SGMS

Scientific Games Corp (SGMS)

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Scientific Games Corporation (SGMS)

Q4 2008 Earnings Call

February 27, 2009 08:30 AM ET

Executives

Joseph R. Wright - Chief Executive Officer

Michael R. Chambrello - President and Chief Operating Officer

Dewayne E. Laird - Vice President and Chief Financial Officer

Analysts

Lawrence A. Klatzkin - Jefferies & Company Inc.

Celeste Mellet Brown - Morgan Stanley

Betsy Gorton - Goldman Sachs

Steven M. Wieczynski - Stifel Nicolaus

Ralph Schackart - William Blair & Company

Carlo Santarelli - JPMorgan

Presentation

Operator

Hello everyone. Thank you for joining us this morning.

With us today are Joe Wright, Chief Executive Officer; Mike Chambrello, Chief Operating Officer; Dewayne Laird, Chief Financial Officer; and Ira Raphaelson, General Counsel.

During this call, they will discuss Scientific Games fourth quarter and full year 2008 financial results followed by a question-and-answer period.

A replay of the call will be available at the company's website www.scientificgames.com for 30 days. As a reminder, this call is being broadcast live. Please refer to yesterday's press release for full details.

Before turning the call over to management, Scientific Games would like me to remind you that this conference call will contain statements that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

This information involves risks and uncertainties that could cause actual results to differ materially from the forward-looking statement. For certain information regarding these risks and uncertainties, references made to Scientific Games Annual Report on Form 10-K for the fiscal year ending December 31, 2007.

Now, let's begin. Mr. Wright?

Joseph R. Wright

Okay. Thanks so much Anne. Good morning and welcome to our Full Year and Fourth Quarter Earnings Call.

For those of you that I haven't met and I look forward to in the next few weeks, I am Joe Wright, and I took over CEO from Lorne Weil as of few weeks ago.

Joining me on this conference call, as Anne mentioned, are Mike Chambrello, Dewayne Laird, and Ira Raphaelson.

Today I'm going to cover a brief summary our full year and fourth quarter results; you saw it in the press release we came out with last night, some observations about the state of the U.S. lottery industry, a description of an important program that we started late last year on our profit improvements. And I'm going to go with kind of a view of the future, which we think is getting better as we're going through the months, and then Mike I'm going to hand it over to you, all right?

Michael R. Chambrello

Very good.

Joseph R. Wright

So you've got to stay here. And then we'll finish up with Q&As with you.

Now on the full year 2008 results, revenues were about 1.1 billion, which is an increase of around 7% over the prior year. This is primarily because of increases in our domestic lottery revenues, continued success in Italy, our startup in China, and the growth of our important Global Draw business.

On the negative side, we reprised the Florida instant, the Pennsylvania instant and the Connecticut online contracts, and we lost South Carolina and South Korea.

Now on the reprising of those contracts, those will normally have a short-term impact, but they'll grow overtime. So those were good extensions on these contracts. Our full year 2008 adjusted EBITDA increased to $361 million, which is up 8% over the year, and if you take out the unusual onetime expenses that were associated with our profit improvement program. In the fourth quarter, we actually had a pretty good year.

Now let's go on to the fourth quarter. Revenues were almost $264 million, which was down 1.5% from the year earlier. However without the foreign exchange impact, those revenues actually would have increased almost 3%.

The fourth quarter adjusted EBITDA was approximately $70 million, which is down from 83 from the year earlier. Now that is the weakness that we saw coming, but it doesn't really reflect the soundness of the business. For example, debt included over $2 million in airfreight of our tickets going to China. That no longer occurs this year.

That reflect the losses that we had in Mexico on a full year basis, which will be much less this year and will not be recurring after that. That also we had a decline in our raising and our venue management business, which we announced today that we are exploring strategic alternatives.

And that had a foreign exchange impact and a $3 million just in the fourth quarter. So the business was actually in pretty good shape for what we call being in the middle of a really terrible economy.

So I hope that gives you a better sense of the soundness of this company and the stability of our main business, which is the lottery business. That being said, we think there are great opportunities to improve our revenue and EBITDA and to improve it this year, and I'll touch on that later.

Before I go, I want to provide you some observations on the state of the lottery business, which represents 78% of our total revenues. Last year is kind of a mix bag. In the instant ticket business, it was slightly up over the entire year in 2008, but it was down about 3% in the fourth quarter.

There were some stars tough among the states in this instant ticket business; Delaware was up 13%, Minnesota was up 25%, and North Carolina increased their payout, was up 63% over the prior year.

On the online business, at least with our customers; it was up around 2% overall for the year, but down 5% in the fourth quarter. So it did weaken in the fourth quarter. Now as we go into 2009, it's interesting.

The instant business seems to be recovering and some states are actually showing record sales such as Tennessee, Georgia, South Carolina, Minnesota, Kentucky, Colorado and others.

Now, these states have something in common. They tend to have well integrated marketing and promotion plans that are accepted by their customers. That's important.

And several other states that are doing well again raised their payouts in 2008 such as Pennsylvania, Arizona, and as I said before, North Carolina. Then as we go into this year, we find that the online business is beginning to recover.

And actually Mike, I'm going to let you cover this a little bit more, if you don't mind. Because I think this is important.

Michael R. Chambrello

Sounds good, okay. As Joe stated, we'll have a very interesting year in 2009 in all areas. And I'll address those other areas in a minute. Let me talk about the systems piece.

First, sort of going along with the profit improvement plan that Joe will discuss a little bit later, made a number of organizational changes in our worldwide systems combining all of our assets under Steve Beason. Steve is a long term veteran of the gaming industry and one thing I want to emphasize is that this consolidation reinforces our commitment to the systems business to the online business while allowing us to streamline our technical and operating activities reduce cost and ultimately improve customer satisfaction.

I'm going to talk about Mexico a little bit later in the call, but let's talk about Pennsylvania to start. We have executed new contract in Pennsylvania. We'll be deploying the type of technology, and more importantly marketing services that are both designed to help the Pennsylvania lottery to continue their really dramatic success in retail sales which, over the term of our last contract actually grew from about 1.7 billion to an excess of 3 billion over the term of the new contracts and with the changing phase of the approached online systems and games. We expect very similar success.

Read the rest of this transcript for free on seekingalpha.com