Scientific Games Announces Second Quarter 2012 Results

Tuesday, 07 August 2012 16:45

Written by Editor

Click here to read entire release

Recent Business Highlights

• Scientific Games' U.S. instant ticket and lottery systems customers' retail sales increased 10.0% and 3.8%, respectively, in the second quarter of 2012 compared to the prior-year period, based on third-party data
• Global Draw's U.K. total gross win and gross win per terminal per day increased 8.3% and 6.3%, respectively, in the second quarter of 2012 versus the prior-year period
• Illinois Lottery instant ticket retail sales increased approximately 27% for the lottery's fiscal year ended June 30, 2012, which coincides with the first full year of the lottery's operation under our Northstar private management agreement ("PMA")
• Signed a four-year contract extension with Puerto Rico's Loteria Electronica to continue to provide instant tickets and lottery systems and services through June 2016
• Signed a three-year contract with the New Hampshire Lottery to remain the primary instant ticket supplier through June 2015
• Agreed to assist in the potential procurement of a PMA for the Pennsylvania Lottery, providing a potential extension of the Company's existing contracts as the exclusive provider of instant tickets and lottery systems and services through August 2017 and December 2018, respectively
• Completed three strategic acquisitions in support of Company's growth initiatives

"We experienced strong retail sales in the U.S. and U.K. during the second quarter, with soft sales levels in Italy andChina," Chairman and Chief Executive Officer A. Lorne Weil commented. "While the quarter's results reflected the impact of both this mixed performance and our continued efforts to streamline operations, our focus remains on executing on our strategic initiatives for the longer-term benefit of our business. We have made continued progress in a number of key areas and completed three strategic acquisitions supporting our interactive and international expansion efforts. We also see the pipeline of growth opportunities developing at an accelerating rate as more lotteries are evaluating privatization and transactions over the internet."

Jeffrey S. Lipkin, Senior Vice President and Chief Financial Officer, added, "As we pursue a number of growth opportunities both domestically and internationally, we continue to remain highly focused on strengthening our balance sheet. We generated nearly $33 million in free cash flow during the quarter and our June 30, 2012 balance sheet reflects reduced leverage from year-end levels. Furthermore, we believe that the activity under our share repurchase program demonstrates our Board of Directors' and management's confidence in our long-term growth prospects."

Business Update

Our second quarter results reflected varying levels of strength across our diverse global businesses. U.S. retail sales continued on a positive trend -- our customers' retail sales of instant tickets rose 10.0% in the quarter and their sales of draw games grew 3.8%. Instant ticket sales continue to be driven by strong performance in larger states, and draw sales have benefited from higher average jackpots.

Additionally, our Properties Plus® offering, which provides internet loyalty and other services to lotteries, is beginning to gain significant traction and appears to be on its way to becoming a meaningful contributor to our results as it has a growing pipeline of opportunities. Properties Plus provides a vehicle for lotteries to move internet audiences from lottery loyalty and rewards programs to playing games online through subscriptions and other product offerings.

Our Gaming business also performed well during the second quarter. Revenue grew 36% driven by the acquisition of Barcrest, and Global Draw's U.K. total gross win and gross win per terminal per day increased approximately 8.3% and 6.3%, respectively. The ability to increase cash box by over 6% demonstrates our ability to help our Gaming customers drive growth.

Sales in Italy and China remained soft in the second quarter, with the sales trends continuing into the third quarter. In Italy, retail sales of instant tickets declined by approximately 8% in the second quarter, which we believe was due in part to a decline in consumer spending related to difficult economic conditions and tax increases. We also faced challenging year-over-year comparisons as we did in the first quarter related to the unprecedented sales performance in Italy in calendar 2011. The strategy remains to increase the productivity of retailers, maximize the portfolio of products offered and enhance marketing support.

In China, instant ticket retail sales declined 7.5% in the second quarter. We believe this performance continued to reflect the product mix introduced in the first half of the year, which varied from our original plans due to delays in product approvals, along with slower than anticipated expansion of the retailer network. We have a robust release schedule planned and approved for the back half of the year including higher price point tickets, licensed property tickets, and tickets targeted to frequent players. We also have additional bar code readers scheduled for deployment. Our value chain management program with the Hubei Sports Lottery, through which we will provide sales and distribution management services designed to assist the lottery in achieving higher retail sales and lower operating costs, is planned for launch in the third quarter. Other initiatives include a more proactive and customized approach to the sale of instant tickets in each province in China. We will seek to tailor product development, planning and marketing to individual provinces to maximize sales in each region. Lottery sales overall remain robust in China and we are optimistic that as we shift from a national-focused model to a provincial-driven model, combined with our other initiatives, instant ticket sales performance should improve.

Our success with the private management of the Illinois Lottery, where revenue grew by nearly 18% and instant ticket retail sales increased by approximately 27% in Northstar's first year of operations, has demonstrated the value to lotteries of focusing on revenue growth. We see heightened interest from lotteries for private management agreements and other outsourcing models, as they seek to increase state revenue and reduce budget deficits by outsourcing more responsibility for the lottery value chain to experienced operators such as Scientific Games. We recently agreed to assist in the potential procurement of a PMA for the Pennsylvania Lottery. A number of other states are also actively pursuing some form of privatization. Internationally, several countries have announced plans for lottery privatization, and we expect to see further development activity in these jurisdictions later in the year.

We also see rising levels of interest from our lottery customers in offering products on the internet.  Accordingly, we remain focused on developing and delivering new and innovative content that may eventually be sold online.

We recently completed three strategic acquisitions supporting our interactive and international expansion efforts. Shortly after the quarter closed, we acquired the assets of Parspro.com ehf ("Parspro"), a leading supplier of sports betting solutions in Europe. We have seen significantly heightened interest from lotteries in Germany and other parts of Europe, Asia and Latin America to expand into sports betting as the next wave of lottery development to generate an additional source of revenue. We plan to bring Parspro's offerings to select lottery customers, as we have done successfully with Parspro for the Norsk Tipping national lottery in Norway, where we integrated Parspro's sports betting system with our venue-based lottery infrastructure to support nearly 4,000 retail points of sale.

During the quarter we acquired SG Provoloto, S. de R.L. de C.V. ("Provoloto"), a company that distributes and develops instant lottery tickets and manages instant lotteries for nearly 30 charities in Mexico and has been aScientific Games instant ticket customer for many years. While Provoloto has grown to become a leading provider of instant ticket services in Mexico, it shares our view that the instant ticket sector has substantial opportunity for growth. We now have the ability to build on Provoloto's relationships and distribution system with the addition of our content, licensing and marketing capabilities to make the instant ticket offering more appealing to consumers, retailers and distributors. We believe this is an important opportunity to demonstrate how the best practices we use around the world may be successfully deployed to grow our Latin America business. Additionally, other countries inLatin America and elsewhere have provisions in their gaming regulations for the operation of charity lotteries. The experience we gain with Provoloto may be used to expand the charity lottery operator model beyond Mexico.

Finally, during the quarter we acquired ADS/Technology and Gaming ("ADS"), a leading third-party field-based service and installation specialist in the U.K. that has worked with many of the betting shops, pubs, arcades and bingo clubs there. The addition of ADS expands our Gaming segment's field service offerings and leverages its cost structure, and we expect customers to also benefit from the additional product offerings.

We expect these acquisitions will provide modest near-term financial benefit and we view them all as playing an important role in our long-term strategy to invest in the products, technology and people that we believe will enhance our ability to generate incremental revenue from our existing assets, and further leverage our participation-based business model.