Hello, everyone, and welcome to the Accel Entertainment Second Quarter 2022 Earnings Call. My name is Seb, and I will be the operator for your call today. I will now hand the floor over to Derek Harmer, General Counsel and Chief Compliance Officer.

Welcome to Accel Entertainment's Second Quarter 2022 Earnings Call. Participating on the call today are Andy Rubenstein, Accel's Chief Executive Officer; and Matt Ellis, Accel'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 various 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 Andy.

Thanks, Derek, and good morning, everyone. Thank you for joining us for Accel's second-quarter earnings call. I'm pleased to report we had another strong quarter. We reported revenue of $228 million and adjusted EBITDA of $43 million. In Illinois, same-store sales were essentially flat to the prior year, despite the current inflationary environment and the fact that stimulus checks went out near the beginning of Q2 last year. Our performance continues to demonstrate the strength and resilience of our business model. We believe local businesses will continue to invest in their gaming due to the incremental profits they receive, and players will continue to choose our local high-quality offering due to its convenience and appeal. On the expense side, just like most other businesses, we experienced higher-than-expected costs for macroeconomic-related impacts such as increased expenses for labor and fuel. We're continually monitoring our spend and looking for ways to mitigate increased costs without sacrificing our best-in-class service. Our asset-light business model and highly variable cost structure will allow us to quickly adjust if there are any further changes in the market. On the M&A front, I'm pleased to report that we successfully closed our acquisition of Century on June 1. The integration is going well, and the companies are working hard as we share our best practices. I'm also pleased to welcome the entire Century team, led by Steve Arntzen, Heidi Schmalz and Merle Frank, to the Accel family. Century is experiencing similar inflationary pressures as we are seeing across the country, but continues to outperform our original estimates. Looking at new states, I'm excited to share that we entered Nebraska in June with a handful of organic locations. Nebraska's play today is significantly lower than our more established markets, but we see potential for both organic and inorganic growth. We aim to develop Nebraska using the growth playbook we developed in Illinois. This will be a new market for us, but one that will eventually lead to an attractive earnings stream. And to that point, we recently acquired VVS, an amusement operator, for $9.5 million. Overall, our M&A pipeline remains active, and we are evaluating multiple opportunities in Illinois and across the country. Our long-term goal is to continue to increase the percentage of our revenue generated outside of Illinois. Switching over to Georgia. In May, the Georgia Lottery announced that it would be extending its Gift Card Pilot Program and making it available to all locations. This program allows players to load their winnings onto a prepaid gift card, which substantially reduces one of the biggest barriers that players face in the Georgia market. As you would expect, our locations in the pilot program experienced significant increases in play. We're currently working with the lottery and our locations to roll out the pilot program across our network. We see this as an opportunity to expand our presence in the market and the profitability of each location. In Illinois, our sales team continues to sign additional competitor and organic locations. As of the end of the second quarter, our backlog had grown more than 14% year-to-date. We're working closely with our locations to ensure that they are licensed and live as soon as possible. Whether we look at the number of eligible businesses without gaming or the number of VGTs per capita, we believe Illinois still has highly visible growth. Overall, Accel achieved several milestones this quarter with the Century acquisition and expansion in Nebraska. More importantly, we continue to build a platform to further expand into existing and new markets. Our local business model, low capital requirements, and highly visible growth offers one of the best returns in gaming. With that, I'd like to turn it over to Matt to walk you through the numbers in more detail.

Thanks, Andy, and good morning, everyone. For the second quarter, we had total revenue of $228 million, a year-over-year increase of 13%, and adjusted EBITDA of $43 million, which was flat compared to last year. This quarter's results include one month of Century, and it is important to remember that Century operates in markets where the revenue split between Century and the location is negotiated. The margins are attractive but lower than our existing business. Illinois same-store sales were essentially flat relative to the prior year. Considering the inflationary environment and stimulus checks issued last year, we believe our performance reinforces that demand for our offering remains strong. CapEx for the second quarter was $6 million cash spend. As of June 30, we had 22,128 terminals and 3,489 locations, year-over-year increases of 68% and 38%, respectively. Location attrition continues to remain low and near the pre-COVID historical averages. At the end of the fourth quarter, we had approximately $282 million of net debt and $601 million of liquidity, consisting of $220 million of cash on our balance sheet and $381 million of availability on our current credit facility. I'd now like to provide an update on our efforts to return capital to shareholders, specifically our share repurchase program. As you're all aware, we announced a $200 million share repurchase program in November of 2021 as we find the opportunity to return capital to shareholders in the form of buybacks and attractive use of our significant free cash flow. During the quarter, we purchased $25 million of Accel stock at an average purchase price of $10.96 per share. Since the program started, we have repurchased more than $55 million of Accel stock through the end of July. Given our relatively underlevered balance sheet and strong free cash flow, we are in a position to make exciting investments while continuing to appropriately return capital to shareholders. Turning to outlook. With the Century acquisition closed, I would now like to provide updated guidance. I'll provide guidance with the in-year impact of Century as well as the pro forma impact. As Andy and I mentioned earlier, demand continues to remain strong, but we are seeing increased expenses and slightly lower revenue growth compared to when we first issued guidance in late 2021. We expect to end 2022 with 22,700 to 23,200 terminals and 3,550 to 3,600 locations. The 2022 revenue is estimated to be $960 million to $990 million. Assuming the full-year benefit from Century, revenue is estimated to be $1.07 billion to $1.13 billion. Adjusted EBITDA is estimated to be $160 million to $165 million. Assuming a full-year benefit of Century, adjusted EBITDA is estimated to be $170 million to $175 million. CapEx is estimated to be $25 million to $30 million of cash spend. Assuming a full year of Century, CapEx is estimated to be $30 million to $35 million of cash spend. Back to you, Andy.

