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spk04: Ladies and gentlemen, thank you for standing by and welcome to the Excel Entertainment Q3 2020 earnings call. At this time, all lines have been placed on mute to prevent any background noise. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then one on your telephone keypad. If you require further assistance, please press the pound key. Thank you. At this time, I would like to hand the call over to your speaker today, Andy Rubin. Sorry. Matthew Ellis, SVP of Corporate Strategy. You may begin, sir.
spk02: Welcome to Xcel Entertainment's third quarter 2020 earnings call. Participating on the call today are Andy Rubenstein, Xcel's Chief Executive Officer, and Brian Carroll, Xcel's 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 and the current health concerns. 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 statement 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 Mr. Andy Rubenstein.
spk00: Thank you, Matt. Good morning, everyone. Thank you for joining us for Accel's third quarter 2020 earnings call. As everyone is aware, after a three-and-a-half-month shutdown, video gaming relaunched on July 1st. The Excel team rose to the challenge and worked with our location partners to reopen as many locations as possible. As a result of these efforts, I'm pleased to report this quarter was the highest revenue and adjusted EBITDA quarter in Excel's history. Later in the call, I will provide an update with respect to pandemic developments, but I would first like to review some other highlights from the quarter. In July, we redeemed the PACE public warrants, and in August, we completed an exchange offer of all remaining warrants. As a result, less than 0.03% of the warrants remain outstanding today. This redemption and exchange offer simplified our capital structure and reduced the potential dilutive impact of the warrants. In early September, we entered into an exclusive agreement with DraftKings to promote their content and programming across all our marketing channels, including our in-locations digital display screens. This first of its kind collaboration further differentiates our offering and deepens our player relationships. This partnership will help us retain and extend agreements with existing locations, attract new organic and competitor locations, and most importantly, drive additional players to our locations. While we are still evaluating the benefits of this partnership, initial results have been positive. Finally, in late September, we completed an underwritten public offering of 9.1 million shares. The offering raised approximately $90 million, which we expect to deploy in the next nine months. Our M&A pipeline remains active, and we aim to continue executing on our growth strategy. For the third quarter, we recorded $136 million in revenue and $23 million in adjusted EBITDA. Our balance sheet remains strong with net debt of approximately $140 million and total liquidity of $274 million. Excel is extremely well positioned to capitalize on any opportunities that may arise in the coming months. With that, I'm going to turn it over to Brian Carroll, our CFO, to walk you through the third quarter results in more detail.
spk06: Thank you, Andy. As of September 30th, we had 11,597 BGTs in 2,363 locations. Year-over-year increases of 12% and 3% respectively. The increase in locations demonstrates that while we are operating in a new normal environment, Excel continues to grow. The IGB has resumed their meetings and our sales teams continue to sign new organic and competitor locations. In addition, our attrition rate on closures remains in line with the pre-COVID historical average. At the end of September, our average residual contract length was approximately 6.9 years on a standalone basis and also 6.9 years including the Grand River acquisition. As a reminder, the Grand River locations originally had an average residual contract length of 5.8 years. The closing of this gap demonstrates our ability to successfully integrate the locations and extend their agreements. We have installed more than 806 VGTs and expect to install a total of 1,000 by year end. Originally, we expected to be able to update 50% of our VGTs remotely to the higher bed limit software and 50% via an on-site update. During the remote update process, it was determined approximately 25% of the remotely updatable VGTs will now require an on-site update. It's important to note this issue affected the entire industry, not just Excel. Today, approximately 50% of all VGTs have been updated to the higher bet limit software. We continue to perform on-site updates every day, but based on current software availability, we now expect to complete the update by June of next year. We had total revenue for the third quarter of $136 million, the highest revenue quarter in Excel's history. Our combined third quarter location whole per day was $596, a year-over-year increase of 4%. It's important to remember Grand River was acquired on September 16th, 2019, meaning those locations were included for all Q3 2020, but only 15 days of Q3 2019. Excluding the Grand River acquisition, our location hold per day was $649, a year-over-year increase of 11%. Adjusted EBITDA was $23 million, another record for Excel. As a reminder, the Illinois VGT tax increased from 33% to 34% on July 1st. CapEx was $13.5 million cash spent in the third quarter, compared to $9.3 million in the third quarter of 2019. The increase was largely attributed to vendors that allowed us to defer payments during the second quarter. At the end of the third quarter, we had approximately $140 million in net debt and $274 million of liquidity, consisting of $179 million of cash on our balance sheet and $95 million of revolver availability. Back to you, Andy.
