International Game Technology PLC (IGT) 2009 Q2 法說會逐字稿

Thank you for standing by. (Operator Instructions) After the presentation, we will conduct a question and answer session. This conference is being recorded.

I would like to turn the call over to Mr. Craig Billings, Vice President Corporate Finance and Investor Relations. Sir, you may begin.

Thank you, operator and good morning, everyone. Welcome to our second quarter 2009 earnings call. With me this morning, is T.J. Matthews, our Chairman; Patti Hart, our Chief Executive Officer; and Pat Cavanaugh, our Chief Financial Officer.

Before we begin, I'd like to note that during the earnings conference call, certain statements and responses to questions may contain forward-looking information, including forecasts of future financial performance and estimates of amounts not yet determinable, macroeconomic trends, the potential for growth of existing and opening of new markets for our products, play levels for our installed base of recurring revenue gains, as well as our future prospects and proposed new products, services, developments or business strategies. Actual results could differ materially from those projected or reflected in our forward-looking statements and recorded results should not be considered an indication of future performance. IGT does not intend and undertakes no obligation to update our forward-looking statements, including any comments regarding our earnings expectations to reflect future events or circumstances. More information on factors that could affect IGT's future business and financial results or cause us not to achiever our forecasts; are included in our most recent annual report on Form 10(K) and other public filings made with the Securities and Exchange Commission.

During this call today, references may be made to non-GAAP financial results. Investors are encourage to do review these non-GAAP financial measures, as well as the reconciliation of these measures to comparable GAAP results in our 8(K) filed with the SEC today. A copy of which can be found on our Website at www.igt.com This call, the Webcast of this call and its replay are the property of IGT. It is not for rebroadcast or use by any other party without the written prior consent of IGT. If you do not agree with these terms, please disconnect now. By remaining on the line, you agree to be bound by these terms. With that in mind, I'll pass the call over to Pat who will discuss the current quarter's results.

Thanks Craig, and good morning, everyone. This morning, IGT reported its second quarter results for fiscal 2009 and the Company generated $0.13 in earnings per share, which reflects the ongoing pressures of the economic downturn and its impact on our industry. However, we do believe this to be the trough quarter as we look prospectively. As we remarked on the last call, we are proactively seeking ways to begin to align our cost structure and capital deployment strategies in response to the current business environment. Accordingly, the current quarter includes restructuring costs totaling approximately $8 million or $0.02 in earning per share, associated with workforce reductions that took place during the quarter.

Turning to the discussion of business results for the quarter. First, game operations. Our game operations continue to be impacted by the difficult marketplace, with revenues down 6% sequentially. And I'll remark on this a little bit later, which really is flat when you adjust for the 14 weeks we had in Q1. And it was down 14% year over year. We earned an average of $53 in win per unit per day, which is consistent with the prior sequential quarter, but down from $63 in the prior year. Lower year over year yields are the combined result of a decline in industry play levels and in the growth of the mix of our lower yield in standalone and lease operations gains in our installed base.

The installed base ended the second quarter at 61,300 units, up 1,700 units year over year and 400 units sequentially. Installed base growth in international markets was partially offset by reductions in domestic, central determination and Class II units and in Class III markets. Approximately, 85% of our installed base is comprised of variable fee games that earn a percentage of machine play levels, rather than a fixed daily fee. Gross profit on gaming operations decreased 6% year over year, with a gross margin of 59% versus 54% last year. The current year quarter included a favorable $5 million adjustment to jackpot expense related to a moderate rise in interest, ie. treasuries and agencies relative to prime.

The prior year quarter included a $12 million unfavorable adjustment to jackpot expense related to the significant decline in interest rates that occurred during the quarter and $8 million in technological obsolescence charges. Going forward, we would expect to see margins in the 57% to 59% range, albeit assuming a relatively stable interest rate environment. Also of note for the sequential comparability purposes, due to a fiscal year calendar adjustment this year, our first quarter had an extra week of operations and contributed approximately $22 million in additional game ops revenue and $12 million in additional gross profit.

