International Game Technology PLC (IGT) 2002 Q2 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. Welcome to the IGT 2nd quarter fiscal year 2002 conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session with instructions given at that time. If you should require assistance during the call, please press zero star and an operator will assist you. As a reminder, this teleconference is being recorded. I would like to turn the conference over to the CEO, Mr. Thomas Baker, please go ahead, sir.

Thank you. I want to welcome everybody to -- to our conference call for the 2nd fiscal quarter. We had a record quarter in many respects and before my comments on going to introduce Maureen Mullarkey, our Chief Financial Officer, here with me. She will go over some of the financial data with you and amplify a little bit on the press release from this morning. Maureen?

Thanks, Chuck. This call is one hour and declaration and there is a live web [INAUDIBLE] on our website, www.igt.com. Before we begin, I'd like to reads a brief prepared statement. During the course of the conference call we may make forward-looking remarks regarding the future events or future financial performance of IGT. We wish to caution that such statements are our beliefs and actual results may differ materially. We refer you to the documents we file from time to time with the sec. This contains important facts that could cause the actual results to differ from the statements made today. I will go over the income statement and balance sheet. The earnings for today and for the quarter ended March 30, 2002, many significant developments occurred during the quarter. One of the most significant was completing the acquisition of Anchor Gaming on December 29th. And the 2nd quarter financial results represent the first full quarter of the combined companies. Pursuant to the acquisition, IGT's % share of the revenues and related expenses are now in the segment. For the 2nd quarter, IGT had record revenues, operating profit, net income, EPS and EBITDA. Of respect [INAUDIBLE] $530 million, $140 million, $74 million in net income. 81 cents per share and $187 million in EBITDA. This compare favorably to the prior year records of $347 million, $100 million, $50 million and 70 cents per share. We also reported record year to date revenues, net income and EPS, as well we're pleased with the operating results for the quarter and the year and feel they're in line with guidance we previously provided and even a little better. Looking at the balance sheet, on March 30th we had cash equivalents of $665 million, working capital of $923 million. Total debt of $1.26 billion, a ratio of under 1.1 times and an interest coverage ratio of 6.2 times. Note that the company's cash balance is up over 83% from the $364 million at the end of our fiscal year last September. And that the leverage in interest coverage ratios improved substantially from 1.5 times and 4.1 times respectively at the end of our fiscal year. Also during the quarter, Standard and Poors raised its corporate rating and debt rating for IGT to Triple B-Minus from Double B-Plus. Anchor was raised to the Double B-Plus from the Double B-Minus. Overall, $180 million EBITDA on the quarter, IGT was able to generate $114 million in free cash flow or $1.26 per share. Due primarily to strong operating results, with the working capital and low cap-x levels. I think investors should be pleased with our focus not only on the growth and efficiencies of the earnings of our company, but on our strong cash flows and investment-grade balance sheet. These elements combined give us tremendous abilities to pursue any financial or operational opportunities that might arise, whether they be acquisitions, share repurchases or debt retirement. Moving onto the income statement, product sales, 2nd quarter product sales revenue of $206 million was down slightly from $221 million last year, yet gross margin contributions were up 3% on a year-over-year basis, due to lower margins and ongoing efficiencies in the plants. Shipments in the quarter totaled $29,500, down 3% from last year, which, remembering benefited significantly from the ramp up of new machine sales into the California market. Last year had California and this year doesn't. And this year was further challenged by the impact of 9-11, primarily in the Nevada market and last year did not. Given these dynamics and in line with prior guidance, domestic shipments totaled 16,300 and essentially flat to last year. Domestic replacement sales totaled 12,000 units and compared very favorably to the 8700 shipped in the same quarter last year. We're definitely the underlying driver of demand in the quarter across all of our markets. Total average prices were just over 7,000 in the December quarter. Down slightly from the prior year. The mix of international versus domestic shipments causes the quarterly averages to fluctuate. Domestic average prices were just under 10,000 and in line with prior guidance, they're just below or sometimes just above the $10,000 mark. It's also inclusive of our VLC new subsidiary, where averages trend slightly below other domestic segments. International average prices at $3700 are consistent with all recent trends. Gaming operations, proprietary gaming revenues were $255 1-800-million, representing a 12% increase over the prior year, assuming 100% of the joint venture was fully consolidated into the results. Revenues compared to the 1st fiscal quarter of this year were up 8% and up 9% from the December quarter. The gains exclusive of Anchor total 28-400 and flat to the December quarter and up from 24,800 a year ago. The changes are worth noting that within jurisdictions there were different trends. Nevada was down 400 gains in the quarter and Native American markets were up 400 in the quarter. While challenging for us in the quarter, we were encouraged to see that installations improved in the last half of the quarter related to timing of new game introductions. And play per game across all of our markets was really up on a year-over-year basis and up since December. Lottery and Paramutual Systems, a new segment for IGT produced revenues and gross profits of just under $40 million and $12 million and represent 29% of related revenues. These results were positively impacted by higher revenues in Pennsylvania and Florida and also benefited from reduced costs related to restructuring efforts that commenced at the end of the prior year quarter. Casino operations produced revenue and gross profits of $26.6 million. Casino operations reflect the results of the Colorado Central Station, the Colorado Brand Casino, the Route and the Reno airport operations. Casino operations were, again, acquired with the anchor merger. Operating expenses for the quarter totaled $108 million or 20% of total revenue. Compared to $71.4 million or 23% of revenue last year. The inclusion of expenses related to the Anchor gaming subsidiaries and the intangibles, consistent with the guidance under FASB 141 and 142 was the primary reason for the increase. Also we have a continued investment in research and development. We also had additional bad debt reserves related to the Argentine market. Other income expense for the quarter was net $20.4 million compared to a net expense of $14.5 million in the same quarter last year. Again, the primary reason relates to Anchor and the inclusion of their 276 million in Senior Sub Downs. To conclude, before I turn it over to Tom, we are very pleased with the financial results for IGT, not only on the income statement, but the ongoing efficiency on the balance sheet, all contributing to very significant pre-cash flows and strong operating results, providing a solid foundation for the balance of 2002. Thanks. Tom?

