Everi Holdings Inc (EVRI) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen, thank you for standing by. Welcome to the Global Cash Access Holdings Incorporated 2011 fourth quarter and full year earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions). I would now like to turn the conference over to Julie Yusgart, Treasury Manager. Please go ahead.

Thank you Alicia, and welcome everyone to GCA's 2011 fourth quarter and full year earnings conference call. Joining me on today's conference call is Chief Executive Officer, Scott Betts, and Chief Financial Officer, Mary Beth Higgins. On today's call Scott will give an overview on the Company's progress and then Mary Beth will provide a brief update on our financial performance in the fourth quarter and review our guidance for 2012. Following these comments we will be happy to take questions.

A few important items before I turn it over to Scott. First, we have posted our earnings release in the Investor Relations section of our website at www.gcainc.com,for anyone who needs access to that information. Also, during this call if we use any non-GAAP finance measures for references we will put up the appropriate GAAP financial reconciliation on our website, finally a replay of today's call will be posted on our website around 5.00 PM Pacific Time.

As we begin let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and are subject to a number of risks and uncertainties. These include without limitations, statements regarding market and segment trends, and conditions in the cash access kiosk and gaming industry for 2012 and future periods.

Our belief that we are positioned to grow our business in 2012 and beyond, the impact of the MCA asset acquisition on our business, the impact of the Durbin Amendment, recently announced changes to rules and regulation regarding the interchange reimbursement structure for ATM transactions, and other uncertainties regarding changes in network fees on our business,our projections and guidance regarding cash EPS, EBITDA, and other financial matrix, our product pipeline, regulatory approvals for new products, our competitive position, and our intention to use free cash flow to repay debt. For factors that could cause actual results to differ materially from those described in our forward-looking statements, we refer you to our SEC filings and the Risk Factors set forth therein.

With that let me now hand it over to Scott.

Thank you and welcome everyone. We are pleased with the results of our fourth quarter, and are enthusiastic about the Company's prospects for 2012 as is reflected in our guidance. Our fourth quarter results were strong with adjusted EBITDA up plus-30% and cash EPS of $0.17, which is up significantly versus the fourth quarter of 2010. These results are within our range of revised guidance that we gave during our last call. These results are driven by a modest but study core in segment growth, the addition of the contracts we acquired in the MCA acquisition, and of course the positive impact on our cost structure from the implementation of the Durbin Amendment.

2012 promises to build upon our fourth quarter results with projected cash EPS of $0.76 to $0.82, which is approximately a 45% increase year-over-year, and an adjusted EBITDA target between $73 million and $77 million, up approximately $18 million on a year-over-year basis. Before I turn it over to Mary Beth to cover the key drivers and the assumptions behind these numbers, I would just like to make a comment about the overall strength of the Company. We have certainly learned a great deal over the last three years, and are a much smarter, stronger, and more capable Company than we were when we entered this period. We are continuing to execute our strategy, invest in the Company's products and services, and improve our balance sheet.

So with that let me turn it over to Mary Beth, to take you through the results and the guidance in more detail.

Thank you, Scott. Good afternoon everyone. As Scott suggested, 2011 ended on a very positive note. The industry has stabilized over the last year, and we are actually seeing steady but modest growth. To provide a quick review of our results for year end December 31st 2011 we slightly exceeded our revised estimates for cash EPS. Our cash EPS which is defined to exclude noncash stock comp was $0.45 adjusted for one-time charges. The non-recurring expenses were comprised approximately of $1.8 million in refinance charges, $1.2 million in Western money acquisition costs, $0.4 million in executive severance costs, and $0.5 million in legal expenses, some of which were related to the MCA acquisition, and approximately $300,000 for the loss on the sale of some obsolete equipment .

Adjusted EBITDA which excludes noncash stock comp was $61.7 million. The full year results were significantly impacted by the results of the fourth quarter where cash EPS was $0.17 compared to $0.09 at Q4 2010, and adjusted EBITDA was $20 million compared to $15.3 million for the fourth quarter of 2010. This was a 31% increase in adjusted EBITDA versus 2010, which included the full quarter of Caesars operations. Our 2011 results were also impacted by an increase of depreciation and amortization during the fourth quarter from the MCA acquisition, and a slightly higher effective tax rate for the full year, due primarily to noncash stock comp related issues.

