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spk10: Good morning everyone and welcome to the Inspired Entertainment fourth quarter 2022 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Please note today's event is being recorded. Please refer to the company's safe harbor statement that appears in the fourth quarter 2022 earnings press release. which is also available in the Investors section of the company's website at www.inseinc.com. It is now my pleasure to turn the call over to Lorne Wheel, Executive Chairman. Please go ahead.
spk03: Thank you, Operator. Good morning, everyone. Thank you for joining our year-end conference call. Here with me on the call, as usual, are Brooks Pierce, who, since our last call, has very deservedly head chief executive added to his president's title. I know you all joined me in congratulating Brooks on this great milestone. We also have our CFO, Stuart Baker, who, as you'll see in a moment, seems to have more than regained full strength since his illness some time ago. We're also joined for the first time this morning by Eric Herrera, an extremely talented finance and development executive who recently rejoined Inspired is VP of Corporate Development. Eric was a key member of our finance and corporate development team at Scientific Games for many years and later a key part of our SPAC team that undertook the merger with Inspired around six years ago. Incidentally, Brooks and Eric are making this call from the Roth Conference in California. So if any of our listeners are attending Roth, please feel free to track them down. I should also mention that after many years as the chief investor relations executive of Inspired, and before that, Scientific Games, Amy Remy has recently departed to pursue a really great and well-deserved opportunity elsewhere in the gaming world. Rather than try to replace Amy, we've chosen instead to retain Jacques Cornet and his gaming team at ICR, a firm we are quite familiar with and highly confident in. One of the ICR principals did great work for us at Scientific Games while he was head of equity capital markets at Bear Stearns. And for the last few years, ICR has very successfully handled investor relations for the New York Stock Exchange listed company Technoglass, an organization with which I have had a close non-executive affiliation for several years. So welcome, Eric and Jacques. Congratulations again to Brooks. and to your continued great health, Stuart. As anticipated for some time, we reached the $100 million EBITDA milestone in 2022, far ahead of 2021 by any measure. As has been our practice in the past, we don't provide official forward-looking guidance, but the research community is generally pretty accurate in its consensus. And as 23 is unfolding so far, we don't expect that the 2022 milestone will stand for much longer. More important than the numbers themselves, our overarching strategy is playing out as well as we could have planned. Our combined digital businesses grew to account for 53% of our EBITDA in the fourth quarter of 2022, up from 46% a year earlier, driving us inexorably toward a higher growth, higher margin, less capital intensive business model. At the same time, our strategy of moving our retail business in the right direction, excuse me, in the light direction is taking hold as well. During the fourth quarter, we signed contracts with Betfred and Paddy Power to deliver a combined 7,000 of our brand new Vantage cabinets through 2023. As we have explained previously, the step down in EBITDA from these two major accounts occasioned by our capital light strategy and pretty much run its course by the end of 2022 because the new vantage cabinet has been showing a 13 wind per day uplift in field trials we can actually anticipate as the rollout proceeds through 2023 we will in fact see an acceleration in ebada from these major accounts notwithstanding the very positive capital impact About a month ago, it seemed like half of Inspired Entertainment attended the annual ICE show in London. I know that Stuart has been dreading receiving the bill for this, but I'd been attending and exhibiting at this show for roughly 20 years, and the response to the product range on our booth and the demos provided by our team were like nothing I've ever seen. Without doubt, the star of the show was the new aforementioned Vantage cabinet, both the vetting shop version discussed just now, and in particular a version we call Vantage Cat C, targeted at the arcade and pub markets. In almost no time since its introduction, we've built a backlog of close to 1,000 new Vantage cabinets for the arcade, and is also known in the UK adult gaming center market. Our entry into this business came as a result of our Novomatic acquisition a couple of years ago, and the revenue and profitability have been quietly but very rapidly accelerating since. As the number of traditional betting shops declined in 2019 and 2020 in response to the reduction in maximum stakes that many of you will recall we discussed ad nauseum at the time, the number of arcades has actually grown sharply in tandem, helping to drive the growth in our overall gaming business we're now experiencing. So this seems to be one of those very rare cases where the law of unintended consequences surprises us with an unintended dividend. Based on hugely positive customer response, we expect the Vantage Cat C will have a comparable impact on our pub business. Our leisure sector overall had a very successful 2022, far ahead of 2021. But as you can see in their