Light & Wonder Inc

NASDAQ:LNW

Earnings Call Transcript 2019-Q4

[Operator]

.

Good afternoon, ladies and gentlemen, and welcome to the Scientific Games 2019 Fourth Quarter Investor Conference Call. [Operator Instructions] Please note, this event is being recorded.

Now let me turn the call over to Trent Kruse, Senior Vice President of Investor Relations for Scientific Games. Mr. Kruse, you may begin.

[Trent Kruse, executive]

Thank you, operator, and good afternoon, everyone. During today's call, we will discuss our fourth quarter and full year 2019 results and operating performance, followed by a question-and-answer period. With me this morning are Barry Cottle; and Michael Quartieri.

Our call today will contain statements that include forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements involve certain risks and uncertainties that could cause actual results to differ materially from those discussed during the call. For information regarding these risks and uncertainties, please refer to our earnings release issued earlier this afternoon, the materials relating to this call posted on our website and our filings with the SEC.

We also will discuss certain non-GAAP financial measures. A description of each non-GAAP measure and a reconciliation of each non-GAAP measure to the most directly comparable GAAP measure can be found in our earnings press release as well as in the Investors section on our website.

As a reminder, this conference call is being recorded. A replay of this webcast and accompanying materials will be archived in the Investors section of our website at scientificgames.com. Also, supplemental reference slides are available on our Investor Relations website. While management will not be speaking directly to the slides, these slides are meant to facilitate your review of the company's results and to be used as a reference document following the call.

Now let me turn the call over to Barry.

[Barry Cottle, executive]

Thanks, Trent. Good afternoon, everyone, and thanks for joining us. 2019 represented another positive year for us as we delivered top line growth, improved our profitability and generated solid cash flow, all while continuing to enhance our leverage position. In fact, this year, we generated over $240 million of free cash flow and reduced our leverage by nearly half a turn to 6.4x. At Scientific Games, we've established a clear vision and strategy to leverage our industry-leading position across the wagering space. As you know, we're the only provider set to deliver a one-stop solution of leading platform and content for our partners across all 3 major verticals, with the ability to deliver a seamless player experience across digital and land-based; however, and wherever the player wants to play. No other competitor comes close to our ability to deliver this experience, which gives us significant advantage as we continue to lay the groundwork for our future results.

In fact, as we look across our business today, we are seeing incredible progress on this journey. Our Lottery team is delivering an unprecedented win rate and expanding our footprint with key wins internationally and domestically such as Brazil, Turkey, Italy, Florida and the Pennsylvania iLottery. In digital, we're leveraging our industry-leading cutting-edge platforms to deliver impressive new sports contract wins such as the recently announced FanDuel and Betfred deals and extensions with key partners like GVC and William Hill. Our sports betting platform's reliability and scalability positions us and our customers to win and lead in this emerging sports segment. In addition, we're the market share leader in North America iGaming and we'll continue to lead the way with partners like DraftKings as this exciting growth market evolves.

Our side play business just beat the market growth rate by nearly 1.5x in 2019 and delivered record mobile revenue for the year, up over 20% and approaching $400 million. And in Gaming, we have the industry's top 2 cabinets, WAVE XL and Twinstar J43, and we're seeing our newest games rise to the top of the charts and exceed out averages. We know we have an opportunity to enhance our results in Gaming and believe our new content like the Money Link family of games, Dancing Drums Explosion and Jin Ji Bao Xi, coupled with the arrival of the industry's most accomplished executives with proven success in the gaming space, to reinforce our current team and the world-class portfolio will help us to deliver improved results.

As a reminder, we recently announced the addition of top industry talent to our Gaming leadership team, including Matt Wilson, former President and Managing Director of Americas at Aristocrat, who is joining our team as CEO of Gaming on March 1, along with other highly experienced and successful leaders to complement our existing leadership team. We are also continuing to lead the way in innovation as we differentiate our business through near-term product innovation like augmented reality table games, SGVision and more. Our commitment to innovation that enhances player engagement and our customers' operational efficiencies is unrivaled as we seek to lead and not follow the industry. And in fact, we recently won the Gaming Intelligence Award 2020 for SGVision as the top supplier innovation.

Now the ultimate goal from executing our vision is simple and straightforward. We are committed to significantly reducing our net debt leverage ratio, delivering improved profitability and generating strong cash flow. We remain committed to deleveraging our balance sheet. And as noted, we are now targeting to be at 6x or below at the end of 2020, 5.5x within 2021, and we'll continue to focus on reducing leverage beyond these targets.

With that, let me highlight some of the key developments throughout our business. Within our lottery group, we're delivering an exceptional win rate on contract rebids and winning significant new deals domestically and internationally. We supply nearly every lottery on the planet across the product lines and remain market-leading player in the high-margin global lottery instant product business.

