Q3 2020 Inspired Entertainment Inc Earnings Call
Good morning, everyone and welcome to the inspired entertainment third quarter of 2020 conference call.
All participants will be in a listen only mode should you need assistance, placing okaka specialist by Pessina Starkey followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please.
Please note today's event is being recorded.
I'll begin today's conference call by refer you to the companies say Harvard.
Safe Harbor statement. It appears in the third quarter of 2020 earnings press release.
Which is also available any that's a section of the company's website at W. W. W. I N S E ink dot com.
Safe Harbor statement also applies to today's conference call.
As a company's management will make certain statements that will be considered forward bucking under security laws enrolled of the S. E C.
These statements are based on management's current expectation or beliefs and are subject to rush I'm certainties and changes in circumstances and.
In addition, please note that the company will discuss the gap and non-GAAP financial measures a.
Reconciliation is included in the earnings press release.
With that completed.
I'd like to turn the conference over to Lauren will the company's executive Chairman Mister We all please go ahead.
Thank you operator.
Morning, everyone [laughter], thank you for joining or three quarter golf golf.
I'm here as usual.
Excuse me with books peers.
Stewart Baker, and Dan Silvers, I'll begin with an overview of the significant momentum that we saw a building across the business throughout.
Throughout the third quarter.
And then discuss the reason.
Surgeons of Covid, driven measures taken place and parts of Europe.
I shall get to talk about the individual business lines in more detail and we should have plenty of time for Tuesday.
We were very pleased with our performance in the third quarter during our first quarter call. When we were in the middle of the pandemic wave.
We set up the thesis that our business would come back very quickly.
Post walk down for three fundamental reasons.
Number one our business predominantly comprises wide area networks, so small locals oriented than us.
In comparison to a single large destination resorts.
Number 290% of our business.
Is driven by contracted multiyear recurring revenue so there's no issue of recreating backlog.
And finally, there are no time lag and starting back up due to supply chain issues.
So it's all of our equipment, you're betting shops pups truck stops et cetera is ready to turn it back on.
At a moment's notice and things played out pretty much as we had expected.
Even though the business was still ramping upwards as we move through the third quarter.
Core business EBITDA for the third quarter was very close to the high watermark. We had reached in the fourth quarter of 2019 before the onset of Covid.
Momentum in a retail related business built steadily through the quarter well.
Well at the same time the growth we had been experiencing in our online business showed little sign of slowing.
Just like the opening of both retail and life sports.
So we were constantly planning that EBITDA in the fourth quarter of this year.
Would overtake the 20th 19 high watermark and be in the range of $20 million or perhaps a more.
And then drove from there at 2021.
Should reduce annual EBITDA in excess of 80 million.
Which we felt would begin to reflect the fundamental earnings power of the combined inspired and for bringing all that go with matic businesses.
And we still very much feel that this is.
The inheritor and shower.
That scenario was playing out quite nicely through the first week of November when as as now pretty well known B U K went once you get into lockdown.
For what was announced to be a month joining Italy.
Gone into a one month locked down a couple of weeks earlier.
In response to these developments, we returned to the playbook that we had developed pretty much on the fly back in March and April.
So we have at this point furloughed.
About two thirds of our employees.
While the remaining one third are experiencing reduced hours or salary deductions.
At the same time, though we're continuing to heavily support development in our online business.
A strategy that pay great dividends during the last shut down very importantly, the U K has extended.
The very generous for low reimbursements came through March 2021.
And this is helping us greatly.
Fortunately, we're in dramatically better shape too wet through the current store regardless of its duration.
We hope it will only be a month is announced but we don't necessarily need to plan on it.
Having been through the cost mitigation drill once before.
Actually twice, if we count the actions taken following the Tri annual review.
We have been able to take action more quickly and more aggressively than we had before.
And we're doing this against the cost structure that is already considerably lower than it had been.
As we've discussed previously our online business grew very substantially during the spring lock down and.
And at this time it continues to grow.
But from a far higher starting point obviously.
Well part of the online grocery independently resulted predictably from the retail closure.
