Good afternoon. Thank you for attending today's PlayAGS Q4 '21 Earnings Call. My name is Bethany and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Brad Boyer, SVP of Corporate Operations and Investor Relations. Please go ahead..

Thank you, operator and good afternoon, everyone. Welcome to the PlayAGS Incorporated fourth quarter and full year 2021 earnings conference call. With me today are David Lopez, CEO; and Kimo Akiona, CFO.

A slide presentation reviewing our key operational and financial highlights for the fourth quarter and full year ended December 31, 2021, can be found on our Investor Relations website, investors.playags.com.

On today's call, we will provide an overview of our Q4 and full year 2021 financial performance and offer perspective on our current financial outlook for the business. This conference call will include the use of forward-looking statements.

Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions, is a forward-looking statement based on assumptions today.

Actual results may differ materially from those expressed in these forward-looking statements and we make no obligation to update our disclosures.

For more information about factors that may cause actual results to differ from material forward-looking statements, please refer to our earnings release that we issued today as well as risks described in our Annual Report on Form 10-K, particularly in the section of these documents titled Risk Factors.

Our commentary today will also include non-GAAP financial measures. We believe the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends in our business.

These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today. Please refer to our filings with the SEC for more information.

With that, I would like to turn the call over to our CEO, David Lopez..

Thanks, Brad and good afternoon, everyone. Before addressing our fourth quarter financial performance, I would like to extend the collective thoughts and prayers of the entire AGS team for our contractors in the Ukraine.

We continue to closely monitor the situation and are doing everything feasible to ensure the health and safety of our contractors and their families. Turning to our results. If 2020 was the year of resiliency within our business, 2021 was the year of transition.

Supported by the foundational changes put into place over the preceding 18 months and an accommodative macroeconomic backdrop, we were able to establish operating momentum within all three business verticals, a trend that continued into the fourth quarter.

Aided by a commitment to fortifying our R&D franchise, enhancing our go-to-market strategy, broadening of our customer account penetration and a general recovery in the North American replacement market demand, we were able to achieve sequential growth in our domestic EGM unit sales volume in all four quarters of 2021.

The year culminated with the sale of 815 units in the fourth quarter, an increase of over 20% sequentially and nearly 3x the volume sold in the fourth quarter of 2020. The momentum was equally as apparent within our domestic gaming operations business, led by our strategic push to further penetrate the industry's higher-yielding premium game segment.

It was not that long ago, Q4 2019 to be exact, that our premium offering consisted of one product, our novelty Big Red jumbo cabinet. Since that time, our R&D, product management and sales teams have collaborated to deliver eight consecutive quarters of growth within our premium game footprint with placements more than doubling year-over-year.

Premium EGMs accounted for approximately 10% of our domestic installed base at year-end. Looking beyond EGMs, our Table Products segment remains a record-setting machine with fourth quarter adjusted EBITDA reaching approximately $2 million.

Our commitment to investing in product and technology to drive customer profitability and efficiency continues to resonate with our operator partners, driving six consecutive quarters of growth in Table Products revenue and adjusted EBITDA.

Finally, our Interactive segment delivered over $2 million of revenue for the fourth consecutive quarter and continues to do so in an EBITDA positive fact. Our traditional slot content continues to resonate in the online real money gaming channel as we take steps to further broaden our geographic and B2C operator partner reach.

With our vastly improved 2021 results behind us, our attention has shifted to ensure we are best positioned to achieve even greater success in 2022.

To that end, I would characterize 2022 as a year of acceleration for AGS, one in which we look to further leverage the continuous improvement in our people, products and processes to strengthen our financial performance.

With that said, I would like to highlight four initiatives that I believe will allow the business momentum established in 2021 to continue throughout 2022, in turn, further strengthening shareholder value.

It's important to note that all four of the initiatives I'm going to discuss are direct byproducts of our commitment to recruit, cultivate and retain some of the best R&D talent in the gaming industry. Turning to our first initiative.

We continue to look for opportunities to further optimize our domestic EGM installed base with a keen eye on our over 11,000 unit Class II footprint. Looking to 2022, our pipeline of new Class II core content looks as strong as ever.

