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

Barry Jonas - Bank of America Merrill Lynch David Katz - Telsey Advisory Group Ross Licero - Craig-Hallum Capital Group James Kayler - Bank of America Merrill Lynch Todd Eilers - Eilers Research Carlo Santarelli - Deutsche Bank Robert Shore - Wells Fargo Securities Dan Fuss - Morgan Stanley Dennis Farrell - Wells Fargo Securities Chad Beynon - Macquarie Research Equities.

Welcome to the Third Quarter 2015 Scientific Games Corporation Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Bill Pfund, Vice President, Investor Relations..

Thank you, Lauren. Welcome, everybody 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 the call, we will discuss our third quarter results and operating progress, followed by a question-and-answer period. Our call today 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 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.

In addition, a replay of this call will 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. In only our third full quarter as the new Scientific Games, we continued to make consistent and significant progress. Just 10 months after closing the Bally acquisition, our showing at the G2E and NASPL tradeshows validated how powerful the combination of our brands, innovation, people and products can be.

Our mission is to empower our customers by creating the world's best gaming and lottery experiences. Our Companywide emphasis on innovation and our strategic focus on building a multibrand portfolio to provide the most comprehensive end-to-end solutions and high-value offerings provide us with a strong foundation for growth.

From an operational standpoint, we're still in the early innings of benefiting from the integration of our Company and leveraging our significant strengths. The results we announced this afternoon reflect our continuing progress. First, cost savings are contributing to attributable EBITDA margin growth.

Even at this early stage, we're demonstrating one plus one is greater than two. Second, integration efficiencies, combined with the beginning of a decline in integration costs, are leading to a higher level of free cash flow available to reduce debt.

So with higher cash flow, we demonstrated our commitment to leverage - reduce leverage by paying down a total of $73 million in debt in the third quarter. That was the amount paid in the first half of the year. In the first nine months of the year, we had paid down a total of $109 million of debt.

A significant strength of Scientific Games is our diversity of business lines and revenue streams. Since the merger, we have made significant strides in fostering collaboration across business lines, leveraging the power of our comprehensive portfolio and building a unified organization focused on taking care of our customers.

Overall, all but one of our business lines has operated as planned. We have taken steps to address the underperformance, as displayed at G2E with the introduction of the TwinStar cabinet. I believe today all of our business lines are now beginning to demonstrate the improvements we expected.

As we've noted in the past, revenues in our gaming systems business can be somewhat lumpy and hard to predict in the short term. This quarter, we had several planned installs that, due to timing of customer acceptance of the system, were moved out from the September quarter. But overall, the systems pipeline remains robust.

We continue to show how our commitment to systems distinguishes us from our competition. We recently announced that we would displace a competitor's system at venues operated by the Alberta Gaming and Liquor Commission.

We will provide our Bally gaming system solutions that will connect more than 14,000 gaming machines across the province's 28 casino properties.

This marquee multiyear contract with the AGLC, combined with a similar marquee multiyear contract with the Ontario Lottery Gaming Corporation announced last year, are solid evidence of the robust pipeline we have for 2016 and 2017. We continue to see strong revenue per day performance in gaming operations.

This is helping offset the industrywide declines in footprint as operators focus on their own costs and EBITDA.

With a strong arsenal of new offerings, including new game themes for all our platforms, we continue to believe that customers who take advantage of these attention-grabbing player favorites will see the benefits to their overall operations.

We believe we have the strongest gaming operations lineup in the industry, with tremendous depth in our brand portfolio helping us to lead in this very competitive space.

At G2E, we showcased 17 new participation games and highlighted multiple new brands, including Cirque du Soleil and the Simpsons and we introduced the new Gamescape cabinet which we expect to drive our performances in the year to come.

New gaming unit sales have been below our expectations throughout this year, as the WMS, Bally and Shuffle Master dual-screen video cabinets were amongst the oldest in the competitive set.

To address this, we launched two new dual-screen video cabinets in the September 2015 quarter, the SG Dualos cabinet at the Australian Gaming Expo and the SG TwinStar cabinet at G2E. The Dualos cabinet was already approved in both New South Wales and Queensland and consequently we were able to take orders at the show.

We shipped 385 units by the end of September, with higher unit numbers expected in the quarters ahead. Our TwinStar cabinet received strong interest at both our pre-G2E customer meetings and at the G2E show itself. This cabinet offers the Company's next-generation ArgOS operating system that is capable of running either Bally or WMS branded games.

This was a key element of our integration strategy and a very major project, involving hardware, operating systems, game development, testing, QA and supporting groups, a great deal of hard work and close collaboration among many different teams around the globe done in record time.

I couldn't be prouder of the entire team for their successful accomplishment. We expect to receive our first approvals for both ArgOS and TwinStar in December and ship our first units this quarter.

I'm delighted to report that at this time, the initial production of our TwinStar units are sold out for this quarter, with accelerated demand expected in future quarters.

Once Dualos and TwinStar are fully approved, these new cabinets are expected to help us gain ship share, as we had not released the new dual-screen cabinet under any brand in more than 30 months. That is significant, as arguably this is the category in which the majority of new unit sales takes place.

In the lottery business, unfavorable foreign-exchange currency translated impacted revenue by $11 million. This is about one-half of the segment's total revenue decline or equivalent to a 6% headwind measured in constant currency. And of course, this compares to a quarter in which we had record international lottery product sales.