In the last 52 weeks, the instant product market has grown domestic U.S. retail sales by over $2 billion year-over-year, and SG represented more than 90% of that growth. And we continue to deliver key wins, both domestically and internationally, in addition to our recent wins in Italy, Turkey and Brazil. We are focused on our retail solutions suite of add-on products to responsibly maximize our lottery customers profits for the good causes they support. In addition to our successful expansion of PlayCentral self-service vending solutions, we are working with lotteries and major retail chains such as Speedway, Pilot Flying J, 7-Eleven, Circle K, Walmart and Kroger as well as a few small regional chains in 10 states on launches and pilots of SCiQ. Lotteries and retailers that fully adopt the features of the SCiQ system are continuing to outpace the industry with a 15% to 20% increase in instant game sales, and they're gaining new customer insights as a result of the big data generated by SCiQ. Adding lottery draw and instant games in-lane and self-checkout is a SCiQ product configuration initiative currently underway to offer grocery stores as well as other big-box retailers, the ability to reach more customers.

Additionally, our high-performance WAVE retailer terminals were selected in the industry's largest lottery and sports betting procurements of 2019 and will power 100,000 points of sale in Europe, Asia, Australia and North America. Also, the Massachusetts Lottery awarded Scientific Games a 3-year contract for a new lottery retail management system to help increase connectivity and productivity for the lotteries network of 7,500-plus retailers.

Within iLottery, we were recently awarded a new 7-year iLottery contract with the Pennsylvania Lottery. Our iLottery launch in Pennsylvania is the most commercially successful iLottery online mobile launch in North America today, with total sales significantly surpassing any previous iLottery launch in the industry's history, and topped $692 million by the end of December 2019.

In 2019, we launched our latest Scientific Games Enhanced Partnership, or SGEP, contract to manage the portfolio and supply chain of instant games in Ohio. The new partnership expands scientific games services to the Ohio Lottery to include game development, portfolio management, inside sales, advanced logistics for warehousing and distribution and retailer optimization. This has already resulted in Ohio achieving record holiday instant game sales to close the calendar year and experiencing 16 consecutive weeks of growth coming into 2020. Ohio joins more than 20 lotteries around the globe, including 4 of the top 5 lotteries in the U.S. that participate in the SGEP program.

In October, we announced that the Florida Lottery, another SGEP customer, selected scientific games as its primary instant game provider through 2027, continuing our more than 30-year successful partnership.

And finally, in December, we signed a 3-year contract extension to continue to be the primary provider of instant games for the California Lottery, the third largest instant games lottery in the world.

In digital, our AEBITDA increased 75%, and we're seeing significant momentum across both sports and iGaming as we win new deals and grow our business. In sports, we're very excited that FanDuel, the leader in the nascent U.S. sports betting market has chosen Scientific Games as its supplier of online and mobile sports book technology. This deal builds on our long-standing partnership with FanDuel's parent company, Flutter. And with the extension of this partnership, Scientific Games technology is now at the core of Flutter's global betting platform across multiple brands. FanDuel has established itself as the #1 operator in New Jersey, Pennsylvania and the overall U.S. sports betting market, and we couldn't be more thrilled by this partnership in all current and future markets.

As recently announced, we signed an extension with William Hill to continue providing our industry-leading open sports solution for the U.K. and Europe, and we recently extended our long-standing partnership with GVC for sports. Through the Ladbrokes and Coral brands, GVC is a long-standing partner of ours across sports and iGaming, and we look forward to continuing to provide industry-leading solutions to that great business as well.

In addition, Betfred has selected SG to launch their end-to-end sports betting solution in Pennsylvania at the Wind Creek Casino in Bethlehem. And in advance of the 2020, 2021 NFL season, Betfred and SG plan to launch digital sports betting in Pennsylvania.

Finally, in sports, we are continuing to launch in additional states with Caesars, grow with our partners, the Oneida Nation, and are close to launching mobile sports with an additional partner in New Jersey.

As we've discussed before, we believe the best product will ultimately win and we're beginning to see this transpire through our recent conversations and these wins. In fact, some of our recent wins and many of our upcoming opportunities represent takeaways from our competitors, which further reinforces our position as the top choice for operators based on our reliability, scalability and the breadth of our features.

In iGaming, we saw an increase of $300 million wagers placed on our OGS platform year-over-year, with $9 billion in wagers this quarter. We also recently announced our partnership with DraftKings for iGaming in New Jersey and are close to launching with multiple operators across Pennsylvania. In addition, Michigan recently passed legislation to legalize sports and online casino in the state, and we're very excited to have been chosen by the FireKeepers Casino to provide both iGaming and sports to players across the state.

Having achieved record wagering months in January in New Jersey and with continued momentum and leadership positions in multiple Canadian provinces, we continue to be the market leader in North America and are well positioned to take advantage of expanding market opportunities in iGaming, where we can leverage our leading position to be the preeminent player in future iGaming expansion. We are investing across our products and solutions in order to be the leading player in the emerging digital market and firmly believe we are poised to best support operators with our robust, reliable and comprehensive sports and iGaming platforms.

As we look at SciPlay, we grew our annual revenue by 12%, beating the market growth rate by nearly 1.5x, and delivered a 30% increase in AEBITDA. We increased ARPDAU 9% to $0.50, and average monthly revenue per payer increased 15% to a quarterly record of $88.06 and delivered record mobile revenue in 2019.