Additionally, it's important to remind everyone that our premium strategy also extends to the Class II market, with those games delivering superior RPD performance. With a renewed focus and a strong pipeline of games, we have the ability to further unlock the full potential of our Class II footprint.

As a reminder, every dollar of lift in RPD performance across our Class II installed base produces over $4 million of incremental annualized high-margin recurring revenue, creating an attractive return profile for our Class II investments.

For our second initiative, we will focus on an equally compelling opportunity to build on our early success in the premium games segment. Supported by the strong initial performance of our Rakin' Bacon Deluxe family of games, operator interest in our Orion Curve premium offering continues to build.

Importantly, curve premium supports a variety of different configurations, providing an added versatility as our operators look to install the product on their core [ph].

Ultimately, we believe the strong performance of our initial launch titles, a deep library of new game themes and the introduction of new gameplay mechanics provides us with the firepower needed to become a more prominent provider of games in the premium segment. Shifting to our third initiative which is EGM unit sales.

While we have made great progress broadening our customer account penetration over the last 12 months, we see considerable opportunity in front of us, particularly with several larger multi-site corporate operators.

Aided by our track record of strong core performing games, we are encouraged by the opportunities we see in front of us with several prominent corporate customers.

In addition, supported by the scheduled introduction of new game content featuring a broader variety of vet levels, game graphics and gameplay mechanics, we have further refined our product road map to arm our sales force with the tools needed to target additional segments of the casino floor.

Finally, we continue to leverage our exceptional game performance to deepen our penetration of the historical horse racing market, or HHR. The expansion of HHR in both new and existing states has led to more prolific growth opportunities within this segment.

Combined, we believe these key initiatives lay a solid foundation for sustainable long-term EGM unit sales growth both in 2022 and beyond. For our fourth initiative, I'm especially excited about the prospects for our Table Products business in 2022.

While further customer adoption of our industry-leading progressive products and personal site licenses drove much of the growth we are able to achieve in 2021, I believe we are in the early innings of realizing the potential of these two offerings.

Additionally, our recent acquisition of the Lucky Blackjack side bet, built on our track record of acquiring proven table product content and leveraging our technology, sales team and service network to broaden our market penetration.

Finally, in the spirit of saving the best for last, I'm pleased to announce our PAX S specialty car game shuffler, recently received GLI approval with our first revenue-generating units now lies in the fuel.

With the launch of PAX, I believe we further demonstrate our commitment to investing in products and technology to make our operator partners more efficient, productive and solidifying our position as a vendor of choice within the Table Products segment.

Before closing, I would like to turn my attention to a somewhat less interesting but equally important initiative, our company-wide commitment to maximizing free cash flow.

The initial payoff from this commitment was apparent in our 2021 financial performance as we exceeded the level of free cash flow generated in 2019 despite only achieving approximately 85% of 2019 adjusted EBITDA.

At the end of the day, I believe that consistent and predictable attributes inherent to our core recurring revenue businesses, our recently lower borrowing costs and our refined capital deployment processes have created a business with resilient and durable free cash flow generation potential, an attribute that appears to be grossly overlooked in the context of our current share price.

Additionally, as free cash flow continues to accumulate, I believe we'll have an opportunity to continue the organic delevering of our balance sheet, creating the potential to further engineer value for our loyal equity stakeholders.

In closing, I would like to thank our employees for their continued dedication and focus during a challenging and complex 2021. I'm greatly excited about our company's prospects for '22 and beyond and I look forward to updating all of you on our progress on upcoming calls. With that, I'll turn the call over to Kimo..

Thank you, David and good afternoon, everyone. I would like to start off today's call by highlighting several key takeaways from our fourth quarter results and sharing some perspective on how we see each of our business segments shaping up for 2022.

I will also address a few items related to our balance sheet, including the outcome of our recent debt refinancing.

It is important to note my forward-looking commentary assumes no material change in prevailing global macroeconomic conditions nor does it anticipate any meaningful disruption to the current casino operating environment related to COVID-19. Turning first to our domestic EGM business.

Fourth quarter domestic EGM RPD exceeded $30 for the third consecutive quarter. Our strong domestic RPD performance more than offset the impact of units removed over the past 24 months as part of our strategic pruning initiatives, in turn pushing fourth quarter domestic EGM gaming operations revenue approximately 4% ahead of Q4 2019 levels.