Recently, our lottery team had a big win with the Arizona Lottery Systems contract. We were awarded the contract, displacing the incumbent provider's offering. We won largely on the basis of the services and technological capabilities we offered; our total value proposition which had the highest weighting in the lottery's evaluation criteria.

And from our recent press releases, you can see that the level of bids to hardware and software in international markets has improved and we're pleased to have won a significant number of these. Consistent with our commitment to innovation, we have won four of the last five bids in our lottery business based on technical scores.

We expect this increased activity will translate into a higher level of lottery contract wins in 2016 and beyond. In our interactive business, we experienced significant growth in revenue from real money gaming activities.

Growth in social gaming paused during the third quarter as we undertook a major software upgrade to update and expand the capabilities and capacity of the original Jackpot Party Social Casino application.

The relaunch of version 2.0 of the Jackpot Party Social Casino occurred in early October and initial results are promising and we're now ramping up marketing to support it. As I mentioned at the beginning of my comments, one of the most encouraging developments for us in the quarter was G2E.

In many respects, it was a coming-out celebration for our Company. We had targeted G2E to show everyone that we would both support our existing product lines and lead the way with innovation, expenditures only possible due to our combined size and scale.

Our product offering establishes the innovation, cohesiveness and product leadership of the new Scientific Games. The breadth and depth of our products, systems and services demonstrated our unique capability to provide customers with true end-to-end solutions.

For those of you who were not able to attend, let me provide a quick overview of our booth at G2E.

We demonstrated new cabinets for both participation and for sale categories and the next-generation ArgOS operating system; multiple exciting new brands including The Simpsons, Cirque du Soleil, Cher, EMPIRE, The Rocky Horror Picture Show, Monty Python and the Holy Grail and Caddyshack, just to name a few; a dozen new proprietary table games, including the Flushes Gone Wild game that garnered plenty of customer attention and was awarded best table games product or innovation at the show; new electronic table systems including our Playboy Bonus Blackjack game; new shufflers, including the award-winning Safe-Bacc automatic shuffler card reader and scoring system for baccarat all-in-one, already approved in many markets around the world; enhancements to our new industry - advancements to our industry-leading gaming systems, including BetVIEW secondary wagering capability across iVDM for slot machines and the Monopoly-branded system game, demonstrating our ability to leverage our brands across multiple channels; new innovative concepts, including our skill-based Space Invaders game that we believe provide a view of the future by enabling new content that will help casino operators attract next-generation players; SG Universe and the significant benefits it brings to land-based casino operators and our lottery team was in their booth two weeks later at the NASPL tradeshow held in Dallas, showing the benefits of integration as emphasized by our leading innovation.

With integration well in hand, this quarter we're stepping up our focus on driving growth and meeting our commitments. I'm excited by the positive steps and progress I see across our Company and their implications for our near- and long-term growth.

We have a robust product line of innovative new products, including the expected launch of TwinStar with its ArgOS operating system and we believe that our performance will improve in the fourth quarter.

And while there continue to be headwinds in sales of new gaming machines, we're setting up for a solid 2016 where we see improved margins, strong cash flows and further debt paydown. Now let me turn the call over to Scott to provide more perspective on the financial results..

Thanks, Gavin and good afternoon, everyone. For the third quarter, total revenue was $672 million and is net of approximately $22 million of unfavorable foreign-currency translation.

On a quarterly sequential basis, our revenue decline is largely due to the delays experienced with certain gaming system contracts and the expected seasonally lower sales of new gaming machines. Attributable to EBITDA or AEBITDA, I guess, was $264 million.

Our AEBITDA margin improved to 39%, up 80 basis points on a quarterly sequential basis, despite the lower revenue and up 440 basis points over the September 14 quarter on a pro forma basis. AEBITDA increased $7 million over the pro forma results of the prior-year quarter despite a 9% decline in revenue.

The increase was driven primarily by the successful implementation of our integration plans and ongoing disciplined cost management. Our quarterly results included several significant charges and costs in the quarter.

The table on page 2 of today's press release and the descriptive review in the paragraph surrounding the table provide the detail of these charges. These items aggregated $648 million pretax, all of which were addbacks in calculating AEBITDA.

The cash impact of these charges in the 2015 third quarter, including our integration initiatives to affect cost savings, amounted to $10 million.

The most significant charges were the non-cash impairment charge of $535 million for gaming business goodwill associated with the revenue streams from the sale and lease of gaming machines and a $104 million non-cash impairment charge to write down certain gaming intangible assets which was included in depreciation and amortization.

Due to the challenges the industry faces with gaming machine sales and the declining installed base of gaming operations machines, under the accounting rules we had indications that the fair value of the gaming goodwill was lower than the carrying value, so we began performing the required two-step analysis process to reevaluate the indicated fair value of goodwill.

We have recorded our best estimate of the impairment value in Q3 and once we complete our analysis in Q4, we will update the estimate if necessary.

In addition, we adjusted down the carrying value of certain intangible trade name assets to their current fair value and moved the remaining carrying value from indefinite lived assets to finite lived assets which will be amortized over a 15-year period.

These impairment charges have no impact on our operations, our AEBITDA, cash flow or financial covenant compliance. A priority for 2015 was the rapid integration of the businesses. We accelerated actions, enabling us to get through this disruptive period and move forward with a renewed focus on customers and our growth plans.

