Light & Wonder Inc (LNW) 2013 Q4 法說會逐字稿

Good evening ladies and gentlemen and welcome to the Scientific Games fourth quarter 2013 conference call.

At this time all participants are in listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, today's event is being recorded.

It is now my pleasure to introduce Cindi Buckwalter, Vice President of Investor Relations for Scientific Games.

Ms. Buckwalter, you may begin.

Thank you, operator.

Welcome and thank you all for joining us this evening.

We appreciate your patience as you waited for our press release to hit the wire.

During this call we will discuss our fourth quarter results followed by a question-and-answer period.

Please refer to our earnings press lease for further details.

With me this evening are David Kennedy, President and Chief Executive Officer, and Jeff Lipkin, Executive Vice President and Chief Financial Officer.

As a reminder, this call is being simultaneously webcast, which may be accessed on the investor information section of our website at www.scientificgames.com.

A replay of the call will be archived in the investor information section of our website.

This conference call will contain statements that constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements involve risks and uncertainties that could cause actual results to differ materially.

For certain information regarding these risks and uncertainties, please refer to our earnings press release, the materials relating to this call posted on our website and our filings with the SEC, including our most recent annual report on form 10-K and our subsequent reports filed with the SEC.

During this conference call we will discuss certain non-GAAP financial measures.

A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to the most comparable GAAP financial measure can be found in our earnings press release.

Now I will turn the call over to David Kennedy, President and Chief Executive Officer.

Thank you, Cindi and good evening, everyone and thank you for joining us today as we discuss our 2013 fourth quarter results.

The progress we have made with our integration initiatives and share with you a brief overview of our strategies to improve performance and build shareholder value over time.

Let me begin by sharing with you some of the critical actions we have completed since our last call.

An organizational structure has been established centered on three operating groups, each with well-defined goals, strategy and accountability.

Our lottery operations consisting of instant products and lottery systems have been combined into one group led by Jim Kennedy, group CEO.

The interactive gaming group consisting of social gaming and real money online line gaming content publishing and distribution through game server integration is headed by Orrin Edidin, group CEO, who launched and led this business for WMS and now, as a unit of Scientific Games operating as Williams attractive.

Finally, the gaming group is led by Bill Huntley, group CEO.

The gaming group is a combination of the acquired WMS traditional gaming business and the Scientific Games gaming business, which is primarily the server based business in the United Kingdom and the video gaming systems business.

Let me say that I am highly confident we have a sound organization structure along with strong leadership to drive improved performance over time.

I am also confident that we have highly experienced, knowledgeable people throughout the organization dedicated to building the value of the company.

Plans and initiatives to integrate WMS and Scientific Games continue to be executed.

And based on actions to date, we are ahead of schedule and expect to exceed our targeted cost reductions for calendar 2014.

Jeff will talk more about these results later.

Over the last several months, operating business plans for 2014 have been developed and are now being implemented.

These plans establish well-defined priorities, initiatives and performance metrics.

Let me emphasize that our plans include investments and initiatives which we believe will provide growth and profit over the longer term.

Further, since our last call, we have divested certain non-core assets and operations including selling our investment in Sportech.

And we have exited the operation of the instant ticket charity lottery in Mexico and the online gaming business in the UK.

And we terminated our contract to operate online gaming site in Belgium.

Let me now briefly highlights the key strategies in each business that we are implementing to drive improved performance and shareholder value.

In the lottery business we will continue to drive value for lottery customers and operators, supporting their retail customers by providing high-performing game content and innovative game delivery systems that leverage our secure platforms.

The instant product portfolio is continuously being expanded with new, exciting instant game programs and digital games along with our unique, highly differentiated loyalty programs and second chance promotional drawing offerings.

Another key strategy is winning profitable contracts.

As you know, the lottery group recently began to sell instant games through the services contract in New Jersey.

We wanted to continue to gain these opportunities as they become available and are profitable.

We will continue to seek expansion into new and undeveloped geographies as we have in past years, as we did with success in China and Italy.

We are now the exclusive supplier of instant games to the Hellenic Lottery, a joint venture in Greece.

Operations are expected to begin in the second quarter of this year.

We recently entered into a contract to begin providing instant games in Panama and a contract to provide instant games in the Dominican Republic.

