Q4 2019 Earnings Call

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Good afternoon, ladies and gentlemen, and welcome to the Scientific Games 2019 fourth-quarter investor conference call at this time. All participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation to ask a question. You may press * then 1 on your touchtone phone to withdraw your question, please press store then to please note this event is being recorded. Now, let me turn the call over to our senior vice president of investor relations for Scientific Games Mister Kruse, you may begin

Thank you operator and good afternoon. Everyone during today's call. We will discuss our fourth-quarter and full-year 2019 results and operating performance followed by a question-and-answer period with me this morning are better off in Michael Kor Terry our call today will contain statements that include forward-looking statements under the private Securities litigation Reform Act of 1995 these statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call for information regarding these risks and uncertainties. Please refer to our earnings release issued earlier this afternoon the material relating to this call posted on our website and our filings with the SEC.

We also will.

A certain non-gaap Financial measures a description of each non-gaap measure and a Reconciliation of each non-gaap measure to the most directly comparable gaap measure can be found in our earnings press release as well as in the investors section on our website.

As a reminder, this conference call is being recorded a replay of this webcast and accompanying materials will be archived in the investor section of our website at Scientific Games. Also supplemental ref slides are available on our investor relations website while management will not be speaking directly to the slides. These slides are meant to facilitate your review of the company's results and to be used as a reference document following the call, Let me turn the call over to Barry.

Thanks Trent. Good afternoon everyone and thanks for joining us 2019 represented another positive year for us as we deliver top-line growth improved our profitability and generated solid Cashflow all while continuing to enhance our leverage position. In fact this year we generated over two hundred forty million of free cash flow and reduced our leverage by nearly a patern to six point four times and Scientific Games. We've established a Clear Vision and strategy to leverage our industry-leading position across the wagering space as you know, with only providers set to deliver a One-Stop solution of leading platform and content for our partners across all three major verticals with the ability to deliver a seamless player experience across digital and land-based. However, and wherever the player wants to play no other competitor comes close to our ability to deliver this experience, which gives us significant Advantage as we continue to lay the groundwork for our future results.

in fact as

We look across our big business today. We are seeing incredible progress on this journey. Our Lottery team is delivering an unprecedented win rate and expanding our footprint with key wins internationally and domestically such as Brazil turkey Italy, Florida and the Pennsylvania, I lottery in digital we're leveraging our industry-leading cutting-edge platforms to deliver impressive new sports contract ends such as the recently-announced FanDuel and betfred Deals and extensions with key Partners, like GDC and William Bill our sports betting platforms reliability and scalability position with us and our customers to win and lead in this emerging sports segment. In addition where the market share leader in North America. I gaming and will continue to lead the way with Partners like DraftKings as it's affecting growth Market evolves.

Our side play business just beat the market growth rate by nearly one point five times in 2019 and delivered record mobile revenue for the year over 20% and approaching 405 and then gaming we have the industry's top two cabinets. Wait Excel and TwinStar k43 and we're seeing our newest games rise to the top of the charts and exceed house averages Thursday. We have an opportunity to enhance our results in gaming and believe our new content like the money link family of games dancing drums explosion and Shinji balancing coupled with the arrival of the industry's most accomplished Executives with proven success in the gaming space to reinforce our current team and the world class portfolio will help us to deliver improved results as a reminder. We recently announced the addition of top industry talent to our gaming leadership team including Matt Wilson former president and managing director of America's at Aristocrat who is joining our team as CEO of gaming on March 1st along

other highly experienced is

successful leaders to complement our existing leadership team

We're also continuing to lead the way in Innovation as we differentiate our business through near-term product Innovation, like augmented reality table Games vision and more our commitment to Innovation a answers player engagement in our customers operational efficiencies is unrivaled as we seek to lead and not follow the industry. And in fact, we recently won the the gaming intelligence award 2024 SG Vision as the top supplier Innovation. Now the ultimate goal for me executing our vision is simple and straightforward. We are committed to significantly reducing our net debt leverage wage delivering improved profitability and generating strong cash flow. We remain committed to the leveraging our balance sheet and has noted we are now targeting to be at six times or below at the age of two thousand twenty five point five times within two thousand twenty one and will continue to focus on reducing leverage Beyond these targets with that. Let me highlight some of the key developments throughout our business.

within our Lottery group

We're delivering an exceptional win rate on contract reboots. And when he significant New Deals domestically and internationally, we supply nearly every Lottery on the planet across the product line wage remain market-leading player in the high-margin global Lottery instant product business in the last 52-weeks. The instant product Market has grown domestic us retail sales by over two billion a year over year and she represented more than 90% of that growth and we continue to deliver key wins both domestically and internationally in addition to our recent wins, and it'll turkey and Brazil.

