Scientific Games Corporation

Thank you, operator. Welcome and thank you all for joining us this afternoon.

During this call, we will discuss our fourth quarter and year-end results followed by a Q&A period. Please refer to our earnings press release for further detail.

As a reminder, this call is being simultaneously webcast and is accompanied by a slide presentation which are both available along with our press release in the Investor Information section of our website at www.scientificgames.com.

We’ve also posted reconciliation information for return on invested capital on our website. A replay of the call and a company slide presentation will be archived in the Investor Information section of our website.

Before we begin, I’d first like to remind you that today’s conference call will contain statements that constitute forward-looking statements made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. This information involves risk and uncertainties that could cause actual results to different materially from these forward-looking statements.

For certain information regarding these risks and uncertainties, please refer to our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our periodic report. During this conference call, we will discuss certain non-GAAP financial measures as defined by the provisions under Regulation G.

A description of each non-GAAP financial measure and a reconciliation of each non-GAAP financial measure to the most comparable financial measure or measures calculated and presented in accordance of GAAP can be found in our earnings press release and in the accompanying presentations on our website.

Now, I’ll turn the call over to Lorne.

Thanks, Cindi. Good morning, everyone, and thank you for joining us for our fourth quarter conference call.

With me today, pretty much as usual, are Mike Chambrello, CEO of our Asia-Pacific business and Jeff Lipkin, our CFO.

I’ll begin by providing some brief updates on the quarter and the full year and then discuss some of the drivers for 2012. Mike will provide an update on our China business, followed by Jeff who will discuss the quarter in greater detail and then we’ll finish up with the Q&A.

Our fourth quarter results of $239 million in revenue and $80 million in attributable EBITDA reflected a business that is affirmatively re-entered the growth phase. Our top line has achieved solid growth for 4 quarters in a row now.

Year-to-year growth in EBITDA lags somewhat behind revenue growth for several unusual reasons that Jeff will explain in greater detail. But I’ll highlight a couple of points.

The Barcrest Analog business, which we are in the process of exiting, was a significant drag on overall profitability. As were SG&A level that are running deliberately ahead of revenue growth as we invest in our growth initiatives.

One of our primary objectives of the management team was to drive shareholder value through increasing returns on invested capital. I’m pleased to say that we’re clearly on track with this objective while we continue to make significant CapEx and OpEx investments in 2011.

Our business performed well and our returns increased steadily throughout the year.

And I should mention that in parallel to increasing returns, our net debt to attributable EBITDA ratio declined to below 4, another of our primary financial objectives.

To put our achievements in perspective, requires an examination of the years leading up to 2011. From 2008 to 2010, we experienced declines in revenue, attributable EBITDA, and return on capital together with increasing leverage.

So our goals in management team in 2011 was to begin to reverse these trends.

The global macro environment was clearly challenging from 2008 to 2010, but I believe that cost cutting in key areas of the business contributed to the decline in ROIC in ways that may not be entirely obvious and perhaps even a bit counterintuitive.

While our margins remains relatively stable throughout this rather difficult period, revenues steadily declined and given the relatively fixed nature of our balance sheet assets, return on invested capital declined as a consequence.

Reversing the trends was somewhat counterintuitive as well. We needed to increase rather than decrease spending on product, technology, content and business development in order to quickly drive revenue growth and attend [ph] on asset utilization.

So far the strategy is working. Return on invested capital for all of 2011 increased to nearly 18% with each quarter showing an increase over the previous quarter compared to the 14% annualized return on invested capital in the third quarter of 2010 just prior to my return as CEO.

As I’ve mentioned several times, we’ve enlarged and greatly strengthen our senior management team throughout this year. And the team has performed superbly.

We have the willingness and the ability to continue to make these investments thanks to our strengthening balance sheet, stable contract base of recurring revenue and because of the positive industry trends we’re experiencing.

The wind appears to be at our back as a result of a number of factors. The price increase in PowerBall, global demand for instant tickets, the opportunities to expand our video and server-based gaming businesses and the increasing interest from our customers in player loyalty programs and other interactive products to touch on a few.

But the Department of Justice opinion issued in December, which stated that U.S. state lotteries sales in-state over the Internet do not violate the Federal Liar Act of 1961, comes as a Properties Plus Internet loyalty offering has begun gaining real traction with customers.