Much of it was driven by our continued spending on both content and technology development.
They enter it has allowed us to meaningfully expand our customer base and at the same time drive significant grow with an existing customers.
And lastly, our liquidity situation is light years beyond where it was last spring.
Reflecting both the recent strong operating performance of the business and a that <unk> funds that were referenced in today's press release [laughter].
Before I conclude let me take a moment and elaborate on that that.
And liquidity situations.
As indicated in the press release.
We received $9.3 million net of taxes is that refund money during the third quarter.
And this past Tuesday.
We received an additional 32 and a half million again, net but any applicable taxes.
At this point, we anticipate receiving an additional and final 4.1 million in the coming weeks, which would bring the total.
That receipts again, neddo taxes $246 million.
Our cash balance on Monday was about 32 million.
Which included the impact of the first roughly 9 million so that.
At this point there is an additional 37 million.
To consider it the difference between the 46 million and 9 million.
And that would bring our total projected cash balance to just on your $70 million.
Our net debt in that case being somewhat conservative will stand at about 250 million.
Achieving our target run right EBITDA of at least $80 million, which as I said, a moment ago, we're quite confident we will.
Once the current lockdown and.
Would have the effect of reducing our leverage to about 3.1.
Which is getting very close to the target those three.
We had established will be made the note vanadic acquisition and I think put us.
And a very strong position in the league table of.
Balance sheets of companies in Orange.
Exactly went to current Lockdown will and is of course impossible to predict.
But we're confident that way does.
A retail business cover quickly for the reason established earlier.
Our online business caring very strong margins and marches, which are getting stronger as the business grows which brooks will explain.
And a moment in a little more detail will continue to accelerate.
And we will quickly establish apologize for sounding like a broken record.
An annual ice EBITDA run rate upwards of $80 million and on that note.
I'll turn the program over to Brooks, who will discuss.
Many of these issues and developments in greater detail Brooks.
Okay. Thank you mourn and I'll give some details wanted discuss on each of the business units and their results for the quarter as well as some relevant numbers to get some more context to the progress. We believe we're making a cross the business so breaking it down into the lines of business [noise] excuse me first in our survey makes gaming business, which incomes.
<unk> R. A recurring revenue business in the UK, Greece, and Italy, as well as our for sale business in North America showed both resiliency and the ability to recover quickly from the Covid locked down in the spring put the numbers to this or that UK business was at roughly 95 per cent of pre COVID-19 levels, even with the impact of.
116, betting shops being closed in the quarter and or Greece business, where we have over 8000 machines installed returned to it's pretty COVID-19 levels on a machine and come basis.
And our sales segment, we sold an additional 54 units in Illinois. Despite the fact that Illinois was shut down for a significant portion of the third quarter and also announced the sale of 100 units to the Western Canada Lottery Corporation or second customer in North America.
Our performance in Illinois continue to be strong with our machines largely performing is either the first or second based on that terminal income and most of the news where they are installed we are gratified to get a significant order and then at some subsequent follow on order from the second largest operator and the state basic.
Large part on our performance and believed that there are significant opportunity for us to grow our sheer and Illinois as well as going forward starting to expand into some of the other distributed gaming markets throughout North America.
Moving onto our virtual sports business, a virtual sports business, which includes our legacy interactive slots continues to show growth with two three revenue increasing by 11% over to to after showing Q2 revenue increasing approximately 9% compared to Q1.
The steady growth as a result of a combination of factors, but is primarily related to virtual sports filling the gap of the reduction in my sporting events gross and the number of customers, we supply in organic growth of existing customers as well as the addition of some significant bespoke events, such as the Kentucky Derby Triple Crown.
Showdown devotional Grand National and just recently completed Lexus Melbourne Cup Cup race of Dreams. Finally, we're happy to announce that we signed our second U S lottery the district of Columbia Lottery to launch R. V play 2.0 horse racing product, which has already shown itself to be successful.
With the Pennsylvania Lottery, we believe that the lottery channel is a perfect fit for our virtual sports products.
