Bill Pfund - VP of Investor Relations David Kennedy - President and CEO Scott Schweinfurth - EVP and Chief Financial Officer.

Brian Mullan - JP Morgan Carlo Santarelli - Deutsche Bank Todd Eilers - Eilers Research Kevin Coyne - Goldman Sachs.

Good evening, ladies and gentlemen, and welcome to Scientific Games First Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference call is being recorded.

It is now my pleasure to introduce Bill Pfund, Vice President of Investor Relations for Scientific Games. Mr. Pfund, you may begin..

Thank you, Erica. Welcome everyone, and thank you all for joining us this afternoon. During this call, we will discuss our first quarter results followed by a question-and-answer period. Please refer to our earnings press release for further details.

With me this evening are David Kennedy, President and Chief Executive Officer; and Scott Schweinfurth, Executive Vice President and Chief Financial Officer. As a reminder, this call is being simultaneously webcast, which may be accessed on the investor information section of our website at scientificgames.com.

A replay of the call will be archived in the Investor Information section of our website. This conference 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, 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 and our subsequent reports filed with the SEC.

During this conference call, 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.

Now I’ll turn the call over to David Kennedy, President and Chief Executive Officer..

Thank you, Bill. And good afternoon everyone. Thank you for joining us today as we discuss our 2014 first quarter results in our ongoing integration efforts.

Our consolidated revenue was $388 million, up $169 million compared to the first quarter of 2013, our attributable EBITDA increased $45 million to $123 million and our free cash flow increased $37 million to $24 million.

Let me share my perspective on the overall performance of our business before turning it over to Scott to provide you with more detail of our results. Total revenue of our lottery business including both Instant Products and Lottery Systems increased 7% or approximately $13 million over the prior year quarter.

By continuing to create high performing games, providing innovative game delivery platforms and offering value added services, we remain focused on helping our lottery customers around the world grow their revenues which in turn helps us increase our revenues.

The important contributors to the growth of our lottery revenues included our success with instant games in jurisdictions where we earned revenue on the participation basis, higher international lottery system product sales, our premium promotional and licensing efforts and the benefit from new lottery contacts including revenue earned from supplying our Northstar New Jersey joint venture and our new customers in Panama and the Dominican Republic.

Additionally, in April 2014, we entered into a new three year contract to continue serving as a primary supplier to the operator of the French National Lottery, which is the second largest instant game lottery in the world.

And we also were awarded a new six year contract to continue serving as a primary supplier of instant games and related services for the Washington Lottery with additional extensions at the lottery’s option. Our instant game contract with Loto-Quebec expired in January 2014.

However, we have continued to provide instant games to this customer under the previous contract terms while the new contract is being negotiated.

Our new contract with Loto-Quebec is anticipated to become effective in the second quarter and will represent a significantly smaller portion of such customer’s instant game business than the recently expired contract. Most recently, we had a soft launch of sales of instant games in Greece and tomorrow, we expect the full launch.

As a reminder, we have a 16.5% equity investment in the consortium that was awarded the 12 year confession that is bringing first instant games to Greece in more than a decade. Scientific Games has exclusive responsibility for and earns revenue firm instant game design and the production and supply of the instant games.

Now let's turn to our gaming business. In our gaming business WMS operations contributed $157 million of the total $169 million year-over-year consolidated revenue increase.

WMS’s new unit sales were appreciably down compared to the prior year quarter, which decrease we believe primarily reflects the conditions prevalent in many areas of the global gaming industry including the lower gross gaming revenue in many domestic gaming jurisdictions throughout the quarter.

We believe that many of our customers have responded reducing the capital spending. In addition, we believe our ship share decline modestly from that achieved in the December 2013 quarter. Against this backdrop of challenging industry conditions, our Blade games continue to perform well on a relative basis compared to the casinos house average.

And we continue to develop comprehensive pipeline of new game [theme]. At the end of March, we launched our new Blade stepper 3-Reel mechanical unit with four commercial launches in the current quarter. This new product line generated significant interest in at G2E and we look forward to a broader rollout in the current quarter.

While still very early, customer feedback and performance on casino floor is encouraging and in line with our strategy of broadening our product lines, this reopens an important segment of the casino floor to WMS product line. The consisted four new games with innovated content is clearly helping our WAP participation gaming business.

In addition to the original Willy Wonka video slot game, which continues to perform well, we also now have the Willy Wonka 3-Reel mechanical game. Our portfolio of Game Themes and the Gamefield xD cabinet expanded in the first quarter with the new clue game.

