Q2 2021 PlayAGS Inc Earnings Call

Yes first quarter 2021 earnings conference call all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After today's presentation there'll be an opportunity to ask question. Please.

Please note this event is being recorded.

I would now like to turn the conference over to Brad Boyer Vice President of Investor Relations Corporate development and strategy. Please go ahead.

Thank you operator, and good afternoon, everyone. Welcome to Ags's first quarter 2021 earnings Conference call with me today are David Lopez, CEO and chemo Archaean our CFO.

<unk> presentation, reviewing our key operational and financial highlights for the first quarter 2021 can be found on our Investor Relations website investors that play a G. S. Dot com on today's call. We will provide an overview of our Q1.2021 financial performance and offer perspective on our current financial outlook. This conference call includes forward looking.

Statements any statement that refers to expectations projections or other characterizations of future events, including financial projections or future market conditions is a forward looking statement based on assumptions today actual results may differ materially from those expressed in these forward looking statements and we make no obligation to update our disclosures.

For more information about factors that may cause actual results to differ materially from forward looking statements. Please refer to the earnings release that we issued today as well as risks described in our annual report on form 10-K, particularly in the section of these documents titled risk factors.

Comment on true today will also include non-GAAP financial measures, we believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP reconciliations between GAAP and non.

<unk> metrics for our reported results can be found in our earnings release issued today. Please refer to our filings with the SEC for more information with that I would like to turn the call over to our CEO David Lopez.

Thanks, Brad and good afternoon, everyone as I sit here and reflect on the past 12 months.

As at how well the gaming industry has endured throughout the COVID-19 pandemic.

It's hard to believe it has only been a year since we and our industry peers. We're talking about the steps, we're taking to preserve our liquidity in the face of unprecedented adversity.

At the onset of Covid as casinos across the country began shutting down I, often heard industry executives and other constituents utter the phrase.

Never underestimate the spirit of the gambler.

Judging by our first quarter financial performance, the gambler spirit is alive and well.

As you have heard from our casino operator partners and seen in the state reported <unk> data, but first quarter was all about momentum.

Although lingering casino closures occupancy restrictions and several unprecedented weather events got the quarter off to a bumpy start trends began to rapidly improve as the quarter progressed to that then relax COVID-19 related operating restrictions declining case counts improve vaccination.

Efforts and other macroeconomic tailwind allowed our U S casino partners to benefit from the release of significant pent up demand across our businesses throughout the month of March.

Fortunately, we were able to leverage our nearly 16000 unit domestic AGM install base to benefit alongside our operator partners as March domestic RPG increased 13% over March 2019, driving our first quarter RPT, 3% above the corresponding.

<unk> 2019 levels.

To command a greater share of the 70000 unit domestic premium market, which generates over 1 billion of annualized growth gaming revenue.

In addition to our premium effort, we continue to look for opportunities to prune lower yielding units from within our installed base as the strategic initiative has the potential to streamline our costs and improve our fair share operating performance over time in the first quarter, we prove and sold approximately 430 units from our.

Domestic installed base.

These units are not included in our product sales kpis for the quarter.

Ultimately, we believe pruning could allow us to generate comparable or higher revenue from a smaller capital footprint further enhancing you overall return and capital efficiencies of our gaming operations business.

Turning to product sales, although we sold a modest 289 units in the quarter. We are encouraged by the tone and tenor of recent conversations with our customers as.

As a more favorable operating environment continues to support a broad based recovery and gaming revenue. We are slowly starting to see the improved revenue performance trigger a willingness by operators to commit capital for new unit purchases.

This sentiment was reinforced by the results of the recent Eilers fan Teaneck quarterly slot survey, where operators indicated they plan to replace an average of 6.5% of their own gains over the next 12 months a notable increase from the 5.9% reported last quarter and well above the <unk>.

<unk> Hello of 4.2 per cent, while we believe it could take a few years before we return to 2019 levels were feeling confident about the potential for a continued recovery in our unit sales as we progress through 2021.

To accelerate the pace of our AGM revenue recovery, we continue to look for opportunities to efficiently expand our business into areas such as historical horse racing or HHR.

