Scientific Games Q4 2008 Earnings Call Transcript

Feb.27.09 | About: Scientific Games (SGMS)

Scientific Games Corporation (NASDAQ: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

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.

So with contracts like Pennsylvania, Maryland, Connecticut and others in hand, our core business is really in place to 2016 or 2016, and we don't expect and anticipate any future shocks like the significant reduction in pricing in Pennsylvania. We will however continue to bid very prudently, partnering in a creative manner with whoever we feel adds value. And in fact reduces the capital commitment required to ensure success in the online business.

One of the things that we really need to focus on and everyone on this call needs to focus on, is that really for the first time... literally the first time in decades, there is a uniform movement between lotteries, vendors and regulators to change the scope of the online product mix and that includes very significantly price points.

Historically, when I say historically, we are talking about 30 years plus, the average price point of every gain has risen is a dollar. You pay the same dollar for a Powerball game, a three digit game or others that you did in 1980. There has been resistance to that type of change, but given the economy, given the need to address budget reductions and given the new sense of growth and lack of an increased aggressiveness amongst the lotteries, we're really seeing a sea changed here.

There is a tremendous commitment to new content, aggregated games like an online version of Wheel of Fortune. There was a material change in Powerball at the beginning of this year. Florida joined Powerball, joining the sort of the Mega Millions Powerball theme for the first time.

We have a jack part of $173 million in place today. So we're really becoming very... I am becoming personal very optimistic for the first time that online sales on retail basis not in spite of the depressed economic times. But maybe as a driver are going to change, and I think we're very well positioned for that. The evolving commitment and momentum toward price point increases is to me sort of the bellwether of what's to come. We can implement these types of changes very, very quickly.

And I anticipate by the second half of this year, we'll see additional aggregated online games and/or increased price points of existing games. And Joe, that's something that we've been waiting for many, many years. And I think it will come to fruition over the course of this year.

Joseph R. Wright

This is a big deal in terms of... on the online, where they are getting together on the price points, could have a substantial impact going forward honestly. But I've got to tell you, I'm really pleased to see the states beginning their promotion programs on it and those states like I said, they're coming now and we're seeing some record weeks with them.

So, again... it's we hear that the lottery business is recession proof all the time. I really kind of never totally believed it, but I didn't know on it. But compared to a lot of the other businesses, we're actually in a pretty good shape. And the revenues in many of these states are starting to come in like I said at record levels.

Let's go on to our profit improvements, initiatives. Many of you asked about this, and we started in the fourth quarter of last year. That was a transition quarter in many ways. As you know, our company was built through an opportunistic and very strategic set of acquisitions. And the result is truly superb lottery and gaming assets.

But in Q4, we initiated an extensive program to maximize profitability and free cash flow. And it was time to do this. And this is also something many of you asked, if I've done this before, yes. This is will be about my third or fourth time.

You have to stay on top of it, you have to have a clear plan. You have to know exactly what you're doing and then every single month, make sure what happens. And that's exactly what we are going to do. But you have to start with your contracts, and we've made some real changes in our contracts going forward that I think are positive.

As governments here and outside the U.S. need additional revenues and I don't think anybody disputes that. We can be there and have a proven record of helping them increase their revenues. But what we are doing now is we are providing this company with incentives that if and only if we are successful increasing revenues to these customers.

We've done this in Georgia, Florida, Camelot, and we are doing with others. So in another words as we increased their revenues, our revenue goes up. We are also providing an additional marketing retail sales support; notable states are Arizona and Florida.

We are working with lotteries and other major suppliers like Mike just referred to, to redefine the online game products. We are cross selling to existing customers; examples are Global Draw in Mexico, the Caribbean and else where.

And we are developing new retail store models and second chance formats. We all know the most profitable and efficient way to grow our revenues is through our existing customers. It's both good for them and is certainly good for us.

Next what we are doing is forming strategic joint ventures that are going to allow us to open up new markets while reducing our capital expenditures. Good examples are China, Europe, the Caribbean, and our joint bid in New York online. Another affectively means of increasing profitability is to eliminate our losing and low margin businesses.

So we've reached an agreement with Televisa to exit our joint venture in Mexico this year. And we're exploring alternatives for our Racing and Venue Management businesses. These are both important steps on increasing the profitability of the company going forward.

Finally we think we're really well positioned to offer governments additional products through their lotteries assuming, we get the regulatory approvals for growth opportunities such as sports betting, VLTs, Keno, and other offerings.

Now let's get on to changes we're actually making in the operation of the company. I am assuming that we are going to have a weak economy throughout this and maybe next year. So we initiated a series of aggressive actions designed to increase, naturally the service to our customers like I mentioned before, but also to focus on increasing margins and increasing cash.

This management team started the process last summer and you are going to see the profits through this year. Starting with capital expenditures, the company is going to reduce our operating CapEx from $230 million in 2008 to 125 million this year.

We've also initiated a substantial cost reduction effort including the reduction in force of over 300 plus employees. A salary and hire increase in all businesses except those with unusual growth opportunities, a substantial reduction in bonuses, a reduction in freeze on all consultants, reductions in travel trade show and other promotion activities, the establishment of a central procurement function that is focused on reducing the $140 million spent on paper, ink, packaging, and freight.

We have a goal of increasing our gross margins of our Printed Products division, which by the way accounts for 50% of all of our revenues, from 39% last year to 43% next year and for our total company for around 40% to over 43%.

Now that may sound small in terms of percentages, but for every 1% that's about $9 million make in costs savings, that's meaningful. Finally we're reorganizing some of our products service offerings to make them closer to our core lottery businesses our strength and to further reduce costs such as such as MDI, our co-op services, our Austria operations, and we're moving to consolidate all of our game software development, and we're outsourcing our machine terminal manufacturing.

You put all of these initiatives together and we should save around 15 to $20 million in costs this year and another 15 to $20 million next year. Now I am fully committed to this and have got the track record to show that I have done this in the past and we will do this here.

The end results should be that Scientifics Games is focused, our product line towards increasing revenue from our existing business, improving the services to our customers and generating increased cash flow. This is going to allow us to reduce our already moderate of debt and also take advantage of growth opportunities in the future.

Overall, we should be in pretty good shape going-forward, because we have very few as Mike mentioned earlier contracts over the next few years coming up that would involve a negotiation. 2009 looks pretty good going forward, and again we are starting to see some of the results.

It's a short time period, but I've got to tell you. I'd rather go into a strengthening situation with our lottery customers than what we had in the fourth quarter. Now, some of the states are taking some real actions in addition what been mentioned before.

While those did increase their payouts like Arizona, Pennsylvania, and North Carolina, California has a referendum on their March ballet to increase their payout from 50 to 65%.

