Bill Pfund - Investor Relations Kevin Sheehan - Chief Executive Officer Mike Quartieri - Executive Vice President and CFO.

Barry Jonas - Bank of America Mike Malouf - Craig-Hallum Capital Todd Eilers - Eilers & Krejcik Gaming David Katz - Telsey Advisory Group John Decree - Union Gaming James Kayler - Bank of America Merrill Lynch Carlo Santarelli - Deutsche Chad Beynon - Macquarie Dennis Farrell - Wells Fargo.

Good afternoon. And welcome to the Scientific Games Corporation Fourth Quarter and Full Year 2016 Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

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

Thank you, Amy. Good afternoon, everyone. During today's call, we will discuss our 2016 fourth quarter and full year results and operating performance, followed by a Q&A session. With me this afternoon are Kevin Sheehan, CEO; and Mike Quartieri, Executive Vice President and Chief Financial Officer.

Our call today will contain statements that constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those being discussed.

For certain information regarding these risks and uncertainties, please refer to our earnings press release issued earlier today, the materials relating to this call posted on our website and our filings with the SEC, including our most recent Annual Report on Form 10-K filed on February 29, 2016, and our 2016 10-K that we anticipate to file tomorrow, as well as subsequent reports filed with the SEC.

We also will discuss certain non-GAAP financial measures this afternoon. A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to the most comparable GAAP financial measure can be found in our earnings press release, as well as on our website.

As a reminder, this conference call is being recorded and a replay of this webcast and the accompanying materials will be archived in the Investors section at scientificgames.com. Now let me turn the call over to Kevin..

Thanks, Bill. Good afternoon, everyone. Thanks for joining us. 2016 was a year of progress, growth and industry-leading product innovation for Scientific Games. Our fourth quarter results marked the fifth consecutive quarter of year-over-year increases in both revenue and attributable EBITDA, exceeding last year's strong performance.

Revenue grew 2% on top of the strong growth generated in the fourth quarter of 2015 and attributable EBITDA increased to $294 million. Our operating and financial results were helped in part by the benefits from the business improvement initiative launched in November, which was largely completed by year-end.

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

At the same time, we extended maturities with approximately 95% of our debt now maturing in 2021 and 2022, and we also reduced our exposure to variable interest rates. Importantly, as we continue to grow and delever we position the company to accelerate our virtuous circle, growing EBITDA and improving our credit metrics.

Now let me turn to the recent additions to our senior leadership team, Karin-Joyce Tjon, better known as KJ. KJ joins us as Chief Operating Officer and President, with responsibility for our Gaming and Lottery divisions. She isn’t here with us today. She is already setting a fast pace and jumping into our initiatives.

KJ has a deep -- has deep experience in transforming businesses, improving processes and driving operational excellence. Working with our business teams, she is going to help us enhance best practices across our businesses and instill the discipline of continuous improvement as a cornerstone of our corporate culture.

We believe there is significant potential that can be realized through further operational improvements. KJ will help us navigate these actions to drive margins.

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

We will intensify our efforts on the margin to develop incremental topline growth potential through innovation, product enhancements and expansion within our core competency. By expanding our horizons and establishing priorities that address our greatest market opportunities, we will improve our consistency and long-term performance.

Another way of saying it, keep a careful eye on executing our budget and 2017 expectations, while enhancing our focus on 2018 and 2019 to ensure that we continue to build and shape our business for the long-term benefit of all of our stakeholders. Now let me turn the call over to Mike to provide his review of the fourth quarter..

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

Our AEBITDA was $294 million, slightly higher than a year ago, which had benefited from some non-comparable items, which I will cover in my review of the segment results. Actions taken in the fourth quarter as result of our business improvement initiative yielded positive results.

Our lottery and gaming segments, as well as our corporate organization achieved lower SG&A costs resulting in a benefit to our AEBITDA margin. The decline in reported AEBITDA margin to 39% for the 2016 fourth quarter from a year ago reflects a change in revenue and business mix, primarily due to the rapid growth achieved in our interactive business.

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

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

Looking at our Gaming segment, revenue was $8 million lower than the prior year, essentially due to $8 million of unfavorable foreign currency translation. Segment AEBITDA decreased by $2 million, as the impact from lower revenue and a slightly less profitable revenue mix was largely offset by a decrease in SG&A expense.