We accomplished in just eight months post acquisition what we originally planned to achieve in 12. Our integration efforts and our focus on continuous improvement are baked into our ongoing operational focus.

As previously reported, we began the quarter with $150 million of Bally-related annualized savings having been implemented and we have now increased that to $194 million at the end of September, well on our way to our year-end goal of $200 million, plus we have implemented $26 million of the $30 million of the WMF year two cost savings.

Cash flow from operating activities was $141 million and we generated free cash flow of $50 million.

As expected, we increased debt paydown on a quarterly sequential basis to $73 million as we voluntarily reduced the outstanding balance of our revolving credit facility by $60 million, made $11 million in mandatory debt payments on our term loan and reduced capital leases by about $2 million during the quarter, bringing total debt payments to $109 million for the first nine months of the year.

We had $534 million in available liquidity at September 30, 2015, reflecting cash and availability under our revolving credit facility and total net debt was $8.3 billion. At quarter-end, the Company was in compliance with its financial covenants.

Cash flow from operating activities for the quarter improved $15 million year over year and $105 million on a quarterly sequential basis, while cash flow available for debt reduction increased approximately $50 million sequentially from the 2015 second quarter.

Cash flow available for debt reduction benefited in the third quarter primarily from a $26 million improvement in net earnings after adjustment for non-cash items and a $96 million favorable swing in working capital.

This was partially offset by $20 million of higher capital expenditures and a $47 million decline in cash distributions from our joint ventures.

We anticipate making continued voluntary debt payments in the fourth quarter, based on our expectation of further growth in AEBITDA, even though our debt service requirements are approximately $61 million higher than in the third quarter.

We maintained a disciplined approach to capital deployment, with the increase on a quarterly sequential basis largely reflecting greater payments for new third-party brand licenses. We now expect capital expenditures of $310 million to $320 million for calendar 2015.

This annual total includes integration-related capital expenditures, as well as one-half of the planned investment for participation-based VLTs in Greece. We continue to maintain a positive outlook for the future placement of our 5,000 VLTs in Greece. However, at present, we believe placements now are not likely to begin until 2016.

Now let me turn to the operating performance of our three business segments, beginning with our gaming segment. Revenue was $429 million, reflecting $287 million from the addition of Bally.

That is inclusive of $4 million of unfavorable currency translation in the legacy gaming business and an additional $7 million of unfavorable foreign-currency fluctuations at Bally on a pro forma basis. On a combined basis, that was a currency translation headwind of more than 2% of revenue compared to last year's pro forma quarterly results.

Revenue was down 5% or $21 million from the second quarter of 2015, principally due to the $18 million quarterly sequential decline in gaming systems, reflecting revenue we could not recognize in the third quarter, but expect to recognize in the future.

With the addition of new contracts that have been received, as noted in some recent press releases, we believe this business remains solid and capable of driving modest annual growth longer term, while continuing to be lumpy on a quarterly basis. Revenue in gaming operations increased $4 million on a quarterly sequential basis.

WAP and premium participation revenue was essentially flat as an increase in average revenue per day for legacy WMS games largely offset a sequential decline in the installed base of WAP and premium participation games. The latest new WAP and premium participation games continued to perform strongly.

With the exciting pipeline of new titles and the innovative Gamescape cabinet for The Simpsons and the new Willy Wonka games that were demonstrated at the G2E, we expect to see continued strong game performance.

The quarter-end installed base of other participation lease units increased slightly over the June quarter and other gaming operations revenue increased $3 million. Revenue from gaming machine sales declined $7 million on a quarterly sequential basis, due to the normal seasonal fluctuation in demand.

A sequential decline in unit shipments of 550 new gaming machines was less than the typical seasonal decline and was partially offset by higher average selling price. Other product sales revenue increased from the sale of approximately 2,300 self-service sports betting terminals in the UK.

These are not slot machines, so they are not included in our new gaming machine units and did not impact reported ASP. Internationally, shipments were down only 219 units on a quarterly sequential basis.

The launch of the new Dualos cabinet and the resulting shipment of 385 units in Australia helped offset the typical seasonal decline in the international shipments. The strength of the average selling price reflected the continued success of the Bally Pro Wave cabinet.

With our higher average selling price, we believe we continue to garner the highest total wallet share of casino replacements. With the introduction of new themes that expand the library of available games on the Pro Wave, we expect continued solid customer demand for that cabinet.

Further, with the expected regulatory approval and commercial launch of the new TwinStar cabinet in the fourth quarter, we expect its sales to begin to offset the drag from lower sales of the WMS Blade cabinet which, as we have described, is one of the older cabinets on the market when looking at the competitive set.

Table products increased slightly on a sequential basis as the increase in the installed base of shufflers and proprietary table games offset a decline in the number of shufflers sold.

With our continued focus on driving an increase in the installed base of units to increase recurring revenue, we expect to benefit in the future from the introduction of new products demonstrated at G2E.

On a reported basis, reflecting the higher revenue from the addition of Bally and the cost savings realized through the implementation of our integration initiatives, attributable EBITDA increased by $145 million to $205 million and our AEBITDA margin improved by almost one-third to 48%.

SG&A expense increased primarily as a result of the inclusion of Bally, partially offset by the cost savings realized from our integration efforts. R&D expense at over 9% of gaming revenue reflect our ongoing commitments to innovation and product development.

