Inspired Entertainment - Q2 2023

Transcript

Operator (participant)

Good morning, everyone, and welcome to the Inspired Entertainment Second Quarter 2023 Conference Call. I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. To rescind a question, do the same afterwards. Please note, today's event is being recorded. Please refer to the company's Safe Harbor statement that appears in the second quarter 2023 earnings press release, which is also available in the Investors section on the company's website at www.inseinc.com. This Safe Harbor statement also applies to today's conference call, as the company's management will be making certain statements that will be considered forward-looking under securities laws and rules of the SEC. These statements are based on management's current expectations or beliefs and are subject to risks, uncertainties, and changes in circumstances.

In addition, please note that the company will discuss both GAAP and non-GAAP financial measures. A reconciliation is included in the earnings press release. With that completed, I now would like to turn the conference call over to Lorne Weil, the company's Executive Chairman. Mr. Weil, please go ahead.

Lorne Weil (Executive Chairman)

Thank you, operator. Good morning, everyone, and thank you for joining our second quarter earnings call. With me today are Brooks Pierce, our President and CEO, and Stewart Baker, our CFO. Second quarter EBITDA was $26.2 million, was roughly in line with consensus, slightly up over last year, but at least $2 million less than we would consider to have been the inherent earnings power in the business in the quarter. As can be seen in the P&L, that was in the earnings release, quarter-to-quarter corporate expense increased by $800,000 from $6.2 million in 2022 to $7 million this year, with the vast majority of this increase due to the timing of our audit expenses.

As we reported some time ago, we changed auditors during 2023 or for 2023 from Marcum to KPMG, with the latter now billing us on a different and unavoidably accelerated cycle. In our leisure business, we incurred a statutory $600,000 increase in labor cost in the second quarter due to the UK National Living Wage, but we have since reconfigured and reengineered our processes, enabling us to offset this cost, going forward, beginning with the third quarter. We had about $1 million of equipment sale EBITDA move out of the second quarter into the second half of this year.

Taken together, these items will benefit the second half to the extent of at least $2 million of EBITDA. Since we were anticipating a strong second half in any case, driven by growth in the digital businesses, continued strength in the gaming business, and a return to growth of leisure, we remain more than comfortable with the current full-year consensus. EBITDA on our digital businesses pre-corporate expense allocation grew by 14% year-over-year on a functional currency basis, comprised of 28% growth in interactive and 11% in virtual sports. As anticipated several quarters ago, our interactive earnings continue to accelerate, driven by platform enhancements, high-performing new games, and additional customer integrations. Recent growth in virtual sports has been moderating. We're anticipating a strong re-acceleration in virtual sports as we move into next year.

We expect that our gaming operator partners will be entering a number of new markets and catalyzed by our NFL license. We're expecting to see significant activity in the U.S. market. In a moment, Brooks will elaborate on much of this. Our leisure business had a year-to-year decline in EBITDA in the second quarter, due almost entirely to the aforementioned labor cost increase, together with the previously reported loss of a pub customer. As we move through the year, the combination of strong seasonality, new holiday park customers, and improved cost structure, should drive leisure into positive growth by year-end. I should add that the last couple of weeks, the, you know, the trading performance has been very, very strong.

Lastly, by no means least, I should mention that trading performance in our core gaming business continues to be very strong, aided by the very successful rollout of our new Vantage cabinet. Here, again, Brooks will elaborate more in a moment. With that, I'll hand it over to Brooks.

Brooks Pierce (President and CEO)

Okay, thank you, Lorne. As I usually do, I'll try to add some color to the results of each of the segments of the business, both in quarter two performance as well as what we're seeing and what we have planned for the second half of the year, which we're very excited about. Our digital businesses, interactive and virtual sports, had double-digit growth in revenue in the quarter compared to prior year, and through the first half of the year, now represent 31% of our revenue, excluding low-margin sales, and 62% of our EBITDA on a combined basis. This continues the trend of shifting more of our business online and expect these businesses to contribute an even larger portion of our EBITDA going forward and generating significant cash flow with high margins and low capital intensity.