press release, there was a hiccup in the fourth quarter. Most of this decline was attributable to currency movements, but there was some weakness in the business itself, mostly timing-related, that Brooks will get into in greater detail in a moment. But for now, let me say that as we begin to deliver the Vantage Cabinet to the pub customer base, we confidently expect to see market share gain, a more rapid conversion to an all-digital estate, and perhaps most importantly, higher revenue per day all of which will combine to restore the leisure business to a more appropriate level of profitability. The performance of our digital businesses more or less speaks for itself. The EBITDA for the virtual sports and interactive businesses combined was $15.6 million in the fourth quarter of 2022, 40% above the level of the fourth quarter of 2021. The virtual sports business accelerated dramatically during the depths of COVID, which many of us will remember, when both live sports and live gaming venues were shut down across Europe, leaving online virtual sports as the only game in town, so to speak. The general thinking at that time was that once both live sports and live venues came back on stream, the virtual's business would revert to its prior level. But not only did it not retreat to pre-COVID levels, it continued to accelerate as illustrated by the most recent fourth quarter numbers, which saw 36% year-to-year growth in revenue and 56% growth measured in functional currency. Underlying this amazing trajectory has been a combination of organic growth with existing customers, new geographies, new customers, and very effective new product development. Likewise, the interactive business defied predictions that it would retreat in a post-COVID world and indeed has lately begun to re-accelerate, posting EBITDA growth of 21% in the fourth quarter, essentially all of it coming in North America, another aspect of our overall strategy that seems to be working well. In the longer term, interactive growth will be driven predominantly by the coming online of new jurisdictions. But in the shorter term, there are several important drivers to our own interactive business. We recently completed our integration with FanDuel and expect to go live by the end of March, an extremely important development given FanDuel's strength in the IEA market. Because the timing of our entry into the Pennsylvania market lagged our other states, we feel we still have significant growing room left in Pennsylvania. And lastly, we have completed some very important enhancements to our platform that should drive growth in all markets. Let me lastly say a few words about our lottery activities. Results in our flagship operation in the Dominican Republic are continuing to run well ahead of expectation. With a population of 12 million, 2,500 retail locations, and revenues well into nine figures, our Dominican Republic lottery operation is comparable in size and scope to many of the state lotteries in the United States and around the world. Since taking over this operation about a year ago, we have been running the retail network and at the same time working on the development of the iLottery platform, and we expect that this will launch before the end of March. There are three very important benefits to this launch. It will enhance the profitability of the DR operation itself. It will give us a captive location to test, refine, and showcase our iLottery content. And it will give us an iLottery platform that we can use worldwide. And finally, a word on our stock repurchase program. In the fourth quarter, we purchased about 40,000 shares at an average price of $9,000. And since the inception of the program, we have repurchased a little over 1 million shares at an average price of $9.79. We have significant room remaining in our repurchase authorization, and we will continue to monitor this carefully. And with that, I'll hand it over to Brooks.
spk05: Okay, thank you, Lauren. And thank you for the congratulations on the title change. But more importantly, my sincere thanks for the guidance and mentorship you have given me over the last 30 years now. Now into the business itself and our performance in quarter four for the full year. And as I normally do, I'll dive a little deeper into each segment and provide perspective on what we're seeing ahead for quarter one in 2023. business overall continues to perform extremely well and we're encouraged by the results and certainly the momentum that's carrying into 2023 although we report in four segments we view the business a bit more simplistically into the digital business virtual sports and interactive and the land-based business gaming which includes lottery and leisure the digital business is characterized by higher growth rates higher margins lower capital intensity, and increasing opportunities for growth, particularly in North America. Digital now represent more than 50% of EBITDA. The land-based business is lighter from a capex standpoint than it has been in the past. This business is characterized by recurring revenues and growth coming from increasing the cash box of our installed base by leveraging our content capabilities across various types of venues, including bedding shops, pubs, lottery, retail, adult gaming centers, holiday parks, motorway service centers, and bingo halls. The land-based business also has tremendous operating synergies. We're in the midst of consolidating the service organizations across our retail business in the UK. When we acquired Novomatic