Revenue in the lottery segment totaled $191 million, inclusive of an unfavorable $11 million foreign currency impact, representing about 6% decline on a constant-currency basis. Lottery revenue was about flat on a quarterly sequential basis.

Services revenue was down $3 million year over year, primarily reflecting a $2 million of unfavorable currency impact and the impact of a cessation of service revenue associated with the previously announced loss of the Colorado Lottery Systems contract, coupled with one of our contracts in China ending June 30, 2015.

As of October 1, we have reached the anniversary of the Colorado contract and the year-over-year impact is now behind us. During the quarter, we signed an extension of our contract with Iowa that goes through June 2019 and extended both the Maryland Lottery systems and loyalty contracts for an additional year until June 2017.

Most significantly, as Gavin noted, we recently won the contract for the Arizona Integrated Lottery System to place - displacing an incumbent competitor. The Arizona Lottery had total lottery retail sales of $750 million in their most recent fiscal year ended June 2015 and we expect to begin operation in the third quarter of 2016.

Lottery product sales were flat on a quarterly sequential basis and down $25 million year over year, compared to the record level of a year ago, inclusive of a $5 million unfavorable currency impact.

Product sales of lottery hardware and software are subject to timing of demand and revenue can be lumpy quarter to quarter, similar to gaming machine and gaming system sales revenue. The lower revenue in 2015 principally reflects the lower level of international lottery bid activity and demand, not a loss of contracts to competitors.

As you can tell from our recent press releases, bidding activity has increased and we anticipate this improvement will lead to increased revenue in 2016.

Instant game revenue grew $2 million or 2% on a quarterly sequential basis and increased $7 million on a year-over-year basis, inclusive of a $4 million unfavorable impact of foreign currency translation. On a constant-currency basis, revenue would have been up 8% year over year.

This increase largely reflects an increase in license and player loyalty revenue, as well as higher instant game revenue from customers with price per unit contracts, partially offset by a slight decline in revenue from customers with participation contracts. Our U.S. lottery revenue increased 9%, about in line with the increase in U.S.

retail sales of our lottery instant games customers. We continue to see strong renewal of lottery contracts based on customer satisfaction, including the recent agreement to extend our instant games contract with the Ohio Lottery for another two years, with four additional two-year extension options, making this a potential 10-year opportunity.

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

Despite the $21 million or 10% decline in revenue, operating income in the lottery segment was essentially flat year over year, benefiting from a more profitable mix of revenue, growth in the more attractive instant games business and a decline in lower margin product sales revenue, as well as lower operating expenses.

AEBITDA for this segment declined 10% compared to the prior year, largely reflecting lower JV EBITDA. Turning to our interactive segment, revenue on a quarterly sequential basis was flat.

Growth in real money gaming was offset by a slight decline in social gaming revenue, reflecting lower marketing support as we updated and upgraded the original Jackpot Party Social Casino. The relaunch of version 2.0 occurred in early October and with marketing returning to a more normal level, early results are promising.

Year over year, revenue grew 11% compared to the pro forma results of the prior-year quarter. The real money gaming revenue growth reflects the ramp-up in revenues from both new sites going live and new games that grow revenue from existing customers.

The number of average daily users was flat on a quarterly sequential basis, while the monthly active users and ARPDAU decreased slightly on a quarterly sequential basis, reflecting the pause in marketing.

As a result of the higher revenue and improved scale within our legacy interactive business, operating income increased about $3 million from the prior-year quarter and AEBITDA increased 67% to $13 million. In summary, during the third quarter we continued to build our foundation.

Based on the new products and plans underway, we expect to achieve progress in driving organic growth and further improving our margin.

This is expected to translate into higher AEBITDA in the fourth quarter, laying a path for additional progress and cash flow in 2016 and beyond and with the higher cash flow, we anticipate continuing to prioritize leverage reduction as a use of free cash flow. And now, some closing comments from Gavin..

Thank you, Scott. Three quarters into the merger and integration of Bally with Scientific Games, we believe our businesses are now largely beginning to perform as planned. The one exception is the dual-screen video product line that was impacted by older cabinets.

The cabinet issue has been addressed and with regulatory approval expected near the end of this quarter, we're feeling good as we finish out 2015 and prepare to enter 2016. We're successfully bringing together all four companies and continuing to support our customers, as was clearly demonstrated at G2E and NASPL.

We're being driven by our mission statement. We're empowering our customers today by supporting our existing product lines and brands and for tomorrow by creating promising, exciting products for the future, fueled by the passion of our talented people and our innovation-focused culture.

Today, about 40% of our teams spanning the globe are focused on innovation. And the feedbacks from our customers to our approach and our products has been highly favorable. Our integration is going extremely well and we're working together as one company. Morale is high.

The supply chain issues that occurred with the closing of the WMS Waukegan plant have been addressed. I also want to emphasize that our management team is being extremely disciplined in choosing which opportunities to pursue and invest in.

This is a team that will not chase revenues or consider revenue opportunities that do not improve cash flows and offer attractive financial returns. We have an exceptionally diverse revenue base, with more than 60% of our revenues comprised of high-margin business that is sticky and recurring in nature.

This is a significant factor that provides a high degree of stability to support our cash flow and the flexibility to pursue only those opportunities that offer appropriate financial returns. Now let me open up the call for questions..

