Accel Entertainment Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 8 speakers on the call.

Operator

Good afternoon, and thank you for attending today's Xcel Entertainment Third Quarter Earnings Call. My name is Jason, and I'll be the moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to our host, Derek Harmer.

Speaker 1

Welcome to Xcel Entertainment's Q3 2023 earnings call. Participating on the call today are Andy Rubinstein, Exel's Chief Executive Officer and Matt Ellis, Exel'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 It 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.

Speaker 1

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 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.

Speaker 1

I will now turn the call over to Andy.

Speaker 2

Thanks, Derek, and good afternoon, everyone. Thank you for joining us for Exel's 3rd quarter earnings call. I'm pleased to report we had another strong quarter. We reported revenue of $287,000,000 a year over year increase of 8% And adjusted EBITDA of $44,000,000 a year over year increase of 7%. Q3's revenue growth Was primarily driven by adding new locations in Illinois along with 1% same store sales growth.

Speaker 2

We also saw some growth in our developing markets where we continue to add locations and attract new players. Our continued growth in the current economic environment Demonstrates the strength of our hyper local business model. Our establishment partners recognize and rely on the incremental profits that our high quality offering brings to their businesses. On the expense side, our cost structure continues to remain stable Despite the inflationary impacts on labor and other expenses such as parts, while the labor market remains tight, We have seen some signs of stabilization, allowing us to better retain and attract talent. Our vendors have worked through nearly all the supply chain disruptions and are now able to provide parts on a timely and consistent basis.

Speaker 2

Our asset light business model and Looking at future growth, our pipeline remains active, and I'm excited to share we're evaluating multiple opportunities across the country. We're working hard to get those opportunities across the finish line and look forward to sharing them with you in the future. Our long term goal remains to continue to increase the percentage of our revenue that is generated outside of Illinois. Overall, Xcel continues to execute its growth playbook. We remain excited about the opportunities in the markets where we are currently operating As well as new markets where we're looking to enter.

Speaker 2

Our strong balance sheet, local business model 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 our financials in more detail.

Speaker 3

Thanks, Andy, and good afternoon, everyone. For the Q3, we had total revenue of $287,000,000 As a reminder, Century has been included in our results since June 1, 2022, and Century operates in markets where the revenue Between Century and the location is negotiated. The margins are attractive, but far lower than our other markets. CapEx for the Q3 was $19,000,000 cash spend. The increase is due to accelerating some purchases in Illinois And additional investment in our developing markets such as Nebraska and Georgia.

Speaker 3

We continue to see upside in both these markets and we're excited by the recent growth. That said, it's important to realize today's investments may not be fully realized for several years to come. As of September 30, we had 24,016 terminals and 3,687 locations, Year over year increases of 7% 5%, respectively. Location attrition continues to remain low and is mostly attributable to our lowest performing locations closing their doors. At the end of the Q3, we had approximately $282,000,000 of net debt And $572,000,000 of liquidity, consisting of $230,000,000 of cash on our balance sheet And $342,000,000 of availability on our credit facility.

Speaker 3

I'd now like to provide an update on our capital allocation strategy. As you're all aware, in November of 2021, we announced a $200,000,000 share repurchase program. With our strong balance sheet and low leverage, We're in a unique position where we can grow our business and return capital to shareholders. During the quarter, we repurchased just over 300,000 shares At an average purchase price of $11.10 per share. We are just over halfway through the repurchase program with approximately 10,000,000 shares repurchased at a cost of approximately $104,000,000 Similar to prior quarters, we are not issuing guidance due to the near term macroeconomic uncertainty.

Speaker 3

However, I would like to emphasize that demand continues to remain strong and should the current trends continue, we expect to finish the year with record breaking results. With that, I'd like to turn it back over to Andy.

Speaker 2

Thanks, Matt. We're pleased with another strong quarter and remain focused on Our growth strategy to create value for our investors, we're confident that our locally focused business model creates a platform to outperform in challenging conditions

Operator

Our first question is from Steve Pizzella with Deutsche Bank. Your line is now open.