We are focused on a retail Solutions Suite of add-on products to responsibly maximize are Lottery customers profits for the good causes. They support in addition to our successful expansion of placing a self-service finding Solutions. We're working with lotteries and major retail chains such as Speedway Pilot Flying J. 7 11 Circle K Walmart and Kroger as well as a few small Regional chains and ten States on launches and Pilots of sight Q lotteries and retailers that fully adopt the features of the site Q system are continuing to outpace the industry with a fifteen twenty per-cent increase in instant game sales, and they're gaining new customer insights as a result of the Big Data generated by side Q adding lottery draw and instant games in layaway. Self-checkout is a site Q product configuration initiative currently underway to offer grocery stores as well as other big big box retailers the ability to reach more customers.

additionally are high-performance wave retailer terminals were selected in the industry's largest Lottery and

Spending procurements of 2019 and willpower a hundred thousand points of sale in Europe Asia, Australia and North America also the Massachusetts lottery awarded Scientist games a three-year contract for a new Lottery retail management system to help increase connectivity and productivity for the lotteries network of 7,500 + retailers.

Within I Lottery we were recently awarded a new seven-year I Lottery contract with the Pennsylvania Lottery RI Lottery launch in Pennsylvania is the most commercially successful. I Lottery online a launch in North America today with total sales significantly surpassing any previous. I Lottery launch in the industry's history and top $692 Million by the end of December 2019.

In 2019, we launched our latest Scientific Games enhanced partnership or stepp contract to manage the portfolio and supply chain of instant games in Ohio the new partnership expand Scientific Games services to the Ohio Lottery to include game development portfolio management inside sales Advanced logistics for warehousing and distribution and retailer optimization. This is already resulted in Ohio TV record holiday instant game sales to close the calendar year and experiencing 16 consecutive weeks of growth coming into 2028. Ohio joins more than 20 lotteries around the globe including four of the top-five lotteries in the US that participate in the s t e p program in October. We announced that the Florida Lottery with another customer selected Scientific Games at this primary instant game provider through 2027 continuing are more than thirty years successful partnership.

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Like in December, we signed a three-year contract extension to continue to be the primary provider of instant games for the California Lottery the third-largest instant games lottery in the world.

And digital are a even increased 75% and we're seeing significant momentum across both Sports and I gaming as we win New Deals and grow our business in sports were very affected the FanDuel the leader in the nascent us sports betting Market has chosen Scientific Games as a supplier of online and mobile Sportsbook technology this deal Builds on our long-term partnership with vandals parent company flutter and with the extension of this partnership Scientific Games technology is now at the core of flutters Global betting platform across multiple Brands faith has established itself as the number one operator in New Jersey, Pennsylvania and the overall us sports betting market and we couldn't be more thrilled by this partnership in all current and future markets off. Its recently-announced. We signed an extension with William Hill to continue providing our industry-leading open Sports solution for the UK and Europe and we recently extended our long-standing partnership with

for sports through the Ladbroke

In Coral Brands is a long-standing partner of ours across Sports and I gaming and we look forward to continue to continuing to provide industry-leading solutions to that great business as well. In addition that threat has selected to launch their into in sports betting solution in Pennsylvania at the Wind Creek Casino in Bethlehem. And in advance of the 2020-2021 off-season that threatened s g plan to launch digital sports betting in Pennsylvania. Finally in sports. We are continuing to launch an additional states with Caesars grow with our partners the Oneida nation and are close to launching mobile sports with an additional partner in New Jersey as we've discussed before we believe the best product will ultimately win and we're beginning to see this transpire through our recent conversations and these winds in fact some of our recent wins and many of our upcoming opportunities represent takeaways from our competitors, which further reinforces our position as the Top Choice dead.

For operators based on a reliability scalability and the breadth of our features.

Increase it three hundred million Wagers placed on our platform year-over-year with nine billion in Wagers this quarter. We also recently announced our partnership with DraftKings for I gaming and New Jersey close to launching with multiple operators across Pennsylvania, in addition Michigan recently passed legislation to legalize Sports and online casino in the state and we're very excited to have been chosen by the FireKeepers Casino to provide both. I gaming and sports players across the state having achieved record wagering months in January in New Jersey and with continued momentum and Leadership positions in Montreal Canadian provinces. We continue to be the market leader in North America and are well positioned to take advantage of expanding Market opportunities and I gaming where we can leverage our leading position to be the preeminent role player in future. I gaming expansion. We are investing across our products and Solutions in order to be the leading player in the emerging digital market and firmly believe we are poised to best support dog.

Raiders with our robust reliable and comprehensive Sports and I gaming platforms.

And I gaining we saw.

As we look at side Play We Grew our annual revenue by 12% beating the market growth rate by nearly one point five times and delivered a 30% increase in a Yvette. We increased our office down 9% to fifty cents an average monthly Revenue per payer increased 15% to a quarterly record of $88.06 and delivered record mobile Revenue in 2009. We believe we are in the early very early stages of a multi-year revenue growth and earnings expansion cycle inside play and we couldn't be more excited by our future prospects and opportunities.

