Scientific Games Corporation
Q4 2020 Earnings Call Transcript

Published: 1 Mar 2021

[Operator:]

Good afternoon. Welcome to Scientific Games Fourth Quarter 2020 Results Conference Call. All participants will be in listen-only mode. After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like turn the conference over to Jim Bombassei, Vice President of Investor Relations. Go ahead.

[Jim Bombassei:]

Thank you, operator and good afternoon everyone. During today's call, we will discuss our fourth quarter and full year 2020 results and operating performance, followed by a question-and-answer period. With me this afternoon are Barry Cottle and Michael Eklund.

[Barry Cottle:]

Thanks Jim. Good afternoon everyone, and thanks for joining us. We are very pleased with our strong execution in the fourth quarter, and the strategic and operational progress we're making across key areas of our business. And I'm immensely proud of our team and goals accomplished together, especially in light of the pandemic. Looking ahead, we will continue to build on the strong foundations we laid in 2020. We are investing to grow while being disciplined as we manage our balance sheet and realign our cost base. Gaming is well positioned to rebound given the reopening, and we're seeing real momentum across our markets and the industry as a whole. We firmly believe our content and solutions will be key to our continued success. To that end, we're building a high performing winning culture that attracts and motivates the world's best talent. And currently, we're conducting a strategic review with the board to determine how we can best optimize our portfolio. Deleverage our business and capitalize on key areas of growth. Our goal is simple and powerful, to deliver outsized returns to our shareholders of capitalizing on evolving industry and macro-economic trends. The conversations continue to progress at a rapid pace. While we're not ready to say anything yet, we're very encouraged by the progress we're making.

[Mike Eklund:]

Great and thanks Barry and good afternoon, everyone. It's good to be back with all of you again today. I hope all of you are keeping well. Before I jump into the financials today, let me just quickly say that I could not be more aligned with Barry's comments. As Barry and I continue to talk a lot about the business we genuinely agree we have a real opportunity in front of us here at Scientific Games to deliver value to our customers', value to our players, value to our global team members and value to our shareholders. We, Barry and I and all the teams around the world are working hard, sometimes it feels like at a breakneck pace, to position Scientific Games for the future. I'm eight months into my new role now and I continue to be extraordinarily impressed with the talent and the caliber of our global team members and the leadership team, and more importantly, how they've all performed in a very difficult macroeconomic environment. It's been extraordinarily impressive to watch and frankly, I'm humbled by it. There is a real sense of energy and optimism at the company despite COVID and it's growing daily. With that, let me turn to the quarter results.

[Operator:]

We will now begin the question-and-answer session. Our first question is from John Decree from Union Gaming. Go ahead.

[John Decree:]

Good afternoon, everyone. Congratulations on such success in such a challenging year operationally. So want to congratulate you Barry and Michael first. And then Barry, if I could ask my first question big picture on the gaming strategy, the new team and kind of operational changes that you've made. I think in your prepared remarks, you've talked about some of the maybe early results, early products from that new team and new changes. Wondering if you could talk a little bit about how we should think about the gaming turnaround going forward. And things we should look for proof points along the way to get a sense of how things are going, how things are progressing and how that turnaround is going.

[Barry Cottle:]

Okay. Thanks, John. Really appreciate that. Yeah, so essentially, we're early in the journey. We're already starting to see progress in the market from the incredible effort that Matt and his team have accomplished coming into gaming, just honestly about a year ago. It's somewhat obviously covered up with COVID and measured against that, but it's exciting because we're positioned nicely as the recovery continues. So if you look under the hood, what Matt and team did over this past year is they took $50 million of permanent cost out of the business, mostly SG&A and reinvested a portion in R&D, really driving the focus on building great games, bringing in some of the industry's top talents, and revamping the entire roadmap and approach to R&D to target the highest profit pools. They then streamlined our cabinet and our game dev to increase the ROI on our R&D spend. Now, we're seeing - we're starting to see the early signs of this effort in the latter part of 2020 and into 2021. If you look at it on a quarter-by-quarter basis, we had quarter-on-quarter growth in the premium game ops which is again our top profit pool target in the space today. We grew from Q2 to Q3 to Q4. And if you look for Eilers, we have the highest percent of top new games in game ops and sales. We also see our active fleet growing at 70% in Q4, and 80% plus in Q1 and our yields are up year-over-year. This is driven by the first products coming out of this group Kascada which has a 2.5 zone performance and coin combo, which has a 3x performance. And we actually have incredible roadmap going through the end of the year with amazing cabinet and Mural and two excellent games that follows these up. So John, I am extremely pleased with where we are. I look out on the field and I see we have an all-star team. We have the right game plan in place, and we're scoring runs in the early innings. Obviously, the game ain't over, but I certainly like our chances.