Our improved domestic gaming operations performance reflects further progress with our premium game strategy, improved core content execution and delivery and stable macroeconomic trends.

Looking ahead to 2022, we believe the steadily improving complexion of our domestic EGM installed base, supported by continued growth in our premium game mix, our expanded game content catalog, particularly within our Class II core segment and our ongoing strategic pruning efforts should allow us to sustain domestic EGM RPD nicely above 2019 levels.

Taking a closer look at domestic EGM installed base, we expect the total number of installed units to remain relatively consistent with year-end 2021 levels. However, the timing and magnitude of additional strategic pruning could lead to modest sequential net unit declines in any given quarter as we progress throughout 2022.

That said, we continue to anchor our domestic game op strategy around maximizing capital efficiency and free cash flow generation and therefore, encourage investors to focus their attention on RPD and total gaming operations revenue when evaluating our future performance.

Turning to fourth quarter EGM unit sales, a growing catalog of new, high-performing core game content, enhanced execution of new content delivery, broadening of our customer account penetration and further recovery in industry-wide replacement unit demand paced an over 35% sequential increase in our EGM replacement units.

Fourth quarter domestic average selling price, or ASP, eclipsed $19,000 as our premium-priced Orion Curve cabinet accounted for over 55% of units sold in the quarter.

Additionally, to help mitigate inflationary pressures resulting from global supply chain disruption, we successfully implemented a price integrity program in the quarter which further supported our strong ASP performance.

As we look out over 2022, we expect our growing portfolio of new core game content, further penetration of the expanding HHR market, an increase in the number of new casino openings and expansion projects and continued recovery in market-wide replacement unit demand to drive a meaningful increase in EGM sales units over the 2,380 units sold in 2021.

Supported by the current trends we are seeing in the market and projections put forth in industry research publications, we continue to believe broader North American replacement demand remains on pace to fully recover to 2019 levels by 2023.

Lastly, we believe a growing mix of premium-priced Orion Curve unit sales and continued implementation of our price integrity program should allow us to sustain our recent strong domestic ASP performance throughout 2022. Shifting to our international EGM segment.

We continue to be encouraged by the consistent recovery we are witnessing within our Mexico business. To that end, the fourth quarter marked the 6th consecutive quarter in which we were able to improve our international EGM RPD performance on a quarterly sequential basis.

We estimate approximately 70% of our international recurring revenue units were active and playable at the end of the fourth quarter with RPD on active units relatively in line with Q4 2019 levels.

Importantly, our international team continues to tightly manage expenses to help offset the impact of the more gradual revenue recovery we are experiencing, in turn allowing the business to positively contribute to company reported adjusted EBITDA.

Looking ahead, we believe our international EGM RPD should recover throughout 2022, with full retractment to pre-COVID levels likely occurring sometime in 2023. Shifting focus outside of Mexico, given the ongoing COVID-related challenges facing the market, we recently made the strategic decision to wind down our modest Philippines operation.

Although expected to be immaterial to our reported revenue and adjusted EBITDA metrics, the Philippines exit will reduce our international EGM installed base by approximately 400 units beginning Q1 2022. Excluding the Philippines removals, we expect our international AGM installed base to remain relatively stable throughout 2022.

Moving outside of EGMs, our Table Products team delivered record segment level revenue and adjusted EBITDA in the fourth quarter. The growing appeal of our Bonus Spin Xtreme progressive paced our strong quarterly performance, allowing customer adoption of our industry-leading progressive technology to further broaden.

Additionally, we continue to find success with our AGS Arsenal site license program with our 16 signed deals generating over $2 million in annualized recurring revenue. A strong mix of high-margin recurring revenues and our team's efficient execution allowed us to deliver exceptional fourth quarter segment adjusted EBITDA margin of over 60%.

Turning to 2022, as David mentioned, we expect the current momentum building behind our Table Products business to accelerate, supported by further adoption of our industry-leading progressive technology, additional AGS Arsenal customer wins, including our first site license in Southern Nevada, the full-scale commercial launch of our PAX S shuffler and the integration of Lucky Lucky.