Moving on to product sales. First, domestic product sales revenue totaled $127 million on volume of 5,500 units for the current quarter, compared to $148 million and 6,500 units in the prior year quarter. Softer replacement demand was the primary driver of fewer shipments year over year. New and expanse in shipments totaled 3,700 units in the quarter, up 1,500 units due to the opening of Sands Bethlehem and the M Resort here in Las Vegas. Our market share in these two expansions was approximately 45% for Sand and 64% for M Resorts. Keep in mind, that the TA has a market cap of 50%.

Domestic nonmachine revenues totaled $52 million in the quarter, down from $67 million in the prior year quarter, primarily due to lower parts and conversion sales. On a sequential basis, however, the decline is really more attributed to fewer system sales in Q2 versus Q1. Although, we continue to support conversion starts for our legacy platforms, we would anticipate that we would see lower parts and conversion trends at least until the AVT technology has been out for longer. Gaming systems revenues and IT fees remained consistent with prior year. Domestic deferred revenue increased $9 million during the quarter, to a total balance of $42 million at March 31. Domestic average revenue per unit was $23,100 for the second quarter, up 300 from the prior year. Sales of machines utilized in our AVT technology comprised 80% of North American units shipped during the second quarter. And likely, will remain at this level or higher in the future, as our legacy for-sale products are are phased out.

International product sales revenue totaled $54 million on volume of 7,100 units, compared to $84 million and 5,600 units in the prior year quarter. The decline in revenue despite higher volume is the direct result of less favorable geographic mix of sales, with fewer shipments into the international casino markets, offset by increased shipments into the Japan and the UK, which carry a lower price point. International nonmachine sales were $18 million, down slightly from $20 million in the prior year quarter. The decrease in quarter was driven by a decrease in parts and game conversion demand. Most notably in Europe, which was partially offset by an increased in gaming systems revenue associated with the integration of the PGIC assets. International deferred revenue increased $8 million during the quarter to a total balance of $12 million at March 31, 2009. International average revenue per unit in the second quarter was $7600, down 49% year over year. Due to the heavy, again, the heavier mix of units shipped into Japan and the UK.

Total product sales gross margins for the quarter were 48%, down 700 basis points from the prior year, primarily due to the stronger mix of lower margin machines into Japan and the UK, combined with a lighter mix of higher margin nonmachine sales worldwide. Going forward, we would expect to see an improvement of product sales gross margins, as the mix shifts back to traditional casino markets. And we're going to recognize improvements associated with our cost efficiency initiatives.

Onto operating expenses. Total operating expense was $190 million for the quarter, compared to $148 million in the prior year. SG&A totaled $118 million for the quarter, which included $13 million of charges for bad debt and $18 million in restructuring charges. Exclusive of these items, SG&A totaled $96 million for the quarter, a decline of $9 million or 9% from the prior year quarter and $25 million or 21% from the fourth quarter of last year. The quarter just before we began our cost rationalization efforts. R&D expense totaled $53 million for the quarter and was consistent with the prior year. Depreciation and amortization, within operating expenses, totaled $19 million for the quarter and also was consistent with the prior year.

Bad debt provision, as I mentioned, totaled $13 million for the quarter, compared to $6 million last year. The current quarter's provision includes approximately $6 million in reserves for certain notes receivable issued in prior year, as opposed to our normal course trade receivable. Total depreciation and amortization, as reflected in our cash flows, was $69 million, compared to $77 million last year. Total D&A includes depreciation on our game ops assets recognized in the margin. The year over year decline was mostly due to a higher base of fully depreciated assets in the quarter.

Other income and expense, net, in the second quarter was a net expense of $12 million, up from $9 million prior year. The increase was most dual to higher borrowing costs and losses on foreign currency, partially offset by some gains on investments and debt retirement. The tax rate for the quarter was 34.6%, compared to 41.9% in the prior year quarter. Excluding $2 million in favorable discrete tax items, the quarterly rate would have been approximately 38%. We expect our quarterly tax rate for the remainder of fiscal 2009 to trend approximately 40% to 42%.