To date, we’ve been awarded 5 contracts and there are several more in the pipeline.

This is fortuitous because the technological roadmap from Internet loyalty to Internet sales, while requiring some incremental development, is fairly straightforward. Properties Plus is creating an interactive platform for the lotteries which will help players better engage with the lottery and help the lottery better promote itself.

Importantly, this will also aid lotteries from gaining access to an expanded media-savvy and younger player base. Our customers that convert to Properties Plus now are only a click away from eCommerce and lottery product sales over the Internet.

We’re currently in active discussions with our U.S. customers to help them determine how best to leverage this positive development in order to drive lottery revenue.

In regards to the recent PowerBall price increase to $2, while still early days, we’re seeing strong results. Through mid-February, industry-wide PowerBall sales are up 50% over the prior year while the sales of Scientific Games Systems users are up over 60%.

This strong growth was fueled by a $336 million jackpot that was won earlier this month, the first jackpot after the price increase and the third largest jackpot in the history of PowerBall. Our customers total block Lotto sales were up about 17% during that time period.

This is very profitable revenue for Scientific Games as you have heard me say many, many times in the past. There are essentially no incremental costs associated with these incremental sales.

Instant ticket sales continued to perform well in the United States and in fact, growth appears to have accelerated despite tougher comparisons. International sales have expanded as well.

We believe growth is sustainable as there’s still a great deal of opportunity in the United States to drive instant ticket sales and overall lottery performance. And internationally, many instant ticket lotteries are still in their infancy.

Elected officials and lottery directors are increasingly recognizing that one of the easiest ways to increase state revenue is to outsource more responsibility for the instant ticket value chain to experienced operators such as Scientific Games whether it be through a cooperative services program or some form of privatization.

Regarding the latter, I should highlight that Northstar is garnering tremendous industry attention due to significant turnaround experienced at the Illinois lottery.

Since June of 2011, instant ticket sales have increased about 29% year-over-year, and draw sales, which previously had been relatively weaker, have grown 5%. It’s no coincidence that these results coincide with the launch of our private management contract.

The most recent weekly results are even more impressive as the year-over-year improvement in instant ticket sales has averaged over 50% and the PowerBall price increase has driven weekly sales growth in draw games to about 45%. These types of results have not gone unnoticed and as a result, we’re seeing increasing interest by lotteries to discuss our cooperative service program and other forms of outsourcing.

We anticipate that in 2012, we’ll see the pipeline of these opportunities grow.

Our server-based gaming business continues to demonstrate a significant value added to customers. Following a successful rollout of terminals to Ladbrokes to the entire state last year.

Ladbrokes’ 2011 full year cash box improved by about 18% from 2010 with global draw having been the sole supplier for less than 3 quarters. In fact, results for Ladbrokes appeared to be accelerating as their fourth quarter cash box grew about 24% year-on-year.

To quote from the Ladbrokes’ latest earnings release, “We have significantly improved our competitive position in 2011 through the efficient roll out of the new Global Draw machines as well an increased operational focus and enhanced customer services.”

This type of performance improvement is not isolated to the U.K. It’s Puerto Rico’s cash box, for example, per machine improved about 61% in 2011 and has nearly tripled since we entered that market in 2009.

In Mexico, cash box per machine grew 6% in 2011 and has grown by over 30% since we installed our machines in 2008. Given our gaming division’s track record of delivering strong cash box results and it’s proven ability to improve customer performance, we believe there will be a number of new server-based gaming opportunities internationally.

And as we complete the process of integrating Barcrest into our business this year, we expect to realize meaningful operating synergies.

Turning lastly to China, we’re pleased that 2011 was a record year for China Sports Lottery retail sales, up 21% to about 20 billion RMB and that at the same time we were able to lay the groundwork for a number of new growth initiatives expected to be bearing fruit in 2012.

Mike will discuss these in somewhat more detail in a moment, as well as outline some interesting instant ticket marketing and development ideas. But as a New Yorker and hardened New York Knicks fan, I’m going to apologize to Mike for stealing his thunder as I tell you now about our plans to introduce very soon the Jeremy Linstant ticket, which we expect will generate a Linsane amount of sales in China.

Sorry about that, Mike.

