Light & Wonder Inc (LNW) 2016 Q4 法說會逐字稿

Good afternoon.

Welcome to the Scientific Games Corporation fourth-quarter and full-year 2016 investor conference call.

All participants will be in listen-only mode.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Bill Pfund.

Please go ahead.

Thank you, Amy.

Good afternoon, everyone.

During today's call, we will discuss our 2016 fourth-quarter and full-year results and operating performance followed by a Q&A session.

With me this afternoon are Kevin Sheehan, CEO; and Mike Quartieri, Executive Vice President and Chief Financial Officer.

Our call today will contain statements that constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements involve risks and uncertainties that could cause actual results to differ materially from those being discussed.

For certain information regarding these risks and uncertainties, please refer to our earnings press release issued earlier today, the materials relating to this call posted on our website, and our filings with the SEC, including our most recent annual report on Form 10-K filed on February 29, 2016.

And, our 2016 10-K that we anticipate to file tomorrow as well as subsequent reports filed with the SEC.

We also will discuss certain non-GAAP financial measures this afternoon.

A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to the most comparable GAAP financial measure can be found in our earnings press release as well as on our website.

As a reminder, this conference call is being recorded, and a replay of this webcast and the accompanying materials will be archived in the investor section at www.ScientificGames.com.

Now, let me turn the call over to Kevin.

Thanks, Bill.

Good afternoon, everyone.

Thanks for joining us.

2016 was a year of progress, growth, and industry-leading product innovation for Scientific Games.

Our fourth-quarter results marked the fifth consecutive quarter of year-over-year increases in both revenue and attributable EBITDA, exceeding last year's strong performance.

Revenue grew 2% on top of the strong growth generated in the fourth-quarter of 2015, and attributable EBITDA increased to $294 million.

Our operating and financial results were helped in part of the benefits from the business improvement initiative launched in November, which was largely completed by year-end.

Recently, we successfully completed a series of refinancing transactions.

As a result of these transactions, we lowered our weighted average interest rate by more than 35 basis points to 6.9% and reduced our annual cash interest costs by approximately $30 million.

At the same time, we extended maturities with approximately 95% of our debt now maturing in 2021 and 2022, and we also reduced our exposure to variable interest rates.

Importantly, as we continue to grow and delever, we position the Company to accelerate our virtuous circle, growing EBITDA, and improving our credit metrics.

Now let me turn to a recent addition to our senior leadership team, Karen Joyce John, better known as KJ.

KJ joins us as Chief Operating Officer and President with the responsibility for our gaming and lottery divisions.

She isn't here with us today as she is already setting a fast pace and jumping into our initiatives.

KJ has a deep experience in transforming businesses, improving processes, and driving operational excellence.

Working with our business teams, she is going to help us enhance best practices across our businesses and instill the discipline of continuous improvement as a cornerstone of our corporate culture.

We believe there is significant potential that can be realized through further operational improvements.

KJ will help us navigate these actions to drive margins.

And, with the addition of KJ to the senior management team, I'm able to direct my attention toward our longer term strategies so that we ensure our priorities are aligned with the long-term opportunities to help our customers grow.

We will intensify our efforts on the margin to develop incremental, top line growth potential through innovation, product enhancements, and expansion within our core competency.

By expanding our horizons and establishing priorities that address our greatest market opportunities, we will improve our consistency and long-term performance.

Another way of saying it, keep a careful eye on executing our budget and 2017 expectations while enhancing our focus on 2018 and 2019 to ensure that we continue to build and shape our business for the long-term benefit of all of our stakeholders.

Now, let me turn the call over to Mike to provide his review of the fourth quarter.

Thanks, Kevin.

Good afternoon, everyone.

Our revenue was up 2% year over year with this growth coming on top of the tough comparison to last year's strong fourth quarter and a $12 million unfavorable foreign currency translation.

Our AEBITDA was $294 million, slightly higher than a year ago, which had benefited from some non-comparable items which I will cover in my review of the segment results.

Actions taken in the fourth quarter as a result of our business improvement initiative yielded positive results.

Our lottery and gaming segments, as well as our corporate organization achieved lower SG&A costs, resulting in a benefit to our AEBITDA margin.

The decline in reported AEBITDA margin to 39% for the 2016 fourth quarter from a year ago reflects a change in revenue and business mix primarily due to the rapid growth achieved in our interactive business.

It is important to remember that our interactive business is still at a very early stage of development and growth.

As a result, the margin reflects the impact of our spending and investment to drive recently launched apps and the development of future apps, drawing upon our extensive library of games and intellectual property that we expect will continue to propel our rapid growth.

Looking at our gaming segment, revenue was $8 million lower than the prior year, essentially due to $8 million of unfavorable foreign currency translation.