Before we look into some of the details behind the numbers, I want to remind everyone that the biggest impact to segment revenue for the year in both cash advance and ATM was a loss of the Caesars contract, which accounted for between 13% and 15% of revenue in these segments for the year. Segment operating results for the quarter, however, were driven by both Durbin and the November MCA acquisition. On a segment basis , cash advance revenues, operating income, and operating margin were $203.9 million, $38.5 million, and 18.9% for the year. And $51.8 million, $15.1 million ,and 29.1% for the quarter. It should be noted that we experienced actual growth in our base cash advance revenue during the quarter. However, the implementation of the Durbin Amendment was primarily responsible for the increase in margin.

The ATM segment revenues operating income and operating margin for the year were $283.7 million, $34.8 million, and 12.3%, the same results for the fourth quarter from $70.3 million, $7.7 million, and 10.9%, which reflected the repricing of a significant portion of our portfolio over the year, as well as the inclusion of the MCA acquired contracts, which had lower margins.

Check services segment results from $26..3 million in revenue, $14.2 million in operating income, and a 54% operating margin for the year, $6.5 million in revenue, $3.0 million in operating income, and a 46.9% operating margin for the quarter.

Our Other segment includes primarily the results of Western Money and Central Credit operations. Our Other segments reported revenues of $30.2 million, operating income of $14.8 million, and operating margin of 49% for the year. The quarter results had revenue at $9.2 million, operating income of $4.8 million, and an operating margin of 52.1%.

The Western Money acquisition is continuing to deliver great results for the Company, both strategically as well as in terms of revenue growth. Our Q4 2011 revenues for Western Money Systems continued to show good sequential and year-over-year growth at $6.7 million, which is an increase of $3.7 million from the fourth quarter of 2010. The revenue from Western Money Systems in Q1, Q2, and Q3 of 2011 was $3.5 million, $4.2 million, and $6.0 million respectively.

Corporate operating expenses for the segment tables were $64 million for year-ended December 31st, 2011 as compared to $65.1 million for the same period in 2010. Corporate operating expenses exclusive of depreciation and amortization decreased by approximately $1.5 million in 2011. It is our continued intention to focus on free cash flow on debt reduction. For 2011 we had net debt payments of $40 million, and paid $7.1 million in fees related to our refinancing. As of March 1st our total borrowings outstanding are currently at $150 million, which is down from approximately $209 million at the end of 2010. As a reminder this $59 million debt reduction since last March is in addition to $10.8 million in cash used for the acquisition completed in the fourth quarter.

Using a 12-month trailing adjusted EBITDA, as of December 31st 2011 our leverage ratio is approximately 2.43 times based on our current outstanding debt level of $150 million. I would also like to take a minute to mention that last week Standard & Poors upgraded our debt facility rating from a BB minus to a BB. At December 31st, 2011 our cash was approximately $55.5 million. Also of note on the balance sheet at year-end is the large growth in our settlement receivables and liabilities.

Although there are other drivers for the changes in these balances, such as the addition the portfolio of the contracts at MCA, this growth is primarily a result of the fact that at December 31st was a Saturday with no banking activity in 2011 versus a Friday in 2010. In addition, December 31st is a high volume day for our business. As of January 31, settlement receivables and liabilities have both already been reduced by over $60 million. We are seeing positive indicators across many of our metrics, and looking at same store dollars to spent, our best measure of industry trends, we have now seen stable positive year-over-year comparisons in 11 of the last 12 months. The last two quarters have grown at an average of 4.1%. Our results mirror this trend. During the fourth quarter of 2011 excluding Caesars, the Company posted year-over-year revenue growth in its base business for the first time in several years.

As we look forward it is important to note the high level of visibility and stability of our contract portfolio. Based on recent contract signings and other verbal commitments from our customers the Company now has visibility on approximately 90% of our revenues through 2012, with very few significant contracts open for renewal during that period. I will now discuss our guidance for 2012, but before we begin that discussion, I want to clearly define our targets for the Company going forward. We believe it is important to provide guidance that reflects the potential cash that can be generated from our operations.

