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Operator
Good afternoon ladies and gentlemen, and thank you for standing by, and welcome to the conference call for Scientific Games Corporation's 2014 second-quarter results.
(Operator Instructions)
As a reminder, today's conference call august 5, 2014 is being recorded, and now I'll turn the call over to Mr. Bill Pfund, Vice President of Investor Relations.
- VP of IR
Thank you, Ryan.
Good afternoon to everyone, and thank you for joining us to discuss Scientific Games 2014 second-quarter results.
With me are Gavin Isaacs, President and Chief Executive Officer, and Scott Schweinfurth, Executive Vice President and Chief Financial Officer.
Before we start, let me review our safe harbor language.
Our call today contains comments that constitute forward-looking statements under the private securities litigation reform act of 1995.
These statements, including statements regarding our outlook and future business conditions, are based on currently available information and involve certain risks and uncertainties.
Our actual results may differ materially from those anticipated in the forward-looking statements.
For information regarding risks and uncertainties please refer to our earnings press release, information posted on our website, and our filings with the SEC, including the Company's most recent annual report on form 10K and in our more recent reports filed with the SEC.
The forward-looking statements made on this call and webcast, the archived version of the webcast, and in any transcript of this call are only made as of this date August 5, 2004 (sic).
During this call, we will also discuss certain non-GAAP financial measures.
A description of each non-GAAP financial measure and a reconciliation of such items to the most comparable GAAP financial measure can be found in our earnings press release.
Now, let me turn the call over to Gavin.
- President & CEO
Thank you, Bill.
Good afternoon, everyone.
First, I want everyone to know that I feel extremely proud and privileged to have the opportunity to lead this great company.
This is a very exciting time for us, but I believe we have even more exciting times and opportunities ahead.
For you baseball fans, I believe Yogi Berra said it very well: this is a once-in-a-lifetime opportunity, and I've already had a couple of them.
Let me briefly highlight some of the key take-aways from our 2014 second-quarter results.
Revenue was $417 million up $182 million over prior-year quarter and included a $170 million contribution from WMS and a 7% increase in lottery group revenue.
The net loss was $72 million compared to $12 million in the prior-year quarter.
The increase included a $26 million pretax loss on the early extinguishment of debt associated with the refinancing of our 9.25% notes, along with higher interest expense in the quarter of $24 million and an $8 million charge recorded in earnings from equity investments related to our share of an estimated net shortfall accrual recorded by our Northstar Illinois joint venture.
Our attributable EBITDA was $132 million compared to $85 million in the prior-year quarter, which reflected the year-over-year contribution from WMS and continued growth in the lottery group, partially offset by decline in earnings from equity investments, primarily due to the $8 million charge relating to our earnings from our Northstar Illinois equity investment.
I think it's worth noting that in addition to the quarterly sequential increase in revenue, currently reflecting seasonal influences, our attributable EBITDA also increased on a quarterly sequential basis.
This increase reflects the benefit from our ongoing integration efforts and the progress made in improving our operating performance, such as reducing the cost of product sales and gaming segment and reducing the cost of instant games in our instant product segment.
Scott will provide more details on our financial performance, but before turning the call over to him, I would like to share some of my observations on our business, as today marks my eighth week at Scientific Games.
As a you review Scientific Games, at our core I believe we are a relatively simple Company.
We have two businesses, our gaming business and our lottery business.
These are organized into three operating groups, lottery, gaming, and interactive.
We break our lottery business into instant products and lottery systems and provide complete financial segment data on both.
Over time, we expect our lottery business in aggregate to provide steady growth and cash flow due to the nature of their portfolios as long-dated contracts.
Within our gaming business, we have three lines of business revenue.
Our interactive products and services, our participation-based games and services, and our product sales line of business, primarily the sale of new gaming machines.
I see the lottery business being quite consistent over the longer-term, generating steady growth through long-dated contracts with upside growth opportunities from both winning new contracts and providing value-added products and services, such as premium promotional games, loyalty programs, and marketing services.
This year our lottery business is benefiting from the commencement of sales to our northbound New Jersey joint venture and to our consortium that operates the great national lottery.
