Light & Wonder Inc (LNW) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2014 Scientific Games Corporation earnings conference call. My name is Whitley, and I will be your operator for today.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference call over to your host today, Mr. Bill Pfund. Please proceed.

Thank you, Whitley. Welcome, everyone, and thank you for joining us. With me this afternoon are Gavin Isaacs, President and Chief Executive Officer, and Scott Schweinfurth, Executive Vice President and Chief Financial Officer. During this call, we will discuss our fourth quarter results and operating progress, followed by a question and answer period. Our 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 from those discussed. For certain information regarding these risks and uncertainties, please refer to our earnings press release issued today, the materials related 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.

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. I would also like to call your attention to several financial tables in this afternoon's earnings release, that offer additional historical information on a pro forma basis about the combined Company's three business segments, gaming, lottery and interactive.

First, we provided a pro forma statement of operations, and a reconciliation of pro forma net loss to pro forma attributable EBITDA for the full year 2014. Second, there are supplemental tables that provide additional information on key performance indicators, and supplemental revenue metrics by segment for the last five quarters, including a table on reported historical results, a table on the standalone result for Bally, and a table of pro forma results. All of which provide the KPIs and revenue metrics on a basis that is consistent with our current presentation and classifications.

As we conformed the Bally and Scientific Games data, we reviewed certain definitions and classifications, particularly in the participation gaming machine install base to ensure comparability. And accordingly, the key performance indicators differ somewhat, from what was previously reported by either Scientific Games or Bally. As a reminder, a replay of the call will also be archived in the investor information section of our website. Now let me turn the call over to Gavin.

Thank you, Bill. Good afternoon, everyone. Today Scientific Games reported fourth-quarter financial results and provided an update on the significant progress we are making in implementing our integration plans, and some of the actions we are taking to drive improving long-term financial results. Our GAAP net loss includes approximate $258 million of pretax charges for integration-related costs, M&A, and financing fees and other largely nonrecurring non-cash charges. Scott will provide greater detail on these items later.

Immediately upon completing the Bally merger last November, we began implementing detailed integration plans. The excellent work done in preparing those comprehensive plans has enabled us to move forward quickly and with confidence. I am proud of our team's commitment and the results they have already achieved thus far, both in the December 2014 quarter, and in the months since. But our work is far from over, and we expect to accomplish a great deal more this year and next.

Let me highlight some of the progress achieved thus far. We quickly implemented actions to begin eliminating duplicative public company expense, and the general and administrative redundancies at both our corporate and divisional levels. Approximately 5%, or more than 450 positions were eliminated by year end. After receiving incentives from the state of Nevada, we announced that our corporate headquarters would relocate to Las Vegas.

We are currently in the process of moving the corporate functions to Las Vegas, and have already closed our New York office. A portion of the New York space has already been sublet, and we are negotiating to sublet the remaining space. In addition, more than 20 facilities worldwide have already been consolidated, and another 35 locations are in progress.

The consolidation of our primary US gaming machine production to Las Vegas is underway. We have already performed a successful trial of producing WMS Blade gaming machines on the Bally production line in Las Vegas, and the transitional -- I'm sorry, and the transition of additional WMS product lines is progressing. While a significant amount of work remains, we are on track and expect to fully transition all WMS manufacturing to Las Vegas by the end of the summer. By implementing best practices from both WMS and the Bally, we expect to meaningfully improve our production efficiency, and our cost structure in the second half of 2015.

We have selected our next-generation operating system platform for our gaming machines. We made this decision quicker than originally anticipated. More importantly, by incorporating elements from both the Bally and WMS next-generation systems that were already in development, we believe our next-generation operating platforms design is a meaningful improvement over either of the original designs.

Our experts are now programming a game development kit that will enable game developers to readily create exciting content for this new operating system. At the same time, our engineering team is working to establish standard internal componentry for all of our next-generation gaming machines. This represents great progress, but we have much work to do before rolling out this product. Ultimately, these efforts will improve our development processes, and bring added efficiency to our customer's management of their casino floors.

We have also begun leveraging our great scale in our supply chain to lower the cost of components used directly in our products. This also holds true for leveraging our purchases of indirect material and services, such as transportation, telecommunications, travel, entertainment, IT hardware and software just to name a few. We are still early in the integration process. However, our actions and progress to date demonstrate our focus to ensure that we deliver products and services consistent with our commitment that customers and players are our number one priority, while simultaneously realizing the economic benefits of achieving the savings targets.

We continue to expect to implement initiatives that will yield 80% of the anticipated $235 million in annual cost savings by the end of 2015, while fully benefiting from the [SHFL] and WMS cost savings during that period. By rapidly implementing our integration plans and achieving cost savings, we expect to drive improvement in our free cash flow and our ability to delever our balance sheet. I remain highly confident that we will begin to demonstrate meaningful improvement in our free cash flow, beginning in the second half of 2015, with continued improvement ongoing in 2016.

While integration efforts are a key priority, and we remain focused on managing our business. We have an exciting pipeline of innovative new products across our gaming, lottery, and interactive businesses that are expected to launch throughout 2015.

In early February, our gaming lottery and interactive businesses participated in the ICE gaming show. Utilizing a single booth allowed us to demonstrate the wide breadth of Scientific Games products offered under the Bally, Shuffle Master, WMS, Barcrest and Williams brands. It was awesome to see. The show was well-attended, and our team performed well together.

Later this month, we will launch a multi-state instant lottery ticket version of our Monopoly Millionaires Club game. While the original draw-based did not meet sale expectations, our lottery team worked diligently with lottery customers to identify a way to continue the TV game show of the same name. From it's first taping, the show has proven to be spectacular.

Just watch what has been posted on YouTube,12 episodes of the Monopoly Millionaires Club TV show have now been produced, which is expected to create widespread awareness and marketing for the lottery game. We expect these shows to begin airing the weekend of March 28 and 29. Nine more TV shows are scheduled to be produced, based on the winners created from the instant ticket game.