[Operator Instructions]. Our first question comes from the line of Barry Jonas from Bank of America..

Just a couple of questions. For product sales, it is clear that the quarter was impacted by your market share, given maybe the age of some of the products available for sale, but also maybe the challenges in the overall market.

How should we think about the interplay between these two factors for you in the quarter?.

We don't know what the whole quarter looks like yet because I think we're the first to report, effectively. So, I don't think we're aware of anything where we majorly lost our - we dropped our ship share much beyond what we expected. So, I think that's the best way to look at it..

Okay..

Did that answer your question? From what our salespeople tell us, we aren't aware of any - anyone that has really pulled away or changed what everyone has been expecting in relation to ship share..

Got it, so you think it's mostly a function of the market, then?.

Yes and also, as we have said many times, we have been - customers were waiting to see what we had at G2E which was near the end of the quarter and I think by showing them that we were supporting all our existing products and that we were innovating for the future, we pleased them and I think that may have had a little bit of an overhang on our prior quarters and this quarter's product sales..

Right, I think last quarter you talked about some of those integration issues.

Is it fair to say, then, post G2E, most of that has passed?.

Yes, I think during the quarter we focused on that. We continuously improved. It was the beginning of the quarter in July that we did our last layoff. After that, there was a great amount of relief in the Company. Okay, people were on the team.

And that enabled everyone to really get focused on fixing the issues that our customers were facing and a lot of them related to the closure of the Waukegan plant.

I'm delighted that right now we're not losing any orders due to - every order that gets entered in the system is getting shipped on time and we continue to fix that as we continue to roll out our ERP across all our Company.

So, I think it's fair to say that we have made substantial advancements in the integration and improvements in our customer service levels..

Just a question on lottery, you had a nice win in Arizona.

Do you think maybe competitor pricing could potentially get a little more competitive in response to you winning mostly on technology here?.

Well, it depends on the bid. The bid has a certain amount of weighting for technology, for other capabilities, for services and then for price. So, I think - 30% of the price was the determinant in Arizona? I can't recall..

I think that's right..

If it still 30%, then it is still 30% and I don't see that being the case, unless the bid requires 70% to be price based.

But we're seeing more and more people expect that - as you move - everyone wants to innovate and everyone wants to have the best system in place and if you are making a decision that lasts for 10 years, I think you try to have a good balance between technology and price, so I am hoping I don't see that to be the case..

Yes and I guess I would just add, Gavin, in your closing remarks you talked about making sure that we're only bidding on business that is going to get us a fair return in cash flow on what we're required to invest and we have - especially after the additional debt that we took on in the Bally acquisition, we have raised the bar a bit on what our expectations are for those returns..

Next question comes from David Katz from Telsey Advisory Group..

One of the big questions I assume we're all trying to get to is what a normalized free cash generation run rate can look like. And as I look at the progress that you have made in terms of synergies and getting the charges out of the way, et cetera, in some respects it can be a double-edged sword.

As we look forward the next several quarters, beyond just improving the business and selling some more games and perhaps praying for a little bit of market improvement, what other levers are left for you to pull to accelerate the free cash generation? And then, Scott, just one detail.

You gave a full year CapEx number and I missed it, so if I could have that again. Thanks..

Okay, I will start with the second question. The full year CapEx number is $310 million to $320 million.

And relative to your earlier question, we're implementing a hundred and - I'm sorry, $200 million of Bally-based synergies this year, but we're not realizing all of that, a fair portion that we're realizing this year, so there will be some more of that that gets realized next year that should help with improving free cash flow.

Plus we have an additional $35 million that is being implemented in year two for the Bally acquisition, a fair portion of that will be realized, but not all in 2016, so there will be some that isn't really realized until 2017.

We do have some assets that - some facility assets that we have for sale that we're looking to move on that will generate some free cash flow and we're looking at what makes up our business and what is core to our business and evaluating that. So, there is some additional levers that we would get from pursuing those types of alternatives.

I also mentioned, I think it was in the press release, that now that we have all of the manufacturing under one roof, we're looking to become more efficient in our process there which should result in increased turnover of inventory and less investment of working capital and inventory that would generate some cash flow..

If I can just follow that up.

In terms of the property that you have out there for sale that is excess, anything you can share in terms of its listed value or order of magnitude in terms of what that would be and timing wise when that should occur?.

Yes, you'll see we filed our Q and I am sure you haven't read it at this point, but we did close on the Reno facility earlier this month and so that will be cash flow that we will have received in the December quarter.

The other facility that we have for sale currently is our Waukegan facility and that we still have on the market at this point and then we're planning a consolidation of our facilities in Sydney and as we get closer to that happening in 2016, we have a facility that we own there that we will also list on the market..

Our next question comes from the line of Mike Malouf from Craig-Hallum Capital Group..

This is Ross Licero on for Mike. Thanks for taking my question, guys. Just you said on the gaming system side, you had a bunch of installs pushed out a quarter or two. Just wanted to see if you could give me a little more color around that.

How many systems and do you expect them to be in Q4 or are they going to be pushed out even further than that?.

I think the majority of them get recognized in Q4, but there will be some that get pushed out. And it is not installation; it is recognition of when we can actually account for the revenues..

