William Pfund - Investor Relations Kevin Sheehan - Chief Executive Officer Mike Quartieri - Chief Financial Officer.

John DeCree - Union Gaming Barry Jonas - Bank of America David Katz - Jefferies Steven Wieczynski - Stifel Nicolaus Mike Malouf - Craig-Hallum Chad Bannon - Macquarie.

Good morning. And welcome to the Scientific Games Corporation Fourth Quarter and Year End 2017 Investor Call [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, Investor Relations.

Please go ahead..

Thank you, Daniel. Good day, everyone. During today’s call, we will discuss our fourth and full year 2017 results and operating performance, followed by a question-and-answer period. With me this morning are Kevin Sheehan, Chief Executive Officer and Mike Quartieri, Chief Financial Officer.

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

For information regarding these risks and uncertainties, please refer to our earnings release issued late yesterday. The materials relating to this call posted on our Web site and our filings with the SEC, including our most recent annual report on Form 10-K filed this morning, as well as reports filed with the SEC.

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

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 of our Web site at scientificgames.com. Now, let me turn the call over to Kevin..

Thanks, Bill. Good day, everyone and thanks for joining us. Our fourth quarter results were strong across each of our business segments and marked our 9th consecutive quarter of year-over-year increases in revenue, operating income and attributable EBITDA. Our team is achieving solid results and our momentum continues to strengthen.

It is gratifying to see how well the team is performing and driving consistent results. Let me share a few highlights from each of our business segments that together delivered top line growth of 9% reduced our net loss and increased attributable EBITDA by 11%.

In gaming, revenue was driven by the exceptional strength of our gaming machines shipments, a record breaking quarterly shipment of 10,249 units. Following a very strong third quarter performance, our replacement unit shipments in the U.S. and Canada were up 23% over the prior year.

Also contributing to the game growth was 31% increase in gaming systems revenue, reflecting the beginning of the systems rollout to Casinos across Alberta, Canada. In our lottery business, our customer centric focus helped our U.S.

lottery customers grow retail sales of instant games in the fourth quarter by 7% year-over-year, including a record level of instant games’ quarterly revenue. We did this by providing our customers with a broad offering of instant games, including a wide selection of holiday themed games.

Adding to that, we offer our customers expansive supporting services and advanced technology, including our leading iLottery and mobile capabilities. In fact, today one in four U.S. lotteries have an SG global lottery app. Our interactive segment continues to roll along with solid growth and improvement.

Segment results were a 24% increase in revenue and a 37% increase in attributable EBITDA year-over-year, including a 28% increase in revenue in our social business. And in the first quarter this year, we took another step forward with the reintroduction of a new and improved Jackpot Party social casino app.

This enhanced player engaging version is evidence of our strategy of continue focus on providing the best player experience. And that leads me to a most exciting accomplishment, which is the completion of the NYX acquisition on January 5th.

NYX has a leading capability in sport waitering and online real money gaming platforms to our own strengths in line gaming content. In addition to building on their own solid track record of growth globally, we believe we are also well positioned to participate in any liberalization of sports setting and online gaming.

I've been part of many acquisitions over the years, and it is rare to find a transaction that is both highly strategic in nature and financially compelling in year one. And NYX checks both boxes. We began our integration efforts following the completion of the transaction and are off to an excellent start.

Most recently, we completed a series of refinancing activities that resulted in pushing out $2.1 billion of our debt maturities from 2022 to 2024 through 2026, and will save as approximately $70 million in annual interest cost at current rates.

As we continue to bring down our interest cost and our net debt to attributable EBITDA, we will also be disciplined in the smart use of cash and capital to profitably grow our businesses, which is expected to meaningfully grow our free cash flow during 2018 and 2019. Now let me turn the call over to Mike..

Thanks, Kevin. Hello, everyone. As Kevin noted, our results were solid. Consolidated revenue increased 9% and attributable EBITDA rose 11%.

Importantly, we experienced growth and improvement in each of our business segments by remaining focused on our strategic priorities to drive top line growth and are disciplined and improving and streamlining our business processes to enhance margins. Now, let me turn to our operating segments. First, our gaming business.