spk00: Thank you, Brian. I'd now like to discuss the COVID-19 situation in Illinois. As of July 1st, in connection with the relaunch, VGTs are required to be spaced six feet apart or to be separated by partitions. Players must wear masks in the gaming area and PPE is provided to the players. These precautions have ensured VGTs can be played safely. Returning player response has been positive as demonstrated by our revenue. In July, Governor Pritzker divided Illinois into 11 regions. As of November 4th, all regions were operating with mitigation measures, which include a prohibition on indoor dining. BGTs are available for play from 8 a.m. to 11 p.m. Despite the reduced hours, Excel has only seen a minimal impact to net video gaming revenue, but continues to monitor the situation closely. Our October revenue will be published by the IGB in the coming weeks, which will reveal Excel had another positive month. To wrap things up, I'm extremely pleased with our record third quarter performance, demonstrating the resiliency of Excel and our industry. The Excel team members continue to overcome the current challenges while delivering industry-leading customer service. We will now take your questions.
spk04: At this time, if you'd like to ask a question over the phone lines, please press star, then one on your telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question comes from line of Greg Gibbous. Your line is open.
spk05: Morning, guys. Thanks for taking the questions, and congrats on the record results. Good to see you. I was just wondering if you could give a sense of how much of your operating expenses in the quarter were maybe one time in nature, just kind of due to getting all your locations up and running again with the new protocol and dividers?
spk06: Yes, this is Brian. The CapEx was approximately over $2 million that was spent on the dividers. With regard to one-time operating expenses, they're included in our numbers. The only time we've adjusted EBITDA for COVID was related to primarily when we furloughed employees and paying benefits and retention bonuses and so forth like that. But just to give you an idea, on a monthly basis right now, COVID is probably costing us probably a little over $100,000 a month in operating.
spk05: Got it. Okay. Thanks for clearing that up. Appreciate that. And regarding the VGTs that have been updated with the new software for the higher betting limits, have you noticed an incremental uplift, I guess, in revenues from those machines, even though I think you said it was only 50% or so have been updated so far?
spk00: Yeah, I mean, it's provided a lift in our overall revenue per location. So whether it's from more selection or more opportunity for people to play in We can't really discern what specific driver, but it has helped us raise the overall location revenue. Okay, great.
spk05: I guess last one for me, just considering we saw those three strong months in the quarter, across the state. I guess I was wondering, you know, if you could comment on anything or share anything in relation to how gaming activity has trended in October relative to those previous months, and then maybe how you expect the IGB's decision to kind of limit hours of play, how you think that'll affect Q4?
spk00: October was a very positive month, and the actual numbers should be published in the next 10 to 12 days. But we have seen some effect, although it's minimal, from the limitation of the hours. But it's really early to make any definitive assessment. Sure. Okay. Thank you.
spk04: Your next question comes from the line of Bill Kettlehut of Goldman Sachs. Your line is open.
spk01: Hi. Thanks for taking my question. I was wondering if you could give us a sense of what you're hearing from the locations that you work with and whether any recent restrictions are going to lead to maybe incremental financial distress or more churn.
spk00: I would tell you that if I own a restaurant bar and I can't sell food or beverage indoors and the temperature's 20 degrees outside, it's going to impact me. So there is going to be some impact on their business. We've seen a little of that when we had a little cold stretch in the last couple weeks. The question is how long the mitigations last and how they're eased. Yesterday, the governor indicated that he was going to evaluate things in the next couple of weeks, so we're hopeful that they'll allow some indoor consumption, and once even some occurs, I think the overall effect will be really minimal.
spk01: That's helpful. Thank you. And I guess kind of more on an unrelated note, there seems to be kind of a lot of moving parts to free cash flow, given the acquisition of Tom's Amusements, and I know you're buying terminals kind of on a forward basis. Could you just give us a sense on what free cash flow conversion as a percentage of EBITDA should be like on a normalized environment, maybe X all those growth investments?
spk06: I can give you this, Brian. I can give you some ranges. Say, for example, in our current, what you've seen in Q3, Probably free cash flow is approximately around $6 million. You then have to deduct CapEx, but keep in mind most of our CapEx is for growth purposes. To refresh, maintenance CapEx runs us maybe $2 to $3 million in a given year. So with that in mind, you have what you've seen in Q3, you have this approximately $6 million a month of free cash flow. less however we spend for growth capex purchasing equipment. That could be about, I'd say on average, about $2 to $2.5 million per month.
spk01: Got it. Thank you. And I guess one last one. I'll sneak in here if I can. Is there anything that you've kind of learned as you spent more time in Georgia over the last quarter?
