Q2 2020 Scientific Games Corp Earnings Call
[music].
Good afternoon, ladies and gentlemen, and welcome to the scientific games, 2022nd quarter Investor Conference call.
At this time all participants are any listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
A brief question and answer session will follow the formal presentation.
To ask a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then too.
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. Crews you may begin.
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.
This afternoon are very cottle, unlike a lot.
Call today will contain statements that include forward looking statements part of the private Securities Litigation Reform Act up 90 95.
These statements involve certain risks and uncertainties that could cause actual results could differ materially from that as discussed during the call reclamation 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 at <unk> filings with the FCC.
We also will discuss certain non-GAAP financial measures a description of each non-GAAP measure at 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 an investor section on our website.
As a reminder, this conference call is being recorded a replay of this webcast and accompanying materials will be archived any investor section of our website and scientific games Dot com.
Also supplemental reference slides are available on our Investor Relations website.
And it's got will not be speaking directly to the flight. These slides that 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.
Thanks, Travis good afternoon, everyone and thanks for joining us I want to start by recognizing my colleagues I'm. So proud of the way our team has stepped up to help each other our partners that our company. We're navigating the current environment incredibly well as evidenced by our strong cost containment and cash management, which allowed us to significantly out.
Form or 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 well also setting ourselves up for success as the economy begins to reopen.
We're very aware that there are still many unknowns and the timing bots, and therefore will be cautious and how we think about bringing cost back to our business.
Ultimately, though we're optimistic in our outlook for the rest of 2020 and beyond we had structured the business to operate effectively through any environment. As we had demonstrated by our ability to continue to drive results across our business well operating through this unprecedented situation.
But we've also positioned ourselves to emerge stronger more nimble and ready to win.
Today, we will share first that we're in a very solid financial position, including over 1.1 billion and liquidity following our recent debt offering.
Second the actions that will 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 advantages of our diverse business that has allowed us to delivering meaningful results throughout the crisis and had this position to drive strong results.
As we look ahead.
We are exiting this crisis with improved liquidity and enhanced product line and 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 my Cat Bond I wanted to take a minute to welcome him to our team. We're 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 I could jump right in and identify.
Several opportunities for us to continue to enhance our operations and deliver improved cash flow and profitability.
Following Mike's comments I'll come back to discuss how we're looking ahead to drive strong results across our business.
Right.
Hey, Thanks, Barry and good afternoon, everyone, it's great to be on the call today.
You know 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 in the many things that we do and if you do those things right should drive higher margins and cash flow.
I see that from the outside looking in.
Ultimately if you do all those things and do the well we should be able to creates real value for our shareholders and unlock some potential at least that I see them a bit.
What I can tell you when I'm happy to report is 45 days into the role I'm more convinced than ever that I made a great decision to join the company not could not be more excited to be here.
For some of you that May know me on the phone from a prior life, that's probably no secret that this kind of investment pieces 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 when everything we're doing.
Number two in filling a set of balance 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 [noise].
With that I would now like to turn to four key headlines that I saw for Q2 was I reflected on the quarter. After that I'll give a brief update on our financial and business unit results with that let's jump right into start with the headlines for Q2.
First it was liquidity.
We have a strong liquidity position with 1.1 billion and available liquidity following our July refinancing, which we topped up by 200 million or so as all of you know.
We also exceeded the me guidance, we provided for Q2, delivering a net cash outflow of minus 16 million versus guidance in a range of negative 79, just a really nice performance by the team there when all said and done our teams generated plus 5 million a positive free cash flow in an otherwise extremely challenging offer.
In the environment. So it's a great job by the teams and we could not be more appreciative of the work that they've done.
The second highlight we completed the refinancing of our notes and 2021 as well as a result, we have no significant maturities due until 2024.
We're pleased with our timing in the market on that refinancing a reason to think many of you better on the phone for your support and getting that done.
In fact, the widespread support that I saw for scientific games was both encouraging a great to see an again just want to sell your 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 US I played business and within the digital business on the I gave me side in particular again material upside great to see the balance of the portfolio working toward damaging.
