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Scientific Games Corporation (NASDAQ:SGMS)

Q4 2013 Earnings Conference Call

March 12, 2014 5:00 PM ET

Executives

Cindi Buckwalter – Vice President-Corporate Communications and Investor Relations

David L. Kennedy – President and Chief Executive Officer

Jeffrey S. Lipkin – Senior Vice President and Chief Financial Officer

Analysts

Barry Jonas – Wells Fargo Securities

Steven Wieczynski – Stifel, Nicolaus & Co., Inc.

Todd J. Eilers – Eilers Research LLC

Michael Malouf – Craig-Hallum Capital Group

Clifford W. Kurz – CLSA Americas LLC

Todd J. Eilers – Eilers Research LLC

Operator

Good evening, ladies and gentlemen, and welcome to Scientific Games Fourth Quarter 2013 Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, today’s event is being recorded.

It is now my pleasure to introduce Cindi Buckwalter, Vice President of Investor Relations for Scientific Games. Ms. Buckwalter, you may begin.

Cindi Buckwalter

Thank you, operator. Welcome, and thank you all for joining us this evening. We appreciate your patience as you waited for your press release to hit the wire. During this call, we will discuss our fourth quarter results followed by a question-and-answer period. Please refer to our earnings press release for further details.

With me this evening are David Kennedy, President and Chief Executive Officer and Jeff Lipkin, Executive Vice President and Chief Financial Officer.

As a reminder, this call is being simultaneously webcast which maybe accessed on the Investor Information section of our website at www.scientificgames.com. A replay of the call will be archived in the Investor Information section of our website.

This conference call will contain statements that constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially. For certain information regarding these risks and uncertainties, please refer to our earnings press release, the materials relating to this call posted on our website and our filings with the SEC, including our most recent Annual Report on Form 10-K and our subsequent reports filed with the SEC.

During this conference call, we will discuss certain non-GAAP financial measures. A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to the most comparable GAAP financial measure can be found in our earnings press release.

Now I’ll turn the call over to David Kennedy, President and Chief Executive Officer.

David L. Kennedy

Thank you, Cindi and good evening everyone and thank you for joining us today as we discuss our 2013 fourth quarter results. The progress we made with our integration initiatives and share with you a brief overview of our strategies to improve performance and build shareholder value over time.

Let me begin by sharing with you some of the critical actions we have completed since our last call. An organizational structure has been established centered on three operating groups each with well defined goals, strategy and accountability. Our lottery operations consisting of Instant Products and Lottery Systems had been combined into one group led by Jim Kennedy, Group CEO.

The interactive gaming group consisting of social gaming and real money online gaming, content publishing and distribution through game server integration is headed by Orrin Edidin, Group CEO who launched and led this business for WMS and now as a unit of Scientific Games operating as Williams Interactive.

And finally the Gaming Group is led by Bill Huntley, Group CEO. The Gaming Group is a combination of the acquired WMS traditional gaming business and the Scientific Games gaming business, which is primarily the served based business in the United Kingdom, in the video gaming systems business.

Let me say that I am highly confident we have a sound organization structure along with strong leadership to drive improved performance over time. I am also confident that we have highly experienced and knowledgeable people throughout the organization dedicated to build the value of the company.

Plans and initiatives to integrate WMS and Scientific Games continue to be executed and based on actions to date we are ahead of schedule and expect to exceed our targeted cost reductions for calendar 2014. Jeff will talk more about these results later.

Over the last several months, operating business plans for 2014 have been developed and are now being implemented. These plans establish well defined priorities, initiatives and performance metrics. Let me emphasis that our plans include investments and initiatives which we believe will provide growth and profit over the longer-term.

Further since our last call, we have divested certain non-core assets and operations including selling our investment in Sportech, and we have exceeded the operation of the instant ticket charity lottery in Mexico and the online gaming business in the UK, and we terminated our contract to operate in online gaming site in Belgium.

Let me now briefly highlight the key strategies in each business that we are implementing to drive improved performance and shareholder value. In the lottery business we will continue to drive value for lottery customers and operators supporting their retail customers by providing high performing game content and innovative game delivery systems that leverage our secure platform.

The SM product portfolio we’ve continuously being expanded with new exciting instant game programs and digital games along with our unique highly differentiated loyalty programs and second chance promotional drawing offerings. Another key strategy is winning profitable contract. As you know the lottery group recently began to sale instant games through the services contract in New Jersey. We want to continue to gain these opportunities as they become available and are profitable.

