Scientific Games Corporation

Thank you very much. Welcome and thank you all for joining us this evening.

With us today from Scientific Games are Lorne Weil, Chairman and Chief Executive Officer; Michael Chambrello, CEO, Asia Pacific Region; and Jeff Lipkin, Senior Vice President and Chief Financial Officer.

During this call, we will discuss our second quarter results followed by a Q&A period. Please refer to our earnings press release for further detail.

As a reminder, this call is being simultaneously webcast and is accompanied by a slide presentation which are both available along with our press release in the investor information section of our website at www.scientificgames.com.

We have also posted reconciliation information for return on invested capital and wholly-owned EBITDA on our website. A replay of the call and accompanied slide presentation is archived in the investor information section of our website.

Before we begin, I would first like to remind you that this conference call will contain statements that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties that could cause actual results to differ materially from these forward-looking statements.

For certain information regarding its risks and uncertainties, please refer to our earnings press release that was released today, the materials related to the call posted on our website and our filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2011 and our subsequent reports filed with the SEC.

During this conference call, we will discuss certain non-GAAP financial measures as defined by the provisions of Regulation G. A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to are most comparable financial measure or measures calculated and presented in accordance with GAAP can be found in our earnings press release and in the accompanied presentations on our website.

Now I will turn the call over to Lorne.

Thanks, Cindy. Good evening everyone and thank you for joining us for our second quarter 2012 earnings call.

With me this evening are Jeff Lipkin, our CFO and Mike Chambrello, who runs our business in Asia-Pacific. I gather that WMS reported at 4:30, so I think we may have fewer participants on the call at this moment than we might normally do because hopefully people are in the process of switching over from WMS to ourselves.

In terms of our quarter, although our EBITDA for the quarter was 6% or 7% behind the second quarter of last year. We do feel very confident about the way that business is developing strategically and I will have more to say on that subject in some detail in a moment.

As Jeff will explain, most of the decline in year-to-year EBITDA can be accounted for by a combination of foreign exchange fluctuation and accounts receivable reserves, so that in effect operationally we are about where we were in the second quarter of last year. Perhaps more interestingly within the core business itself continued quite strong performances in the U.S.

and U.K. in particular were offset by local conditions in Italy and China where the year-to-year in decline attributable EBITDA from a combination of contract and joint venture income was about $7 million.

So I think that puts the quarter in terms of financial performance in proper perspective. In a few minutes, Mike will discuss the steps we are taking to re-accelerate the business in China and we are of course hopeful that some of the recent positive news comes out of Europe, well healthy economic situation in Italy.

As I've mentioned in previous conference calls, we continue to maintain discretionary spending at a relatively high level in order to drive major product technology and geographic developmental activities. We of course have the option of reducing the spending levels in light of short-term weakness in some of our markets and unanticipated delays in certain developmental initiatives.

But as long as our overall profitability and cash flow remaining strong as they are, I think we are not inclined to generate near-term performance improvement at the expense of medium-term development. Some of the most interesting initiatives we are supporting at the moment include a state-of-the-art system and content for electronic instant tickets, a real money social network gaming platform, enhancements to our industry-leading player loyalty program, new content and yield management activity in our U.K.

server-based gaming business, the development of a new pub-gaming retail model that drives growth at the pub segment of our business and the development of so called Class III gaming products and associated systems to allow our very successful server-based gaming model to be adapted to North American lottery route and commercial casino market.

At the same time we are supporting important business development initiatives in many parts of the world including mobile and server-based gaming opportunities in China, which Mike will talk about in a minute and a range, a very broad range of lottery-related opportunities in Asia and Latin America.

As mentioned earlier the U.S. lottery industry remains extremely healthy with our customers' retail sales of instant tickets having risen 10% in the quarter and their sales of draw games by just under 4%.

An important emerging driver for instant ticket retail growth is our own Properties Plus player loyalty and rewards program. As it gained significant traction in the market, it not only drives retail sales of underlying instant tickets, but it becomes an important contributor to our financial results in its own right.