AEBITDA margin of 47.5% was an improvement over the 46.8% in the third quarter and 47.2% in the year ago quarter. In the year ago quarter AEBITDA included the shipment of 884 VLTs to Oregon and a convert to sell of participation units.

In Gaming operations, while the total installed base of WAP and premium units declined 198 units on a quarter sequential bases. We achieved a 1% increase in the installed footprint of WAP units at year-end. This increase primarily reflects the strong performance and success of our unique Gamescape cabinet.

This innovative cabinet coupled with the Willy Wonka world of Wonka continues to generate exceptional player engagement in its initial installations and we will follow the success of Willy Wonka with the highly anticipated launch of THE SIMPSONS game this summer.

Average daily revenue across the WAP premium and daily fee participation units declined 6% on a year-over-year basis. On a quarterly sequential basis the 4% or approximately $2 per unit decrease largely reflects the seasonal change that typically occurs between Q3 and Q4 in the participation business.

Turning to gaming machine shipments, during the fourth quarter we shipped 9,234 new gaming machines globally, which is up over the year ago quarter, primarily due to an increase in international shipments. International shipments rose 14% reflecting increases in both replacements and for new casino openings.

Our growth in Australia continues to reflect higher shipments of the Dualos cabinet. In the U.S. and Canada the impact from the shipment of 884 VLTs to Oregon in the year ago period was largely offset by a 600 unit increase in the shipment of gaming machines for new casino openings in the 2016 fourth quarter.

Despite strong replacement shipments in the year ago quarter, shipments to U.S. and Canadian customers representing replacement units increase slightly year-over-year. Shipments of TwinStar cabinets continued to increase reflecting the bandwidth of content available and the strong performance of games like Lock It Link and Pronouns.

Additionally, we are seeing exceptional player appeal for the new TwinStar J43 cabinet, which began its rollout in the fourth quarter. The next edition to the TwinStar family of cabinets is a mechanical real version plan to launch within the next 10 days.

For the full year I would note that our total gaming machine shipments increased by 2,828 units or 10% over 2015. Our average sales price was $16,268, down from last year, primarily due to a lower revenue mix of the premium price pro wave cabinet.

As a result of our combination of solid ASP and strong unit ship share we believe Scientific Games continued to be -- to lead the market on a dollar share basis for gaming machine sales in the U.S. and Canada. Gaming Systems revenue of $64 million was down from $69 million in the year ago quarter.

Maintenance revenue continued to grow on both a year-over-year and sequential basis. Our Gaming Systems business continues to be the market leader with a strong and growing customer base.

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

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

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

In aggregate, we believe our Systems business continues to be well-positioned to help customers due to our continued investment in the development of new software tools and enhanced hardware. Table products rose 37% year-over-year, primarily due to an increase in sales of shufflers and other utility products to international customers.

Revenue from leased products maintained its steady growth trajectory with a 6% year-over-year increase. The total installed base of proprietary table games, progressives and shufflers continued to expand both year-over-year and on a quarter sequential bases.

Also the acquisition of DEQ will strengthen the product portfolio and should provide an additional growth driver for 2017. Also as we look to 2017, we expect to see a significant increase in our installed base of VLTs. The Suffolk County Jake's 58 facility in New York recently opened with several hundred units.

As the year progresses, the facility is anticipated to house a thousand VLTs of which our share will be approximately 50%. Additionally, the installation of VLTs in Greece has begun.

We expect to have several hundred units in place by the end of the first quarter and while installations will continue throughout the year, we anticipate the ramp will be a bit more weighted in the back half of the year.

Also regarding seasonality, I would remind everyone of the typical seasonality that occurs in the Gaming business for placement sales in the first quarter compared to the fourth quarter.

As most casino operators start a new capital budget year and are cautious in capital spending for replacement games early in the year, spending then typically increases in the second quarter. Lottery revenue decreased to $8 million, inclusive of a $3 million impact from foreign currency translation.

