Light & Wonder Inc (LNW) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2015 Scientific Games Corporation earnings conference call.

My name is Whitley and I'll be your Operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

I would like to turn the conference over to your host for today, Mr. Bill Pfund.

Please proceed.

Thank you, Whitley.

Welcome, everyone, and thank you for joining us.

With me this afternoon are Gavin Isaacs, President and Chief Executive Officer, and Scott Schweinfurth, Executive Vice President, Chief Financial Officer and Corporate Secretary.

During this call we will discuss our second-quarter results and operating progress followed by a question-and-answer period.

Our call will contain statements that constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements involve risks and uncertainties that could cause actual results to differ materially from those discussed.

For certain information regarding these risks and uncertainties, please refer to our earnings press release issued today, the materials relating to this call posted on our website and our filings with the SEC, including our most recent annual report on Form 10-K filed on March 17, 2015 and our subsequent reports filed with the SEC.

We will discuss certain non-GAAP financial measures.

A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to the most comparable GAAP financial measure can be found in our earnings press release.

As a reminder, a replay of this call will also be archived in the investor information section of our website.

Now let me turn the call over to Gavin.

Thank you, Bill, good afternoon, everyone.

Today Scientific Games reported second-quarter results.

Only our second full quarter as the new Scientific Games and a quarter where we have made significant progress in working to empower our customers with innovative new products and services, whilst at the same time implementing our planned cost savings.

With the implementation of our integration initiatives well ahead of schedule, my current focus is working with customers and our Scientific Games teams to innovate and drive growth.

Revenue for most of our operations was on track in the second quarter, the exception was gaming and machine product sales which were below our expectations.

Lower overall market demand coupled with not unexpected challenges of integrating all of our companies resulted in lower new units shipped.

The integration issues have been identified and we are laser focused on them.

Our higher margin recurring revenue businesses such as table products, gaming systems, gaming operations, Lottery instant games and Interactive are all showing improvements as expected.

Some of our more notable accomplishments during the quarter included our WAP and premium participation games continue to perform extremely well, providing strong player appeal and high earnings performance in casinos across the country.

Our Monopoly Luxury Diamonds game continues to be amongst the best performing games we've ever released.

Duo Fu Duo Cai and 88 Fortunes continue to gain popularity globally while newer games such as the Flintstones and the latest Willy Wonka game are hitting the ball out of the park.

And now recently released Friends game is off to a very strong start.

We recently launched a new WMS-branded s32 widescreen cabinet that replaces the Bluebird xD cabinet.

And next week at the Australian Gaming Exposition, we will demonstrating a new Shuffle Master Branded cabinet called [Dualis] with an array of new games that will update our portfolio of slot products for the Australian and Asian markets.

The first ever Shuffle Master classic poker tournament was launched at more than 200 casinos and the national championship will be held in Las Vegas on September 28 at the Venetian.

With $250,000 in prize money, this event is creating excitement and driving player traffic for all our proprietary games including Three Card Poker Ultimate Texas Hold 'em and other popular such games.

Following the successful first season of the MONOPOLY MILLIONAIRES' CLUB TV game show, the show has been picked up in syndications for a second season that is expected to launch in September.

Across our Lottery business, many of our customers, especially those for whom we are the CSP, or Cooperative Services Provider and primary instant game supplier, reported record fiscal year instant game retail sales.

Customers such as Florida, Georgia, Pennsylvania, Tennessee and Camelot in the UK together with others turn to us because of our extensive gaming library, experiencing game analytics and our laser customer focus.

We expanded our relationship with the National Norwegian Lottery become the sole supplier of instant games and will be launching an entirely new instant games platform with them in the future.

Additionally, our pipeline of new proposals and lottery contract extensions is robust.

And we look forward to sharing our opportunities with you in the coming months.

In our Interactive division, the recent launch of Quick Hit slots and our new Hot Shot casino are significant expansions of our social gaming business.

The Quick Hit slot app was the first to showcase Bally-branded games in the social game space.

And Hot Shot casino is our first integrated social game app that encompasses games from across our entire Company.

While it's still early, both apps are providing promising results.

During the quarter, we entered into 14 customer agreements for our SG Universe suite of products and services bringing the total to 48.

Additionally, we launched seven new customers with our Play4Fun social product during the quarter, plus two new [Carnival ships] with our market-leading venue bit on property waging solution.

And finally following the work last year and signing up new real money gaming customers and the technological collaboration needed to make our services interactive with our customers website, real money revenue provided excellent growth in our Interactive business in the second quarter.

The launch of additional new games, including two new great Monopoly games and the first ever Bally and Shuffle Master-branded games, together with partnering with online casino operators in Spain and Denmark provide additional new opportunities for further growth.

Our product development efforts continue to be focused on driving innovation and new products.

