Light & Wonder Inc

NASDAQ:LNW

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, and welcome to the Scientific Games Corporation Fourth Quarter and Year-end 2017 Investor Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Bill Pfund, Investor Relations. Please go ahead.

[William Pfund, executive]

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

Our call today will contain statements that include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call. For information regarding these risks and uncertainties, please refer to our earnings release issued late yesterday, the materials relating to this call posted on our website and our filings with the SEC, including our most recent annual report on Form 10-K filed this morning as well as other reports filed with the SEC.

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

As a reminder, this conference call is being recorded, and a replay of this webcast and the accompanying materials will be archived in the Investors section of our website at scientificgames.com.

Now let me to turn the call over to Kevin.

[Kevin Sheehan, executive]

Thanks, Bill. Good day, everyone, and thanks for joining us. Our fourth quarter results were strong across each of our business segments and marked our ninth consecutive quarter of year-over-year increases in revenue, operating income and attributable EBITDA. Our team is achieving solid results, and our momentum continues to strengthen. It is gratifying to see how well the team is performing and driving consistent results.

Let me share a few highlights from each of our business segments that together, delivered top line growth of 9%, reduced our net loss and increased attributable EBITDA by 11%.

In Gaming, revenue was driven by the exceptional strength of our gaming machines shipments, a record-breaking quarterly shipment of 10,249 units. Following a very strong third quarter performance, our replacement unit shipments in the U.S. and Canada were up 23% over the prior year. Also contributing to the Game growth was a 31% increase in gaming systems revenue, reflecting the beginning of the systems rollout to casinos across Alberta, Canada.

In our lottery business, our customer-centric focus helped our U.S. lottery customers grow retail sales of instant games in the fourth quarter by 7% year-over-year, including a record level of instant games quarterly revenue. We did this by providing our customers with a broad offering of instant games, including a wide selection of holiday-themed games. Adding to that, we offer our customers expansive supporting services and advanced technology, including our leading iLottery and mobile capabilities. In fact, today, 1 in 4 U.S. lotteries have an SG mobile lottery app.

Our Interactive segment continues to roll along, with solid growth and improvement. Segment results were a 24% increase in revenue and a 37% increase in attributable EBITDA year-over-year, including a 28% increase in revenue in our social business. And in the first quarter this year, we took another step forward with the reintroduction of a new and improved Jackpot Party social casino app. This enhanced player-engaging version is evidence of our strategy of continued focus on providing the best player experience.

And that leads me to our most exciting accomplishment, which is the completion of the NYX acquisition on January 5. NYX adds a leading capability in sports wagering and online real-money gaming platforms to our own strengths in online gaming content. In addition to building on their own solid track record of growth globally, we believe we are also well positioned to participate in any liberalization of sports betting and online gaming. I've been part of many acquisitions over the years, and it is rare to find a transaction that is both highly strategic in nature and financially compelling in year 1, and NYX checks both boxes. We began our integration efforts following the completion of the transaction and are off to an excellent start.

Most recently, we completed a series of refinancing activities that resulted in pushing out $2.1 billion of our debt maturities from 2022 to 2024 through 2026 and will save us approximately $70 million in annual interest costs at current rates. As we continue to bring down our interest costs and our net debt to attributable EBITDA, we will also be disciplined in the smart use of cash and capital to profitably grow our businesses, which is expected to meaningfully grow our free cash flow during 2018 and 2019.

Now let me turn the call over to Mike.

[Michael Quartieri, executive]

Thanks, Kevin. Hello, everyone. As Kevin noted, our results were solid. Consolidated revenue increased 9% and attributable EBITDA rose 11%. Importantly, we experienced growth and improvement in each of our business segments by remaining focused on our strategic priorities to drive top line growth and our discipline in improving and streamlining our business processes to enhance margins.