Our year ago revenue included $4 million from the final quarter of operations under the China Sports Lottery validation contract. Lottery segment AEBITDA was down $12 million compared to the year ago quarter, largely due to the impact of the lower revenue and a $5 million decline in EBITDA from our joint ventures.

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

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

Revenue from participation based contracts rose approximately 1% year-over-year and our international instant game revenue grew 2% despite the foreign currency impact. Year-over-year services revenue decreased, primarily reflecting the $4 million impact from the previously disclosed exploration of the China Sports Lottery contract.

In addition, sorry, the addition of the Arizona systems contract largely offset the impact from the expiration of the Indiana Terminal Services Transition Agreement. I would remind everyone that last year lottery services revenue benefited in Q1 from the $1.6 billion Powerball jackpot.

Our Interactive segment once again had a great quarter, with exciting play from our social game apps capturing player’s attention and engagement, and driving revenue growth up 52% year-over-year. It was another quarter where our growth exceeded the industry for the period.

According to third-party estimates, we exceeded the industry average by 5 times on a year-over-year basis.

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

As a result of strong year-over-year revenue growth, operating income increased $4 million and AEBITDA rose $6 million compared to the prior year period. The AEBITDA margin while down slightly year-over-year increased on a quarterly sequential basis to 21.5%.

As we previously noted it’s important to recognize that our Interactive business is still at an early stage of development and growth, even as our original social B2C game apps, Jackpot Party and Gold Fish continue to provide growth above the industry average, we have expanded our offering with the addition of three more apps leveraging some of our biggest franchises, Quick Hit Slots, Hot Shot Casino and Blazing 7's Slots and are in the process of launching yet another new app 88 Fortunes.

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

Revenue for our Interactive B2B business which includes Real Money Gaming and SG Universe, which features the Mobile Concierge platform and the Play4Fun Network social casino also increased more than 50% over the prior year period.

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

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

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

And the year-over-year changes in accrued interest of $19 million and accrued income taxes of $17 million. The other components within working capital largely offset each other. During the fourth quarter we continue to reduce debt by paying down $17 million.

Overall, we reduced the total principal face value of debt by nearly $170 million in 2016, compared to $142 million in 2015. As Kevin already noted, we are quite pleased with the results of our refinancing actions taken in the first quarter of 2017.

Importantly, going forward, we maintain our focus on deleveraging, seeing our recent refinancing actions as just a point along our journey to reduce leverage. And now I’d like to turn the call back over to Kevin..

Thanks, Mike. Before taking your questions, I’d just like to note that we are off to a solid start in 2017 with momentum building across the company. It’s now been six months since I joined Scientific Games and I could not be more excited about the progress being made and the potential that lies yet ahead.

We have clear opportunities to improve our operational capabilities and our service to customers, and we have a best-in-class team around the globe focused on realizing our prospects to drive our topline.

We are continue to build on our strength as an innovator, thought leader with the products and services that will help our customers grow and strengthen their businesses. And by focusing on exceeding our customers’ expectations we have the potential to drive meaningful value for our stakeholders.

And now we’d like to turn the call over to the operator for questions. Thank you..

[Operator Instructions] The first question is from Barry Jonas of Bank of America..

Hi, guys. Good afternoon..

Good afternoon..

So after the Bally acquisition, prior management talked about leverage target sort of the sub 5 range within four years.

Kevin, just wonder if you have any updated thoughts on when and how we could get to those levels and if the issuance of equity would be on the table?.

Yes. Take that in two pieces, let me start the second, there is no thoughts about issuing new equity at this point. I think we have the great opportunity here to the leverage and I'm not sure why we want to meet that.

I do see the commitment that was made upon the acquisition and believe me I have our entire team razor focus and in fact I am taking the top 30 people on a weekend retreat, we start on Friday night and we finished on Sunday night, so that we don't conflict with the work week and there is no time for anything, but in room sweating it out, working towards figuring out how to drive the value of this company.

And not only as the EBITDA that we talked about back then and the net debt to EBITDA multiple. Those are important to me. And when I came in that was a very important topic to make sure. I got all of the team to understand, this is what we promised to our bondholders in particular and we need to work in that direction.

I think you can see we are moving in the right direction. If we deliver in ’17, we have a very meaningful impact on those leverage ratios and I would suspect in 18, we would be well on our way to getting towards what you're hoping us to do.