Thank you, Maureen. Since the world changed for all of us last September, we've been telling you we believe there were two types of companies that would evolve. Those that were nervous or uncertain about their ability to grow, or even survive, and those that were comfortable about coming out of an uncertain economic environment and be stronger than ever. We've maintained at IGT is in the latter category. I'm reaffirming the position today. We began the quarter by completing the acquisition of Anchor Gaming. This has given us a [INAUDIBLE] more segments of the legalized Gaming world than we've ever had before. We're more diverse and have further opportunities for growth and feel as strong as we ever have. We've had several calls today and I know there are many questions, but I want to take a couple of moments and discuss a few of our business segments before opening it up to questions. Most of the questions we've been receiving are directed to the growth of our game operation segment of our business. The historical face of our mega jackpot recurring revenue gains remained essentially unchanged during the quarter and for the first half of the year. There were several installations of new games. In fact, we installed 6600 games in the first half of the year, but it was offset by essentially the same number of removal of games. Removals were highest in the early weeks of this second quarter. Installations were much stronger in the last half. This relates to a number of things: New titles is certainly something that drives the -- the unit count on our mega jackpot grouping. New titles that were released, but only in selective markets during this period were American Band Stand, Bewitched, Slotto, Diamond, Cinema and Harley Davidson. All the games very popular and doing well. And these new products were responsible for growth in the last half of the quarter some of our new game introductions are not yet approved in many jurisdictions at all. Harley Davidson, which is a very strong game, is, to date, only in most. The -- Missouri. The backlog for new games to be installed Omega Jackpots is about 4400 machines. That's up 57% over the number at the end of the last quarter, when it was 2800. The removals as we are finding out this year, are much more difficult to predict. Some operators have reduced recurring revenue gains to reduce expenses. At some point we feel this will resolve in some reduction in revenue and believe that strong games will always be the most successful way to gain gaming casino operations. Many new, exciting titles are scheduled for the remainder of the year. Our brand extensions of already popular games. This week we are releasing the "Survivor" game and a joint venture with WMS. In late May we will release an Elvira game, she is the Mistress of the Night. Cousin "It" and brand of the Addams Family game will be release made late May. We will have a new version of the perennial popular Quarter Mania 2002 which will be out in July. Also in July, there will be a release of Beverly Hillbillies, Tournament Ofons, a brand extension of video Jeopardy. A game, Punch a Bunch, an extension of The Price is Right. And James Dean, which is a continued expansion of the Diamond Cinema series. And then in September, last month of our fiscal year, we will release I Love Lucy. IGT has the best performing games and the largest portfolio of games. Our operations revenue and margins are up sequentially. We've had better revenue generation and yield per unit. The coin in per game is up 12% from December and 5% from last year. Whenever operators remove games for whatever reason, they will always remove the lowest performing games. The new and replacement games are generally always stronger. IGT ends up, as do the operators, with the higher quality of games, sometimes we remove games on our own accord. There's greater geographic diversification than ever, primarily because of the expanding markets and a lot of this is Native American, now the biggest market for -- for the Mega Jackpot games. And many removals from lower play per region units have been balanced by new units in higher play per region units. Since the acquisition of Anchor, we've realized if there's some clarification necessary to try and quantify the number of units on recurring revenue games, perennially we have talked about our Mega Jackpot game, which, for the most part, includes white area progressive, but in some case, participation games and even rental games. Anchor operated, independently of IGT, about 2,000 stand-alone games. Most of these were called Wheel of Gold. They also operated event games and some of which were included in the form of IGT Anchor Spin for cash joint venture. We have games that have not been included in the Mega Jackpot numbers, including software royalties on games which are sold. Most of the games in the field today are action gaming multi-play poker games. The total reserve new-sharing or I should say recurring revenue model for games in the total North American field, is approximately 50,000 games. There is a diversity of pricing arrangements within this number I just gave you, but customers have a wide variety of options to get the best software for machines that they own or to place IGT games on their floor that are specialty games that they can keep for the amount of time that it makes sense for them to do so. The strongest games are always more expensive. They also always are the most profitable and therefore always command a premium price. We believe that this segment of our business had a strong showing in a rather difficult environment. In terms of product sales, I want to comment that we also feel we had a strong quarter in a difficult