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Edited Transcript of HDRAU earnings conference call or presentation 12-Aug-19 3:00pm GMT

Q2 2019 Inspired Entertainment Inc Earnings Call

NEW YORK Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Inspired Entertainment Inc earnings conference call or presentation Monday, August 12, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* A. Lorne Weil

Inspired Entertainment, Inc. - Executive Chairman of the Board

* Brooks H. Pierce

Inspired Entertainment, Inc. - President & COO

* Daniel Braun Silvers

Inspired Entertainment, Inc. - Executive VP & Chief Strategy Officer

* Stewart F. B. Baker

Inspired Entertainment, Inc. - CFO & Executive VP

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Conference Call Participants

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* Alex Silverman

AWM Investment Company Inc.

* 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

* Michael Fawzy Malouf

Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team

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Presentation

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Operator [1]

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Good morning, and welcome to the Inspired Entertainment Second Quarter 2019 Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I'll begin today's conference call by referring you to the company's safe harbor statement that appears in the second quarter 2019 earnings press release, which is available in the Investors section of the company's website at www.inseinc.com, that's www.inseinc.com. This safe harbor statement also applies to today's conference call as the company's management will be making certain statements that will be considered forward-looking under securities laws and the rules of the SEC. These statements are based on management's current expectations or beliefs and are subject to risks, uncertainties and changes in circumstances.

In addition, please note that the company will discuss both GAAP and non-GAAP financial measures. A reconciliation is included in the earnings press release.

With that completed, I would now like to turn the conference over to Mr. Lorne Weil, the company's Executive Chairman. Mr. Weil, please go ahead.

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [2]

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Thank you, operator. Good morning, everyone, and thank you for joining our second quarter earnings call. Here with me this morning, as usual, are Brooks Pierce, President and CEO; Stewart Baker, our CFO; and Dan Silvers, our Chief Strategy Officer.

By now, I assume you've had a chance to read the press release. In that press release, we referred to the three-pronged strategy that we're in the process of implementing: mitigation of the Triennial impact to a level of $2.5 million a quarter or less; generation of new business in our VLT, Virtual Sports and Interactive business to fully offset the impact of the Triennial by the end of this year or beginning of next; and the completion and the integration of the Novomatic U.K. Gaming Technology Group acquisition.

In my opening remarks, I'd like to touch on each of these and then hand it off to Brooks to talk in more detail about our business development initiatives and, in particular, our progress in North America. Stewart will cover the financials and any deal-related discussion at the end of our prepared remarks.

Our second quarter results were, of course, negatively impacted by the reduction in the maximum B2 stakes to GBP 2 in the U.K. LBO market, which was implemented on April 1, 2019. We believe these regulatory change caused the decrease of approximately $5.5 million in revenue and $4 million in adjusted EBITDA on a constant-currency basis. Excluding the impact of the Triennial, we think the second quarter would have been very much in line with the 2019 first quarter and due to the impact of onetime sales, a topic that I'll return to in a couple of minutes, the second quarter would've been somewhat behind the second quarter of last year.

As we have discussed previously, we think it'll take until the end of the year fourth quarter 2019 or first quarter 2020 for the full mitigation plan to be implemented. As expected, we have borne the full impact maybe even more than the full impact of the revenue reduction, if some of the positive trends in revenue that we've been seeing lately continue in the second quarter, while having only partly mitigated the impact of it through operational restructuring. This, again, as explained previously, was partly a consequence of the acceleration in the Triennial Implementation from the original date of October 2019 back to April 2019. Some of these mitigation initiatives take time, and the loss of 6 months preparation has had an impact.

Ironically, though, a large part of the remaining mitigation -- the largest part really of the remaining mitigation will be driven by shop closures as announced previously by our customer base. Since this seems somewhat counterintuitive, I think it's worth digressing for a moment to discuss this a little bit.

Just like about everything else in the economic world, individual machine earnings across our U.K. installed base can be observed to follow in 80/20 distribution, so that the machine is at the strongest end of the distribution earn a multiple of the earnings of those at the weakest.

With the GBP 100 stake, even the weaker machines provide some positive contribution, but as the move to the GBP 2 stake lowered the tide for all shops, this is no longer the case. Whereas, our revenues are driven by a direct linear relationship to the cash going into the machines. Many of our costs are unrelated to revenues, but in fact, driven simply by the physical numbers of machines regardless of the revenue those machines generate, costs such as field maintenance, transportation and logistics, spare parts, communication costs and so forth.

So as the overall industry goes through this period of restructuring and shop consolidation, our performance will be positively impacted.