As customers increasingly turn their attention to revenue opportunities on engaging their players to continue to generate greater attendance and spend per player, we believe our unique strengths and differentiation will pay dividends.

Our global capabilities and scale of resources to support innovation and gaming -- and game differentiation across our multiple brands under the Scientific Games umbrella are a distinct advantage.

For example, we recently launched a Zeus-branded Instant game the takes a well-known strong performing slot game brand and extends it into the lottery space.

Earlier this year we completed a comprehensive player study that provides significant data-driven insights to assist our future product development efforts.

Among the research finding was the simple fact that about half of those players who buy instant lottery games also buy slots -- sorry, also play slots.

And then about three quarters of all slot players also play lottery games.

I believe the actions we've taken to drive innovation of new products, along with the rapid implementation of cost savings initiatives, which Scott will shortly discuss, will be favorably reflected in our second-half performance.

As I get ready to head to Australia for Australian Gaming Exposition, I could not be more excited.

I believe we will have a strong showing led by the new innovative Shuffle Master-branded Dualis cabinet focusing on the Australasian markets.

Following soon after is the G2E Mobile Gaming Expo in Las Vegas and the National Association State and Provincial Lottery NASPL conference in Dallas where we'll be demonstrating an extensive array of new products and innovation.

At G2E, we will also show our customers some exciting new nontraditional game contents enabled by the recent change in Nevada Legislation which allows more skill-based gaming products.

It's a long road and I'm extremely excited by the positive steps and progress I see in becoming one Company with a shared vision, priorities and passion.

Our synergies are embedded in our business plans and we are executing well on all these initiatives.

Now please let me turn the call over to Scott to provide more perspective on the financial results.

Thanks, Gavin, and good afternoon, everyone.

For the second quarter, total revenue increased to $692 million compared to $417 million a year ago with the increase reflecting about $319 million from Bally and an $11 million increase in our legacy Interactive business, partially offset by a $37 million decline in legacy Gaming revenue and an $18 million decrease in Lottery revenue.

The change in our consolidated revenue is inclusive of $12 million of unfavorable foreign currency translation mostly in the Lottery business.

Attributable EBITDA, or AEBITDA, increased $134 million to $266 million and our AEBITDA margin improved 680 basis points to 38% driven by the successful and ongoing implementation of our integration plans and disciplined cost management.

On a pro forma basis, AEBITDA increased $6 million over the prior year period despite a 10% decline in revenue, which is slightly lower than the 11% revenue decline experienced in the first quarter.

As a result of the rapid and meaningful integration actions we are taking in our business, our results included several significant charges and costs on the quarter.

The table on page 2 of the press release and the descriptive review in the paragraphs following the table, provide the detail of these charges.

These items aggregated $56 million pretax, all of which were addbacks in calculating AEBITDA plus an additional $9 million pretax of additional charges that were not added back to AEBITDA.

The cash impact of these items, including our integration initiatives to affect the cost savings in the 2015 second quarter amounted to approximately $24 million while $41 million did not have a cash impact on the quarter.

Additionally, we had $7 million in deferred revenue that was eliminated in purchase accounting at the time in a Bally acquisition that we otherwise would have recognized in the quarter.

Turning to cash flow, our free cash flow was about flat on a year-over-year basis but declined on a quarterly sequential basis largely due to higher quarterly sequential interest payments reflecting the $110 million in semi annual coupon payments for our 10% senior unsecured notes.

Despite this higher cash outflow, we reduced the outstanding balance of our revolving credit facility by $5 million, made $11 million in mandatory debt payments and reduced our capital leases by $1 million during the quarter, bringing total debt payments to $36 million for the first half.

Cash flow during the quarter was favorably impacted by $50 million in distributed earnings and capital from our equity investments partially offset by $10 million in third-party brand license payments.

As we look towards the third quarter based on our current expectation of further growth in AEBITDA and the lower quarterly sequential interest payments, we expect to affect the more meaningful debt pay down.

Drawing on our experience from earlier integrations, we've been able to accelerate the implementation of integration actions and planned cost savings without any meaningful delays.

And consequently, our integration is running ahead of schedule.

By June 30 we had implemented annualized Bally cost savings of approximately $150 million and with the additional actions implemented in July primarily related to the closing of the Waukegan facility, we have now implemented $184 million in annual cost saving synergies or nearly all of our first year targeted savings.

Notable among the more impactful actions through July 31, 2015, almost 1000 jobs positions have been eliminated through integration redundancies and forms the majority of the savings implemented to date.

We have completed the vast majority of global position eliminations arising out of the Bally acquisition and we have no further planned reductions in force for this year.

We have now completed a corporate reorganization of our legal entity structure in North America to consolidate gaming licenses reducing the number of duplicate filings and fees.

