Accel Entertainment Q2 2024 Earnings Call Transcript

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July 30, 2024

Key Takeaways

  • Xcel delivered a record Q2 with revenue of $309 million (up 5.7% Y/Y) and adjusted EBITDA of $50 million (up 6.5% Y/Y).
  • The company added ~50 new locations this quarter (30 in Illinois, 11 in Montana) and achieved positive same-store sales growth in Illinois, Montana and Nebraska driven by increased demand, new machines and favorable weather.
  • Xcel announced a pending acquisition of Fairmont Park for $35 million in stock, gaining a master sports betting license, a long-term FanDuel partnership and a two-phase casino development targeting $20–25 million EBITDA within five years.
  • Illinois gaming tax rose from 34% to 35% on July 1 (split evenly with partners), but the upcoming TITO implementation (within 18 months) and Xcel’s variable cost structure are expected to largely offset the increase.
  • As of June 30, Xcel had ~$300 million net debt and $522 million in liquidity, is two-thirds through a $200 million share repurchase program and expects 2024 CapEx of $55–65 million (down over 20%).
AI Generated. May Contain Errors.
Earnings Conference Call
Accel Entertainment Q2 2024
00:00 / 00:00

There are 8 speakers on the call.

Operator

Good afternoon. Thank you for attending today's Xcel Entertainment Q2 twenty twenty four Earnings Call. My name is Tamiya, and I will be your moderator for today's call. 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 your host, Derek Harmer, General Counsel and Chief Compliance Officer.

Speaker 1

Welcome to Xcel Entertainment's Q2 2024 Earnings Call. Participating on the call today are Andy Rubenstein, Xcel's Chief Executive Officer Matt Ellis, Xcel's Chief Financial Officer and Mark Phelan, Xcel's President of U. S. Data. Please refer to our website for the press release and supplemental information that will be discussed on this call.

Speaker 1

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 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.

Speaker 1

Any projected financial information presented in this call is for administrative 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.

Speaker 2

Thank you, Derek, and good afternoon, everyone. Thank you for joining us for ExCel's 2nd quarter earnings call. This is a very exciting time here at ExCel. First off, we had another record breaking quarter. We reported revenue of $309,000,000 and adjusted EBITDA of $50,000,000 positive proof of the strength of our convenient local gaming offering.

Speaker 2

Secondly, we announced our pending acquisition of Fairmont Park, which Mark will discuss in more detail shortly. In terms of financial performance, our home market in Illinois posted market wide GGR growth of 5% year over year and ExCel outperformed that, growing revenues by 6%. This is in stark contrast to Illinois casinos, which were flat year over year. We're proud of the strong foundation we've built in our home state, leading in a model that's a win win win for our state, our customers and gaming providers like us. We added almost 50 locations nationwide this quarter, highlighted by 30 in Illinois and 11 in Montana.

Speaker 2

This is another way we differentiate ourselves from traditional casinos, unit growth. This unit growth was in addition to positive same store sales growth in Illinois, Montana and Nebraska, which was primarily driven by increased demand in our offering, new machines and favorable weather. In Nevada, we saw a modest decline in same store sales due to an overall increase in supply in the Greater Las Vegas locals market. Turning to expenses. Earlier this year, Illinois raised the state gaining tax from 34% to 35% effective July 1.

Speaker 2

The increase is split evenly between us and our location partners. Based on our highly variable cost structure, we will hopefully offset most of the increased expense. On the regulatory front, we're seeing signs Illinois will implement ticket in ticket out known as TETO, which should make cash processing more efficient and more importantly create a more convenient experience for our players allowing them to switch between games in our venues without cashing out and cashing in each time. We expect Keto to be rolled out in the next 18 months. Before I turn it over to Mark, I want to take a few minutes to talk about Accel's value proposition and where we see our greatest opportunities.

Speaker 2

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, oftentimes 15 minutes or less. We support our 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 teens. In our core route based business model, our steady state growth algorithm is both simple and compelling.

Speaker 2

We target low single digit revenue growth, mid single digit EBITDA growth and high single digit free cash flow growth and core business CapEx quickly compressing down towards our annual depreciation of $40,000,000 Looking ahead, the primary levers for growth in our core route business are 1, growing organically in Illinois, Nebraska and Georgia with both newly licensed establishments and converting competitor locations 2, collecting a greater share of location economics through selectively owning establishments in markets where this is permitted and is otherwise profitable. 3, driving profitability in Nebraska and Georgia through operational execution and strategically positioning ourselves in the face of favorable legislation and 4, preparing ourselves for future opportunities in new states likely to legalize local gaming in the future. Outside of our core business, our M and A pipeline remains active as demonstrated by the Fairmont announcement. We are confident that we can leverage our proven capabilities as a local gaming operator to convert opportunities in the attractive and sizable $15,000,000,000 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.

