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Edited Transcript of EVRI.N earnings conference call or presentation 4-Aug-20 9:00pm GMT

·52 min read

Q2 2020 Everi Holdings Inc Earnings Call LAS VEGAS Oct 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Everi Holdings Inc earnings conference call or presentation Tuesday, August 4, 2020 at 9:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Darren D. A. Simmons Everi Holdings Inc. - Executive VP & FinTech Business Leader * Dean A. Ehrlich Everi Holdings Inc. - Executive VP & Games Business Leader * Mark F. Labay Everi Holdings Inc. - Executive VP, CFO & Treasurer * Michael David Rumbolz Everi Holdings Inc. - CEO & Director * Randy L. Taylor Everi Holdings Inc. - President & COO * William H. Pfund Everi Holdings Inc. - VP of IR ================================================================================ Conference Call Participants ================================================================================ * Adam P. McLaren Moody's Corporation, Research Division - VP & Senior Analyst * Barry Jonathan Jonas Truist Securities, Inc., Research Division - Gaming Analyst * Brad J. Boyer Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst * Chad C. Beynon Macquarie Research - Head of US Consumer, SVP and Senior Analyst * David Brian Bain ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst * David Brian Katz Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure * John Kimbrough Davis Raymond James & Associates, Inc., Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Hello, everyone. Thank you for standing by, and welcome to the Everi Holdings 2020 Second Quarter Earnings Conference Call. (Operator Instructions). As a reminder, this call is being recorded. Now let me turn the call over to Bill Pfund, Vice President, Investor Relations. Please go ahead, sir. -------------------------------------------------------------------------------- William H. Pfund, Everi Holdings Inc. - VP of IR [2] -------------------------------------------------------------------------------- Thank you, operator, and welcome, everyone. Since we're operating from multiple locations today, please bear with us in case we end up with some sort of technical difficulties. Let me begin by reminding everyone of the safe harbor disclaimer that covers today's call and webcast. Our call will contain forward-looking statements and assumptions, which involve risks and uncertainties that could cause actual results to differ materially from those discussed during our call. These risks and uncertainties include, but are not limited to, those contained in our earnings release today and other SEC filings, which are posted in the Investors section of our corporate website at everi.com. We do not intend and assume no obligation to update any forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which are made only as of today, August 4, 2020. In addition, we will refer to certain non-GAAP financial measures such as adjusted EBITDA, free cash flow, total net debt, total net debt leverage ratio and net cash position. A description of each non-GAAP measure and a reconciliation to the most directly comparable GAAP measure can be found in our earnings release and related 8-K as well as within the Investors section on our website. This call is being webcast and recorded. A link to the webcast and replay of today's call can be found in the Investors section of our website. Joining me on the call today are Mike Rumbolz, our Chief Executive Officer; Randy Taylor, President and Chief Operating Officer; Mark Labay, Executive Vice President and Chief Financial Officer; Dean Ehrlich, our Games Business leader; Darren Simmons, our fintech business leader; and Harper Ko, General Counsel. Now it's my pleasure to turn the call over to Mike. -------------------------------------------------------------------------------- Michael David Rumbolz, Everi Holdings Inc. - CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Bill, and good afternoon, everyone, and thank you for joining us. Since our last call about a month ago on June 2, the gaming industry and we here at Everi have made meaningful progress with casino reopenings across the country. In April, at the beginning of the second quarter, as a direct result of all of our casino customers having closed, we had essentially no revenue. By the end of June, with about 75% of U.S. casinos reopened, our revenues were ramping in conjunction with those reopenings. For the quarter, we achieved better-than-expected results, including generating positive adjusted EBITDA with positive contributions from both Games and FinTech. Previously, we anticipated that this would not happen until the third quarter. These results were accomplished largely due to 4 key factors. First was our taking rapid and aggressive action in March to reduce operating costs and cash burn as well as taking steps to preserve and increase our liquidity position. Second were the steps we took to focus our priorities and enhance our operational efficiencies. Randy will be providing some additional details and perspective on these steps, which we believe will continue to have a positive impact. Third, we're benefiting from the strong performance of our FinTech solutions and the strength and growth of our recurring revenue gains. Our Games strength is a result of the investments that we have made the last several years to foster a culture of originality in our game development studios. Along with that, we have had a keen focus placed on product differentiation in both Game features and Game play. Mark will be speaking to some of the key performance trends that we experienced in the second quarter as well as how these metrics are trending at the beginning of the third quarter. And fourth, although it occurred somewhat unevenly, casinos opened more quickly than we'd anticipated. And as an even greater surprise, we saw an enthusiastic demand from casino patrons. I would point out that even as we took aggressive steps to reduce costs, we maintained our focus on the development of products that provide cashless and contactless options. With several years of experience under our belt, we anticipated that the pandemic could act as a catalyst to accelerate interest and demand by players and operators for new solutions that offer contactless and cashless options and that support social distancing. Our focus is paying off, principally in the form of increased customer interest in our self-service solutions that offer cashless optionality and cost efficiencies. These offerings include our existing quick-ticket product that allows players to receive a gaming voucher, which can be inserted into their favorite slot machine, enabling them to avoid cash handling and face-to-face interaction with casino employees. We're also completing development of a mobile application for these quick-ticket transactions. Additionally, the development of our fully digital CashClub Wallet continues, including its integration with the leading gaming systems providers. CashClub Wallet expands the options for patron access to their funds where, when and how they want to access them. This solution, using Everi's technology and money transmitter capability, gives operators the opportunity to create a seamlessly integrated solution across on-premise and online, across multiple states and jurisdictions. And it integrates their payments, loyalty, anti-money laundering and responsible gaming all into one ecosystem. The extension of our CashClub Wallet to the wagering account systems will allow players to directly fund a gaming machine through a cashless mobile application and also allows financial transactions to extend the locations off the gaming floor. We have no doubt that the ability to easily and seamlessly use their casino wallet throughout a resort will provide the patrons with an enhanced cashless experience. This is an exciting, growing opportunity for cashless gaming and gives Everi the ability to introduce new transaction types or, said another way, new revenue opportunities for both the casino operators and Everi. Given our many years of industry leadership and player-funding solutions, we believe that we have first-mover advantage and will become the leader in cashless funding options in casinos as these technologies are adopted more broadly in the