But again everything are predicated on the market being a reasonable for us, which we believe it is and nothing out of the blue as far as acquisitions, which we don't have anything of significance in the pipeline. But anything we would do would only be towards creating value for all of our stakeholders..

Okay. Great.

And look in the opening comments I think there is a pretty positive view on Interactive for the next year and I'm wondering if we sort of take out some of the one timers for Gaming and Lottery if you can kind of give maybe your view on sort of how those segments on a normalized basis should grow going forward?.

We have -- I think, if you look, reflect on the consensus that’s out there for 2017, the market is expecting us to grow our business nicely and I think the ingredients of that are pretty shared between Gaming, Lottery and Interactive.

We set targets for each of the businesses and I would say, was an easy exercise, but we have worked hard to get to where we could position this company for the topline growth that we need, as well as making sure we continue to be thoughtful about process improvements.

So I really believe that this quite an opportunity there as we move forward in rationalizing and being able to go-to-market as efficiently as possible. So, I think, you'll see that each of the businesses is going to have a reasonably good year..

Fantastic. Thanks so much guys..

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

Great. Thanks for taking my questions. First I’d like to start off with just on the Interactive side, the daily average use and the monthly average use was down, while the revenue was up.

Is that -- is there something going on there at all with regards to that slowdown?.

No. Not that we see at this point. It really becomes somewhat of the seasonal nature of Interactive and then as we continue to grow and expand the number of products that we are offering we see a lot of crossover between the different apps at this point in time.

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

Okay.

And then, sort of get into the other question about the leverage ratio that was previously mentioned, one of the things that you are going to need is some sort of topline side on the Gaming side to help get you there and I'm just wondering, Kevin, as you -- at G2E you were brand new and at ICE you were at least you had been there for a couple of months? I'm wondering if you're getting any sense that after a very long pause here or trough here in the Gaming side that we are getting the resurgence or that we might get a cycle coming out of this if you are feeling anything like that? Thanks..

Yeah. I think there is a bunch of different things of which most of them I can’t talk about.

But I would say, on a topline basis just stay tuned, I think, there is a lot of things that we are doing that are going to be all my goodness they are doing that type thing and focused on the Gaming and that is why KJ is here in particular, are we doing everything, we can dissecting the gaming business on all of the topline revenue drivers and on the margin.

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

And then, I think, also as you look at the markets that you've seen since November and I think there’s -- the beginning of some confidence with the Caesar's thing kind of going into the past tense.

I think you're going to start to see some reinvestment by the gaming companies and I don't think it's going to be, oh my God, look at what is coming, but it's going to be a moderate, gradual increase that you'll start to see on a consistent basis..

Okay. Thanks for the help..

The next question is from Todd Eilers of Eilers & Krejcik Gaming..

Hi, guys. Thanks for taking the questions. On the game sales side, you guys obviously had a strong number there. Can you maybe talk to what hit in the quarter, for example, to both of the new New York casinos hit in the quarter for you and any other color would be helpful? Thank you..

Yeah. I think from opening and expense perspective, Q4 ‘16 included del Lago and Rivers and we also had some Tioga Downs units in there. So the New York marketplace did help the quarter. That was primarily we drove up the units in Q4 for us, but we have seen it across the board as well..

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

Do you expect to have your full 5,000 allotment of the Phase I installed by the end of calendar year or with some of that may be spillover into early ‘18? And then also a question on the CapEx related to those games, have you guys -- has all that CapEx hit yet or will we see some more of that in the first half? And then, finally, with games going in any sort of kind of early performance indications?.

Yeah.

So, I think, there is about 400 games installed at this point and if you look at the year going across, it will start to pick up in the second half of the year, but we expect most of the machines to be deployed by the end of the year and then we're hopeful that we have opportunities on another round for the gaming parlors, so hopefully, some good news there.

But the games are performing based on the way we modeled and so I think that's good news. You're never quite certain until things get rolling out, but again it’s early. So we need to, I think, next quarter we'll have a better feel for that as we have more machines and a little bit more time.

The CapEx, we had a couple downs, these machines already built, but let Mike take the rest..