Moving on to the balance sheet. Cash and equivalents and short term investments, inclusive of restricted amounts, totaled $288 million at March 31, compared to $374 million at September 30. The decrease is due to the timing of receipts and disbursements at quarter end. We would anticipate that we would continue to maintain balances somewhere in the $300 to $400 million on a go forward basis. Debt totaled $2.2 billion at March 31 and is comparable to the balance at September 30. Working capital was $734 million and was consistent with levels we saw at September 30. Average days sales outstanding were 76 days. And inventory turns were 2.8 times. Both improving sequentially, from 80 days and 2.6 times in the prior year quarter.

Shares outstanding remained relatively flat at roughly 394 million at the end of the quarter. Year to day, we have generated $206 million in cash flow from operations, up from $195 million in the prior year. Although we saw a reduction in net income year over year, cash flow in the prior year was burdened by additional prepayments for long-term licensing rights. And the current year benefited from reductions in our receivables and inventory balance. Capital expenditures totaled $134 million year over year, compared to $150 million in the same prior year period, primarily due to lower investments in TBE following last year's completion of our Las Vegas campus. CapEx is expected to trend in the quarterly range of $50 million to $75 million and will continue to be managed carefully as part of our efficiency and cost reduction efforts.

Debt financing update. As of March 31, IGT had drawn $1.5 billion on its $2.5 billion credit facility. Our convertible bonds have a high likelihood of being put back to IGT in December of this year. To date, we have repurchased $193 million of this issue, leaving $707 million outstanding. While we anticipate having sufficient capacity under our existing credit facility to pay off the convertible bonds, we are in discussions with credit providers regarding options for our credit facility. Including the potential to extent the maturity on a portion of the commitment. During this calendar year, we may also access the capital markets ahead of the potential put on the convertible bonds and the expiration of our credit facility in December 2010. That concludes my prepared remarks. And I'd like to now turn the call over to T.J. and Patti for their closing comments.

Thank you, Pat. And good morning to everyone that's on the call. I just have a couple of comments to make and then I'm willing to hand the call over to Patti. Obviously, our quarter continued to see the effects of the economic slow down and what are the tight credit markets that constrain gaming operator budgets. That affected our product sales and revenues realized in gain ops. But we are, I think, getting most of this behind us. We are starting to see some evidence that there is some stabilization of revenues, at least in the regional markets. Of course, year over year, Atlantic City, Las Vegas, places that are kind of uniquely affected by their environment, like Illinois, are still suffering year over year declines. But really kind of throughout middle America, I think, we're starting to see year over year flat revenues and even some signs of increases due to some relaxed regulation in a couple of key jurisdictions.

So, with this challenging environment, we think that we have this obligation to help our customers look for ways to contain costs. And we have two ways of doing that for them. One, we can continue to try to move them to operating leases. In other words, shift their business activity away from product sales towards game ops, which has a been a longstanding goal of ours, in any event. And also, as we continue to progress towards our networked floors of the future, of course, with that comes some form of cross-rationalization for the operators. And we think that that becomes a more compelling story as we make progress technically on that.

The core issue for us has been replacement units. And we really reached, I think, a replacement trough that is unsustainable for any length of time. I think if you take a look at all of the replacement units shipped, not just by us but by the entire industry, this is correlating to something like a 40-year replacement cycle, far beyond anything that we've ever seen. In fact, 20 years has really been kind of the out date, as far as those trends go. And as you know, we have the wherewithal to accelerate replacement from time to time if we do our job right on an innovation basis. And so, hopefully, that's right around the corner. But we understand that, given operator budgets, that it's going to continue to be a struggle for at least likely this calendar year.

So in response to those challenges, as you know, we've been implementing our own cost reductions. We've got certain amount of that behind us last fall and some additional reductions in the manufacturing area this April. And I think that one of the real benefits of kind of changing management's focus here is that we get to revisit everything that we do. And in that, get to really look for ways to become more efficient. And as a result, have some further cost rationalization kind of accrue to us in that process. We've also been really aggressive in trying to make sure that we don't stop attracting kind of the best and the brightest of the industry to IGT. And so, with that here in this in just last week, we've announced two new additions to our management team. And Craig, who has introduced himself earlier on the call. And Tom Mikulich, who I'm really hoping in his MegaJackpot will give us an opportunity to really take an operator's perspective on how to optimize our full replacement of machines outstanding.