For some time, we've been forecasting that the fully mitigated adjusted EBITDA impact of the Triennial would be $10 million to $11 million a year or about $2.5 million a quarter. Based on results we've seen so far in the recently completed second quarter, combined with comprehensive updated modeling, we're confident we'll reach this level during the fourth quarter of 2019 or the first quarter of 2020. Indeed, given both recent positive revenue trends and the deeper analysis of costs, we think there is a significant opportunity to do even better, mitigating the impact to as low as perhaps $2 million a quarter.

We said early on that we expect that by the end of the year that our overall adjusted EBITDA run rate would be back to where it was going into the Triennial. In other words, that by the end of this year, our other business initiatives, which Brooks will talk about in more detail, such as the launch of our gaming machine business in North America, new machines in Greece, new Virtual Sports contracts in Loto-Quebec and elsewhere and additional interactive customers, again, very interestingly and excitingly in North America. These will together be generated roughly $2 million to $2.5 million per quarter, enough to fully offset the impact of the Triennial and to take us back to where we were before the stake was lowered to about $13 million or $14 million of EBITDA per quarter.

A moment ago I mentioned that I would return briefly to the subject of onetime sales. At the present time, our onetime hardware and software in sales as all of you will know, who have been observing, are very lumpy and very difficult for us to forecast, largely because our European customer base for product sales is extremely narrowed. This, of course, often makes quarter-to-quarter financial comparisons very difficult.

As we launched the VLT business in North America, which Brooks, again, will discuss in more detail in a moment, we anticipate that our customer base and product sales will become much, much broader and in the process, will not only be an important growth driver, but as importantly will smooth out the quarter-to-quarter swings that are now occasioned by product sales.

Finally, pending regulatory approval, we are targeting to complete the acquisition of Novomatic's U.K. Gaming Technology Group by the end of the third quarter. This merger is an exciting step forward in the evolution of Inspired, giving us greater scale, scope and financial strength. The acquisition offer significant synergies with essentially no customer overlap and, therefore, no risk of revenue dissynergy. We will be able to offer our B2B customers new revenue opportunities and new ways to keep players engaged across gaming, amusements, Virtual Sports and Interactive marketplaces. It also gives us the ability to use NTG's strong products and exclusive content portfolio, which will further mitigate the impact of the Triennial as we introduce the exclusive Novomatic titles into our U.K. FOBT stake.

In addition to organic growth, we see significant potential for increases in profitability too as the business goes through its conversion from what was it onetime been entirely analog business towards now about halfway through the process of conversion to digital. For a variety of both revenue and cost-related reasons, we believe that profitability correlates very highly to the rated digital conversion.

Quantitatively, as we've mentioned before, NTG's 2018 adjusted EBITDA when added to our conservative estimate of synergies would yield approximately $35 million of incremental adjusted EBITDA, and with only modest growth in revenue and/or margins in 2019 and 2020 and we would hope to experience a little bit of both. We could expect to reach an adjusted EBITDA run rate of close to $40 million during 2020.

To summarize then, as we approach the first quarter of 2020, we expect to have mitigated the Triennial impact to between GBP 2 million and GBP 2.5 million per quarter or less, added an equivalent amount of new adjusted EBITDA from initiatives in North America, Greece, Virtual Sports and Interactive and to have acquired largely integrated NTG. This is obviously a huge amount of activity for us to absorb and digest over the course of the next several months, but we feel we have a tremendous organization in place to execute it and we're confident that as we move through 2020 that we can achieve the levels of performance that this conversation implies.

And with that, I'll turn it over to Brooks to further discuss our new business developments and our initiatives.

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Brooks H. Pierce, Inspired Entertainment, Inc. - President & COO [3]

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Okay. Lorne, thanks. So I'm happy to provide some color on the positive momentum we're seeing across the business and I'll handle that by all the various parts of the company. We've announced the couple of new contracts the first time today. So let's start with those.

In our server-based gaming business, probably the largest announcement based on financial implications, is our William Hill contract extension. As most of you would be aware of, William Hill is our largest customer and this extension secures our relationship through 2022. This extension is particularly noteworthy as it requires only a modest investment of 100 terminals for trial during the 3-year term.

Notably, we've also secured a contract with BGT for them to purchase nearly 1,000 of our used SBG terminals that are being displaced due to shop closures in the U.K. LBO market. We've mentioned we will find use for these machines either for parts or for self-service betting terminals, but this commitment accounts for a good portion of our displaced machines.

Moving down the map, geographically to Greece, we've been awarded another 580 machines with OPAP, 380 of which will be our new VALOR VIP terminal, which is the cabinet we've developed and we'll be selling in the North American market. I think it's notable to point out that this brings our total to 8,940 machines out of the total of 25,000 that OPAP is contracted to provide in Greece. That's roughly 36% of the entire state and we'll have the largest share of the OPAP stating that, that's really directly based on the performance of our products, and we're delighted to be extending our relationship with OPAP with these new terminals.