And with that in mind the following definitions will be used for all of our calls and guidance going forward. First, cash earnings will be defined as net income plus deferred income tax plus noncash stock compensation plus amortization. As we have discussed before, GCA has some very unique tax attributes that enhance our ability to generate cash flow. Therefore, we believe adding back the deferred income taxes is appropriate when determining cash earnings. Additionally you will note we have not included depreciation in our definition of cash earnings, as we believe it is a reasonable proxy for CapEx. Cash earnings will provide investors with an approximation of the Company's ability to generate excess cash in a particular period.

Second, cash EPS is defined as cash earnings divided by our average number of diluted shares outstanding. Third, adjusted EBITDA will be defined as follows,Operating income plus depreciation and amortization plus noncash stock comp. We have provided these revised calculations in our earnings release for 2011. Therefore our guidance for 2012 is as follows,our cash EPS guidance for 2012 is a range of $0.76 to $0.82, our adjusted EBITDA range is $73 million to $77 million, the average diluted shares outstanding we have utilized is 66 million, and interest expense is based on an increase in the three month LIBOR curve over the period from about 55 basis points to 70.

Now let's discuss the major drivers for 2012, there are four main issues that we believe are worth highlighting. First, obviously, the impact of Durbin. As you can see from our segment results for Q4, Durbin will add significantly to the earnings for 2012. Looking to our forecast for 2012 we anticipate that segment operating margin will decrease slightly over the course of the year, as we strategically utilize the cost savings and as these savings are offset by fee adjustments that we anticipate over the course the year.

Second impact is the MCA acquisition. Although we do not publish revenue targets, it should be noted that the MCA acquisition should add approximately $50 million to revenue for the Company in 2012. It will also add overhead for direct portfolio operating costs. The MCA portfolio also generates a significantly lower operating margin than our current portfolio.

The third impact are various uncertainties in other card fees. I would like to remind everyone that although we have confirmed the impact of the Durbin legislation, there is still uncertainty regarding additional fees and charges that the networks and associations may implement in an attempt to offset the negative impact of Durbin. This may have the effect of reducing a portion of the Durbin benefits in the future. As an example although not directly related to the debit interchange reduction, Visa, Star and Nice had all recently announced changes in their interchange reimbursement structure for ATM transactions that will become effective in March and April of 2012.

These changes should have a modest impact on our ATM profitability, because this interchange fee is actually a revenue item for GCA. Included in almost all of our agreements is the ability to pass on these changes to our customers, therefore beginning in the second quarter you may see a reduction in ATM revenues, with a similar decrease in ATM commissions paid to our customers. Change of this type are indicative of a very fluid and dynamic environment for the financial services and payments industry, as banks, card association, and the EFT networks, try to adjust to the changing economic landscape post-Durbin.

The fourth impact is GCA's strategic spending. The guidance we have given also anticipates using some of our improved operating cash flow to strengthen our product portfolio and drive our product initiatives. Therefore, our forecast includes a 10% increase in our operating expenses, although a pores of these increase are associated with MCA direct operating costs, the remaining increase are primarily related to strategic staff additions, as well as focused product and profits improvements. We feel it is vital at this juncture to broaden the gap between our product portfolio, and that of any of our competitors. We are the market leader, and we intend to stay there.

Our capital expenditures were $7.4 million for 2011, and we anticipate that CapEx for 2012 will be between $6 million and $8 million. We anticipate the continued use of our cash flow for debt repayment throughout 2012, as a result of our repayment strategy our balance sheet should continue to improve, and provide the Company with significant flexibility going forward. As you can tell from the above discussion, we are extremely pleased with the results we are sharing with you, and we believe that GCA is well-positioned for the future.

Now I will turn

Thank you Mary Beth. We continue to make good progress across all aspects of our business. Underlying segment growth trends continued to show a 3% to 4% same store growth in terms of total cash dispensed for the second half of 2011. And so far in 2012 this trend appears to be continuing. I actually want to highlight an emerging and potentially important trend that underlies these numbers. We have talked a lot about payments trends in these calls, including the shift from debit and credit to ATM, that we saw as consumers responded to a weakening economy, and reduced spending per visit. This hypothesis proved itself during the downturn.

Over the past several quarters our confidence in the stabilization and the modest recovery has been given credence by our improved same store dollar numbers. Our data has proven to be a pretty good surrogate for what the operators are seeing. The important fact that Mary Beth stated in her comments, is that we now have seen some positive growth in the cash access, that is our debit and credit business, in the last two quarters. We would expect this opposite progression of consumer behavior to happen, as consumers gain more confidence and increase their spend per visit. While it is certainly too early to declare a trend, we will be watching this very closely over the next few quarters. But we feel the early reversal of these trends is very encouraging, both for GCA's business as it has a significant impact on our margin, as well as for the industry.