In the gaming business, we will continue to focus on creating innovative content, product systems and services delivered in traditional as well as interactive and social channels.

Innovation has been the foundation of success at WMS over the years.

We continue to invest in the advanced R&D efforts and support the casino evolved advanced technology lab to help ensure future generations of our gaming products will be based on creative and leading-edge thinking.

I am confident that we have the right talented people and the capability to continue to provide innovative and exciting player experiences to drive customers' revenue and profit.

Following on the success of the Blade and the game filled XD products, we are excited about the launch of the Blade 3-Reel mechanical slot machine this month.

The initial results of the new 3RM product have generated wins substantially over the average in this segment of the casino floor and production quantities rollout in this product will occur in the second quarter.

In the US regional markets, the trends appear to be challenging, with the two most recent months showing larger declines in same-store results compared to the prior year.

This trend is leading our customers to be more cautious about spending capital to refresh their slot floor and in addition, the competitive landscape continues to be a challenge.

As a result, we have taken actions to broaden our product base, expand our geographic reach and further penetrate existing markets so that we are not as dependent on revenues from the North American replacement market.

We have already begun investing in projects to achieve these objectives.

We recently took over direct sales in both Australia and Peru from our distributors.

And we are expanding our game development studio in Sydney to provide unique content for the Australia and Asian markets.

Further, we'll identify and invest in other new opportunities for gaming expansions around the world to ensure we capture our fair share of the revenues.

Turning now to Williams Interactive.

Since its recent launch, Williams Interactive has established itself as a leading global publisher of proven, high-performing WMS content and now, Barcrest content, into both real money and social play-for-fun channels.

Within social gaming channels we recently launched our second application, Goldfish Casino.

Goldfish complements our first and highly successful social game, Jackpot Party Social Casino.

Jackpot Party Social Casino consistently ranks among the top 5 to 10 social gaming casino applications on Facebook, iOS and Android.

Within the real money gaming business, we are now live with 11 operators across Europe and expect to continue our expansion, adding new customers.

During this year, we look forward to launching our real money games in the regulated jurisdictions of Delaware and New Jersey.

The launch of the online casino operations in the state of Delaware was a collaborative effort between our lottery and gaming business and demonstrates what our combined businesses can achieve.

As announced in October, our Scientific Games UK gaming business secured an important renewal of a five-year contract with Ladbrokes.

And we are now in the midst of rolling out over 9,000 of our new clarity terminals across the Ladbrokes estate.

On the integration front, we have moved the responsibility for our game content studio in Manchester, which is primarily focused on producing server-based gaming content for the UK, to Phil Gelbert from WMS and now our global head of product development operations.

We are taking the best development practices among our content studios and rolling them out globally.

Finally, before turning it over to Jeff, I want to emphasize that across all our businesses we are focused on improving our profit margins and cash flow by driving efficiency through continuous improvement.

In this regard, we have already made significant progress toward achieving the targeted cost reduction synergies identified in our planning efforts to fully integrate our company as a result of the acquisition of WMS.

Let me turn the call over to Jeff, who will provide more detail on the targeted cost reduction synergies as well as discuss the financial results and the other significant changes affecting the acquisition of WMS.

Thanks, David and good evening everybody.

I will review the highlights of the quarter and provide some additional color on our press release.

As you know, we completed the acquisition of WMS on October 18 and therefore our reported results for 2013 reflect the results of operations for WMS for 74 days following the close of the acquisition.

I thought it would be held will to provide a high-level overview regarding certain changes in our reporting in this quarter as a result of the WMS transaction.

We will continue reporting our operations in three business segments: gaming, instant products and lottery systems.

Our gaming segment now comprises all of the operations of WMS including Williams interactive and the legacy SGUK Mexican and Caribbean server based gaming businesses plus our video gaming systems business, which was previously reported under our lottery systems segment.

Our 2012 results have been recast to reflect this change.

The equity investments in our gaming segment included Roberts Communication Network, International Terminal Leasing and Sportech.

Our instant product segment, which was previously called printed products, includes our instant lottery games, licensed products and player loyalty programs.

