Scientific Games Corporation
Q3 2007 Earnings Call Transcript

Published: 4 Nov 2007

[Operator:]

Hello, everyone, and thank you for joining us this morning. With us today are Mr. Lorne Weil, Chairman and Chief Executive Officer; Michael Chambrello, President and Chief Operating Officer; Duane Laird, Chief Financial Officer. During this call, they will discuss Scientific Games third quarter 2007 financial results followed by a question-and-answer period. A replay of the call will be available at the company's Web site, www.scientificgames.com for 30 days. As a reminder, this call is being broadcast live. Please refer to yesterday's press release 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, references made to Scientific Games' annual report on form 10-K for the fiscal year ended December 31, 2006. Now let's begin. Mr. Weil. A. Lorne Weil – Chairman of the Board and Chief Executive Officer Thank you, operator. Good morning everyone and thank you for joining our third quarter conference call. As all of our third quarters seem to be, this one is unusual and complicated. As I gather we are completely alone in this situation. As I prepared my remarks, I tried to be mindful of these insightful comments made by our Rabbi [ph] during the recent High Holiday Services to the effect that, there is no such thing as a good long sermon and no such thing as the bad short sermon. So I apologize in advance for not having been mindful enough. As we discussed in the press release, revenue performance in the third quarter continued strong. Overall revenues were up 23% over last year and up 11% excluding the impact of the acquisition of OGT. Instant ticket revenues of about 141 million in total over a 52% over of last year and 24% excluding OGT. As also mentioned in the press release the primary instant ticket growth progress in the quarter were sales in Italy and sales of licensed products led by the new Deal or No Deal(NYSE

[Michael R. Chambrello:]