And then, as this transition takes place, look, I'm disappointed about the quarter and wish it was a slightly different backdrop for letting go of the CEO role. But I do look at these results and look at the last seven years and know that great progress has been made to towards the diversification of our revenues. Our revenues are better today than they were a few years ago. They're much more diverse in terms of the markets in which we participate, making us truly a global Company. And now, not only a global Company by selling products but also in terms of how we go about developing our products, with the advent of our R&D center established in China in the last few months.

We also are much better positioned relative to our game operations business, in that, we've really expanded greatly beyond the casino footprint. We've grown that installed base by about 2/3 in the last five or six years. And are now present in virtually all markets from which we can derive recurring revenue. Not only casinos, as mentioned, but also electronic bingo and the Internet. A much bigger presence outside of the United States. And also, the transformation away from box dependency and selling more and more systems, services and software application to the market. It's something that's well underway. So, over the last seven years, I think great progress has been made. I think it's probably the next seven years, though, with Patti's guidance, that the Company really is going to establish a new paradigm for how casino floors of the future are managed.

And some of the technology that is required for us to bring it forth. And so, that transformation to really focus our R&D dollars in a way in which we can truly stimulate demand through technological development and make sure that we maintain share by providing the best content to the market, is something that I think that is in good hands with Patti. And with that, we'd like to turn the call over to her.

Great. Thank you, T.J. And I speak for everyone at IGT in giving heartfelt thanks for the leadership you've provided the Company over the years. IGT's global footprint, our leadership and unique product and systems innovation and our outstanding financial results are all testament to the strength of your stewardship. And I look forward to continuing to work with you as our Chairman.

Over the past three weeks, I have had the pleasure of spending time with numerous stakeholders, both inside and outside of IGT and I am already feeling at home. Within the Company, I've experienced firsthand the energy that has driven IGT so successfully over the years. I've been impressed with our team's intense focus on the creating products that will enhance our customers' competitiveness and improve the gaming patron's experience. I am excited about our robust pipeline of market leading products and I am truly pleased to assume the position of CEO. I look forward to leading this organization through both our current and future challenges.

As is the case with any leadership change, there are certain points I would like to better understand and then address. Sharpening certain aspects of the organization's strategy and focusing our efforts on what we do well. Leveraging the talent in our development studios, our manufacturing facilities and our sales force to increase the velocity of decision making and expedite the delivery of products to market. Implementing specific measurements to gauge the result of our efforts earlier and more often, from the initiation of a contest to the translation of that contest into a product. And ultimately, to the delivery of that product to our customers. We must properly design our efforts to quickly and profitably capitalize on the opportunities as the gaming floor of today transforms into the gaming floor of the future.

As I mentioned on my introductory call a few weeks ago, it is my intention to spend my first three months at IGT learning about all aspect of our business, including how we might better address these key items. I have also encouraged our employees to engage in a similar analysis of our business. And consider how they think about our organization, our products and most importantly, our customers. While this quarter's financial results were not at levels we consider acceptable, we are excited about the future for several reasons. As T.J. mentioned, after several challenging quarters, certain gaming markets seem to be stabilizing. And we hope we will see this uptick hold as we move into the traditionally higher volume spring and summer seasons.

Our shift share has shown some recent improvement, driven by receptivity to our new AVT product line, including strong early success from our MLD and multiplay products. We anticipate these innovations will help us continue to compete in the video/slot segment. Our much awaited server-based gaming initiatives are now live on casino floors, beginning with the installation of our Tier One product at Ameristar St. Charles. We are finalizing contracts with a number of customers for commercial versions of Tier One and expect to generate our first incremental revenues from our server-based efforts in the third quarter. Meanwhile, we will continue to work with CityCenter in preparing for the first floorwide implementation at the end of this calendar year.