Fourth quarter revenue grew by $32 million over the prior year or 7%. Our AEBITDA margin improved to 80 basis points to 48.3% and as a result, segment AEBITDA increased by $19 million. As Kevin noted, revenue from gaming machine sales increased $20 million or 12% as we shift a record breaking 10,249 new units globally. The increase of 817 U.S.

and Canadian replacement units in the fourth quarter coupled with our third quarter increase resulted in a total of 1,716 more units in the second half of 2017 compared to the second half of 2016. Shipments from new casino openings and expansions totaled 884 units in the quarter, down from 1,229 units in the prior year. Overall, in the U.S.

and Canada, we shipped a total of 5,840 new gaming machines, including 4,421 replacement units, 884 units for casino expansions and 535 VGTs to Illinois. International shipments rose to 4,409 units, which is up 290 from the 4,119 units we shipped a year ago, also reflecting strength in replacement shipments.

Shipments for new casino openings totaled 208 units in this year’s fourth quarter, down from 404 units in the year ago period. Year-over-year, our average selling price for the fourth quarter was up 4%, primarily reflecting the positive influence of newer cabinets like our TwinStar J43.

While the quarter sequential decline reflects a higher mix of international shipments, as we noted throughout 2017, our favorable performance reflects our ever expanding portfolio of innovative content and the strength of the TwinStar family cabinets, particularly the strong performance being generated on casino floors by the gains on the TwinStar J43 and the locket lien gains on the original TwinStar dual screen cabinet, along with continued solid sales of the Pro Waves Dualos and other platforms.

Based on our ongoing strong gaming machine performance, we expect continued strong demand in replacement shipments in 2018.

However, I would note just as a reminder as you review your models that the gaming business in the first quarter last year included shipments for several large new casino openings, including the iLani' Tribal Casino in State Washington and a couple of properties in Asia, while the timing of new casino openings in 2018 are expected to occur after the first quarter.

For example during 2018, we fully expect to get our fair share with the expected openings of the Hard Rock Atlantic City and MGM Springfield Massachusetts casinos whereas we had no new large openings in the second or third quarters of 2017.

And of course, we also fully expect to get our fair share of the numerous casino expansions within tribal and commercial operator that will occur throughout the year. In gaming operations, revenue was down 2% year-over-year. To put that in perspective, that’s about half the rate of decline experienced in the third quarter.

We are making progress and remain fully focused on executing on our strategic improvements. The install base of wide-area progressive and premium participation gaming machines was down 419 units on a quarter sequential basis, largely reflecting our accelerated replacement of older units in the install base.

As noted last quarter, we are experiencing a relatively high level of churn in the install base of older units being retired, even as we continue to install more games cabinets.

We expect to continue replacing our older units on Casino floors over the remainder of 2018, driven by the steady introductory pace of new products, including the new B75 extra large curve screen cabinet and the innovative new TwinStar J43 iReels cabinet with launch only at the end of Q4.

With the introduction of our highly anticipated James Bond themed games, which are expected to launch mid-year, we expect our pace and performance and incremental machine placements to accelerate in the second half of 2018. The average daily revenue per unit for WAP and premium participation units was essentially flat year-over-year.

Revenue from other participation units was essentially flat compared to a year ago as an increase of 785 units in the install base year-over-year was largely offset by a 2% decline in the average daily revenue per unit, reflecting the impact of lower yielding Greece VLTs.

On a quarter sequential basis the more than 1,000 unit increase in Greece VLTs was offset by nearly 1,500 unit decrease being offline of units in the Caribbean as a result of hurricane Maria related damage.

Table products revenue declined approximately $5 million year-over-year and $11 million decrease in product sales from the record sales level in the prior year period associated with several new casino openings, primarily in Asia more than offset the $6 million increase in revenue from other higher install base of customers, proprietary table games and other table products.

Gaming systems revenue increased $20 million year-over-year, reflecting the beginning of the rollout of the new casino system for Alberta. The first casino went live on November 20th and we expect to continue to roll out the system to casinos across the province through 2018 and 2019.

In addition, we continue to roll out the new system to casinos in Ontario through 2018 and '19 as well. I would point out that our revenue also continues to reflect higher hardware sales, driven by the ongoing success of the new iVIEW 4 display unit. Turning to lottery. Our fourth quarter revenue increase $18 million or 9%.

Segment AEBITDA was up 20% compared to the year ago quarter, reflecting the strength of our revenue as well as a more profitable revenue mix and lower operating cost. Instant games revenue grew 8% globally. In the U.S. revenue grew $9 million or 10% to a new quarterly record of $151 million. The solid U.S.

growth included higher year-over-year sales of license games, partially reflecting revenue related to the multi-state WILLY WONKA GOLDEN TICKET instant game, as well as a strong response to holiday theme games.