Our gaming operations business continues to perform well relative to the overall industry, reflecting the benefit of great new games and increased player attendance at US casinos year-over-year in the 2014 fourth quarter. Our average daily revenue for the combined and sold footprint increased 10% year-over-year on a pro forma basis. Our legacy WMS footprint of WAP, premium, and daily fee participation gaming machines at December 31, 2014 decreased 142 units on a quarterly sequential basis, despite the impact of a single large customer that removed 259 units in December as they prepared for significant corporate change.

We believe our [full] quarter combined ship share of new units to the casinos operated in the US and Canada increased on a year-over-year basis, despite combined low and new unit shipments. Industry shipments have been lower all year, reflecting the impact of the challenging industry conditions that contributed to customer's lower capital spend.

In that environment, our share of our customers spend, our share of their wallet has been increasing due to the success of the new Bally games on the prior [Pro Wave] cabinet, which has led to an increased average selling price since it was launched last year. Once again, we've generated strong interactive revenue growth, largely due to the continued player appeal of our Jackpot Party Social Casino, the growth of the newer Goldfish slots app, the addition of Dragonplay results, and higher revenue from Real Money gaming. Now let me turn the call over to Scott.

Thanks, Gavin, and good afternoon, everyone. For the fourth quarter, total revenue increased to $566 million, compared to $402 million a year ago, with the increase reflecting about $152 million from the 40 days of Bally results following the acquisition, plus having a full quarter of WMS results, compared to only 74 days in the prior-year quarter. Attributable EBITDA increased $43 million to $173 million. Our results included a number of significant charges in the quarter, aggregating $258 million pretax, of which $240 million were add-backs in calculating attributable EBITDA, and $18 million, all of which are non-cash were not added back.

The table on page 2 of the press release, and the descriptive review in the paragraph following the table provide detail of these charges. To summarize, these significant pretax charges included accelerated equity compensation payouts to Bally employees associated with the acquisition of $41 million, long-term asset impairments and write-downs of $38 million including $6 million for the impairment of indefinite lived intangible assets, M&A costs and other charges of $37 million, legal contingencies and settlements of $24 million, inventory write-downs for discontinued product lines resulting from the Bally acquisition of $18 million, employee termination and restructuring costs of $17 million, and fees for Bally acquisition-related financing of $65 million.

In addition, we also recorded a tax benefit of $79 million due to the reversal of the valuation allowance related to US deferred tax assets, as the result of the deferred tax liabilities established as part of the purchase price allocation for the Bally acquisition. We recorded $18 million of other non-cash charges in the 2014 fourth quarter that were not added back to attributable EBITDA, including impairment charges associated with the Monopoly Millionaires Club contract, impairment charges related to inventory obsolescence, increased bad debt reserves to write-down certain receivables from international customers, and additional shortfall charge related to the Northstar Illinois joint venture.

Of the $248 million in pretax charges, approximately $135 million impacted our cash flow in the fourth quarter, while $102 million were non-cash, and $21 million will impact future cash flow, mostly separation and retention payments. Additionally, as a result of the purchase price accounting adjustments in connection with the Bally acquisition, we reduced Bally's deferred revenue by $27 million in the aggregate, of which $5 million would have been recognized as revenue for the 40 days post closing of the Bally acquisition, and $22 million would have been recognized as revenue in future periods.

Purchase accounting adjustments also increased Bally's depreciation and amortization by $21 million for the 40 day post closing period. Bally's finished goods inventory was written-up to fair value by $19 million, as a result of the purchase price allocation adjustment, of which $7 million impacted the fourth quarter in higher cost of product sales, and the remaining $12 million will impact future quarters as that inventory is sold.

The balance sheet reflects the significant impact of the Bally acquisition and related financing. At year-end, we had total debt of $8.5 billion, nearly all long-term with no significant maturities before 2018. By year end, we had paid down $15 million on our revolver used to fund the Bally acquisition, and we ended the year with $172 million in cash and cash equivalents.

In addition, in February 2015, we added $25 million of capacity to our revolver which provides us added liquidity. Assuming the additional revolver capacity had been in place at December 31, 2014, our liquidity would have been $538 million, including cash and cash equivalents and available borrowing capacity under our expanded revolver. Based on the outstanding debt balance at December 31, 2014, the annualized cash interest expense would be $615 million, and adding non-cash interest and amortization of debt fees and original issue discount, our total annual interest expense would be approximately $652 million.

We have $51 million of mandatory debt payments in 2015, and we will prioritize prepayment of our revolver with the free cash flow expected to be generated in 2015. While cash flow from operating activities for the quarter was a use of $30 million, it included the $135 million cash impact of the charges previously noted. Based on existing contractual obligations and planned investments, we expect to invest $320 million to $350 million in capital expenditures during 2015, which includes approximately $15 million to $25 million of integration-related capital expenditures.

We expect to maintain a prudent and disciplined approach towards capital deployment, and investing in the future of our business. In this regard, I know many of you have questions about our opportunity in Turkey. As we move towards signing the 10-year concession contract, we are in ongoing negotiation with our partners about making a potential equity investment. As we are still negotiating, there are no specifics that I can provide today.

However, I would note that Turkey is most likely one of the most exciting potential growth opportunities on the horizon. We believe that the opportunity to significantly grow the market and generate cash flow in collaboration with our partners as the lottery operator and exclusive supplier of instant games and lottery systems during the 10 year concession is exceptional. Let me reassure you that our approach in Turkey is fully consistent with our disciplined approach to capital deployment, and an expectation for improved financial returns and cash flow.

Now let me turn to our segment operating results. With the Bally acquisition, we have organizationally structured our business into three segments, gaming, lottery and interactive. In the body of the press release, we disclosed the results as well as revenue and key performance indicators of the combined Company, which in the case of the gaming and interactive segments included Bally's results for the 40 days post closing of the acquisition. As Bill mentioned, we provided additional tables in the release to help investors better understand how we are managing the combined Company, and the revenue drivers of our three segments.

To review our three segments performance, I'll begin with the gaming segment, which generated revenues of $302 million. That is an increase of $150 million over the prior year, with the increase essentially all related to the Bally results for the 40 days post closing of the acquisition, and the inclusion of a full quarter of WMS results, versus [74] days in the prior-year quarter.