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

Okay. Perfect. And we -- yeah, that's helpful. Okay. And then last question you mentioned systems and kind of how ‘16 was a baseline year and you’re expecting growth in ‘17 driven by some of the large Canadian contracts that you guys have.

How should we think about that in terms of, I guess, on a quarterly basis, is this going to be spread kind of equally across each of the quarters, are might it build throughout the year or just how should we kind of be thinking about that in terms of modeling?.

Yeah. I think, as much as I hate to say the word, hockey stick on the system side, it unfortunately does fall into the very late part of the year. It’s absolutely in the fourth quarter with a little luck we'll get some of this into the third quarter. But it's really the two Canadian systems are toward the end of the year.

Anything else you want to say there, Mike?.

Yeah. And then, not only will it hit for, you’ll get the hockey stick at the end of ’17, but you will pick up in ‘18 as well as especially with Ontario, not only where you have the initial go-live but you’ll have all the other locations getting go-lives going throughout ‘18 and into ‘19 as well..

So, I think, on a macro standpoint, what you’re going to see from us as we report the way I see it today anyway is that, the year will progressively get better and not that we're going to start with the bad result in the first quarter, it’s going to be a solid result..

Perfect. Thanks, guys. Appreciate it..

The next question is from David Katz of Telsey Advisory Group..

Hi. Afternoon. Thanks for taking my question. I must say, Kevin, while they are doing that piqued my interest and I suppose I would ask just a couple of questions around that.

And is that sort of topline stuff something that is going to require some capital going out, is it perhaps finding new ways to use assets or opportunities that you already have, I suppose what I'm asking is, is it going to be or while they are doing that accretive or while they are doing that something else?.

Yeah. I think you should get your application in here, because you're saying it the way I am. And it is going to be a variety of things.

It's never a simple, easy equation to say, hey, we're going to go after this new stuff, but there is a lot of stuff that, I want to be sure we are focused on, because over the next several years, three years, four years, whatever the time is, there are emerging things that will come into this industry and we want to be on the forefront of those.

And we're mindful of the capital and the capital spending, because at the end of the day capital is the last piece before the cigar box has what cash goes to pay down debt, so also very important part of this. But you are exactly right on each of these line items.

Everything that we do every single day, can we do it a little bit better, can we get a couple more machines in there, can we get another technology advanced that could drive a little bit more value to the topline and I'm sure you guys have all seen the main slide that’s recapped about 10,000 companies over a 40-year period and you could drive your net income and your EBITDA, but without topline you are not going to get the multiple.

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

Okay. And if I can just follow-up and if this was in some of the commentary already I’ll apologize.

But with respect to the Systems dynamic that we discussed later in ‘17 and beyond, we’ve learned over the years the difference that where there is a significant amount of hardware included and with that margin opportunity is versus more software heavy should, we be thinking about this as a relatively hardware heavy install?.

The installs that are coming now, but I will tell you that the move is on for solutions that are more nimble and more software-based. So we need to be eyes wide open on this now so that we are prepare for this as it comes, so that….

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

Sure..

With respect to, I think, we are talking -- thinking more about Canada, where there is sort of a….

Yeah..

… major insulation and go-live. In many cases those major installations include a fair amount of hardware, which bears a lower margin and sort of follow-on sales or re-sales that or software heavy to have a higher margin.

And I was asking for any color around the profitability of that, we'll avoid using the term hockey stick, but how we should think about the flow through on that?.

Yeah. I think from a margins perspective, when it’s a new install go-live like this there's going to be a mixture of both hardware and software. So it's pretty much going to be a nice balanced margin associated with that.

Like to your point when it is just an upgrade the hardware is there already and it is a software install and obviously software carries a much higher margin than a pure hardware sell would be..

Okay. I think I understand. Thank you very much. Appreciate it..

The next question is from John Decree of Union Gaming..

Hi, everyone. Thanks for lot of color so far. Just wanted to hop back on Interactive business and there's been focus on customer acquisition and some of the content development.

I was wondering if you could kind of provide high-level the playbook for when the focus maybe shifts from the topline and then back to the margin if there's kind of any timeline in your eyes for that?.