Thanks, Matt. We are pleased with our performance this quarter and are focused on executing our growth strategy and the strong foundation we have built. We remain confident that our locally focused business model creates a platform to outperform in difficult times and thrive under normal circumstances. We aim to leverage our proven asset-light business model and extremely strong financial position to continue our expansion and return capital to our shareholders. Our success would not be possible without our dedicated and high-performing employees. They are the true competitive advantage of our business that makes Accel the preferred choice in our markets. We will now take your questions.

Our first question comes from Chad Beynon from Macquarie.

Congrats on the Century closure. Also, thanks for giving guidance. I know there are a lot of unknowns out there and most companies aren't willing to give it at this point, but since you did, I wanted to take a stab on that. Given your view on lower revenue growth than what you were originally projecting, is this something that you're seeing in recent trends in June or July? Or are you maybe just taking a conservative approach, just given the world that we live in, the news that we're seeing, and kind of the macro and inflationary environment?

Thanks, Chad. This is Andy. We're basically looking forward relative to some things we're seeing in the macro environment. We haven't seen anything significant directly in the markets that we operate in, but as we see prices rise in some of the discretionary spending categories as well as the inflation that we're seeing in fuel and other costs that affect our players, we're taking a more cautious approach. But we haven't seen anything in June or July that's dramatic, and we feel pretty confident that our position today and where we sit in the marketplace and the gaming world is a relatively stable revenue flow.

Okay. Great. And then in terms of the Nebraska market, can you just talk about how big that market can be, if that could be kind of a top 3 market for you guys? Or if it's just another opportunity to build on your current units?

Yes, it's really too early to determine it. The challenges with Nebraska is that it has a very unique style of game and a very underdeveloped gambling market. As you may be aware, casinos or racinos are going to be coming on in that market. So we'll get some indication of the potential there, but today, the machines are effectively rather amusement skill type games that are regulated. We don't expect them to perform anywhere close to the Illinois market, and we're investing early to see what we can develop. We'll have better information and data probably around midyear 2023.

Our next question comes from Steve Pizzella from Deutsche Bank.

Now that the Century acquisition is closed, does that allow you to be more aggressive on the M&A front? Are there similar acquisitions inside in a sense that are out there you think? And how have the expectations evolved over the last 6 months?

Yes. Thanks, Steve. We haven't really changed our approach. We're always evaluating acquisition opportunities as individual opportunities, and we've continued to proceed in a way that is thoughtful. We're obviously taking into consideration the current economic environment. We have seen a slight change in the acquisition environment where people are starting to realize that this significant growth they were trying to price their businesses at going forward isn't a reality. We had obviously substantial growth in 2018, 2019, 2020, and 2021, but that can't continue at those levels. So there are still opportunities. We're evaluating them. I think where the market goes in terms of pricing has yet to be determined.

Okay. And then just knowing in the past for the legacy kind of Illinois business, I think you've talked about margins being able to potentially get to 19% to 20%. Can you talk about where you think this current portfolio margins can get to, knowing Century legacy margins are relatively lower?

Yes. I'm going to have Matt pipe in on that.

What I would say is that the Illinois sort of margin is intact. As we've always said, we're continuing to build this base to support far more than Illinois and Century, and Nebraska is sort of a first step there, and we've got growth in Georgia. It's a little too soon to tell what the overall margin would be, thinking of the competitive nature of the Nevada and Montana markets, but I think the pro forma guidance gives you sort of a blend of everything. But at this point, for competitive reasons, we're not going to start breaking out margins by specific market.

Our next question comes from Omer Sander from JPMorgan.