Outside of North America, our acquisition of Progressive Gaming is yielding new opportunities on both the systems side of our business and in our core machine business. IGT is focused on creating long-term value for all its stakeholders. Business cycles are inevitable. But even in this more challenging environment, IGT remains a profitable enterprise that generates significant cash flows. Our objective is to provide superior financial results through disciplined strategic actions; to achieve revenue growth; maintain an efficient organization, in line with our revenues; and to make prudent decisions in our capital deployment efforts. And I want to thank you for your continued support.

On the subject of guidance, our recurring revenues of greater than $3 million per day provide a wonderful base for our Company's financial performance. Further, we remain comfortable with our projections for new and expansion units, as the casino pipeline includes a number of projects that we expect will open by the end of 2009. However, we continue to have limited visibility when it comes to replacement orders. We believe the second half of the year will be modestly stronger than the first half but we will remain cautious until we see sustained incremental replacement unit demand, both domestically and internationally.

As a result, we are providing a range of annual EPS guidance. The low end of this range assumes the continuation of current trends, evidenced primarily by soft replacement sales through the end of fiscal 2009. While the high end represents a certainty degree of marketplace recovery, with replacements at levels above what we have seen in recent periods. With these parameters in mind, our EPS guidance for 2009 has a range of $0.75 to $0.85, inclusive of an anticipated increase in interest expense in the fourth quarter of approximately $0.02 a share, resulting from the expected refinancing of our credit facility. Our range also excludes the impact of any restructuring charges during the year.

On a more positive note, we are optimistic that the recent stabilization of play levels will continue and that a recovery is on the horizon. With this recovery, we also believe that the replacement rates we have seen recently are just not sustainable and that 2010 will be a better year for IGT. With Pat and T.J. available here to provide a bit more color, we'd be happy to take your questions.

(Operator Instructions) Our first question comes from David Katz of Oppenheimer.

Hi, good morning. And I'll apologize if I missed a couple of the details here but have you broken out, of the 5,500 units that were sold, how many of those were knew versus replacement?

We did, David. The replacement number was 1,800.

1,800. Great. Now, within the installed base, I noticed over the last couple of quarters you've been breaking out sort of fixed versus variable. And I think in the past, we may have looked at least versus more pure participation. Are those essentially the same breakouts because I think we were sort of running numbers slightly different from how you've broken them out fixed versus variable?

They are, David. We're just -- because we're kind of unusual in our industry, in that, we have highest concentration of variable fee games. If you look at most of our competitors, they have a much larger proportion of their installed base that's either on a fixed basis or variable with a cap on it. So, we're much more sensitive to play levels. And that's why I did it. So, it's a good news / bad news story. The bad news is we have to suffer through these downturns and softer play levels. The good news is, as things improve, you see that leveraged greatly through our P&L.

All right, okay. I think I'm good for now. I'll circle back. Thanks.

Our next question is from Robin Farley of UBS.

Great, thanks. I have two or three questions. First, is that new guidance range, when you say it excludes restructuring charges, does that new guidance range add back any of the other adjustments that you've broken out in the quarter or is the restructuring the only thing that's being added back to get to that 75% to 85% level?

Just restructuring, Robin.

Okay. Great. That's helpful. And a few other questions. One, is your SG&A, maybe we would have expected it to be down a little bit more given the cost saves. And maybe you can just give us a little color on where those SG&A levels will sort of level out going forward? And then lastly, if you can talk about, with City Center, kind of when you expect to ship to CityCenter and what kind of market share you're expecting to get there? Thanks.

You bet. First on SG&A, there is a lot of noise in it, so it's not a clean direct line of save. But if you use Q4 of last year as your baseline and compare that to where we're at today, I back out bad debt just because that's the volatile piece. But the additions back to it, we acquired the assets of PGIC and with that acquired a little over 100 people, I believe it was. So that did add some back. But I think going forward, you're going to see us continue to rationalize that number down. I don't have a specific figure for you but you should anticipate that number continuing to come down over time. We're just about ready to kick off our 2010 planning cycle. A big focus of that is really -- and it's not so much about costs. It's more about the structure, which will lead to a more efficient cost structure as we address that.