We will continue to seek expansion into new and undeveloped geographies as we have in past years as we did with success in China and Italy. We are now the exclusive supplier of instant games to the Hellenic Lotteries, a joint venture in Greece. Operations are expected to begin in the second quarter of this year. And we recently entered into a contract to begin providing instant games in Panama and a contract to provide instant games in Dominican Republic.

In the Gaming business, we will continue to focus on creating innovative content, product systems and services delivered in traditional as well as interactive and social channels. Innovation has been the foundation of success at WMS over the years. We continue to invest in the advanced R&D efforts and support the Casino evolved advanced technology layer as to help ensure future generations of our gaming products will be based on creative and leading edge thinking. I am confident that we have the right talented people and the capabilities to continue to provide innovative and exciting player experiences to derive customers revenue and profit.

Following on the success of the Blade, and the game field HD products we’re excited about the launch of the Blade 3-Reel mechanical slot machine this month. The initial results of the new 3-RM product have generated win substantially over the average in the segment of the Casino floor, and production quantities roll out in this product will occur in the second quarter. In the U.S. regional markets, the trends appear to be challenging with the two most recent launch showing larger declines in same-store results compared to the prior year.

This trend is leading our customers to be more cautious about spending capital to refresh their slot flow and in addition the competitive landscape continues to be a challenge. As a result, we have taken actions to broaden our product base, expand our geographic reach and further penetrating existing markets so that we are not as depended on revenues from the North American replacement market.

We’ve already begun investing in projects to achieve these objectives. We recently took over direct sales in both Australia and Peru from our distributors and we are expanding our game development studio in Sydney to provide unique content for the Australia and Asian markets. Further, we will be indentifying in this, another new opportunities for gaming expansion around the world to ensure we capture our fair share of the revenue.

Turning now to the Williams Interactive, since its recent launch, Williams Interactive has established itself as a leading global publisher of proven high performing WMS content. And now Barcrest content into both real money and social play for fun channels. Within social gaming channels, we’ve recently launched our second application, Gold Fish casino.

Gold Fish compliments our first and highly successful social game, Jackpot Party Social Casino. Jackpot Party Social Casino consistently ranks among the top five to ten social gaming casino applications on Facebook, iOS and Android. Within the real money gaming business, we are now live with 11 operators across Europe and expect to continue our expansion adding new customers.

During this year we look forward to launching our real money games in the regulated jurisdictions of Delaware and New Jersey. The launch of the online casino operations in the State of Delaware was a collaborative effort between our lottery and gaming business and demonstrates what our combined businesses can achieve. And as announced in October, our Scientific Games in UK gaming business secured an important renewal of a five-year contract with Ladbrokes. And we are now in the midst of rolling out over 9,000 of our new clarity terminals across the Ladbrokes’ stake.

One the integration front we have moved the responsibility for gaming content studio in Manchester, which is primarily focused on producing server based gaming content for UK to fill Gilbert from WMS and now our global head of product development operations. We are taking the best development practices among our content studios and rolling them out globally.

Finally before turning it over to Jeff, I want to emphasis that across all our businesses we are focused on improving our profit margins and cash flow by driving efficiency through continuous improvement. In this regard, we have already made significant progress toward achieving the targeted cost reduction synergies identified in our planning efforts to fully integrate our company as a result of the acquisition of WMS.

Now let me turn the call over to Jeff who will provide more detail on the targeted cost reduction synergies as well as discuss the financial results and the other significant changes reflecting the acquisitions of WMS.

Jeffrey S. Lipkin

Thanks David and good evening everybody. I’ll review the highlights of the quarter and provide some additional color on our press release. As you know we completed the acquisition of WMS on October 18, and therefore our reported results for 2013 reflect the results of operations for WMS for 74 days following the close of the acquisition.

I thought I would be helpful to provide a high level overview regarding certain changes in our reporting this quarter as a result of the WMS transaction. We will continue reporting our operations in three business segments; Gaming, Instant Products, and Lottery Systems.

Our Gaming segment now comprises all of the operations of WMS including Williams Interactive, and the legacy SG UK, Mexico and Caribbean server based gaming businesses, plus our video gaming systems business which was previously reported under our Lottery Systems segment. Our 2012 results have been recapped to reflect this change.

The equity investments in our gaming segment include Robert Communications Network, International Terminal Leasing and Sportech.

Our Instant Product segment which was previously called Printed Products includes our instant lottery games, license product and player royalty programs. Also included in the Instant Product segment are our equity investments that provide outsourced services to the Italy, Illinois and New Jersey lotteries along with an equity investment in our instant ticket supplier for the China Sports Lottery. This segment further includes our equity investment in Hellenic Lotteries in Greece, where we’re expected to commence operations in mid-2014.