[John Decree:]

Barry just a quick follow up, so Kascada is live today, it has launched and Mural is another cabinet, will launch later this year, is that correct?

[Barry Cottle:]

That's correct. Yeah, Kascada is out in the marketplace to do today it's good, sorry performing well. And then if you look at our presentation deck, you'll see Mural as well launching in the marketplace. These are going at the heart of the gaming market, North America game Ops, and ultimately sales as well. And they've got really great products, game setup, launching with Mural and you saw Coin Combo and MONOPOLY come out with Kascada. And for Mural you have our Willy Wonka and our 88 Fortunes product coming out on that. And the products and the games look fantastic.

[John Decree:]

Thanks, Barry. Mike if I -

[Barry Cottle:]

Operator we lost -

[Operator:]

The next question is from - you want me to go back to John?

[Mike Eklund:]

Yeah. Can you open up John back again, please? I think we got caught up there. Thank you.

[Operator:]

Okay, go ahead.

[John Decree:]

My apologies guys, just quickly, Michael. I was going to ask about the working capital improvement in the quarter. If you could unpack some of those improvements and if you could give us any insight as to what is sustainable for 2021 and how we should think about working capital for this coming year?

[Mike Eklund:]

John, I promise I didn't tell Jim to cut you off there because you're going ask me a question. Good to talk to you. I appreciate you asking about working capital. For us working capital, free cash flow is becoming just the mantra for us within the organization. Cash is king, as we say internally a lot lately, really does drive a lot of shareholder value, and we're focused on it as a result. We're extraordinarily pleased with the progress the team made last year obviously with the results we put on the board, $72 million of free cash flow in Q4, 186 million for the full year. We're really proud of the free cash flow conversion, 23% dropping through to the bottom line and AEBITDA up to 600 basis points year-over-year. We talked a lot about it in Q2, Q3. Working capital actually had a $230 million improvement in working capital year-over-year, just by going after all the working capital accounts, DSO, DPO, DSI and just the normal hygiene you put around that. The Treasury teams did a great job with our cost of debt, took our cost of debt down from 5.8 last year to 5%, freed up $78 million. And then all of that kind of landed with this $1.3 billion of liquidity that we're certainly happy with as well at $363 million year-over-year. Going forward, it's going to continue to be a top priority. Obviously, we're just going to continue to pull all the levers that we've been pulling this year. It won't be any one thing it's going to be a lot of small things just like it was this year. We'll continue to focus on free cash flow, continue to focus on liquidity, continue to focus on the cost of capital, we're obviously going to modulate our CapEx with the demand from our customers as they know more, we'll know more and we'll turn that number up or down as the year goes. And then a whole lot of focus, as you heard us talk about in the prepared remarks on operational excellence and the cost impact that comes out of that, $50 million last year, another 50 million on a run rate basis exiting this year, all of that and then you get gaming kind of Q2, Q3, Q4 starting to recover and you get the really good kind of cash flow back in the business which comes from AEBITDA growth out of our gaming business. We're pretty bullish about the prospects here and we're going to stay focused on it. And again that as we call it, that's rocket fuel to give the teams to invest in all the growth opportunities, all the new products, all the right content for their market so they can continue to win wherever they play. And so we're pretty bullish on our working capital. We're pleased with the work the team has done so far. And it'll continue to be a top focus for us going forward.

[Barry Cottle:]

Operator, we'll take our next question.

[Operator:]

Our next question is from Barry Jonas from Truist Securities. Go ahead.

[Barry Jonas:]

Hey, guys, I wanted to start with a question on cashless gaming. Can you talk about the strategy behind doing a cross licensing agreement with IGT? And just any further thoughts about the wider market opportunity? Thanks.

[Barry Cottle:]

Thanks, Barry. Let me just make sure I get the second question right. So you asked about cashless on the first and what was the second?

[Barry Jonas:]

Just any further thoughts about how big the market opportunity could be for cashless?

