Q2 2023 Accel Entertainment Inc Earnings Call
Good afternoon. Thank you for attending to XL Entertainment second quarter 2023 earnings call. My name is Matt and I'll be your moderator for today's call all lines will be muted during the presentation portion of the call up an opportunity for questions and answers at the end if you like to ask a question. Please press star one on your telephone.
I'll keep it.
I would now like to pass the conference over to our host Derek Harmer.
Eric. Please go ahead welcome to Accel Entertainment's second quarter 2023 earnings call.
Participating on the call today are Andy Rubenstein, <unk>, Chief Executive Officer, and Matt Ellis <unk> 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.
Forward looking statements are subject to risks and uncertainties.
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 Andy.
Thanks, Derek and good afternoon, everyone. Thank you for joining us for <unk> second quarter earnings call I'm pleased to report we had another record breaking quarter, we reported revenue of $293 million a year over year increase of 28% and adjusted EBITDA of $47 million a year over year increase.
<unk> of 9%.
Q2 revenue growth was primarily driven by the successful acquisition of century, which is now fully integrated and 0.4% same store sales growth in Illinois.
The modest growth in Illinois was mainly due to unfavorable weather warmer temperatures came earlier than expected and we've seen higher thunderstorm activity during the summer.
Our continued growth in the face of economic uncertainty clearly demonstrates the strength of our hyper local business model, our establishment partners recognize and rely on the incremental profits are high quality offerings bring to their businesses.
On the expense side, our technology investments have started to bear fruit.
Over the winter, we re imagined how to provide service to our locations by investing in technology to help us more efficiently dispatch our technicians, while continuing our industry leading level of service.
Our cost structure continues to remain stable, despite the inflationary impacts on labor and costs, while the labor market remains challenging we have seen some signs of stabilization, allowing us to better retain and attract talent.
Our asset light business model and highly variable cost structure will allow us to continue to quickly calibrate our business to any additional changes in the economy.
On the regulatory front, we reached a settlement with the Illinois gaming board to resolve our disciplinary complaint for $1 million $125000 with this matter behind US we look forward to working together more productively.
Turning to century I am pleased to share that we've completed our back office integrations and our operations teams continue to align our best practices with centuries capital constraints removed. We're now focused on unlocking centuries growth by investing in new equipment and strategic acquisitions.
On the Greenfield front, we're closely watching North Carolina is a part of north Carolina's efforts to reduce corporate income taxes. We're hopeful the state was turned to distributed gaming as an alternative source of tax revenue.
The house and Senate are currently reconciling the respective budget bills both of which currently include distributed gaming.
We should know more by the end of August looking at M&A, our pipeline remains active and we are evaluating multiple opportunities across the country.
Our long term goal continues to be the increase as a percentage of our revenue generated outside of Illinois.
Overall <unk> continues to execute its growth playbook, we remain excited about the opportunities in the markets, where we are currently operating as well as new markets, we're looking to enter.
Our strong balance sheet local business model 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 our financials in more detail.
Thanks, Andy and good afternoon, everyone for the second quarter, we had total revenue of $293 million a year over year increase of 28%.
And adjusted EBITDA of $47 million, a year over year increase of 9%.
As a reminder century has been included in our results since June one 2022 and century operates in markets, where the revenue splits between century and the location is negotiated.
The margins are attractive, but far lower than our existing business.
I'd also like to note that our reported $47 million of adjusted EBITDA includes the $1 $1 million to $5 million settlement with the <unk>.
Capex for the second quarter was $20 million cash spend the increase is due to accelerating some purchases in Illinois to avoid supply chain disruptions and additional investment in our developing markets, such as Nebraska and Georgia.
We continue to see upside in both of these markets and we're excited by the recent growth.
That said, it's important to realize today's investments may not be fully realized for several years to come.
As of June 30, we had 23759 terminals and 3655 locations year over year increases of 7% and 5% respectively.
Location attrition continues to remain low and is mostly attributable to our lowest performing locations closing their doors.
At the end of the second quarter, we had approximately $285 million of net debt and $575 million of liquidity consisting of $233 million of cash on our balance sheet and $342 million of availability on our current credit facility.
I would now like to discuss our capital allocation strategy.
As Youre all aware in November of 2021, we announced a $200 million share repurchase program.
With our strong balance sheet and low leverage we are in a unique position, where we can grow our business and return capital to shareholders Gen.
Generally speaking, we intend to fund growth using our credit facility and return our free cash flow to shareholders.
I'd like to emphasize that this strategy may change, depending on macroeconomic conditions growth plans and other factors.
To that end during the quarter, we repurchased $8 $1 million worth of <unk> stock at an average purchase price of $9 14 a share.
We are now just over halfway through the repurchase program with $9 7 million shares repurchased at a cost of just over $100 million.
Similar to last quarter, we are not issuing guidance due to the near term macroeconomic uncertainty how's.
However, I would like to emphasize that demand continues to remain strong and should the current trends continue we expect to deliver another strong year with record breaking results.
