Inspired Entertainment, Inc.

Good morning, everyone, and welcome to the Inspired Entertainment fourth quarter and full year 2020 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 will be an opportunity to ask questions. Please note, this event is being recorded. I'll begin today's conference by referring you to the company's safe harbor statement, that appears in the fourth quarter 2020 earnings press release, which is also available in the investor section of the company's website at www.inseinc.com. This safe harbor statement also applies to today's conference call, as the company's management will be making certain statements that will be considered forward-looking under securities laws and rules of the SEC. These statements are based on management's current expectations or beliefs, and are subject to risks, uncertainties, and changes in circumstances. In addition, please note the company will discuss both GAAP and non-GAAP financial measures. A reconciliation is included in the earnings press release. With that completed, I would now like to turn the conference over to Mr. Lorne Wheel, the company's executive chairman. Mr. Wheel, please go ahead.

Thank you very much, operator, and good morning, everyone else. and thank you for joining our fourth quarter and year-end conference call. I'm joined, as usual, by Brooks Pierce, Stuart Baker, and Dan Silvers. At the risk of stating the obvious, let me begin by saying that the fourth quarter of 2020 tried our patience like no other quarter I can recall over the course of my career in this industry, and I'm sure Brooks feels the same as those Those of you who might have followed us going back to our scientific games years or even before that to our auto tote years, you will know that we have dealt with some pretty strange quarters. We began the fourth quarter with a predictably very strong October, continuing the month-to-month ramp up that began in the third quarter of 2020 following the worldwide lockdown that had occurred in the second quarter. In October, we earned $6.8 million in EBITDA, a pretty healthy margin of 32% on revenues of $21.2 million. Most importantly, October EBITDA was nearly 20% above the EBITDA we earned in October 2019. And yet, as mentioned in the press release, the October performance itself was well below What we feel its potential was because we were dealing with pub curfews from the beginning of the month, and then the introduction of the tiered system of UK closures in the latter half of the month, which significantly impacted both pub and betting shop revenues, against which, unfortunately, there was very little cost offset possible. So I think we can say with a very high degree of confidence that absent these factors, October revenue EBITDA and especially margins would have been very considerably higher than the October actuals. And this begins to give us again some sense of the true earnings power of this business. And this is further underscored by the fact that at least 90% of our business is derived from recurring revenues and therefore sustains itself from month to month, except, of course, when there's a mandated government shutdown. Yet, despite the handicaps just mentioned above, October performance was as strong as it was, and as I said, 20% above 2019, was largely because of the realization of increased synergies from the Novomatic acquisition And most importantly, the tremendous growth in our online business, which, as mentioned in the press release, doubled between the fourth quarter of 2019 and the fourth quarter of 2020. And here again, the vast majority of this growth was from multi or is from multi-year recurring revenue contracts. To refresh everyone's memory, we earned about 19 plus million dollars at current exchange rates in EBITDA in the fourth quarter of 2019. And this is important because that was the first quarter following the completion of the Novomatic acquisition, but before the issue of COVID had struck. So at that time, we talked about having a high degree of confidence that we had established a baseline annual EBITDA level of about $80 million. I think we referred to that at the time as our par EBITDA. And given the impact of increased synergies we've seen since then, and of course the tremendous growth in our own business that we had begun to see clearly over, we would have expected the fourth quarter of 2020 to come in well ahead of 2019. Just as October he had been well ahead of October 2019 and to therefore establish an annualized EBITDA baseline that was proportionally greater than that $80 million baseline. But of course, this is where the strangeness of the quarter kicked in and our one step forward was quickly followed by the proverbial two steps back. The month of November, saw the UK go back into complete lockdown. And then in November, an increasingly complicated and disruptive tiered system was reintroduced that, despite significantly impacting revenues, made effective cost management very difficult, if not almost impossible. Notwithstanding the convoluted nature of the fourth quarter, we ended the year with about $47 million in cash and an undrawn revolver of nearly $28 million for total liquidity of about $75 million, aided, of course, by the value-added tax refunds that we have discussed previously at length. I can say that our year-end cash balance would have been quite significantly higher had we not used a good part of that refund