environment. Unit shipments were 16,300 versus the 16,500 in the corresponding quarter a year ago. Down a little bit, but essentially the same. It was 16.3 versus 12.6 in the immediately proceeding quarter. The big news on product sales is a replacement sale. 12,000, a new quarterly record, beating the 10,500 that we recorded in the 3rd quarter of last year. That's up from 8700 in the immediately preceding quarter. Excuse me, 8700 from the same corresponding quarter of 2001 and 7200 in the 1st quarter of this year. The growing acceptance of ticket-in/ticket-out continues to be the primary driver of replacement sales as well as orders for future sales. An IGT survey, which we conducted, indicated that about 80% of players today prefer ticket-in/ticket-out capable machines. We saw a changeover at one casino. I know this is not a household name in The Wall Street people, but Cypress Bayou, a casino in Louisiana, changed out the entire floor, over 1,000 machines, to ticket-in/ticket-out in the 2nd quarter and it is working well for them. Park Place Entertainment has made a 9 property, 15,000 machine commitment to EZ Pay. Bally's in Las Vegas will operate 17,000 machines on EZ Pay, pending the completion of modifications to the Player Tracking System and regulatory approvals of the changes. Three Atlantic City properties for Park Place are in the process of increasing their test size to a total of 1750 machines. The MGM Mirage people have conducted an EZ Pay test at [INAUDIBLE] billings, about 200 machines. The customer response has been excellent. They're scheduled to install one at the Mirage by the end of April with a 350-machine test. And a 100-machine test at New York, New York in May. And we also have started the first EZ Pay test at the Mandalay Bay group with 60 machines that went live in early April at the -- at the Luxor. The coast resort property, which include the Sun Coast, which was really the first casino to open with 100% cashless EZ Pay systems. They've recently signed an agreement with us to purchase 2500 EZ Pay games over the next year and a half. This is part of over a three part process which began in August of 2000 and will culminate in virtually every machine of the floors being ticket-in/ticket- out. We're confident that our technology will continue to constitute a major driver of the domestic replacement sales for a long time to come. This quarter also demonstrated that the video lottery market is emerging as a new and powerful driver of replacement sales. The installment base in this area is old, even older than the casino market. And we have indication that's it will continue to produce strong replacement demand for some time to come. VLC, which was acquired in the merger of Anchor, puts us in a better position to maximize the opportunities in the video lottery market. During the quarter, sales in video lottery in Canada were 1400,West Virginia, a new market, 1150. Oregon, which is a replacement, 950. And 300 other machines. Canada is emerging as a strong replacement sale market and with VLC we have over 65% market share in Canada. VLC recently received an order for 8400 VLPs in Quebec, all replacement units to be delivered over the course of the next 18 months, 2003 around early 2004. This is the largest single VLT order ever awarded to a single machine supplier. During the quarter just ended, we shipped over a thousand machines into the Atlantic province of Canada. This is a market of about 9,000 gains and the Atlantic lottery group is in an active replacement mode. IGT, we believe enjoys 50% of the market when it was replaced. And the Canadian VLT market is expected replace approximately 30,000 machines in the next two to three years. In the international market, our unit sales were 13,002, down a little bit from the corresponding quarter of 2001, 13,800 and the strong showing in the 1st quarter, a little under 20,000. Japan had 1650 units, up over last year, but down sequentially from Q1, 6600 units. Our strong domestic sales offset a slower, but profitable quarter overseas. Last quarter it was the other way around. This indicates that our geographical diversification works sometimes as an effective hedge against cyclical slow periods in a given market. Maureen covered some of the numbers on our lottery business. The primary strength was higher handle in Pennsylvania and Florida, which are their largest domestic contracts. Profitability was helped as a result of restructuring efforts that commenced over a year ago and have resulted in a rationalization of cost structure and lower break even for that business. The casino operations, she also commented a bit on the numbers there, and our revenue was strong in cash flow, exceptionally strong from the casinos and the revenue up slightly on the year on the Anchor route in northern Nevada. Some thoughts about IGT and our specific business segments. With the Anchor merger, we're more diversified than ever before. We're well positioned to participate in growth in lottery, paramutual, public gaming, casino gaming through traditional and Native American casinos, expansion, new legalized or replacement of the existing market. We, as everybody that follows the gaming industry, are somewhat disappointed as a result of Kansas, Kentucky and some others that have taken what we view as a non-action on expanding gaming, whether it be machines that tracks or whatever. But we have historically not included specific revenue from expansion of new jurisdictions until they happen. We think expansion is inevitable and fully expect continued growth, with or without it. Due to the diversification that we feel we've achieved at this point. At this time, I will open it up to questions.