Thanks, Lorne, and good morning, everyone. We've got a lot to cover, so let me jump right in with printed products. As Lorne mentioned, we've begun the process of reviewing our printed products production, operations, and services top to bottom. The first significant impact of this review or rationalization as we refer to it, has resulted in the closing of our production facility in San Antonio, Texas, and the initiation of discussions with the workers' consul, which is a necessary part of the shutdown process under German law to close the production part of our facility in [inaudible] Germany. The closing of these two facilities would result in a net reduction force of just under 400 employees. We will however continue to maintain a German headquarters in [inaudible], where the bulk of our employees who are currently working on our cooperative services instant ticket programs are located. Let me just mention that in addition to the recent award of Rheinland Pfalz, we are actively working three new accounts and hope to have good news to report on those earlier the next year, following the ratification of the monopoly treaty. So expansion in Germany continues and a little off-center, but in line with our CSP activities in Europe, we believe we may have a sweeper in the Ukraine and look forward to that start-up in the first quarter of next year. But back to the cost side. Although these rationalizations and reductions will result in significant reduction in personnel, we'll see a material improvement in quality, efficiency, and cost in our other manufacturing facilities as a result of this consolidation. This consolidation will facilitate a centralized management approach to all of our management facilities, allowing us to reduce turnaround time, which is a key customer requirement, while more efficiently matching game specifications with the most cost effective and efficient of our 13 presses operating worldwide. In addition, as the new press known as P-6, with warm reference, in Germany comes to pull production, we'll see a net increase of 8 billion ticket capacity annually in Georgia, bringing us to worldwide capacity of just over 46 billion tickets annually. We are also exploring strategic alternatives regarding our operation in Peru, which will result in the sale or disposal of this business and an additional reduction in force of approximately a 100 people in addition to the 1000 or so kiosk-based sales agents currently in place. This situation should be resolved by the end of this year. While as Lorne mentioned, we endured some growing pains with the launch of “P6” in the full integration of OGT during Q3, I'm happy to report that in Q4, efficiency in each of our production facilities, Leeds, Montreal, Chile, and Georgia is up from Q3 and in fact the first half of the year. As examples, efficiency’s improvements include reductions in make ready time of critical conformance of turn put in cost of 21% and a 14% improvement in packaging throughput, for long run games and leads. Through activities primarily associated with waste reduction and process improvement in our Chile production facility, overall ticket production costs there have decreased by 11% versus the first half of the year and we expect continued improvement in that plant. Montreal has achieved reduction in waste of 1%, as well as an 11% reduction in finishing cost, both key drivers of overall production costs. And finally in Georgia, “P6” our newest press, is consistently running at a speed of a 1000 beat per minute, 20% faster than our next-fastest press and prior to this a 1000 beats per minute was only a theoretical rate and now it's turned into a real rate for us. Of course, this is done with no degradation in quality. It's clearly the fastest and most efficient press in the world, in the lottery industry today, and we will begin to see the economies as a result. These improvements are largely the result of an exchange of an implementation of best practices resulting from the OGT acquisition. During due diligence process of that acquisition, we envisioned about $17 million or so in synergies. We’ve exceeded this goal and anticipate annual I'd savings of approximately $20 million per year beginning in Q1 of 2008, beginning to drive service margins back towards Scientific Games' historical averages. To summarize this part, in addition to the margin improvements that will result in closing of San Antonio, we are targeting to generate substantial additional profit improvement through the proposed shut down in Diafield [ph] , disposition of Peru, economies of scale and inherently lower costs associated with “P6”, additional packaging automation, rationalization of targeted overhead structures, as examples game programming from multiple locations, game audit and customer service just to name a few. So as Lorne mentioned, in addition to the $20 million in savings already identified and associated with San Antonio, we are targeting another $20 million in annualized savings from these other activities beginning next year. With that let me move on to Systems. The Systems Group really had a strong third quarter on a number of months. Revenues increased by 7% versus Q3 of 2006. This was driven primarily by a large Powerball jackpot that was really only one or two draws away from having a huge positive impact. Hopefully we'll get the big one this quarter. We're at $62 million today and climbing. More importantly though, it's worth noting that our overall service margins increased to 42% in Q3 FY06, 47% in Q3 2007. While Powerball helped, it was only a partial contributor to the increase in margin. Cost reductions, consolidations, the improvements in efficiencies related to our restructurings and systems in the fourth quarter of last year, are fully implemented and we're seeing the full benefit of their impact. Although we've made great progress in margin improvement in 2007, there's still much to be done and we're highly focused on it. We'll continue to find areas to reengineer in the online business, such as communications, terminal maintenance, and overall capital reduction, of a key driver in the profitability of any systems growth. Also, you may recall asset margin average roughly 15 to 20, maybe 25% in the quarters immediately following that acquisition. I'm happy to report that operating margin in Scientific Games Austria in S-net, grew from a combined 37 democrat Q3 FY06 to almost 60% in Q3 FY07. This increase is driven primarily from non-hardware-related sales and services, really the core of our non-U.S. systems business model and is indicative of margin improvement associated with the integration of S-net and the restoration of health of that business following the acquisition by Scientific games. In fact, the integration of S-net is so seamless and complete at this point that I will only report on the combined SG Austria group going forward. Next let me move on to Mexico, although I think it would be just as appropriate, maybe more so discuss Mexico in terms of a business development activity as opposed to ongoing operations. However, as Lorne mentioned, we continue to work on the issues that I discussed at some length on our last call, namely retailer recruitment, OXO expansion, and the future launch of new games such as instant tickets and Televise lottery bingo. Scientific games in Televisa remain disappointed in the level of retailer penetration, sales, and profitability to date but together we're committed to ensuring the overall success of this lottery, certainly in the long-term. More specifically, we're working very closely with Televisa in all areas related to sales and marketing. We'll be submitting new online and instant games for government approval, have implemented enhanced training for retailers and sales staff, including sales incentive plan. We conduct, are conducting comprehensive retailer and player research analysis allowing us to better understand and execute next steps. We're working on Televisa in improving every aspect of their sales performance with the existing retailer base, while providing new chains or recruiting new chains and independents and motivated retailers in the Mexico City area. As a result of this new focus, terminal installations have slowed down while we work with Televisa on the implementation of a new retailer recruiting strategy. Second only to optimizing the retailer network is the launch of Instant tickets, while game content, price payouts and an ongoing approval process that will allow Scientific Games to implement the same sales and marketing techniques that have been so successful for us and our partners around the world. While still stalled in the final approval process at this time, we do hope to launch instant tickets very early next year. We won’t have the 8000 to 10,000 terminals in the field by year end as originally forecast. However if we have 6000 or so highly motivated retailers with a proper mix of instant and online products ready to launch in the new year, I believe we have the opportunity to get this lottery on track. Finally, it’s finally related to Mexico, over the past couple of months some of you have asked me about the project implementation process, terminal and network reliability and other operating activities in Mexico. While we certainly wish sales were higher and this will come, I can tell you that the project itself was as trouble free as any I have been associated with. The infrastructure, system, terminal communications network are operating very efficiently and reliably, or simply stated as we’ve come to expect Scientific Games’ systems and hardware to operate. We simply need to focus on the sales. It is taking longer than we hoped, for Mexico remains a key long term growth opportunity for our company and we will get it off the runway. Let me move on and finish with the, as Lorne mentioned, the big one, China. I discussed China at length on our last call and if anything I am only more enthused and optimistic regarding our opportunities there than I have been at any point during our market development activities. We remain on track to close on our acquisition of 50% of Guard Libang [ph] this month, Rex Capital remains a strong, well respected local partner. They continue to expand their footprint in key provinces and cities in China while improving overall profitability. This further confirms that the instant ticket market in China is ready for these systems and drive for a company like Scientific Games, for very rapid growth. Our overall China market strategy is falling very nicely into place. I do wish I could go into more detail on each of our areas, key areas of activity so given the sensitive nature of our discussions a more thorough update will have to wait until our next call. I am confident that you will be quite pleased with our progress when we are in a position to discuss it in much greater detail. As stated last call, we remain very bullish on the China market, our ability to identify the right partners, opportunities and infrastructure needed to create and maintain a rapid growth market over the very long term. China, is in fact, a big one and we are very, very well positioned. It’s been a long series of discussions, I am sure there are a number of questions so with that I will turn it over to Lorne.

