Accel Entertainment, Inc.

Good afternoon and thank you for joining the Excel Entertainment Q3 2024 earnings call. My name is Kate and I will be the moderator for today's call. At this time, all lines are in a listen only mode and will be until the question and answer portion of the call. If you would like to queue up for a question, you may do so by pressing star followed by a one on your telephone keypad. I would now like to turn the call over to Derek Harmer, General Counsel and Chief Compliance Officer. Derek, you may proceed.

Welcome to Excel Entertainment's third quarter 2024 earnings call. Participating on the call today are Andy Rubenstein, Excel's Chief Executive Officer, Matt Ellis, Excel's Chief Financial Officer and Mark Phelan, Excel's President of U.S. Gaming. 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. Actual results may differ materially from those discussed today and the company undertakes no obligation to update these statements unless required by law. For 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. Any projected financial information presented in this call is for illustrative purposes only and should not be relied upon as being predictive of future results. The inclusion of any financial forecast information in this call should not be regarded as a representation by any person that the results reflected in such forecasts will be achieved. 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 Excel's third quarter earnings call. We had another strong quarter. We reported revenue of $302 million and adjusted EBITDA of $46 million, proof of the resiliency of our convenient local gaming offering. Secondly, we made solid progress in our pending acquisition of Fairmont Park, which is expected to close this quarter. In terms of financial performance, our largest market, Illinois, posted market-wide GGR growth of 5% -over-year, outperforming Illinois casinos, which were down 1% -over-year on a comparable basis. We are proud of the strong foundation we have built in our home state, leaving in a model that's a -win-win for our state, our customers, and local convenience-based gaming providers like us. We continue to optimize our largest state-based route footprint, managing headcount and broader operational excellence, to more than offset the modest drag from recent tax increases. During the quarter, our location count was down a bit sequentially. In Illinois, this was due to two factors. First, the strategic closures of 22 underperforming locations. And second, some openings were delayed by the cancellation of the July Illinois Gaming Board meeting. The subsequent IGB meeting was in September, and not all locations were live by month end. By the middle of October, the remaining licensed locations were live. Regarding our strategic closures in Illinois, we continue to review our portfolio and look for opportunities to prune. We have identified a subset of our locations within our bottom decile performers that we will phase out over coming quarters. Given we also have an attractive pipeline of planned openings at promising locations, we expect near-term Illinois net unit growth to be flattish, with some potential positive impact on EBITDA and returns on invested capital as we rotate locations. Across our footprint, we continue to refine our sales and operating model, focusing on the highest hold per day locations. This improvement in the composition of our portfolio will help both top line and bottom line, driven by choiceful segmentation and resource allocation. In Nebraska, we're encouraged that strong revenue growth during the quarter was driven by hold per day. We are seeing fruits of our strategic product shift, swapping in higher performing games and removing lower performing revenue share units. We see more runway to do this across our fastest growing market. On the regulatory front, Illinois continues to lay the groundwork for Ticket In, Ticket Out, also known as Tito, which would make cash processing more efficient and more importantly, create a more convenient experience for our players, allowing them to switch between games and our venues without cashing out and cashing in each time, making our sites more akin to a casino experience. We expect Tito to be rolled out in the first half of 2025. We continue to monitor the regulation related to this. Before I turn it over to Mark, I want to take a few minutes to talk about Excel's value proposition and where we see our greatest opportunities for growth. For both our customers and players, we provide a high quality slot gaming experience at a low price point that can be accessed by our players at a local convenient retail location of their choosing in 15 minutes or less. We support retail gaming partners by providing them with high margin revenue per square foot gaming products and self-service technology. We instill player loyalty through our rewards programs and create memorable player experiences with our diverse game selection. And finally, we maintain collaborative and reliable partnerships with regulators across 11 different regulatory structures, all while generating attractive returns on capital in the low teams. In our core route-based business model, our steady state growth algorithm is both simple and compelling. We target low single digit revenue growth, mid single digit EBITDA growth, high single digit free cash flow growth, and core business capex quickly compressing down towards $40 million. Looking ahead, the primary levers for growth in our core route business are, one, growing organically in Illinois, Nebraska, and Georgia through both newly licensed establishments and converting competitor locations. Two, driving profitability in Nebraska and Georgia through operational execution and strategically positioning ourselves in the face of favorable legislation. Three, collecting a greater share of location economics through selectively owning establishments in markets where this is permitted and is otherwise profitable. And four, preparing ourselves for future opportunities in new states likely to legalize local gaming in the future. Outside of our core business, our M&A pipeline remains active, as demonstrated by the Fairmont announcement. We also expect to provide an update on Louisiana before year end. We are confident that we can leverage our proven capabilities as a local gaming operator to convert opportunities in the attractive and sizable nationwide $15 billion GGR local gaming market. Most assets in this market are unconsolidated and sit at EBITDA levels that are below the radar of larger gaming companies, conditions that play to our strengths. As a prime example of these opportunities, I'm going to turn it over to Mark.