Getting into the numbers, a little bit more year over year comparisons of quarter, 320, 28, and a quarter 320, 19 chosen <unk> a 31% increase in revenue for many of the aforementioned reasons and speaks to the trajectory that we see for this segment of our business. We've also announced some recent key business.
Developments that we expect to augment this growth with the launch of additional channels like our virtual basketball with Oh path in Greece. The expansion of our relationship with G. B C. Now to include additional branch. If there is such as B went in sporting bet and the early results from a contract we long.
<unk> at the very end of September with our V. P P products or virtual plug and play product in Turkey, with <unk> and Nisley, which we based on the numbers were seeing thus far should be a major contributor to our business going forward.
Uhm getting into the retail side of the business. The retail business came back gradually during the corner and ultimately almost returning to its pre COVID-19 levels by the end of the quarter. The online component of virtual as as you can imagine declined from its high watermark and quarter to when there was no life sports retail was shut down but for.
The illustration R. R Q3 online virtual sports was still 45% higher than two three of 2019.
So let me move onto the interactive slots side of our business the interactive slots business show tremendous growth in the quarter, but really also it has throughout the year. This is due to a number of factors, including the quality and volume of new game content, we've developed and deployed utilized.
The utilization of key game assets acquired through the N T. G acquisition, such as real King Mega ways, which was our best performing game and a quarter.
The expansion of our geographies, including notably North America increase we added 29, new customers in five major integrations throughout this year and also the addition of our online business in Belgium that came as part of the N. T. G acquisition, so to put that into our numbers perspective or interact.
Of slots business was up 78.5% overall year to date with the legacy interactive business up 132% year to date just to to really comment on what born was saying about the acceleration in the third quarter are interactive slots business was up 103% and the legacy part of the interactive.
This was up 197%.
And we talked about this before but the part of the this part of the business scales beautifully and so as revenues grow at these rates the profitability grows even faster.
In terms of potential for this business, we think it's huge with a number of jurisdictions being added in North America, Michigan, probably notably for many on the call as well as Germany and Holland in Europe in 2021, so over the next 12 months, we're targeting to increase our non U K revenues.
In the segment to be roughly 40%.
Moving onto the last part of our business the acquired business. The leisure business. This is the one that was probably the most impacted by the Covid situation is a big part of this business says you would know is both seasonal and operates primarily in quarters, two and three and relies on both travel and football and football September was.
The best month for the holiday parks part of the business, but the business was then forced largely closed down in October even though there were substantial bookings planned.
In the pub side of the business the pumps machine business was impacted in several different dimensions with social distancing requirements being instituted that reduced the number of machines that can be played the curfew that cut back operating hours in pubs and now to lockdown.
Just sit on her an encouraging note our digital machines performed at 95 per cent of their pre COVID-19 levels, but with fewer machines turned on.
The majority getting onto the cost side for a second the majority of the cost synergies that we were expecting to achieve and have talked about in previous calls from the N. T. G acquisition has now been implemented and we believe the business's position to recover once in a lockdown conditions are lifted and hopefully won't repeat in the seasonal part.
Of this business in 2021.
Is more mentioned, we're in the midst of a temporary lockdown across R retail business and have already implemented the necessary steps, we needed to take to reduce our overall cost structure leveraging furlough program in the U K. We're confident that will recover quickly. Once lockdowns are listed as we did last time and that will continue to invest in our online busy.
Mrs that are showing tremendous growth with attracted margins in the interim and that will help them mitigate this temporary shutdown and most importantly position us for the future with a strengthened online businesses and with that I'll pass it back to Lorne for final remarks.
Thanks Brooks.
Unfortunately, I don't have any final remarks <unk>.
Other than.
To.
So I hope everyone.
Understands.
Well the business has been doing and how strong the future is and.
At this point.
Operator, if you could open the program up to Q&A, Yeah, I would appreciate it. Thank you we.
We will now begin the question and answer session to ask a question you May Press Star then one on your touch 10 cents here using a speaker phone. Please pick up your handset before pressing thank you.
So let's try a question. Please press thigh then count.