near and long term. Now before I turn the call over to Randy, I would like to remind our investors that the executive team here at Everi has positioned our company to quickly regain our revenue, earnings and cash flow momentum, which was already building prior to the onset of the COVID-19 pandemic. We continue to benefit from our existing offerings in both FinTech and Games. In particular, the player popularity and performance of our premium operating units together with the 636-unit increase in our installed base of operating units during the first half of 2020 should play a meaningful role in our second half results. Additionally, we expect to benefit from the ability to assist customers to address the new operating environment with our cashless solutions that are available today and the pipeline of exciting products that we are developing to address the future. And now let me turn the call over to Randy to speak to some of the operational changes that we've made. -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [4] -------------------------------------------------------------------------------- Thank you, Mike. Good afternoon, everyone. During the second quarter, we completed a comprehensive review of our opportunities and growth drivers, together with our internal operational processes. Basically, we took the opportunity to look at everything we do. This review was done with a critical eye toward planning and adjusting our priorities so that we could create and deliver our products and services with excellence under the new normal. We embraced this review as a catalyst for improvement and have established a set of near and medium-term priorities. One of the first items was the realization that a significant portion of our workforce could be highly productive by working remotely and many actually preferred to do so. This has allowed us to begin to consolidate facilities and plan for future consolidations, based on the terms of our various lease locations with the ultimate goal of reducing our annual occupancy costs. By working more effectively from remote locations, we also expect to save on travel costs, all while enhancing our employees' engagement. In the quarter, we consolidated some of our corporate and FinTech space in Las Vegas, resulting in a $1 million charge in the quarter for lease exit costs. We continue to review our entire lease footprint from warehousing to office space and expect further consolidation in the future. We also incurred a charge of approximately $2.7 million in the quarter for severance and other employee-related costs as we streamlined certain processes and rightsized our business to focus on higher-value opportunities. Even as we leaned out the total organization, we also redirected resources to higher-value opportunities such as our cashless projects. In addition, we reviewed our existing game and cabinet development road map in light of the changes we expect in the industry. As a result, we are focused on the appropriate product categories to drive further growth in both ship share and yield per unit in our product sales and gaming operations business. Thus, we wrote down or reduced certain assets that don't embody the above strategies. Together with some related inventory, software and other costs, these nonstrategic asset write-offs totaled $9.5 million in the quarter. Finally, specific to the pandemic, we made the decision to cancel our annual TournEvent of Champions event, which resulted in approximately $400,000 of charges, and we wrote off approximately $600,000 of receivables that we believe are uncollectible as a result of casino closures. Of the $14.8 million of pretax charges in the second quarter, approximately $11 million was of a noncash nature. In the second half of this year, we expect in the neighborhood of $1 million to $2 million of additional charges related to our planned further consolidation of facilities. Going forward, we will continue to invest in innovation and development that offers the potential for growth and high returns. In addition to the heightened interest we are seeing in our forward-thinking FinTech solutions, our game studios have a full pipeline of exciting game content that we expect to launch in the coming months. These new games will augment our strong performing game themes that are already in the market. Now I'd like to turn the call over to Mark to share his perspective on our performance and the trends as we begin the third quarter and what that could mean for the future. Mark? -------------------------------------------------------------------------------- Mark F. Labay, Everi Holdings Inc. - Executive VP, CFO & Treasurer [5] -------------------------------------------------------------------------------- Thanks, Randy. Because I like the imagery it conveys and sets the stage perfectly from my prepared remarks, I'm going to start by carrying forward your metaphor from the last call and frame out our current views on our business operations. With COVID effectively closing all the roads and highways of the gaming industry, our Ferrari has been in the garage since the end of the first quarter. Well, as June operating results indicate, Randy's Ferrari is getting back on the road again. As a conservative guy, and with things only beginning to reopen, he is checking out the lower gears first, and while moving swiftly, he is still cautious. However, with how our volumes are trending, it suggests that we should be highly encouraged that even in this uncertain environment, we'll be able to open it up and run full throttle before too long. Now that's a rather protracted metaphor for saying that we believe we have an amazing car, which is our business. And we see no fundamental issues with this powerful engine that's driving it. We just need some open road to really let it perform. As all the roads reopened and the industry continues to stabilize in the near term, we expect to regain strong operating momentum in our business that we exhibited as we entered 2020. We also continue to see an acceleration of growth opportunities that positions us well for long-term success as a result of the improvements we are currently seeing in many of our key performance metrics that I'll now highlight. In the second quarter, our installed base grew by an additional 87 units on a quarterly sequential basis. This was on top of the 140-unit sequential increase we reported in the first quarter. Year-over-year, that's a 9% increase over the ending installed base at June 30, 2019. Significant in the quarter, premium games accounted for 81 of these incremental units. This is on top of the 555-unit quarterly sequential increase in premium units we reported in the first quarter. Premium units have grown almost 2,400 units or approximately 70% since the June of last year and now represent approximately 39% of our total installed base. This compares to just 25% a year ago. With the pandemic closing most casinos for a large portion of the first half of 2020, the 636 incremental units we have added this year have not had the full opportunity to contribute to our growth in daily win per unit nor to total games revenue. With our customers reopening, these units coming back online and the existing backlog of orders for new premium units, we are well positioned for continuing sequential unit and revenue growth. Daily win per unit declined for the full quarter, which was expected. This almost exclusively the result of a large number of days in which no units were active or generating revenue inside of the closed casinos. However, using internal metrics, and based on the estimated number of unit days that our games were actually active during the quarter, the daily win per unit on our active devices was in excess of $35 per day. This is comparable to where our units were performing at the beginning of the year prior to the closure of casinos as a result of the pandemic. Recent unit additions to the Game portfolio as well as the performance of our existing installed base contributed to our strong performance. Our recently introduced wide area progressive game themes, the Mask and the Karate Kid, which are both offered on our dual-curved screen DCX cabinet, are performing very well out of the gate. Our existing franchise games, such as Shark Week, which we launched in February of 2019, and Smokin' Hot