Our blend of products and services aimed at helping lotteries grow help drive 7% increase year-over-year in retail sales for our lottery customers. Our international business increased revenue by $2 million or 3% year-over-year. Year-over-year, services revenue increased, partially reflecting the higher multistate revenues in the U.S.

due to the large Powerball and Mega Millions jackpot that occurred in the fourth quarter. Additionally, as noted in the third quarter earnings call, the hurricane storm activity in the fall heavily impacted lottery results in Puerto Rico during the fourth quarter.

We estimate the total hurricane related impact within the lottery segment at approximately $3 million of loss to AEBITDA during the fourth quarter. A key milestone for the next nine years was accomplished in the fourth quarter when the Italian Scratch and Win Instant Games concession was renewed with LNS, our Italian joint venture on the same term.

The concession fee was also maintained at the same cost with our pro-rata share being 20% or a total of €160 million. In addition, the supply contract remained the same with Scientific Games being the preferred supplier, providing 80% of the instant tickets. Turning to our interactive segment.

Revenue continued to grow rapidly, driven by the ongoing strong momentum in our B2C social gaming business. Segment revenue increased 24% over year to $113 million, and segment AEBITDA increased 37%, reflecting year-over-year margin expansion.

We continue to execute on our strategies that lever our extensive library of gaming IP and content to continue to deliver rapid top line growth in a healthy and growing overall marketplace.

As an example, during the quarter, we completed significant player enhancements to our established Jackpot Party Social Casino app and re-launched the app in the first quarter of 2018. By continuously working to enhance the player engagement enjoyment of our app, we continue to keep growing that important base of paying players.

As a result, our B2C social gaming business revenue was up 28% year-over-year. Importantly, our earnings performance continues to improve and manifest itself at higher cash flow. Operating cash flow in the fourth quarter of 2017 increased $42 million from the prior year to $118 million.

This increase was driven primarily by $27 million or 28% increase in incremental net earnings after non-cash adjustments. For the quarter, changes in working capital were $16 million use of fund and for the full year, working capital changes in aggregate were only $22 million use of fund despite $200 million increase in revenue.

During the fourth quarter, we issued $350 million of our 5% senior secured notes due 2025 and later drew $315 million on the revolver, largely for the funding of the NYX transaction. We acquired $92 million worth of NYXs securities during the fourth quarter and completed the acquisition on January 5 of 2018.

In addition, we paid our pro-rata of share of the initial Italy’s Scratch and Win Instant Games concession payment of $12 million during the quarter. Although 2017, we continued to make significant progress in our de-leveraging efforts. At December 31st, we had $8.1 billion of net debt.

Our net debt attributable EBITDA ratio declined to 6.6 times trailing 12 months AEBITDA from 7.4 times at year end 2016. And as Kevin noted, we recently completed a series of refinancing transactions. These transactions included upsizing and reprising our Term Loan B with lower the rate from LIBOR plus 325 basis points to LIBOR plus 275.

We also added on to our 5% senior notes due 2025 and had our first European bond offering with attractive rates priced eight years secured -- senior secured and senior unsecured notes due 2026. The net proceeds from these refinancing transactions are being used to redeem the $2.1 billion of our higher cost 7% senior secured notes.

Prepay a portion of our revolver and pay accrued interest premiums fees and expenses associated with the transactions.

In aggregate, these transactions, along with the prospect of the interest rates swaps, will lower our annual cash interest cost by approximately $70 million at current rate and reduce our average interest rate by approximately 80 basis points on an annualized basis.

Additionally, the extended $2.1 billion of our debt maturities from 2022 out to 2024 through 2026. I would also note that we have the potential depending on market conditions to take additional steps in 2018 to further reduce our interest cost when our 10% senior unsecured notes become callable on December 1st.

Before taking your questions, I would remind everyone that our commitment remains focused on executing operating improvements and capitalizing on smart opportunities that will grow our business and reduce leverage. Now, let’s take our first question. Operator, please open up the lines..

Thank you [Operator Instructions]. The first question comes from John DeCree with Union Gaming. Please go ahead..

I wanted to start on the unit sales in the quarter over 10,000, looks like a quarterly record for you guys, so quite an accomplishment and you spoke a lot about the replacement units increase, particularly the back half of '17 and we've heard on at least one large corporate customer talking about refreshing a bit more their floor than they have previously.