As we turned the gaming we expected deliver improvements in our largest division similar to the accomplishments. We produced across our other segments and game Ops we continue to focus on creating best-in-class game franchises optimizing our product roadmap to attractive segments and maximizing deployment Roi through efforts such as content interoperability. Our new games are continuing to perform as we hold off of the top 20 new premium least and whack games in the latest Tyler's and create check report as we look ahead. We're excited about opportunities in the class to Market and leveraging our strong content line to deliver improved results. I'm also eager to work with max pain and Connie to accelerate the groundwork that has been laid by Jamie Odell and our entire gaming team.

And game sales we continue to own the industries to best portrait cabinets are New Wave XL cabinet and the twins start.

J 43 and are delivering exciting new content for the fourth quarter. We saw continued penetration of the J 43 and strong momentum in in wave XL sales. In addition. We urgently launched our new drop and lock game series on the way that sell internationally do is now proved in all major Australian jurisdictions with our total footprint outperforming the house Average Joe including our latest Game launch Penny Pier, which is significantly outperforming the house average and we're building momentum with a dual sex as the sales process is ramping up with a thousand units Jeff. Thank you for in Illinois. Our results continue to be very strong and we are the clear market leader in new unit shipments from the expansion Bill and in Norway, we recently signed an agreement to supply 4,000 video Lottery terminals across multiple locations throughout the country looking ahead were excited about the continued opportunities in Illinois historical horse racing and international as wage.

leveraging our industry best cabinets

and finally in gaming we continue to deliver outstanding results and table products within over eight per-cent increase in Q4 where the clear market leader in the sticky high-margin systems business where we recently installed our systems for the new Wind Creek Bethlehem casino, and we're chosen by Hard Rock International Force news Casino property Hard Rock Hotel and Casino Sacramento just apply a full complement of Casino Management Systems products.

And closing we're focused on executing our strategic imperatives to leverage the near-term opportunities we have in front of us and positioning ourselves to win and future growth across existing and Emerging Markets long, as you can see Scientific Games is the leading player to deliver best-in-class games Lottery and sports betting two players across any channel or platform. They want to play with a vision deliver a seamless player experience that only we can provide by staying focused on our imperatives. We're poised to deliver profitable growth and significant cash flow generation to reduce debt and contingent on our deleveraging path.

Now, let me turn the call over to Mike to provide his review of the fourth quarter results.

Thanks, very good afternoon, everyone or the quarter. We generated $860 billion in revenue and $328 billion in Consolidated. Ebitda, Consolidated ebitda margins wage on one hundred basis points to 38% driven by a even a growth inside play and digital offset by the mix shift of revenues this quarter between hardware and software sales within a very engaging

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Was $37 billion compared to net income of $207 million in the prior year. This quarter included a $40 loss on a debt refinancing transaction related to our Chef offering and a $12 loss related to the remeasurement of our Euro denominated debt, the prior-year included in 183 million dollar reversal of a reserve or to resolving the shuffle Tech legal matter and a $14 gain on remeasurement of our Euro denominated debt.

In Gaming fourth-quarter revenue declined $25 billion with our systems business accounting for fifteen million of the decline as major site installations in Canada or winding down and lower monthly sales accounted for an additional 10 million as a result able to decrease $24 million from the prior-year.

We shipped 7766 machines globally including 3501 replacement units in the US and Canada and 1009 opening an expansion unit which included 961 shipments to the Illinois bgt Market in the prior-year. We shipped 9023 machines globally which included 3788 Republican unit 945 opening expansion units, which included $659 units to the Illinois bgt Market looking ahead. We recently launched drop and lock which many of em a G2 we on the wave Excel and we will be launching our new classic style five real mechanical cabinet in the second quarter.

Naturally shipments total 3266 compared to $4,290 a year ago in the prior-year. We shipped nearly 1,200 lower-margin machine operator our average selling price for the quarter was $17,268. We are experiencing success with Dallas Texas in the Australian Market wage continue to expect to regain ship share in that market. The cabinet has now approved in all major jurisdictions in Australia and was recently approved in New Zealand. We sold 1000 units off the quarter which was up over 350 units from the third quarter with games like Penny pier and hot hot jackpots performing well in excess of house average.

Game apps Revenue was down three million on a quarter sequential basis primarily due to seasonality Hazard u.s. And Canadian installed base was roughly flat from the prior year. They try opening the California and additional units in the Northeast led to increased placements, which was offset by continued pressure in the weapon premium segment internationally our installed base wage increased by over 700 units on a sequential basis. We added over five hundred units in Greece which are lower-yielding units gaming systems Revenue decreased $15 million from the prior-year driven by the winding down of major Canadian site installations that made for a very challenging comparison.

as a reminder

We had $92 million in the year-ago quarter, which was a record going forward. We see an opportunity for new business wins and systems rolling out a new service model for gaming system support in casinos upgrading to the IBEW for we are pleased to announce that Parx Casino in Philadelphia is upgrading their over 3,000 slot machine floor with I've you for displays. We are partnering with Eldorado resorts to install at 4 properties where we are replacing competitor systems at three of them.