Ironically, since I'm American, but I'm over here in London, calling this on the other side of the pond, but in North America, everything is progressing really quite well with our North American VLT initiative. The preliminary response to our VALOR VIP terminal has been excellent and we're expecting to be licensed and start running trials in Illinois in September-October time frame. It's a slight digression there about Illinois, so on a positive twist of phase, most of you would know that the Illinois governor signed a law authorizing a major extension of gaming in June with -- in terms of the total market roughly 21,000 gaming machines potentially being added to the market. The segment of the market that we focus on, the route market has permit licensed restaurants, bars, veterans and paternal organizations and smaller truck stops to increase from 5 machines to 6 machines and in the truck stops themselves being able to go up to 10 machines from 5. So that amounts to if you take the ability of all these locations, it could add up to 7,000 machines. And key to this is, this is not replacement machines, these are additional machines.

So we consider this very fortuitous as previously, we would have to convince operators to remove an existing machine and replace it with ours, but now they can install one of our machines as their 6 machine without disrupting their existing business. The change in maximum stake from $2 to $4 and the increase in price payout from a maximum of $500 to a maximum of $1,199 is another positive for the market and all of our games have been developed with that capability in mind.

The feedback from all the operators and that's been a fair bit of time in Illinois in the last few weeks that we focus is, very positive on our entry into the market and they're excited with the success that we've shown in other distributed gaming markets around the world. I'm very excited to have a new player in the market. So we have certainly some high expectations to our success in Illinois.

Moving on to Virtual Sports. Again, in North America, we've added Loto-Quebec to our list of North American customers. Loto-Quebec joins BCLC as our Canadian interactive customers where we'll be providing a Virtual Sports and Interactive content to their mobile gaming platforms. The more places that we can introduce Virtual Sports across the North America, the more we'll build both awareness and game traction and that's important for the development of Virtual Sports going forward because it is reasonably new phenomena in North American market.

So let's talk a little bit about Pennsylvania because we've been there now for roughly a year. We're launching a new game in Pennsylvania with the Pennsylvania Lottery with the branded called Derby Cash, that will be this fall, hopefully in September and we're enthusiastic about the potential success of the product and the lottery's commitment from a marketing perspective and training perspective and the ability to go out and get more venues on the back of the Derby Cash products. So we're excited about the opportunity in Pennsylvania going forward.

Moving on to our interactive business, we continue to secure new contracts, including 4 this quarter and improve our speed to market due to faster integration time. It's a big focus of the technology organization that we talked about with some decent leading and getting faster integration gives us speed to market.

Our current interactive content, some of which is brand new, has been very popular. And I have no doubt, this is one of the areas that has huge potential to grow benefit, not only from what we're developing currently, but from the content that's been developed within the Novomatic technology group after, hopefully, successful acquisition closing.

So the combination of our VLT, Virtuals and Interactive initiatives throughout North America are starting to bear fruit and we expect to see a meaningful contribution to come from this region going into 2020.

So before I hand it over to Stewart, I just want to say, I've been in the gaming business for a long time, and clearly, the Triennial was very serious headwind for our -- for Inspired, but I feel very confident that our pipeline of products, new customers and markets will deliver sustainable growth going forward.

So I now like to turn the call over to Stewart to discuss our financials in more detail. Stewart?

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Stewart F. B. Baker, Inspired Entertainment, Inc. - CFO & Executive VP [4]

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Thank you, Brooks. Good morning, good afternoon, all depending on where you're listening from. So when considering the results of the second quarter, particularly versus the same quarter last year, there are a number of factors to be aware of. So I will take slightly more time than I normally would to try to explain these.

So overall, reported revenue for the quarter decreased about $10 million year-over-year and $7 million quarter-over-quarter. There are a number headwinds impacting this. Firstly and foremost, as Lorne mentioned, not surprised, $5.5 million of this decline is due to the Triennial Implementation, which began on the first day of our second quarter. As Lorne also mentioned, the first quarter of post-implementation, at least in adjusted EBITDA terms was always expected to be worst. So this is due in part to the customer growth win per unit per day impact being the largest initially increasing over time and we've certainly seen an improving trend, with customer growth win per unit per day increasing from nearly 45% decline in April to 38% decline in June.

In addition, we anticipate our customers announced store closures and restricting efforts will help mitigate the effects and curb the losses going forward due to the benefits of supporting the smaller and profitable state as well as being able to use the sale of removed terminals.