As importantly, Properties Plus provides an elegant vehicle for lotteries to move from loyalty and rewards to real money Internet play and several other developmental activities mentioned a moment ago are quite relevant in this context. The number of loyalty and rewards procurement opportunities is growing as news of the success stories of early adopters has spread around the industry, both within the United States and internationally.

As pioneers in the field of access to the largest portfolio of licensed brand, we believe we are well positioned to win new business in this exciting category. There were several other drivers behind the growth in our U.S.

lottery business in the quarter. Instant ticket sales to the Illinois Lottery were up about 27% in the first year of Northstar’s private management of backlog.

Our success with Illinois has demonstrated the value to lotteries are focusing on revenue growth. We are seeing heightened interest from lotteries through private management agreements and other outsourcing models as they seek to increase date revenue and reduced budget deficits by outsourcing more responsibility for the lottery value chain to experienced operators such as Scientific Games.

We recently agreed to assist in the potential procurement of the PMA for the Pennsylvania Lottery and a number of other U.S. states are actively pursuing some form of privatization.

Internationally several countries have announced plans for lottery privatization and we expect to see further development activity in these jurisdictions later this year.

We also see growing interest from our lottery customers in offering products on the Internet. We remain focused on developing and delivering new and innovative content that may eventually be sold online as well as new games for our proven lottery retailer network and server-based gaming systems.

Our gaming business also performed quite well this quarter. Revenue grew 36%, driven importantly by the acquisition of Barcrest and Global Draw as U.K.

total gross win and gross win per terminal per day increased approximately 8.3% and 6.3%, respectively. The ability to increase Cash Box by over 6% cross across our state demonstrate our ability to help our gaming customers drive growth and of course it illustrates the opportunity for very high marginal profitability for these systems for ourselves.

As mentioned earlier, retail sales in Italy and China remained soft in the second quarter with these sales trends continuing into the third quarter so far. In Italy, retail sales of instant tickets decreased by about 8% which we believe was due in large part to a decline in consumer spending related to difficult economic conditions and meaningful tax increases.

We also faced challenging year-over-year comparisons as we did in the first quarter following the record sales performance in Italy in calendar 2011. Our strategy in Italy remains to increase the productivity of retailers, maximize the portfolio of products offered and enhance marketing support.

In China, instant ticket retail sales declined 7.5% in the second quarter. We believe this continues to reflect the product mix introduced in the first half of the year which as we discussed last quarter vary from our original plans due to delays in product approvals along with slower than anticipated expansion of the retailer network.

We have a number of initiatives planned which we believe will help reaccelerate sale including a shift from a nationally-focused sales and marketing strategy to a prudentially driven model which Mike again will discuss in a moment.

Lottery sales overall remained robust in China and we are cautiously optimistic that as we implement these initiatives and continue to expand the retailer network, instant ticket sales will rebound. We are also confident as mentioned earlier regarding developmental opportunities in China in the areas of mobile-server based and high-frequency gaming.

We recently completed 3 strategic acquisitions supporting our interactive and international expansion efforts. Shortly after the quarter closed, we acquired the assets of Parspro, a leading supplier of sports-betting solutions in Europe.

We are seeing significantly heightened interest from lotteries in Germany and elsewhere in Europe, Asia and Latin America to expand in sports-betting as the next wave of lottery development to generate additional revenue.

We plan to bring Parspro's offerings to select lottery customers as we have done successfully with Parspro for the Norsk Tipping national lottery in Norway where we integrated Parspro's sports-betting system with our venue-based lottery infrastructure to support nearly 4,000 retail points of sale and their entry into the sports-betting business.

During the quarter we also acquired Provoloto, a company that distributes and develops instant lottery tickets and manages instant lotteries for nearly 30 charities in Mexico and has been a Scientific Games instant ticket customer for many years.

Having grown to becoming a leading provider of instant ticket services in Mexico, Provoloto shares our view that the instant ticket business there has substantial opportunity for growth. We now have the ability to build on Provoloto's relationships and distribution system with the addition of our content licensing and marketing capabilities to make the instant ticket offering more appealing to consumers, retailers and distributors.

