Q3 2019 Earnings Call
Good morning, everyone and welcome to thus far enough down that's you're going after July 19 conference call. All participants will be in listen only mode should you need assistance, they seek medical conferences specialist, but pressing the star keys for buys evil.
After today's presentation, the we'd be an opportunity to ask questions. Please note. Today's event is being recorded I'll begin today's conference call I refer you to the Companys Safe Harbor statement. This appears in the third quarter 2019 earnings press release, which is probably the best her section of the company's website that.
Www Dot Oh, yes, see good dotcom.
So far but statement also applies to today's conference call at the company's management, we've been making switches to advance the could be considered forward looking on the securities those elements of that C. <unk> C.
These statements are based on managements current expectations or beliefs, not subject to risks uncertainties and changes in circumstances you.
In addition, please note that the company were discussed both GAAP and non-GAAP financial measures reconciliation is included into earnings press release, we just completed I wouldn't like to turn the conference call all though to learn a wheel the company's executive Chairman Mr. Weil. Please go ahead.
Thank you operator.
Good morning, everyone. Thanks for joining.
By now quite familiar with.
In the press release this morning, we referred.
Two three prong strategy that we had been in the process of implementing for.
Review.
[laughter] generation Fabio business.
And our worldwide VLP virtual sports.
And interactive businesses.
With the goal to fully offset the impact to try and Neil.
And at the same time.
So these things are going on.
We're integrating.
And all the magic UK.
Position that we've talked quite a bit about.
Including realizing.
Oh, the synergies that we had projected at the time, but.
As we talk more this morning.
[laughter] in my remarks, I'd like to tuck in each of these and then handed off to Brooks.
Talk in more detail about the business development initiatives and the integration efforts that are underway.
Lastly store will cover the financials and any refinancing related matters.
At the end of our prepared remarks before we open it up to one [laughter].
Our third quarter results were obviously negatively impacted by the reduction at the maximum stake.
The two pounds in the UK LDL market, which was implemented on April 1st.
As we bought a number of times it was originally intended.
To be implemented.
In October .
This year and was accelerated back into April .
Which created a rate.
Logistical.
Issues again that we've discussed a number of times.
Bother to go into it anymore detail today [laughter], but as we've discussed previously would think it'll take.
Until we're in the first quarter of 2020.
Full mitigation plan to be executed.
As expected we born the full impact.
The revenue reduction.
And the second and third quarters.
Well, having only partially mitigated the impact through cost focused.
Operational initiatives.
Part of the reason.
That we've only mitigated.
Part of the impact is.
As I mentioned, a moment ago because the.
The change in the regulation itself.
Became six months.
And some other things.
That we can do to vary significantly mitigates the impact that you can't take place until.
Shop closures and other.
Activities have run their course.
I think right now most importantly, we're seeing very steady improvement.
In the sequential year over year trend.
The gross win per day.
Oh immediately after the.
The implementation of the triennial on April 1st.
This measure of revenue performance was down 44%.
By May.
The decline I had improved to 40%.
Throughout the third quarter it was on average 37%.
It it improved again to 25% in the month of October .
And so far in November amongst the date, it's about 20% so.
As you can see there's been a tremendous.
Improvements on the revenue side.
As we won't get too in a moment of where the process of implementing common and changes on the cost side.
Along the way we've seen the closure so far of approximately 850 shops.
And.
The aftermath supports our previously a light thesis that.
Substantial portion of the revenue walk through the shop closure [laughter] wouldn't be recovered through our remaining a state.
Now the shops close would on average be at the lower end.
Of the Cashbox distribution.
I should also mention here that at least as of the present time.
There have been very limited shop closures.
On the part of the.
Major operators in the UK, who are not our customers.
Most of the shop closures has been our customers so.
As and when we began to see some closures on the part of.
Operator, sure not our customers logic would say that you will.
[laughter] capture at least some part of that re circulated revenue and we would expect.