With that I'd like to turn it back over to Andy.
Thanks, Matt.
Pleased with another strong quarter and remain focused on executing our growth strategy to create value for our investors. We're confident that our locally focused business model creates a platform to outperform in challenging conditions, such as these and thrive under normal circumstances, we will now take your questions.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
Any reason to removed a question. Please press star followed by two again to ask a question press Star one as a reminder, if youre using a speakerphone. Please remember to pick up your handset before asking your question. We will pause here briefly is questions registered.
The first question is from the line of Steve <unk> with Deutsche Bank. Your line is now open.
Hey, guys. Thanks for taking my question.
Can you just talk about any trends you saw intra quarter by month and by location and maybe any color you can give us on July .
Hey, Steve Thanks for the question.
Generally speaking the whole quarter came in strong.
As Andy discussed when the warmer weather comes revenue slows up a bit but throughout the quarter. We recovered. So I would say overall, we continued to stay on a general basis ahead year over year.
Little more modest on the same store sales growth, but still growing.
And then on the century side as well.
Distant granted we got them in June of last year, but we're seeing year over year growth there as well July .
Similar to Q2 looks good maybe not as strong as years ago, but still up.
So.
Like I said, we feel pretty good about everything hard to get too aggressive just with everything going on.
But we continue to see positive numbers.
Okay. Thank you that's helpful and then margins were up nicely quarter over quarter.
And thanks for the color on the cost can you talk about where you think you can get margins to kind of moving forward in the back half and then as we can.
Think about 2024.
So I think remember.
You've got to think again cost tariff in general our raises come mid year, so that will be factored in.
But again revenue is growing so I think.
I wouldn't go much up from where we're going but like we said we've been able to manage our cost structure, while keep our service levels are very high.
I think sort of what you've been seeing is something to continue modeling. The one thing I would stress is while demand holds up obviously those incremental revenue dollars.
Can have an impact, but overall I think what <unk> seen for the first two quarters of this year with just maybe a little bit of cost inflation for the back half is a pretty reasonable way to model.
Okay. Thanks, and then just one more if I can.
Thanks for the color on North Carolina.
Are there any other jurisdictions, you're looking at maybe in Chicago often in.
Are there any other states you could share.
What youre seeing out there in the legal legalization trial.
Thanks, Steve This is Andy.
We have been monitoring the miseries the Indiana is the city of Chicago, we haven't seen any real movement.
It would indicate that some of these jurisdictions would.
Either legalize or adopt.
Legalized gaming and so on.
<unk>.
Definitely for 'twenty four.
We're very pessimistic.
Anything other than North Carolina.
Having any movement looking into.
The future.
Maybe.
It's something that we're constantly monitoring it.
And even if.
There was.
Some type of movement on that.
It's probable that it's going to take 18 to 24 months.
After the legislation passes or the authorization before we will be able to monetize the market.
Yes.
Okay. Thanks appreciate it.
Thank you for your question.
The next question is from the line of Chad Beynon with Macquarie. Your line is now open.
Afternoon, nice quarter and thanks for taking my question.
Andy wanted to ask about just broadly M&A conversations you mentioned your strong balance sheet and.
And your appetite to grow outside of Illinois. So just wondering if bid ask spreads have tightened or given how strong the consumer has been.
Nationally if potential sellers are still.
Not ready to to come down on price.
Yes, Thanks Chad.
There's still a bit of a disconnect and I think you have to look at it market by market some of the legacy markets.
It is contracting in terms of the the gap.
But.
Especially with interest rate pressures.
On some of these businesses.
And the actual cost of capital increasing.
We're starting to get a reality check.
We've looked at some of the transactions that have happened in the last year or two.
They are not today.
Wouldn't be viable.
And we're kind of pleased with our position that we've kind of.
We've been able to use our capital more prudently.
And we expect there'll be opportunities as as we move forward because.
The pricing is becoming more and more attractive.
Thank you I appreciate that.
And then back on North Carolina.
Apologies that I that I haven't looked into this to the degree that I should've, but.
It's a $10 million population state and if I look at Illinois, and I kind of back out Chicago, where there is there is no product nor.
North Carolina could actually be bigger from a population standpoint than what we see in Illinois from a unit standpoint within the two different bills have they've been has it been discussed in terms of what the size could be I mean could this be as big as you know.
Present day, Illinois after after North Carolina matures.
Yes, that's a very interesting question the legislation hasn't been finalized there is a lot there has been multiple iterations of it in many different.
Proposals that we've seen.
Or heard about some most of them we haven't even seen.
Sure.
There is the potential for.
Equipment.
In the market limitations, whether it's by individual.
Storefront or its total market and a lot of that is being negotiated.
I believe because of this mentality it may hold back.
<unk>.
The opportunity or the total market.
Ability to earn.
Because of legislative limitations.
Again.
It's all speculative because we havent seen anything thats close to final.
And we will continue to wait.
For it to be worked out all this being said.