Now let me turn to our operating segments. First, our Gaming business. Fourth quarter revenue grew by $32 million over the prior year or 7%. Our AEBITDA margin improved 80 basis points to 48.3%, and as a result, segment AEBITDA increased by $19 million. As Kevin noted, revenue from gaming machine sales increased $20 million or 12% as we shipped a record-breaking 10,249 new units globally. The increase of 817 U.S. and Canadian replacement units in the fourth quarter, coupled with our third quarter increase, resulted in a total of 1,716 more units in the second half of 2017 compared to the second half of 2016.

Shipments for new casino openings and expansions totaled 884 units in the quarter, down from 1,229 units in the prior year. Overall in the U.S. and Canada, we shipped a total of 5,840 new gaming machines, including 4,421 replacement units, 884 units for casino expansions and 535 VGTs to Illinois.

International shipments rose to 4,409 units, which is up 290 from the 4,119 units we shipped a year ago, also reflecting strength in the replacement shipments. Shipments for new casino openings totaled 208 units in this year's fourth quarter, down from 404 units in the year-ago period.

Year-over-year, our average selling price for the fourth quarter was up 4%, primarily reflecting the positive influence of newer cabinets like our TwinStar J43. While the quarter sequential decline reflects a higher mix of international shipments, as we noted throughout 2017, our favorable performance reflects our ever expanding portfolio of innovative content and the strength of the TwinStar family of cabinets, particularly the strong performance being generated on casino floors by the games on the TwinStar J43 and the Lock It Link games on the original TwinStar dual screen cabinet, along with continued solid sales of the Pro Wave, Dualos and other platforms.

Based on our ongoing strong gaming machine performance, we expect continued strong demand in replacement shipments in 2018. However, I would note, just as a reminder as you review your models, that the gaming business in the first quarter, last year included shipments for several large new casino openings, including the ilani tribal casino in state of Washington and a couple of properties in Asia, while the timing of new casino openings in 2018 are expected to occur after the first quarter. For example, during 2018, we fully expect to get our fair share with the expected openings of the Hard Rock Atlantic City and MGM Springfield Massachusetts casinos, whereas we had no new large openings in the second or third quarters of 2017. And of course, we also fully expect to get our fair share of the numerous casino expansions within tribal and commercial operators that will occur throughout the year.

In gaming operations, revenue was down 2% year-over-year. To put that in perspective, that's about half the rate of decline experienced in the third quarter. We are making progress and remain fully focused on executing on our strategic improvements.

The installed base of Wide-Area Progressive and premium participation gaming machines was down 419 units on a quarter sequential basis, largely reflecting our accelerated replacement of older units in the installed base. As noted last quarter, we are experiencing a relatively high level of churn in the installed base of older units being retired even as we continue to install more Gamescape cabinets. We expect to continue replacing our older units on casino floors over the remainder of 2018, driven by the steady introductory pace of new products, including the new V75 extra-large curved screen cabinet and the innovative new TwinStar J43 iReel cabinet, which launched only at the end of Q4.

With the introduction of our highly anticipated James Bond-themed games, which are expected to launch midyear, we expect our pace and performance and incremental machine placements to accelerate in the second half of 2018.

The average daily revenue per unit for WAP and premium participation units was essentially flat year-over-year. Revenue from other participation units was essentially flat compared to a year ago as an increase of 785 units in the installed base year-over-year was largely offset by a 2% decline in the average daily revenue per unit, reflecting the impact of lower yielding Greek VLT. On a quarter sequential basis, the more than 1,000-unit increase in Greek VLTs was offset by nearly a 1,500-unit decrease being offline of units in the Caribbean as a result of Hurricane Maria-related damage.

Table products revenue declined approximately $5 million year-over-year, and $11 million decrease in product sales from the record sales level in the prior year period, associated with several new casino openings primarily in Asia, more than offset the $6 million increase in revenue from the higher installed base of shufflers, proprietary table games and other table products. Gaming systems revenue increased $20 million year-over-year, reflecting the beginning of the rollout of the new casino system for Alberta. The first casino went live on November 20, and we expect to continue to roll out the system to casinos across the province through 2018 and 2019. In addition, we continue to roll out the new system to casinos in Ontario through 2018 and '19 as well.

