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Executives

Robert Becker - VP and Treasurer

Analysts

Scientific Games Corporation (SGMS) Bank of America Merrill Lynch Leveraged Finance Conference December 4, 2013 2:50 PM ET

Unidentified Analyst

Good afternoon everyone again, very happy to be able to introduce Scientific Games. We have Robert Becker who is the Vice President and Treasurer at Scientific Games. Scientific Games obviously disclosed a large transformational acquisition that we helped to finance. Very happy to have you here and he'll go through the story. Thanks Robert.

Robert Becker

Thank you everybody for coming. Sort of feel a little bit like a school teacher, reminds me of the like the last day before summer break. You guys here had a big meal and 81 degrees and sunny outside and you showed up for the presentation so I appreciate that.

Just like to go through briefly a presentation about the Company, businesses we're involved in and then open it up to any questions. I would like to draw your attention to our statement about non-disclosure information and non-GAAP measures, it's in the presentation, it's also on our website.

For those of you who have followed Scientific Games for a few years, I'll be describing the Company that's significantly different than we were in the past, as a result of an acquisition of WMS Industries that we completed about seven weeks ago. And it was a highly complementary and transformative transaction.

On a combined basis, we are a leading developer of technology-based products and services for the gaming and lottery industries. We provide a full suite of products and services, whether they're for the lottery, instant-ticketing systems, whether for casinos, land-based casinos or on the Internet. And we also have a full suite of integrated products and services that we provide through the Internet.

We are a performance-focused organization. We're headquartered in New York with substantial operating presence in few countries. Headquartered in Chicago as our gaming business, Atlanta is sort of a headquarters for our lottery business, but we also have presence in Beijing, Las Vegas, Leeds, London, Montreal, Pune, India, which is an important part of our synergy objectives, Santiago, Chile and Vienna, we have about 5,000 employees globally.

Combined revenues on the LTM 6/30 basis of about $1.6 billion, generating attributable EBITDA of about 663 million which we include about 100 million of anticipated run rate synergies. And we have a current equity market cap of about 1.5 billion enterprise value of 4.5 million.

We believe that we are at a favorable alignment point, where we have the core competencies of innovative technology and creative and comprehensive content in a Company that we now have size and scope to pursue what we see as a convergence in the gaming industry sort of between lotteries and the gaming business.

In just about the, the financial categories if you'd look at we are a leading provider in this space. Near the comp in revenues and in EBITDA and on EBITDA margin basis, on a LTM basis 6/30. We are showing the sort of leadership position there.

I'm going to describe the Company in three main categories, lottery, gaming and interactive. And just give you a brief overview of each of those. The lottery business accounts for about 50% of our revenues. In this business we are the leading provider of instant-tickets for lotteries around the world. This is about $75 billion worldwide market. We have a very comprehensive manufacturing capabilities. We have nine presses in five countries that generate roughly and can print roughly 45 billion tickets. All those tickets are developed and designed with a very comprehensive portfolio of brands, both brands that we have created and licensed brands from third-parties. And we have shipped tickets to 50 countries around the world and also supplied to 40 states here in the U.S.

On the lottery systems business, this is the business that is the network lotteries where if you go buy a lottery ticket or a Powerball or Mega Millions, we also are a leading provider in this space. This is a 200 billion market worldwide. We have 10 full service management contracts in the U.S. and we’ve supplied over the years dozens of similar contracts and networks around the globe. We are a leading provider of game design sort of the full suite of services going from game design to marketing to integrated delivery and telemarketing services and this is what we bring to our lottery customers.

And we have a strong portfolio of contracts, contracts in the Printed Products Group generally known from three to five years with renewals in the systems business they generally run a little bit longer because of the capital requirement. But we have a portfolio of these tickets, of these contracts that are running out for a number of years and we expect that we’ll maybe see about 10% coming to free over the next 12 months.

A little bit more about the printed products business. This business is in mature markets so we continue to see growth. Our revenues grew about 4% year-over-year, and a quarter ending September. Some of the new contracts that we have coming onboard we are a supplier to the new privatized New Jersey Lottery through our equity ownership there and participation with Gtech. We are the exclusive provider to the Greek State Lotteries and these are both multiyear contracts 12 years in the case of Greek’s and 15 I believe in the case of New Jersey. We’re a exclusive supplier to tickets to the Greek Lotteries. In the third quarter we started the Dominican Republic into ticket lottery and in Panama that was started in October.