Recently, we received favorable news that a consortium in Turkey, with whom we have had an exclusive supply contract to provide both the lottery system and instant games, won a 10-year contract to operate the Turkey national lottery.
We're excited that a new national lottery draw game, the monopoly millionaires club, developed by Scientific Games and approved by the multi-state lottery association will commence sales in the fourth quarter to be followed in early 2015 with the nationally syndicated TV game show.
And, as I've traveled, met with team members and customers, and have gained better insights, I've developed great respect for the management team and employees in our lottery business.
This group is well-managed with a deep bench of experienced, dedicated people and is positioned to achieve its goals.
Our interactive business comprises two units, social and real money gaming.
Today most of our revenue comes from our two social game casinos: Jackpot party social casino and the new growing Goldfish Social Slots Casino.
But with 14 Real Money Online Casino license remote game server agreements operational, as of today, we expect participation revenue from Real Money Casino operators to provide steady and improving growth in coming quarters as the base of players grows.
Our participation-based gaming business, particularly due to strong performance of our wide area progressive games, is performing well both in absolute and relative terms, growing our wallet share in spite of the gaming industry's present challenges.
Our daily average revenue of our WAP games is up 4% year-over-year, and our footprint of WAP units is up 6% year-over-year.
However, our footprint of non-WAP premium participation games declined year-over-year and on a quarterly sequential basis.
In the UK, the average daily revenue of our participation games also showed a modest improvement, largely reflecting the positive player reaction to the introduction of new game content developed by both our WMS and our Scientific Game gaming teams.
While our shipments of new gaming machines were disappointing on a year-over-year basis compared to the record shipments of replacement units a year ago, on a relative basis, we believe we experienced improve traction.
We believe our ship share, well below a year ago, did improve over the level of the previous two quarters.
This reflects the continued strong performance of our core video games on our blade cabinet, and the introduction of our new blade stepper cabinet.
I've spent time seeing the lineup of new products and gaming content being developed for this year's G2E.
I am keenly aware that the core competency for developing innovative new products is alive and well in our gaming business.
I can't wait for our customers to see our exciting new lineup of games.
With solid performance on our latest games, including the new blade stepper, I believe we are well-positioned to recapture the ground we lost to our competitors.
And with our integration efforts progressing ahead of plan and a renewed focus on identifying ways to improve processes and margins, together with an increased discipline on capital spending, I'm confident that we will continue to strengthen our free cash flow generation.
As noted in our call on Friday discussing the pending acquisition of Bally, cash flow is a key focus.
And our goal is to primarily use our increased free cash flow to pay down debt and bring our leverage ratios back to more optimal levels.
Now, please let me turn the call over to Scott to review our financial performance and outlook for the second quarter.
- EVP & CFO
Thanks Gavin, and good afternoon everyone.
For the June 2014 quarter, our total consolidated revenue was $417 million, an increase of $182 million from the second quarter of 2013.
The revenue increase included $170 million for the acquisition of WMS and a $13 million or 7% revenue increase in our lottery business.
Our consolidated attributable EBITDA increased $48 million to $132 million, primarily related to the WMS acquisition, coupled with a slight decline in our lottery businesses, which included an $8 million charge recorded in earnings from equity investments related to our share of an estimated net shortfall accrual by our Northstar Illinois joint venture.
Our consolidated cost of revenue, which does not include any depreciation or amortization expense, decreased from 57% of revenue to 46% of revenue, primarily reflecting the impact of the acquisition of WMS and the changing mix of revenue streams and was, in face, slightly lower as a percentage of revenue than our 2014 first quarter.
Operating income, inclusive of 5 million of employee termination and restructuring expenses, primarily related to our ongoing integration efforts, was $4 million down from $12 million in the prior-year period.
Our net loss of $72 million compares to a net loss of $12 million in the prior-year quarter, and this increase reflects a $26 million pretax loss on early extinguishment of debt associated with refinancing our 9 1/4 notes due 2019; $24 million pretax of higher interest expense, primarily attributable to the WMS acquisition; and the $8 million pretax charge related to our share of the estimated net shortfall accrual relating to our Northstar Illinois equity investment.