WMS gaming machine production in Waukegan, Illinois was fully transitioned to our Las Vegas gaming production facility by the end of June.

And for all operational purposes we have now largely completed the closure of the Waukegan facility.

We have closed or are in the process of combining duplicative facilities around the world that is anticipated to result in a 20% reduction in the number of facilities by the end of this year.

And our other major integration initiatives are also on track such as developing a single robust next-generation operating platform which is currently in field trials.

As a result of accelerating integration activities originally planned for 2016 into 2015, we now expect to exceed our first year target for Bally-related integration cost savings and have raised our expectations to $200 million of implemented annual savings by the end of 2015.

We also have implemented $26 million of the $30 million of year two WMS cost savings initiatives and remain on track to reach the $30 million expected by the end of the calendar year.

On a pro forma basis for the six months ended June 30, 2015, combined R&D and SG&A expense is down $86 million.

Thus we can get on with running our business, improving our focus on our worldwide organization on innovation, taking care of customers and improving the smooth functioning of business processes.

Our organization is now moving forward focused on our promising future.

As to our capital deployment, we continue to maintain a highly disciplined and prudent approach towards capital allocation.

As such we are maintaining our expected range of $300 million to $325 million in capital expenditures for 2015.

This includes approximately $15 million to $25 million of integration-related capital expenditures as well as the planned investment in VLTs in Greece and other gaming operations opportunities.

Briefly, there are no new updates regarding the placement of our participation based VLTs in Greece.

As publicly reported, OPAP suspended the insulation of VLTs pending the outcome of their still ongoing negotiations with gaming regulators.

With the Greek Parliament's adoption of reforms to remain in the euro zone and their need for increased tax revenue, we remain hopeful that the installation and go live with the precipitation units will begin by the end of 2015, although political conditions in Greece remain somewhat fluid.

Now let me turn to the operating performance of our three business segments.

First I'll begin with the Gaming segment, which generated revenue of $450 million inclusive of $3 million of unfavorable foreign currency fluctuation.

That's an increase of $273 million over the prior year with the increase attributable to the addition of Bally's results of $310 million, partially offset by lower revenue in our legacy gaming business mostly related to lower new unit sales.

On a reported basis, our R&D and SG&A expense increased primarily as a result of the inclusion of Bally, partially offset by the cost savings realized from our integration efforts.

Reflecting the higher revenue and the cost savings realized through the implementation of our integration initiatives, attributable EBITDA increased by $133 million to $200 million despite the $3 million incremental bad debt expense of $2 million of higher legal expense related to a legal settlement and $1 million of incremental inventory charges.

In the earnings release, you can see the impact that the Bally acquisition had on our actual reported results compared to our actual reported results in the year ago period.

In order to provide a better like-for-like perspective on the revenue trends of our Gaming business, I will focus my following comments on the additional data found in the table of key performance indicators and the supplemental revenue metrics that are provided in the earnings release.

That data presents pro forma results as Bally had been acquired effective January 1, 2014 which we believe may be more meaningful to investors to understand trends in our business.

Looking at our Gaming operations line of business, revenue in the second quarter was $190 million, an $8 million decline compared to the prior year on a pro forma basis but largely flat on a sequential quarterly basis.

Year over year the decline in the average footprint of WAP, premium and daily fee participation units of 1,960 units, or an 8% decrease, was largely offset by 8% increase in the average daily revenue to $56.77 per unit mostly due to high performance of the legacy Gaming units which averaged $83.77 per unit.

On a quarterly sequential basis, revenue from WAP, premium and daily fee participation units increased 3%.

The net removal of 220 units, or just under 1% decrease in our installed base of WAP and premium participation games at quarter end compared to the beginning installed base was a meaningful slowdown on a quarterly sequential basis compared to the rate of proceeding two quarters as well as significantly lower than the year-over-year impact.

The ending installed base of other leased and participation products was about flat on a year-over-year basis, but decline 1% on a quarterly sequential basis while the average daily revenue decreased 5% to $15.46.

The decline in average daily revenue primarily reflected the implementation of a 5% increase in machine -- in gaming machine duty on revenues from our UK customers partially offset by improved cash box performance in our UK installed base as well as an increase in the average daily revenue of Bally games including VLTs at New York rasinos.

Bally and WMS shipments to US and Canadian customers totaled 4,001 units, representing a decline of 2,621 units from the prior-year quarter due to 508 fewer Illinois VLTs shipped, 677 fewer gaming machines for new casinos openings and expansions, and a 1,436 unit decline in replacement units due to lower overall market demand and frankly some integration issues we experienced.

But as Gavin stated, these issues have been identified and are being addressed.

Partially offsetting the unit decline was a 3% increase in average selling price per new unit on a pro forma basis.