At this time, all five men apparently to assemble the roster.
The first question comes from David <unk>, Iraq Capital. Please go ahead.
Great. Thank you Uhm first congratulations on their execution post Covid, one and of course fighting for that that rebate. That's fantastic Uhm I guess my first question would be just any specifics I know you're not gonna get into as it relates to M&A activity with.
Retail partners, but if you have any kind of big picture thoughts you know I know a lot of your contract would probably run with the change of control, but uhm can you speak any different comp structures in the market, maybe some capex opportunities you know a new a new partner that uhm may.
Really intend to focus on the business anything Big picture wise would be helpful.
David <unk>, maybe you can be a little more.
Splits it and the <unk>.
And your question I'm I'm I'm not.
I'm I'm speaking to William Hill in particular.
Oh I see.
I get it.
Well.
Actually you know I think Brooks is probably not now that I understand the thrust of the question.
Brooks do you feel comfortable I mean, we have to be obviously, a little bit careful because william.
It's a very very good customer.
And I wouldn't want to.
Try and.
Conjecture anything about what might happen as a result of.
The you know the impending deal with Caesars, but.
You know Brooks, if you Wanna try and say something.
Well I think probably the only thing I would say is is in David as you noticed it looks like it's gonna be kind of bifurcated that it'll be the retail and all my business in the UK looks like it might go somewhere else, but the seizures acquisition that that more mentioned all all I can really say isn't there already an existing customer of ours way.
Hello, and Nevada, the C E O of that part of the business, Joe Asher is a guy that bone and I, both known for 25 years. He certainly understands what we're about and and understands the value of virtual sports and I would expect and would certainly hope that as the.
City to provide virtual sports expands in North America that I would see we'll email slash seizures as a as a key customer of ours I don't know if that answers your question, but that's kind of how I see it.
Got it okay perfect you know I guess it is.
Follow up if I could ask about North America, you know brought to you spoke to the you know the potential for new route markets that you may enter or a route markets that you may enter uhm have you been building distributor like relationships and any of the upcoming potential markets that have been.
And spoken about recently like you know places that would have 100 per cent white space like like Pennsylvania.
Is that.
Yeah, I think well we are certainly we're certainly monitoring it closely and it it appears as though many of the people that are the operators in Illinois would certainly be interested and Pennsylvania. If that were to happen I would say probably the next market. We we just received our weisinger in west.
Virginia, and that's a market, we know well and that's going to be a replacement market and I would see that as a as a market in 21 that we would be targeting as well as you know most of the Canadian provinces as well as Oregon. So we think there's you know there's a fairly there's a fair bit of runway for us and those.
Markets, notwithstanding any potential new markets that may pass legislatively like uhm expansion in Pennsylvania, you're Missouri or any other market.
Okay, Great Yup, David Let me just add to that I think you know this but just to remind you the.
The market's that Brooks is talking about a particular markets like West Virginia and the Canadian provinces. These these are places where.
You know we've been doing business for 25 years and have.
You know very significant relationships that go.
And that that go back forever, so as as we be get burnt or attention to them we have.
Let's say.
Bill did marketing infrastructure that.
You know that we can rely on.
Right on it and I I promise last one <unk>. The only thing I wanted to ask lastly was with regard to you know net debt now much lower you know <unk> and again, great job with it with the bat rebate Uhm EBITDA run right. It looks like it was higher and I'm sure. It will be again then.
And once you then but the street is had and what we had any kind of thoughts on accelerating and M&A strategy based on those components.
Well.
The.
You know we can only.
We can accelerated and M and a strategy only as fast.
As.
The opportunities you know too.
To do what we Wanna do strategically you know present themselves I think.
You know, we don't want to fall into the.
Trap that.
Many others, who gone before us have fall into that one's our leverage you know declines to a manageable level. Then we go on a shopping spree and we put it back you know to where it was before for no.
You know a real real strategic purpose I mean, I think we can talk we've talked about the fact that our our focus from and eliminate point of view.
You know geographically is clearly in North America, because it's by far.
The largest market in the world that we're not.
We're not represented.