Now, I'd like to turn to a review of our three business segments performance, beginning with our gaming segment.
As a reminder, our gaming segment includes all of the WMS business, including interactive gaming, our legacy SG gaming business, and the central monitoring control systems business.
Segment revenue was $209 million an increase of $169 million over the prior-year, all of which related to the acquisition of WMS.
Service revenues from our WAP and premium participation gaming machines was $58 million, essentially flat with the 2014 first quarter.
The revenues reflect a 5% year-over-year increase in the average revenue per day for our WAP and premium participation units to $70.73, as we benefited from the player appeal and performance of our newest game, offset by a decline in the non-WAP premium installed base of participation units that we believe reflects the continued pressure on casino operators across the industry to control expenses and manage their cash flow.
At June 30, 2014 our footprint of 3,707 WAP units represented a 6% increase over the prior years installed base and comprised approximately 42% of WMS's installed base of WAP and premium participation units compared to 36% at June 30, 2013.
Our average installed base of other leased and participation units rose to 27,228, reflecting the addition of 2,462 leased WMS units partially offset by a decline in the total installed footprint at UK gaming, primarily reflecting the previously reported loss of the Betfred contract.
The average daily revenue for these units increased slightly, reflecting a slight improvement in the UK and the addition of the higher-yielding WMS units.
Services revenue from interactive products and services increased $32 million year-over-year, reflecting the inclusion of the WMS interactive revenues.
As previously noted, social casino revenue is now reported on a gross revenue basis before platform fees as a result of a change in the Facebook payment settlement process rather than on a net revenue basic as historically reported by WMS.
The reported change represented approximately $8 million of the interactive services revenue and an equal amount to the cost of services for the current year period.
Daily active users increased to 1.4 million from just 600,000 a year ago and rose by 100,000 daily active users on a quarterly sequential basis.
The sequential increase in our daily user base primarily reflected growth resulting from the launch of our second social casino app, goldfish social slots near the end of the first quarter and it's increased availability as we extended the app across multiple mobile platforms in the second quarter and stepped up our targeted marketing of the Goldfish site.
While the average daily revenue per daily active user declined to $0.22 from $0.36 in the prior-year quarter, largely reflecting the broader user base from the expansion across mobile platforms, which tend to monetize at a lower average rate.
The daily rate was essentially flat on a quarterly sequential basis.
Product sale revenue was $81 million, which included $77 million in revenue from sales of WMS products.
However, the WMS revenues representative decline from product sale revenue reported by WMS in the year ago period primarily related to a 2,187 unit decrease in US and Canadian shipments of WMS units.
This reflects a decline from the record number of casino replacement units a year ago and the impact of 234 Canadian VLTs in the prior-year.
Similar to the challenges in the first quarter, we believe the decline in replacement unit shipments for the second quarter reflected a combination of casino operators limiting capital spending as a result of declines in their gross gaming revenues and an estimated decline in our ship share compared with the prior-year quarter.
However, we believe that our ship share improved from the 2014 first quarter.
International shipments of WMS gaming machines declined from 2,055 units to 1,222 units, largely reflecting lower shipments to Latin America, including lower shipments to Argentina due to import restrictions and a decline in units shipped to Mexican customers, reflecting the challenges in that market.
Shipments of UK gaming, bingo, and arcade machines declined from 519 units to 328 units.
During the second quarter, the average selling price for WMS's gaming machines at $15,405 was about flat with the prior-year quarter.
As noted in the release, we fully launched the mechanical reel blade stepper cabinet in the second quarter, shipping a total of 617 stepper units.
Additionally, our other product sales increased, reflecting higher subscription revenues related to the growing installed base of blade video units, higher conversion kit sales, and higher used unit sales.
At the beginning of July, we received regulatory approval for blade gaming machines in both Macau and Singapore, and in our services business, we began placing the first blade participation units, a three-reel mechanical Monopoly luxury diamonds game that includes WMS's first use of a mechanical wheel bonus feature as the top box.
The first units have been an Atlantic city for just a few weeks, and the early performance is very encouraging.
We incurred $2.2 million of employee termination and restructuring costs mostly related to headcount reduction and the remaining costs of exiting our online gaming business in the UK and a related managed services contract in Belgium.