Looking briefly ahead to 2012, we’re hopeful that the combination of our continued investment and growth initiatives together with a positive industry backdrop barring any unforeseen circumstances will result in continued, perhaps accelerated, revenue growth as well as returns commensurate with the modest degree of operating leverage.

And with that, I’ll turn it over to Mike to talk more about China.

Okay, thanks, Lorne. As Lorne mentioned, and was highlighted in our press release, China Sports Lottery retail sales in the fourth quarter increased approximately 16% year over year to 5.3 billion RMB.

We’re pleased to also report that 2011 was again a record year for retail sales which CSL and we’re approximately 20 billion RMB up just about 21% from 2010. Our fourth quarter results were driven largely by the 18% increase in average selling price, always a key driver of sales.

This increase comes on the heels of a very successful launch in the first 30 RMB instant ticket in Q3. This 30 RMB game, called King of Diamonds, was introduced in September and in only 4 months generated over 1.2 billion RMB in retail sales.

The 30 RMB price point is our highest price point available on the market currently and it’s continued success gives us increased confidence that over time, we can continue to raise price points in China as we’ve done all around the world.

Looking ahead to 2012, we plant to focus on several key initiatives to help drive retail sales growth.

First, we plan to launch a broader array of 30 RMB instant tickets and continue to integrate licensed brands. As Lorne mentioned earlier, one of the many instant ticket launches that we’re really very excited about is the relaunch of the NBA game including a Jeremy Lin branded instant ticket, if you will.

The NBA tickets will also be sold at higher price points for this year versus last year. 20 RMB for player images such as Jeremy Lin and Kobe Bryant and 10 RMB for team logos versus 10 RMB and 15 RMB price points last year.

We expect good and solid . We expect good and solid and brisk sales.

We’ll also continue to work aggressively to grow the retailer network and increase the penetration of instant ticket validation devices. In fact, the CSO has just formalized the policy where each retailer will be required to have its own IDT, or barcode reader.

Those barcode readers would simply be attached to an existing CLS lottery terminal.

The target is to have “one device, one store”, fully implemented within the next 12 months. Just as an example, roughly today, 75% of retail sales are driven by, again, roughly 40% of the network that had active IDTs.

This commitment to the expanded infrastructure is a huge leap forward and will certainly pay dividends for years to come.

In addition, we focused on enhancements to the supply chain including logistics improvement, distribution and warehousing and the introduction of tools such as telemarketing and game management software. Most of these improvements will be rolled out in about midyear.

Finally, we’ll be introducing a new interactive platform, the CSL [ph], that will include second-chance drawings. This will likely happen in Q2.

And we also plan to roll out our Loyalty and Players Club programs a little later in the year.

So clearly, we’ve got a lot of exciting plans in the pipeline for China. However, I do want to note that due to a number of factors, sales in the first couple of months of the year have started off relatively softly.

These results are largely due to the timing of the Chinese New Year, which fell in late January versus early February in 2011, and really, fairly tough and aggressive year-over-year comparisons.

That said, we have a very comprehensive marketing plan in place that is moving up the introduction of higher price-point games. That will include significant promotional activities sponsored by, at this point, over 2/3 of the Provinces and those will happen in March/April timeframe.

The retailer expansion -- network expansion that I mentioned earlier will start with the installation of about 20,000 BCR readers, barcode readers, in the first half of the year. And one product I’m particularly excited about is an Olympic Anniversary game, we'll launch this summer, which, if you’ll recall really ticked off what I believe has been an exciting and sustained growth story in China since 2008.

So we’ll continue to drive the key initiative I discussed earlier and we believe that we’ll be able to return to our typical growth rates over the course of the year.

With that, I’ll turn things over to Jeff.

Thanks, Michael. Hello, everybody, and thanks again for joining us this afternoon.

Our results for the fourth quarter reflected growth in revenue in each of our segments. Looking back on the full year, we are pleased that we have been able to achieve both year-over-year and sequential revenue growth in each quarter in 2011 while enhancing our return on invested capital over 2010.

We believe these achievements are the result of both solid fundamentals in our Lottery and Gaming businesses and the execution of our plan, which we outlined in the beginning of 2011.

Let’s jump into the highlights of our results. Q4 revenue was $239 million compared to $212 million last year, an increase of 13%.

