Inspired Entertainment, Inc.

Good morning, everyone, and welcome to the Inspired Entertainment third quarter 2022 conference call. All participants will be in a 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, today's event is being recorded. I'll begin today's conference call by referring you to the company's safe harbor statement that appears in the third quarter 2022 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 security laws and rules of the SEC. These statements are based on management's current expectations or beliefs and are subject to risks, uncertainties, and change in circumstances. In addition, please note that 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 call over to Lorne Wheel, the company's executive chairman. Mr. Wheel, please go ahead.

Thank you very much, operator. Good morning, everyone. And thank you for joining our call this morning. With me, as usual, are Brooks Pierce, Stuart Baker, and Dan Silvers. Despite the inconvenience of the slide in the pound, and some narrowly focused inflation and supply chain issues. Our underlying momentum in the third quarter was very strong, and we're executing well along each of our main strategic vectors. Just to be able to put everything in context, it's worth reviewing our overarching strategic objectives. One, drive high double-digit growth in our high-margin capital-efficient digital businesses, addressing the gaming industry, lottery, and sports betting verticals. Two, manage our land-based businesses for mid-single-digit growth while reorienting our business model in a way that significantly reduces its capital intensity. And three, combine these two to yield an overall business that is growing faster, has higher margins, and far lower capital requirements. These three in turn allow us to more than adequately fund our overall growth objectives while at the same time attending to our balance sheet. Our net leverage right now is below 2.5, and as mentioned in the press release, we have repurchased more than a million shares so far. Notwithstanding the currency inflation and supply chain issues mentioned earlier, our EBITDA on the quarter was about equal to consensus, suggesting that the underlying business is close to hitting on all cylinders. Our overall EBITDA margin, though healthy, 37%, was down from about 39% in 2021. But more than all of this decline was a result of inflation and supply chain issues unique in our holiday park segment. In a moment, Brooks may elaborate on that a little. But as we move through the fourth quarter and into the first quarter of next year, we expect that this situation will have been remediated. As we've mentioned before and as we've been targeting, our digital businesses grew to account for a little over 50% of our EBITDA on the quarter, up from 36% a year ago, and what happens otherwise to be the seasonally strongest quarter in the holiday park segment, at least from a revenue point of view. The start of the quarter, once again, was our virtual sports business, which established records for revenue, EBITDA and margins. Specifically, revenue and EBITDA grew respectively to $14.6 million and $12.6 million in 2022, from $10.5 million and $8.6 million a year ago, about a 50% increase in EBITDA and a rather remarkable result. While a majority of the recent growth has come from outside the United States, we're getting excellent traction with the Pennsylvania Lottery, the DC Lottery, and Ontario iGaming. And we're cautiously optimistic that there are many more important developmental opportunities in the North American market. There is no seasonality to this business, the virtual sports business, that we can see. And there were no one-time revenues or other events in the quarter. So effectively, the virtual business at the moment is generating EBITDA at the run rate of $50 million a year, which just so happens to be more than twice what the entire EBITDA was of Inspired Entertainment five years ago. Growth in our digital interactive or iGaming business was more moderate in the quarter as we wait for contracted new customers and product enhancements, as Brooks will talk about in a moment, to come on stream. Revenue in the month of October for the interactive business accelerated to 14% year after year, and we feel that we are pivoting back upwards to a higher rate of growth. Of particular note here is that we will shortly be launching our second iLottery game with the Quebec Lottery following the extraordinarily successful launch of our first game earlier this year. The Betfred contract mentioned in the press release represents a very critical element in our overall strategy. With about 1,400 retail locations and 5,600 terminals, Betfred is our largest customer in the UK server-based gaming market. Historically, this market has evolved our making the capital investment to create the installed base of terminals, earning a return over the life of the concept. In the best-read model, we will be selling the terminals and then supplying on an ongoing multi-year basis content and technical services. Here again, we're cautiously optimistic that in the relatively near term, the majority of our customers will move to this model so that our retail business will become effectively an extension of our digital business. We supply content and technical support on a recurring multi-year contract basis, but we do not supply capital. I should also mention that Betfred is a very important customer for our virtual sports and iGaming products, illustrating even greater synergy between the two sides of our business. And with this, I'll hand it to Brooks to elaborate in more detail.