We believe this is important opportunity to demonstrate how our best practices may be successfully deployed to grow our Latin American business. Other countries around the world also have provisions in their gaming regulations for the operation of charity lottery, and so the experience we gain with Provoloto may be used to expand the charity lottery operator model beyond Mexico.

Finally, during the quarter, we acquired ADS/Technology and Gaming, the leading field-based third-party maintenance service and installation specialist in the U.K. that has worked with many of the betting shops, pubs, arcades and bingo clubs that comprise our overall customer base.

ADS expands the gaming group's field servers offerings and leverage the cost structure and we expect customers to benefit from the additional product offerings. We expect these acquisitions will provide solid near-term financial benefit as well as view them as playing an important role in our longer-term strategy and investing into the products, technology and human resources necessary to drive steadily increasing overall return on investment.

And with that I will turn things over to Mike to discuss what's going on in China in a little more detail.

Okay thanks, Lorne. As Lorne mentioned the China Sports Lottery’s retail sales in the second quarter declined by 7.5% year-over-year to approximately RMB 5.1 billion.

Our results reflected the continued effect of the challenges we identified in the first quarter, a lack of new and compelling products in the market, due to delays in the product approvals and slower than expected expansion of the CSL retailer network. For the headline, the financial headlines out of China are currently filled with data points that indicate a slowing economy, we don't believe that macro factors contributed to the lagging sales of instant tickets, in fact sales of other lottery products remain resilient as draw and sports betting increased 10% and 25% respectively in the second quarter.

Clearly the lottery industry overall remains very strong.

We are optimistic that the CSL results should be stronger in the second half of 2012. Our more sanguine outlook reflects the fact that our marketing and game plans have already been approved and we anticipate more instant tickets for our code readers being deployed to retailers throughout the year.

As we have said before, our ability to drive sales growth depends almost entirely on a steady stream quality, new game introductions, expansion of our retailer distribution network and higher price points. We have also determined as Lorne mentioned that it’s necessary to be more targeted in our sales and marketing approach.

So we will begin to offer products and solutions that are tailored to each individual province.

Moving forward product development, planning and marketing will be done with greater coordination with provincial lottery leaders and our products and marketing will reflect the consumer preferences of their provinces. This is a stark contrast with our previous one-size-fits-all national approach.

While we anticipated the eventual need for this strategic shift frankly, we thought the need to be implemented would be a little bit later in this end ticket product life cycle. This strategy is of course very similar to what has been implemented in the U.S.

for decades and we are optimistic that we will yield similar long-term success.

We also look forward to the launch of our operational efficiency program for the Hubei Province later this quarter where we will be providing value chain management services designed to optimize instant ticket sales.

To further highlight Lorne's comments on developmental opportunities, in addition to those for instant tickets we have been working very hard over the past 18 months on opportunities currently existing in server based gaming, high-frequency systems-based games and mobile wagering. While the timing of the conversion of these opportunities is somewhat difficult to predict.

We feel we are very well positioned in each of these areas and that any one of these opportunities could have a positive near- or intermediate-term impact on our overall business in China. We will continue to focus of course on our revamped instant tickets strategy in driving retail instant ticket sales to a new inflection point while we expand and diversify our overall portfolio for products and services in China.

With that I will turn it over to Jeff to discuss our finances.

Thanks, Mike. Hello, everybody, and thanks again for joining us this evening.

Before I get into the details of the quarter I want to highlight at a high level a few of the key financial items. Overall, we saw 4% growth in revenue this quarter.

Lottery systems and gaming revenue grew while our Printed Products revenue declined. The decline in Printed Products primarily resulted from a couple of specific factors.

We experience lower revenue from our instant ticket business in Italy due to the lower retail sales as previously discussed. Also our licensed property business generate less revenue this quarter compared to last year due to the timing of the very successful multi-state game that positively impacted that quarter.

Together these 2 items represented a decline of approximately $15 million of revenue. This revenue was replaced generally by higher instant ticket revenue in United States and other international jurisdiction, increases in service revenue from the U.S.

lottery systems and gaming and increases in product sales and lottery systems and gaming. The impact of the mix of these revenue resulted in generally flat revenue while revenue less cost of sales and services as a result of that declined were a generally higher margin.

