Inspired Entertainment, Inc.

Good morning, everyone, and welcome to the Inspired Entertainment second quarter 2023 conference call. I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. To rescind a question, do the same afterwards. Please note, today's event is being recorded. Please refer to the company's Safe Harbor statement that appears in the second quarter 2023 earnings press release. which is also available in the investor section on 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 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 now would like to turn the conference call over to Lorne Wheel, the company's Executive Chairman. Mr. Wheel, please go ahead.

Thank You operator good morning everyone and thank you for joining our second quarter earnings call with me today are Brooks Pierce our president and CEO and Stuart Baker our CFO second quarter EBITDA was 26.2 million was roughly in line with consensus slightly up over last year but at least a couple of million dollars less than we would consider to have been the inherent earnings power in the business in the quarter. As can be seen in the P&L that was in the earnings release, quarter-to-quarter corporate expense increased by $800,000 from $6.2 million in 2022 to $7 million this year, with a vast majority of this increase due to the timing of our audit expenses. As we reported some time ago, we changed auditors during 2023 or for 2023 from Markham to KPMG, with the latter now billing us on a different and unavoidably accelerated cycle. In our leisure business, we incurred a statutory $600,000 increase in labor costs in the second quarter due to the UK national living wage, But we have since reconfigured and reengineered our processes, enabling us to offset this cost going forward beginning with the third quarter. And we had about $1 million of equipment sale EBITDA move out of the second quarter into the second half of this year. Taken together, these items will benefit the second half to the extent of at least $2 million of EBITDA. And since we were anticipating a strong second half in any case, driven by growth in the digital businesses, continued strength in the gaming business, and a return to growth of leisure, we remain more than comfortable with the current full-year consensus. EBITDA on our digital businesses' pre-corporate expense allocation grew by 14% year-over-year on a functional currency basis comprised of 28% growth in interactive, and 11% in virtual sports. As anticipated several quarters ago, our interactive earnings continue to accelerate, driven by platform enhancements, high-performing new games, and additional customer integrations. Recent growth in virtual sports has been moderating, but we're anticipating a strong reacceleration in virtual sports as we move into next year, We expect that our gaming operator partners will be entering a number of new markets and catalyzed by our NFL license. We're expecting to see significant activity in the US market. In a moment, Brooks will elaborate on much of this. Our leisure business had a year-to-year decline in EBITDA on the second quarter, due almost entirely to the aforementioned labor cost increase. together with the previously reported loss of a pub customer. But as we move through the year, the combination of strong seasonality, new holiday park customers, and improved cost structure should drive leisure into positive growth by year end. And I should add that the last couple of weeks, the trading performance has been very, very strong. Lastly, but by no means least, I should mention that trading performance in our core gaming business continues to be very strong, aided by the very successful rollout of our new Vantage cabinet. And here again, Brooks will elaborate more in a moment. And with that, I'll hand it over to Brooks.