Table products continue to grow with Revenue up to 5 million from the prior-year period is $65 million on continued strength in the business.

Turning the lottery or fourth quarter Revenue increased two million to 233 million and a e but it was down seven million 298 million compared to the year ago.

Domestic instant product Revenue was flat from the prior-year with growth in our s g e p program offset by the repricing associated with the extension of our Florida contract off. It's typical in the lottery business that when the contract is renewed the economics are reset at a lower rate and then the profitability builds over time as we add additional services in the prior-year quarter. We had two large jackpots in Mega Millions and Powerball, which did not reoccur this year. This benefited our a ibadah by approximately seven billion dollars in the prior-year.

Lottery product sales were strong at $29 million which was an increase of eight million from the prior-year as we had strong terminal sales in several International locations in a reminder product sales are generally one off in nature and note from a comparability perspective. The first quarter of 2019 product sales were very strong at $33 million driven by a large domestic Hardware sell. We continue to expect to ship 15,000 wave terminals to the Turkish National Lottery and up to 30,000 wave terminals to cesal in Italy month beginning in the second quarter of 2020, which will continue through the first half of 2021.

We see a lot of opportunities around Lottery including our recent Award of the instant ticket contract in Brazil with our joint venture partner that is expected to begin operations in the third quarter wage or States adopting the s t e p program where we manage all aspects of the lottery process and ongoing adoption and roll out of our retail Solutions such as psyche. You play Central terminal's

For our side Place segment Revenue was 113 million and a Eve. It was 32 million of 8 million from the prior-year in digital. We generated a 75% increase in the aeb the $21 million on flat Revenue Asbury mentioned we continue to win new business including FanDuel DraftKings and others wage launch. I gaming and sports with FireKeepers in Michigan which recently passed enabling legislation and we've extended our contracts with GDC and wage.

Moving to our cash flow and balance sheet. We generated $56 million in free cash flow in the quarter during the quarter. We completed a note offering of 1.2 billion of senior unsecured notes that lowered our interest costs and extended our maturities.

At quarter-end we had three hundred thirteen million in cash and cash equivalents and our net debt leverage ratio was down to 6.4 as we continued our deleveraging efforts as Barry stated. We remain committed to deleveraging our balance sheet. However, we are now targeting to be at or below six times by the end of 2025 and 1/2 x twenty Twenty-One and we'll continue our focus on deleveraging Beyond these levels capex was $78 million compared to ninety eight million in the prior year.

this concludes our

Parrot remarks operator. Could you please open up the line for questions?

Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

And our first question comes from Barry Jonas of SunTrust, please go ahead.

Hey guys, I guess maybe it's a start. You know, what would you say the main driver is and guiding down that lever the net leverage Target from 5526, you know really what changed since Q3 earnings or they're more one-timer that could impact free cash flow this year or maybe something that might lower potentially, but that growth any color there would be helpful.

Thanks, very first of all, I do want to emphasize our our primary Financial Focus continues to be delivering as demonstrated. Obviously by are lowering of our leverage by nearly a half a turn off the past year, and we looked actually improved that pays over the coming year that said, you know, we want to maintain some flexibility as we drive the business forward while continuing this focus on deleveraging and we also must be thoughtful as to as we look ahead on the uncertainties of the current market, so, you know to be very clear that while we've lowered the expectations on twenty-twenty Leverage results. We're absolutely not stepping back at all from this focus, and we'll be driving our business to deliver enhance profitability and cash generation, and I'll ask Mike to add a little more color. Yeah sure, just to provide a bit more color just on the current environment that we're seeing, you know in order to grow game UPS. We need to grow not only our foot but also improve our pdas and unfortunately right now we're just name.

Seeing the increase in our game on split print, although the RPD is slightly above prior-year. The core footprint is really only relatively flat on a quarter sequential basis now, however with the

With our gaming leadership team which were all very excited that Matt and shiban have joined on a on an accelerated timeframe from what we were originally anticipating that on top of the current game performs and you know, the success of the cabinets we have with wave XL gainfield 2.0 as well as the J 43 cabinet. We do expect to see a future Improvement in gay mobs from a game sales perspective. You know, we do have the industry's top two cabinets and we expect to continue to produce enhance content. But as you see in the industry expectations on replacement sales have been lowered and we also continue to monitor the situation with the coronavirus and its potential impact on that what it may have on our our customer at this point. Now on the flip side of those kind of head winds that were facing we are seeing improvements in the ship share in Australia. We're continuing to drive the results in Illinois that we spoke wage.