Tough market [noise].
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 in Q4, and we're comfortable with where our lottery business is going into the second half of the year.
The fourth headline them, but final headline your heart teams reduce the $150 million of cash expenses in the quarter.
We work through a very difficult business environment. Our teams were able to re examine all aspects of the shipments importantly, we now expect a meaningful portion of these cost measures to result in permanent savings in 2021 and beyond as the team is said to rethink the way, we do business now and in a long term.
Now, let's look at our quarterly piano results the impact of Cobot 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 for 539 million.
The lower revenue resulted in eight EBITDA declining to 121 million, which compares to 335 million in the prior year.
The 121 million of EBITDA. Good included $33 million charge in our gaming segment related to receivables and inventory valuation and you'll see that in our disclosures in response to the business environment, we reduced our operating expenses as you've seen by $122 million were 17% to 595 million.
We'll continue our focus on expense controls and reduction 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 to 15 per share versus 75 million or 83.
Per share in the prior period.
We are.
Turning to our balance sheet and cash flows we delivered 52 million and cash flow from operations and as I mentioned earlier generated 5 million and free cash flow, our cash flow upside relative to our made guidance was primarily due to better than expected collections and stronger performance in some of our business segments of we've already talked about our teams did an outstanding job manner.
Engine, the things that they largely control and delivered a $32 million source of cash from working capital improvements in the quarter [noise].
In addition, we eliminated all non essential expenses implemented workforce cost savings measures and defer all non critical capex from Capex. It's important to say that was important for me is 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 assessed.
Waste 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're now planning for capital expenditures to be in the range of 210 to 240 or $90 million below our original guidance for 2020.
With all of these actions our liquidity as we've 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 as a reminder, we previously amended our credit agreement to obtain relief on the net first lien leverage ratio covenant through 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 into our business unit performance, starting with signed five five play revenue was up 41% to 166 million, while EBITDA increased 80% to 60 million driven by record CPI is across the board. It was great to see the productivity dropping through to the bottom line in the five point business for sure.
Our digital revenue increased 6% to 73 million, while EBITDA increased 67% again really nice productivity dropping through to the bottom line.
We continue to win bills and stand up new customers in both gaming in sports and our US I gaming revenue was up 135% in the second quarter, demonstrating the significant growth potential we haven't us market as it continues to ramp.
Our our lottery business were 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 SGP 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.
And gaming our results were clearly impacted by global casino closures that our team has positioned the business well stay focused on our largest profit opportunities significantly streamlined 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 500000 connected slot.
Drive meaningful revenue in the future.
To wrap it all up as we said before we have over 1.1 billion and liquidity and plenty of runway in or debt maturities given our recent refinancing.
We have rightsize 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 back cost of the businesses, we because the results Warren I feel optimistic that the lessons, we've learned and the actions we've implemented while navigating the sun person.
In an 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 this business 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 buried in the talented team of leaders that he's put together together, we will for sure unlock the true potential of foreign.
To the Gibbs with that let me turn it back over to Barry Barry.
Thanks, Mike as you heard we have and will continue to effectively manage through this crisis.
It would also focus on current and long term success across our business.
Our focus remains on building, a better stronger and more efficient business from the future, we're 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.
Delivering best in class products, focusing our strategies and accelerating our actions towards a more nimble and effective scientific games.
Gaming, we're controlling what we can control by reducing our cost structure to trade 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 in the front Francis the team is focused on several areas, including North American premium pre.
Binion gaming operations in North American outright sale segments, and commercializing products to innovate for our customers drive operational efficiencies and provide significant revenue opportunities.
Our premium gaming operations. The team is working to grow this segment with a focus on driving commercial excellence with our top franchises, including the number one lacking in the market dancing John's explosion.
To expand placement opportunities with antigens explosions customers, Matt may now select between three different cabinets, which includes the Twinstar vseventy five twinstar way the XL and now since start Jay 43 to drive replacement sales within the North American sales segment. The team is focused on developing core products that.
