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Accel Entertainment, inc (NYSE:ACEL)
Q3 2021 Earnings Call
Nov 4, 2021, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, everyone, and welcome to the Accel Entertainment Q3 2021 Earnings Call. My name is Daisy, and I’ll be coordinating today’s call. [Operator Instructions] I will now hand over to your host, Mathew Ellis, the Senior Vice President of Corporate Strategy from Accel Entertainment.

So Mathew, please go ahead.

Mathew Ellis — Senior Vice President of Corporate Strategy

Welcome to Accel Entertainment’s Third Quarter 2021 Earnings Call. Participating on the call today are Andy Rubenstein, Accel’s Chief Executive Officer; and Brian Carroll, 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 & 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.

Andy Rubenstein — President, Chief Executive Officer & Director

Thanks, Matt. Good morning, everyone. Thank you for joining us for Accel’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 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 22, 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 Accel 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, Accel was awarded 243 new licenses or 35% of the total new licenses awarded. Our ability to win more licenses in our current market share is a strong testament to our sales capabilities and location owners believing. 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, Accel 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.

Brian Carroll — Chief Financial Officer

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 bet limits software and our six VGT initiative. capex for the third quarter was $8 million cash spend. As of September 30, 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 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 million to $750 million with adjusted EBITDA of $140 million to $145 million. capex is estimated to be between $20 million to $25 million cash spend.

Year-end net debt, excluding any acquisition financing should be approximately $110 million to $115 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 Century. Since the exact timing of Century is still uncertain, the guidance I’m going to provide with Century will be on a pro forma basis with Century 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 3,700 to 3,800 locations.

2022 revenue is estimated to be between $820 million to $870 million. Assuming the full year benefit from Century, revenue is estimated to be $1.07 billion to $1.18 billion. Adjusted EBITDA is estimated to be between $160 million to $170 million. Assuming a full year of Century, adjusted EBITDA is estimated to be between $182 million to $198 million. Cash spend capex is estimated to be between $20 million to $25 million. Assuming a full year Century, cash spend capex is estimated between $25 million 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 our net debt for 2022 at this time. As we have more visibility, we will resume providing updates.

Back to you, Andy.

Andy Rubenstein — President, Chief Executive Officer & Director

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 [Technical Issues] in 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 Accel the preferred choice in distributed gaming.

We will now take your questions.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] Our first question comes from Omer Sander from JPMorgan. Omer, your line is open. Please go ahead.

Omer Sander — JPMorgan — Analyst

Hi, Andy, Brian and Matt. Thanks for taking the question. I’m hoping you can parse out commentary a little bit more. It looks like your 2021 guidance implies a nice sequential step-up in locations in VGTs in the 4Q. Are you seeing the momentum more on the conversions in gross units? Or is it more a moderation on the attrition trend?

Andy Rubenstein — President, Chief Executive Officer & Director

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 of our — some customers that are currently with some of our competitors. We are getting some growth with additional equipment in our current portfolio, but I don’t — it’s not material going forward.

Omer Sander — JPMorgan — Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Kathleen Brenek [Phonetic] from Goldman Sachs. Kathleen, your line is open. Please go ahead.

Noah Stan Naparst — Goldman Sachs — Analyst

This is Noah on for Stephen Grambling from Goldman. Looking at the 2022 guidance that you’ve given in sort of parsing out what is organic Accel versus Century, it would seem to be that the contribution from Century, 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 things have been going better than expected? Or what’s driving that?

Andy Rubenstein — President, Chief Executive Officer & Director

So we’ve seen Century do a really nice job as the — we’ve — 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 in — especially in the Nevada market, where they now have a player rewards program that the state allowed to be implemented July one 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.

Noah Stan Naparst — Goldman Sachs — Analyst

Thanks. And if I could just ask one follow-up. Do you have any insight into the potential legalization in Virginia and Missouri? I realized you touched on it, but any conversations there?

Andy Rubenstein — President, Chief Executive Officer & Director

Yes. I mean in both markets, there has been legislation introduced in the past. 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 could happen, and it got close in both states at different points over the last couple of years. They — both states see that — the success that the State of Illinois has had and as we look forward, I mean 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 gaming that was introduced in the 2009 legislation that we implemented October of 2012. So we’re hopeful. But with any expected legislation, until you get it signed by the Governor, we’ve learned that lesson a few times here in Illinois, it’s not legislation.

Noah Stan Naparst — Goldman Sachs — Analyst

Thanks. That’s it for me.

Operator

Thank you very much. Our next question comes from Steve Pizzella from Deutsche Bank. Steve, your line is open. Please go ahead.

Steve Pizzella — Deutsche Bank — Analyst

Hi, guys. Thanks for taking my questions. I think 2022 year-over-year guidance implies approximately 15% revenue growth at the midpoint ex Century, I believe, with about half coming from new VGTs. Can you talk about the drivers of the other half?