Technology Business in the UK a few years ago, we kept the two field organizations separate to start the process. But we've now embarked on a consolidation plan that will generate significant savings starting in the second half of this year. Lauren constantly reminds us of the Jack Welsh adage that anybody can grow if they don't have to worry about making money, and anybody can make money if they don't have to grow. But the true test of a successful company is its ability to do both. We are 110% committed to doing both across the enterprise. Within digital, our virtual sports business continues to deliver record results with full-year 2022 revenue up 71% on a functional currency basis and EBITDA up 83% on a functional currency basis year-on-year. The mix between online and retail virtual sports now sits at roughly 80% online and 20% retail, but both are showing growth across multiple product lines and across multiple geographies, including the U.K., Italy, Greece, and Morocco. These trends are continuing in the first quarter. And in addition, we have a number of product enhancements and launches like our home run shootout game scheduled in the end of the first quarter, the beginning of the second quarter that we believe will continue to contribute to these record results. We're also encouraged that the progress we're making in our North American virtual sports business as Ontario is now a significant market for us. Our two U.S. lottery customers in Pennsylvania and D.C. are performing well. and we're building a pipeline of additional lottery and sports betting operators opportunities in states that we expect to launch later this year and into 2024. We're very encouraged by the progress we're making on the other side of our digital business, the interactive or iGaming part. Interactive revenue grew 24% on a functional currency basis in Q4 compared to Q4 2021. This growth comes with Inspired still not live yet, as Lauren mentioned, with FanDuel, who are approximately 20% of the USI gaming market. We are currently targeting being live with them either towards the end of Q1 or more likely early in Q2. This growth is driven by improved content, consistent delivery of games, roadmaps, faster integrations with new customers, and a greatly expanded account management team with new additions in both North America and Europe. We're very excited about some of our titles coming out over the next few quarters, including a licensed Terminator game that I've seen that looks amazing, and it's eagerly anticipated by our customers. As Lorne mentioned, our booth at ICE was a capacity throughout, and the positive feedback we received from our customers on new games and new products confirms our belief that this business segment also has tremendous momentum coming into 2023. Moving on to the gaming side, Q4 was a quarter of significant achievement for us as we successfully delivered our largest North American gaming machine sale to Western Canada Lottery Corporation of 820 Valor terminals. This was achieved through a great partnership with our customer in Saskatchewan under some very difficult weather and operating conditions, and we're extremely proud of the whole group that delivered this important project. Q4 was also significant due to the contract signed with Bedfred and Paddy Power in the quarter on the backs of the successful trial of the Vantage cabinets, which, as Lorne mentioned, produced a double-digit uplift in the cash box of the trial machines. We'll be very busy throughout 2023 delivering these approximately 7,000 machines across the estates of both customers, a not insignificant operational and logistics challenge. Lauren covered thoroughly in his remarks about the pipeline of Vantage cabinets that we'll be delivering to the AGC market in 2023. But these terminals also come with the tail of content fees beyond the initial sale, which has grown tremendously over the last two years and is building a base going forward as our installed base gets bigger and bigger. Looking forward, we're in the early stages of trials with two customers in North America. That, if successful, will build a larger footprint for our North American gaming machine business. As Lauren mentioned earlier, our leisure business, and more specifically the pub segment, had a challenging fourth quarter. While this continues to be a key strategic market for us, we experienced a rare, and we confidently believe temporary, loss of market share in 2022, the impact of which peaked in the fourth quarter. At the same time, we signed a very strategic new Holiday Parks customer, which by mid-year should generate equivalent earnings. We'll roll out the Vantage product throughout the pub market, driving both regained machine share and higher per machine income, and therefore we feel confident that we should end the year nicely ahead in leisure. Loren covered the lottery activities in detail in his remarks, and I share his enthusiasm for this vertical as it really is in our DNA. Many of our biggest customers around the world, such as OPAP, CECL, LATAMATICA, and the Morocco National Lottery are operators that we've had a ton of experience with in this vertical throughout our careers. We're starting to see momentum build worldwide, but particularly in North America for our iLottery content, our virtual sports, and eventually iLottery and retail lottery platforms based on our work in the DR, which we believe will be transferable to other lottery jurisdictions worldwide. With that, I'll hand it over to Stuart for some further remarks.
