Q1 2020 Earnings Call
Good morning, everyone and welcome to inspire vendor payment first quarter 2020 conference call. All participants will be in listen only mode should you need assistance. Please signal the conference specialist by pressing the star Keith followed by zero. After today's presentation there will be.
And the opportunity to ask questions. Please note that this event is being recorded.
I'll begin today's conference call by referring to you. So the company Safe Harbor statement that appears.
The first quarter 2020 earnings Press Summit press release, which is also available in the Investor section of the company's website at Www Dot I and S E I and see Dot Com. This safe Harbor statement also applies to today's conference call.
As a company is manageable we make in certain statements that would be considered for we're looking under securities laws and the rules of the S. E. C. These statements are based on managements current expectations or beliefs and are subject to risk uncertainty and changes in circumstances.
In addition, please note that the company will discuss both GAAP and non-GAAP financial measures. A reconciliation is included in the earnings press release.
With that completed I would now like turn the conference over to Lorne wheel, the company's executive Chairman Mr. Weil. Please go ahead.
Thank you operator.
Putting everybody and thank you for joining our first quarter conference call.
To me.
Virtually.
Our Brooks peer Stuart Becker, Dan Silberstein I'll begin my remarks by briefly discussing the first quarter.
In the context of the plan that we had been implemented code 90 Yep.
That I'll discuss the positive revenue cost scripts that we've been seeing your boss eight weeks or so.
And the impact they have had other liquidity at our outlook going forward.
Finally, I'll talk a little bit about how we see our retail business coming back.
At that point I'll turn it over to Brooks to discuss several of these revenue would cost developments in more detail.
The departure from our usual conference call for that [laughter] Stuart will not do a detailed.
To review the financials.
All of the necessary detailed press releases and Kate.
Stuart is of course available this warning to answer your question.
Well, we last spoke early March during our fourth quarter earnings call. We were tracking ahead of barge hurdle budget for the.
First quarter up 2020, and nicely on plan relative to 2020 full year consensus estimates of EBITDA.
Which would've been in the mid 70 million.
Because of the significant seasonality in the acquired no bad business.
Even though what would have been a seasonally weakest first quarter would that have dropped sharply.
To EBITDA welcome to the 20 use in the second and third quarter and that level of go do before but of course, the entire scenario changed dramatically during March when literally 100% of our retail business would all geographies were shut down.
As expected in previously discussed.
First quarter EBITDA was impacted by a number of concurred factors.
Residual impact of the Triennial review.
Which did not go into effect until April 29 team, but Fortunately as of the end of March has now five we bid lapse.
Deliberately increased spending levels during the first quarter in anticipation of very significant revenue increases that had been expected second.
The seasonality of required wholly park business, where the fixed cost structure erase.
Do you ever get to eat the dog contributed by other parts of the acquired though that business.
And finally did not recur, it's a certain onetime revenue items in the fourth quarter of last year.
But of course, what was not expected which completed.
In fact, the perfect store was the impact of Cold gene, which eliminated a huge portion of retail revenue in Betty shops, pubs, arcades et cetera, before any attempt in cost could be reduced.
[laughter] admit barges this was a bold they get would've been difficult if not impossible to believe.
We would have ended April with positive EBITDA offer the bugs as well as positive cash flow.
Week by week as we move through bed barge to the end of April now into mid May we've been able to steadily your dramatically lower operating costs aided significantly by the UK for lower reimbursement, Glenn which very critically was just extended a from June through the end of October.
At the same time as almost a mirror image of our declining costs are online revenue began accelerating week by week. So that by the end of April or EBITDA. It did positive for the bump and continues on a week to week rocks trajectory.
As a consequence of these two positive trends. We ended the month of April was slightly board that $49 million, a catch up considerably more than we might expect that a couple of months ago.
Given our current liquidity, along with where EBITDA cash flow, our we believe were nicely position.
Wait for the retail barrel to reopen [noise].
Our retail networks in the UK Europe. The U.S. consist primarily of physically small geographically widely dispersed.
Predominantly locals facilities that will have a relatively short response time to turned back on.
It's highly likely to quickly recover their player base.
Reinforcing this view.
I think it's important to mention a in conclusion that just last week I think it started last Monday.