Our Lottery Systems segment includes our systems to sell draw games such as Lotto, Powerball and Mega Millions along with Kino and sports betting. Our lottery systems equity investment in China, Guard Libang has provided validation services to the China Welfare Lottery, is also reported in the results of this segment.

Revenue classified as services revenue from our income statement includes Lottery Systems services, WMSs gaming operations and Williams Interactive’s business. WMSs product sales business flows through our product sales line and on our income statement. I should also note that the convergence of reporting between the companies has resulted in some changes in the classification of certain items on our financial statement.

WMS had previously reported amortization of brand and technology licensing, minimum licensing guarantees to the cost of services line and amortized gaming lab, testing fees and R&D. All amortization is now included in our deprecation and amortization lines, consistent with Scientific Games presented new guidance.

We will also present an R&D line on the phase of our income statement which contains the amounts incurred by WMS for R&D and some historically immaterial amounts of Scientific Games previously included in SG&A. We will continue to report attributable EBITDA which includes our share of the EBITDA from our equity investments. As in the past, we derived this metric largely under definition of the EBITDA contained in our credit agreement.

The definition of EBITDA on our new credit agreement differed from some respects from the definition under the prior credit agreement and we’ve highlighted these differences in the press release tables.

Lastly we’ve added a number of key performance indictors to our press release to provide investors with the better understanding of the revenue drivers of our business. Some of the KPI definitions in the gaming segment were updated to reflect the combined SG and WMS operations. We present and define these KPIs in the press release.

So with that background, I will highlight and amplify a few things in our consolidated financial results for the quarter. As you can see in the table on Page 2 of the press release we have summarized the impact of the acquisition related and restructuring items that impacted the quarter. These include a $13 million increase in cost of product sales in gaming due to the increase to fair value of WMS’s finished goods inventory, which was an adjustment under purchase accounting with a material impact on our cost of product sales.

Operating expenses was impacted by a total of $51 million of charges including restructuring expenses of $33 million, primarily consisting of $22 million of severance, the cost of vacating and closing facilities, cost associated with exiting a product line along with the impact of exiting our Mexican lottery operations and the interactive managed service business in Belgium.

The $22 million breakdown is follows; $9 million impacted corporate, $9 million head gaming, $4 million impacted instant products and in addition we expensed $14 million in the gaming segment for acquisition related fees and expenses, which primarily consistent of investment banking, legal and integration consulting costs.

In the aggregate, these merger and restructure items along with the couple of other items enumerate on the chart with the use of pretax income by $70 million. We also recorded income tax benefit of $131 million as we reduced our evaluation allowance by the amount of net deferred tax liabilities acquired in the WMS acquisition. In addition to the items reported in the table, we also recorded $25 million for legal contingencies and settlements in the fourth quarter.

Total earnings from equity investments declined $18 million, primarily due to $23 million in charges including $17 million for a change in the estimated useful lives with certain gaming machines that impacted our ITL or International Terminal Leasing equity investment and $6 million was from a write-down of our Guard Libang equity investment partially offset by a one-time $8 million lease termination fee negotiated part of a five-year extension of a contract, which also is the primary driver for the $7 million year-over-year increase in EBITDA from equity investments. Attributable EBITDA in the quarter was $131 million, up $41 million over the prior year period.

Let me now turn to a brief overview of the three business segments from bit more detail on the operating performance. Starting with the gaming segment, which again unless indicated otherwise in the press includes the legacy WMS business for only 74 days.

Revenue was $182 million or an increase of $138 million over the prior year. WMS revenue for the 74-day period was $145 million, while legacy Scientific Games revenue decreased approximately $7 million principally reflecting lower North American machine sales and a decline in machine sales to UK bingo and arcade customers and a slight decline in the service revenue from our UK LBO customers.

When you look at the KPIs on a full quarter basis, conclusive of the 18 days prior to the acquisition as presented in the supplemental table in the release, the average installed base of WAP and premium participation gaming machine in the December quarter was 9,450 units and the average revenue per unit per day was $64.84.

Participation based revenue increased as we experienced growth in our average installed base of 279 units and in the average revenue per day of $0.57 year-over-year despite the challenging industry condition during the period.

At the end of the period, our total footprint was down 113 units year-over-year, despite our WAP installed base increasing almost 500 units and reaching 3,817 games, which I believe is a record level for WMS.

The growth in our installed base of WAP games reflects the continued strong performance of our Gamefield xD cabinet for which we now have five titles in the field and expect to launch our new BEETLEJUICE game on the platform in the June quarter. Approximately 20% of our total WAP and premium participation installed base at year end is comprised of Gamefield xD games.