Thanks, Andy. We announced the acquisition of Fairmont last quarter for approximately $35 million in Excel stock. The acquisition includes a master sports betting license with a long-term partnership with Fandl, a racetrack, an off-track betting facility, as well as multiple opportunities across the state, and the ability to develop a -in-class, locally-focused casino. We also welcome Bill Steritz and Rob Vitale, both world-class value creators as long-term investors in Excel. Much of this transaction builds on the core capabilities in local gaming that we have honed over the last 15 years with attractive returns on capital and free cash flow. In September, we received transaction approval by the Illinois Racing Board. On October 24th, we received required approvals from the Illinois Gaming Board. With these approvals, we can move forward with closing Fairmont, which we expect to close in early December. We will provide an update then. Looking ahead, November 2nd is the final day of racing for the 2024 season. Subsequently, we will begin construction of a Phase I facility with permits pulled and approved. We've also hired a general manager to oversee casino development and operations, and onboard an industry veteran to consult on all aspects of horse racing. As a reminder, we expect to develop this project in two phases. Phase I will be built in the existing grandstand with approximately 250 slot machines, 4-6 electronic table games, improved food and beverage amenities, and a Fandl-branded sportsbook. This will be done with relatively low capital intensity and is expected to open in second quarter 2025. For Phase II, we'll erect a permanent casino on site with detailed plans for 600-plus slot machines, 24 table games, improved food and beverage amenities, and a new larger Fandl sportsbook. We are combining our local gaming expertise with key partnerships in areas outside our business to create an exceptional customer offering. We are encouraged by the progress so far. Overall, Phase I and Phase II casino buildout plans remain on track, and we will provide additional updates when the time comes. With that, I'll pass it over to Matt to go over the fundamentals of the quarter.

Thanks, Mark, and good afternoon, everyone. For the third quarter, we had total revenue of $302 million, a -over-year increase of 5.1%, and adjusted EBITDA of $46 million, a -over-year increase of 3.9%. As of September 30th, we had 25,729 terminals in 4,014 locations, -over-year increases of .1% and 2.8%, respectively. Revenue per location for the third quarter in our core states was as follows. Illinois was $839 per day, an increase of .7% -over-year. Montana was $613 per day, an increase of .7% -over-year. Nevada was $802 per day, which was flat to the prior year. And Nebraska was $257 per day, an increase of .8% -over-year. The increases in Illinois, Montana, and Nebraska really emphasize the strength and resilience of both our business model and, more importantly, consumers who continue to choose our high-quality, local, and convenient offering. Capital expenditures for the third quarter were $17 million cash spent. As a reminder, the primary driver of our elevated capbacks was the introduction of four new, high-performing gaming terminals at the same time in Illinois. We view this year's and last year's elevated capbacks as one time in nature. For 2024, we are projecting capbacks across our core to be between $60 and $65 million, a decrease of more than 20% from last year. Over the longer term, we expect capbacks to decrease even further towards $40 million, as Andy highlighted earlier. This will be an encouraging boost to capital returns and thus returns on capital. At the end of the third quarter, we had approximately $289 million of net debt and $538 million of liquidity, consisting of $265 million of cash on our balance sheet and $273 million of availability on our credit facility. On our capital allocation strategy, we continue to make progress on our $200 million share repurchase program. During the quarter, we repurchased 585,000 shares at an average purchase price of $10.52 a share for a total of $6 million. We are 70% of the way through the repurchase program, with 13.5 million shares repurchased at a cost of $140 million. 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. With that, I'd like to turn it back over to Andy.