And relative to CityCenter, those assets will probably ship possibly before our fiscal year end. However, you won't see revenue in this current fiscal year because of revenue rec as it relates to the system. And you'll see us with, I think, very nice market share, probably at 60% or north of there.

Okay. Great. Thanks. And just to clarify, with your SG&A comment then, you said you'll be starting the 2010 planning soon. Does that imply that for the next few quarters, SG&A will look pretty much like it did this quarter if you take out the bad debt and restructuring?

Yes. I think we should be at levels that are -- there's a little bit of variability and some of the thing are volume-based like incentives and things, sales folks and stuff. But for the most part, SG&A should remain hopefully at these levels or lower.

Okay. Great. Thanks.

Your next question is from Steve Wieczynski of Stifel Nicolaus.

Good morning, guys. First, Pat, could you break out the other income line for me?

Sure. Give me just a second to. We have interest income of $14.8 million, interest expense of $28 million. And then other, which would be gain/loss on investments, we bought back the bonds, had some gains there and then foreign currency valuation.

Right, okay, thanks. And then, Patti, when you talked about seeing some markets starting to stabilize, maybe you can give a little more color in terms of maybe which markets you're seeing some strength in and which ones are still pretty soft?

Sure, I'll address that. The places that are still having a difficult time are ones that have factors beyond the recession affecting revenues. And so, it's a destination market like Las Vegas. It's a market that's adversely impacted by competition like Atlantic City. It's markets that are still being affected negatively by tighter regulations, like Illinois. The flip side of that is markets like Missouri, Louisiana, that are much more local oriented in terms of play levels are definitely stabilizing.

And the markets, that I think I've said before, that I use as kind of the cleanest barometer of being affected by a recession but not affected by these other factors, has been Arizona. And I think Arizona was still down this last quarter. It was down something like 5% year over year. So, it is still showing that there is some degradation of play levels out there due to the economy and kind of changed consumer behavior. But the rate of degradation is much lower than it had been towards the end of last year. The sequential comparison, I think, looks fairly stable in that regard. So, yes, year over year is still down but sequentially, it's much more a flat comparison.

And so, I do think that we're probably starting to see the consumer return in a way in which we understand that they ultimately will because they do like our products. As an industry and as a Company, we have something that they want to play. And so, I would anticipate that through 2010 -- as we approach 2010, we're going to see stabilization of revenues. And what's really important about that, is not just how it impacts us but how it impacts the operator mindset. Because all of the sudden, it will allow them to be better planners of their business and have, as a result I think, more freedom to deploying capital and maintenance CapEx.

Okay. Got you. And then, last question for Patti, kind of a high level question. Since you've been there in your limited time what has surprised you so far on the positive side? And then, what has -- what do you think needs the most work as you kind of start digging in?

Digging in is a good way to describe it. I think when I joined the Company three weeks ago, I had a fairly high level view of IGT's strengths and weaknesses from the boardroom. And I really am starting my process to really dig in. And the things that I would say after my first three weeks, that I'm initially focused on kind of three areas. One, is addressing this whole notion of the mix shift that's going on in the market and really preserving the power of our recurring revenue model. I really recognize the importance of that in our installed base and really focused with my team. I'm looking for growth opportunities for the lucrative MegaJackpot.

T.J. mentioned earlier, we've added Tom Mikulich. I think Tom really does bring with him some of the in-depth knowledge of casino operators and player marketing that we're looking for. So I would say, priority number one, would be we're very focused on that and that's a trend that we think needs to kind of head the other direction.

The second, is really focusing on our ship share and replacement sales. We continue to gain outside share in new openings but we've struggled, frankly, to really gain comparable share in the replacement cycle. So, that would be kind of priority number two. And number three, is really -- and I need to be convinced that our R&D investment is really flowing through to revenue producing products at the appropriate rates. And so, those are kind of the three things.

