SGMS

Scientific Games Corp (SGMS)

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Scientific Games Corporation (SGMS)

Q3 2009 Earnings Call

October 26, 2009 12:00 pm ET

Executives

Joseph R. Wright - Chief Executive Officer

Michael R. Chambrello - President and Chief Operating Officer

Jeff Lipkin - Chief Financial Officer, Vice President

A. Lorne Weil - Chairman of the Board

Analysts

Bob Evans - Craig-Hallum Capital

Carlo Santarelli - JPMorgan

Lawrence A. Klatzkin - Chaplain Credit Partners

Presentation

Operator

Hello, everyone and thank you for joining us this afternoon. With us today are Lorne Weil, Chairman; Joe Wright, Chief Executive Officer; Mike Chambrello, Chief Operating Officer; Jeff Lipkin, Chief Financial Officer; Ira Raphaelson, General Counsel.

During this call, we will discuss Scientific third quarter 2009 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 today’s press release for full details.

Before turning the call over to management, Scientific Games would like to remind you that this conference call will contain statements that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties that could cause actual results to differ materially from the forward-looking statement. For certain information regarding these risks and uncertainties, references made to the Scientific Games Annual Report on Form 10-K for the fiscal year end of December 31 of 2008.

Now, let's begin. Mr. Wright.

Joseph R. Wright

Okay, thanks so much. Good afternoon and welcome to our third quarter earnings call. I am Joe Wright and with me over here as the Operator mentioned are Lorne, Jeff, and Ira.

Mike Chambrello, our President and Chief Operating Officer, is actually calling in from Chile where he is at the World Lottery Conference.

Now our agenda for today’s call is as follows -- I am going to first share with you some of my thoughts on the third quarter and the year-to-date. Mike is then going to review some of the important operating results. Jeff will take you through our financials and finally Lorne will provide some closing comments.

Now in the third quarter just ended, much like the prior two quarters of this year, our revenues continue to be primarily impacted by factors that are not driven by the fundamentals in our underlying business, such as foreign exchange, contract repricings, and the movement of our China printing operations to our joint venture line. But right now, as we’ve stated before, we are managing this business for free cash flow and you can see the results that we published this afternoon that we continued to deliver on that metric.

First let me give you a top level review of our markets and our business, which are actually holding up very well. On the quarter to quarter basis, we are increasing revenues and EBITDA and while our retail sales from our lottery business in the United States, particularly the instant ticket business, is flat to slightly down, those lotteries where the marketing and promoting their business are growing, some of them even in the 10% range over last year.

The U.S. online business continues to benefit from better jackpot [rules] from Powerball and Mega Millions and as a result, 10 of our 13 states are actually up over last year. Importantly, there are some exciting developments that are occurring in this online business and Mike is going to address that for you later.

On the international front, instant ticket sales also remained strong. For example, Italy, while it is large right now, is almost up 2% over last year. The U.K. is almost 10% over last year, and China would be 50% over last year but last year was a partial year, so on an apples-to-apples basis it is probably 30%, 35% over.

Our global draw business continues to grow with the installed base of terminals and the win per day both showing increases. So when you put that all together, our core lottery and server based gaming businesses continue to outperform the broader consumer sector.

Now, given our reputation and success in the U.S. and abroad, it should be no surprise to anybody that we continue to be awarded new contracts. This quarter alone we signed new contracts with Vermont, Arkansas, Delaware, [Bodwortenburg], Germany, and Indiana. And we signed an agreement to provide terminals to the Israeli Sports Betting Board.

I would also like to talk a moment about the extraordinary progress this company has made since initiating the profitability improvement program late last year. Through most of this year, our company has faced not only the previously mentioned factors but also possibly the toughest economic environment you and I are going to see. We responded quickly to both of those items and as a result in each quarter, our gross margin continued to improve over the prior year. And our free cash flow has increased by over $100 million.

We also successfully exited our contract in Mexico, which we said we were going to do, and had negatively impacted our results last year by almost $10 million, and we are actually able to realize some value for our assets.

A further achievement of that profitability improvement program is that cost management, disciplined capital expenditures, and a return on investment focus are now a deeper part of our culture.

Jeff will describe the results of these efforts in more detail but I believe these are significant achievements and our management and employees should be proud of what they have accomplished in a tough year.

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