Thanks, Matt. As I mentioned earlier, we are very pleased with our strong performance this quarter and excited for what the future holds with Fairmont Park. For the immediate term, we remain focused on executing our growth algorithm with improving cash flow and returns and closing the Fairmont acquisition. Long term, we look forward to capitalizing on the significant growth opportunities ahead of us as an aligned and incentivized Excel team. Excel remains strong as evidenced by our third quarter results and our healthy balance sheet, enabling us to pursue a multi-pronged approach to capital return, making us a compelling investment. Local gaming is an attractive growing niche within the broader gaming market, with multiple opportunities to generate strong and consistent revenue and EBITDA growth, as well as strong free cash flow and returns on capital. We will now take your questions.

We will now begin the question and answer portion of the call. If you would like to ask a question, you may do so by pressing star followed by a one on your telephone keypad. If for any reason you would like to remove your question, you may do so by pressing star followed by a two. As a reminder, if you were using a speakerphone, please remember to pick up your handset before asking your question. Again, to ask a question, it is star followed by a one on your telephone keypad. The first question will come from the line of Steve Pazella with Deutsche Bank. Steve, your line is now open.

Okay, good evening, everyone. Just following up on the closures, I guess, why is now the right time? How did you identify these locations? And how should we think about location when per day and EBITDA margins improving in Illinois moving forward?

So it's not a question of now is the time. It's something that we're constantly evaluating. Recently, we've called it in the last year, we've seen the continuation of inflation in wages, in a lot of the cost of goods sold or assets that we deploy. But most recently, the biggest hit was the tax hike. We had in the last legislative session, the state took an additional 1% tax on the industry, half of it hitting us and half of it hitting the establishment owners. And many of the situations, it pushed us into a lower profit margin than we'd like to be. And we have reacted to that by taking a closer look at those locations and whether we could make adjustments in our cost structure. And when we couldn't get it back to the level that we see fit, we have had to make the difficult decisions to redeploy our equipment, either in other locations or to exit the actual location.

Okay, that's helpful. Thank you. And then just wanted to follow up on Fairmont, if we could. Do you have any updated dots on the projections for the acquisition at all? And can you just remind us exactly what you get on the sports betting side and some of the economics of those arrangements? And then also, if Illinois was to ever legalize iCasino, how would you think about this in the context of potentially having leverage to an iCasino product, but also the potential impact on the route game business?

Okay. Thanks, Steve. I'm going to have Mark Phelan, who's leading the project, for us answer.

Hey, Steve. In terms of Fairmont, all of our construction costs so far in line with what we projected back in July, which is all public, I think we said ultimately the project would be a $20 to $25 million ebitda project. And we still feel really comfortable about that over the next couple of years. And in terms of the deal with Fandl, it's confidential. Like I could just say it's a very favorable relationship for both Fairmont and Fandl. And the contract extends for a significant period of time well beyond sort of the next couple of years. And we're excited to be partners with them.

Okay, I appreciate it. Thanks, guys.

Thank you. The next question will come from the line of Chad Banon with Macquarie. Chad, your line is now open.

Hi, guys. This is Sam on for Chad. Thanks for taking our question. We wanted to ask about M&A activity. Any new opportunities that you guys are seeing in the sub $25 million ebitda level? Obviously, there's a lot of runway, as you mentioned in your opening remarks. So maybe also getting a better idea of what are some of the biggest hurdles that you currently see in the market that you need to overcome with potential targets in order to come to terms. Any color would be helpful.