Segment AEBITDA decreased by $2 million as the impact from lower revenue and a slightly less profitable revenue mix was largely offset by a decrease in SG&A expense.

AEBITDA margin of 47.5% was an improvement over the 46.

8% in the third quarter and 47.2% in the year-ago quarter.

In the year-ago quarter, AEBITDA included the shipment of 884 VLTs to Oregon and a convert-to-sell of participation units.

In gaming operations, while the total installed base of WAP and premium units declined 198 units on a quarter-sequential basis, we achieved a 1% increase in the installed footprint of WAP units at year end.

This increase primarily reflects the strong performance and success of our unique GameScape cabinet.

This innovative cabinet, coupled with the Willy Wonka World of Wonka content, continues to generate exceptional player engagement in its initial installations.

And, we will follow the success of Willy Wonka with the highly anticipated launch of the Simpsons game this summer.

Average daily revenue across the WAP premium and daily fee participation units declined 6% on a year over year basis.

On a quarterly sequential basis, the 4%, or approximately $2 per unit decrease largely reflects the seasonal change that typically occurs between Q3 and Q4 in the participation business.

Turning to gaming machine shipments, during the fourth quarter, we shipped 9,234 new gaming machines globally, which is up over the year-ago quarter, primarily due to an increase in international shipments.

International shipments rose 14%, reflecting increases in both replacements and for new casino openings.

Our growth in Australia continues to reflect higher shipments of the Dualos cabinet.

In the US and Canada, the impact from the shipment of 884 VLTs to Oregon in the year-ago period was largely offset by a 600-unit increase in the shipment of gaming machines for new casino openings in the 2016 fourth quarter.

Despite strong replacement shipments in the year-ago quarter, shipments to US and Canadian customers representing replacement units increased slightly year over year.

Shipments of TwinStar cabinets continued to increase, reflecting the bandwidth of content available and the strong performance of games like Lock It Link and Kronos.

Additionally, we are seeing exceptional player appeal for the new TwinStar J43 cabinet, which began its rollout in the fourth quarter.

The next addition to the TwinStar family of cabinets is a mechanical wheel version, planned to launch within the next ten days.

For the full year, I would note that our total gaming machine shipments increased by 2,828 units, or 10% over 2015.

Our average sales price was $16,268, down from last year primarily due to a lower revenue mix of the premium price Pro WAVE cabinet.

As a result of our combination of solid ASP and strong unit ship share, we believe Scientific Games continued to be -- to lead the market on a dollar share basis per gaming machine sales in the US and Canada.

Gaming systems revenue of $64 million was down from $69 million in the year-ago quarter.

Maintenance revenue continued to grow on both a year over year and sequential basis.

Our gaming systems business continues to be the market leader with a strong and growing customer base.

In 2016, our annual gaming systems revenue was $241 million, which is largely without a benefit from large multiple-property customers performing upgrades or conversions.

With revenue expected to increase in 2017 due to the revenue recognition on our two large Canadian contracts in Alberta and Ontario, we believe the systems revenue in 2016 can be viewed as a trough level of revenue for our gaming systems business.

Compared to the previous trough in 2010, revenue in 2016 was up 25% which translates into a 4% per year compounded annual growth rate during the four-year period without any significant amount of new casino expansion.

In aggregate, we believe our systems business continues to be well positioned to help customers due to our continued investment in the development of new software tools and enhanced hardware.

Table products rose 37% year over year, primarily due to an increase in sales of shufflers and other utility products to international customers.

Revenue from leased products maintained its steady growth trajectory with a 6% year-over-year increase.

The total installed base of proprietary table games, progressives, and shufflers continued to expand both year over year and on a quarter-sequential basis.

Also, the acquisition of DEQ will strengthen the product portfolio and should provide an additional growth driver for 2017.

Also, as we look to 2017, we expect to see a significant increase in our installed of VLTs.

The Suffolk County Jake's 58 facility in New York recently opened with several hundred units.

As the year progresses, the facility is anticipated to house 1,000 VLTs of which our share will be approximately 50%.

Additionally, the installation of VLTs in Greece has begun.

We expect to have several hundred units in place by the end of the first quarter.

And, while installations will continue throughout the year, we anticipate the ramp will be a bit more weighted in the back half of the year.

Also, regarding seasonality, I would remind everyone of the typical seasonality that occurs in the gaming business for replacement sales in the first quarter compared to the fourth quarter, as most casino operators start a new capital budget year and are cautious in capital spending for replacement games early in the year.

Spending then typically increases in the second quarter.

Lottery revenue decreased $8 million, inclusive of a $3 million impact from foreign currency translation.