Arkansas is going after legalizing state online and instant lotteries. Delaware has a legislative effort to legalize sports betting. Georgia, Kentucky, Oregon, New Mexico are exploring VLTs. There is a lot of things that are going on out there. And by the way, I think we'll continue to, as the states are looking at a $350 billion plus budget deficit going-forward.

And in our Global Draw business, I'm so proud of these guys. They continue to expand sales in the UK, in Mexico and other countries. And they're building on the relationships that we have in Scientific Games. I think you are going to see them also expanding further in Europe, Asia, in Latin America; and again I believe they are going to have some very good years.

Now Mike, go into a little bit more detail on the operations and what you see has happened during the last year and is going on right now in our business.

Michael R. Chambrello

Right Joe, happy to do it and I will go into maybe a little bit more detail than we have in the past, but first I want to reiterate Joe's comments. Now if you look at 2008 overall, we really did have a lot of success over a broad of range products and business segments. But I am certainly not going to try and sugarcoat the fourth quarter results on this call or at any other time.

We weren't pleased with them, but nor were they... those results reflecting of the overall health or state of our business or the industry. And certainly do not anticipate that the fourth quarter results and please don't take those results and look to play back or think ahead 2009. That's simply not the case and not going to happen and I'd like to spend a few minutes telling you why.

So why don't we start right off with the big one, which is China? Just to give you a little historical preference or perspective. We did startup China last year 31 provinces in a matter of months. For the first time in China, we introduced higher price points, the higher price points range from traditional 2 RMB to 3, 5, and 10 RMB certainly led by the Olympic tickets and the Olympic launch.

Over the course of the year, we grew to 130,000 selling points, which resulted in about 10 billion RMB in sales, just a dramatic increase for the overall market and certainly for the CSL. From an operational perspective we were able to get the first console press up and running and operational by the end of the year, and I'm very thrilled and pleased to say that the first game that was printed was a 10 RMB game called Golden Axe, and it's sold out in just 17 days, really a pretty phenomenal accomplishment.

So what's in store for 2009 in China? Well, we've established a very strong local marketing sales and technology team. This will give us the opportunity and capability to provide strong support to our customer and continue to push the marketing plan on a day-to-day basis.

Having said that, sales will be slightly lower in Q1 in China primarily as a result of the elimination of the importation of tickets from the U.S., the shutdown nationally of sales during the seven day long Chinese New Year holiday, nothing frankly we hadn't anticipated, and the burning of excess inventory of lower price points games that had accumulated in 2008.

With the Compco 1 (ph) operational and the installation of the second press, anticipated to be up and running by the second quarter. We're prepared to implement our marketing plan and what does that mean. Part of this plan literally is just to get the right balance of price points and inventory into the marketplace in the locations that sell them best.

By the end of Q1, we'll have a higher number of 10 RMB games on the street than ever before pursuing at any point during 2008. More importantly and a key to future growth is the moving forward of the average sales price in 2008, which was up 5.37 RMB, but based on the approved marketing plan and the games that had been already approved that average sales price will go to almost 8.5 RMB.

This plan is always subject to change, but it's directionally correct and I have a level of optimism that we can exceed that number.

Our first 20 RMB game, something that was unthinkable at this time last year with price point that high, will actually be introduced in the second quarter. In the second quarter, our average sales price due primarily to the 20 RMB game will grow to just over 11 RMB. So if you assume capacity run rate of about 8 billion, standard unit tickets beginning in the second half of the year and a price point approaching say 10 RMB, but it could certainly be higher, waiting to the math on that and see that future is very, very bright in China.

The other thing I want to emphasize from a profitability prospective is, the higher the price point, the higher the margin. Certainly from our systems perspective, there are no incremental costs, so the margin path is very, very high. And as we are paid on a percentage of sales basis, although higher price point tickets are slightly more expensive to produce, net-net the improvement on margin will be very, very significant as we continue to drive that average sales price.

So for the coming year, we are forecasting somewhere between 16.5 and 20 billion RMB sales, again that's only for the CSL, not for the entire market. We anticipate our point of sales growing to about 200,000 installed terminals to say 70,000 it's all aggressive, but really very achievable in my mind anyway.

We just take a step back, because I've spoken with many of you on China over the course of the last year. I've repeatedly stated that 2009 will be a learning experience, be about building infrastructure and implementing best practices, building and enduring lottery in China.

Based on the approved marketing plan in 2009, higher average sales price, increased capacity, introduction of 20 RMB games expanded point of sell will have a great year, but our focus is on establishing the ground work for a breakout year in 2010.

I can't contain my level of enthusiasm for this market and the way that we are building to it. 2009 is going to be really, really good, but 2010 is going to be fantastic.

Joseph R. Wright

You know, you said that all along right, on it and your team has done a great job of building that product, it really has (ph).

Michael R. Chambrello

They've done a great job, and frankly, it's a great customers, who is willing to learn and willing to help drive the market. And again, to think that 12 months ago, we'd have a 20 RMB game hitting the street, it would have been unthinkable.

Joseph R. Wright

If they're really working with as well.

Michael R. Chambrello

Absolutely. Moving on to what Joe mentioned as the next flowing star and if you had spoken with Lorne a year-year and a half or two years ago about his vision for Global Draw, even in his enthusiasm, I don't think he could have addressed the growth and the profitability that Global Draw has been to this company.

If you just look at machine growth, in 2008, we ended the year at over 14,700 space approaching 15,000 machines. Our projection for machine growth in 2009 is about 19,000 machines, unless we have a breakout in one of our non-European opportunities, in which case that number could be significantly higher.

The international experience, these guys are doing a great job and we are gaining great traction. Let me give you a couple of examples.

Barbados will rollout about 800 machines this year, roughly a third of those would be rolled up by the end of Q1. Cash spots, not sure, we're forecasting at this point; it's about a $80 per machine per day. Mexico, that success story just continues and it's looking great will be just under 1,000 machines in Mexico by the end of Q1.

Malta, little Malta, we should have about 150 to 200 machines by the end of Q1 and cash spots to me this is an amazing number, about €100 per day per machine, pretty good. Elexer (ph) out in Asia, we are going have a pilot in Q2 about 100 machines, we could easily ramp up to 500 by year end cash spots opportunity there, I'm not sure looks like about $75 per day per machine.

In addition to Barbados, we've got some really good opportunities throughout the Caribbean. Some of you maybe aware that we have a strategic partnership with Caribbean Cage; if you're not familiar with Caribbean Cage, their Principal is Bob Johnson, the very well known and extremely successful entrepreneur. They've been working that market working on licenses for a number of years now.