Thank you. Ladies and Gentlemen, if you wish to ask a question, please press the one on your touch-tone phone. You will hear a tone indicating you've been place made queue and may remove yourself at anytime by pressing the pound key. On a speaker phone, pick up your handset before pressing the number. For a question or a comment, please press the one at this time, one moment for our first question. Our first question comes from the line of Steven Kent at Goldman Sachs. Go head.

I have a fundamental question. You know, with the cash continuing to build up and the stock acting incredibly volatile, what are your plans for the $65 million of cash that sits on the balance sheet?

Well, it gives us the ability to pursue a number of things, acquisitions is one, although I don't have an indication of anyone we're looking at, at all. Share repurchase is something we've done in the past and still have an appetite to do and at times, debt retirement. And we could theoretically take out our entire debt in the next seven months with the current free cash, but we'll continue to do these things when we think it makes sense to do so. When the stock acts uncertain or certainly when there is demand going one way or the other, up or down, we generally have waited until things settle down, rather than trying to influence the direction of what it's gone. But we will -- that's what we have in mind. And as far as acquisitions, you know, we always look, and, you know the things we look for, strategic, we look for people and look for accretion. But no change in that, Steve.

Is there a stock price where it's even more accretive, the bogey you're looking for?

Well, I think it would be accretive where it is right now, but I think we look not only at accretion, but at the the uncertainty of an existing market. In other words, we don't try and push against the wave that we sometimes don't understand. And can't control.

Okay, thanks.