Speaker 4

Hey, Matt, Andy. Good evening. Thanks for taking my questions. Can you talk about If you saw anything outside of normal seasonality from a customer demand perspective in the quarter throughout Your 3 main regions and then maybe any color you can give us on how October trended?

Speaker 5

Yes. Thanks for calling, Steve. The what we're seeing is Basics kind of stability in the play, still some growth, but it's not It's minimal in terms of year over year on the same store Play. As we look in some of the markets, we're seeing strength where we've invested in new equipment. We've seen that in the Nevada market.

Speaker 5

Illinois, we're starting we continue to see that. But overall, I'd say, there's the market's been stable. I think it's kind of representative of the fact that our business It's incredibly resilient even as people are starting to pause in their discretionary spending. October has kind of followed the trend. And although we don't have the final numbers and results, As you'll see in the reporting in the next few days from the state, From what we have seen, again, it's very strong, stable performance.

Speaker 5

The customer sees that we provide a value, we provide convenience, and And quality, I mean, the quality of our equipment keeps getting better and better. So the experience that they have locally is Just as good or better than they may experience in a casino or at a destination location. So we feel good about it. We have confidence in this quarter. And although we're kind of holding off on forecasting Beyond the end of the year, I think the stability of our business and where Distributed gaming kind of sits in the gaming vertical is a position of strength.

Speaker 4

Okay. Thank you. That's helpful. And then as we think about margins in the cost structure, Looks like margins were flat to maybe down a couple of basis points year over year. How should we think about that cadence moving forward?

Speaker 4

And maybe What kind of what level of revenue growth do you think you need to get to margin expansion moving forward?

Speaker 3

Hey, Steve, it's Matt. Thanks for the question. I'll start with cost first. Again, I think we talked about this in the past, but our raise cycle is in July. So the best thing to look at rather than a year ago is sort of sequential.

Speaker 3

And as we talked about Expenses overall and wages being the biggest part of that have been pretty stable. I mean, we have our annual cost of living increases and stuff like that, But the cost structure has been very stable. Frankly, on the forecasting part, that's the easy part of the job. What is sort of as Andy discussed earlier, the revenue. And while we're seeing strong trends, a lot of that margin Expansion will come down to sort of how the revenue flows in.

Speaker 3

We feel very good about the cost base. Again, we're close to home, we're local. We're an easy convenient option for our players. So as he said, October came through better than we internally forecasted, but again, you'll see the numbers soon. Overall, we feel good, but we'll certainly try to get some margin expansion, but a lot of that will come through on the demand side.

Speaker 4

Okay, thanks. And then just one more if I could. The kind of $60,000,000 to $70,000,000 level And CapEx this year, is that a good run rate to think about moving forward into kind of 2024 2025 as we build out our models?

Speaker 3

I think you can go a little lower than that. Like we talked about, we walked some purchases forward this year just out of abundance Caution and to be a little opportunistic, I would expect it to drop 10% to 20% next year. We'll see how everything comes in, but we had a lot of new products come in and then to be safe, we didn't want to run into any shortages. Like we said, a lot of those have gone away. But certain equipment, you don't want to end up with a backlog or you can't keep setting new locations.

Speaker 3

So I would expect it down 10% to 20%.

Speaker 4

Okay, great. Thank you.

Operator

Our next question is from Chad Beynon with Macquarie. Your line is now open.

Speaker 6

Hi guys. This is Sam on for Chad. Thanks for taking our questions. First question with same store regional gaming revenues slowing in the broader gaming industry. Could you remind us of the various growth Opportunities that you guys have in your portfolio that are not dependent on same store growth such as tuck ins, new locations, vertical integration?

Speaker 6

And what would the aggregate growth be from these avenues assuming same store trends across the portfolio are flat in 2024 and 2025?