We place additional games into Virginia, and Kentucky, HHR markets during the first quarter and driven by exceptional Ags game performance our pipeline for the remainder of the year continues to grow looking ahead. We believe we have the potential to broaden our presence in the Virginia from Kentucky markets. While also taking advantage of.

We're growing online presence to execute our first omni channel enterprise wide agreement with a large multistate operator in addition to providing the operator with access to our growing suite of online content. The agreement also extends to our product sales and gaming operations segment, a first of its kind for Ags.

We intend to look for opportunities to further leverage our omni channel content capabilities with additional operators in the future.

In closing I was very pleased with our team's execution in the quarter and then equally as encouraged by the macro level trends and overall sentiment we are seeing across the gaming landscape today.

Following 1 of the best strategic planning off sites I've ever been a part of I believe we are strengthening our organizational alignment around key business objectives, which should allow us to improve our operating efficiencies and enhance shareholder value over time.

I'd like to thank all our Ags team members for their hard work flexibility and commitment in the first quarter and I look forward to sharing our progress with all of you in the quarters ahead.

I will turn the call over to chemo to provide additional perspective on our financial results liquidity position and current outlook for the business.

Thank you David and good afternoon, everyone.

I am proud of the way our team came together to deliver strong first quarter financial performance.

Our results once again serve as a testament to the resiliency and durability inherent to our company's recurring revenue centric business model.

Although it remains difficult to predict the degree to which changes in the macroeconomic environment, including those directly related to COVID-19 protocols.

<unk>, our customers operations or demand for our products I am confident our improved execution and strong liquidity position will allow us to deliver more consistent financial performance that in turn further enhance shareholder value turning to our first quarter 2021 operating results, we generated consolidated revenue of 55.

$5.4 million, representing an increase of 2% versus the prior year's quarter.

Our gaming operations, our recurring revenue improved 4% year over year.

Easing COVID-19 related operating restrictions and ongoing vaccination efforts unlock significant pent up demand across our U S. Operator partners businesses as the quarter progressed.

In turn strengthen our domestic <unk> gaming operations revenue.

Continued rollout of our industry, leading table game progressive products.

Broadening of our penetration into the lucrative AGM premium game segment and enhanced execution within our real money gaming business further supported our improved recurring revenue performance in the quarter.

In aggregate revenue generated from recurring sources accounted for 80% of our total reported revenue compared to 79, 9% in the 2000 Twenty's first quarter.

With respect to equipment sales total revenue decreased 6% year over year to $10.9 million.

Revenues related to our ongoing effort to strategically prune lower yielding units from our Oklahoma AGM installed base increased by $2.1 million.

However, this increase was more than offset a sustained sluggishness in the north American replacement market, reflecting operators current preference to carefully manage capital expenditures as their businesses recover from COVID-19 related business disruption.

<unk> first quarter 2021, net loss of $7.8 million improved compared to a net loss of $14.4 million incurred in the prior year's quarter.

The year over year decline in our reported net loss reflects our improved revenue performance led by our recurring revenue businesses and recognition of lower depreciation and amortization expense due to several intangible assets, reaching the end of their useful lives.

Higher interest expense related to our incremental debt financing, which we closed upon our may 2020, partially offset the flow through of our improved operating performance to the bottom line.

Consolidated adjusted EBITDA totaled $26.3 million compared to $24.5 million in the prior year's quarter.

Adjusted EBITDA margin was 47, 5% nicely above the 45, 1% achieved in the first quarter of 2020.

Strength within our high margin recurring revenue businesses and an increase in higher margin revenues generated from our ongoing strategic pruning initiative paced our improved adjusted EBITDA and adjusted EBITDA margin performance versus the prior year.

These items were partially offset by normalization in our operating expenses versus the prior year period, which benefited from our early stage COVID-19 related liquidity preservation initiatives.

As we look to the full year, we continue to expect margins to bracket, which is another way of saying land slightly above or slightly below the low end of our targeted 45% to 47% adjusted EBITDA margin range. Our margin outlook reflects the anticipated impact of investments in our R&D franchise to support future.

Your growth initiatives ahead of a more pronounced recovery in new unit sales revenue.

Now I'll provide an update of each of our operating segments, beginning with our AGM business.

Total first quarter 2021, GM revenue was $50.5 million relatively consistent with the prior year's quarter.