Attributable EBITDA in the quarter for the gaming segment of $73 million primarily represented the benefit of WMS and represented a $10 million quarterly sequential improvement largely due to improved earnings after adjustments for non-cash items and seasonal trends.
For our instant product segment, total revenue was $139 million, an increase of $9 million or 7% over the prior-year period.
Our US revenue increased 12%, which compares to our US lottery customers retail sales of instant games that increased 5% year-over-year.
Our growth also includes the year-over-year benefit from sales to our Northstar New Jersey joint venture and a 33% increase in revenue from licensed premium promotional games and player loyalty programs.
International revenue declined slightly, about 1%, as a 2.5% decline in retail sales in Italy, lower China validation revenue, and a decline in Canada related to lower sales to Loto-Quebec under proposed new arrangements, and the exiting of our unprofitable provoloto operations in Mexico earlier this year were partially offset by the start up of sales of instant games to our Hellenic lottery strength entry in Greece and growth in certain other European and Latin American lotteries.
While operating income in the instant product segment increased 12% year-over-year, attributible EBITDA for the segment was up only about $1 million or 1% from the prior-year period primarily due to the impact of the $8 million charge related to our share of the estimated net shortfall accrual by our Northstar Illinois equity investment.
Along with higher SG&A, we also incurred $800,000 of restructuring costs in the quarter as we exited a small paper roll conversion facility in the US, which was non-core to our operations.
Turning to our lottery systems segment, revenue of $69 million was up 8% year-over-year, or approximately $5 million, largely reflecting a $4 million increase in product sales primarily due to sales of systems hardware and software to international customers, principally Norsk Tipping, the Norwegian national lottery.
Service revenue increased $1 million or 3% primarily driven by higher sports betting revenue from international customers.
In the US, the comparison with the 2013 quarter was unfavorably impacted by a record Mega Millions jackpot that benefited retail lottery sales in the year-ago quarter.
And, looking ahead, the 2013 third-quarter services revenue benefited from two large, above $300 million Powerball jackpots.
Operating income increased $4 million largely reflecting an unfavorable mix of lower margin product sales.
Attributible EBITDA was $22 million for the segment, a decline of $2 million or 8% from the prior-year quarter as the higher revenue was offset by a less profitable revenue mix.
On a quarterly sequential basis lottery systems segment revenue, operating profit, and attributible EBITDA were up as a $5 million sequential increase in revenue contributed to $3 million sequential improvement and attributible EBITDA.
I would now like to review the significant progress we are achieving with our integration initiatives.
I'm very pleased that the efforts of our team has realized -- that our teams has realized to date in integrating the businesses has resulted in cost savings ahead of our initial 2014 target of $15 million.
Reflecting this great progress, we have raised our 2014 target to now obtain at least $70 million in annualized cost savings in 2014, and we continue to expect to achieve our target of $100 million in annualized cost savings by the end of 2015.
As expected, certain of these integration initiatives require costs to be incurred to achieve the savings, and during the second quarter, our employee termination and restructuring costs totaled $4.9 million, primarily from employee separations.
We anticipate we will incur additional integration related costs in the second half of 2014 as we continue to execute on our integration and other cost savings plans, although, we believe the cost for our integration actions were weighted more heavily to the first half of the year primarily due to the timing of employee separations.
For 2014, we continue to expect such integration costs to total between $15 million and $20 million.
In addition, we expect an additional $15 million to $20 million of integration-related capital expenditures of which the largest project is to implement the Oracle HR and financial software modules throughout the legacy SG business.
There will be additional operating and capital costs incurred in 2015 to complete our plans.
For the second quarter, our free cash flow, defined as net cash provided by operating activities less capital expenditures, was an unfavorable $31 million use of cash, which was a decrease of $34 million from the prior year, largely reflecting a $23 million decrease in cash from net operating activities largely due to unfavorable changes in current assets and current liabilities, coupled with an $11 million increase in capital expenditures.
Our inventory value June 30, 2014 was $33 million higher than at December 31, 2013, and our accounts payable had declined $57 million over the six months, largely reflecting the timing of payments.