That could be one other drivers.
Okay continued improvement.
In the revenue per terminal to per day that I mentioned a moment ago.
Whereas our revenues are driven by a direct linear relationship to the cash going into the machines, obviously, many actually most of our cost.
Our unrelated to revenues, but in fact, driven simply by the physical numbers of machines.
[laughter], we pointed this out before cost such as field maintenance.
Transportation logistics spare parts et cetera.
So as the overall industry go through this period of restructuring in Sop consolidation our cost mitigation efforts are going to be driven by a smaller more profitable the state.
As well as being able to either redeploy a the terminals that we have removed in the field into other geographies in a world.
Or cannibalize them.
First service spares.
Which is a significant portion of our ongoing operating costs.
For some time, we've been forecasting [laughter] fully mitigated adjusted EBITDA impact to the triennial would be between 10 and $11 million a year.
Based upon what we're seeing so far in the fourth quarter.
Bind with comprehensive updated modeling we're confident we will reach this level by the first quarter of 2020.
Indeed, given both recent positive sequential revenue trends.
On a deeper analysis of costs. We think there is a decent opportunity that we can do even better than that.
[laughter], we've been saying sometimes that.
We expected by the end of the year or early next year.
Our overall adjusted EBITDA run rate.
It would be back to where it was going.
As we went into the try anyway.
A number around let's say 12, and a half 13 in half a million dollars of EBITDA quarter.
So in other words or in that timeframe.
Our other business initiatives, which Brooks, we'll talk about is considerably more detailed in a moment.
Such as of the launch of our gaming machine business in North America.
No machines in Greece.
New virtual sports contracts and a new virtual sports products.
[laughter] and very importantly.
Additional interactive customers, which we have been adding a at a very accelerating rate.
Altogether will be generating I would say at least two and a half million dollars quarter enough to offset the impact of the Tri Ed Hill, and again take us back.
To a more normalized level of EBITDA, which as I said a moment ago is what is shall we say between 12 and a half $13 million of EBITDA per quarter.
Finally, and right now I guess it away. Most importantly, we completed the acquisition nomadic ukase gaming technology group.
These businesses are experiencing very positive trends.
Both in terms of the Standalone revenue and profitability.
But also the integration and synergy work.
We have been doing it the trends have actually been stronger than what we anticipated when we agreed to acquire these businesses.
Our thesis on the business going through its conversion from what was at one time it entirely analog business.
So what is now more than 60%.
Through the process of conversion to digital.
It's proving correct and it's very clear.
That the pubs cashbox is increasing.
Almost in lockstep with the the trend from analog to digital.
This in turn and again as we've discussed before.
Has a very positive impact.
On the EBITDA margins of the business and we're seeing this happened in parallel.
There are quite a few other positives were seeing in the in TV business that Brooks will discuss in more detail.
Based on this evidence we expect that's a 2020 adjusted EBITDA.
Coming from the nomadic businesses both grow nicely.
Over what it wasn't 2019 on top of this the work we're doing now seems to suggest that the synergy potential could be greater than what we originally expected.
Making us incrementally more comfortable with existing synergy guidance.
And working towards the higher number.
Uh huh.
Said this before but I should mention that the.
The management team.
That is dealing with this.
Has had a very considerable experience in the past add integrating acquisitions like this and so we're pretty confident that.
The estimates and projections that we're making are going to be.
Comfortably achieve.
Quantitatively as we've mentioned before.
MTG 2018 adjusted EBITDA.
Added to our original estimate the synergies.
I would yield approximately $35 million of incremental adjusted EBITDA.
With only modest growth in revenue and are and what margins in 2019 and 2020.
And quite possibly.
A greater than expected synergies.
We could reasonably expect.
To reach a an adjusted EBITDA run rate.
In these businesses are somewhat higher than the for 35 million that.
We have been talking about [noise].
I should mention here that.
The nomadic businesses are somewhat more seasonal.