The interactive segment growth of 28% in both revenue and EBITDA was helped in large part by the launch of FanDuel in both Michigan and Pennsylvania, as we've outlined in previous calls. We expect that growth from this customer to continue as we add more and more of our best content with them and go live with them in New Jersey yet this month. The growth of interactive was really across all geographic areas, with Europe/UK growth being 17%, North America growth growing at a strong 52%, Latin America growing even faster, but on a small base.

We see these trends continuing because of the quality and quantity of the content we're releasing every quarter, but we're also starting to see some real traction in some key markets for us, like Italy, with growth of over 230% year-over-year, and the Netherlands, a growth of 95% year-over-year, but both growing off of a smaller base. In fact, we just had our best ever week in terms of both total handle and revenue in the interactive segment ever, just last week. Looking forward, we have some very exciting titles launching in the second half of this year, including Terminator, Big Piggy Bank, and Space Invaders: Win and Spin, along with all of our usual holiday games around Halloween and Christmas.

We'll be introducing some exciting product innovations later this year that we think will accelerate this growth even further. It's a very competitive space, as you all know, but we're clearly delivering excellent growth and cash flow conversion in this part of the business. Moving over to virtual sports, as we talked about in our last quarterly call, the comps in this area are going to get tougher as we grew this segment of the business dramatically in 2022 through the launch of some innovative games, the shift to more people playing online, and some key new geographies. Even with that, our Q2 2023 revenue was a record quarter.

We've consistently said that we believe that one of our biggest potential markets was in North America, that we were gearing our product and sales strategy to capitalize on this, we're starting to see the fruits of that strategy. Good example would be in Ontario, where our virtual sports revenue was up 10% versus the same period last year, the total North American revenue in virtual sports was up 20% year-over-year. That's without even being live with our home run baseball game, our NFL licensed game, the highly anticipated hockey game that will launch in 2024. In baseball parlance, we're in the very early innings of this.

The product team has been working feverishly to have our NFL game ready for the September launch, but as you would expect, it'll take some time to get it rolled out to our customer base around the world. We expect very little contribution in the third quarter, but a greater contribution in Q4 and accelerating into 2024. We're building multiple versions of the NFL product that we'll be launching throughout the next six months to 12 months, similar to the multiple versions of soccer we offer, which currently is our most popular game. We're working with several of the key sports betting operators and expect to be live with them over the rest of this year and even into early next year.

Our plan is that by this period in 2024, we'll have the product roadmap of North American-focused content and the distribution with the largest sports betting operators, alongside the addition of further states from the lottery vertical, to deliver on the internal expectations we have for this segment of the business. No doubt, it's taken a little longer than expected or hoped, but we have a clear vision now on the path to success for this part of the virtual business. Moving on to the gaming side of the business, the highlight of both the gaming segment and the leisure segment has been the launch of the Vantage cabinet in both areas. In gaming, we've now installed almost 50% of the customers we're converting and are still seeing close to 10% improvement in the cash box.

As we had mentioned before, with the trials of Vantage showing a 13% uplift in the cash box, we had realistically expected there would be a modest falloff with the added density. Frankly, almost 10% growth is even better than our expectations, with almost 50% installed. We expect to finish the rest of the Betfred and Paddy Power installs by October, and we'll see the benefit of that for most of the fourth quarter. We've also improved our operating efficiency, as Lorne mentioned, across both the gaming and leisure segments by combining our field engineers, both geographically and cross-trained them on multiple products, and the benefit of those operating efficiencies will now start showing in the second half of the year.

Finally, we're seeing good results from the installation of the terminals in WCLC that we sold last year, with approximately 600 terminals now installed, which we hope will help us sell this product to other provincial operators and other U.S. jurisdictions of distributed gaming. Moving on to leisure. Although the sample size is much smaller, the growth we're seeing in the cash box, cash box for Vantage, in pubs is approximately 14%, and we'll be aggressively rolling this product out with our key pub customers, excuse me, over the rest of the year. Our Flex cabinet continues to be the best performing cabinet in the adult gaming center space.

As Lorne mentioned, we're in the seasonally highest period for our holiday parks, and the early results are encouraging, and we expect this part of the business to be back in growth mode by year-end. Finally, we're making excellent progress in our new lottery system development and have now gone live with online wagering with Lotería in the Dominican Republic and are seeing growth from this part of the business. Particularly, the online lottery part has picked up nicely, as we've seen a 50% month-over-month revenue increase in July. In summary, we obviously have a lot of growth drivers to deliver in the second half across all segments of the company, and our focus remains on execution of these to build momentum for the rest of the year and into next year. With that, I'll hand it over to Stewart.