More than 3500, OPAP shops in Greece were reopened a for lottery and both live virtual sports betting, though not as yet for veal teas.
And just the very first week.
Notwithstanding the enforcement of significant customer websites and social destined to deal with the cold issue a the daily level of our virtual sports business.
Uh huh.
For the entire week returned to about 80% to 85%, whereas before cobot 19, So I think.
The fact that.
We were able to achieve this I see I forget.
He clearly supports both the thesis on the resilience of the wide area locals market in general.
And of course, it further accelerates our Bob come on.
EBITDA cash flow, so that going forward will hopefully continue to see the benefit of Greece as well and of course, we're looking forward to the restart it could be LTV.
Adjusted Greece, but given a and our other geographies as well.
And so with that I'll hand, the program over to Brooks.
Okay. Thanks, Lauren I'll keep my comments brief as well do a lot more time tortue Rene at the end of ended the call as Ron mentioned, our virtual sports and interactive businesses were growing prior to covert 19, the shelter in place restrictions have really accelerated that growth, we're seeing significant growth in our current.
Churchill's and interactive customers organically with their existing customers, adding additional customers in the quarter and both SEC segments and importantly, a number of contract execution. This quarter that we'll be launching soon at an incredibly robust pipeline of opportunities across both segments.
Oh, the virtual Grand National under Kentucky Derby Triple Crown show Cat Showdown excuse me showcase our product to new audiences with viewership in the UK of almost 5 million people and in the U.S. of almost 2 million people.
We're enthusiastic about the announcement of our deal with the Oregon Lottery and SB Tech or we've been steadfast in our belief that the lottery channel will be a significant driver of growth for us with the wide distribution and vast number retailers in their networks. This channel along with the expansion of sports betting across North America in both retail.
And online are key to our long term strategy.
Combination of all of this and importantly, the lack of live sports has been a tremendous lift to our virgils business and experience around the world shows us that these products are sticky with players and we will be a core offerings of our where she was on a worldwide basis.
Moving to the interactive slot side, our swap portfolio showed all the same characteristics as we mentioned about virgils business with substantial growth in play from existing customers a number of new customers added and importantly record numbers out of our North American business in New Jersey, and with lot of Qubec and BC.
LC and Canada.
We'll be adding customers in new Jersey as we currently only provide two for the top 10 customers, but have announced agreements as you have seen for both virgils and slot content with Draftkings and Fanduel ended GBC licenses in New Jersey, and these will be going live here in the second quarter.
We've also noticed an additional states like Michigan that'll be coming online and are hopeful that more seats will be added.
Also thrilled to see how our omni channel strategy is working as many of our core retail titles likes insurer in and Super Hot troops are also the leading titles online.
We're expecting growth out of some key international markets like Greece, Spain as they launched this year and our success in Greece retail already should service wells in the products go on line with customers like OPAP.
Finally, we're very excited from a product standpoint, with two mega waste titles were launching this summer with this ensuring that Meg waste game as well as a tighter we acquired as part of DMT GE acquisition, a real King Mega waste game. So these are are very exciting for our customers.
Moving on to the VLP side of the business, we discussed last quarter about our early success in Illinois with the launch of our Bauer and to the market starting in fourth quarter in 2019, and what we saw in sales in the first two months of 2020.
We had sold 161 terminals over the first two months and we're expecting a robust third month to end the quarter, which obviously was stopped with the shutting down of gaming in Illinois.
We believe that there will be strong demand for our products when Illinois opens back up and start games are consistently leading performer in the venues. We serve and we also believe that distributed gaming into already and other market. Other markets. We are targeting will be much easier to manage as Laurent had mentioned before with social distancing practice practices.
[noise], we also believe that the social distancing requirements will be easier to manage and our venues throughout the world just as Lauren mentioned before about Greece, but also in the UK and Italy.
Let me move to the cost side of the business and talk a little bit about from a cost and the initiatives. We've undertaken subsequent to the closure of our retail business I wanted to add some color to that so along with all the measure as previously mentioned, we've been able to execute on the synergy plans as part of D. and TG acquisition that we spoken over the past.
In this time frame and are confident of our updated synergy projections of $15 million.
We'll be in a stronger financial position when our retail businesses open back up and we will have rightsize the organization to service our customers when their businesses open.