Thank you, our next question is from the line of Robin Farley at UBS Warburg. Please go ahead.

I have a couple of questions, actually. You, in the past, I guess the business for Anchor hadn't really been profitable, but I don't know if it was operating systems versus the VLT shells you're talking about. But if you could just talk about the economics of the VLT sale versus normal product sales? And then, also, there is a different mix of games, Tom, that you eluded to. I wonder if you could, also, going forward, the best way to think about your revenue share in games and whether the win per units increasing or the numbers increasing, can you categorize it as two or three basic kinds of revenue sharing? And going forward from there, what we can expect?

Robin, T.J. Matthews is with me and I'm going let him take the question.

Hi, Robin.

On the video lottery business, those sales function identical to those of the casino world. You heard Maureen say the average purchase price was just a little bit lower. What happened historically at VLC, we went through a couple-year period of restructuring the business, getting costs in order and doing it at a time with little sales activities in the video market. Canada and there are domestic operations here , as well, Louisiana, Oregon, where the old equipment we're seeing replaced actively and think the trend will continue for probably at least the next two, if not three or four years, and VLC is the prime beneficiary of that. They have a major market presence in Canada and several U.S. states. And between them and IGT, our likely going to be the replacer of the majority of the games. It is just a new trend. In terms of thinking the recurring revenue base, you know, we broke off numbers, but I wouldn't spend lots of time on seeing what contributes to what. We said the Mega Jackpot business, 19,500 in the hybrid business. A [INAUDIBLE] we didn't mention, but have is 3500 machines out in recurring revenue public gaming markets, basically slot machines at paramutual facility that we operate on a percentage of revenue. The machines have been contributing to the overall revenue we call gaming operations for a long period of time. I think it was just important for people to note how big the recurring revenue effort was in terms of the number of machines deployed. Was I focus on two things. That is on the Mega Jackpot number, the primary driver of revenues. And the relative revenues per gain. One thing tom mention that he did really is extremely important, was how many machines have been installed in the first six months of this year. 6600 myself, a rate of 250 machines a week. And that trend continues. We have a backlog of 4400 machines. I don't see installs as being the issue at this point in time. We're removing a fair number of games, had t has to do with push back of operators, under-performing machines out there. Maybe an overzealous installation from us in the past. I think with new game titles in the second half of the year, you will see installation out strip removals throughout the rest of the year. That's good for '03 growth. The most important statistic this year. We were up 10% quarter-over-quarter. The -- end was 5% up year-over-year. Those are big numbers and evidence of the fact that we can grow without necessarily having to affect the install base. Those are the two figures you've always concentrated on. I would look at those.

In terms of new installs for the Mega Jackpot side, we shouldn't necessarily look for net new installs in the next two quarters?

No, I think you should. I think we will have an active effort, 250 a week and 6600 machines for the second half of the year, as well. And the goal to remove less than that. I believe that we will accomplish that.

Robin, the thing that's difficult is to predict the removals. In this environment, as T.J. said, there's been pushback and there's been customers that want to reduce their expense and have taken them out. When they take them out, they take out the lowest turning games. They're not taking them out because they're IGT's games.

And my last question, then,terms of the win per unit, I know in the release you talk about enhanced old per gain. On the sur face it is hard to see it because the mix has changed. [INAUDIBLE] more color to sort of see to what degree the gain has changed year-over-year and to use it as a base going forward, you know, getting on the surface, the growth profit per unit is flat just using the progressive gains?

Yes, robin, you're right about the mix changing the actual revenues realized per gain. We have a number of pricing models, even within the Mega Jackpot universe, that's why we focused on the metric of coin in that, demonstrates long-term yield better than any other metric and 5% year-over-year growth and good sequential growth, 10% sequential growth. That's a figure that demonstrates that we're growing to yield on average on the devices we have deployed.

Okay, thanks.

Thank you. Our next question will come from the line of Joyce Minor at Lehman Brothers. Please go ahead.

Hey, guys, just to follow up that. I think at last quarter you said you expected full-year placements of 2500 games, but I guess we've seen, you know, pretty flat placements here in the first half. T.J., your comment is that you basically don't know what to project in the way of removals? But hope for 6600 installations, is 2500 still a reasonable expectation?