[A. Lorne Weil:]

Thanks, Mike. Excellent job and clearly all the things you and I talked about is planned and my opening remarks are well along in terms of implementation and so with that Operator, will you please open up the program to Q and A please. Question and Answer

[Operator:]

Thank you. [Operator Instruction]. Your first question comes from the line of Celeste Brown with Morgan Stanley. Please proceed.

[Celeste Mellet Brown:]

Hi, guys. Good morning.

[A. Lorne Weil:]

Good morning.

[Celeste Mellet Brown:]

I have a couple of questions for you. First, relating to the instant ticket instant business. Were the issues with the start up expenses with the new press something that you anticipated or did they take you by surprise?

[Michael Chambrello:]

Well, absolutely take us by surprise. I think it was really a combination of the new press, the integration of OGT, the contemplation of the shutdown in San Antonio so it was sort of a perfect storm of activities, in the intermediate, long term, certainly very positive. That really did stretch our resources, I would say for the first time in quite a long time.

[Celeste Mellet Brown:]

And then in terms of the instant ticket businesses? Is there anything we should be thinking about in terms of the fourth quarter from a revenue perspective that might be a little and that might be hard looking at last year’s number or from a margin perspective, either year-over-year or sequentially?

[A. Lorne Weil:]

Well I think looking at, as we see it right now and we don’t have much visibility yet in terms of the fourth quarter market. But I don’t see any reason, I can’t think of any reason why there should be anything of a significant nature, comparing fourth quarter of this year to the third quarter of last year. I think, sequentially from the third quarter and the fourth quarter there certainly is one issue and that is that we had, I am not likely to call it a spike, but we certainly had a well delivered licensed product sales in the third quarter because of the introduction of the Deal or No Deal game which was just extremely successful that certainly will not be duplicated in the fourth quarter. I should mention though that the Deal or No Deal game, the way the design revenues actually will continue for several quarters on into late next year, but a disproportionate amount of the cost we are actually taking in the third quarter. So although we will just kind of spiky effect because of Deal or No Deal from a revenue point of view, the hearings aspect that should be a little more moderated.

[Celeste Mellet Brown:]

So from an EBITDA perspective maybe they look more like second quarter than the third, 30%, 31% than 28%?

[A. Lorne Weil:]

Over all ticket margins you mean?

[Celeste Mellet Brown:]

Yes.

[A. Lorne Weil:]

Well basic problem Mike said and what we are seeing, its hard to imagine that you can this margin from the fourth quarter will be higher than they were in the third quarter, whether there will be all the way back to where they were either in the second quarter or this year or the third quarter as we talked about earlier last year, its difficult to say I would expect not, but I certainly would expect that the margins in the first quarter would be something a virtually as good as we have ever seen.

[Celeste Mellet Brown:]

Okay. And then in terms of the global job business just so we can understand better what some of the numbers you talked about in your, in the press release, can you first can you give us the unit for the average in the quarter and units for the 3Q?

[A. Lorne Weil:]

I don’t have it in front of me, but it’s probably 9500, 9600, 9700 and short of 10,000.