These new WAP games provide player feel and drove modest revenue growth in the WAP and premium participation category. Importantly the performance of these new games is yielding higher revenue per day as we’ve clipped $7 per unit per day for the quarter.

This is a notable achievement in light of the headwind of the gross gaming revenue declines in many U.S. regional jurisdictions during the quarter.

In our UK gaming operation after securing a five year contract renewal with Ladbrokes, we’re currently on target to complete the rollout of approximately 9,000 of our new [clear kit] gaming terminals across the entire state this quarter.

Additionally we have just begun to rollout WMS gaming content across our UK installed base of terminals and the initial results are encouraging. These positive events are tempered by the UK government’s announcement of its intent to increase the gaming machine duty on certain gaming machines from 20% to 25% of net win in March 2015.

In addition the UK government has proposed additional regulations that would take effect in October 2014 related to the opening of new bidding shops, new requirements for players weighing more than 50 pounds and allowing players to set limits before commencing play on the amount of time or money they want to spend.

These proposed changes will likely negatively impact our UK customers’ business and therefore our future revenues. The interactive gaining revenue reflects ongoing success in both the real money gaming and social gaming applications.

We continue to pursue new supplier agreements with additional real money online casino operators to integrate with their remote game server which features our library of interactive games such as releases agreement announced with bwin party.

During the March quarter, we expanded our interactive portfolio with the launch of the second social casino The Gold Fish Social Slots Casino on Facebook. During the soft launch period, our social gaming team closely monitored the analytics as they drove a series of live test with the player audience.

Following the success of the testing period in the current quarter we are beginning to expand the availability of this new gaming site across mobile platforms and grow the player base through highly selective marketing. Additionally we recently expanded our Jackpot Party Social Casino to the Yahoo platform.

We are one of the first three casino games to be available on Yahoo. The result of all these efforts was new daily revenue records in April.

As we move forward, I am encouraged about the progress we continue to make across our various integration initiatives and by the execution of our specific business strategies targeting the growth opportunities that we see in the marketplace.

Even as we remain highly focused on implementing our integration plans and delivering our cost savings we also are proceeding with our initiatives and investments to grow the business.

Within the Gaming segment we have strategies to further broaden the gaming revenue stream in North America as well as target expansion through new international opportunities.

We are investing in international initiatives to develop specific new products, supported by direct sales and distributions such as our initiatives focused on Australia and with our product development teams having no shortage of new game ideas we look to broaden our portfolio by targeting specific underpenetrated opportunities in North America as well as in international markets such as we are doing with the Blade 3 Reel mechanical product.

By investing in the development of these products and initiatives in 2014 we expect to position our business to capitalize on future opportunities. Now let me turn the call over to Scott who will provide more detail on our financial results and ongoing integration efforts..

Elimination of duplicative public company costs; lower compensation cost as we have already reduced headcount by approximately 4%, primarily in the corporate functions and other areas that are part of the SG&A expense; lower stock compensation costs to the impact of substantially all of the WMS equity plan awards that were busted or canceled a closing combined with subsequent employee departures.

Manufacturing cost savings from sourcing initiatives and utilizing SG expertise in this area, indirect procurement savings resulting from the increased buying power of the combined organization and exiting our interactive gaming operations in the UK and Belgium and exiting certain Mexican lottery operations which will improve our bottom line.

As originally expected, the planned initiatives reduced cost of product sales and lower R&D costs have longer lead times because they are often dependent upon certain prerequisite actions and these areas among others are expected to lead to additional cost savings in 2015.

Certain of these integration initiative require cost to be incurred to achieve the savings. And during the first quarter our employee termination and restructuring costs totaled $5.6 million along with $3.7 million of other costs associated with the WMS acquisition including previously announced retention bonuses.

Our costs to achieve the integration savings are weighted more heavily to the first half of the year based on the timing of employee terminations such as those related to the businesses we’ve already exited plus the timing of retention payment.

We anticipate we will incur additional integration related costs in the coming quarters as we continue to move forward on our initiatives. For 2014, we continue to expect such costs to total between $15 million and $20 million.

In addition, we expect an additional $15 million to $20 million of integration capital expenditure of which the largest project is to implement the Oracle HR and Finance software modules throughout the legacy SG businesses. And there will be additional operating and capital costs incurred in 2015 to complete our plans.

Another area of focus for us is cash flow.

As a result of the combination of our cost reduction actions, the impact of the WMS acquisition and distributed earnings from our equity investees, our free cash flow defined as net cash provided by operating activities less capital expenditures increased by $37 million to $24 million in the 2014 first quarter.

