Transcript
Hello everyone and welcome to the XL Entertainment Q3 2021 earnings call. We will begin shortly. If you would like to register a question ready for the Q&A, please press star followed by one on your telephone keypad. Thank you for your patience. And welcome to the XL Entertainment Q3 2021 earnings call. We will begin shortly. If you would like to register a question ready for the Q&A, please press star followed by one on your telephone keypad. Thank you for your patience. Welcome to the Excel Entertainment Q3 2021 earnings call. My name is Daisy and I'll be coordinating today's call. You will have the opportunity to register a question at the end of the presentation. If you would like to register a question, please press star followed by one on your telephone keypad. I will now hand over to your host, Matthew Ellis, the Senior Vice President of Corporate Strategy from Excel Entertainment.
so Matthew, please go ahead. Welcome to Xcel Entertainment's third quarter 2021 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, including those related to COVID-19 and its variant strains. 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 statements 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.
Good morning, everyone. Thank you for joining us for Excel's third quarter earnings call. It's hard to believe, but this is the first time since we became public in November of 2019 that we've been fully open for two consecutive quarters. I'm pleased to report the strong performance for the second quarter continued throughout the third quarter. On a seasonal basis, the third quarter is typically the lowest performing quarter, but, as demonstrated in our results, we continue to see year-over-year location revenue growth of more than 30%. As we've highlighted throughout the year, the primary drivers of the higher revenue were the completion of higher bet limit software upgrades and the six VGT installations. We also continue to optimize our product offering, which helps us retain our existing players and attract new players. Due to the quarter's strong results, we are raising our current year guidance again and also releasing 2022 guidance. I'll leave it to Brian to walk you through the numbers later in the call. Turning to growth. As most of you are already aware, on October 22nd, we amended our credit facility, which increased our borrowing capacity from $438 million to $900 million. It was a large ask from our lender group, but after seeing our intended uses of the funds along with our high-quality credit story, we actually received commitments in excess of our ask. Our M&A pipeline is active, and we expect to announce more opportunities in the future in both existing and incremental new states. I'd also like to thank our lender group for their continued support. While we're on the topic of M&A, Century is still on track to close in the first half of 2022, and they continue to perform better than our original estimates. As we're not certain on the timing of closing, we're releasing 2022 guidance to illustrate what Excel would look like if Century was included for the full year. On the organic front, our sales teams continue to sign additional competitor and organic locations. Year-to-date, Excel was awarded 243 new licenses, or 35 percent of the total new licenses awarded. Our ability to win more licenses than our current market share is a strong testament to our sales capabilities and location owners believing in the Excel difference. Our sales team is just one of many competitive advantages that differentiates us from other operators. We're continuing to monitor the number of licenses awarded each meeting. But more importantly, we're focused on the size and quality of our sales pipeline, which continues to grow. We always aim to win more than our fair share of licenses and then work with our location partners to maximize their gaming and overall business revenue. When we look at the number of eligible businesses without gaming or the number of VGTs per capita, we believe Illinois still has a significant amount of future location growth. In Georgia, we continue to grow our backlog and expect to end the year with 100 live locations. We also continue to work on improving the gaming experience for players and are hopeful that a new redemption option will be introduced in the future. We remain excited about the long-term prospects for us in this market. Looking at other states, we remain cautiously optimistic that several states will consider distributed gaming in the future. For example, Virginia and Missouri will likely introduce distributed gaming bills in their upcoming legislative sessions. We continue to work with the various stakeholders in these states to educate them about the benefits of distributed gaming and the incremental revenues it generates for state and local governments and small businesses alike. We are confident that our growth playbook we built in Illinois will enable us to be successful in any future market. Overall, Excel is in a strong position to capitalize on the future. We believe we offer one of the best returns in gaming combined with highly visible growth. With that, I'd like to turn it over to Brian to walk you through the numbers
