Q3 2021 PlayAGS Inc Earnings Call

I would like to highlight a few that I view as most impactful.

First in advance of the initial Covid outbreak, we invested in broadening the scale and scope of our game development franchise.

So the return on game Dev investments takes time to recognize I'm confident our third quarter results would have looked a lot different if not for the contributions made by those additions to our game development team.

Second we continue to leverage recent hires with significant industry experience to apply greater analytical rigor around all facets of our gaming operations business.

In addition to thoroughly evaluating new deployed machine Capex. Our team also ensures our existing assets are oriented to optimize our return on investment, which occasionally includes strategic pruning opportunities.

It continues to recover from post Covid lows, it's clear that our core content performance has helped to accelerate our recovery.

The volume of quality content available today within our core game portfolio is the best in the company's history with three families of games performing nicely above house average.

Importantly, our improving execution has not been lost on the market as the strong performance of our captain riches Tiki Fortune and Lucky O'reilly titles allow us to achieve the largest percentage point growth in the October Eilers performance report and the new core games category.

Ultimately I believe the added depth quality and diversity of our core content portfolio could allow us to take share as the domestic replacement market further recovers.

Looking beyond slots the operational momentum also extended to our interactive and table product segments.

In the interactive space, our performance remains relatively consistent as we begin to ramp spending to prepare for future growth in what we believe is one of the most promising segments.

And our table segment third quarter revenue and adjusted EBITDA established new all time records.

Notably we saw sequential growth across all cable product verticals, including Progressives side best premium games and shoppers.

Looking ahead, I see no signs of momentum slowing as demand for virtually all new table products remained strong.

Perhaps most importantly, the momentum witnessed throughout the third quarter carried over to the global gaming Expo.

Exiting <unk>, we received overwhelming positive operator feedback on the product showcase for our booth on.

On the slot side operators were particularly complementary of the depth of content enhanced graphics and new gameplay mechanics.

The feedback on our table products was equally is encouraging with our bonus spin extreme progressive receiving the gold award in the annual GGP gaming and Technology Awards.

All told <unk> served as a formal opportunity for us to showcase our teams output over the past 18 months.

Judging from the customer response, it appears operators were collectively supportive of our current strategic path.

Employees for their contribution to our company's success and look forward to further updating you on our next call with that I'll turn the call over to keep.

Thank you David and good afternoon, everyone I would like to start off today's call by reviewing our third quarter results and providing some forward looking perspective for each of our operating segments.

Although not anticipated that is important to note my forward looking commentary assumes no material changes with respect to COVID-19 related operating restrictions casino closures are macroeconomic conditions.

Turning to our results third quarter AGM revenue was $61.6 million up slightly on a quarterly sequential basis.

We sold a total of 663 units in the quarter 110 of which were associated with new casino openings and expansions.

Domestic average selling price or ESP was approximately 19000, reflecting a higher mix of premium price Orion curve units sold in the quarter.

Looking ahead to the four quarter, we expect our improving core game content execution broadening opportunity set with an HHR and steadily improving north American replacement unit demand to result in unit sales that nicely exceed third quarter levels.

With respect to AFP, we expect growing demand for our premium price Orion curve cabinet combined with our price integrity initiatives to result in fourth quarter ESP that is in line with to slightly ahead of the level of achievement the third quarter.

Turning to our domestic gaming operations business third quarter RPT of 31 O eight exceeded $30 for the second consecutive quarter and came in nicely ahead of the 25 O eight achieved in the third quarter of 2019.

A supportive broader domestic gaming revenue environment, a growing mix of higher yielding premium games within our domestic installed base improving core content execution in our ongoing strategic pruning initiatives all contributed to our improved domestic RPT performance in the quarter.

Business, although we continue to see signs of improvements throughout the Mexico market. The pace of recovery has been much slower relative to what we are experiencing in our domestic business.

Third quarter International RPT was 511 up 10% over $4 56 for 66% achieved in the 2021 second quarter, but still well below levels, we were achieving prior to COVID-19 at.

