Bill Pfund - VP, IR Gavin Isaacs - President, CEO Scott Schweinfurth - CFO.

Barry Jonas - Bank of America Merrill Lynch Steve Wieczynski - Stifel David Katz - Telsey Advisory Group Carlo Santarelli - Deutsche Bank James Kayler - Bank of America Mike Malouf - Craig-Hallum Capital Group Todd Eilers - Eilers Research Chad Beynon - Macquarie.

Good day, ladies and gentlemen and welcome to the Q2 2015 Scientific Games Corporation Earnings Conference Call. My name is Whitley and I will be the operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session.

[Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now 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 Web site 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 also 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 the call will also be archived in the Investor Information section of our Web site. 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 the 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 in our Scientific Games teams to innovate and drive growth. Revenue from most of our operations was on track in the second quarter. The exception was gaming 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 unit 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 the more notable accomplishments during the quarter included; our WAP and premium participation games continued 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 ever released.

Duo Fu Duo Cai and 88 Fortunes continue to gain popularity globally, while newer game such as the Flintstones and the latest Willy Wonka game are hitting the ball out of the park. And our recently released Friends game is up 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 be demonstrating a new Shuffle Master branded cabinet called [Dualis] [ph] 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 in more than 200 casinos and the national championship will be held in Las Vegas on September 28 at the Venetian.

With $250,000 in price 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 syndication for a second season that is expected to launch in September.

Across our lottery business many of our customers especially those that whom we are the CSP or cooperative services provider and primary instant game supplier reported record fiscal year instant game retail sales. Customer such as Florida, Georgia, Pennsylvania, Tennessee and Camelot in the U.K.

together with others turned to us because of our expensive gaming library experiencing game analytics and our laser customer focus. We expanded our relationship with the national Norwegian lottery to become the sole supplier of instant games and we 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 a significant expansion 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 across our entire company. While still early both apps are providing promising results.

During the quarter, we entered into 14 new 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 ships with our market leading venue bet 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 service interactive with our customers Web sites, 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 operated in Spain and Denmark provide additional new opportunities for further growth.

Our product development efforts continued to be focused on driving innovation and new products. As customers increasingly turn their attention to revenue opportunities and engaging their players to continue to generate greater attendance and spend per player. We believe our unique strengths and differentiation will play dividends.

Our global capabilities and the scale of resources to support innovation in the 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 that takes a well known strong performing slot game brand and extends into the lottery space. Earlier this year, we completed a comprehensive player study to provide significant data driven insights to assist our future product development efforts.

Among the research finding was a simple fact that about half of those players who buy instant lottery games also play slots. And that about three quarters of our slot players also play lottery games.

At least the actions we have taken to drive innovation of new products along with a 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 the 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] [ph] cabinet focusing on the Australasian markets. Following Australian Expo is the G2E Global Gaming Expo in Los Vegas and the National Association of State and Provincial Lotteries, NASPL conference in Dallas.

We will be demonstrating in an extensive array of new products and innovation. At G2E, we will also show our customers from exciting new non-traditional 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 the 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 prospective 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 $11 million increase in our legacy interactive business partially offset by a $37 million decline in legacy gaming revenue and $18 million decrease in lottery revenue.

The change in our consolidated revenues 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 EBITDA margin improved 680 basis points to 38% driven 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 in the quarter. The table on page two of the press release and the descriptive review on the paragraphs following the table provide the detail of these charges.

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

The cash impacts of these items including our integration initiatives to effect 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 time of the Bally acquisition that we otherwise sort of 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 sequentially 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 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 and AEBITDA and the lower quarterly sequential interest payments, we expect to effect a more meaningful debt pay down.

Drawing on our experience from earlier integrations, we have been able to accelerate the implementation of integration actions and plan cost savings without any meaningful delays. And consequently, our integration is running ahead of schedule.

By June 30, we have 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 savings synergies or nearly all of our first year targeted savings.

Notable among the more impactful actions through July 31, 2015, almost 1000 job 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 Los Vegas gaming production facility by the end of June and for all operational operations we have now largely completed the closure of the Waukegan facility.

We have closed or in the process of combining duplicative facilities around the world that have anticipated the result and 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 trial.

