Hello all, and a warm welcome to the PlayAGS First Quarter 2022 Earnings Call. My name is Lydia, and I will be your operator today. [Operator Instructions] It’s my pleasure to now hand you over to our host, Brad Boyer, SVP, Corporate Operations and Investor Relations. Please go ahead when you’re ready..

Thank you, operator, and good afternoon, everyone. Welcome to the PlayAGS Incorporated first quarter 2022 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 first quarter ended March 31, 2022, can be found on our Investor Relations website, investors.playags.com. On today’s call, we will provide an overview of our Q1 2022 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 our actual results to differ materially from our forward-looking statements, please refer to the earnings press release 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 you 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 press 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. On several of our recent conference calls, many of you have heard me discuss the foundational improvements we have implemented over the past couple of years.

Today, I would like to highlight several first quarter accomplishments that I believe reflect early returns on the organizational investments we have made to date.

First, we sold a total of 955 EGM units globally in the first quarter, more than three times numbers sold in Q1 2021 and a nearly 20% increase over Q4 2021, extending our streak of sequential unit sales growth to five consecutive quarters.

Second, our domestic EGM RPD increased 2% sequentially and approximately 14% year-over-year, topping $30 for the fourth consecutive quarter.

Third, we achieved sequential growth in our premium product installed base for the ninth consecutive quarter with premium games accounting for 11% of our domestic EGM installed base at quarter end compared to 5% just one year ago.

Fourth, our table game business delivered record revenue performance for the third consecutive quarter with revenues increasing by more than 25% year-over-year to $3.5 million.

Finally, net leverage at quarter-end was a more approachable 4.2 times compared to 7.4 times at the same time last year, putting us on track to deliver upon our year-end net leverage target of less than four times.

While the list of accomplishments I just referenced are quite positive, I believe they simply foreshadow what our laser-focused organization can accomplish in the quarters and years ahead.

From a product and company performance perspective, these are exciting times at AGS, as we look to build [Technical Difficulty] established over the past 12 months. In assessing the short term, I imagine the question on the minds of some investors is whether or not the gambler has been or will be impacted by the current macroeconomic challenges.

The short answer is that to date, there is no observable change within our recurring revenue business, which once again is proving to be resilient. In addition, we, as an industry, continue to benefit from a rather consistent and healthy recovery in North American replacement demand.

In addition to the stable underlying trends within our business, we continue to benefit from numerous initiatives and investments in R&D, sales and product management.

In R&D, our accelerated investments have yielded an expanded and industry-leading hardware portfolio, a stable of strong for-sale core games led by the likes of Captain Riches and Lucky O’Reilly and a premium portfolio led by Rakin’ Bacon Deluxe that has us poised for growth in the quarters ahead.

While R&D has set us in motion for success, our sales and product management teams are reporting wins as follows. We are penetrating the customer base more broadly than ever before. We have dramatically improved our CapEx and cabinet deployment process as we also stay focused on SWAT real estate optimization.

And last but not least, we have consistently grown unit sales over the last five quarters while not compromising our average sales price per cabinet, which is one of the strongest in our competitive set. Turning to tables.

The trends are equally as encouraging, supported by our commitment to providing our customers with innovative value-added products, which, without question, have improved the profitability of their casino floors. I will briefly highlight some of the recent trends with our consistently growing Table Products segment.

Order momentum continues as BSX or Bonus Spin Xtreme continues to wow our customers with the ability to link just about every table game tied to a single progressive, which is a one-or-time offerings in the industry.

Another highlight for BSX was our recent installed nearly 40 units had the grand reopening of the Palms Las Vegas, our largest single site installed to date.

Pax, our latest card shuffler, which was recently launched have been very quiet, which the pun is intended, as the machine is quiet and so are the service calls, a coveted combination in the shuffler product space. With the smooth launch, we expect orders to build and installed to steadily increase over the coming quarters.

Lastly, our AGS Arsenal site license offerings have combined nicely with Pax and BSX to aid in the continuing momentum we’ve had over the past year.

Finally, in the Interactive segment, we’ve been able to achieve relatively consistent performance as we continue to strategically reposition the business to better take advantage of our strong land-based product portfolio in the North American online markets.

Although, we expect our interactive business to remain stable in the near term, we are currently investing in additional resources to expand our pipeline of gates from our land-based business into the online space.