[Celeste Mellet Brown:]

Okay. And then can you talked about the big increase in the win per shop, how does that translate back to, in the way we think about, I guess for the Slot companies, like a daily win per unit back to you, so last year the implied number was $24 a day per machine? Are we are going to see 30% growth on that, or we are going to see something more modest?

[A. Lorne Weil:]

I think we will see something a little more modest because some of the customers, particularly Cole [ph] as I mentioned in the press release beginning in the third quarter had daily rates or percentages that we get that were not appreciably, but somewhat lower than they had been in the previous year. So if you take, if you start let’s say with your 30% number and reduce that by let’s take an extreme case and 10%, the 10% to 30% that resulting number should be at least in theory what the daily benefit to us will be?

[Celeste Mellet Brown:]

Okay. And which is closer to margins as well then to theory say a higher margins than last year’s fourth quarter?

[A. Lorne Weil:]

Yes. Definitely, it will definitely flow through to EBITDA there’s no questions about that. Obviously as I mentioned it earlier, you do have the incremental depreciation on the machine but it’s the number to work out like they are supposed to, the incremental EBITDA to work the depreciation.

[Celeste Mellet Brown:]

And you started to see the rate changes last year in the fourth quarter, so with higher revenue and consistent rate from some of your machines that way. So higher?

[A. Lorne Weil:]

That’s exactly right, I mean in the fourth quarter, you see, you should see better year-to-year comparisons because most of the rate reductions went into the fourth quarter last year exactly, so the third quarter would have been the last quarter when we’ve had a in fact an apples to oranges comparison year-to-year.

[Celeste Mellet Brown:]

Okay. And then finally just one more question. Can you talk about…

[A. Lorne Weil:]

I think you can ask all the questions you want, because these are good questions?

[Celeste Mellet Brown:]

I don’t want anybody else to get squeezed out, though just in terms of some of the announcements you have made CIE, like can you talk about the timing of the installations and then also when we might see the pub trials translate into significant machine for instances, quarters might?

[Michael Chambrello:]

Well actually the CIE and the pub contracts are similar in that, they all in one way or another have benchmarks, of what they call the in the U.K. cash box or what we have been calling win per day and as we hit the benchmarks, another trounce or another slug of machines go in. So in the case of the pubs the faster we hit these benchmarks, excuse me the faster the machines will go in. So it’s almost entirely within our own control, right now its difficult to say because we are just getting start, I think by the next conference call, we should have a much clearer idea. But what I can tell you is that the data that we are seeing so far is we are performing extremely well in comparison to the benchmarks and therefore we should begin to see these machines ramping up. And certainly in our own budget for FY08, we have, we are forecasting and with some pretty good degree of confidence it’s a pretty significant EBITDA contributions from the pub business, as against media. In the case of CIE, it’s exactly the same thing we being with several 100 machines and then they ramp up. Again as we perform actually in the CIE case, it’s relative to their the averages that they are experiencing right now. In the trials that we had in the CIE we were performing again extremely well compared to the averages, had we not been I don’t think they would have gone ahead with contract and as we hit the thresholds they step up, the rate of machine installations and we are feeling optimistic that by the end of FY08, we should have at least the maximum number of machines in CIE provided for the current contract, but again only time will come.

[Celeste Mellet Brown:]

Okay. Thank you very much.

[A. Lorne Weil:]

You are welcome.

[Operator:]

Your next question comes from the line of Larry Klatzkin with Jefferies, please proceed.

[Lawrence A. Klatzkin:]

Hello guys.

[A. Lorne Weil:]

Hello Larry.

[Lawrence A. Klatzkin:]

Couple of questions. To see what you were just talking about when the forward change get fully going how many of the 11,000 pubs you think you end up with, what’s the full potential there?

[Michael Chambrello:]

You mean how many of the 11,000 pups that they have among themselves?

[Lawrence A. Klatzkin:]

Yes, exactly.

[Michael Chambrello:]

I think the way the you were to aggregate all the contracts, it’s probably around a third.

[Lawrence A. Klatzkin:]

Okay. That’s makes good sense. As far as getting more locations although we go just got contracts from Mexico, are you, you have mentioned in the past, you are hoping for a number of locations that you have more Global Draw machines outside the U.K., what how is that going?