It's certainly a possibility, so, we won't necessarily tell anybody to think otherwise, but just don't know. Obviously the environment changed a great deal. Part of the environment that change succeed how darn successful we've been in the last six quarters when we've grown the business tremendously. The install base, you know, you take a look at year-over-year comparisons is the 24.4 or the 24.8. We have a growing business here. I think that to allow a couple of flat quarters in terms of actual units dispel that would be a mistake.

So, I mean that almost makes it sound like you feel more confident that, in fact it could be better than that. Are you willing to raise your guidance on the number? Or reiterate guidance on the number.

No, it's just -- I -- i actually thought we would grow up more in the first half of the year than we have. So, the removals have been, you know, definitely shifted, it's been one to one. We used to install two and remove one. Association that shift is - has occurred in the first half of the year. I don't know, Joyce, we will keep installing the games and I believe that be some operators have taken their numbers as a percentage down, but the games still very strong. I don't -- I would expect it's going to slow down at some point.

I guess as you talk to them, do you get the sense, you know, more of the removals are in the past than in the future? Or does it lead you to rethink your pricing at all? Because they are putting, you know, Harrahs is saying they're putting other participation games on the floors, but your competitors, where the pricing ends up being better.

Harrah's is a second case. I think the pricing issues that we have with Harrah's we discuss with Harrah's and not discuss, you know, ON A public conference, but different people feel differently about our games. Our belief is that the strongest games are the way to grow profits and historically it's proven to be the case, even in periods where we've had flattish growth before. And we have had flattish growth before. Go back two, three years, we've had our games did not grow for a period of about nine months. So, we've seen this before. Strong flames always rule out in my view. That's what we're going to continue to do.

Okay. Just a follow-up on the lottery business. Maybe for T.J., if I could, could you talk about Florida and what percentage of the lottery business that is to you and when did the contract come up for renewal? And same thing on Minnesota. The S&Ps are in there and what you're thinking there?

Certainly the Florida contract is an important part of our business, over 25% of our revenues, it is one of our big contracts and it is uncertain as to when it will come up for renewal because times of litigation that exists in Florida. We had a contract that runs through the minimum of 2004. And it may, in fact, be longer than that, depending on what is the outcome of the litigation. In the case of Minnesota, there is an active RSP there, as we speak, we have responded to it and we are one of three respondance. We hope to retain that contract, but that contract historically hasn't been particularly profitable for us as a company, and so win or on lose, we think we will be better off in either incidence. It represented a quarter of what the overall lottery represents.

Next is Harry Curtis at J.P. Morgan. Please go ahead.

Hi. A couple of mundane questions. First of all, I'm trying to understand how your cash balance increased as much as it did. If I take the December cash balance, add the Anchor cash and then the free cash that you've generated in the March quarter, I guess more like 550, was there a reclassification or what am I missing there?

No, Harry. With the companies combined together it was just over $425 million at the end of December. You know, the free cash flow, I do take a more current view on the calculation of that, including is there changing, working capital and take out the CAP-X, which was pretty minimal. But there was no reclassification of cash. Just generate a lot of cash in the quarter.

All right. I will call you offline on that. The second question that I had was regard to additional margin expansion opportunities, really in both sides of the [INAUDIBLE] was better than what we thought and I'm wondering if there is much more opportunity there not withstanding, say, an increase in interest rates.

Sure. On the product side I've got it previously to end the year, the fiscal year, at around 42%. Somewhere in that range. I think that's still a good number, I think we've benefited in the 2nd quarter, a little bit through a mix, Tom mentioned the Cypress Bayou shipment into the Native American market up in Louisiana, which had a high mix of our 2000 gains. Association I'd stick to the same guidance and see the CEO margins that we realized in the 2nd quarter for game operation sees a good point to follow.

With you see much upside in that, though? It certainly was -- I didn't -- I don't or I confess that I can't -- don't really understand how the charges are generated, so, I'm wondering is there an opportunity for another 100 base point increase in the margin?

I think her guidance at 42 is where you ought to be.

54, 55.

Okay.

So, 54, 55, then.

For the ps.