We'll deliver proven content and competitive pricing with affordable hardware options. The recently launched Twinstar matrix and Twinstar five reel mechanical had strong constant roadmaster, both for sale and gaming operations segment, we are bringing a number of classic titles forward to build customer confidence around our content portfolio.
While also providing flexible pricing options for our customers.
We've also accelerated technology and products across cashless and contact with solutions that are gaining significant traction in the market as a result that code that 19.
Taking a mobile first approach the unified wallet product is powering and cashless gaming experience by getting players the power to instantly access funds to play slawson tables through a mobile app.
Cashless solutions will help keep a team members and guess safe and also cost effective for casino operators. We have also developed the social different thing and automated gains sanitation modules to support our customers by automatically enforcing social distancing among slot players, allowing players the access to the reserve.
For their favorite game during their visit and eliminating the manual tasks are 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 in interest for the electronic table games segment remained strong sales have more than doubled in the past quarter and the order pipeline has seen a three X demand increase since March.
Accord 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're excited to have recently welcome 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.
And our lottery group were seen significant improvement in performance in recent weeks at the U.S. instant products sales are searching 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 us states.
And two recent internationally in Germany as a reminder, following our elevation to 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've seen across our instant games business is the outstanding results were seen in our SG ERP program States on the S. GDP program outpace industry sales growth by over 40% in fact, Ohio switch to the as GDP program in July 2019, and it seems.
On a 13% increase in ticket sales in that first year.
Five of the top 10, performing lotteries in the World, Our SGP 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 advance logistics retail optimization and digital engagement.
Speaking of digital within lottery, our I lottery 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 today, delivering total sales at a billion dollars and under two years and is now on track to deliver over a billion.
In sales annually.
We continue to expect to see I lottery adoption accelerates the prostate and we're incredibly well positioned to benefit from these rapidly increased adoption levels.
And our digital segment, we have significant momentum as we expect to announce another big partnership when 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 bedspread in Colorado sports for the low the Dutch lottery, which is a takeaway from the competitor Firekeepers in Michigan. The first tried to launch in the state demonstrated in our market leading position as the state begins operations and we relaunched stopped because still on an improved tech platform I would note that Don.
It's still and low and demonstrate the power of one ESG and our long standing partnerships with these world Lottery Association operators.
As we look ahead, we'll be watching sports with Golden Nugget in New Jersey, and gaming and sports with Golden Nugget, and Pennsylvania, and Michigan, and we're thrilled to support Golden Nugget as they look to significantly accelerate their digital business across the us, especially in light of their public lifting plans and in Michigan alone, we are extremely well positioned to.
Clean Golden Nugget, Firekeepers, sandal 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've discussed before the Igaming in sports markets are expected to grow at incredible rates across the U.S., but I gaming 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, I gaming revenue and project out to a mature you am I getting market and implies a 22 billion Gigi our opportunity in the us for Igaming alone.
And our partner Golden Nugget is targeting 10% of share of this over $20 billion market further highlighting our vast potential looking at recent results across New Jersey, we held 44% market share and our gaming revenue in the state was up 113% versus last year with our unmatched.
Oh, just 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 pre eminent player and future I gaming 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 best 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 best in the UK our leaders in many other regulated markets and our position to be the number one supplier in the us market.
[music].
And finally with side play 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 search we've seen in player demand.
As a result, we generated record quarterly revenues of 166 million up 40% the last year and our EBITDA increased 80% to 60 million also a quarterly record.
Worked out increased 40% to 57 cents average monthly revenue per payer increased nearly 25% to 101 in 13 cents and payer conversion grew 80 basis points to 6.8%.
All of these capesize 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 come to play during the second quarter, adding a new Sean or 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.
Grow revenue.
We're excited about a 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're in a very solid financial position and we're continuing to effectively manage to 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're ready to pursue the numerous growth opportunities we have in front of us across all of our divisions.
Now before we turn to Q in May I wanted to quickly address the recent filing from our shareholders Mcanderson Forbes, we expect to work cooperatively with Mcanderson Forbes as we always have had the considers a sale of its SG shares.