[Michael Chambrello:]

That’s going well. We have one or two other situations in Latin America that are, let’s see, very close to the completion and we have a couple of situations two, or three situations else where in Europe that are in similar place. So I think and you know one of these things feed on themselves so the commitment we have for CIE will have a very positive impact on the other locations that we are talking to in Latin America and the performance numbers on the new machines in the U.K. that I talked about before. Once these numbers begin to become obvious to other jurisdictions in Europe, I think that will have positive impact too, so things, they might not be moving faster than we would like but they are currently moving in the right direction.

[Lawrence A. Klatzkin:]

All right. You have over 9,000 machines in inventory in the U.K. that are completely depreciated. Can you use a number of these machines in contracts outside the U.K.?

[Michael Chambrello:]

Yes, actually to be precise the machines aren’t in inventory in the U.K. They are actually inventory in Ireland, in our plant there where we refurbish them and shine them up and they are getting ready to go to all the places and yes, a couple of the Latin American opportunities that I talked of before, not CIE but a couple of other Latin American opportunities we will be using the Legacy machines from the U.K. and so, that promises obviously to be a very profitable operation because, there is no interest or depreciation on shipping those and we have got a, a number of, a lot of significant interest now including a couple of places in Asia where potential customers are seriously looking at launching gaming machines that was, using the Legacy machines in the U.K. so I think, excuse me Ireland so I think we have a lot of opportunities in those machines and of course we don’t have any downside because of new satellite in the, concluded program.

[Lawrence A. Klatzkin:]

All right, cool. That’s good. Any chance I know with the announcement of the four pub chains, you got what, four of the top ten. Any of the other chains now thinking, “Boy am I going to be left behind and I’ll see, you may be in discussions with?

[Michael Chambrello:]

Yes, actually that’s an easy on to answer because we, you are probably distracted and understandably so by something else that is more impact but we actually put out a press release this morning announcing that we tried to fit pub chains so at least one of the remaining five was thinking very seriously because they have already signed the contract.

[Lawrence A. Klatzkin:]

Oh, congratulations.

[Michael Chambrello:]

Thank you.

[Lawrence A. Klatzkin:]

How many pubs does that chain have?

[Michael Chambrello:]

I don't know off the top of my head, Larry, but I can find that out for you. A lot. It's one of the major chains.

[Lawrence A. Klatzkin:]

Okay. And then as far as China production plan, I know with your one contract, you need to put a plan in for a 2% revenue, for a 1% revenue fee, but I assume the 17 with Rex, this country doesn't have anywhere close to that capacity. Are you chance putting in the company a quality of the “P6” into China and could you be getting another whole fee structure for putting that in?

[A. Lorne Weil:]

I'll ask Mike to answer that whole thing, Larry.

[Michael Chambrello:]

I'm not sure I understand or discuss the 1%, but beyond that what I would say is that clearly as I'd mentioned on a prior call, additional printing and production capability will be required in China, what they have in place today, by any measure, is not going to be adequate to fulfill the needs of the not-too-distant future. As far as the types of press or number of presses, we are reviewing that sort of on a constant basis and I think as I mentioned earlier on our next call will be able to go into much more detail on that area.

[Lawrence A. Klatzkin:]

That's excellent, okay. Then last thing, you said you're looking for a gain from OGT of like $20 million and maybe $20 million from plant shutdowns. Those are two different, those are really the same thing, correct?

[Michael Chambrello:]

No, no, no. When we're talking about OGT, we're talking about the full integration of OGT and the synergies that we had identified prior to the acquisition. So that's one piece. A second piece would be related to Peru and to Realfield [ph] to some of the other cost savings activities again related to just our sheer capacity, economies of scale, reduction in consolidation of overhead as a result of viewing our manufacturing capabilities on a worldwide basis as opposed to pockets in the United States, pockets in Latin America, the U.K., etc. So the first phase is clearly an integration of OGT, the second phase is the consolidation of the plants, which I described, and the third, and there will be a fourth phase over the course of the year, is related to the other types of cost savings.

[Lawrence A. Klatzkin:]

All right, well, thanks. Lorne, do you still think $2 a share is due in 2008?

[A. Lorne Weil:]

I knew--

[Lawrence A. Klatzkin:]

Sorry.