SG&A increased approximately $9 million year-over-year of which $2.7 million related to season expenses in connection with M&A and financing related activities; $2.3 million related to a non-cash accrual for our Asia-Pacific incentive comp plan; $2.1 million related to investments in our growth initiatives, including increased headcount; $1.8 million of new SG&A associated with the acquisition of Barcrest; $800,000 on increased stock-based compensation expense.

First noting that the increase related to Barcrest SG&A does not reflect our anticipated synergies from integrating the business within our gaming division.

Our attributable EBITDA of $80 million for the quarter increased by nearly $3 million compared to $78 million in Q4 2010. However, as Lorne mentioned earlier, attributable EBITDA this quarter did not fully reflect the incremental margins that we expect to generate on our incremental revenue growth for a few very specific reasons.

In addition to the increase in SG&A, to support growth initiative that we just discussed, the analog component of Barcrest business generated approximately $5.5 million of revenue increase during the quarter, but produced negative operating income.

We recently completed a comprehensive strategic review of this business and decided to exit it in order to focus on the more significant and profitable digital business of Barcrest, which was the primary reason we purchased the company.

We also incurred about $1 million -- $1.3 million of expense related to a customer equipment refurbishment program which we expect to complete in Q1.

Lastly, attributable EBITDA was impacted negatively by $1.1 million resulting from foreign exchange losses during the quarter.

Our EBITDA from equity investments was approximately $19 million this quarter, essentially flat compared to last year, although earnings from equity investment declined by about $5 million on a year-over-year basis.

While we realized EBITDA growth for most of our equity investments, the contribution from our Italian joint venture declined year-over-year primarily related to increased advertising and other expenses including certain one-time items.

We also realized reduced earnings from our -- from one of our equity investments due to an asset impairment the company recorded in Q4.

Operating income for Q4 was $19 million compared to an operating loss of $11 million in Q4 of last year when our results were impacted by $31 million in non-cash impairment charges and accelerated depreciation expense.

Our interest expense decreased by $2 million year-over-year primarily due to higher average debt in Q4 of last year.

We realized a $2 million expense increase year over year in other of our other income and expense category, primarily due to the previously-mentioned foreign exchange lawsuit.

Our $3 million income tax expense this quarter relates primarily to our international operations because we don’t realize tax benefit for our U.S. pretax loss since we established an evaluation allowance in Q4 2010 against our U.S.

deferred taxed assets.

As a result of these factors, we reported a net loss of $8.5 million, or $0.09 per share in Q4 ’11 compared to a net loss of $158 million, or $1.74 in Q4 last year.

Turning to our segments. Printed products revenue grew by 1% in the quarter.

Our U.S. business was strong due in part to solid instant ticket retail sales in several states led by Illinois.

This growth was partially offset by decreased revenue from international customers including a lower volume of instant tickets sold to Italy.

Printed products operating income grew by 15% to $32 million from $28 million last year, driven by both higher revenue levels and a more profitable revenue mix, plus the absence of a $2.3 million earn-out payment related to an acquisition from 2004.

Turning to Lottery Systems. Lottery Systems revenue increased 10% year over year.

Service revenue grew 8.5% led by higher U.S. revenue, which was driven in part by higher instant ticket validation revenue and larger block Lotto jackpots.

Our 17% increase in sales revenue was largely due to higher sales of software and hardware to international customers.

Operating income for Lottery Systems increased to $11 million compared to an operating loss of about $8 million, primarily due to $21 million in non-cash impairment charges in Q4 2010. This was primarily offset by a less profitable revenue mix and equipment refurbishment program for one of our customers, which we expensed in the quarter.

Higher SG&A expenses this year for increased headcount, an expense to support the growth of our China businesses.

Finally in Gaming, revenue increased 80% year over year in Q4 reflecting several factors including the acquisition of Barcrest, a 40% increase in global draws in games, medias, install base and terminals and an 8% increase in global draws for gross win per machine per day.

Gaming operating come with approximately $3 million compared to an operating loss of approximately $11 million last year, primarily due to impairment charges and accelerated depreciation expense of about $11 million in Q4 2010.

Our operating income also benefited from higher revenue and a more profitable mix of service business. As mentioned earlier, margins on product sales were negatively impacted by a net loss generated by Barcrest analog terminal business.

Gaming also incurred about $1 million in employee termination and restructuring incentive in Q4 related to the integration of Barcrest along with higher SG&A of about $3 million, primarily due to the addition of Barcrest overhead.