I would point out that our revenue also continues to reflect higher hardware sales driven by the ongoing success of the new iVIEW4 display unit.

Turning to lottery. Our fourth quarter revenue increased $18 million or 9%. Segment AEBITDA was up 20% compared to the year-ago quarter, reflecting the strength of our revenue as well as a more profitable revenue mix and lower operating cost.

Instant games revenue grew 8% globally. In the U.S., revenue grew $9 million or 10% to a new quarterly record of $151 million. The solid U.S. growth included higher year-over-year sales of licensed games, partly reflecting revenue related to the multistate WILLY WONKA GOLDEN TICKET instant game as well as a strong response to holiday-themed games. Our blend of products and services aimed at helping lotteries grow helped drive a 7% increase year-over-year in retail sales for our lottery customers. Our international business increased revenue by $2 million or 3% year-over-year.

Year-over-year services revenue increased, partially reflecting the higher multistate revenues in the U.S. due to the large Powerball and Mega Millions jackpot that occurred in the fourth quarter. Additionally, as noted in the third quarter earnings call, the hurricane storm activity in the fall heavily impacted lottery results in Puerto Rico during the fourth quarter. We estimate the total hurricane-related impact within the lottery segment at approximately $3 million of loss to AEBITDA during the fourth quarter.

A key milestone for the next 9 years was accomplished in the fourth quarter when the Italian Scratch and Win Instant Games concession was renewed with LNS, our Italian joint venture on the same terms. The concession fee was also maintained at the same cost, with our pro rata share being 20% or a total of EUR 160 million. In addition, the supply contract remained the same with Scientific Games being the preferred supplier providing 80% of the instant tickets.

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

We continue to execute on our strategies that lever our extensive library of gaming IP and content to continue to deliver rapid top line growth in a healthy and growing overall marketplace. As an example, during the quarter, we completed significant player enhancements to our established Jackpot Party social casino app and relaunch the app in the first quarter of 2018. By continuously working to enhance the player engagement and enjoyment of our apps, we continue to keep growing that important base of paying players. As a result, our B2C social gaming business revenue was up 28% year-over-year.

Importantly, our earnings performance continues to improve and manifest itself in higher cash flow. Operating cash flow in the fourth quarter of 2017 increased $42 million from the prior year to $118 million. This increase was driven primarily by a $27 million or 28% increase in incremental net earnings after noncash adjustments.

For the quarter, changes in working capital were a $16 million use of funds, and for the full year, working capital changes in aggregate were only a $22 million use of funds, despite a $200 million increase in revenue.

During the fourth quarter, we issued $350 million of our 5% senior secured notes due 2025 and later drew $350 million on the revolver, largely for the funding of the NYX transaction. We acquired $92 million worth of NYX's securities during the fourth quarter and completed the acquisition on January 5, 2018. In addition, we paid our pro rata share of the initial Italy Scratch and Win concession payment of $12 million during the quarter.

Although 2017, we continued to make significant progress in our deleveraging efforts, at December 31, we had $8.1 billion of net debt. Our net debt attributable EBITDA ratio declined to 6.6x trailing 12-month AEBITDA from 7.4x at year-end 2016. And as Kevin noted, we recently completed a series of refinancing transactions. These transactions included upsizing and repricing our term loan B with lower rate from LIBOR plus 325 basis points to LIBOR plus 275. We also added on to our 5% senior notes due 2025 and had our first European bond offering with attractive rates priced 8-year secured -- senior secured and senior unsecured notes due 2026. The net proceeds from these refinancing transactions are being used to redeem the $2.1 billion of our higher-cost 7% senior secured notes, prepay a portion of our revolver and pay accrued interest premiums, fees and expenses associated with the transactions. In aggregate, these transactions, along with the cross-currency interest rate swaps, will lower our annual cash interest costs by approximately $7 million -- $70 million at current rates and reduce our average interest rate by approximately 80 basis points on an annualized basis.