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. 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 installation of VLTs pending the outcome of their still ongoing negotiations with gaming regulators.

With the Greek parliament adoption of reforms to remain the eurozone and their need for increased tax revenue, we remain hopeful that the installation in go live or the participation unit 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 will 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 those 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 in 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, the $2 million of higher legal expense related to 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.

Net debt results -- pro forma results of Bally had been acquired effective January 1, 2014, which we believe maybe a more meaningful to investors to understand trends in our business.

Looking at our gaming operations, our 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 print of WAP, premium and daily feed participation unit of 1960 units or 8% decrease was largely offset by an 8% increase in the average daily revenue to $56.77 per unit mostly due to high performance of legacy gaming units which averaged $83.77 per unit.

On a quarterly sequential basis, revenue from WAP, premium and daily feed 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.

With a meaningful slowdown on a quarterly sequential basis compared to the rate of the proceeding 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, the 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 5% increase in machine and gaming machine duty on revenues from our U.K. customers partially offset by improved cash box performance in our U.K. installed base as well as an increase in the average daily revenue of Bally games including the VLTs at New York casinos.

Bally and WMS shipments of U.S.

and Canadian customers totaled 4001 units representing a decline of 2621 units from the prior year quarter due to 508 fewer Illinois VLTs shipped, 677 fewer gaming machines for new casinos openings and expansions and 1436 unit declined 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 3% increase in the 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 conversations that occurred in the March 15 quarter.

With our higher average selling price, we believe we got 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 the innovative Pro Wave cabinet.

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

Internationally, we shipped 2104 units a decline of 1028 units largely reflecting lower sales due to continued import restrictions in Argentina and the fastest in the Australia and the Mexico markets. With the launch of the 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 the 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 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 from maintenance and services compared to only 33% in 2008.

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

Cable 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 with a slight increase in the number of shuffler 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 U.S.

and mostly transacted in local currencies, the lottery business was subject to a higher degree of foreign currency impact than our gaming business which mostly sells in U.S. dollars globally.

Services revenue 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 the lower sales of hardware terminals to both U.S. and international lottery customers primarily those in Europe.

These sales similar to the installation of gaming systems hardware are subject to timing and demand and therefore, the quarterly revenues are often lumpy. Instant game revenue was essentially flat inclusive of $4 million of unfavorable impact of currency translation.

An increase in instant game revenue from customers with participation contracts driven principally by higher retail sales to our U.S. customers and slightly higher price per unit sales to other U.S. and international customers was largely offset by lower price per unit sales to other U.S. and international customer and – to U.S.

and international customers was largely offset by lower licensing and player royalty revenue primarily related to the timing of signing new contracts for license product games.

We continue to see strong renewal of lottery contracts based on customer satisfaction including the recent agreement to expand 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 and setting from a more profitable mix of revenue and lower operating expenses.

The EBITDA for the segment was flat compared to the prior year largely reflecting the more profitable mix of revenues and lower operating expenses offset by the three 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 7 new customers including expanding our presences by entering Denmark and being among the first to go live on day one in Spain as that country enabled regulated online gaming during the June 2015 quarter.

Social gaming revenue increased 9% on a quarterly sequential basis as we continue to benefit from an increased base of users of Jackpot party and Gold Fish social casino apps. Additionally as Gavin noted, we launched two new standalone social gaming sites during the quarter are Quick Hit slots and hotshot casino social game 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 in 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 and 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 improvement from 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] Our first question comes from the line of Barry Jonas of Bank of America Merrill Lynch. Please proceed..

Hi, guys.

Can you give maybe a little more color on the challenging gaming market and any integration issues and maybe what 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, we are the first really to report. So a lot of it is – we are going on not perfect data. We don't think the market was a strong overall this quarter as it was last year certainly in the United States.

As we transition and then put together the companies together we had some issues with sales force and that's being the stuff that you expect sort of onboard and operating manufacturing we shut down Waukegan and we had to move everything down to Bally in Vegas that's all operating.

And there has been some customer concerns frankly despite us assuring everyone otherwise that perhaps we are 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 that they will see that clearly G2E and that will be very apparent and clear.