Net cash provided by operating activities increased by $60 million to $83 million reflecting an increase in net earnings after adjustments for non-cash items of $17 million largely attributable to the acquisition of WMS, a favorable contribution from reduced working capital $27 million mostly due to a reduction of receivables, partially offset by an increase in inventories, again mostly related to WMS and a $16 million increase in distributed earnings from equity investments.

Our capital expenditures for property, plant and equipment including lottery and gaming services expenditures and intangible asset and software expenditures was $60 million compared to $36 million a year ago with the increase mostly due to the addition of $36 million of capital expenditures from WMS partially offset by a decrease in other capital expenditures.

As a [side by] I think it’s worth noting that our G&A expense for the quarter of $94 million, of which most of the $61 million increase is from WMS exceeded our total capital expenditures of $60 million.

Additionally we made a capital contribution of $18 million to ITL to fund capital equipment for our customer contract and we recorded a related capital lease asset and liability of $14 million on leasing such equipment from ITL in our UK gaming business.

In the quarter, we received a return of capital distribution of $22 million from LNS, as well as total proceeds on the sale of our equity investment in Sportech of $45 million, which included a $15 million gain on sale.

Additional cash items in 2014 first quarter was a previously announced 2 million shares repurchased for $30 million along with the redemption of common stock under our stock-based compensation plan to fund employee withholding taxes on rested shares for $19 million and required principle payments of $6 million, mostly under our term loan.

In summary, we believe that the combined company benefits from the diversity of revenue streams and when coupled with our intense focus on integration synergies and free cash flow generation, the foundation is in place for improved operating results in future quarters. Erica, would you please open the line for questions..

(Operator Instructions). And your first question comes from the line of Brian Mullan with JP Morgan. Please proceed..

Hey guys, Scott congratulations on the new role. You touched on free cash flow at end of your remarks, could you just talk kind of broadly about your views on the priority of free cash flow use going forward between the different options the company has.

Is there a targeted leverage ratio you like to see slightly in the near-term to medium-term? Thank you..

Sure. Well, I think naturally our primary use of cash flow is to fund additional initiatives within the business to grow the business. And David made reference to some revenue opportunities that we're pursuing particularly in the gaming side of the business. And I think some of that will require some capital as we move forward.

In the past, the company has looked at a variety of other uses of cash flow including paying down debt our current credit agreement those have provision for some obligatory pay downs of cash flow in excess of certain amounts so we would certainly look at that.

In terms of the leverage ratio, at this point I would say, I don't have a target that we would like to get to. I think I need more time to determine exactly what that means relative to the full operations and where we're taking the operations.

But I'm comfortable with the current leverage ratio we have and the current credit agreement we have in place..

Okay. Thank you..

Your next question comes from the line of Carlo Santarelli with Deutsche Bank. Please Proceed..

Hey everybody. Thanks for taking my question. David in the prepared remarks and Scott I know you touched on it as well, you mentioned the $24 million of free cash flow in the quarter.

I was just trying to understand a little bit better what that included and is that inclusive of the sales, as well as obviously the buyback capital that you used?.

No, it's not. In fact, it is the net cash provided from operating activity less additions to property and equipment, lottery and gaming operation expenditures for software and that sort of thing and intangible assets. And that should total to the free cash flow of approximately $24 million.

Does not include the return of capital payments for LNS, does not include the sale or the proceeds from the sale of Sportech and it does not reflect the use of cash to buy back shares..

Okay, I understood. Thank you. That’s helpful.

And then just if I could touch on the acquisition comment, could you guys maybe put a little bit of a framework around some of the -- I would guess pieces of the puzzle that you would be looking to acquire and what piece of the business would that be more of a domestic acquisition something in the slot industry or are you thinking something more international and maybe a little bit outside of the gaming business more towards the, obviously the core lottery business?.

Well, I am not sure exactly what you heard perhaps you had a miscommunication, but we didn’t talk about any acquisitions. Perhaps you heard Scott referred to a priority being, invest in the existing business, which is just the investment of retained earnings in that business. But we didn’t mention….

I thought -- yes sorry, I thought Scott mentioned one of the uses of capital was potential acquisition activity, so I thought it would, but maybe I am mistaking..

No I don’t think so..

Okay, understood. That’s all for me..

It’s good to clear that up..

Thank you..

(Operator Instructions). Your next question comes from the line of Todd Eilers with Eilers Research. Please proceed..

Hi guys. Thanks for taking my questions. I apologize if you have touched on some of these before; I got on the call bit late.