Nearly proportionately as a company and not nearly represented.
In terms of in particular as I said, a second ago. The you know the history that you know Brooklyn, I had that for many years and they gave me in the street and.
And and I think from.
Well, I'm, a product or technology or service.
Point of view, we're I think we're.
Pretty focused on the.
The digital world as we see how the.
Our digital slots and an online virtual sports has grown it's clear that.
Particularly the slots part is <unk> you know the potential there is almost limitless. So I think we know exactly.
No.
<unk>, we have a tremendous history in the lottery world and the.
The the online opportunities and lottery I think are are also phenomenal. So I think we know.
Pretty clearly.
What and where it is that from an M and a point of view.
We want to focus and.
At as the EBITDA comes up and the leverage comes down obviously will have.
And and and ideally [laughter].
You know the trifecta of course is.
<unk> that comes down.
Or even dog goes up.
And please god at last our share price.
As of the third part of the Trifecta begins to reflect that then we have the financial resources to.
To execute and M and a strategy, but again I think we're going to be very careful to be sure that whatever we do really does it make strategic stands and we're not doing it just for the sake of doing something.
Fantastic. Thank you.
The next question comes from Chad Damon <unk> I'm sorry. Please go ahead.
Good morning. This is drawing been you're on for Chad. Thanks for taking my question. So we're thinking about it temporary cost saving with the permanent cost savings that you discuss on the call can you discuss the margin structure of the business. It similar pro forma revenue levels that were prior to Covid.
<unk>.
Sure.
<unk>, Yeah, you should <unk>.
Since you're not gonna have your own.
Sections to talk about today, why don't you respond to that question.
[laughter].
Absolutely.
Thanks soon so yeah in terms of thinking about the margin of the business and I think we put in the announcement that if you look on a pro forma basis year on year, we increased I think it was from about 26.2% to up to 31.4%. This year. So you know sizeable increase and okay. There was some <unk>.
Temporary cost savings and that but that was more than offset by temporary income when we hope to be temporary income reductions, particularly in the legend parts of the business.
So of the S D N a savings and yes, we say this.
As soon as you savings and there's probably about two and a half million dollars and which forms significant part of the 9 million and all the rest of your day reduction year on year, but of the remaining you know a sizable amount of that will be and will be companion and savings and you know and that down and he was obviously too I think we took.
Give us a little bit on the on the last cochlea in school that sound and just to make sure that we can stuff as much as that cost this coming coming back and keeping me to dependent saving so yeah. It says it is fenced in back in the margins in terms of the numbers. We saw this here this call to into the cities I think you know that's the level that we come from them within a few.
Gotcha.
<unk> the.
Chad what I would add to that.
Which I think is.
Is extremely important just just to to reflect back on something that Brooks said a minute ago.
The the.
The at any point in time the margins.
And the online business are considerably higher than the margins in the retail business, even though the <unk>. The the marches in the retail business you know when we're at full strength are very good. So that's the mix of the business generally swings from.
Retail too too online that alone.
Obviously, it's gonna bring the average margin up but at as that's happening.
Because the operating leverage it so.
Tremendous in the online business and it scales, so fast that as of the online business is growing.
It's it's own margins are increasing and so there's an effect the double whammy.
On the company overall, because the mixes swinging more to online and the online marches themselves dark rolling So that helps you take.
Think about where the margins are headed I'm I offer that observation.
Awesome. Thanks for the color I'm Gonna pass it on.
[laughter].
As a reminder, if you have a question. Please press star one and next question comes online sit down and Cry talent <unk>. Please go ahead.
Great Congrats on the results and getting the refund guys.
Thank you uhm.
First question is back in April May kind of first go around when the world shut down you talked about getting the cash burned down to about a half a million pounds per month is that still the expectation now if the world were again to completely shut down and not just a few countries kinda regionally, but I'm kind of worldwide shut down.
And then I guess secondly has to grow with an online some of the cost containment that you guys have done is that change that expectation.
Yeah, that's the your the the the code to your question actually was.
It was gonna be the.
The main part of my answer so.
