Light & Wonder Inc (LNW) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Scientific Games Second Quarter 2017 Investor Conference Call.

(Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Bill Pfund, Head of Investor Relations.

Please go ahead.

Thank you, Anita.

Good morning, everyone.

During today's call we will discuss our 2017 second quarter results and operating performance, followed by a question-and-answer period.

With me this morning are Kevin Sheehan, Chief Executive Officer; and Mike Quartieri, Chief Financial Officer.

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

These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call.

For information regarding these risks and uncertainties, please refer to our earnings 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 March 3, 2017, as well as any subsequent reports filed with the SEC.

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

A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP 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 Investors section at scientificgames.com.

Now let me turn the call over to Kevin.

Thanks, Bill.

Good morning, everyone, and thanks for joining us.

This morning, we reported strong second quarter performance, which follows the strong performance achieved in the first quarter.

It was our seventh consecutive quarter of year-over-year increases in both revenue and attributable EBITDA, and a strong conversion to cash flow.

I'm really pleased with how our team is truly driving improvements in performance and in our consistency to do what we say and deliver results.

For the second quarter, our total revenue grew 5% to $766 million.

On a constant currency basis, revenue was up 6% with contributions from all 3 business segments.

Our focus on continuous improvement and the benefits from an improved organizational structure led to a 270 basis point improvement in attributable EBITDA margin.

And the combination of margin enhancement, coupled with our top line growth, increased attributable EBITDA by 13% to $315 million.

Our momentum is building and we have significant opportunities for further improvement.

In our Gaming segment, the improvement is evidenced by the ongoing success of our Gamescape cabinet, our Pro Wave cabinet and increased shipments of our TwinStar family of gaming machines, including the high-performing J43 and 3-reel mechanical cabinets.

Global gaming machine revenue increased 6% in the quarter despite no new casino openings, due to an increase of 736 units or 24% in replacement shipments and a higher average selling price.

Both gaming systems and table product revenue each increased by double-digit percentages year-over-year.

In our gaming operations business, revenue from our WAP and premium participation games was essentially flat on a quarterly sequential basis as a slight decrease in the installed base was offset by an increase in daily revenue, in part contributed by our very successful Gamescape cabinet.

With the improving revenue trend, the tremendous performance of the Gamescape platform, the launch of THE SIMPSONS game near the end of the quarter and a future pipeline that includes Seinfeld and James Bond-themed games, we are excited -- we are actually very excited by our outlook for growth.

Our lottery business performed well despite a difficult comp due to the 11% revenue increase in the global instant games business last year.

This year, our U.S. instant games business increased 5% on top of a 17% increase in the prior year, reflecting strong market growth and improved revenue from licensed products.

And finally, certainly not least, our interactive business continues to shine as results were driven by ongoing strong growth in our social gaming B2C business, complemented by the acquisition of Spicerack's social bingo app.

In the first half of 2017, our social B2C business generated more revenue than in all of 2015.

Our strategy that leverages our extensive library of gaming, intellectual property and content continues to deliver rapid top line growth.

Revenue growth exceeded the industry average on a year-over-year basis, and reflects both share gains and market expansion in a healthy growing industry.

Complementing the revenue growth was our focus across the company on maintaining cost discipline and continuous improvement in our business processes.

That combination led to a 270 basis point improvement in attributable EBITDA margin for the quarter.

Importantly, our growth converted into cash.

In the second quarter, we had $78 million improvement in our operating cash flow and a sevenfold increase in free cash flow.

Since the beginning of the year we've reduced our net debt by $139 million, even as we invested $52 million in accretive acquisitions that have expanded and strengthened our future cash flow potential.

This morning, we also announced our intent to capitalize on our improved financials and favorable market conditions.

We have initiated the process to amend and extend our existing term loan B-3 with the stated purpose of increase -- of reducing our interest costs and extending its maturity out to 2024.

Our strong second quarter performance is a testament to the value our technology-focused products bring to our customers and the collaboration and dedication of our talented employees worldwide.

Our success is built by everyone pulling together across the company to develop and support the innovative, player-engaging products our customers seek and deliver the cash flow and financial results our investor base wants.