The sale consideration is at a very early stage and therefore, we have no. Additional details provided this time and will not be commenting further today.
We will provide updates as appropriate.
And one ensure you 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're happy to take your questions.
Operator could you. Please open the line for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.
The first question is from John Decree with Union Gaming. Please go ahead.
Hi, Barry Hi, Michael.
Graduation, guys on the on the quarter I don't think we'll see.
Results from our sector than a positive EBITDA EBITDA and free cash flow. So congratulations on that and Michael seems like you pick the did time to start so.
We love these aside instinct.
Thanks, John.
Yes, but lot of this stuff to talk about Barry So maybe I'll just kind of start high level.
And kind of just your thoughts on on long term strategy as the world just kind of changing on us in real time. So a number of your business segments are really shine in here you highlighted most of them I think in your prepared remarks, whether it's on lottery results demand for electronic tables of course side play and I've seen out.
Lets get your view on how sustainable some of this demand is on the other side of the pandemic whatever that kind of new normal might look like we're obviously experiencing a lot of growth right now but.
Your thoughts in 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.
Absolutely.
Thanks, John and.
I think there may be.
Two questions. There. So let me tackle first the precisely digital piece of this and then.
Up a little bit about kind of the note on onto your comment on long term strategy. So.
First of all in as you noted we certainly saw benefits inside play in digital from the stay at home dynamic how it's important to note that we had our games at site play in an incredible shape going into that and also being on the forefront of digital gaming allowed us obviously to truly capitalize on the surgeon 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 the rapid player adoption of digital that we've 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 the land based markets. So we think digital has continue to have a lot of strong growth ahead as this land based gaming and they can grow in tandem looseness in New Jersey, and obviously in Pennsylvania with Ilottery. So we expect both of these businesses to continue to drive meaningful growth to going to see growth.
In the addressable market growth and consumer adoption grows.
Growth in products gains features and.
Because we think it's a very healthy business in which we have a really strong position.
And then in terms of our long term strategy I would say I feel.
Competent today as I ever have about the positioning that we've created our go forward strategy that quite frankly, what's happened is really reaffirmed and made the strength and competitive advantage of both our team and the diverse portfolio of businesses, we have restructured 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 to Igaming market today and in this past quarter delivered 135% I gaming revenue growth in the us in this quarter alone and then if you look at B the momentum that we have on the deal and loss.
Front on sports just reinforces our leadership position there as well I don't think anyone as as well positioned as we are today or in the future to take advantage of the rapid growth and I think we're going to see it in those markets.
On the lottery front as Mike alluded to we're not only well positioned but also that business. So resilient as we saw in Q2 and we're now seeing the instant ticket sales increased significantly and if you look ahead, we're positioned to take advantage of new territories, such as of Brazil onshore and the unprecedented bid winning streak that we have.
Now the acceleration in adoption by lottery and then the broader adoption of the SGP program, where we manage the full lottery solution. So really strong kind of play there on the lottery side ISI play as we mentioned record growth.
In the quarter, 40%, which is two X the market rate and EBITDA, 80%, which shows the leverage that we have that business as it scales and then add on top of that the recent acquisition of come to play. We're now expanded beyond social casino into the casual game market, which again health enables us to continue to accelerate and grow that business going forward again.
I mean, we Havent amazing team just laser focused on driving greater share of the customer wallet through propelled really compelling product roadmap and commercial approach, both during and post coded, while becoming leaner and more efficient with the business.
You know, we can't control or predict covered that we can impact our market share we can impact our cost structure and so we're extremely confident and 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 enhanced cash flow and creating a 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 potential and deal.
Leverage the business generates strong results for all of our shareholders.
That's helpful. But I think you answer multiple questions in there given there's so much to talk about but.
If I could sneak one short follow up in you've been talking little bit about some additional partnerships on the digital front it might be on the horizon and realize you probably can't specify who.
How far along those are but could you kind of qualified but a big partnership might be fleet is is it a kind of multi jurisdiction or.
Does it go across I'd like to see new in store associate with the has a big partnership in your eyes equals Mike.