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

Before taking your questions, I would remind everyone that our commitment remains focused on executing operating improvements and capitalizing on smart opportunities that will grow our business and reduce leverage.

Now let's take our first question. Operator, please open the lines.

[Operator]

[Operator Instructions] Our first question comes from John DeCree with Union Gaming.

[John DeCree, analyst]

I wanted to start on the unit sales in the quarter over 10,000. Looks like a quarterly record for you guys, so quite an accomplishment. And you spoke a lot about the replacement units increase, particularly in the back half of '17, and we've heard at least one large corporate customer talking about refreshing a bit more of their floor than they have previously. I was wondering if you could talk a little bit about -- a little bit more color about what you're seeing in replacement demand and if that's, kind of, first customer refreshing some of their floor a bit more than been historical, has kind of stimulated some of their competitors to do the same.

[Kevin Sheehan, executive]

Yes, I can take that. The way we're seeing things right now is we've been through a very protracted period of kind of being in the same place with the -- the way the industry was looking at new machines. And now with the Caesars' bankruptcy behind us and the economic activity that we're experiencing right now, you can sense and see that the operators are back in the investment mode. And the fact that we have all these great games coming out and now currently has enabled us to be very strong, and we see that continuing. We see that momentum continue with the other operators as we go through 2018. So we're very optimistic about where our situation will be, vis-à-vis our position in the market.

[John DeCree, analyst]

Kevin, if I could follow up. Are you getting more kind of inbound inquiries from your customers? Are they seeing kind of some of the performance trends and coming to you looking for a little bit more? Or is it more of a kind of a sales process on your end going out and getting a little bit more replacement, if one kind of strategy or event has been kind of more occurring than the other?

[Kevin Sheehan, executive]

Yes. Well, obviously, our sales guys are always out pounding the pavement, and the fact that we have all those great product is helping them be more successful in that. And I would say we are also -- and some of this is just the beginning of the excitement on all of the new product that we have coming out in 2018 and beyond, that we're starting to see a bit of a momentum change. At -- And I can think of a couple offhand that are coming to us, and they see the economics of good games and how they play out in the casino at a higher rate than some of the existing games. So that's enabling us to have an easier road as well. So I think it's a combination of both: a great sales team; and good products.

[John DeCree, analyst]

Great. And if I could, one more on the gaming upside. Two consecutive quarters where the kind of WAP premium revenue per unit has shown some stability relatively flat on a year-over-year basis. I think Michael, in your remarks, you've talked about replacing some of the older games in the installed base with some of the new Gamescape stuff. And I was wondering if you could kind of talk about when you might see an inflection point as you kind of go through that kind of accelerated upgrade process. And maybe some color on how well that the Gamescape stuff is doing relative to some of the older stuff on the floor, and if you think you can kind of see that revenue per unit kind of shift into positive territory on a year-over-year basis this year.

[Kevin Sheehan, executive]

Yes. I mean you got to look at the whole gaming business. And just remember, we have 4 real major pieces to the business. And the first part of your question was talking about the game sales and our #1 position there. And as everyone knows, we have this strong phenomenal market share in gaming systems and table games as well. So 3 out of 4 pieces are on overdrive. And as I talked about several times during 2017, we had underinvested in new platforms for game ops, and we were kind of riding on the past, '15 -- '14, '15, '16 really did not have a new platform launch. And then, as you know, Gamescape has been a very big success, and as of today, we have 1,575 Gamescapes launched and installed. So that's a real good fact and between the WILLY WONKA, which was a phenomenal success and continues to be, and THE SIMPSON games are out there now as well as the Seinfeld games are being rolled out. The good news -- I mean, the reality, though, is it's going to take time to fix the past, and we are all over it. And as you saw our -- at G2E, we have a significant amount of effort on game ops, and it's a signature behind our James Bond launch, and we've got games -- 3 different games coming out under the James Bond brand in the second quarter on new platforms: on a Gamefield 2.0, on an iReels 3RM and a Blade mechanic. So 3 new things coming out in the second quarter. And then in the third quarter, we've got a jumbo 75 and then our game PRIZM on -- with 007. So loads of effort, and we're navigating through that. We see the light, which is a good thing. We see the light very clearly, but there is still the churn that would -- we're over -- riding through. And I would say that let this ride for a couple of quarters, know that we're putting massive efforts into this. And as we get into the second half with the extra juice of the 3 Bond games and then the continuing efforts in the third and fourth quarter with new games as well, I think this is going to be a good story in 2018, but just ride through the next couple of quarters as we navigate through with the new platforms.

