Scientific Games Corporation
Q2 2020 Earnings Call Transcript

Published: 24 Jul 2020

[Operator:]

Good afternoon, ladies and gentlemen. And welcome to the Scientific Games 2020 Second Quarter Investor Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this event is being recorded. Now, let me turn the call over to Trent Kruse, Senior Vice President of Investor Relations for Scientific Games. Mr. Kruse, you may begin.

[Trent Kruse:]

Thank you, operator, and good afternoon, everyone. During today’s call, we will discuss our second quarter 2020 results and operating performance, followed by a question-and-answer period. With me this afternoon are Barry Cottle and Mike Eklund. Our call today will contain statements that include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call. For information regarding these risks and uncertainties, please refer to our earnings release issued earlier this afternoon, the materials relating to this call posted on our website and our filings with the SEC. We also will discuss certain non-GAAP financial measures. A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings press release, as well as in the Investors section on our website. As a reminder, this conference call is being recorded. A replay of this webcast and accompanying materials will be archived in the Investors section of our website at scientificgames.com. Also, supplemental reference slides are available on our Investor Relations website. While management will not be speaking directly to the slides. These slides are meant to facilitate your review of the company’s results and to be used as a reference document following the call. Now, let me turn the call over to Barry. Barry?

[Barry Cottle:]

Thanks, Trent. Good afternoon, everyone, and thanks for joining us. I want to start by recognizing my colleagues. I am so proud of the way our team has stepped up to help each other, our partners and our company. We are navigating the current environment incredibly well as evidenced by our strong cost containment and cash management, which allowed us to significantly outperform our cash flow expectations for the quarter. This better-than-expected performance is a testament to our team’s ability to effectively manage our business in the short-term, while also setting ourselves up for success as the economy begins to reopen. We are very aware that there are still many unknowns in the coming months, and therefore, will be cautious in how we think about bringing cost back to our business. Ultimately, though, we are optimistic in our outlook for the rest of 2020 and beyond. We have structured the business to operate effectively through any environment as we have demonstrated by our ability to continue to drive results across our business, while operating through this unprecedented situation. But we have also positioned ourselves to emerge stronger, more nimble and ready to win. Today, we will share, first, that we are in a very solid financial position, including over $1.1 billion in liquidity following our recent debt offering. Second, the actions that we are continue to take to effectively manage our portfolio of assets and best position ourselves for the future. And finally, demonstrate the strength and true competitive advantage of our diverse business that has allowed us to deliver meaningful results throughout the crisis and had us positioned to drive strong results as we look ahead. We are exiting this crisis with improved liquidity and enhanced product line, an incredible team and ready to pursue numerous growth opportunities we have in front of us across all of our segments. Now before I turn the call over to Mike Eklund, I wanted to take a minute to welcome him to our team. We are very fortunate to have Mike on Board. He brings a wealth of experience in financial and operational leadership and a passion for aligning all aspects of the company’s finance and operations with its core business model. Mike has just jumped right in and identified several opportunities for us to continue to enhance our operations and deliver improved cash flow and profitability. Following Mike’s comments, I will come back to discuss how we are looking ahead to drive strong results across our business. Mike?

[Mike Eklund:]