Secondly, we have an FX headwind of about $1.5 million on revenue year-over-year with the pound versus the dollar rate from the prior year being $1.36 for the period compared to $1.29 in the current year. So looking at where the rate is today, this is a trend that looks like it'll continue into the quarter we're currently in.

Thirdly, as Lorne alluded to, we had strong comparatives in the prior year in both hardware and software license sales in server-based gaming accounting for $1.3 million and $3.6 million reduction, respectively.

Fourthly, we weren't helped with external factors and that too with the key SBG markets. In Italy, on top of the 1.5% increase in turnover taxes down to the year, there was a further 0.4% increase at the start of May. This equates that Italy now having a gross win tax of approximately 64%. Whilst we managed to mitigate the majority of this through increased revenue elsewhere, this gave a drag of $0.6 million.

And finally, due to legislative delay in Greece, we won't be able to roll out new content or deploy new terminals during the period. But thankfully, this is an issue that's now been resolved at the end of the quarter.

These factors all weighed heavily on our adjusted EBITDA comparison to, with the decline in the quarter versus the comparative period of $6.6 million, including an impact from the Triennial Implementation of $4 million. The decrease of software license has increased at around $3.5 million as well as $0.5 million from the Virtual Sports contract rephasing on top of an FX challenge of around $0.5 million.

So in Server-Based Gaming, revenue decreased 31.6% in functional currency basis comprised of a reduction in service revenue at $7.2 million and $1.3 million reduction in hardware revenue for exactly the reasons I previously mentioned.

Our Server Based Gaming revenue as a percentage of total Server Based Gaming revenue was up 79.8% from 71.7% in the prior year mainly due to the last year software license sales in Greece. This is probably more appropriate level going forward, excluding the impact of North American VLT sales.

So we ended the quarter with a little over 35,000 terminals, which was up roughly 2,500 from the prior year period, but down modestly from the 35,300 in the prior quarter. We expect the machine counts continue to decrease consecutively due to the shop closures in the U.K.

As many of you will know, William Hill has announced its plans to close around 700 LBOs before the end of the year. But to reiterate what we said before, shop closures at the bottom end of the income range are not a bad thing from profit perspective.

In Virtual Sports, reported revenue decreased 8% in dollar terms and 2% in functional currency, $0.2 million. There was a $0.5 million reduction in Virtual Sports revenue during the quarter to a rate rephrasing from major customer were moved to [5%] across the year, taking out spiky rates. In addition, as we talked about a number of times, there's also an ongoing reduction in revenue from amortization and historic long-term license deals. Compared to the prior year quarter, this accounted for a $0.3 million reduction.

So of note, we saw a solid growth during the quarter in retail venues, in the U.K. mainly due to new channels as well as a migration of B2 players post Triennial Implementation in Belgium and several of the retail customers in the world, including Morocco and China.

In addition, Scheduled Online Virtual were $0.2 million in the quarter. Further down the income statement, our SG&A expenses decreased due to staff-related cost savings made in conjunction with Triennial implementation as well as facilities and IT-related cost savings. There were increases in stock-based compensation expenses and acquisition-related transaction expenses related to the proposed acquisition of NTG, whilst depreciation and amortization decreased.

So speaking of NTG, we believe the proposed acquisition is on track for third quarter closing and as we said before, we expect to achieve $12.3 million to $13.3 million of synergies through shared costs and increase buying power and updates on FX rate at the time of the initial announcement. We're ready to believe this transaction will be transformational for the business and will lead to combined business with much greater scale and diversification.

So in connection with the acquisitions, Inspired has commitments to enter into a new GBP 220 million term loan facility as well as a GBP $20 million revolver credit facility, the term loan facility will be used in part to refinance the acquisition as well as to pay-off the existing indebtedness and to pay fees and expenses related to the acquisition. We expect the term loans to be a meaningfully lower cost of capital in our current debt.

So finally, looking back at the quarter in question and turning attention to the cash flow, I think it's worth spending a little bit of time on this. Within the quarter, there was net cash generation of $14.7 million versus an outflow of $3.2 million in the prior year. Basically, this is masked by an increase in the revolver during the current quarter of approximately $9 million, which is being used to hedge the remaining Euro rate exposure on the NTG acquisition.

However, even without this, there was very meaningful positive movement in cash generation year-on-year. So if we define free cash flow and net cash flow provided by operating activities plus net cash used in investing activities, we see an increase to maybe $10 million year-over-year for the 3 months from an outflow of $3 million last Q2 to an inflow of $6.8 million this year. There's a number of factors I should expect driving this, but by farther largest is the significant reduction year-on-year in capital spend. And whilst the Triennial impact will be focused, from a cash point of view, more in Q3 than Q2, we expect these lower Capital expenditure levels of the organic business to continue for the foreseeable future.