As I mentioned this is a mature market but we believe that there are ample opportunities for growth. We have a very robust loyalty program. We feel that there is an opportunity to extend that to new jurisdictions and new customers. We believe that in the international market in U.S. roughly 60% to 70% of the market is instant tickets and outside the U.S. that’s more like 20%, so we believe that there is a vast opportunity for growth of instant tickets outside the U.S. and we believe we can also generate additional EBITDA synergies by increasing our production efficiencies.

Lottery systems business, we saw 11.5% increase year-over-year growth in the third quarter this was largely driven by some of the jackpot games, but again this is the business where we -- in the U.S. we are generally providing things on a participation basis outside the U.S. it’s generally a sales business with an ongoing service contract so some of that revenue growth came from equipment sales. Some of those sales that we’ll realize in the coming quarters are sales to Delaware State Lottery Switzerland and also a very major customer in Norway.

The growth drivers here we have a system that’s in place our capital is in place and we feel that there is a great opportunity to develop incremental business by increasing your price points and it’s only take us at a higher price also developing new types of games all of that revenue would generate substantial margin because your CapEx is and your operating margins are fixed at that point. We also believe there is opportunities to develop the iLottery opportunities Delaware’s one state, North Carolina is another that is pursuing some lottery opportunities by selling it through the Internet.

Gaming business is our second category and it consists of the legacy Scientific Games gaming business and the WMS business. What’s important to note is that while we were both in this phase WMS being far larger than the Scientific Games’ gaming business it’s very complementary, because we were approaching different markets both in terms of geographies and in terms of the types of lotteries that we or the types of gaming machines we were selling.

We believe we’re a leading innovator and developer of creating content and gaming machines. We have now a very robust pipeline of cabinet and game production that’s coming out for sale. We are leading provider in the for-sale market, but we also have a very large participation business in North America and UK. And what’s important is that all of this business is supported by a very comprehensive content program both developed and licensed.

Scientific Games gaming business and this is our legacy business which is centered in UK. We have about like close to 25,000 terminals in the UK. These are all networked through their LBO offices. So from a technology standpoint, we have a very robust program have a lot of terminals connected in wide area, and that’s important when we look forward to how we can provide some revenue synergies with WMS.

We also had an installed base of about 5,000 terminals in a few markets in the Caribbean and in Latin America. This business has been affected by a couple of things, economic conditions, weather conditions in UK had impacted this business such as we saw decline in revenue year-over-year for about 7% or 8%.

We also exited a ancillary business that wasn’t really core, that was selling arcades and similar types of machines to the pub business that also had an impact on our revenue. And our customer relationships are strong and that was evidenced by a recent renewal, a final renewal of contract with our largest customer in the UK Ladbrokes where we’re delivering 9,000 terminals for that 5 year renewal.

We believe that the opportunities for growth here are pretty immediate by taking in our existing networks and courting some of WMS’s very strong content onto our networks thereby increasing the appeal to the players and therefore the participation in those games, and we feel then that we can also expand that footprint.

WMS gaming, as I mentioned they’re a little bit different than we were -- they are strong in both the for-sale casino business and also they have a participation business as well. The revenue was up 3.5% in the June quarter that was largely the result of new product that they put out, the Gamefield xD cabinet is a participation-based cabinet. This is a high player appeal of cabinet that offered it to casinos for participation, it came out and we now have four games available for that cabinet.

The Blade cabinet also came out in March of 2013 and we’re seeing a very high relative performance of this cabinet versus the other competitors. What’s important about that is that the performance when it’s relatively higher than your competitors. You both can increase you ship share in future orders. You also can support your premium pricing which is what we have been able to do. It’s important to keep this product fresh and we came out with this cabinet with six games. We now can offer up to 24 games to our customers.

Growth drivers for WMS Gaming, we were very excited about this. WMS in the recent past had not delivered a regular group of new products. They had about an 18-month hiatus where they hadn’t come out with any new products and they sold ship share, suffered because of that and we are all focused on that now and both the cabinets, and the game content is going to be coming and we have a strong pipeline to have this product come out on a more regular basis. We expect to have a launching in the spring of 2014 for instance of a new mechanical real game that has a participation aspect to it through a Monopoly game.