Then the legacy inspired businesses with about half.
More than half of the EBITDA coming in the second or third quarters because of the importance of the summer holiday season.
So to summarize then as we look ahead.
And think about where it will be.
Let's say when we're exiting the first quarter of 2020 so.
About two quarters from now less than two quarters from now.
We would expect to have mitigated triennial impact.
To around two and a half million dollars quarter.
To have comfortably added adjusted EBITDA.
From a range of initiatives in North America, Greece, virtual sports interactive and so forth.
And finally.
To have the largely integrated and TG.
Realizing bolt yet standalone profitability.
And the attendance energies.
That we're seeing that it has with our legacy inspired business.
So with that I'd like now to handle over to Brooks to further discuss.
Our new business developments and in particular.
Our most recent initiatives in North America [noise].
Hi, thanks worn and I'd like to absent the little bit of color to some of the points you touched on in particular, the benefits and the integration plans for the MTG acquisition as well as the pace of the business developments that we've been working on it in the North American market. The teams have been working hard as Warner mentioned on the integration.
Lands and we see a number of opportunities both in cost savings and also in revenue growth in synergies in terms of the acquired businesses I think it's important to emphasize the addition of the design studios and capabilities of Astra Gulf fruit and debate.
We strongly believe that the combination of these three groups with our existing inspired content development team will position us well to execute on our omni channel strategy across multiple geographies.
Both bear fruit and Astra for example are producing content for the UK pub sector that is growing that business significantly as a leader in the space by a large margin. This content is driving the digitization of the public sector as more intervention from analog and the shift to digital has historically increase the cashbox.
Summer and thereby our revenue and importantly, our margins. So we believed that this content combined with a the leading prismatic cabinet is the key to success in that segment of business. We also expect to leverage this new content plus the six key nomadic titles, we acquired including book.
In the transaction within our UK elbow business spoke to drive increased cashbox, there as well as to reduce our reliance on third party content to increase both our margins and our revenue.
Moving onto some others as we've discussed on previous calls are inspired content is leading the way in performance in Greece, and we're excited to be placing our valor cabinets. In fact, just this week. The first dollar cabinets were installed in Greece.
We use Greece as a proof point for what we thought it would take to succeed in Illinois, because the markets or are similar in that they are distributed with a large number of locations and a relatively small number she is per location.
We created bespoke content for that normally market. After doing extensive study and analysis and are encouraged by the results. We are seeing thus far albion on only a relatively small sample set.
So we expect to be in trials with a number of operators this quarter.
And we'll report on the conversion of these two both sales and to follow on sales and the upcoming quarters with the addition of the six machine in Illinois.
The combination in addition of all of this content creation will drive not only our server based gaming business.
But again as Gordon mentioned that will likely also serve as a catalyst for our interactive rgs business as we develop content for the multiple territories that we serve.
We're seeing significant growth in that space and expect that to continue.
Beyond the UK, where we're expanding in Sweden, Spain, Italy, and importantly, North America.
So our growth strategy in North America really is across the entire business.
We've talked about the virtual sports business.
The launch of our games in Illinois in fact on virtual sports side, we're looking forward to actually next week the launch of a new game with the Pennsylvania Lottery of Derby cash that I think I've mentioned on previous calls has different mechanics with the larger payoffs structures multiplier et cetera et cetera. So we're looking forward to launching that product.
Yeah.
And getting the results on the virtual sports side also on the online side of our virtual sports business, which is showing nice growth throughout.
We'll be going live with customers in New Jersey coming up shortly like bad Threesix five.
The worldwide leader in virtual sports, who have 17 streams of virtual sports launching a new Jersey shortly.
So our pipeline of virtual sports offerings, and the North American market has picked up and we're looking forward to rolling out some of the new products. We have developed that we've talked about in the past our virtual basket of products that we've launched in the UK and it's doing or doing some amazing business and then some of the new content that we've mentioned before our.