Stewart Baker (EVP and CFO)

Thank you, Brooks, and good morning, all. As normal, I'll give an overview of the financials. One area where comparability is helped in this quarter's analysis versus the prior period is exchange rates. While the pound to dollar rate was a little lower at 1.25 this year, versus 1.26 in 2022, this gap is much smaller than it has been in previous quarters. For consistency with prior quarters, I use the functional currency pound variance when explaining movements. It's also worth noting that given where the rate currently is and where it was last year in the third quarter, we expect in Q3 that FX will become a tailwind. We lose that complexity around that, the variances, but we gain one with low-margin hardware sales.

If you remember, these are in relation to an estate refresh in the UK, as the Vantage terminals replace Eclipse terminals, which have been out for about 10 years now. Historically, we have CapEx these, either some or all of them, but now have an agreement from our large customers that they will do so broadly at cost. As we are selling terminals, the revenue needs to be booked, as does the cost of sale, positively distorting revenue growth and negatively distorting EBITDA margins. In this analysis and the earnings release, we've tried to provide the clarity so you can see the results, including and excluding these sales. As the rollout will likely continue into the fourth quarter, this will be relevant for the rest of the year. Look at the numbers.

Overall, revenue grew 13%, including these low-margin sales, and 7% excluding them. As has already been mentioned, interactive revenue grew at 28% and virtual sports grew at 8%, with the latter coming up against tougher comparatives. In the land-based business, gaming revenue was up 24%, including these low-margin sales, and 6% excluding them. It's also pleasing to be reporting that leisure has returned to top-line revenue growth, growing 2% compared to a decline in the first quarter, year-on-year of 4%. At an adjusted EBITDA level, we grew 1%, which is clearly a smaller growth rate than we've been seeing recently, so it's worth giving some color here. As Lorne has mentioned, we have a phasing difference with the auditor change, which causes a 3% impact on growth rates.

In addition, in the prior year, the nature of hardware sales and gaming were higher margin, as casino terminals don't carry an ongoing revenue for content. We've spoken many times over the years about how these type of sales peak and trough through quarters, and this happens to be a quarter when they were low and the comparative period was high. The other big area of impact is wage inflation, particularly in the leisure segment, which is the biggest staff costs. Costs rising faster than revenues is not a trend that can continue, nor do we expect it to, based on what we can see, based on a combination of cost reduction measures, as well as revenue growth drivers that Brooks spoke about.

Notwithstanding that overall, EBITDA growth for the company was below longer-term trends, it's worth pointing out that both interactive and virtual sports grew at double-digit rates at 28% and 11% respectively. Further down the income statement, depreciation and amortization was up 5%, or $0.5 million. This excludes an out-of-period adjustment from Q1 at $0.6 million, so excluding this was broadly in line. You may have seen in the earnings release that we have revised the prior year numbers for this chart, for this chart, based on software assets being amortized earlier than initially recorded. For the avoidance of doubt, this revision does not impact revenue, adjusted EBITDA, CapEx, or cash flows. There were no exceptional SG&A charges in the period, but the interest line does show an increase of $1.3 million year-on-year.

To be clear, this is not reflective of increased borrowings or, or the cost of borrowings, as our rate is fixed at 7.875% until the middle of 2026, but instead reflects Forex differences on cash balances and mark-to-market movements on FX hedges. Turning your attention to the balance sheet, CapEx in the quarter was $10.6 million, down from $11.1 million in the same quarter last year, and from $11.6 million in the first quarter of this year. We finished the quarter with $42 million of cash, which gives us a net leverage of 0.4x when looking at the last twelve-month EBITDA on a functional currency basis.

On capital allocation, you'll have seen we only purchased a nominal amount of stock in the quarter. Still have just under $15 million of this facility available and are constantly evaluating both stock and debt repurchases. Finally, while we are working to try and file the 10-Q today, this may end up not being possible, given the revisions to amortization. If this isn't possible, we'll add details later today with KPI information, usually only in the Q, in the form of an updated investor presentation, and expect the Q to follow shortly after. With that, I'll now hand back to Lorne for any closing remarks before opening up to Q&A.