SG&A was negatively impacted by an increase of $2.4 million of accounts receivable reserves. The negative impact of foreign exchange resulted in approximately $4 million of EBITDA impact due to both transaction and translation impacts during the quarter.

JV EBITDA was negatively impacted by approximately $3 million due to our JVs in China and Italy, again due to the decline in retail sales in those geographies during the quarter.

Our results were also impacted by expenses relating to our ongoing efforts to streamline our operations, improve the efficiency of our business and invest in growth initiatives. We incurred $7.3 million of accelerated depreciation and $6 million of restructuring charges primarily related to the previously announced closing of our Australian printing facility and the reorganization of our gaming business, along with write-downs of software development costs and gaming terminal during the quarter.

From a balance sheet perspective, we are pleased that we generated significantly higher free cash flow year-over-year, reduced our leverage and further extended our debt maturity profile. With that high level summary of the quarter, let me now go through in greater detail the details of the quarter.

Q2 revenue was $229 million compared to $220 million last year, SG&A increased $3.7 million year-over-year of which $2.4 million reflected the increase in accounts receivables reserves I mentioned earlier, $1.4 million of higher acquisition-related due diligence expenses and $800,000 of higher stock-based compensation expense.

We also had $1.3 million of incremental SG&A in Q2 ’12 associated with the inclusion of the Barcrest in our results. These increases were partially offset by a customer claim recorded in Q2 ’11.

Operating income was $9.1 million versus $28.9 million. EBITDA from our equity investments was $21.2 million compared to $24.5 million last year, again primarily due to the reduced results from Italy, China and FX.

Our interest expense declined by $2.2 million year-over-year primarily due to the decrease in volume costs on our valuable interest rate debt and the expiration of an interest rate swap in October 2011.

Other income expense increased by approximately $2 million in large part due to foreign exchange transaction expenses during the quarter. We reported a net loss of $12.6 million or $0.14 per share in Q2 ‘12 compared with a net profit of $7 million or $0.08 last year.

Turning to the discussion of our segments. Printed Products revenue declined 7% in the quarter, this was driven by $12.2 million decrease in U.S.

and international revenue from customers who buy tickets based on a price-per-thousand ticket basis led by lower sales to Italy, the timing of orders, the impact of contract revision and the increased competition where we were not the exclusive ticket supplier.

Revenue from our licensed property business declined $8.7 million largely due to challenging year-over-year comparisons from the successful launch of the Wheel of Fortune multi-state game in the first half of 2011. We also realized a $1 million negative impact from foreign exchange; we had an increase of $8.8 million in revenue from the U.S.

and international customers who compensated us based on a percentage of retail sales led by sales to Illinois. And revenue from our Properties Plus loyalty and rewards program customers increased by $2.3 million year-over-year.

Printed Products operating was $23.9 million compared to $37.8 million last year due in part to a lower and less profitable revenue mix, along with an increase of $4.6 million in depreciation and amortization expense and $4.5 million of employee termination/restructuring costs. The restructuring costs were for the closing of our Australia printing facility that we announced on our Q1 earnings call.

The higher D&A levels were due to a $3.1 million write-down in development cost and $1.5 million accelerated depreciation related to Australia plant. We expect to incur an additional $1 million to $2 million of accelerated depreciation in the balance of 2012 related to the Australia plant closing.

The increase in SG&A was offset by a year-over-year decline principally due to our customer claim recorded in Q2 2011.

Lottery systems revenue increased 14% year-over-year reflecting higher equipment and systems sales revenue in both the U.S. and international jurisdictions.

Service revenue was essentially flat compared to prior year strength in our U.S. business and higher instant ticket validation revenue was offset by lower revenue in China and other international territories and a $1.1 million in negative FX impact.

Lottery Systems operating income increased to $10.5 million from $9.1 million last year primarily reflecting higher revenue.

Gaming revenue grew 36% year-over-year due in large part to the acquisition of Barcrest which added $9.9 million in revenue. Results also reflected a $3 million increase in service revenue from license betting shop and pub customers in the U.K.

and $800,000 from international jurisdictions, partially offset by the loss of revenue from the William Hill contract and quarter’s revenue was also impacted by the loss of $1.9 million in revenue from exiting the Austrian over-the-counter business and $900,000 in negative FX impact.