Our other premium participation based footprint declined in the quarter due to increased competition in the non-WAP premium category.

Other leased and participation units include 2,198 leases WMS units and legacy Scientific Games, server base gaming machines in the UK and Mexico and the Caribbean. Installed base total for these units was 29,018 units at December 31, which is up 3,974 units or 16% on a comparable year-over-year basis; the increase is largely due to the addition of the WMS leases units along with an increase in the legacy SG server based gaming machine.

The decline in average revenue per unit reflects the blending of rates of the SG and WMS machines in this category. Interactive products and services revenue increased $27 million year-over-year. The contribution from Williams’ Interactive represented $26 million of the increase. During the quarter, there where approximately $1.2 million average daily users for the Jackpot Party Social Casino.

Average daily active users increased to 140% and average revenue for daily active user or ARPDAU was slightly down year-over-year at $0.26. The DAU increase reflected growth in total users on both desktop and mobile while the slightly lower ARPDAU due to the overall broadening of the player base. As mentioned in the release, revenue from our social gaming business is now reported on a gross revenue basis before platform fees, rather than on a net revenue basis as previously reported by WMS due to a change in the way Facebook settles payments, which represented approximately $7 million of revenue this quarter of an increase.

Product sales revenues of $72 million included $69 million in revenue from sales of WMS products, including new U.S. and Canadian unit sales of 2,169 machines in the partial quarter of which 1,631 were replacement units, 352 machines were Illinois VLC units and 186 were for new casino openings or expansions plus 1,571 units shipped internationally. Blade units comprised 42% of the total unit shipped this quarter.

We remained pleased with the performance of the Blade as this game content is held up exceptionally well and what we believe is nearly 1.3 times casino house average. The launch of the new Blade mechanical real machine is on track and we expect to begin shipments before the end of March. I would note that the year-over-year reported decline in total WMS unit shipped primarily reflect the 1,060 VLT unit shipped to customers in Canada in the year-ago period.

On a like-for-like basis, Casino replacement units increased 42% compared with 1,170 in the 2012 fourth quarter and based on available industry information, we believe our shipped share of Casino replacement units increased both on year-over-year and sequential basis.

Attributable EBITDA in the quarter for the gaming segment was $55 million, which included $12 million of JV EBITDA, primarily from our international terminal leasing joint venture, which during the quarter recorded an early termination fee as I mentioned earlier.

Turing to our Instant Products segment; total revenue was $140 million or 8.3%, up 8.3% form a year-ago period including the comp commencement of sales to our Northstar New Jersey equity investment and the launch of Instant game operations in the Dominican Republic and Panama. U.S. lottery customers retail sales of Instant games increased 4.3% year-over-year led by higher revenue growth in jurisdictions in which we supply games on a participation basis. Retail sales of Instant games in Italy declined 1.2% year-over-year. The $3 million increase in licensing and player loyalty revenue was primarily driven by promotional and linked games along with new contracts. There was a restructuring charge in the quarter of $4 million related to the exit of our lottery operations in Mexico. Attributable EBITDA in the instant product segment was $65 million up 9% or $5 million for the prior year period.

Turning to our lottery system segment, revenue of $80 million was up 8.4% year-over-year. Product sales revenue rose 15.4% principally due to sales in international markets. Service revenue increased 5.9%, primarily driven by higher sports betting revenue and the launch of iGaming for the Delaware Lottery.

Attributable EBITDA was $26 million for the segment compared to $27 million in the prior year period, primarily due to lowest service margins related to a higher proportion of revenue coming from product sales and reduced EBITDA from our China equity investments.

In summary, there were a number of movements and adjustments but if you step back and focus on the performance of our business. In Q4 the legacy Scientific Games business revenue increased 4% to $257 million primarily driven by growth in the instant games and lottery system product sales, partially offset by a decline in SG legacy gaming businesses.

Looking at the legacy WMS results for the entire fourth quarter including the 74 days we own them as well as the 18 days prior the acquisition, total revenue increased by 5% to $155 million driven in large part by the strength and their participation in interactive businesses.

As indicated in our press release on a pro forma basis for 2013 the company would have generated revenue of approximately $1.7 billion and attributable EBITDA of $553 million before the expected synergies in 2014.

As David mentioned we are ahead of schedule and implementing initiatives that will take cost out of the combined company and we now expect that we will be able to achieve at least $69 million of annualized run rate cost synergies by the end of 2014. We’ve already initiated or completed actions that are expected to have an annualized run rate impact of $45 million in savings by the end of 2014, including $37 million in annualized savings in SG&A related to lower headcount, stock-based compensation expense, elimination of public company redundancies and facing some indirect procurement initiatives.