in more detail. Thanks, Andy, and good morning, everyone. For the third quarter, we had total revenue of $193 million and adjusted EBITDA of $38 million, year-over-year increases of 43% and 63% respectively. Revenue per location per day for the third quarter was $798, a year-over-year increase of 34%. The primary drivers of the increase were the higher bed limit software and our six VGT initiative. CapEx for the third quarter was $8 million cash spend. As of September 30th, we had 13,384 VGTs and 2,549 locations, year-over-year increases of 8% and 15% respectively. Location attrition continues to remain low and mirror the pre-COVID historical averages. It is our continued belief that businesses with incremental gaming revenues have a lower failure rate as compared to businesses without. At the end of September, our average residual contract length was approximately 6.7 years. At the end of the third quarter, we had approximately $148 million of net debt, down $19 million from Q2. Including our amended credit facility, we have $730 million of liquidity consisting of $180 million dollars of cash on our balance sheet and 550 million of availability. I would now like to provide updated guidance for 2021 and 2022. As a reminder, the 2021 guidance assumes no acquisitions and includes the partial shutdown from January of this year. We are now forecasting to end the year with 13,660 to 13,775 VGTs in 2,600 to 2,620 locations. Revenue for 2021 is now estimated to be between $725 to $750 million with adjusted EBITDA of $140 to $145 million. CapEx is estimated to be between $20 to $25 million cash spend. Year-end net debt excluding any acquisition financing should be approximately $110 to $150 million, implying a year-end trailing debt to EBITDA multiple of only 0.8, giving us ample firepower to pursue additional inorganic and greenfield opportunities. For 2022, I'm going to share guidance with and without Sentry. Since the exact timing of Sentry is still uncertain, the guidance I'm going to provide with Sentry will be on a pro forma basis with Sentry included for the full year. The 2022 guidance also assumes Georgia will no longer be an emerging market in the second half of 2022 since we have operated in Georgia for more than 24 months. We expect to end 2022 with 14,560 to 14,750 VGTs in 2,760 to 2,795 locations. Including Century, we expect to end 2022 with 23,000 to 25,000 VGTs in 3,000 to 700 to 3,800 locations. 2022 revenue is estimated to be between 820 to 870 million dollars. Assuming the full-year benefit from Sentry, revenue is estimated to be $1.07 to $1.18 billion. Adjusted EBITDA is estimated to be between $160 to $170 million. Assuming a full-year of Sentry, adjusted EBITDA is estimated to be between $182 to $198 million. Cash spend CapEx is estimated to be between 20 to 25 million dollars. Assuming a full year of century, cash spend CapEx is estimated between 25 to 35 million. Taking into account our amended credit facility, the timing of the century acquisition, and the growth Andy discussed earlier, we are not guiding on net debt for 2022 at this time. As we have more visibility, we will resume providing updates. Back to you, Andy.
Thanks, Brian. We are extremely pleased with our performance this quarter and even more excited for what the future holds. It is important to remember that our product and gaming experience today is substantially better than it was in 2019, and that is reflected in the results and outlook. We have newer cabinets, better software, higher jackpots, and our locations continue to invest in nicer gaming areas, given the strength and importance of the incremental revenues we help them generate. We remain confident that our asset-light, hyper-local business model creates a platform to outperform in difficult times and really thrive under normal circumstances, as demonstrated by our continued performance. We aim to leverage our differentiated operating model and extremely strong financial position in order to continue our expansion both in Illinois and across the country. Our success would not be possible without our dedicated employees and loyal customers. They are the true competitive advantages of our businesses that make Excel the preferred choice in distributed gaming. We will now take your questions.
Thank you very much. If anyone would like to register a question, please press star followed by one on your telephone keypad. When preparing to ask your question, please ensure you are unmuted locally. If you would like to withdraw your question, please press star followed by two. Our first question comes from Omar Sander from JP Morgan.
Omar, your line is open. Please go ahead. Hi, Andy, Brian, Matt. Thanks for taking the question. I'm hoping you can parse out the commentary a little bit more. It looks like your 2021 guidance implies a nice sequential step up in locations and VGTs in the 4Q. Are you seeing the momentum Is it more on the conversions and gross units, or is it more in moderation on the attrition
I would say the – this is Andy. Thanks for the question, Omer. I'd say that the attrition is relatively flat as far as it's not declining or growing, kind of consistent with past experience. It's more on the ability to win new customers and convert some customers that are currently with some of our competitors. We are getting some growth with additional equipment in our current portfolio, but it's not material going forward.
