Q2 2019 Earnings Call
And welcome to the inspired entertainment second quarter 29 conference call all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions. Please note today's event is being recorded.
I'll begin today's conference calls I refer you to the Companys Safe Harbor statement that appears in the second quarter 2019 earnings press release, which is available in the investors section of the company's website at Www Insync Dot com, that's www dot I N S E N C dot com.
The Safe Harbor statement also applies to todays conference call as the company's management will be making certain statements that will be considered forward looking under securities laws and the rules of the FTC.
These statements are based on management's current expectations or beliefs and are subject to risks uncertainties and changes in circumstances.
In addition, please note that the company will discuss both GAAP and non-GAAP financial measures.
The reconciliation is included in the earnings press release.
With that completed I would like to turn the conference over to Mr. Weil, the company's executive Chairman.
Mr. Weil. Please go ahead.
Sorry, Thank you operator, good morning, everyone.
[noise] and thank you for joining our second quarter earnings call.
Here with me this morning as usual our Brooks peers.
President and CEO Stuart Baker.
Our CFO and Dan Silverstein.
Our chief strategy Officer.
By now I assume you've had a chance to read the press release.
In that press release, we referred.
Two the three pronged strategy that we're in the process of implementing mitigation of the train Neal impact to a level of two and a half million a quarter or less.
[laughter] generation of new business in our BLT.
Virtual sports and interactive business to fully offset.
The impact of the triennial by the end of this year or beginning of next.
And the completion and integration of the nomadic UK gaming Technology group acquisition.
In my own remarks, I'd like to touch on each of these and then hand it off to Brooks.
To talk in more detail about our business development initiatives.
And in particular, our progress in North America.
Stuart will cover the financials in any deal related discussion at the end of our prepared remarks.
Our second quarter results were of course negatively impacted.
By the reduction in the maximum be two stakes.
Two two pounds in the UK LTL market, which was implemented on April 1st.
2019.
We believe this regulatory change caused a decrease of approximately five and a half million dollars in revenue.
And $4 million and adjusted EBITDA on a constant currency basis.
Excluding the impact of the triennial, we think the second quarter would have been.
Very much in line with the 2019 first quarter.
And due to the impact of one time sales.
A topic that all regions turned to win a couple of minutes.
The second quarter would have been so what behind the second quarter of last year.
As we have discussed previously we think it will take until the end of the year.
Fourth quarter, 2019, or first quarter 2020.
For the full mitigation plan to be implemented.
As expected we are born the full impact maybe even more than the full impact of the revenue reduction yes.
Some of the positive trends in the revenue that we've been seeing lately continue.
In the second quarter, well, having only partly mitigated.
The impact of it.
Through operational restructuring.
This again as explained previously was partly a consequence of the acceleration in Detroit anyone implementation.
From the original date of October 2019 back to April 2019.
Some of these mitigation initiatives take time to the loss of six months preparation has had an impact.
Ironically, though a large part of the remaining mitigation of the largest part really of the remaining mitigation will be driven by shop closures as announced previously by our customer base.
Since this seems somewhat counterintuitive I think it's worth digressing for a moment to discuss this a little bit.
Just thinking about everything else in the economic World individual machine earnings across our UK installed base.
Can be observed to follow in 80 20 distribution.
So that the machines at the strongest and other distribution earn.
A multiple of the earnings so those are the weakest.
With 100 pounds stake even at the weaker machines provide some positive contribution but as the move to the two pound stake lowered the tide for all shops. This is no longer the case.
Whereas our revenues are driven by a direct linear relationship to the cash going into the machines.
Many of our cost are unrelated to revenues, but in fact, driven simply by the physical numbers of machines, regardless of the revenue those machines generate cost such as field maintenance.
Transportation and logistics spare parts communications cost and so forth. So as the overall industry goes through this period of restructuring and shop consolidation of our performance will be positively impacted.
For some time, we have been forecasting that the fully mitigated adjusted EBITDA impact of the triennial would be $10 million to $11 million, a year or about two and a half a million dollars a quarter.
Based on our results we've seen so far in the recently completed second quarter combined with comprehensive updated modeling.
We're confident we'll reach this level during the fourth quarter of 2019.
For the first quarter of 2020.
Indeed, given both recent positive revenue trends in a deeper analysis of costs. We think there is a significant opportunity to do even better mitigating the impact to as low as perhaps $2 million quarter.