The continued integration of Barcrest and the discontinuation of our analog business will likely result in additional restructuring charges in Q1 and Q2. However, we expect to realize synergies from these actions later in the year.

Moving onto the balance sheet. Our debt less cash year end was approximately $1.3 billion and liquidity stood at $296 million and $192 million of availability under our revolver and cash of $104 million.

We’re pleased to report, as Lorne mentioned, that as a result of the growth in attributable EBITDA this year, our debt less cash trailing attributable EBITDA is now less than 4x.

While our free cash flow is slightly negative for the fourth quarter, it was impacted by our semi-annual interest payment this quarter.

For full year, free cash flow is about $79 million compared to approximately $62 million last year. Total CapEx for 2011 was $92 million compared to $109 million last year.

There are a couple of items that I want to point out with respect to our free cash flow metric. During 2011, we invested about $31 million in an existing equity investment to fund the acquisition of gaming terminals.

While the accounting for this expenditure is through an equity investment, we view this as CapEx.

On the in-flow side, we received an $18 million return of capital payment from L&S. Since these were deemed a return of capital, we record the receipt in the investing section of our cash flow statement and thus it was not included in our free cash flow metric.

In summary, we’re pleased with our fourth quarter results and our performance for 2011. We’ve made significant progress in our growth initiatives and delivered on the plan that we outlined at this time last year.

Excluding any results of the divested racing business in 2011, revenue increased 10% to $879 million. Attributable EBITDA increased 8% to $327 million.

And as Lorne mentioned, ROIC improved from 17.6% in 2011 to 15.9% in 2010 -- I’m sorry, from 15.9% in 2010.

It’s important to stress that we achieved these results while simultaneously investing significantly in our growth initiatives.

In 2012, we continued to execute on our previously stated plan, focusing on revenue growth in a manner that improves our return on invested capital.

With that, I’ll turn it back to Lorne to wrap things up.

Thanks, Jeff. I don’t have too much more to say.

I think we’re all pleased, as Jeff said, with the way the year turned out. We pretty much achieved dead on target the objectives that we set and that we talked about a year ago and we’re hopeful that will continue to do more of the same.

So operator, if you want to open the program up for Q&A, we’re ready.

Good afternoon everyone. I wanted to see if we could talk a little bit more about the opportunity to sell lottery tickets over the internet following the DOJ opinion ruling.

Could you maybe talk a little bit about what your expectations might be for timing-wise, when should we expect some of these state lotteries to start selling tickets over the internet? And then also could you maybe talk a little bit about what types of games that might include?

Would it just be lotto games or do you envision kind of instant ticket and other types of games on there? And then how does that all fit in with your property plus contracts?

Can those be essentially turned into a contract to basically do this for the state lotteries?

Those are tough questions to answer, Todd. The DOJ decision that came in December kind of came as a surprise to the lotteries.

So I think a lot of the questions that you’re asking, the lotteries are really only beginning to ask themselves now and beginning to talk to us about because I just think it wasn’t on people’s radar screen to happen the way it did. Now that it has happened, I think it’s going to begin to move very quickly with increasing momentum.

I certainly think that we will see some number of U.S. lotteries selling lottery tickets over the internet in 2012.

I think that’s a virtual certainty. And I think, or at least we’re hopeful, that that would be a mix of traditional lottery draw as we call them nowadays, draw games.

In the old days, we used to call them online games, but now that gets confused with the internet, so we call them draw games. And what I’ll call electronic instant tickets that as the name implies are internet or electronic versions of the instant scratch tickets that we sell in paper form through shops.

I would seriously doubt that very many lotteries in 2012 or perhaps even looking beyond that will go very far beyond those traditional lottery games in terms of their internet offering. But I'm often wrong about these things often enough that there’s certainly an excellent chance that I’ll turn out to be wrong about this.

But again, that would only be upside. So if we look at how lotteries have done in other parts of the world where the ability to sell traditional draw and instant ticket games on the internet have been available for a while, the U.K.

for example and some other countries in Europe, the quantitative potential for this, we think, is very significant. And it’s particularly significant from a profitability point of view for both lotteries and for ourselves because quite obviously for any number of reasons, the profit margins on this kind of business are potentially very much higher than the profit margins on traditional business.