Lorne Weil (Executive Chairman)

Thank you, Stuart. That was an excellent financial summary. I don't have any further prepared remarks. Operator, if you can please open the program to Q&A.

Operator (participant)

At this time, I would like to remind everyone in order to ask questions, press star and then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from David Bain from B. Riley. Please go ahead.

David Bain (Managing Director and Senior Research Analyst)

Great, thanks so much. I guess, first, Brooks, you mentioned the lottery in tandem with virtual sports. Could you give, maybe an example or two of new potential virtual sports concepts that could operate or be offered in a traditional lottery outlet or sales environment? As you're having those discussions, what's your best take on, on when we may see agreements, understanding that, you know, lotteries don't often move very fast like, like some other industries?

Lorne Weil (Executive Chairman)

Yeah, well, that, that part is definitely true.

Brooks Pierce (President and CEO)

I think we've seen already with both Pennsylvania and D.C., that the lottery vertical is, is definitely a good one for virtual sports. Clearly, the NFL, Lorne can comment on this as well, is something that the lottery industry is, is tremendously excited about, 'cause they've, they've never really been able to, to get an NFL license like we have. All I can tell you is that we're in accelerated conversations with a number of state lotteries, you know, largely driven by the NFL license. We expect, you know, certainly to be able to announce something through the course of the, of the rest of the year. You're right, it does take a little bit longer to get decisions made in, in this space and, and obviously, to do the integration to get it implemented.

I don't know.

David Bain (Managing Director and Senior Research Analyst)

and are there concepts where it could actually be ported to more of a traditional kind of ticket, or numbers format, where then someone-?

Brooks Pierce (President and CEO)

Yeah

David Bain (Managing Director and Senior Research Analyst)

can view it?

Brooks Pierce (President and CEO)

Yeah. I mean, the reality is, is, as you know, the, you know, the outcome of, of a virtual sports game is literally just like a, a Keno game or, a lottery draw. We've had a number of conversations with lotteries, about could this be a new, enhanced, you know, kind of exciting way to accelerate their growth in the, in the draw game space? We've had, you know, our product people on the lottery, state lottery product people having a number of conversations. Whether it'll be, you know, a new, kind of highly innovative, advanced version of Keno or even, as a draw game, you know, we think virtual sports will slot in very nicely to the, to the lottery product offerings.

David Bain (Managing Director and Senior Research Analyst)

Awesome. Then, just, I guess, Stewart, maybe if you could review to the best of your ability, I know some of this is out of your hands, as operators, but kind of the sales weighting of, of low margin, customer transitions, over the next few quarters, the weighting there. Then, I don't, I don't know if, if Brooks or Lorne you mentioned, I didn't hear it, if you discussed the, the network lift from Vantage Cabinets to date?

Stewart Baker (EVP and CFO)

Yes, let me start with, with the first one then, Dave. In terms of number of terminals, that's probably the easiest way of thinking about it. In the second quarter, we delivered around 930 low-margin sales, generating around $4.4 million of revenue. In the third quarter, we expect to do just over 4,000. Then in the fourth quarter, we expect to do just over 1,000.

David Bain (Managing Director and Senior Research Analyst)

Perfect.

Brooks Pierce (President and CEO)

Um, yeah-

David Bain (Managing Director and Senior Research Analyst)

Do we have. Oh, sorry.

Brooks Pierce (President and CEO)

I did mention. Oh, I'm sorry. Well, go ahead if you want to finish, if there's anything more-

David Bain (Managing Director and Senior Research Analyst)

No, I missed it then. Go, go, if-

Brooks Pierce (President and CEO)

Yeah. On the Vantage cabinet, what we talked about is, if you remember, we said in the, in the trial, we were seeing-

David Bain (Managing Director and Senior Research Analyst)

Right

Brooks Pierce (President and CEO)

a 13% uplift, which was, was very nice. We always had assumed that, that, you know, when you have so many more terminals, that there would be a slight drop in the cash box. Frankly, we've been very pleasantly surprised with now, you know, almost half of the terminals installed, the, the uplift in the cash box is still at roughly 10%, which is, you know, very meaningful for our operator customers, and obviously, bodes well for us going into the fourth quarter when we're fully deployed.