Capital expenditures for additions to property, plant, and equipment, lottery and gaming services expenditures, and intangible assets and software expenditures was $55 million compared to $44 million a year ago with the increase due to the addition of $29 million of capital expenditures from WMS partially offset by a decrease in other capital expenditures.
Due to lower-than-anticipated capital expenditures for the six months ended June 30, 2014, we are lowering our 2014 estimate from $280 million to a range of $260 million to $270 million.
During the second quarter, as part of our refinancing of our 9 1/4 notes, we incurred $26 million of out-of-pocket refinancing costs.
Net cash provided by operating activities was $24 million, a decline of $23 million from the prior-year quarter as a $27 million increase in net earnings after adjustments for non-cash items and loss on early extinguishment of debt was offset by an unfavorable $27 million change in working capital and a $23 million decrease in distributed earnings from our equity method investees.
Additionally, the distributed earnings and distributions of capital from our equity investees aggregate $54 million for the six months of 2014 up $9 million from the first six months of 2013.
We've invested $41 million in our joint ventures during the first six months of 2014, which principally reflects the capital contribution to ITL for funding participation gaming terminals in the UK for a customer contract for which we completed the full installation in June 2014 quarter.
We've recorded a related capital lease asset and liability on leasing such equipment from ITL to our UK gaming business.
In the second quarter we also received a return of capital payment of $11 million from ITL.
During the second quarter, we refinanced or 9 1/4 notes due in 2019, paying related fees and other refinancing costs from our cash on hand.
As a result, we have $350 million of new notes due 2021 at a new rate of 6.625%, which should yield an annual benefit of approximately $9 million in cash flow.
In summary, we believe that the combined Company continues to benefit from the diversity of our revenue streams, and when coupled with our intense focus on integration synergies and free cash flow generation, we believe the foundation is clearly in place for improved operating results in future quarters.
Ryan, would now please open the line for questions.
Operator
(Operator Instructions)
Steve Wieczynski, Stifel.
- Analyst
Good afternoon, guys.
Scott, the first question is for you.
It's actually kind of a technical question.
But with the social and gaming revenues, I'm just having a hard time coming up with -- I know you talked about it's gross versus net -- so how should we think about that going forward?
I guess the question is: If you guys reported $32 million there, should that really have been about $24 million or $25 million?
Is that the right way to think about it?
- EVP & CFO
Right.
Had we reported under the method that WMS had used, the number would have been $24 million.
And we have one quarter remaining, the September 2014 quarter, where there'll be a difference between the way that WMS reported the number for the quarter and the way that Scientific Games reported the number.
The net, the $24-million number, would compare to a $17-million number that WMS reported in the June 2013 quarter.
- Analyst
Okay, so is it fair to say then, from the daily user, if you -- you guys just reported a 1.4 million number.
If you expand that out a little bit, that would look more like last quarter -- like that 1.34 million or 1.35 million-ish type range?
- EVP & CFO
Right.
It was up about 100,000 quarter over quarter on a sequential basis, correct.
- Analyst
Okay, got you.
Then, we look at the product sales side of things; it's still, obviously, a pretty tough operating environment.
And I know, Gavin, you guys don't give guidance, but maybe help us think about how you're thinking about the back half of the year from a product sales, and even a gaming operation segment as well?
- President & CEO
Well, the product sales -- obviously, Steve, we have a G2E coming up in less than two months.
I think that traditionally everyone lets the major operators come and see their products prior to that.
And I know that that will start, probably, in the next couple of weeks.
We're hoping that that will help drive some sales in the second half of the year.
And then, after G2E, I think you're going to see some really nice products there, and I think it hopefully bodes well for, again, further improvement from the fourth quarter.
From a gaming operations perspective, I think that our WAP is probably one of the highlights.
Performance of our wide areas of WAP is certainly one of our highlights of our performance with an increase in the wins and the actual placement.
Clearly, environment at the moment has been one of reducing premium non-WAP games.
But we think with some of the great new games that we'll be producing at G2E, and games like the new stepper that Scott referred to with the wheel on top, I think you will start to see some increasing placements there, too.
I certainly hope that that will be the case.