Gaming operating loss was $3.1 million compared to operating income of $3.2 million last year primarily due to a $5.1 million increase in D&A, $4.2 million increase in SG&A and $1.5 million of employee termination and restructuring cost. The increase in D&A reflected $2.7 million of accelerated depreciation for obsolete gaming terminals and $2.4 million from the acquisition of Barcrest.

The higher SG&A expense was primarily due to the $2.4 million increase in accounts receivable reserves and $1.3 million of incremental overhead from the acquisition of Barcrest.

The employee termination and restructuring expenses related to the previously announced reorganization of the gaming business. We expect to incur an additional $1 million to $1.5 million of restructuring charges in the balance of 2012 as we continue to exit certain properties.

Moving onto the balance sheet. Our debtless cash at quarter-end was approximately $1.3 billion reflecting reduced leverage from year-end levels.

Our liquidity at quarter end fit at $324 million including $212 million of availability under our revolver and cash of $112 million. Our debt less cash to trailing 12 months attributable EBITDA is below 3.8x.

During the second quarter and through August 3 we repurchased 1,335,000 shares at a total cost of $11.1 million under our existing buyback program. Our free cash flow was $32.9 million for the quarter, up from $26.6 million in Q2 last year driven in large part by an improvement in working capital.

Total CapEx for Q2 ’12 was $28.6 million compared to $22.4 million last year. There are a couple of items that I want to point out with respect to our free cash flow metric.

During Q2, we received a return of capital payment of $15.5 million from Italy and $900,000 from international terminal leasing. Since these amounts are deemed as return of capital for accounting purposes, we recorded the receipt in the investing section of our cash flow statement and they are therefore not included in the reported free cash flow metric.

To wrap up, the quarter’s results were impacted by several discrete items along with the weakness in Italy and China retail sales somewhat offset by the performance of our U.S. and U.K.

businesses. We are pleased with the strengthening in our balance sheet during the quarter and the continued progress we've made on our growth initiatives including the completion of 3 strategic acquisitions Lorne discussed earlier.

With that, I will turn the call back to Lorne to wrap up.

Thanks, Jeff. I think you wrapped it up nicely in your remarks, so rather than to belabor that, I will ask the operator to kindly turn the program over to Q&A please.

Just a couple of questions; I want to see if I could get some additional color on the Printed Products segment. I think you guys did a nice job of kind of outlining the drivers that drove the decline I guess and the upside in the quarter.

But I wanted to dig down a little bit deeper and I guess you mentioned it looks like a $12 million decline in U.S. and international price per 1,000 ticket customers and I think you mentioned Italy was about $7 million of that.

In general, is this the price per 1,000 ticket contracts, has that over the last couple of quarters, has that been a drag or has that kind of been a gain and a loss I guess as we go quarter-to-quarter. And I guess what I'm trying to get at it is should we expect this to be kind of an ongoing drag on that business segment going forward I guess?

Todd, it’s Jeff; I think the PPK customers and in particular Italy were down the last couple of quarters as you mentioned for very specific reasons. I don't think it’s an indication quite frankly of a broader trend.

I think as Italy being our largest PPK customer, dealing with some very specific issues that Lorne outlined in his comments.

With respect to some of our other U.S. PPK customers, there are some contract adjustments that we get impacted, but just I think at this point I think it’s really timing of sales more than anything else from the PPK side.

Whereas on the CSP side or the percentage of sales contracts, we have a greater influence in driving those customers and driving the revenues for those customers. Whereas as you know on the PPK customer we’ll essentially deliver in ticket.

Right.

You could also have, Todd, more in the PPK we record our revenue, just to follow-up on Jeff’s comment, when we ship it to our customer, so you can have a lot of fluctuations in our revenues that are out of sync with what’s happening with the customer’s revenues if they are either building or liquidating inventory. But I think particularly in CSP, we recorded our revenue when they were actually sold through the retailers so there tends to be a much closer tracking of our reported revenues with the retail sales of the customer.