Speaker 2

As a prime example of these opportunities, I'm going to turn it over to Mark.

Speaker 3

Thanks, Sandy. As we all know, we announced the acquisition of Fairmont for approximately $35,000,000 in Excel stock. The acquisition includes a master sports betting license with a long term partnership with FanDuel, a racetrack, off track betting opportunities and the ability to develop a best in class, politically focused casino. We also welcome Bill Sterics 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've honed over the last 15 years with attractive returns on capital and free cash flow.

Speaker 3

We are currently going through the licensing process with the Illinois Gaming Board and the Illinois Racing Commission and anticipate that the transaction will close in the Q4 of this year. As a reminder, we expect to develop this project in 2 phases, with total development spend of approximately $85,000,000 to $95,000,000 in addition to the 3,500,000 Xcel Shares exchanged for the Fairmont Park assets. Phase 1 will be built in the existing grandstand, adding 200 slot machines, 4 to 6 table games and continuing to utilize the existing FanDuel Sportsbook and Food and Beverage outlets. This will be done with relatively low capital intensity and is expected to open in Q2 2025. For Phase 2, we'll direct a permanent casino on-site with detailed plans for 500 slot machines, 24 table games and a new larger FanDuel Sportsbook.

Speaker 3

We are combining our local gaming expertise with key partnerships in areas outside our core to create an exceptional offering. For the horse track, we will build on Fairmount's long term horse racing management team as well as consultation from industry experts. For the casino, we're engaged with RRC Gaming Management including Tony Rodio, former CEO of Caesars Entertainment and Hallie Gagnon, CEO of HTC Gagnon Hospitality and former CEO of several casino companies including Seneca Gagnon. In food and beverage, we're discussing food and beverage amenities with several experienced F and B operators. In sports betting, we're assuming the existing long term relationship with FanDuel, the number one sports book in Illinois.

Speaker 3

Broadly, these partners will complement Xcel's expertise in local gaming, regulatory partnerships and efficient capital allocation. Within 5 years, our conservative underwriting implies a $20,000,000 to $25,000,000 adjusted EBITDA opportunity. We're excited that the acquisition is expected to be accretive to adjusted EBITDA and free cash flow at an applied multiple of approximately 5.5x. This opportunity takes advantage of our core expertise and builds on Xcel's strong distributed route based platform and is an exciting milestone in our national expansion in the local gaming market. With that, I'll pass it over to Matt to go over the fundamentals of the quarter.

Speaker 4

Thanks, Mark, and good afternoon, everyone. For the 2nd quarter, we had record revenue of $309,000,000 a year over year increase of 5.7 percent and adjusted EBITDA of $50,000,000 a year over year increase of 6.5%. As of June 30, we had 25,757 terminals in 4,034 locations, year over year increases of 5.7% and 4.7% respectively. Location attrition continues to remain low as mostly attributable to our lowest performing locations closing their doors. Revenue per location for the quarter in our core states was as follows.

Speaker 4

Illinois was $8.62 per day, an increase of 0.5%. Montana was $6.12 per day, an increase of 7.6%. Nevada was $8.43 per day, a decrease of 2% and Nebraska was $2.55 per day, an increase of 7.6%. The increase in Illinois, Montana and Nebraska was due to a combination of increased player demand, new equipment driving more play and favorable weather. The decline in Nevada was due to an overall increase in supply in the Greater Las Vegas locals market.

Speaker 4

Capital expenditures for the Q2 were $18,000,000 cash spend. The increase over the last year was attributable to payments of outstanding invoices from last year. As a reminder, the primary driver of our elevated CapEx was the introduction of 4 new high performing gaming terminals at the same time in Illinois. We view last year and this quarter's elevated CapEx as one time in nature. For 2024, we are still projecting CapEx to be between $55,000,000 $65,000,000 a decrease of more than 20% from last year.