Hey. Thanks, Barry, and good afternoon, everyone. It’s great to be on the call today. It’s interesting as I reflect back on my decision to join the Scientific Games team, I was certainly excited at the time about the multiple growth drivers across the many business units we have here. I was also excited about the clear opportunity to enhance operational effectiveness and the many things that we do and if you do those things right, it should drive higher margins and cash flow, and I could see that from the outside looking in. And ultimately, if you do all those things and you do them well, we should be able to create some real value for our shareholders and unlock some potential, at least that I see in the business. What I can tell you and I am happy to report as 45 days into the role, I am more convinced than ever that I made a great decision to join the company and I could not be more excited to be here. For some of you that may know me on the phone and from a prior life, it’s probably no secret that this kind of investment thesis is exactly what I like to do and exactly what I have fun doing. And as you might imagine right away, my focus will be on a couple of key things. Number one, delivering predictable results with everything we do. Number two is filling a set of balanced priorities across liquidity growth and profitability. Number three, achieving operational excellence across the full cost structure of the firm and then, of course, de-levering. With that, I would now like to turn to four key headlines that I saw for Q2 as I reflected on the quarter, after that I will give a brief update on the financial and business unit results. With that, let’s jump right in and start with the headlines for Q2. First with liquidity, we have a strong liquidity position with $1.1 billion in available liquidity following our July refinancing, which we topped up by $200 million or so as all of you know. We also exceeded the May guidance we have provided for Q2, delivering a net cash outflow of minus $16 million versus guidance in a range of negative $70 million to $90 million. So really nice performance by the team there. When all was said and done, our team has generated plus $5 million of positive free cash flow in an otherwise extremely challenging operating environment. So it’s a great job by the team and we could not be more appreciative of the work that they have done. Now the second highlight, we completed the refinancing of our notes in 2021 as well. As a result, we have no significant maturities due until 2024. We are pleased with our timing in the market. On that refinancing, I think many of you that are on the phone for your support in getting it done. In fact, the widespread support that I saw for Scientific Games was both encouraging and great to see, and again, I just want to tell you thank you for that. Third highlight is the breadth of the portfolio which really helped us balance our results for the quarter. While we all know the Gaming business was materially impacted by the widespread casino closures during Q2, the stay-at-home orders actually have the opposite effect by generating material upside for our SciPlay business and within the Digital business on the iGaming side in particular again material upside. Great to see the balance of the portfolio working to our advantage in this tough market. Our Lottery business also proved its resiliency and held its own for the quarter. Of course, we got off to a slow March and April, but recovered really nicely in May and June, and we see that momentum carrying over into Q3 and Q4, and we are comfortable with where our Lottery business is going into the second half of the year. The fourth headline and the final headline, our teams reduced $150 million of cash expenses in the quarter. As we worked through a very difficult business environment, our teams were able to reexamine all aspects of the business. Importantly, we now expect a meaningful portion of these cost measures to result in permanent savings in 2021 and beyond as the teams has set to rethink the way we do business now and in the long-term. Now, let’s look at our quarterly P&L results. The impact of COVID-19 disruptions that resulted in temporary closures of casinos globally and a lower level of Lottery ticket sales drove a 36% decline in our revenues to $539 million. The lower revenue resulted in AEBITDA declining to $121 million, which compares to $335 million in the prior year. The $121 million of AEBITDA did include a $33 million charge in our Gaming segment related to receivables and inventory valuation and you will see that in our disclosures. In response to the business environment, we reduced our operating expenses, as you have seen, by $122 million or 17% to $595 million. We will continue our focus on expense controls and reductions and will only layer those costs back into the business as we see revenue ramping back up. Our net loss for the quarter was $198 million or $2.15 per share versus $75 million or $0.83 per share in the prior period year. Turning to our balance sheet and cash flows, we delivered $52 million in cash flow from operations, and as I mentioned earlier, generated $5 million in free cash flow. Our cash flow upside relative to our May guidance was primarily due to better than expected collection and stronger performance in some of our business segments that we have already talked about. Our teams did an outstanding job managing the things that they largely control and delivered a $32 million source of cash from working capital improvements in the quarter. In addition, we eliminated all non-essential expenses, implemented workforce cost savings measures and deferred all non-critical CapEx. From CapEx it’s important to say and it was important for me as the new guy coming in, we did that with an eye towards continuing to invest in our future growth and efficiency opportunities. We will continue to proactively assess ways to streamline our cost structure and make Scientific Games as efficient as possible. Our CapEx spend this quarter was $39 million, compared to $65 million last year. For 2020, we are now planning for capital expenditures to be in the range of $210 million to $240 million or $90 million below our original guidance for 2020. With all of these actions, our liquidity, as we have talked about is over $1.1 billion following our recent notes offering. Finally, we ended the quarter with a net debt leverage ratio of 8.6, and as a reminder, we previously amended our credit agreement to obtain relief on the net first lien leverage ratio covenant through and including Q1 2021. Looking ahead, we are committed to significantly reducing our debt leverage ratio, delivering sustainable profitable growth and generating strong cash flow. Now I will quickly turn to our business unit performance, starting with SciPlay. SciPlay revenue was up 41% to $166 million. While AEBITDA increased 80% to $60 million, driven by record KPIs across the Board. It was great to see the productivity dropping through to the bottomline in the SciPlay business for sure. Our Digital revenue increased 6% to $73 million, while AEBITDA increased 67%. Again, really nice productivity dropping through to the bottomline. We continue to win builds and stand up new customers in both Gaming and Sports and our U.S. iGaming revenue was up 135% in the second quarter demonstrating the significant growth potential we have in the U.S. market as it continues to ramp. Our Lottery business was down 10% to $290 million, while EBITDA was down only 6% to $97 million. The margin upside was driven by increased penetration of our higher margin SGEP revenue and lower expenses. In addition, in the last four-week period, domestic Instant Lottery Ticket sales are turning up over 20% from the prior year. Finally, we still expect to launch the Instant Ticket Lottery in Brazil later this year. In Gaming our results were clearly impacted by global casino closures, but our team has positioned out business well, stay focused on our largest profit opportunities, significantly streamline the cost structure and are continuing to innovate for our customers through contactless and cashless solutions where we can leverage our industry leading systems business in over 500,000 connected slots to drive meaningful revenue in the future. To wrap it all up, as we said before, we have over $1.1 billion in liquidity and plenty of runway in our debt maturity given our recent refinancing. We have right-sized the business appropriately to handle the current environment, while continuing to successfully position ourselves for the future. The teams are maintaining a critical focus on controlling expenses and we will only add that cost to the business as we -- as the results warrant. I feel optimistic that the lessons we have learned and the actions we have implemented while navigating this unprecedented environment will enable us to emerge as a more efficient business delivering increased cash flow that will allow us to achieve all the potential I see in the space. Again, it’s great to speak with all of you today. I couldn’t be any more excited to be at Scientific Games and working with Barry and the talented team of leaders that he’s put together. Together, we will for sure unlock the true potential of Scientific Games. With that, let me turn it back over to Barry. Barry?