[Operator]

Our next question comes from Barry Jonas with Bank of America.

[Barry Jonas, analyst]

Just for starters, I wanted to talk about tax reform. Would love to: a, get Mike's thoughts on the impact to your financials going forward. I know you're not a cash taxpayer now, but maybe just how -- talk about longer term how this influences the business. And then on the flip side, I'd love to see if tax reform is influencing any discussions with operators, specifically around the CapEx deductibility that they will now enjoy.

[Michael Quartieri, executive]

Yes, sure. So from an overall basis, the tax reform was about a $10 million benefit to us in the quarter, which flowed through the provision line, which is really nothing more than the revaluation of the deferred taxes that we have on the books from the 35% statutory rate down to the lower rate. When you look at it holistically, say, over the next 5 years, it's going to be pretty much neutral to us. So you do have the detriment of the loss of deductibility of some of the interest expense, which is going to be pretty much offset by the deductibility of the CapEx spend. So those 2 major items actually kind of just wash each other out for us. Then the other big component about being able to repatriate earnings back to the U.S. in a tax-free manner, given the fact that we have a $1.3 billion net operating loss, we're already bringing that money back essentially tax-free, granted it does utilize some of the NOL. But at this point, when we look at over the next 5 years out, it's pretty net neutral to us. And then to your second part of your question, if I were the CFO of an operating company, I'd be using this to my advantage to buy more product. So I think it's definitely going to be a positive for us.

[Barry Jonas, analyst]

Got it. Okay. We talked a little bit about -- you talked a little bit about game ops before. I just want to make sure I understand. In this quarter, the reduction, about 2% sequential in the installed base for WAP and premium, you're replacing older games with new games, but is it just a function that you're -- the operators are waiting for some of the newer games like James Bond to come through in the next couple of quarters? Is it more just a timing issue? Or is there real -- just no real issues for this segment overall on a market-wide basis?

[Kevin Sheehan, executive]

I think, at the end of the day, they look at their report card of how the games are performing, and so that's putting a little bit of pressure on the older games that are 5, 6 years old. But you're right, they're also looking at the -- all the exciting new stuff that we have coming out in the coming quarters. And we've got a lot of energy already on the orders and initiatives that we're doing around the Bond launches. So as I said, the second half of the year, you're going to start to see a lot of momentum because of all this new stuff that's coming out. And whether individual casinos are just waiting or whether they're making decisions now, it's a combination of both of those.

[Barry Jonas, analyst]

Got it. And then just last one for me. You just made a small acquisition in Brazil. Could you maybe talk about the potential opportunity there on the gaming side? And maybe update us on what's going on in the lottery privatization side as well.

[Kevin Sheehan, executive]

I'll take the first part. Yes, this was amazing to me that if we were to be successful in gaining entrance into Brazil, we now have a product that works successfully in that market. I was pushing when I first came in as to why were we not able to do that with all of our smart developers and stuff, but it's a very different mathematics formula and what makes those games work down there. So this was an eloquent way of getting the right product mix to enable us to be successful if that market opens up, but it also helps us in other markets that we're in today.

[Michael Quartieri, executive]

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

[Operator]

Our next question comes from David Katz with Jefferies.