We are confident that our customer relationships, along with the proven performance of our games will lead to a new period of growth when we’re able to place more games into [Technical Difficulty] for our operators. In the end, I’m encouraged by our consistent and improved performance over the last year.

That said, I’m most excited about what lies ahead in 2023 and beyond. And while I’m saying that, you might be asking, why are you so excited? The answer is tied to the overall theme of my prepared remarks and that is investment and the related returns that we have seen and expect to see as we look into the future.

The reality is that R&D investments require some patience. And with the time it takes to initiate staff and begin production for multiple new studios, we and you have walked down the path of patience together.

Now that those studios are online, we are seeing returns and we’ll continue to see leverage contributions as we layer in new productivity for the team members who started 12 months to 18 months ago, all of which will further accelerate the growth of our slot business.

This growth coupled with our table game momentum and a promising Interactive segment should provide accelerated growth, increased cash flow and in turn, continue to delever our balance sheet. A summary of outcomes, which feel heavily discounted in the context of our current share price.

With that, I will turn the call over to Kimo to walk you through our first quarter results in greater detail..

Thank you, David, and good afternoon, everyone. I would like to start off today’s call by reviewing some highlights from the first quarter and offering perspective on how we see the business trending as we look ahead to the second quarter.

I will also address a few items related to the balance sheet and close by sharing some thoughts on our capital allocation priorities for the remainder of the year. It is important to note my forward-looking commentary assumes no material change in prevailing global macroeconomic conditions. Turning first to our domestic EGM business.

First quarter domestic EGM RPD increased 2% on a quarterly sequential basis, topping $30 for the fourth consecutive quarter.

The sustained positive momentum in our domestic EGM RPD performance reflects continued successful execution of our premium game growth initiative, the improving depth and breadth of our core game content offering, the compounding effect benefit of our installed base optimization efforts and consistent industry-wide GGR trends.

We expect to further benefit from these trends and initiatives throughout the second quarter, which should allow us to continue our string of $30-plus domestic EGM RPD performance for a fifth consecutive quarter.

Shifting to our domestic EGM installed base, we had a total of 15,915 units installed at quarter-end, relatively consistent with the prior sequential quarter. Supported by growing demand for our high-performing premium game products, we believe we could achieve modest sequential domestic EGM installed base growth in the second quarter.

As a reminder, we continue to target cash-on-cash payback of less than 12 months on all new machine placements at threshold, which we believe will allow us to continually strengthen our per unit economics, increase our returns on invested capital, accelerate our free cash flow generation and ultimately, maximize long-term shareholder value.

Looking at EGM sales, we sold a total of 955 units globally in the first quarter, an increase of nearly 20% relative to the 815 units sold in Q4 of 2021. The firm’s quarter marked the fifth consecutive quarter in which we were able to grow EGM unit sales on a quarterly sequential basis.

Four items allowed us to sustain our consistent unit sales growth trajectory in the quarter.

First, as David mentioned, our decision to accelerate investment into our R&D franchise continues to broaden and strengthen our core game content portfolio as our growing team has been able to produce a higher volume of game themes, offering more diverse feature sets with a more consistent release cadence.

Second, our sales team continues to identify opportunities to strategically expand our customer account penetration, particularly with several larger corporate buyers. Third, we continue to leverage our exceptional game performance to command an outsized share of the growing historical horse racing market, both in new and existing jurisdictions.

Finally, we have continued to command our fair share of sales opportunities within the steadily improving North American slot replacement market.

Looking ahead to the second quarter, we expect to further benefit from each of the four previously discussed themes, which should allow us to deliver Q2 2022 EGM unit sales that are in line with to slightly ahead of Q1 levels.

First quarter domestic average selling price, or ASP, eclipsed $19,000 for the second consecutive quarter, supported by growing demand for our premium-priced Orion Curve cabinet and continued implementation of our price integrity program.

We expect these two items to positively influence our ASP performance in the second quarter, allowing us to maintain our industry-leading ASP. Shifting to our international EGM segment, we continued to witness a consistent recovery within our Mexico business.

To that end, the first quarter marked the seventh consecutive quarter in which we are able to improve our international EGM RPD performance on a quarterly sequential basis.

We estimate approximately 80% of our international recurring revenue units were active and playable at the end of the first quarter, with RPD on the active units relatively in line with pre-pandemic levels.