On a quarterly sequential basis, average selling price was up 8% due to the higher number of leased to conversions that occurred in the March 15 quarter.

With our higher average selling price, we believe we garner the highest total wallet share of casino replacements.

A primary element in our increased share of customer spend, the wallet share, has been the success of Bally games on innovative Pro Wave cabinet.

The Pro Wave cabinet has been a leading contributor to the realization of higher average selling prices since it was launched last year as customers recognize it's strong player appeal and corresponding value provided to our customers.

Internationally we shipped 2,804 units, a decline of 1,028 units largely reflecting lower sales due to continued import restrictions in Argentina and the softness in the Australian and Mexico markets.

With the launch of new Shuffle Master cabinet in Australia and Asia this quarter, we will have new products to offer the international markets.

Gaming systems revenue on a pro forma basis increased to $78 million, up on both a quarterly, sequential and year-over-year basis.

While installations and overall revenue remain lumpy on a quarterly basis, this business remains solid with a customer base that is quite sticky.

We remain the premier supplier with a continued high win rate and an improved mix of recurring revenue.

Maintenance revenue was up 7% year over year.

Today approximately 50% of Gaming systems revenue is for maintenance and services compared to only 33% in 2008.

For the remainder of 2015, we continue to see improved opportunities for customer system upgrades, expansions and installations.

Table products revenue increased $2 million, or 4% on a pro forma basis, reflecting higher recurring revenue from continued growth in the installed base of shufflers, proprietary table games and other leased products along a slight increase in the number of shufflers sold.

In our Lottery segment, revenue totaled $190 million inclusive of an unfavorable $9 million foreign currency impact compared to $208 million in the prior period.

With about 40% of Lottery revenue generated outside of the US and mostly transacted in local currencies, the Lottery business is subject to a higher degree of foreign currency impact than our Gaming business which mostly sell in US dollars globally.

Services revenues declined $5 million.

Revenue was impacted by the cessation of sales related to the previously announced loss of the Colorado Lottery systems contract effective October 1, 2014 and lower international revenue largely reflecting $2 million of unfavorable foreign currency impact and lower sports betting revenue.

Product sales declined $13 million inclusive of $3 million of unfavorable currency impact largely due to lower sales of hardware terminals to both US and international lottery customers, primarily those in Europe.

These sales, similar to the installation of gaming system hardware, are subject to timing and demand and therefore the quarterly revenue is often lumpy.

Instant Game revenue was essentially flat inclusive of a $4 million unfavorable impact of currency translation.

An increase in Instant Game revenue from customers with participation contracts driven principally by higher retail sales to our US customers and slightly higher price per unit sales to other US international customers, was largely offset by lower price per unit sales to other US and international customers -- and I'm sorry, to US and international customers was largely offset by lower license than player loyalty revenue primarily related to the timing of signing new contracts for licensed product games.

We continue to see strong renewal of Lottery contracts based on customer satisfaction including the recent agreement to extend the instant game contract for the Massachusetts Lottery for another year.

Over the last six years, more than 90% of our Lottery customers across all business lines have chosen to continue to retain Scientific Games.

Despite the $18 million, or 9% revenue decline, operating income in the Lottery segment increased 11%, or $5 million year over year, benefiting from a more profitable mix of revenue and lower operating expenses.

AEBITDA for this segment was flat compared to the prior year largely reflecting the more profitable mix of revenues and lower operating expenses offset by the $3 million charge related to the proposed Northstar, Illinois revised settlement with the State of Illinois.

Turning to our Interactive segment, revenues on a pro forma basis increased $9 million, or 21% year over year, reflecting growth in both social gaming and real money gaming.

Real money gaming revenue increased 65% on a year-over-year basis and 18% on a quarterly sequential basis.

During the quarter we went live with seven new customers, including expanding our presence by entering Denmark and by being among the first to go live on day one in Spain as that country enables regulated online gaming during the June 15 quarter.

Social gaming revenue increased 9% on a quarterly sequential basis as we continue to benefit from an increased base of users of both the Jackpot Party and Gold Fish Social casino apps.

Additionally as Gavin noted, we launched two new stand alone social gaming sites during the quarter, our Quick Hit Slots and Hot Shot Casino social gaming apps.

On a pro forma basis, the average daily users increased about 5% while the ARPDAU increased about 11% compared with the prior-year quarter.

As a result of the higher revenue and improved scale within our legacy Interactive business, actual operating income increased by about $6 million from the prior-year quarter.

AEBITDA more than doubled to $13 million, reflecting the benefit of higher revenue and the improved scale being achieved in the Interactive business.

In summary, by successfully building on the improvements achieved in the first quarter, we believe we are largely on track and that continued progress will be achieved in implementing our integration initiatives and improving organic growth.