Yes, this business has complex revenue recognition standards because there is multi-deliverable elements that are part of the contract and the system has to be accepted for some of the revenue to be recognized and that's dependent upon our customers signing a document acknowledging that..

Okay and did you quantify that? The - pushouts?.

We didn't say what the dollar amount was specifically, but we said that it was down $18 million from the prior quarter, sequential quarter..

Okay, so I guess had these pushouts not occurred, would you guys be flat? Is that what we should assume?.

In terms of revenue? Yes, we would have been close, yes..

Next question comes from James Kayler from Bank of America..

A lot of my questions have been answered. I guess on the gaming ops side, can you just talk more broadly about what your customers are saying? It seems that the sort of shrinking of the base on the premium side is slowing down.

Do you think that we're getting pretty close to a point where that could actually stabilize and then potentially grow?.

I hope so, James. I think that you are absolutely right, that it is certainly slowing down and as you show great new products and customers see the benefits of them, we're hoping to see some growth there.

Clearly as some customers, major customers, clear up their other issues, we hope to see them reinvesting in their properties and this is a really easy, simple way to do it..

I guess related, obviously we were at G2E and I think universally people thought that the product lineup looked very good.

Maybe, Gavin, can you just lay out for us how to think about the various bigger-ticket items and how they are going to roll out in terms of timing from an approval perspective, as well as a production ramp perspective? How should we think about that over the fourth quarter and into 2016?.

Okay, so I guess the first point and if we look at each of the different categories, with systems, systems as we mentioned are lumpy. We have a lot of great innovations that we keep doing in that area. We invest in that part of the business like no one else is. We really do believe in it.

And you're going to continue to see improvements come and you're going to continue to see us build upon our base and that is just a hard one to model on a quarterly by quarterly, but you can see the long-term trends and growth there.

And really from an approval perspective, the majority of the approvals are on hand or being achieved as we require them. In relation to gaming sales, clearly Dualos and TwinStar were the key products for us there.

It was important for us to show our customers who were asking questions, as were our competitors, whether or not we were going to support all our brands. We kept clearly saying that we were and we showed that we're at G2E.

So if you own an existing Bally, WMS, Shuffle, Barcrest cabinet, you saw lots of product, a lot of which is already approved, to support that product going forward. But I guess most importantly in the dual-screen video space, you saw TwinStar and the new ArgOS operating system.

We anticipate those products to be approved in the next few weeks, ideally the beginning of December and the initial product build for the month of December has already been sold. So I think you get into Q1 and you start getting into a normal - normalized pattern there. I don't anticipate to have any - ramp-up takes about a quarter.

I don't know if there is going to be any impediments to us selling more by virtue of that. Dualos, we're already into our second - well, our first quarter - our first full quarter, I should say, of sales and that's been vitally important for the Australasian market, as well as the international European markets.

We introduced that to the European markets. I guess one of the key differentiators between that product and TwinStar is that product takes coin and that's really important around the world where you have EUR1 and EUR2. It also actually runs on the existing operating system. So, I see that product as beginning to ramp up for us already.

So from a product sales perspective, I think that's - we're doing okay there and I'm excited by that and I think that was one of the key takeaways for us from the show. Gaming operations, people say you spend a lot of CapEx on these things.

Can you support them? And I think what we showed on our key cabinet forms that we're - have got support titles for each of those and that means that they can be supported and when the performance begins to drop, we can immediately implement those new titles. Again, a lot of them are already approved.

Gamescape which was the one where you put your hand in front of The Simpsons machine and everyone seemed to be focused around, that won't be available until mid-next year and that was never planned to be anywhere until mid-next year, but it just shows the breadth.

With the third product on the Dragon Spin circular cabinet and all of that, we have got a lot of great depth in that sector. When it comes to tables, we continue to invest in our tables and particularly our electronic tables. We showed a lot of our new versions there for the North American and Asian and European markets.

We showed a community-style table game, electronic table game, so we're excited by that and we continue to do well and most of them are already approved, so the table side of it, we keep going ahead.

When it comes to - well, we had lottery products there, but the lottery systems get built as they get sold and again, we're starting to utilize loyalty across the whole portfolio. From an interactive perspective, we made it very clear that our products continue to do well.

In the casino social slots market, I see that the best content seems to do the best. Unless you were a first mover, the companies that have done - that are doing the best at the moment are the ones that are getting into their portfolio of product and monetizing it in the social space.

We're just scraping the surface there and it was important that we upgraded the Jackpot Party platform to facilitate that and subsequently, I believe, we have also launched our Hot Shot Casino. So, that one all goes well in there.

And for online or for real money gaming which particularly in Europe and places like that is important, you are starting to see a ramp-up because previously we redoing the connections to the different B2C sites. Now they are in place, so it is just a question of offering our content on our RGS server and allowing players to play off that.

So I think I have covered everything there. But the whole point of G2E, from the very beginning of putting these companies together, to go back to David's question, it has taken three quarters which is pretty quick, I think, of getting all these bullet points in place and G2E was like a coming-out parade for us.

I think we're now ready to really start driving the business and showing the benefits of everything we can do. And even without - even with those clouds already over us, we're already showing that one plus one is greater than two.

So, whilst the financial results aren't what we would have loved, we believe we have all the necessary bricks in place now to really move forward with this joint - well, with Scientific Games..