From an ISP perspective, we are not really seeing that many major changes, I don't believe. It's always being – and people keep asking about that and it really doesn't – it's affected by product mix. But to the last five or six years it's been about the same.

Competitive pressure wise, quarter is a 90 days, it's very short, the life of an order effectively from contract to actually shipping between 4 and 6 weeks. So I really can't say that I have seen a big change in behavior in the competitive market during that period.

Is that sort of answer the question?.

Yes. That's perfect, Gavin..

Thank you..

An then, look, I know free cash flow was impacted by the coupon payments which should boost Q3.

But in other quarter of positive working capital movements, how should we think about working capital movements going forward?.

Well, obviously, bit of it is subject to what's happening on the revenue side of things. With revenues being down 10% that has a positive working capital impact on receivables and to a certain extent on inventories. I think we have done a decent job of managing the working capital and we are going to continue to remain focused on that..

Great Okay. Thanks a lot guys..

Thank you..

Your next question comes from Steve Wieczynski with Stifel. Please proceed..

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

Was that really across the board, all your customers or was that or was it one or two customers out there that saw a bigger follow-up versus the other ones?.

Look, as I said these things are 90 days sprints in many respects and where 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 have seen and I guess it was an analyst report the other day, the total number of units is 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, you know, it's not as big as it's used to be, but the shuffler business had a – actually got a great quarter and not surprisingly but the least side of the business was extremely strong.

What drove that in the quarter?.

Well, we just continue to see growth in the installed base. And it's been relatively consistent growth on a quarterly basis..

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

What gives you confidence that you will 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% note. We will have a positive impact on cash flow and then it sort of reserves itself in the December quarter.

But, we are looking to 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..

Yes. Let me add to that Steve a little bit. When you look at a more 30,000 foot perspective there were a lot of people who for the last six months have said that's a big synergy, we don't think you are going to get it. Clearly, we feel – we are showing that we can do that well and that we have 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 in 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 in every business is operating well with the possible exception of gaming sales.

I think what we need to do is show that up with some new products, convince the customers as we will that we are support doing what we said we do, which is to support all the brands. And I believe we deal with very good for the future..

So can I add – if I can add on to 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 are seeing today or is it, are you guys putting in some growth there?.

No. We basically see what you all see which is about same as what's here today. It's funny what we do and I know this sound stupid that if we look at our own internal stuff we get obviously a bottom up.

And then with the litmus test we do, we take all Europe, and since what you are saying and if there is anything that's way out there we ring one of you and say how come you got so much more or so little less and we check it that way..

Okay, great. Thanks guys..

Your next question comes from the line of David Katz of Telsey Advisory Group. Please proceed..

I wanted to just about the CapEx guidance, you – if you can 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 just so we could portion that out?.

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 discloseable..

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 kind of a positive view on systems revenue, can you just talk more a bit about where that positive outlook is coming from and why you think that?.

Sure. We have announced the OLG deal that we are going to start to earn some revenue line yet this year. We have – the ALH deal is for the most part behind us. There will be some additional revenue recognition in the third quarter relative to that one.

And there is other things that we see in the half that give us confidence but this is what continue to remain at a higher level. Last year or I will say, the Bally year that on June 30, 2014, was a record year for that business. And we have said all along that we will not likely get up to that level again.

But, certainly up about the level that we will add 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 now they are 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.

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 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 was 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 sort of go away will be getting the benefit of synergies for the full year versus sort of lower rate that we are getting this year because we didn't implement everything effectively on January 1, 2014.

We on the CapEx side is an example of $30 million of Greek VLTs likely not be something that is recurring. We have also had some unusual charges that we called out and the numbers that we are not expecting to be recurring that will -- hopeful that too. So yes, this year as Gavin said it's only the second full quarter here that we have combined.

I think we have 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. I appreciate it..

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

Hey, guys. Thanks for taking my question. 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 unclear 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 in several quarters into it – do you believe that $235 million is the right number or you still kind of in the exploratory phases and potentially there is more down the road?.

Well, as I said, we are pleased with the progress that we made to-date. We were able to accelerate some things. And we kind of learned from our past integrations that this is a path, right, and we are partly down the path. And there will be some things that we will be looking at.

But, it could potentially make them larger but we are not prepared at this point in time. Again, we are very pleased with the progress we made so far. We are investigating another item and we will see where we get to..