We said early on that we expected by the end of the year that our overall adjusted EBITDA run rate would be back to where it was going into the trillion deal in other words that by the end of this year, our other business initiatives, which Brooks, who will talk about in more detail.
Such as the launch of our gaming machine business in North America.
New machines in Greece, new virtual sports contracts and water, Quebec and elsewhere.
And additional interactive customers again.
Very interestingly in Excitingly in North America.
These will together be generating roughly two to two and a half million dollars per quarter enough to fully offset the impact of the triennial.
And to take us back to where we were before the stake was lowered to about 13 or $14 million of EBITDA per quarter.
A moment ago, I mentioned that I would return briefly to the subject of onetime sales.
At the present time, or one time hardware and software sales as.
As all of you will know Doug.
Have been observing are very lumpy.
And very difficult for us to forecast.
Largely because our European customer base for product sales is extremely narrow.
This of course, often makes quarter to quarter financial comparisons very difficult.
As we launch the VLP business in North America, which Brooks and again, we will discuss in more detail in a moment.
We anticipate that our customer base for product sales will become much much broader.
And then the process will not all be not only be an important growth driver, but as importantly, it will smooth out the quarter to quarter swings.
That are now occasion by product sales.
Finally, pending regulatory approval, we are targeting to complete the acquisition of Nova Maddox.
UK gaming technology group by the end of the third quarter.
This merger is an exciting step forward in the evolution of inspired giving us greater scale scope and financial strength.
The acquisition offer significant synergies with essentially no customer overlap and therefore, no risk of revenue dis synergy.
We will be able to offer our b to b customers new revenue opportunities.
New ways to keep players engaged across gaming musicians virtual sports and interactive marketplaces.
It also gives us the ability to use in TV strong product and exclusive content portfolio.
Which will further mitigate.
The impact of the triennial.
As we introduce.
The exclusives nomadic titles into our UK.
Bob Tuesday.
In addition to organic growth, we see significant potential for increases in profitability too as the business goes through its conversion from what was it one time it entirely analog business to what is now about halfway through the process of conversion to digital.
For a variety of both revenue and cost related reasons.
We believe that profitability correlates very highly to the rate of digital conversion.
Quantitatively as we've mentioned before and TG East 2018 adjusted EBITDA.
When added to our conservative estimate of synergies.
Will yield approximately $35 million of incremental adjusted EBITDA.
And with only modest growth in revenue and or margins in 2019, and 2020 and we would hope.
Two we experienced a little bit of both.
We could expect to region adjusted EBITDA run rate of close to $40 million during 2020.
To summarize them as we approach the first quarter of 2020, we expect to have mitigated the triennial impact to between two and two and a half million pounds per quarter or less.
Added an equivalent amount of new adjusted EBITDA from initiatives in North America, Greece virtual sports in a directive.
And it has acquired and largely integrated and TG.
This is obviously a huge amount of activity for us.
Two.
Sorbion Digest over the course of the next several months, but we feel we have.
A tremendous organization in place to execute it.
And we're confident that as we.
Move through 2020 that we can.
Achieve the levels of performance that this conversation implies.
And with that I'll turn it over to Brooks.
To further discuss our new business developments and our initiatives.
Right Okay. Thanks.
So I'm happy to provide some color on the positive momentum were seeing across the business and I'll handle that by all the various parts of the company.
We've announced a couple of new contracts for the first time today, so let's start with those.
And our server base gaming business, probably the largest announcement based on financial implications is our William Hill contract extension.
As most of you would be aware Williams hills, our largest customer and this extension secures our relationship through 2022.
This extension is particularly noteworthy as it requires only a modest investment.
Of the 100, new terminals for trial during the three year term.
Notably we've also secured a contract with BG TV for them to purchase nearly a thousand of our U.S SPG terminals that are being displaced due to shop closures in the UK LDR market. We've mentioned, we would try to use for these machines either for parts for for self service that in terminals, but this commitment accounts for a good portion of our displaced machines.
Moving down the mat geographically degrees.
Been awarded another 580 machines.
With over 380 of which will be our new valor VIP terminal, which is the cabinet redevelop them, we'll be selling in the North American market I think it's notable to point out that this brings our total.
To 8940 machines out of the total of 25000 that OPAP is contracted to provide increase that's roughly 36% of the entire state and will have the largest share of the o., Pakistan and that's really frankly based on the performance of our products and we're delighted to be extending our relationship with the whole kind of with these new terminals.
Ironically, sometimes.