Consistent with our expectations entering the year, we believe our international EGM RPD should further recover throughout 2022 with full retracement to pre-pandemic levels, likely occurring sometime in 2023. During the first quarter, we executed our first EGM unit sales into international markets since Q2 2020.

Looking ahead, we have identified additional opportunities to further leverage our GLI-approved for-sale products in international markets. Moving outside of EGMs. Our first quarter Table Products revenue increased 9% sequentially to a new all-time record of $3.5 million.

Highlights in the quarter included the first placement of our Pax S specialty game card shuffler with 14 units installed in six different jurisdictions at quarter-end, and over 50% sequential increase in our Bonus Spin Xtreme installed base to nearly 120 units and the execution of our 17th AGS Arsenal site license with our contracted business generating over $2 million of annualized revenue.

Additionally, in January, we completed the acquisition of Lucky Lucky blackjack side bet, building on our successful track record of leveraging thoughtfully executed M&A to strengthen our table product portfolio.

Supported by growing customer demand for Pax and Bonus Spin Xtreme, coupled with scheduled controlled eyes [ph] of additional AGS Arsenal site license contracts, including our first site license in Southern Nevada, we expect our string of seven consecutive quarters of sequential table products revenue growth to continue in the second quarter.

Trends within our interactive business remained consistent throughout the first quarter, with the segment delivering over $2 million of quarterly revenue for the fifth consecutive quarter and positive adjusted EBITDA for the ninth consecutive quarter.

Segment level results continued 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.

With respect to our online content, we recently achieved a top five supplier indexing ranking in the April 2022 Eilers Online Game Performance Report with our Capital Gains theme recording a top 10 slot game ranking.

Additionally, in April, we successfully launched with 25 operators into the Ontario privatized market, including our first contracted arrangement with the two most prominent daily fantasy sports brands currently operating within the online space.

Looking ahead, we continue to refocus our interactive business around broadening our penetration of regulated North American RMG markets. Additionally, we have started to leverage additional resources to allow for a more consistent game release cadence into the online channel.

While these new customer wins and content initiatives should support revenue growth in the back half of the year, we believe second quarter revenues could look similar to those achieved during the first quarter as these growth accelerators take time to fully ramp. Turning to margins.

First quarter adjusted EBITDA margin was 45%, in line with the expectations articulated on our fourth quarter call. We estimate transitory costs related to global supply chain and logistics disruption impacted the year-over-year margin comparison by approximately 90 basis points.

Looking ahead, although we are starting to see wage pressures, global logistics disruption and the price of certain raw materials moderate, we continue to navigate anomalistic inflationary pressures on a handful of electronic components.

As a result, we expect to incur higher average material costs in the second quarter, the impact of which will likely be accentuated by the anticipated growth in our EGM sales revenue mix. Additionally, we plan to host our annual GameON Customer Summit in June, which will contribute to a seasonal increase in our SG&A expense.

These two items are likely to contribute to a modest sequential decrease in our second quarter adjusted EBITDA margin.

That said, given the moderation we are starting to see in our production-related costs, we expect second quarter margins to serve as the low watermark for the year and believe we should be able to achieve sequential margin expansion throughout the back half of 2022.

Additionally, our production team continues to do an excellent job, mitigating these challenges where possible, allowing us to maintain our pre-pandemic lead times on new orders and fulfill the full extent of our demand in our pipeline.

Finally, supported by the growing demand we are currently seeing for many of our products, we believe we should be able to mitigate a significant portion of the higher dollar weighted cost, helping to neutralize the net impact to our adjusted EBITDA performance.

Before closing, I would like to offer some perspective on our current thoughts around capital allocation and the balance sheet. First quarter capital expenditures totaled $12 million, over half of which is related to new machine placements. For the full year, we expect to incur consolidated CapEx of $56 million to $62 million.

First quarter free cash flow [indiscernible] net cash flow from operating activities less CapEx, was approximately a negative $4 million. Costs associated with our debt refinancing impacted free cash flow by approximately $6 million.

Additionally, net working capital was a consumer as we experienced a slight build of inventory to ensure that we are positioned to fulfill the growing demand we see for our products in a timely fashion.

Looking out over the remainder of the year, we do not expect working capital changes to prove as impactful to our full year free cash flow performance. Looking at the balance sheet. We ended the first quarter with net leverage of 4.2 times and approximately $73 million of total available liquidity.

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

Supported by the operational momentum we’ve continued to see within the business, the approximately $10 million of annualized cash interest savings we have started 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 four times.