Lorne Weil (Executive Chairman)

To remind them about the pub, too.

Brooks Pierce (President and CEO)

Yeah, sorry. Loren was just saying, the other part of it then, maybe we probably haven't elaborated on this as much as we should have, is, you know, the Vantage cabinet, it's a, a slightly different version of the Vantage cabinet, is going now into the pubs market as well. The early numbers that we're seeing in the pubs market is actually even better than the LBO business at 14%. You know, by the end of the year, we're going to have thousands of Vantage terminals in, you know, multiple segments of our business, and hopefully, continuing to produce the, the results that we're seeing thus far. You know, that's, that's a very nice tailwind for us, obviously, in the fourth quarter, but moving into next year.

David Bain (Managing Director and Senior Research Analyst)

Awesome. Thank you.

Brooks Pierce (President and CEO)

You're welcome. Thanks.

Operator (participant)

Our next question comes from Barry Jonas from Truist Securities. Please go ahead.

Barry Jonas (Managing Director and Senior Gaming Equity Analyst)

Good morning, guys. As we think about the growing importance of digital to the business, can you talk about how you think about the synergies with the land-based side? Thanks.

Lorne Weil (Executive Chairman)

Yeah. Well, there's, I mean, if there, there, there are two important synergies. The origin is the, you know, the content development and this so-called omni-channel strategy that a lot of people think is, is, has been and will continue to be key to succeed in the business overall. We, we, our start in the, in the digital business was our land-based, our main land-based customers in the UK, the William Hill, Paddy Power, and actually even the UK operators in the UK that are not our customers, like Ladbrokes and Coral. When they first launched online gaming in, in the UK, the first games that were launched were the same games that had been played on the, on the machines in the shops. People would play it in the shop. They had a couple of games that they really liked.

They'd get home, they'd play them on their phone or on their computer. The whole idea of developing games in retail, seeing what works in retail, and then transferring those games to online is sort of the origin. That continues to be a very important driver of the business. We get, you know. One of the reasons we're able to introduce so many games to the online market, that drives, I'm not sure if Brooks mentioned it, but I think in the first six months, our interactive's up 50% over last year, something close to that.

We're able to introduce, you know, that many new games because we have, you know, an installed base of 50,000 or more machines in retail, in retail locations that we can amortize that total software development expense. Again, actually, that's ironically where this issue that Stewart mentioned earlier about our having to revise the amortization of this game software, just because we're doing so many games and so many people are doing them, that this has kind of just slipped.

I think continuing in the future, again, the ability to have a huge retail base that lets us really understand what works and what doesn't, and having both a retail and an online business to be able to amortize the cost of the content development, I think is a huge benefit. I, and I think without question, is why we've been able to build such a successful iGaming business that is so profitable so quickly. I think if we didn't have our retail business, we wouldn't have been able to do that in a million years.

Brooks Pierce (President and CEO)

Yeah, Barry, just one, one last point I'd add to that. I think it's, it's interesting that you see it's, it's somewhat different by geography. Obviously, where we have big installed bases of retail terminals in the UK and in Greece, what you would see is the same content that's at the top of the board for both online and retail in those markets, but it would be different content in Greece than it would be in the UK. Having the ability to be able to develop games specific to geographies-

Lorne Weil (Executive Chairman)

Good point.

Brooks Pierce (President and CEO)

really does kind of enhance our, our growth. As I mentioned, it's a very competitive space. That's, that's certainly a big advantage that we have. Hopefully, as we grow our North American VLT business, we'll start getting even more and more traction from that in North America as well.

Barry Jonas (Managing Director and Senior Gaming Equity Analyst)

That, that, that's extremely helpful. Just as a follow-up, there, there's been some M&A activity in the space since your last call. I just wanted to get your thoughts on your appetite for M&A here. Thanks.

Lorne Weil (Executive Chairman)

Well, our appetite from M&A- for M&A, you know, continues to be, you know, strong as it always has been. As, you know, we've talked about this a number of times, Barry, we're not going to do an M&A, you know, just for the sake of doing M&A, so we can, you know, acquire some earnings. I think we, we have a pretty clear template of what we're interested in. We don't have any intention of doing anything that would be considered, you know, a significant diversification. I'm strongly of the opinion that, you know, sticking to your knitting is the best strategy. We're looking at lots of stuff. We're not gonna overpay, we're not gonna do anything that's dilutive.