to repay debt. So we entered the first quarter lockdown with a strong liquidity cushion, and because the ground rules were clear and simple from the outset and aided by the continuation of the UK furlough scheme, which I believe now has been extended until September of 2021, we were able to get our cost structure well aligned with the shutdown. As was the case during the lockdown in 2020, we have in the first quarter continued to spend very heavily in support of our online business and the business continues to grow in response to this. Based upon the most recent announcement by the UK government, we're planning on the reopening process beginning in April and that our retail business will be back essentially to normal by the end of June, just as we begin the third quarter. During the third quarter of 2020, Which is seasonally by far the strongest quarter for our holiday park business and actually therefore Should be seasonally the strongest quarter for the whole company Contribution from the holiday park business was minimal because of severe restrictions that were in effect throughout last summer Conversely, we're cautiously optimistic that this summer will be much stronger for the holiday park business and with far fewer restrictions other than travel restrictions in the UK, which ironically will be very beneficial to us, we think. In addition, we project that synergies from the nomadic acquisition will have increased further. And finally, as discussed at length previously, will nevertheless be discussed in greater detail in a moment by Brooks, our online business, comprising both virtual sports and iGaming components will in the second and third quarters of 2021 be far ahead of comparable periods in 2020. Taking all these factors together, the impact of the summer, the increasing synergies, and the tremendous growth in the online business, I think this gives us a way to think about not only the second and third quarters of this year, 2021, once the lockdown ends at the end of this month, but also a way of thinking about an annualized EBITDA level that will go far beyond the $80 million baseline we discussed at the end of 2019 prior to the COVID interruptions. And with that, I'll hand the program over to Brooks.

Thanks, Lauren. And I'll add some more details to your commentary in doing it in the new reporting format that we've outlined in the release, namely starting with gaming, then virtual sports, then interactive, and then leisure. So I'll update on the businesses that were operating in the fourth quarter and are currently in the first quarter of 2021, which are interactive business as well as the online part of our virtual sports business. but also try to give some perspective on the reopening of our retail businesses in key markets like the UK, wherein the government has laid out a very specific timeline for segments of the industry to open and the operating conditions in which we will be able to open. So starting with gaming, the retail aspects of our businesses we've talked about have more or less been closed in our key operating markets such as the UK, Greece, Italy, and North America since November as Lauren outlined. and continue to be largely locked down as of today other than Illinois. The UK has announced that bedding shops will be allowed to open as of April 12th, albeit with some restrictions on the number of machines per shop that are open as well as the dwell times in the facility. Greece and Italy have yet to confirm when their bedding shops will reopen, but we are projecting that during the second quarter and with capacity at full by the time we reach the second half of the year. As experienced in all territories after the first and second lockdowns in 2020, we expect that the turnover will return to prior levels quickly and they'll be at 100% going into the second half of the year. As you'll see in the release, we're migrating our business in Italy into a recurring revenue model for game content and platform only, and we'll not be providing service to this market going forward with CECL being the first customer to move to the new model. We expect to increase our margins significantly by doing this and play to our strengths in providing leading content and an open platform, and we'll be working to migrate our Italian gaming machine business in total to this model. Please note that this will not change our operating models in Italy for both our virtual sports business and our interactive business. We're also pleased to deliver the first 100 terminals to our second North American customer, the Western Canada Lottery Corporation, And we believe that there are further opportunities in the Canadian provincial markets going forward and we will be pursuing these. Our games continue to perform well in Illinois and we expect accelerating sales in that market going forward as operations there build back to a steady state. Moving on to our virtual sports business. As Lauren commented previously, the online segment grew dramatically, and we grew that part of the business, our recurring revenue, by 90% in the fourth quarter and 58% for all of 2020, due in part to retail virtuals being closed in most of our markets and real sports either being shut down or reduced. In this environment, we accelerated development on a key product initiative of ours, the launch of our virtual plug and play, or VPP as we call it. And this is a product that seamlessly