I was wondering if you could talk a little bit about, little bit more color about what you're seeing in replacement demand. And if that first customer refreshing some of their floor a bit more than historical what’s stimulated some of their competitors to be the same..

I can take that. The way we’re seeing things right now is we’ve been through a very protracted period of being in the same place with the way the industry was looking at new machines.

And now with the seasons bankruptcy behind us and the economic activity that we're experiencing right now, you can sense and see that the operators are back in the investment mode. And the fact that we have all these great games coming out and out currently has enabled us to be very strong.

And we see that continue, we see that momentum continue with the other operators as we go through 2018. So we’re very optimistic of that where our situation will be vis-à-vis our position in the market..

Kevin, if I could follow up. Are you getting more in bound enquiries from your customers? Are they seeing similar performance trends and coming to you looking for a little bit more? Or is it more of a sales process on your end going out and getting a little bit more replacement.

If one strategy or event has been more occurring than the other?.

Well obviously, our sales guys are always out down in the pavement. And the fact that we have all those great products it’s helping them be more successful in that.

And I would say we are also -- and some of this is just the beginning of the excitement on all of the new products that we have coming out in 2018 and beyond that we’re starting to see a bit of momentum change.

And I could think of a couple and that are coming to us and they see the economics of good games and how they play out in the casino at a higher rate than some of the existing games. So that’s enabling us to have an easier road as well. So I think it’s a combination of both great sales teams and good products..

If I could one more on the gamin op side, two consecutive quarters where the lap premium revenue per unit has shown some stability relatively flat on year-over-year basis. I think Mike in your remarks you’ve talked about replacing some of the older games in the install base with some of the new GAMESCAPE stuff.

But I was wondering if you could talk about when you might see the inflection point as you go through that accelerated upgrade process and maybe some color on how well the GAMESCAPE stuff is doing relative to some of the older stuff on the floor? And if you think you can see that revenue per unit shift into positive territory on a year-over-year basis this year?.

You got with the whole gaming business, and just remember we have four real major pieces to the business. And as a first part of your question was talking about the game sales and our number one position there, and as everyone knows we have the strong phenomenal market share in gaming systems and table games as well.

So three of the four pieces are on overdrive. And as I have talked about several times during 2017, we had underinvested in new platforms for game apps and we were riding on the past and ’14, ’15, ’16 really did not have a new platform launch.

And then as you know GAMESCAPE has been a very big success and as of today we have 1,575 GAMESCAPE launched and installed. So that’s a real good fact and between the WILLY WONKA, which was a phenomenal success and continues to be and the Simpsons games are out there now, as well as the [Science O] games would be rolled out.

The good news and I mean the reality though is it’s going to take time to fix the path and we are all over it.

And as you saw at G2E, we have a significant amount of effort on game ops and to signature behind our James Bond launch and we’ve got games from three different games coming out under the James Bond brand in the second quarter on new platforms on a Gamefield 2.0 on an iReels 3RM and Blade Mechanics.

So three new things coming out in the second quarter and then in the third quarter, we got a Jumbo 75 and then our game PRIZM with 007. So loads of effort and we’re navigating through that. We see the light, which is a good thing, we see the light very clearly but there is still the churn that we’re over riding through.

And I would say that let this ride for couple of quarters know that we’re putting massive efforts into this and then as we get into second half would be extra juice of the three bond games and then the continuing efforts in the third and fourth quarter with new games as well. I think this is going to be a good story in 2018.

But just right through the next couple of quarters as we navigate through with the new platforms..

Thank you. Our next question comes from Barry Jonas with Bank of America. Please go ahead..

For starters, I wanted to talk about tax reform. Would love to A, get Mike’s thoughts on the impact to your financials going forward. I know you’re not a cash tax payer now but maybe just how, talk about longer term how this influence the business.

And then on the flip side, I would love to see if tax reform is influencing any discussions with operators, specifically around the CapEx deductibility that they will now enjoy. Thanks..

So from an overall basis, the tax reform was about $10 million benefit to us in the quarter, which flow through the provision line, which is really nothing more than the revaluation of the deferred taxes that we have on the books from the 35% statutory rate down to the lower rate.

When you look at a holistically sale over the next five years, it’s going to be pretty much neutral to us. So you do have the detriment of the loss of deductibility of some of the interest expense, which is going to be pretty much offset by the deductibility of the CapEx spend. So those two major items actually just wash each other out for us.