So with that, I'll hand back to Lorne for any additional comments before opening up for Q&A.

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [5]

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Thank you, Stewart. That was an excellent report. I have no comments to add at this time. So operator, if you're able to, can you please open the program up to Q&A, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question comes from David Bain from ROTH Capital.

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David Brian Bain, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [2]

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I have 3 questions, if I could. First, just based on continued diligence and market observations, as NTG has seen a pickup in win in their segments post Triennial or any other market or company-specific commentary with regard to NTG? I know, Lorne, I think you mentioned potential upside with some synergies and that was new. So any line item information where that could have come from would be helpful too?

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [3]

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Stewart, do you want to comment on that if you can?

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Stewart F. B. Baker, Inspired Entertainment, Inc. - CFO & Executive VP [4]

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Yes. Oh, as you see, Lorne, the difficulty is I can't really. So...

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [5]

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Yes.

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Stewart F. B. Baker, Inspired Entertainment, Inc. - CFO & Executive VP [6]

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Yes. So for competition reasons and this may seem a little crazy, but it's the way -- the rules we're going to live by, David, that we don't now get access to NTG financial information until the transaction closes. So whilst, I'd say, that we're -- there are certain areas they're in, particularly the pub markets that we would expect to see pickup from Triennial and we believe from the data that we saw prior to signing that there were some benefits there. In terms of up-to-date real-time information that's -- unfortunately, that's something I cannot add any more color on.

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David Brian Bain, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [7]

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Okay. And then, Brooks, you reviewed Illinois a little bit, and for some time we chat about 4Q around another opportunities for VLTs. And you used the word -- you all have used the word meaningful contribution in the past. Now that we're fairly close to 4Q, could you give us a sense of what percentage of revenue would be meaningful through the 4Q or 2020?

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Brooks H. Pierce, Inspired Entertainment, Inc. - President & COO [8]

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Sure. So the plan for us is we've gone out, we've had meetings with literally all of the operators and we have commitments from virtually all of them to put our games on trial. And as you know it's always about the performance of the games, but we feel very confident that we'll get our games out of market on trial in the fourth quarter and assuming that they do well, which, again, the feedback, ultimately the player determines that, but the operators that we're talking to love the cabinet, love the breadth and depth of our games. And frankly, we are manufacturing machines as we speak, to be able to fill those orders and we fully expect if Illinois is successful, there will be tack-on orders not only in Illinois, but obviously in other G2S markets like you would see in Oregon, the Canadian provinces, et cetera, going into 2020. So hopefully, that gives you at least a sense of where we see the market for the fourth quarter and really going into the first quarter of next year.

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David Brian Bain, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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Okay. All right. And then my final one was if you had to bifurcate the U.K. win improvement assumption drivers from where you are today, I mean you have the initial impact and some stabilization of the upside. So you have supply coming out with shop closures, you have tech mitigation and maybe even NTG content mitigation? What element, I guess, give you the most comfort with kind of win per day assumptions in your model that lead you to maybe some of the upside that Lorne talked about?

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Brooks H. Pierce, Inspired Entertainment, Inc. - President & COO [10]

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Well, I think you've noted actually all 3 points. We're seeing the trend we talked about through the second quarter and obviously month into the third quarter and the trends have continued in the existing business. We're going to be rolling out some new contents on the roulette side this quarter that we expect to have a meaningful impact to help us. Certainly, the feedback -- although we can't go too far into it from the NTG content, there's 6 titles that we're getting, all of which are prominent titles. And then our LBO customers are certainly, I think, looking for to getting those. So I think the combination of the players getting more used to the environment, us doing some content work, the NTG content coming in and just the general momentum that we're seeing should help us all the way through.

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [11]

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David, just to add to that a little bit, just to be clear that where we're kind of following all the vectors, but your question is when we see happening to the win per day, clearly, as the shops close and the lowest-performing machines are pruned out, then, of course, the average win per day is going to increase of the remaining machine significantly simply because mathematically, we've taken the worst-performing ones out. But then in addition to that, I think everybody feels that, although there isn't a unanimous view right the second on what this percentage is, but certainly a meaningful percentage of the play that had been going to the lowest-performing machines will recirculate into some betting shops somewhere. And this obviously will add to the mathematically higher win per day that simply comes from pruning. And then finally, adding on top of that what we actually think will be probably a very meaningful positive impact from the Novomatic content because these games perform wildly successfully throughout Europe and they're not available right now in the U.K. betting shop market. So the combination of all of that, the pruning out of the poor machines, the recycling of some percentage of the pruned revenue and then the improved content on top of that, we should see over the next few quarters a very significant increase in the average win per day.