We combined their ability, their experience with our Global Draw content technology and Experience, and we really have very, very high hopes for very near term success there.

In addition what drives Global Draw, there is no one that comes close as a content driver. They provide superior service. If there is uninterrupted growth in pound revenue, it confirms the logic of really destination gaming versus... a local gaming where is destination gaming. You can look at what's happening to the destination area while we're growing pretty dramatically.

So Global Draw just remains huge part of our company's success. Beginning to get some real attention and some traction is Games Media. If you look at the number of locations we'll have by the end of Q1 or say, early Q2, we'll have about a 1,000 sites, maybe approaching 2,500 probably slightly less terminals by the mid-end of Q2.

We've got some real upside opportunity as some regulatory changes take place relative to states in price increase. We expect that this will happen probably mid-year or thereabouts and this really provides a great opportunity to demonstrate the benefit of digital over analog machines because we've got game content. They're ready to go as soon as the legislation is approved. We're ready day one and that and certainly that would not have been the case with an analog approach.

Our focus in Games Media in 2009 however is not getting as many machines out in the field as quickly as we can. Our focus is getting good critical mass, say that 2,000 to 2,500. Implementing the best practices related and associated with this new digital age, understanding what it takes to grow content and sales on a local basis, and then really have to hit a heavy expansion once we've gone through that learning curve.

Keep in mind that there is very, very high margin of profitability on the new machine revenue because of our ability to piggyback in the UK on Global Draw infrastructure. And if you think about it the return on a new machine and by the way, we are working on cost reductions on these machines is probably pretty close to one year, which is pretty significant. If you're talking about capital and capital utilization, it doesn't get much better than that.

Let's move onto Printed Products. As Joe mentioned, we may not be totally recession proof, and Q4 was certainly soft. But way Q1 in February are showing not only are we recession resistant, but with lotteries willing and wanting to take advantage of this environment, we are seeing record sales in some areas.

Frankly I'm a little bit surprised by it, most of those records sales are being driven by specific actions. Frankly that Scientific Games is helping to lead, but we seeing significant sales increases in areas that haven't demonstrated material changes in the marketing plan as well, which means we are probably much more resistant than maybe to the recession than maybe we thought even in even as recently as the fourth quarter.

Where is our strength in printed products? Let's start domestically. Hard to imagine, but we received 16 contract extensions in 2008. And those extensions ranged from one year to four years. And they include a couple of very, very key wins. So let's start with Florida.

Right off the top, I'm going to concede that the new price and the new contract structure is hurt earnings in the short run, that was evident in Q4 it will be evident in Q1 and throughout some parts of the course of this year. We just sort of have to take a step back and look at what where we are in Florida and recognize that.

This Florida extension... this Florida contract is for six years. It's got a fixed extension price for the final four years. So in essence, we are likely looking at 10 years in Florida at the same price. We have a 90% market share commitment; really unparallel partnering with the lottery on a marketing plan.

And as Joe had mentioned really for the first time, but not the only time for Scientific Games, we have tier pricing, where as if as we drive resale sales higher and to new levels, our commissions, our fee actually increases. Somewhat unprecedented in the lottery industry, but certainly a clear demonstration of the partnering that we have with the Florida lottery literally for the next decade or so.

Joseph R. Wright

No, but as a model for future contracts, Mike, as I mentioned before, this is going to something that where we are going to be able to demonstrate the value to potential customers, because for every increase that we get revenues, they get multiples of that.

Michael R. Chambrello

And what it really is Joe? We have started putting our money where our mouth is and...

Joseph R. Wright

Exactly.

Michael R. Chambrello

...say we're content-driven. We understand this business better than anyone else. We are willing to take a short-term haircut in order to realize long-term gains. Having said that, the Florida contract as it exists today is in the high end of the top third in our margin contracts. It's a great contract today. It's going to be a greater contract in the future.

Joseph R. Wright

But that's a great pricing model out to get contracts with government customers.

Michael R. Chambrello

Absolutely and in that same line, we were fortunate enough to earn an award contract extension in Georgia through 2013. Georgia is an extremely key contract for us. And Joe, we have the same pricing methodology and model in Georgia that we have in Florida.

Joseph R. Wright

I think it's great.

Michael R. Chambrello

So, great, thanks. Again just to sort of reiterate, retail sales were soft in Q4; there is no denying that. Our industry is proving remarkably resilient for consumer product in these trouble times. As Joe discussed, we've got... we got record sales in a number of jurisdictions. We are tracking them very closely.

And new plans that are in place and have not yet hit the ground or literally just hit the ground this week in places like Florida and Tennessee and a couple of other jurisdictions are not yet reflected in that increased sales gross. So I personally am pretty optimistic and bullish.

And like our systems contracts with these key contract extensions in Florida, Georgia, the other 16 that I referenced are co-op services in Pennsylvania and South Carolina. We are secured through 2013. We don't have any big pricing changes coming up.

So we are provided a consistent long-term profitability and growth opportunity that I feel at this point will be uninterrupted again certainly through 2013. Having said that, we've got a continued focus on cost reduction and quality improvement, particularly in our North American opportunities, just as we shut down our highest cost lowest profitability press in Georgia.

We are fully assimilated with OGT. And by the way for those of you that are keeping score, the FTC investigation that had been ongoing was resolved this quarter. We're pleased to say, so that's well behind us. The installation of what our Ultrium P7, our guys in production will like it in Montreal; with another VHS press will give us the capacity in Montreal of another 8 billion standard ticket units. It's going to provide us with a great competitive cost advantage and market opportunity in Canada. I don't say that Canada. We are underperforming in that market, it's a great market, and it's been targeted for us as a clear growth for opportunity in 2009.

Speaking of growth, let's just say we're right into Gratta e Vinci in Italy. The growth there just remains phenomenal, retail sales in 2008 were in excess of €9 billion. It's about 2.5 billion tickets. Sales growth of about 17% year-over-years '07 to '08, clearly too early to forecast 2009, but we anticipate continued growth and continue to enjoy a strong and good relationship with our partner Lottomatica there.

Staying in Europe, I think everyone is aware that Camelot received a new license, which will commence in April of this year. That new license and the bid that resulted in the award of that license had a significantly increased focus on scratch tickets. SG remains the exclusive provider of those scratch tickets. We do have our facility in Leeds, England, which is strongly supporting that effort.

The model in this license though for Scientific Games is it's a little different. It's a shared risk model. The higher we drive scratch sales, the greater our revenue opportunity in a percentage basis, increased revenue, margin and profitability versus formal model, which was simply a price per thousand model.