Yes. Our job as a management team, we have done this big acquisitions, we got all these plans and synergies. We have got all these plans execution. We build them into our business cases. We build them into our operating plans. 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 are talking about with the $235 million relates to the acquisition and there is some that we have realized better than we expected. There is some we realized that having at the same level as you expected.

But, that's our job as management team and we will be effective at that..

Understood. Thank you guys. And just then if 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 on the press release like on the last page, it's like the next from the last bullet point list out of the dividends and return on capital payments from each of the equity investments.

This year, the second quarter number was higher primarily because we received our large payment from L&F in the second quarter whereas last year that payment fell in the first quarter. We are starting to see some return from lottery, which is nice and hopefully once the situation sort of settles down, we will see continued growth there..

Okay.

Scott, so as I think about the back half of the year then in last year I think the total distributions were like $77 million, are we still borrowing the time difference here, you obviously saw in the first half, or 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. I mean the entity is actually have to meet and decide to distribute it but it should be in that range. And I think we have 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..

Your next question comes from the line of James Kayler with Bank of America. Please proceed..

Hey, guys.

How are you doing?.

Hey, James..

Hey, James..

Gavin, I think probably for you maybe just a little bigger picture.

Can you just seemingly a rebound in regional gaming kind of that gave a little momentum, what are your customers saying about their slot buying plans and budgets and I guess, are they already starting to think about budgets for next year?.

Okay. First of all, our customers do well and our mission is to empower our customers. So it was great to hear the commentary from the other day from the customers that they are 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 a little perhaps. And you got a new offering for a reason to come back, I certainly know that from some customers. The capital is usually set at the beginning of the each year.

And they have the CapEx budget, how they are thinking about us the next year, absolutely, a lot of people plan around the launches of G2E et cetera. And I believe our first pre-G2E to revisit, it's August the 6th this week. So people are right in their planning ties and they will do so up to an including G2E.

Hopefully, they will be given some capital for spend beyond their plans for this year. But otherwise we hope that the good fortune, their experiences continues in the next year and we will see that reflected and maybe a bit more of an increase in purchases..

Very good. And then just changing gears to the wide area of progressive business, Scott did highlight that the sequential declines have slowed a little bit but what are you hearing from customers on that front. What has driven I mean, obviously, your machines are performing well.

So what is driving the continued shrinking of wide area progressive footprint, just broadly in the industry?.

I think a lot of that driven by our friends in the finance community be focused on EBITDA. And so it's a lot better to buy and appreciate that it is to lease. And so when they are touch sharing their revenues with us that's the reason – for whatever reason I had preferred to buy out right.

When we put big brands out on gaming equipment and attract players. It enables us to invest in some technological cutting edge stuff in the games, but they have to be leased. So once they are on the floor some customers believe they don't need as many as they would have in the past.

But, again, a lot of its driven by the fact that they – when they buy something they could appreciate it and when they lease it they can't – my perspective of way of seeing is, the product performing that well, why wouldn't you want more..

Fair point. I guess just a last one, just a little more detail on Waukegan, can you just 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?.

My recollection is that of the $235 million there was $44 million that related to manufacturing. And of that about a third about 15 million related to the impact of consolidating the manufacturing operations. And you are 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 foresight to the middle of July. There is a little bit of dribble over cost there.

But, certainly about the timing you got to the fourth quarter and that will be gone..

Okay. Very good. Thank you guys..

Thank you..

Your next question comes from the line of Mike Malouf with Craig-Hallum Capital Group. Please proceed..

Great. Thanks for taking my question as well. Gavin, wondered if you can just go a little bit more into the gaming side on the product sales, could have known in March when I asked about disruption, your comment you are not seeing any disruption on the sell side. So in the June quarter, it looks like it came out a pretty hard or let's be quick.

Where are you in that process as far as rectifying that problem? Are we still two months out or do you have it under control or maybe they will last to the end of the year.

Just trying to get some color on that?.

You know, I think it's no longer going to impact on anything like deliveries like it as in the past. I think a lot of the changes that we are making process wise result in bring 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 in the right place and we need them and things like that. So we have the right people working on that immediately, and I don't expect those problems to carry on to the rest of the year. I think we are not perfect yet, but we are getting there better every day.