[Barry Cottle:]

Thanks, Mike. As you heard, we have and will continue to effectively manage through this crisis, but would also focus on current and long-term success across our business. Our focus remains on building a better, stronger and more efficient business for the future, and we are committed to providing market leading products and services to our customers across Gaming, Lottery and Sports betting both in retail and digital. Our teams are clear on what needs to be done when today and in the future by delivering best-in-class products, focusing our strategies and accelerating our actions toward a more nimble and effective Scientific Games. In Gaming, we are controlling what we can control by reducing our cost structure to create a leaner and more efficient organization, while also building out strategic long-term growth opportunities to drive greater share of wallet today and as we continue to emerge from the current crisis. The team is focused on several areas including North American premium Gaming operations in North America and outright sales segments and commercializing products to innovate for our customers to drive operational efficiencies and provide significant revenue opportunities. For premium Gaming operations, the team is working to grow the segment with a focus on driving commercial excellence with our top franchises, including the number one WAP game in the market, Dancing Drums Explosion. To expand placement opportunities with Dancing Drums Explosion, customers may now select between three different cabinets, which includes the TwinStar V75, TwinStar Wave XL and now TwinStar J43. To drive replacement sales within the North American sales segment, the team is focused on developing core products that will deliver proven content and competitive pricing with affordable hardware options. The recently launched TwinStar Matrix and TwinStar 5 Reel Mechanical had strong constant roadmaps for both for-sale and Gaming operations segments. We are bringing a number of classic titles a number of classic titles forward to build customer competence around our content portfolio while also providing flexible pricing options for our customers. We have also accelerated technology and products across cashless and contactless solutions that are gaining significant traction in the market as a result of COVID-19. Taking a mobile-first approach, the unified wallet product is powering a cashless gaming experience by giving players the power to instantly access funds to play slots and tables through a mobile app. Cashless solutions will help keep both team members and guests safe and it’s also cost effective for casino operators. We have also developed the social distancing and automated game sanitation modules to support our customers by automatically enforcing social distancing among slot players, allowing players the access to reserve their favorite game during their visit and eliminating the manual task of searching for games that need to be sanitized by automatically identifying these games. These solutions are creating significant revenue opportunities for us and solving problems for our customers. In addition, the pipeline and interest for the electronic table games segment remains strong. Sales have more than doubled in the past quarter and the order pipeline has seen a 3x demand increase since March. Quartz Hybrid launches in Q3 to further enhance the player experience within this product line. Finally, the team continues to drive organizational improvement, reduce our cost structure and we are excited to have recently welcomed Melissa price as our new Senior Vice President of Global Gaming Operations as we continue to attract and retain the best talent in the industry. In our Lottery group, we are seeing significant improvement in performance in recent weeks as the U.S. Instant product sales are surging. In fact, the U.S. Lottery market is up over 20% for Instant Game retail sales in the most recent four-week period versus last year. We also continued to demonstrate an exceptional win rate on contract rebids, as evidenced by our recent renewals in multiple U.S. states and two recent internationally in Germany. As a reminder, following our elevation to the primary supplier in Connecticut, Scientific Games is now the primary supplier to all 10 of the top performing Instant Game lotteries in the world. Building on the momentum we have seen across our Instant Games business is the outstanding results we are seeing in our SGEP program. States on the SGEP program outpaced industry sales growth by over 40%. In fact, Ohio switched to the SGEP program in July 2019 and it’s seen a 13% increase in ticket sales in their first year. Five of the top 10 performing lotteries in the world are SGEP partners and we see continued opportunity to convert additional states to this program, where we provide a full Instant ticket category management program across product solutions, advanced logistics, retail optimization, and digital engagement. Speaking of digital within Lottery, our iLottery solution is continuing to deliver outstanding results with the Pennsylvania Lottery. As you know, our iLottery launch in Pennsylvania is the most commercially successful iLottery launch in North America to-date, delivering total sales of $1 billion in under two years and it’s now on track to deliver over $1 billion in sales annually. We continue to expect to see iLottery adoption accelerates across states and we are incredibly well-positioned to benefit from these rapidly increased adoption levels. In our Digital segment, we have significant momentum as we expect to announce another big partnership win in the very near future. We delivered four key launches over a four-week period in June, with two additional partners in the process of launch. This type of velocity demonstrates our significantly improved speed to market capabilities. We launched Betfred in Colorado, Sports for the NLO, the Dutch lottery, which is a takeaway from the competitor. FireKeepers in Michigan, the first tried to launch in the state, demonstrating our market leading position as the state begins operations and we re-launched Dancing Drums [ph] on an improved tech platform. I would note that Dancing Drums and the NLO win demonstrates the power of one SG and our longstanding partnerships with the World Lottery Association operators. As we look ahead, we will be watching sports with Golden Nugget in New Jersey and iGaming and sports with Golden Nugget in Pennsylvania and Michigan. And we are thrilled to support Golden Nugget as they look to significantly accelerate their Digital business across the U.S. especially in light of their public listing plans. And in Michigan alone, we are extremely well-positioned between Golden Nugget, FireKeepers, FanDuel, and others who we are discussing our full suite of products with, and we expect all operators in the state will utilize our Gaming content. As we have discussed before, the iGaming and Sports markets are expected to grow at incredible rates across the U.S., with iGaming expected to grow at a compound annual growth rate of over 65% and Sports expected to grow at an over 50% rate. In fact, if you take New Jersey iGaming revenue and project out to a mature U.S. iGaming market, it implies a $22 billion GGR opportunity in the U.S. for iGaming alone and our partner Golden Nugget is targeting 10% share of this over $20 billion market, further highlighting our vast potential. Looking at recent results across New Jersey, we have held 44% market share and our iGaming revenue in the state was up 1135 versus last year. With our unmatched OGS platform and market leading position in North America iGaming, no one is better positioned to take advantage of these expanding market opportunities where we can leverage our position to be the preeminent player in future iGaming expansion. And in Sports, we are set for a second half recovery and are seeing significant demand within returned events such as European soccer leagues and racing. In fact, we saw a 44% year-over-year increase in bets placed on Royal Ascot day one. Our technology helped pioneer Sports betting nearly 20 years ago and carries with it a platinum level reputation for scalability, reliability and robustness. We are the worldwide leader in delivering Sports technology and systems to regulated markets. We drive over 60% of the bets in the U.K., are leaders in many other regulated markets and are positioned to be the number one supplier in the U.S. market. And finally, with SciPlay, we produced record results in the second quarter. We delivered significant and compelling enhancements to economies, game quality and live ops across our portfolio that allowed us to truly capitalize on the surge we have seen in player demand. As a result, we generated record quarterly revenues of $166 million, up 40% to last year and our AEBITDA increased 80% to $60 million, also a quarterly record. ARPDAU increased 40% to $0.67, average monthly revenue per payer increased nearly 25% to $101.13 and payer conversion grew 80 basis points to 6.8%. All of these KPIs represent record levels and demonstrate the incredible position all of our games are in. In addition to these great results, we also acquired casual game developer, Come2Play during the second quarter, adding a new genre of evergreen casual games and an incredibly talented team to our portfolio immediately expands our market beyond social casino apps and enables us to leverage our unique technology and strategies to drive player engagement and grow revenue. We are excited about our record breaking results in the second quarter and for our future given the strength of our games and the untapped growth opportunities we have ahead of us. In closing, we are in a very solid financial position and we are continuing to effectively manage through this crisis and best position ourselves for the future. We are moving forward with improved liquidity and enhanced product pipeline and incredible team and we are ready to pursue that numerous growth opportunities we have in front of us across all of our divisions. Now before we turn to Q&A, I want to quickly address the recent filing from our shareholders of MacAndrews & Forbes. We expect to work cooperatively with MacAndrews & Forbes as we always have and they consider the sale of it SG shares. The sale consideration is at a very early stage and therefore we have no additional details to provide at this time and we will not be commenting further today. We will provide updates as appropriate and want to ensure that this process will not affect our business planning, decision making nor day-to-day management in any way whatsoever. The leadership team will continue to run the company and report to the Board. With that, we are happy to take your questions. Operator, could you please open the line for questions.

