Everi Holdings Inc.

Hello, everyone. Thank you for standing by, and welcome to the Every Holdings 2021 Second Corner Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the prepared remarks, the call will open for questions and an answer session. As a reminder, this call is being recorded. Now let me turn the call over to Bill Fund, Senior Vice President, Investor Relations. Please go ahead, sir. Thank you, operator. Welcome, everyone. Let me remind everyone of our safe harbor disclaimer that covers today's call and webcast. Our call will contain forward-looking statements which involve risks and uncertainties that could cause actual results to differ materially from those discussed in our call. These risks and uncertainties include, but are not limited to, those contained in our earnings release today and in other SEC filings, which are posted in the investor section of our corporate website at every.com. We do not intend and assume no obligation to update any forward-looking statements, which are made only as of today, August 4, 2021. You are also cautioned not to place undue reliance on such forward-looking statements.

We will refer to certain non-GAAP financial measures, such as adjusted EBITDA, free cash flow, and net cash positions.

A description of each non-GAAP measure and a reconciliation to the most directly comparable GAAP measure can be found in our earnings release and related 8K, as well as in the investor section on our website. This call is being webcast and recorded. A link to the webcast and a replay of today's call can be found in the investor section of our website. On our call today are Mike Rumbles, Chairman and Chief Executive Officer, Randy Taylor, President and Chief Operating Officer, Mark Labai, Chief Financial Officer, Kate Lowenhar-Fisher, General Counsel, Dean Ehrlich, Games Business Leader, and Darren Simmons, our FinTech Business Leader. Now I will turn the call over to Mike Rumbles. Well, thank you, Bill, and good morning, everyone, and thank you for joining us. I'd like to begin by sharing a few highlights and observations from the second quarter. Our outstanding results and strong growth relative to 2019 are clear evidence of the success of our organic growth initiatives, as well as the sustained recovery in the gaming industry. All of our key financial and operating metrics are up impressively compared to the pre-pandemic 2019 second quarter, and we significantly exceeded our results for the second quarter of 2020. On a consolidated financial basis, we set all-time quarterly records in revenue, net income, earnings per share, and adjusted EBITDA. With that financial performance, free cash flow generated in the first half of 2021 exceeded the free cash flow we generated over the prior two years combined. Our results were even slightly ahead of the expected range that we announced in June in conjunction with our refinancing activity. Operationally, our excellent performance clearly demonstrates that the complementary nature of our games and fintech segments has never been stronger. In games, the investments that we made to expand our game development studios and broaden our portfolio of differentiated cabinets continue to drive sustained growth in both our ship share of for sale units and in our gaming operations installed base. Each cabinet style that we produce is supported by a strong pipeline of original content that is available for distribution in both class two and class three markets. And this library continues to expand. This content pipeline is also supporting our growth in the digital iGaming space. In FinTech, we have successfully expanded our product offerings through investments in both internally developed products as well as through strategic accretive acquisitions of complementary products and technologies. As a result, Today, we offer the most comprehensive portfolio of integrated financial, loyalty, and reg tech solutions for the casino industry. Furthermore, since we had the vision several years ago to create a digital neighborhood with a focus on cashless technology, our products are integrated with one another. This provides casino operators additional value and ensures the seamless operation of these mission-critical solutions, while at the same time providing casino patrons with player-friendly offerings. As a result of our operating progress, the successful refinancing of our debt, and our substantial free cash flow, Every has never been in better shape. As we shift our focus from deleveraging, our disciplined capital allocation practice will remain the same to stay the steady course of return-focused investments. Our investments will be made with an eye toward expanding our range of complementary products to drive further share gains in our core games businesses, as well as to broaden the capabilities of our digital neighborhood in our fintech business. You can think of our integrated digital neighborhood as a broad platform upon which we can layer new products that will continue to grow our business by increasing the value that we offer to casino operators and their patrons. We will also remain focused on investments in newer technologies that leverage our core strengths. Our digital cash club wallet solution is just one example of this. Today, we are live with our cashless wallet solution at 10 casino properties that have more than 24,000 gaming machines and 700 table games. These casinos encompass both tribal and commercial operators, and we are facilitating cashless transactions for thousands of casino patrons in multiple states. Our cashless wallet technology places us squarely at the forefront of the dawn of an exciting new long-term growth opportunity in the casino industry. Our competitive advantage draws its strength from our substantial experience and expertise in funding transactions across the gaming industry. This strength is combined with our unique banking as a service solution focused on the Cash Club wallet and strategically integrated with all of the products on our digital neighborhood platform. This creates a seamless experience for casino guests and enables significant cost efficiencies in the back of house operational side of the casino. We also have several new loyalty and reg tech related products that are under development and are continuing to extend our range of products in these categories. Another example of our return focused investment strategy is our remote game server. Our creation of a state of the art technology infrastructure leverages the strength of our successful game development. This has favorably positioned us to become a leading content provider for the rapidly expanding iGaming world. As our track record demonstrates, our search