spk00: Thank you, Brooks. Good morning, all. As has been mentioned already, we're very pleased with the performance in the quarter and the year. As a number of metrics have already been covered, I'll keep the overview of the numbers brief and also give a short update on a couple of other areas. As with recent quarters, we have been impacted by exchange rates, which come into play in a few places, but none more so than the conversion of functional currency GPP results to the reported US dollar results. In Q4 of 2022, the average pound-to-dollar rate was 118 compared to 135 in Q4 of 21, a fall of 13%. Across the full year, the average rate declined to 1.23 from 1.37. For this reason, unless stated otherwise, I'll keep comments to functional currency variances to best focus on the underlying trends of the business. So overall in the fourth quarter, revenue grew 34%. And as a reminder, while the full year number comparison to the prior year does include the impact of lockdowns, there's no such impact in Q4. And as such, this is a like-for-like trading environment. On a segmental basis, gaming grew 61%, virtual sports grew 56%, and interactive grew 24%. While gaming's growth is obviously positively impacted by the delivery to Western Canada, gaming service revenue also grew an impressive 14%. Leisure declined 4% for the reasons mentioned by Brooks. It's also worth mentioning in this segment that motorway services revenue grew by 17%, and the holiday park revenue growth was impacted by a tough comparative that included the benefit of a performance bonus in the prior year. Adjusted EBITDA overall was up by a similar amount to revenue, growing 33% year-on-year, and as such, margins were comparable year-on-year, ironically also 33%. Our thesis is that as the digital businesses grow faster than the land-based businesses, our overall adjusted EBITDA margin will increase. With virtual sports adjusted EBITDA margin for the quarter of 83%, an interactive margin of 51%, the four trading segments combined, i.e. excluding corporate, grew EBITDA margin from 38.6% to 41.6%. However, the prior year corporate number benefited from some non-repeatable benefits, and the current year had the opposite impact, meaning that the total overall company margin stayed the same. Overall, for the full year, revenue increased 53% and adjusted EBITDA 73%. As touched on previously, the first few months of 2021 were impacted by COVID lockdowns, which obviously dampened the prior year comparatives in gaming and leisure. But this isn't the only factor contributing to the growth rates, with virtual sports revenue increasing 71% and interactive increasing 13%. And as an aside, it will be great going forward to be able to talk about year-to-date results without having to talk about the impact of lockdowns. Further down the income statement for the quarter, profit before tax grew to $5.9 million from a loss of $2.7 million in the prior year. For the 12-month period, it grew from a loss of $38.3 million to a profit before tax of $25.5 million. Earnings per share for the full year grew from a loss of $1.60 in 2021 to positive $0.84 per basic share and $0.77 per diluted share in 2022. Turning attention to cash, we started the quarter with $37.4 million of dollars and ended it at $25 million, a decrease of around 12.4 million, with a breakdown as follows. Firstly, the quarter included a biannual interest payment of around $11 million. Secondly, there were significant working capital outflows, the majority of which we expect to reverse in 2023. The biggest of these was in accounts receivable due to the timing of sales in the quarter, and I'm pleased to say in all cases, the largest revenue items have now turned to cash in the first quarter. We also saw an increase in inventory holdings. As mentioned in the release, this was deliberate to get us on the front foot of any potential supply chain challenges in the amount of terminals we expect to deliver in 2023. In prior years, we would not have had the cash to be able to make these short-term investments and would have suffered with lost or delayed sales results. So this left net secured senior debt at year end of $258 million and net EBITDA leverage in dollars of 2.6 times, significantly reduced from the 4.2 times at the end of 2021. And we expect this meaningful reduction in net leverage trend to continue during the course of 2023. While we're on the subject of borrowings, I'll take the opportunity to remind you the interest rate on our bonds is fixed. And while we do have a call option starting this May, our bonds don't expire until June 1st, 2026. So with that, I'll return to where I started and reiterate that we're pleased with the results we're reporting today and are excited about the opportunities ahead of us. I'll now hand back to Lorne for any closing remarks before opening up to Q&A.
spk03: Thank you, Stuart. It's always nice to hear a report that's that positive. And no, I don't have anything further to add, Operator, so if you can open the call up to questions, please.
spk10: At this time, I would like to remind everyone, in order to ask a question, press star, then the number 1 on your telephone keypad. Your first question comes from a line of Barry Jonas from Truist Securities. Your line is open.
spk08: Hey, guys. Good morning. First off, congratulations to Brooks. And I guess my first question, I know you're not giving guidance, EBITDA guidance for the full year, but there's clearly a lot of positive things you've highlighted for 2023. So maybe as you roll it all together, can you give any more color on how you see the consolidated EBITDA growth trajectory this year? And then any thoughts on seasonality as well? Thanks.