NFL alumni virtual football game and also our hockey game with NHL engine Jaromir younger.
So with that I'll pass it to steward for the financials.
Thank you Brooks good morning go.
So overall and U.S. dollar terms revenue compared to the same quarter last year was down around 25%, an adjusted EBITDA around 47%.
There's been the case in recent quarters, there was a drag from FX rates, where we saw some very low sterling rates and the quota. So in pound rates. These a these growth rates are improved by around 4%.
Negative variances were caused by three main factors.
Firstly as expected seasonal were impacted by the change in the maximum stakes in the UK beat to market.
As Lou mentioned, we saw some pickup during the quarter, but more importantly, the trading in October November to date. It gives rate encouragement. Despite the store closures at the very ended the quarter revenue from October was in line September and we expect November to be higher on top of this the store closures allow us to unlock more of the cost benefits and these are progressing well.
Secondly, we had high comparables in hardware and software license sales in the prior year quarter.
If you remember on the last quarterly call long talked about the fact that given the majority of our revenues recurring the nonrecurring piece the pit lumpier than we would like and camco smart swings quarter to quarter not certainly the case here.
And incidentally. This is another benefit the acquisition brings in diluting lists.
There are also headwinds in the recurring business, including in Italy Vale take what tax increases another regulation caused a decrease year over year of $1.1 million.
And visual sports we were impacted by reduction in license Amortizations as we talked about many times before the contract Rephasing on the lack of an international soccer tournament. This summer.
However, we're confident eventual suppose we'll get back into growth rate in Q4.
So quite a few reasons the year on year position is challenging challenging to look out for that reason I do think is worth commenting briefly on the quarter to quarter growth Q2 Q3.
So taking out the impact of the currency fluctuations and looking in pound times adjusted EBITDA increased from 6.9 million to 7.1 million.
This growth is even more pronounced when considering that we had an Italian license sale in Q2 going in cap rate of approximately 250000.
Eventual seasonality impact of about 300000 pounds and phasing of costs such as exhibitions in Q3 that we didnt have in Q2 was about 300000 pounds.
In terms of cash flow for the first nine months of the yeah. If we look at that free cash flow, which we defined as cash provided by operating activities less net cash used in investing activities.
See an increase of $7.6 million from a 1.7 million dollar outweigh last year compared to an inflow was 5.9 million this year.
Finally reductions in adjusted EBITDA.
Free cash flow in the quarter was negative for $4 million I'm, all coming a phone call to impact on cash outlays from the trail was a factor as was a great.
LT Capex spend actually the biggest factor was the amount of transaction fees and restructuring cost in the quarter.
And Tim to the balance sheet, specifically, the new debt. We now have 140 million pounds of borrowings at LIBOR, plus seven to 590 million euros, LIBOR plus six 750 flow.
This means the average blended coupon rate is around 7.7% sit down from about 10.9 has done previously and about 17% 15 months or so ago.
This term loan, we havent 20 million pound revolving credit facilities.
Finally briefly on the acquisition to reiterate what low and I'm Brooks of both said, we're pleased with the state of the business, which is firmly back into growth mode.
Very positive incomes in both the pub set to but also the alleges that.
Talking to the ledger sector as a long touched on this is a seasonal business with a number of venues closing during the fall and winter months as such approximately 70% to 80% of adjusted EBITDAR The acquired business because historically come from the second and third quarter screens.
So hopefully that gives a bit of an overview of the call to trading in the current debt position, so with that I'll hand, but the long for any additional comments before we open up to.
Thank you and I.
Thanks toward that was an excellent.
Review.
I don't have any further comments. So operator, you can opens up program to Q and eight please.
A question.
Yes, good question.
I have touched some fun.
<unk>.
Okay.
Vicki.
So your question please.
Then.
With that.
Okay.
Please go ahead.