We believe we are in the early -- very early stages of a multiyear revenue growth and earnings expansion cycle at SciPlay, and we couldn't be more excited by our future prospects and opportunities.

As we turn to Gaming, we expect to deliver improvements in our largest division, similar to the accomplishments we produced across our other segments. In Game ops, we continue to focus on creating best-in-class game franchises, optimizing our product road map to attractive segments and maximizing deployment ROI through efforts such as content interoperability. Our new games are continuing to perform as we hold 6 of the top 20 new premium-leased and WAP games in the latest Eilers & Krejcik report.

As we look ahead, we're excited about opportunities in the Class II market and leveraging our strong content lineup to deliver improved results. I'm also eager to work with Matt, Siobhan and Connie to accelerate the groundwork that has been laid by Jamie Odell and our entire gaming team.

In game sales, we continue to own the industry's 2 best portrait cabinets, our new WAVE XL cabinet and the Twinstar J43, and are delivering exciting new content. For the fourth quarter, we saw continued penetration of the J43 and strong momentum in WAVE XL sales. In addition, we recently launched our new Drop & Lock game series on the WAVE XL. Internationally, Dualos X is now approved in all major Australian jurisdictions, with our total footprint outperforming the house average, including our latest game launch, Penny Pier, which is significantly outperforming the house average, and we're building momentum with the Dualos X as the sales process is ramping up with 1,000 units shipped in Q4.

In Illinois, our results continue to be very strong, and we are the clear market leader in new unit shipments from the expansion bill. And in Norway, we recently signed an agreement to supply 4,000 video lottery terminals across multiple locations throughout the country.

Looking ahead, we're excited about the continued opportunities in Illinois, historical horse racing and international as well as leveraging our industry best cabinets.

And finally, in Gaming, we continue to deliver outstanding results and table products with an over 8% increase in Q4. We're the clear market leader in the sticky high-margin systems business where we recently installed our systems for the new Wind Creek Bethlehem Casino and were chosen by Hard Rock International for its newest casino property, Hard Rock Hotel & Casino Sacramento, to supply a full complement of casino management systems products.

In closing, we're focused on executing our strategic imperatives to leverage the near-term opportunities we have in front of us and positioning ourselves to win in future growth across existing and emerging markets. As you can see, Scientific Games is the leading player to deliver best-in-class games, lottery and sports betting to players across any channel or platform they want to play, with a vision to deliver a seamless player experience that only we can provide. By staying focused on our imperatives, we're poised to deliver profitable growth and significant cash flow generation to reduce debt and continue on our deleveraging path.

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

[Michael Quartieri, executive]

Thanks, Barry. Good afternoon, everyone. For the quarter, we generated $863 million in revenue and $328 million in consolidated AEBITDA. Consolidated AEBITDA margins were down 100 basis points to 38%, driven by AEBITDA growth in SciPlay and digital, offset by the mix shift of revenues this quarter between hardware and software sales within Lottery and Gaming. Net loss was $37 million compared to net income of $207 million in the prior year period. This quarter included a $40 million loss on a debt refinancing transaction related to our notes offering and a $12 million loss related to the remeasurement of our euro denominated debt. The prior year included a $183 million reversal of a reserve related to resolving the Shuffle Tech legal matter and a $14 million gain on remeasurement of our euro denominated debt.

In Gaming, fourth quarter revenue declined $25 million, with our systems business accounting for $15 million of the decline as major site installations in Canada are winding down, and lower machine sales accounted for an additional $10 million. As a result AEBITDA decreased $24 million from the prior year.

We shipped 7,766 machines globally, including 3,501 replacement units in the U.S. and Canada and 1,009 opening expansion units, which included 961 shipments to the Illinois VGT market. In the prior year, we shipped 9,023 machines globally, which included 3,788 replacement units, 945 opening expansion units, which included 659 units to the Illinois VGT market.

Looking ahead, we recently launched Drop & Lock, which many of you saw at G2E on the WAVE XL, and we will be launching our new classic style 5-reel mechanical cabinet in the second quarter.

Internationally, shipments totaled 3,266 compared to 4,290 units a year ago. In the prior year period, we shipped nearly 1,200 lower margin machines to a U.K. operator. Our average selling price for the quarter was $17,268. We are experiencing success with Dualos X in the Australian market and continue to expect to regain ship share in that market. The cabinet is now approved in all major jurisdictions in Australia and was recently approved in New Zealand. We sold 1,000 units in the quarter, which was up over 350 units from the third quarter with games like Penny Pier and Hot Hot Jackpot, performing well in excess of house average.

Game ops revenue was down $3 million on a quarter sequential basis primarily due to seasonality, as our U.S. and Canadian installed base was roughly flat from the prior year period. A tribal opening in California and additional VLT units in the Northeast led to increased placements, which was offset by continued pressure in the WAP and Premium segment.