Speaker 4

Over the longer term, we expect CapEx to decrease even further towards our $40,000,000 of annual depreciation as Andy highlighted earlier. At the end of the Q2, we had approximately $300,000,000 of net debt and $522,000,000 of liquidity, consisting of $255,000,000 of cash on our balance sheet and $267,000,000 of availability on our credit facility. On our capital allocation strategy, we continue to make progress in our $200,000,000 share repurchase program. During the quarter, we repurchased 906 1,000 shares at an average purchase price of $10.16 for a total of $9,000,000 We are 2 thirds of the way through the repurchase program 12,900,000 shares repurchased at a cost of $133,000,000 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.

Speaker 4

Thanks,

Speaker 2

Matt. As I mentioned earlier, we are very pleased with our record performance this quarter and excited to what the future holds with Fairmont Park. For the immediate term, we remain focused on executing our growth algorithm, closing the acquisition and getting the casino live. Looking further ahead, we have a strong financial position, demonstrated growth trajectory, improving cash flow profile and strong returns on invested capital. Despite this, we trade at a low double digit free cash flow yield and a mid single digit enterprise value to EBITDA multiple.

Speaker 2

We look forward to capitalizing on the significant growth opportunities ahead of us as an aligned and incentivized ExCel team will move this needle. ExCel remains strong as evidenced by a record second quarter results and our healthy balance sheet. This enables us to pursue a multi pronged approach to capital return making us a compelling investment. Local gaming is an attractive growing segment within the broader gaming market with multiple opportunities to generate strong and consistent revenue and EBITDA growth as well as strong free cash flow. We will now take your questions.

Operator

We will now begin the question and answer session. The first comes from Steve Pizzella with Deutsche Bank. You may proceed. Andy, on the M and A front,

Speaker 5

you noted the pipeline continues to remain active. Are these similar opportunities to Fairmont in terms of type of assets, size and return profile? And do you have the bandwidth to take on additional projects while working on the Fairmont development?

Speaker 2

Thanks for the question, Steve. The lot of the other opportunities that we're looking at are

Speaker 6

they

Speaker 2

have some resemblance of Fairmont. And when I say resemblance, they're local gaming entertainment type opportunities. Each of them is a little different from each other. Their scale ranges from a few $1,000,000 in an EBITDA upwards into the $20,000,000 $30,000,000 of EBITDA. So I can't say that any 2 are alike, but there's a lot of similarities.

Speaker 2

And they are able to accentuate our competitive advantages in operating slot machines, working with the local customer and providing value in the entertainment. As far as the ability to take on more of these opportunities, absolutely. We have a great team. We have great partners all over the country. And you'll see that the opportunities when they present themselves, it's not going to be in one geography because we're pursuing opportunities across the United States and in many of the markets that we already are operating and some that are adjacent or in the region.

Speaker 2

So there's a lot to look forward to. We're super excited. We're building that skill set to be able to take on more and more and we've got a great team.

Speaker 5

Okay, great. Thank you. And then regarding the Illinois gaming tax increase, can you talk about anything you can do to offset that? I believe you started talking about Tito. What is the opportunity there?

Speaker 2

So as far as the Tito is concerned, we believe that Tito will really help facilitate our players in getting more value for their time. It won't be cashing out all the time. They'll be able to continue their play. And historically, markets where this has been introduced, it provides a lift to the market of about 5% to 10%. So we feel that will help mitigate the 0.5% tax that we increase that we received.

Speaker 2

And in addition, we've really focused on some of the bottom part of our portfolio that's maybe not core to our operations. And this tax kind of really allowed us to identify opportunities to operate in what we call revenue centers and make the overall route more profitable and cut back on some of the expenses for those outlined accounts that at the margin no longer profitable.

Speaker 5

Okay. Thanks. And just lastly, you noticed a modest same store declines in Nevada due to some of the increased local supply. Have you seen any changes in demand there at all we go through July or any green shoots?

Speaker 4

Hey, Steve, it's Matt. Thanks for the question. I would say overall, no, nothing noticeable. It's really just the supply influx that we're seeing. But I think overall across the business everywhere, including Nevada, you're seeing a real healthy customer for our offering.

Speaker 5

Okay. Thank you. Appreciate it.

Operator

Thank you. The next question comes from Chad Binnen with Macquarie. You may proceed.

Speaker 6

Afternoon. Thanks for taking my question. With respect to the new locations in Montana, from a percentage standpoint, certainly some nice growth there. Could you just talk about how that how you see that portfolio evolving post the acquisition that you made over a year ago, if there's still new opportunities and if you see that as a big growth market for you guys over the next 12 to 18 months? Thanks.