Our year-ago revenue included $4 million from the final quarter of operations under the China sports lottery validation contract.

Lottery segment AEBITDA was down $12 million compared to the year-ago quarter, largely due to the impact of the lower revenue and a $5 million decline in EBITDA from our joint ventures.

The year-ago quarter benefited by approximately $11 million in aggregate from the China sports lottery contract, a value-added tax credit received through our Italian joint venture, and a contract termination fee.

Looking a bit closer at revenue, instant games revenue declined 1%, primarily reflecting lower sales of price per unit contracts and licensed games due to the timing of new game launches compared to the activity in the year-ago quarter which had included revenue from the sales of our monopoly millionaires' club instant game in several states.

Revenue from participation-based contracts rose approximately 1% year over year, and our international instant games revenue grew 2% despite the foreign currency impact.

Year-over-year services revenue decreased, primarily reflecting the $4 million impact from the previously disclosed expiration of the China sports lottery contract.

In addition, sorry, the addition of the Arizona systems contract largely offset the impact from the expiration of the Indiana terminal services transition agreement.

I would remind everyone that last year, lottery services revenue benefited in Q1 from the $1.6 billion Powerball jackpot.

Our interactive segment once again had a great quarter with exciting play from our social game apps capturing players' attention and engagement and driving revenue growth up 52% year over year.

It was another quarter where our growth exceeded the industry for the period.

According to third-party estimates, we exceeded the industry average by five times on a year-over-year basis.

You will note that our presentation of revenue for our interactive segment now includes the breakout of revenue for the social B2C gaming line which represents the business that was designated unrestricted in the third quarter, and our other interactive category represents our B2B business lines which includes the combination of our real money gaming and SG Universe operations.

As a result of strong year-over-year revenue growth, operating income increased $4 million, and AEBITDA rose $6 million compared to the prior-year period.

The AEBITDA margin, while down slightly year-over-year, increased on a quarterly sequential basis to 21.5%.

As we previously noted, it's important to recognize that our interactive business is still at an early stage of development and growth.

Even as our original social B2C game apps, Jackpot Party, and Goldfish, continue to provide growth above the industry average, we have expanded our offering with the addition of three more apps, leveraging some of our biggest franchises: Quick Hit Slots, Hot Shot Casino, and Blazing 7s Slots.

And, are in the process of launching yet another new app, 88 Fortunes.

The marketing support to create awareness, the player acquisition cost to build the player base, and the pre-launch development investment were the primary drivers behind the increased annual cost during the past year that impacted margins in the period.

Revenue for our interactive B2B business, which includes Real Money Gaming and SG Universe, which features the mobile concierge platform and the play-for-fun network social casino, also increased more than 50% over the prior year period.

This rapid growth reflects the significant increase among casinos that have chosen our robust solution to strengthen the relationship between the casino and their players.

Now, turning to cash flow.

During the fourth quarter, we had $130.5 million negative swing in our working capital components on a year-over-year basis which masks a $40 million improvement in our net earnings after adjustments for non-cash items in the quarter.

The primary drivers of this unfavorable swing in working capital include a $36 million non-cash write-off related to the termination of our Monopoly Millionaires' Club program and the receipt of a $46 million federal income tax refund in the 2015 period.

And, the year-over-year changes in accrued interest of $19 million and accrued income taxes of $17 million.

The other components within working capital largely offset each other.

During the fourth quarter, we continued to reduce debt by paying down $17 million.

Overall, we reduced the total principal face value of debt by nearly $170 million in 2016 compared to $142 million in 2015.

As Kevin already noted, we are quite pleased with the results of our refinancing actions taken in the first quarter of 2017.

Importantly, going forward, we maintain our focus on deleveraging, seeing our recent refinancing actions as just a point along our journey to reduce leverage.

And, now, I'd like to turn the call back over to Kevin.

Thanks, Mike.

Before taking your questions, I'd just like to note that we are off to a solid start in 2017 with momentum building across the Company.

It has now been six months since I joined Scientific Games, and I could not be more excited about the progress being made and the potential that lies yet ahead.

We have clear opportunities to improve our operational capabilities and our service to customers.

And, we have a best-in-class team around the globe, focused on realizing our prospects to drive our top line.

We are continuing to build on our strength as an innovator, thought leader, with the products and services that will help our customers grow and strengthen their businesses.

And, by focusing on exceeding our customers' expectations, we have the potential to drive meaningful value for our stakeholders.

And, now, we'd like to turn the call over to the operator for questions.

Thank you.

(Operator Instructions)

Barry Jonas, Bank of America.

Hi, good afternoon.

Good afternoon.

So, after the Bally acquisition, prior management talked about a leverage target oft he sub-five range within four years.