Yeah, I think that's fine I think.
As you alluded to and I also appreciate you highlighting the the momentum we're having right now and 50, both the deals as well as the launches I think we launched four.
[music].
We had four launches in the last four weeks and another two eminent we.
We do have on the open bet side or the sports side of the business. We had told US everybody. Our playbook was to replicate our success that we've had in the UK by delivering the best most reliable proven scalable and customizable product and overtime everybody's going to gravitate toward that and we're seeing that happened in the U.S. as people who it.
Made original choices for somebody else are now switching over to us as they want to scale up and then and I think thats worked out really nicely on the on the Igaming front, our OGIS platform, which.
Kind of the Netflix I would say up the space, where we have a very rich you know 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 four people operators in entering that space. We do have.
Deals that were not announcing today, but we had that are in the pipeline eminent and I think as you alluded to kind of yes to all the above multi jurisdictional et cetera. So we're happy with the.
The momentum were seeing in that side and.
As I said fortunate the playbook that we had in place seems to be seems to be playing out.
Thanks, Barry Thanks for taking my questions I'll hop back into the Q.
Your next question is from Barry Jonas with Suntrust. Please go ahead.
Hey, guys, Hey, Barry welcome Mike.
I wanted to.
Two questions one or start with the gaming segment, just just curious what you're hearing now as you speak with customers first when a pandemic first really hit when do you think customer budgets and purchasing levels could go back to pre coated levels.
Yes, that's a great question, obviously a.
Hey, challenging question just given.
The state of of where we're at.
In terms of Cove, it and and alike I guess the way I would answer to this.
Look there is a high degree of uncertainty to everything obviously has to be Caveated. However, you know.
Based on the conversations we're having.
We do expect to see more normalized level of spend next year.
We do believe the gaining business will grow meaningfully in 2021.
If you look at kind of the.
View of the impact on recovery that we're seeing in the market today, we've got roughly 85%, let's say at the scene as 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 it kind of describe the market per se in terms of us in particular, I think we're very fortunate in that sense at our exposure exposures 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 is it's very.
Such a local local driven markets and so.
You know were.
We're always cautious, but we're encouraged I would say and so as I mentioned before we can't.
We can't control or predict coded, but what we can do is make sure 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.
Well, that's really helpful, but maybe just.
To drive home that point, a little bit more we're certainly seeing instances in some of the regional markets of second waves of cases I'm. Just wondering if you look at some of your real time participation data or maybe even on the lottery side actually or are you seeing a tail off there are those businesses holding despite any second waves.
Yes, a couple of things first so when you talk about the second second way of what we've seen actually is there have been.
Remember this close it thousand casinos.
Opening up over the course of the country, we've only seen a few.
Two to three that the casino the close basically temporarily but reopened obviously in Arizona, Oklahoma.
And they closed for a day or two.
Sanitized and reopened but where we're still seeing the momentum of people cautiously.
Continuing I think what people are at least what we're seeing and coming out at our discussions is people ensuring that they are taking the right social distancing sanitation measures that.
We'll help them stay open and grow and obviously you can.
We have been with the the systems leadership position that we have weve taken at upon ourselves are really try to come in with a set of products and services that will enable our operators continue to do that and we've created as opposed to obviously, the cashless and cardless, which we have in the market now and ready and available, but we also set up.
You know sanitation and system the type of of products that enable people to turn on different machines key to run off in order to keep people socially distance actually testing some surface and topical things and so the goal here is to try to keep that momentum going and leverage our.
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 we can impact during this call the time besides the wall at a cost structure is we want to make sure we ensure employees our customers in our players or say right and and we always keep that very high on a on the on the list as well and Barry. This is trend I just would add to your point on on lottery, you know, we called out the surgeon instant ticket growth here over the last.
Yes, four weeks, but thats been transpiring for longer than those four weeks and has been very consistent. So we are seeing those encouraging trend and to various point, we're innovating for our customers.
At this point in time as well.
That's great to hear as well so just as the last one from me maybe to get might consider freight.
Sure the remarks about de leverage from here, but.