At the end of the second quarter, we estimate approximately 65% of our 7896 unit International installed base was active relatively consistent with the prior sequential quarter.

Despite a smaller revenue base. Our team has remained extremely diligent at managing expenses within our international segment to ensure the business continues to positively contribute to our consolidated adjusted EBITDA and free cash flow performance.

Our table products segment once again delivered record revenue and adjusted EBITDA performance in the third quarter. The total table products installed base grew to 4648 units at quarter end, representing an increase of 190 units on a quarterly sequential basis importantly.

Importantly, we expanded the installed base across all segments of the business, including progressive side bets premium gains and shufflers.

Looking ahead to the fourth quarter, we believe further commercialization of several new highly anticipated table products, including our bonus spin extreme progressive the initial launch of our Pax at specialty card shuffler and the growing appeal of our Ags Arsenal site license offering has the potential to simultaneously expand our Tam.

Product installed base and increase our table product revenue relative to the levels achieved in the 2021 third quarter.

Finally result, within our interactive segment remains stable with third quarter revenue topping $2 5 million for the second consecutive quarter.

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

Throughout the quarter, we thoroughly evaluated the technical and commercial components of our real money gaming business to ensure we are positioned to efficiently and effectively capture our fair share of the immense online growth opportunity that lies ahead.

As part of this internal review process, we identified several opportunities for improvement that we believe will strengthen our orange RMG businesses long term vibrancy.

That said the implementation of these measures is likely to moderate the sequential revenue growth trajectory, we are able to achieve within the interactive business for the next two to three quarters.

Looking ahead, we remain deeply committed to furthering our presence within the RMG channel and believe the enhancements. We are implementing today will only help to turbocharge, our three pronged growth strategy in the back half of 2022 and beyond.

Demand for our products. We are now expect to be nicely free cash flow positive for the full year.

Finally, our net leverage at September 30th 2021 was four seven times down from seven five times at the start of the year.

Are adjusted net leveraged for covenant compliance purposes was four three times, placing us nicely in compliance with our six times leverage covenant.

Looking ahead, we expect to end the year with Ness leverage inside of four five times as we remained laser focused on restoring the balance sheet flexibility we had prior to the Covid pandemic when our balance sheet was levered, while inside a four times.

Additionally, would continue to carefully manage our leverage in liquidity position to ensure we can execute on opportunities to lower our borrowing costs as they present themselves.

As a reminder, or 95 million incremental term loan price that LIBOR, plus 13% steps down to a one O. One soft call in May 2022, potentially creating an opportunity for us to materially lower our cash interest expense in terms strengthening our free cash flow generation.

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

Thank you very much. Thank you would like to ask a question. Please do say now my pressing star and then one on your telephone keypad. If you change your mind and would like to withdraw. Your question. Please press stops on it by chain when preparing to ask a question. Please ensure that you would just like if I need to lie to me.

My first question today comes from David Bain sum be Riley David Your line is open.

Great. Thank you and congratulations on the nice results.

I guess my first question would be on HHR since I didn't hear that mentioned.

There seems to be a lot of potential expansion opportunities next year in that segment can we get an idea of how you see that.

That segment of emerging.

And basically your overall strategy to continue to be one of the the leaders to supply it.

Mmm.

Those from just sort of being in Atlanta, primarily to Australia, Austin other locations Reno and beyond.

Our big goals to deepen the content pipeline. So keep it simple on the boxes, we don't need to have five.

Premium we will have additional flavors in the future, but for now we believe content is king almost just like the online business.

So that's our huge focused right now I'm really proud of the team. If we go back and sort of look at the games that we've produced over the past year and how it's affected not just.

Our premium space, which I know, we quoted we've gone from 4% of our installed base at the start of the year up to now to 8% of our installed base at the end of the quarter.

<unk> P D up there.