Great. Thank you. Thank you. Our next question comes from Kathleen Brennick from Goldman Sachs. Kathleen, your line is open. Please go ahead.
Hi, this is Noah on for Stephen Grambling from Goldman. You know, looking at the 2022 guidance that you've given and sort of parsing out what is organic, you know, Excel versus Century, it would seem to be that the contribution from Century, you know, you sort of stepped up the guidance versus what you'd originally outlined at the analyst day. Are you seeing any trends there in Century's markets that, you know, things have been going better than expected, or what's driving that?
So we've seen Century do a really nice job as the markets have reopened in kind of mid-2020 and going forward. And they have performed better than expected, consistent with what we're seeing across the country. So there's been some changes, especially in the Nevada market, where they now have a player rewards program that the state allowed to be implemented July 1st of this year. And so I think we'll see benefits. We've seen benefits from it a little bit in the initial phase, and I think we'll continue to see it as we go forward into 22.
Thanks. And if I could just ask one follow-up, do you have any insight into the potential legalization in Virginia and Missouri? I realize you touched on it, but any conversations there?
Yeah, I mean, in both markets, there has been legislation introduced in the past. There's interest. There's interest from the legislators. The question is whether or not, like, the stars will align to get that legislation across the finish line. And in any given year, it can happen. and it got close in both states at different points over the last couple of years. Both states see that the success that the state of Illinois has had and as we look forward, it's a real benefit for the state as well as for small business owners and small business owners in Illinois have really benefited from the route gaming that was introduced in the 2009 legislation that we implemented October of 2012. So we're hopeful, but with any type of legislation, until you get it signed by the governor, we've learned that lesson a few times here in Illinois.
um it's not legislation thanks that's it for me thank you very much our next question comes from steve pizzella from deutsche bank steve your line is open please go ahead
hey guys thanks for taking my questions uh i think 2022 year-over-year guidance implies approximately 15 revenue growth at the midpoint x century i believe um with about half coming from new vgts can you talk about the drivers of the other half yeah i mean one of the bigger drivers
is if you recall we were shut down for 22 days in january so we're going to pick up the revenue from basically a zero for two-thirds of the month more than two-thirds of the month of January. The other part that we'll see is there was some, there'll be some annualization of the six machines that were implemented after we went up. And then finally, a lot of the software that came into play was finally implemented in that first and second quarter. So they'll get the benefit of the $4 bets. So all those different factors will contribute to additional revenue. And obviously, our overall economy has inflationary pressures. And so people are spending more, and the relative value of our entertainment hasn't changed.
Okay, great. That's helpful. Thanks. And then is there any way you can kind of talk about the cadence within the quarter? Did you see any impact from the Delta? And then if you're able to give any comments on October trends.
Yeah. So looking at it, like the Delta hasn't really had much effect. And as we saw in the past, as entertainment options are more limited, we do better because we're a safer form of entertainment that's closer to home with environments that they're comfortable in. comfortable with. So, the Delta hasn't had anything negative. If anything, as people are traveling a little less than anticipated, they're staying closer to home and playing our machines and we've had a very like good performance during this period October kind of is like almost any other relative month of the seasonality is similar that that what would as as expected so we're not seeing any outlier
one way or the other okay helpful thanks and then just one more if i could can you just talk about the pipeline you are seeing for new locations and how much visibility you do have into 2022
pipeline and beyond yeah so the pipeline you we you can we only see as far as kind of what our current portfolio of locations that we have signed up, and then obviously the gaming board's licensing process is the other major factor. We continue to perform and we continue to win new opportunities. Our customers choose us over other options time and time again. And so, can't really see how, like, later into the second half of 22 is going to perform, and except for the fact that we do have a good team, and they have performed in the past, and we expect them to continue to succeed in the future. So what that means is that we hope that the performance that you've seen out of Excel will continue going forward.