American, but I'm over here in London, calling this on the other side of the time, but in North America everything is progressing really quite well with our North American plc initiatives.
The preliminary response to our Bauer VIP terminal has been excellent and were expecting to be licensed and start running trials in Illinois in the September October timeframe.
Just a slight digression there about Illinois, so want to positives was the same as most of you would know the Illinois Governor signed a law authorizing a major expansion of gaming in June with in terms of the total market roughly 21000 gaming machines potentially be added to the market.
The segment of the market that we focus on the route markets.
This permit licensed restaurants bars veterans internal organizations and smaller truck stops.
To increase from five machines to six machines and then the truck stops themselves being able to go up to 10 machines from five.
So that amount so if you take.
The ability of all these locations it could add up to 7000 machines and key to this is this is not replacement machines. These are additional machines. So we consider this very fortuitous as previously we would have had to convince operators to remove an existing machine and replace it with ours, but now they can install one of our machines as their six machine without disrupting their existing business.
The change in maximum safe from $2 to $4.
And the increase in price pay out from a maximum of $500 to a maximum of 11 $99 is another positive to the market and all of our games have been developed with that capability in mind.
The feedback from all the operators and I've spent a fair bit of time in Illinois in the last few weeks that we've spoken to is very positive our entry into the market and they are excited with the success that we've shown another distributed gaming markets around the world and very excited to have a new player in the market. So we have certainly some high expectations for success in Illinois.
Moving on to virtual sports.
Again in North America, we've added a lot of Quebec to our list of North America customers.
A lot of Qubec joins Bcl see as our Canadian interactive customers, where we'll be providing our virtual sports and interactive content to their mobile gaming platforms.
The more places that we can introduce virtual sports across North America. The more we will build both awareness and gain traction and that's important for the development of virtual sports going forward because it is a reasonably new phenomena in north American market.
So, let's talk a little bit about Pennsylvania, because we've been there now for roughly a year, we're launching a new game in Pennsylvania with the Pennsylvania Lottery.
With the branded called Durban cash that will be this fall hopefully in September and we're enthusiastic about the potential success of the product and the lotteries coming then from a marketing perspective, and trainee perspective, and the ability to go out and get more venues on the backs of the Derby cash products. We're excited about the opportunity in Pennsylvania going forward.
Moving onto our interactive business, we continue to secure new contracts, including for this quarter.
And improve our speed to market faster integration times, it's a big focus of the technology organization that we talked about with CBS and leaving.
And getting faster integrations gives us speed to market.
Our current interactive content some of which is brand new it's been very popular and I have no doubt. This is one of the areas that has huge potential to grow and will benefit.
Not only from what we're developing currently but from the content that's been developed within the no dramatic technology group.
After the hopefully successful acquisition closing.
So the combination of our VLP virtually an interactive initiatives throughout North America are starting to bear fruit and we expect to see a meaningful contribution to come from this region.
Going into 2020.
So before I hand, it over to Stuart I, just want to say.
No.
I've been in the gaming business, a long time and clearly the triennial was a very serious headwind for for inspired.
But I feel very confident that our pipeline of products, new customers and markets will deliver sustainable growth going forward. So I'd now like to turn the call over to Stuart to discuss our financials in more detail Stuart. Thank you Bruce Good morning, Good afternoon, all depending on my listening from.
So when considering the results of the second quarter, particularly versus the same quarter last year. There are a number of factors to be aware of so I will take slightly more on the nominee work to try to explain these.
So overall reported revenue for the quarter decreased about 10 million year over year, and 7 million quarter over quarter. There are a number of headwinds impacting this first and foremost as Lou mentioned not surprise five and a half million dollars of this decline stoops that final implementation, which began on the first day about second quarter.
As Lynn as loan also mentioned the first quarter post implementation at least in the adjusted EBITDA guidance was always expected to be the worst.
This is due in part to the customer gross win per unit per day impact being the largest initially increasing over time and we've certainly seen an improving trend with customer gross win per unit. The day, increasing from nearly 45% decline in April so 38 cents decline in June .
In addition, we anticipate a custom as announced store closures and restructuring efforts will help mitigate the effects incurred the losses going forward due to the benefits of supporting the smaller more profitable estate as welding as well as being able to use wholesale to remove terminals.
Secondly, we had an FX headwind of about one and a half million dollars I'm revenue year over year with the pound versus the dollar rate in the prior year the ones. They six of the period compared to 129 in the current year.