We remain confident that our AEBITDA and free cash flow will be better in the second half of the year with additional improvements in 2016 and beyond.

And as we previously noted, we intend to prioritize our free cash flow to reduce leverage.

Now Whitley, let's open up the call for questions.

(Operator Instructions)

Barry Jonas, Bank of America Merrill Lynch.

Can you give maybe a little more color on the challenging gaming market and any integration issues and maybe where you think your market share could shake out this quarter?

Also ASPs and definitely yields are up nicely, are you seeing any changes in the competitive pricing dynamic?

Okay, Barry, this is Gavin.

I think that when it comes to why the sales were down from our perspective, and we are the first really to report, so a lot of it is going on not perfect data, we don't think the market was as strong overall this quarter as it was last, certainly in the United States.

As we transition and put together companies together we've had some issues with sales force and that's been stuff that you expect and now they're all on board and operating.

And manufacturing we shut down Waukegan and we've had to move everything down to Bally in Vegas.

That's all operating.

And there's been some customer concerns frankly despite us assuring everyone otherwise that perhaps we're not going to support the WMS brand going forward, which is very untrue.

I think they hear it, but I'm not sure if they believe it.

But they will see that clearly G2E and that'll be very apparent and clear.

From an ASP perspective, we're not really seeing that many major changes I don't believe.

It's always been people keep asking about that and it really doesn't -- it's effected by product mix.

But for the last five or six years it's been about the same.

Competitive pressure wise, quarters are 90 days, it's a very short -- the life of an order effectively from contract to actually shipping between four and six weeks.

So I really can't say that I've seen a big change in behavior in the competitive market during that period.

Does that answer the question?

Yes, that's perfect, Gavin.

And then look I know free cash flow was impacted by the coupon payments which should boost Q3 but another quarter of positive working capital movements, how should we think about working capital movements going forward?

Well obviously a bit of it is subject to what's happening on the revenue side of things.

With revenues being down the 10% that has a positive working capital impact on receivables and to a certain extent on inventories.

I think we've done a decent job of managing the working capital and we're going to continue to remain focused on that.

Great.

Okay, thanks a lot guys

Steve Wieczynski, Stifel.

So I guess first question is going to go back to the product sales and you talked about integration issue, but was -- the drop off there in replacements was pretty steep especially sequentially.

Was that really across the board from all your customers or was that -- was it one or two customers out there that saw a bigger fall off versus the other ones?

Look at I said these things are 90-day sprints in many respects and whereas they might have pushed an order or not, I don't think I saw anything dramatically different from only one particular customer.

But I can double check that one with you and verify it.

But I just think from what we've seen and I guess it was an analyst report the other day, the total number of units if a bit lower than we expected based on the survey they did.

So I think it would be a bit more across the board.

Okay and then it's not a big as it used to be, but the Shuffler business had a great quarter and the -- not surprisingly but the lease side of the business was extremely strong.

What drove that in the quarter?

Well we've just continued to see growth in the installed base and it's been relatively consistent growth on a quarterly basis.

Okay and last question, Scott, I guess for -- Scott, I guess last question for you, You talked about higher debt payments in the back half of the year and with the free cash flow still being significantly negative at this point.

What gives you confidence that you'll be able to really push that free cash flow and actually have free cash flow over the next six -- ?

Well, I think certainly in the September quarter not having the $110 million interest payment on the 10% notes will have a positive impact on cash flow and that it reverses itself in the December quarter.

But we're -- our -- look at the future relative to both revenues and free cash flow which show an improvement in the second half of the year over the first half of the year.

And let me add to that, Steve, a little bit.

When you look at more 30,000 foot perspective there were a lot of people who for the six months have said that the big synergies not -- we don't think you're going to get it.

Clearly we feel we're showing that we can do that well and that we've executed ahead of plan in relation to synergies.

On top of that we told everyone from the beginning that we had some product issues that we hope to resolve with the spring shows and the first one coming up next week in Australia and then after that G2E.

And then on top of that the fact that pretty much every business is operating well with the possible exception of Gaming sales, I think all we need to do is shore that up with some new product, convince the customer as we will that we are doing what we said we would do which was support all the brands.

And I believe we do look very good for the future.

So can I add on -- if I can add onto that.

So when you guys are doing your internal forecast for the back part, how do you guys and how are you modeling out the replacement sales?

Are you looking at a level that we're seeing today or is it -- are you guys putting in some growth there?

No, I think we basically see what you all see which is about the same as what's there today.

Its funny, what we do and I know this sounds stupid is that we look at our own internal stuff, we get obviously a bottom-up.

And then as a litmus test we do, we take all your reports and see what you're saying and if there's anything that we lay out there, we ring one of you and say how come you've got so much more or so little less and we check it that way.

Okay great.

Thanks, guys.

David Katz, Telsey Advisory Group.