While achieving our net leverage target remains our highest priority, we are committed to allocating our excess capital in a manner that creates the greatest value for the company and its stakeholders.

To that end, we believe the meaningful disconnect that exists between the momentum we are witnessing in many facets of our business and the current levels at which our shares trade present a compelling opportunity to drive long-term returns well above our internal capital deployment hurdle rates.

Accordingly, to the extent that dislocation in our equity valuation persists, we could look to opportunistically repurchase our own shares, all else being equal.

Importantly, based upon the demand trends we are seeing within the business today, we do not view executing share repurchases and achieving our net leverage target as being mutually exclusive. As a reminder, at March 31, 2022, we had approximately $47 million available for repurchases under our existing authorization.

Operator, this concludes our prepared remarks. We would now like to open the line up for questions..

Thank you. [Operator Instructions] Our first question today comes from Barry Jonas of Truist. Your line is open..

Thank you. Given the strong commentary on gambler’s resiliency, which has really been mirrored so far by operators starting season, I was hoping to get more color on your views on the replacement cycle. I believe you said in the prepared remarks that you expect to see some growth.

But how sensitive do you think your customers will be especially with the stock market performance that we’ve been seeing across the board here? Thanks..

Hey Barry, thanks. So the last comment, I don’t really know how we’ve ever seen the stock market in particular effect or impact capital expenditures with our customers. I have to go back quite some time to really track that and say, oh, it was the stock market performance that drove that. I think so far, we continue to see the consumer show up.

If you were to try to get a room in Vegas here going out quite a few months, you’ll see that Vegas performance and room pricing, it’s not cheap to come here. It’s not easy to get a room. Every indication we get across the board, is that the consumer is still there or we’ll say the player is still there.

Last time I commented on the call that I don’t necessarily believe that gamblers are tuned into CNN every day. They seem to – this is their form of entertainment.

And so long as they keep coming and the trends continue to be strong within gaming themselves, we believe that the CapEx spend is going to be there, and we believe that, that replacement market is going to be, in line with what we’re seeing around that Eilers numbers, if you will..

That’s great to hear. And then just as a follow-up, historically, I believe there’s been a belief that Native American tribes will maybe spend a little more than commercial operators.

I’m just curious if that trend does seem to be consistent today?.

I mean, I think that there’s times where that’s certainly true, right? I think – I hate to say during the pandemic, during the heat of the pandemic, I think that Canada – bits of Canada and our tribal customers were – is where the strength really resided. I think that generally speaking, we’ve seen that.

I think that this year, we might see a little bit of an uptick in the commercial side. So I think it’s a little bit more balanced. Our travel customer has always been great. Our commercial ones are awesome too. I don’t know that there’s enough differentiation there to say that tribal is carrying the day.

But I will say that, in tough times, in tougher times, historically tribal has carried the day..

Great. Thanks so much..

Thanks, Barry..

Our next question today comes from Jeff Stantial of Stifel. Your line is open, Jeff..

Hey good afternoon everyone. Thanks for taking our questions. First off, just on the strategic pruning initiatives, it looks like some more cabinets pulled in the quarter.

Should we expect more activity throughout the year to more than offset by organic growth? And if so, how many more quarters do you think, you feel that you can hit, we’ll call it, a normalized attrition rate, if that makes sense?.

Hey Jeff, it’s Brad here. The base for all intents and purposes was relatively flat on a quarterly sequential basis. I think as we sort of messaged in the prepared materials, we do expect that base to grow in the second quarter, really on the backs of the momentum we’re seeing with our premium product.

Our Rakin’ Bacon Deluxe game continues to perform quite well in the market, leading to the incremental demand that we’re seeing. We’ve also recently rolled out some additional gameplay mechanic features for Curve Premium, that’s helping to stimulate demand there.

So I think if I look at the first quarter, it’s generally in line with the commentary we provided on the last call of being flattish. And we – looking forward, expect to see some growth there.

The only other thing that I would throw out there is that, we did mention, and as you all are aware, obviously, some of the supply chain situations that are going on out there.

It does require you to rationalize your supply, and so when you see an upswell in demand for product sales, sometimes that causes you to allocate cabinets differently to different channels. So I think we’ve done an exceptional job of getting ahead of the supply chain stuff.

And I think as you look to 2Q and beyond, I think that really becomes a driver as well to help us support growth there in the domestic installed base..