Looking at where the races. Today. This is a trend that looks like it will continue into the quarter with currently.
Thirdly, as long alluded to we had strong comparative in the crying in both hardware and software license sales and said it best gaming accounting for $1.3 million or $3.6 million reduction respectively.
Fortunately, we went out of external factors and that two of the key SPG markets in Italy and on top of the one and a half a cent increase incentive attacks at the start of the year. It was the third the 9.4% increase in this doesn't make.
This equates to Italy, now, having a gross win tax of approximately 64%, whilst we managed to mitigate the majority of this through increased revenue elsewhere.
This gave a drag of $9.6 million and finally due to legislative delays in Greece, we weren't able to roll out new content will deploy new terminals during that period, but thankfully. This is an issue. It has now been resolved and ended the quarter.
These factors will weigh heavily on our adjusted EBITDA comparison, too, but the decline in the quarter versus the comparative period, and 6.6 million, including an impact in the training and implementation of $4 million a decrease in software license had an increase of around three and often in dollars as well as half a million dollars from eventual sports content Rephasing on top of an FX challenge of around $12 million.
So instead of Ace gaming revenue decreased 31.6% and functional currency basis comprised of a reduction in service revenue of $7.2 million and $1.3 million reduction in hardware revenue for exactly the reasons I previously mentioned a server based gaming revenue is essentially total sensor based gaming revenue was up to 79.8% from 71.7 cents in the prior year, mainly due to last year's software license sales in Greece.
This is probably more appropriate level going forward.
Excluding the impact of North American Vmc sales.
So we ended the quarter of little over 35000 terminals, which was up roughly two and a half thousand from the prior year period, but down modestly from the 35300 in the prior quarter. We expect the machine counts continued to decrease consecutively due to the shop closures in UK.
As many of you will know William Hill has announced his plans to close around 700 elbow is before the end of the unit, but to reiterate what we said before shop closures at the bottom of the income range and not a bad thing from a profit perspective.
Adventurous both reported revenue decreased 8% in dollar terms and 2% in functional currency on $4.2 million.
There was a half a million dollar reduction in virtual schools revenue during the quarter to a rate re phasing for major customer we've moved to five cents to cross the it taken out spiky rates.
In addition, as we talked about a number of times that just sort of an ongoing reduction in revenue from amortization of historic long term license deals.
Compared to the prior year quarter this accounted for $9.3 million reduction.
So what we saw solid growth during the quarter in retail venues in the UK, mainly due to new channels as well as the migration to be to place post trial implementation in Belgium, and several other retail customers in the world, including America in China.
In addition, scheduled online virtual Screenos point $2 million in the quarter.
Further down the income statement, our SGN expenses decreased due to staff related cost savings made in conjunction with trial implementation as well as facilities and IP related cost savings.
There were increases in stock based compensation expenses and acquisition related transaction expenses related to the proposed acquisition of MTG was depreciation and amortization decreased speaking at and T.J.. We believe the proposed acquisition is on track for third quarter closing and as we said before we expect to achieve $12.3 million to $13.3 million the synergies through shed costs and increased buying power and that's based on FX rates at the time and the initial announcement.
We really do believe this transaction will be transformational for the business and will lead to a combined business with much greater scale and diversification.
So in connection with the acquisition despite as its commitments to enter into a new 220 million pounds temime facility as well as the 20 million pound revolver credit facility.
Tim I feel like it will be used in part to refinance acquisition as well as the pay off the existing indebtedness and to pay fees and expenses related to the acquisition.
We expect it to be a meaningfully lower cost to capital and a current debt.
So finally looking back at the the coating question turning attention to the cash flow I think it's worth spending a little bit of time on this.
Within the quarter, there was net cash generation of 14.7 million versus an outflow of frequency a million dollars in the prior year admittedly. This is masked by an increase in the revolver. During the current quarter of approximately $9 million, which is being used to hedge the remaining euro rate exposure on the MTG acquisition.
However, even without later, it's very meaningful positive movement in cash generation year on year. So if we define free cash flow as net cash provided by operating activity less net net cash used in investing activities. We see an increase of nearly $10 million year over year for the three months from an outflow of $3 million last key to tune in blevins $6.8 million this year.
There's a number of factors.
Expect driving this but by far the largest is the significant reduction year on year in capital spend.
And what's the Tri annual impact will be felt from a cash point of view more in Q3 than Q2, we expect these lower capital expenditure levels on the organic business to continue for the foreseeable future.