Then the other big component about being able to repatriate earnings back to the U.S. in a tax free manner. Given the fact that we have $1.3 billion net operating loss, we're already bringing that money back essentially tax free granted it does utilize of the NOL.

But at this point, what we look at over the next five years out it’s pretty neutral to us. And then to your second part of your question, if I were the CFO of an operating company, I would be using this to my advantage to buy more products. So I think it’s definitely going to be a positive for us..

We talked a little bit about game ops, just want to make sure I understand. This quarter the reduction of about 2% sequential on the install base for WAP and premium. You're replacing older games with new games.

But is it just a function that you're -- the operators are waiting for some of the newer games like James Bond to come through in the next couple of quarters.

Is it more just the timing issue or is there just still real issues for this segment overall on a market wise basis?.

I think at the end of the day, they look at their report card of how those games are performing. And so that’s putting a little bit of pressure on the older games that are five six years old, but you’re right they’re also looking at all the exciting new stuff that we have coming out in the coming quarters.

And we’ve got a lot of energy around orders and initiatives that we’re doing around the bonds launches. So as I said the second half of the year you’re going to start to see a lot of momentum because of all the new stuff that’s coming out.

And whether individual casinos are just waiting or whether they are making decisions now it’s a combination of both of those..

And then just last one from me. You just made a small acquisition in Brazil.

Can you maybe talk about potential opportunity there on the gaming side and maybe update us on what’s going on in the lottery privatization side as well?.

I’ll take the first part. Yes, this was -- it’s amazing to me that if we were to be successful in gaming entrants into Brazil, we now have a product that works so successfully in that market.

I was pushing when I first came in as to why were we not able to do that with all of our smart developers and stuff, but it’s a very different mathematics formulary and what makes those games work down there.

So this was eloquent way of getting the right product mix to enable us to be successful if that market opens up, but it also helps us in other markets that we’re in today..

And then in regards to your second part of the question on the Brazil, I think from a market perspective looking at we’re anticipating the RFP to come through for the instant ticket business in Brazil. I think we’re hoping that that comes through by the end of Q1 and we stand ready to submit our submission to get into that business..

Our next question comes from David Katz with Jefferies. Please go ahead..

So specifically with NYX. What I would love to understand better and I think everyone would is the specific capabilities and offerings that you have today for sports betting with respect to NYX.

Meaning is it an operating platform? Does it have a user interface? What pieces are in place? And are you A, at this point, a total solution offering for casino operators or any operators should sport betting come down the pipe, which could begin as early as next week?.

So the product offering that’s available to us now through NYX is a full suite. So not only as its the backend system that does the accounting, tracking everything that supports the actual betting process, but it also has all the analytic tools around it. It has the user interface.

So it allows basically our customers who are those to be the operators to operate a fully functional sports book system..

Or I should say a full suite of sports book operations. The only component of this line of business that I’ll make sure I reiterate. So it’s come up a couple of different times in no instances are we going to be the actual operator of the sports book.

So I know we received questions from others about how do you get your arms around all your customer think to that effect when we're actually taking bets from individuals, that will not be the case. We are the system provider on the B2B basis to the operator itself..

And can you talk a little bit about the degree to which that offering can integrate with the casino systems business that you have today.

And what if any benefits or obstacles there are to that? And what I am essentially getting at is, are your casino systems customers much more easily or more likely to favor you for sports betting solution, should those opportunities come up?.

And I think we believe that that’s the case and would be efforts that we have been doing on our own coupled with the NYX acquisition, we believe we are the logical person to be handling this. But not only to the gaming side, because on a state by state basis, this may land out being a lottery platform, so we're working on both sides of the equation..

And if can just ask a little bit more about the systems business, because the quarter was obviously a pretty big revenue quarter and that was driven by the rollout of Alberta.

And I know there was commentary in the release about that continuing through the remainder or the year, as well go lives in Ontario and then the announcement of the Turning Stone contract.

Can you just give us some qualitative thoughts around how that business can roll over say the next four to eight quarters?.

I mean I would say, we're not anticipating any large spikes within any of the next, I will call it, eight quarters coming out because we did -- that would go out through 2019. It’s just going to be a process of how it gets rolled out to each of the individual casino of locations within those two provinces.

So there might be a little bit of bump here and there. So it’s not going to be complete straight line over the next eight quarters. But it will be a relatively smooth process with a little bit of variation quarter-to-quarter just based on the timing of the go lives.