Renewals of existing contracts and new contract wins have always been high for GCA, and we have over 90% visibility in our contracts to the end of 2012. We are winning the vast majority of new casino openings, and these are contributing meaningful growth for us. The important thing everyone needs to understand is that there is a robust pipeline of new openings well into 2013, all of which provide increment opportunity for GCA. Even with some cannibalization of existing casinos, we have seen this in both the Rivers and Aqueduct openings, where both grew GCA's entire business in the region.

Western Money kiosk business continues to be a terrific acquisition, not just in terms of units, but also in terms of our strategy. Our new kiosks and our tight integration of our systems is setting new standards in the industry and getting noticed. We are winning head-to-head versus competition not only for new openings, but also in the refresh cycle. We are well on track to increase our unit sales by 25% or 30% in 2012.

The MCA acquisition was completed very efficiently, and importantly we are able to demonstrate to these important customers a difference in service level, acceptance rates, and kiosk performance that GCA offers. At the risk of speaking for our customers, I think it is safe to say that they are happy to have GCA back, and appreciate all of the efforts and improvements that we have made in our Company. We are continuing to invest in our products, innovation, and organization to deliver our strategy. As we mentioned earlier, you will see about a 10% increase in our operating expense next year, of which more than half is investments in these areas of product improvement and our organization capability. The remainder is driven mostly by increases in volumes from the MCA contracts.

We have a very strong product pipeline rolling out over the next 18 months, covering our core products, new innovation, business intelligence tools, and our CXC kiosk platform, and we will be giving more details as these products go-to-market. Looking at 2012 our strategy and plans are very focused. We continue to be focused on delivering our product pipeline, we continue to improve all facets of our customer service, we have a collective goal across our organization of delighting our customers, and never giving a customer a listen to leave. We are building the foundation for international growth focused on Asia and the UK, and we will continue to find, foster and execute technology partnerships and acquisitions for the future.

In summary we are continuing to execute our strategy we laid out several years ago, and it is bearing fruit. We have consistently moved forward on these initiatives through some tough times, and we are now certainly receiving some favorable winds at our backs, including improved segment trends noted above. So we will keep up the pace of product innovation, service improvement, and execution of our initiatives. As I stated at the onset we believe GCA is a stronger, smarter, better-equipped Company moving forward.

So with that, I will turn it over to the operator for questions. Go ahead, operator.

Thank you. (Operator Instructions). Our first question is from the line of George Sutton with Craig-Hallum. Please go ahead.

Thank you. And I think first it is probably good to have a toast to Dick Durbin.

Absolutely.

It is a good thing.

So what I wanted to first understand is you obviously had a great amount of debt pay down already in this new fiscal year, and I wondered if you could talk about the offsets of further paying down debt versus some of the investments you are making in products?Can you just give us a relative sense of how you are planning to spend the cash flows?

Yes. Well, I think we have dimensionalized that a bit in the comments that both Mary Beth and I have made, which is if we are talking about a 10% increase in the operating expense, call that in the $6 million to $7 million range, probably about half of that or so is really investment in our organization talent, as well as the opportunity to continue to bring products to the marketplace as soon as we can. Most of that frankly is capability driven more than it is the other costs, so that is why it is very important we continue to both invest in the organization and bring the products to the marketplace as soon as we can. I think our comments around the rest of the excess cash that we generate as the year unfolds, really follows the comments that Mary Beth made, which is we are going to certainly continue on buying down debt, we are still not at our target ratios, but we will certainly make more progress on that across the second half of the year.

You threw in the end a foundation, setting a foundation for International growth?

Yes.

Haven't heard you talk about that much in the past?

Yes.

Is there a little more to it?

Yes. There are two important facts on that. The first is we have spent a very long time continuing to work with regulators and the operators in the UK, recall back in 2007 with the enactment of their gaming legislation at the time, had the unintended consequence of really not allowing cash access services to happen inside a casino. And that was a very good business for and we had some very strong relationships with the operators over there, we have sort of never given up on that, and have continued to work with like regulators and the operators over there, and we have done a soft relaunch in the UK in the latter part of last year, we have a new system and more robust operating platform that will be rolling out over the next 60 days or so, that we hope will just sort of rekick that market, and then we will nurse that thing back to health. That was probably about a $6 million or $7 million market to us when we had to exit it, so we are very pleased with being able to clear those hurdles, work with the stakeholders over there, and get UK restarted and we will report on how that is going in subsequent quarters.

