Q2 2022 Accel Entertainment Inc Earnings Call

Hello, everyone and thank you for standing by the Accel Entertainment's second quarter 2022 earnings calls will be underway in two minutes time.

[music].

Hello, everyone and welcome to the Accel Entertainment's second quarter 2022 earnings call.

My name is Sarah and I will be the upright so feel cold today.

There will be an opportunity for Q&A on today's call and you can register your question by pressing star one on your telephone keypad oil prices start to withdraw your question. If you require operator assistance at any time, Please press star zero.

Ill hand, the floor over to Derek Comma General Counsel and Chief compliance Officer.

Welcome to Accel Entertainment's second quarter 2022 earnings call participating.

Participating on the call today are Andy Rubenstein, <unk>, Chief Executive Officer, and Matt Ellis Excel Chief Financial Officer.

Please refer to our website for the press release and supplemental information that will be discussed on this call.

Today's call is being recorded and will be available on our website under events and presentations within the Investor Relations section of our website.

Some of the comments in today's call may constitute forward looking statements within the meaning of the private Securities Reform Act of 1995.

These forward looking statements are subject to risks and uncertainties, including those related to COVID-19, and its various strange.

Actual results may differ materially from those discussed today and the company undertakes no obligation to update these statements unless required by law.

For a more detailed discussion of these and other risk factors investors should review the forward looking statements section of the earnings press release available on our website as well as other risk factor disclosures in our filings with the SEC.

During the call we may discuss certain non-GAAP financial measures.

For reconciliations of the non-GAAP measures as well as other information regarding these measures. Please refer to our earnings release and other materials in the Investor Relations section of our website.

I will now turn the call over to Eddie.

Thanks, Derek and good morning, everyone. Thank you for joining us for <unk> second quarter earnings call I'm.

I'm pleased to report we had another strong quarter, we reported revenue of $228 million and adjusted EBITDA of $43 million.

And Illinois same store sales were essentially flat to the prior year. Despite the current inflationary environment and the fact that stimulus checks went out near the beginning of Q2 last year.

Our performance continues to demonstrate the strength and resilience of our business model.

We believe local businesses will continue to invest in their gaming due to the incremental profits they receive and players will continue to choose our local high quality offerings due to its convenience and appeal.

On the expense side, just like most other businesses, we experienced higher than expected costs for macro economic related impacts such as increased expenses for labor and fuel.

We're continually monitoring our spend and looking for ways to mitigate increased costs without sacrificing our best in class service.

Oh, absolutely business model and highly variable cost structure will allow us to quickly adjust if there are any further changes in the market.

On the M&A front I am pleased to report that we successfully closed our acquisition of century on June one the integration is going well and the companies are working as hard as we share our best practices.

I'm also pleased to welcome the entire century team led by Steve Aaronson.

Smoltz.

And rural Franked to the <unk> family.

Essentially is experiencing similar inflationary pressures that we're seeing across the country, but continues to outperform our original estimates.

Looking at New States I'm excited to share that we entered in Nebraska in June with a handful of organic locations.

Nebraska has played today is significantly lower than our more established markets, but we see potential for both organic and inorganic growth.

We aim to develop Nebraska using the growth playbook, we developed in Illinois. This will be a new market for us, but one that will eventually lead to an attractive earning stream and to that point.

Recently acquired Bbs and amusement operator for $9 $5 million.

Overall, our M&A pipeline remains active and we are evaluating multiple opportunities in Illinois and across the country.

Our long term goal is to continue to increase the percentage of our revenue generated outside of Illinois.

Switching over to Georgia in May the Georgia Lottery announced it would be extending its gift card pilot program and making it available to all locations. This program allows players to load their winnings onto a prepaid gift card, which substantially reduces one of the biggest barriers players face into Georgia.

Okay.

As you would expect our locations in the pilot program experienced significant increases in play.

We're currently working with the lottery and their locations to roll out the pilot program across our network.

We see this as an opportunity to expand our presence in the market and the profitability of each location.

In Illinois, our sales team continues to sign additional competitor and organic locations as of the end of the second quarter, our backlog had grown more than 14% year to date.

We're working closely with our locations to ensure that their license and live as soon as possible.

What do we look at the number of eligible businesses without gaming or the number of <unk> per capita we believe Illinois still has highly visible growth.

Overall <unk> achieved several milestones this quarter with the century acquisition and expansion is in Nebraska.