Joseph R. Wright

But again, it follows the model the overall concept of us going in and giving them, in some cases, a lower base price, but incentive to go and had an increased revenues. And I want to emphasize, this is really how we want to go forward. And I think it's been well received by the customers.

Michael R. Chambrello

Well, again, Joe, it's sharing the risk, and we're saying how good are we, and how good we think we are and our confidence level, and that is very, very high.

Joseph R. Wright

And we know we're good.

Michael R. Chambrello

Well, now we have to demonstrate it.

Joseph R. Wright

I know.

Michael R. Chambrello

So having said that in the UK in particular, we are going to see an adverse impact in Q1 and Q2 due to this contract change. Basically what happens is there's a significant store of inventory under the old price per thousand model. And so as we enter into the shared risk approach in the second quarter of this year. It's another example of taking a step back in order to take two steps forward, but the benefits of this new model over the course of the next 15 year or so, really just going to be phenomenal.

And we are thrilled with Camelot's aggressive approach to instant tickets and the partnership that we have there as well. So what's next in printed products, look we recognized that the future opportunities for real growth will be heavily dependent on our ability to enter new markets internationally and to further stimulate the growth of under performing markets in Europe, Latin America and Asia.

To that end, we are in a process of taking all of our international sales business development assets and consolidating them under John Walsh. John, as some of you know, was one of the key architects of our success in Italy, China and the UK. The other benefits to this consolidated effort will be frankly in a selfless basis for me to spend less time on the road and much more time focusing on key strategic operating issues this year.

Target opportunities for next year, some of the names you're familiar with, but I think the timing is real Greece, Turkey, Vietnam, Eastern Europe, and again overtime, Germany. Just to summarize it, we've secured our printed product business long-term with the worldwide rationalization of our press capacity, continued focus on game design price improvement, retail sales leading to increased margin.

We'll see steady margin improvement over the course of 2009. I did talk about systems just a few minutes ago. Let me reemphasize what Joe mentioned regarding Mexico. We've made the commitment to you all about mid-last year that we would have our Mexico situation resolved, heading into 2009, and I'm pleased to report that that has happened. By mutual agreement the SCi Games and Televisa have agreed to cease operations no later than early Q3 of this year.

SG will retrieve and retain ownership of all of the equipment and I want to emphasize that 2009 operating shut down asset write off costs are all included in the Q4 write down that we just discussed, which will result in no adverse P&L impact in 2009 and for beyond in Mexico.

Great resolution to that, great spirit of cooperation with Televisa, but we want to emphasize, we are not exiting that market. We still believe that the instant market is right with potential. We'll have a high profile their. It will be a different model, but I think there are some near-term opportunity, any equipment that we are moving particularly the satellites will have in other areas, pretty immediately.

Joseph R. Wright

That's a great result. I'd like to have that behind us. It kind of clears the field going ahead, and Mexico will be our market force.

Michael R. Chambrello

Absolutely agree, Joe. So I apologize for being a little long winded, but I think we needed some clarification and where we are and where we are going. So I hope that you'll agree that while Q4 was a problem, if you look at the fact that we had stable profitable contracts going out for a number of years to come that the aggressive sales marketing game design price point changes in the U.S. markets have been well received and are not future opportunities. They are opportunities that are going to happen in 2009.

The session of operations in Mexico, the profitability improvement programs that Joe just discussed and of course the growth in places like China, Global Draw, UK, Global Draw outside of the UK, we're in pretty good shape. We're strong; we're going to get stronger. Our profit will improve. We'll retain our costs. We'll be very careful with our capital. And I think going forward, we are going to be reporting good things over the course of this year.

So Joe, with that, I will turn back to you.

Joseph R. Wright

Okay, good wrap up Mike. I hope you've got the feeling from both Mike and myself that we're seeing some strengthening in our market right now. So far, I would say, the online business is up around 1%. It's not great, but it's up. And the instant business is beginning to strengthen particularly in some states. And again, I think we're both pretty pleased with that one.

I'm sorry for all the adjustments that we had in the fourth quarter, but it was important and it was very important to get some of these changes behind us to kind of give us a clear running track in front of us. Such as a lot of our severance costs, the writing off of some of the losing operations like we just mentioned in Mexico with the great result we had there and a lot of the rest of them.

Now I also hope that you notice the increased information that we're providing in the press release that came up. We're doing this on purpose in order to provide you with more information. And I hope also like the increased information on this call. As I said before, we will make this a goal of ours to go and give you as much information as we can without providing guidance, but to go ahead and bring you closer to what we really feel are the key drivers of our business.

Having said that, Anne, I'm going to hand it over to you. I'd like to thank everybody for listening, and we'll be happy to take any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions). And the first question comes from the line of Larry Klatzkin with Jefferies. Please proceed.

Lawrence Klatzkin - Jefferies & Company Inc.

Hey guys, we do appreciate the increased information flow.

Joseph Wright

How are you, Larry?

Lawrence Klatzkin - Jefferies & Company Inc.

Hey Joe. You do the cost cutting, do we you have any concerns about keeping the production up as you do the cutbacks, any kind of worries about that?

Joseph Wright

No, not at all. As a matter of fact, when we opened up the first press that Mike mentioned in China and the second one coming up at the end or the second quarter, this is going to give us the capacity, so we don't have to go 24x7. As you know, last year, we were all out. We really had no capacity left at all. And so this is going to open this up a little bit to where we can kind of rationalize our productions and our packaging lines. So I don't see a problem with that at all; do you Mike?

Michael Chambrello

No. Actually Larry, this was not a scattergun approach. This was a full team effort. We researched the organization up, down, left, right. And the areas that were cut frankly are areas that are not going to generate future growth, future profitability and areas like production. We are never going to mess with what makes us as great as company as we are, and no worries there whatsoever.

Joseph Wright

Yeah, we don't really take a risk on that. I think probably it was done in a very short period of time, I think we did a good job of looking at the entire organization; Mike, I really do, and the last area that would be customer service and production.

Michael Chambrello

And part of it is again return on capital, the decommissioning of the press that I mentioned in my notes is it's the highest and released official press that we have. We are going to put the new press of an operating in Montreal. And like our other BHS, it's actually reduced its cost and manpower. So there is a return on our capital right there.

Lawrence Klatzkin - Jefferies & Company Inc.

Now are you buying a new... a new press is going to go up in Canada too?

Michael Chambrello

It's going to be installed in the second quarter of this year, operational in the third quarter Larry, and it's going to lay the ground work for us to be extremely competitive in a Canadian market, where we are underperforming and undeserving our customer. I'm very excited about it.

Lawrence Klatzkin - Jefferies & Company Inc.

What are we looking for a margin improvement versus the old two presses?