First, a question on Century and the growth in Nevada and Montana. And Illinois, obviously, core Accel had additional licenses being granted, plus you had the 6 machine. Can you talk about the growth landscape in Nevada and Montana? How much of the locations and VGT growth in your full-year guidance is from these markets? And if our math is correct, it looks like the locations in Nevada and Montana are lower than your Investor Day 14 months ago. What's driving that dynamic?

The markets in Nevada and Montana are quite stable, with opportunities for growth. However, they do not have the same significant organic growth potential as Illinois. Some fluctuations since the Investor Day may simply be due to the natural cycle of locations, but Century continues to experience growth and perform exceptionally well. You can observe the integration, although some locations have more terminals, which may require mixing for optimization. Overall, as mentioned in the call, Century is still exceeding our initial projections, which is encouraging. We will keep applying our best practices and growth strategies, along with their operational efficiencies, to develop a larger and more successful company.

Okay. Great. And then maybe shifting to Illinois. Last quarter, you talked about the removal of some of the idle machines due to the Rule of 72. Did that weigh on any of the unit growth in the second quarter? And maybe another way of putting that, can you bifurcate the gross units added in Illinois versus the removals in the second quarter?

Sure. Not as pronounced as Q1, which is why we didn't really address it. Certainly, a handful of locations are still in that cycle, but obviously, we're starting to go in. But to quantify, it's another 10 to 20 locations probably, but as we sort of address it, it's stabilized now. And you can see, obviously, sequentially, we are starting to grow again.

Our next question comes from Greg Gibas from Northland Securities.

If I could follow up on the Nebraska market. It sounds like it's obviously very early there, but in terms of the market structure, maybe how do regulations differ? And then are the establishments pretty similar to the establishments where terminals are in Illinois? And I guess, maybe how should we think about the pace of your expansion in the state?

Thanks, Greg. This is Andy. The equipment used in this market is quite unique, which means we don't see the usual manufacturers found in casinos or even in the skill gaming sector. This uniqueness will significantly hinder growth. We're facing challenges in obtaining inventory, and the gameplay resembles more amusement play. Typically, locations have only a few machines, and it will take time for players to accept this as a gaming option. However, the market isn't new; it has been operating for about 3 to 4 years in a nonregulated format before that. We're investing in this market to observe player development and determine their genuine interest in gaming entertainment. The facilities are somewhat similar to those in Illinois, but Nebraska has a much smaller population, leading to games being mainly found in taverns and truck stop environments. In terms of regulations, they are more aligned with amusement skill markets than traditional gaming markets. The regulators in Nebraska are well aware of the market dynamics and have been cooperative and supportive as we enter the area. Nevertheless, this market differs from conventional routes or casino settings.

I wanted to ask about the trend of your new establishment win rate in the quarter and if you believe you're still gaining market share in Illinois.

Can you just repeat that again?

Yes. Sorry about that. Just kind of curious how you think your win rate has trended on new establishments, and I guess within the quarter? And then do you still think you're gaining market share in the state?

So I'm trying to understand if you are asking about the new establishments that are just coming online with us in Illinois.

I am curious about the percentage of new establishments that Accel has won in the state and how that has trended over time.

Okay. I'll let Matt answer that question.

We are actively working to increase our efforts. Andy mentioned that our backlogs are growing, which is a positive indication. When we talk about these backlogs, we're not just referring to signed agreements; we're also considering competitor locations and organic opportunities in municipalities with gaming that have their liquor licenses. Overall, we are performing well in this area. Although we've traditionally kept our backlog details more private, our aim is to continue growing them and assist our locations through the licensing process. As we've mentioned before, there is still potential for growth in Illinois. We evaluate it in terms of liquor licenses without gaming and VGTs per capita; the market continues to expand, and we foresee significant growth ahead.

Got it. Very helpful. And I guess just last one for me. What’s the strategic rationale for the VVS purchase? And maybe what multiple did that purchase equate to?

The strategic concept is that VVS has an established presence in the market. They are well-positioned and have a strong team. The actual multiple is not yet determined because, as we analyze the market, there is a significant earn-out potential. As they assist us in growing the market, their earnings will increase to support expansion. Many locations currently have only a few machines, and as we grow, we will be able to add more machines. This will lead to higher payments, giving us a clearer understanding of the multiple involved.

We have no further questions in the queue. I will hand the floor back to Andy Rubenstein.

I want to thank everyone for joining us this morning. We had a pretty good second quarter. We're really pleased with it. And as we're looking forward to the second half of this 2022 year, we think that you'll continue to see us growing, expanding in some of the markets that we're in and identifying opportunities for us to continue to grow. And we appreciate you joining us this morning and look forward to talking to you at summer's end. Thank you.

This concludes today's conference call. Thank you very much for joining. You may now disconnect your lines.