[Operator:]

[Operator Instructions] The first question is from John DeCree with Union Gaming. Please go ahead.

[John DeCree:]

Hi, Barry. Hi, Mike. Congratulations guys on the quarter. I don’t think we will see too many results from our sector that has positive AEBITDA -- EBITDA and free cash flow, so congratulations on that. And Mike, it seems like you picked a good time to start, so we welcome you to the Sci Games team.

[Mike Eklund:]

Thanks, John.

[Barry Cottle:]

Thanks, John.

[John DeCree:]

A lot of good stuff to talk about, Barry, so maybe I will just kind of start high level and kind of get your thoughts on long-term strategy as the world is just kind of changing on us in real time. So a number of your business segments are really shining here. You have highlighted most of them, I think, in your prepared remarks, whether it’s on Lottery results, demand for electronic tables, of course, SciPlay and iCasino. I wanted to get your view on kind of how sustainable some of this demand is on the other side of the pandemic, whatever that kind of new normal might look like, we are obviously experiencing a lot of growth right now. But what are your thoughts and views on the growth or at least this level of business demand sticking around whenever we get to hopefully the other side of this pandemic?

[Barry Cottle:]

Absolutely. Thanks, John. And I think there may be two questions there, so let me tackle first the SciPlay and Digital piece of this and then talk a little bit about kind of the note on long-term -- again comment on long-term strategy. So, first of all, as you noted, we certainly saw benefits in SciPlay and Digital from the stay-at-home dynamic. However, it’s important to note that we had our games at SciPlay in incredible shape going into that and also being on the forefront of Digital Gaming allowed us obviously to truly capitalize on the surge in player demand as well. And I think it’s also clear that I think the current environment has created significantly higher baseline for these businesses going forward, given the rapid player adoption of Digital that we have seen. I’d also note that, if you take a look at iGaming, that market has grown in recent years. In New Jersey along with a land based market. So we think Digital has continued to have a lot of strong growth ahead as does land based gaming and they can grow in tandem. We have seen this in New Jersey, and obviously, in Pennsylvania with iLottery. So we expect both of these businesses to continue to drive meaningful growth. So you are going to see growth in the addressable market, growth in consumer and adoption, growth in product, games, features and we think it’s a very healthy business in which we have a really strong position in. And then in terms of our long-term strategy, I would say, I feel as confident today as I ever have about the positioning that we have created, our go-forward strategy. In fact, quite frankly, what’s happened is really reaffirmed to me the strength and competitive advantage of both our team and the diverse portfolio of businesses we have. We structured the business to operate effectively through the environment and our leadership position created a lot of opportunities to deliver profitable growth today and sets us up nicely for the future. So as you mentioned, our Digital business we lead the iGaming market today, and I mean, this past quarter delivered 135% iGaming revenue growth in the U.S. in this quarter alone. And then, if you look at the momentum that we have on the deal and launch front on Sports just reinforces our leadership position there as well. I don’t think anyone is as well-positioned as we are today or in the future to take advantage of the rapid growth that I think we are going to see in those markets. On the Lottery front, as Mike alluded to, we are not only well-positioned, but also that business is so resilient as we saw in Q2 and we are now seeing the Instant ticket sales increase significantly. And if you look ahead, we are positioned to take advantage of new territory such as the Brazil launch or -- and the unprecedented bid winning streak that we have now, the acceleration in adoption via Lottery and then the broader adoption of the SGEP program where we manage the full Lottery solution. So really strong kind of play there on the Lottery side. On our SciPlay as we mentioned record growth in the quarter of 40%, which is 2x the market rate and AEBITDA at 80%, which shows the leverage that we have in that business at it scale and then add on top of that the recent acquisition of Come2Play we are now expanding beyond social casino into the casual game market, which again help enables us to continue to accelerate and grow that business going forward. In Gaming, we have an amazing team just laser focus on driving greater share of the customer wallet through a compelled -- it’s really compelling product road map and commercial approach both pre and post-COVID, while becoming leaner and more efficient with the business. As you know, we can’t control or predict COVID but we can impact our market share we can impact our cost structure. And so we are extremely confident in Matt and team’s ability to deliver profitable market share growth in the quarters ahead. When you look at all that and on top of this team’s reducing cost across the Board, enhance cash flow and create even more nimble efficient business overall. We believe that just enables us to be in a really nice position competitively and achieve our full potential and deleverage the business and generate strong results for all of our shareholders.