Michael Chambrello

I think that I don't want to be so gracious to say that we'll double it. But we'll begin by this time next year to certainly approach the margins that we have in the UK.

Lawrence Klatzkin - Jefferies & Company Inc.

And the margins right now in Canada?

Michael Chambrello

Half of what they are in the UK.

Lawrence Klatzkin - Jefferies & Company Inc.

Okay. Italy renewal, just the status of that; what's going on with it?

Joseph Wright

Larry, I would say overall on Printed Products, the goal is that we've got in there, I think are achievable and that is to go from 39% last year to 43% next year on gross margins. And I really put that into demonstrate that I feel very comfortable that we are going to achieve that. But you can't say on one press.

Michael Chambrello

Yeah.

Joseph Wright

Because that's just not as you know the way we do things. Also I would say in terms of the people who were rift in the company, where you hate to do that, remember the company was built through a series of acquisitions, and really hadn't taken the time to go and consolidate those and take advantage of the synergies, so much of that reduction was improving the overall working of the company, as a company, not as individual business unit.

Michael Chambrello

Hey Larry, I didn't mean to be evasive by the way, just because I know the number in the UK. What we're looking at today in Montreal from a margin perspective to sort of high-teens profit margin. That's going to dramatically improve.

Lawrence Klatzkin - Jefferies & Company Inc.

Okay. And then, the Italy renewal process I mean, the stock, GTX put a new plan in United States. Is there any chance that they look to use some of that in Italy or shipping tickets from Florida to Europe to same as shipping tickets from United States to China?

Michael Chambrello

Yeah, I'm not going to comment on GTX business for the use of their plant in Florida. What I will tell you is that, our relationship with Lottomatica today, 2010, well 14, 18 pick a number is very strong. We don't anticipate any... if there are no changes to the license or the license process, then we anticipate and are confident of no changes in the consortium makeup or production that Scientific Games company provides to Italy.

Lawrence Klatzkin - Jefferies & Company Inc.

Okay. I mean you guys were on the path of doing maybe 400 million of the EBITDA1. I know you are not giving guidance, but is it reasonable to expect that you have a chance of doing that in 2009?

Joseph Wright

Well, that's a good try, Larry. We are not going to give the guidance on the EBITDA on it. But I think we really have given pretty much good information out there to where you can put it in the models and see where we're going to come from.

Lawrence Klatzkin - Jefferies & Company Inc.

All right. Thanks guys.

Michael Chambrello

Thanks Larry. Yeah, I was just going to add that, look, there are some things, where we are still on the runway with. I still consider China on the runway, it's profitable and is successful is it's still on the runway,

Global Draw, same thing; it's great and getting greater. Contracts like Florida are going to improve. We are going to take the hit in the UK, but it's going to be great in the second half of the year. So directionally Larry, I think we're in good shape, but maybe the path is going to be a little bit longer than we had hoped. But it's coming; no question.

Joseph Wright

But that's also why we undertook this cost reduction program.

Michael Chambrello

Absolutely.

Joseph Wright

And again, there is two ways you can grow. You can just grow on the top line down or you can grow from the bottom line up. And right now we're focusing on both of them, but with a very heavy emphasis on increasing cash flow. That's important to us right now.

And if you go anywhere around our company, do me a favor. If you see somebody who hasn't got that message, give me a call.

Lawrence Klatzkin - Jefferies & Company Inc.

All right. And the New York joint venture bid; could you explain that?

Joseph Wright

Go ahead, Mike.

Michael Chambrello

Yeah. Well, look, we've been saying for a couple of years now, our strategy on the systems business has been that we are going to have a fixed return or we are either not going to bid or we are going to find a strategic partnership.

What we've done sort of a unique approach certainly in this industry in New York given the size of that job, given the current market and given where we want to deploy out capital in other areas like Global Draw, China in printed products.

We chose to enter into a relationship with Intralot in New York, where Scientific Games would provide all of the traditional co-op services, the warehousing distribution, inventory, Televisa (ph) and things of that nature. By the way, we are the instant ticket, primary instant ticket provider in New York. So it was a perfect combination.

It's not... we didn't enter into any long-term strategic relationship as Joe mentioned. Look, we don't require 100% of all business. We are going to look at pieces of the business, geographies, who is the best partner, and then put together what we think is the best opportunity for us to increase value and increase cash flow. And in New York our assessment was that partnering in that manner provided us an opportunity to participate in New York in a win situation while not over reaching on capital that we didn't feel would the proper return.

Joseph Wright

Look, every single one of these, Larry, is going to go hit and pass a very stringent return on investment test. And every one of these are going on up and literally being approved by Mike, Dewayne and myself. And I think going forward, by joint venturing like this or joint bidding like this, particularly if we're bringing to our strength, which is instant tickets into the market as well as our strength, which is co-op services and a lot of the rest of this. This is a win-win and we expect to be doing more of these in the future.

Michael Chambrello

Yeah, but having said that, I want to reemphasize as I said in my statements earlier, we are not deemphasizing, we are not exiting,

Joseph Wright

Yeah.

Michael Chambrello

We are changing our approach to the systems business. We are committed, we've got a new terminal. We think it's great, we think it's the best one out there. The consolidation between our North American and the rest of the world technology and in systems groups; it's going to provide some great benefit for us. I just want to emphasize. Please do not misread or misinterpret.

We are in the business; we are in it for the long haul. We just recognize that and I've said this before over the next year or two, there is going to be a great opportunity in systems. The models changing, the markets changing, the price depression that's been in place over the last couple of years, which largely we haven't been pulled into is going to present an opportunity for a content driven company willing to change the model. That's us; we are well positioned for it. And I see that as a growth area, not this year maybe, but certainly in '10 and '11.

Joseph Wright

Yeah, totally agree.

Lawrence Klatzkin - Jefferies & Company Inc.

All right, thank you guys.

Joseph Wright

Okay, thanks Larry.

Operator

And the next question comes from the line of Celeste Brown with Morgan Stanley. Please proceed.

Celeste Mellet Brown - Morgan Stanley

Hi guys, good morning.

Michael Chambrello

Good morning Celeste.

Celeste Mellet Brown - Morgan Stanley

First, I just want to clarify... I guess won't call it guidance. The cost cutting that you discussed in your press release, the 15 to 20 million for the year. That does not include the cost savings from shutting down Mexico and the reduced shipment cost to China and the Global Draw and others; is that right?

Joseph Wright

That does not include any of the Mexico cost at all. Some of the cost on the China will be included in there, but not very much. And the rest of anything like the Oklahoma write down, that does not include any of those.

Celeste Mellet Brown - Morgan Stanley

Okay. So it's just where you are reducing force et cetera?