In addition, we’ve already achieved $6 million in an annualized run rate savings and cost of product sales primarily from manufacturing procurement of the component sourcing initiatives. And $2 million in annualized run rate savings in R&D expense resulting from our initiatives to rationalize hardware and software platforms as well as eliminate implicative functions net of investments made in new initiatives.

We remain on track to achieve the forecasted $100 million in synergies by the end of 2015. It is important to note that there will be cost associated with achieving these savings initiatives. We currently anticipate that we will incur a structuring cost and other expenses of approximately $15 million to $20 million in 2014 and $10 million to $15 million in 2015.

Based on existing contractual obligations and planned investments, we expect to invest up to $280 million in capital expenditures in 2014, including approximately $15 million to $20 million of integrated related capital expenditures in that number, primarily related to technology and systems investments related to the integration. We also expect to make a net investment of approximately $27 million in international terminal leasing to fund our share of the purchase of the gaming machines for our participation based gaming business.

We also have a number of notable items impacting 2014 cash flow we wanted to point out. We anticipate making approximately $21 million into deferred payments related to the WMS acquisition and restructuring activities.

During 2014 we expect to payout approximately $11 million in earn outs related to legacy WMS acquisition. Approximately $30 million was used for share repurchases in January, along with $60 million to settle equity awards for cash in connection with employee terminations.

In the first quarter we received approximately $45 million from the sale of our Sportech investment.

I’ll wrap up by saying that we are intensely focused on furthering the progress we’ve made with respect to our integration efforts in the short-period of time since closing the acquisition and we look forward to continuing to update you on our progress.

With that we will be happy to take your question. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question today is from the line of Barry Jonas with Wells Fargo Securities.

Barry Jonas – Wells Fargo Securities

Hi guys.

David L. Kennedy

Hi Barry.

Barry Jonas – Wells Fargo Securities

David, you’ve been running the company now for I guess almost four months. Can you talk a little bit about what you see is your key priorities and maybe any differences in strategy versus the prior management team?

David L. Kennedy

I think to outline, I think the strategies and I don’t know how those were compared to prior management specifically but I think we are faithfully on the same track. Certainly those strategies across all the business units generally involve creating and continue to generate content that’s exciting and that really works for all of our customers as well as our players.

And also to continue to integrate in producing products and services and particularly, I would say that would include our systems and the technology. And in addition I think it maybe this is somewhat different we want to target to improve our market share into the markets that we are in. And I should say profitable market share, and we want to expand our footprint where we have opportunities in the U.S. and outside the U.S. as well.

Barry Jonas – Wells Fargo Securities

Great. And maybe to just talk a little bit about potential opportunities for revenue synergies with WMS, just want to get your take on that?

David L. Kennedy

Well, we believe they’re certainly there, but at this point I would say that they are in agreements with the development stage and I would much prefer to talk about them after we actually get some accomplishments and some achievements in that area.

Barry Jonas – Wells Fargo Securities

Right, I think on the last call there was some discussion about the point WMS content on a global draw. Is that still in the cards?

David L. Kennedy

In fact it’s happening now, but I don’t know the outcome just yet. So it’s early days, as I indicated.

Barry Jonas – Wells Fargo Securities

Got it. All right, thanks a lot guys.

David L. Kennedy

Thanks Barry.

Operator

Your next question is from the line of Steve Wieczynski with Stifels.

Steven Wieczynski – Stifel, Nicolaus & Co., Inc.

Hi, good afternoon guys.

David L. Kennedy

Hi Steve.

Steven Wieczynski – Stifel, Nicolaus & Co., Inc.

So from the WMS side of things, the wider you’re progressive depending on WMS, look extremely strong and healthy, maybe how you guys are thinking of that I think about that as we kind of move over the next two quarters or so?

David L. Kennedy

Well, I’ll start off, I think certainly that’s the key part of the business and we would certainly do everything we could to drive to that areas of business and I’ll turn it over Jeff who will add to that.

Jeffrey S. Lipkin

Yes, we have as you know is one of our objective is to grow our participation date and so and largely the growth that you saw in the fourth quarter came from the Gamefield xD, which continues to perform very well for us and we continue to have new scenes that are being released and as I mentioned BEETLEJUICE will be coming out in the next couple of weeks.

We have monopoly mechanical, which is new as well which will be a WAP game that we have coming out in the second quarter with start track games and we have more to come. So we are very, very focused on the WAP state, it’s obviously a very productive part of the participation market as we mentioned. I mentioned in my prepared remarks that decline we had in units was in the non-west segment of the participation units, where we do see more competition. So we are focused on higher end of the market and we are lucky to have a very strong product in Gamefield.