In order to help provide perspective on the impact of the Bally merger on our financial results, I would first like to comment on our reported financial results for the gaming segment, and then discuss trends on a pro forma combined basis. Gaming operations increased $57 million to $135 million due primarily to Bally results for the 40 days post closing of the acquisition, and a full quarter of WMS, compared to 74 days of WMS in the prior-year quarter. The addition of Bally increased the ending footprint of WAP premium and daily fee units by 15,349 units, but lowered the average daily revenue by $[14.62] to $58.28 per unit.

Bally also added 18,618 units to the ending install base of other leased and participation units, and increased the daily average revenue by $2 to $14.78 per unit. Gaming machines sales revenue was $119 million, of which $56 million was from new unit sales of Bally products. Total new unit shipments were 6,100 units, with an average selling price of $16,308. A total of 3,101 new Bally units were sold during the 40 day period after the closing of the merger, including 2,049 units for US and Canadian customers.

Shipments of WMS replacement units to the US and Canadian customers increased 305 units, which was more than offset by 500 fewer Illinois VLT and lower units for new casino openings. The continued success of the premium priced Bally Pro Wave cabinet contributed to the increase in average selling price. Shipments to international customers totaled 2,049 units, including 1,052 Bally units. The $28 million in gaming systems revenue, and the $20 million in revenue from table products was primarily due to the Bally results post closing.

Turning to our costs, our earnings release provides a detailed breakout of the charges that impacted cost of services revenue and cost of product sales revenue. Selling, general and administrative expense increased $74 million, largely reflecting the addition of Bally, and $85 million of charges previously described. We incurred $11 million of employee termination and restructuring expense, primarily related to our integration efforts, including $1 million of WMS integration-related actions prior to the Bally merger.

Depreciation and amortization increased $69 million as the result of $38 million from Bally, inclusive of $21 million related to purchase accounting for the 40 days post closing of the acquisition, coupled with $28 million of accelerated depreciation and long-term asset impairments and write-downs. Attributable EBITDA of the gaming segment in the quarter was $106 million, but this was after the negative impact of $9 million of non-cash charges related to the increase in bad debt reserve and inventory write-offs, plus there was the additional impact from the purchase accounting adjustments to deferred revenue.

Switching to discuss pro forma combined metrics, as if Bally and WMS had been acquired effective October 1, 2013, gaming operations revenue was down $1 million quarter-over-quarter. A 10% increase from the average daily revenue per unit largely offset the 2,629 unit decline in the average installed footprint in our WAP, premium and daily fee participation units, which was primarily the result of decreases earlier in the year, along with the removal of participation games by a single large customer in the 2014 fourth quarter.

The decline of 1,433 units in the average installed base of other leased and participation products primarily reflects the previously reported loss of the [Bet Set] contract for fixed-odds betting terminals in the UK at the beginning of 2014. We were pleased to see a 7% increase in the daily average revenue earned at our UK installed base, and the Bally daily revenue was also up slightly year-over-year, resulting in an overall 5% increase in daily average revenue for our other participation and leased units.

Combined Bally and WMS shipments to US and Canadian customers totaled 4,798 units, representing a decline of 1,083 units from the prior-year quarter. Combined, we only shipped 228 Illinois VLT units, and 59 units to new casino openings and expansions in the December 2014 quarter, an aggregate decline of 1,903 units compared to the prior-year period. Replacement units aggregated 4,511 units, a year-over-year increase of 848 units.

Shipments of new Bally replacement units increased by 547 units to US and Canadian customers, but were more than offset by a1,403 unit decline in Illinois VLT, and units for new casino openings. We shipped 2,782 new units to international customers, a decline of 1,406 units largely reflecting lower sales due to the continued import restrictions in Argentina, and softness in the Australian and Mexico markets.

Gaming systems revenue for the [full] quarter declined $29 million, due to lower hardware and software revenue, primarily reflecting fewer installations in the December 2014 quarter, compared to the record high level of installations in the prior-year quarter. Maintenance revenue was essentially flat. Table products revenue declined $1 million, as the decrease in a number of units sold was partially offset by an increase in leased revenue, due to the larger installed base of utility and proprietary table games.

In our lottery segment, revenue totaled $221 million inclusive of an unfavorable $4 million foreign currency impact. Instant game revenue increased 3% over the prior year to $141 million. 4% growth in instant game revenue from customers with participation contracts was driven principally by higher retail sales to our US customers, including higher sales to Northstar New Jersey, plus sales to Atlantic lotteries, which began operations in May of 2014, partially offset by lower sales to international customers, and the exiting of certain unprofitable Mexican operations in the first quarter of 2014. We also experienced an 8% increase in licensed and player loyalty revenue.

Services revenue declined $5 million, primarily due to lower retail sales of draw-based games in the fourth quarter, including Powerball and Mega Millions games. Sales in the fourth quarter of last year had benefited from an all-time record $648 million Mega Millions jackpot. This year is off to a better start, as a $564 million Powerball jackpot was built throughout the early weeks of the quarter, and hit midway through this quarter.

Service revenues in the 2014 quarter was also impacted by the cessation of sales from the previously announced loss of the Colorado contract effective October 1, 2014, partially offset by higher sports betting revenue. Product sales benefited from the sale of additional terminals to lottery customers in the US, and an increase in hardware sales to international customers, primarily those in Europe.

Operating income for the lottery segment increased approximately $2 million year-over-year, primarily from the benefit of lower operating expenses that reflect the improved organizational alignment, and the effectiveness achieved during the last year, along with a lower amount of employee termination and restructuring expense. Partially offsetting these improvements in operating expense was a $4 million increase in the cost of instant games, largely reflecting a $6 million charge associated with the Monopoly Millionaires Club contract, and a $4 million in D&A for impairment of lottery contracts. Attributable EBITDA for the segment declined $6 million or 7% from the prior-year period to $85 million.

Turning to our interactive segment, revenues increased $13 million year-over-year reflecting growth in the social gaming business, and $3 million from the inclusion of Bally and Dragonplay results post closing. Pro forma revenue grew 13% year-over-year. Social gaming continues to benefit from an increased base of users, on both the Jackpot Party and Goldfish Social casino apps. On a combined pro forma basis, ARPDAU increased slightly on a quarterly sequential basis, and was flat with the prior-year quarter.