We see that the Scientific Games historical international presence is going to be something that WMS business can leverage, so we can now take the U.S. product to customers at overseas, similarly our systems capability as I mentioned, we have this network capability for our gaming business and we feel that we can use their strong slot content and pair that with our system capabilities and grow the business that way.

The third category, relatively small at this point but growing and very important is the interactive business. Here's where we're seeing the convergence of gaming between sort of traditional gaming and lotteries, we feel that one of the places we’re going to see this is the Internet. WMS has, brings to us the Jackpot Party Social Casino, which is a Play4Fun site, and it's one of the top sites, it's available on all platforms and it's available through Facebook and social web connections as well.

Play4Fun network is a B2B sort of a white label product that we provide and this is the same sort of games that players see and play for real in the casino, in the land-based casino they cannot play on the Internet and again it's that brand recognition aspect and we are providing that to our casino customers with the knowledge that hopefully someday the regulations will change and they'll be able to turn these sites from the Play4Fun to a real money game.

Outside of the U.S. where Internet waging is already legal, we have the remote game server where all of our products that we are providing on land-based casino operators, we can now port those to the online casino operators as well. And again just around the apple what we can do here we have a B2B sports betting software, all of these things are supported by our loyalty and reward programs, which get your players sort of an infinity program and get your players connected to your games.

Growth drivers here, sort of the secular trends for everything being on the Internet and wireless, people want to play games, the games that they want, when they want, where they want and we feel we're positioned to do that, we feel that the social gaming part of WMS business still has room for a lot of growth both in the U.S. and internationally and ultimately more real money gaming either from lotteries, such as Delaware which just launched this fall, a iGaming, iLottery site, and when that expands to other states, we feel we’re positioned for that.

We have grown in the past through some of our equity investments and these investments have been necessary for a number of reasons, but the important ones are in Italy and Greece, for example, it’s important to partner with a local company it's a way to get into the market, and that's why we’ve entered into that strategic relationship.

In China, it was more of a regulatory issue without foreign ownership, in Northstar both in Illinois and New Jersey it was important to pair with a partner who had complementary technology and also somebody who could defray the investment, minimize what our investment requirements were. The important part of what we do with our strategic investment is that we secure a supply contract. So if you will the equity ownership is the price of entry but what we really want to do is to get the supply contract either for the instant-tickets or for the lottery system.

We haven’t really talked publically about our, the revenue synergies that we feel are achievable from the acquisition but they're no less real than the cost synergies that we've talked about a little more specifically. The first thing I want to point out is that we have a systems capability in Scientific Games that is very robust and is capable of handling wide area networks, that wasn't something that WMS was very strong in, so we feel that we can generate significant growth by pairing our technology with their content.

As I mentioned before Scientific Games has a presence, significant presence outside the U.S. that now lends us the ability to take the WMS products and services and gives us an antre into these other markets, just to grow that business.

WMS has great content and this is where we feel that we can Scientific Games can benefit by porting some of their content to our existing platforms both on the Internet and on land-based wide area networks. And our interactive businesses are pretty complementary as well. License product is sort of very important part of our businesses. We have both at very high profile and very productive license brands and that is how we're developing our content to attract players to games both instant-ticket games and lottery games and as well as slot games.

And one good example now as we believe we can take this brand name Jackpot Party that's well recognized in social gaming and creators to pick it forth as an example. And the other -- I guess the last point here is that we have been B2G supplier Scientific Games because lotteries, our buyers our customers. WMS has been B2B Company and we feel that we have some revenues and opportunities by selling to each other's customers.

In terms of the cost synergies real quickly we have talked about the $100 million the number we came up with after doing some extensive analysis early on in the acquisition process. We had a nine month period where we had to get regulatory approval and we had an opportunity to have a very detailed and in-depth integration plans on a department-by-department basis. And we in fact validated the 100 million of expected synergies we feel very strongly about that.

From a total cost standpoint we feel it's achievable because it really represents less than 10% of the combined expenditures of the Company, but we feel it's very achievable. As I said we have detailed plans, the former CFO of WMS is now the CFO of our gaming business is also the Chief Integration Officer. So we didn't just sort of go through some planning and then decide to let it just happen on its own.