Thanks, Sam. This is Andy. So we've seen a fair amount of inventory come onto the market. There's some that are actively being marketed, as well as a couple kind of private conversations. The bid ask is differential, is narrowing. And I think a lot of it is due to the fact that some of the sellers have recognized the value of a partnership with Excel. And I think that will just similar to what market reference in our prepared statements, there are people like Bill Stewart's that recognize Excel as a great partner and one that can get them high returns on their investment. And in a lot of these situations, the seller has either decided to partner with Excel and participate going forward or recognizes Excel ability to create additional value. So I think you'll see in the next 12 to 18 months more of these types of opportunities, very local. A lot of them tend to be small business owners that identify Excel as a very good partner.

Thanks for the color. And then as a follow up, I wanted to ask about any potential state legislation that you will be tracking closely into next year and whether this upcoming election could potentially have an impact state legislation as legislators shuffle around, et cetera.

Hey, Chad, this is Mark. I'm sorry, Sam. We track a couple of the higher sort of probability states for Pennsylvania, Virginia, North Carolina, Missouri. In particular, we're focusing on North Carolina as they have a real need to raise revenues for a variety of reasons and they have a long history of gray gaming. In terms of the election coming up, certainly states with dominant political positions that might be at risk are good candidates for potential legislation if results tend to take away those dominant political positions. We have a couple states like that and we're watching them very closely.

All right. Thanks a lot. I'll jump back into Q.

Thank you. As a reminder, if you would like to ask a question, it is star followed by a one on your telephone keypad. The next question will come from the line of Greg Gibbous with Northland Capital Markets. Greg, your line is now open.

Hey, thanks for taking the questions, Andy, Matt, and Mark. One of the follow-up on the location closures, and you maybe spoke to this, but what was the estimated impact to the business's profitability as a result of that?

Hey, Greg, it's Matt. Thanks for the question. When you think about our base and the denominator, to see the impact on 22 locations is pretty minimal. I think Andy sort of mentioned this is always happening with some of the recent changes. We might accelerate some of these closures. So as we talked about before, I mean, this is part of our overall growth. Again, that sort of mid single digit, even a growth, low single digit revenue, higher free cash flow. But when you think about such a small number, it's going to have a minimal impact on those metrics. But I think overall, it'll be important to achieve that goal about growth that we talked about.

Yep, got it. That's fair. And a couple of questions relating to, I guess, the core Illinois market. You pointed out Illinois casinos being down 1% year over year versus year growth. Other than probably a lot could be attributed to just the different business model, why do you kind of point to in terms of the outperformance there? Are there any other factors maybe besides that? And then separately with Illinois, Tito, how do you kind of expect Ticket In, Ticket Out to impact the business?

So, Zanny, thanks Greg. The product that we put out in the marketplace tends to be a level above a lot of our competitors in terms of we refresh what we have in our establishments with the latest equipment. We have very similar games to what they see in the casino. And the fact that our product is very local, they don't have to make a big evening to go to the casino. And on one given machine, they get the equivalent of 10 to 15 slot machines because of the multi-game offering. So, we're seeing more and more of a customer selection to play in their local either tavern, convenience store, as opposed to making the trip to the regional casino. And I think kind of this environment is such that it benefits us. We still have strength in the consumer, but they're being a little more prudent. And we look forward to providing a quality offering to them both in times of with the economies and flux to when it's at its peak. And even when there's challenges, people choose the quality offering that we provide. Looking at things such as Tito, I think that will provide a lift. The question is how much. But we're looking forward to that for sometime in the second quarter next year. And that, I think, will lift, will provide some growth in the industry because of the convenience and the ability to have kind of a better experience.

Makes sense. Appreciate the color.

Thank you. At this time, there are no further questions registered in the queue. As a final call for questions, if you would like to queue up, you may do so by pressing star followed by A1 on your telephone keypad. We will pause here briefly to allow any remaining questions to be registered. We do not have any further questions in the queue, so I will turn the call back over to Andy Rubenstein.

I just want to thank everybody for joining us. We wish you guys an early happy holidays starting tomorrow with Halloween. And we look forward to rejoining you in the new year with some positive results for the year and a lot of exciting news for 2025. Thank

you. That concludes today's call. Thank you all for your participation and you may now disconnect your lines.