So I think we’re definitely going to see, I'm tempted to say many, but certainly some number of our customers launch internet marketing efforts in 2012. And I think as other lotteries see the results of those, we can expect that others will follow suit.

I'm sorry that I can’t be any more precise with you, but as you could appreciate, this is unchartered territory for the lottery business. And even though Cindy at the beginning of the program read the usual disclaimer about our comments containing forward-looking statements, et cetera, these particular forward looking statement at least sitting here only a couple of months after the DOJ made its’ decision is just something that I'm not comfortable yet being very aggressive about.

I think 3 months from now when we have our first quarter conference call, we will by then have 5 or 6 months of talking to customers. And several of them moving their initiatives forward, I would imagine that I’ll have a lot more to report.

Okay, great, that’s helpful. Second question I had was related to the printed products of the instant ticket business.

I think you guys quoted in the press release that retail sales were up I believe, unless I'm mistaken, about 8.5% year-over-year in the fourth quarter. But it looks like the revenue that you guys reported on the service side was only up about 0.5% point year-over-year.

Can you maybe talk a little bit about what the deviation there is? Does that have anything to do with some of the contracts that are kind of price per 1,000 maybe being down year-over-year, or just why would that be different?

That’s exactly what it is. Todd, it’s Jeff.

It’s just how we recognize revenue on the POX or CFP contracts. They are correlated to the retail sales of our customer whereas the PPK contracts where we actually just sell the product and we sometimes sell it in advance of the retails.

We sell them in advance of the retails. Sometimes if not, it’s correlated with the operating result that the lotteries report.

That and then there’s some contract changes year-over-year that affect our rate to a lesser extent than newer contracts perhaps that affect the revenue, the rate we get compensated on the revenues. But for the most part, I think it has to do with what I described.

Yes, I think, Todd, Jeff’s last point is important. If you didn’t know anything else other than the reported growth in the retail sales of the lotteries and the growth in our own retail sales, that discrepancy, if you would, all other things remaining equal attribute to price attrition in our business.

But I'm very familiar with our contracts. And between the first quarter of 2000 -- the fourth quarter of 2010 and the fourth quarter of 2011, I can’t think of any significant contract that was extended or renewed at a meaningful lower price.

And certainly not one that would have caused anywhere close to the difference that you identified. So I think it has to have mostly to do with the timing issue that Jeff talked about.

Okay, and then my last question was related to the equity earnings. It came in below what we were looking for.

And I think you cited a couple things on the call. The first I think was Italy, increased marketing and advertising costs.

And I believe you mentioned a charge in the quarter for the JV there. And then I believe you mentioned another charges and another JV.

Can you maybe give us a little bit more color on what the 2 charges were, both for the Italy business and the other joint venture that you mentioned?

On the Italy joint venture, there were a couple of one-time items that affected their net income, which you’ll see reflected in our 10-K when we file our financial statements tomorrow. Advertising was a big part of it, but there was some other charges that they took in the fourth quarter.

And then the other joint venture was RCN, which had an impairment to goodwill that affected their year-end results.

And do you have like a rough number for both of those either combined or separate?

The RCN number I think was less than $10 million, $5 or $10 million. And the Italy one was I think -- I don’t have an exact number.

I’ll have to get back to you on that. It’s in our financials that we’re filing tomorrow.

For starters, could you guys talk, and I know Jeff detailed it a little bit, but could you talk a little bit about how we should be thinking about SG&A on a go-forward basis I guess in the near term and then maybe what you think is a more normalized longer term run rate? And then I have a follow-up on China.

Just following up on my response to Todd, the number I gave you was on 100% basis. We own 29.4% of Robert, so there’s an equity income percentage of the number I gave you.

I think it was $5 million or $6 million. I think we had 29.4% of it.

The question on SG&A where it’s trending, I think the -- as we talked about in our call, we’ve been somewhat deliberately head count in support of our growth initiatives. So I think where we are today sort of reflects the additions for what we, at least sitting here today, can envision we need to execute on our growth initiatives.

And so the levels that we’re operating at today, I think are generally where we see SG&A going. I will mention, or I will highlight that I mentioned in my comments area that it’s part of the restructuring related to the shutting of the analog business of Barcrest and some restructuring at Games Media that we anticipate, I think it’s $4 million to $6 million charge primarily in Q1, maybe Q2, that'll put SG&A for restructuring for that business.