But but any level of levers you would consider.
To sort of accelerate dot whether its asset sales equity issuance spin outs of a division just curious to get any high level thoughts there.
Yeah. My initial reaction is it's a little too early to tell but.
Clearly Q2 Q3 with all the uncertainty of in market. Our approach has really been look what's control we control in this environment in this environment, we controlled with all safety and well being of our team members.
We control keeping our customer satisfied with product innovation, what they need when they need it we cannot control cost and we control working capital frankly, all of our attention has really been on that in Q2 was really.
Kind of a 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.
Tribal in regional casinos around the digital display business are doing well lottery is trends.
So a 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're kinda posture either way we need to go.
Things open up we're going to lead in heavy and fast than we're ready to go if they tightened backup will tighten back up with them. We've already got the cost controls in place. We've got the liquidity in place we got the head room from a cash flow and in place. So.
Really a lot of a focus on to this point trends we've done, let's just get things stabilize given the environment. We're in on the reality of where we are again tough environment, but 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 June.
I feel really good about the house of brands that put together so really good about the leadership team to various put in place and my interactions with all of them. So far been extraordinarily positive hard working focused dedicated really waiting in on the right topics clearly when you look at the business with a new set of eyes from the outside in.
I see opportunities in the working capital cycle will be a lot of focus on liquidity cash flow payables inventories receivable does 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're going to work through over the next 90 days. When you look at what are the company came together with a lot of.
The acquisitions overtime, and so 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're trying to get out of the Russia will be environment.
Now the leadership team and I've got a lot of conversations around what is 2021 look like and what does the next three to five years look like.
Taken advantage of the growth in the marketplace and continue to invest where we need to invest but then also making sure that were self funding a lot of that and de levering up. The same time are really to getting after cost really getting after working capital really getting after liquidity in a meaningful way and so yes, I see opportunities there we've got to some of those out over the next 90 to 100.
20 days, but I think of it will have a whole lot more to say about that going into the new year, but I'm encouraged by what I see the opportunities. Thus the authors and for yes. This is Barry just add on to it myself just real quick assist.
As Mike said, it I think we set ourselves up to operate the business in a way that they can.
Generate cash in and.
And manage through this environment.
So we don't need to do the asset sales, we've obviously got amazing strategic valuable asset inside play we have a major currently strategic and valuable asset in our digital business and we think that Theres strong strategic value and these they have great features and growth.
And Sam synergy within our businesses with.
Brands distribution channels and the player convergence that come along with it that make scientific games actually uniquely a competitive advantage. All that said, we always look at and explore ways to enhance value in the interest of all our shareholders, but it is more looking at it as an opportunity.
As opposed staying out of it as opposed to need.
Really helpful. Thank you so much guys.
Thanks Barry.
Your next question is from Brad Boyer with Stifel. Please go ahead.
Hey, Thanks for taking the questions guys and congrats on the solid quarter.
First question for me.
I appreciate all the color around the non gaming segments and all the momentum were seeing there.
But still kind of look at it. So you know gaming. So is your 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're doing today to ensure that you maintain your position in the gaming.
Segment, and then the gaming market.
In these unusual times any additional color you can provide around that would be helpful.
Yes, I mean, absolutely I think first.
I would put it in two buckets, one is ensuring that we have a at the right cost structure and efficiency in the organization to compete not just through co there, 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, but actually walked in the door right when cobot happened and.
Things and plans that they had.
I had thought you know head mapped out that they wanted to do.
Accelerated quite frankly in cobot and it was 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'll win.
And I think they've done that and so the second pieces, obviously, winning the greater share of wallet and so you know the things that they have done is you know going after great products right. So you know when the unit sales space, we launched to value engineered cabinets that just really.
Currently in the marketplace with the matrix in the five reel mechanical we line them up with really strong classic titles.
New versions of classic titles, we also developed a commercial incentives around them.
And it 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 upside very similarly, we took our top performing franchises like dancing drowns et cetera.
You know improve.
The game performance, we we've launched them with another we're launching them with a new set of.