I wanted to also ask a question on the Internet opportunity with respect to the U.S. lotteries, and obviously Illinois is currently selling lotto or at least one of the lotto games online right now.

Can you maybe give us an update, I think we saw Delaware passed several Internet gaming initiatives, I guess to include lottery sales, but can you maybe give us an update on the timing of when you might expect that and then also any other states that might be moving in that direction at this point?

Well, these like Mike was saying about the mobile gaming and server based gaming opportunities in China a minute ago, the timing of these things is very difficult to predict. But I can tell you that from not just conversations, but let's just say very active working session is that we are having every day of the week with significant number of lotteries -- that very many of the lottery in United States are very serious about launching for real money Internet sales and much more comprehensively certainly than has been in the case in the Illinois where the sales have been basically limited by the Illinois banks governing what can and happen on the Internet.

I talked a little bit earlier about the significant commitment that we are making to electronic instant tickets and this is in response to huge interest in this product area that we are seeing from not only some of the lotteries in U.S., but separately internationally as well. So the timing is very tough to gauge, but I think this is one of these things where it’s like we have seen with the Internet-based loyalty program.

In a week, we were hammering at it and hammering at it and hammering at it and then all of a sudden someone does it and they get tremendous results and that begets 2, and that begets 4 and you are riding that upward curve and of course these Internet-based loyalty programs themselves will make launching real money Internet play and the number of these states a lot easier because they have a huge customer base already committed to the website and so forth.

So I'd hate to try to -- I know some people you know some other people in the industry are saying by the end of this year there will be 4 lotteries selling on the Internet and by the end of 2013 there will be 10 lotteries selling on the Internet. And I don't like to get into that game, but we are obviously very privy to at least the conceptual plan and intentions of most of the leading-edge lotteries in the country and we are very, very sanguine about what the impact of this is going to be on us, certainly over the course of the next couple of years.

And just one last question if I might on Illinois video gaming market, where you guys are the central system provider, can you maybe give us an update on the timing there. I believe you guys are in testing on that system, can you just kind of update us on maybe when you might expect to be done with that.

And I guess at this point how many retailers or games might you expect to have deployed here by the end of the year.

A lot of this stuff, Todd, is still somewhat influx. The putting of the retailers on is largely in the hands of Illinois regulators who handle licensing and all the things of that sort and they are being fairly careful about how that process is handled.

I think the system is pretty much with all the testing is all set to go and it’s really now in the hands of the Illinois regulators in terms of the licensing and start up.

So I wouldn’t want to take a shot at guessing how many machines we will have on the system by the end of this year, but I would be very highly confident in projecting that there certainly should be thousands of machines on the network, most likely tens of thousands machines on the network, by the end of next year. And at that level of machine connection of course, it also depends on what in the U.K.

we call the Cash Box or will be call in the States the daily win is, but at a fairly moderate figure and let’s say cautiously optimistic machine count, this system should be a very, very significant financial contributor to our results in 2013.

I just had a couple of quick questions for you just with respect to kind of the China and kind of where you guys are in the process of kind of rebuilding that market there. Kind of how you are guys thinking about the ramp from here.

You kind of mentioned that the trend continued in August, but how should we think about the recovery there.

I am suddenly now soon about to be out-of-date knowledgeable about what we are doing in China because Mike and I spend quite a bit of time in China over the last few weeks. I will give you my quick takeaway from Mike and I traveling all over the place and talking to a huge number of people.

I think the final getting the approvals from the Ministry of Finance of all the games that we had in the queue, going into the first quarter and for a variety of reasons really not worth going into did not a go-ahead on until very recently.

I think combination of that and Mike's accelerated plan of getting more barcode readers into the market that will expand the distribution. I think those 2 should easily take care of [Technical Difficulty] because I think we understand what they're attributable to.