- Analyst
Okay, and then, last question: Gavin, going back to you with -- the question we've gotten a lot over the past couple of days since the deal was announced -- the timing of that deal was extremely fast.
Can you give us a little bit more color on terms of why it came together so quickly, and the thinking behind that?
Why did you think it was a good idea to get it done that quickly?
- President & CEO
I think if you have a great idea and the synergies and the meeting of the minds and the strategies all align, why is there any reason to procrastinate?
I think this is an instance where we really did see -- both sides saw a great advantage in bringing these two companies together.
And I think this -- the longer you delay these things, the more people you get involved, I think the likelihood of leaks and other potentially damaging messages can come out.
And I thought it just was a very effective way of doing it.
- Analyst
Okay, great, thanks for the color, guys.
- President & CEO
No worries; thank you, Steve.
Operator
Mike Malouf, Craig-Hallum Capital Group.
- EVP & CFO
Mike, are you there?
- Analyst
I'm here right now, sorry.
Thanks for taking my questions.
I'm wondering if you can give us any feedback with regards to the casino operators on the consolidation that's going on, on the gaming side?
And I'm sure that they -- one of the questions that I keep getting are: If your ship share through one casino is 30%, just to pick a number -- if you combine WMS and Bally, that maybe that triggers something where perhaps they move that down to 25% just because they think that's enough to give one company.
And I'm just wondering if you could comment on some of the feedback you're getting?
Thanks.
- President & CEO
The feedback's been fairly positive, and I have to say, feedback's been consistent from one perspective, and that is: It doesn't matter whether you're big or small, and doesn't matter whether we love you or we hate you.
We're only going to buy games that perform.
So, I think there are so many companies out there now making content; ultimately it becomes the opportunity to sell.
Ship shares are moving around so much that if your games are good and they've got legs, casinos will buy them.
If it turns out the Bally games are good and the WMS games are good, well, then that's great for a combined entity.
But you're not going to penalize one company by virtue of a merger, if their games are good.
On the same token, you can be a very small, one-man shop almost or a five-man shop producing great content, and the biggest casinos will still buy from you.
So, I think it's all being overplayed, and I think the feedback we're getting across the board from customers is: They get it; they understand why we do these things.
But at the end of the day, unless we make great content, it doesn't matter.
They will buy the best games.
- Analyst
Great.
Just one other question, maybe for Scott.
Is there some sort of loose guidance that you can give us on the rate of debt that you're expecting for the acquisition?
- EVP & CFO
You mean the interest rate?
- Analyst
Yes.
- EVP & CFO
Yes, I really will not know that until we go out and raise the actual financing over the coming months.
It's going to be a mixture of secured debt, unsecured debt notes, and we'll have to see what the market bears relative to the financing.
But we are moving forward on that because there's a lot to accomplish.
- Analyst
Got it.
Okay, thanks a lot.
Operator
Todd Eilers, Eilers Research.
- Analyst
Thanks for taking my questions.
Looks like, obviously, instant tickets were strong for you guys in the quarters.
You highlighted Greece, I believe, and New Jersey as boosting that.
I was wondering if you could maybe talk a little bit more about the launch of instant tickets in Greece -- maybe what sort of impact that specifically had on you guys in the quarter; and then New Jersey as well.
And then also the launch of the new Turkey contract -- maybe what the timing is on that?
Thank you.
- President & CEO
Thanks, Todd.
Certainly, Greece -- it came in at about expectation.
But interestingly, the number of stores that we anticipated being open, and up and running, was lower than what we planned, but the revenue per store was actually higher.
So, that bodes well for Greece for us.
New Jersey -- sort of on plan as well.
It wasn't way above, and it wasn't way below, but it was pretty much as expected, and it's growing; it's great.
Clearly, the product's being well received there, and that's very nice to see.
And then, finally, in relation to Turkey, we don't anticipate that coming online until 2016.
So, obviously, that's a great one for us because it's a supply contract, and there's no equity investment upfront required.
- EVP & CFO
The other color I'll add relative to New Jersey is: When we took over that contract, there was quite a supply of tickets from the previous provider that were in the warehouse that we needed to sort of, I'll say, burn through, use up.