[John DeCree:]

That’s helpful. I think you answered multiple questions in there, given there’s so much to talk about. But if I could sneak one short follow up in. You have been talking a little bit about some additional partnerships on the Digital front. It might be on the horizon and realized you probably can’t specify who or how flung along those are. But could you kind of qualify what a big partnership might be it for you? Is it a kind of multi-jurisdiction partner or does it go across, I can see the lens where it certainly would be a kind of a big partnership in your eyes if you could qualify?

[Barry Cottle:]

Yeah. I think, no. That’s fine. I think, as you alluded and I also appreciate you highlighting the momentum we are having right now and that we booked the deals, as well as the launches. I think we launched four -- we had four launches in the last four weeks and another two imminent. We do have -- on the open bet side or the Sports side of the business, we told everybody our playbook was to replicate our success that we have had in the U.K. by delivering the best, most reliable, proven, scalable and customizable product. And over time, everybody is going to gravitate toward that and we are seeing that happen in the U.S., as people who had made original choices for somebody else are now switching over to us as they want to scale up, and then -- and I think that’s worked out really nicely. On the iGaming front, our OGS platform which kind of the Netflix, I would say, of the space, where we have a very rich -- kind of feature-rich platform that attracts the top content studios that we bring to market in addition to our own IP. We can offer that as well and so it becomes kind of a must-have for people, operators entering that space. We do have deals that we are not announcing today, but we have that are in the pipeline and imminent and I think as you alluded to kind of, yes, to all of the above, multi-jurisdictional, et cetera. So, we are happy with the momentum we are seeing in that side, and as I said, fortunate that the playbook that we had in place seems to be playing out.

[John DeCree:]

Thanks, Barry. Thanks for taking all my questions. I will hop back into the queue.

[Operator:]

The next question is from Barry Jonas with SunTrust. Please go ahead.

[Barry Jonas:]

Hey, guys. Hey, Barry. Welcome Mike. I wanted to -- I had a few questions, I wanted to start with the Gaming segment. Just curious what you are hearing now as you speak with customers first when the pandemic first really hit. When do you think customer budgets and purchasing levels could go back to pre-COVID levels?

[Barry Cottle:]

Yeah. That’s a great a great question. Obviously, a challenging question just given the state of where we are at in terms of COVID and alike. I guess, the way I would answer this is, there’s a high degree of uncertainty, so everything obviously has to be caveated. However, based on the conversations we are having, we do expect to see more normalized level of spend in next year and we do believe the Gaming business will grow meaningfully in 2021. If you look at kind of the view of the impact and recovery that we are seeing in the market, today we have got roughly 85%, let’s say, casinos open. And the early results are actually very encouraging when you see coin-in on a per day basis actually up significantly for the units that have been turned back on. So the initial consumer demand seems to be there and that seems to be moving forward. In terms of -- that’s how I’d kind of describe the market per se, in terms of us in particular, I think we are very fortunate in the sense that our exposure is largely tribal and regional, so that’s 95%. And we believe that the recovery in that space actually will be faster because that you don’t have the contingency on travel and tourism, it’s very much a local driven market. And so we are always cautious but we are encouraged, I would say. And so, as I mentioned before, we can’t control or predict COVID, but what we can do is make sure our cost structure is set up appropriately and make sure we have the products and services lined up ready to take the greater share of wallet that we can when it does.

[Barry Jonas:]

Well, that’s really helpful. But maybe just to drive home that point a little bit more. We are certainly seeing instances in some of the regional markets of second waves of cases. I am just wondering as you look at some of your real-time participation data or maybe even on the Lottery side actually. Are you seeing a tail off there or are those businesses holding despite any second waves?