spk03: Well, the barriers we gave If we gave a clearer perspective on how all of the positives roll together to produce a consolidated EBITDA for 2023, I think that would probably be considered guidance. So, I don't think we can do that, but, you know, I think we feel good about the consensus
spk08: uh numbers that for the full year 2023 are uh are out in the market and we're gonna do everything we can to outperform the consensus that's about all i can say okay that that that's helpful and uh you know it was pretty helpful color on the dominican lottery and specifically i lottery i guess as you think about the growth potential for content and platform curious to get your thoughts
spk03: uh around new jurisdictions legalizing or are you more looking to sort of attack existing markets for competitive wins um you know nobody knows what what's going to happen with with new i lottery jurisdictions you know i think where we are right now is i think we're quite a ways behind where everybody would have expected we'd be at this point. There's only a handful of lotteries in North America that have iLottery. There are a bunch that we know want it and are working to make it happen, but I think it's really, it's impossible to say at this point you know, what's going to happen for sure. In terms of our own strategy, I think we're focused in the short term on our content strategy because there really isn't much opportunity, at least in North America, for our platform. I don't think any of the existing lotteries Lottery operators are interested, particularly in changing their platform supplier. But I think as the industry grows, more and more of the revenue will be in the content side as well. But I also should say, Barry, that we're looking at a number of jurisdictions as opportunities for both platform and content outside the United States. So the DR... uh in that in that sense is a it is a you know demo site for us because there are dozens of lotteries uh around the world particularly in europe that uh would be and and in latin america that would be opportunities for us yeah lauren and let me just add one more thing and thanks barry for the for the
spk05: Well, thank you. One of the things, the nice thing about, frankly, ironically, that things are going a little bit slower in the iLottery side is it really does give us this opportunity, as Lorne mentioned, in the Dominican Republic to refine the product and test, whether it's content, whether it's platform. So frankly, the fact that it's going a little bit slower, I think ultimately may lead to an advantage for us as we build out our product and our content in a market like the DR where we can pretty much test everything. So it's not the worst thing in the world for things to be going a little bit slower, at least from our perspective.
spk03: Yeah, that's a very good point. Thanks, Bruce.
spk08: Got it. Well, excited for the Dominican Analyst Day whenever that happens. Thanks so much for all the callback. I appreciate it.
spk10: And your next question comes from the line of David Bain from B. Reilly. Your line is open.
spk06: Awesome. Thank you. I reiterate Barry's comment on the Analyst Day. Congrats, Brooks, and happy to hear about you.
spk03: I thought you were going to ask for an analyst week.
spk06: Yeah, no, that sounds even better. Perfect. Well, yeah, so the iLottery, very helpful. Next, I mean, obviously virtual sports, obvious growth engine here. I mean, unique scares, to me anyway, versus other products and gaming. Can you give us the setup for this year versus last year? I mean, how should we view potential growth maybe going forward over the next couple of years? I mean... given where we're at today. If you can kind of big picture it, that would be helpful. Are we mid-innings or is it still a young product?
spk03: You want to take a shot at that, Brooks?
spk05: Yeah, I mean, I think we feel, obviously, you know, these growth rates are tremendous. And, you know, at some point it's going to flatten out a little bit. But we certainly feel like we have a number of amazing opportunities in geographies around the world with a number of new products that are coming out. Some of the things that we've done, Dave, to increase the frequency, I mean, we've taken the betting cycles down in a number of markets going from three minutes to two minutes to even one minute, and we've seen a commensurate uplift in the revenue, which really kind of helps validate the product, and we think it certainly works in every market. Obviously, the biggest market that we've been talking about for quite some time is North America. And we've made progress there. I mentioned in my remarks about how Ontario has now gotten to be a significant market for us. And we've been having a number of conversations with both lottery operators and sports betting operators. And I think people are coming around to the idea that this is a product that's viable in terms of the sports betting operators. In terms of the sports betting operators, you know, this is a great product for them to add to their mix. So, you know, we feel like we've got a lot of runway across all of the virtual sports business.
spk06: Okay, awesome. And then, thanks, Brooke. So from a content kind of creation perspective, you have iLottery, virtual sports, interactive, land-based. I mean, can you give us a sense as to how the team is aligned and if there's going to be any sort of changes, like dedicated content Lottery studios, maybe, you know, from a CapEx perspective, something to think about, or are they just really just feeding into one another? How do you kind of set this up as you broaden categories and strengthen categories going forward?