Okay. Great. That’s helpful. Thanks Brad. And then on the international shipments, modest contribution, but as Kimo mentioned, this is the first time you’re selling anything internationally in about six or so quarters.

Just curious what markets you’re targeting here moving forward? And if we should think about this as one of several kind of key growth drivers or really more of, we’ll call it, a logical low investment adjacency to some of the things you’re already doing domestically?.

Yes. I think you pegged it pretty well on the last one there. We’ve always been in Latin America and Caribbean, et cetera, markets. We’ll continue to focus in those areas. I don’t know if you’re sort of leaning towards, and say, hey is Asia or Europe going to be in the cards for us – or Australia at the moment.

And the answer to that in the short term is no. Our focus is North America and then some folks – Mexico is part of that, but Mexico being part of North America and then, of course, Latin America as a whole, and we sell into a number of different countries there.

We believe that as they continue to fill out with pandemic and our efforts increase there, that we’ll see some modest contributions there. But I refer to them as modest contributions at this point, and just something that will keep hammering our way at..

All right, very good. Thank you both..

Thanks, Jeff..

Thanks..

The next question today comes from David Bain of B. Riley. Please go ahead..

Great. Thanks so much.

So I guess my first one would be, based on the ROI that you’re seeing in RPD from the game refresh that you’re doing, with the broadened content and improved content and the new premium mix, are you seeing an increased opportunity within the existing footprint versus maybe a quarter or two ago? Or is it all going as planned with regard to the kind of the optimization roadmap?.

I think it’s been rather consistent.

I think, David, if I were to refer to anything in your question, whether we see anything different than we did before, I’d really just sort of lean on our staff, and I think that we’re just getting better at it, right? And as we get deeper into the process of, what I would refer to is like that real estate optimization, where we go in and we’re able to identify a piece of real estate or a location where we think have value go in there and put in a new unit or a refurb unit or anything of the like.

I think it’s just something that, over time, we improved upon everything we’ve done in the past. There’s obviously various learnings that we have from the past. But we’ll always bring in new folks. I think we’ve got the best talent that we’ve ever had in our product management and game ops team.

And I think that if anything is getting “better” it’s just because we’re really improving our way that we conduct business there..

Okay. Awesome.

And then outside of that, like the content and cabinets and execution there, is there an opportunity for link progressives within your footprint in the relative near term?.

Wow, we’re getting a product catalog today. All right. So the link progressives are always an opportunity. We have most of the technology, if you will, David. At this point, we’ve always taken – I’d say we’ve taken a look at in the past, as far as link progressives goes. We certainly are very close on the technology front.

I think that if we were to enter that market at any point, we’d probably lean into the tribal market first. And I’d say in our key markets to begin with, if we were to ever go there. But the opportunity for a linked progressive it’s clearly there for us because the technology isn’t a big leap..

Okay, great. Thanks so much..

Thanks..

Next in the queue is Roth Capital’s Edward Engel. Your line is open..

Hi, thank you for taking my question and I’m apologies if you addressed this already because I have – I guess I know you’re not trying to give guidance beyond 2022.

But I guess just bigger picture, in order to – since domestic installed base starts to return to consistent growth, is that just a function of the premium in the Class III segment outpacing declines in Class II? Or do you think that eventually you’re going to get to a point where the Class II installed base begins to stabilize, and even potentially start to grow again?.

So I don’t know if I got that perfectly there. But the Class II installed base is solid. I wouldn’t refer it as, Class II is declining, as far as quality or anything of the like, or necessarily RPDs or anything. So we believe that not only is Class II solid, but it’s something that, again, I’ll use the term installed base optimization.

Over time, we can make every piece of real estate within reason, more profitable to the company, right? So I think layering on top of that, the things that are obviously going well for us, is our core games, which some core games are end up leasing and obviously, core game sales on top of that, helps us grow.

But clearly, premium and then premium being sort of that mix shift into a higher percentage of premium, this all will help us. But I don’t want to say it’s like, hey, it’s just premium, and it’s going to offset something that isn’t healthy in Class II. I’d say Class II is healthy and stable. Class II can get better with our core games.

Class II will get better with our premium games. And then, of course, in our commercial environments, premium will continue to sort of increase our performance there. And I think just to go back a little bit to prepared remarks, this really reflects this investment that we’ve made.