Correct.

Okay, thanks.

And just so you know, I mean there is -- it takes a certain amount of people to run the business, there is some depreciation up there. There is some royalty expense and then there's an interest-related expense about whether we buy treasury ships for the jab pots or whether the winners take along some.

Next is from the line of Bill Learner at Prudential. Go head.

Thanks, guys. How you doing? Can I just -- with you clarify a comment you made, Maureen, on the Gaming OPS margins with respect to interest rates and buying treasury to fund jackpots going forward? In your margin assumptions for that segment, do you have any rate increases in there? That will be number one, then I will follow-up.

You know, it would be very difficult to try and forecast interest rates. We're pretty good at it in the company, but typically I don't depend on that. I mean I think there's general consensus out there that the rates are going up, which would be a benefit to the company, but no, I haven't really assumed any kind of rate change other than what we realized, you know, when we ended the March quarter.

Okay. And the other question would be: Can you give us an update on your thoughts with respect to [INAUDIBLE] going forward, better than anticipated in the quarter, how about going forward? You've given the number in the past of 12,000 or so units in the quarter. With you stick to that from here?

Yeah, this is Tom. In the past we said we thought we would eventually get to a point of 50,000 a year or 12,500 a quarter, driving the replacement side. That could vary a little bit and this was helped by replacement in the video lottery markets, still part of the market. But, yeah, 12.5 is the number I'd stick with.

Thanks.

Next we will hear from Michael Rietbrock at Salomon Smith Barney. Go ahead.

Hey, guys. Most of our questions have been asked, but Maureen, before we run out of time, it is my job to ask you this: Everything you said indicates that your guidance hasn't changed. I assume you're comfortable with the current numbers that are out there?

Let me take that one because we talked a lot about that and exactly what to say to you, you know, if it came up. We thought we might get through without this!

Sorry.

Change expected this is the best quarter we've ever had in a number of of ways. I can't tell you which quarter is going to be the better of the two at this point. I'm going give you a range and I believe that in the last half of the year we're going to do somewhere between $1.75 and $1.85. And I don't have that broken down by quarters, just for the latter half of the year. I know that's wider than what you'd like, but if you're -- that even takes the numbers off -- at the top end of that, higher than where we're at. At the bottom end of that, they may be a little lower, that's our guidance.

Okay. Have you taken a shot at next year?

I think you got to look at next year in the 15% EPS growth is what I would like for as a baseline.

Good, okay, thank you.

Our next question will come from the line of Daniel Davila at Hibernia Southcoast. Please go ahead.

Maureen, did I hear you correctly that you had $114 million in precash-flow for the quarter?

Correct.

Any idea if that's the going rate for the ensuing quarters?

I think that we provided you with a table in the press release on the add-back of depreciation and amortization, there's been a change there. The only area that would -- which is about $44 million for the quarter -- you know, my calculation of free cash flow is after we pay our taxes and after we pay our interest on our debt. And then also look at CAP-X. CAP-X for IGT and Anchor together probably ranges between 50 and $60 million a year, excluding any kind of major bids. Then I also look kind of changing working capital for the company because IGT is kind of working capital intensive at times. But I think that the trends -- I don't think we will see a huge amount of use there in that we're showing declining inventory balances in greater efficiencies on the receivable side. So, those are the metrics to think about when you calculate the free cash flow relative to your earnings and, you know, it's pretty straight forward about taxes and expense are for interest. So...

Okay. Thanks.

Next is Trey Bowers at MSF Investment Management. Go ahead.

Thank you. The next line is David Anders at Merrill Lynch. Go head.

T.J., just a clarification, on the 5% growth for progressive revenue on a win per unit basis, was that to the operator or 5% growth to IGT? I missed that.

5% and would affect both the operator and IGT the same.

Great, thank you.

Next is from the line of Todd Jordan at Dresdner. Please go ahead -- Todd Jordan at Dresdner. Go ahead.

This is a question for T.J. T.J., looking at the participation games put out in the last two years, excluding the Wheel, which has a long average life, what's your sense or have you done an analysis on the average life of any of those games or titles you've put out in the last two years?