And that whole process of making sure that not only are we ready and have everything installed, but also that the casino operator has their resources and are fully dedicated to get that done, which we don’t see to be a problem at this point.

There will be some lumpiness as other newer items like you said Turning Stone come online, where you would see some variation as well.

But I think the one important fact that shouldn’t be lost is once these casino locations start to come online, that’s when the maintenance revenue or the maintenance components of it kick in and that will be a much more straight line trajectory going out in the future..

If I can just follow that up quickly, which is the $83.5 million of revenue in this reported quarter.

Would you consider that to be a spike? And of the Turning Stone deal, what is the timing on that currently, you expect it to be?.

Usually the initial go live in Q4 was the initial for the system itself. So that would be a bit of a spike as far as revenues goes within the quarter..

We’ve got similar spike with each of the other big systems when they come on in ’18 and ’19..

And so at this point, we don’t have a specific timeframe on Turning Stone at this point as far as the recognition of the system based on the go live sign off by the customer..

Our next question comes from Steven Wieczynski with Stifel. Please go ahead..

Most of my questions here have already been asked, but just wanted to ask you guys a question around capital allocation priorities. We’re at a point now where the underlying business seems to be on much firmer footing. You’ve refinanced a significant portion of the balance sheet.

Just coming out of NYX, curious to hear your thoughts Kevin on how you’re thinking about capital allocation going forward here? Thank you..

I think job one is that it’s critically important to me and to this organization is continuing to improve our net debt to EBITDA. We’re going through some of the noise of getting these refinancings done.

And as you know some of the cost that go along with taking the stead out early, but the good news is at much better rates and much more effective interest cost, prospectively we have one more big financing to deal with sometime later this year.

And that’s as you just think about taking out 10% debt at some premium, it goes to down to 105 towards the end of the year. But that could be a massive savings.

And then as you look at that once that’s done then you’ve got a completely different economic formula here where your interest cost has come down dramatically at the same time as we are feeling very confident with 2018. And frankly, I’m very focused on 2019, because I’m comfortable with where we are for 2018.

And I want to make sure we continue this momentum in ’19 and beyond. When you run those models, all of a sudden our net debt to EBITDA turns quite dramatically different, and the continuation of the improvements that Mike alluded to earlier where we went from the end of 2016 to the end of 2017.

The other discipline I would say is that when you get into the capital allocation, on acquisitions as you’ve seen, the transactions that we’ve done over the last 18 months or so have all been accretive in the first year.

So that’s a good discipline, because even if you’re buying a business, you’re building enough EBITDA to maintain and improve your net debt to EBITDA. And I would say the last thing is just a lot more rigor around the capital expenditure side of the business, and making sure we’re focused on spending our money as smartly as possible.

And I would say that there was areas of opportunity in ’17 and there continue to be in ’18 where we are being much more prudent in deciding on initiatives and what are the returns or what they do for the business kind of things.

So there is a lot of moving parts here at Scientific Games but all of them, whether it’s the operating business or the capital allocation, are all really moving in the right direction. So I’m really excited about the way things are going..

Our next question comes from Mike Malouf with Craig-Hallum. Please go ahead..

If I could focus just quickly on the interactive business, I know that you in the past you’ve talked about some strategic moves potentially with that division. And I am just wondering if you could give us an update on your thoughts. Thanks..

Really at the end of the day, we have a business that’s growing quite rapidly and there is a lot of value creation in that business. And there are synergies with us in making that a really successful business.

And right now the smartest thing for us is be doing with the top line and EBITDA growth that we’ve been experiencing and we expect to continue to experience would be to just be keep our head down, run the business as carefully and smartly as possible. But of course, we're opportunistic if something happens so we’ll certainly listen to it.

But right now, job one is to continue to run the business expertly..

And then with regards to overall SG&A cost. We obviously saw that pop up a little bit in the fourth quarter.

Could you give us a little bit of color or commentary on where you think that is at level and unusual level as we go into 2018?.

So when you look at it, there is a couple of things. So one there is a increase in some of the market cost in Q4 versus what's normally would have been in Q3 with G2E spilling over into October this year versus September a year ago.

There is also some higher comp in Q4 associated with the incentive comp for our year-end bonus programs, so that was a bit of a spike in the quarter, which wouldn’t be a normal run rate on a go forward basis.

As well as, just I think in the prior year if you remember, you did have the November actions that we took, which also moves some of those cost from a SG&A prospective down into the restructuring charge line.