We couldn't have achieved this without the extraordinary efforts of our employees our employees working under extremely difficult circumstances for reduce pay but they really stepped up and we're looking forward to bringing back our employees that are on furlough as soon as the retail business since return.
These have been difficult times for all but we feel very good about the growth we're sitting in our online business. Since the early results. We've seen an increase from our first read their market coming back the difficult measures, we've taken to align our cost structure with the new reality is going forward and our strong belief that were in the market segments of that had the chance to recover the fastest.
I won't be the easiest for our customers to manage and this new operating world. So with that that's my remarks, I'll turn it back over to Lorne.
Hi, Thanks, Brooks Oh, Okay, operator, I think at this time, we can open the program up to you at eight.
We will now begin the question and answer session to ask a question you. My Press Star then one on your Touchtone phone, if you're using speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble a roster.
Our first question is from Chad Bennett from Macquarie go ahead.
Good morning Lawn Brooks, thanks for the prepared remarks.
Nice to hear you guys are doing well wanting to start with.
Just kind of the business model and the margin ramp recovery.
I believe you know the majority of your revenues our recurring so as the the locations up and back up I'm, assuming your margins can ramp quite quickly.
Do you see dependent on.
The amount of revenues going into the machines, but could you just kind of help us think with maybe a fixed versus variable on your cost structure and does the business kind of gets back to close to normal state what the margin profile could look like across the company. Thanks.
Oh I'll take a shot at the at least the high level on that and then Brooks or Stuart <unk>.
Because certainly AD board detail, but I think.
The.
<unk>.
I think there's no question I think the three things <unk>, yeah, three things going on.
As our retail business comes back.
[music].
The the margins on the legacy business overall should.
Come back at least.
[laughter] excuse me come back at least.
To the levels, where they were before a co bid so.
EBITDA margins than I think we're comfortably you had on average at that 30.
You know it's a it's it's obviously an average of.
A few different businesses have different marquee characteristics. The the online business the margin doesn't obviously higher but assuming it comes back at roughly the same mix, we would expect to see barges.
Comfortably above thirtys for us.
The overall margin.
Second factor the overall barges have.
Have you acquired businesses as we pointed out a few times was considerably lower than ours at the type of acquisition.
But the Digitization is moving fairly quickly we have.
I think a terrific Glenn.
For taking much of the business cashless, which will have a tremendous impact on margins.
And so.
I don't know.
On his dad, the low basis, if we could expect.
The acquired business overall, EBITDA margins without taking account of synergies to get up into the third use where ours are but certainly.
Let's say 10 points higher it did they were at the time, we acquired the business and then try.
There are the synergies as Brooks pointing it out.
Once everything settles down.
And ironically, the the the Kogut experience is actually accelerated the implementation of the synergies.
That'll add another 15 million.
Dollars on top of.
Everything else. So that's probably another six or seven points of margin. So if you combine those three pieces are the legacy bid margins pretty much going back to where they were.
The increase in the in the middle dramatic barges for.
Both the Digitization going cashless and then finally, the the realization of the synergy so I think.
I feel pretty good that.
Whatever our revenues get back to where they were prior to coal that the overall barge into the company should be considerably higher.
Okay that makes sense and on the analog to digital transformation.
On the acquired businesses.
Given what's going on right now and the.
The cash situation or your view of just kind of.
Preserving cash should that.
Should that take a little bit longer than I guess, where you had talked about before I know you're already had a pretty high percentage on the digitization, but could you walk through the timeline there well the payback.
On the investment in the digital to she is is so quick.
That's a even in the.
In an environment, where up where obviously were being as stingy as we possibly can with capex.
I think the one thing we probably won't.
Necessarily slowed down is is is that because it you know it takes maybe not even a year to get our you know our our our investment back.
And so it would be baby being penny wise pose foolish not the state with that investment.
Yeah, and Lorne, let me just had one more point to that and Chad. The other part about the Digitization is the business model and the pubs market is on a rental rate. So even though it may take some time for pub traffic to come back and cash boxes to come back the way. It's structured is we get paid a daily.
Rental fee.
So to Lawrence point. The payback is is a very quick and be theres not a risk.
The play won't come back at the pace that we'd like to come back.