Stuff Wicked Wheel, which came to the market in October of 2018, also still remain strong performers. Our latest premium non-WAP game theme, The Vault, which launched in the fourth quarter of 2019, continues to exceed our expectation. This game theme is currently performing at a level higher than any game we've previously launched. With the increased number of installed premium units and their ongoing strong performance, we continue to believe that our performance in gaming operations will be similar to or exceed the levels reached pre-pandemic. As it relates to unit sales, we expect that operators, in general, will want to continue to conserve capital. Therefore, slot spend by our customers is expected to remain at reduced levels throughout 2020. However, the first quarter launch of our newest cabinet, Flex, with its combination of differentiated cabinet design and game themes, contain proven features and play mechanics, positions us strongly to gain our fair share of any available slot spend by our customers. Of the 381 units sold in the second quarter, 109 were Flex cabinets. The relative performance of these Flex units within our early adopters also remains very encouraging, which gives us confidence in the opportunity for future sales. Another way of looking at our relative strength is our floor share for new casino openings. In general, we have been garnering a floor share at new casinos that exceeds our overall floor share and even our most recent quarterly ship share. This remains true for several of the locations that are scheduled to open near the end of the year as their construction periods end. In our FinTech segment, business is also recovering strongly on a relative basis. Currently, our same-store sales for cash access transactions and volumes are trending only moderately below the levels experienced in the prior year. We continue to believe the player loyalty business is a great business and a great fit for Everi. We expect sales of loyalty software and the associated self-service, contactless kiosks to be a meaningful contributor to our revenues in the near term. Longer term, the recurring software license support fees we charge for these player loyalty and marketing products will supplement our already strong recurring revenue base. In the second quarter, revenues from player loyalty products and services totaled $3.0 million compared to $4.9 million a year ago. Even during the period when casinos were closed, and we deferred certain support contract revenues, we continued to install new player loyalty equipment at our customer facilities as they planned and prepared for their reopenings. We also signed cash access agreements with both new and existing customers as casino operators continue to appreciate the value of our comprehensive and integrated FinTech product and service solutions. Turning now on to our balance sheet. Our net cash position of $133 million improved from $40 million at the end of the first quarter. This primarily reflects the $118 million of net proceeds we received from our new $125 million incremental term loan, which we borrowed in April. I would also point out that during the second quarter, we incurred approximately $600,000 of transaction-related expense in connection with the issuance of the incremental term loan and the amendment to our credit facility. These charges were included in operating expense, and combined with the charges Randy just walked through are included in the $14.8 million in nonrecurring charges we added back in the quarter in determining adjusted EBITDA. We believe that our current net cash position, combined with the cost-reduction initiatives that Randy and Mike discussed, provides a strong base of liquidity and enables us to sustain our operations in the event of any near-term pullback in the industry. Finally, as it relates to our debt, I would also highlight that even with interest associated with the new incremental term loan and the full drawdown on our $35 million revolving credit facility, our cash interest in the second quarter was lower than the second quarter of the prior year. As we look towards the second half of 2020, there's still plenty of uncertainty in the market. The American Gaming Association reports that as of today, approximately 85% of all U.S. casinos are now open. Within our customer base, we're seeing a fairly similar percentage of total cash access terminals and gaming units as being installed in active locations. We continue to expect more casinos will reopen, but with the majority now open, this will occur at a slower pace than we saw in May and June. While we remain cautious, we are highly encouraged by the performance achieved in June, and by what we've seen thus far in the third quarter. Given the social distancing and other capacity restrictions implemented by our customers, many of our games remain inactive. We believe our games that are active are still over-indexing when compared to pre-pandemic period, and we continue to see new orders for our premium products. This means operators recognize that our games are in demand by players, and this player demand is driving strong results today and we expect will continue into the future. Based upon the current level of activity and the strong relative performance in both our Games and FinTech businesses, we now expect that we will generate positive free cash flow in both the third and fourth quarters. This is a little earlier than our previous expectations when we talked about our first quarter results in June, when we had anticipated only positive free cash flow in the fourth quarter. We also expected adjusted EBITDA will continue to improve in the third quarter, and we will then see further sequential improvement in the fourth quarter. While it's still early, provided there is no substantial industry pullback due to second wave of COVID in fall or winter, all of our improving performance metrics would indicate that Everi should have a strong year in 2021. With that, I'll now turn the call back over to the operator for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) First question is from David Bain from ROTH Capital. -------------------------------------------------------------------------------- David Brian Bain, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2] -------------------------------------------------------------------------------- Great. And Mark, I apologize if you just reviewed this, but just so that I'm clear, for the days that the units were in use, the daily wins plus 9% versus last year, can you give us a sense as to the number of units in the base that we're on. And then looking at July, thinking about August, sounds like you're at par with the industry, 85% of the games now generating revenue. Have you seen -- what kind of simultaneous impact or win per day have you seen since that ramp has occurred? I mean just kind of wondering, as a whole, if we've seen any kind of drop-off after initial pent-up demand perhaps or real impact from COVID flare-ups or the demand just remains steady across the board? -------------------------------------------------------------------------------- Mark F. Labay, Everi Holdings Inc. - Executive VP, CFO & Treasurer [3] -------------------------------------------------------------------------------- I could certainly speak to our experience, and we have certainly seen, I'll say, fairly steady demand for the products as customers have reopened. Our access volumes have seemed to remain consistent at locations in terms of performance, and while moderately off the prior year that they do seem to be holding fairly steady, and we continue to add new customers as new markets open and new casinos within those markets open. So we've been seeing a nice steady growth in May and really in June as the bulk of the casinos opened up. In terms of your first part of your question related to the Gaming ops business, we really tried to frame out for you in the prepared remarks how our units are performing. And we think -- again, what we tried to convey is we are certainly seeing over-indexing compared to where we entered the COVID period. That could be a function of fewer games on casino floors, but also, I think, it speaks to the quality of our game content, and the players -- how it's resonating with players in terms of performance. So we're still