As things come along, that fit that template and the numbers work, then, you know, we're anxious to do it. Obviously, our balance sheet right now is really strong. As Stewart said, the leverage is, you know, right now two and a half. I would imagine by the end of the year, it might be down to two. And we've got plenty of cash, we're generating plenty of cash, so we certainly have the resources to do it. We're not going do anything unless it really makes sense.

Brooks Pierce (President and CEO)

Barry, one other thing, it's obviously, it's prescient today with all the news with Penn and ESPN, et cetera, et cetera. You know, M&A can benefit us in other ways. As the sports betting space is, is getting more and more competitive, and M&A is, is going on in that space, and with the NFL license that we have, which is something that we assume that, you know, all the sports betting operators are going to want this product, kind of the rising tide should lift all boats, and we think that will be very beneficial to us.

We're, you know, we're happy to see, you know, how big and competitive the, the sports betting business is, because we think it will obviously, as we've talked about many, many times, virtual sports is complementary to the sports betting business, and in the rest of the world, it's roughly 10%-15% of sports betting. We're, we're delighted to see sports betting continuing to grow in the way it is.

Barry Jonas (Managing Director and Senior Gaming Equity Analyst)

Awesome. Thanks so much, guys.

Lorne Weil (Executive Chairman)

Thanks, Barry.

Operator (participant)

Our next question comes from Jordan Bender, from JMP Securities. Please go ahead.

Jordan Bender (Senior Equity Research Analyst)

Great, thanks for taking my question. I want to start my follow-up. You guys talked about in the virtual sports segment, just kind of the comps getting tougher into the back half of the year. Is it kind of fair to assume that that is, you know, mid-single-digit growth in two H, and then you mentioned in 2024, that's when it starts to reaccelerate again? Is that kind of the right way to think about it?

Lorne Weil (Executive Chairman)

Yeah, yeah, I, I think it is. I mean, I, I think as, as Brooks was saying in his, in his part, that a, a major driver- of the growth, in virtual sports is the opening up of new geographic markets. Because after i-i-in, in the absence of, of, of a, of, of a game-changing product like the NFL football game that Brooks talked about, you know, after two years, you know, the new markets tend to f- you know, after a, a big growth period, tend to flatten out a little bit. going back 1 year or so ago, for a period of time, we had a, a significant, you know, increase in new territories.

You know, that kind of slowed down, and, and then the growth, you know, with a time lag of a year or 18 months, begins to slow down too. Now looking ahead. I think your numbers are, are, are right in terms of the short-term growth expectations. From our conversations that we're having with our customers, they are preparing to enter a number of new geographies over the course of the next year or 18 months, together with the impact of the NFL game that I think we're pretty confident will, will re-accelerate the business in the States, where effectively, each state is like a different country.

I think, I think, yeah, I think 1 year from now, we'll be comfortable that we'll be back on a growth cycle, as we were, let's say, one year ago, because we'll have the new geographies combined with the NFL product.

Jordan Bender (Senior Equity Research Analyst)

Okay, that, that's great color. I guess my second one here is just on the margin within the virtual sports segment. It seems like, you know, quarter after quarter here, we continue to talk about that hitting new highs. You know, where are you guys seeing the leverage from that keeps pushing up that margin? You know, I guess if we look into 2024, is it kind of fair to assume that as revenues keep going up, you're gonna continue to gain that operating leverage that you've seen over the last, like, 18 months or so?

Lorne Weil (Executive Chairman)

Yeah. And you can see it in our interactive business, too. As the interactive business grows, the margin is, you know, either the gross margin or the EBITDA is growing faster than the revenues are, because this is a classic case of, you know, build once, sell many times. You know, we build a game, then the operating costs, apart from marketing, is simply the cost of electronically delivering the game to the customer base. As the customer base grows, the costs really don't grow.

In theory, it's a business where the margin will continue to get better, almost to infinity, as the sales grow, unless the growth is driven by something that requires some huge incremental expense that we right now don't have, and at this moment, I can't see what that is. So at least for the foreseeable future, I don't see the revenue margin dynamics changing.