Also included in the instant products segment, are our equity investments that provide outsourced services to the Italy, Illinois and New Jersey lotteries along with an equity investment in our instant ticket supplier for the China sports lottery.

This segment further includes our equity investment in Hellenic Lotteries in Greece where we are expected to commence operations in mid-2014.

Our lottery systems segment includes our systems to sell draw games such as Lotto, Powerball and Mega Millions along with Keno and sports betting.

Our lottery systems equity investment in China, Guard Libang, which provides validation services to the China welfare lottery, is also reported in the results of this segment.

Revenue classified as services revenue from our income statement includes lottery systems services, WMS' gaming operations and Williams Interactives business.

WMS product sales business flows through our product sales line on our income statement.

I should also note that the convergence of reporting between the companies has resulted in some changes in the classification of certain items on our financial statement.

WMS had previously reported amortization of brand and technology minimum licensing to the cost of services line and amortized gaming lab testing fees in R&D.

All amortization is now included in our depreciation and amortization line, consistent with how Scientific Games presented these items.

We will also present an R&D line on the face of our income statement which contains the amounts incurred by WMS for R&D and some historically immaterial amounts that Scientific Games previously included in SG&A.

We will continue to report attributable EBITDA which includes our share of the EBITDA from our equity investments.

As in the past, we derive this metric largely on a definition of EBITDA contained in our credit agreement.

The definition of EBITDA in our new credit agreement differs in some respects from the definition under the prior credit agreement and we have highlighted these differences in the press release tables.

Lastly, we have added a number of key performance indicators to our press release to provide investors with a better understanding of the revenue drivers of our business.

Some of the KPI definitions in the gaming segment were updated to reflect the combined SG and the WMS operations.

We present and define these KPIs in the press release.

With that background, I will highlight and amplify a few things in our consolidated financial results for the quarter.

As you can see in the table on page 2 of the press release, we have summarized the impact of the acquisition-related and restructuring items that impacted the quarter.

These include a $13 million increase in cost of product sales in gaming due to the increase to fair value of WMS' finished goods inventory which was an adjustment under purchase accounting.

This had a material impact on our cost of product sales.

Operating expenses was impacted by a total of $51 million of charges, including restructuring expenses of $33 million, primarily consisting of $22 million of severance, the cost of vacating and closing facilities, costs associated with exiting a product line along with the impact of exiting our Mexican lottery operations and the interactive managed services business in Belgium.

The $22 million breakdown as follows: $9 million impacted corporate, $9 million hit gaming, $4 million impacted instant products, and in addition we expensed $14 million in the gaming segment for acquisition related fees and expenses.

This primarily consisted of investment banking, legal and integration consultant costs.

In the aggregate, these merger and restructure items along with a couple other items enumerated on the chart reduce pretax income by $70 million.

We also recorded income tax benefit of $131 million as we reduced our valuation allowance by the amount of net deferred tax liabilities acquired in the WMS acquisition.

In addition to the items reported in the table, we also recorded $25 million for legal contingencies and settlements in the fourth quarter.

Total earnings from equity investments declined $18 million, primarily due to $23 million in charges including $17 million for a change in the estimated useful lives of certain gaming machines that impacted our ITL or International Terminal Leasing equity investments.

$6 million was from a write-down of our Guard Libang equity investment partially offset by a one-time $8 million early termination fee negotiated as part of a five-year extension of a contract which also is the primary driver for the $7 million year-over-year increase in EBITDA from equity investments.

The attributable EBITDA in the quarter was $131 million, up $41 million over the prior year period Let me now turn to a brief overview of the three business segments for a bit more detail on the operating performance.

Starting with the gaming segment, which again, unless indicated otherwise the press release, includes the legacy WMS business for only 74 days.

Revenue was $182 million or an increase of $138 million over the prior year.

WMS revenue for the 74 day period was $145 million, while legacy Scientific Games revenue decreased approximately $7 million, principally reflecting lower North American machine sales.

And a decline in machine sales to UK bingo and arcade customers and a slight decline in the service revenue from our UK LBO customers.

When you look at the KPIs on a full quarter basis, inclusive of the 18 days prior to the acquisition as presented in the supplemental table in the release, the average install dates of WAP and premium participation gaming machines in the December quarter was 9,460 units and the average revenue per unit per day was $64.84.