We have a very rigorous program for making sure that these synergies get achieved and we have some person in charge of making sure that all the initiatives that were identified are actually completed. We expect to hit our 100 million run rate by the end of 2015, but we expect all of the initiatives that will lead to that 100 million to be in place by the end of 2014.

The important thing also to note is that we recognized that WMS's strength is in their content and in their creativity and their innovation. And the synergies that we have identified are administrative in nature, overlapping finance, legal accounting and those types of things. We also feel that there are some savings by transitioning some of Scientific Games’ high cost engineering to low cost jurisdictions.

WMS has established an engineering facility in Pune, India and we feel that there is substantial savings that we can accrue by moving engineering there. But we're very clearly and everybody is very keenly aware that we do not want to kill the goose that lay the golden egg and in terms of synergies they will not touch the content and development products.

This is just a representation here of our cash flow, one of the things that we're happy about is that the businesses we expect to generate anywhere between 150 million to 200 million of free cash flow this is after normalized capital expenditures, our pro forma interest and some assumptions for working capital.

Our capital structure, capital structure we closed on our $2.6 billion accredit facility funded with a 2.3 billion term loan, we now have below under a 3.1 billion of net debt. Our leverage considering attributable are to the attributable EBITDA and anticipated synergies is about 4.6 which is slightly above where we were pre-acquisition, we feel this is a very a sort of comfortable level because of the company’s free cash flow generation because we have long-term recurring revenue contracts and because of our significant liquidity that currently exists in the form of cash and undrawn revolver.

And the other thing I like about this capital position is that we do have the opportunity to prepay the debt without penalty. In terms of our capital structure, we have about four and a half a year period where we don’t have any near-term maturities of any size. So this gives us a long runway to accomplish our synergies, our growth plans and I have to worry about refinancings or debt paydowns.

So, in closing the key credit highlights, we are a leading innovative supplier of gaming and technology in the Indian technologies space we’ve got a diverse and recurring revenue base, we’ve got marquee customers both commercial customers and government customers an extensive portfolio of high visibility brands, substantial free cash flow generation and favorable industry dynamics we see the conversions in gaming that we can benefit from and we see that the industry maybe in the consolidation phase and we think that we are in a good position to benefit from that. So that’s the remarks I have that, any questions. Yes sir.

Question-and-Answer Session

Unidentified Analyst

[Indiscernible]

Robert Becker

Sure, yes management change is the question. As some of you may have seen the Board announced that Lorne Weil, who’s leading the Company, he is our CEO and Chairman and that David Kennedy was going to be another CEO and Lorne would be our Chairman. This was -- it may have seemed a sudden change but the Board had been contemplating and succession planning for a while. There was nothing problematic, it was not triggered by any sort of findings or problem or anything like that.

I think the timing was a bit of a surprise just because we did close the acquisition but I think in part that was one of the reasons why it was done at this time. The Board recognize that it was really important to stay focused during this period of integration between the two companies and Lorne’s contract was due to renew at the end or expire I should say at the end of 2015, it wasn’t really sure when they would start those renegotiation discussions but that could have been a potential distraction from the integration.

So, I think the Board just thought it was an appropriate time to sort of start things clean, put a new manager in place, David Kennedy is experienced with the Company, he’s been on the Board for four or five years, he served executive positions within the company, sat on a bunch of the Board committees, audit committee, executive committee so he’s very familiar with the Company. And he’s a professional manager having run -- had large management positions at the collar and Revlon.

So the Board just thought it was a prudent change to make we’ve got a deep management in terms of visionaries, both in the WMS and at Scientific Games at the next level down. So, the Company has digested the information and we’re sort of moving on during our integration and making sure that we’re servicing our customers.

Unidentified Analyst

[Indiscernible]

Robert Becker

None that I could talk to now, I don’t think there is any wholesale change that anybody should be concerned about.

Unidentified Analyst

Alright the clock had wound down so it might be the [indiscernible] but thank you very much for coming over.

Robert Becker

Great, well thank you. And we will be around if anybody has any questions they’d like to ask personally.

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Source: Scientific Games Corporation's Management Presents at Bank of America Merrill Lynch Leveraged Finance Conference (Transcript)
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