Okay that sounds great and then the last one just moving to the United States on on Illinois, you talked about your successes.
And that which started in the fourth quarter continued in the first quarter Brooks I think you said essentially every Illinois, operator has trial your machines, there and follow through with order. So it can you give us maybe an updated kind of total addressable market, maybe what medium term expectations could be once this.
Once the market recovers, we all understand that the next couple of quarters.
Operators are gonna be constrained here, but you know given the success that you've had do kind of have an updated view on what the total addressable market could be in Illinois, or just updated expectations in a in North America. Thank you yeah, yeah. So in Illinois, obviously, it will depend on when it comes back and will also depend on.
When people go to the six machine.
We think that well and obviously with the larger stakes and crisis, We think Illinois market will come back fairly fairly quickly and we would expect I'm just based on our performance right now as you know Chad it's basically been two vendors in the market North Americans had a little bit of success, but but frankly, we would expect to be a core.
Offering.
Based on the results that we've seen and you know all to locations at it appears to us that it's going to be no requirement.
From a customer demand standpoint for people to have our machines. So we we feel that that's a market that will support us and then in terms of the other markets.
I think we've talked about this before certainly we're targeting of since you asked markets like Oregon and D. Canadian provinces, and again pretty Cove. It we were seeing some some real positive feedback from those customers and felt like we would be making some announcements this year about that.
I have to see how that plays out, but we're no less bullish on those markets and I think as we've talked about him before we think that distributed gaming.
Has a much better chance of expanding than building a large casinos.
Thanks, that's thanks Brooks, let's look guys.
Thank you thanks Chad.
Our next question is from David Bain from Roth Capital go ahead.
Great. Thank you hope you guys are well I was hoping we can start with interactive actually and congratulations on the expansion there could you walk us through maybe a bifurcation of online revenue versus the rest of the business I mean.
In essence, when you say a interactive has increased 30% 100% over March in February can you give us an actual baseline revenue number for either January or February.
Stuart you want to take I want.
Yes, David I notice you hit.
The way I think about any it intends off where we were before hand weighted expected overall interactive revenues to be just under 10% as the overall group so going that's a combination of.
Online videos and online slots. So hopefully that gives you the size of where before and I'm going to trading on now.
Got it okay.
And then can you give us a snapshot of maybe the economics virgils with like a fan tools are draftkings that those types of channels in terms of like a percentage of revenue or basically any way you would look at capsulitis capitalizing a this for us to sort of model growth across the channels and as you add.
Additional isom this is a pretty high margin business can you speak the margins at all.
And then all of.
You are Brooks doing what ride that.
I can take yeah, I can take or if I could you got first part of it.
Patrick the first part of it so David how it works is we get paid a percentage of the energy are.
And mostly that just to give you a range than kind of double digits.
But just you know not not way in double digits, but in double digits. So for us kinda like it is with our existing virtual as customers to the whole idea is to be able to drive play with the customers and I think most of our customers like Draftkings and Fanduel.
Who have a large base of customers will be trying to kind of cross pollinate the virtual product with what they're seeing in live sports and frankly with swap. So it's just another part of their portfolio that there will be able to try and get their customers engaged and obviously, we'll do everything we can to help them in that but that's kind of the business.
I don't know Stuart if there's anything more bornemisza anymore, you want to add about that well I think in terms of David's question have you don't thinking about how to model.
Uh huh.
How to bottle the opportunity overall going forward.
I think.
The the you know the best guidance you could get David is to look at the experience in Europe.
Where are the customers all have.
Oh, So limited.
Lives sports and they have you know some of them have.
15, or 16 or or more channels of our virtual worlds and generally.
The virtual do surprisingly you know.
10, or 15% it varies a little bit between online and add the retail market, but.
That something in that range is not.
An unrealistic.
Oh, you know estimate of what the volume.
Virtual.
Betting handle could be and so if you start with.
Whatever your projections are.
For the Big sports betting business, and then take a percentage of that.
As Virtualized and then asked debate.
What's the GE GE are all that is for the operator, and then give US is Brooks said in the low double digits percent of that and multiplying those three things together would give you saw them.
Target Oh.
What that does this could be into us and of course from a profitability boy did you.