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David Brian Bain, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [12]

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Okay. That's actually really helpful. And just a follow-on that then like from modeling -- from a modeling standpoint, 3Q and 4Q would probably see the most closures, but also additional stabilization as you suggested with continuation of positive win into '20 with NTG content and other mitigating technologies that you suggest that you're going to be implementing?

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [13]

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Yes. No, of course, we're not going to be -- we won't have the NTG titles until the NTG deal is closed, But again, pending the final competition review, we hope that will be sooner rather than later.

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Operator [14]

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Our next question comes from Chad Beynon with Macquarie.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [15]

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Lorne, you gave some broad forecasts kind of exiting the end of the year and assuming that nothing has changed with NTG. Stewart, could you kind of help us think about where leverage will be at the end of closing the deal? And then as we think forward, given that we all expect NTG to be an accretive deal, how should we think about kind of where you're comfortable with leverage?

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Stewart F. B. Baker, Inspired Entertainment, Inc. - CFO & Executive VP [16]

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Dan, do you want to take?

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Daniel Braun Silvers, Inspired Entertainment, Inc. - Executive VP & Chief Strategy Officer [17]

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Yes. So, Chad, I'm not sure what obviously, which period you look at in terms of EBITDA will drive leverage, but we'll have approximately GBP 220 million of funded debt at closing, right? So depending on which period to use will drive the exact leverage level. I think nothing's really changed in terms of how we think about target leverage, which is this will, obviously, put us a little bit above 3x at closing with -- we think it'd be a very clear path to be leveraging through EBITDA growth and debt repayment. And we think about target leverage on a stabilized basis for the company at about 3x target level. So we are going a little bit above, but only with a clear path to delevering down to that 3x or below level.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [18]

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Okay, that's perfect. In the U.K., just in terms of the current betting shop contracts, is there anything else coming up in the near term that we need to be mindful of? And as you've talked to your partners in the market, have they given you any feedback in terms of their excitement with what you can bring with NTG, with a bigger library?

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [19]

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Brooks, do want to talk about that?

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Brooks H. Pierce, Inspired Entertainment, Inc. - President & COO [20]

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Sure. So in terms of contracts, all 3 of our biggest customers are now signed out through 2022. So getting the William Hill extension then being such a big customer of ours was critically important. So we've got clear runway for the next few years in terms of that. Yes, and the feedback that we're getting from our customers and, again, probably at [William] Hill as the one that we've been talking to the most through the process of this negotiation of the extension of the contract is, yes, they're very excited. These are titles that everyone knows that have not been available in the LBO market in the past. So they're quite anxious to get this content in their facilities as soon as possible.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [21]

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Great. Lastly, on the OPAP announcement, how quickly can you get these machines out into the market? And as you've continued to roll out more units, what has happened to the win per day? And how should we expect these to perform given that the market is just getting closer to points of saturation? That's all for me.

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Brooks H. Pierce, Inspired Entertainment, Inc. - President & COO [22]

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Sure. Well, so as Stewart mentioned, and I'm not sure it came through 100%, but as Stewart mentioned, it was a political issue that caused the delay in the rollout of cabinets. That's now gone, and the rollout has started again. It will start -- it's starting in August. And we expect to be fully deployed. OPAP has assured us that all of them will be in the market by the end of the year. In terms of the win per day, sure, there is -- as you get kind of broader distribution, there is some concern about the win per day. Good news is as we talked about we're putting 400 of the games that will be our new cabinet, and they will be putting in their best gaming hall locations, and they're fully expecting this to be the premium cabinet for them. So I think some combination of -- yes, there might be some slight dilution in terms of the numbers of locations, but we're pretty excited about the new cabinet going into the best locations and the early numbers that we've seen so far in the third quarter is actually Greece is coming back and growing from what we've seen so far. So we're pretty excited about that.

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Operator [23]

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(Operator Instructions) Our next question comes from Mike Malouf from Craig-Hallum.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [24]

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Great. Just have a couple of them. If we could just go back to Illinois for just -- for a quick second, it sounds like a very nice opening up of the market. And I'm just wondering how big will the test or at least the senses is that the tests that you're going to be running in the fourth quarter with a lot of these route guys

(technical difficulty)

how big is it? And how is the sales process with them? If you can just take us through that. Obviously, I don't really understand how consolidated that market is.