But other than that charge, I think it’s sort of generally in line with where we are today. We’ve added costs, again it wasn’t by accident, where we thought we needed to amplify the resources to execute on the opportunities we have.

Then on the lottery systems’ side, obviously you guys have -- margins have basically been flattish year-over-year if you look at ’11 versus ’10. When we look out to ’12 and you factor in maybe some of the numbers that you’ve been seeing from some of the changes of the Powerball, et cetera, how do you guys think about a margin ramp in that segment?

And how do you think about maybe flow-through on that incremental? I would assume it’s something less than 100, but obviously very high.

I think Lorne mentioned that, as he said several times, as related to the $2 Powerball, there’s very little incremental cost associated with that price increase. And so the challenge there is figuring out what the net growth is in that product when you consider some level of cannibalization of the $1 product.

We said it was very material and incremental so far, but it is early days. And then I think the other factors which will affect lottery systems’ margin going forward is obviously the growth in China, which is at high margin.

You know that there is a step down in rate in 2012 of 10 basis points. And then it’s flat in 2013, so that will have an impact on sort of the revenue that China contributes.

And ultimately, the margin that it contributes to that business unit.

That was partially my last question. But Mike, given the step down, you’re kind of at a 9% disadvantage I guess when you look at validation revenues.

With what you’re seeing in the market and obviously a tough comp in January, are you guys of the belief that validation revenues could grow year-over-year given the aforementioned factors?

We faced the same challenge in 2011 when we had the identical size step down and we saw significant growth. And so I think we get through this soft spot and do some of the things that we talked about just a few minutes ago, I think the business is strong.

And we overcame it last year, so directionally, I think we’re on course.

That’s Mike Malouf. A couple questions, one, can you give us an update on Greece and what’s going with that contract as far as timing?

There’s not really much to update. As best as we understand it right now, they’re intending to issue 10RSP for privatization of the instant ticket lottery increase sometime within the next 2 or 3 months.

And they’ll take whatever time they normally take to make a decision. And theoretically by early summer, they would have announced a winner.

And then it’s a process of putting in the infrastructure, and building the inventory, and creating an organization, and so on, and so forth in order to launch it. So if they stay roughly to the timeframe that people are talking about now, it could be up and running by the end of the year.

But so far this is what we’re told. Is there an [indiscernible] and we haven’t actually seen it, any hard documentation.

So right now, it’s still -- I’d say it’s more certain than being the realm of conjecture, but it would certainly be a lot more certain if they had issued an RFP on it. I think things were generally on hold pending resolution to the debt crisis in Greece.

And it feels at least that things are starting to -- they’re getting refocused on these asset monetization to get an increase.

Okay, and then with regards to Italy, with flat numbers in the fourth quarter, it looks like October and November, we were up around 7%. So it looks like December was down quite a bit.

Can you comment just a little bit on what’s going on with Italy as far as sale go and is there a one-time reason why December was so weak?

I don’t know about December, but January was through the roof. I think January was up something like 18%.

And February, there’s some bad weather in February. I think the truth is the fourth quarter in 2010, Mike you’ll recall, is when we launched last year the concession.

And importantly, they launched it with a 10 Euro Win for Life game, which was extremely successful. And so part of the issue is that there was just a very tough comp we’re up against.

We were sort of round tripping on the new concession, the LNS business. And in the same timeframe this year, we had 2 Euro games that launched.

So it’s a little bit of price points and it’s a little bit of tough comps related to the period. And so we still look at sort of that business and where we ended up for the year at 8.4% as being a very successful year in 2011.

And continue to think that it will lead to a very attractive market for us.

Just a follow-up to your definition of a draw game. Is that something like Keno?

Yes, a draw game is any game where the -- like Powerball, like Daily Pick Three where the winning ticket is determined by drawing numbers.

I guess would you see the frequency on a daily basis? I know it’s still to be determined, or could you see it hourly or like Keno every 15 minutes?

The numbers games can be -- draw games can be as often as you want. If you play it on a video lottery terminal, you could have a draw game every 5 seconds.

So that’s the lottery’s discretion, but the distinction that we’re trying to make is between the instant scratch tickets that are pre-printed and pre-determined in our factory. And people buy them in the shop versus games where the outcome is determined in real time by the drawing, generally of balls out of a drawing machine.