[Barry Cottle:]

Okay, got it. Okay, thanks. So first of all, thanks for asking, obviously, we're extremely excited around this morning's announcement. The cross-licensing agreement enables us to provide cable operators with access to the gaming industry, most compelling portfolio of cashless gaming and IP technologies. This is something we've been working on for years. We built a huge comprehensive set of patents and technologies in the space. So when we combine that with IGT that enables us to basically deploy the best solution. With the tech - with all the technologies and IP that comes into this pool, we can build a seamless cashless solution for our - from our customers. And we've actually built a product, obviously, and it's out in market now with the Seminole's. There's really three key pieces of this if you got to think about it. One is it's really essentially an extension of the systems business. So we have the IP and technology, we have the product and solution that solves the last mile. And by the way, we have a systems business. And by being the leading systems provider with over 525,000, interconnected, slot footprint, we have a really large addressable market to go out and attack this. The revenue model, obviously, is going to be a hybrid of recurring and non-recurring elements, as we put - as we continue to roll this out into the marketplace, and then obviously, we have the pool for license as well.

[Barry Jonas:]

Got it and then just maybe another question on gaming and product sales, as you speak to customers about '21, how do you see the outlook? On one hand, we're hearing about lingering COVID concerns, potential for smaller slot floors. On the other hand, we've got the vaccine, and it seems like operators are more focused on that gaming VIP player, maybe is a little more discerning on new slot products. So just would love to hear what the - what you think the outlook is this year?

[Barry Cottle:]

Yeah, look, its fluid clearly. So we don't want to speculate too much on that future macro environment trend. But I got to tell you what we're seeing or I should say, we aren't seeing this in our near-term trends. Now, I got to, obviously, have to qualify that. And as you guys know, our customers are mainly the tribal regionals, which is 95% of our business and 80% of their revenue is slots. So it's very important business for these folks that they lean into, particularly as other pieces of their business, like bars, lounges, and restaurants also get impacted by COVID, but we're seeing sequential improvement, so Q2 to Q3 to Q4 across the board and that shows up in a premium game ops trends. Our game sales have continued to improve as even in the context of the holiday resurgence of COVID. And we're seeing it in our first percent fleet, as we mentioned before, from 70 now, even into 80% in the Q1 range, with yields continuing to grow. And then obviously, of that set, we feel really confident with our roadmap as we're starting to see our new products from this team come out in the marketplace, with the highest percentage of top new premium and WAP games in the marketplace per Eilers. And the new products that I mentioned, which I think the one thing to think about is as this thing continues to move, players go to casinos to play exciting new games, and so we really believe in value and invest in great content. That's always been the case and we're optimistic that it will continue. And so as this continues to recover, we're going to focus on building those products because having those new products in the marketplace is what creates excitement for the operators.

[Barry Jonas:]

Great, thanks so much, Barry.

[Operator:]

Our next question is from Chad Beynon from Macquarie. Go ahead.

[Chad Beynon:]

Hi, good afternoon. Thanks for taking my question. I wanted to start with digital. Barry, you touched on, I guess, high level on the IGaming, the OGS in the content side versus sports betting, the OpenBet opportunities, it sounds like the iGaming may actually be as good if not better of an opportunity, given your share in New Jersey and what you alluded to in Michigan, and more so if more states legalize. But I wanted to get your kind of high level in terms of how you're thinking about these segments long-term, maybe just some additional color in terms of your successes and how you're thinking about the business going forward?

[Barry Cottle:]

Absolutely, yeah, look, we are very bullish on iGaming, for several reasons. First, as you mentioned, first of all, the 2020 was actually a record year for it. So we're coming off a record year, and we believe we're well positioned for 2021. As you mentioned, part of it is just growth driven by the macro environment there's new markets, new states that are starting to legalize, it's behind the sports betting there's not as many legalized states, but it is becoming a fast follower. And we're seeing in the new markets, like Pennsylvania, Michigan light up. There's really strong demand there. And we're sitting nice, because we actually have the leading product in the marketplace. We have the leading pan out there. Today, we have what we call OGS, but it's essentially as our Netflix of games, right. We service 140 operators on one end and then 2,800 games on the other end that we bring together of third-party content, that we then anchor with our own content inside that the killer IP, we mentioned, I think, in the script, the 88 Fortunes leading the Michigan market and so we have just really great content, really great distribution, just waiting for these markets to continue to roll out. And it's a business where our content reaches the players. So it's must have content and so it gets widely distributed by all the operators in the marketplace today. So yeah, it's a real strong business that we're very bullish on. And as we're continuing to expand internationally, we're just setting ourselves up for the United States as that smoothing and as we all know kind of moving a little faster due to the COVID stimulus.