Importantly, we continue to build a platform to further expand into existing and new markets.

Our local business model low capital requirements and highly visible growth offers one of the best returns in gaming with that I'd like to turn it over to Matt to walk you through the numbers in more detail.

Thanks, Andy and good morning, everyone for the second quarter, we had total revenue of $228 million a year over year increase of 13% and adjusted EBITDA of $43 million, which was flat compared to last year.

This quarter's results include one month of century and it is important to remember that century operates in markets, where the revenue split between century and the location is negotiated the margins are attractive, but lower than our existing business.

Illinois same store sales were essentially flat relative to the prior year.

Considering the inflationary environment and stimulus checks issued last year, we believe our performance reinforced as demand for our offerings remains strong.

Capex for the second quarter was $6 million cash spend.

As of June 30, we had 22128 terminals and 3489 locations year over year increases of 68% and 38% respectively.

Patient attrition continues to remain low and mirror the pre COVID-19 historical averages.

At the end of the fourth quarter, we had approximately $282 million of net debt and $601 million of liquidity consisting of $220 million of cash on our balance sheet and $381 million of availability on our current credit facility.

I'd now like to provide an update on our efforts to return capital to shareholders, specifically our share repurchase program.

As you're all aware, we announced a $200 million share repurchase program in November of 2021, as we find the opportunity to return capital to shareholders in the form of buybacks and attractive use of our significant free cash flow.

During the quarter.

We purchased $25 million of <unk> stock at an average purchase price of $10 96 per share.

Since the program started we've repurchased more than $55 million of <unk> stock through the end of July .

Given our relatively under Levered balance sheet and strong free cash flow, we are in a position to make exciting investments, while continuing to appropriately returning capital to shareholders.

Turning to outlook with the century acquisition closed I would now like to provide updated guidance.

I'll provide guidance with the in year impact of century, as well as the pro forma impact.

As Andy and I mentioned earlier demand continues to remain strong, but we are seeing increased expenses and slightly lower revenue growth compared to when we first issued guidance in late 2021.

We expect to end 2022, with 22000, and 723200 terminals and 3550 to 3600 locations.

2022 revenue is estimated to be $960 million to $990 million, assuming the full year benefit from century revenue is estimated to be 1.17 to 1.1 dollars 3 billion.

Adjusted EBITDA is estimated to be $160 million to $165 million, assuming a full year benefit of century, adjusted EBITDA is estimated to be $170 million to $175 million.

Capex is estimated to be $25 million to $30 million of cash spend.

Assuming a full year of century, Capex is estimated to be $30 million to $35 million of cash that back.

Back to you Andy.

Thanks, Matt we.

We are pleased with our performance this quarter and are focused on executing our growth strategy and the strong foundation, we have built.

We remain confident that our locally focused business model creates a platform to outperform and difficult times and thrive under normal circumstances.

We aim to leverage our proven.

Asset light business model and extremely strong financial position to continue our expansion and return capital to our shareholders.

Our success would not be possible without our dedicated and high performing employees. They are the true competitive advantage of our business that make excel the preferred choice in our markets. We will now take your questions.

Thank you as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad or pressure to to withdraw your question al.

First question comes from Chad Beynon from Macquarie chat.

Please go ahead.

Hi, Good morning, Thanks for taking my question and congrats on the century closure.

Hum.

Also thanks for giving guidance I know a lot of unknowns out there and most companies aren't willing to give it at this point, but since you did wanted to take a stab on that.

Given your view on lower revenue growth than what you were originally projecting is this something that youre seeing in in recent trends and in June or July or maybe just taking a conservative approach just given you know the world that we live in the news that we're seeing in kind of the macro and inflationary environment. Thanks.

Thanks, Chad this is Andy.

We're basically looking forward.

Relative to.

Some things were seeing in kind of the macro environment, we haven't seen anything significant directly in the markets, we operate in but as we see prices rise in.

Some of the discretionary spending categories as well as the.

Inflation that we're seeing in fuel.

And others.

Others costs. It does affect our players were kind of taking a more cautious approach, but we haven't seen anything in June July that's that's dramatic and we feel pretty confident that our are positioned today and where we sit in the marketplace in the gaming world is a relatively stable.

Revenue flow.

Okay, great. Thanks for for clarifying that.

And then in terms of the Nebraska market can you just talk about how big that market can be if that could be you know kind of a top three market for you guys or if its just another opportunity to kind of build on your current.

The current units thanks.