As far as giving you an exact number of where we want it to be no. I mean, we're not we're not quite there yet and we don't have the crystal ball on the macroeconomic environment and how deep that could affect us as I've always said, though I believe the new normal is above what it was in 2019 before the pandemic.

Think when things settle in and it will remain above the 2019 numbers and I'm speaking industry wide.

And again focus on premium focus on content and that'll help us keeps.

Keep strong RPT numbers up there.

Understood. That's helpful. Directionally and then on the margin front I appreciate the reiteration of the 45% to 47% target I wanted to focus on some of the language in the release, suggesting maybe some residual austerity measures are still being reflected in opex. During Q3. If you just look at the ECM segment.

As we move into 2022 as well.

Perfect. That's all for me I'll pass it on I appreciate all the collar guys.

Thanks.

Our next question comes from Barry Janus from cherished sorry. Please go ahead.

Thank you, Hey, Hey, guys. It sounds like you're addressing the supply chain issue out there, but I'm I'm curious David if you think this is a long term issue that at some point, we'll have visible in tax either for H, yes, or your competitors.

Hard to say you know at this point, we know it reaches into 2022, obviously how far.

Three 2022.

Where to just sort of swag it a little bit probably mid 2022 is when we expect things to come back in line, but it seems like every time.

There's signs of Stabilising in us really understanding it perfectly maybe it takes a writer of left on us, but that's why we're doing what we're doing in our ops and product procurement teams because it's important for us to sort of stay ahead of things plan.

Very closely work with our option product management sales team and so they've been doing that since the very beginning of the pandemic again proud of the work they've done there because this is not easy stopped but we've got really a first class team barriers and.

To get back to it probably probably into Q1 Q2 of 22.

And beyond that it's a little hard to say how much further will go if you talk to the car industry folks obviously, they expect go a little deeper, but we aren't exactly sharing all the same materials.

Understood.

Ah you chose a follow up question, we heard a little bit about this but.

As you started throwing the interactive segment I'm curious, if they're sort of more of a strategy of coordinating development and release of game content across multiple channels, namely ECM an interactive.

Yeah, everybody was pretty positive right I mean, it's no secret that when you look at all of the numbers coming out of the operators and the different state gaming revenue numbers I think everybody is performing really really well I think the second point to make is just internally, we feel better I think one of the comments might've been in David's section in the prepared remarks, it's like we've never had.

Such a broad.

Set of products to offer our customers right. If you just look at slots I think you were at your at the Booth for the Booth tour and you look at the slot.

Content that we have whether it's the cabinet offerings to different games, whether it's core premium like we just feel better with what we have to offer. So if you combine the two right.

Obviously, we would say that we feel really good about Q4 based on the pipeline. We already have and then as we look at next year with the pipeline building. We we felt we felt much better than we did say a quarter or two ago.

And it seems to me just to sort of chime in.

One of the things that was impressive.

From my view was that we had so much nice good quality content that we wanted to get on the floor at <unk> that we didn't put some things in there that were already released.

One game in particular, probably one of our best core games out there I caught monkey pirate, but it's not really the name of the game, it's actually called tap enriches that wasn't even in our booth and Thats a game, that's our core for sale game and it is out there legitimate we competing with premium content. So.

Say that theres much in the way of that.

But as far as other uses I think you'll see us consistently reinvesting in the business through R&D are obviously, putting money behind the premium in game Ops initiative and we're very very focused I think on the the potential event next year right when our $95 million incremental rose to a 101 soft call.

It's like we we look forward to.

Being able to do something with that and whether we refinance the entire.

Term loan b structure or not we'll see but we're encouraged by conversations we've already had to date so.

We will have very good options we feel.

Definitely thank you very much guys appreciate it.

Thanks Jen.

As a reminder, if you would like to ask a question. Please do so now by pressing Star and then one on your telephone keypad at Star followed by one on your telephone keypad.

At this time, we have no further questions. So this now concludes today's conference call. Thank you everyone for joining us today and please now disconnect your lines.

Yes.

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