Great. Thank you guys have three questions if I could the first on Illinois, Oh, we get a sense or a little bit more granularity of performance data to date I mean generally are we in line with the market geography, you you ship to are you, making any interim adjustments to units any thoughts on you know the initial.
Based performance in General and then I'm.
Trying to get a sense as to the potential rollout and and the market I'm actually looked to next year.
Sure.
So and then Illinois as I mentioned in my remarks, it's obviously, a very small sample size, we have 17 machines installed at the moment.
Which again is pretty small to to measure, but we are happy with the numbers that we've seen thus far we will be rolling out additional trials throughout this quarter, but as I'm sure you know the.
The impact of the addition of the six machine there now talking about that could be possibly in the first quarter next year. So what we're getting is either somebody will put one of our games on trial as a replacement or did I think they issued somebody like a 160, new licenses last quarter. So some of that will come with.
This this quarter and will install there so probably early days to add to say, but I can I can tell you that both.
The early performance numbers and certainly the feedback that we've gotten from customers and players has been very positive.
Okay.
And then on the UK. It just looks like a prime minister may be sympathetic to calls for stricter regulation for online essentially like the two pound limit on all night slots any credit cards et cetera, if that ends up like a 2021 of that can you give us an idea of any benefits.
Or you know potential negatives for inspired.
Well.
You know I think we've talked about a number of times that our interactive business is although it's probably the fastest growing segment is also the smaller segments. So we wouldn't be impacted far less than that many others and certainly nothing in the magnitude whatsoever in relation to to try anyway.
Yeah.
Stewards here in probably is a better expert on UK politics is although that might be a bit of an oxymoron with everything that's going on in the UK, but.
Right now this is just the.
Ministerial group that is that is pushing this.
So you know, it's still will take time to to play out and I'm sure.
The gaming industry in the remote gaming industry and particularly.
Probably having learned from.
Some of the mistakes that may have been made on the triennial I'm sure we'll be very aggressive in promoting their responsible gaming activities and obviously that will support them and in that regard but.
Should not if this were to occur by 2021.
I wouldn't consider it a huge issue for us.
Okay.
Okay, and then I'm just last one would be on the MTG acquisition I missed part of the uplift that you all kind of spoke to a and Threeq you in particular was there a benefit from the trend ill add to kind of some of the performance and TG. Because you did give a lot of data points, but we just quantify the trailing 12.
Thank you I mean, whats synergies are closer to 37 or around there.
Yes.
Okay Central interesting so.
So.
I mean in terms of a trailing 12 months EBITDA from the acquired business that's in the.
19 million pound range.
Sterling.
That'd be great.
Pretty pretty any synergies yeah, absolutely sorry, yes, and just no I mean.
Let me just add one thing about your comment I think thats one of the big.
Questions that people are asking US is you know has the impacts of the trailing only elbow shifted game play to the pub market kind of hard to quantify because it's it's not carded play over there as you know.
But the reality is one of the rationales behind this acquisition of MTG frankly, whether a player goes from elbow to a public sector.
We expect to be the leader both of those segments. So we hope to capture that revenue, but certainly the the pod.
Cashbox performance both in terms of the digital stuff that I talked about before to content, but frankly, we believe there is some crossover play.
Okay, great. Thank you. Thank you.
Your next question is from Chad.
Please go ahead.
Wanted to tie back on on that last question, just kind of focusing on and TG. Stuart you mentioned, the seasonality about 70% to 80% in the second and third quarter. So as we think about the synergies I guess more importantly, the cost synergies.
Should we expect that those really don't start to come and.
Until that similar timeframe or can you know some of the potential revenue and cost synergies.
So you know starts to show up in me any income statement prior to Twoq you. Thanks.
Yes, Thanks, Jeff.
So I mean in terms all the time and give the synergies and I think in terms of the impact to revenue on the seasonality. That's you know there's not a significant correlation that.
We're starting to an Atlas synergies that we said that.
Well start seeing the benefit of those.