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Brooks H. Pierce, Inspired Entertainment, Inc. - President & COO [25]

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Sure, sure. So in terms of the trials, we have preliminary indications from 12 of the 15 operators that they will put our games on trial. 2 of the others we actually have some technical work we need to do, so they would like to trial as well, but we just got a -- had a little bit of technical work. So we'll certainly have machines across the state with all of the operators. And then they've given us, again, the commitment such that if the games perform, here is the order of magnitude what we would deliver -- or what we would order and then we would have to deliver over in the fourth quarter and probably leading some into the first quarter of next year. Without going too much into the specifics, I can tell you that the pipeline is significantly higher than our original anticipated pipeline. And large part due to the fact that we got very lucky in terms of the expansion. So it would have been a bit more difficult, as you can imagine, to replace existing machines with the new machine, but having the ability to have a new provider come into the market as the 6 machine really was a very, very good outcome for us. So that's kind of where we see the Illinois market.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [26]

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And what we need to see is that success in the Illinois market and sort of those follow-on large implementations before we could expect some movement in Canada and Oregon and such?

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Brooks H. Pierce, Inspired Entertainment, Inc. - President & COO [27]

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Yes. I think that's fair to say. I think if we're successful in Illinois, certainly, the other markets will be looking at Illinois. But remember, in this particular segment, in the route segment, it's been primarily dominated by Scientific Games and IGT. And all of the customers that we've talked to have been looking for innovation and looking for a new supplier to come into the space. So obviously, we need to have a successful product, but we're confident based on the conversations with all of our customers that they are looking for some new differentiated varied product. And frankly, you have seen the success that we've had in route markets around the world, and so we're coming in, I think with some pretty high expectations.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [28]

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Okay. Great. And then just a follow-up on Pennsylvania. I know that you have a new game coming out. Have you decided on a different strategy about go-to-market? And I know it sounds like Pennsylvania is going to be behind it with the marketing push. Can you just talk a little bit about what sort of you've learned over there and what kind of differences that you're going to be implementing over there?

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Brooks H. Pierce, Inspired Entertainment, Inc. - President & COO [29]

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Yes. So when we launched our original products in Pennsylvania, we went out and did some customer focus work with the Pennsylvania Lottery and with players. What became very clear to us is the game that resonated with players that had the most kind of notoriety and people viewed as a betting game was horse racing, kind of 70% and probably the next closest sport was in the '20s. So obviously, the Pennsylvania Lottery saw that, and there's a number of markets, Lorne may want to comment on this, but there's a number of markets throughout North America that already have a monitor game for horseracing and has success. So we're going into Pennsylvania. I would say, there's a huge difference right now. The maximum prize you can win in either our car racing or football game is $250. In the horseracing game, the max price will be $800,000. So Pennsylvania has told us that they're putting their marketing muscle, TV commercials, training, et cetera, et cetera, behind it because what they want is a product that succeeds so that they can get into more bars and taverns. They've given us a pretty substantial target of it for growth into that segment because they want to be able to sell not only our monitor games, but also their keno games. So I think they felt like things probably weren't done on both sides. We'll take some of the blame for that, but they probably would tell you that they didn't market this as much as they would like to, but they have gotten behind it this time, and obviously, we'll start seeing the results in September.

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [30]

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Mike, it's Lorne. Just to add a little bit of color to that, the -- and thanks for actually jogging my memory on that, Brooks. But what seems like an eternity ago at Scientific Games, we introduced a horseracing game in Maryland, which has remarkably similar, let's say, socioeconomic demographics to Pennsylvania. And the horseracing game in Maryland is and has been for a number of years phenomenally successful. I think the population of Pennsylvania is, Brooks, that of 2.5x the size of Maryland about?

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Brooks H. Pierce, Inspired Entertainment, Inc. - President & COO [31]

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Yes.

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [32]

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I think it's like 5 million versus 11 million or 12 million. But anyway, if -- and I think the handle on horseracing annually in Maryland is around a couple of hundred million dollars a year, as my memory serves me. So if -- and again, given that we're starting with at least 2.5x the population, if we were to work with Pennsylvania Lottery with sufficient marketing support were to reach, not per capita sales but the same absolute level of sales as Pennsylvania as Maryland, that would have a dramatic impact on our financial performance, all by itself it would far more than generate the incremental profit that we've been talking about that we're looking to offset the impact of the Triennial. So this is a very, very important development. We think obviously, it's great that the Pennsylvania Lottery has undertaken to do this and to give the support that they're going to be giving.

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Michael Fawzy Malouf, Craig-Hallum Capital Group LLC, Research Division - Partner, Senior Research Analyst & Head of Boston Team [33]

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And what's the timing, again, on this launch of the Derby?