<unk> said, Julie the Ito, the incremental profit or the incremental revenue is very very very high.
That was a those very helpful. Thank you.
The last question, if I could would be back to retail it looks like you know William Hill, and others that they like fairly healthy you know and when you look across the portfolio of those your work with just any kind of thoughts on the health of their businesses and you know any sort of thoughts on on the competitive landscape and how that may.
Change you know this accelerates closures by some competitors or anything as we come out the other side of covered on the retail side from a share perspective.
Uh huh.
Well you why don't you can't go ahead on but you know you're going to.
Well, what I was going to say, yes, David what I was going to say is as you. As you know you know a large portion due to the impact of the triennial of the kind of taking to the lower end of the other shops and closing them has has pretty much occurred I think William Hill close over seven.
100 shops, my guess is that they'll probably be some slight.
Additions to the shop close your numbers because of covert 19, but again I think it will be a on the the kind of Alaska.
Link of the chain so to speak and as we've talked about before in a couple other calls what generally happens is you know a big chunk of that goes to other of our customers. Since we have you know William Hill, Paddy power and better Fred.
But now I think we're encouraged by what we're seeing with online and expect that there's going to be sticking this component to the online revenue that may not have existed before so we would hope to recapture what any additional store closures would be or at least a big chunk of that through either one of those channels.
Mhm.
Okay, great. Congrats again on the expansion of online or interactive thanks, so much.
Sure. Thanks.
Again, if you have a question. Please press Star then one.
Next question is from Ryan said that Ted said Gal from Craig Hallum and capital Grille go ahead.
Good morning, guys. Thanks for taking my questions [noise].
So you guys talked a little bit about a virtual sports in the U.S., but we've been hearing about a surgeon betting on simulated Madden and E sports in the U.S. well traditional sports are plus bone and kind of the big growth opportunity. There. How do you think about the opportunity for virtual sports in the U.S., maybe how it compares to.
Yeah.
E sports and simulated sports such as Madden.
Well I'll.
I'll give you.
I'll give you buy thought and then again all that's Brooks too to chime in so again, if we start with Europe.
The experience there is that.
The.
The play ball you bode virtual both online and.
In the retail world tends to track.
The betting on lives sports fairly fairly closely and there's a lot of overlap in the players as there's sort of a rhythm to the way they play.
It's sports betting.
Was effectively legalized a couple of years ago, where they got rid of passbook.
We have been.
Very active obviously and you had talked the with all of the players.
That.
We're planning to large.
Sports betting in the states in I think now that it's up to 16 or 17 states that in the past state laws.
And the response that we had Getty was yet this looks like a really great product. We you know we.
Love to talk you about you know baby doing so big but we've just got so much on our plate or so busy with.
With creating our it infrastructure and dealing with the state government and and recruiting players and doing all that stuff that we really just kept worry about this right now.
And so we kind of in a way it in a log term said caught a break because.
As Brooks was saying, whether it's the yield the GBC brands or.
Or draft keurig or.
Then we will.
It also certain state lotteries and so forth.
Now with they're not being much too.
To better because of live sports being shut down have all the accelerated.
They are interested in talking to us about put a virtual sports on their platform. So I think by the time.
The world recovers from home Bowl.
Recovery in the sense of sports coming back.
And the sense of people, having the opportunity to bed on them.
I think idle feedback no we will have.
Very significantly expanded our U.S. customer base of virtual sports customers and the experience in Europe would say that.
When real sports a back.
It it it is probably not going to cannibalize the business that we will have created in the meantime, and in fact, it might even help it because it's got to bring players back a than had been absent for awhile. So I think the.
The.
The team being here is that.
And again the interest you know we have.
I don't know Brooks I don't know how many.
Potential new customers, we have skewed up to.
Habit integration done, but its you know it's very significant maybe you want to comment on that.
Yeah, I I won't comment on the specific numbers, but yeah. There is the pipeline is in huge and I think Tim I think Lawrence points are all spot on I guess, probably the only other thing I would add to that is is.
Idea of let's say wouldn't it be a comes back I I don't think that the anybody's going to be watching to and be a players playing each other and then be a two k., but I do think people will be betting on virtual sports as you know one event, that's going off every four or five minutes just like they would be betting lives.