It’s clearly an investment – in fact, it’s an investment in people and our team members, and that’s what we’re starting to see pay off here, really in the last couple of quarters.

And if you think about core games in the last five quarters, where we’re seeing sequential growth in premium, we’re seeing growth now in five quarters in the core sales, and we’re seeing our team just really pump out great games. And I’ll even go off-roading a little bit here, but our investment in tables is paying off too.

I know it’s a smaller segment that people don’t look really hard at sometimes. But if you look at the quality of the games, the quality of the shuffler we just released, and really the performance of BSX or Bonus Spin Xtreme, we have a very, very bright future there as well.

I hope that answered your question the right way?.

Yes, great. Thanks for color..

Thank you. [Operator Instructions] Our next question comes from Chad Beynon of Macquarie. Your line is open Chad..

Thanks. Thanks for taking my question. Kimo, you mentioned that the second quarter should be the low watermark for margins. I know previously, you guys have talked about a range of 45% to 47%. I think last quarter; you said we should be kind of aiming towards that low end.

Is that still a range that we can get back to for the back half of the year? Or given that equipment sales could become a bigger part of the mix, is that something that we should just kind of remove in terms of near-term targets? Thanks..

Yes. I mean so Chad, good point. I mean I think it’s the latter. I mean, I think I would focus on what we said on our last call being kind of a lower end of the range so 45%, which is what we achieved in Q1.

We called out some, we’ll call it, short to medium term pressures, right? So in Q1, we had about 90 basis points of, call it, elevated COGS, right? So mainly material costs and logistics costs, and our expectation is that, that will continue into Q2.

I mean I think on the flip side to all of this is that already, we’re starting to see some of that moderate on certain parts of our bill of materials or bond costs in our machines.

I think the other side is a real positive for us as well, is that if you look at where our lead times were pre-pandemic, like we’re able to maintain that today, because of some of the things that Brad mentioned earlier, our supply chain team, kind of getting in the front of it and also being able to strategically wrestle through it.

So that has really helped us as well. I think another thing we called out specific to Q2 and why we say Q2 sort of will be below all other markets, what we feel is we do have our customer event that we’re bringing back this year for the first time, since pre-pandemic, which is Game On. So there is the seasonality of that in Q2 as well.

But again, the commentary being, that we see bond costs moderating. We expect that in the back half of the year, we’ll be able to improve upon it. But I would focus probably closer to that 45% range..

Okay. Perfect. Thank you.

And then given your relationships with operators and the scale, particularly with increased R&D and headcount to kind of focus on output, are there opportunities for you to acquire more adjacent businesses to kind of leverage what you’ve built here? I know you’ve done a couple of small things over the past couple of years, probably more on the table games side recently.

But given the dislocation of some businesses, are there opportunities for you to kind of bolt on something in the near term? Thanks..

Thanks, Chad. I think the opportunity is always there. One thing that we probably pride ourselves in, is that we continue to always look. It’s more of a disciplined thing, than a neat thing. And if we’re not disciplined to be out there and looking, we might miss an opportunity at some point.

Bolt-ons, sort of like smaller acquisitions, I think those are great. They’re right in our wheelhouse. We do a great job with that. And our table games team, as a matter of fact, does a fantastic job with sort of those tack-on deals.

But in the slot space, interactive or tables, we continue to sort of work that process, be disciplined and should the opportunity arise, to do something small there, we jump on it..

Thanks, David. Appreciate it..

Thank you..

The next question comes from [indiscernible] of Jefferies. Please go ahead..

Hi, good evening guys. The premium game installed base has grown well.

Just wondering how do you guys think about that base to grow kind of through 2023? Is growth more expected in the back half of this year, or is it more consistent? Just love to hear your thoughts there?.

We don’t really give specifics on this, but I think that what you’re talking about there, is just consistent growth. We’re not looking for anything to pop in a big way, but I think the potential for growth there and having some – we could have some meaty quarters from time to time, right, where we could see that number moderate.

But I think our goal is good consistent growth, be out there would be aggressive, be smart, not chase bad deals, but chase good deals with fantastic ROIs. And so I think consistency is the word. But our sales team, let’s say, they are aggressive as a whole, we are consistent, and we’ll make sure that we’re out there doing great deals..

Got you. That makes sense.

And then just lastly, the international DGM and installed base, are there markets that you guys have seen that are coming back online faster than others? Just curious to see what the situations are for 2Q and for the rest of the year?.