Internationally, our installed base increased by over 700 units on a sequential basis. We added over 500 units in Greece, which are lower-yielding units. Gaming Systems revenue decreased $15 million from the prior year, driven by the winding down of major Canadian site installations that made for a very challenging comparison.

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

Cable products continue to grow with revenue up $5 million from the prior year period to $65 million on continued strength in the business.

Turning to Lottery. Our fourth quarter revenue increased $2 million to $233 million, and AEBITDA was down $7 million to $98 million compared to the year-ago period. Domestic instant product revenue was flat from the prior year with growth in our SGEP program, offset by the repricing associated with the extension of our Florida contract. It's typical in the lottery business that when a contract is renewed, the economics are reset at a lower rate. And then the profitability builds over time as we add additional services.

In the prior year quarter, we had 2 large jackpots in Mega Millions and Powerball, which did not reoccur this year. This benefited our AEBITDA by approximately $7 million in the prior year. Lottery product sales were strong at $29 million, which was an increase of $8 million from the prior year as we had strong terminal sales in several international locations. As a reminder, product sales are generally one-off in nature. And note from a comparability perspective, the first quarter of 2019, product sales were very strong at $33 million, driven by a large domestic hardware sale.

We continue to expect to ship 15,000 WAVE terminals to the Turkish National Lottery and up to 30,000 WAVE terminals to SISAL in Italy beginning in the second quarter of 2020, which will continue through the first half of 2021. We see a lot of opportunities around lottery, including our recent award of the instant ticket contract in Brazil with our joint venture partner that is expected to begin operations in the third quarter; more states adopting the SGEP program, where we manage all aspects of the lottery process; and ongoing adoption and rollout of our retail solution such as SCiQ, PlayCentral and WAVE terminals.

For our SciPlay segment, revenue was $113 million and AEBITDA was $32 million, up $8 million from the prior year. In digital, we generated a 75% increase in AEBITDA to $21 million on flat revenue.

As Barry mentioned, we continue to win new business, including FanDuel, DraftKings and others, and will launch iGaming and sports with FireKeepers in Michigan, which recently passed enabling legislation. And we've extended our contracts with GVC and William Hill.

Moving to our cash flow and balance sheet. We generated $56 million in free cash flow in the quarter. During the quarter, we completed a note offering of $1.2 billion of senior unsecured notes that lowered our interest costs and extended our maturities. At quarter end, we had $313 million in cash and cash equivalents, and our net debt leverage ratio was down to 6.4x as we continued our deleveraging efforts. As Barry stated, we remain committed to deleveraging our balance sheet. However, we are now targeting to be at or below 6x by the end of 2020, 5.5x in 2021, and we'll continue our focus on deleveraging beyond these levels. CapEx was $78 million compared to $98 million in the prior year.

This concludes our prepared remarks. Operator, could you please open up the line for questions?

[Operator]

[Operator Instruction] And our first question comes from Barry Jonas of SunTrust.

[Barry Jonas, analyst]

I guess, maybe to start. What would you say the main driver is in guiding down the net leverage target from 5.5x to 6x? Really, what changed since Q3 earnings? Are there more one-timer that could impact free cash flow this year? Or maybe something that might lower potential EBITDA growth? Any color there would be helpful.

[Barry Cottle, executive]

Thanks, Barry. First of all, I do want to reemphasize, our primary financial focus continues to be deleveraging, as demonstrated, obviously, by our lowering of our leverage by nearly half a turn over the past year. And we look to actually improve that pace over the coming year. That said, we want to maintain some flexibility as we drive the business forward while continuing this focus on deleveraging, and we also must be thoughtful as to -- as we look ahead on the uncertainties of the current market. So to be very clear that while we've lowered the expectations on 2020 leverage results, we're absolutely not stepping back at all from this focus. And we'll be driving our business to deliver enhanced profitability and cash generation.

And I'll ask Mike to add a little more color.

[Michael Quartieri, executive]

Yes, sure. Just to provide a bit more color, just on the current environment that we're seeing. In order to grow Game Ops, we need to grow not only our footprint but also improve our RPDs. And unfortunately, right now, we're just not seeing the increase in our Game Ops footprint. Although the RPD is slightly above prior year, the core footprint is really only relatively flat on a quarter sequential basis.

Now however, with the recent additions with our gaming leadership team, which we're all very excited that Matt and Siobhan have joined on an accelerated time frame from what we were originally anticipating, that on top of the current game performance and the success of the cabinets we have with WAVE XL, Gamefield 2.0 as well as the J43 cabinet, we do expect to see some future improvement in Game ops.

From a game sales perspective, we do have the industry's top 2 cabinets, and we expect to continue to produce enhanced content. But as you've seen, the industry expectations on replacement sales have been lowered, and we also continue to monitor the situation with the coronavirus and its potential impact on what it may have on our customers at this point.

Now on the flip side of those kind of headwinds that we're facing. We are seeing improvements in the ship share in Australia. We're continuing to drive the results in Illinois that we spoke to at the G2E event as well as we are shipping our first historical horseracing units in Q1. And as you know, we have clear momentum and big wins coming in digital, as Barry mentioned, with FanDuel and Betfred and in lottery, with the Brazil joint venture, Italy and Turkey, all of which will just start to hit our results in the back half of 2020.