Yeah platform agnostic cabinets as well some new coming to market again with certain segments of pricing and things to go after the market an attack it in the most strategic spaces.
So a streamlined product roadmap with higher quality product with a really strong commercial execution and operational efficiency and then.
We looked at the market and said, Okay. What is 'cause it present.
That we believe will occur during cold and after and.
That brought us to things like the electronic table games market, which we mentioned before which is.
It is.
You know really strong product line that we've put a lot of emphasis in and get into market. We already have a significant share in this space, but we're seeing more.
More demand than we've ever seen and then the systems products that I mentioned before in terms of accommodating Kobe cashless cardless and so.
Trading products that we believe the market needs and then just streamlining our products with higher quality games, and and driving operational efficiency in the organization, Matt and his team has come in and done a stellar job 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're going to take market share.
Okay. That's helpful.
And then my second question is you know in light of some of the recent combination activity in sports betting world from a technology perspective, I think there's been this narrative out in the marketplace that.
More BDC operators are ultimately going to want to own.
Their platforms outright.
Could you just provide any perspective on that in this public forum from from your perspective, and just you know any conversations you're having with clients would have you.
Is that train of thought from your perspective misguided just any color you can provide on that would be helpful.
I would say I wouldn't say.
I would say the word misguided, but I don't think that captures what exactly going on in the marketplace. Today, we see it both ways and in fact, if you look at if you look at historically in the UK market, what you'll find is the opposite happened right. So majority of the other players in the UK market at some point in time made attempts to run.
On their own platforms and realize that they'd rather have a robust platform that scalable and customize nickel and use that as a competitive advantage and focus on what I would call kind of the more customized couple consumer close to consumer type of of of.
Technologies and capabilities and.
So I would say, we're seeing a mix of that in the United States as much of some folks trying or going down that path. We're seeing also a counter to that of people walking away from their platforms and integrating hours and so I think.
You are seeing a balanced approach I do think the bulk of the mark to market will ultimately be supplier driven as opposed to be to see owned and the other thing that we're doing is very similar to what we did in the I gaming space is providing value added services on top of the platform itself right. So we are in a very similar way that we have just left.
Form, which just opened open market, which basically plugs in the best of best in Class Third party sports betting products and tools into our platform that one integration they get everything and and we were continuing to go up the value chain with Don best and others to provide value.
That is services that are unique to the platform that we provide so.
It's out there so I don't again with use it misguided, but it's not it's not a clear trend is actually more of a balanced and and the broader longer term trends, we've actually seen go the other way.
Perfect. Thanks for the a very thorough answers guys appreciate it.
Thanks, Brett.
Your next question is from Chad Beynon with Macquarie. Please go ahead.
Good afternoon, Thanks for taking my question.
Might be too early to to ask us, but since you you certainly made great strides in the quarter. Then I think most of US thought do you have any medium term leverage goals I know before that was something you are really focused on and given that you're kind of running through budgets are you willing to share maybe what a 2021 or 2020 to leverage goal could be.
Yeah, Jeff This is Mike and I'll, let Trent jump in here too I think you kind of hit it there. It's a little too early to say no. The reality is Q2 Q3 of has been around making sure we're positioned to deal with whatever happens in the marketplace around us right.
Let's get the maturities moved outlets good liquidity topped up let's get after costs lets get after cash let's make sure that we're we've got the financial well being and help the firm.
Firmly in place and we do right now we feel good about that we're kind of it a wait and see like the rest of the market now as to where this thing is going to go I'm just going to continue to move forward is going to retrench to some of the questions that were assets. We said we've got pretty good.
Courage any signs in the marketplace. If things are inching forward and we're going to prepare for that but we try to hold off on a new long term goals right now until we just have a little better line of sight, what's going to happen in Q3, so that firms up when we get into our planning for 2021, we've got a better idea where things go we'll get a little bit more declared of on that front.
But obviously to various points if we got digital growing we got cash flow improving we got cost coming down we've got lottery holding its own we've got a lot of good momentum as all those things happened they generate cash that help us would that equation that you're referring to.