[Barry Cottle:]

Yeah. So a couple of things first so when you talk about the second wave. What we have seen actually is, there have been -- remember that’s close to a thousand casinos opening up over the course of the country. We have only seen a few, two to three that the casino that closed basically temporarily, but reopened obviously in Arizona, Oklahoma, and they have closed for a day or two, sanitized them and reopened. But we are still seeing the momentum of people cautiously continuing. I think what people are at least what we are seeing and coming out in our discussions is, people ensuring that they are taking the right social distancing sanitation measures that will help them stay open and grow. And obviously, I can -- we have been -- with the systems leadership position that we have, we have taken it upon ourselves to really try to come in with a set of products and services that will enable our operators continue to do that and we have created those -- obviously the cash was in cargos which we have in the market now and ready and available. But we also set up some sanitation and system type of products that enable people to turn on different machines, keep them off in order to keep people socially distanced by actually testing some surface and topical things. And so the goal here is to try to keep that momentum going and leverage our systems position in order to give people tools in order to do that safely, because the goal is obviously -- the other thing we can impact during this COVID time besides the wallet and cost structure is, we want to make sure we ensure our employees, our customers and our players are safe, right? And we always keep that very high on the list as well.

[Trent Kruse:]

And Barry, this is Trent. I just would add to your point on Lottery. We called out the surge an instant ticket growth here over the last four weeks. But that’s been transpiring for longer than those four weeks and has been very consistent. So we are seeing those encouraging trend, and to Barry’s point, we are innovating for our customers at this point in time as well.

[Barry Jonas:]

That’s great to hear as well. So just the last one for me, maybe to get Mike into the fray. I appreciate the remarks about the leverage from here. But any levers you would consider to sort of accelerate whether it’s asset sales, equity issuance, spinouts of a division, just curious to get any high level thoughts there?

[Mike Eklund:]

Yeah. My initial reaction is it’s a little too early to tell. But, clearly, Q2, Q3 with all the uncertainty in the market, our approach has really been look let’s control what we control in this environment. In this environment, we control the health, safety and well-being of our team members. We control keeping our customers satisfied with products, innovation, what they need when they need it. We can control cost and we control working capital. Frankly, all of our attention has really been on that and Q2 was really kind of prepare for the worst hope for the best posture. As we go into Q3, which is really where our focus is now, it’s kind of cut over to cautiously optimistic for all the reasons that Barry said. We see encouraging trends with kind of tribal and regional casinos around the Digital, the SciPlay business are doing well, Lottery, as Trent said, pretty tough March and April, but May and June kind of bouncing back recovering really nice, we feel great about the momentum there. And so as those things start to stabilize, we are kind of postured either way we need to go. If things open up, we are going to lead in heavy and fast and we are ready to go. If they tighten back up, we will tighten back up with them and we have already got the cost controls in place. We have got the liquidity in place. We have got the headroom from a cash flow in place. So really a lot of the focus up to this point frankly has been let’s just get things stabilized given the environment we are in and the reality of where we are. Again, tough environment that feel great about the work that the team has done. It’s been really impressive to see. Coming in new, I can tell you this just from the outside looking in. I feel really good about the house of brands that we put together. I feel really good about the leadership team that Barry has put in place and my interactions with all of them so far have been extraordinarily positive, hardworking, focused dedicated really leading in on the right topics. Clearly, when you look at the business with the new set of eyes from the outside and I see opportunities in the working capital cycle there will be a lot of focus on liquidity, cash flow payables, inventories, receivables, just leaning all of that stuff out and really making sure we get the best out of it. Little too early to tell you exactly, I have some hypothesis that we are going to work through over the next 90 days. When you look at the way the company came together with a lot of acquisitions over time, a lot of things get left behind in terms of synergies, effectiveness, integration, et cetera. When you look at things like automation, digitization of everything we do internally just like we do externally, I see a lot of opportunities there. So as we get ready for 2021, we kind of get out of the rush of the environment we are in now. The leadership team and I have had a lot of conversations around what does 2021 look like and what does the next three years to five years look like. Taking advantage of the growth in the marketplace and continue to invest where we need to invest. But then also making sure that we are self-funding a lot of that and delevering at the same time, are really getting after costs, really getting after working capital, really getting after liquidity in a meaningful way. And so, yes, I see opportunities there. We have got to bets some of those out over the next 90 days to 120 days. But I think we will have a whole lot more to say about that going into the new year. But I am encouraged by what I have seen of the opportunities I see out there so far.

[Barry Cottle:]

Yeah. This is Barry. Just to add on -- to add to what Mike said just real quick is this, as Mike said, I think, we set ourselves up to operate the business in a way that they can generate cash and manage through this environment. So we don’t need to do the asset sales. We have obviously got an amazing strategic valuable asset in SciPlay. We have an amazingly strategic and valuable asset in our Digital business and we think that there’s strong strategic value in these where they have great futures in growth and send synergy within our businesses with brands, distribution channels and the player convergence that come along with it that makes Scientific Games actually uniquely a competitive advantage. All that said, we always look at and explore ways to enhance value in the interests of all our shareholders, but it is more of looking at it as an opportunity as opposed -- and staying out of it as opposed to a mean.

[Barry Jonas:]

Really helpful. Thank you so much, guys.

[Barry Cottle:]

Thanks, Barry.

[Operator:]

The next question is from Brad Boyer with Stifel. Please go ahead.

[Brad Boyer:]

Hey. Thanks for taking the questions guys and congrats on a solid quarter. First question for me, I appreciate all the color around the non-Gaming segments and all the momentum we are seeing there, but still kind of look at it and say Gaming still is your largest segment? And I was hoping you could provide a little additional color, Barry. You touched on a little bit some other answers, but just a little additional color around, what you are doing today to ensure that you maintain your position in the Gaming segment and in the Gaming market in these unusual times. Any additional color you could provide around that would be helpful?