So I think probably on a run rate basis looking at what the run rate is for the first three quarters is a more reflective view of SG&A on a go forward basis with a slight uptick to that, just based on general CIP type level increases across the board..

And then with regards to CapEx any color on that as we look into 2018.

And specifically is there a need for CapEx if we do indeed get any change in the legal frame work of sports betting?.

So looking to CapEx, if we look at what we were guiding to a year ago to where we ended up, we were slightly below -- the low end of that range, if not slightly below. Part of that was if you look at the Maryland contract in the lottery systems, because of the protest, that delayed some of the CapEx spend which now triggering into the 2018 model.

So you will see that there is a little bit more on the higher end of CapEx for '18 being projected at this point, as well as we continue to rollout on the game of cabinet that Kevin has been talking throughout the call. We have a higher amount of budgeted CapEx for that spend as well. But it’s important to note that that’s completely variable.

We don’t make cabinets and so we have orders for those cabinets out on the casino floor. Now that gives us a little bit of downside protection on that CapEx number. Getting back to your other point and your question regarding the rollout of sports betting, yes there will be some CapEx spend associated with that.

But I don’t believe that it will be significant it’s really more on the technology type server and hardware type spend as opposed to anything else that we have..

Our final question will be from Chad Bannon with Macquarie. Please go ahead..

I wanted to start on the lottery side of things. You had a nice win in the quarter with a new lottery system. Can you help us think about your expectations in 2018 and the opportunity to take share on lottery systems? And Kevin, you did mention that you’re making sure that you’re spending CapEx smartly. And I know this business does require some CapEx.

So how do you think about the opportunities there and if there is the right ROI for new RFPs? Thanks..

I mean every single thing we look at, you sell it -- their ROI is the key ingredient. It’s got to meet certain benchmarks for us.

And based on our technology and our belief that we provide incremental benefits to whatever states whether its Kansas whoever and that they choosing us based on our bids not even being the low bids, gives us comfort that the state see the value of choosing us. But all this stuff is done based on ROIs..

And then going back to the interactive B2C business, you talked broadly about your vision for this segment. But could you help us think about operating leverage, just given that revenues continue to grow, I think above most people’s expectations. And it looks like you’re starting to see that leverage and that margin improvement.

But just help us to think about if you’re still reinvesting at the same pace this year or if we should see that spring up if revenues continue to grow. Thanks..

Let me start it and then Mike will correct, what I don’t say correctly. As you can imagine when this trip started a few years there were only a few games in the B2C spectrum. And as we’ve added new games, the marketing spend on a bigger group of games becomes a smaller part of the expense side.

And so that should lead to continual margin improvement overtime. We do have new products that we’re launching in 2018 and we’re excited about them. So that has to be taken into account with that. But I would expect that the margins will continue to improve..

And then last one for me, just a housekeeping question. The 1,500 units that were offline in the Caribbean, are those back in service? And I know you quantify the impact from the Puerto Rico lottery.

Are you able to quantify the impact for the fourth quarter with these units being offline?.

Yes, so I’ll say the recovery of those units and then coming back online is going to be a slower process as just the entire Puerto Rico island gets back up to speed. So I don’t -- it’s not going -- the 1500 units are not back online today. There is just going to be a slow growth throughout the course of ’18.

As far as the impact goes in Q4 for gaming, it was under $1 million. So hence we didn’t call it out, because of what the material to the operations of gaming as it was for lottery..

Thanks everybody for joining us today. As you can tell, we’re really highly energized by the meaningful opportunities ahead of us. In just few weeks, our senior leaders are getting together for a weekend in an offside location. It’s our second strategic session.

We’ll discuss the progress we've made last year and more importantly the meaningful opportunities that exist for us for further development, and to also explore the order of possible in coming years.

In closing, I would like to reiterate that our strong fourth quarter performance is further evidence of the value provided by our focus on developing technologies and innovative products that power top line growth.

By focusing on helping our customer grow, we in turn grow, build the momentum and consistent performance that enable us to deliver improved financial results, increased cash flow and additional leveraging.

As we did in 2017, I'm confident that we will continue to act smartly to grow revenues emphasize continuous important in our business processes and execute on our priorities. By continuing to do so, our future remains bright. We look forward to updating you on additional accomplishments and the first quarter performance on our next conference call.

Thank you all and have a nice day..

Thank you all for joining us for this conference call today. You may now disconnect..