I am proud of the improvements our employees are making in revenue generation and in business processes through our continuous improvement focus, and I would like to compliment all of our Scientific Games employees around the world.

I am confident we have the best team in the industry, and that we will continue to focus on delivering the best gaming and lottery experiences to our customers and improve performance to our investors.

Now let me turn the call over to Mike.

Thanks, Kevin.

Good morning, everyone.

As Kevin noted, our momentum is building.

Consolidated revenue increased 5% and our attributable EBITDA rose 13%.

Our margin enhancement was a result of a more profitable mix of revenue within each of our business segments, our streamlined organizational structure and ongoing cost discipline.

Let me now provide a brief review on each of our operating segments.

First, our Gaming business.

Revenue increased $15 million or 3% over the prior year despite $5 million of unfavorable foreign exchange.

Segment AEBITDA increased by $26 million or 13%, reflecting the higher revenue and a more profitable revenue mix.

The AEBITDA margin was 49.6%, a 400 basis point improvement over the year-ago quarter despite the $7.5 million benefit in the 2016 quarter from insurance proceeds received related to the settlement of a legal matter.

Revenue from gaming machine sales increased $9 million, reflecting a 24% increase in U.S. and Canadian replacement units, a 421-unit increase in international shipments and a higher average selling price in the quarter.

This offset 901 fewer units shipped as a result of no new U.S. casino opening and expansions, or Oregon VLT shipments in the quarter.

In the U.S. and Canada, we shipped a total of 4,367 new gaming machines, including 3,773 replacement units and 594 VGTs to Illinois.

Internationally, shipments increased 421 units or 14% to 3,411 gaming machines, including 54 for new casino openings.

While we expect continued favorable year-over-year performance in replacement shipments, I would remind everyone that last year's third quarter results included 744 units for new casino openings from MGM's National Harbor and the normal seasonal sequential slowdown from Q2 to Q3.

There are no shipments for corresponding new casino openings expected in this year's third quarter.

In gaming operations, revenue generated from wide area progressive premium and daily fee participation gaming machines was essentially flat.

A $1.08 improvement in average daily revenue per unit offset a sequential decline of 187 units, primarily older platforms in the installed base.

During the quarter, our footprint of high-performing Gamescape cabinets continued to expand.

Near quarter end, we launched THE SIMPSONS game on the Gamescape platform.

Due to the tremendous success of the WILLY WONKA game, we expect THE SIMPSONS game to be highly incremental to the footprint of the installed Gamescape units.

As Kevin noted with the success of our Gamescape platform, the planned pipeline of future content for it, along with the robust pipeline of content in general, which includes the James Bond-themed content announced earlier this year, we anticipate further improvements in the second half of this year.

The footprint of other participation in leased units increased 1,191 units on a quarterly sequential basis.

Driving this increase was the expansion of additional VLTs in New York gaming facilities coupled with the ongoing rollout of VLTs in Greece.

The footprint expansion more than offset $1.00 decline in revenue per day, which reflects the impact from the lower yielding VLTs in Greece and the foreign exchange impact from the U.K. units.

In local currency, our U.K. units were essentially flat on a revenue per day basis.

Gaming systems revenue was $67 million, was up 13% from $60 million in the year-ago quarter, reflecting higher hardware and software sales, including system installations at ilani, Baha Mar Resort and Aliante Casino Hotel.

Table products rose 15% year-over-year, reflecting organic growth from an increase in the leased revenue from shufflers, proprietary table games and other table products.

Additionally, we benefited from the DEQ acquisition completed in Q1.

Turning to lottery.

Our revenue decreased $2 million inclusive of unfavorable $2 million foreign exchange impact.

On a constant currency basis, revenue was essentially flat.

Lottery segment AEBITDA was also flat compared to the year-ago quarter as an improvement from a more profitable mix of revenue and lower SG&A was offset by $7 million lower EBITDA contributed by our joint ventures, about half of which was due to a value-add tax credit of our Italian joint venture, LNS, in the year-ago period.

Looking a bit closer at revenue.

Instant game revenue decreased slightly as our U.S. growth was offset by the timing of new game launches in some international markets.