There is a real possibility that nothing happens and thats as all of US have followed legislation in these markets for many many years.
<unk>.
It can.
The teasers and any given day it can go one direction or another in terms of the momentum.
We think it's pretty positive right now.
But until the governor signs it.
As we learned and what happened in Virginia.
Nothing is guaranteed.
Good points. Thank you and then lastly, just thinking about the the century.
Gration I am looking at a $177 million of TTM.
EBITDA with much greater strength in the last two quarters is there still are there still synergies from the century acquisition that could could come in the future or do you feel like that portfolio.
Outside of macro trends is running.
Optimally thanks.
So.
As far as looking at it from a synergy standpoint.
They've done they run a very very good operation and we've extracted some synergies, but what we're seeing more as opportunities and.
They have a very good brand they have outstanding service, they're a leader in both markets.
And with the capital.
That we've provided.
<unk> really been able to upgrade and seek out new opportunities and so we think that.
They are.
They haven't reached their potential.
And we think they are there.
We're still on a path to keep to continue growing their presence in each market.
And improve the topline performance.
Great. Thank you very much nice quarter.
Thank you for your question.
The next question is from the line of Greg <unk> with Northland. Your line is now open.
Okay.
Hey, good afternoon, guys. Thanks for taking the questions.
I guess first just to follow up on you mentioned the back office integrations with century being complete and now the focus is on kind of investing in some new equipment.
Will we see a meaningful impact on financials that we should be accounting for a result of that or is that just kind of the.
Next step in terms of the focus on that integration.
Thanks for calling Greg.
I think you'll see.
A gradual improvement and.
Growth in the revenues, it's not going to.
Is that going to be a big pop, it's going to be something that we'll consistently happen over the next couple of years.
It's you.
You are talking about a big ship.
We're adding pieces to it and its growing but its not something thats going to happen overnight.
<unk>.
We've got great leadership, there and.
Our market our market presence.
As significant.
To where we are a recognized leader.
So I think we can build on that and.
You will see the benefit from that for a few years to come.
Okay great.
Regarding M&A.
The goal to kind of diversify outside of Illinois more.
What I just mentioned looking at multiple markets, what would kind of beer.
The primary or maybe the top markets that youre looking at in terms of M&A transactions.
And we're I.
I mean, we're looking.
Across the board on these these opportunities and.
I think.
There is a lot of promise in markets outside of Illinois and.
<unk>.
We've spent quite a bit of time exploring these markets.
Fortunately.
The century Grand vision.
Part of our business has allowed us to.
To investigate and understand how gaming works in many other markets.
And from that from those learnings I think when a new market like Nebraska opens up.
We've been successful it's because of the experience that we that the century brand vision teams have.
In developing products for new markets.
Understanding the needs of the market and we lever that.
Very quickly to work with companies, who are in the market and either do a partnership or an acquisition too.
Establish ourselves and as.
Nebraska is.
Has moved along and grown and started to trend towards positive EBITDA.
You'll see the benefit.
Of that experience.
Sure Okay.
Makes sense.
I guess, just lastly, I did want to follow up on North Carolina, something that we should be tracking more closely I know you've kind of provided the high level, but can you just remind me where it stands today in terms of legislation in.
You said when we'd expect to get an update but when would we maybe hear an update on the next step of that legislation and that North Carolina market.
So.
From our understanding the.
The legislation.
Related to gaming.
We will be is currently in the budgeting process. So they are looking to close gaps.
And tax revenue that they are reducing and whether it's a corporate tax or personal tax or.
Some other tax revenue.
And replace it with something.
Something like.
Video gaming.
Our revenue or our video gaming tax.
It's still in the budgeting process the budget has not been approved.
And.
The deadline originally it was the end of June .
Been extended obviously.
And they are working through this we expect to get more information.
And color around where.
This legislation is and what it is because it's been held fairly secretive way its not like what you've experienced in Illinois, where the legislation gets written they get circulated.
The different process, but we are optimistic that.
They see the value.
<unk>.
Bringing legalized regulated gaming to replace.
The current industry there.
And be able to provide the.
The gap that they need to close in order to reduce other taxes.
Perfect. It makes sense, we'll keep an eye on that one going forward.
Thanks for addressing the questions Andy.
Thank you for calling in.
Thank you for your question.
There are currently no further questions registered so as a reminder, it is star one on your telephone keypad.
There are no additional questions waiting at this time, so I'll pass the call back to Andy Rubin for any closing remarks.
Thank you everyone for joining us today.
Like we said earlier we had.
A very good second quarter.
The summer Hasnt.
Change too much from traditional trends and.
We look forward to continue to performing.
At a high level and as we remarked earlier the opportunities or are there for real growth and.
I hope to demonstrate in the next couple of quarters, how we continue to lead in route gaming not just in Illinois, but throughout the U S. Route markets. So thank you again have a great summer and we'll talk to you in the fall.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.
You again have a great summer and we'll talk to you in the fall.