Steven Wieczynski – Stifel, Nicolaus & Co., Inc.

Great, that was kind of part of my second question was that that the lower yielding products is that something that’s you think will be a pretty tough and I guess you guys answered this, but a pretty tough environment going forward?

David L. Kennedy

We see more competition in that segment on participation, yes.

Steven Wieczynski – Stifel, Nicolaus & Co., Inc.

Okay. Jeff, going to China, again China was again just like it was down, I think it was about 8% according to the release, any update there in terms of how you are approaching that market at this point?

Jeffrey S. Lipkin

In terms of China from the leadership perspective, I will let maybe David comment there and then I’ll…

David L. Kennedy

We certainly established a good leadership group there and that team very experienced people, some have been there, effective leadership within there. Since we started with the China business and I would say it’s beginning to stabilize, it was down of course as you indicated last year, but it’s beginning to stabilize and we are continuing to follow the same strategies that we have, growing out new Instant games as we get them approved by the ministry and we are looking for other developments as well and hopefully we will be able to tell you later in the year. So it’s definitely a focus and it continues to be very profitable and I believe organized and focused on the right strategies and have the right team over there to implement.

Jeffrey S. Lipkin

In terms of the China market, it continues to be very healthy. The Instant side continues to struggle relative to the overall lottery market in China, but the market itself is healthy and we are having ongoing discussions with our ultimate customer about some structural changes which are too early to talk about, things that we discussed in the past, which again until they happened we prefer not to mention, but we think that with some structural changes we can continue to grow that market as significant growth still left in it from our perspective and we also continue with the strategy of diversifying our business in China and going into other areas of the lottery spaces in that market.

Steven Wieczynski – Stifel, Nicolaus & Co., Inc.

Okay. And then just did you said CapEx for this year was $280 million?

Jeffrey S. Lipkin

CapEx is $280 million, correct.

Steven Wieczynski – Stifel, Nicolaus & Co., Inc.

Did you breakout?

Jeffrey S. Lipkin

What’s that?

Steven Wieczynski – Stifel, Nicolaus & Co., Inc.

Did you breakout the maintenance component of that?

Jeffrey S. Lipkin

It’s sort of a hard thing to breakout a maintenance component. I hesitate to do it. We have a number, but it’s a little bit definitional in terms of what you put in that category. When you fix the machine, it’s a little bit easier to say that’s maintenance, but when you’re developing licenses for license product business is that maintenance or is that growth, so it’s hard to put a tight definition around it. I would say that there are several projects that are included in there, that’s the combined WMS and Scientific Games CapEx forecast and it’s been scrutinized, reviewed, challenged, ranked, then ranked again a couple more times and we’re very comfortable with the areas that we are investing in and as I did mention in there as a sub-limit of that, there is about 15% to 20%, that’s integration related, mostly systems and hardware related.

David L. Kennedy

I think you should also know that because I believe all the conference we’ve got clear and focused strategies, then inform our capital allocation that were being very rigorous and disciplined as we allocate that capital as we invest and that then of course contributes not only to the top line, but also as we target to improve our margins and our cash flow.

So I believe that we’ve got a very disciplined process. We’ve got a very good plan that’s really focused on all the initiatives that you want to target for growth as well as growth in near term as well as building out some of our systems functionality and that kind of thing.

Steven Wieczynski – Stifel, Nicolaus & Co., Inc.

Okay. And then last question, I guess with the change in management and now WMS being incorporated here, any change in terms of this thought there behind issuing guidance going forward?

Jeffrey S. Lipkin

Well, we considered that and we talked to our Board about it frequently, but at this point, we will continue with our practice of not providing any guidance.

David L. Kennedy

I know we just put out our release shortly before the call started or maybe temporarily before call starting, but there is quite a bit, it’s not about giving guidance, we went to great lines I would say to give as much information that one would want and need to be able to construct a view of the business. We are going to continue to give these data points along the way.

The discussion we just had on CapEx is an indication of sort of our movement a little bit in that direction. We haven’t in every year done that and I think it’s been very clear, we also have a pro forma number that’s out there which I think forms the basis of a reference point in terms of what the businesses would have looked like last year.

We talked about what synergies are going to be for the year and we talked about what we think the health of our end market looks like. So I think you’ve got all the ingredients to be able to develop your point on view on where the business goes from here and which I think is a very significant step from our perspective in terms of providing helpful information.

Steven Wieczynski – Stifel, Nicolaus & Co., Inc.

Okay, great. Thanks guys.

Operator

Your next question is from the line of Todd Eilers of Eilers Research.