I wanted to ask about the CapEx guidance, if you could either help us get to or help us understand how much would be -- is in there for Greece just in case we were to think about Greece not happening this year or so we could portion that out.

Yes, I think about half of the CapEx for Greece had been spent in the first half of the year and our expectation is that the other half will be paid in the second half of the year.

So half of the total amount of what was budgeted for Greece has already been paid?

Correct.

I guess I was asking how much is the total Greece budget, if that's disclosable?

I think that the total is about 10% of the total budget.

10%, okay.

I believe Scott, you mentioned in your remarks that you have a positive view on systems revenue.

Can you just talk more a bit about where that positive outlook is coming from, why you think that?

Sure, we've announced the OLG deal that we're going to start to earn some revenue on yet this year.

We've -- the ALH deal is for the most part behind us, there'll be some additional revenue recognition in the third quarter relative to that one.

And there's other things that we see in the hopper that give us confidence that the systems business will continue to remain at a higher level.

Now last year, or well I'd say, the Bally year that ended June 30, 2014 was a record year for that business.

And we've said all along that we'll not likely get up to that level again, but certainly up above the level that we were at for the December and March quarters.

And from my perspective, David, the systems business is much more -- it's much tightly -- it's much more integrated into the core Gaming business now.

Working much closer together and they're now in a position where they can make an offer to a customer on a new opening or anything like that or expansion, which includes other product offerings.

In the past it was always separate; that's working very well.

But most pleasing has been the initial rollout of ALH and OLG; both of them have gone extremely well that shows a great improvement in the quality of the product.

So we feel very strong about our leading systems business.

Okay, thank you.

One more quick one, if you don't mind on free cash flow.

Once we get through this year which has certainly a lot of moving parts, et cetera, and not asking for anything too specific or any guidance, but as we look at next year and the prospects for generating free cash flow, maybe there are some parts in here or specific items or issues we can talk about that clear away as we get into next year that should allow for a little more robust free cash flow generation?

Yes sure, certainly the cost to achieve the integration savings from both an OpEx standpoint and a CapEx standpoint will be less; those go away.

We'll be getting the benefit of all the synergies for the full year versus the lower rates that we're getting this year because we didn't implement everything effectively on January 1, 2014.

We -- on the CapEx side, as an example, the $30 million of Greek VLTs will likely not be something that is recurring.

We've also had some unusual charges that we've called out and the numbers that we're not expecting to be recurring that will help with that too.

So yes, this year, as Gavin said, it's only the second full quarter here that we've combined.

I think we've done a great job on getting our integration plans implemented and that's going to provide a meaningful increase in cash flow.

Okay thanks very much, appreciate it.

Carlo Santarelli, Deutsche Bank.

As you guys think about the synergies right now and being on a run rate for the $200 million as of year end, just so I'm clear that the $235 million number for Bally remains in place; the timing of that has accelerated a little bit?

Yes, that's exactly right.

And as you guys think about it now being several quarters into it, do you believe that that $235 million is the right number or are you still in the exploratory phases and potentially there's more down the road?

Well as I've said, we're pleased with the progress that we've made to date.

We were able to accelerate some things and we've learned from our past integrations that this is a path, right, and we're part way down the path.

And there will be some things that we'll be looking at that could potentially make them larger, but we're not prepared at this point in time.

Again we're very pleased with the progress we've made so far, we're investigating other items and we'll see where we get to.

Yes our job as a Management team -- we've done these big acquisitions, we've got all these plans for synergies, we've got all these plans for execution -- we build them into our business cases, we build them into our operating plan.

Our job is to do things better, more effectively and grow revenue at the same time.

So will we expect to find future savings, absolutely.

But that's just running the business.

The number we're talking about with the $235 million relates to the acquisition and there are some that we've realized better than we expected, there's some we've realized that haven't had the same level as we've expected.

But that's our job as a Management team and we will be effective at that.

Understood, thank you, guys.

And then I could ask one follow up with respect to the equity investments and the cash distributions from those investments, could you guys provide a little bit more color on I think the number was like, $49 million or $50 million in the quarter and how we could think about that going forward as a source of cash?

Yes, actually in the press release on the last page, it's the next to last bullet point lists out the dividends and return of capital payments from each of the equity investments.

This year the second-quarter number was higher primarily because we received our large payment from [LNF] in the second quarter where as last year that payment fell in the first quarter.

We're starting to see some return from Hellenic Lotteries which is nice and hopefully once the situation in Greece settles down, we'll see continued growth there.

Okay, Scott, so as I think about the back half of the year then and last year I think the total distributions were like $77 million, are we still, barring the timing difference here that you obviously saw in the first half, are we still looking at it at a cash number that should be pretty similar year over year or maybe even a little bit up this year?