[Barry Jonas, analyst]

Got it. Okay. So next one is on the FanDuel deal. I think a lot of inbounds from investors who -- and maybe anything additionally you can give in terms of the scope of the services and timing would be helpful? And I guess, if you're displacing an incumbent, maybe what steps would be taken to mitigate any friction there?

[Barry Cottle, executive]

Yes, absolutely. I'm happy to. I'll try to hit. I think there are several aspects to that. So obviously, we're excited to be chosen by the industry leader in the sports in the U.S. And I think, as you guys know, we've been saying from day 1, we have the best product. We believed in it, and we believe that we're going to win in the long run. And I think that's exactly what's coming to fruition here with this and other deals. The deal basically builds on our long-term partnership with Flutter. And with the extension of this, our technology, basically, our sports wagering engine will become a core of Flutter's global betting platform across multiple brands. So we're now going to power Betfred, Paddy Power, Sportsbet and now FanDuel. And actually, we believe we have additional opportunities across existing and future brands as at Flutter, given this partnership and their continued expansion in this area. We expect to be operational by third quarter, hence, Q mentioning and talking about our investment to go live, but the impact of it financially, obviously, being more towards the latter. We'll continue to progress from there with the addition of both future states and then the migration of existing states. It's -- so you can kind of expect that beginning in that time frame. Obviously, we're not giving out specifics on economics, but this deal is material. It's a recurring revenue model, and we expect it to be significantly positive for the digital business.

And I also will mention at this time, we've actually, as I mentioned, this is just another of the deals that we have and the momentum -- we actually recently signed another important leading multistate operator that will be announced soon with others on the way. So excited about that one as well.

[Barry Jonas, analyst]

Great, great. And just last for me. Q, you somewhat addressed it, but I'm curious, to get your thoughts on how you expect to see Matt and some of the other recent hires. What sort of imprint do you expect them to put on the gaming division and timing to see that? Is it just gaming development, the cost side sales, just would love to get more thoughts on the transformation there.

[Barry Cottle, executive]

Yes, I actually started on that one. Look, we've made some good progress in gaming, but we've obviously been dealing with a fairly transitional era, so to speak, from a leadership perspective. And so we were super excited to be able to bring in Matt, Siobhan, Connie and a very experienced team, actually on an accelerated time line. People who know this industry and have a proven level of success and so to join our current group of proven industry talent. So we think the combination of that will be super strong. Connie -- in fact, Connie and Siobhan have jumped right in and are adding tremendous value, leveraging the great work that Jamie Odell and existing leaders have started. Matt's joining, as you know, March 1.

And so in terms of impact, I would look at it this way. The team is focused on the kind of -- there's going to be impact over time, right? So team is focused on a lot of near-term opportunity in sales, Game Ops execution, et cetera, all while building out kind of our winning portfolio of games and cabinets, which will improve results over the long term. Great news is we have great game developers. We have really strong products and franchises. And now, I think, really a world-class team in place that's going to have a really meaningful improvement, much like, honestly, you're seeing the momentum in lottery and digital today. I think you're going to start seeing that in gaming in a big way.

[Operator]

Our next question comes from Brad Boyer of Stifel.

[Brad Boyer, analyst]

First one is just a bigger picture question for you, Barry. I know coming out of G2E, there's a lot of buzz around Sci Vision and sort of how that may play out. I guess the question would be, when should we expect realistically that technology such as that could start to have some sort of an impact here on the actual results?

[Barry Cottle, executive]

Yes. So right now, I mean, we've been having a tremendous amount of interest from operators as well as socializing and evangelizing the stuff on a regulatory basis as well with actually really strong positive feedback. And if you take as an example, SGVision, in particular, just very practical application such as player identification, anonymous bonusing, chip tracking, some of these things, people are -- our customers are seeing real value there. And so I would say from an expectation perspective in terms of being productized and commercialized, you're going to start to see that bidding in the second half of this year.

[Brad Boyer, analyst]

Okay. That's helpful. And then Q, in your prepared remarks, you mentioned coronavirus is potentially sort of having some type of an impact. Could you comment whether or not you have seen any change to date that you could, in any way, sort of directly link to that?

[Michael Quartieri, executive]

It's not hitting us today, like if we look at our supply chain, there's been no interruptions in our supply chain at this point, and we don't anticipate it impacting us through Q1. I think, really, the impact is really -- it's kind of a wait and see. If you think about it from an operator's perspective, there is a tremendous amount of free cash flow and business that gets generated during this holiday period of Chinese New Year. So you can imagine the entire casino floor in Macau being completely shut down for a couple of weeks is going to have some impact on these operators.

Now the question and what we're cautious about is this a very temporary, and we're going to see recovery back before the end of Q1? Will some of that come through in Q2? How much of this will really impact the spending habits of the -- of our customers? That's the thing that we're just closely monitoring and waiting to see at this point. But as of right now, we haven't seen that impact.