In the U.S., we achieved a $5 million or 5% increase in the instant gaming revenue, including a benefit from higher year-over-year sales of licensed games, largely reflecting the ongoing rollout of the multistate WILLY WONKA GOLDEN TICKET instant game.

This performance is noteworthy given the tough comp last year, which was up 17% as a result of U.S. lotteries purchasing additional new instant games to launch.

Remember, the lotteries had just reaped the revenue benefits from a huge Powerball jackpot in the preceding quarter.

Year-over-year services revenue decreased primarily reflecting lower multistate revenues due to lower jackpots compared to the year-ago.

During the quarter, a new 8-year contract for systems and services was signed with the state of Maryland and the Maryland Lottery.

And finally, but certainly not least, our Interactive segment continues its rapid growth.

Revenue was up 28% year-over-year to $107 million, with results driven by ongoing strong growth in our social gaming B2C business, up 32%.

Our strategies that leverage our existing library of gaming IP and content continue to deliver rapid top line growth.

Revenue growth exceeded the industry average on the year-over-year basis and reflects both share gains and market expansion in a healthy growing industry.

In addition to strong organic growth of our social casino business, on April 7, we completed the acquisition of Spicerack Media.

The founders of Spicerack developed what has become the #4 social bingo app, the popular Bingo Showdown mobile game.

An addition of the social bingo app is highly complementary to our existing game portfolio.

Bingo games have attractive player profiles and financial characteristics, and the acquisition was immediately accretive to our earnings.

Additionally, more recently, we acquired Red7Mobile, a U.K.-based firm that expands our talent base and technology for real-money gaming portion of our Interactive business and also gives us a toehold in the sports betting.

As a result of the strong revenue growth, operating income increased $5 million and AEBITDA rose $6 million or 35% compared to the prior year period.

The AEBITDA margin increased year-over-year to 23%.

Turning to cash flow and the balance sheet.

Operating cash flow increased $78 million to $169 million.

The major driver of the increase was a $61 million increase in earnings after adjustments for noncash items, with working capital changes contributing the majority of the balance of the year-over-year change primarily based on timing.

Free cash flow increased to $101 million from $15 million a year ago, reflecting the increase in operating cash flow.

After debt paydown of $10 million in the quarter and funding of our accretive acquisition, cash and cash equivalents increased by $66 million in the quarter.

As a result of our operating improvements and focus on deleveraging, our net debt has declined $139 million since the beginning of the year.

And coupled with our growth in AEBITDA during the last 7 quarters, our net debt leverage has dropped to 6.8x trailing 12-month AEBITDA.

As Kevin noted, today, we also kicked off our plan to amend and extend our term loan, taking advantage of our improved business performance and the favorable market conditions.

We expect to lower our interest costs and extend the term loan maturity.

Before opening the call to your questions, I would remind everyone that our dedicated goal is to continue to execute operating improvements and capitalize on financial opportunities that will enable us to further grow our business and reduce leverage.

And now I'd like to open up the call to questions.

Operator?

(Operator Instructions) The first question comes from Barry Jonas with Bank of America.

Kevin, do you think your strategy on top line growth and cost savings are really set now?

And maybe how are you thinking about growth as you head into 2018?

Yes.

I think it's clear from the vantage point I have that we're in the early innings.

I will tell you that we're doing a forensic on every aspect of the top line, as you would expect.

That's where we can get the multiple expansion as we show that we can drive the top line in the business.

So let me spend a little bit of time just going through, from the way I'm looking at it, and then you can ask me anything else.

But -- so from the Gaming business, there's a whole series of pieces of the business as you know.

So the game sales, as you see what we've done in the last couple of quarters to really move into a leadership position there, and we've got great games, and the guys are doing a fantastic job of coming up with smart games that people want to play.

So I see that continuing and I look at the momentum of what we've got, and we've got some outside marketing support with Applied Minds, I think you guys -- any of you that have been following us after we signed the James Bond deal, we engaged Applied Minds to maybe take a fresh look at the way we build games and the types of games, et cetera.

So based on their early read, I feel like we have a lot of opportunity there.

Game operations to me was a bit neglected.