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

But the other side of that is as we get bigger and bigger the impact of the rollout of a new game becomes less and less, so you see a lot of games coming now, three games as off of the base that was four, but if you rollout to the end of this year, you're talking about a new game when you already have seven or eight.

So the mathematics work a lot better. So it's one of these ones where we wanted to get the scale to where we needed to be and we’re obviously doing it very well, so you don't want to constrain that, but the day will come when we have a much higher revenue base that the impact on the margin of new games will be less..

And then on the topline, just for a little bit more clarity, a lot of talk on getting the right content and new content relative to customer acquisition we saw, I think, in a prior question discussed the users slightly declining.

Is the focus primarily at this point in terms of where your spending dollars and time on content or is there still some focus on customer acquisition as well or is it just mostly content at this point?.

Yeah. It’s still both and the content and the acquisition -- go hand-in-hand as far as I would say.

But the customer acquisition, we have a very smart way that we get rewarded for the cost and so, I think, that works very well and the other part was -- what was the part?.

Just, I think, you covered it, on the focus on content relative to customer acquisition?.

Yeah. We are excited and we have got some pretty neat stuff coming down on the path on the content, so stay tuned I would say..

Great. Thanks, guys..

The next question is from James Kayler of Bank of America Merrill Lynch..

Hey, guys.

How are you doing?.

Good.

How are you?.

Good. I just wanted to circle back on just the outlook for unit sales in ‘17. You mentioned Caesars, which I think is interesting with their exit. And on their fourth quarter call they definitely talked about investing in slots.

But do you have a guess at what you think sort of replacement unit growth will be in ’17 and then maybe just give us a sense for when you are looking at new openings what the comparison in ‘17 is like versus ‘16?.

Yeah. I'll take it. So from a replacement cycle, I think, it’s -- we're cautiously optimistic that the -- this trend has been relatively flattish with maybe a slight increase given the overall positive sentiment within the economic environment today.

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

So we're hoping that, although, we anticipate flattish, which is consistent with third-party estimates, we're hoping to see a little bit of a slight increase in that year-over-year. From a new openings perspective, I think, last year you had a sizable amount of new openings with the openings in Macau and National Harbor here domestically.

So, I think, you'll see a slight decline in that, but I think, offsetting that will be a slight increase in the replacement cycle as I mentioned earlier. So, I think, in total it will end up battling itself out..

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

How should we think about that in terms of how they rollout? Most of those action has been taken and we should see them in the numbers sort of starting relatively soon or is it kind of a gradual throughout the year?.

You've seen some of the benefit in this quarter and then the residual….

Okay..

… will be on a run rate, because we've completed just about everything at this point..

So the full $75 million should be embedded in that?.

Plenty of it is, no, a portion of it has already been factored into the fourth quarter, so incrementally it's a subset of the $75 million..

Yeah. Okay.

And then, just one housekeeping thing, can you just tell us what the distributions from the JVs were in ‘16 and if there is anything that would change that up or down in ‘17?.

Sure. Give me one second here. You are making me dig back into my -- all my schedules that I have available to me.

From a distribution perspective, most of our distributions are going to come through the form of, let’s say, you're looking from a Q4 perspective or full year, let me rephrase that?.

Actually, I guess, I was just looking at the -- what happen in ‘16 and how to think about ‘17?.

I think looking from ‘16 to ’17, the only thing that would be slightly different would be we got in ‘16 the benefit of the value add tax rebates, that I mentioned. There was a little bit in Q4 of ‘15 related to the Italian joint venture that we have and there was another little piece that we picked up in Q2 of ‘16.

There is no anticipation that we are going to get that type of benefit again in ’17. And then from a pure operations perspective, we would expect it to be relatively consistent year-over-year from that point, other than Greece coming online..

Okay. And I guess my last question for Kevin, when you moved to Interactive or at least the B2C into the Interactive sub, so you cited sort of potential, strategic opportunities.

I'm just curious, I mean, obviously, if I can’t talk about specifics, but where are you kind of stand with that if you still think that there are strategic opportunities or if you're more focused on just growing organically?.

I think we're going to be very careful and smart about this. We’ve got a business that is growing very rapidly. We seem to have the right game mix. We have a very good management team. You want to make sure you're looking at this for the long-term at all times.