Okay, I appreciate it. Thanks, guys.
Thank you very much. Our next question comes from Jordan Bender from Macquarie Capital. Jordan, your line is open. Please go ahead.
Thanks for taking my question. So, last week, Illinois expanded gaming and allowing slots into locations that you previously couldn't penetrate, although I think only about 8% of municipalities didn't allow VGT, so relatively small. But do you know the market size for these veteran and fraternal organizations, and is that in your guidance?
So, no, it's not in our guidance. And it's a very small opening that was created. I would say, whatever those municipalities, you can't expect more than one or two veterans locations in those municipalities. and a lot of them don't even have veterans' halls or American legions. So that's kind of not something that we're looking toward for meaningful revenue, and our hope is that at some point there's other opt-ins where you can have a greater ability to expand the VGTs in some of these opt-in communities. But it's not any of our guidance.
And then the Illinois market is still north of around 55 operators. When you look at future years, what do you see in terms of consolidation and how do you fit into that M&A when you think about M&A inside of the state versus outside of Illinois?
Yeah, I mean, there's always opportunities for consolidation. I don't think there'll be significant consolidation, and part of that is that the market has a couple big players, And I think overall the state wants to keep a good competitive market, but at the same time, I think you'll still always see a lot of really small players. And as far as Excel goes, we're always pursuing acquisitions inside of Illinois. but I'd say a lot more of our focus has been recently in other opportunities in other markets and I mean centuries the best example I think that is as we learn new markets through centuries distribution and manufacturing business we'll identify where we should be next.
Perfect. Thanks, Andy.
Thank you.
As a reminder, ladies and gentlemen, if you'd like to register a question, please press star followed by one on your telephone keypad. Our next question comes from Greg Gibbeth from Northland Securities. Greg, your line is open. Please go ahead.
Hey, guys. Thanks for taking the questions. First, just wanted to confirm that we're at nearly 100 percent in terms of installing the six DGTs and then the higher BET limit installations.
Thanks, Craig. We are, yeah, in the 98 percent range. Not much. There's not much additional.
Right. And then if I could follow up on the kind of what you provided on the M&A pipeline,
do you think acquisition multiples have changed at all, maybe since your last few acquisitions?
I think they've stabilized, maybe slightly lower, but pretty stable.
got it and um you know just to follow up to on your commentary regarding century outperforming your expectations uh just wondering if you could maybe expand on to what degree uh they did yeah
i mean they're just their revenue has been um significant it's and it's and it's it's following the trend that we've seen across the country where very local, very regional type gaming has been a preferred form of entertainment as the economies reopened from the kind of pandemic period. And so where we saw in 2019 about $20 million in EBITDA, we're expecting it to be somewhere between 18% to 22% higher. and it's based on just that people want entertainment that's close to home where they know people who are in the establishment and they feel comfortable and they're seeing a lot of the same trends that we've seen in Illinois. Obviously, they're not getting the value of adding a six machine and higher bet limits, But we also think they're going to get the benefit of having a player reward system that was just recently implemented.
Got it. That's helpful. And I guess last one for me, any sense of whether locations under contract are impacted by labor supply issues at all?
Yeah, labor in this industry is being impacted very similar to kind of lower wage businesses. And fortunately, a lot of our business partners are family-owned small business owners, and so they have a very loyal employee base. But we have seen situations where there's been real struggles to hire or to grow their employee base because of rising wages and the limited market. And we foresee that being a challenge in the near future, and hopefully as more people feel comfortable to go back into the workplace, some of that will go away.
Okay, understood. Thanks again, and congrats on the results. Thanks, Greg.
As a final reminder, everyone, if you would like to register a question, please press star followed by one on your telephone keypad now. we have no further questions so I'll hand back over to Andy for closing I just want to thank
everyone for joining us today and wish everyone a safe and healthy holiday season and look forward to speaking with everyone again in the new year thank you everyone for joining today's
call you may now disconnect your lines and have a lovely day