All told, we believe our growing product portfolio and high-quality team position us to deliver continued growth in Table Products revenue and adjusted EBITDA as we progress throughout 2022.

Trends within our Interactive business remained consistent through the fourth quarter, with the segment delivering its 8th consecutive quarter of positive adjusted EBITDA.

Segment level results continue to benefit from the strong performance of AGS content within the online channel and further broadening of our real money gaming, or RMG operator partner relationships.

Looking ahead, we believe the strategic refocusing of our real money gaming business on distributing AGS content into the North American market could lead to temporary moderation in the level of sequential revenue growth we are able to achieve over the next couple of quarters.

That said, as we look to the back half of the year, we expect growth to accelerate as we release additional AGS game content into the RMG channel, complete scheduled third-party operator integrations and enter additional regulated North American jurisdictions.

Despite our tempered near-term revenue growth outlook, we expect our Interactive business to continue to positively contribute to our full year adjusted EBITDA performance.

Before discussing the progress we have made on the balance sheet and leverage front, I would like to offer some perspective on how we see adjusted EBITDA margin shaping up for the year. Like any business, we continue to navigate and, where possible, mitigate inflationary cost pressures introduced by labor shortages and supply chain disruption.

Additionally, as an organization, we remain deeply committed to investing in our future success, primarily through the addition of quality R&D talent.

Although these two items, combined with the ongoing revenue recoveries we are experiencing in our EGM equipment sales and international gaming operations business are likely to place downward pressure on our adjusted EBITDA margin as compared to pre-COVID levels.

We believe our cost discipline and mitigation initiatives should allow us to deliver full year 2022 adjusted EBITDA margin that lands in reasonably close proximity to the low end of our historically targeted 45% to 47% range.

Looking ahead, we believe operating leverage realized through the further recovery in EGM equipment sales, continued improvement in our domestic EGM RPD performance and greater contribution from the higher-margin Table Products segment presents the greatest potential to drive incremental margin expansion within our business.

Turning to the balance sheet. We ended the year with net leverage of 4.2x and $125 million of total available liquidity.

On February 15, 2022, we successfully completed the refinancing of our total debt outstanding which allowed us to simultaneously lower our borrowing costs, extend key debt maturities, reduce our total principal amount of debt outstanding and expand our revolver capacity.

Adjusted to reflect the impact of the refinancing transaction, net debt would have been approximately $538 million.

Looking ahead, supported by the operational momentum we continue to see within the business, the approximate $10 million of annualized cash interest savings we expect to realize as a result of the refinancing transaction and our organizational commitment to maximizing free cash flow, we remain confident in our ability to deliver upon our year-end 2022 net leverage target of less than 4x, while achieving our 2022 target is a key first step, I would encourage investors to think of the target as a stop along the journey and not the final destination.

To that end, as we look out over the next several years, we remain deeply committed to restoring and subsequently improving upon the financial flexibility we had prior to the onset of COVID when our balance sheet was net levered in the mid-3s. Operator, this concludes our prepared remarks. We would now like to open the line up for questions..

[Operator Instructions] The first question is from the line of David Katz with Jefferies..

Can we just talk about the installed base in particular? I know you gave -- you have some guidance in the deck and some of your commentary but can we just expand upon some of the puts and takes that would lead you to do better or in line with what you have? Is it a function of getting product through the channels? How would you kind of classify the demand outlook that you're factoring in to your commentary?.

So you're referring to the lease installed base, just to be clear, right?.

Correct..

Okay. So, from our perspective, there's probably a few things that we focus on and we've talked a lot about them before. And first, we'll just start with a goal to be capital efficient, right? We've really talked about how that's driven some of our cash flow, made us a more efficient company across the board.

And I think that, as we said, COVID really put us in a great situation to sit down and focus on this more precisely. So, capital efficiency is sort of number one goal. And then from there, you say, hey, what are the businesses we're in? We're in obviously Class II recurring.

There's some Class III and then, of course, premium, right? And so, we have our required returns that we want to get on those investments and it goes back to sort of that capital-efficient focus. And obviously, the rest is the R&D, right? I mean, it's the quality of the games that are going out the door.