But having said that, you never know what happens and if somebody came along and offered us [ph] to play ticket (44:43) kind of price tag then we have to at least think about it, but we're not thinking about any of that stuff right now and we think that having it separated is just giving you guys a better way to see it and it also -- we were able to do it because of the size before it got beyond the restricted basket last year and I think there are also potential opportunities to tuck in little things and if we could do something smart there we'll do that to help accelerate the topline growth..

All right. Very good. Thank you..

The next question is from Carlo Santarelli of Deutsche..

Hey, guys. Thanks for taking my question. Mike, you commented and I might have missed. But it sounded like you said, you are talking about the installed base and you are talking about some of the premium product.

And I thought you mentioned, at the end of quarter maybe was up 2%, could you possibly just kind of maybe articulate that gain, were you saying it was up 2% from the average base in the period?.

What I was referring to was what up it would be installed base for just the WAP portion of that entire installed base.

Because we usually -- we just disclose the WAP and premium participation units, which was down slightly year-to-year but the WAP portion of it is up on a quarter sequential basis by 1% which is the first time it’s been up for a good two year, three plus years..

Okay.

And that was the average base in the period, correct, that you are referring too or is that the quarter end base versus quarter end base at 3Q?.

It’s the quarter end..

Okay. Got it. And then -- and just, sorry, go ahead..

Gamescape, when it came on, came on probably the second half of November and into December is where we really saw the increase in the placements. So that's why you're seeing at the quarter end data to actually an increase over the Q3 prior quarter and date..

Got it. Okay. Understood. And then, just if I could on, in terms of thinking about kind of free cash flow for next year, you obviously talked a little bit about the working capital headwinds in the fourth quarter.

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

Well, from a CapEx perspective we disclose they will be somewhere between $280 million to $310 million is the guidance we provided in the press release.

And looking at working capital or I think it’s going to be relatively flat, because the headwind we hit this quarter that I alluded to in the opening remark is really more about those one-time items that we just impacted in 2015 and they really want the result of any actions that were in ‘16 that would then impact ’17..

Okay. So if I think about it from the perspective of $120 million year-over-year kind of change of net debt.

That is somewhat of a baseline as we think about 2017 then with respect to obviously changes in inflows of JV with our overall core adjusted EBITDA for the company, is that a fair way of categorizing it?.

Yeah. I think, it’s fair, our decrease in net debt was, well, I should say, a decrease in principle face of debt was $170 million and I think from….

That was discount, right..

Some of that was on the cash, on the discount on what we bought back in Q2, the $25 million gain. So cash was probably $145 million..

Okay..

So, I think, that’s a fair baseline and then given where we’re going from our growth trajectory and what we think we are going to be able to do, we should be able to easily pay back more than that at this point. As we all chuckle and laugh early morning..

Okay. Understand.

And then, just to confirm something the adjusted EBITDA, how are you guys treating the FX and the definition of AEBITDA in terms of the FX headwinds in the fourth quarter? Or I should say, what impact if any did it have on it?.

More revenue….

Yeah. It’s really more on a revenue side on the translation, because there is a built in natural hedge on the FX, because if the costs are associated with that revenue is tied in with the same foreign currency..

Yeah..

So at least from AEBITDA perspective, we are not adjusting anything in AEBITDA to be on a constant currency basis. We are not going to talk about the revenue side of it, because we don’t see it as a material impact to that bottom end number..

Right. Okay. Thank you..

You’re welcome..

The next question is from Chad Beynon of Macquarie..

Great. Thanks for taking my questions. First one, with respect to the $75 million of cost savings, Kevin, you mentioned that that these have all now been implemented.

Could you guys help us think about the buckets or I guess, is the margin impact going to be seeing in Gaming or in Lottery, just kind of help us think about where the savings will be shown through in the P&L? Thanks..

You are going to see across all the lines. But I would say that this probably little bit more on the Gaming side, I mean, excuse me, the Lottery side, from some of the actions that we took in 2016..

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

In your prepared remarks you also mentioned that Simpsons would be delivered in the summer, so that to me may indicate that Wonka is performing better than expected and I know this is kind of going into the weeds but this is Gamescape is very important part of your product delivery.