[A. Lorne Weil:]

Someone was going to ask that question and if somebody did, I figured it was going to be you, Larry. Right now, we’re, I think we're much more focused on dealing with the issues that I talk about and that Mike talked about. And I think that if we get this whole range of things done and I really don’t see any major issues at all with getting them all done. Then I think there is no question that we will come out with a business having what’s called the earnings power to make $2 a share whether we can do it in 2008 or 2009, it’s not really a major concern right now. I think our concern in getting all these pieces into proper focus with each other and I think, to really prepare ourselves for the long-term. We need to be getting much more then reported earnings. We really need to be getting our focus. And actually for that matter your focus, back on what the, the power of this business is generally cash. And I think that’s to do with, careful balance sheet management and making sure we’re getting for the moment the cash flow we’re entitled to get and we need to get from the asset that we have. And then, in effect using that to get everything in proper line and I think clearly we’re understanding exactly what we need to do, to do that and that’s what we’re going to do. And if we can get back to where, we can be generating, after necessary maintenance CapEx, in my view a couple of hundred million dollars a year in the real after maintenance CapEx cash flow, and just by a coincidence would be around $2 a share. But $2 a share in real cash not necessarily $2 a share in earnings. So that’s, that kind of what am I my thinking is and that’s what, that’s where focus is. I think if we manage this to where we’re generating and this might certainly concede in a considerably nearer term, to generate that kind of what’s called cash earnings per share, then I think we once again have a something on our hands of great value.

[Lawrence A. Klatzkin:]

Thanks a lot. And I look forward to winning your stock at 60.

[A. Lorne Weil:]

You and me both Larry.

[Operator:]

Your next question comes from the line of Ralph Schackart, with William Blair. Please proceed.

[Ralph Schackart:]

Good morning. Michael, I was wondering if you could just clarify if I could summarize your thoughts on the $20 million OGT. The OGT savings and then the others should we think of that an aggregate $40 million potential cost savings at some point through 2008 perhaps, actually in 2008, is that the right way to think about it?

[Michael R. Chambrello:]

Yes. It’s the right way to think about it. The OGT portion of that we’ll see much sooner in the year, in fact we're on schedule to complete the shut down by 12/31 of this year. So I’m not going to say that and we’ll be a 100% efficient day one, Q1. But, certainly in Q1 we should start to see the real benefits of that. The second tranche is something that, that really we’ll see over the course of the year. But it is absolutely not a situation where, and we’ll get to that second tranche cost savings run rate in the last week of the fourth quarter of 2008. So the OGT part will be certainly in the front end of the year and the second tranche at savings and restructuring will be done over the course of the year but weighted more towards the first or middle half of the year as opposed to say the third or fourth quarter.

[Ralph Schackart:]

Great. And then, just if you could, either Lorne or Mike, comparing to [inaudible] for us that you cut at a high level. Mexico, Germany and China of these three markets, which one has the capabilities to start contributing, sort of as soon as, call it FY08 and then which one, a little bit longer-term perspective, has the most torque so to speak in terms of strongest earnings power to the business?

[Michael Chambrello:]

Okay. Well, we certainly see China, of the three, as the largest opportunity. It’s also the one that is probably a little earlier on the growth curve or life cycle than the other two. But given the way things are lining up there, given the market the build up in the end to end market and the dealings that we had with both the CSL and the CWL as well as our local partners. In my mind that is without question the largest opportunity and I do think more than the second half of 2008 that will begin to see some contribution maybe material contribution, but certainly some contribution from our Guardla bond acquisition and I am optimistic from some of the other contracts and activities that will roll on a road on at this point in China. So as I said in my comments very, very bullish, very, very optimistic. But I think the full force of the China opportunity we’ll really begin in 2009 and 2008 will probably be a little bit of a teaser, but one that will be in a very, very positive direction for all of us in including for the lottery stock. The second one is Germany, as I mentioned we are still waiting for the ratification of the monopoly treaty which is so based and ready for the end of the year. I think the fact that we were able to get a contract executed prior to ratification of that treaty was really a great, great sign out for the market. I mentioned that we have three other very active opportunities in place. I would suggest that it’s the treaty were ratified earlier, then we’ve been in position to report on them a little bit earlier. But we certainly are optimistic that by the middle of next year we will have the two Hasan and Hanover [ph] that are currently operating by the way, sales are doing great even though we have this one hand maybe one and a half hand tied behind our back as far as implementing the types of sales and marketing strategies that we know would rise sales even further. So we could have 6 years of operating at some point maybe in the first year. So the, so we could have up to 6 of an operating by the second half of, end of the second quarter next year. And really for the first time we had price point movement with a 5 year old game in Essent [ph] which got lot of the gates as we anticipated very, very well, very strong. But the key there was, we broke through a barrier that forehand and then we had broken through in Germany and one of the things we have seen is that other lotteries are taking note of that type of success and we are very, very optimistic that the mean acceleration in the momentum with Germany in next year. And we certainly see a nice contribution certainly on an annualized basis beginning in the second half of next year. So we were further behind in Germany and we would like to be really just because of the monopoly situation not because of any other factor that frankly was within Scientific Games’ control and we think we are going to get to the point where we’ve been so optimistic about the last couple of years and 3 is now a trend and six would be good piece of business for us.