Yeah, it's really early the determinant.

The challenges with Nepal. Scott is it has a very unique styled game and the very underdeveloped.

Gambling market as you may be aware casinos are where we're seeing those are going to be coming on in that market.

We'll get some indication.

The potential there, but today the machines are effectively.

Amusement skill type games.

Our regulated.

And they we don't expect them to perform.

Anywhere close to the Illinois market.

Well look we're investing in early to see what we can develop and.

We'll have better kind of information.

Data probably around.

Kind of mid year 2023.

Thanks, Andy appreciate it.

Thank you our next question.

Thank you. Our next question comes from Steve <unk> from Deutsche Bank.

Please go ahead.

Hey, good morning, guys. Thanks for taking my questions.

Now that the century acquisition has closed does that allow you to be more aggressive M&A front.

Are there similar.

And in size of centers that are out there you think.

How have seller expectations have evolved over the last six months.

Yep Thanks, Steve.

We haven't really changed our approach, we're always evaluating Egypt acquisition opportunity.

As its individual opportunity and.

We've.

Continue to to perceive proceed in a way that.

It's thoughtful and we're obviously taking into consideration the current economic environment.

We have seen.

A slight change.

In the acquisition.

Ironman where people are starting to realize that.

This significant growth.

That they were trying to price their businesses going forward.

Is it.

A reality that we're going we had obviously substantial growth.

18, 19 2021.

And but that's that can't continue.

At those levels so.

Is there there are still opportunities we're evaluating them.

I think so.

So where the market goes in terms of pricing has yet to be determined.

Okay. Thanks, and then just knowing in the past for the legacy Tenet, Illinois business, I think you've talked about margins being able to potentially get a 19% to 20% can you talk about where you think this current portfolio margins.

And get to know them.

Century legacy mom.

Our relatively lower.

Yeah, I mean, I have met I've been on that.

Hey, Steve how are you.

What I would say is that the Illinois sort of margins intact. As we've always said, we're continuing to build this base to support far more than Illinois and century in Nebraska as sort of a first step there and we've got growth in Georgia.

It's a little too soon to tell what the overall margin would be thinking of the competitive nature of the sort of Nebraska or excuse me, the Nevada, Montana markets, but I think the pro forma guide gives you sort of a.

A blend of everything.

But at this point for competitive reasons, we're not going to start breaking out margins by specific market.

Okay, Great I appreciate it thanks guys.

Our next question comes from Omer Sander from J P. Morgan. Please go ahead.

Hey, good morning, Andy Matt Thanks for taking my question.

First a question on century, and the growth in Nevada, and Montana, and Illinois, How's the core itself.

Had additional licenses being granted plus you had the sixth machine can you talk about the growth landscape in Nevada, and Montana, how much of the locations and B G. T growth in your full year guidance is from these markets and if I'm right. If our math is correct. It looks like the locations in Nevada, and Montana are lower than your Investor day, 14 months ago, what's driving that down.

Hey, Omar so.

You know when you the Nevada, Montana markets they are pretty stable.

There's there's always opportunity to grow it's not like Illinois, where there is a huge organic growth path.

Some of the ebb and flow from the Investor Day, you could just be naturally the cycling up locations.

But overall century continues to grow continues to perform really well.

You can kind of see it combining but in other cases, you might see and Youll remember that they have more terminals per location, so sometimes you're optimizing the mix.

But overall like we said on the call country still outperforming our original estimates, which is great to see and.

I would say, we're going to continue sort of combining our best practices in our growth playbook in their operating efficiencies to kind of build.

Just a bigger and better company.

Okay, great. Thanks, and then maybe shifting to Illinois last quarter, you talked about the removal of some of the idle machines due to the rule of 72 did that weigh on any of the unit growth in the <unk>, maybe you know another way of putting that can you bifurcate the gross units added in Illinois versus the removal.

And the two care.

Sure not as pronounced as Q1, which is why we didnt really address it.

Certainly.

Handful of locations still in that cycle, but obviously, we're starting to go in but you.

To quantify it.

10% to 20 locations, probably but as we sort of address where it's sort of stabilized now and you can see obviously sequentially. We are starting to grow again.

Okay. Thanks, so much.

Yeah.

Our next question is from Greg you Best from Northland Securities. Please go ahead.

Hey, good morning, Andy and Matt Thanks for taking the questions.

If I could follow up on the Nebraska markets.

It sounds like it's obviously very early there, but in terms of the market structure, maybe how do regulations differ and then.