Okay, but I guess there hasn’t been any sense as to which way, if the states would be looking for a higher frequency than daily I guess.

Many states already have frequency higher than daily. Some states have, let’s say, a Pick Three game twice a day.

Okay.

And again, states that have Keno as you correctly observed play it every 5 minutes.

Just switching gears a little bit to a philosophical question. Do you envision let’s say a move towards internet gaming being tied into the existing distribution channels and perhaps driving people back and forth, or is there risks in your mind of any cannibalization?

That’s actually a very -- I think it’s more than just philosophical, but it’s a very, very good question. Clearly because our business is so bound up with the lottery business, we’re very conscious as we talk with our customers about managing the introduction and moving towards the sales and marketing of lottery products on the internet in a way that optimizes the overall sales of the lottery.

Because neither we nor the lottery itself would be in any position to benefit if one product were to cannibalize the other. And you mentioned the retail channel, which is terribly important because clearly, we in the lotteries have to be very conscious of what the impact of sales over the internet is on the retailers.

We have devised several techniques or several ideas where we can use internet sales in a way that just exactly as you suggest drives players back to the retail channel in a way that actually -- rather than sales on the internet being cannibalizing are actually synergistic with the traditional retail channel. We’re beginning to do that quite successfully actually with this properties plus player loyalty program that Jeff was talking about before.

So yes, philosophically, our view is the whole internet exercise in activity has to be managed in such a way that we’re making the overall pie bigger. And that we’re doing it in a way that is beneficial and synergistic to the traditional retailers who, no matter what happens with the internet, will always be the primary channel of distribution for lottery tickets.

Great, that’s helpful. And just switching gears to the balance sheet, I notice that you do have a bond that becomes callable in June of this year.

Just any thoughts on refinancing that when it becomes callable or would you prefer to just wait until closer to the maturity?

The truth is, we don’t need to do anything. We’re very comfortable with the 7 7/8.

We totally understand and are aware they become callable in June. And we understand where they’re trading and where a new deal we think it comes.

But at the moment, I think we’re going to continue to think about all of the options that we have. And I don’t think it’s something we have to do.

We’re quite comfortable that we have no debt maturities really of any significance before June of 2015. I think that’s sort of our biggest focus.

And that security’s June of 2015, which is by my calculation 4.5 years from now, so it’s not something we’re stressed about at all. To the extent there was something very opportunistic, might we look at it?

Maybe.

Just a couple questions, Jeff or Lorne. You had a $2.7 million expense related to M&A and financing activity.

Was that related to the Barcrest acquisition or was there something else in the fourth quarter?

The biggest component of it are actually the consent solicitation on the 2015 notes that I just mentioned that commenced in October. And then the second largest expenditure relates to the Barcrest transaction.

So those are the 2 big components in that.

Okay, great, and then on the lottery system service side, was there some one-time expense there? I would have thought that given the revenue boost, the margins, the gross margins would have been better.

And I think you did mention it. I missed it.

In Q4, there was a refurbishment of terminals for one of our large customers that we did that we expensed. And that had an impact of like $1.3 million or so in the quarter.

That negatively impacted our margins this quarter.

Okay, and that’s on the system side?

That’s on the system side, correct.

And then this might have been in the press release, but can you provide the service revenue from Barcrest in the quarter? So Barcrest revenue excluding the sales component?

Total revenue was $11.5 million for Barcrest, and I think it’s $5.5 million from the analog. So it was $6 million that came from the service revenue.

That revenue was very profitable. As I mentioned in my comments, the analog revenue produced an operating loss, which had an impact as I mentioned on our results in the quarter for that business.

So going forward, will we not see any more sales from Barcrest? Did they sell any digital product or is that all revenue share?

Yes, I think we’ll see some sales. But we are exiting as we speak, we announced in late January the exit from the analog business.

But there are some sales revenues that will go through the diversified gaming P&L, which one example of it is the content that we sell, like what Barcrest sells in Italy to Cersa.

Thank you, operator. Thanks, everyone, for joining us.

Again, we appreciate your interest and support. Good questions as always.

And we’re looking forward to speaking with you sometime in the next couple of months at the end of the first quarter. Thanks.