Two at the g2e event as well as we are shipping our first historical horse racing units in q1. And as you know, where have clear momentum and big wins coming a digital is very mentioned with FanDuel and betfred and in Lottery with the Brazil joint venture Italy and turkey all of which will just start to hit our results in the back half of 2020.

Got it. Okay. So so next one is on the FanDuel deal. You know, I think a lot of inbound from investors who you know and and maybe any thing else you can give in terms of the scope of the services and and timing would be helpful. And and I guess if you're displacing an incumbent, maybe steps would be taken to mitigate any friction there. Thanks God. Yeah. Absolutely. I'm happy to I'll try to hit think there's several aspects to that. So obviously we're excited to be chosen by the industry leader in the sports in the US and I think it's as you guys know we've been getting from day one. We have the best product we believed in it and we believe we're going to win in the long run and I think that's exactly what's coming to fruition here with this and and other deal the deal basically bills on our long-term partnership with flutter. And and with the extension is our technology, you know, basically are you know Sports wagering engine will become a core of birth.

Global betting platform across multiple Brands, so we're now going to power betfred Patty Powersports bed, and now FanDuel and actually

Believe we have additional opportunities across existing and future Brands, as you know, flutter, you know, given this partnership and they're you know continued, you know expansion in this area, you know, we we expect to be operational by third quarter against you know, Q mentioning and talking about our investment to go live, but the impact of it financially obviously being more of the latter will continue to progress from there with the addition of both future States and then the migration of existing States. It's so you can kind of expect that, you know beginning in that that time frame obviously, we're not giving out specifics on economics, but this deal is material. It's a recurring Revenue model and we accept that we expect it to be significantly positive for the for the the, you know, the digital business and and you know, I also mentioned at this time, we've actually, you know, as I mentioned this is you know, you know, just another of the deals that we have and they'll ma'am.

Momentum we actually recently signed another important leading multi-state operator. That will will be announced soon with other.

Is on the way so excited about that one as well.

Great, great and just last for me, you know you somewhat interested, but I'm curious to get your thoughts on how you expect to see mad and some of the other recent hires, you know, what sort of imprint do you expect them to put on the game version and and and trying to see that as it is it just gaming development the cost Side Sales. Just just would love to get more thoughts on on on the transformation there and thanks.

Yeah, actually start and and on that one look we we've made some good progress in gaming but we've obviously been dealing with the Fairly transitional era so to speak from a leadership perspective. And so we were super excited to be able to bring in, you know, match Vaughn, and a very experienced team actually on an accelerated timeline people who know the the district's you know, and have a proven level of success and so to you know to join our current group of of you know, proven industry Talent. So we think the combination of of of that will be you know, super strong talking about kind Siobhan of Jump Right In and are adding tremendous value leveraging the great work that Jamie Odell and and existing leaders has started mats joining as you know, March 1st off and and so in terms of impact, I would look at it this way the teams focused on that you can kind of there's going to be impact over time, right? So teens focused on a lot of near-term opportunity and sales game off execution time.

Et cetera all the while.

Building out kind of a are winning portfolio games and cabinets which will improve results over the long-term. You know, great news is we have great game developers. We have em, strong products and franchises and now I think really a world-class team in place that's going to you know have a really meaningful Improvement much. Like honestly, you're seeing the momentum in Lottery and digital today. I think you're going to start seeing that in gaming in a big way.

Great. Thanks so much guys. Thanks.

Our next question comes from Brad Boyer of stifel, please. Go ahead.

Yeah, thanks for taking the questions guys. First one is just a bigger picture question for you Barry. I know coming out of g2e. There's a lot of Buzz around side vision and and sort of how that may play out. I guess I should be one should we expect realistically that you know technology such as such as that could start to have some sort of an impact here on the actual results. Yeah. So, you know right now, I mean we've we've been having tremendous amount of interest from operators as well as uh, you know, socializing and Evangeline Evangeline this stuff on a regulatory basis as well with, you know, actually really strong positive, you know feedback and you know, if you take as example Su Vision a particular just very practical applications such as you know player identification Anonymous bonusing ship-tracking some of these things, you know, people are are our customer.

Seeing real value there. And so I would say from an

Dictation perspective in terms of being you know, productize and commercialized you're going to start to see that getting in the second half of this year.

Okay, that's helpful. And then Q in your prepared remarks you mentioned coronaviruses is potentially sort of you know, having some type of an impact. Could you comment, you know, whether or not you have seen any change know to date that you could in any way sort of directly linked to that? It's not hitting us today. Like if we look at our supply chain, there's there's no interruptions in our supply chain at this point and we don't anticipate it impacting us through you know, Q one I think really the impact is really it's kind of a wait and see if you think about it from an operator wage. There is a tremendous amount of free cash flow of business that gets generated during this this holiday. Of Chinese New Year. So you can imagine the entire casino floor in Macau completely shut down for a couple of weeks. It's going to have some impact on these operators. Now the question and what we're cautious about is is this a very temporary

And we're going to see recovery back before the end of q1.