for new technologies, geographies, and interesting products can provide further sustainable growth across our fintech and games portfolios. We will invest in both internal development and in strategic acquisitions that can combine with our core strengths to provide accretive growth. And now let me turn the call over to Randy so he can provide you some more insight into our operational successes. Thank you, Mike, and hello, everyone. We hope you are all safe and doing well. Beyond our focus on technologies and products that Mike just mentioned, We also have strengthened and broadened the depth of our management team over the last several years. This enhanced leadership is evident across our product development, sales management, and production execution teams. We have never been stronger or had a more aligned workforce worldwide. As a result, we are executing at a high level, which in turn is delivering financial growth. Our track record also reflects the emphasis we've placed on striving to build a corporate culture focused on people and collaboration. This includes intangible but important elements to foster minds that will accept the prudent risk-taking needed to create new products while also driving home the disciplines needed for consistent execution and operating processes. We believe the strength of the worldwide every team, the culture of collaboration and innovation we continue to foster, and having the right people in the right positions are key factors in why we have so quickly regained the momentum that our business was demonstrating just prior to the onset of the pandemic. The heart of our success is our core recurring business operations, which represented approximately 77% of second quarter revenue. These operations are performing beyond our initial expectations and are providing exceptional growth in today's environment. While the casino industry has rebounded solidly from the depths of the pandemic, we believe our performance reflects our growth focus and consistent operating execution. The success of our premium games remains the primary growth driver of our install-based unit count and the higher average daily win per unit. These in turn drive significant gaming operations revenue growth. Our base of premium units has increased every quarter for the past three years and now is 43% of our total installed base. This is the leading contributor to the 61% growth in gaming operations revenue that we achieved relative to the 2019 second quarter. In the second quarter, we had initial installations of the new Monsterverse wide-area progressive game on our Empire DCX dual-curve cabinet. While it is very early in its rollout, the initial performance is highly encouraging. Following regulatory approval in April, we also made the first placements of our wide-area progressive games in Nevada. This opens up a substantial commercial marketplace for future growth. Also contributing to the gaming operations growth was the 139% year-over-year increase in revenue from our digital operations compared to the 2020 second quarter. Our digital revenue was also up 50% on a quarterly sequential basis, as during the quarter we went live at customer sites in the additional jurisdictions of West Virginia, British Columbia, and Manitoba. We firmly believe that our proprietary content positions us very well for long-term growth. Alongside our success in gaming operations, product sales rose compared to the 2019 second quarter. Both replacement sales and total shipments, which includes several hundred units for new casino openings and expansions, also increased sequentially over the 2021 first quarter. In the new casino openings, we garnered strong relative floor shares and our ship share of unit replacement sales increased compared to our typical historical share. This is partially driven by the success of our Empire Flex Cabinet and its library of what has quickly become player popular video content. Turning to our FinTech business, total segment revenues increased 21% over the 2019 second quarter, reflecting growth in each of our three line item categories. Our financial access services revenues, formerly Cash Access Services, which includes our cash and cashless financial service solutions, increased over the 2019 second quarter by 13%. This growth was largely driven by higher same-store transactional activity, which was up at a mid-teens rate consistently throughout the quarter. I would note that this is a much higher rate compared to the mid single digit percentage growth rate that we typically experienced in recent years pre-pandemic. Contributing to this growth were incremental revenues from new customer wins and customer expansions during the period compared to 2019, partially offset by a few customer sites that are still closed or operating with limitations, as well as an almost nonexistent international player in the U.S. due to the ongoing travel restrictions from foreign countries. Another quarter of growth was also achieved in our software and other, Formally, our information services and other, which includes growth from our loyalty software sales and subscriptions and from our reg tech software for regulatory compliance. Like financial access services, revenue from software, reg tech solutions, and annual maintenance and support services has a large recurring revenue component. Recurring revenue portion represented 80% of software and other revenues in the second quarter, while initial or other one-time sales accounted for 20% of Q2 revenue. Revenues from hardware sales, formerly called equipment, increased 63% over the 2019 second quarter. Growth over both the 2021 first quarter and the 2019 second quarter reflects a meaningful contribution from the sale of loyalty and financial access kiosks, cage, and other equipment for new casino openings, expansions, and new customer wins. After being delayed due to the pandemic, we believe there was also a slight pickup in replacement sales of financial access kiosks. Now I'd like to turn the call over to Mark to share his perspective on our free cash flow and outlook. Mark. Thanks, Randy. On today's call, I'm first going to focus on the significant increase in our free cash flow. Then I'll turn to the improvement in our capital structure, and I'll finish with our outlook for the remainder of 2021. As Mike noted, our second quarter free cash flow increased substantially over 2019 and the prior years. This growth represents a more significant flow-through from the increased adjusted EBITDA, along with a more modest level of capital expenditures in the quarter as measured as a percentage of total revenue. We believe the CapEx run rate in the first half of the year reflects how we have managed