I don't want to say it in a negative way, but when you look at the past number of years, we had such momentum inside that part of the business.

And then after the acquisitions took place, the Kevin read on it was that we might have delayed making some decisions on some of the new product offerings.

And now that you see that we've got this great Gamescape, you could see the opportunity that's there.

When you build the right products that have the right engagement and the right play, I think you have a very unlimited opportunity moving forward, and we've got a lot of momentum in that regard.

So looking at where we missed in the last couple of years, it makes sense as to what we've been riding through over the last couple of years, and we're now about to cross that and turn it into a much better scenario.

On the shuffle and the chippers and the table games, I think we continue to do well there.

I still see opportunities in Macau and other markets.

And just a recent visit at Galaxy and meeting with the management team, just -- they love our products and just as one example that we have the right stuff.

So we just need to get it out there and penetrate as fast as we can.

And success breeds success, as you would expect.

And I'm also -- we did some pricing in the business and it was to move us more back towards the royalty stream of earnings as opposed to the one-hit wonders of selling the machines.

Of course, we still sell the machines, but I'd much rather have the royalties as we have a sustained base of business as we move forward on that.

On the last piece of the Gaming business, the gaming systems, we've got a new leadership.

And I could tell you, if I thought I had fire in the belly, I look like I am in a nursing home next to Cath Burns, who's running our business.

And in the first 90 days, she's met with every customer, she's assessed everything.

She sees great opportunities, of course, she's making sure we're handling the great deals that we've got, the Canadian deals that we've got coming up in the next couple of quarters.

So I see that momentum shifting and moving in the right direction.

So I would say the gaming business and our leader there, Derik Mooberry, he came in and he was very excited for the first time.

It's the conversion of being -- and I don't want to say Derik, he's a pretty positive guy, but I'll assess it as a glass half empty to a glass half full and he's very excited about the prospects in every part of his business, which is the beginning of the cultural change that I'm seeking.

And so that's -- that was a really exciting interplay with me.

And then on the lottery business, you could see we had a strong quarter and we were topping over some very strong comps.

But if you look at the 2-year stack, we are doing really well.

And I think the team there, headed by Jim Kennedy, is focused on doing smart things.

And we've got this WILLY WONKA billion-dollar ticket, and they've been able to break through and do some real smart things there in an environment where, otherwise, it would have been a bit more of a benign nature year-over-year.

And then when you look at the social and you see what Barry and his team have continued to do every quarter and very smart.

And just as an example with the Spicerack that Mike alluded to, having our best-in-class kind of marketing and knowing how to exploit that positively, you're going to see that being a very comfortable transaction for us.

So it was very quickly integrated, so that was a very important piece to me.

So I want to make sure as we do these tuck-in things, that we're integrating them properly.

And in 90 days, we're not even talking about the integration because it's done, and that's the way it should be.

So a couple checkmarks that we're starting to get that right and I'm excited about that.

And I think there's other expansion opportunities on that business as well, and Barry, we'll start to dig into that as we move forward.

So all in all, I think the top line is moving in the right direction, we're continuing to finesse, we have lots of opportunity and I'm excited about our prospects for the coming years.

I don't know if I answered that too long or did I cover what you wanted.

Yes -- no, that was fantastic.

I really appreciate the color there.

Maybe just on the replacement sales, they're particularly strong in the quarter even when backing out Oregon last year.

Do you think this is really market share gains?

Or is it also a sense of maybe market conditions are improving?

I think it's a bit of a combination of each.

And we're never going to be the guys that are out there looking to fight over market share because that's a no-win battle.

I've lived in so many environments where -- from running Avis and running Norwegian, and if you get into that in a fisticuffs way, nobody wins.

So we want to lead with good product offerings.

And I think based on that, the natural movements will happen.

And so it's a combination of both though.

I think the economic environment is moderating.

I think the good things that we're starting to see out at Caesars is moving other players as well.

So it's going to be a measured orderly strengthening over a number of years.

It's not going to be, oh my God, all of a sudden, things are just tremendous.

I think it's going to take us some time, but we're going in the right direction from an economic environment.

The next question comes from Mike Malouf of Craig-Hallum Capital Group.