Kevin, just wondering if you have any updated thoughts on when and how we could get to those levels?

And, if the issuance of equity would be on the table?

I'll take that in two pieces.

Let me start the second.

There is no thoughts about issuing new equity at this point.

I think we have a great opportunity here to deleverage.

I'm not sure why we would want to mute that.

I do see the commitment that was made upon the acquisition, and believe me, I have our entire team razor-focused on it.

In fact, I'm taking the top 30 people on a weekend retreat.

We start on Friday night, and we finish on Sunday night so that we don't conflict with the workweek.

And, there's no time for anything but in room sweating it out, working towards figuring out how to drive the value of this Company.

And, not only is the EBITDA that we talked about back then and the net-debt-to-EBITDA multiple, those are important to me.

When I came in, that was a very important topic to make sure I got all of the team to understand this is what we promised to our bondholders in particular, and we need to work in that direction.

I think you can see we are moving in the right direction.

If we deliver in 2017, we have a very meaningful impact on those leverage ratios, and I would suspect in 2018, we would be well on our way to getting towards what you're hoping us to do.

But, again, everything is predicated on the market being reasonable for us, which we believe it is, and nothing out of the blue as far as acquisitions which we don't have anything of significance in the pipeline.

But, anything we would do would only be towards creating value for all of our stakeholders.

Okay, great.

Look, in the opening comments I think there is a pretty positive view on interactive for the next year.

And, I'm wondering if we take out some of the one-timers for gaming and lottery, if you can give your view on how those segments on a normalized basis should grow going forward?

We have, I think, if you reflect on the consensus that's out there for 2017, the market is expecting us to grow our business nicely.

And, I think the ingredients of that are pretty shared between gaming, lottery, and interactive.

We set targets for each of the businesses, and I won't say it was an easy exercise, but we worked hard to get to where we could position this Company for the top line growth that we need as well as making sure we continue to be thoughtful about process improvements.

I really believe that there is quite an opportunity there as we move forward in rationalizing and being able to go to market as efficiently as possible.

So, I think you'll see that each of the businesses is going to have a reasonably good year.

Fantastic.

Thanks so much.

Mike Malouf, Craig-Hallum Capital.

Great.

Thanks for taking my questions.

First, I'd like to start off with, just on interactive side, the daily average use and the monthly average use was down while the revenue was up.

Is there something going on there at all with regards to that slow down at all?

No, not that we see at this point.

It really becomes somewhat of the seasonal nature of interactive.

And then, as we continue to grow and expand the number of products that we're offering, we see a lot of crossover between the different apps at this point in time.

But, at the same time, as we continue to push through new and innovative products in more, I'd say, the titles that get into the program, we just see that we are going to have the continued growth going forward.

Okay.

And, getting to the other question about the leverage ratio that was previously mentioned.

One of the things that you are going to need is some sort of top line side on the gaming side to help get you there.

And, I'm just wondering, Kevin, at G2E, you were brand-new and at ICE at least you had been there for a couple of months, and I'm wondering if you're getting any sense that after a very long pause here or trough here in the gaming side that we are getting the resurgence?

Or, that we might get a cycle coming out of this?

If you are feeling anything like that?

Thanks.

I think there are a bunch of different things of which most of them I can't talk about, but I would say on a top line basis, just stay tuned.

I think there is a lot of things that we are doing that are going to be -- oh, my goodness, they are doing that-type thing.

And, focused on the gaming, and that is why KJ is there in particular is are we doing everything we can dissecting the gaming business on all of the top line revenue drivers and on the margin.

I think, historically, we were looking for those big windfalls, but if we take a look at everything on a very, very specific basis and if we can raise 25, 50 basis points here and there, I think that's the way that we are going to work our way through to future success.

And then, I think also as you look at the markets that you've seen since November, and I think there's the beginning of some confidence with the Caesar's thing going into the past tense, I think you're going to start to see some reinvestment by the gaming companies.

And, I don't think it's going to be, oh my God, look at what is coming.

But, it's going to be a moderate, gradual increase that you'll start to see on a consistent basis.

Okay.

Thanks for the help.

Todd Eilers, Eilers & Krejcik Gaming.

Hi.

Thanks for taking my questions.

On the game sales side, you obviously had a strong number there.

Can you maybe talk to what hit in the quarter?

For example, did both of the new New York casinos hit in the quarter for you?

And, any other color would be helpful?

Thank you.

I think from an opening and expansions perspective, Q4 2016 included Del Lago and Rivers, and we also had some Tioga Downs units in there.

So, the New York marketplace did help the quarter, and that was primarily what drove up the units in Q4 for us.

But, we have seen it across the board as well.

Okay, perfect.