Brooks Pierce (President and CEO)

Yeah, and I think, Jordan, that Lorne's comment on geographies and expanding geographies just accentuates that. Because for us to go into a new geography for either virtual sports or, or our iGaming business, you know, it, it is selling the same thing and, and, you know, further expansion. When I mentioned in my comments about how Italy has grown substantially for us and how the Netherlands has grown substantially for us, I mean, that's, that's been a very pointed focus for us, to try and get more markets to grow like we've seen in North America and UK and Greece, et cetera, et cetera. We are starting to see the, the benefit of, of kind of more effort and, and more markets, and then obviously, whatever new markets open.

Jordan Bender (Senior Equity Research Analyst)

Great. Thank you very much.

Brooks Pierce (President and CEO)

Sure thing. Thanks.

Operator (participant)

Our next question comes from Edward Engel from Roth MKM. Please go ahead.

Edward Engel (Senior Research Analyst)

Hi, thank you for taking my question. Appreciate the kind of the cadence of the Vantage rollout. I just wanted to kind of two quick ones on that. Would you expect all of this kind of rollout that you've talked about in the past to be finished by the end of this year? And then of those kind of 6,000 that you pointed out, is that all for a sale at low margin, or is any of that kind of invested on your balance sheet? Thanks.

Brooks Pierce (President and CEO)

Um-

Lorne Weil (Executive Chairman)

It's all-

Brooks Pierce (President and CEO)

yeah, it's all low-margin sale, and certainly in the, the LBO or betting shop business. We, we'll be done with Paddy Power and Betfred, this year, but we would, the William Hill conversion will go into next year. In terms of the pubs, most of it will be done, or a big chunk of it will be done this year, but there'll also still be some lingering conversions in the pubs market next year.

Lorne Weil (Executive Chairman)

On our balance sheet, the, the pub, the pubs. I add the What Brooks was saying about the betting shop business, in answer to your question, yeah, that's all, that, that- those 6,000 machines is all in, in the betting shops, and that they're all being bought, effectively financed by the customers. The, in the pub business, we continue to make the CapEx-

Brooks Pierce (President and CEO)

and obviously, we derive the benefit of the increased, cash box that it's driving. For a variety of reasons, our, our CapEx on a game, in the pub business is much, much lower than the CapEx would have been on a game that we were putting into the betting shops.

Edward Engel (Senior Research Analyst)

All right, that's helpful, Colin. Thank you.

Ryan Sigdahl (Senior Research Analyst)

Our next question comes from Ryan Sigdahl, from Craig-Hallum. Please go ahead.

Good morning, this is Will on for Ryan. Thanks for taking our questions. First wanted to touch on FanDuel. It seems like the launch and rollout is going well. Give an update on New Jersey? Curious on when you think Pennsylvania might launch, in addition to that, are you supplying virtual sports to FanDuel?

Brooks Pierce (President and CEO)

Well, in terms of, of Pennsylvania, we're already live with FanDuel in Pennsylvania. In terms of New Jersey, I would say it's going to happen this month. It's always, you know, subject to final testing and regulators, but we're, we're scheduled to go, I think maybe even next week. Can't really comment, specifically on virtual sports other than what I said in my remarks, and that, that we're in discussions with, you know, many of the, of the operators, the sports betting operators, in particular, because of the NFL license. You know, when we, when we can announce something in that regard, we will.

Ryan Sigdahl (Senior Research Analyst)

Fair enough. Then maybe as a quick follow-up, MLB Shootout launched during the quarter, I believe. How's that-

Brooks Pierce (President and CEO)

It did.

Ryan Sigdahl (Senior Research Analyst)

performed, and has it helped accelerate any traction at all?

Brooks Pierce (President and CEO)

It hasn't launched yet, so, it will go live this quarter. I think with bet365 first, and then we'll go into others. When we, you know, when we have our next quarterly call, we'll obviously be able to update what's happened both in the NFL game and the Home Run Shootout. You can highly anticipate that in the third quarter call.

Ryan Sigdahl (Senior Research Analyst)

Great. Thanks, guys.

Brooks Pierce (President and CEO)

You're welcome. Thanks.