I just want to focus on the wide area progressive side, again.

Bill, obviously, the number of units continue to tick down a little bit as you kind of go through this transition.

And I'm wondering if you can give us a little bit more color as you look out over the next year, given that we have Seinfeld and Bond coming out, and obviously, SIMPSONS are coming out now.

When do you think we might get some stability in the number of units and then maybe even cross over into the growth?

I think you're starting to see the changing pattern inside that business.

If you look at the inner workings of all of the different types of games that we have, we had some legacy games that were out there for a very long time.

Thankfully, they stayed out there, so we're earning something on them.

But as they get long in the tooth, they're starting to move back to us.

But the positive momentum of Gamescape, and we've got 3 or 4 different platforms coming that we see this, I don't want to be too optimistic, but the next couple of quarters, you're going to start to see a very strong movement into the right direction.

And there'll be a more consistent change as opposed to what I think we've been going through.

And it gets back to the fact, as I said earlier, that we kind of took a hiatus for a while in coming out with good product.

And you look at it, it's glaring to me as a guy that looks at it from outside the industry that that's what happened.

And some of the other players that have been smart through that period, you could see that they've grown that part of the business, I think, in my opinion, at our expense and now we're going to reclaim our space.

Great.

And then on the interactive side, we saw SG&A pop up a little bit.

Is that because of the acquisitions causing the EBITDA margins to be down sequentially on that?

And should we see sort of back to sequential improvement as we leverage that?

Or can you just give us a little color on that?

Yes.

It's Mike Quartieri, I'll take that.

And so from an SG&A perspective, it's twofold.

One, you're right, it is partly driven by the acquisition of Spicerack.

But at the same time, as we've talked about in the past, when you look at the individual apps that we have coming out and that we've recently issued, there's a growth period in the beginning when there is what we're going to call their infantile stage, where we're spending more on marketing and player acquisition cost in order to develop the player base at such point.

As we get to a more mature app, those costs are able to subside and then you have that nice base of ongoing customers that you have that you don't need to spend the marketing and player acquisition cost associated with.

So it's really going to be (inaudible).

Great.

That's helpful.

And then on Bond, when does Bond come out?

And is that basically a Gamescape product?

Is that what you're hinting towards or telling people?

Well, it's premature, but we're looking at a different platform.

I won't get any more specific than that.

We'll have some excitement around G2E so just stay tuned.

I think everyone from our side was blown away with what we're seeing as far as what we think we can do with that new franchise.

As a matter of fact, I was over in London on Friday meeting with the family that controlled the rights and we're all excited about our prospects.

The next question comes from Chad Beynon with Macquarie.

Firstly, on the gaming system side, Kevin, you mentioned -- or Mike, I'm sorry, it was in your prepared comments that the hardware improvement was a result of the ilani, the Baha Mar and the Aliante placements.

So does that imply that you really haven't recognized anything from the OLG and Alberta?

And any update in terms of when we should see this, if it's in 2017 or mainly in 2018?

Any color there will be helpful.

Yes.

Sure.

For OLG and Alberta, that's going to be coming through in Q4, so -- and then thereafter.

So the actual go live will take place in Q4.

And then as they roll out the system to the individual sites, you'll see a revenue stream coming through '18 and into '19 as well.

In the quarter, in the prepared comments, the ilani, Baha Mar and Aliante were system go lives.

ilani, actually, we shipped all the units for the slot for Q1, but with the casino actually went live in Q2, we were able to recognize the revenue related to the systems.

And then from a hardware perspective within that group, it's really being driven by the iVIEW4 that's getting rolled out across all of our customers.

Okay.

Very helpful.

And then with respect to the $20 million onetime royalty payment, I believe that just hit the cash flow.

Can you confirm that that was not in the income statement, that that was just a cash inflow?

Well, there's a combination.

The cash came in and there are royalties that will be generated over the coming years.

It's a 5- or 6-year period which we'll get a royalty for the use of some of our products and designs.

Yes.

The full $20 million is not in the P&L.

That was just the cash advance.

Okay.

And then just the last one, could you give us an update on any opportunities as you see kind of the gaming landscape unfold over the next 12 to 18 months?