spk05: Yeah, that's a great question. And honestly, you know, the content teams, if you had seen, you know, what we've done at ICE really across the whole business, they really are kind of hitting on all cylinders. But at some point, we're going to run into, particularly if we gain some momentum in the iLottery content space, where we're probably going to have to add capacity in terms of content. We did actually hire someone on the iLottery side who used to work for us inside games, and he's created three games that you'll see coming out this year that we're pretty excited about. But it's certainly not... you know, out of the realm of possibility that we would add additional studio capacity, whether that be, you know, build it ourselves or potentially acquire it. So generating kind of world-class content is really what we're all about, and we're certainly going to make sure that we have enough capacity to produce it.
spk04: Awesome. A lot going on. Thank you. Thanks, Dave.
spk10: Your next question comes from the line of Ryan Sigdall from Craig Hallam Capital Group. Your line is open.
spk01: Good morning. Congrats on the performance in 2022 and to Brooks. I want to start with some gaming, some Paddy Power, Betfred, transitioning to the asset light model this year. Curious what that transition timeline looks like throughout the year. And then secondly, do you have any other smaller customers that you haven't talked about that are also transitioning? I'm curious more so around the supply chain and installing 7,000 cabinets with those two, but is there enough capacity to do more beyond that?
spk05: Yeah, so I'll talk a little bit about the operational side, but I think Stuart probably should talk a little bit about the financial side. Yeah, look, we've done this before where we've replaced a number of cabinets, and we do it in partnership with our customers because it's, You know, we're going to install 7,000 terminals, but they're over a huge number of locations. So from an operational standpoint, it's a lot of coordination, literally from supply chain all the way through to working with our customers to get them installed in all the locations. So that's pretty much going to take most of kind of the second, third, and maybe even bleed a little bit into the fourth quarter before we'll have all of these terminals replaced. I don't know, Stuart, is there anything in terms of, well, I guess Ryan's just going back a little bit, in terms of the forward inventory that we've done to be able to deliver all this stuff. I mean, we made a conscious decision to go out and deal with anything in relation to the supply chain and get on the front foot, I think, as Stuart said in his remarks. So it's a big challenge, but we feel pretty confident about it.
spk01: Any other customers potentially beyond those two to transition?
spk05: Not meaningful in terms of in the UK, but I think I did mention that we have one jurisdiction that now is active on trial and we expect another one, both of these in North America. Um, but these are, you know, this is a, this would be an order and one location of kind of 150 terminals and another one, it could be up to a thousand terminals. So it shouldn't stretch us in any way, but, but, you know, we've got to go through and have successful trials with them. But obviously if we're successful, there'll be two more markets in North America where we'll have a presence, which is what we ultimately want to do is build a big, you know, North American gaming business.
spk01: Then just one on Interactive. So congrats on FanDuel integration. Good to see that finally done. Curious the timeline on the other two major iGaming operators or leaders, I guess, in the U.S. market. DraftKings, Beyond Pennsylvania, which I believe you're live only in that state, and then BetMGM, and then maybe Beyond those, any updates on Caesars and Penn and some of the other...
spk05: Yeah, so with DraftKings, we're live within Connecticut and New Jersey as well. And interestingly, I don't think we don't disclose down to the customer level, but our performance with DraftKings as of late has been very good. And BetMGM is our biggest customer in the iGaming space, and they continue to produce. They're the leader, I guess, certainly nationwide. They continue to produce amazing results with us. We have a great relationship with them. I can tell you that all of them are very excited about some of the content that we have coming out. I mentioned Terminator License. License brands really do resonate in the North American market, probably more so, and around the rest of the world. So we're, you know, obviously with our background with scientific games, with licensed products, we're very familiar with that space. So I think you'll see more and more of that going forward as a way for us to kind of differentiate ourselves.
spk04: Great. Thanks, guys. Good luck. Thanks, Ryan.
spk10: Your next question comes from the line of Jordan Bender from JMP Securities. Your line is open.
spk09: Great. Thanks for taking my questions, and congrats again, Brooks. I want to start on the virtual side. So the margins for virtuals continue to get stronger. They did throughout 2022. As we look forward in the 23, are the margins you're generating now something that we should think about? Are these sustainable at these levels? Thank you.