our capital spending to match our customers' recovery. With continued improvement in our customers' operations, and as we look to restart certain capital projects that were deferred during the height of the pandemic, we expect the second half CapEx spend to be modestly higher than the first half of 2021. Looking forward, we expect our free cash flow will also continue to increase as a result of lower cash interest. This will come from both the lower effective interest rates and the lower debt levels we have achieved following our recent refinancing. Compared to the balances outstanding at June 30th of this year, our annualized cash interest costs are expected to decrease by more than $23 million based on current run rates. It's also important to note that through this refinancing, we've extended maturities on our borrowings, with our term loan now due in 2028 and our notes due in 2029. Needless to say, this decrease in cash interest will flow directly through to future free cash flow. As a result of our enhanced cash flow profile, the very significant portion of our top line that is derived from recurring revenue streams, and our expectation for continued growth of adjusted EBITDA, we are now comfortable with a long-term net leverage ratio target of 2.5 times to 3 times adjusted EBITDA. We believe this level maintains a healthy and reasonable balance of debt given our size. and provides the flexibility for us to pursue high-return, accretive, organic, and acquisition-related growth opportunities. With the cash balances we have on hand and the additional capacity of our new, undrawn $125 million revolver, we believe we have adequate liquidity and flexibility to support our ongoing business needs, including any short-term setbacks. Turning to our outlook. For the full year, inclusive of the expected early debt extinguishment costs associated with our refinancing, we expect net income to be in a range of $87 to $95 million and adjusted EBITDA to be in a range of $332 to $342 million. Let me share some of the variables that shape these views. First, as a result of the recent refinancing transactions, we expect to incur approximately $32 to $35 million of pre-tax charges in the third quarter related to the extinguishment of debt and the write-off of prior financing discounts and fees. Approximately $21 million of these charges relate to the redemption premium and make-whole interest on the former borrowings, while the rest are largely non-cast charges that will impact net income but not adjusted EBITDA. At a macro level, we believe the first half of 2021 benefited from pent-up demand, improved vaccination rates, and the easing of limitations on our casino capacity. Government stimulus also likely played a role. For every, as Randy noted, the growth in our financial access transaction activity as compared to 2019 was well above historical levels. This strength also likely benefited the daily win per unit of our gaming operations. Therefore, while we believe much of this increase is sustainable, we are taking what we believe is an appropriately conservative view on the back half of the year due to preceding government stimulus benefits, an increase in pressure on consumer discretionary spending, and the more recent and renewed overhang of COVID and the Delta variant. As you review your models, in the third quarter, we expect to see a temporary, one-quarter-only pause in the growth of our installed base. As we started the third quarter, a large customer converted a couple hundred units from leased to purchase units as they transitioned their floor away from a leased model. This will result in an initial reduction of our leased footprint of gains. And while we continue to see growth outside of and beyond this single customer, we expect the total installed gaming operations base to be down slightly to perhaps flattish for the third quarter before again resuming growth in the fourth quarter. Contributing to our expectation for the resumption of growth in the fourth quarter is the expected opening of a tribal customer's new Class 2 casino facility. In conjunction with this casino opening, we expect to incur between $2 and $3 million of new placement fees that will lock in a footprint of approximately 200 units until mid-2028. We expect to have the majority of the initial total footprint of games at this facility. Moving on to equipment and hardware sales. In the second quarter, we generated strong units for both our games and fintech segment as a result of new casino openings and expansions. While new openings and expansions are always part of our quarterly results, the second quarter had a larger quantity than we normally would expect. Accordingly, because of fewer new casino openings and expansions in the second half of 2021, we do not anticipate the same level of expansion sales of both games and fintech hardware in the third or fourth quarters as we had reported for the second quarter. Therefore, without that second quarter bump, we expect to see shipments of equipment and game sales at levels more closely aligned with the first quarter of 2021 rather than the second quarter. I do want to take a moment to highlight how our second quarter results have reinforced the evidence of the gains we are achieving in ship share for unit sales. While our customer's purchase decision horizon remains focused on only the next 60 to 90 days, and they appear to be waiting until G2E to see what is in the pipeline, we are seeing clear evidence of improved spending in conjunction with the success of their slot floors. We believe we are capturing a higher percentage of the spend compared to our historical levels. There are also still opportunities for continued growth, primarily from our international operations. Certain customers, like those in Canada and other international markets, where the casinos have remained closed, are only now starting to reopen. As these locations begin to see their gaming revenues return, this could lead to further revenue growth opportunities for both our games and fintech segments. We expect free cash flow will remain strong in the back half of 2021. The fourth quarter will also benefit from the one-time change in the timing of the semiannual interest payment on our new unsecured notes. Our new notes were issued on July 15th and now have semi-annual interest payments that will occur in January and July as compared to the previous payments we made in December and June. Thus, our former comparable December interest payment will now be made in January. With that, I'll now turn the call back to the operator for questions. Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of David Bain with B. Riley. Please proceed with your question.