[David Katz, analyst]

So specifically with NYX, what I would love to understand better, and I think everyone would, is the specific capabilities and offerings that you have today for sports betting with respect to NYX, meaning is it an operating platform? Does it have a user interface? What pieces are in place? And are you, at this point, a total solution offering for casino operators or any operators, should sports betting come down the pike, which could begin as early as next week?

[Michael Quartieri, executive]

Yes, I'll take it. So the product offering that's available to us now through NYX is a full suite. So not only is it the back-end system that does the accounting, tracking, everything that supports the actual betting process, but it also has all the analytic tools around it. It has the user interface, so it allows, basically, our customers who are those who would be the operators to operate a fully functional sports book system, or I should say a full suite of sports book operation. The only component of this line of business that I'll make sure I reiterate because it's come up a couple of different times, in no instances are we going to be the actual operator of a sports book. So I know, we receive questions from others about how do you get your arms around know your customer. Things to that effect, when we're actually taking bets from individuals, that will not be the case. We are the system provider on a B2B basis to the operator itself.

[David Katz, analyst]

Got it. And can you talk a little bit about the degree to which that offering can integrate with the casino systems business that you have today? And what, if any, benefits or obstacles there are to that? And what I'm essentially getting at is are your casino systems customers much more easily, or more likely to favor you for a sports betting solution should those opportunities come up.

[Kevin Sheehan, executive]

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

[David Katz, analyst]

Okay. And if I can just ask a little bit more about the systems business because the quarter was obviously a pretty-big-revenue quarter, and that was driven by the rollout of Alberta. And I know there was commentary in the release about that continuing through the remainder of the year as well, go lives in Ontario and then the announcement of the Turning Stone contract. Can you just give us some qualitative thoughts around how that business can roll over, say, the next 4 to 8 quarters?

[Michael Quartieri, executive]

Yes, I mean, I would say, there's -- we're not anticipating any large spikes within any of the next, I will call it 8 quarters coming out because we did tell them that it would go out through 2019. It's just going to be a process of how it gets rolled out to each of the individual casino locations within those 2 provinces. So there might be a little bit of bump here and there, so it's not going to be a complete straight line over the next 8 quarters. But it will be a relatively smooth process with a little bit of variation quarter-to-quarter, just based on the timing of the go-lives and that whole process of making sure that not only are we ready and have everything installed, but also that the casino operator has their resources and are fully dedicated to get that done, which we don't see to be a problem at this point. There will be some lumpiness as other newer items, like you said, Turning Stone, come online where you would see some variation as well. But I think the one important fact that shouldn't be lost is once these casino locations start to come online, that's when the maintenance revenue or the maintenance components of it kicks in, and that will be a much more straight-line trajectory going out in the future.

[David Katz, analyst]

Right. If I can just follow that up quickly, which is the $83.5 million of revenue in this reported quarter, would you consider that to be a spike? And of the Turning Stone deal, what is the timing on that currently expected to be?

[Michael Quartieri, executive]

It's -- yes, usually, the initial go-live in the first -- sorry, in Q4 was the initial for the system itself. So that would be a kind of a bit of a spike as far as revenue goes within the quarter.

[Kevin Sheehan, executive]

You get similar spike with each of the other big systems when they come on in '18 and '19.

[Michael Quartieri, executive]

Correct. And so at this point, we don't have a specific time frame on Turning Stone at this point, but as far as the recognition of the system based on the go-live sign-off by the customer.

[Operator]

Our next question comes from Steven Wieczynski with Stifel.

[Brad Boyer, analyst]

This is actually Brad on for Steve. Most of my questions here have already been asked, but just wanted to ask you guys a question around capital allocation priorities. We're at a point now where the underlying business seems to be on much firmer footing. You've refinanced a significant portion of the balance sheet. Just coming out of NYX, curious to hear your thoughts, Kevin, on how you're thinking about capital allocation going forward here.