And that's now been completed, and so we're getting more of -- the 100% allocation of purchases.
- Analyst
Got you.
That's helpful.
And then, also wanted to ask -- see if you could talk a little bit more about the -- or you mentioned the new Monopoly-branded multi-state lotto game.
I was wondering if you could talk a little bit more about that, and maybe how that impacts Scientific Games as a Company?
How do you generate revenue from that game?
Sounds like it's expected to launch here in the fourth quarter.
Can you maybe talk about how many states have approved that game?
And maybe how many states need to approve it for that to be meaningful for you guys going forward?
- EVP & CFO
Sure.
It is a --
- President & CEO
I very quickly flicked that one over to Scott.
(laughter) Given my (inaudible) experience, and partly because I only knew about half the answer to that question.
- EVP & CFO
I'm not sure I got all the questions done here.
But we are going to be launching this new national draw game.
It has a different focus than Powerball and Mega Millions, in that instead of having one giant winner of a large jackpot, there will be lots of $1 million winners.
And so, if the main jackpot is not won, there'll be even more $1 million winners in the subsequent drawing.
It's a $5 ticket, and we are expecting to launch in October.
I believe the expectation is we'll launch with lotteries.
And I don't know the number, but it's about 150 million population for what the launch partners are.
And we expect that to grow over time as additional lotteries sign on and gear up to be able to provide it in their states.
We're going to earn a percentage of the sales -- the lottery sales -- as our revenue.
And from that, we will have to fund the cost of the TV game show that is also going to be Monopoly oriented that will launch in the spring of 2015.
- Analyst
Okay.
Very helpful; thanks, Scott.
Just one last question on the gaming business: Can you tell us how many conversions you had in the quarter from the bluebird 2 cabinet to the CPU-3 operating system?
I know that's something you had talked about last quarter.
Looks like it had a fairly decent impact, but just kind of curious: How much of that activity happened in the quarter?
And then how should we think about that going forward?
Was it more of a one-time deal in this quarter, or should we expect more of that for the remainder of the year?
- EVP & CFO
Todd, I would tell you that that number really wasn't a meaningful number for the quarter.
We launched it sort of, I'll say, mid-quarter, so we're hopeful that this coming quarter, with a full quarter's worth of sell through that it can be more meaningful.
The item that drove the other revenue was more based on the subscription revenue from the PPP plan for the blade platform because, as we've continued to sell blade video product, for the most part, they all come with that subscription plan, and so that tends to drive revenue.
And I believe we also had some outright conversion sales to a couple of international customers that aided the revenue line for the quarter.
- Analyst
Okay, thanks, guys; appreciate it.
Operator
Cameron McKnight, Wells Fargo.
- Analyst
Great; thanks very much.
Good afternoon.
- EVP & CFO
Hi, Cameron.
- Analyst
Question, first, for Gavin just on operating trends.
It seems that operating trends across gaming equipment are clearly under some pressure.
Your biggest competitor reported replacement units down 50% year on year.
Your replacement units were down, meaningfully, year on year, as well.
How should we think about operating trends going forward?
Should we think of gaming equipment as having, say, a 12-month lag to regional gaming, or do you think the relationship's closer?
What should we be looking towards over the next 12 months, in terms of signs that things are stabilizing?
- President & CEO
Well, tough question, but I think the relationship's much closer than that.
I think, if you look at what's happened in the last 10 months, say, no one was even talking about regional softness until December -- till winter really.
And then since winter, it's been all of a sudden: Oh dear, oh my, everything's down.
And clearly there's pressures, and clearly there's economic issues around that are affecting our customers to an extent that it picks up.
But, ultimately, the products are getting older in the field.
And what we are seeing -- like today we saw one operator produce increased sales in almost all their markets, which was fantastic.
And I think you see that that sometimes is a result of investment in your floors.
And I think we see that where casinos and -- like, obviously, we see we have the benefit of seeing Native American casinos as well, but casinos invest in their product.
They are not suffering as badly as some who don't, and I think that there's an opportunity for that.
I don't know how to answer it, other than saying that I think the relationship's a lot closer, and I am really hoping that the trends do improve.