Speaker 2

Yes. Thanks, Chad. This is Andy. We are excited about Montana. We've found many opportunities in the market to grow our offerings to the establishments.

Speaker 2

You've seen some new software that we've offered to our existing partners. We've come out with some new models on the games, which is a lot of that has allowed us to win more contracts. We're the premier systems provider in the market. Our iREWARDS program continues to be the one most preferred by players. And as we've identified opportunities for us to test some of our own operation strategy, we've had a few locations that we've opened up ourselves to identify ways to help our existing partners to improve their businesses.

Speaker 6

Thank you. And then post the acquisition, which is coming with the issuance of new stock, you still have a significant amount of cash on the balance sheet. So how should we think about again in terms of what you need to keep within the company just in terms of working capital, what should be used on an annual basis in terms of share repurchases? Matt, you mentioned that CapEx does come down. So just trying to figure out opportunities in terms of deploying some of this other cash mainly in 2025?

Speaker 6

Thank you.

Speaker 4

Hey, Chad, it's Matt. Thanks for the question. So I think you hit the nail on the head. Free cash flow generation is going to go up. I mean, the first deployment for us is always growth.

Speaker 4

As these M and A opportunities come up, we will pursue them. And like Andy said, we have the team for it. We also have the financial capacity for it. So that comes first. Next would be returning capital to shareholders.

Speaker 4

We generally want to use our free cash flow to do that because we think that's far more attractive than repaying any debt. So don't want to quite get to an exact number, but if we continue to perform and generate this cash, I would expect our return to capital to shareholders to creep up a bit from where we've been today.

Speaker 3

That's great to hear. Thank you very

Speaker 6

much guys. Appreciate it. Nice quarter.

Speaker 4

Thanks, Chad.

Speaker 2

Thank you.

Operator

Thank you. The next question comes from Greg Gibas with Northland. You may proceed.

Speaker 7

Hey, Andy, Mark and Matt. Thanks for taking the questions. If I could just follow-up on some of the dynamics in the quarter, you spoke to the slight Nevada declines being related to increased supply. And you want this kind of do you expect more supply growth kind of to continue in that market? And then secondly, with the new equipment driving more play, I'm guessing more overall, particularly in Illinois.

Speaker 7

How long should we expect that to be a tailwind?

Speaker 2

Thanks, Greg. It's Andy. First of the Nevada market, I think the locals market continues to have new supply come on. As you saw, Durango happened in late 2023 and there's a lot more new construction coming on. There's but at the same time, the Nevada market, especially Las Vegas market is a growing population.

Speaker 2

So we think demand will continue. Now other macro factors, I don't know how that will impact the local market, but we see a continuance of demand in the near future. As far as Illinois, there you look at the ratio of slot machines to people or population, we're still underserved in the market on a relative basis. The quality of the equipment that we continue to bring to our customer improves, which basically increases the demand. So we believe that our local convenient offering will always be the most attractive and we see continued growth.

Speaker 2

The cost of our entertainment is not affected by inflation. So it is a value proposition for dollars that they have for their time.

Speaker 7

Got it. That's helpful. And if I could follow-up on your M and A commentary. Is it fair to say that nothing's really changed from a priority perspective following the recent Fairmount purchase? I guess, we shouldn't assume that you're going to be less aggressive in the near term.

Speaker 7

I just kind of wanted to confirm that your stance on M and A isn't really changing. Is that fair?

Speaker 2

Yes. I would not say we're going to be less progressive. That's probably not a fair comment. We the timing of Fairmont is such that allows us to continue pursuing a lot of these opportunities that we've been working on for the last 12 to 18 months. I think you'll see that we'll continue with finding local gaming opportunities that are within our economics that we have significant liquidity to execute on these.

Speaker 2

And we have the team to be successful in the local gaming entertainment market. And we're looking forward to showing the investor community that excel and it delivers over and over again.

Speaker 7

Got it. That's helpful. Thanks and congrats.

Speaker 2

Thank you.

Operator

There are currently no other questions in queue. With no questions remaining at this time, I will pass it back over to Andy Rubinstein for closing remarks.

Speaker 2

Thank you. I just wanted to thank everyone for joining us today. A few weeks ago when we announced the Fairmont transaction, we're looking forward to sharing an update on that on the next earnings call. I think you'll see that the direction XL is going is exciting and Fairmont is the beginning of a new trajectory, where Xcel will continue growing in markets across the United States. So enjoy the summer and we'll see you again in the fall.

Speaker 2

Thanks.

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