I will give one for Scott, real quick. Just to clarify, Scott, you mentioned when talking about the fourth quarter that you expect continued debt paydown. We all know that it is a big coupon quarter for the bonds. I think you mentioned $60 million sequential improvement.

So can you, A, just confirm that's what you said and B, are there one-time things in there that you - where you are going to get proceeds where you can pay down debt with or I assume this also reflects higher EBITDA sequentially?.

Yes, I will confirm what I said. You said it correctly. And I will confirm that the things that you are asking relative to growth in EBITDA and are there some other things in there? Yes. As an example, as I said, the Reno facility was sold and will generate some cash flow for us in the quarter..

Next question comes from Todd Eilers from Eilers Research..

Just had a follow-up on the systems discussion with some of the recognition of some of the installs getting delayed or pushed out. Scott, I thought I heard you say or make a comment regarding for the full year you still expected low single-digit growth for systems.

Were you referring to calendar 2015 or was that a statement maybe for calendar 2016?.

I think it was meant to be a future statement..

And then on the lottery side, obviously the Arizona systems contract, a nice new win for you guys. You mentioned the timing.

Can you give us a sense for how much CapEx might be related to that project and when would you expect to record that?.

I think we have not specifically talked about dollar amounts, other than to say some of the bids that are out there have a high amount of capital, some of them have a mid amount of capital and some of them have a low amount of capital and Arizona would fall into the mid amount of capital requirement. And it would be 2016.

I think there is a slight - there is a couple million that is actually some development costs for this year in the fourth quarter, but the preponderance of it will be next year..

And then on the game sales side, it looked like you guys started to recognize a small amount of the Oregon VLT order with Bally.

How should we think about the remainder of that contract rollout?.

Yes, I think it will be Q4, Q1 and maybe a dribble in Q2..

Okay. And then, I guess, last question I had, I believe there is some activity internationally on the lottery side with respect to Brazil and the privatization of the instant ticket business there.

Can you maybe talk - Gavin, can you maybe talk about that as an opportunity and how should we think about that opportunity, I guess, as we look forward for that business?.

We're certainly looking forward to that business and we're working very hard on it. I don't know if I can give you much more about it at the moment. Brazil is obviously - we continue to look all around the world at opportunities that make sense.

And as I mentioned, we're only going to do opportunities that make financial sense to the Company in a fiscally responsible manner and Brazil clearly is one of those great opportunities.

So, it is still a bit early and we're still working out the best way to approach that, but it is certainly something that is, I guess, at the top of our business development list..

Next question comes from Carlo Santarelli from Deutsche Bank..

So, when you guys talk about and frame some of the write-downs, could you maybe provide a little bit more maybe color around what specifically were the aspects? And I know obviously you mentioned some of the participation-based games. And at some point here, I would think it would start to get easier on you with respect to the WAP declines.

Are you seeing and/or hearing anything from customers that would lead you to believe that they're getting a little bit more comfortable, at least, with their percentage of participation product on floors today?.

I will answer the latter part of the question. I think that, yes, you are hearing - we're not seeing the same level of removals as we have seen in the past. Clearly, customers continue to look at their floors and continually companies like ourselves continue to invest in these great products that drive incremental revenues, we believe.

So, there's going to be a balance and we have definitely seen a slowing in the removal. So that goes well and we hope to see a normalization to the kind of levels we're in now. It is a competitive market, though. So, we continue to focus on it and I think at G2E we showed that we have some pretty compelling products in that space..

Carlo, relative to the write-downs themselves, there is not one factor that I can point to that said this is why we needed to do a two-step evaluation of the goodwill or the - look at the intangibles.

It is more what we have experienced over the last several quarters and specifically what we saw happening within the third quarter with both us and our customers that let us to believe that there were indicators out there that required us to do the first step and then the second step analysis..

And then, I guess, in your case obviously from a Scientific Games perspective, it is Bally and WMS, but could we read into it that maybe some of the predecessor company acquisitions also will factor into that? Or if you could maybe try and bucket the $535 million to any degree that you would be able to do so or is that - too difficult?.

No, no. We have talked about it in our public documents, the various reporting units that we have and one of the reporting units is the SG gaming reporting unit that consists solely of gaming machine product sales and gaming operations revenues.

And so, it is the goodwill that got allocated to that reporting unit is the one that we're writing down by the $535 million..

And then, if I could, just one follow-up.

In terms of the write-down, how do you think about the future cash flows from the businesses that you have had to take the goodwill impairment for? Is that something that we need to think about as you have framed the outlook for free cash flow from the operating business?.

As part of our analysis, we use both an income approach and a market approach to determining what the fair value of the businesses were. And that's a factor in what the ultimate calculations are based off of. We used a third-party valuation firm, the same one that we had used for the original purchase price allocations as a part of the process..

Next question comes from Robert Shore from Wells Fargo..

I just had a quick question on the lottery.

Given the competitive procurement process for the Italian lotto concession, can you maybe comment on your potential interest in the contract or the process at all?.

Obviously, it is one of the big procurements that is taking place around the world and we're looking at it. I don't know if I can say much more than that. We obviously have to look at it.

We look at everything that is potentially of value and accretive to our shareholders, but again we will take a very responsible approach to that, taking into account everything else we have got going on in Italy..

And they still haven't issued the RFP, right?.

They haven't issued anything..

Next question comes from Dan Fuss from Morgan Stanley..