And then, another question with respect to Greece VLTs that you mentioned were starting to be deployed in the first quarter, but you mentioned more back-half-weighted in terms of installations.

Do you expect to have your full 5,000 allotment of the phase I installed by the end of calendar year?

Or, would some of that maybe spill over into early 2018?

And then, also a question on the CapEx related to those games?

Has all that CapEx hit yet?

Or, will we see some more of that in the first half?

And then, finally, with games going in any kind of early performance indications?

Yes, so I think there are about 400 games installed at this point.

If you look at the year going across, it will start to pick up in the second half of the year, but we expect most of the machines to be deployed by the end of the year.

And then, we're hopeful that we have opportunities on another round for the gaming parlors so hopefully some good news there.

But, the games are performing based on the way we modeled it.

So, I think that's good news.

You're never quite certain until things get rolling out, but again its early so we need to -- I think next quarter we'll have a better feel for that as we have more machines and a little bit more time.

The CapEx, we had a 2,000 of these machines already built, but let Mike take the rest of it.

Of the 5,000 that we'll have to install, about 2,500 or nearly 50% of which are constructed already, which means the remaining 2,500 will flow through CapEx during the course of this year.

Okay, perfect.

That's helpful.

Okay.

And then, last question, you mentioned systems and how 2016 was a baseline year and expecting growth in 2017 driven by some of the large Canadian contracts that you have.

How should we think about that in terms of -- I guess, on a quarterly basis, is this going to be spread kind of equally across each of the quarters?

Or, might it build throughout the year?

Or, just how should we be thinking about that in terms of modeling?

As much as I hate to say the word hockey stick on the systems side, it unfortunately does fall into the very late part of the year.

It is absolutely in the fourth quarter with a little luck we'll get some of this into third quarter, but it's really the two Canadian systems are toward the end of the year.

Anything else you want to say on that, Mike?

Yes, not only will it hit for -- you'll get the hockey stick at the end of 2017.

But, you'll see pickup in 2018 as well especially with Ontario.

Not only will you have the initial go-live, but you'll have all the other locations getting go-lives going throughout 2018 and into 2019 as well.

So, I think on a macro standpoint what you are going to see from us as we report -- the way I see it today anyway is that the year will progressively get better.

And, not that we're going to start out with a bad result in the first quarter, it is going to be a solid result.

Perfect.

Thanks.

Appreciate it.

David Katz, Telsey Advisory Group.

Hi, afternoon.

Thanks for taking my question.

I must say, Kevin, wow, they are doing that -- piqued my interest.

And, I suppose I would ask just a couple of questions around that.

Is that top line stuff something that is going to require some capital going out?

Is it perhaps finding new ways to use assets or opportunities that you already have?

I suppose what I'm asking is, is it going to be, oh wow, they are doing that, accretive?

Or, oh wow, they are doing that, something else?

I think you should get your application in here because you're saying it the way I am.

And, it is going to be a variety of things.

It's never a simple, easy equation to say, hey, we're going to go after this new stuff.

But, there is a lot of stuff that I want to be sure we are focused on because over the next several years, three years, four years, whatever the time is, there are emerging things that will come into this industry.

And, we want to be on the forefront of those, and we're mindful of the capital and the capital spending because at the end of the day, the capital is the last piece before the cigar box has where cash goes to pay down debt.

Also, very important part of this.

But, you are exactly right.

On of each of these line items, everything that we do every single day, can we do it a little bit better?

Can we get a couple more machines in there?

Can we get another technology advance that could drive a little bit more value to the top line.

I'm sure you have all seen the [Bain] slide that has recapped about 10,000 companies over a 40-year period, and you can drive your net income and your EBITDA, but without top line, you are not going to get the multiple.

And, the big opportunity I think we have here in addition to driving significant profitability as we move forward is to do it in a way that rewards us by getting some top line acceleration.

Okay.

And, if I can just follow up -- if this was in some of the commentary already, I will apologize.

But, with respect to the systems dynamic that we discussed later in 2017 and beyond, we learned over the years the difference that where there is a significant amount of hardware included in what that margin opportunity is versus more software-heavy.

Should we be thinking about this as a relatively hardware-heavy install?

The installs that are coming now.

But, I will tell you that the move is on for solutions that are more nimble and more software-based so we need to be eyes wide open on this now so that we are prepared for this as it comes.

I'm not sure I asked my question exactly the right way so if I can just try one more time?

I think we are thinking more about Canada where there is a major installation and go-live.

In many cases, those major installations include a fair amount of hardware which bears a lower margin than follow-on sales or re-sales that are software-heavy that have a higher margin.

And, I was asking for any color around the profitability of that?