So with that I'll hand, but the long for any additional comments before opening up to Q.
Thank you Stuart.
That was an excellent reporting.
I have no.
Comments to add at this time, so operator if.
Able to can you. Please open the program up to acuity. Please.
Thank you.
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 you for <unk>.
Speakerphone, please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from David.
From Roth capital. Please go ahead.
Great. Thank you I have three questions if I could.
First just based on continued diligence and market observation as.
MPG seen a pickup and when and their segments posting at all or.
Any other market or company specific commentary with regard to NTT G. I know Mark I think you mentioned potential upside with some synergies and that was new so any line item information where that could have come from would be helpful too.
Stuart you want to comment on that if you can.
Yes, well as you say.
Blown the difficulty is that I can't really so yeah, Oh, yeah for competition reasons and it may seem.
Similar crazy, but it's the way the rules are going to live by David We don't now get access to MTG financial information until the transaction closes.
So well start to say that we you know there's certain areas, they're in particularly the pulp market that we would expect to see pickup from triennial and we believe from the data that we saw prior to signing that there was some benefit that intensive up today real time information, that's unfortunate not something I cannot anymore color.
Okay.
And then Brooks you reviewed Illinois, a little bit and for some time, we chatted about fourq you around another opportunity is for the LTV and you use the word you all have used the word meaningful contribution in the past now that were.
Fairly close to Fourq, you could you give us a sense of.
You know what percentage of revenue would be meaningful for either fourq or 2020.
Sure so looks like and for for Us is.
We've gone out and Weve had meetings with literally all of the operators.
And we have commitments from from virtually all of them to put our games on trial, but as you would know it's always about the performance of the gains, but we feel very confident that we will get our games out and marketed on trial in the fourth quarter and assuming that they do well, which again the feedback ultimately to the player determines that but the operators that we're talking to love the the cabinet love the breadth and depth of our games and frankly, we're manufacturing machines as we speak to be able to fill those orders and we fully expect is Illinois is successful.
They'll be tack on orders not only in Illinois, but obviously, an allergy to ous markets like you would see Oregon that Canadian provinces et cetera going into 2020. So hopefully that gives you at least a sense of where we see the market for the fourth quarter and really going into the first quarter of next year.
Okay, All right and then my final one was if you had to bifurcate the UK win improvement assumption drivers from where you are today I mean, you have the initial impact of some stabilization to the upside. So you have supply coming out what that shop closures, you attack mitigation, and maybe even and TG contact content mitigation.
What element I guess give you the most comfort with kind of win.
Her day assumptions in your model that you know did you too.
Maybe in some of the upside that Lauren talked about.
Well I think I think you've noted actually all three points, we're seeing the trend we've talked about through the second quarter and obviously, we're already a month into.
The third quarter and the trends have continued in the existing business.
We're going to be rolling out some new content.
On the left side.
This quarter that we expect to have.
A meaningful impact.
To help us certainly the feedback although we can't go too far into it from the MTG content. There's you know there are six titles that we're getting all of which are prominent titles.
In our LTL customers or are certainly I think looking forward to getting those so I think the combination of the players getting more used to the environment us doing some content work the NPG content coming in and just the general momentum that we're seeing should help us all the way through.
Okay, Hi, Dave.
Yeah, David just just to add to that a little bit just to be clear that.
We're we're kind of following all the vectors, but in your question is.
It is you know.
What do we see happening to the to the win per day.
Clearly.
As the.
As the shops close and the lowest performing.
Machines are proved out.
Then of course, the average win per day is going to increase the remaining machine significantly simply because mathematically we've taken the the worst performing ones out, but then in addition to that.
I think everybody feels that.
Although there isn't a unanimous.
View right. This second on what this percentage is but certainly a meaningful percentage of the play that had been going.
To the lowest performing machines will.
You know re circulate into some bedding show up somewhere and.
This obviously will add.
To the mathematically higher win per day that simply comes from pruning and then finally.
Adding on top of that we actually think.
We'll be.
Probably a very meaningful positive impact.
From the Nova Mad at content because these games perform.
Wildly successfully throughout Europe , and they're not available right now in the UK bedding shot market. So the combination of all of that the pruning out of the poor machines.
The recycling of some percentage of the pruned revenue and then the.
The improved content on top of that.
We should see.
Over the next few quarters a.
Very significant increase in the average win per day.