spk00: I'd say the major lesson learned there is that we're going to have to be very prudent in choosing our business partners as there's a wide range of companies and operations, and some of them are more attractive to partner with, and especially as a public company, we need to protect our brand and the ethics that we run our business. And there's individuals there that don't seem to be concerned about running a business with integrity.
spk01: Great. Thank you. That's it for me.
spk04: Once again, if you'd like to ask a question over the phone lines, please press star, then one on your telephone keypad. Your next question comes from the line of Steve Pezzeglia of Deutsche Bank. Your line is open.
spk07: Hey, guys. Thanks for taking my questions. Can you just talk about any insights that you might have to the type of customers you are seeing at your locations relative to the pre-pandemic visitation? We have heard from some of the regional gaming operators that they have been seeing a younger customer and just wanted to see if that aligns with what you are seeing also.
spk00: I wouldn't say it's necessarily a younger customer. We're seeing some younger players, and there are obviously some older players that are less comfortable going out. But you got to remember, like, our portfolio is so diversified geographically throughout the state that the kind of feelings or reaction to the COVID restrictions are very different depending on where you live. And so we're not seeing any major trend, but there is some individuals who are elderly that don't feel comfortable. And then for Some of the younger individuals who may have gone to a casino or gone to the movies or done some other activity, those players have trended towards us, and we're getting more of that visitation.
spk07: Okay, great, thanks. And then just one of the follow-up on the DraftKings deal, can you just kind of talk us through the benefit that you receive from it and any economics you could actually share on it?
spk00: So there's been, as far as benefits, we've seen a few of our competitor locations decide that they wanted to move their business over to Excel when their contracts have finished because we're offering a benefit that's unique in this marketplace. So we've seen that. We're going to get some new customers. People also are opening up new establishments that want to have that feature for their guests. Financially, we today don't have a revenue share, as we don't have a license for sports betting, but we are an affiliate and are receiving compensation from DraftKings as we're getting a lot of sign-ups from players, and that benefit's being shared with the establishments that the player signs up at, or that they acknowledge that they kind of got the information. So it's very early to measure that, but we have got a fairly significant amount of sign-ups since we kicked this off, and DraftKings is, I would guests doing well in the state of Illinois in terms of player acquisition and player communication. And we were a form of that communication.
spk07: Okay, great. I appreciate it. Thanks, guys.
spk04: Your next question comes from the line of John Detree of Union Gaming. Your line is open.
spk03: Hi, everyone. Thank you for taking my questions. Andy, I guess the first one is for you, perhaps, and then a follow-up maybe for Brian. And I'm not sure if you've added any more color, but with the equity raise in the quarter and adding some cash to the balance sheet, I think in your prior remarks you mentioned about possibly deploying that over the next nine months or so. And I was wondering if you could give us any kind of more color guidelines as to where you'd be looking or prefer to spend that capital. more likely in Illinois or something like you did with Tom's, perhaps in Georgia or another state, just kind of getting your sense of capital priorities?
spk00: There's lots of opportunities. There's still some significant things that we're working on in Illinois. And as we have the focus to explore into new markets and really establish ourselves, I those opportunities are also presenting themselves. So I think you'll see us move in a couple different directions, and hopefully 2021 will be a pretty acquisitive year.
spk03: Thanks, Andy. That's helpful. And Brian, perhaps for you, you know, with additional liquidity on the balance sheet, your leverage ratio comes down quite a bit. And I think, you know, kind of anticipating some growth capital being deployed there. uh in 2021 as andy had just discussed where do you feel the right kind of leverage ratio is for excel kind of right now kind of with growth capital to pull it in without you know kind of is there a range um that you guys feel comfortable with and want to be in hi yes john um i mean more more recently just because of a little bit of disruptions we were as high as around four
spk06: And typically we might get, you know, obviously we're delivering back. Historically, we've always been come for around the two to three range. And then we would lever up if we did an acquisition and then kind of fall back down pretty quickly just because of our free free cash flow. And but right now, like I said, you know, we're below four. And, you know, so it's kind of a historically since we've been in business, we've done it that way. So typically, you know, once everything levels off, you know, we feel pretty comfortable around two to three. Does that answer your question? It does. That's perfect. Thanks, guys.
spk04: There are no further questions over the phone lines at this time. I turn the call back over to Andy Rubenstein.
spk00: I just wanted to thank everyone for listening today. Hopefully... The mitigation from our governor will be modified and reduced in the coming weeks. And for all of you that live in Illinois and around the country, please continue to wear your masks because it will only help our industry as well as to mitigate the effects of the COVID environment. Have a good day. Thank you.
spk04: This concludes today's conference call. You may now disconnect.
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