spk05: From my perspective, yeah. From my perspective, there's no reason that the margins would be any different than what we're seeing. It's obviously a great business in terms of the growth rates and the margins and Really, there's no capital for us per se. Really, it's just developing the content. So unless Stuart feels or Lauren feel any differently, I don't see any reason why margins will be any different than where they are.
spk04: No, I agree.
spk00: Go ahead, Stuart. I agree. I mean, the business is growing, so it does continue to get a bit more operating leverage, but there's only so far that those margins can go, right? So we might see a small increase in 23 over 22, but, yeah, that's obviously the margins are high to begin with. It's business that we love.
spk09: Great. And then for my follow-up, you know, absent M&A, kind of how should we think about the capital allocation priorities in 23? You know, you've been repurchasing shares throughout the year. I mean, is that kind of how we should think about where cash is going for the year?
spk03: Yeah, I think repurchasing shares is certainly in the capital allocation mix. I think the way our businesses are growing right now, there certainly isn't any feeling that to or need to generate growth by acquisition because, you know, we have pretty much as much growth as we can handle, you know, consistent with our balance sheet targets. You know, we're always looking for, you know, smaller tuck-in strategic acquisitions that can strengthen one of our businesses and, give us assets or access to markets that we don't have. But I'd say right now, philosophically, our M&A attitude is we don't need to be paying unnecessarily high prices to buy earnings, but we're very interested in strengthening our competencies and adding to our asset base. So I think that's how we're thinking about it, and I think that's realistically what you might be able to expect in 2023. Great.
spk04: Thanks.
spk10: And again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from a line of Chad Bann from Macquarie. Your line is open.
spk07: Good morning. Thanks for taking my question. Also echo my remarks to Brooks. Congratulations. Brooks, I wanted to start with the gaming business, and congrats on delivering all the Western Canadian orders in the fourth quarter. I know you talked about a few new markets that you're kind of thinking about for 23, but as we think about North American opportunities on the retail gaming side, As we look out a couple years, is this still a priority to continue to get licensed and kind of color in the white space in other markets, or is it just harder to do just given the types of machines you're currently offering in the market? Thanks.
spk05: Yeah, thanks, Chad. Look, we think we have plenty of runway. You know this, but for everyone, we'll explain. We're targeting the VLT market primarily with G2S because that's the technology that we've kind of built our business on. So there's a number of opportunities across the Canadian provinces, certainly Oregon. So those are the markets that we're going for. Illinois is obviously now pretty much moved into a replacement market. I would say that doing anything in the class three or historical horse racing or any of that space is not something that we're contemplating at the moment. But we certainly have the competency to be able to go into those markets if we chose to. But right now, we see line of sight to the VLT G2S market as really the primary driver for our growth. Okay, perfect. Thanks.
spk07: And then, Stuart, just in terms of CapEx for the year, I don't know if you provided that number. I'm sure it will be in the queue, but could you help us with that? And then a number for 2023. And then also, as an addendum to that, will the Betfred games that are deployed, will those kind of show an inflated CapEx number for this year? I know that'll be a no margin when it's printed from a P&L standpoint, but just trying to understand the free cash flow dynamics. Thank you.
spk00: Yeah, so let me start on the last bit then, Chet. So in terms of the Betfred and Paddy Power, so they will go through revenue and cost of sales. as you say, approximately nil margin. So no impact on CapEx, but will negatively impact overall EBITDA margin. So we're going to try and make that as clear as possible going forward, so we can strip that out. In terms of overall CapEx for the year, the 23 – sorry, 22 came in, as we talked about on the prior call, just around the $40 million mark. And in 23, It gets slightly complicated because some of the capex that we've got does come with an upfront cash consideration from customers. So if we strip that out, it's probably in the region of kind of mid-30 million, slightly up from where we talked about before, but see there's a bit of inflation from those numbers that we talked about before, but also there's a lot of opportunities for us to invest in internally.
spk04: Okay, that's great. Thank you all. Appreciate it. Thanks, Chad.
spk10: And there are no further questions at this time. Mr. Lorne Wheel, I will turn the call back over to you for some final closing remarks.
spk03: Thank you, Operator. I don't have much to say other than obviously we're very happy with our performance this year. Sorry, our performance last year. We're very optimistic about our performance in 2023. We appreciate all of your support, and we look forward to speaking with you in about three months. Thank you.
spk10: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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