Participation based revenue increased as we experienced growth in our average installed base of 279 units and in the average revenue per day of $0.57 year-over-year despite the challenging industry conditions during the period.

At the end of the period our total footprint was down 113 units year-over-year despite our WAP install base increasing almost 500 units and reaching 3,817 games, which I believe is a record level for WMS.

¶ The growth in our install base of WAP games reflect the continued strong performance of our game field XD cabinet for which we now have five titles in the field and expect to launch our new Beetlejuice game on the platform in the June quarter.

Approximately 20% of our total WAP and premium participation install base at year-end is comprised of game field XD games.

Our other premium participation base footprint declined in the quarter due to increased competition in the non-WAP premium category.

Other leased and participation units includes 2,198 leased WMS units and legacy Scientific Games server-based gaming machines in the UK, Mexico and the Caribbean.

The install base in total for these units was 29,018 units at December 31, which is up 3,974 units or 16% on a comparable year-over-year basis.

The increase is largely due to the addition of the WMS leased units along with an increase in the legacy SG server based gaming machines.

The decline in average revenue per unit reflects the blending of rates of the SG and WMS machines in this category.

Interactive products and services revenue increased $27 million year-over-year.

The contribution from Williams Interactive represented $26 million of the increase.

During the quarter, there were approximately 1.2 million average daily users for the Jackpot Party Social Casino.

Average daily active users increased 140% and average revenue per daily active user or ARPDAU, was slightly down year-over-year at $0.26.

The DAU increase reflected growth in total users on both desktop and mobile while the slightly lower ARPDAU is due to the overall broadening of the player base.

As mentioned in the release, revenue from our social gaming business is now reported on a gross revenue basis before platform flees rather than on a net revenue basis as previously reported by WMS due to a change in the way Facebook settles payments.

This represented approximately $7 million of revenue this quarter of an increase.

Product sales revenue of $72 million included $69 million in revenue from sales of WMS products including new US and Canadian unit sales of 2,169 machines in the partial quarter, of which 1,631 were replacement units, 352 machines were Illinois VLT units and 186 were for new casino openings or expansions plus 1,571 units shipped internationally.

Blade units comprised 42% of the total units shipped this quarter.

We remain pleased with the performance of the Blade, as its game content has held up exceptionally well at what we believe is nearly 1.3 times casino house average.

The launch of the new Blade Mechanical Reel machine is on track and we expect to begin shipments before the end of March.

I would note that the year-over-year reported decline in total WMS units shipped primarily reflects the 1,060 VLT units shipped to customers in Canada in the year-ago period.

On a like-for-like basis, casino replacement units increased 42% compared with 1,170 units in the 2012 fourth quarter and based on available industry information, we believe our shift share of casino replacement units increased both on a year-over-year and sequential basis.

Attributable EBITDA in the quarter for the gaming segment was $55 million which included $12 million of JV EBITDA primarily from our international terminal leasing joint venture, which during the quarter recorded an early termination fee, as I mentioned earlier.

Turning to our instant product segment, total revenue was $140 million or up 8.3% from the year-ago period including the commencement of sales to our Northstar New Jersey equity investment.

And the launch of instant game operations in the Dominican Republic and Panama.

US lottery customers retail sales of instant games increased 4.3% year-over-year led by higher revenue growth in jurisdictions in which we supply games on a participation basis.

Retail sales of instant games in Italy declined 1.2% year-over-year.

The $3 million increase in licensing and player loyalty revenue was primarily driven by promotional and linked games along with new contracts.

There was a restructuring charge in the quarter of $4 million related to the exit of our lottery operations in Mexico.

Attributable EBITDA in the instant product segment was $65 million, up 9% or $5 million for the prior-year period.

Turning to our lottery system segment, revenue of $80 million was up 8.4% year-over-year.

Product sales revenue rose 15.4%, principally due to sales in international markets.

Service revenue increased 5.9%, primarily driven by higher sports betting revenue and the launch of iGaming for the Delaware lottery.

Attributable EBITDA was $26 million for this segment compared to $27 million in the prior-year period, primarily due to lower service margins related to a higher proportion of revenue coming from product sales.

And reduced EBITDA from our China equity investment.