performing on a like-for-like basis on a same time of day basis at levels in excess of $35 a day, which is consistent to where we entered the pandemic closedown periods. -------------------------------------------------------------------------------- David Brian Bain, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [4] -------------------------------------------------------------------------------- Okay. Great. And I know I get one follow-up. So I'm going to choose here. So I guess I'll ask Mike. With the -- you mentioned the increased interest for fully cashless wallet with the mobile solution. I'm just curious as to the content of those discussions. I mean how do you educate the casino operators like kind of the loyalty [job] or tightening relationship opportunity with the patron? I think without that much CapEx from their end, what's the biggest factor to moving this forward? Is it waiting to see the first few adopt? And then once it is adopted, how do you work with the casino to educate the actual patron about the technology so that they, one, download and, two, use it? -------------------------------------------------------------------------------- Michael David Rumbolz, Everi Holdings Inc. - CEO & Director [5] -------------------------------------------------------------------------------- Yes. We -- well, a couple of things there, David. Firstly, during the closedown as a result of the pandemic, we saw casinos that actually took the quick-ticket product that didn't have it previously. We installed at 2 major customers' locations during the pandemic shutdown because they were so interested in having something available when they reopened their casinos. But we also have been talking with management groups at a large number, quite frankly, of our customers about the various products and which ones may be the best for them. I mean one of the questions that always comes up is the adoption rate. And we've seen an uptick in the adoption of quick ticket over the last month or so once we started reopening casinos. So we're seeing more use of quick ticket. It's in more locations. But a lot of casinos are asking us about what it's going to take to go to the mobile applications. And as we have those discussion, we have to tell them that a part of what's going to occur is the customer is going to have to adopt at the same time that you bring this onto your floor, and that means you're going to have to help educate the customer as we will, and we'll help you in that effort. But at the end of the day, the customers have to feel comfortable with the technology, and the best way to introduce it to them is a combination of us and the casino operator and, in particular, their marketing departments letting the customers know the value of using it. And because it's tied into our loyalty systems, the fact that they'll be able to reward them for their use of that cashless system, no matter which one they install. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- We'll take our next question from John Davis from Raymond James. -------------------------------------------------------------------------------- John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [7] -------------------------------------------------------------------------------- Just really want to follow up on the question on active machines. If we were to just look, so 85% of the casinos are open, the average casino that's open, if you just had a ballpark, what percentage of your machines are active? Obviously, the $35 win per day is very positive, but just trying to gauge what percentage of your machines in your footprint are active at open casinos? -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [8] -------------------------------------------------------------------------------- It's Randy. It's hard for us to get you what you're looking for. I would say, look, in our footprint, we believe that about 80% of our games at locations that are open are available, right? So how many they actually have up and operating really can depend from casino to casino. So it's just hard for me to give you a specific on how many of those are really operating right now. I guess, the only thing I can say is the detailed work that we did, we believe that our estimate is that they're doing $35 a day. I just can't tell you if that's at a specific location. Overall, I've got 90% of my -- 80% of my machines up and operating. It's just not that easy. We don't have that type of reporting. And they can turn them off and on as time goes on. So I think the best you can get from is that our footprint -- a large portion of our footprint is up and operating. And I think as Mark laid out really well, the games that are operating are doing above index that they were doing before. So they're perform very well. So I wish I had better details, but I really don't, John. -------------------------------------------------------------------------------- Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [9] -------------------------------------------------------------------------------- The only thing I would add is -- John, the only thing I would add is that we do have configurations that do allow us to keep more games on than most. And upon configurations, it does allow itself the opportunity to not have half the game shut off, if there's a 50% requirement. They would keep the games that are more socially distant on rather than shut half of them off. So we're really working with our customers to do those types of creative ideas and concepts to make sure that we do, in fact, obviously, keep as many games on as possible. -------------------------------------------------------------------------------- John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [10] -------------------------------------------------------------------------------- Okay. And then Randy, I appreciate all the detail on the -- I don't want call it, restructuring, but that's basically what it is. Any idea what the kind of the annual cost saves are that you've implemented and how we should think about the decremental margins from the revenue that's going to, obviously, be down year-over-year in 3Q versus the benefit from the cost saves and then also the longer-term impact -- potential impact on the margin? And then finally, let me squeeze in, just CapEx and cash interest expectations for 3Q. -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [11] -------------------------------------------------------------------------------- I'll take this one, John, instead of Randy. I would tell you, I think on our last call, we framed out for you $35 million to $40 million kind of range in terms of OpEx and R&D exclusive of certain costs for noncash items like the noncash comp piece of the P&L. I think that, that range still kind of holds true. We're probably, with more casinos opening with us, bringing back employees to prepare for casinos opening, restoring salary levels for employees. We're probably more near the higher end of that range for Q3 and probably right at the top of that range for Q4, leading into 2021. I think if you look back at different analysts where their projections were, we've never given operating expenses as a guidance point, but I think folks were kind of more along the lines of $50 million for those 2 numbers. So I think those savings that we see from the reduction in employee base plus some of the other cost saves that we think are in there should kind of frame you into a number without too much work. -------------------------------------------------------------------------------- John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - Research Analyst [12] -------------------------------------------------------------------------------- Okay. And then just cash -- CapEx and cash interest for 3Q? -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [13] -------------------------------------------------------------------------------- Yes, CapEx, I think we're still pretty much holding to our estimates that we gave forth last quarter on where we thought we'd be for the year, which is about 1/3 reduction from our original guidance. So that kind of puts you somewhere in the $75 million to $80 million range. I think we're expecting a good portion of that still our customer equipments and games going on in the installed base. We've talked about or I talked about, in my remarks, that we expect the backlog and the pipeline for placements in the premium unit will help drive that, but I think there's some variability or some optionality in those numbers, depending on how the market goes. So I'd say that's probably a good conservative estimate range of where we think CapEx will be for the year. And as it relates to cash interest for the year, we have our semiannual payments on our notes in June and December. So Q3 will probably be just a little north of $12 million at current interest rates. And Q4 is probably $22.5 million, $23 million, somewhere in that range. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- We'll now take our next question from Barry Jonas from Truist Securities. -------------------------------------------------------------------------------- Barry Jonathan Jonas, Truist Securities, Inc., Research Division - Gaming Analyst [15] -------------------------------------------------------------------------------- I wanted to start with the Games division. Can you maybe give a little more color about, when you give these performance metrics, maybe give more color specific to the markets, whether that's tribal Class II, Class III or commercial markets? Just curious if we can dive in anymore there. -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [16] -------------------------------------------------------------------------------- Well, I would say, again, we have a -- it's Randy, Barry. It's -- clearly, we've got a higher Class II overall footprint. So I think we're performing -- that would be the biggest piece of it. I still think our premium units, which make up 40%, is where the majority of our revenues being driven from. So again, I don't know how much -- regionally, there's not really a way to break that out because we've got a fairly spread out footprint, but again, what's really pushing our performance is the premium games, which is almost 40% of our footprint, and we believe those games are what being played the most. -------------------------------------------------------------------------------- Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [17] -------------------------------------------------------------------------------- Barry, I'd also tell you that even within our standard Class II installed base, our core performance has gone up significantly year-over-year. So we get some of those metrics as well. And if I were to say where we -- which type -- which part of the market we're going up the most, I think it's all the above right now. I mean we're -- we just definitely have been on a really good run in terms of the products that we've introduced, not only in the premium side, but even on the standard side for a significant installed bases within our best Class II customers. That's about it from me. -------------------------------------------------------------------------------- Barry Jonathan Jonas, Truist Securities, Inc., Research Division - Gaming Analyst [18] -------------------------------------------------------------------------------- Got it. That's great to hear. And then maybe taking some of that commentary and applying it to FinTech. If operators are noting lower visitation, but higher spend per visit, can you just remind me for your cash access revenues? Is that tied closer to the number of transactions or to the amounts processed? -------------------------------------------------------------------------------- Michael David Rumbolz, Everi Holdings Inc. - CEO & Director [19] -------------------------------------------------------------------------------- Well, I'll tell you what, Barry, I'm going to have Darren answer that for you, but I will let you know that we're -- I mean we're seeing greater volume for the number of bodies that we believe are coming into the casino. So part of what you're seeing is an uptick in the amount of monies that are going through. We don't -- we've never cast our FinTech revenues as being a substitute for GGR numbers because what happens to the cash after our systems put it out, whether it be the ATMs or cash access through the cage or through our kiosks, we don't have a way of tracking where that money goes. We know, obviously, that a good portion of it is going to the casino, but it also may be used for other things around the casino operations. But Darren, do you want to address that question? -------------------------------------------------------------------------------- Darren D. A. Simmons, Everi Holdings Inc. - Executive VP & FinTech Business Leader [20] -------------------------------------------------------------------------------- So from a revenue standpoint, based on the transaction, it's a combination of both depending on the transaction. ATM is more on a per-transaction basis, so that is really all about the volume. The other transactions are more really about the volume and the size of transaction. The bigger the transaction, the more we make. So it's a combination of those for the cash and for the quasi cash, the debit and the credit card transactions. -------------------------------------------------------------------------------- Barry Jonathan Jonas, Truist Securities, Inc., Research Division - Gaming Analyst [21] -------------------------------------------------------------------------------- Well, I guess, if you look at your early 2018 disclosures, I think ATM, even though it's a higher gross number in terms of your actual revenues was a lower percentage. So I guess what I'm getting at is, as we see these trends of higher spend per player, even though maybe there are social distancing limitations, limiting the amount of players in there, like, should we be more focused on the amount of cash that's going through the casino as opposed to the amount of players there? -------------------------------------------------------------------------------- Darren D. A. Simmons, Everi Holdings Inc. - Executive VP & FinTech Business Leader [22] -------------------------------------------------------------------------------- Well, I think the transaction volumes are still pretty good on a same-store basis. We are seeing certainly higher average transaction sizes, but I don't know if there's necessarily a drop-off really significantly on a same-store basis for customers that have reopened. As we kind of mentioned during the quarter, it really shows the pent-up demand. It has not really dropped off. And in fact, we're actually seeing into Q2 and now into Q3 sort of the lap of new contracts that we signed last year, and then as we mentioned in the remarks, the new contracts that we've actually signed have contributed. So I don't think it's as big an issue that way in terms of the absolute size of the transaction because I do believe that our same-store volumes are similar to pre-COVID. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- We'll now take our next question from Brad Boyer from Stifel. -------------------------------------------------------------------------------- Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [24] -------------------------------------------------------------------------------- First question for whoever wants to take it. It's just around the growth in the installed base in the quarter. I was just hoping if you could give some additional color as to sort of the composition of that growth. Were we over-indexed to Vault in the quarter? Are we still seeing strong demand for some of those sort of early mover premium titles that allowed you guys to grow? Just any additional color you could provide around sort of the composition of the growth in the installed base? -------------------------------------------------------------------------------- Michael David Rumbolz, Everi Holdings Inc. - CEO & Director [25] -------------------------------------------------------------------------------- So thanks for the question, Brad. So I would say, the growth in the installed base is definitely related to the premium side of it. And we still see demand coming in. So it's a little bit of yes and yes, right? So obviously, time will tell. You mentioned the Vault. I mean it's starting off just tremendous, as Mark mentioned in his prepared comments. And we think there is a really long runway for it. So let's see where this thing goes from there. But we are seeing