[Brad Boyer, analyst]

Okay. That's helpful. And then lastly, I just want to go back to Barry's question around the FanDuel deal. Again, I mean, I think there's a lot of misinformation in the market. Could you just explicitly state, does this deal encompass all of FanDuel's sort of platform operations in the U.S. and any existing and new markets that may open up?

[Barry Cottle, executive]

So basically, the deal builds on the Flutter today. So if you think about Flutter today, it's Betfair, Paddy Power, Sportsbet and now FanDuel. We obviously believe that it's additional opportunities. Well, this opens up also additional opportunities that will happen as Flutter begins to expand. But this basically makes our sports wagering engine, a core part of their global betting platform that they're leveraging across their multiple brands.

In addition, by the way, it also enhances the existing iGaming relationship as well. But on the sports side, if you look at as a -- it is a Flutter FanDuel deal.

[Michael Quartieri, executive]

And plus, just one of the important things is on a revenue basis, being the recurring nature of it. As FanDuel expands with gaming expanding across the U.S., this contract will grow in value with us accordingly with that. So we are pleased. I mean, this -- for us, this is the game changer. As Barry alluded to earlier, we've said all along, when there is the big rush, when PASPA got repealed and everybody wanted to be up and running before that Falcon/Eagle game at the start of the NFL season, we weren't going to be able to service every customer and take everybody on at that point, given the product that we had. Now that we've got to this productized model, and as Barry alluded, the best product was going to win outright in the long run. We proved that throughout the U.K., having, what, 8, 9 of the top 10 customers. We believe we're going to see that as it comes to fruition across the U.S. as well.

[Barry Cottle, executive]

And it involves -- it's not a specific market deal. It is about being a part of their core technology, their core sports betting platform that they plan to take to existing markets from a migration perspective as well as new markets.

[Operator]

Our next question comes from John DeCree of Union Gaming.

[John DeCree, analyst]

Two questions for me, one on CapEx and then one on gaming. So Mike, can you walk us through a little bit of thoughts on CapEx? What are some of the big items in there that we should think about for the year? Any kind of larger contract payments and the timing of that?

And then specifically, is there any CapEx related to some of the sports contracts that you announced so far?

[Michael Quartieri, executive]

Yes, sure. So CapEx guidance is roughly $300 million to $330 million, a little bit higher tick up from what we experienced this year. And as you know, when we go through our CapEx spend, we're looking at everything from contractual obligations, planned strategic investments as well as contemplating any successful contract wins or renewal. And so the CapEx has been probably the biggest variable we have is the game ops footprint. And as you saw this year, in 2019, that game ops footprint didn't grow as we anticipated and, therefore, there was the controls around the CapEx spend to ensure that we had the right ROI. And so you saw the CapEx spend where it was this year.

Coming into 2020, we do expect CapEx to increase slightly, especially around game ops footprint as we grow that. We also have new contracts around what we've just talked about with FanDuel. Relatively light CapEx in nature, so I'm not anticipating large spikes up in the CapEx associated with that. If you think about lottery contract renewals, we do have the 1 contract associated with Pennsylvania Lottery systems. But at this point, when we look at the timing of the award. We're anticipating there'll be little to, I'd say, a minimal amount of CapEx in this year that is probably more likely to become a heavier 2021 CapEx spend. And so along those lines, we're just going to constantly evaluate the ROI and make sure we're making the right investments in the right places.

[John DeCree, analyst]

I guess a follow-up on the sports betting contracts, With -- you had first launched a sports betting, there were some start up expenses, and I think that was to kind of the adapt the technology to the U.S. But when there's your big contract launches like this, will we see some start-up expenses go through the P&L? Or has that largely been done with what you've done in the prior 12 or 18 months?

[Michael Quartieri, executive]

Yes. There's always going to be some because if you think about it, you productize the engine; however, the engine does need to be tweaked as it rolls out to new jurisdictions just based on the regulatory requirements at that time. But those are modifications made to a module as opposed to a fundamental rewrite of the engine itself. So yes, there's always going to be system enhancements that we're always going to reinvest in this tool to make sure we maintain our top position. But the magnitude of the rewrite going from what was open that, which was a very bespoke system, which they went live only 1 customer per year, to this more productized version that we have, that we can get customers up and running in roughly 3 months. That heavy lift is behind us, so we should anticipate anything to that effect going forward.

[John DeCree, analyst]

Got it. And then my question on gaming, big picture, maybe for both of you. I think in the prepared remarks or in response to an earlier question, you've talked about replace -- expectation for replacement demand being a little lower across the industry and the installed base not quite getting to where we had hoped. What's the high level feedback from customers? I mean there's a lot of major consolidation going on. Do you think it's a little bit of timing on replacements as larger companies integrate and decisions on slot? Or are you getting any feedback that would suggest a more structural slowdown in gaming spend or anything like that? And that's it for me.