In summary, there were a number of moments and adjustments, but if you step back and focus on the performance of our business in Q4, the legacy Scientific Games business revenue increased 4% to $257 million primarily driven by growth in the instant games and lottery systems product sales, partially offset by a decline in SG's legacy gaming businesses.

Looking at the legacy WMS results for the entire fourth quarter including the 74 days we owned them as well as the 18 days prior to the acquisition.

Total revenue increased by 5% to $165 million, driven in large part by the strength in their participation in interactive businesses.

As indicated in our press release, on a pro forma basis for 2013, the company would have generated revenue of approximately $1.7 billion and attributable EBITDA of $563 million fee before the expected synergies in 2014.

As David mentioned, we are ahead of schedule in implementing initiatives that will take cost out of the combined company.

And we now expect that we will be able to achieve at least $60 million in annualized run-rate cost synergies by the end of 2014.

We have already initiated or completed actions that are expected to have an annualized run-rate impact of $45 million in savings by the end of 2014.

Including $37 million in annualized savings and SG&A related to lower headcount, stock-based compensation expense, elimination of public company redundancies and savings on indirect procurement initiatives.

In addition, we've already achieved $6 million in annualized run-rate savings and cost to product sales, primarily from manufacturing procurement and component sourcing initiatives.

And $2 million in annualized run rate savings and R&D expense resulting from our initiatives to rationalize hardware and software platforms as well as eliminate duplicative functions net of investments made and new initiatives.

We remain on track to achieve the forecasted $100 million in synergies by the end of 2015.

It is important to note that there will be costs associated with achieving these savings initiatives.

We currently anticipate that we will incur restructuring costs and other expenses of approximately $15 million to $20 million in 2014 and $10 million $15 million in 2015.

Based on existing contractual obligations and planned investments, we expect to invest up to $280 million in capital expenditures in 2014 including approximately $15 million to $20 million of integrated capital expenditures in that number, primarily related to technology and systems investments related to the integration.

We also expect to make a net investment of approximately $27 million in international terminal leasing to fund our share of the purchases of gaming machines for our participation based gaming business.

We also have a number of notable items impacting 2014 cash flow that we wanted to point out.

We anticipate making approximately $21 million in deferred payments related to the WMS acquisition and restructuring activity.

During 2014, we expect to pay out approximately $11 million in earn-outs related to legacy WMS acquisition.

Approximately $30 million was used for share repurchases in January along with $16 million to settle equity awards for cash in connection with employee termination.

The first quarter we received approximately $45 million from the sale of our Sportech investment.

I will wrap up by saying that we are intensely focused on furthering the progress we have made with respect to our integration efforts in the short period of time since closing the acquisition.

And we look forward to continuing to update you on our progress.

With that, we will be happy to take your questions.

(Operator Instructions)

Barry Jonas, Wells Fargo securities.

Hello guys.

Hello.

David, you have been running the company now for almost four months.

Can you talk a little bit about what you see as your key priorities and maybe any differences in strategy versus the prior management team?

I attempted to outline the strategies and I don't know how those would compared to prior management specifically, but I think we are essentially on the same track.

Certainly those strategies across all of the business units generally involve creating and continuing to generate content that is exciting and that really works for all of our customers as well as our players.

And also to continue to innovate and produce products and services.

In particular I would say that would include our systems and our technology.

In addition, I think, and maybe this is somewhat different, we want to target to improve our market share in the markets that we're in, and I should say profitable market share.

We want to expand our footprint where we have opportunities in the US and outside of the US, as well.

Great.

Maybe talk a little bit about potential opportunities for revenue synergies with WMS.

I want to get your take on that.

We believe that they're certainly there.

At this point, I would say that they are in very much the development stage and I would much prefer to talk about them after we have actually had some accomplishments and some achievements in that area.

Right.

I think the last call there was some discussion about deploying WMS content on global draw.

Is that still in the cards?

In fact it is happening now, but I don't know the outcome just yet.

So it is early days as I indicated.

Got it.

Thanks a lot guys.

Steven Wieczynski, Stifel Nicolaus.

Hi.

Good afternoon, guys.

Hi, Steve.

From the WMS side of things, the wider and progressive component of WMS looked extremely strong and healthy.