Okay. That's that's actually really helpful. Just to follow on that then like from modeling from a modeling standpoint, Threeq and Fourq you would probably see the most closures.
But also you know additional stabilization as you suggested with yeah, you know continuation of positive when end to 20 with.
And TG content and and.
You know other mitigating technologies that you suggested you were going to be implemented yet now of course, we're not going to we won't have the the NTT titles until.
But in the end teaching deals closed, but again pending.
The final competition review.
We hope that will be sooner rather than later.
Okay, great. Thanks, guys appreciate it.
Sure David.
Our next question comes from Chad Beynon with Macquarie. Please go ahead.
Hi, Thanks for taking my questions.
Lauren you gave some broad forecast kind of exiting the end of the year in assuming that nothing has changed with and TG Oh Stuart could you kind of help us think about where leverage will be at the end of a closing the deal.
And then as we think forward given that you know, we all expect MTG to be an accretive deal how should we think about.
Kind of where you are comfortable with leverage thank you.
Yeah actually if you want to take.
Yeah. So.
John Im not sure why.
Obviously, which period.
You look at in terms of EBITDA will drive leverage, but we will have approximately 220 million pounds of funded debt.
At closing.
Right, so so depending on which period you use.
Well, we'll drive the exact leverage level I think you know nothing's really changed in terms of how we think about target leverage which is.
This will obviously put us a little bit above three times at closing when we take a very clear path to deleveraging through.
EBITDA growth and debt repayment.
And we think about target leverage on a stabilized basis for the company add that you know about it.
Three times.
Target level. So we are going a little bit above that only with a clearer a clear path to de levering down to that three times or below level.
Okay. That's perfect. Thank you Dan.
In the UK just in terms of the current betting shop contracts is there anything else coming up in the near term that we need to be mindful of.
And as you talk to your partners in the market.
Have they given you any feedback in terms of their excitement with what you know you can bring with with entergy.
With a bigger library.
Brooks you want to talk about that.
Sure so in terms of contracts.
All three of our biggest customers are now signed out through 2022, so getting to William Hill extension.
That'd be such a big customer of ours was was critically important. So we've got we've got clear runway for the next few years in terms of that.
Yes, and the feedback that we're getting.
From our customers and again, probably a U.S hills as the as the one that we've been talking to the most through the process of this.
Of this negotiation of the extension of the contract is yeah. There. They're very excited. This is these are titles that that everyone knows that have not been available in the LTL market in the past.
So they're they're quite anxious to get these.
This content in their facility as soon as possible.
Correct.
Lastly on the OPAP announcement, how quickly can you get these machines out into the market and as you've continued to rollout more units.
What has happened to the win per day, and you know how should we expect these to perform.
Given that the market is just getting closer to a point of saturation and that's all for me.
Sure well, so as Stuart mentioned I'm not sure it came through 100%, but as Stuart mentioned, there was a political issue that caused the delay in the roll out of cabinets. That's now gone and the rollout is has started again it will start starting in August .
And we expect to be fully deployed OPAP has a mature does that.
All right.
We'll be in the market by the end of the year.
In terms of the of the win per day sure. There's there's.
As you get you know kind of broader distribution. There is some concern about the win per day. Good news is as we talked about.
We're putting 400 of the games that will be our new cabinet that there will be putting in their best gaming all locations and they are fully expecting this to be the premium cabinet to them. So I think some combination of yes, there might be some slight dilution in terms of the the numbers of locations.
But we're pretty excited about the new cabinet going into the best locations and.
The early numbers that we've seen so far in the third quarter is actually Greece's is coming back and growing.
From what we've seen so far so we're we're.
We're pretty excited about that.
Okay. Thank you guys.
Sure thing.
Again, if you have a question. Please press Star then one.
Our next question comes from Mike Malouf from Craig Hallum. Please go ahead.
Great.
Thanks for taking my questions I, just have a couple of them.
If we could just go back to Illinois for just for a quick second it sounds like a very nice opening up of the market and I'm just wondering how big will the test on or at least the senses is that the tests that you're going to be running in the fourth quarter with a lot of these.
Rob guys, how big is that and how is the sales process.
With them, if you could just take us through that and I'm, obviously don't really understand how consolidated that market us. Thanks.
Sure sure.
So in terms of the.
In terms of the trials.
We have preliminary indications from 12 of the 15 operators that they will put our games on trial to the others. We actually have some technical work we need to do so they would like to trial as well, but we just got to have a little bit of technical work. So we'll certainly have.