Well some of that come through and to how much of this will really impact the spending habits of the of our customers. That's the thing that we're just closely monitoring and waiting to see at this point. But as of right now we haven't seen that impact.

Okay, that's helpful. And then lastly I just want to go back to Barry's question around the sandal deal again. I mean, I think there's a lot of misinformation in the market. Could you just explicitly state does this deal in compass all of handling a sort of platform operations in the US and any existing and new markets they may open up.

So the basically the the the deal Builds on the the the flutter today. So if you think about flutter today is Betfair Patty Powersports bad phone now FanDuel, we obviously believe that you notice additional opportunities. Will this opens up also additional opportunities that will happen as flutter begins to to expand off this basically makes our Sports wagering engine a core part of their, you know, Global betting platform that they're leveraging across there multiple multiple brands.

an addition by the way of

Also enhances the existing I gaming relationship as well. But on the sports side, you know it look at as a it is a phantom flutter FanDuel wage and plus just one of the important things is on a revenue basis being the recurring nature of it as FanDuel expands with gaming expanding across the chef. This contract will grow in value with us accordingly with that. So yeah, we are pleased. I mean this for us this is the game changer Asbury alluded to earlier. We said all along when there was the big rush when passed the got repealed and everybody wanted to be up and running before that falcon eagle game at the start of the NFL season. We weren't going to be able to service every customer to take everybody on at that point given the product that we had now that we've got to this productize model and Asbury looted the best product was going to win outright in the long run we proved dead.

Throughout the UK having eight nine of the top 10 customers. We believe we're going to see that as it comes.

Across the us as well and it and it involves. It's not a specific Market deal. It is about being a part of their core technology of course sports betting platform that they plan to take the existing Market wage from a migration perspective as well as new markets.

Okay, very helpful. Thanks guys.

Our next question comes from John decree of Union gaming, please. Go ahead.

Good afternoon. Everyone two questions for me one on Copaxone and one on gaming so I can you walk us through a little bit of thoughts on capex. What are some of the big items in them that we should think about for the year any any kind of larger contract payments and the timing of that and then specifically is there any capex related to some of the sports contracts that you've announced so far? Yeah. Sure. So capex guidance is you know roughly 300 or 330 a little bit higher pick up from what we experienced this year off. And as you know, when we go through our capex been we're looking at everything from contractual obligations planned strategic Investments as well as contemplating any successful contract wins or renewal and so, you know, the capex been probably the biggest variable we have is the game Ops footprint and as you saw this year in 2019 that game us wage

And didn't grow as we anticipate.

And therefore there was the controls around the capex spend to ensure that we had the right Roi and so you saw the capex spend where it was this year coming into twenty-twenty. We should expect capex to increase slightly especially around game Ops footprint as we grow that we also have new contracts around what we've just talked about with fan a relatively light capex and nature. So I'm not anticipating large spikes up in the capex associated with that. If you think about Lottery contract renewals, we do have the one contract associated with Pennsylvania Lottery systems. But at this point when we look at the the timing of the award, you know, we're anticipating. There'll be little to add a minimal amount of capex in this year that it's probably more likely to become a heavier 2021 capex spending money.

And so along those lines, you know, we're just going to be constantly evaluate the ROI and make sure we're making the right investments in the right places.

It's a follow-up on sports betting contracts. You have first launched a sports betting it works in start-up expenses. And I think that was too kind of adapt the technology to the US when there's a good contract like this. We see some start-up expenses go through the p&l or has that largely been done with with what you've done in the prior twelve or eighteen months.

There's always going to be some cuz if you think about it, you productized the engine. However, the engine does need to be tweaked as it rolls out to New Jersey addictions just based on the regulatory requirements off at that time. But those are modifications made to a module as opposed to a fundamental rewrite of the engine itself. So yeah, there's always going to be in system enhancements that we're always going to reinvest in this tool to make sure we maintain our top position but the magnitude of the rewrite going from what was open that page was a very bespoke system which they went live only one customer per year to this more productize version that we have that we can get customers up and running in roughly three months off that heavy lift is behind us and we should anticipate anything to that effect going forward.

Got it. And then my my question on gaming big picture maybe for both of you. I think in the prepared remarks or response to an earlier question, you talked about replace expectation for replacement Demand Being a little lower across the industry and the install base not not quite getting to where we had hoped. What's the high-level feedback from customers mean? There's a lot of major consolidation going on. Do you think it's a little bit of dead of timing on replacement is larger companies integrate and decisions Onslaught or are you getting any feedback if it would suggest, you know, more structural slow down and being a band or anything like that and that's just for me. Thanks guys sure, you know, unfortunately given were the first to report. You know, I know eilers is quoted that the the markets have to be down about 4% We were down 8% So obviously we're all disappointed about that. But you know at the same time we know that when the comes to the replacement cycle, there is some timing that wage

Go through some customers will take delivery.