In summary, we believe that the combined Company is beginning to reflect, and will continue to benefit from the diversity of our revenue streams. When coupled with our intense focus on achieving integration cost savings, we have a defined path to generate improving free cash flow. And as we've previously noted, we intend to prioritize our free cash flow to reduce leverage. We believe the foundation is in place for improved operating results in the future quarters. With that, let me turn the call back to Gavin.

Thank you, Scott. Before taking your questions, I want to summarize and reiterate our key priorities. Without question, our number one commitment is to our customers. Building on our heritage of innovation and creating great content and systems across gaming, lottery and interactive. With our talented people, intellectual property, well-known brand, breadth and depth of product portfolios, technologies and scale, we believe we are the best-positioned Company to create new ways to engage players and help our customers drive growth.

Second, we remain focused on the rapid implementation of our integration initiatives, which should drive long-term margin improvement and greater free cash flow. We are action results orientated, and our goal remains to delever to 4 [x] times our attributable EBITDA by the end of four years.

And third, we remain disciplined in the management of costs and deployment of capital. We will work continuously to refine our business processes to better utilize working capital, increase our operating margins, and generate free cash flow. Our management team and Board are fully committed to drive profitable growth, enhance our financial returns, and delever the balance sheet.

I want to thank everyone on my executive team, and more than the 8,500 Scientific Games employees around the world for their passion, dedication and commitment to make our Company, a customer-centric, world-class leader in innovation and performance. I believe we have the best team in our industry. Great companies are made up of great people, and we have a great future ahead of us. Operator, we will now take the first question, please?

(Operator Instructions)

Your first question comes from the line of Steven Wieczynski with Stifel. Please proceed.

Good evening, guys.

Hi, Steve.

So that was a lot of information and a lot of numbers. But I guess --

Did you get all that?

Yes, Scott, could you repeat all of your prepared remarks again? (Laughter).

Well, there's also a whole lot of numbers in the tables we provided.

I know. I found that.

But we did that specifically, because we knew there were going to be questions about how things looked liked in the past, on the new basis that we were presenting them so.

Right. So that is my first question actually. If you looked at the combined companies as if they were together since October 1 -- I guess, Gavin, the core in terms of product sales, the number of units sold was, I guess a little bit softer than what we were looking for. But the ASP was a little bit higher, I mean, actually a good bit higher than what we are looking for. So could you just maybe get us up to speed in terms of what you're hearing from customers in terms of CapEx spend, in terms of what they're thinking over the next 12 months? And maybe how they responded to the combined platform?

The feedback from the customers has so far -- I have been on a few -- thank God now we have got the acquisition done, and I can get on with running the business. I have now been on a few customer calls, and some very high level customer meetings. I think the feedback we're getting from customers is, I don't think they're going to open up the checkbooks completely now and go crazy, it will be a bit more of the same as last year. But they are very comfortable with who we are. They are very comfortable with our team. They are very comfortable with our strategy.

They love the fact were going to keep the product brands alive, and keep the WMS games being created in Chicago, the Bally games being created in Nevada, the [SHFL] games being created in Australia and Asia, the use of the India development teams. But at the same time, bringing savings to the actual equipment, and bringing the core operating systems together. So they love that strategy. They feel we are very well-positioned. They understand that we now can provide them with everything, with systems, tables, with games.

And frankly, when the bucket isn't growing that much, our goal is to get a bigger share of that bucket. So the unit numbers maybe down, but I think our revenue share and our ASP has gone up. So I think at the end of the day, we did grow that percentage of share -- of wallet share if you will. But last quarter was such a [terribly even] quarter, by virtue of the acquisition closing mid quarter, and everything else that was going on and year-end, I think that this is the year, we really look forward to accelerating and pushing ahead with our plans. That's a long -- that is almost as long as answer as Scott's dissertation on the numbers, right? (Laughter).

No, no, it wasn't that long. (Laughter). But so the second question. I guess, in terms of the debt reduction at this point. I know, Scott, it sounds -- I mean your free cash flow obviously was negative in the quarter, and it sounds like maybe your expectations in terms of when you turn cash flow positive has been delayed a little bit. I don't know if I am reading into that a little bit. But can you maybe help us think about where you expect -- your leverage is here today, but maybe how you expect to kind of get down to that 5 or 5.5 times, where I think people would be a little bit more comfortable with the longer-term story?

Yes, I think you have to remember that the December quarter included about $135 million of sort of cash-based charges for a variety of things, integration and M&A sort of oriented. And so, that had an obvious impact on cash flow from operations, and the free cash flow that was generated in that period.

And I think what we've said, and I think Gavin said it in his prepared remarks, we are expecting that come the second half of 2015, that things will be going in sort of the right trajectory. We still have some costs to achieve, the synergies that we are going to be incurring in the first couple of quarters here, that will have an impact on that cash. We were able to make a very small dent in the revolver in the quarter, paid it down by $[15] million.

We are more actively managing what we're doing with the cash balance, and looking forward getting down to the 4 times multiple. It's going to be a combination of improving the attributable EBITDA, dropping more to the bottom line there. Prudent spending on capital, which I think you can go back and look at what we accomplished during the 2014 period. I think, at the beginning of the year, we gave a capital number that was in the $280 million range, and on the side of games only side, we spent maybe 20% less than that.

So we are going to continue to invest wisely, and make sure that we get an appropriate return on the capital that we are investing. So I don't think -- people certainly shouldn't be modeling it to be sort of ratable over, equal over a four year period [production]. I think there will be something of a ramp-up.

Okay, got you. And the last question for me would be, I guess, the last question for me would be on the guidance side. It's clear you guys are probably not going to be giving guidance, and Scientific Games typically hasn't. But I guess with the complexity now of the business model, can you just give us an idea of maybe how you are thinking about -- maybe the different business units in terms of -- just kind of some broader-based commentary around each segment would be pretty helpful?

I don't quite know what you mean by that? You want financial indications on what we think --?