From a training perspective, we now have a stable sales force. We made last big changes to the sales force this mid-July and we now have a stable team, stable sales force we really believe we are fit to breathe. But, some come from WMS, some come from Bally, some come from shuffle, some come from outside.

And selling something new and something different can some times be a challenge. So getting the right training in place for that and making sure people are appropriately incentivized to ensure that they sell 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 field based games just wondering if you can just give us a sense I will – you have been around for a while, how long do you think this could actually take to get in an impact in you and are we started to develop those games and more details, I just sort of – what kind of impact could that have?.

Sure. Well, the first skill based game which really would fit within these definitions, was done by Bally about 7 years ago with PONG. I don't know if you recall PONG. We had at the show. And the idea was, it was set payout at about 92% with a bit of skill you could get a few percent more.

Maybe before it's time 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 are all going beyond – certainly way going beyond that in different concepts that we will be showing at G2E.

We have been working very closely with the progressive regulators people like Nevada showing the way that they want to try and innovate and be a place for innovation to welcome and many of other jurisdictions following very closely. So I think you got to come to G2E and you will see some really cool stuff.

When that will be available, I think that there is 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..

Okay. Thanks a lot..

Come and enjoy them..

Your next question comes from the line of Todd Eilers with Eilers Research. Please proceed..

Hey, guys. Thanks for taking my questions. I want to ask a quick one on the lottery side specifically on instant tickets, looks like in your release it looks like the U.S. instant ticker retail sales are pretty strong in the quarter up about 8% year-over-year. When I look at your participation contract bucket there, looks like that was up only 1%.

Can you maybe talk a little bit about why maybe that came in below or under what kind of the broader market was doing? Was there any kind of one-time items there? And just a little more color on that will be helpful. Thanks..

I'm not sure exactly what you are 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 a bit – there is some of that that was in the participation of the contracts that would be an element to it..

Okay. That's –.

We can dig into that a little bit more for you, but I think that would be – the day that we got here 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 for 100 plus units sold.

Anything, I guess one time there or how should we kind of think about that going forward, we are kind of looking for that market that kind of slowly ramp down, but saw a nice kind of rebound this quarter, just – how should we look at that going forward?.

Yes. I think that the last Illinois game and control board meeting, they approved a 124 or 129 new locations. So as long as the game and control board moves in that manner that creates some opportunity for all the suppliers then 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, just maybe an update I don’t know if you provided in the press release I apologize if I missed it, but Oregon VLT replacement, 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..

Thanks Todd..

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

All right. Our next question comes from the line of Chad Beynon with Macquarie. Please proceed..

Hi, great. Thanks for taking my questions. First one, just wanted to ask on the VSG universe agreements you provided and kind of your opening commentary you said that they are 14 new sign ups.

Can you just talk about the breadth of these agreements maybe the number of different customers and then more importantly any feedbacks that you had from customers if they may interest in implementing the system across other portfolios or other properties in their portfolio? Thanks..

Sure. I mean it's a very exciting product. It's a very exciting way of linking not getting with game play, with future, with everything that we are doing. Clearly some of the customers like the Penns' of the world we announced the trialing at many new properties and if successful they will look at other ones that's up to them.

We are feeling very comfortable. A lot of the properties, I mean I think we really announced, a lot of them people who have like any of the big groups beyond Penn have not really taken it yet. I'm not really sure which property we do announce them when they come out. So I'm sure that for historical – it's out there.

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

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 kind of provide some detail on that if you just saw some of that come into this year or you are kind of changing some of the synergy opportunities in 2016?.

I think it's a little bit of mix of both. We did accelerate some of the initiative into 2015 and we have not spent as much on some of that we thought we were going to spend. So you are quite correct, we have taken down the total.

I think we started with a total of $80 million, right? And we have taken that down a little bit based up on where we are and sort of what we see going forward..

Okay. Thank you very much..

Well, again, thank you all, I said it before.

This is a – it's a long road, we just started down and I'm excited about the progress we are making and clearly, we would love to see stronger sales across the game portfolio but as I do expect that as our products come out and our momentum builds we will get stronger and stronger and 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..