[Michael Quartieri, executive]

Yes, sure. Unfortunately, given we're the first to report, I know Eilers has quoted that the market is to be down about 4%. We were down 8%. So obviously, we're all disappointed about that. But at the same time, we know that when it comes to the replacement cycle, there is some timing that will flow through. Some customers will take delivery in Q3, others wait till Q4. So when you look holistically over the back half of the year of Q3 and Q4 combined, our total domestic sales were up about 3%. So it gives us some good feeling about the overall picture from a 6-month period perspective, although we are extremely disappointed with where the sales came through in Q4.

That being said, Q1 is always seasonally a low number, unless there's a opening and an expansion that takes place, which, unfortunately, for the 2020 year, we're not anticipating much in that activity level. And then, unfortunately, as I mentioned before, the impact of coronavirus, it's just going to be a wait and see to see how customers are reacting to that and what they do from a CapEx spend on that perspective.

[Operator]

Our next question comes from David Katz of Jefferies.

[Cassandra Lee, analyst]

This is Cassandra asking on behalf of David. Could you talk about kind of the consolidation trend going on in sports betting? And how that impacts you? Or what other opportunities you're seeing from there?

[Barry Cottle, executive]

Yes. So I'll take it. So I think -- I guess I would answer it in a couple of different ways. One is, first of all, I think when you see things like the DraftKings, SB Tech and things of that nature, things like that have, I think, a positive impact for us, obviously, because in that one, in particular, it opens up what was SB Tech's traditional B2B player and moves them into kind of a B2C capacity. So some consolidation actually is opening up the market for us from a B2B perspective. You're also seeing the pairing of some of the operators with media brands, which I think is also a huge positive that simply is showing the tremendous amount of interest in sports betting and the investment and belief in the marketplace, right? And then -- and those become very powerful customer acquisition tools. And as what we believe the market leader in the B2B supplier, those kind of things get us excited.

[Cassandra Lee, analyst]

Okay. And also, can you talk about -- can you help us get an idea of working capital, what should we expect going forward, is it going to change?

[Michael Quartieri, executive]

Yes. Look, when you think of working capital, my expectation would be that we would maintain relatively flat to just maybe a slight use. And really what the slight use becomes is really around the revenue recognition guidance that you have nowadays where it's -- when control of, say, a lottery ticket passes to us, to the lottery itself, we're now recording revenue, even though we can't build for that until it's actually sold under a point-of-sale or a percentage of sales basis. So that will cause some variation on just the timing of shipments. But I would expect CapEx to be a relatively flat number on a year-by-year basis at this point.

We've kind of gone through not only 1 year, but 2 years of rev rec. And I think we've lapped a lot of that impact. It's embedded in our numbers at this point, and we should be able to maintain a relatively flat if not improve on the working capital that we had for the past year.

[Operator]

Our next question comes from Chad Beynon of Macquarie.

[Chad Beynon, analyst]

Mike, I just want to hit on seasonality of the business. In 2019, it was relatively equal across the 4 quarters, I think Q3 was a little bit higher. Understanding that you don't give guidance -- EBITDA guidance for 2020, should it be relatively equal across 2020, with maybe slight weighting up in the back half, given the WAVE placements? Or is there any reason why it should be different this year?

[Michael Quartieri, executive]

If you're looking overall, or are you just specific to gaming? I think that's the one thing I want to make sure I'm clear on your question.

[Chad Beynon, analyst]

Across the company.

[Michael Quartieri, executive]

Okay. So if you're looking across the company, bigger things will happen in the back half of the year. So FanDuel, Betfred coming online in Q3. Sizable product sales with SISAL in Italy as well as Turkey, both starting end of Q2 into Q3 of this year. Brazil joint venture will commence in Q3 of this year. We -- as we've talked about earlier, we made a strategic investment in an additional press in leads for lottery instant tickets that will come online at the end of Q3. And so from along those lines, we would start to see more in the back half of the year than in the front half.

In addition to that, with the addition of Matt and Siobhan coming online for us in gaming, expectation, as Barry said, they're going to be focused on some near-term objectives to make sure we're hitting where we need to be in Q1 and into Q2. But a lot of the work that they're going to be doing is really going to be looking to benefit the back half of '20 and the first half of '21 and really start to get that momentum going around that point in time.

One other thing that has really kind of impacted last year and kind of make it look like it was relatively, call it, consistent throughout each of the quarters, was the timing differences around the Canadian systems installation. So if you looked at Q4 last year, it was our #1 quarter by far from an installations perspective. Q3, which we just passed, was a sizable quarter, and Q1 of this year was a sizable quarter. That is all behind us now. And so we're going to see a tail off of that. So I would expect our business, if you're looking at just gaming, in particular, to go back to its more seasonality impact where Q2 and Q4 were usually the substantially better quarters than Q1 and Q3. From a lottery perspective, certainly, the back half of the year is going to be -- I'd say, as you said, that's going to be the high point of what you see there, especially around the hardware sales.

And with digital, I think you're going to see a relatively consistent business going forward until you hit the Q3 mark, when FanDuel and everything else comes online.

[Chad Beynon, analyst]

Okay. Great. And then my follow-up, just around any noncore assets as you think across the next 12 to 18 months, are there opportunities to monetize anything in the portfolio? And then separately, but related to that, how are you guys thinking about your current stake in SciPlay right now? And that's it for me.