That they are trending to shorter lives, to video game devices. Some games demonstrated substantial long-term success in the marketplace, certainly Addams Family, the Video Jet game is a testament to that. We saw a prominent franchise in the Million Dollar Pyramid and with The Price is Right. There is no way to characterize life, you know, on average, for that cross section of games, but there is definitely a decrease in light. That's why you've seen IGT over the last couple of years decrease the amount of time for which they depreciate, now down to 24 months. The big thing, of course, that very to do as an organization is figure out ways to extend life and decrease costs. We're doing a much better job at making sure that we can re-use base games and redeploy them into the marketplace as new titles. More importantly, we're taking existing titles in the marketplace and extending them with kind of updates, the same brand. We are taking links and putting like products on that same link. So, we have a very active effort to reduce cost and extend life for the products that are out there.

What would be the cost of pulling in a game that's maybe lost its allure and retrofiting it to a brand-new game? Upstating the software and the glass and the appearance?

You know, it's -- it's anywhere from a very modest cost to a very extensive one, Todd. There's no way of predicting that. The brand extension that's we're working on, cousin it for the Adams Family, one is Time Portal 4, Austin Powers, those are going to be easier for to us do and less expensive for to us do than say taking a Austin Powers device and making it a price is right. There is no way to quantify that. The brand extension effort is such that we don't want I'm come back before we can enhance them. We will try to do as much of that on the floor as possible and do it as lowest cost as possible.

We can also say, though that, in changing, it is probably incidental to the cost of developing the game. And that's that's the most important thing.

And related to that, Maureen, in terms of depreciation, to pull a game off that hasn't been fully deappreciated, but you're able to retrofit it into a new game, how does the accounting work on that?

When we take a game in from the field, we will look at sort of the pool of games that are retrofitable and the pool of games that, you know, are not. Generally that's, you know, all -- the newer games are all retrofitable. I take a conservative approach and, you know, you know, expense more now. Rather than, you know, capitalize. So, you know, fairly conservative and I'll take a write down in the current period and write back to the retrofitable game, the cost we incur to put them back in the field.

We're not building a soft inventory in rat. We bring it in and there is no chance that it's going go out, we deappreciate it to zero.

Okay. Thank you very much.

Once again, language, if you have a question or comment, please press the one on your touch-tone phone at this time. Mr. Baker, nobody is cueing up, please continue.

Just in conclusion here, I want to reiterate that I think that the Anchor merger has made it a more compelling cash flow story than ever before. We talked about some of that today in the deal. We also acquired increased revenue, and a large body of depreciable infinite life intangibles, increasing our depreciation and amortization, up $26 million sequentially from Q1. Association the deal is more creative to cash flow than to EPS and has been mentioned, we've generated $114 million in free cash flow, about 126 per share. The quarter is now one for the record books and the record is, again, appropriate. We had quarterly records in net income, EPS revenue, operating income and EBITDA to name a few. These, of course, were strengthened, some of them, as a result of the merger. That's the purpose of a merger, to add value to shareholders and this clearly has been a deal that has done that and will continue to do so. We've heard concern expressed about our game operations and the possibility that jurisdictional expansion was not proceeding as quickly as many had hoped. These are concerns that we have, too, but we believe that if not ill-founded, they are issues that we're dealing with. We've shown on the recurring revenue side that growth isn't totally dependent on the quantity of I'm line. The quality of game counts, too. Our games are great. Our revenue and earnings in this sector grew. What's more, we're confident that growth in quantity will soon rejoin the ever-improving quality and this segment will continue to be strong. Jurisdictional expansion is still moving ahead in New York, and RP for machines has been lap due in may. We'd like to see other states fast track on the issue. Some may still do so. But with or without it, there will be continued growth in the domestic replacement sales, which set a quarterly record this time. The same old drivers continue to be important to our business. The abundance of better games, the ticket in/ticket out cashless technology and the age of the installed base, which provides a target-rich environment. All of this is opportunity, we believe in the hands of the strongest team that we've ever had at IGT and we're operating from a base of unprecedented financial strength and an improving economic environment. We have reason to be confident that IGT has a long way to go. Thank you for your interest and thanks for listening to our conference call. Goodbye.

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