On the flip side, I'm delighted with our new products, particularly the MLD and multiplays, getting good re-accepting in the marketplace. And so, I feel like that's going to be a nice foundation for us going forward. We are continuing to integrate the SB platform to really move it from being kind of an outside project for the Company into our core day-to-day business model. And I think, with that movement, we will begin to see some efficiencies and really reap the rewards of the investments we've made in SB.

And then lastly, on the financial side, we're really doing a great job managing working capital and cash, I think evidenced in our accounts receivable improvement that you heard about. So, a lot of the efficiency initiatives I think are really starting to take hold for us. So I would say, basically, we're focused on leveraging the intellectual bullish power in the Company's financial resources, intellectual property. As I mentioned on the initial call, I'm going to really spend the quarter digging in. These are kind of on both sides of the ledger, the things that I see early. But I'm committed to really making my way through this 90 days and then reporting back to our shareholders on the decisions that we've made at the end of that 90 days and how they might impact us.

Okay. Great. Thanks, guys.

(Operator Instructions) Our next question comes from David Katz of Oppenheimer.

Hi. Pat, could we just talk about the financial strategy and how things unfold for the remainder of the year? I know you touched on the convert issue. If you could give us sort of your view of what the financing markets look like for you and how we should be thinking about cost of capital going out, that would be helpful?

Sure, I think probably the biggest thing to consider, Craig, and you see this, it's not something that's unique to us or our industry. And that is that banks are wanting to reduce their exposure. And so, bank lines of credit, the size of them is coming down. You've seen it recently with Wynn and a number of others that have amended their facilities. And so, that then leads you to the fact that, okay, you're going to be less reliant on bank debt, so you're going to need to access the capital markets. Which means you, at some point, you've probably put some straight debt on your books. And so we're exploring that now. Don't necessarily have any concrete conclusions today. But if you just look at the cost of straight debt versus that of the shorter term bank debt, that will give you a delta. I'd say, we've factored in into our Q4 an increase, I believe there's about $0.02 a quarter in EPS due to the incremental borrowing costs.

We should be --.

Hopefully, by the July call, we'll have -- I'll be able to be much more articulated in what we are doing. It's a work in progress but I think going well.

Right. So, we should be thinking a smaller bank deal and perhaps a bonds offering out there of some kind?

Yes, that's probably the most likely scenario at this point.

Right. And you don't have any sense of order of magnitude between those two at this point?

Not because we're still sizing it.

Okay. All right, perfect. Thanks very much.

You bet. Thanks, David.

Your next question is from Todd Eilers of Roth Capital Partners.

Hi, guys, how are you? I'm not sure if you gave it but can you maybe give us what your estimated overall ship share was for the quarter based on your internal estimates, as well as one of your other competitors reported as well?

Yes, on an overall basis, Todd, our internal estimate is about 54%. Of course, that was heavily weighted because of the newer expansion. My gut level guess on the replacement, would probably be plus or minus 40%. And that is really gut level because we're a little bit like you, in that, we come up with that number the same way you do. We wait until everybody reports and then we figure out what the number was.

Sure, understandable. Could you also maybe give a sense of what your guidance range implies for ship share?

I think stability. I don't think it envisions any big increase or anything but I think we're feeling fairly comfortable about the quality and the performance in the pipeline of products, as we've seen. Particularly, our performance in video has improved greatly over the last 12 months. And that's really starting to manifest itself in the -- particularly, the MLD product and this multiplay, which is a new type of game but video format.

Okay. And then last question, you mentioned that certain regional markets are stabilizing and seeing some encouraging trends, obviously, outside of Las Vegas and Atlantic City. I don't know if you've given this in the past but can you maybe give us a sense in the gaming ops side of the business, maybe what your exposure is to the Las Vegas and Atlantic City markets, either in units or revenue or however you guys look at that?

I think those two markets, from a unit perspective, out of the 60,000 units maybe it's 10%, which would mean the revenue and margin exposure is probably less than that. Given that Las Vegas, in particular, is one of the lower yielding markets, just given the shear number of devices that exist in this market versus others.

Okay. That's helpful. Thank you.

