SGMS

Scientific Games Corp (SGMS)

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Scientific Games Corp. (SGMS)

Q2 FY08 Earnings Call

August 1, 2008, 08:30 AM ET

Executives

A. Lorne Weil - Chairman and CEO

Michael R. Chambrello - President and COO

Joseph R. Wright - Vice Chairman

Analysts

Celeste Mellet Brown - Morgan Stanley

Lawrence A. Klatzkin - Jefferies & Company, Inc

Steven M. Wieczynski - Stifel Nicolaus

Robert J. Evans - Craig Hallum Capital Group

Carlo Santarelli - JP Morgan

Ralph Schackart - William Blair & Company

Presentation

Operator

Hello everyone. Thank you for joining us this morning. With us today are Mr. Lorne Weil, Chairman and CEO; Michael Chambrello, President and COO; DeWayne Laird, CFO.

During this call, they will discuss Scientific Games' second quarter 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 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 Litigations Reform Act of 1995. This information involves risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. For certain information regarding these risks and uncertainties, reference is made to Scientific Games' annual report on Form 10-K for the fiscal year ended December the 31st, 2007.

Now let's begin. Mr. Weil?

A. Lorne Weil - Chairman and Chief Executive Officer

Thank you very much, operator. Good morning everyone, and welcome to our second quarter 2008 conference call. We are here this morning, as usual, with Mike Chambrello and DeWayne Laird, and we are joined today by Joe Wright, who as I think most of you know, will be taking over as CEO on January the 1st next year when I will relinquish that title to become Chairman. At that time, Joe will have the privilege of inherited responsibility for the quarterly conference calls, thereby mercifully ending my uninterrupted streak of quarterly conference calls that something I think is just shy of 70.

We were reasonably pleased with the results of the second quarter, which came in pretty much in line with expectations we outlined on our last conference call. Revenue was 14% ahead of last year and exceeded $300 million in a quarter for the first time. Adjusted EBITDA, as we defined it in the press release, was $104 million, 17% of last year, is also a record.

EPS on a reported basis was $0.31, nearly 50% higher than reported EPS in the first quarter of 2008. EPS was $0.35 after adjustments and $0.41excluding non-cash stock option expense.

In terms of the adjustments themselves, there were four items: the Global Draw earn-out, which we've discussed previously; the extinguishment of debt pursuant to the $850 million financing completed in the second quarter, which is something I will talk a little bit more about later on; the resolution of the California Horse Racing Board matter, which I don't expect to be talking about later on; and about $1 million to enhance the retirement package of Bill Huntley who has been one of the most important contributors to the success of this company for many, many years, dating back to our early pioneer days together in the company formally known as Autotote.

And indeed I would like to take this opportunity to thank Bill publicly for all the great work he has done for us in that time. The combination of Autotote and Scientific Games that took place in the fall of 2000 seems actually impossible to believe that it's been pretty much eight years by now could not possibly have been as successful as it has been without Bill's leadership.

Fortunately, Bill whose expertise in technology and operations is, in my humble opinion, second to none, not only in our company, but even our industry, will continue to be closely involved with Scientific Games as a consultant well into the future.

As we reported in the press release, instant tickets continued to perform extremely well in what is considered to be an otherwise difficult economic environment. Instant tickets same-store sales increased about 6% in the quarter. Mike will talk about that in more detail later. The latter rate of growth was somewhat below the trend growth rates that we have become used to in the last six or seven years, but in actuality, consistent with our internal expectations and excellent in deed considering the general economic climate.

Over the course of the last several weeks, there have been any number of items in the press commenting on the strength of the lottery business in general, and the instant tickets segment in particular, and strongly contrasting it with what has been taking place in the gaming industry overall.

In past conference calls, going back not just quarters but indeed years, we've commented in great detail on why we think this is generally the case, and why in this kind of environment we would see pretty much what we're seeing. So I don't think I need to belabor it here yet again.

The positive margin gain coming from the integration of OGT, this is something we've talked about for a few quarters. It was felt in the second quarter, but unfortunately, this was masked by the impact of sales to China. As mentioned in the press release, the combination of air freight and duty to China reduced Printed Product margins by about 2 percentage points in the second quarter. And as was not mentioned in the press release, plant loading and efficiencies in Alpharetta associated with the scheduling of the China business, though a little difficult to measure exactly, probably impacted margins negatively by at least another two points.

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