Todd J. Eilers – Eilers Research LLC

Hi, guys thanks for taking my questions. I apologize if you’ve mentioned, but could you maybe give us a sense for how much of an impact the launch of the new business or private management agreement in New Jersey contributed in the quarter and then how does that flow through your financials as well.

David L. Kennedy

Yes, New Jersey had almost a de minimus impact on the fourth quarter. As you know Todd, it started its operations in October and when you take over an existing lottery operation and significant as the New Jersey lottery, here’s a significant amount of inventory out in the field. So it’s a period of time where you need to burn through that inventory and I would tell you that in earnest the impact that is just starting to be felt we’re shipping tickets more frequently now. There was – and the way it hits our P&L like our other sort of outsourced arrangement that there is both a printing component that’s in the instance products revenue and that reflects our supply agreement with the joint venture and there is a joint venture agreement that allowed us to participate in the overall economics of the outsourced relationship and there was no impact to that effectively in the fourth quarter either it’s really going to start to resolve this year, it is one of our drivers for next year it’s state that historically we did not have a very significant footprint in terms of share of tickets free print that was primarily a competitor’s market. So we are excited about New Jersey.

Todd J. Eilers – Eilers Research LLC

Okay, great. And then I just want to follow-up with another new potential market, getting greater launch which is Greece you mentioned I believe expectations now for the middle part of this year or this summer obviously since that was an exist – was not an existing market, could we expect kind of an initial inventory build there where you might see a nice start to that market launch?

David L. Kennedy

Well we will start operations as we said in May it really be difficult to predict, because we are rolling out in the new distribution channels, we are effectively starting up a lottery bid that seized operations some years ago. So we are starting from ground zero, so it’s not even like the situation in New Jersey with us from the fabulous channels and systems and everything. So it’s very difficult at this point to predict precisely what the revenues and profits are going to be for Greece?

Todd J. Eilers – Eilers Research LLC

Okay, that’s fair. And then just last question on WMS, on the gaming ops side, it looks like the yields there were held up pretty strong in the quarter especially relative to competitors who saw some pretty sizeable sequential declines in the quarter, citing weather issues et cetera, is that simply just the mix of business there with the higher earning WAPs being a larger portion of the overall mix of those units or is there also and/or is there also anything else going on there that might cause that those yields to be above kind of our estimates?

David L. Kennedy

I think it’s really as you said Todd, and as I said in my remarks, the increase in WAP units in the relative mix of that segment, that helped us for the quarter given the performance of the WAP piece of it and obviously the Gamefield is a big component of that WAP footprint.

The WAP footprint I think today, that’s Gamefield is about 20%, it’s about I’m sorry, it’s higher about 2,000 of the 3,800 machines I’m sorry, that almost 40%, both kind of investments almost 50%.

Todd J. Eilers – Eilers Research LLC

Okay, great. Thanks guys.

Operator

Your next question is from the line of Michael Malouf with Craig-Hallum Capital Group.

Michael Malouf – Craig-Hallum Capital Group

Great thanks guys. How are you doing?

David L. Kennedy

Great Mike.

Michael Malouf – Craig-Hallum Capital Group

A question on sort of use of free cash flow obviously and you bought back some stock in the fourth quarter, a little bit more aggressive here in the first quarter so far, can you talk a little bit about the use of free cash flows relative to buyback stock and or paying back debt?

David L. Kennedy

Well I would say as we go forward, we’ll prioritize the repayment of debt but not to eliminate the opportunity for acquisitions to seize some opportunities out there or build our capability through our strategic acquisition I think we got the balance sheet to continue to do that, and of course our Board if they believe that there is an opportunity of buying back stock, you can see us doing there, but I think the priority would be to repay debt like strategic acquisitions that really fit very well what we are doing now and expanding our capability in some ways and then potentially although less of a priority I think in being the repurchasing shares.

Michael Malouf – Craig-Hallum Capital Group

Okay, great. And then, can you comment a little bit I know everybody is looking at Greece as a roll out here in the late spring, early summer here what other opportunities on the horizon that are served in your pipeline these days?

David L. Kennedy

Well, there is a quite few in the pipeline and you know how this works Todd, it takes years to develop these opportunities it never decline there with one is going to be trending to a real opportunity at some point in other words we’ll be able to capture a contract out there. So, there is always Brazil for example, but I wouldn’t say that’s anything but on an ongoing effort at this point we have been involved and trying to develop that for some years now. So there is markets out there that do not like that and so there is always lot of opportunities we want to be on the forefront of attempting to develop those we start well ahead of time we invest in all the resources that we need in order to develop the territory at the time then when it becomes right, and we’ll get on them and we hope like it disagrees like we’ve been the past in other territories that will be successful.