Beyond that we announced last year the fact that we were installing all of our products in the Western Money kiosks in Galaxy opening in Macau. We see this as a long-term opportunity for the Company, in terms of being able to get more and more of that market. We think some of the new products and services that we now have give us an opportunity to differentiate ourselves frankly from the local banks there, and from my standpoint it just needs to be a place that we learn how to win. I think that is going to be probably more like a 2013 initiative, but we have got people on the ground and we are certainly continuing to push that part of the business, and get our strategy and our product lineup to be able to win in Asia.

That is great. Lastly Mary Beth if I could on MCA, you mentioned $50 million of impact in 2012. Is that an absolute number? That is not an incremental relative to--?

No. I just wanted to give everyone, I had said this on the call at the end of the third quarter just to kind of give you a sense of the size of MCA. The revenues are in the $50 million range. So it is a fairly large number, so I just want to make sure when everybody is modeling that they remember that.

I understand. Thank you very much. Congratulations.

Thank you.

Thank you.

Thank you. The next question is from the line of David Bain with Sterne, Agee. Please go ahead.

Thanks. First I have to ask about my QuikTicket fetish. Maybe one way to ask it is if there is any margin attribution, or really any attribution for the product, and counter 2012 guide, and if you can give us any granularity around the current state of where we are with the product?

It is very modest. Very modest in 2012. It is on our agenda. We expect to be in the marketplace I think we are being cautious in terms of the competitive nature of the business nowadays, in terms of giving too much detail, but your enthusiasm is only second to mine.

Okay. And would you announce when the product is in beta, or is that going?

Yes.

Okay.

Yes.

And then on Macau, just a follow-up on that, looking at Galaxy, and then looking at some of the more mass oriented large casinos out there, how do you liken that to some of the large customers here? Is it a larger opportunity?

I think it is, if you really look at, you sort of project out and we have got a couple of properties that are opening up on Cotai, I think it is Four and Five are opening up again, very soon or Five and Six.

Cotai Central, yes.

And so if you look at the mass gaming part of that and we all know it is obviously when you look at the total numbers, it is very junket driven, it is still potentially a $12 billion to $14 billion gaming revenue okay, which puts it about call it 20% to 22% of what the US business is. In other words, it could be sort of like another Vegas.

Okay.

It is not there yet, but I think when you look at the growth of gaming on the mass gaming as you call it on the floor, that is why we have got to figure out a way to win there, so it could be meaningful business for us, and again I think it is we are out of 2013/2014 for that kind of growth, but I think some of our new products and services again as we have said on other calls we compete with the local banks there, and you have to kind of be able to do something different. We demonstrated that with our integration with our kiosks for Galaxy, and I think some of the new products and things that we have, as well as the kiosk functionality, give us a platform to build around to get in that market.

Okay. Great. And just last one. Casino intelligence sales, casino customer acquisition trends, anything specific for the fourth quarter, and then are those casino customers, they are typically larger I would expect, and when they come up for renewal do you expect the incumbency of the product to be significant for that renewal?

Yes. You asked a lot of questions there, so let me make sure I answer them for you. We continue to see traction on the casino share intelligence. It does tend to be with the larger more sophisticated customers at this point in time, but not 100%. There are other smaller operators who can see the opportunity for them, and I think proportionately it is a great help for anybody who uses that tool. We are also in the process of continuing to upgrade and move out new versions of that, so those all are positive trends as we move into 2012, and yes, I would expect that products like that, I mean we have talked about the only anecdote we know to the price compression is innovation, and having these kind of unique products is at that core. So I would expect when we start seeing renewals in 2013 and beyond, that our products are starting to have that desired effect that both increase the stickiness of incumbency, and hopefully allow us to get a few more basis points along the way.

Great thanks, guys.

Thanks.

Thank you. (Operator Instructions). The next question is from the line of David Hargreaves with Sterne, Agee. Please go ahead.