Could we get a little color on the interactive decline quarter over quarter? It seemed like social gaming was down and the monthly active users were down.

What drove that?.

We had a redo of the Jackpot Party Social Casino site that was underway and so we didn't put - let's say we didn't spend as much marketing dollars on the existing system and we went live with the 2.0 version of that software at the beginning of October and reinstated marketing to its more normal levels and so our expectation is we took a pause as we were making - adding capabilities, capacity, different user interface for the site..

So is the expectation that we will be returning to quarter-over quarter growth here with the rollout of the site?.

Yes, absolutely. That is the expectation..

Just on the lottery side, it just seemed that there was a negative margin or a decline in margins related to the instant games that was pretty material. Costs were up there $8 million year over year.

Was there anything driving that in particular?.

I don't think there was any one item that drove that. It is really mix of what's being ordered by customers. Often times, there is what we call the deliverables for the base bid and then there is add-on options and features and functionality.

And I think this last quarter - and the latter tend to have a little bit higher margin to them and I think the last quarter we didn't see quite as many options being selected by the customer base..

And then just on the table leasing side, that seemed to actually have a very strong quarter, significantly quarter over quarter. Was there anything - far outpacing the growth in the installed base of products.

What was the driver of that?.

Look, I think we have a very strong product offering in that place. We have a very strong team pushing it and it is a product that I personally believe strongly in for the future. And we did a lot of - we continue to do very well in that space. Obviously, New York was great when they introduced games of skill effectively, that's what they call it.

And we have the only real offerings in that space that make any sense, so that was a good increase for us. But that's one product line that is way ahead of expectations..

And just lastly, with the potential for these future facility sales, is there any ballpark number that we should be using, roughly, going forward, when we think about potential proceeds from them? Thanks..

They are in the $10 million to $20 million to $25 million range each, with Reno being a little bit lower than that low end..

Next question comes from the line of Dennis Farrell from Wells Fargo Securities..

Scott, in the press release you talked about being more efficient on the working capital side of the business and I was wondering if you could provide more clarity about that and maybe give us some guidance about where you think - what type of usage that will be next year?.

I think, as I have said, the biggest opportunity for us right now is with inventory and reducing the amount of inventory on hand.

The gentleman that runs our manufacturing and sourcing effort has an objective to meaningfully increase the number of inventory turns that while we're able to achieve and this is something that obviously doesn't happen overnight, but a lot of focus and effort on making sure that we're as efficient as possible with our purchasing function, with our moving inventory throughout the manufacturing facility..

Okay and then on the CapEx front, do you expect next year to be a larger CapEx figure than this year or is it probably about a stable number?.

We're right in the throes of our budgeting process right now, so I am not able to definitively talk about where that number is going to end up because we haven't determined where we want that number to end up. But I don't think you're going to see a significant increase or a significant decrease in that number.

There should be - there will still continue to be some capital that is being spent to achieve the integration savings, mostly related to the Oracle implementation within the Bally framework there..

Okay and my last question is for Gavin. Gavin, as you worked through your integration plans, you drove strong margin growth in a challenging revenue environment.

Did the cost-reduction plan have a greater-than-expected impact on revenues and can you get some of that revenues back going forward?.

I think you can. I think you clearly can. I don't think - I think if you were going to ever have to - if you look at - if you had a crystal ball and you wanted to do a deal like putting together WMS, Bally, Shuffle Master, Scientific Games, to do it in an environment where there isn't a lot of growth in the market is probably a good time to do it.

I think if we can show that our products drive incremental revenue and our products are innovative and future facing, then I think there is opportunities to capture some revenue in the future..

Our final question will come from Chad Beynon from Macquarie..

A couple quick ones. Gavin, another crystal ball question for you on the 2016 replacement expectations, I guess market wide.

Given that we've seen some pretty impressive top and bottom line results from most of your customers year to date and they're probably going through the same budget processes that you're going through, what does your crystal ball say just in terms of does this translate to more overall replacement units domestically? Thanks..

If I had a crystal ball, it would be fabulous. We don't anticipate - we're planning on relatively flat year on year. We plan cautiously. We hope that by virtue - we're very encouraged by the strength of the regional and the other operators and we see great strength in some of the Native American markets.

So, we hope that enables some of these newer products to be put on floors and there is more replacement, but that's not the way we plan our business. All our plans from the very beginning have been based on very conservative numbers. But any help you guys can give us in encouraging our customers to invest more would be greatly appreciated..

And then, Scott, just one on the synergies, so you said $194 million run rate at the end of 3Q and you are expecting $10 million in the fourth quarter. But you noted in one of your responses that some of the bridge between $200 million and $235 million could come beyond 2016.

Could you frame this out a little bit? Is that mainly a question of scale or was there something else that I'm not thinking of that would push some of the synergies beyond 2016?.

Well, we're going to implement $35 million of additional Bally synergies in 2016, but they are not all being implemented on day one of 2016.

So they get implemented throughout the year, so what gets realized in the P&L is a portion of the $35 million that gets implemented and then there will be an incremental realization in 2017 for things that get implemented part year in 2016..

I would now like to turn the call back over to Mr. Isaacs for closing remarks..

Okay, thank you again for joining us this afternoon and we look forward to providing you with an update on our progress and results at the end of February when we report our fourth quarter and our full year results. Thank you..

Thank you for calling..