And as we said in some of our prepared remarks, a huge focus for us to not only recruit but also retain the best talent in the industry, put out the best games and really produce a very high percentage of our games is what we would say is hit rates.

So, the puts and takes are, as always, Dave, there's sort of performance, right and then, our appetite for growth versus capital efficiency. And I think that's where we need to make great decisions, right? So I don't know if that's helpful or if that just -- if that's broad enough for you and covers it..

Yes. I mean, look, I think one of the things I'd like to measure is, how would you sort of classify your outlook, particularly in the EGM business, both parts of it, versus the last quarterly call, we actually made some updates intra-quarter.

Would you say it's progressively better, the same, a little worse, how should we take that?.

So you're talking -- now you're saying for outlook here and what we know about sort of the start of 2022. I think that it's pretty much as expected. There's no real surprises.

Obviously we can't speak specifically but I'll give you a little bit of flavor and say, hey, it's probably similar to what you're hearing from a lot of the operators which is other than a little blip on the screen with Omicron. I think things have been very consistent in Q1. I'd say, as expected, our demand on the core game sales side has been strong.

And as we said, our premium products continue to perform well, in particular Rakin' Bacon Deluxe our curve premium. I think they've really proven -- or that game and the curve premium product has proven to be an excellent addition to our lineup there in the portfolio.

So, I'd say, as expected and again, a lot of things in line with what the operators have been saying as far as the quarter goes..

Our next question comes from the line of Carlo Santarelli with Deutsche Bank..

Maybe try and just frame how you look at -- you guys made a couple of references to the historical racing machines. And obviously, as you look out to 2022, things continue to evolve.

But as you look at that market across maybe the 2- to 5-year window, what you kind of see is the opportunity from a market size, just in terms of total units and the ability to kind of make a dent there? And how you guys kind of stack up within the context of that?.

So I think we'll start a little bit within the context, right? It's probably the easier question to answer at this point, Carlo.

So, our games performed very well in all of the HHR jurisdictions where we are present, right? So I think that our -- if you want to call it, ship share or floor share is going to be very healthy and it's actually much stronger than it is in our, we'll say, commercial markets or non-HHR markets, right? As far as sizing the industry, it's a little tricky because I don't want to say every day but as time progresses, we continue to see these historical horse racing markets open up.

So the sizing of the industry, depending on who you asked could really vary. There's actually some locations abroad that now are talking about HHR as being a product line that are a legislation for products that will pass. So trying to size that right now is very difficult.

But I would say that it's a healthy market and we will get something very good in our share and again above what you would see for our normal ship share in the commercial markets. And Brad has something to add..

Yes, Carlo, the only thing I would add is that the nice attribute of HHR as we look ahead into '22 is that not only are you seeing continued growth in existing markets like Virginia and Kentucky and Wyoming in existing buildings but you have new buildings coming online within those markets, coupled with new markets themselves coming online, notably New Hampshire.

Beyond that, there's definitely some legislation that's getting kicked around in various jurisdictions, some that have regulated casino gaming, some that have no forms of regulated gaming. So, I think the intermediate-term outlook around HHR as a category is a fairly interesting one.

And as David said, I think we're well positioned there, given the strength of our game performance to-date..

Great. And then, just one more.

Kimo, you talked a little bit about the outlook for margins kind of that 45% to 47% historical range, how you're thinking about 2022? Within that, as you guys kind of look at SG&A, I think the number was about $64 million for this year with a somewhat subdued spend in the first quarter -- sorry, 2021, I was referring to somewhat subdued spend in the first quarter relative to kind of the 2Q through 4Q periods.

How should we think about kind of the 2022, I would assume that number is a little bit higher in 2022 but the magnitude of kind of that change for the year?.

Yes. I mean, if you look at specifically SG&A, yes, I definitely say it will be slightly up from 2021. And I think you pointed out an important thing, right, in Q1, it was pretty light. But if you look at the Q4 exit, probably a pretty good way to think of it as you move through H1 of 2022 and then we'll have some uptick in the back half of the year.

I think the margin comment more importantly probably centered around -- we continually talk about our commitment to R&D, right? So I think you're going to see our R&D investment continue to ramp as we move through 2022 at a rate that's higher than our SG&A increase.