Joseph Wright

It is pretty much what it looks like Celeste, it is reduction of over the 300 people. It is substantial reduction in terms of the bonus plans. We've reduced our 401-K, which I don't think I mentioned before by 50% of what it was. It's pretty much across the board, where we are really focusing on free cash flow.

Celeste Mellet Brown - Morgan Stanley

Okay, great. And I know you don't want to give guidance, but your depreciation number is going to change, I think dramatically from a lot of the write downs. Can you just help us with that one number?

Joseph Wright

Sure, Dewayne's been sitting here trying to get into this call something like that. So you're on Dewayne.

Dewayne Laird

Hi Celeste. I think looking forward to 2009, if I was going to apply guidance on depreciation, it would probably be in the order of down by 8 to $12 million, because you are going to not have the Mexican contract going forward. And the Pennsylvania contract if you recall, we talked about this even last year, had a significant reduction in depreciation expense associated with entering into the new contract.

Celeste Mellet Brown - Morgan Stanley

Dewayne, just for clarification, I'm not sure what's depreciation number to work off, because there are some adjustments in one of the fourth quarter, can you... is it down 8 to 12 from our level?

Dewayne Laird

8 to 12 from the kind of normalized depreciation number excluding the write downs that we took in the fourth quarter.

Celeste Mellet Brown - Morgan Stanley

So, it's down from the 35, 36 million a quarter?

Dewayne Laird

Well, depreciation expense for the whole year last year was kind of normalized, probably 109 million or 110 million.

Celeste Mellet Brown - Morgan Stanley

Okay, it's very helpful. And then Joe...

Dewayne Laird

I'm sorry, it's 141 million, but it's still going to come down in the 8 to 12 million.

Celeste Mellet Brown - Morgan Stanley

Okay. And Joe or Mike just to clarify again sorry to ask annoying questions. The 43% instant margins this year, is that a run rate by the end of the fourth quarter or is that what you expect for the full year?

Joseph Wright

That is going to be 43%. It's going to be in 2010, that's going to be the full average year for 2010 for Printing Products.

Celeste Mellet Brown - Morgan Stanley

Okay. And then there has been some discussion about the earn-out because of the shift in the currencies. Dewayne, can you help us with what that number will be and having it paid it yet?

Joseph Wright

Hey Celeste?

Celeste Mellet Brown - Morgan Stanley

Yeah.

Joseph Wright

I'm sorry, the 43% is the 2010 that's the entire company.

Celeste Mellet Brown - Morgan Stanley

The entire company?

Joseph Wright

Yeah. For the Printed Products division, actually I'm going to say we are going to 43% also, okay. So, it's for both of them.

Celeste Mellet Brown - Morgan Stanley

So gross margin for the whole company.

Joseph Wright

Yeah.

Celeste Mellet Brown - Morgan Stanley

Okay, and...

Dewayne Laird

On the Global Draw earn-out, I think right now we are targeting numbers somewhere in the 80 to $90 million range.

Celeste Mellet Brown - Morgan Stanley

Okay.

Dewayne Laird

And it will be paid... it has not yet been paid. It will be paid certainly in the first half of 2009.

Celeste Mellet Brown - Morgan Stanley

Okay. And have you locked in currency at this point.

Dewayne Laird

The payout is still pound sterling. So we've covered ourselves there I think both with natural hedges as well as some forwards.

Celeste Mellet Brown - Morgan Stanley

Okay, good. And then finally, Joe, you said you didn't want to talk about on the sale of rising at all. But could we reassume that the any proceeds will be used to reduce that?

Joseph Wright

We haven't really kind of decided on what we're going to be doing on those proceeds. But certainly that's one of my goals Celeste, yes.

Celeste Mellet Brown - Morgan Stanley

Okay, thank you. And thanks for all of the detail on the press release.

Joseph Wright

Sure, happy to.

Operator

And the next question comes from the line of Betsy Gorton with Goldman Sachs. Please proceed.

Betsy Gorton - Goldman Sachs

Good morning.

Joseph Wright

Good morning.

Betsy Gorton - Goldman Sachs

Can you just talk about what the margin progression on the printed products might look like in 2009, so for example, for first quarter? I mean other than China, other than not shipping the tickets over, will first quarter look like fourth quarter and just how do you see that rolling out throughout the year?

Joseph Wright

I see basically 39% in 2008. You're talking about just Printed Products, right?

Betsy Gorton - Goldman Sachs

Right.

Joseph Wright

We're going to be going up to probably a little bit North of 41%. And my guess is that we will be running at a 43% in 2010 throughout the year. Beyond that we're going to continue to work on it. The goal here is to continue to increase those margins for the free cash flow. But one of things I was talking to Celeste about and that is, also we've ticket for the total company. I would say you can see us going up to around that level next year and every 1%. Again, I repeat is $9 million.

Betsy Gorton - Goldman Sachs

Okay.

Joseph Wright

And that pretty much goes right down to tax line.

Betsy Gorton - Goldman Sachs

And then...

Michael Chambrello

And then for the things that though, keep in mind there's actually two issues. And that... they really did the first half of this year, and that bill directly impact the margin. The first is, as I mentioned earlier, the UK will have no positive impact almost in the first half of the year because of the contract change. UK is generally pretty high margin business for us. So we won't see that kick in until the second half of the year.

The second point to make is that Florida, again, we took the hit in Q4. We are taking a hit in Q1. But Florida is embarking on and my experience an unprecedented marketing campaign for instant tickets and the instant tickets sale. So those... that literally was kicked off this week. So I don't think we'll see a significant impact at all in Q1. We'll start to get some traction in Q2. But to get to the margins that Joe described, those are two big drivers that are not going to be enforcing Q1 at all, and in the UK probably not enforced really until the third quarter. So with those caveats, and I would say that... Joe's comment.

Joseph Wright

Offset by the savings, I think, you mentioned before in terms of China.

Michael Chambrello

Yeah.

Betsy Gorton - Goldman Sachs

Okay.

Joseph Wright

And not going through the shipping first of all the excess production on 24x7.

Michael Chambrello

Yeah.

Joseph Wright

And we've got plus the shipping, plus the taxes?

Betsy Gorton - Goldman Sachs

Okay. And then in terms of Florida, did you all ever give the percentage of retail sales or the pricing where you're starting out on that contract?

Michael Chambrello

No, we generally for within our contracts, we are not allowed to discuss, and we don't discuss with the pricing. I will however tell you that the pricing in the Florida contracts given some of the requirements of the Florida contract is a bit higher than in contracts that were either let or awarded in the same timeframe.

Betsy Gorton - Goldman Sachs

Okay. And then just finally on getting back into Mexico, the timing on that; is that an '09 event or more of a 2010 or later event?