Maybe how you guys are thinking of that or thinking about that as we move over the next two quarters or so?

I will start off.

I think certainly that that is a key part of the business and we would certainly do everything we could to drive that area of the business.

I will turn it over to Jeff if he wants to add to that.

We have, as you know, one of our objectives to grow our participation base, and largely the growth that you saw in the fourth quarter came from the game field XD, which continues to perform very well for us and we continue to have a new themes that are being released.

As I mentioned, Beetlejuice will be coming out in the next couple of weeks.

We have Monopoly mechanical, which is new, as well which will be a WAP game that we have coming out in the second quarter.

We have Star Trek game and we have more to come.

We are very, very focused on the WAP space.

It's obviously a very productive part of the participation market.

As I mentioned in my prepared marks, the decline we had in units was in the non-WAP segment of the participation units where we do see more competition.

So we are focused on the higher end of the market and we are lucky to have a very strong product and game field.

Right.

That was going to be part of my second question.

The lower yielding products, is that something that you think will be a pretty tough -- and you basically just answered this -- environment going forward.

We see more competition in that segment of participation.

Yes.

Okay.

Jeff, going to China -- again China looks like it was down about 8%, according to the release.

Any update there in terms of how you are approaching that market at this point?

In terms of China, from a leadership perspective, I will let David comment there.

We certainly established a good leadership group there and that team, very experienced people.

Some have been there -- in fact the leadership has been there since we started with the China business.

I would say it is beginning to stabilize.

It was down, of course, as you indicated, last year but it is beginning to stabilize, and we're continuing to follow the same strategies that we have, rolling out new instant games as we get them approved by the ministry and we are looking for other developments as well, which I hope we will be able to talk to later in the year.

It is definitely a focus, it continues to be very profitable, and I believe we are organized and focused on the right strategies and have the right team over there to implement.

In terms of the China market, it continues to be very healthy.

The instant side continues to struggle relative to the overall lottery market in China.

The market itself is healthy and we are having ongoing discussions with our ultimate customer about some structural changes, which are too early to talk about, things that we discussed in the past, which until they happen, we prefer not to mention.

We think that with some structural changes, we can continue to grow that market.

It has significant growth still left in it from our perspective.

We also continue with strategy of diversifying our business in China and going into other areas of the lottery space within that market

Jeff, did you say CapEx for this year was $280 million.

CapEx is $280 million.

Correct.

Did you break out the maintenance component of that?

It's sort of a hard thing to break out a maintenance component.

I hesitate to do it.

We have a number, but it is a little bit definitional in terms of what you put in that category.

When you fix a machine, it is a little bit easier to say that's maintenance.

But when you are developing licenses for a license products business, is that maintenance or is that growth?

It is hard to put a tight definition around it.

I would say that there are several projects that are included in there.

That's a combined WMS and Scientific Games CapEx forecast.

It has been scrutinized, reviewed, challenged, ranked, then ranked again a couple more times and we are very comfortable with the areas that we are investing in.

And as I did mention, in there is a sub-limit of that.

There's about 15 to 20 that integration related, mostly systems and hardware related.

I think you should also know that, because I believe or I'm highly confident that we have very clear and focused strategies that then inform our capital allocation, that we are being very vigorous and disciplined as we allocate that capital as we invest.

That then, of course, contributes not only to the top line but also as we target to improve our margins and our cash flow.

I believe that we have a very disciplined process.

We have a very good plan.

It's very focused on all of the initiatives that we want to target for growth as well as growth in the near-term as well as building out some of our systems' functionality and that kind of thing.

And the last question, with the change in management, and now WMS being incorporated here, any change in terms of the thought there behind issuing guidance going forward?

We consider that and we talk to our board about it frequently, but at this point we will continue with our practice of not providing any guidance.

I know we just put out our release shortly before the call started or maybe contemporaneous with the call starting.

Without giving guidance, we went to great lengths, I would say, to give as much information that one would want and need to be able to construct a view of the business.

We're going to continue to give these data points along the way.

The discussion we just had on CapEx is an indication of our movement a little bit in that direction.

We haven't in every year done that, and I think it has been very clear.

We also have a pro forma number that is out there, which I think forms the basis of a reference point in terms of what the businesses would have looked like last year.