We'll avoid using the term hockey-stick, but how we should think about the flow-through on that?

I think from a margins perspective, when it is a new install, go-live like this, there's going to be a mixture of both hardware and software.

So, it's pretty much going to be a nice, balanced margin associated with that.

Like to your point when it is just an upgrade, the hardware is there already, and it is a software install.

Obviously, software carries a much higher margin than a pure hardware sale would be.

Okay.

I think I understand.

Thank you very much.

Appreciate it.

John DeCree, Union Gaming.

Hello.

Thanks for all the color so far.

Just wanted to hop back to the interactive business.

There's been focus on customer acquisition and some of the content development.

I was wondering if you could provide high-level -- the playbook for when the focus maybe shifts from the top line and then back to the margin?

If there's any timeline in your eyes for that?

I've got to tell you, I think the most important thing for us to do is have a great pipeline of new games so that we have that momentum that continues.

But, the other side of that is that as we get bigger and bigger, the impact of the rollout of a new game becomes less and less.

You see a lot of games coming now -- three games off of a base that was four.

But, if you roll out to the end of this year, you're talking about a new game when you already have seven or eight.

So, the mathematics work a lot better.

So, it's one of these ones where we wanted to get the scale to where we need it to be, and we are obviously doing it very well so you don't want to constrain that.

But, the day will come when we have a much higher revenue base that the impact around the margin of new games will be less.

And then, on the top line.

Just for a little bit more clarity.

A lot of talk on getting the right content and new content.

Relative to customer acquisition, we saw I think in a prior question discussed the users slightly declining.

Is the focus primarily at this point in terms of where you're spending dollars and time on content?

Or, is there still some focus on customer acquisition as well?

Or, is it just mostly content at this point?

Yes, it still both.

And, the content and the acquisition -- go hand-in-hand as far as I would say.

But, the customer acquisition, we have a very smart way that we get rewarded for the costs, and so I think that works very well.

And, the other part was, what was the other part?

I think you covered it.

On the focus on content relative to customer acquisition.

But, we're excited, and we've got some pretty neat stuff coming down the path on the content so stay tuned.

Great.

Thanks.

James Kayler, Bank of America, Merrill Lynch.

Hi.

How are you doing?

Good.

Good.

I just wanted to circle back on the outlook for unit sales in 2017.

You mentioned Caesars, which I think is interesting with their exit.

And, on their fourth-quarter call, they definitely talked about investing in slots.

Do you have a guess at what you think replacement unit growth will be in 2017?

And then, maybe just give us a sense for when you are looking at new openings what the comparison in 2017 is like versus 2016?

I'll take it.

So, from a replacement cycle, we're cautiously optimistic that this trend has been relatively flattish with maybe a slight increase given the overall positive sentiment within the economic environment today.

As consumers feel a little more comfortable, you're going to see the benefit, and operators -- as the operators get that benefit, they are going to feel more comfortable and make the investments in their capital.

So, we're hoping that although we anticipate flattish, which is consistent with third-party estimates, we're hoping to see a little bit of a slight increase in that year-over-year.

From a new openings perspective, last year you had a sizable amount of new openings with the openings in Macau and National Harbor here domestically.

So, I think you'll see a slight decline in that, but I think offsetting that will be a slight increase in the replacement cycle as I mentioned earlier.

So, I think in total it will end up [balancing] itself out.

Okay, very good.

And then, on the incremental cost saves that were announced last year -- or, early this year, the $75 million.

How do we think about that in terms of how they roll out?

Have most of those actions been taken?

And, we should see them in the numbers starting relatively soon?

Or, is it gradual throughout the year?

You've seen some of the benefit in this quarter, and then the residual will be on a run rate because we've completed just about everything at this point.

So, the full $75 million should be embedded in the -- ? (multiple speakers)

A portion of it has already been factored into the fourth quarter so incrementally it's a subset of the $75 million.

Okay.

And then, just one housekeeping thing.

Can you just tell us with the distributions from the JVs were in 2016?

And, if there is anything that would change that up or down in 2017?

Sure, give me one second here.

You are making me dig back into all my schedules that I have available to me.

From a distribution perspective, most of our distributions are going to come through the form of -- let's see, you're looking from a Q4 perspective or full year?

Let me rephrase that piece?

I guess I was looking at what happened in 2016, and then, how to think about 2017?

I think looking from 2016 to 2017, the only thing that would be slightly different would be we got in 2016 the benefit of the value-add tax rebate that I mentioned.

There was a little bit in Q4 of 2015 related to the Italian joint venture that we have, and there was another little piece that we picked up in Q2 of 2016.

There is no anticipation that we are going to get that type of benefit again in 2017.