Michael Chambrello

No, it's that we will have no financial impact on 2009 given the write downs that we've taken both in hard assets and in an ongoing operations. We expect to be removing equipment from Mexico this summer. It's subject to... we want to do a very orderly shutdown with Televisa. Again our relationship with them is very, very good. So it's a matter of will it be August or October, not really sure. But those are the timeframes we'll be removing equipments thereabouts. But the impact began on 2009, will be no adverse impact other than the write offs that we recognized in Q4.

Joseph Wright

And then, we're going to have an opportunity to go ahead and continue with our instant ticket business in Mexico, which as Mike mentioned before, we think is going to be a good business. The Global Draw business in Mexico is going to be a good business, and being able to get the equipment back. We're going to be able to reuse some of that equipment. That's very important, but we're going to get this behind us this year.

Betsy Gorton - Goldman Sachs

Okay.

Michael Chambrello

But to those point in other segments, Mexico remains the target of ours. We'll be very, very smart about the way we introduce any capital or infrastructure. It's a great market down there for instant tickets. And at some point we are going to convert it.

Joseph Wright

Yeah.

Betsy Gorton - Goldman Sachs

Okay, thank you.

Michael Chambrello

I agree with Joe the CIE business and the overall Mexico business for Global Draw is growing and picking up seems; that's a key market for us, which is why we need it to exit it in as graces may not be direct word, but this is main responsible.

Joseph Wright

Yeah, but in the right way.

Michael Chambrello

Yeah.

Joseph Wright

Yeah.

Betsy Gorton - Goldman Sachs

Okay. Thank you.

Joseph Wright

You bet.

Operator

And the next question comes from the line of Steven Wieczynski with Stifel Nicolaus. Please proceed.

Steven Wieczynski - Stifel Nicolaus

Yeah, hi good morning guys.

Joseph Wright

Hey Steve.

Steven Wieczynski - Stifel Nicolaus

Just one question for you; you talked about domestic sales in terms of what you're seeing so far in January and February, and maybe I missed this. But what have you seen so far in China this year? And then also what is your gained employment look like going to China for the remainder of the year?

Joseph Wright

Mike, let me hand it over to you. But let me also say that China is pretty tough, Mike, I think for us to gauge, because we haven't had the inventory over there. And every time we've gone up with... like you said, on the latest one, we went out with whatever our new tickets... our higher price, tickets that lasts, what, 17 days?

Michael Chambrello

Yeah.

Joseph Wright

And so again it's really tough to know what the final market demand will be when you can't actually supply it. So once we get the second press in there, then we are going to have a much better feeling on it, but so far I guess as far as I have seen everything that comes in, it's very strong market force.

Michael Chambrello

Yeah, one of the key concerns in China following the Olympics was that a fad, would it pass and would we have a sustainable business there. Simply put, this Golden Axe games sold on 17 days, we didn't even get it to all of the provinces before it sold out. So again with the caveat that in Q1, we have the transition, because we couldn't build up inventory fast enough of the games and the price points that are in demand there.

The seven day holiday in China was not something that we anticipated. Literally it stopped selling for seven days, but your other point, we've got 68 games approved, working papers in place and production schedules in place and in order through Q2 and for a literally start up lottery that's very, very good. And the emphasis on the increased selling price; average sale price of the tickets is very, very encouraging.

Steven Wieczynski - Stifel Nicolaus

Okay, guys. And maybe just one more quick question; we haven't heard about Germany for a while just. What are your thoughts this year going forward at this point?

Michael Chambrello

Well, Germany remains sluggish to say the least. But what I will tell you is when we see a clear indication that it's beginning to pickup and gain momentum from a regulatory perspective as well as from an individual lottery prospective. We're perfectly positioned to jump right back in. But as I said earlier we've got a lot targets out there, and ones that are not moving nearly as quickly as Germany are ahead of them in our development path, assignment of resources et cetera. I still remain and believe that that's going to happen at some point. And until we see some real momentum, we're focused in other growth areas.

Steven Wieczynski - Stifel Nicolaus

Okay, Thanks guys.

Joseph Wright

You bet.

Operator

And the next question comes from the line of Ralph Schackart. Please proceed.

Ralph Schackart - William Blair & Company

Hey, good morning guys.

Michael Chambrello

Good morning.

Joseph Wright

Good morning.

Ralph Schackart - William Blair & Company

Joe, I know you don't like to give guidance, but I was just thinking to be kind of helpful if you could help us think about 2009 as we go forward. It seems like cost is pretty bullish about growth. I'm just trying to get a hand along what happened the quarter versus some of your commentary today. Can you help you think about what markets will just grow, sort of an absolute basis in 2009, just high level between instant online and diversified gaming?

Joseph Wright

I think both your instant and onlines are going to grow, but I wouldn't say Mike that they're going to be dramatic at all. I would say if there, let's say 1 to 2 to 3% that might be pretty good. I would like to see more than that in certain states.

Italy, continue to be strong, I think China will continue to be strong. Global Draw and Games Media will be strong on it. And I've got great hopes what you talked about before on the online when you come in with the change matrix on it and the higher price points.

Michael Chambrello

Yeah.

Joseph Wright

So overall, let me tell you the approach we are taking towards 2009. We are bullish, but we are careful. We are not assuming that these growths are going to happen, because honestly I've never seen, you can call this a recession or somewhere between recession, I have never seen one like this. So therefore we are aggressively going and going after the cost reduction to make sure we increased the margins.

And this is something that I know that we can do. But in terms of the strength of the market place, that's where I would see the main strengths. Also I think the Global Draw expansion and other markets, it is going to happen. And so overall again if we come across as bullish that's because we see some, and we know we're going to be happening, and we're also seeing the results coming in, but we're careful.

Michael Chambrello

I agree Joe. Actually I see in pockets that put the risk out there, because we help put the marketing plan in place. I actually see double-digit growth year-over-year in places like Florida, Tennessee, maybe even Georgia; those are huge drivers. And it's only going to take one or two big moves in the online from a price point perspective or from an aggregated gain perspective.

And again, this is a unique environment for us, where all of the vendors are working together on this; it's unprecedented. A number of the lotteries are working together on this. And it's going to take one or two of those to pop in the second half of this year to I think change the overall environment. And as Joe mentioned, one or two to pop in the Caribbean on the Global Draw side, and will significantly beat the sort of the machine target that I laid out earlier.

Joseph Wright

But while these markets are taking place, what you're going to see in more and more on these calls, you're going to see more and more of us talking about our cash results during the quarter, our cash position, and all the rest, because that really is the way of managing the company.