[Kevin Sheehan, executive]

Yes, I think job one is -- that's critically important to me and to this organization is continuing to improve our net debt to EBITDA. We're going through some of the noise of getting these refinancings done and, as you know, some of the costs that go along with taking this debt out early, but the good news is at much better rates and much more effective interest costs prospectively. We have one more big financing to deal with, sometime later this year. And that's -- and if you just take and think about it, taking out 10% debt at some premium, this goes down to [ 105 ] towards the end of the year, but that could be a massive savings. And then as you look at that once that's done, then you've got a completely different economic formula here where your interest cost has come down dramatically at the same time as we are feeling very confident with 2018 and frankly, I'm very focused on 2019 because I'm comfortable with where we are for 2018, and I want to make sure we continue this momentum in '19 and beyond. When you run those models, all of a sudden, our net debt to EBITDA turns quite dramatically different. And the continuation of the improvements that Mike alluded to earlier for where we went from at the end of 2016 to the end of 2017. The other discipline, I would say, is that when you get into the capital allocation on acquisitions, as you've seen, the transactions that we've done over the last 18 months or so have all been accretive in the first year. So that's a good discipline because even if you're buying a business, you're building enough EBITDA to maintain and improve your net debt to EBITDA. And then I would say the last thing is just a lot more rigor around the capital expenditures side of the business and making sure we're focused on spending our money as smartly as possible. And I would say that there was areas of opportunity in '17, and they'll continue to be in '18 where we are being much more prudent in deciding on initiatives and whether the returns or what do they do for the business kind of things. So there's a lot of moving parts here at Scientific Games, but all of them, whether it's the operating business or the capital allocation, are all really moving in the right direction. So I'm really excited about the way things are going.

[Operator]

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

[Michael Malouf, analyst]

If I could focus just quickly on the Interactive business, I know that in the past, you'd talked about some strategic moves, potentially with that division, and I'm just wondered if you could give us an update on those thoughts.

[Kevin Sheehan, executive]

Really at the end of the day, we have a business that's growing quite rapidly, and there's a lot of value creation in that business, and there are synergies with us in making that a really successful business. And right now, the smartest thing for us to be doing with the top line and EBITDA growth that we've been experiencing, that we expect to continue to experience, would be to just be -- keep our head down, run the business as carefully and smartly as possible. But of course, we're opportunistic. If something happens, we'll certainly listen to it. But right now, job one is to continue to run the business expertly.

[Michael Malouf, analyst]

Great. And then with regards to overall SG&A costs, we obviously saw that pop up a little bit in the fourth quarter. Could you give us a little bit of color or commentary on sort of where you think that -- is that level an unusual level as we go into 2018?

[Michael Quartieri, executive]

Yes, I'll take that. So when you look at it, there's a couple of things. So one, there was an increase in some of the marketing costs in Q4 versus what normally would have been in Q3, with G2E spilling over into October this year versus September a year ago. There is also some higher comp in Q4 associated with the incentive comp for our year-end bonus programs. So that was a bit of a spike in the quarter, which wouldn't be a normal run rate on a go-forward basis as well as just, I think, in the prior year, if you remember, you did have the November actions that we took, which also moved some of those costs from a SG&A perspective down into the restructuring charge line. So I think, probably on a run-rate basis, looking at what the run rate is for the first 3 quarters is a more reflective view of SG&A on a go-forward basis with a slight uptick to that, just based on general CIP-type level increases across the board.

[Michael Malouf, analyst]

Okay, great. And then with regards to CapEx, any color on that as we look into 2018? And specifically, is there a need for CapEx if we do, indeed, get any change in the legal framework of sports betting?