[Michael Quartieri, executive]

Yes, I'll add a quick comment. The only really noncore asset that we have is our old Chicago building, which was the old headquarters of WMS that will be -- is on the market, and we're looking to sell at this point. Hopefully, we'll be able to announce the closing of that transaction, hopefully, by the end of Q1 is what we're anticipating.

And in regards to SciPlay, you may want to repeat your question and I can hand that over to Barry.

[Barry Cottle, executive]

No, no. I'll mention it. Look, I think -- look, we continue to be bullish on SciPlay. As I mentioned before, they did 1.5x the market growth in 2019. They have a really strong core group of games that during the latter part of last year, we went through some transition with them and with a few of the games in terms of technology platform and the like. But I think there's a lot of great effort in getting the core driving. They're obviously going to have another -- they're going to have their earnings call after this. But we should still believe we have a strong team in place, strong group of games and good growth ahead there in that market.

[Operator]

Our next question comes from Joe Stauff of Susquehanna.

[Joseph Stauff, analyst]

A couple of questions. North American replacement unit sales, obviously, is -- it's a hypersensitive value driver for you guys. I'm wondering if you can share with us any additional puzzle pieces in the fourth quarter in terms of why it was down over 20%? Was it just product availability? Was it you guys just didn't benefit from the budget flush that normally occurs in the fourth quarter? And in particular, as you think about 2020, would you expect to see growth from this line item as we think about sort of our forecast and expectations for you guys?

[Michael Quartieri, executive]

Yes, sure. So typically, when you get at the end of the fourth quarter, there's always a bit of a run-up with the last minute small orders. As CFOs get to the end of the quarter, they look at their CapEx for the year and go, "Hey, I got an extra $0.5 million to spend." And they release it to the slot guys and they go out and place an order. Unfortunately, for us, we just didn't see that materialize this year as we've had in the past. But along those lines, we did have a decent gap in the exclusive titles that we had planned to be created for the WAVE XL, and that's where we just didn't have anything new coming out in Q4, as we anticipated.

Remember, we showed at G2E, Super Colossal Reels as well as Drop & Lock. And unfortunately, they were expected to be out mid-November, very early December to help kind of move those units forward in Q1 -- or sorry, in Q4, and those products just didn't get through the regulatory approval process and start hitting the market until January of this year.

[Joseph Stauff, analyst]

Okay. So it was a bit of both, right? Budget flush kind of weaker than expected, your product availability also was lower. But now that product availability in the first quarter is out there, right?

[Michael Quartieri, executive]

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

[Joseph Stauff, analyst]

Sure. And then the second question -- got it. The second question I had, just on Game ops. Q, I think you had mentioned, certainly your strategy to increase the footprint. Are you referring to Class II in that statement, just given the capital intensity of increasing footprint for Game Ops? Or are you also including Class III in that? Obviously, I'm asking that in the context of certain operators, obviously, consolidating this year and expectations that footprint for them, at least from a Game ops perspective will decline.

[Michael Quartieri, executive]

Yes, sure. It is both. When we look at the CapEx spend associated with growing footnote -- footprint, we want to make sure that it's being done in a very prudent fashion, and we get the return on investment that we're looking for. We're very cautious not to take anything like a, call it, a V75, which is in very expensive cabinet and sticking it in some regional casino that we're going to make $25 a day on. That grows the footprint, but it certainly doesn't do anything to benefit our free cash flow and our operating results accordingly.

[Barry Cottle, executive]

Yes. And this is Barry, I'll add on to that kind of in both regards. So Class III, we spent a significant amount of time really driving -- it's an area where we were deficient in our product line up over a year ago. We now have really focused our product development on some really strong franchises being brought to market there. The Money Link family of games, Ultra Hot Mega Link, the ultimate cash spend with the J43 Motion Wheel coming out, Dancing Drums Explosion, MUNCHKINLAND, Jin Ji Bao Xi, all performing above the game floor average right now. To go after that, hold our floor, use content interoperability, so that the cabinet itself doesn't prevent us from capturing the floor space. Again, all will be built on and accelerated under the new team.

On the Class II, we also spun up about 1.5 years ago an even stronger, dedicated Class II resource, building unique content, exclusive content for that market. And we've got 27 exclusive titles coming out in 2020. In Oklahoma, obviously, we're partner with GCG, but going beyond the Class II. So all of the above, as Q said, with a concerted effort from a product perspective to go increase our share of that market.

[Operator]

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

[Barry Cottle, executive]

Thanks. And thanks, everybody, for joining us today. We really appreciate your support. We are extremely confident we're going to win in Gaming, like we are now in Lottery and Digital. The entire organization is laser-focused on executing our strategy that's going to enable us to accelerate this progress, extend our industry best positioning. It allows us to deliver the greatest returns for our stakeholders and set ourselves up for profitable growth, and generate the significant cash flow to continue on our deleveraging path. With that, I thank you very much.

[Operator]

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