Our next question is from Joe Greff of J.P. Morgan.

Good morning everyone. Pat, just on the annual EPS guidance range of $0.75 to $0.85, what is the second half EPS range then? I just want to make sure I'm using the first half EPS correctly here. And just clarify, is that GAAP, is that -- it sounds like it's some sort of adjusted EPS but can you walk through what exactly that range is and what that implies for the second half?

Well, first, it's GAAP with one exception and that would be the restructuring charges.

Okay.

And most of those were a Q1 and Q2 event. It was, in total, probably about $25 million in total.

Okay. And, Patti, maybe I can ask you a question differently. You talked about some of the opportunities. But maybe you can look back and you've been on the Board for awhile. What hasn't gone right at IGT? Why do you go back and you look at it and you say, "Okay, we've lost ship share domestically." Why do you think that's been the case? And then, from there, maybe then you can figure out how to fix that?

Well, I think actually, that's exactly the analysis that we're doing. And I -- it would be inappropriate for me to reach that conclusion at this point. I think Pat and his team, along with my entire senior management team, as we're working through the 2010 planning process, which we're kicking off next week, that's exactly the kind of things we're looking at. Is to go back from a root cause perspective and have a better understanding of why we find ourselves where we do. And that's how we'll address it and we'll have plans to address it.

So, I would say it's probably not one thing. My guess and just my three-week look, it's not one thing that has caused us to be where we are. And it isn't anything intentional and it's not going to be one solution either. So, I think as I indicated earlier, kind of three areas, it's kind of replacement, ship share and this mix shift away from our wide area of progression, particularly in our MegaJackpot business. And then, really making certain that our R&D investments are working for us and materializing into revenue generating products, are kind of my three areas that as I look at 2010, I feel like we need to make significant improvement in those three areas.

Okay. Good enough. And then, Pat, going back to the guidance question, at the lower end of the range, that $0.75 you're assuming that you're kind of run rating about 1,800 of domestic replacements for the next two quarters.

That's correct.

Great. Thanks, guys.

You bet, thanks, Joe.

Our next question is from David Bain of Sterne Agee.

Hi, thanks. Did you guys review ASP's by chance? Because I'm trying to back into the number and it was a little off from where I had forecasted.

Give me just a second, David, let me find the page.

Okay .

ASP's.

For domestic.

North America, 13.6.

That was quite a difference versus where we had forecasted. Is there a reason for that? Did the price levels go down or were there volume discounts?

It would have been mix. And I apologize, I don't have that in front of me. I'm not aware of any outsized discounts or big deals we would have done. Well, in saying that, though, the two big -- given that the units, in total, were lower for the quarter and were heavily populated with newer expansions, two big openings in particular, those would have been bigger discounts associated with them. So, that is probably the --.

So, we can expect maybe that to come back a little in game sale margins, maybe to pick up a little bit?

Yes, I would anticipate, particularly as we get -- that concentration of AVT is going to continue to rise, particularly MLD and some of those, they have a much higher price point.

Okay. I'm good. Thanks, guys.

Your final question comes from Justin Sebastiano of Morgan Joseph.

Thanks. Hi, guys. If we exclude the video poker units sold to the M Resort, what would the ship share have been?

I apologize, Justin, I don't have it in front of me. You could circle around with Bill or Craig and they could probably help you understand that.

Okay. And then, I apologize if you mentioned this but was the new international units sold in the quarter?

New international units, it would have been the majority. I want say there were about 300 to 500 new units. The majority would have been replacement. Most of the international markets we serve are replacement markets.

Got you, okay. And just so I'm clear, the $0.75 to $0.85 EPS guidance, that's GAAP less that $8.3 million restructuring?

Yes.

Okay.

GAAP, with the exception of any restructuring charges, which was about $25 million year to date, Q1 plus those that we just took in Q2.

Okay. Thanks, guys.

Thanks, Justin.

Okay. Well, we appreciate all of your time this morning. We look forward to conversations in the future and reporting on IGT's progress. Thanks very much.

This does conclude today's conference call. You may disconnect at this time.