Okay, thanks, Lauren. Excellent summary of how we view the business, and I'll try to give some more detail and insight on each of the operating segments. So let's start with the digital businesses, which, as Lauren mentioned, now contribute more than 50% of our EBITDA and are the areas of higher growth and higher margins with less capital intensity, which we expect will continue to scale nicely. Our virtual sports business had another outstanding quarter, growing on a functional currency basis. At the revenue line by 63% and EBITDA at 75% compared to Q3 of 2021 and by 12% and 13% or 12% of revenue and 13% of EBITDA over our previous quarter, again, on a functional currency basis. This segment continues to perform at an extremely high level with a number of key drivers still to look forward to, notably the plans we're building on for the North American markets. We're now live with two lotteries in the US and several gaming operators in both New Jersey and Ontario. We're very encouraged by the responses we received at both G2E and the World Lottery Summit in Vancouver, with an increased pipeline of opportunities developing based on the success we're seeing for virtual sports on a worldwide basis. The segment continues to show strong organic growth in both online and retail. across a number of geographies and we expect to add additional territories to build on this base. A good example of the popularity of the product is in Greece where we expanded our menu of available products and increased the frequency of the events and saw 17% growth last month in what's a very mature market. We're excited to launch our home run shootout product this quarter with icons like Babe Ruth and Mickey Mantle. and other legends of the game and expect it will be very popular in many key markets. And lastly, we expect to see a bump from the World Cup this month as there will likely be increased football in many of our betting operator shops and retail and increased interest in our most popular sport, soccer or football, depending on who you're talking to, and our online channel. Needless to say, we're very bullish on this business segment. Moving over to the interactive ride gaming segment, which showed 10% growth in functional currency in the quarter as well, although somewhat moderated from our growth rates experienced during COVID. We're starting to see the benefit of our launches in Pennsylvania with Q3 only having Rush Street for the full quarter and DraftKings for just a few days in the quarter. BetMGM will be going live this month, Caesars will be going live next month, and we're still hopeful to add FanDuel in Pennsylvania and our other key markets of New Jersey, Michigan, and Connecticut. Interestingly, where we are live with FanDuel in Ontario, they already represent close to 10% of our business there, so we have high expectations when their resource challenges free up and we can get them live in all of our jurisdictions. We're also introducing some key product enhancements, like our first progressive games in North America, planned to go live in Q4 this year. All of the above, plus continued growth in key markets like Greece and the Netherlands, The launch of a number of new titles throughout the fourth quarter and the holiday season bode well for this business going forward and going into 2023. We also have gone live with our second iLottery game in Lotto Quebec and are looking to expand this footprint in other jurisdictions worldwide as we build out our library of iLottery content. So clearly we believe there's great momentum in the segment and as we've seen from our October results, a number of positives that we see for all of our digital businesses. Moving over to the retail side, we are gratified to sign a new five-year contract with our largest customer in the UK by machine totals and shop locations, Betfred. The Vantage cabinet will be rolled out to the Betfred estate in 2023 after its successful trial this year that produced a meaningful uplift in the cash box in the locations where it was on trial. We expect strong demand for this product from all of our LBO customers in the UK and we'll also be introducing this product in the pub segment of our leisure business. In Greece, we continue to see impressive results with Q3 win per unit higher than any other Q3 since our first launch in 2017, and this is with significantly higher number of machines deployed. We're at the early stages of discussions with our customer in Greece on replacement cabinets for those that have been there since inception, and with over 9,000 terminals deployed there, we believe there's a great opportunity to drive incremental value in a mature market with new cabinets and industry-leading content. Lastly, we're very encouraged by the opportunities discussed at G2E with additional operators in the distributed games markets, where we have already proven our success in both Illinois and Western Canada. As Lorne mentioned in his remarks in the leisure segment, and specifically the holiday parks, is where we face headwinds on a cost basis from inflation and cost of goods sold unique to that business. The revenue across the leisure segment held up very well across pubs, holiday parks, and motorway services, but margins were impacted by the aforementioned cost issues. We continue to believe strongly in the opportunity in pubs and motorway segments, but clearly we need to rectify some of the cost issues in the holiday parks part of the business as we move forward. With that, I'll hand it over to Stuart for his comments.