No, more just like -- okay, so on the gaming side of the business, I mean, how do you guys view, like participation? I mean, is it -- are you kind of expecting more of a flattish cut type of environment? I mean, those kind of higher commentary -- (Multiple Speakers)

Okay, sure. Well, let's start with gaming. I mean, obviously with our tables, the whole sector as a whole I think that, relatively flat with a little bit of growth in our market share, and our share of the wallet. We expect to see that, and that's the way we are measuring that one. Our gaming operations are continuing to grow slightly. In relation to lottery, likewise as it always has been, if you drew a line over the last few years, and you extrapolate it, I think you will get your right growth rate there.

And I think we're seeing meaningful growth in interactive, particular in the social and the Real Money in Europe, and places like that seems to be going pretty well, too. So I think, it's going to be a lot easier to give you a better -- you'll be at a lot better guidance once we have a few quarters of both companies operating together, or four companies operating together. But I think that's the environment we are looking at the moment, and I think our ability to execute, our ability to deliver on the synergies, and our ability to really lead in many ways the sector, I think will give us the driving benefits and the incremental results we are looking for.

Yes, and I would agree with that, Gavin. I think, one of the things that will also drive the interactive business is putting the Bally and [SHFL] content out in the social space, because that's not yet been done, and represents a real great opportunity for us. And that is going to be happening yet this year.

Yesterday, we went live with [Quicket] to go -- (multiple speakers). So all of these things are starting to happen. I can only reiterate what I said in our comments, that we had very, very good detailed integration plans. We have a great group of people who are all very familiar, in many instances with each other, and they're getting on with it. And I think a great example of that is the -- the former Williams interactive teams going in there and assisting the Dragonplay team to get [Quicket] up, Steve, and get it out in a format which we are excited by.

Okay, great. Thanks a lot guys.

Thanks, Steve.

Your next question comes from the line of Brian Mullan from JPMorgan. Please proceed.

Hi guys, congratulations for closing the Bally acquisition.

Thank you.

I know you just touched a little bit on segment guidance, but if we look specifically at the casino business systems, the last we heard from Bally, they were guiding for a revenue decline in FY15, which only has two quarters left to go. So are you able to provide any expectations for the next two quarters? And in that business longer-term, can you talk about the opportunities you see to resume growth?

Yes, I mean, I think that systems has such a long lead time. I am very familiar with systems. The lead time for a systems deal can be anything -- even over two years sometimes, but around 12 to 18 months. I think that Bally projected that the year before, they had some very, very big sales. I think we've got some big ones coming on track in this year.

We have got ALH, which -- (multiple speakers) in the second half. I think that with the new approach to how we're managing the systems business, not separate but part of the gaming business, we have some great opportunities to grow that pie. I think that one of the things that we were very lucky to do, when we did the acquisition was keep Dick Haddrill involved in the business, particularly focused on the systems, and we have a strategic objective to really grow our dominance in that sector.

It's an area in which Bally really do separate themselves from the pack, and we're making continual improvements. The ALH rollout is very exciting for us, because that gives us a small scale product, and we can start -- we traditionally we've always been strong in the pop-ins in the large casino market. But now we can go and attack the smaller end. So I think the forecast and the projections for our systems business is very positive, and it certainly is strategically an area we intend to focus on and ideally dominates.

Great, thank you. And then, just a quick follow-up, Scott, can you update us on what your NOL balance was at the end of the year? And then, any expectations for your cash taxes going forward would be great? Thanks a lot.

Yes, the NOL balance will be in the K, which I think we are going to file on Monday. And the cash tax number is going to be sort of 10s of millions, sort of small, because it is mostly the foreign results, not the US results.

Okay. Thank you.

Your next question comes from the line of Cameron McKnight with Wells Fargo. Please proceed.

Great. Thank you. A question for Gavin. Replacement units looked like they were up about 23% year-on-year in the quarter. I guess, you're taking share more than the market is getting better?

Yes, I think Bally in the last quarter continued to have a very stellar performance with the, particularly with the Wave cabinet. I think one of the areas for opportunity for us, and Brian, I think also from some of the [Shuffle] product, maybe one of the areas of opportunity for us is to get all of the brands firing. We had some very extensive and detailed plans this year on how we are going to really hit the [WMS] brand in particular.

Bally continues to be strong. We've got an s23 that we showed at G2E that will be -- that is currently being ordered now for the Bally line. The Blade, clearly we're getting phenomenal performance in the participation area. We just have to try and get at ways to move more of those units to the sales floor, and we have plans for that as well.

So I think possibly -- but again, it's such a messy quarter. It's difficult to draw too much out of it, but I do believe that the customers response to the merger and the position of where and maybe compared to some of the others, may be indicative in that.

Okay. Great, thanks. And then, just following on, I mean, we've seen a little bit of improvement in regional gaming trends over the past two or three months. There is a bit of debate whether it is weather, or whether it's an improvement in the low end consumer. Are you seeing that translate in your gaming ops business? Have you seen that translate into at least a slightly better tone, when you're sitting down and talking to customers?

I think it is fair to say yes to both. I think the customer is -- I think are getting used to operating in the new environment if you will, and I think that, yes, we have seen some nice figures. I think it's a mixture of lots of different things, gas prices. I think it's a mixture of weather. I think it's a mixture of [puts], a little bit more better sentiment, who knows? But yes, we are definitely seeing it, and the conversations with the customers are positive.

Got it, thanks. And then, one final one if I may. A little bit bigger picture, Gavin, you have been in the CEO seat for a while now. You're well past the first 100 days. How do you think you're looking at your different businesses relative to your predecessors?

Well, my predecessors didn't have the benefit of putting them all together, and I keep coming back to the great opportunity that provides us. Because in the past, particularly from an investment in the future perspective, one of the things I continue to hear from customers, is that they're looking for a -- what the future is going to look like. They're looking for someone to show them what that kind of product is going to bring new players and increase their revenues.

