WMS Industries, Inc. Earnings Call Nuggets: Domestic Environment, Average Selling Pricing Decline

On Monday, WMS Industries, Inc. (NYSE:WMS) reported its third quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Domestic Environment

Carlo Santarelli – Deutsche Bank: Brian, I just had two bigger picture questions and then Scott, I had just one follow-up if you don’t mind. Brian, could you talk a little bit about the domestic environment, what you’re seeing in ASPs, obviously sequentially down year-over-year. Would you talk a little bit bigger picture about that and then if you wouldn’t mind just qualitatively walking us through what you are seeing in the international space as well on the product sales side?

Brian R. Gamache – Chairman and CEO: Sure, two separate issues. I will deal with the ASP question first, Carlo. I think that our ASPs year-over-year as we mentioned on the call we are really down due a mix issue. We didn’t have as many premium for-sale products. The VLT units, new large orders that were more competitive than normal orders and then just the competitive market pressures in general. I would think that from a modeling standpoint, you probably want to use the last three quarters or so as a more typical ASP price going forward. I think given the competitive pressures you are not going to see us have great pricing leverage in the next two to three quarters, but I think it will be a more normalized run rate going forward, call it the $16,000 range. But we are – there is no question there is competitive pressures out there unlike we have ever seen before. As far as international, there were four jurisdictions that we really haven’t done a lot of business with this year that we have done previously. Mexico, that’s I would say that that market is now stabilized. It’s certainly not a growth market as it was in a lot of the previous couple years. Australia is – Singapore and Switzerland are all undergoing national standards. In Europe, the European market is very similar to the U.S. market, where it’s very challenged economically right now. So, I think, internationally it’s more of a timing issue as is anything. Australia, Singapore and Switzerland will be resolved from an OS standpoint in the next couple of quarters, but I think, international was – is challenged as well right now.

Carlo Santarelli – Deutsche Bank: Brian, thanks. That’s very helpful. Scott, I just had one question, if you look at the end of period install base after the fiscal 2Q, as well as the end of period install base after the fiscal 3Q, your average install based for this quarter was obviously meaningfully below both. Could you talk a little bit about maybe the timing in the period, obviously some late orders came, did you have some product off for a good period of the fiscal 3Q, I assume that’s the case. But maybe could you walk us through how that calculation turns out?

Scott D. Schweinfurth – EVP, CFO and Treasurer: Yeah. Sure. We started the quarter with 9,282 units in the install base, and during the first half of the quarter, the install base shrank from that number, and then in the last half of the quarter with new approvals on new games, particularly the CLUE game that got approved in March, we were able to accelerate installs of product at that point. So, we ended the quarter with 9,389. So the 9,115 is just merely an average taking the install base at the end of each day in the quarter, and dividing it by the number of days in the quarter.

Brian R. Gamache – Chairman and CEO: Scott mentioned, Carlo, we touched about 20% of our install base during the quarter, which was a huge number for us, and yet our backlog went up quarter-over-quarter. I think, our backlog went up quarter-over-quarter. I think, our backlog last quarter was 1,900 units. It’s now nearly 2,100 units, and during that timeframe, we’ve touched a lot of products. So, we continue to get our gaming operations business back in order, and I believe that as we mentioned this is the most prolific stable of products we’ve launched in anyone quarter, this is Q4, and I think heading into Q1 of fiscal ’13, we’re going to be back in business here and we’re going to have some tailwind for once.

Average Selling Pricing Decline

Steven Kent – Goldman, Sachs: Can you just talk a little bit about the average selling price decline in the quarter, did you ship any of the Maryland units if you exclude the VLT this quarter, what were the average selling prices, just some discussion about that and then also can you talk about your tax rate this quarter, it looks like it’s about $0.01 or $0.015 or so, is that the tax rate we should be using for the balance of this fiscal year?

Brian R. Gamache – Chairman and CEO: Let me deal with the ASP question, first, Steve. We have backwards of $1,100 year-over-year, and as I said earlier, I don’t believe that’s going to be the case in Q4 and Q1. I believe there is a set of circumstances here that were a little bit unique and we did ship games in Ohio, and we did ship games in Maryland. We’re not going to break those out for competitive reasons, but any time you go backwards $1,100 and your margin is up 320 basis points, you’re obviously doing some pretty good work. Our supply chain guys are breaking their backs right now to get us best-in-class margins, and in fact, we just recently eclipsed the Q3 60% on our Bluebird2 to Bluebird2e product, which has been an internal milestone of ours for quite some time. So we are continuing to make great progress there and as we get to a more normalized environment, I believe you will see our margins to be best in class.

Scott D. Schweinfurth – EVP, CFO and Treasurer: Steve, on the tax rate, there were some discrete tax items in the quarter that should not be a recurrence of the tax rate. It should be in sort of normal 36% to 37% in the first quarter. Now that’s all is subject to some miracle, the R&D tax credit gets pushed through Congress and signed by the President by June 30th. That would have a positive benefit, but we don’t think that’s likely to happen.