It is a really good quarter, and the growth is encouraging, the 3% to 4%. I was hoping you might be willing to break out anything in terms of volume of transactions versus size in terms of what you are seeing in trends there?

I will give you sort of an overview of the trends, because I think again, we have over the last 3.5 years have spent a lot of time on this call talking about those trends, and hopefully, it is helpful for people on the call, because I think they have turned out to be very good leading indicators of what is happening with the industry. When we look at 3% to 4% we are really talking about sort of total dollars to the floor as sort of an indication of the health of our gaming customers, and we saw that start to turn positive in January, February of last year. I think Mary Beth said 11 of the last 12-months have been positive, and the last two quarters have been in the 4% range, and we continue to see that moving forward.

The trend that I talked about that was also encouraging, is really what we are seeing happening in the split between transaction types, and again, if you have been following the business for a while, as we saw the downturn in 2008 with the economy, we saw a constriction in the face, but the biggest trend that we saw actually was the movement from debit and credit down to ATM, which again you would expect people to do as they are, as the amount of cash they want to withdraw constricts, you use the easiest simplest method to get that cash, and what has been again we are just seeing that, and when we saw the turnaround at the beginning of the year, you started to see total cash to the floor start to stabilize and grow. We saw frankly very modest increases in face, and you saw the sort of the bottom tier transactions called ATMs start to grow significantly, okay.

Now what we are seeing is the next sort of step on that, which I think again is sort of the reverse progression of the consumer behavior. We are starting to see our cash access business, our debit credit business start to show positive growth in the quarter, and again, that is because we think is it will be again if this trend continues, will be a good indication of the return of consumer confidence. Certainly an increase in their spend per visit, and obviously it has great positive things for our business and margins, just as it had a negative drag on us when those shifts were happening to the negative. So that is again, we saw that in the fourth quarter, we will continue to keep on eye on that and continue to report on that in the progressive quarters.

I am not sure if I totally got you. Would you say transactions are up as well overall?

Yes. Transactions are up in the growth, and face is up modestly.

And then are there any meaningful geographic trends you would be willing to share us, major markets versus regional markets or--?

No. There is some difference by operator, and some that you just know. I mean Atlantic City has continued to struggle, but we are seeing across the portfolio pretty, there is no one or two big drivers positive or negative.

In the past you have offered some meaningful color on California. Is there anything you could say about how that state is doing?

The state and native American gaming is doing okay. It tends be a little bit diverse in terms of the portfolio. There is just such a concentration the native American casinos, particularly in Southern California, that you will see some pluses and minuses, but on aggregate they are probably pretty close to in line with our portfolio performance.

Thank you so much. That is helpful.

Thanks.

Thank you. The next question is from the line of Michael Chapman with Private Capital Management, please go ahead.

Thanks. Mary Beth, quick question on MCA. Is that EBITDA dollar positive?

Yes. Oh, yes. It is EBITDA positive.

Okay. And that is after fully loading it for all overhead that you guys said you would?

Yes. Yes. It is definitely EBITDA positive. I think we said earlier, just because the assets we bought are all contracts, the amortization is a little heavy, because it is a short window, so I think from an amortization perspective the number is a little bit bigger, but EBITDA it is absolutely EBITDA positive.

Okay. And then are there any one-time costs for MCA that will occur in the first quarter?

No.

Okay.

No.

Then you kind of mentioned margin progression throughout the year. I am assuming kind of on the gross margin line. Would you expect to sequentially decrease as you use the positive from Durbin to sweeten the pot for your customers so should we expect that the fourth quarter just reported would be the peak for gross margins, and they will slowly attrit?

I think that is probably the thesis for my about watching margin. I mean there are a couple things that are going on here. We don't have a lot of renewals this year, so that probably will have less to do with it, but there are certainly little fees and little adjustments that are coming throughout the network associations and such, that we can't always anticipate, and I think what we are looking to is also if there is continued improvements from the base business, that in fact may help offset some of that. I would say if I were to take fourth quarter 2012 over fourth quarter 2011 likely the margin by the time we exit the year will be lower.

Okay. And then just kind of following on from that just given the mix, I mean you guys have pointed out over the last couple of years you had negative volume, negative mix, and negative pricing. You said you kind of anniversaried most of the pricing, volume is turning around, and it looks like mix is improving. Is that a fair assessment?

Yes. I think that is exactly what Scott was trying to say.