We have in the past always, every company does, struggle to keep up with the R&D on their existing platforms. By virtue of our size and scale now, we've got a whole team working on the future. And some of the products that they're already coming up with are really amazing and very exciting for the future. So I'm really lucky to being in a position that the other -- my predecessors of the one-off companies have never had, which is that ability to really invest, and you've got scale to invest in the future, and look at some of the ways we can grow the industry.

I mean, that's one part of it. The other part of it is, I think by bringing all of these companies together, across -- we really didn't go out there, and say, there were going to be all of these positive synergies. We really focused on the cost synergies. But as we get to know each other better, and as we get to see each other's products and possibilities, we start seeing greater opportunities for synergies and positive revenues synergies across the board. And that's also exciting.

And clearly in the branding areas, when you have a brand, and we can put it out in scratch tickets, we can put it out in gaming machines, we can put it out in the internet, we can put it out in social. We are a very compelling partner for anyone who has a brand, from a systems perspective, leveraging the strength of the Bally systems portfolio and assisting the lottery systems. The lottery systems are, I guess, applicable to the bids in which they respond.

But by virtue of some of the additional functionality we have, we are looking at ways of adding them into our systems portfolio, and there is a lot of cross work being done there. So I guess, that is the really big benefit, and the opportunity for me is that I have this scale and size. I have great people running my businesses. I'm really excited about my team. They are getting on with it. They all have plans. They are all working together.

My job is to create the culture. I think you know me well enough, and some of the other people on the call know me well enough, that I am pretty passionate about that. And I do [impose] the culture that I want across the board, and I think everyone is really responding well to that. So it's very exciting. So I'm -- and as I said earlier on the call, I am absolutely excited that the acquisition part of it is done, and that we've moved into the full on integration, running the business execution phase. And that's exactly what we're doing.

Great. Thanks very much.

Pleasure.

Your next question comes from the line of Mike Malouf with Craig-Hallum Capital Group. Please proceed.

Great. Thanks for taking my questions.

No problem.

Gavin, can you talk a little bit about the sales force with regards to WMS and Bally, and how they are being integrated? I'm just wondering if you're seeing some conflict, or as far as competition goes between the salesforces, and how that is being handled? Thanks.

So what we did is, we went to Rome and borrowed the Colosseum and gave them all swords, and tried and let them [sumo]-- (laughter) So it's a phenomenal opportunity, all the -- both companies had great sales teams. The first step was to pick the sales management team, and we've done that, and we've really got some very strong regional managers and directors in place there.

Then now what we are doing is, bit by bit, we are making sure that say, in the past where a rep might have had 30 accounts, going forward they are going to have 20 accounts. So we're going to get much better service to our customers. We're going to have expert in areas like tables, who will continue to do their stuff independently, well, not independently, but focused on that and likewise systems, but working together with the regional managers. So at the end of the day, one plus one isn't going to equal one. We've always planned for one plus one to equal say, 1.6. And part of that involves a lot of cross training, how do you sell a WMS, how do you sell a Bally?

So far, so good. The people at been responding very well. In fact right now, in Vegas there is another big training session going on. So really the way we've approached it, was to pick the team, the leaders first, as we did the integration, as we did the acquisition.

Pick the key management team, because as I said in the speech, great people are made up of -- great companies are made up of great people. And we're doing in the same thing in sales. A lot of people are mirroring each other at the moment, assisting each other, a very positive culture.

For example, we have one instance where we promoted someone out of the field from say, Bally to a director position, and the WMS person got that area. But the Bally person is constantly down there, working on the transition and working with them. So it comes down to passion, and the right kind of people, and I think we've got a mix of that, and I think it's going pretty well.

Are you experiencing, or maybe I should ask, how much disruption are you experiencing as you go through all of this?

What do you mean by disruption?

I mean, are you seeing an effect on sales? Are you seeing market share shifts at all?

No, not at all.

Good, great. And then, Scott, if you could just remind me what did you have for interest expense for next year, for 2015?

Yes, based on the debt that was outstanding at December 31, it was $652 million in total. Sorry, that includes some non-cash interest for the original issuer discount, the deferred financing expenses, et cetera. So the cash based interest was $615 million.

$615 million. Okay, great, thanks. That's all I had. Thank you.

Thank you, Mike.

Your next question comes from the line of Todd Eilers with Eilers Research. Please proceed.

Hey guys, thanks for taking my question. Hey Scott, just wanted to make sure I understood on the adjusted EBITDA, it sounded like earlier on the call, you mentioned there was about $18.5 million of non-cash charges that were not included in your attributable EBITDA number of $173 million. So simply just adding that back and getting the $192 million, is that a fair pro forma number for adjusted attributable EBITDA? And was there anything else that might have added or subtracted from that number, other than that $18.5 million?

Yes, the other piece, Todd, that I mentioned was in purchase accounting. We ended up having to eliminate the deferred revenue that Bally had on its books for things that -- let's say, there still wasn't an obligation to do something in order to earn that revenue, and that in total I think was $27 million. And of that $27 million, $5 million of the revenue would have been recognized in the December quarter. So you can take a margin off of that, if you wanted to add that back. And then, the other $22 million will impact probably the first couple of quarters in 2015.

Okay, great. That's helpful. Also wanted to ask a question about Greece VLTs. OPAP announced a while back that they had selected four vendors and Scientific Games was one of those. I don't know to what extent you guys can talk about it, but if you could share any information on the opportunity, timing, just general thoughts that would be helpful as well?

Yes, we were selected as one. I think the reason none of us are talking too much about it at the moment, is that the contract is just being finalized now. But I mean, have we announced the numbers?

No.

We haven't.

We will, when the contract is actually signed, I am certain that we will put a press release out (multiple speakers).

It's a good opportunity. I have spent a bit of time already this year over in Greece and in Turkey, and I am very excited by the opportunities. I think every time you roll one of these out, it leaves -- whatever it is, you learn lessons. In the UK, you learn lessons, and I think those lessons have been well put to bear, and when it comes to the OPAP rollout, I'm very excited by it.

Okay, great. And then, just a last question on the interactive business, it looks like you guys broke that your EBITDA for the first time, it looks like it's about a 20% margin. Some of the larger competitors in the social casino space are kind of in that 30%, 35% range.