But I wanted to see on the lottery side, can you give us a sense for how much the New Jersey market contributed this quarter; was it material or not for your instant ticket business? And then also maybe an update on Greece when at this point in time, what’s your best guess for when that market launch is?.

So Todd, on New Jersey, I would say it had an important contribution to our revenues but not a material the way I would characterize the New Jersey contribution.

And then secondly on Greece, I did say in my remarks and unfortunately, as you said, you got on the call later that we’ve had a soft launch and we expect to launch tomorrow as a matter of fact a full launch in Greece..

Okay, perfect. I apologize for that. And then I had a couple of other questions on the WMS side of the business. Obviously the premium units declined sequentially there and I guess that’s for the second quarter in a row there.

I mean how should we kind of look at that installed base going forward, should we expect stabilization here through the remainder of the year or might we seek some further unit removals at this point in time, what’s your thoughts going forward there?.

Well, I give you first off and then I would pass to Scott because he’s had a history in the business to comment. But I would say that one while it did decline and I wouldn’t want to project exactly where we would go with that basis just because of conditions in the marketplace; on the other hand, it remains focus and a target in our business.

So, we like that business a lot, we like to expand it if market conditions are conducive to this..

I guess I’d just add that there is a bit more competition in that marketplace, particularly in the non-WAP units at this point in time.

And so that has an impact on ability to sort of grow the business and it’s also dependent upon game performance because we’ve seen that in the past that with good gains you will be able to garner more share on the casino floor.

But one of the key areas of focus over the last 12 months has been growing the WAP footprint and we’ve been fairly successful with that that produces higher gross profit dollar contribution on a daily basis. And we have variety of new products for both the WAP and the non-WAP that we’ll be coming out with over the near-term..

Okay, great. Thanks guys..

Your next question comes from the line of Kevin Coyne with Goldman Sachs. Please proceed..

Hi, good afternoon, thanks for taking the question. I was just wondering if I could follow up on the leverage question.

I know you don’t have a precise target in mind but with your peers rated investment grade, do you feel a need to be there at some point or are you more or less more -- comfortable being high yield credit profile?.

We certainly feel extremely comfortable with where we are and having a high yield profile. We don’t have a target in the investment grade..

Okay, that’s helpful. And then I was just wondering if I could ask a broader theoretical question. As we think about let’s say, us from the analyst side sometimes follow the replacement cycle and we have certainly seen it widen and stay wide for a while relative to where it was maybe five years ago.

But when we think about just the mix of machines on almost any gaming floor, we know that certain machines last almost forever. There could be reels and video poker machines out there for over 20 years that still run fine.

But if we think about the machines that have maybe been installed in the last five years, is there a theoretical or estimated use for life on those machines? Would it be monitors or something like that? Would that makes you think or the market think that there is a limited amount of time that we're going to need to be out there.

Now I know that you can swap out software and do that to always upgrade the case in the box and what not.

But is there any theoretical timeframe that we can think of with this current generation of machines to where they will need to be replaced?.

I'll make a couple of comments and then I'll turn it over to Scott because he has got the history in the gaming business.

But I know in our server base gaming business, in the UK, what drove the replacement cycles there were the upgrades to the machines as much as anything and then their ability because of those upgrades in order to deliver gains or chains that enhance the player experience.

I suspect it's the same thing in the casino so that what I would call broadly speaking the innovations in both the cabinets and the machines, the platforms, the software and the games and sales that’s what's really drives it. It's not so much from what I hear from your question, the physical aspects of gaming..

Yes. Mines more of a where and there question..

Yes. I don't think that's the issue at all, I think it's all about the innovations to improve, enhance the player experience.

Scott?.

Yes. You are spot on with that. The machines are built to last.

There is a robust secondary market that once the past three casinos, the side that they are going to replace what they have in the floor will often taken trade-ins or sell them directly to third-party distributors who place them in mostly international markets that can afford the high price of the new gaming devices.

And so, the useful life of the machine is lengthy..

Okay. Fair enough. I appreciate it..

Hence we have no further questions; I will now turn the call over to Mr. Kennedy for any closing remarks..

Thank you very much. Thanks to all of you for joining us. In closing, I want to reiterate a few points that we're clearly focused on delivering the cost savings and increased cash flow from our integration efforts in the near-term.

To investing in our core competencies to grow our businesses by executing our strategies and that increasing our global share on the casino floor and expanding our business presence in underpenetrated markets and driving operational efficiencies and improvements.

Thanks again, we look forward to updating you on our progress on our second quarter earnings call. Thank you..

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect. And have a great day..