Okay, thank you, Lorne. And as I usually do, I'll try to add some color to the results of each of the segments of the business, both in quarter two performance as well as what we're seeing and what we have planned for the second half of the year, which we're very excited about. Our digital businesses, interactive and virtual sports, had double-digit growth in revenue in the quarter compared to prior year, and through the first half of the year now represent 31% of our revenue excluding low-margin sales and 62% of our EBITDA on a combined basis. This continues the trend of shifting more of our business online and expect these businesses to contribute a larger portion of our EBITDA going forward and generating significant cash flow with high margins and low capital intensity. The interactive segment growth of 28% in both revenue and EBITDA was helped in large part by the launch of FanDuel in both Michigan and Pennsylvania, as we've outlined in previous calls, and we expect that growth from this customer to continue as we add more and more of our best content with them and go live with them in New Jersey yet this month. The growth of Interactive was really across all geographic areas with Europe slash UK growth being 17%, North America growth growing at a strong 52%, and Latin America growing even faster but on a small base. We see these trends continuing because of the quality and quantity of the content we're releasing every quarter, But we're also starting to see some real traction in some key markets for us, like Italy, with growth of over 230% year-over-year, and the Netherlands, a growth of 95% year-over-year, but both growing off of a smaller base. In fact, we just had our best-ever week in terms of both total handle and revenue in the interactive segment ever just last week. Looking forward, we have some very exciting titles launching in the second half of this year, including Terminator, Big Piggy Bank, and Space Invaders Win and Spin, along with all of our usual holiday games around Halloween and Christmas. And we'll be introducing some exciting product innovations later this year that we think will accelerate this growth even further. It's a very competitive space, as you all know, but we're clearly delivering excellent growth and cash flow conversion in this part of the business. Moving over to virtual sports, as we talked about in our last quarterly call, the comps in this area are going to get tougher as we grew this segment of the business dramatically in 2022 through the launch of some innovative games, the shift of more people playing online, and some key new geographies. Even with that, our quarter two 2023 revenue was a record quarter. We've consistently said that we believe that one of our biggest potential markets was in North America, and that we were gearing our product and sales strategy to capitalize on this. And we're starting to see the fruits of that strategy. Good example would be in Ontario where our virtual sports revenue was up 10% versus the same period last year. And the total North American revenue in virtual sports was up 20% year over year. That's without even being live with our home run baseball game, our NFL license game, and the highly anticipated hockey game that will launch in 2024. In baseball parlance, we're in the very early innings of this. So the product team has been working feverishly to have our NFL game ready for the September launch, but as you would expect, it'll take some time to get it rolled out to our customer base around the world. We expect very little contribution in the third quarter, but a greater contribution in Q4 and accelerating into 2024. We're building multiple versions of the NFL product that we'll be launching throughout the next six to 12 months, similar to the multiple versions of soccer we offer, which currently is our most popular game. We're working with several of the key sports betting operators and expect to be live with them over the rest of this year and even into early next year. So our plan is that by this period in 2024, we'll have the product roadmap of North American focus content and the distribution with the largest sports betting operators alongside the addition of further states from the lottery vertical to deliver on the internal expectations we have for this segment of the business. No doubt it's taken a little longer than expected or hoped, but we have a clear vision now on the path to success for this part of the virtuals business. Moving on to the gaming side of the business, the highlight of both the gaming segment and the leisure segment has been the launch of the Vantage cabinet in both areas. In gaming, we've now installed almost 50% of the customers we're converting and are still seeing close to 10% improvement in the cash box. As we had mentioned before, with the trials of Vantage showing a 13% uplift in the cash box, we had realistically expected there would be a modest fall-off with the added density. But frankly, almost 10% growth is even better than our expectations with almost 50% installed. We expect to finish the rest of the Betfred and Paddy Power installs by October, and we'll see the benefit of that for most of the fourth quarter. We've also improved our operating efficiency, as Lorne mentioned, across both the gaming and leisure segments by combining our field engineers, both geographically and cross-trained, them on multiple products. And the benefit of those operating efficiencies will now start showing in the second half of the year. Finally, we're seeing good results from the installation of the terminals in WCLC that we sold last year, with approximately 600 terminals now installed. which we hope will help us sell this product to other provincial operators and other U.S. jurisdictions of distributed gaming. Moving on to leisure, although the sample size is much smaller, the growth we're seeing in the cash box for Vantage in pubs is approximately 14%, and we'll be aggressively rolling this product out with our key pub customers over the rest of the year. Our flex cabinet continues to be the best performing cabinet in the adult gaming center space. And as Lauren mentioned, we're in the seasonally highest period for our holiday parks, and the early results are encouraging, and we expect this part of the business to be back in growth mode by year end. Finally, we're making excellent progress in our new lottery system development and have now gone live with online wagering with LATESA and the Dominican Republic and are seeing growth from this part of the business, particularly the online lottery part. has picked up nicely as we've seen a 50% month-over-month revenue increase in July. So in summary, we obviously have a lot of growth drivers to deliver in the second half across all segments of the company, and our focus remains on execution of these to build momentum for the rest of the year and into next year. So with that, I'll hand it over to Stuart.