That is exactly it.

And then just on the head count growth that you expect on the operating side, is that a precursor to growth that you expect from new casinos that are opening up that you need to staff for, or is that just a rebound from the costs that you had to take out, given the way that the whole space is going over the last three years, that you had to cut and you have held off, you have done a great job of holding the line on the sales and marketing costs throughout the last five quarters, and were you kind of cutting into muscle there, and you needed to ease up a bit, or is there more of a precursor to what you expect to see?

Well, I will tell you some of it is just reinvesting if you will in our current organization. The staff adds that we are looking at are all to increase our capability, in terms of innovation and getting to market, and expanding in some of the markets, and with some of the initiatives that I talked about.

So had you kind of underinvested in that just to--?

No. I think we have done a very good job of despite the downturn, and over the last three years continuing to have a steady hand on the rudder in terms of our strategy, building our innovation capability, continuing to move products out in the marketplace. We see this as an opportunity right now to sort of push the pedal down a little bit harder, so it is really more about being able to increase the rate of innovation, moving some things out to the marketplace a little faster, perhaps take on a little bit more in our agenda than we would have normally. We have got the ability to do that now, and we think it is just really important for us to continue to push that strategy of product differentiation.

Okay. And then just the casinos that are opening in Ohio, Maryland, and all of the other places there, was there a need to pick up sales people in those regions?

We have made some adjustments in our sales force, and we have added a couple of people as the bigger drivers for us is actually our expanding product portfolio, as much as it is new casino openings, from sort of a territory kind of place. We have probably more than half of the products that we sell today we didn't even have in 2008, so we have a much deeper relationship, a much deeper sale with our customers. Obviously things like Western Money are easy to see, so we have increased the touch at our customers, so we have had some increase in sales force because of that, but the operation of the actual casinos or the volume that is coming on, doesn't really add to our operating costs significantly from a headcount standpoint, there are vault cash and things like that are proportional to it, but otherwise they come on, we scale very nicely on the way up.

Okay. And then just a quick question on interest rate. You mentioned that you have been upgraded and leverage looks like it is going to be coming down this year. What impact does that have on the spread you pay over to LIBOR?

Our spread is unfortunately, we are working right now with that with a floor, and so we are hitting the floor at current rate, so we are just having some pretty good discussions about at what point, it is worthwhile to go in and reset that and we are actively discussing that right now.

So what is the floor rate that you pay on your debt?

We pay 7% right now.

Okay. So whatever the debt outstanding is to for modeling purposes assume 7% on.

Yes. And we assume obviously that as we approach two to one with good credit ratings, and strong cash flows that we can likely reprice that a little bit.

And it has been higher than that reported. Is that just amortizing in some of the changes from the previous renegotiation?

Yes.

Okay. And how long will those be in, so will your reported be higher than 7%, even though the cash from that will be lower?

Well we have got the fees amortized, and I think they are like 350 a quarter, or something like that. So if you took your debt and I think it is about 350 a quarter, on just the amortization of the fee that is included in the interest expense.

Okay. Great. Thanks a lot and good quarter, guys.

Thank you.

Thank you.

Thank you. The next question is from the line of Lew Moser with Mafax Investors. Please go ahead.

I was wondering what are the innovative products that you have coming online are you the most optimistic about?

I think that is sort of a point in time question. I think right now that when you look at the impact that it is having on our business and our customers, I think the new redesigned Western Money lineup is having the most positive impact on our business, and probably will over the short-term, call it the next year or two.

Our ability to really change the game in terms of what these multi-function kiosks do, the fact that your now have a single supplier that is not only driving the services but also the hardware, customers are responding extremely positively to that, and I think there are a lot of positives that we are getting out of that,not only just the obvious reported increase in the Western Money devices, but also the capability to allow them to engineer that experience to use many of the other assets that they have on the floor, in terms of their promotion systems, their media systems, their bonussing systems, using our equipment to further give them return on that investment, is right now getting the, we are very pleased with that business right now.

Thanks. Great job, guys.

Thanks.

Thanks.

Thank you. There are no further questions at this time. I will turn it back over to management for any closing remarks.

Perfect. Thanks everyone for joining our call, and we look forward to talking to you during the quarter. Thanks everyone.

Ladies and gentlemen, this does conclude the conference call. You may now disconnect, and thank you for your participation.