the 10% notes sitting out there now the income December one that call premium steps down to one or two and a half. So we want to make sure that we're keeping an eye very closely on that and positioning ourselves to take advantage of refinancing the remaining portion of that.
I also we're kind of keeping a close eye on the sub notes you've got the maturity coming up in 2020.
But just note that on the sub notes that are coming up.
If we do anything prior to one year out from their maturity that will utilize restricted basket capacity. So we want to make sure that we're very cautious about that.
And at the same time, we're keeping an eye on everything, especially with the IPO proceeds that we have and making sure that we're using those effectively to position ourselves for the future revised that we need to do.
Appreciate it thank you very much thank you.
The next question comes from John Decree with Union Gaming. Please go ahead.
Hi, everyone. Thanks for taking my question.
Had to just wanted to ask if you could provide a little bit more detail obviously may two.
Strategic hires Jamie and Matt I was wondering if.
If there is anything a little bit of a change in strategy or.
They're going to be able just to help execute if you could just comment a little bit on on your thoughts there.
Yes happy to do so.
No change in strategy in fact, I would say is just it is about executing on the strategy we want to.
Build.
And deliver the greatest gaming experience.
To anywhere anybody anywhere they play and.
Both Matt and Cheney are.
People, who I mean, they are strong cultural leaders with proven industry success that love and games and no games and.
And so we're thrilled to be able to.
Bring them on and work with them to.
In our in our mission to go to go make that that work.
I think if you look at Matt.
In particular.
Yeah, Great people do great things and we're building our goal is to build this greatest game company.
And he is Super strong addition to the team it really completes our master plan for staffing of the leadership team. If you look across our be use each of our be use are being led by rising industry stars that are aggressive hungry and have great track records of success in their respective Ben businesses kind of ready to write their own legends and Matt fits really nicely into that mold and he was he has kind of been born and raised in this industry with that passion for.
For gaming.
And which is fantastic and.
And Jamie as you guys know he is.
His reputation speaks for itself is just.
And.
And gaming icon that we're super excited with that he can partner with me and with Derek prior to Matt coming on board to really work across the board on strategy product roadmap content and help us.
Make that happen and then obviously continued to mentor and help us as Matt comes on board. So we're super excited about that.
Thanks, Barry that that's helpful and I wanted to jump back to the deleveraging question I think in response to marry John asked this question a little earlier.
You've outlined all the initiatives you have across your business segments and.
While it's.
We'd like to to hope and thank all of our initiatives will work you do have a number of opportunities whether its side Q VCTS and Illinois, everything you're doing on the gaming ops side is it is it a fair assessment to say I mean, as we look at your leverage target in our model.
We really only need moderate EBITDA growth in our models kind of mid single digit to get there given the number of initiatives is it fair to say.
I don't have to necessarily execute on everyone perfectly through 2020, given how many initiatives you have in.
Your level of confidence and at least getting some of those initiatives to ramp in aside Q timing is difficult as Mike had mentioned in his in his response to a question. So just wanted to gauge your level of confidence in getting to some of those things to generate EBITDA growth that you need to to kind of hit that leverage target.
Yes, no I mean, I think you actually said that he actually said it well, which as you know that you don't.
I think we the way we we prioritize those opportunities based upon the the the gap upside that we see.
Prioritize or and probability of success and the return on investment and we feel that we were smart about doing that and that and so.
It makes us confident and we don't have to hit 100 on across the board on all of them to get it. So we have a high confidence level.
Thanks, Barry I appreciate that.
The next question comes from Joseph Stauff with Susquehanna. Please go ahead.
Good afternoon.
I wanted to try to better understand basically the outlook or.
How do you think about sort of the outlook for your North American installed base. This.
The the operational turnaround game ops.
I know is in process right.
At least history of the company is it kind of keeps getting pushed out so if I look at the second quarter.
And I, just basically for the closed casino.
The installed base was flattish I guess sequentially.
And I am wondering.
Is it reasonable to assume that you could get it.
Some level of year over year growth in your installed base sometime this year in North America or.
You know that that's going to require some.
Pretty big numbers I was wondering like how how you think about it.
Yes look I mean, we're not.
That specific speaking specific numbers.
The.
As I mentioned, we've got it we believe in it you actually called out perfectly that the impact of the installed base that.
That impact is packed with us on on Q2.
But we were over index and when we were that we were we were under indexed under indexed and premium. We've now re worked our product roadmap to have the right shots on goal across the category of game ops and we're starting to penetrate the floor with great product at the right business model and price point, we think by doing that.
We're going to have both the player demand and then the operator demand in order to grow our AR the floor print and and then and along with that we think we'll get the yield with it.
We are seeing signs of that and we're confident we can achieve that.
Okay. So it sounds.
Just wanted to clarify here.
It sounds as though the strategy basically is likely to pay off more so in the yield per game versus sort of the installed base installed base. Obviously is much harder to predict and obviously there are a number of factors but.
Is that a fair assessment.
Assuming execution of the strategy and the new product portfolio and.
So on and so forth you will see it as we normally have at least thus far in the higher yield per game.
But the installed base may take longer.
That's a fair assessment, because if you look at the games that are coming back there still.
A sizable amount I'd say, probably close to 35% to 40% of the existing footprint.
That are older cabinets that are ones that are like six seven years old like we commented on in Q1.
Declined in the footprint in nearly every one of those games was in excess of six years old and so when you're looking at an operator games that are six years old are sitting in the corners of these casinos and actually more function as furniture than they do as a real revenue generating piece of equipment for them. So as those units come back.
We're going to be very opportunistic about the footprint that we put out there to make sure that we're going to get the best return possible from a free cash flow perspective.
So you're right you will see it on the yield side absolutely.
And then just one follow up.
Onside play.
First quarter just reported.
How do you guys think about this right you have a large majority stake is it something where.
Call. It a 180 days after the IPO.
In may that could be something where.
You would think about distributing those shares on a tax free basis is that in the works where do you think more so.
Of your large majority stake being.
More longer term in nature.
I'll cover the the whole purpose of going back two years ago, and spending side play or which was the social division into an unrestricted sub was to enable this to become this entity that we could do the IPO for.
That IPO was for.
Okay purely for de leveraging purposes here at corporate.
And any future.
I will say stock transactions associated with site play would probably consist of secondary offerings.
With such proceeds coming back into the corporation to be used for deleveraging.
Got it.
Okay. Thank you.
You got it.
This concludes our question and answer session I would like to turn the conference back over to Barry Cottle for any closing remarks.
Greg.
Thanks for joining us today, we appreciate your your support the entire organization is laser focused on delivering outstanding games, and capturing capturing market share in emerging digital markets, while making our business more efficient.
These key focus areas will allow us to deliver the greatest returns for our stakeholders set ourselves up for profitable growth and generate significant cash flow to continue on our de leveraging Pat.
We are firmly committed to reducing leverage in this business and we'll continue to focus beyond our current target of 5.5 I look forward to speaking to you next quarter hopefully seeing a lot of you sooner at GTV in mid October and showing you our product lineup that we're really excited about this year. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.