Ralph Schackart - William Blair & Company

Right. Thanks Joe, and that's a good segue to my next question. Historically, Scientific Games has had a lot of... I guess you can call them one-timers in the quarter... maybe three terms quarters have been pretty sloppy. How much of a focus now that you're at the helm. Are you going to put on eliminating some of these types of quarters and focus on the cash flow going forward?

Joseph Wright

That is the way I've managed every company. And that's exactly what we are doing over here. And I've just got to tell you, I would say the rest of the management has picked that up on it.

Michael Chambrello

I would say without question, Joe.

Joseph Wright

The first couple of meetings were little confusing, but those occurred lasted like really in the third quarter or fourth quarter. And I feel very comfortable that we've got the management team that are literally in step with us. And let me say this and I say this with a very friendly feeling in my heart towards everybody that works here and that is that of somebody who's not then they won't participate in our success.

Ralph Schackart - William Blair & Company

Great. And one more if I could please; on Printed Products, you mentioned sort of a tag about 400 bps of margin improvement this year. How much of that margin improvement is sort of within your control in the cost side and how much from an end market growth and leverage stand point sort out of your control.

Joseph Wright

Okay, and now that's over two years, that 400 basis points.

Ralph Schackart - William Blair & Company

Yeah.

Joseph Wright

Okay. That's going to be... or running rates going to be in 2010. And I think as Mike also mentioned in the first quarter and in the quarter, a lot of these reductions that we are taking that are... we've already taken are not going to have full affect until we go towards the latter part of this year or next year. Let me give you an example.

On the severance, while we did go and we have reduced our workforce and again it's not our production workforce or anything that would affect the delivery or servicing of our customers. A lot of these are going to be spread out in terms of people leaving the companies based upon like our production schedules like. And that will occur primarily over the first half of this year. But the severance is pretty much behind us.

Some of the procurement changes we're going to make are probably won't even take place until let's say going into 2010, because we have existing contracts in place, so it depends; on bonuses, that's easy, that's been done. The severance for the most part will be spread out. On the travel and all the rests of these, which are substantial expenses that's done; we are already managing that. CapEx, we have already taking it down. There is just a lot of these sayings that have occurred. Now the job that Mike and I are going are have is making sure that everybody maintains its discipline throughout all of this year and next year, and we are going to do that.

Ralph Schackart - William Blair & Company

Right. One last one if could sneak one in. And in terms of just SG&A and the line item that you can control in terms of modeling or for 2009; would that line item be down in absolute dollars over 2008?

Joseph Wright

Yes.

Ralph Schackart - William Blair & Company

Okay, thank you.

Joseph Wright

And to go back, and I sorry to answer the question, how much of this on the gross margin can particularly elect the SG&A. Can we control internally? Most of it.

Michael Chambrello

Let me add one other thing, because it was a source of a number of surprises disappointments last year including significantly the fourth quarter. When we talk about printed products, a key component of printed products is actually in the eye or a license product business. Although license products in the MDI brand remains very, very important to us, we have taken a good hard long look at that business model, and we're in the process of making some adjustments and some changes. Some of them are cost related, but most of these are sort of more strategic to ensure that we don't see that type of fluctuation in the future. We are better able to forecast and execute on contracts going forward and at last you become much more integrated with the overall Printed Product sales process and success story.

Ralph Schackart - William Blair & Company

Yeah. Okay.

Joseph Wright

Okay.

Operator

And our final question comes from the line of Carlo Santarelli with JPMorgan. Please proceed.

Carlo Santarelli - JPMorgan

Hey guys. I just had a few quick ones. MDI revenues in the quarter Mike, I know you just touched on it. Is there anymore color you could provide on that?

Michael Chambrello

In the quarter being...

Carlo Santarelli - JPMorgan

The fourth quarter.

Michael Chambrello

Fourth quarter? Let me put it this way. They were down and we were disappointed with where they were. We believe that they will be up in Q1, but not dramatically versus Q4, and that, as great as the brand is, we are not happy with the execution. The management team in MDI is not happy with the execution, and I can tell you as recently as 14 hours ago, we were in the process of addressing it. So, that will get better. But we need to tweak that model in order for us to take full advantage of that unique competitive advantage that we have.

Joseph Wright

Listen, MDI has a terrific differentiator in terms of our product offerings through their license products and all the rest of it. But Michael (ph) really what they did is they've got to be tight and closer to our sales force that works with the lotteries day in and day up. And that's exactly what we're doing. But we don't want to loose the uniqueness of the license product offering. It does really have something; our competitors do not have.

Michael Chambrello

No question; absolutely, yes.

Joseph Wright

Understood. And then one follow up; are there... of your charges, were there charges in your lottery system sales cost of good sold line? When I look at that, obviously there is a negative margin implied. So I assume some of that $7 plus million charge in that business is in that line item. But if not, I was wondering if you can maybe comment a little bit on margins on your new way of terminal rollouts?

Michael Chambrello

Well, the first one... I think we talked about this on the last call. I think we went into a little bit of detail, but let me hit it again. The rollout of the WAVE terminal in Italy, which was actually not the WAVE terminal, it was called the Leonardo, which used the WAVE as the basis what was pretty significantly customized for that geography. When we got there and we literally did the redesign over a period of a couple of months, which you know is not the ideal way to do it. So anyway, so the bottom line is the sales that we had on those terminals in Q4 were virtually breakeven. I'm very comfortable at this point to say that sales that will have on those terminals as we roll them out during 2009, we'll be at a reasonable margin.

Carlo Santarelli - JPMorgan

Okay. And then I guess a little bit of a follow up that if I recall is $90 million contract, about how far into those sales are you right now and what do we kind of expect maybe if you can give some color on an overall margin for the entire lot?

Michael Chambrello

Well, we are probably, I don't know, 20% of the way into that build or delivered at this point. The speed at which user will choose to roll it out is not within our control. We will certainly see some material sales this year leading into 2010, from a margin perspective; we don't normally go into that level of detail. But think of the digit, maybe starting with the two win, it will be in that general area.

Joseph Wright

Hey Mike, again, pretty good. You're getting into the new sharing of transparency.

Michael Chambrello

I'm trying.

Carlo Santarelli - JPMorgan

I appreciate the color guys.

Joseph Wright

You bet.

Michael Chambrello

That's it.

Joseph Wright

Okay, thank you very much.

We know that Lorne is listening on the call with us. And just want to say, Lorne, we appreciate that everything you did to build a really great company. And you are going to stay involved; I want everybody to know that you're going to stay very much involved on the strategy, and the direction of this company, which is important.

I'd like to thank everybody for listening to the call and to the questions, and look forward to working with you in the future. Bye now.

Michael Chambrello

Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.

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