Machines across the state with all of the operators.
And then they've given us.
You know again the commitments such that as the games perform here is the order of magnitude, what we would deliver or what we would order and that we would have to deliver over in the fourth quarter and probably bleeding some into the first quarter of next year without going too much into the specifics I can tell you that the pipeline is significantly higher than our original and anticipated pipeline in large part due to the fact that we got very lucky in terms of the Spansion.
So it would have been a bit more difficult as you can imagine to replace existing machines with the new machine, but having the ability to have a new provider come into the market as the six machine really was a it was a very very good outcome for us. So that's kind of where we see the Illinois market.
And what we need to see is that success in the Illinois market and sort of those follow on large implementations before we could expect some movement and Canada, and Oregon and such.
Yeah, I think Thats I think Thats fair to say I think.
If we're successful in Illinois, certainly the other markets will be we will be looking at Illinois.
But remember in this in this particular segment in the route segment.
It's been primarily dominated by scientific games, and IGBT and all of the customers that we've talked to had been looking for innovation and looking for a new supplier to come into the space.
So obviously, we need to have a successful product, but but we're we're confident based on the conversations all of our customers that they are looking for some new differentiated very product and frankly have seen the success that we've had in route markets around the world.
And so we're we're coming in with I think some pretty high expectations.
Okay, Great and then.
Just a follow up on Pennsylvania, I know you have a new game coming out.
Have you decided on a different strategy about go to market and I know it sounds like Pennsylvania is getting behind it with a marketing push can you just talk a little bit about what.
Sort of.
You've learned over there and what kind of differences that you're going to be.
Yes, so when we.
When we were when we launched our original products in Pennsylvania, and we went out and did some customer focus work.
With the Pennsylvania lottery and with players what became very clear to US is the gain that resonated with players that had the most kind of notoriety and people viewed as a betting game was horseracing kind of 70% in probably the next closest store it was in the in the Twentys.
So obviously, the Pennsylvania lottery saw that and there's there's a number of markets more and may want to comment on this but there's a number of markets throughout North America that already have a monitor game for horse racing and had success. So.
We're going into Pennsylvania, I would say.
There's a huge difference right now the maximum price you can win in either our car racing or a football game is $250 in the horse racing game, the Max price will be 800000.
So, Pennsylvania as has told us that they are putting their marketing muscle TV commercials training et cetera, et cetera behind it because what they want as a product that succeed so that they can get into more bars and taverns.
They've given us a pretty substantial targeting that for growth into that segment.
Because they want to be able to sell not only our monitor gains but also their keno game. So.
I think they felt like things.
Probably work done on both sides will take some will take some of the blame for that but they probably wouldn't tell you that they didnt market. This as much as they would like to but they have gotten behind it. This time and obviously, we'll start seeing the results in September .
Okay, great. Thanks for the help.
Hi, Mike its Lorne just just to get to.
To add a little bit of color to that.
The.
And.
Thanks for actually.
Jogging my memory on that Brooks, but.
What seems like an eternity ago.
At scientific games, we introduced.
A horse racing game in Maryland.
Which has.
Remarkably similar.
So lets say socio economic demographics to Pennsylvania.
And.
The horse racing game in Maryland is.
And has been for a number of years phenomenally successful.
I think the population of Pennsylvania is.
Brooks said of two and a half times the size of Maryland about.
And.
I think it's like 5 billion versus 11 million or 12 million, but anyway if if.
And I think the.
I think the handle on horse racing annually in Maryland.
Is around a couple of hundred million dollars a year is if my memory serves me so.
If you.
And again given that were starting with.
At least two and a half times the population, if we were to or the Pennsylvania lottery.
With sufficient marketing support we're too.
Region. This is not not per capita sales, but the same absolute level of sales as Pennsylvania.
The as Maryland that would have.
A dramatic impact on our financial performance of all by itself it would.
Far more than generate the.
The incremental profit that we've been talking about that we're looking to.
Offset the impact of the triennial. So this is a very very important.
Development, we think obviously, it's great that the Pennsylvania watery.
Has undertaken to do this and.
And to give us the support that they are going to be given.
And what's the timing again on this on this launch of the Derby.
As of September end of September is when the launches.
Got to happen.
Okay, great. Thanks, a lot.
Our next question comes from Alex Silverman from eight W. M investments. Please go ahead.
Hey, good morning.
[noise] sales can you hear me.