We have talked about what synergies are going to be for the year.

We have talked about what we think the health of our end markets look like.

So I think you have got all the ingredients to be able to develop your point of view on where the business goes from here, which I think is a very significant step, from our perspective, in terms of providing helpful information.

Great.

Thanks guys.

Todd Eilers, Eilers research.

Thanks for taking my questions.

I apologize if you mentioned, but could you maybe give us a sense for how much of an impact the launch of the new business or private management agreement in New Jersey contributed in the quarter.

And then how does that flow through your financials, as well?

Yes.

New Jersey had almost a de minimis impact on the fourth quarter.

As you know, Todd, it started its operation in October.

When you take over an existing lottery operation as significant as the New Jersey lottery, there's a significant amount of inventory out in the field.

So there is a period of time where you need to burn through that inventory.

I would tell you that in earnest the impact of it is just starting to be felt.

We are shipping tickets more frequently now.

The way it hits our P&L, like our other outsourced arrangements, is that there is both a printing component that is in the instant products revenue and that reflects our supply agreement with the joint venture and there is the joint venture agreement that allows us to participate in the overall economics of the outsourced relationship.

There was no impact of that effectively on the fourth quarter either.

It is really going to start to be felt this year.

It is one of our drivers for next year.

It is a state that historically we did not have a very significant footprint in, in terms of our share of tickets we printed.

It was primarily a competitor's market.

So we are excited about New Jersey.

Okay.

Great.

Then I just wanted to follow-up with another new potential market getting ready to launch, which is Greece.

You mentioned, I believe, expectations now for the middle part of this year or this summer.

Obviously, since that was not an existing market, could we expect an initial inventory build there where you might see a nice start to that market launch?

We will start operations, as we said, in May.

It will really be difficult to predict because we are rolling out in new distribution channels.

We are effectively starting up a lottery that ceased operations some years ago.

So we are starting from ground zero.

It's not even like the situation in New Jersey where there's some established channels and systems.

It is very difficult at this point to predict precisely what the revenues and profits are going to be from Greece.

Okay.

That is fair.

The last question on WMS, on the gaming ops side.

It looks like the yields there held up pretty strong in the quarter, especially relative to competitors who saw some pretty sizable sequential declines in the quarter, citing weather issues et cetera.

Is that simply just the mix of business there with the higher earning WAPs being a larger portion of the overall mix of those units, or is there also -- and/or is there also anything else going on there that might have caused those yields to be above our estimates?

I think it is really as you said, Todd, and as I said in my remarks, the increase in WAP units in the relative mix of that segment that helped us for the quarter.

Given that the performance is the WAP piece of it and obviously the game field is a big component of that WAP footprint.

The WAP footprint, I think, today, its game field is about 20%.

I am sorry.

It's higher.

It is about 2,000 of the 3,800 machines, so about almost 40%.

Almost 50%.

Okay.

Great.

Thanks guys.

Mike Malouf, Craig-Hallum Capital Group

Thanks, guys.

How are you doing?

Good, Mike.

Question on use of free cash flow.

Obviously you bought back some stock in the fourth quarter, a little bit more aggressive here in the first quarter so far.

Can you talk a little bit about the use of free cash flow relative to buying back stock or paying back debts.

I would say as we go forward, we will prioritize the repayment of debt, but not to eliminate the opportunity for acquisitions if we see some opportunities out there or to build our capability through a strategic acquisition.

I think we have the balance sheet to continue to do that.

Of course our board, if they believe that there is an opportunity to buy back stock, you could see us doing that.

But I think the priority will be to repay debt, make strategic acquisitions that really fit very well with what we're doing now and expanding our capability in some way.

Potentially, although less of a priority, I think, would be the repurchase of shares.

Great.

Can you comment a little bit -- I know everybody is looking at Greece as the rollout here in the late spring or early summer.

What other opportunities on the horizon that are in your pipeline these days?

There's quite a few in the pipeline.

You know how this works.

It takes years to develop these opportunities.

You never quite know when one is going to be turned into a real opportunity at some point.

In other words, we'll be able to capture a contract out there.

So there is always Brazil, for example, but I wouldn't say that that's anything but an ongoing effort at this point.