Operator (participant)

Our next question comes from Chad Beynon from Macquarie. Please go ahead.

Chad Beynon (Managing Director and Senior Analyst)

Morning. Thanks for taking my question. Wanted to revisit the margin question. On the, the, the non, new CapEx or the, the, the non, new machines that are, that are coming in at low margins, can you help us think about where gaming and leisure margins are versus, you know, maybe how you were thinking about it last year? Whether it's wage, utilities, freight costs, et cetera, a lot of moving pieces on the inflation side. Just wondering if that same store margin business is starting to look a little bit better here. Thanks.

Brooks Pierce (President and CEO)

Stewart, you want to, you want to handle that one?

Stewart Baker (EVP and CFO)

Yeah, sure. Hey, Chad. In terms of leisure segment, let's start there, it might be a bit easier. As we said, there's the impact on the top line of the declining, or the lost pieces that we took out from the pub business, in kind of Q3 for the last year, that's now annualizing. We've got the new impact of additional holiday parks, which boosts it, particularly in this Q3 period that we're in now. Then there's the wage inflation piece that we talked about, that's particularly where you, you can see in Q2. We think that for the cost reduction reasons that we took in the prepared remarks and then the benefit of the additional holiday parks revenue, we think leisure margins will be back where they were.

As Lorne said, certainly back into EBITDA growth as well as revenue growth. On the gaming side of the business, obviously, the low margin sales to Betfred and Paddy Power are distorting the numbers at the moment. If you take away those numbers, there's a bit of a in quarter, year-on-year decline, as we had the high margin product sales in Q2 of last year. They jump around, you know, as we spoke about over the years. There's no declining trend there. It just happens to be a lower quarter this time versus a high comparative. You know, all the upside that we're seeing from Vantage will fall to margins, and there's no additional cost on that. Then we've got the additional the cost reduction measures in gaming as well.

Putting all those pieces together, you know, at least similar margins, if not improving margins in gaming.

Chad Beynon (Managing Director and Senior Analyst)

Excellent. Thank you on that. Here in the U.S., there's some really good momentum in North Carolina. I think two bills have been put forward from the separate houses on distributed gaming legalization. If this market legalizes... I guess maybe a two-parter on this: One, if this market legalizes, you know, would you be ready to get into that market, given what you've done in other some other distributed markets? Secondly, Lauren, how are you just thinking overall, if, if this passes, how other states might, you know, look at this as a, as a source for revenues? Thanks.

Brooks Pierce (President and CEO)

Sure. Yeah, no, well, we obviously monitor that very closely, and certainly depending on how it goes in North Carolina, but if, if, if it does pass and they expand into distributed gaming, similar to what they've done in Illinois and the, you know, the provincial markets in Canada, yeah, that's right, that's right in our sweet spot. Distributed gaming, where it's, you know, a large number of locations with few numbers of machines, where downloading content makes a huge difference, that's, that's our absolute sweet spot. You know, we've always believed that distributed gaming, was going to be a growth.

Lorne Weil (Executive Chairman)

driver in this, in this industry that, you know, the, the growth or the building of a bunch of big casinos going forward probably seems to have slowed down. If North Carolina were to do it, that might be a tipping point for other states, as we've seen with gaming legislation throughout the years, is generally when one state does it, surrounding states feel like they're impacted, then they tend to pass it as well. Yeah, we- we're obviously big, advocates for distributed gaming because we think it fits perfectly with our kind of what we do everywhere else in the world.

Chad Beynon (Managing Director and Senior Analyst)

Thanks, Brooks. Appreciate it.

Lorne Weil (Executive Chairman)

Okay, Chad. You're welcome.

Operator (participant)

I will now turn the call back over to Lorne Weil for closing remarks.

Lorne Weil (Executive Chairman)

Thank you, operator. Once again, thank thanks to all of you for joining the call. I know everyone is anxious to get off the phone because there's a very exciting conference call going to begin at 9:00 A.M. I might even listen to it myself. In the meantime, let me just iterate that we are very ebullient, very positive about where we're going to be in the second half of the year. A lot of things we've been working on are, are coming together very nicely, and I think we're going to be very happy with the year come the end of December. We look forward to speaking to all of you in three months, and thanks again.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you for all joining. You may now disconnect.