Speaker 5

Thanks, Sam. This is Andy. We have quite a few opportunities, whether it's tuck in here in Illinois or other markets and I'd expect us to continue Those opportunities pursuing those opportunities in 2024, we will Expand our retail operations, we have got a couple locations that will be able to I operate the retail business in Montana. You'll see the opportunities Kind of manifest themselves in 2024. And then we're looking at a lot of new markets.

Speaker 5

I mean, there's We, as Accel has expanded its business to places like Nebraska, The success there has indicated to us that there is other Real opportunities for us to grow. We are a manufacturer in states like Louisiana, South Dakota. We anticipate getting more involved in the Louisiana market as we get into the second half Of 24. So the opportunities are there. I think by the time we do this call, At the end toward the end of the Q1, you'll see that we've made some progress, and The real results will be will start to be realized in The second half of twenty twenty four into twenty twenty five.

Speaker 6

Great. Thank you for that. And then as a follow-up, Looking at Illinois data, it doesn't look like the VGT market has been impacted by any of the new casinos that have launched in the last few months. And it actually looks like growth has accelerated. Just wondering what you've seen, if anything, in your portfolio at all?

Speaker 5

I mean, we really haven't felt it. There's a couple individual locations that are In proximity of the casino that had marginal decrease, We believe that in general as gaming becomes more of an acceptable form of entertainment in Illinois similar To how it is in Nevada that more people see it as A real value in entertainment. We're in an inflationary environment in many of the other entertainment alternatives Where our value proposition of Time or the money spent is the same, And people are appreciating what our offer is. So Our view is Illinois is a strong market. We'll become more and more of a gaming Culture, as we've seen over the last 11 years of operating that playing slot machines It is an entertainment that people prefer.

Speaker 6

Great. Thanks for the color and nice quarter.

Speaker 5

Thank you.

Operator

There are no more questions. Oh, sorry, we have another question from Greg Gibas with Northland. Your line is now open.

Speaker 7

Hey, thanks guys. Thanks for taking the questions. First, I guess, you mentioned just tuck ins in Illinois continuing to look at those. I think it's been a little while, so I'm curious if you're still seeing attractive opportunities in terms of tuck ins within Illinois.

Speaker 5

Yes. And we're evaluating them. And those opportunities will I think They're present and I think they'll continue. The market As always kind of transitioning and a lot of again, 11 years into this market, There are people that are looking to exit or find a company to partner with. And We've demonstrated that we're a good partner.

Speaker 5

And when the opportunity is appropriate and We kind of go through the diligence that indicates this is The right spot for both companies, we'll continue to execute on that.

Speaker 7

Great. And then I guess kind of the follow-up there, you mentioned the goal still being to expand revenues I'm just curious like where you'd stack up those growth opportunities in terms of markets. With North Carolina up table For the time being, where are you kind of most excited about?

Speaker 4

I

Speaker 5

mean, we really like some of the opportunities in Montana that We've started to capitalize on, and We've been able to be successful in a few of these retail situations. And I think We'll be able to continue down that path to grow the business significantly. You're looking at other states that are out there. Nebraska is growing from a very low number, but we see a very strong growth pattern And same store sales growth there. So I think, like I said, as we move into next year, There'll be other states that we've identified To pursue that we may make a stronger effort.

Speaker 5

We're really looking hard at What we're doing in Georgia, whether we pivot in one direction or the other, South Dakota has presented a few opportunities. So they are there and But I would tell you Montana is the one that is most actionable right away. It may be a different conversation 6 to 9 months from now, but Montana is the most present.

Speaker 7

Got it. That's helpful. Thanks, Andy.

Operator

There are no more questions. I'll pass call back over to the management team for closing remarks.

Speaker 5

Thank you, everyone, for joining us today. We are pretty excited about what's coming in 2024, which will spill into A very strong second half of the year and into 2025 and 2026. We appreciate you guys listening today. I wish everyone a safe and happy holiday season, and we'll look forward to sharing some good news as we talk to you again in the New Year. Thank you.

Operator

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.

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Accel Entertainment Q3 2023
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