And then, from a pure operations perspective, we would expect it to be relatively consistent year-over-year from that point.

Other than Greece coming online.

Okay.

I guess my last question for Kevin, when you moved interactive, or at least the B2C into the interactive sub, you cited potential, strategic opportunities.

I'm just curious.

Obviously, you probably can't talk about specifics, but where you stand with that?

If you still think that there are strategic opportunities?

Or, if you're more focused on just growing organically?

I think we're going to be very careful and smart about this.

We've got a business that is growing very rapidly.

We seem to have the right game mix.

We have a very good management team.

You want to make sure you're looking at this for the long term at all times.

But, having said that, you never know what happens.

If somebody came along and offered us the [play tea] price tag, we'd have to at least think about it.

But, we're not thinking about any of that stuff right now.

We think that having it separated is just giving you a better way to see it.

And, it also -- we were able to do it because of the size before it got beyond the restricted basket last year.

I think there are also potential opportunities to tuck in little things.

If we could do something smart there, we'll do that to help accelerate the top line growth.

All right.

Very good.

Thank you.

Carlo Santarelli, Deutsche Bank.

Hello.

Good afternoon.

Thanks for taking my question.

Michael, you commented, and I might have misheard.

But, it sounded like you said -- you were talking about the installed base and you were talking about some of the premium product.

I thought you mentioned that the end of quarter maybe was up 2%.

Could you possibly just articulate that again?

Were you saying it was up 2% from the average base in the period?

What I was referring to was what is up is the installed base for just the WAP portion of that entire install base.

Because we just disclose the WAP and premium participation units which was down slightly year-to-year.

But, the WAP portion of it is up on a quarter-sequential basis by 1% which is the first time it's been up for a good two, three-plus years.

Okay.

And, that was average base in the period, correct?

That you were referring to, or is that the quarter-end base versus quarter-end base at 3Q?

It's the quarter-end.

Okay.

Got it.

Sorry, go ahead.

GameScape when it came on, came on probably the second half of November and into December is where we really saw the increase in the placements.

So, that's why you are seeing it at the quarter-end date.

It's actually an increase over the Q3 prior quarter-end date.

Got it.

Okay.

Understood.

And then, just if I could in terms of thinking about free cash flow from next year.

You obviously talked a little bit about the working capital headwinds in the fourth quarter.

As we think about 2017, would you be able to possibly shed some light on A, CapEx plans for the year as well as any kind of working capital headwinds and/or tailwinds that we should be aware of?

Well, from a CapEx perspective, we disclosed it would be somewhere between $280 million to $310 million is the guidance we provided in the press release.

In looking at working capital, I think it's going to be relatively flat because the headwind we hit this quarter that I alluded to in the opening remarks is really more about those one-time items that were just impacts in 2015, and they really weren't the result of any actions that were in 2016 that would then impact 2017.

Okay.

So, if I think about it from the perspective of a $120 million year-over-year change of net debt, that is somewhat of a baseline as we think about 2017 then?

With respect to, obviously, changes in flows of JV, [but our] overall core adjusted EBITDA for the Company?

Is that a fair way of categorizing it?

Yes, I think it's our decrease in net debt was -- well, I should say our decrease in principal face of debt was $170 million, and I think -- .

Some of that was discount, right.

Some of that was on the cash in the discount on what we bought back in Q2.

The $25 million gain.

So, cash-cash was probably $145 million.

So, I think that is a fair baseline, and then given where we're going from our growth [trajectory] and what we think we're going to be able to do, we should be able to easily pay back more than that at this point.

As we all chuckle and laugh at each other.

Okay, understood.

And, just to confirm something.

The adjusted EBITDA, how are you treating the FX in the definition of AEBITDA in terms of the FX headwind in the fourth quarter?

Or, should I say what impact, if any, did it have on it?

It's really more on a revenue side on the translation because there's a built-in natural hedge on the FX because the costs associated with that revenue is tied in with the same foreign currency.

Yes.

At least from an AEBITDA perspective, we're not adjusting anything in AEBITDA to be on a constant currency basis.

We're only going to cost about the revenue side of it because we don't see it is a material impact to that bottom end number.

Right.

Okay.

Thank you.

You're welcome.

Chad Beynon, Macquarie.

Great.

Thanks for taking my questions.

First one with respect to the $75 million of cost savings.

Kevin, you mentioned that these have all now been implemented.

Could you help us think about the buckets?

Or, I guess is the margin impact going to be seen in gaming or in lottery?

Just kind of help us think about where the savings will be shown through in the P&L?

Thanks.

You're going to see it across all the lines.

But, I would say that there's probably a little bit more in the gaming side.

Excuse me, in the lottery side, from some of the actions that we took in 2016.