And then, the other comment related to margin would be, we talked about the strength, right, of the EGM sales business and that business really picking up in 2022 compared to '21. That mix change, right, will affect margins somewhat.

So I think the commentary earlier was more, we'll be within the range that we historically talked about but probably a little on the lower side of that range. So closer to the, call it, 45% area..

And just to confirm, so coming out of 4Q, I think you guys were at $18.9 million. That would imply an SG&A for the year in the mid-70s.

Is that what you're saying? If we just kind of run rate of that number, the exit rate?.

Probably a little bit higher than that, [indiscernible]. I was looking at it adjusted and taking out stock comp and whatnot is how I normally look at it but probably a little bit higher than that, Carlo, for the full year of '22..

Our next question comes from the line of David Bain with B. Riley..

Nice results and I like what you're continuing to build. My first question, I guess, would be a follow-up to David's question earlier. Just hoping to get a little bit more specific, given the market volatility, a real-time snapshot, if you will. And I know we're hearing similar things from casino operators.

But if you could provide your experience, are you hearing any sort of shift in casino customer buying, just given the macro or geopolitical volatility? And then similarly, are we seeing any end customer traffic or spend change given oil volatility or anything else that we kind of watch on TV every day that's potentially less impactful to the domestic regional gaming right now..

Yes. I mean, I can comment as much as possible here in Q1. Again, that little Omicron that happened and I think it was a blip in the radar and we got right back the business, David.

It appears that gamblers don't watch the news, right? They don't seem to be too concerned with the geopolitical thing right now because there's a number of jurisdictions around the country.

I won't name them specifically but there's a number of them domestically that continue to put up very strong numbers, right? I think that regionally things vary but I think that things have been in line. And again, the operators have been, I think, rather positive on the quarter.

We have not -- you asked a specific question about, hey, have we seen the shift in maybe demand on the CapEx side, on the capital side spending for slot machines. And we haven't seen any shift other than what had been happening which was a positive shift where they were starting to get back to business again.

So, from an end player point of view and performance, there has been positive indicators, again, since the Omicron little blip. And as far as operator spending, I think it's in line with expectations. And like I said, some of the smaller pockets around the domestic market regionally are doing extremely well still.

So, I think everything is in line and as expected there..

And then my next would be on the premium games. I know 10% of your ops mix is now premium which is a great move. What's the optimum mix here? What are we shooting for? And it seems like there's two opportunities, in my view, maybe I'm off. But it would be the mix of the existing footprint to replace and get incremental win.

And then the other would be, you're only 2% of the total 70,000 premium units out there which probably that would carry a higher ROI to attack but they're probably each accretive and you want to optimize that mix.

So what is the optimal mix? And what's kind of the strategy when you look at your footprint relative to new opportunities? Well, I don't know if there's a number that we post up for optimal but it's almost like it's home runs, right? More or better, right? So bottom line, as we know that we have a competitor out there that's a like size to us and they're in that low-40s, -- low to mid-40s range as far as the mix goes.

As far as our -- so that's sort of a guiding light, if you will, as far as where these businesses can go. As far as the strategy goes, I think it goes back to our capital optimization.

And we just have to measure whether you say it's an install into the existing premium space or it's taking premium units and putting it into our existing footprint, right? The AGS footprint, be it Class I or Class II and whatever returns are, A, the best and, B, more stable.

So it's not always what can I make in the next 8 to 12 months but it's which one of those installs will be a good marathon runner for us and not just being sort of a short-term thing.

So we really do balance that out as far as attacking the actual premium space versus really optimizing the heck out of our Class II and Class III footprint out there that's already on lease right now..

Our next question comes from the line of Jeff Stantial with Stifel..

I wanted to start on the supply chain framework, if possible. An update on disruptions here would be helpful.

How have things trended generally since the last time we spoke at Q3? And does it feel like pressures are improving generally sequentially?.

So, I think our supply chain situation has been stable. I'll let Kimo or Brad jump in here if necessary. But I think it's been stable. And a lot of that has to do with our team. Our folks have been in front of this thing. From the very beginning, they worked their tails off to make sure that we don't get in a bind.