[Barry Cottle:]

Yeah. I mean, absolutely. I think first, I would put it in two buckets. One is ensuring that we have the right cost structure and efficiency in the organization to compete not just in COVID but when we come out of it, so that as the market starts to recover, we can invest in the right things. And Matt and his team actually walked in the door, right, when COVID happened and things and plans that they had thought, had mapped out that they wanted to do accelerated quite frankly in COVID and it’s an opportunity for us to make this division as efficient as possible so that we could again invest in the products and services we believe we will win and I think they have done that. And so the second piece is obviously winning the greater share of the wallet. And so the things that they have done are going after great products, right? So, in the unit sales space we launched two value-engineered cabinets that just recently in the marketplace with the Matrix and 5 Reel Mechanical. We lined them up with really strong classic titles, new versions of classic titles. We also developed the commercial incentives around them and a commercial strategy with our operators to partner and be flexible in a way that we can potentially take share as their CapEx starts to come to fruition. On the game ops side, very similarly, we took our top performing franchises like Dancing Drums, et cetera, improve the game performance. We -- we have launched them with another -- we are launching them with a new set of platform-agnostic cabinets as well some new coming to market. Again with certain segment pricing and things to go after the market and attack it in the most strategic spaces, so a streamlined product roadmap with higher quality product with really strong commercial execution and operational efficiency. And then we look at the market and said, okay, what does COVID present that we believe will occur during COVID and after. And that brought us to things like the electronic table games market, which we mentioned before, which is a really strong product line that we have put a lot of emphasis in in getting to market. We already have a significant share in the space but we are seeing more demand than we have ever seen. And then the systems products that I mentioned before in terms of accommodating COVID, cashless, card-less. And so creating products that we believe the market needs and then just streamlining our products with higher quality games and driving operational efficiency in the organization. Matt and his team has come in and done a stellar job of going after that in a challenging time and I think that sets us up for profitable growth now and going into the future where we are going to take market share.

[Brad Boyer:]

Okay. That’s helpful. And then my second question is in light of some of the recent combination activity in the Sports bidding world from a technology perspective. I think there’s been this narrative out in the marketplace that more B2C operators are ultimately going to want to own their platforms outright. Could you just provide any perspective on that in this public forum from your perspective and just any conversations you are having with clients, what have you? Is that train of thought from your perspective misguided, just any color you can provide on that would be helpful?

[Barry Cottle:]

Look, I would say, I shouldn’t say the word misguided, but I don’t think that captures what exactly is going on in the marketplace today. We see it both ways, and in fact, if you look at historically in the U.K. market, what you will find is the opposite happened, right? So, majority of the players in the U.K. market at some point in time made attempts to run their own platform and then realized that they would rather have a robust platform that’s scalable and customizable and use that as a competitive advantage and focus on, what I would call, kind of a more customizable consumer -- close to consumer type of technologies and capabilities. And so, I would say, we are seeing a mix of that in the United States as much of some folks trying or going down that path, we are seeing also a counter to that of people walking away from their platforms and integrating ours and so, I think, you are seeing the balanced approach. I do think that the growth of the market will ultimately be supplier driven as opposed to B2C owned. And the other thing that we are doing is very similar to what we did in the iGaming space is providing value-added services on top of the platform itself, right? And so, we are in a very similar way that we have the OGS platform, we just opened market which basically plugs in the best of best-in-class third-party Sports betting products and tools into our platform. The one integration, we got everything and we were continuing to go up the value chain with Don Best and others to provide value-added services that are unique to the platform that we provide. So it’s out there, so I don’t, with -- again, wouldn’t use it and misguide it, but it’s not a clear trend, it’s actually more of a balance than and the broader longer term trend we have actually seen go the other way.

[Brad Boyer:]

Perfect. Thanks for the very thorough answers, guys. Appreciate it.

[Barry Cottle:]

Thanks, Brad.

[Operator:]

The next question is from Chad Beynon with Macquarie. Please go ahead.

[Chad Beynon:]

Hi. Good afternoon. Thanks for taking my question. It might be too early to ask this, but since you have certainly made greater strides in the quarter than I think most of us thought. Do you have any medium-term leverage goals, I know before that was something you were really focused on and given that you are kind of running through budgets, are you willing to share maybe what 2021 or 2022 leverage goal could be?

[Mike Eklund:]

Yeah. Chad, this is Mike and I will let Trent up in here too. I think you kind of hit it there. It’s a little too early to say. The reality is Q2, Q3 has been around making sure we are positioned to deal with whatever happens in the marketplace around us, right? Let’s get the maturities moved out. Let’s get liquidity topped up. Let’s get after cost. Let’s get after cash. Let’s make sure that we are -- we have got the financial well-being and health of the firm firmly in place and we do right now. We feel good about that. We are kind of in a wait-and-see like the rest of the market now as to where this thing is going to go. Is it going to continue to move forward? Is it going to retrench to some of the questions that were asked? As we said, we have got pretty good encouraging signs in the marketplace that things are inching forward and we are going to prepare for that, but we have kind of held off on any long-term goals right now until we just have a little better line of sight what’s going to happen in Q3. So as that firms up and we get into our planning for 2021 and we have got a better idea of where things go. We will get a little bit more declarative on that front. But, obviously, to Barry’s point, we got Digital growing. We have got cash flow improving. We have got costs coming down. We have got Lottery holding, it’s on. We have got a lot of good momentum. As all of those things happen they generate cash, they help us with that equation that you are referring to. So it’s clearly in our line of sight. It’s a top priority. There’s no scenario where it’s not going to be my top priority in the firm but it’s a little too early to say right now.