Come through the income statement after around.
Six months I'm, a little bit before and then really ramping up to.
To that level.
We talked about previously, yes, and chat I would just Dan just one additional thing to consider as we were pretty disciplined in terms of as we thought about synergies really focusing on the cost side in terms of what we've spoken about because obviously cost synergies or a whole lot easier to be per.
Active on then then revenue synergies and so I think when when steward talks about they're not being a high degree of correlation between the seasonality in the underlying business.
And the synergy realization I think thats.
Instructive, because the revenue synergies that we expect to achieve at some point.
Would be over and above what we've already communicated to the market ends and so I don't think.
As Stuart said, you should look at the seasonality as predictive of when the synergies are realized.
Okay perfect.
Brooks on Illinois understanding that it's a small sample size, we're still trying to frame out your opportunity. When you did your due diligence and when you continue to speak to operators in the market are there opportunities to have multiple games next to each other in these venues.
Kinda echoing the cluster effect that we seemed casinos or should we expect that you know your success is more one machine per venue meeting if if if your valor game is successful you know could there be another one two or three next to each other in about new or.
Do they really care about Oh variability, thanks, well I think I think it's a little books.
Clearly it will depend on the operator, I would say that the operator that we have the most trials with now.
You know has said if the game continues to perform in that and the way that it is thus far that they can see doing the clustering that you're talking about.
Clearly, it's all going to be performance, driven and probably the best scenario is when the six machine gets rolled out.
If we can get those out as quickly as possible and as you know.
Everybody's going to be going for the land grab at that point.
But I have my my sense is that it will be a blend some operators will want to.
Yeah, I do clustering as you're talking about some will just want to take one at a time, but it's really going to be performance driven and as you know that I mean, the market from a competitive standpoint, it's really.
Ourselves AGTC games.
Even site into different brands. So it's not it's not the whole gang of of slots supplier, so little bit less competition in the space. So.
But it will as you would know at all ultimately will come down to performance.
Okay. Thank you and then the last one for me just on Greece. You noted that you anticipate the remaining 1200 units and then in the next six months, which will be positive for a free bid on free cash flow beyond that.
Is there still an expectation that there could be another phase of new games or has opened up essentially kind of closed out the market. At this total size that that we're kind of seeing right now.
Yeah, I think well.
Certainly our view is that the 25000 once they are installed that that's going to be yet.
There is certainly for us there's an opportunity going forward if they decide based on performance and I think in as you know where the leading performer in the market if they decide to do some reallocations.
We could certainly gets where you would expect as the high performer that we would get some of that but I think what you'll really see chat is that the Greek market is going to morph into really a yield management, both from old past perspective, and our perspective, because they've been racing like crazy to get all of these machines installed by the end of the year.
Which is what they have to do but I think what you'll start to see next year is their focus and obviously our involvement in that on trying to grow as opposed to spending all their time trying to get machines install.
Okay. Thank you very much appreciate it.
Perfect.
Again.
Please press Star then one.
Yeah.
Okay.
No.
Okay.
I would like to turn the conference.
Hello.
Thank you very much.
Operator, and again, thanks, everybody for.
For listening in.
This is.
In many ways.
I think pivotal quarter.
In the evolution of inspired.
We have all these work streams going on.
With mitigating the triennial and launching a bunch of new products.
In our other businesses.
Helping to grow.
The core nomadic revenue and EBITDA and doing the integration too.
Generate the synergy so it's a huge amount of effort happening in a very compressed period of time, but if you.
Take the time to add up all the.
The things that we've discussed in the course of the Paul.
I think you'll agree with us that as we move into.
Let's say mid 2020.
We shouldn't be reaching performance levels.
Our far beyond anything we've ever done before and.
And.
Certainly.
Something were all the effort that's going into driving these actions now.
So thanks, again, and we look forward to talking to you at another few months. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[noise].
[noise].
[noise].
Okay.
[noise].