Any updates that are worth noting, Brazil, Pennsylvania, et cetera?

And that's all for me.

Yes.

I don't think there's anything that we want to go out on record.

But every opportunity that's out there, we've got our teams making sure we're in the running.

And I'll leave it at that.

The next question comes from Michael Pace with JPMorgan.

Maybe to go back to the top line a little bit, you mentioned Alberta and Ontario starting in later this year, rolling out over '18 and '19.

I'm wondering if you can help to quantify the units or top line maybe on those 2 combined?

What we should see there?

And also, can you do the same for in terms of Greece, in terms of the timing rollout, et cetera there?

Yes.

Sure.

From a Alberta perspective, I don't think we've actually commented before on actual dollar amounts that are supposed to come through, but it will be meaningful to the Q4 results because those are some larger, long-term contracts.

And from a Greece perspective, the continued rollout plan is to take us out through...

Although we'll have the majority in by the end of this year, we should have the final units in some time around spring of next year.

And as I commented before from a revenue per day perspective, it's relatively low at this point, just given the state of the economy within Greece and the amount of disposable income available to its citizens at this point.

And that lower revenue per day is what's dragging down the revenue per day for the other leased gaming participation machines that I commented on earlier.

Okay.

And then can you just talk about what you're seeing in terms of a pipeline for new casino openings?

Either region, domestic, international, but just what are you guys thinking on that line item maybe improving?

It will improve.

The biggest opening coming up in the rest of the year is going to be Montreign up in the Catskills.

And we're still kind of anticipating it probably going to be at Q4, but nothing's been announced at this point.

And then as we get further into '18 and '19, we should see a slight improvement in the casino openings as Springfield comes online as well as -- what's the other one?

Wynn.

Wynn in Boston Harbor.

Okay.

And then maybe Michael or even if Kevin wants to take this one.

I appreciate that net debt is coming down, you have $200 million or so of cash in the balance sheet.

You're very much in the black on -- and sustainable on free cash flow now.

So I'm just wondering what your thoughts are on maybe reducing the gross debt number?

Or do you prefer having that cash for flexibility optionality for tuck-in acquisitions as you've done?

No.

I think at the end of the day, we want to deploy the cash smartly towards paying down the debt.

As you see, the rate we're paying on the debt versus the rate we're receiving on the money sitting there.

So we've been doing a lot of things to drive the cash numbers.

So we -- part of the nuance of what we're doing today in this financing is to make sure we do it in a measured way.

The next question comes from David Katz with Telsey Advisory Group.

I wanted to ask about some more detail just within the cash flow statement, which is just a little bit condensed in the Q and specifically around the adjustments to reconcile net loss to cash provided by operating activities.

Can you just talk about some of the items that are in there?

I mean, that appears to be one of the bigger swing factors in just looking at cash from ops and how much it went up for the first 6 months of this year versus last year.

And I suppose there are changes in deferred income taxes and other stuff was kind of a sizable swing also.

But can you just talk more about what's in there?

Sure.

Really, what we did is we just condensed what would have been the full disclosure of the cash flow statement for interim period.

The biggest components in there is depreciation expense, the noncash interest expense, your stock-based compensation.

Any loss or gain on extinguishment of debt would flow through that line as well.

So the biggest components being depreciation, stock-based comp and the net -- the noncash portion of interest expense.

Got it.

And in terms of the refinancing effort that you're making, can you talk about the parameters -- I mean, I'm not going to ask you sort of what you think you can save at this point in time because, obviously, it's an open process.

I believe -- I mean it sounds like it's an open process or -- and you're just confident enough that it's going to land somewhere that would make sense.

And is it fair of us to assume that if it's less than 0.5 percentage points, it may not be worth doing?

And anything greater than a full point is probably not realistic at this point?

Is that a fair assumption on my part?

We can't answer that.

But I would say that the first part is, as far as if it turns out to be a benign change, we will have to sit back and think about it, balance the cost of doing it versus the opportunity to maybe wait a bit.

But as far as the range, I don't think we should get into that conversation.

Right.

I recognize that, that was a bit more specific.

