Q1 2005 Scientific Games Corporation Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Hello, everyone. Thank you for joining us this morning. With us today are Mr. Lorne Weil, Chairman and CEO of Scientific Games, and Mr. DeWayne Laird, Chief Financial Officer. During this call Mr. Weil will discuss Scientific Games first quarter financial results for 2005. Followed by question and answer period. The telephone number of the replay for domestic callers is 877-519-4471 or 973-341-3080 for international callers. Conference ID number 5947234 or you can visit the Scientific Games website at www.scigames.com As a reminder, this call is being broadcast live. Please refer to the press release we distributed yesterday for full details.

Before turning the call over to management, Scientific Games would like to remind you that this conference call will contain statements that constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. For certain information regarding these risks and uncertainties, reference is made to Scientific Games' annual report on Form 10-K for the fiscal year ended December 31, 2004. Now let's begin. Mr. Weil.

LORNE WEIL, CHAIRMAN & CEO, SCIENTIFIC GAMES CORPORATION: Thank you, operator. Good morning, everyone, and welcome to our first quarter conference call. Before we get into a discussion of the quarter, I'd like to apologize for two things. One, I gather there are a number of Cinco DeMio revelers from last night on the call and so I apologize for making you be at the telephone at 8: 30. More importantly, I'd like to apologize for the confusion regarding the postponement of the open house that we were going to have next week in Atlanta. As I explained a couple of days ago to a J.P. Morgan investor conference at the Winn Hotel in Las Vegas, next week simply turned out to be a perfect storm. In this case a very positive perfect storm of worldwide marketing commitments that our people really had no option but to fulfil. We find that we need to send a systems group to China. We find that we need to send an instant ticket group to Germany and we find that we need to send a racing group to an industry bidders conference here in the United States.

Taken together, these commitments represent very significant potential new business for us. But, as it happens, it also wiped out all the speakers that we were planning to have in Atlanta. I guess that's what we get for letting our managers speak. But the flip side of all of this is that by the time we have the rescheduled meeting, I think it's in the latter part of June, I hope that we'll have some very interesting developments to discuss that will come as a result of these trips that are taking place next week. So we look forward to seeing many of you in June and again, we're sorry for the inconvenience. In our 2004 year-end conference call that we had a couple of months ago, I outlined in some detail a way of thinking analytically about the years 2005 and those years beyond that, given that we had previously announced our plan to discontinue formal guidance. I provided growth guidelines for revenue, EBITDA earnings, cash flow and certainly our business continues to perform quite comfortably within those guidelines, at least as I understand them.

And as I anticipated at that time regarding the first quarter of this year, the completion of the Florida online contract and the very unusually large one-time sales that occurred in the first quarter of 2004 do, in fact, do indeed make quarterly comparisons this year somewhat difficult. I might also mention that the matter was further exacerbated by the delay in the start up of the Colorado online contract, which would have at least partly offset the lost of Florida. Nevertheless, as outlined in yesterday's press release, despite having entered the first quarter of 2005 needing, in effect, to make up about $9 million at EBITDA relative to 2004 just to stay even, we ended up $0.01 a share ahead of 2004 on a somewhat larger number of shares. And I can tell you that we are quite pleased with this result for a variety of reasons. In fact, to get an even clearer sense of the strength of our core lottery businesses in the first quarter, it's worth taking a moment to further dissect some of these numbers, as I imagine some of you have already done.

If the 9 million of nonrecurring EBITDA is eliminated conceptionally from the first quarter of 2004, the Company overall would have shown EBITDA growth of about 17% from a pro forma of 44 million in '04 to a little over 51 million, as we reported, in '05. At the same time, however, and I will return to this matter more comprehensively in a moment, our two racing related business units together declined in EBITDA year-over-year from about 10.8 million in '04 to 7.5 million in '05. Although we did see sequential improvement in the racing businesses relative to the fourth quarter of 2004, the year to year racing related decline is obviously not great news. But, if these racing numbers are further deducted from the recurring EBITDA figures outlined a moment ago, then the lottery business can been seen to have grown in recurring EBITDA from 33 million in '04 to nearly 44 million in '05, an increase of about 33%, even without the inclusion of Colorado.

So the core lottery business, which is the engine that's driving our growth and which will take us to the three and four year targets we've been previously talking about, it is very, very strong and performing at least as well as our model would have suggested and maybe even better. Let me now return for a moment to the racing businesses where, as mentioned in the press release, overall U.S. handle was down in the first quarter impacting both our pari-mutuel systems business and our venue management activity. At the same time, as I mentioned a moment ago, we did see sequential growth relative to the fourth quarter of '04 and at this point we're cautiously optimistic regarding continued improvement as we move sequentially through the year. Underlying these expectations are several positive factors and we think we're seeing stabilization in the U.S. handle, a start up of a number of significant international pari-mutuel projects, many of which, I think, we'll be talking about in the next couple of months.

Cost reductions in our U.S. systems business, resulting from systems' re-engineering, continued growth in account wagering, that being driven by continued growth in our cable TV program in Connecticut, and, perhaps most interestingly rapid expansion in our race and sports book management business beyond our core market in Connecticut. An expansion in which so far includes management contracts in the Bahamas, St Croix, Aruba, St Kits, Barbados and potentially locations in Europe. All of these are new. None of these were in operation in '04 at all. We're especially enthusiastic regarding the sports side of this equation. We have been rapidly adding resources in this area. I'm sure at some point in the discussion today we'll be talking about margins and I'll want to mention considerable discretionary spending that we incurred in the first quarter. And we expect to be talking quite a bit more about the sports business in general in the future.

In general, we have in the last few months, I think, seen a greater concentration of new business activity than at any time in our history. In addition to all the venue contracts …