That's a fair estimate.

The entities actually have to meet and decide to distribute it, but it should be in that range.

And I think we've shown that we get a fairly high distribution of cash from the attributable EBITDA that we -- that those entities earn.

I think that's the key item.

Yes, okay.

Thank you very much.

James Kayler, Bank of America.

Gavin, I think probably for you just a little bigger picture, can you list seemingly a rebound in regional gaining starting to gain a little momentum?

What are your customers saying about their slot [bought] buying plans and budgets?

And are they already starting to think about budgets for next year?

Okay, so first of all we love it when our customers do well.

Our mission is to empower our customers.

So it was great to hear the commentary the other day from the customers that they're seeing a pick up.

What we need to see is we need to see that reflected in purchases.

Anecdotally, customers are recognizing that when you have fresh product, people are enjoying it more perhaps.

And you've got a new offering for a reason to come back.

I've certainly heard that from some customers.

The capital is usually set at the beginning of each year and they had their CapEx budget.

Are they thinking about it for next year?

Absolutely.

A lot of people plan around the launches of G2E, et cetera.

And I believe our first pre-G2E visit is August 6, this week.

So people are right in that planning phase and they'll do so up to and including G2E.

Hopefully they'll be given some capital to spend beyond their plans for this year, but otherwise we hope that the good fortune they're experiencing continues into next year and that we'll see that reflected and maybe a bit more of an increase in purchases.

Very good.

And then changing gears to the wide area of progressive business, Scott did highlight that the sequential decline did slow a little bit, but what are you hearing from customers on that front?

What has driven -- obviously your machines are performing well, so what is driving the continued shrinking of the wide area for aggressive footprint just broadly in the industry?

Well, I think a lot of that's driven by our friends in the finance community who focus on EBITDA, and so it's a lot better to buy and depreciate than it is to lease.

And so when they're sharing their revenues with us, there's a reason for whatever reason they prefer to buy outright.

When we put big brands out on gaming equipment, it attracts players, it enables us to invest in some technological cutting edge stuff in the games, but they have to be leased.

So whilst they are must on a floor, some customers believe they don't need as many as they would have in the past.

But again, a lot of it's driven by the fact that when they buy something, they can depreciate it and when they lease it, they can't.

But my perspective the way it has been is that if the product performing that well, why wouldn't you want more of them.

Fair point.

A last one, a little more detail on Waukegan.

Can you talk about the timing, I assume that you didn't really get a lot of benefit in the numbers from a manufacturing perspective in the quarter, should we see a pretty meaningful step function on that front in the third quarter?

Well my recollection is that of the $235 million there was $44 million that related to manufacturing.

And of that about one third, about $15 million related to the impact of consolidating the manufacturing operations.

And you're right, we saw a little bit in the June quarter but we really didn't start shutting down the plant until the beginning of June, the month of June.

So there will be more impact of that to be seen in the third quarter and beyond.

And really even the third quarter we didn't really have the reduction or force there until the middle of July, so there's a little bit of dribble over of costs there.

But certainly by the time you get to the fourth quarter, it'll all be gone.

Okay, very good.

Thank you, guys.

Mike Malouf, Craig-Hallum Capital Group.

Gavin, wondered if you could go a little bit more into the Gaming side on the product sales, because I know in March when I asked you about disruption you were commenting that you were not seeing any disruption on the sell side.

So in the June quarter, it looks like it came at you pretty hard or at least pretty quick, where are you on that process as far as rectifying that problem?

And are we still two months out or do you have it under control or maybe it'll last until end of the year?

Just trying to get some color on that.

I think it's no longer going to impact on anything like deliveries like it has in the past.

I think a lot of the changes that we are making process wise result in bringing all these companies together and bringing the lines together in Vegas and things like that.

Supply chain wise making sure that we have the appropriate parts arriving at the right place when we need them, things like that.

So we have the right people working on that immediately and I don't expect those problems to carry on for the rest of the year.

I think we're not perfect yet but we're getting better every day.

From a training perspective, we now have a stable sales force, we made our last big changes for sales force mid-July.

And we now have a stable team, stable sales force, we really believe we have best of breed.

Some come from the WMS, some come from Bally, some come from SHFL, some come from outside.

And selling something new and something different can sometimes be a challenge.

So getting the right training in place for that and making sure people are appropriately incentivized to ensure that they fill the entire portfolio; again well on top of that.

So they were the major kind of issues that we experienced.

And realistically not unexpected but a little bit disappointing all the same, so being addressed immediately.

Great, and then with regards to skill-based games, wondered if you could give us a sense of you've been around for awhile, how long do you think this could actually take to get impacting you?

And have you started to develop those games in a more detailed fashion?

What kind of impact could that have for you?

Sure.