[Ralph Schackart:]

Great.

[Michael Chambrello:]

Mexico. You know Mexico is going to be a bit of a grind, the focus though I think that we has a Scientific Games and until you say as the most senior levels of their company are in the right place, its on quality of retailer, retailer penetration and we really need to get the right gains on industry that will take advantage of the market potential that we have and as Warren mentioned greatly underserved market. So, and needs to be a big part of that and a big driver of that. So, we will look towards sort of partnership drive, those approval issues are through and its going to be a bit of a haul longer than we expected and yet we are successful in hitting three or four levers that Warren mentioned then there really isn’t any reason why Mexico a little further off than we can expected, shouldn’t be a very significant contributor to our overall profitability in the future.

[Ralph Schackart:]

Great, looking forward to the pieces get hold together I guess.

[Michael Chambrello:]

Okay. As are we thank you.

[Operator:]

Your next question comes from the line of Bob Evans with Craig-Hallum, please proceed.

[Robert J. Evans:]

Good morning everyone.

[A. Lorne Weil:]

Hi Bob.

[Robert J. Evans:]

Hi. Keith a lot of my questions have been answered and I would have asked just Larry by the way, but on the Games Media can you so you get a sense of that business may kind of one down and then ramp up, can you, we invested how much were you down sequentially on that business, on the units standpoint, in terms of sales and how should we kind of expect that near term as we transition from digital?

[Michael Chambrello:]

I don’t have the numbers in front of me Bob, but I think the drop in revenues and unit revenue and analog shipments from the second quarter to the third quarter was like 75.

[Robert J. Evans:]

Okay.

[Michael Chambrello:]

Which was a very significant time.

[Robert J. Evans:]

Okay. And then I assume we are going to stay at a low level for Q4 and then start to see, I am just trying to get, give me your thoughts in terms of how should we think about ramp, just so, because we sometimes tend not to get some modeling thought right, so, how is that?

[Michael Chambrello:]

Yeah. I think Q4 that looks, kind of like Q3 and then the quarters should begin improving sequentially because the machines that were all… have been delivered obviously, are going to start generating daily levels of income and then as they do they will be getting more machines and they will be generating yearly revenue. Bear in mind that the… it’s kind of apples and oranges comparison, Bob because the analog business we shipped and then we sold the terminal we got paid once in that legit and in case of the digital terminals, we are getting a revenue stream over hopefully a number of years. So, you don’t have quite the same revenue model but you have the completely different profit model, obviously.

[Robert J. Evans:]

Yes. No, obviously it’s a much better business model going forward and again just trying to get a sense of magnitude and that’s helpful.

[Michael Chambrello:]

I think as I said earlier to Celeste, I think a quarter from now we are going to have a much clearer idea of trajectory of Bob on the revenue and profit generation. I can only say that the guys that run this business who have been in this pub gaming machine business for a long time and know it inside and out and know the customers inside and out, and whose own compensation depends on no insignificant measure on how well they perform against their own budget. Our budgeting revenues and EBITDA for next year from the digital product that I, myself would be very, very, very happy with. Let me just put it that way.

[Robert J. Evans:]

On a revenue per machine standpoint?

[Michael Chambrello:]

Revenue per machine standpoint and from an overall profit performance for the business for the full year ’08.

[Robert J. Evans:]

Okay. And can you refresh my memory in terms of the number of machines within the pubs that you signed up?

[Michael Chambrello:]

Whole number of machines and all the pubs that we have, where we have contracts with now is probably on the order of 25,000. 20,000 to 25,000 but we don’t as I answered very earlier on, I don’t think we are anticipating nor would we have the assumptions and our own projections that we be any more near that many machines, I think that reasonable goal for us in the pub business would be to have a machine in the pub network, give or take as we have in the Global Draw franchise network. And we would hope that they would be generating for us around the same revenue per day per machine. And I think if we can get to that point that will be very nice.