We sold a total of 289 units in the quarter all of which were replacement units compared to 464 units in the prior year period PJM units were sold into 14 U S States and 2 Canadian provinces, with British Columbia, Virginia, and Ohio emerging as our top III sales markets does.

<unk> average selling price or ASP was approximately 17500 relatively consistent with the level achieved from the prior year.

As David mentioned, we're starting to see an early indication of modest improvement in customer demand for new units as Covid operating restrictions are eased and the health of our customers' businesses improves.

However, we continue to believe the North American sales market could potentially take a few years to fully recover to pre COVID-19 levels that said I believe we will see a fairly material quarterly sequential increase in our second quarter of 2021 unit sales as a result of a more favorable opening in <unk>.

Expansion demand outlook.

Our domestic ECM installed base at the end of the first quarter comprised 15456 units.

Representing a quarterly sequential decrease of 812 units.

The sequential decline reflects the planned strategic pruning of approximately 430, lower yielding units and the impact of COVID-19 related floor configurations.

After adjusting for these changes we estimate approximately 99% of our domestic units were active at quarter end. The net impact of the removed units on our domestic installed base was partially offset by the placement of opening and expansion units and growth within our HR and Orion Star Wall unit footprints.

Looking ahead, we remain committed to searching for inefficiencies within our installed base and strategically pruning as situations permit.

<unk> realized in the 2019 first quarter.

Domestic <unk> improved month over month throughout the 2021 first quarter with notable strength witnessed across several impactful geographies during the quarter as final month.

David mentioned, we believe our first quarter domestic RPT performance benefited from several unique macroeconomic factors many of which we believe were temporary.

That said, we would expect to see some level of moderation in our reported domestic RPG as these macro influences gradually taper off.

Turning to our international ECM business, our installed base comprised 7985 units at quarter end unchanged versus the 2024th quarter and about 50% of which were active as of the end of the quarter.

International RPT was $2.94 down 57% year over year, but up approximately 15% on a quarterly sequential basis.

A less supportive macroeconomic climate and stringent COVID-19 related operating protocols continued a protracted recovery within our Mexico gaming operations business.

That said, we are seeing signs of additional casino openings and improved customer demand throughout the Mexico market, which has us feeling cautiously optimistic about the potential for international R&D to continue to gradually recover as we progress through the remainder of 2021.

Our table products segment generated first quarter revenue of $2.8 million, representing an increase of 11% year over year and 8% on a sequential quarterly basis.

Table products adjusted EBITDA was $1.4 million, establishing a new quarterly record for the segment.

The total table products installed base at quarter end comprised 4362 units, representing an increase of 12% year over year and 108 units sequentially.

We estimate approximately 90% of our table products lease installed base was active at quarter end compared to 80% at the start of the quarter.

Looking ahead, operator interest in our growing suite of industry, leading progressive products and our Ags Arsenal site license offering continues to build.

Combined we believe progresses site licenses and paths have the potential to simultaneously expand our cable product installed base and increased our average lease price as we proceed through 2021 finally, our interactive segment delivered first quarter 2021 revenues of $2.1.

Representing an increase of 41% year over year.

Our real money gaming business led the way in the quarter with revenues more than doubling year over year to a record $1.4 million.

Perhaps more importantly, our interactive segments delivered positive adjusted EBITDA for the fifth consecutive quarter supported by improved revenue performance.

Looking ahead, we believe our continued success in integrating our online content with additional BDC operators, introducing additional ags titles into the online domain.

And expanding our suite of online content to include our first online table game offerings have the potential to produce improved revenue and profitability within the interactive segment in the quarters ahead.

Turning our focus to cash flow and the balance sheet first quarter Capex totaled $9.9 million compared to $10.6 million in the prior year period.

Growth and intangible Capex accounted for the majority of our quarterly capital spend at $5.2 million and $3.8 million respectively.

Looking out over the remainder of 2021, we expect our quarterly growth capex per ramp in the second and third quarters.

As we look to broaden our presence in the premium recurring revenue segment prior to moderating in the fourth quarter first quarter free cash flow was near breakeven compared to a positive $8.2 million in the prior year.

The year over year free cash flow decline reflects the first quarter of 2021 period related unfavorable working capital changes.