Okay.

Great.

And then, on the gaming ops you mentioned, Mike, that at the end of the quarter the installed base was up.

In your prepared remarks, you also mentioned that Simpsons would be delivered in the summer.

So, that to me may indicate that Wonka is performing better than expected.

And, I know this is kind of a going into the weeds, but GameScape is a very important part of your product delivery.

So, could you maybe provide a little bit more color on Wonka?

And then, just anything you are hearing with anticipation for Simpsons?

Thank you.

Sure, I'll start with the Simpsons piece.

We're targeting summer, which could be right at the end of Q2 maybe very early Q3, so that's why we kind of went with the summer date as opposed to trying to peg it to Q2, Q3.

That's going to be a little fluid.

In regards to Wonka, we are quite pleased with the results that Wonka continues to deliver.

There was a lot of discussion around at G2E when the first couple machines were out there that they were doing somewhere around five to six times house average.

Obviously, that's not something that's continued as we rolled out more and more of these units.

But, it's still outperforming house average, and we're continuing to get orders every day and pushing those products out.

Great.

And then, maybe if I can squeeze in one last housekeeping one.

$69million goodwill impairment on the lottery side.

Was that with respect to instant games or services?

Just a little color on that, please?

And, that's it for me.

It was all international lottery systems, and it was really around the expiration of the China validation contract that I spoke to in the prepared remarks.

And, our -- I'd say not inability, but the difficulty in us getting replacement revenues for that type of business that we lost.

But, if you remember a year ago, we have the impairment on the US lottery systems.

So, at this point in time, there's been no impairment charges recorded regarding anything about our instant product business which is the scratchers.

Okay, thanks.

Congrats on the progress in the quarter.

Thank you.

Dennis Farrell, Wells Fargo.

Great.

Thank you very much.

I was wondering if you could talk a little bit about the capital expenditure mix in your guidance?

I know you spent about $272 million to $273 million in 2016.

Didn't seem like you got a tremendous return on that investment?

And, I'm not sure if that's more of a maintenance CapEx number or not?

I'm just kind of thinking as I look forward to this coming year, the year that we are in, is that mix going to be more allocated towards interactive?

Or, do you see it -- how do you see it affecting your business on the gaming side and the lottery side?

Yes.

I'll jump in here.

I'd say two components that were of sizable nature and exclusive of anything around least gaming machines -- taking that off the table.

The next two larger components of CapEx would have been the Oracle implementation, which is part of our integration post-merger, and getting that rolled out across the global entity.

So, obviously, unfortunately, you don't see a nice return on that through the results as you would see.

The other component that was of nature was the Arizona lottery systems contract, and that didn't go live until the second half of the year.

So, you'll see more benefit from that throughout 2017 than you did in 2016.

But, from a mix perspective, we would expect the mix to be relatively consistent year-over-year.

Okay.

So, what do you think the mix would be for interactive in 2018?

Is it 25% of the CapEx spend, do you think?

Or, is it less?

Oh, it would be far less than that.

The capital components of interactive are really around hardware for servers and things to that effect.

It's really going to be less than 5% of the total.

A relatively small number in total.

All right.

That's helpful.

And then, I guess in regards to as you think about deleveraging the Company, obviously, equity has been off the table for a while with the Board.

What are your thoughts on acquisitions or divestitures either to grow out of this through acquisitions or to make some accretive asset sales?

It depends on the opportunities that are put in front of us.

But, from an acquisition standpoint, we're going to be very thoughtful.

Do we have a competitive advantage?

Is it accretive?

Do we see it being a sustainable change in our business?

And, we'll look at those types of opportunities.

And then, on the other side of the equation, there is no rush to do anything.

We have businesses that are all performing today.

As I said, we went through a very thorough budget process.

We're excited about the prospects for 2017.

But, having said that, if somebody came along with a big fat checkbook and wanted to buy some one of our businesses that may not be as core as another, we would listen to the conversation.

But, we are not pushing anything here right now.

We're going to be thoughtful about all of this.

And, at the end of the day, we feel we have an enormous opportunity to bring down our ratios which ultimately will play out in the stock price.

But, we have a long way to go, and that's why I'm here.

Got it.

And then, Mike, one last one.

What was the NOL balance at year-end?

It's about $1.25 billion.

And, we are going to use that this year, right?

(laughter) All right.

Thanks, everybody.

Thanks.

Thanks, everybody, for joining us this afternoon.

We are really excited about our prospects and the opportunities that we have in front of us, and our journey is underway.

We're heading to, I think, a great place for our stakeholders.

And, it's going to be a lot of action, a lot of fast-paced stuff coming down the path so stay tuned.

Talk to you next quarter.

Thanks so much.

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