[Chad Beynon:]

Okay. It makes sense. And then regarding SciPlay, the metrics, particularly ARPU was very strong and I am sure you guys will get into this on the SciPlay call. It’s certainly kind of confirms that your monetization teams are doing better and you acquired Come2Play, which I think is an interesting acquisition and it gets you into the casual game space that doesn’t have as strong monetization. Small acquisition, but given that you guys are doing so well. Do you think casual games could become a bigger opportunity for you given everything that you have learned in your successes in terms of monetizing games and given that the pool of games and customers is significantly larger than the current pool for casual game -- for casual casino? Thanks.

[Barry Cottle:]

Yeah. Absolutely. I think the playbook here is to look for companies that we believe in the game and the game themes. These casual puzzle, card, board, like-skilled mechanic with very simple gameplay, very similar to a slot. We plug it into our monetization machine. We create meta games on top. We create monetization loops. We create social loops. We improve their UA. It’s the exact same playbook we use for bingo which tripled that business and the goal is to come in and find people who really understand and know a core mechanic and do it really well. In this case, the solitaire game, which we are really -- we really like and then we layer on our knowledge and expertise with them to go -- to build that category. And you are exactly right, the casual game space is bigger. It tends to be less monetized but that’s where our expertise is, is taking these simple loop games and figuring -- and building the meta game around them in order to get that monetization. And so you are exactly right and we are very excited about it and the team that we have got there.

[Trent Kruse:]

And Chad, this is Trent. I would just simply add to that point on monetization. They do run some ad-based business and so this is going to give us a chance to look at and learn in that space as well which could create another avenue for growth for us down the road.

[Chad Beynon:]

Thanks. Appreciate it. Nice results, guys.

[Barry Cottle:]

Thank you.

[Mike Eklund:]

Thank you.

[Operator:]

The next question is from Ryan Sigdahl with Craig-Hallum Capital Group. Please go ahead.

[Ryan Sigdahl:]

Thanks, guys. Good afternoon and congrats on the good results in the challenging environment here.

[Barry Cottle:]

Thank you, Ryan.

[Mike Eklund:]

Thank you.

[Ryan Sigdahl:]

Just want to dig in a little bit more to say on the new customer that’s coming. Is that a new Digital customer or is that an expansion with an existing operator and then is that a new online participant or you are displacing someone else that expire?

[Barry Cottle:]

Yeah. Basically what we are seeing is when people were forced to work from home, they had to learn and adopt a new way to do the things that they love, right? And so we are seeing -- I would say, it’s both, we are seeing new players coming to the space and getting comfortable with digital and mobile gameplay and I think that just expands the addressable market. In addition to that, because that your phone is on you 24x7, we are also seeing frequency of play. It happened as well whereas if you have to get up and drive to a land base entity y to make at bet or to play a game, you -- there’s a barrier or friction there. So we are seeing both. We are seeing frequency of play, frequency of spend and spend and then we are seeing new people come in that enter the market.

[Trent Kruse:]

And Ryan, just to your point on our new deals in the future, it is both, it’s on the iGaming and Sports side, and as Barry alluded to earlier, multi-jurisdictional, so certainly some exciting things on the horizon.

[Barry Cottle:]

Yeah.

[Ryan Sigdahl:]

Yeah. Maybe just to be more clear, the new customer that’s coming for Digital that you talked about in your prepared remarks, is that an existing Digital customer that you are expanding with, or is that a brand new operator that you are adding?

[Trent Kruse:]

Ryan. It’s Trent again. I -- it is an addition, but we really can’t say anything more beyond that today, but we will have an announcement soon.

[Ryan Sigdahl:]

Got it. Moving on, one more for me, so on the casino customers that have reopened, so partial capacity. What have you seen from their machines, which ones are they turning on? Is it their own machines or is it the premium leased? And then how are your machines and then how are your machines comparing versus competitors?

[Barry Cottle:]

So I think most of them are balancing the space, and so, I would say, ultimately, it’s really balanced quite frankly. It’s what we are seeing in terms of the -- what machines are getting turned on. I will say, a lot of -- you are seeing a lot of obviously gravitation toward familiar big franchises, which plays well into our world, right, with the franchises that we have are well-known. It’s kind of like when your restaurants all got turned off or shutdown and restaurants that came back up and everybody didn’t go to a brand new restaurant. You went to the restaurant that you loved and missed the most, right? And so, in a lot of ways the same thing happens here and the great news is we have got such great traditional plethora of franchises that are out there in the marketplace. And as I mentioned earlier on, the -- we are seeing significant coin-in on an active machine above and beyond what we would normally see and so the balance of that tells us that we are really doing well. We can’t point to competitively yet. There’s no reports out there that will -- that would give me any credibility on that. But we are encouraged by the results of putting that one

[Ryan Sigdahl:]

Thanks, guys. Good luck.

[Barry Cottle:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Barry Cottle for any closing remarks.

[Barry Cottle:]

Hi, all. Thanks for joining us today. We really appreciate your support and I am very pleased with the actions we have taken in the second quarter with the successful note offering and implementing cost saving measures, while continuing to operate effectively for our customers. The diversity of our businesses and being on the forefront and being on the forefront of Digital Gaming was critical to allow us to successfully navigate the worst of this environment. We have the right team coupled with the best products across both land based and mobile gaming to position us for the future profitable growth. Thank you very much.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.