As of March 31, 2021, we had $107.3 million of available liquidity inclusive of our $30 million undrawn revolver compared to $111.7 million at December 31, 2020.

For the full year, we remain confident in our ability to maintain or potentially improve upon our December 31, 2020, and liquidity position with improvement weighted to the back half of the year.

Total net debt, which is the principal amount of total debt less cash and cash equivalents.

Was approximately $543.6 million at March 31, 2021.

To $540.8 million at December 31, 2020.

Our total net debt leverage ratio, which is total net debt divided by adjusted EBITDA for the trailing 12 months period decreased from 7.5 times at December 31, 2020 to 7.4 times at March 31.2021.

Our modified net debt leverage ratio use for our covenant compliance purposes was 4 <unk>.

Zero times below the maximum allowable level of 6.0 times.

Operator. This concludes our prepared remarks, and we would now like to open the lineup for questions.

We will now begin the question and answer session.

To ask a question you May Press Star then 1 on your Touchtone phone.

If you're using a speaker phone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then 2.

At this time, we will pause momentarily to assemble our roster.

Our first question is from Chad Beynon from Macquarie go ahead.

Hi, good afternoon. Thanks for taking my question nice results.

Understanding that youre, not giving guidance I wanted to focus on the installed base outlook.

Did you you noted that the premium market comprises roughly 70000 units in North America and it sounds like Star will star Wall is performing well and curve is right around the corner can you just kind of help us think about long term, maybe what some market share goals could be and then near term how are you.

Thinking about rolling out some of the titles that have been successful.

And could drive some some growth in your installed base. This year. Thank you.

Thanks, Chad.

We will start when sort of the second half of the question there.

I think on the first half we're not really.

Offering any particular guidance on what we're aiming for a market share of.

That sort of premium base that premium lease space. As a reminder, we're just getting started and I think as you know.

And Brad and I were talking the other day.

A solid 6 months into the launch of our premium product campaign, we're happy with how it's going so far we've been happy with the momentum of the Star Wall. We just launched curve premium AD too early to tell there are of course happy because it's early and usually we see good results early with our products.

Like that.

But we'll be we'll be <unk>.

<unk> curve premium throughout the back half of the year additional in Q2.

We've got a great lineup.

Quite honestly not just in a box, but we're very pleased Chad with our R&D effort there on games and really what their focus has been on <unk>.

Covid and of course, I'm, just going to sort of plug the other 2 divisions 2 for online and tables have done a fantastic job in R&D, but.

I know I'm, giving you a high level answer here, but yes, we're not guiding on on market penetration of our ship share rate or anything like that just yet it's too early in the game, but as you see on star wall. So far so good we're very pleased with results and early on current premium.

M.

But again, we're confident that that's going to do well our first game that we're launching there is a reagan bacon deluxe.

As a known product.

We'll call it a fan favorite with our players. So so far so good and obviously youll get more updates on that down the line.

Okay great.

And then the other side of that just on the strategic pruning I know you guys.

Went through a lot of time with this during the past 6 to 9 months does the elevated our PD levels that we're seeing right now given strong regional gaming trends does that kind of change how you were thinking about maybe pruning more and where does this stand.

As you as you kind of look at it now.

Yeah, good question and something.

We've obviously discussed but.

We're pretty confident that the pruning process and what we've embarked on here and Chad is the right thing to do.

As far as the.

Integrity base and what we've done there we think it's been very effective.

We are in the closing innings of that.

We will continue to look at other areas of the business.

If something is not generating revenue or its generating a very low revenues because.

Location or something of the like.

Moving to get after it and permanent because from a cash allocation and efficiency point of view.

We want to be smart.

With our money and with shareholder money and we continue to think it's the right strategy to get underperforming units out and as we continue to rollout whether its class 2.

For lease product or if its class III lease in class III premium lease. We think this is going to continue to improve our performance efficiency RPT and the like so we're sticking to our guns on it and obviously.

It does change the equation when you look at a particular unit at any particular point in time. So of course, if our team we have our team in product management game ops, if theyre looking at a unit now of course, it might not look like it's ready to be pruned.

<unk> is maybe what it looked like in the past so it does impact some things, but the high level strategy, we're sticking to GAAP.

Thanks, David appreciate it best of luck.