There has been a couple of situations where, although our unit sales are spiking, you see our changes in sequential quarters and year-over-year. We've been able to provide product at times when we know that others are struggling.

So, I don't want to say that we're doing better on supply chain than others but I know that we're doing okay and we're doing well and it's stable. And that's largely due to the fact that we have a very experienced crew that gets out there and gets the job done every day.

Brad, do you have anything or Kimo, do have anything to add to that?.

No. I mean I think you said a good thing. I mean, we've been actively planning and preparing for the supply chain disruption. I think the team has done a great job there. Our lead times have held fairly consistent with where they've been historically which has been somewhat of an advantage for us in the market.

And so, I don't think anyone could say that the supply chain disruption situation is approaching "normal" but it does feel stable, continue to manage it on a very closely monitored day-to-day basis. And I'm just really proud of what our team has been able to achieve there in light of the challenges that the global economy presented there..

And then, for my follow-up on the Class II yield optimization plan for 2022, can you just provide a bit more context here? What's the RPD threshold, the trigger optimization and what kind of uplift do you underwrite? And then, I'm assuming it's fairly limited but just a rough sense of the cost to get in and upgrade to cabinet would be helpful as well..

Yes. So that's -- I mean there's no prescribed amount there. What we try to do is just overall, we try to get something in the 12-month payback range when we deploy capital. On an optimization, that can vary a little bit. But generally speaking, we want to see those kind of returns.

We have a huge footprint and there's a lot to get out there and get after. So that's the approach that we take. As far as saying on a specific RPD, it's not easy to sort of lock that down and say, hey, this is what we're looking for because that definitely varies a bit by geography.

And it really just goes -- you take the uplift and what you're going to achieve and then you look at your capital requirements or your returns on capital requirements and that's how we sort of approach it.

So, the RBD lift is really more the factor and it's the cost of the unit and on top of that, at times, we're using refurbished units that aren't brand-new that are going out the door. Brian? Yes, Jeff, I would just add too that some of this Class II optimization initiative is not necessarily a capital-heavy endeavor.

We have a lot of new Class II content scheduled to roll out here in the first half of the year which allow us to go out and sort of re-energize some of what I would call the present gen Class II cabinet installed base that's in the field.

So, I think there's a real nice kind of opportunity there, again, kind of drawing it back to that free cash flow focus where the flow-through on that incremental RPD lift that we're able to achieve off of a content swap is quite high. And so, I think we feel pretty good about the opportunity that we have there.

And there's some longer duration opportunities that we're looking to exploit around some gameplay mechanics and progressive technologies that we have within the Class II space.

Again, we'll have a mix of a -- there will be a capital part of that but there will also be a part where we can go out and upgrade and touch machines without incurring incremental CapEx. So, I think we feel really good about the opportunity that we have there. I think importantly, those games, it's a fairly resilient sticky segment of the market.

I think we feel good from a duration perspective about the opportunity that we have within Class II..

The next question comes from the line of Barry Jonas with Truist..

David, why not give EBITDA guidance here? What would you like to see before going that route?.

I'm actually -- I'll let Kimo sort of hit that one probably is a pretty well-extended answer..

I think, Carlo, the -- I mean, Barry, sorry -- I think it's a philosophical question, right? And I think for us, what we feel like is, we've been able to -- we feel successful in the sense that we give the color that we -- how we feel about the market and where the business is headed, right? And I think if you look at what we did last year, we gave sort of similar guidance for the year, right? We sort of gave context I'll say.

And we feel like that -- we just feel like that's the best way, I think, to guide as we move forward with the business..

And just to be clear, you mentioned you had some Ukraine contractor exposure.

Is there any potential financial impact there? Or has that been largely mitigated?.

Yes. So it's a situation that we closely monitor, Barry. We do have some contractors over there that support our interactive operation. As it stands today, we don't expect it to be material to the financial performance of the business. We don't have any fixed assets on the ground in the Ukraine. It's all kind of tech-based support type program.

So we continue to closely monitor it and we're doing what we can to support our contractors over there..

If I could just sneak one more in, do you see any opportunities for any additional tribal placement agreements at this point?.

No.

You mean like those long-term travel placement type agreements?.

Yes, correct..