Yes. So most most of my questions have been asked and answered, but how do you see getting back to your prior level of EBITDA in terms of the split between growing into it and and cutting costs to get there.
Yeah. So the all I'll tell you what.
I think as Stuart and.
And gross and and Dan can give you their view. So if you go back Alex to what I was saying in the.
In the conference call.
We have.
If we were to get.
To the.
The upper end of the mitigation targets are the two and a half a million.
A quarter versus the.
The 4 million that we were at in the second quarter that would require in effect cost cutting of a million and a half.
US assuming that there was no.
Benefit to the mitigation by increased revenues from the nomadic stuff and so forth.
And that overall and and if we were to.
If we could get to the 2 million.
Tri annual impact and that would be another half a million dollars of cost cutting so that would take it to a couple of million.
And the overall.
Impact at that point of the Tri annual would have been two or two and a half million and we've said that our analysis.
Gives us comfort that.
We will generate through growth.
An amount of EBITDA equivalent to.
What we're losing through the triennial so when you.
Shake all that up together it says.
That if we're going to add let's say $4 million a quarter.
To our current level of EBITDA to get to the 13 or 14.
That were intending to get to.
About 40% of that is going to come from cost cutting and 60% will come from growth.
Got it.
All right that is.
That is very helpful.
Uh huh.
I think thats it for me Oh.
He.
I'm sorry, one last thing.
At what point I assume William Hill causes shops over the second half of the year at what point can you actually make meaningful changes to your repair.
Your repair group and your your routing group in order to speak to some of those costs out yes.
Stuart you want to or Brooks, you want to comment on that.
Yeah, I'll take the first part of two or three wants to add some color. He can Alex originally we thought that William Hill was going to be doing this on a phased basis.
They've come out and they are on their call last week and force. We we in working with the notice is that they are now anticipating to do this and one big closure of 700 shops or thereabouts.
On the first of October so or thereabouts.
So that's what they've guided to and that's what we're working towards our cells and may be some tweaking.
Around the edges of that but thats more or less the way that we think it's going to go so as Lorne alluded to in his remarks, there's there's some factors of costs that quite frankly.
Even if even if shops are doing the level of business. They do require service and columns and so on and so forth. So.
So having this all happen at once we clearly will have to come in and get machines out and get our workforce right size et cetera, et cetera, but that's orders of magnitude when it's going to happen and how it's going to happen.
And that friends and had a paddy power have not come out Paddy power has come out and basically said they are not going to global shops, and best friend as as basis, even though they're not a public company as guided to the fact that they will probably be the last man standing and want to see what the impact is so I think they'll be slower.
And we'll take longer than what William Hill is doing.
Got it okay. Thank you very much for that for the help on that.
Sure.
At this time, we have no further questions.
This concludes our question and answer session.
I would like to turn the conference back over to Mr. Lorne wheels for any closing remarks.
Thank you operator.
I don't really have again anything to add.
Other than two.
Reiterate that we have.
An enormously full plate.
Of things that are going on.
Normally I might be.
Concern that were biting off more than we can chew because we've got.
All the mitigation to deal with we've got all of the growth initiatives to deal with and we've got the.
The completion integration of the.
No amount of acquisition.
I think weve added.
Very intelligently it very thoughtfully to organization.
In the last few months, we've talked about Steve Vsan, who was for many years, our Chief Technology Officer at scientific games, who recently joined US as our Chief Technology Officer here.
The long Brooks and an operating team that is.
Really phenomenal.
One again that I've had many many many years of experience with so I think.
I think we know what we're doing and I think we have the bandwidth to get all this stuff done.
And.
I think we all feel.
That.
Not if but when we get all this stuff done as we move into 2020.
We're going to have.
A real tiger by the tail and.
And a tremendous platform too.
Grow from there and.
At least.
For the next.
You know six or nine months, it's it's all about execution.
We have.
All the things we need to do to get to the.
To the level of financial performance that we've been talking about is all there in front of US we really don't need.
Any strategic miracles to happen, we just need to execute.
On.
These identified initiatives and I feel.
Quite confident that we will.
And.
Come the early part of next year will be where we need to be so thank you all for.
Your patience and your perseverance with us we obviously.
Hugely appreciated.
And.
I think they can.
Comfortably say that.
Not too far down the road.
Your patience and your persistence and your perseverance will be.
Greatly rewarded.
So thanks, again, and we will talk to you in.
In three months.
Bye.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.