Is there any reason why, as you kind of scale that business over time, any reason why you couldn't get into that 30%, 35% range? And then also, was curious if you are willing to break out the percent of revenue on mobile versus Facebook? Thanks.

Yes, I think one of the things that we are investing in right now is the rollout of the Real Money gaming part of interactive. And so, we are spending a bit more there, that's having an impact on the overall margin of that business. But if we continue to get those on board, I think that will help improve the margins there. The -- I think if we -- I don't think we'll ever separately sort of split out social versus Real Money gaming. But I think you'd see something more similar to what you are expecting, if you just saw the social of that, but separately.

And I'm sorry, Todd, what was the other question you asked, about breaking out something?

Yes, I was just curious on the social side, if you were willing to give the mix between mobile versus Facebook?

We haven't done that. We didn't opt to do that, as part one of the many metrics we disclose, but I think we'll consider that in the future.

It looks like I managed to find one that you guys didn't put in the press release.

I'm sure that it's -- (multiple speakers -- laughter).

Thanks, Gavin.

Thanks, Todd.

Your next question comes from the line of [Jeremy Franklin] with Macquarie. Please proceed.

Hey guys, it's actually Chad Beynon here.

Hey Chad.

Hey, one question starting with the gaming ops. I know you mentioned that you had a decline, a sequential decline in your footprint, based off one large customer reducing their floor. Wondering if that is something that will or will not come back? And then just kind of a bigger picture question on the gaming ops. One of your main competitors had a pretty significant decline within the WAP or premium based segment. And I was wondering if you could kind of share your views, if you think that regional operators are maybe reducing kind of the percentage of WAP in premium based, or if you would've expected to gain share during the quarter? Thanks.

So I think -- let me answer, there are three question there. The first question is I don't know. I mean, I would assume that -- WAP products are very popular. Players love to play them. If you're looking after your customer, and you don't have some of the great brands and the great products that people are making and investing a lot of R&D dollars into, you may find out that customers go to properties that do have them.

So when that large corporate customer gets through its issues, I would expect that they would look at reinvesting in their floor. I don't know, that is up to them. In relation to the regionals, I think it goes back to the same thing, that if Monopoly and Jubilee Diamonds is the hottest game on the floor at the moment, and I don't have it, you probably need to have it. But I don't think they're going to add incremental units. I think they are going to take those units from someone else and put that game on.

So I think our portfolio is performing pretty well, across the board, by having the benefit of having the Bally games now in there and the brands. We are seeing good performance with Bally, with all the brands across all of those portfolios. I think one of our big areas of disappointment last year was in the non-WAP premium products, where we lost a lot of units.

I guess, that was an area where because they are not WAPs, because they are sort of like -- a branded version of a standalone game in many instances. The customers who. attack that part of their floor to reduce costs. At the same time, I don't think we performed, certainly on the WMS side of it, very well in that sector.

But [we] showed we have a lot more new games coming out in that sector, and we're seeing some very good performance so far from Flintstones. And I think Bally is seeing some good performance in the Bally brand. We are seeing some good performance with Wonder Woman. So I think we have some really good products across all the portfolios there. We're also excited about the class two opportunities now that we can combine all of the different brands. So I think we're feeling fairly confident, comfortable in the gaming operations sector. That answer your question?

Yes, the other one I had on that three-part question, was the one about the one large customer who had a reduction in footprint?

Yes, well, as I said, I certainly hope when they get through whatever they are going through, they look at reinvesting and delighting their players, and I hope that we have the products that will help do that for them.

Okay. Got you. Thanks. And then, moving onto product sales, Gavin, you talked about a new operating system that your firm, that your team is working on. Wondering if you could share timing on this? I know the last wave of new operating systems, I think everyone said it was 10 times the prior firepower.

Wondering if there is significant innovation that could potentially create market share opportunities with the new operating system? And then, the second part of that question is, would you plan to have the current number of cabinets from WMS and Bally, the Pro series, the s23 Blade, et cetera, kind of using this in the system? Thanks.

Okay. So you ask long questions. (Laughter).

They're multi-part.

Multi part and multiple questions (laughter). So in relation to the operating, the operating system. The key thing you have got to remember about operating systems, and I mean, you can build the biggest engine in the world, and yada yada yada. But if you don't build great games, it doesn't mean anything. And the key to getting more efficient is when we talk about building an operating system, we are also building a game kit, a game development kit with it.

The operating system as I mentioned in my words, we are planning for a two year projection for all that. We are ahead of that. We found that both WMS and Bally were doing things to improve their existing offerings, to keep up the technology more than anything else. We've taken the best of both worlds and put them together.

Again, a great team of people working very effectively on that. They are now on the -- working through that now, and developing the game development kit. So I think we will be well on track for that. That will be forward and backward compatible, so we will be able to support all of the current cabinets that we have out there. One of the things that clearly, our size and scale helps us do, is come up with additional cabinets where required.

Or it seems that the Wave has proven that a great cabinet can help great software, and by virtue -- and some other cabinets, we have great content by itself, seems to drive product sales. So you need to have both, and I think we are well-positioned for both. Did I answer all the parts of that question?

Number of cabinets?

Number of cabinets going forward. Well, we got the s23 about to be launched, and I think we have got a couple more planned releases for this year. I think part of innovation results, in not only being able to release great software, but you've also got to bring good-looking cabinets to the customer's floors. So we will continue to do that, and I think we have plans that coincide with the needs of our product line and the customer desires.

Okay. Thanks, Gavin. And Scott, one for you, since it was really the only guidance number that you issued, the $320 million to $350 million of CapEx. Could you talk about the variance, the low-end to high-end, if that is more on lottery contracts, or gaming ops based on efficiencies that you see throughout the year?

Yes, I think it will be more dependent upon spending on the lottery side of the business, than on the gaming side of the business. Because on the gaming side, the biggest piece is for the actual gaming ops installed base. And I think we know what we need to do to keep that base fresh, and replacing and changing out top boxes, et cetera. So I think the variability will be more on the lottery side.

Okay. Thank you very much.

Thank you.

Your next question comes from the line of Kevin Coyne with Goldman Sachs. Please proceed.

Can you hear me?