Establishing its pretty similar to the establishment where criminals are in Illinois.

And I guess, maybe how we should think about kind of the pace of your expansion in the state.

Thanks, Greg Zandy.

Okay.

Bob.

It's like I said.

The type of equipment is so unique.

There are not the traditional manufacturers that you see.

In the casinos, nor even in the steel markets.

And that's going to prohibit.

Growth significantly there's there's challenges in terms of.

Getting inventory and the <unk>.

Type of play is.

It is definitely.

More similar to amusement play.

The the typical location only has a few machines.

And.

It's really going to take a while for.

The players to really embrace.

This as a gaming option.

That being said.

The market is not new it's probably been.

Operating <unk>.

For three to four years.

With kind of a nonregulated version.

Prior to that so.

We're like I said investing in the market.

I'm looking to see how the players develop seeing if the.

There is real interest in AR.

<unk> Entertainment and.

The types of facilities.

Similar to what you see in Illinois, obviously, the population is significantly low or in Nebraska and therefore.

<unk>.

The games will be concentrated more in some of the tavern.

And trucks up types of environments as far as regulations.

They are a regulated more like.

<unk> skill.

Market than they are a gaming market.

The Nebraska.

Regulators are are very attuned to what's going on in the market and have been very helpful.

Uh huh.

<unk> really been collaborative and as we've moved into that market.

But it is a it's different obviously.

Then a traditional.

Router casino market.

Great I appreciate all the color there Andy.

Wanted to ask two.

Just kind of curious on whether you think here how I guess, how your new establishment win rate has trended in the quarter and whether you believe you are continuing to gain market share in Illinois.

Yeah.

Okay.

Can you just repeat that again.

Yeah, sorry about that.

Just kind of curious how you think your win rate has trended on new establishment and I guess within the quarter and then.

You know, whether you still think you're gaining market share in the state.

So when you yeah, so I'm trying to understand so new establishes the ones that are just coming on line with us in Illinois is that what you're asking.

I guess in terms of all new establishment that kind of turn on in the state you know how many of the or what percentages kind of XL winning.

Estimate and maybe how that's trended.

Okay.

Matt and I got a chance of that question.

Yeah. So what I would say is you know we're continuing to sign more Andy referenced on the call. Our backlogs are growing which is always a good sign and when we quantify that we're not talking about just pure signed agreements but.

Meaning obviously competitor locations, but also organics that are in municipalities with gaming cabinet liquor licenses all of that so.

Generally speaking, we're still doing very well on that front, we always sort of kept the backlog closer to our best but what.

What we're focused on you know obviously that looks at the backlog is getting the locations license in line, but all all we can focus on is continuing to grow those backlogs, which we are and then providing helping our locations through the licensing process.

Like we've always said, Illinois still has room to grow we look at it both that is liquor licenses without gaming and Bgc's per capita.

It's certainly the market continues to get bigger, but we still see a good amount of growth in the future.

Got it very helpful and I guess just last one from me strategic rationale for the V. B S purchased and maybe what multiple to that purchase equate to.

So the strategic.

Our concept there was that they have a established route in the market.

<unk>.

We're well positioned.

And.

A really good team of people that they have.

D B S.

And the the actual multiple.

Is kind of to be determined because.

As we look at the.

This market.

There is a significant earn out that is they will help us to grow the market.

We will kind of be able to there'll be able to to grow there.

The payment.

With to expand so like I said earlier.

The a lot of the locations just have a few machines.

And as a.

It expands we're able to add more machines.

The payment will increase and then we will have a better.

Kind of concept.

Or a more firm number as to what the multiple was.

Okay. It makes sense thanks, guys.

So we have no further questions in the queue I will hand, the floor back to Andy Rubenstein.

I wanted to thank everyone for joining us this morning.

We had a pretty good second quarter, we're really pleased with that.

And as we're looking forward to the second.

The second half of this 2022.

Yeah, we think that you'll continue to see us growing expanding in some of the markets that we're in Ah and identifying opportunities for us to continue to grow and we.

We appreciate you joining us this morning, and look forward to talking to you.

At Summer's end.

Thank you.

Yeah.

Yeah.

This concludes today's conference call. Thank you very much for joining you may now disconnect your lines.

No.

No.

Okay.

Hi.

Uh huh.

Okay.

No.

Yeah.

Yeah.

Yeah.

Okay.

Right.

Yeah.