So I think in the short run, I think we are feeling pretty good about flat to say moderate increases. I think the ability to really accelerate the sales upwards and resume the kind of growth that we had in the past is bound up in the strategy of moving much more to an American model where at least let's say there 31 provinces, the China probably 30% of them or 10 or 11 account for the majority of sales at least in those general 11 provinces now beginning to have product plans and to somewhat lesser degree distribution plans that are customized to those provinces exactly as we do in the states and it was really only when we started to do that in the states a number of years ago that we saw the instant ticket market accelerate the way it has.

So, Mike, if you want to add somewhat to that I apologize for stealing your time.

No, no, that's exactly right, I think in the short-term I would add one other factor more and that's somewhat given to the issues that you just described. We find ourselves at the retailer level and in an over inventory situation of old and frankly stale product.

So as we begin to launch this new series of games, sort of in parallel with that over the rest of this quarter and into the fourth quarter we will be returning and replenishing this old and stale inventory with frankly a much more vibrant product.

And as it relates to the longer-term strategy, some of you probably will recall that we had a similar situation in China in 2010 where we had a surprising slowdown and we changed our strategy as a result of that slowdown and it didn't take quite as we weren't able to implement maybe as aggressively as we all would have liked but once implemented it proved quite successful and quite frankly I think we are in a very, very similar situation here, we've got a strategy, we have to shift some resources, change some of the infrastructure in place, we are doing that in concert with our customers, with the full support of our customer but we are driving those changes and once implemented I think this revised strategy or the U.S. strategy on a province by province basis should be very, very successful and we will be back to where we think we all need to be and should be.

Great, thanks, and maybe a follow-up to that. When you look at the Lottery Systems group the Lottery System segment you obviously had some strong sales revenue there, I wonder if you could kind of talk about the online lottery trends that you are seeing and kind of what’s driving that obviously next to China here kind of what we are looking at is low single-digit growth for around in there kind of talk about where things are going now how you are looking at that segment going forward?

Well our strategy in the online business has been a very consistent one as I said I am sure you have heard me say many times. There is no part of Scientific Games where the marginal profitability and marginal return on capital is higher than in the online business when we generate more revenue through the existing infrastructure.

So this is one of those areas where we have really been the devoting financial resources, working with the lotteries to merchandise and sell more aggressively, developing new games and variations on new games to increase and improve the product mix in the online business. We have obviously got some bump from a combination of $2 powerball and the powerball Mega Millions cross selling and all of these things are coming together to create an environment and culture where for the first time really, really working to drive more revenue through the system.

I think we have talked before a number of our customers are looking very seriously at keno for example as entirely new category that can really produce a step function increase in sales if we look at places like Maryland, for example, where we have done this the per capita sales were tremendous. So if we could get 2 or 3 or 4 or 5 of our important online lottery customers where the regs would actually permit this to decide they want to do keno that would have a major impact on our online sales and even greater impact on profitability as of the way that the fixed-cost variable costs in this business work.

So those who really the big ones. The other one of course is that pretty much every one of our online contracts with the exception of possibly one that I can think of we earn our online system revenue as a percent of all sales, not just online sales but instant ticket sales too.

So in those states where we are fortunate to be both the instant ticket supplier and the online ticket supplier by working with the lottery to accelerate instant ticket sales, we actually get a double whammy because we get the benefit on the instant ticket side but we also accelerate the revenues on the online lottery sites so in states like Pennsylvania, Iowa as a couple of examples where again we, Indiana where we get all the growth in one benefit [ph].

And then one last question if I may, just kind of in the diversified gaming segment, you guys talked last quarter just about how you are trying to get rid of them, kind of pull up the Barcrest analogue business, kind of where do you guys think you are with the Barcrest integration and where you are in terms of the analogue business and kind of closing that business out?

Yes, I think as it relates to the analogue business and with the restructuring charges that we recorded today there was about $2 million in the second quarter relating to that restructuring, we are pretty far along, the only thing that has yet to be even done with respect to the restructuring is the closing of certain properties which we expect that there could be cost that are between $1 million to $1.5 million in the balance of 2012. And that's just simply a matter of recording those charges when we actually exit the facility.

But most of the integration shutting down of the analogue activity has been done already and it's reflected in our results.