Q three others wait till Q4. So when you look holistically over the back after the year of Q3 and Q4 combined our total domestic sales were up about 3% So it gives some good feeling about the overall picture from a six-month. Perspective. Although we are extremely disappointed with where the sales came through in Q4. That being said Q one is always seasonally a low number unless there's a opening and an expansion that takes place which you know, unfortunately for for the 2020 Year, we're not anticipating much in that wage level and then you know, unfortunately as I mentioned before the the impact of coronavirus, it's just going to be a wait and see to see how you know customers are reacting to that and what they do off from a capex spend on that perspective.

Understood. Thanks for all the additional color. You got it.

Our next question comes from David Katz of Jeffries, please. Go ahead.

I just Cassandra asking on behalf of David. Could you talk about kind of the consolidation Trend going on in sports betting and how that impacts you or other opportunities you are seeing from there.

Yes, I'll take it. You know, so I think I guess I would answer in you know, a couple of different ways one is first of all, I think you know when you see, you know things like with the you know, the Draft Kings, you know, SB Tech and things of that nature things like that have you know, I think a positive impact for us obviously because it you know in that one in particular opens up, what was SB type of traditional B2B player and moves them in to you know, kind of a betta seat capacity. So some consolidation actually is opening up a market, you know for us from a B2B perspective, you know, you're also seeing the pairing of you know, some of the the The Operators with media Brands which I think is just so huge positive, you know, that simply is, you know, showing the tremendous amount of interest in sports betting in the investment belief in the market place, right and and and those become, you know, very

powerful, you know customer acquisition tools and as what we believe will you know, the

Good leader in the B2B supplier. Those kind of things get us excited.

Okay, thank you. And also can you talk about can I help with an idea of working capital? What should we expect going forward? Is it going to change?

I'm look when you think of of working capital my expectation would be that we would maintain relatively flat to just maybe a slight use and really what the the slight use becomes is walk around the the revenue recognition guidance that you have nowadays where you know, it's

When control of sale lottery ticket passes to us to the watery itself. We're now recording Revenue even though we can't build that until it's actually sold under a point of sale or a percentage of sales basis. So that will cause some variation on just the timing of shipments but I would expect capex to be a rep a relatively flat number on a year-by-year basis at this point. We've kind of gone through not only one year but two years of Red Rock and I think we've left a lot of that impact. It's embedded in our numbers at this point. We should be able to maintain a relatively flat if not improve on the working capital that we had for the past year.

Okay.

Thank you very much.

Our next question comes from Chad Beynon of Macquarie, please go ahead.

Hi, good afternoon. Thanks for taking my question. I just want to hit on seasonality of the business in 2019. It was relatively equal across from the four quarters. I think Q3 was a little bit higher understanding that you don't give guidance even a guy names for twenty twenty should be relatively equal, you know crossed off with maybe a slight waiting up in the back half given given the wave placements or is there any reason why it should be different this year?

If you're looking over all or are you just specific to gaming? I think that's the one thing I want to make sure I'm clear on your question across the company. Okay, you're looking across the company bigger things will happen in the back half of the year. So FanDuel betfred coming online and Q3 sizable Products off the solid Italy as well as turkey both starting end of Q2 into Q3 of this year Brazil joint venture will commence in Q3 of choice year. We've as we talked about earlier, we we made a Strategic investment in an additional press in Leeds for a Lottery instant tickets that will come online at the end of June and so from a long those lines, we would start to see more on the back half of the year than in the front half in addition to that with the addition of math and shiban coming online for us in game.

Expectation is very said they're going to be focused on some near-term.

Objectives to make sure we're hitting where we need to be in q1 and Q2. But a lot of the the work that's going to be doing is really going to be looking to benefit the back half of 20 and the first half of 20 Jun and really start to get that momentum going around that point in time. One other thing that is really kind of impacted last year and kind of make it look like it was relatively called a consistent throughout each of the quarters was the timing differences around the Canadian systems installation. So if you look at Q4 last year, it was our number one quarter by far from an installation perspective Q3, which we just passed was a sizable quarter in q1 of this year was a sizable quarter that is all behind us now. And so we're going to see at a loss of that. So I would expect our business if you're looking at just gaming in particular to go back to its more season birth.

Impact we're cute too and Q4 or It's usually the substantially better quarters than q1 and Q3 from a lottery perspective. Certainly the back half of the year is going to be a I said that's going to be the the high point of what you see there, especially around the the hardware sales and with digital. I think you're going to see a relatively consistent business going forward until you hit the Q3 Mark when FanDuel and everything else comes online.