[Robert J. Evans:]

Okay. Thank you. And on the D&A, I know there is an uptake, any risk again from modeling purposes any help there in terms how we should think about D&A perhaps for Q4 going-forward?

[Michael Chambrello:]

I think the Q4 D&A should not look appreciably different than a Q3 D&A. They may be a few hundred thousand dollars one way or the other but… and I would simply see that being fairly stable as we move through next year.

[Robert J. Evans:]

Okay. And in Germany your restructuring there is, it sounds like that’s not going to have an impact on you getting your business just is, is there any… I guess are there any issues with restructuring that and trying to grow that market?

[Michael Chambrello:]

Well, I think that if we were closing up shop in Germany and moving out lock stock and barrel, I think that would have, that has the potential to have negative impact on the development of the business. But I think if we continue to have a, developing into a significant cooperative services presence. So we are doing all the warehousing, distribution other aspects, telemarketing and so forth. The same guy’s running the business and really the only thing that we’re doing differently is printing the tickets in the UK and shipping in, into Germany. I think that the advantages of producing in the UK are so huge even to the German customers because we are going to be able to have their delivery. We’re going to be able to have faster turnaround. We’re going to be able to have better folly [ph] and at the end of the day money talks. The costs in the UK are so much lower than the manufacturing cost in either one that we can give the German customers who are buying tickets as opposed to cooperatives, meeting cooperatives, serving customers, not an insignificant break on the prices which of course, in a lull and still have substantially higher margins then we have right now simply because, I mean the cost, the unit cost of producing tickets in Germany are a multiple, not a percent but a multiple of what they are in the UK. And therefore, I think we can manage this thing in a way that will actually, the classic term, lemons into lemonades. I think we can make a plus out of it in Germany.

[Robert J. Evans:]

Okay. Thank you. And love the talk on cash earnings, will love if you could even put in your release just because I think you would get everybody on the same page more easily.

[Michael Chambrello:]

Okay.

[Robert J. Evans:]

Okay. Thank you.

[Operator:]

This is your last question from the line of Carlo Santarelli with Bear Stearns. Please proceed.

[Carlo Santarelli:]

Hey guys lot of my questions have been answered. If you guys won’t mind if you could kind of broadly talk about how the pub economics differ from Global Draw and how we should be thinking about it on a win per day metric and kind of a operating profit metrics between the two businesses?

[Michael Chambrello:]

Our, you, situation right now and the way that we are structuring it and we are moving forward. The economics as such should be close to identical to the economics in Global Draw. And the way we get there is that we think that the win per day in the pubs will be modestly lower then the win per day in the betting shops. But we think that because the introduction of the digital network is changing the distribution structure in the pub market in a way that it will make the machines very significantly more profitable for the pub operator that we can get a little higher percent in the pub then we are getting from the betting shops. And the product at a little higher rate and a little lower daily win per machine should come out to about the same dollars of revenue per machine per day for us. And then we kind of stepping down from the growth, what say that’s the gross margin to the bottom line. Again as I mentioned earlier we, that the games media digital network will really be able to take you back on the Global Draw network because we will be using the same satellite network that we used, to download and interact with the betting shop terminals for the pub terminals and at least, up to the level of the numbers of machines we're talking about, we think our existing field infrastructure with a little bit of enhancement but not a lot, is capable of dealing with the pub stuff too because the geographies are so overlapping and if you look carefully at what our field technicians do. About half of their time is spent traveling and about half of their time is spent doing and that there are twice as many places for them to do stuff within the same geography then, almost by definition the travel time drops in half and the work time doubles. But, the number of people stays pretty constant. So, if you put all that together, you come out with an economic model of the pub business that I think is pretty attractive.

[Carlo Santarelli:]

Great. Thanks a lot guys.

[Michael Chambrello:]

Yep.

[A. Lorne Weil:]

Well operator, I think if there are no further questions, we’ll bring this conference call to a conclusion, by saying again, Thank you all for joining. Thank you all for sharing our patience with the multitude of things that are going on right now. I think we see, near medium term that looks really phenomenal and I think over the next few quarters, we're going to see this scenario that we've been talking about this morning, unfolding quite clearly. So, Thank you all for, again for joining and we’ll see you in a few months.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.