[Chad Beynon:]

Right and then I want to touch on another growth industry and growth driver for you guys, iLottery. There's some questions around if it is additive to iGaming, both iLottery and iGaming are offered in Pennsylvania and I think you highlighted pretty strong results in iLottery. So can you just confirm that this continues to be a good growth driver for you guys and then for the state? And is that what gives you confidence that more states will look to legalize in the future? Thanks.

[Barry Cottle:]

Yes, absolutely. So I'll talk specifically about Pennsylvania and then maybe pull it up to talk a little bit more broadly about our iLottery offering. To your point the Pennsylvania lottery actually had - both the instant tickets at retail and digital both grew year-over-year in the same year, in a year where iGaming also was launched in Pennsylvania. And so what we see is that the market, overall market is growing and all boats are rising with that. We're super excited about it, because we're already the global iLottery leader today. We provide platforms and digital content to 20 lotteries globally. And in 2020, alone, we launched iLottery, with Canada, Germany, Hungary and Turkey. And we think the US States, potentially an additional 10 states will adopt iLottery over the next couple of years. And if you think about it, from where we sit, we have very strong relationships with our lottery partners today across a comprehensive set of services today, and we have the most successful iLottery is launched in North America, the first program to reach $1 billion in sales, and so we got a great product in iLottery and we have a really strong relationships with our customers. And so we we're bullish on iLottery and feel like we're really set up to win there.

[Chad Beynon:]

Thanks Barry, appreciate it.

[Operator:]

The next question is from David Katz from Jefferies. Go ahead.

[David Katz:]

Good afternoon, everyone. I appreciate the results and congrats on it. When we think about the process of getting leverage lower over an extended period of time, are you sort of contemplating sort of broader, bigger - strategies for taking bigger bites, I suppose, as what I'm getting at? It certainly is commendable to generate free cash flow in this environment, but are there ways to maybe get the leverage down faster?

[Barry Cottle:]

Very much appreciate the question. And clearly, as you - and I thank you for acknowledging, by the way, the operational success that we've been having. As we mentioned before, we're not going to go into the specifics today on the incredible strategic work that we're doing with the board. What I can say is, we've been very busy with very productive discussions with the board on that strategy that's going to focus on setting Scientific Games up to be a high growth company, focused on maximizing Scientific Games shareholder value and focus on de-levering, when we have something to share, we really look forward to share with you.

[David Katz:]

I appreciate that. And I hope you don't mind me asking. My second question is around the digital aspects of the business. There is an awful lot of capability in there from social sports to real money. Are there certain capabilities or other ways to increase the positioning strategically, right, within those digital businesses, any posture on M&A or tuck-ins or any of those sorts of things that could help that positioning?

[Barry Cottle:]

We're constantly looking out in the marketplace for product gaps in our product portfolio and things of that nature. Obviously, in the digital and sports betting space, we made a big bet several years ago with NYX and OpenBet. And so we've got a fairly comprehensive product offering today. But we're constantly looking out there for talent or for portfolio gaps. So we're - we don't sleep at night, we're always looking to grow and be aggressive.

[David Katz:]

Me either. Thanks very much. Congrats on that.

[Barry Cottle:]

Thank you.

[Operator:]

Our next question is from Jeff Stantial from Stifel. Go ahead.

[Jeff Stantial:]

Hey, great, good afternoon, everyone. Thanks for taking my questions.

[Barry Cottle:]

Operator, we lost Jeff. Hey, Jeff, sorry, we lost you there. Can you just restart your question?

[Jeff Stantial:]

Yeah, I wanted to start on the gaming business, specifically, as line of sight into the vaccine rollout and full herd immunity continues to improve each day. Just curious, have you noticed any changes in customer tone regarding capital budgets? Specifically, just wondering at what point we could start to see an inflection there.

[Barry Cottle:]

Basically, as we mentioned before, right now with the customer base that we have, which is that the tribal regional, which is 95% of our base, and the near-term trends, we're continuing to see sequential improvement.

[Jeff Stantial:]

Okay, great. That's helpful and then just switching gears here over to SciPlay. And I'm sure we'll get more colors here on the call after this, but just wanted to get your updated high-level thoughts of how do you - I'm just curious, how do you see the market opportunity as you expand into the casual game genre playing out for you guys, and how do you plan to compete versus the current players there? And that's all for me. Thanks.