Yes.

Sorry about that. Thank you for taking the questions. Most of been asked and answered. But just wanted to clarify on page 3 of the press release, where you referenced the $15 million of restructuring costs that you've incurred in the fourth quarter. When you used the word additional, referring to the rest of 2015 and 2016, that's in addition to the $15 million, not in addition to I guess, the approximate $75 million or $80 million that you expect to incur?

Correct.

Right on target.

Okay. And I may have -- you may have been asked this question, but with the number you gave on page 2, the full year run rate for 2014 on a combined basis, do you happen to have that for just the fourth quarter, the revenue and EBITDA?

No I don't -- No, I don't think we have disclosed that. You found another number we didn't disclose on this press release.

We can make it longer for next year, next quarter.

Okay, I'll try following up. Just I don't know if anyone referenced any things you are hearing from your end customers, in terms of any tailwind from gas prices, whether it be more so on the lottery side? Do you have any read through on that?

Instant ticket sales are up, and the draw obviously, gets benefited by the big jackpots. But I don't know. I don't know if I could actually definitively say yea or nay, but sort of the logic would sort of dictate maybe? That would be a fair way of putting it.

Okay. And just one final -- I believe on the Caesars call, it was brought up in terms of let's say, purchasing trends going forward, that perhaps the gaming equipment providers may have to think of new ways to re-create the slot machine. And I know that's something that you and your competitors have been working on. But when you think about that next-generation solution that could drive the replacement cycle, do you work alongside the operators, as well when you think about those things, or is it kind of comes out of the Skunkworks (multiple speakers)?

No, no, no, what we do is we absolutely work with that. When we say we are customer-focused, we really do mean we are customer-focused. Two weeks ago, we have a customer advisory board. We fly in all the big customers. We sit down with them, we get feedback on what we're doing.

We show them some of the things that we are planning for the future. We get customers who we partner things with. So we do a lot of that. But customers want to grow their revenue, we want to grow ours, so we work together on that project. I think that there is still a lot of great revenue.

We all focus on the corporates, because they report. There is a massive Native American market out there. There is a massive [racing] end market out there, and they're all seem to be continuing to grow, and they continue to invest in their floors. So our products continue to evolve. There is maybe, it ' like an evolution, not a revolution. But we are working on some new products for the future, as I've mentioned by virtue of our R&D size and scale, which hopefully will bring a little bit more speed, and then, revolution to that sector. But certainly it is a partnership -- it's always a partnership with your customer.

Great. Thank you.

Okay. Are there any others?

Our last question comes from David Hargreaves with Sterne Agee. Please proceed.

Hi. Thank you very much for all the detail you put in the release. I find it very helpful. (multiple speakers).

It's [quite a lengthy] message to get across, but it will much -- we have to do that once. And then, we can move forward as a simple unified company.

No, I mean that. We like more rather than less. So thank you very much.

Sure.

When we are looking at the pro forma number that you gave us for the year, I know that you tend to include some attributable EBITDA that is non-cash. And I was wondering if you could give us the non-cash portion of that $989 million that you listed in the release?

Well, are you talking about the EBITDA from our equity investments?

Yes, sir.

So that's actually, in that there is a reconciliation of net loss to attributable EBITDA, and it is $70.6 million of EBITDA from equity investments. Or maybe it's $70.8 million? Yes, sorry, $70.8 million.

And can you give us a sense for how Bally as a standalone entity would have reported, would have performed on a like-for-like basis in the quarter?

No.

So you don't have like a EBITDA number that we could -- okay. In addition to the financial information, I'd be interested in seeing something that sort of organizes your schedule of patent expirations. I think if we look specifically to Shuffle Master just as an example, in the last 10-K, you put in a disclosure about patents expiring through 2015 being immaterial to the Company. And I'm wondering what's beyond that is material, and could you give us some sort of a schedule -- and maybe that will be in the 10-K?

I don't think there is anything. I think we have a statement in the 10-K that there is nothing material that is happening in the near future.

Was there something relating to Shuffle Master that was key, that was going to be expiring? Because it is weird, the way that language is worded.

Let me just give you a little bit of color on that. I think I know that business probably as well as I know the other ones. You have a patent, and what you do, is your patent gives you a legal right to exploit that patent for 20 years from its grant. You just don't sit back on that, and expect that at the end of 20 years, [everything to come out and do it. What you try and do, is you try and extend it.

So for example, with a table game, you might have the first patent that goes for 20 years, but then you might add side bets. And as the side bets come on, you extend the life. So you can really extend the -- someone can come up and debate the core game maybe. But if they don't have the patented side bets, it's not the same.

The other thing that you've really have got to remember -- and I think this is the same across all different sectors not just gaming -- the trademarks are really, really important, and they last forever. So players who love to play Blazing 7s, right? The Blazing 7s patent maybe gone, and you might be able to make [Kamado] Soups 7, or something else, whatever you want to call it. People want to play Blazing 7s. People want to play three card poker. They don't want to play Scott Schweinfurth poker, which maybe a copy of some of the base games.

So I think the trademarks are really important as well. And that's why the -- that's why there's nothing really material I don't believe, from a patent expiration perspective, because we do have these little side bet extensions on many of our patents in that sector. Does that sort of help?

Yes, it certainly does. And then lastly -- this is really small, but I'm just curious. When you talk about the $4 million write-down of receivables internationally, I was wondering if you could tell us what business that's related to, and perhaps what region it pertains to?

Yes, it was in the gaming business in Latin America.

Got it. Thank you so much.

Thank you.

That concludes today's Q&A. I will now turn the call over to Mr. Isaacs for closing remarks.

Well, again, thank you for putting up with all that data. I mean, it really is [detailed]. I want to specifically thank Scott and his team for doing an amazing effort to bring this, all these companies together and go through the close, at the same time as we are running our business. So they are doing, really double the work. There is a lot of detail there, but as it has been said a few times, hopefully that will give some great explanation.

And as we move forward, we are going to run the business. We're going to report back. We will continue to report on our synergies. We will continue to report on the [sets] of the businesses. We thank you for your support, and look forward to speaking to you next time. So thank you.