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Brooks H. Pierce, Inspired Entertainment, Inc. - President & COO [34]

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September -- end of September is when the launch is going to happen.

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Operator [35]

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Our next question comes from Alex Silverman from AWM Investments.

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Alex Silverman, AWM Investment Company Inc. [36]

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Can you hear me?

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [37]

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Yes.

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Alex Silverman, AWM Investment Company Inc. [38]

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So most of my questions have been asked and answered, but how do you see getting back to your prior level of EBITDA in terms of the split between growing into it and cutting costs to get there?

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [39]

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Yes. So all -- I'll tell you what. I think -- and Stewart and Brooks and Dan can give you their view. So if you go back, Alex, to what I was saying in the conference call, we have -- if we were to get to the upper end of the mitigation target to the $2.5 million a quarter versus the $4 million that we were at in the second quarter, that would require in effect cost cutting of $1.5 million assuming that there was no benefit to the mitigation by increased revenues from the Novomatic stuff and so forth. And that overall -- and if we were to -- if we could get to the $2 million Triennial impact, and that would be another $0.5 million of cost cutting, so that would take it to a couple of million. And the overall impact at that point of the Triennial would have been $2 million or $2.5 million, and we've said that our analysis gives us comfort that we will generate through growth an amount of EBITDA equivalent to what we're losing through the Triennial. So when you shake all that up together, it says that if we're going to add, let's say, $4 million a quarter to our current level of EBITDA to get to the $13 million or $14 million that we're intending to get to, about 40% of that's going to come from cost cutting and 60% will come from growth.

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Alex Silverman, AWM Investment Company Inc. [40]

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Got it. That is very helpful. I think that's it for me. I'm sorry, one last thing. At what point, I assume, William Hill close the shops over the second half of the year? At what point can you actually make meaningful changes to your repair group and your routing group in order to take some of those costs out?

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [41]

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Yes. Stewart, do you want to -- or Brooks do you want to comment on that?

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Brooks H. Pierce, Inspired Entertainment, Inc. - President & COO [42]

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Yes. I'll take the first part and then Stewart, if he wants to add some color he can. Alex, so originally, we thought that William Hill was going to be doing this on a phased basis. They've come out in their call last week, and we've been working with them know this is that they are now anticipating to do this and one big closure of 700 shops or thereabouts on the 1st of October so -- or thereabouts. So that's what they've guided to and that's what we're working towards ourselves or maybe some tweaking around the edges of that. But that's more or less the way that we think it's going to go. So as Lorne alluded to in his remarks, there's some factors of cost that, quite frankly, even if shops aren't doing a level of business, they do require service and comps and so on and so forth. So having this all happen at once, we clearly will have to come in and get machines out and get our workforce right size, et cetera, et cetera, but that's orders of magnitude when it's going to happen and how it's going to happen. And Betfred and Paddy Power have not come out -- Paddy Power has come out and basically said they're not going to close shops, and Betfred has -- they said, even though they're not a public company, has guided to the fact that they will probably be the last man standing and want to see what the impact is. So I think there will be slower and will take longer than what William Hill's doing.

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [43]

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At this time, we have no further questions.

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Operator [44]

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This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Lorne Weil for any closing remarks.

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A. Lorne Weil, Inspired Entertainment, Inc. - Executive Chairman of the Board [45]

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Thank you, operator. I don't really have, again, anything to add other than to reiterate that we have an enormously full plate of things that are going on. Normally I might be concerned that we're biting off more than we can chew because we've got all of the mitigations to deal with. We've got all of the growth initiatives to deal with, and we've got the completion integration of the Novomatic acquisition.

I think we've added very intelligently and very thoughtfully to our organization. In the last few months, we've talked about Steve Beason who was for many years our Chief Technology Officer at Scientific Games, who recently joined us as our Chief Technology Officer here along with Brooks and an operating team that is really phenomenal and one, again, that I've had many, many, many years of experience with. So I think we know what we're doing, and I think we have the bandwidth to get all this stuff done.

And I think we all feel that not if, but when we get all this stuff done as we move into 2020, we're going to have a real tiger by the tail and a tremendous platform to grow from there. And at least for the next 6 or 9 months, it's all about execution. We have all the things we need to do to get to the level of financial performance that we've been talking about is all there in front of us. We really don't need any strategic miracles to happen. We just need to execute on these identified initiatives, and I feel quite confident that we will and come the early part of next year will be where we need to be.

So thank you all for your patience and your perseverance with us. We obviously hugely appreciate it, and I think I can comfortably say that not too far down the road your patience and your persistence and your perseverance will be greatly rewarded. So thanks, again, and we will talk to you in 3 months. Bye.

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Operator [46]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.