- Analyst
Right; got it.
And then, just as a follow-up, Gavin, on the same vein.
What are you hearing from -- one question we get a lot from investors is: What's happening on the participation side of the Business?
What are operators saying on participation?
Are operators pushing back on participation as a category or is it just that the bar has risen and the category's more competitive than it was, say, two or three years ago?
- President & CEO
That's exactly right, the bar has risen a lot.
And it's always been an area where operators have not necessarily enjoyed spending their money, but, ultimately, that's where we spend a lot of our R&D, and where we create great products for customers, for their customers.
But, clearly, there's a lot of competition out there, and the bar's been raised.
And where your product is performing well and they become staples on floors, they need to be there.
Where they're not, they get removed.
I think part of the softness we saw in our non-premium WAPs, or in our premium non-WAP games, was the fact that we didn't have a lot of great new titles, which we're starting to come through now.
So that's a very competitive area, and we look forward to competing in that going forward.
- Analyst
Right, got it.
And then just a question for Scott.
Scott, in the first page of the release, you noted $133 million of EBITDA, but negative $30 million of free cash flow.
Going forward, how should we think of the conversion rate of EBITDA to cash over time?
- EVP & CFO
I would hope that that free cash flow number would be positive.
That's clearly our focus.
And you'll remember we define the free cash flow as cash flow from operations on our cash flow statement, less what we're spending on CapEx.
That's a little bit different than attributable EBITDA, as a starting point there.
And this quarter, a couple of things relative to working capital went, let's say, the wrong way and caused a use of working capital; whereas, in the first quarter, it was a generator of cash flow from operations during that cycle.
- Analyst
Right, got it.
Thanks very much, guys.
- EVP & CFO
Thanks, Cameron.
Operator
Brian Mullan, JPMorgan.
- Analyst
Hi, guys; thanks for taking my question.
Just wanted to ask a question on the lottery systems business.
I recognize that it only accounts for roughly 10% of the gross profit of the current Company, less than that when you add Bally to the mix, obviously.
But from a CapEx perspective, though, Scott, I was wondering if you could share how much of the $350 million of estimated annual CapEx from last week's presentation might be coming from that segment?
And along those same lines, does the pending Bally deal change your desire to pursue new contracts for the segment for the foreseeable future?
I know you've noted in the past, a competitor has several coming up over the next 12 to 18 months.
- EVP & CFO
We've actually submitted bids on three that were already due here.
- President & CEO
Let me answer that last part very firmly.
We absolutely will not pull back from bidding on the contracts that we want to go after.
It's very important to us, and part of our strategy going forward, that we are focused on all our customers in all our segments.
And lottery is a key customer, and lottery customers will be key.
And where it's appropriate and where it makes sense, we will bid for lottery systems contracts.
- EVP & CFO
Brian, I don't have in front of me the breakout of the capital between the different segments, so let me get that, and I'll send that on to you.
- Analyst
Understood.
Okay, thanks, guys.
Operator
And we have no further questions, so I'll pass it back to Mr. Isaacs for any closing comments.
- President & CEO
Thank you.
And let me reiterate that we are focused on generating high cash flow from operating activities by increasing our margins, delivering cost savings from our integration efforts, and controlling our working capital needs.
We're also going to be building on our core competencies aimed at increasing our share, and expanding our business presence in underpenetrated geographies to grow our revenues.
We want to improve our free cash flow by remaining disciplined in our allocation of capital towards those growth investments that provide sufficient economic return on a risk-adjusted basis.
Finally, by primarily directing the use of that free cash flow toward paying down our debt.
We look forward to updating you on the progress towards these objectives, along with our progress on the Monopoly's millionaires club, the Turkey lottery privatization efforts, and the exciting new products which you will see at G2E.
Of course, we'll provide you further information on the pending transformation and transformative acquisition of Bally, which will combine two great innovative and highly creative customer-focused companies, to create a leading supplier of gaming content and systems technologies, to enable one-stop shopping to our gaming and lottery customers.
Thank you all for joining us, and I look forward to speaking to you all soon.
Operator
Thanks, everyone, for your time and your participation.
And you may disconnect, and have a great rest of the day.