[Barry Cottle:]

Okay, great, great question. Look, I think, an incredibly smart move. Number one, where it's an opportunity to expand in the $20 billion casual gaming genre in which there's a lot of winners and we have the right playbook to enter that casual space. So if you think about it, slots is a compelling simple core loop and Solitaire is a simple core loop. And so what we're looking for in the casual space is games and teams that know how to build, understand that genre, that simple core loop with evergreen - that's also evergreen, and then plug them into the machine that the analytics, the live ops, the UA monetization machines that SciPlay has. And the great thing is we have the - there's a playbook there of entering into that piece of casual, and one that we've actually done before. If you think about it, Bingo is a multi-card, simple loop game as well. Very different than slots that we plugged in and we were able to 3x the revenue run rate within a year. And so we think it's something we've done before and it's a smart move to enter that much larger town.

[Jeff Stantial:]

Great, thanks. Appreciate all the color and congrats on a strong quarter.

[Barry Cottle:]

Thank you. Operator, we have time for one more question.

[Operator:]

Okay, our last question is from Ryan Sigdahl from Craig-Hallum. Go ahead.

[Ryan Sigdahl:]

Great, thanks, Michael, Barry. Congrats on the operational improvements and very good to hear on the encouraging progress on the strategic assessment process. Just want to jump into digital quick. So congrats on the uninterrupted performance during the Super Bowl when your main competitors had notable outages, which were fairly high profile across a number of operators, but curious if this has resulted in any new customer opportunities for you guys, and then maybe share learnings that you guys have had over the years, how you fine tune the tech in the UK bring it here basically to execute so well?

[Barry Cottle:]

Yeah, absolutely, great question. I'll actually reverse it and start with your first question. So what we have found over the years and decades of actually running sports betting through Europe is that you have to be reliable, stable, and provide a customizable solution to operators so that they can compete in the marketplace, you can't fall down, but you also have to give them the flexibility to create an offering that helps allow themselves to differentiate. And we've been able to do that with home that basically, over years and years in the UK. And we got to the Super Bowl and escape, but before that we got to the Melbourne Cup, we got to the Grand National and UK. And so the Super Bowl is just yet another example of years of time-tested tech that's in the market today. We actually see, by the way our UK market share continuing to grow as operators want to systems integrate the best core elements of their tech solutions in order to have the best product in the marketplace. And so we just keep - our mentality is build the best product and it will win over time right. And what we're seeing in terms of - going back to your first question in terms of growth, we believe that we still have - there's still a ton of macro and market factors that are driving growth for us. Number one is new markets and states are can continuing to light up as COVID is driving continued interest to legalize. We have new deals that are coming in everywhere from European providers coming over to the marketplace, as new states light up, there's regional players there. There's also players that have already made a short-term decision to get into market with a tech solution and switch over to our solution. We've seen several of those that we just recently launched, so new deals. And then behind that quite frankly for 2021, we've got new deployments for deals we've already done, right. FanDuel continues to expand and win, Golden Nugget, et cetera. Our goal is to deploy throughout FanDuel throughout 2021. And so I think I believe we said we went from three to 17 deployments from 2018 to 2020. We should come close to doubling that in 2021, so we've got - we have a lot of great growth just in as kind of sports betting marches throughout the United States. And then lastly, our new products, we continue to launch new products. Example of one that we offer an accordion of like anything that you want, but you can take as little as you want as well and we continue to launch new products into our offering like bet building capable et cetera. So there's just things like that as we continue to attack it, we try to we grow the market.

[Ryan Sigdahl:]

Great, one quick follow up just on the IGT cashless, is that - is the go-to-market in a joint operational fashion there? Are you sharing tech and then you're each going around separately as to end customers and monetize that?

[Barry Cottle:]

It's the latter, we're pulling the IP. But the solution is really - is driven out of an extension of your systems business providing that cashless last mile. And so we have our solution, actually, as I mentioned before in the market, but by pooling the IP between ourselves and IGT, which we both have very comprehensive IP, we're able to actually create a solution that is really best in market as seamless as possible for the player and that's super, super important today.

[Ryan Sigdahl:]

Thanks. Good luck, guys.

[Barry Cottle:]

Thank you.

[Operator:]

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

[Barry Cottle:]

Thanks everyone for joining us for today's call. We're all very excited at Scientific Games about the path forward. There's a new sense of energy and optimism at the company as we looked at how we can best optimize our portfolio, deleverage our business and capitalize on the key areas of growth in order to deliver outsized returns for our shareholders. We are excited to update you on our progress in the coming quarters as we look to unlock the value of Scientific Games. Thank you for your support.

[Jim Bombassei:]

Thank you everyone. We'll be available after the call to take any further questions.

[Operator:]

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