[Michael Quartieri, executive]

Yes. So looking at CapEx, if you look at what we were guiding to a year ago to where we ended up, we were slightly on the low end of that range, if not slightly below. Part of that was, if you look at the Maryland contract in the lottery systems because of the protest that delayed some of the CapEx spend, which is now triggering into the 2018 model. So you'll see that there is a little bit more on the higher end of CapEx for '18 being projected at this point as well as, as we continue to roll out on the game ops cabinets that Kevin's been talking to throughout the call, we have a higher amount of budgeted CapEx for that spend as well. But it's important to note that, that's completely variable. We don't make cabinets until we have orders for those cabinets out on the casino floor. So that gives us a little bit of downside protection on that CapEx number. Getting back to your other point of your question regarding the rollout of sports betting, yes, there will be some CapEx spend associated with that, but I don't believe that it'll be significant. It's really more on the technology-type server and hardware-type spend as opposed to anything else that we have.

[Operator]

Our final question will be from Chad Beynon with Macquarie.

[Chad Beynon, analyst]

Wanted to start on the lottery side of things. You had a nice win in the quarter with a new lottery system. Can you help us think about your expectations in 2018 and the opportunity to take share on lottery systems? And Kevin, you did mention that you're making sure that you're spending CapEx smartly, and I know this business does require some CapEx. So how do you think about the opportunities there? And if there's the right ROI for new RFPs?

[Kevin Sheehan, executive]

Yes. I mean, every single thing we look at, you said it -- their ROI is the key ingredient. It's got to meet certain benchmarks for us. And based on our technology and the -- our belief that we provide incremental benefits to whatever states, whether it's Kansas whoever, and that they're choosing us based on our bids, not even being the low bid, gives us comfort that the states see the value of choosing us. But all of this stuff is done based on ROIs.

[Chad Beynon, analyst]

And then going back to the Interactive B2C business, you talked broadly about kind of your vision for this segment. But could you help us think about operating leverage, just given that revenues continue to grow, I think, above most people's expectations? And it looks like you're starting to see that leverage and that margin improvement. But just kind of help us think about if you're still reinvesting at the same pace this year, or if we should see that spring up if revenues continue to grow.

[Kevin Sheehan, executive]

Let me start it, and then Mike will correct what I don't say correctly. But as you can imagine, when this trip started a few years ago, there were only a few games in the B2C spectrum. And as we've added new games, the marketing spend on a bigger group of games becomes a smaller part of the expense side. And so that should lead to continual margin improvement over time. We do have new products that we're launching in 2018, and we're excited about them. So that has to be taken into account with that, but I would expect that the margins will continue to improve.

[Chad Beynon, analyst]

Great. And then last one for me, just a housekeeping question. The 1,500 units that were offline in the Caribbean, are those back in service? And I know you quantified the impact from the Puerto Rican lottery. Are you able to quantify the impact for the fourth quarter with these units being offline?

[Michael Quartieri, executive]

Yes. So the -- I'll say, the recovery of those units and then coming back online is going to be a slower process as just the entire Puerto Rican island gets back up to its feet. So I don't -- it's not going to -- the 1,500 units are not back online today. There's just going to be a slow growth throughout the course of '18. As far as an impact goes in Q4 for Gaming, it was under $1 million. So hence, we didn't call it out because it wasn't material to the operations of Gaming as it was for lottery.

[Kevin Sheehan, executive]

Thanks, everybody, for joining us today. As you could tell, we're really highly energized by the meaningful opportunities ahead of us. In just a few weeks, our senior leaders are getting together for a weekend at an off-site location. It's our second strategic session. We'll discuss the progress we've made last year and more importantly, the meaningful opportunities that exist for us for further development and to also explore the art of the possible in coming years. In closing, I'd like to reiterate that our strong fourth quarter performance is further evidence of the value provided by our focus on developing technologies and innovative products that power top line growth. By focusing on helping our customers grow, we, in turn, grow, build the momentum and consistent performance that enables us to deliver improved financial results, increased cash flow and additional leveraging. As we did in 2017, I am confident that we will continue to act smartly to grow revenues, emphasize continuous improvement in our business processes and execute on our priorities. By continuing to do so, our future remains bright. We look forward to updating you on additional accomplishments and the first quarter performance on our next conference call. Thank you all, and have a nice day.

[Operator]

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