The difference between now and then is that.
The online businesses Brooks explained in both the virtual sports and the slots.
Is at a much higher level.
Now then it was.
Say eight or nine months ago.
And and our cost structure is in is in better shape, what we what we don't know.
<unk>.
Right now is.
Is what will happen to.
The.
The online businesses in response to much of the retail business being closed because whether they spike up.
As they did.
Back in the spring or not.
Has a significant impact on on what the catch performance will be so I.
I think it <unk>.
Right. This minute, it's it's hard to say I think using where we were.
Back in the spring as a starting point.
I think is makes all the sense in the world.
And where.
It goes from there.
I think we will have a better.
Picture.
Certainly over the course of the next few weeks, but I I think.
There isn't any reason to think.
That we can't use the experience of.
Oh, the last shutdown is at least appointment departure, and then and then <unk>.
Look at it in the context of.
The impact of the online business and the fact that the cost structure is.
Is <unk> is stronger now than it was then yeah.
And then just one follow up to that so it sounds like kind of the base business, you know modestly better than than when it was then given all those.
Accelerants and those pieces, what can you remind me what the <unk> services, and then kind of minimum maintenance Capex Uhm again, if you're not really making machines are putting anything into place.
Yeah, well [laughter].
The the maintenance Capex.
Through any period of shut down.
Other than the development.
Games for online business. So this this would be our own.
Programmers.
And game developers.
Developing.
Games, because I think you know we we introduce.
You know two or three new game titles a month in the online space. So.
That's capital investment that pays back almost instantaneously and.
And we won't.
Back on that but any kind of.
Machine capex or stuff like that.
I think for the duration of shut down I think we can assume.
For all practical purposes, what that's gonna be zero.
As far as that service.
You know it.
If if we take that it if we took the net debt and we assume that we use.
A significant part of the $70 million in cash we're gonna have.
To reduce the debt then.
You know as a rough order of magnitude.
That service would be around 8% of $250 million. So.
All that.
<unk> around a million and a half.
<unk> dollars.
A month if it <unk>, if we were gonna be paying a monthly, which we don't we actually had.
A semi annual interest payment that we made.
Fairly recently, which if you're trying to reconcile the cash numbers that I was talking about before in my prepared remarks.
That would be accounted for by the interest payment that we <unk> <unk> <unk> <unk>, which was with the last semiannual interest payment. We made going forward will be paying interest quarterly, but if we were to.
Let's say amortize that into something monthly.
If if you used to 50, but you know that would bring you to a rat a million and a half a month, but.
Right. This minute, we're still thinking through exactly what we're going to do.
Great Tuple also answered one of my other questions on the difference between the cashew mentioned burst what was on your balance sheet. So appreciate that one more for me just on virtual and and thinking more the the retail side of that person online now what kind of eight months.
Removed from the start of Covid sports life sports have largely resumed all those conversations gone with retailers seen any acceleration uhm or is it kind of back to business as it was before.
I think Brooks is the right person to answer that.
Yeah, I think it has pretty much gone back to where it was before we have a number of customers, where we're adding additional channels. So they know as I mentioned on in my remarks about adding basketball to our customers and greet so having a third channel we've done that with.
Uhm G P C as well so I think to what we're seeing in the retail side of the business you know when they're out of lockdown is virtually because of the growth from the past is is kind of being augmented or at least being pushed a little bit more by the operators themselves. So we see see the retail.
Business and for rituals being a very strong.
Great for me guys. Thanks Goodbye.
Thank you thanks.
As a reminder, if you have a question please press star one.
Alright, there are no further questions I'd like to 10 o'clock back to have like a low iron will be all for closing remark.
Okay. Thank you operator.
Thank you everyone for.
We're going to call. This morning, I know there was a very busy.
Earning schedule and so we really appreciate your finding time to join our call. The questions were great. We're as you can tell pretty ball you in about.
The business right now and.
We look forward to talking to you in another three months. Thanks Bye.
At Comcast is not for quite a bit taking perfect <unk>.
Thank you for attending today, It's education you may now disconnect.