Well, the first skill-based game, which really would fit within these definitions, was done by Bally about seven years ago with PONG.

I don't know if you recall PONG, we had it at the show.

And the idea was, it was a set payout at about 92%, and with a bit of skill you could get of few percent more.

It may be before it's time or whatever it may be and maybe not the same focus as we have today, but not a huge success in the marketplace.

I think we're all going beyond -- or certainly we're going beyond that in different concepts that we'll be showing at G2E.

We've been working very closely with the progressive regulators.

People like Nevada are showing the way that they want to try and innovate and be a place for innovations, welcome in many of the other jurisdictions following very closely.

So I think you got to come to G2E and you'll see some really cool stuff.

When that will be available I think that there's a desire by everyone in the industry to get them out there quickly, so I think you may see some out there early in the new year, maybe even before, but I doubt it.

Probably early in the new year would be my guess.

Great, thanks a lot.

Come and enjoy them.

Todd Eilers, Eilers Research.

Wanted to ask a quick one on the Lottery side, specifically on instant tickets.

Looks like in your release it looks like the US instant ticket retail sales were pretty strong in the quarter, up about 8% year over year.

When I look at your participation contract bucket there, it looks like that was only 1%.

Can you maybe talk a little bit about why maybe that came in below or under what the broader market was doing?

Was there any one-time items there?

And a little more color on that would be helpful, thanks.

Yes, I'm not sure exactly what you're looking at, Todd, but I think the instant business had $3 million or $4 million of negative foreign currency fluctuation in it.

And I think there's some of that that was in the participation of contracts that will be an element to it.

Okay.

We can dig into that a little bit more for you, but I think that would be -- the data we've got here and showing all our CSP sites having record years across the board with good growth.

Okay, that's helpful.

And then also wanted to ask a question, Illinois VGTs, looks like it was actually pretty decent quarter there; 400 plus units sold.

Anything one time there or how should we think about that going forward?

We were looking for that market to slowly ramp down but saw a nice rebound this quarter, how should we look at that going forward?

Yes, I think at the last Illinois Gaming Control Board meeting, they approved 124 or 129 new locations.

So long as the Gaming Control Board moves in that manner, that creates some opportunity for all suppliers.

And I don't know that all 129 or -- will be up by September 30 but it certainly provides some visibility to some revenue earning opportunities.

Okay, perfect.

And then last question, an update.

I don't know if you provided in the press release, I apologize if I missed it, but Oregon VLT replacements, should we expect those -- some of those units to start hitting in the third quarter?

No, I think the start will be in the fourth quarter.

Okay, all right.

Thanks, guys.

Operator, we have time for about one more question, please.

Chad Beynon, Macquarie.

First one, wanted to ask on the SG Universe agreements you provided in your opening commentary; you said that there are 14 new sign-ups.

Could you talk about the breadth of these agreements, maybe the number of different customers?

And then more importantly any feedback that you've had from customers if they may have interest in implementing the system across other portfolios or other properties in their portfolio?

Thanks.

Sure, it's very exciting product, it's a very exciting way of linking marketing with game play with the future with everything that we're doing.

Clearly some of the customers like the Penns of the world we've announced a trialing at many new properties and if successful, they'll look at it for other ones, that's up to them.

We're feeling very comfortable.

A lot of the properties, I think we've really announced -- a lot of them are people who have -- any of the big groups beyond Penn have not really taken it yet I don't believe, and I'm not really sure which properties.

We do announce them when they come out.

So I'm sure that's all historical and its out there.

In relation to what I've heard, which is the most pleasing, is that this product enables customers that have been seeing some dormant customers on their lists get reactivated by virtue of being able to use it, which is bringing back to the casino some revenue.

So it's really doing extremely well in some of the instances where customers have expressed to me what it's doing, that's been one of the key pluses.

But clearly it's a great link to the future.

Okay thanks, Gavin.

And Scott, one housekeeping thing you mentioned that the $15 million to $25 million of cost for additional operating synergies in 2016 has now been reduced about $10 million on both book ends.

Could you provide some detail on that?

If you just saw some of that come into this year or you're changing some of the synergy opportunities in 2016?

Well, I think it's a little bit of mix of both.

We did accelerate some of the initiatives into 2015 and we've not spent as much on some of them that we thought we were going to spend.

So you're quite correct.

We've taken down the total I think we started with the total of about $80 million, right, and we've taken that down a little bit based upon where we are and what we see going forward.

Okay, thank you very much.

Well, again thank you all.

I've said it before, this is a long road we've just started down and I'm excited about the progress we're making.

And clearly we would love to see stronger sales across the Gaming portfolio but I do expect that as our products come out and our momentum builds, we'll get stronger and stronger I look forward to sharing that with you at the end of the third quarter.

Thank you.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation, you may now disconnect.

Have a great day.