In terms of line outside I think once that people know about that out there and being discussed on a preservation side would be Ontario and Turkey, I would say that on the lottery side of the business particularly on the lottery systems side there appears to be a large number of RPs that we are gaining visibility to that are not Scientific Games’ stakes to provides us within opportunity and thought so sort of the testament to the stability of our contract that we have at this point in the cycle.

Michael Malouf – Craig-Hallum Capital Group

Okay, thanks a lot for now.

Jeffrey S. Lipkin

Welcome.

Operator

(Operator Instructions) Your next question comes from the line of Clifford Kurz with CLSA.

Clifford W. Kurz – CLSA Americas LLC

Yes, hi thanks for taking my question. I’m calling on behalf of John O. could you breakout what was the remises EBITDA for the quarter on a pro forma basis for us?

Jeffrey S. Lipkin

Yes, since it’s been integrated I think the challenge in doing that is that, there has been businesses that have moved around, we’ve integrated accounting policy so it’s something that I would rather not to at this time I think it’s productive I think what we’ve given you is a very clear picture as to what the revenues work for WMS and we’ve obviously given you a lot of performance data that will be help you understand how they’ve done, but because literally people have moved between businesses, we aligned where our businesses are fitting in a emerging or legacy Scientific Games businesses, WMS and moving the business that was in our lot of existence business to WMS, it’s really not something I think is helpful more that we want to create sort of a track record of having to give that number going forward.

Clifford W. Kurz – CLSA Americas LLC

Okay, great. And then just one other question in terms of, I know WMS doesn’t have a systems business right now for safe for the gaming equipment, but are you guys, is that something that you guys would consider given your lottery operations going forward, are you talking about that right now?

Jeffrey S. Lipkin

It’s certainly something that we will evaluate. We have the capability to do this. The issue is whether we can determine, whether there is a profitable opportunity to enter in that business.

The business that moved from our lottery systems business unit to the gaming business unit was our video assistance business, which is today primarily our central monitoring control business, which is really a wide area network transaction based systems for the regulated markets, but has a lot of applicability for us and it’s moved over now in-house within the gaming business.

We can certainly add to the system and build that the functionality quite rapidly and so I would say that we do have the capability to enter that market and again whether we reduce that, again whether I’d say profitable entry.

Clifford W. Kurz – CLSA Americas LLC

Great, thank you.

Operator

Your next question is a follow-up question from the line of Todd Eilers.

Todd J. Eilers – Eilers Research LLC

Hi, guys thanks, just had an another follow-up. You guys previously announced a new licensing deal with Hasbro. I was wondering if you can maybe speak about that a little bit, it seem like that potentially could be an advantage for you guys on the WMS side, when going after kind of new licensing opportunities for kind of the premium lease space on, do you fell that’s the correct way to kind of look at things and just any color on that new deal would also be helpful as well?

David L. Kennedy

Well, certainly that deal was one that we feel was very strategic and it was also a deal that provided a benefit from the acquisition just because of our scale and so in addition to the, I guess you say the standard license that we got, we also got some other channels that will become available to us. So, it’s a very strategic deal and it is one of the differentiators we think as we go forward. So, Jeff you want to add.

Jeffrey S. Lipkin

I think we’ve accommodate an attractive license fee because of the different channels as you said we were able to monetize a brand in the interactive space, in the lottery space and in the gaming space. So this was a very attractive deal for us and allows us to lock in some very, very important brands in the gaming space for a number of years.

David L. Kennedy

The fact is the license was like to do business with you and you can distribute their brands and promote their brands across a number of different channels with a larger footprint and so clearly that’s what we have and that’s one of the benefits of the combined companies.

Todd J. Eilers – Eilers Research LLC

Okay, great thanks guys.

Operator

Ladies and gentlemen this concludes the question-and-answer portion of today’s broadcast. I’d like to turn the call back over to Mr. Kennedy for any closing remarks he’d like to make.

David L. Kennedy

So, thank you all for joining us today. In summary, I would like to reiterate that across all our global businesses, we are clearly focused on driving and delivering the benefits from the integration, both cost savings in the near-term and investing to support revenue growth opportunities both near and longer-term. And two, executing our strategies aimed at growing market share, expanding our business presence in under penetrated markets and driving operational efficiencies and improvements. And we look forward to updating you on our progress, on our first quarter earnings call in May and again thanks for joining us.

Operator

Ladies and gentlemen, thank you so much for your participation in today’s webcast. This does conclude the presentation and you may now disconnect. Have a great day.

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