We have been involved in trying to develop that for some years now.

There is markets out there that are not unlike that.

There is always those opportunities.

We want to be on the forefront of attempting to develop those.

We start well ahead of time.

We invest in all the resources that we need in order to develop the territory.

At the time then when it becomes right, we will get on them and we hope, like we did in Greece, like we've done in the past in other territories, that we'll be successful.

In terms of line of sight, I think the ones that people know about, that are at least out there and being discussed on the privatization side would be Ontario and Turkey.

I would say that on the lottery side of the business, particularly on the lottery system side, there appears to be a large number of RPs that we are gaining visibility to that are not Scientific Games states, which provides us with an opportunity and is also a testament to the stability to our contracts that we have in this point in cycle.

Thanks a lot for the help.

You are welcome.

(Operator Instructions) Clifford Kurz, CLSA.

Thank you for taking my question.

I am calling on behalf of John Oh.

Could you break out what was WMS's EBITDA for the quarter on a pro forma basis for us?

Since it's been integrated, I think the challenge in doing that is that there's been businesses that have moved around.

We have integrated accounting policies.

So it is something that I would rather not do at this time.

I don't think it is productive.

I think what we have given you is a very clear picture as to what the revenues were for WMS.

We have obviously given you a lot of performance data that will help you understand how they have done.

Because, literally, people have moved between businesses.

We have realigned where our businesses are sitting, merging our legacy Scientific Games business with WMS and moving a business that was in our lottery systems business into WMS, it's really not something I think is helpful, nor do we want to create a track record of having to give that number going forward

Okay.

Great.

One other question.

In terms of, I know WMS does not have a systems business right now, per se for the gaming equipment, but are you guys -- is that something that you guys would consider given your lottery operations going forward?

Are you talking about that right now?

It is certainly something that we will evaluate.

We have the capability to do this.

The issue is whether we can determine whether there is a profitable opportunity to enter in that business.

The business that moved from our lottery systems business unit to the gaming business unit was our video systems business, which is today primarily our central monitoring control business, which is really a wide area network transaction based system for the regulated markets, but has a lot of applicability for us and it's moved over now, is housed within the gaming business.

We can certainly add to that system and build out the functionality quite rapidly.

So I would say that we do have the capability to enter that market.

Again, whether we would do so or not would depend on whether it is a profitable entry.

Great.

Thank you.

Todd Eilers.

Hi.

Thanks.

Just another follow-up.

You previously announced a new licensing deal with Hasbro.

I was wondering if you could maybe speak to that a little bit.

It would seem like that potentially could be an advantage for you on the WMS side when going after new licensing opportunities for the premium lease space.

Do you feel like that is the correct way to look at things, and any color on that new deal would also be helpful as well?

Certainly that deal was one that we thought was very strategic and it was also a deal that provided a benefit from the acquisition just because of our scale.

So in addition to the standard license that we got, we also got some other channels that will become available to us.

It was a very strategic deal and it is one of the differentiators, we think, as we go forward.

Jeff, you want to add anything?

I think we've become an attractive licensee because of the different channels, as you said.

We were able to monetize the brand in the interactive space, in the lottery space and the gaming space.

So this was a very attractive deal for us and allows us to lock in some very important brands in the gaming space for a number of years.

The fact is, the licensors like to do business with you when you can distribute their brands and promote their brands across a number of different channels with a larger footprint and clearly that is what we have.

That is one of the benefits of the combined company.

Okay.

Great.

Thanks guys.

Ladies and gentlemen this concludes the question-and-answer portion of today's broadcast.

I'd like to turn the call back over to Mr. Kennedy for any closing remarks he'd like to make.

Thank you all for joining us today.

In summary, I would like to reiterate that across all our global businesses, we are clearly focused on driving and delivering the benefits from integration, both cost savings in the near-term and investing to support revenue growth opportunities both near and long-term.

And two, executing our strategies aimed at growing market share, expanding our business presence in underpenetrated markets and driving operational efficiencies and improvements.

We look forward to updating you on our progress on our first quarter earnings call in May.

Again, thanks for joining us.

Ladies and gentlemen, thank you so much for your participation in today's webcast.

This does conclude the presentation.

You may now disconnect.

Have a great day.