Yes. So that’s all Mexico at this point. And I think that we’ve probably settled in and add a number here that we’ll see sort of steadily – slowly but steadily continue to increase, until it gets back to wherever the norm is for Mexico. But most of what you’re seeing there from an installed base that you’re tracking is all Mexico.

And as we’ve said, Mexico has been a much slower recovery than United States and Canada. We anticipate that it will continue to come back, and then it will be healthy as it was in the past when it gets there..

Appreciated. Thanks..

Thanks..

And finally, we have a follow-up question from David Bain of B. Riley..

Awesome. Thanks. Yes, when I heard tables being mentioned, I had to hop back in. On the PAX S rollout, maybe could you help us understand the cadence a little bit of that? I mean you were in six different jurisdictions with 14 machines.

So I assume that these were -- I don’t know if they were on a trial basis before layering on to the rest of specialty tables within a certain casino or other multiple casinos.

Just trying to understand, could we see that number accelerate from the existing footprint on top of more placements within new casinos? How should we view that?.

Yes, good question, David. So you’re pointing out, there’s a lot of jurisdictions. There’s not a lot of units and really not – I won’t jump too far into the weeds here on shuffler rollouts, but our Head of State there his view and his aim is to get out there, get into a few different jurisdictions. It’s always good.

We go out and testing one, but then we get into multiple jurisdictions. So we get an idea how a shuffler, which is dealing with sort of like a living and breathing thing when you talk about a card. The playing card is not a piece of steel, right? And so we want to get a feel for what it’s like in all the different markets.

Once we are settled in, and we know that the machine has been consistent and you sort of heard my commentary that it’s been quiet. Machines quiet, service calls are quiet. We’re very happy with how it’s performing so far.

Then like you said, we’ll roll out in each one of those jurisdictions, higher quantities and then move to additional jurisdictions beyond that. Very promising product line. Again, homegrown on this one. I think that we’re really proud of the performance so far, and we do look for sort of like an accelerated rollout of some – at some point, of course.

So we have high hopes for that machine..

Okay. Awesome. And then maybe just a follow-up on Chad’s question a little bit, on M&A. I mean we saw a competitor get more heavily into HHR. There’s some evolving market opportunities as, domestically and maybe even internationally.

Is that also an area you look to with M&A? And maybe thinking about it this way, do you look at R&D allocation there differently, as that accelerates, or is the R&D that you’re doing already captured when you’re producing for Class II and Class III within that segment?.

Yes. So I’ll sort of start with the last question first. HHR is different work than Class II and Class III. I wish that it was all the same work, but it’s not the same work. It does require additional manpower to do that. That manpower has already worked out in our mix. We’ve had zero problems converting our Class III or Class II games into the HHR space.

So as far as an acquisition in that space to sort of deeper penetrate that market, I’d say the answer there is no. I’d say our market penetration in HHR far exceeds our penetration in the other markets, right? So we’re actually in very healthy shape there. There’s no need to do a bolt-on or anything to get the R&D work done.

We’re working really closely with our partners to roll out into new jurisdictions. And we continue to see those good sort of like initial market penetration in the existing markets down Kentucky, et cetera. We have a very, very high penetration. And David, as you probably know, extremely high performance.

So in HHR specifically, yes, we see that it’s going into additional states and maybe into international markets. But our conversion into those – that sort of space is rather easy for us and we’ve been getting it done very efficiently..

Yes, David, I would just add as well, I think the root of your question is really oriented around capital allocation. I think it was fairly clear in Kimo’s commentary, that our underlying goal here is to allocate capital to its highest and best use. Along those lines, I think we appreciate the degree to which investors are focused on leverage today.

And so that is our highest priority, and we feel good about our ability to achieve our leverage target for the year, of less than 4 times.

At the same time, we did mention that buybacks are part of the capital allocation puzzle, and in the interest of maximizing shareholder value, we evaluate buybacks along with debt repayment and M&A, all in the same bucket.

And I think if you look at kind of how the stock is trading and the valuation relative to the group and the historical norms, I think M&A would have to present a fairly compelling return potential to sort of fit within that prioritization. So I’ll just throw that out there as well..

Understood. Perfect. Thanks guys..

Thanks, David..

Thank you. We have no further questions in the queue. So this concludes today’s call. Thank you for joining us. You may now disconnect your lines..