So it's clearly in our line of side, it's a top priority. There is no scenario, where it's not going to be my top priority I'm a firm, but it's a little too early to say right now.
Okay makes sense.
And then regarding side play the the metrics, particularly ARPU was a very strong and I'm sure you guys will get into this.
So I play call.
It's certainly kind of confirms that your your monetization teams are doing better and you acquired come to play, 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've 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 or for casual casino. Thanks.
Yeah, absolutely I think the.
Playbook here is to look for companies that.
We believe in the game and the game teams these casual.
Puzzle card board like skilled mechanic.
You know with very simple game play very similar to a slot we plug it into our monetization machine, we create medic gains on top we create monetization lives we create social lives we improve their you a if the exact same playbook, we use store bingo, which triple that business and the goal is to come in and.
Fine people, who really understand and no core mechanic and do it really wells 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're exactly right. The the casual games spaces bigger.
It tends to be less monetized, but that's where our expertise is taking these simple loop games and figuring that and building the the the medic game around them in order to get that monetization and so.
You're exactly right, we're very excited about it and the team that we got there and Chad. This is trend 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 you know in that space as well, which could create another avenue for growth for us down the road.
Thanks appreciate it nice results goes.
Thank you.
Next question is from Ryan sit down with Craig Hallum Capital Group. Please go ahead.
Thanks, guys good afternoon and.
Congrats on the good result, managing or a challenging environment here.
Thank you. Thank you.
Just wanted to dig in a little bit more if you could say on the new customer that's coming up 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're displacing someone else mother spire.
Yes, basically we're seeing is when people were forced to work from home.
To learn and adopt the new ways to do the things that they loved right and so we're saying you know, but I would say, it's both were seeing new players coming into this space.
You know that and getting comfortable with digital and mobile you know gameplay and I think that just expands the addressable market.
In addition to that because that your phone is on your 24 by seven.
You know, we're also seeing frequency at play.
You know happened as well, where as you know if you have to get up and tried to land based entity to make a bad or to play a game you Ah Theres a barrier friction there so.
We're seeing both were seeing frequency of play frequency of spend and spend and then we're pursuing new people come in that you know into the market and Ryan just to your to your point on on new deals in the future. It is you know it's it's both it's it's on the I gaming in sports side, and as Barry alluded to earlier multi jurisdiction.
It also Ah, yes, certainly some exciting things on the horizon yet.
Yeah, maybe just to be more clear the new customer that's coming up for digital that you you talked about in your prepared remarks is that an existing digital customer that you're expanding with or is that a brand new operator bigger ready.
Brian is trying to get.
It is an addition, but we really can't say anything more beyond that today, but we will have an announcement so.
Got it.
Right.
Moving along 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 the turning on it.
Their own machines or is it the premium leased and then how are your machines comparing versus competitors.
So I.
I think most of them are balancing the space and so I would say ultimately it's really balanced quite frankly.
Here's what we're seeing in terms of.
The you know what machines are getting turned on I will say.
A lot of you're seeing a lot of obviously gravitation towards.
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 you know when we when you're restaurants, all about turned off or shut down and other restaurants that came back up and everybody. You didn't go to a brand new restaurant you went to the restaurant that you.
Often miss the most right and so.
Lot of ways. The same thing happens here and the Great news as we've got such Great. You know traditional plethora of franchises that are out there in the marketplace.
And as I mentioned earlier on the we're seeing.
Significant coin in on a on an active machine above and beyond what we.
I would normally see and so the balance of that tells US that you know that we're really doing well, we can't point to competitively at weed out. There is no reports out there that will you know that that would give me any credibility on on that but.
We're encouraged by the result of put it that way.
Great. Thanks, guys. Good luck.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Bury Carl for any closing remarks.
Hi, Thanks for joining us today, we really appreciate your support and I'm very pleased with the actions we've taken in the second quarter with a 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 of digital gaming was critical to allow us to say.
Excessively navigate the worst of this environment, we have the right team coupled with the best products across both land based in mobile gaming to position us for the future problems profitable growth. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.