I just, a couple of things, when I am looking at use of cash I am just wondering if you can give us a sense of sort of balancing the use of cash relative to the debt paydown, share buyback, certainly acquisitions and then maybe other investments, I was a little surprised to see that, I think for the first half and why haven't you bought back shares.

Yes, sure, so the capital allocation question is something that we discussed pretty intimately with our board. I think we felt that given where our stock price is that there was an opportunity, a good return and a good opportunity to purchase some stock during the quarter which we did.

But we continue to look at that relative to acquisition opportunities as well as debt repayment we've done, in fact all 3 this quarter having consummated 2 acquisitions during the quarter and 1 shortly after the quarter as well as pay down a substantial amount of debt actually in China that you will see in our results. I mean there's no one answer, it's not like we said we prefer this over that and there are a pretty fluid discussion with our Board and sort of based on facts and circumstances.

And then, Lorne, you were actually pretty helpful with talking about the Internet sales and the opportunity surrounding that. With regards to outsourcing can you give us a sense maybe the same type of color with regard to where states are relative to the outsourcing trend and in particular I think you referred to several countries that we’re looking to do get some clarity on that?

Mike, when you talk about outsourcing, it’s what we otherwise call the private manager agreements or is that what you mean?

Yes, that's probably a better way to look at it. I was just using the wrong term.

Yes, well, outsourcing per se has been for us a very important component of our business for agent because what we call our cooperative services program where essentially the lottery turns over to us, product planning, warehousing distribution, telemarketing and so forth is something we've been doing for quite a while. It’s been -- are in a way the fastest growing sub-segment of the instant -- actually the overall lottery market in North America and the fastest-growing component of our business.

So a lot of what happens in the so-called private manager arrangement like we have with our Northstar business in Pennsylvania, really involves our doing essentially exactly what we do in a traditional cooperative service as you would call it outsourcing in that case it’s really an outsourcing.

So we have seen steady increases over the years in states coming to the conclusion that they can generate more growth and they can generate more profitability by outsourcing that part of the business to us and the private manager trend that we are beginning to see now kind of takes that one step further and allows the private manger to take on some of the responsibilities like advertising and similar functions in the running of the lottery.

A lot of states are showing significant interest in this. A lot of state are public about it, have documents floating around, Indiana is one, New Jersey is another, and Pennsylvania of course; the Province of Ontario is again where we have had a very important presence for years is serious about doing some outsourcing arrangement to modernize their lottery.

And all of this is great for us because it is increasing the value added as available to either us or of course obviously our competitors, because these are all competitive procurements.

But the point is it’s enlarging the pie available for suppliers who can add value because the lotteries have finally figured out that the secret of success in generating more and more dependable cash flow for good causes, the key to that is growing revenues, not having costs. And they see that the way to growing revenues is to be willing to pay and in effect vendors like ourselves on the value added basis if we are able to drive revenue.

So I would say that the real key thing here is we are coming out of an era where much of the lottery industry felt that the way to grow the resources available that could cause us ways to cut costs. And much of the cost-cutting that we saw in therefore in cost-cutting that we saw in the last few years was a direct consequence of that.

We have seen quite clearly now to be moving into a new era where the paradigm is not cost cutting, but rather revenue growing and it’s been backed the cost that used to be cut are now actually going to move in the other direction, but they move in the other direction because they can drive revenues. This seems to be the paradigm that everyone is embracing.

So I must say that in the 25 years or so that I've been in this business and we, Mike and I in particular being the old-timers have seen any number of trends come and go. This move from a cost-cutting paradigm to revenue-growing paradigm is without question the healthiest thing that we've ever seen.

And I think as we combine that with both the regulatory and lottery having a much more expansive view now of using new media as one of the ways to generate that growth that it really in many ways I think we see a new era in this business dawning which again going back to where I started my remarks today is why notwithstanding this particular quarter for mostly technical reasons as Jeff explained, not being as strong in comparison to the same quarter last year as we might normally like, notwithstanding that, we are feeling tremendously optimistic about where the business is in.

Thank you very much operator. I think I just made my concluding remarks in response to the fortunate question that Mr.

Malouf was kind enough to ask and so I think on that note we will end today's call and look forward to seeing you all in about 90 days. Thank you.