And I wasn't trying to catch you half-asleep at an early hour.

You knew I just came back from India.

I've been on a plane the entire week killing myself.

So I am not in my top form here, so you could have gotten me.

My point is that you, obviously, have some confidence that it will be meaningful enough to pursue or you might not have brought it up.

That would be pretty logical.

Otherwise, you're right, we wouldn't have brought it up.

And I think this is a journey, as I would say.

It's going to be an incremental thing that happens over a period of time.

And until have we a couple of big wins and then all of a sudden, you could do a size change.

And so we just want to be always making sure we're taking advantage of every opportunity.

And then when the big opportunity comes our way, we want to be positioned for that as well.

So when you look at the net debt-to-EBITDA and the improvement, I think what you said, Mike, it's down to 6.8.

6.8x.

And we said that and how that's improved.

And when we look at our business model over the coming year or so, we see that to the point where you guys will never even be asking us about it.

And that's exciting because when I came in everything was all about the debt level.

But we have the confidence and the strut in our step that we feel that we're making great momentum and that will be a transformation that will happen over time.

The next question comes from Joe Stauff with Susquehanna.

I wanted to revisit maybe just the number of replenishments that you had in the quarter.

There are a number of questions at different angles about it.

But I guess, my premier question was -- and Kevin, I think you touched on this in a little bit, but do you think it's -- that one of the primary drivers are other operators trying to respond before Caesars emerges from bankruptcy later this year?

I guess, Pinnacle in particular has had a pretty public announcement that they were reinvesting or taking all the cash from the business in terms of the free cash flow and instead of buying back stock or reinvesting it back in the business.

So I was wondering if you -- what you can share with us with respect to how broad the replenishment numbers were and do you think that's part of it?

I think -- I'll start it and Mike could jump in.

I think that is definitely part of it and I think this is a logical next step for this industry that has been delaying some of the spending.

And now once that starts to shift a little bit, you'll see that start across the industry and I think you're alluding to the beginning of that.

Yes.

I guess, adding to these comments, we're going to see wide spread.

There's not going to be any large, I'll say, sizable super orders that's going to come in through any one operator in Q3 is what we're expecting.

It's just there'll be a lot of orders coming through across the board.

Okay.

And then, I guess, I wanted to ask some more specifics maybe on the gaming upside.

You did respond to some of the questions.

I know on the premium, certain -- in terms of the installed base and the new products and so forth that you have in there, is it conceivable that you could see an installed base, call it installed base just under 21,000 in the quarter?

Is it conceivable to see growth in that at some point this year?

Yes.

I think with the continued rollout of Gamescape plus the new content that's coming out, we would -- we should expect to see some growth and stabilization in that installed base between now and the end of the year.

Okay.

And then on the interactive side, and Mike, I think you commented on this talking about how the investment in the ramping of the cost and so forth, but what is a fair EBITDA margin to assume maybe in the second half of this year for the interactive business?

I'm not sure we want to get into the actual margin goals, but I would just say that when you think about the business as it's building and as we roll out these new games, the new games in associated marketing and other costs that go along with the rollouts become a lesser and lesser piece of bigger and bigger business.

So I would say that the trend will be in the right direction as opposed to anything more than that.

We want to make sure we build this business as smartly as we can because we think we have a diamond in the rough.

We know we do, actually.

This concludes our question-and-answer session.

I have a couple -- yes, actually, if you let me just make a couple of points.

I wanted to thank everybody for joining us this morning.

And I want to make sure you could tell, you don't see me through the phone, I'm really excited about the improvements we are making, the momentum we are gaining and the many opportunities ahead of us.

In mid-September, we and the lottery customers will gather for our national show.

And then in the first week of October, the G2E will be held in Las Vegas.

We'll be able to, again, showcase a broader array of innovative and exciting new products for our gaming customers.

As we look to the second half of '17, I can assure you that we remain disciplined and focused on our priorities.

Our team is executing well on our strategies and plans, and we will continue to be smart as we identify additional opportunities that could generate incremental cash flow and value for our shareholders.

We look forward to updating you on our progress during the third quarter conference call.

Thanks and have a great day, guys.

This conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.