growth in our highest revenue-producing categories. And as long as we continue to do the things that we're currently doing, vis-à-vis perform, we should see continued traction in terms of growing that respective footprint. -------------------------------------------------------------------------------- Brad J. Boyer, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [26] -------------------------------------------------------------------------------- Okay. That's helpful. And then second one, maybe for Darren or again, whoever wants to take it, just around cashless, there's been a lot written lately in the public domain just around changing appetites for cash flows amongst regulators and what have you. I was just kind of curious, is there a scenario in which the adoption of cashless could introduce alternative means or, dare I call it, competition or ways in which a patron could get cash to the floor? i.e., if a slot systems provider has some sort of a cashless app that can fund a game, could that offering work simultaneously with your existing cash business? Just any color around that? -------------------------------------------------------------------------------- Mark F. Labay, Everi Holdings Inc. - Executive VP, CFO & Treasurer [27] -------------------------------------------------------------------------------- So I'll answer it this way. I think when you think of sort of what you're proposing there, you're really talking about payment methods. And so introducing new payment methods is always an opportunity for increasing cash to the floor. And so what I would say is, from our perspective, we're interested in being able to interconnect the gaming floor also to the non-gaming side. And so having the ability to be able to take on these other payment methods is something that, obviously, we're interested in doing. But having a true cash wallet that is not just the purchase of gaming credit is a much different thing. And in our conversations with our customers, that's what's resonating. They understand our ability to leverage the ecosystems of products and services that we have today, all of the touch points that we have today, the things that we're doing with them in terms of the settlement of the transactions that we're providing today, all of the AML tools, anti-money laundering tools that we provide, the KYC tools that we're providing, for the ability for someone to be able to actually have a mobile wallet, that's the differentiator. Leveraging the infrastructure that they've invested with us is a differentiator. Because those other systems don't have all of that. -------------------------------------------------------------------------------- Michael David Rumbolz, Everi Holdings Inc. - CEO & Director [28] -------------------------------------------------------------------------------- Yes. And one of the other things, Brad, is, I mean, we've integrated with the major system providers to the slot. So if you're suggesting there might be a slot manufacturer that would have their own unique methodology for bringing value to the game, it would be very difficult for the casino operator to take that into their system the way they can bring in the values from our cashless solutions into the gaming systems that are already in place on the casino floor. But in addition, if you're referencing some of the cryptocurrencies, the regulators that have looked at cryptocurrencies have rejected them pretty much out of hand as being methods that they're not interested in allowing on the casino floor right now. -------------------------------------------------------------------------------- Mark F. Labay, Everi Holdings Inc. - Executive VP, CFO & Treasurer [29] -------------------------------------------------------------------------------- Yes. And I think, Mike, you bring up sort of a good point. I mean at the end of the day, right, our positioning is to provide choice to the consumer. Because not all of them are going to say, I want to be able to perform transactions on my mobile phone. So we're providing the ability for them to get to cashless but leveraging the infrastructure that they've invested in so that the consumers, the players, the patrons today have the option of how they want to access their funds, where they want it and when they want it. So that's how we're differentiating ourselves. And the reality is cash today is still preferred, right? I mean that's our cash -- our ATMs are performing splendidly during this time, I have to say. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- We'll take our next question from Chad Beynon from Macquarie. -------------------------------------------------------------------------------- Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [31] -------------------------------------------------------------------------------- Guys, as you reviewed the business operations, particularly on the game side, I guess how did you end up thinking about medium-term or longer-term product sales, market share goals, and if it's worth it, to invest the R&D and the CapEx that you have in prior years, given the growth in the margins that you're generating in the gaming ops division and FinTech? I guess my point is, as you went through this process, since you're returns-focused, is it a lower priority and are you rethinking how much time, effort and capital you'll be committing to that division? -------------------------------------------------------------------------------- Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [32] -------------------------------------------------------------------------------- Chad, thank you very much for the question. What I would tell you is that you got to concentrate on all of it, right? You got to make sure that all your product categories are solidified. And the one thing to remember is that we have a tremendous amount of installed base that's still in our standard product categories, right, that we would sell to certain commercial customers, but are also represented in revenue share in our Class II business. So the answer is, yes, you've got to do both. And I think we're very well positioned with our current road map that takes us well north of 2021. And I feel very, very confident in both. I hope that answers your question. -------------------------------------------------------------------------------- Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [33] -------------------------------------------------------------------------------- Okay. Yes. No, that's perfect, Dean. And more on the near term, when you're speaking -- when you and your staff are speaking to operators, are they even looking for packaged deals, conversion kits and looking to purchase anything, I guess, in the near term? Or is it kind of a hard no at this point from all the operators across the country? -------------------------------------------------------------------------------- Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [34] -------------------------------------------------------------------------------- It just depends, Chad. It really does. There are certain projects that you would have thought would have been canceled that they were working on pre-COVID that they continued forward with that are still moving forward. Are people are cautious? Absolutely. But I would tell you that they are still always trying to optimize what is turned on, on their respective floors. They're doing theme conversions. They want to make sure on the premium side they have the best products that they can have, not just only from us, but I presume from all the vendors. And quite frankly, as far as the products they bought beforehand that they have themes that aren't particularly working, they're still looking at enhancing those as well. I mean, granted they may not have every game turned on, but they do want to make sure they optimize what, in fact, is turned on and make sure that they provide as much value to the patrons as possible. -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [35] -------------------------------------------------------------------------------- And Chad, this is Randy. I'd also add on the FinTech side. We are having operators that are still looking for our loyalty product. That's capital to them. And they're continuing to look at those products and acquire those products and the same on our kiosks side and some other capital assets that we provide. So I still think operators are being -- they're being very careful and very strategic on what they buy. But the products that we have are resonating with the customers and, therefore, they are finding pockets where they can buy our products on both sides of the business. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- (Operator Instructions) And we'll go with our next question from David Katz from Jefferies. -------------------------------------------------------------------------------- David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [37] -------------------------------------------------------------------------------- I appreciate all the commentary and the detail, and congrats on a positive quarter. I wanted to ask about the touchless and particularly the white label. I apologize if you touched on it. I'd love to know what the timing on that is. And I know that every circumstance is different. But if you could help us understand exactly how that adds value, in other words, how you get paid for it and the degree to which it enables sales of other products and the degree to which it just adds value to the entirety of that segment. -------------------------------------------------------------------------------- Darren D. A. Simmons, Everi Holdings Inc. - Executive VP & FinTech Business Leader [38] -------------------------------------------------------------------------------- It's Darren. So the white label that we referenced in the last call was really around our core wallet, and this is something that we had said was going to enable cashless transactions to be able to have a player, have a mobile application that is branded to the casino but does not talk to any of the systems. And so that is actually available now. And the bigger, I guess, effort is around the actual integration of our wallet into the gaming wagering account systems. And so that is where we can actually fund directly into those wagering account systems that the operators have invested in. So what's been interesting is that during sort of the shutdown time, a lot of operators have -- are now doing a number of upgrades and changes to their systems to be able to actually make these mobile and wallet functions work within their system. So they do have an investment that they need to make and infrastructure changes they need to make to be able to actually consume into their gaming operations, the mobile wallet integrations into their gaming systems. But as Mike mentioned, we have done integrations into the major operating systems. And so it's really now just a matter of timing. We've actually got a couple of customers that are targeting Q4 and Q1 for rollouts with those investments into those gaming systems to be able to enable wallet functionality. So we're ready. -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [39] -------------------------------------------------------------------------------- And David, this is Randy. I was just going to say, from a -- you spoke a little bit, but again, remember, the transaction as it comes into the wallet, when it's funded, it's still the same type of transaction fees that we would charge, whether they were doing it on the floor at the ATM or if they were going to do it directly from an ATM transaction into their wallets. The fee structure from our standpoint -- and I think that's the whole premise here is that we're keeping their structure in place, so the operator keeps their fees as well. And again, it's just another transaction type for a casino operator. And as Darren said, still, a lot of people are doing normal ATM transactions, but the goal here is, if you want to use a wallet, you can, but you still have to source it and pay the fees that you've paid in the past. -------------------------------------------------------------------------------- Darren D. A. Simmons, Everi Holdings Inc. - Executive VP & FinTech Business Leader [40] -------------------------------------------------------------------------------- Yes. For us, we look at it as just an extension of all of the services that we're providing today. So we see this as an opportunity to introduce new transactions. There are new transaction types that are available with the implementation of the wallet, and there is some premium for wallet transactions that we'll get. So... -------------------------------------------------------------------------------- David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [41] -------------------------------------------------------------------------------- Okay. And if I can just follow up quickly, specifically about Oklahoma. And what you're hearing from operators in terms of specifically their traffic, their customer engagement? I, frankly, heard different things from people there about whether cases are ramping up and having some impact on people's inclination to move about. -------------------------------------------------------------------------------- Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [42] -------------------------------------------------------------------------------- David, this is Dean. -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [43] -------------------------------------------------------------------------------- Yes, go ahead, Dean. -------------------------------------------------------------------------------- Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [44] -------------------------------------------------------------------------------- Do you want to take it, Randy? Or do you want me to take it. -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [45] -------------------------------------------------------------------------------- No, if you have any more -- yes, go ahead and take it. I don't have any more color, I don't think, than you do, but go ahead. -------------------------------------------------------------------------------- Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [46] -------------------------------------------------------------------------------- The only thing I would say is that if you look at our play levels and you get some really good detailed information out of that market, it would suggest that it's rather business as usual. There isn't any -- if you look on a location-to-location basis, it's something that really sticks out (inaudible). Basically, when the 4 walls are open, we seem to be doing very well. And that's the best I could draw so much. Randy, do you have anything else you want to add? -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [47] -------------------------------------------------------------------------------- No, I agree with you, Dean. I don't -- I'm not quite sure where you're heading with David, but so far, we don't have any indication other than if they're opening, they seem to be doing well. -------------------------------------------------------------------------------- David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [48] -------------------------------------------------------------------------------- Okay. I appreciate that. The information is plentiful. The amount of it that is accurate, credible, et cetera is less. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- We'll now take our next question from George Sutton from Craig-Hallum. -------------------------------------------------------------------------------- Adam P. McLaren, Moody's Corporation, Research Division - VP & Senior Analyst [50] -------------------------------------------------------------------------------- This is Adam on for George. With respect to the updated Game and Cabinet road map that Randy mentioned in his remarks, I was hoping if you could provide a little more detail. Is there anything specific you could point to that you pivot away from? And is there anything new that you're focused on that you weren't in the past? -------------------------------------------------------------------------------- Darren D. A. Simmons, Everi Holdings Inc. - Executive VP & FinTech Business Leader [51] -------------------------------------------------------------------------------- I'll let Dean give more... -------------------------------------------------------------------------------- Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [52] -------------------------------------------------------------------------------- I mean, George, I think we're focused on exactly what we've talked about in the past. I mean we're really excited about our Flex deployment strategy. We have plenty of theme bandwidth in terms of what's going to hit the market, not only throughout the rest of 2020, but into 2021 differentiated play mechanics, new solid Mask. We're very excited about that. If you look at DCX, which we rolled out as well in our premium segment, we got an extra couple of themes coming out. Monsterverse is right after the Mask and Karate Kid. So very much looking forward to that. Our steppers of real mechanicals are still continuing to do what our mechanicals do. Plenty of themes that are supporting that product to unwind. So really just we feel like we're in very good position. And I would say, I'm very cautiously optimistic as long as the 4 walls stay open that we got a great shot of continuing to move the needle. -------------------------------------------------------------------------------- Adam P. McLaren, Moody's Corporation, Research Division - VP & Senior Analyst [53] -------------------------------------------------------------------------------- Great. And then Darren, I believe you also mentioned that one of the things that you're seeing right now is a lot of discussion with casinos about what is actually the right product fit for them in terms of contactless and touchless. Could you expand on what exactly are the factors that are brought up in those discussions? -------------------------------------------------------------------------------- Darren D. A. Simmons, Everi Holdings Inc. - Executive VP & FinTech Business Leader [54] -------------------------------------------------------------------------------- Well, I think number one is, can we facilitate more cashless and contactless transactions. So again, as we've mentioned many, many times, a simple, low-hanging fruit, low investment, quick and easy to deliver is the quick-ticket transaction, which somebody is able to go up to a self-service kiosk and facilitate the purchase of a gaming ticket. So cashless transaction, self-service, you don't have to go to a cage. We've also, again, continued to facilitate more cashless transactions in terms of check cashing, where you're able to do that self-service at a kiosk. So it's those self-service, cashless transactions that are, I guess, the easiest ones to be able to implement and roll out. And again, we've done -- the sales team has done a great job, and our installed base for those particular products has increased quite dramatically over the last quarter, and we continue to implement, quick to get at more and more locations. And in fact, new jurisdictions are looking at more cashless and contactless-type solutions that they're supporting. As far as we move more into what I would say is the more involved wallet integrations into the gaming systems, into the wagering account systems, as I mentioned, they do have a slightly bigger investment that they need to make to be able to enable that on their gaming floor. But as we mentioned, we've done those integrations into those systems and, ultimately, it's a response to the demand of players that they do want to have more cashless options. So as I mentioned, we are there with our existing infrastructure to enable that. And as Mike had mentioned in some of the earlier -- one of the earlier questions, at the end of the day, we've got an infrastructure that players and patrons and the operator are using right now. So in terms of our ability to introduce this technology and this functionality, it's already embedded into all the services that we have today. So there is a greater level of comfort and security with that because they're interacting with us today. And so we think we're best positioned as we leverage, again, the loyalty pieces of our business and how it's already integrated into all the touch points that we have. So it's really around demand that they have from their customer base and our ability to be able to introduce it to their gaming floor. And like I say, over the last few months, they've been making those changes to their game floor, and they're doing it right now, and we're excited about rolling it out with several customers. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- We'll take our last question from David Bain from ROTH Capital. -------------------------------------------------------------------------------- David Brian Bain, ROTH Capital Partners, LLC, Research Division - MD & Senior Research Analyst [56] -------------------------------------------------------------------------------- Just one follow-up on the games sold of 380. Can I just ask if those were contracted prior to the quarter? Did they come in late in the quarter? And I know in Q&A, you touched on the loosening in the purse strings for slot buying being mixed. But as regional casinos see the performance being better than most anticipated, is there like an emerging mindset of any sort from some customers to refocus a bit more quickly on kind of the streamlined earning potential of automated portions of their floor as they deemphasize other amenities? Or is that not happening? -------------------------------------------------------------------------------- Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [57] -------------------------------------------------------------------------------- Well, David -- go ahead, Randy. -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [58] -------------------------------------------------------------------------------- Go ahead. No, go ahead, Dean. This is hard. Go ahead. -------------------------------------------------------------------------------- Dean A. Ehrlich, Everi Holdings Inc. - Executive VP & Games Business Leader [59] -------------------------------------------------------------------------------- I think, once again, as we mentioned, it's a mixed bag. You're going to have some -- as far as what was purchased in Q2, mostly prior sticking to commitments that they're willing to be basically opened up found the capital and purchased product, right? Ongoing, it's a big question. It's very difficult to answer, right, what's it going to look like down the road. I mean, our thought process has always been we have -- if you have the product and it's meeting the player demand, it will figure out a way to get on the floor. And obviously, with the strength of the regionals and tribals and how well we do in those respective categories, we have a great opportunity to continue to move the needle forward. I mean that's the best way I could say it. I'm not sure, Randy, if you have anything to add to that or what your thoughts are. -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [60] -------------------------------------------------------------------------------- No, I don't think we have a lot of insight just yet, but we are very pleased that people that had kind of committed to things continued through it. We -- as Mark talked about, we got some really good ship share on some of the newer properties that are opening. So I think with our new cabinets, with the games that we produced, I think we're in a good position, but I just think it's too early to really be able to say how well people are positioned and what they're going to do in the next couple of quarters right now. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- And that does conclude our question-and-answer session. I would now like to turn the call over to Randy for any closing remarks. -------------------------------------------------------------------------------- Randy L. Taylor, Everi Holdings Inc. - President & COO [62] -------------------------------------------------------------------------------- We'd like to thank everybody for joining us today. With the actions we've taken and the gaming industry continuing to rebound, we expect the balance we have in our -- with our Games and FinTech segments places us in a unique and strong position to continue to improve our revenues and our cash flow in the coming months. We look forward to providing you an update on our next quarterly call. Thanks for joining us. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- That does conclude today's call. Thank you for your participation. You may now disconnect.