And be a basketball so I mean, we feel very good about how our product actually sits alongside live sports and so Barnes point, that's kind of improving over the years and Europe and remember most of our customers here.
We had their start in Europe and know all about this so I think they see the potential for this in the states as well.
Oh good. Thanks. That's helpful. You guys talked kind of regionally you talked a lot about trees coming back online, Illinois summit regions. So.
What are you specifically hearing from retail in the UK and what's your expectation for the timeline and pace of reopening there.
Brooks go ahead.
Yeah, So the way and Stuart since you're there in the UK, you're probably a as close to it as anybody but I'll tell you the way the UK at least as it stands right now is there they're talking about coming back in phases, and it looks to us as though the lions share of our business.
This will be categorized in phase three of the of the retail relaunched which did include everything from our motorway services to clubs to holiday parks at a license bedding shop offices, although there's a lot of political stuff going on behind the scenes it looks to us like.
The first week of July is when we expect the UK retail we could consume some positive movement earlier, because I know, there's certainly youre. The industries are lobbying to be opened earlier as non essential retail, but I think from a planning standpoint, we're assuming the first week of July.
I don't know steward add anything bar.
No I don't view, a you've got the latest position as you said it working too, but I guess like everywhere subject to change.
Good out last question for me, so assuming retail opens kind of on those timelines along with the cost cuts you guys have done I think he can inflect positive free cash fluoxetine this calendar year.
I'm, sorry could you repeat the last part of the question I just didn't hear it.
Yeah, just any color or thoughts on free cash flow and kind as you look at the back half of this year or exiting the year with retail coming back on line to cost cuts you've made.
Can we inflect back to positive free cash flow either in the back half or exiting the year early 2021, I guess any thoughts or timeline there.
Yeah, Stuart you want to I mean, I havent opinion, but.
We should have our CFO, who is closest to that take a shot at that first.
I don't know happy if you get unless you want give your opinion loan and then I'll.
[laughter].
No because I don't what was the call to think I've been fluids. Your answer so I'd I'd, rather I'd rather have you take your best shot.
Sure.
So running just couple of things to think about there is as you say.
The revenue is going to come back online and as we sense. Its recurring some expected to come back pretty quickly and then we will only bring back costs, where the you know the revenues high enough to cover it. So we shouldn't go into position, where we 10 or more custom than the getting in revenue and and you know there'll be a small working capital outflows.
That being image and the ramp up as our costs I named and people need paying.
Second week, sometimes get cash in that we need to English.
But then kind of as you alluded to as well and I, we know can attend the capex on.
Anyway near the same extend as we had before to use loans wed from before they're going to carry on being stingy, obviously, an element of our capex days.
And then laid the capitalization so as that comes on.
We've got an element now still and still in the business with and on the interactive side, but when the retail side comes on the ramp up but we should be no you should assume that gun fluids and that certainly in the short to medium Tim the capex will be reducing.
So you should be expecting that the trends ethyl moves into plus to free cash flow.
Good that's it for me guys. Good luck and I'll hop back in the queue. Thank you.
At this time, we have no more questions.
This concludes that question and answer session I would now like to turn the conference back over to Mr. long wheel for any closing remarks.
Thank you operator, or I don't really have bunch to conclude with except thank you all for.
Calling in from wherever your hopefully safely hunker down.
I think you can tell by the the tenor of.
Of our call today that we're feeling pretty good about where we are considering the.
The predicted that everybody of the world Zim. The Weve I think we played the had.
As well as we possibly could up.
Our businesses are doing.
As we've said the online world and now with Greece back considerably better than we might have expected.
And consequently, our liquidity is very strong.
A month to month before bids is surprisingly good.
And we're just gonna have to wait this out until a more of the of the of the markets like breached come back at UBS.
Each of our markets.
Most of whom.
Our remarkably similar style to our customers it Greece.
And therefore.
Stags responded quickly as Greece has to them.
I think by the time, we get to the end of this year, we should be a.
You should really be up let me go along.
Pretty close to where we buy business had it not for this whole unfortunate.
Incident so.
Thanks, again, and and we'll talk to you in another quarter.
Right.
The conference has now concluded thank.
Thank you for attending today's presentation.
You may now disconnect.
Yeah.