So could you maybe provide a little bit more color on Wonka and then just anything you are hearing with anticipations for Simpsons? Thank you..

Yeah. Sure. I will start with the Simpsons piece. I mean, we are targeting summer which could be right at the end of Q2 may be very early Q3, so that’s why we kind of live with the summer date as oppose to trying to peg it to a Q2, Q3, as that going to be a little fluid.

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

I know there was lot of discussion around G2E when the first couple machines were out there that they were doing somewhere around five times to six times house average, obviously that’s not something that's continued as we can rolled out more and more of these units.

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

Great.

And then, maybe if I can squeeze in one last housekeeping one, the $69 million goodwill impairment on the Lottery side, was that with respect to instant games or services, just a little color on that, please and that’s it for me?.

Yeah. It was all international lottery systems and it was really around the -- our -- the expiration of the China validation contract that I spoke to in the prepared remarks and I'd say not inability but our -- the difficulty in us getting replacement revenues for that type of business that we lost.

But if you remember a year ago we had the impairment on the U.S. Lottery Systems, so at this point in time there has been no impairment charges recorded regarding anything about our instant product business which is the scratchers..

Okay. Thanks. Congrats on the progress in the quarter..

Thank you..

Last question operator?.

Last question is from Dennis Farrell of Wells Fargo..

Great. Thank you very much. And I was wondering if you can just talk about little bit about the capital expenditure mix in your guidance, I know you spend about$272 million to $273 million in 2016.

Didn’t seem like you got a tremendous return on that investment and I am not sure if that's more of a maintenance kind of CapEx number or not and I am just kind of thinking, as I look forward to this coming year of the year that we are in, is that mix going to more allocated towards Interactive or do you see it, how you see it effecting your business on the Gaming side and Lottery side..

Yeah. I will jump in here.

On the -- I would say, two components that were sizable major and I would say, exclusive of anything around leased gaming machines, taking that off the table, the next two larger components of CapEx would have been the Oracle implementation, which is part of our integration post-merger and getting that rolled out across the global entities.

So, obviously, unfortunately you don’t see a nice return on that through the results as you would see. The other component that was the major was the Arizona Lottery Systems contract and that didn't go live until the second half of the year. So you'll see more benefit from that throughout ’17 then you did in ’16.

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

Okay.

So what would you think the mix would be for Interactive in 2018, is it 25% of the CapEx spend do you think or is it lesser?.

Well, it would be far less than that. The capital components of Interactive are really around hardware for servers and things to that affect. Yeah, it’s really going to be less than 5%..

Yes..

Okay..

… of the total, relative to all number in total..

All right. That’s helpful. And then, I guess, in regards as you think about kind of deleveraging the company. I mean, obviously, equity has been off the table for a while with the board.

What your thoughts on acquisitions or divestitures either to grow out of this acquisitions or to make some a creative asset sales?.

Look, it depends on the opportunities that are put in front of us. But from an acquisition standpoint, we are going to be very thoughtful. Do we have a competitive advantage, is it accretive, do we see it being a sustainable change in our business and we will look at those types of opportunities.

And then on the other side of the equation, there is no rush to do anything. We have businesses that are all performing today. As I said, we went through a very thorough budget process. We are excited about the prospects for ’17.

But having said that, if somebody came along with big fat checkbook and want to buy someone of our businesses that may not be as core as another, we would listen to the conversation. But we are not pushing anything here right now.

We are going to be thoughtful about all of this and at the end of the day we feel that we have an enormous opportunity to breakdown our ratios and which ultimately will play out in the stock price as, but we have a long way to go and that’s why I am here..

Okay. Got it.

And then, Mike, one last one, what is the NOL balance at year end?.

It’s about $1.25 billion and we are going to use this year right..

Thanks guys. Appreciate it..

All right. Thanks everybody -- and thanks everybody for joining us this afternoon. We are really excited about our prospects, the opportunities that we have in front of us and our journey is underway, we are heading to I think a great place for our stakeholders and is going to be a lotof action, lot of fast pace stuff coming down the path.

So stay tuned and talk to you guys next quarter. Thanks so much..

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