Andy Rubenstein — President, Chief Executive Officer & Director

Yes. 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 on the revenue from basically a 0 for 2/3 of the month, more than 2/3 of the month of January. The other part that we’ll see is there was some — there will 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, we’re — our overall economy has inflationary pressures. And so people are spending more and the relative value of our entertainment hasn’t changed.

Steve Pizzella — Deutsche Bank — Analyst

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?

Andy Rubenstein — President, Chief Executive Officer & Director

Yes. 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 safer with form of entertainment that’s closer to home, with environments that they’re comfortable with as — 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 good performance during this period. October kind of is like almost any other relative month of — the seasonality is similar than what would — as expected. So we’re not seeing any outlier one way or the other.

Steve Pizzella — Deutsche Bank — Analyst

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?

Andy Rubenstein — President, Chief Executive Officer & Director

Yes. So the pipeline, 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 from time and time again. And so I can’t really see how later into the second half of ’22 is going to perform, 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 you’ll — we hope that the performance that you’ve seen out of Accel will continue going forward.

Steve Pizzella — Deutsche Bank — Analyst

Okay appreciate it. Thanks, guys.

Operator

Our next question comes from Jordan Bender from Macquarie Capital. Jordan, your line is open. Please go ahead.

Jordan Bender — Macquarie Capital — Analyst

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?

Andy Rubenstein — President, Chief Executive Officer & Director

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 Legion. So that’s kind of not something that we’re looking for toward for meaningful revenue. And our hope is that at some point, there’s other opt-ins where you can have a more — a greater ability to expand the VGTs in some of these opt-in communities, but it’s not in any of our guidance.

Jordan Bender — Macquarie Capital — Analyst

Okay. 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?

Andy Rubenstein — President, Chief Executive Officer & Director

Yes. I mean there’s always opportunities for consolidation. I don’t think there’ll be a lot of significant consolidation. And part of that is that the market has a couple of big players. And I think overall, the state wants to keep a good competitive market. And — but at the same time, I think you’ll still always see a lot of really small players. And as far as Accel 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 Century is the best example. I think that as we learn new markets through Century’s distribution and manufacturing business, we will identify where we should be next.

Jordan Bender — Macquarie Capital — Analyst

Perfect. Thanks, Andy.

Andy Rubenstein — President, Chief Executive Officer & Director

Thank you.

Operator

[Operator Instructions] Our next question comes from Greg Gibas from Northland Securities. Greg, your line is open. Please go ahead.

Greg Gibas — Northland Securities — Analyst

Hi, guys. Thanks for taking the questions. First, I just wanted to confirm that we’re at nearly 100% in terms of installing the six VGTs and then the higher bet limit installations?

Andy Rubenstein — President, Chief Executive Officer & Director

Yes. Thanks, Greg. We are, yes, in the 98% range, not much. There’s not much additional.

Greg Gibas — Northland Securities — Analyst

Okay. Great. And then if I could follow-up on the kind of the — what you provided on the M&A pipeline. Do you think acquisition multiples have changed at all, maybe since your last few acquisitions?

Andy Rubenstein — President, Chief Executive Officer & Director

I think they’ve stabilized, maybe slightly lower, but pretty stable.

Greg Gibas — Northland Securities — Analyst

Got it. And just a follow-up, too, on your commentary regarding Century outperforming your expectations. Just wondering if you could maybe expand on to what degree they did?

Andy Rubenstein — President, Chief Executive Officer & Director

Yes. I mean their revenue has been significant, and 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 reopen 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 there — and it’s based on just the people want entertainment that’s close to home where they know people who are in the establishment, they feel comfortable. And they’re seeing a lot of the same trends that we’ve seen in Illinois that obviously, they’re not getting the value of us 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.

Greg Gibas — Northland Securities — Analyst

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?

Andy Rubenstein — President, Chief Executive Officer & Director

Yes. Labor in this industry is being impacted very similar to all the 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 more — feel comfortable to go back into the workplace, some of that will go away.

Greg Gibas — Northland Securities — Analyst

Okay. Understood. Thanks again and congrats on the results.

Andy Rubenstein — President, Chief Executive Officer & Director

Thanks, Greg.

Operator

[Operator Instructions] We have no further questions. So I’ll hand back over to Andy for closing.

Andy Rubenstein — President, Chief Executive Officer & Director

I just want to thank everyone for joining us today, and I wish everyone a safe and healthy holiday season and look forward to speaking with everyone again in the New Year.

Operator

[Operator Closing Remarks]

Duration: 32 minutes

Call participants:

Mathew Ellis — Senior Vice President of Corporate Strategy

Andy Rubenstein — President, Chief Executive Officer & Director

Brian Carroll — Chief Financial Officer

Omer Sander — JPMorgan — Analyst

Noah Stan Naparst — Goldman Sachs — Analyst

Steve Pizzella — Deutsche Bank — Analyst

Jordan Bender — Macquarie Capital — Analyst

Greg Gibas — Northland Securities — Analyst

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