Okay.

Thank you just around any non-core assets, you know, as you think across the next few months, but there are opportunities to bow ties anything in the portfolio in you know separately but related to that how you guys thinking about your current state and inside flight right now and that's it for me next page. I'll add a quick comment, uh, you know, the only really non-core assets that we have is our old Chicago building which was the old headquarters of WMS. That would be is on the market and we're looking to sell at this point. Hopefully, we'll be able to announce the closing of that transaction. Hopefully by the end of q1 is what we're anticipating off in regards to side play. You may want to repeat your question and I can hand that over to Barrett. I think would look we continue to be you know, you know bullish on side plate as I mentioned before they did one point wage.

Five times the you know the market.

Throughout the 2019 we have a really strong core group of games that you know during the latter part of last year. We went through some transition with them and with a few of the games in terms of Technology platform and uh and the like but I think the, you know, there's a lot of great effort in getting the core, you know, uh driving they're obviously going to have another they're going to have their earnings call after this month, but you know, we we we should still believe we have a strong team in place strong group of games and and and good growth ahead there in that market.

Thanks. Appreciate it. Thanks.

Our next question comes from Joe's of Susquehanna, please go ahead. Thank you a couple of questions, you know North American replacement Unit. C is

it's a hypersensitive value driver for you guys. I'm wondering if you can share with us any additional puzzle pieces in the fourth quarter in terms of why it was down, you know over twenty years and was it just product availability was it, you know, you guys just didn't benefit from the budget plush that normally occurs in the fourth quarter and in particular off as you think about 2020, would you expect to see growth from this line item, you know as as we as we think about sort of our forecasts and expectations for you guys. Yeah. Sure. So, you know typically would you get at the end?

To the fourth quarter. There's always a bit of a

Sign up with last-minute small orders. It's cfo's get to the end of the quarter. They look at their capex for the year and go. Hey, I got an extra half a million dollars is spent. They release it to the slides and they go out and place an order. Unfortunately for us. We just didn't see that materialized this year as we've had in the past, but along those lines we did have a decent Gap in the exclusive titles had planned to be created for the wave XL and that's where we just didn't have anything new coming out in Q4 as we anticipated. Remember we showed at g2e Colossal real as well as dropping lock, and unfortunately, they were expected to be out, you know, mid-november very early December to help kind of move those units forward in faith, or sorry. Thank you for and those products just didn't get through the regulatory approval process and start hitting the market until January of this year.

Okay, so is it a bit of both right budgets kind of weaker-than-expected your product availability also was lower but now that product availability in the first quarter.

is out

They're right.

It is out there, but then we're also being cautious about what we're seeing and what the potential impact of coronavirus could be sure and then the second question.

Thank you. The second question. I had just on on gay mobs. I think you had mentioned, you know, certainly your strategies to increase the footprint or are you referring to class two in that statement? You know just give them the capital intensity of increasing footprint for game Ops off or are you also including class 3 in that, you know, obviously I'm asking that in the context of a certain operators obviously consolidating this year and month expectations that footprint for them. At least from a game Ops perspective will decline

Yeah sure. It is both when we look at the capex pin associated with growing foot and footprint. We want to make sure that it's being done at a very prudent fashion and we get the return on investment that we're looking for. We're very cautious not to take anything like a call it a v seventy-five which isn't very expensive cabinet and sticking it in some Regional casino that we're going to make $25 a day off but it certainly doesn't do anything to benefit our free cash flow in our operating results accordingly. Yeah, and it's just very I'll add on to that and you know kind of you know regard so long, you know class three we spent significant amount of time really driving, you know, it's an area where we were deficient in our product line up over a year ago. We now have really focused our product development out on some really strong franchises being brought to Market their, you know, the money link family of games Ultra hot and the ultimate cash pin with the J 43 motion wheel coming out dancing drums explosion. Yep.

Finland, you know, Jingle Bells

All performing above you know, the the game floor average right now to go after that hold our floor used content interoperability so that the cabinet itself doesn't prevent us from capturing of floor space again, all will be built on and and accelerated under under the new team on the class too. We also spun up about a year-and-half ago and even stronger dedicated class to Resource Building unique content exclusive content for that market. We got 27, exclusive titles coming out in 2020, you know in Oklahoma obviously partner in life, but going beyond the class too. So all the above azcue said with a concerted effort from a a product perspective to to to go increase our share of that market.

Thanks guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Barry Cottle for any closing remarks.

Thanks, and thanks everybody for joining us today. We we really appreciate your support. We we are extremely confident. We're going to win and gaming like we are now in Lottery and digital the entire organizations laser focused on executing our strategy that's going to enable us to accelerate this progress extend our industry best positioning it allow us to deliver the greatest returns for stakeholder set ourselves up for profitable growth and generate the significant cash flow to continue on our deleveraging path without a thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.