integrates into a customer's existing website with all 14 of our sports currently. This product went live with a number of customers in the fourth quarter of 2020 and will be going live in 2021 with a number of key new customers, including BetMGM, Caesars, FanDuel, and others. To give you an example, our launch in Turkey with this product with our partners from both CESOL and MISLI has been very successful and is on a run rate of producing over a million dollars in annual revenue to us. We just literally yesterday launched our match day product with them, which is on VPP where players can bet on eight simultaneous virtual soccer games. All at once and create a number of interesting wagering options, similar to what you would see with parlays and sports betting in the States. Obviously, the results are very early, but day one was dramatically bigger than we had expected. In terms of our land-based virtual customers, we've talked over many of these quarters about the Pennsylvania Lottery. We're very happy to report that the PA Lottery has shown dramatic growth in 2020 with sales increasing by 255% compared to 2019, even with sports bars in Pennsylvania closed for a large part of the year and also after normalizing for promotions from the PA Lottery. We believe that those outlets will start to reopen the sports bars, that is, and we're looking to launch an updated football product. So the second channel with our horse racing product in the market later this year. We're also very happy to be launching our second North American lottery with the DC lottery. And we'll go live with that in the second quarter. And interestingly, it'll be the first installation in North America where we'll be replacing an existing product. So we'll have a measuring stick to base against. And finally, we signed an agreement with Larry Column, who is the announcer for all the Triple Crown races and did our virtual Kentucky Derby race this summer to be the voice of our virtual horse racing product in North America, which is really part of our strategy to localize our content. So moving on to the interactive segment, the segment has shown obviously tremendous growth as we discussed in the release, basically doubling in size in 2020. And we're continuing to see the strength of that segment in the first quarter of the year thus far. And this really comes down to a strategy that we have consistently articulated on these calls and is based on a few key drivers, which include the following. Number one, successful integration. We had 42 new customers and five new aggregators in 2020 across multiple geographies. An increased pipeline of delivery of new content to our customers by increasing our game releases by 55% in 2020 and adding some very successful titles, including Centurion Megaways, Real King Megaways, our entire line of Cashbot games, and Gold Cash Freespins. We have a number of new titles that will be released this year, including Cops and Robbers Megaways, and we're building bespoke new content specifically for the North American, Greece, Belgium, and Italian markets. Speaking of Greece, this is one of the new geographies that really grew substantially And it really validates our omnichannel strategy, as we've talked about many times, about how we're positioned in the retail side in Greece. This was really born out with the number one online game being the same as our number one retail game, namely Super Hot Fruits. Lastly, a pipeline of new markets to come online in 2021 that we're obviously very excited about would be Michigan and West Virginia. And upon successful completion of our licensing in Pennsylvania, that one will come on board as well. We've also recently just gone live in both Spain and Germany and see key new international markets like the Netherlands, Romania, and Colombia all being added yet this year. So in summary, the combination of our online business really is a key focus of the strategy of the company and growth going forward, even as we expect our retail businesses to rebound quickly in 2021. Last but not least, talking about our leisure business, which includes the pub side, the holiday parks and motorway services, which have been, as we've talked about, the most impacted by the restrictions in the UK as they rely completely on footfall traffic. So we showed in the third quarter last year, even with some of the restrictions, Lauren mentioned, the power of the earnings of this business between the lockdowns and would expect these to benefit the most with the lifting restrictions in the UK. The UK government has advised that indoor hospitality and leisure can open from May 17 and advanced bookings are extremely strong with most locations already actually sold out for peak holiday weekends and the phrase that they use staycation so folks staying in the UK travels expected to be very robust through 2021. We've right-sized the business through the integration process in 2020, and we expect margins in this business to improve substantially with the increased demand across a significantly lower cost base. So in summary, all indicators are leading us to forecast internally that the second half of this year will be a clear demonstration of the earnings power of Inspired, with significantly growing online businesses combined with the recovered, and I think this is key, locals-based retail businesses. So with that, I will pass it back to, I think it's going back to Lorne.