Yes. So the ones -- the customers that we engage with there, they're in place. And for the most part, there isn't any additional ones that we have to be focused on. There are some -- there might be some expansions that you could be referring to, etcetera but that will probably fit under our umbrella and our existing agreements that we have right now.

There's probably no need to sign a new agreement because we have flexibility within those agreements to add units, etcetera..

The next question is from the line of Chad Beynon with Macquarie..

I wanted to ask one about the tables business. So you announced the acquisition of Lucky Lucky and your revenues and EBITDA continue to move up into the right. Just wanted to ask a little bit more about that.

Are there still opportunities from an M&A standpoint to do more tuck-ins? And can you do these given that you're hyper-focused on reducing leverage at this point? And then, just medium or -- I guess, medium to long-term, I know you had historically talked about getting that business closer to $10 million of EBITDA on an annual basis.

It's kind of moving in the right direction.

Just any other additional commentary in terms of goals on the table business?.

So, yes, the Lucky Lucky acquisition falls sort of right into our wheelhouse where we can acquire something -- we think we have the ability, just like we have with other games, to expand the footprint, add our technology.

It just really makes for a very efficient form of growth for us, especially with what I would refer to as industry-leading technology and progressive. As far as additional M&A goes, the pool is not deep there but we are always combing through it.

As you see, this is one that we came across and we've been aware of it for our -- pretty much our entire career as the game has been around for a long time. But our table team and John do a great job of just sort of sifting through these things.

And is there room to do small deals like this? I think there's room to continue to do tuck-ins so long as they fit our criteria, A, for returns and even, B, for just the efficiency in which these businesses tuck into our business, like I said, with the technology, the progressives, etcetera. So that's sort of how we view that.

And then, I don't know if Kimo has any commentary about that EBITDA that's moving up into the right which we like to. But I don't know if he has any additional thoughts on that for the longer-term..

I mean, you can see, Chad, that the business is headed in the right direction, like you said, right? And I think, we are, we'll say, well on our way towards that goal that you mentioned that we had sort of thrown out there earlier. I think that's probably about the best thing to add..

Yes. I think the key is that we're setting up nicely. Kimo is sitting on that -- we're directionally right on pace and everything or exceeding what we had hoped maybe at times. But when you look at it, we now have great core table games. We have the best progressive out there. We have a great arsenal program that we referenced in the prepared remarks.

And then, of course, we had the launch of the PAX shuffler which again, speak about the team and the folks that we put together and the retention and recruiting that we've done. This is really a fantastic achievement for the team. It's now GLI-approved. As you heard, again, in our remarks, was that handful out there.

And as we like to say, it's been quite -- which is quite good when you release the shuffler in more ways than one. And so, we're very proud and this yet another step in that direction and beyond that you're referring to..

And then, on your decision to exit the Philippines, I would assume that that's a market that has probably lagged the domestic market here. It's probably just starting to kind of improve and will -- increasingly improve with vaccination rates.

So why exit that market now? Did you just take a fresh look at kind of the medium term and the risk reward wasn't there? Just curious on the timing on the announcement..

Yes. I mean, if you look at where the market is, right, today, I think you used the right word lag, right? I think the Philippines market, COVID is still a very relevant thing in that market.

And it is, I think, behind what our expectations would be for it, right? And I think if you look at the opportunity cost, you look at where our capital and effort is best spent.

I think we just felt like, you know what, we need to make a very clear decision and just exit the market, right? We need to be as good as something like that than when we enter a market. So I think we just felt like it was the right time and just look forward and attack other opportunities that we have in front of us..

Yes. And Chad, I would just add that I would reinforce what was in the prepared remarks which is that we don't expect this decision to be material to our reported revenues or adjusted EBITDA. So, I think that provides some additional context around how we're thinking about this decision..

We do have a follow-up question from the line of David Katz with Jefferies..

Thanks for letting me circle back. Apologize if I missed it.

What have you said about sort of a CapEx budget for '22? Did you give any indications on that?.

No. I think the only thing we put out there, right, David, is just we mentioned our leverage target to be under 4x by the end of the year..

Mr. Katz, there are no additional questions waiting at this time. And that concludes the PlayAGS Q4 '21 earnings conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines..