Ladies and gentlemen, thank you for standing by, and welcome to the Accel Entertainment Q3 2020 Earnings Call. [Operator Instructions] At this time, I would like to hand the call over to your speaker today, Andy Ruben -- sorry, Mathew Ellis, SVP of Corporate Strategy. You may begin, sir.

Welcome to Accel Entertainment's Third Quarter 2020 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 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 and the current health concerns. 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.

Thank you, Matt. Good morning, everyone. Thank you for joining us for Accel's Third Quarter 2020 Earnings Call. As everyone is aware, after 3.5-month shutdown, video gaming relaunched on July 1. The Accel team rose to the challenge and worked with our location partners to reopen as many locations as possible. As a result of these efforts, I'm pleased to report this quarter was the highest revenue and adjusted EBITDA quarter in Accel's history. Later in the call, I will provide an update with respect to pandemic developments, but I would first like to review some other highlights from the quarter. In July, we redeemed the Pace Public Warrants, and in August, we completed an exchange offer of all remaining warrants. As a result, less than 0.03% of the warrants remain outstanding today. This redemption and exchange offer simplified our capital structure and reduced the potential dilutive impact of the warrants. In early September, we entered into an exclusive agreement with DraftKings to promote their content and programming across all our marketing channels, including our in locations, digital display screens. This first of its kind collaboration further differentiates our offering and deepens our player relationships. This partnership will help us retain and extend agreements with existing locations, attract new organic and competitor locations and most importantly, drive additional players to our locations. While we are still evaluating the benefits of this partnership, initial results have been positive. Finally, in late September, we completed an underwritten public offering of 9.1 million shares. The offering raised approximately $90 million, which we expect to deploy in the next 9 months. Our M&A pipeline remains active, and we aim to continue executing on our growth strategy. For the third quarter, we recorded $136 million in revenue and $23 million in adjusted EBITDA. Our balance sheet remains strong with net debt of approximately $140 million and total liquidity of $274 million. Accel is extremely well positioned to capitalize on any opportunities that may arise in the coming months. With that, I'm going to turn it over to Brian Carroll, our CFO, to walk you through the third quarter results in more detail.

Thank you, Andy. As of September 30, we had 11,597 VGTs in 2,363 locations. Year-over-year increases of 12% and 3%, respectively. The increase in locations demonstrates that while we are operating in a new normal environment, Accel continues to grow. The IGB has resumed their meetings, and our sales teams continue to sign new organic and competitor locations. In addition, our attrition rate on closures remains in line with the pre-COVID historical average. At the end of September, our average residual contract length was approximately 6.9 years on a stand-alone basis and also 6.9 years, including the Grand River acquisition. As a reminder, the Grand River locations originally had an average residual contract length of 5.8 years. The closing of this gap demonstrates our ability to successfully integrate the locations and extend their agreements. We have installed more than 806 VGTs and expect to install a total of 1,000 by year-end. Originally, we expect to be able to update 50% of our VGTs remotely to the higher bet limit software and 50% via an on-site update. During the remote update process, it was determined approximately 25% of the remotely updatable VGTs will now require an on-site update. It's important to note this issue affected the entire industry, not just Accel. Today, approximately 50% of all VGTs have been updated to the higher bet limit software. We continue to perform on-site updates every day, but based on current software availability, we now expect to complete the update by June of next year. We had total revenue for the third quarter of $136 million, the highest revenue quarter in Accel's history. Our combined third quarter location hold per day was $596, a year-over-year increase of 4%. It's important to remember Grand River was acquired on September 16, 2019, meaning those locations were included for all Q3 2020, but only 15 days of Q3 2019. Excluding the Grand River acquisition, our location hold per day was $649, a year-over-year increase of 11%. Adjusted EBITDA was $23 million, another record for Accel. As a reminder, the Illinois VGT tax increased from 33% to 34% on July 1. CapEx was $13.5 million cash spend in the third quarter compared to $9.3 million in the third quarter of 2019. The increase was largely attributed to vendors that allowed us to defer payments during the second quarter. At the end of the third quarter, we had approximately $140 million in net debt and $274 million of liquidity, consisting of $179 million of cash on our balance sheet and $95 million of revolver availability. Back to you, Andy.

Thank you, Brian. I'd now like to discuss the COVID-19 situation in Illinois. As of July 1, in connection with the relaunch, VGTs are required to be spaced 6-feet apart or to be separated by partitions. Players must wear mask in the gaming area and PPE is provided to the players. These precautions have ensured VGTs can be played safely. Returning player response has been positive as demonstrated by our revenue. In July, Governor Pritzker divided Illinois into 11 regions. As of November 4, all regions were operating with mitigation measures, which include a prohibition on indoor dining. VGTs are available for play from 8:00 a.m. to 11:00 p.m. Despite the reduced hours, Accel has only seen a minimal impact to net video gaming revenue, but continues to monitor the situation closely. Our October revenue will be published by the IGB in the coming weeks, which will reveal Accel had another positive month. To wrap things up I'm extremely pleased with our record third quarter performance, demonstrating the resiliency of Accel and our industry. The Accel team members continue to overcome the current challenges while delivering industry-leading customer service. We will now take your questions.

[Operator Instructions] Your first question comes from the line of Greg Gibas.

Congrats on the record results. Good to see. I was just wondering if you could give a sense of how much of your operating expenses in the quarter were maybe onetime in nature just kind of due to getting all your locations up and running again with the new protocol and dividers?

Yes, this is Brian. The CapEx was approximately a little over $2 million that was spent on dividers. With regard to onetime operating expenses, we -- they're included in our numbers. The only time we've adjusted EBITDA for COVID was related to primarily if we have -- when we furloughed employees and paying benefits and retention bonuses and so forth like that. So -- but the -- just to give you an idea on a monthly basis right now, COVID's probably costing us a little over $100,000 a month in operating.

Got it. Okay. Thanks for clearing that up. I appreciate that. And regarding the VGTs that have been updated with the new software for the higher betting limits. Have you noticed an incremental uplift, I guess, in revenues from those machines, even though, I think you said it was only 50% or so of an updated so far?

Yes. I mean, it's provided a lift in our overall revenue per location. So whether it's from more selection or more opportunity for people to play, we can't really discern what specific driver, but it does -- it has helped us raise the overall location revenue.

Okay. Great. I guess, last one for me. Just considering we saw those 3 strong months in the quarter across the states, I guess I was wondering if you could comment on anything or share anything in relation to how gaming activity has trended in October relative to those previous months? And then maybe how you expect the IGB's decision to kind of limit hours of play, how you think that will affect Q4?

October was a very positive month. And the actual number should be published in the next 10 to 12 days. But we have seen some effect, although, it's minimal from the limitation of the hours. But it's really early to make any definitive assessment.

Your next question comes from the line of Bill Ketelhut of Goldman Sachs.

I was wondering if you could give us a sense of what you're hearing from your -- from the locations that you work with? And whether any recent restrictions are going to lead to maybe incremental financial distress or more churn?

I would tell you that if I own a restaurant bar and I can't sell food or beverage indoors and then the temperature's 20 degrees outside, it's going to impact me. So there is going to be some impact on their business. We've seen a little of that when we had a little cold stretch in the last couple of weeks. The question is like what is -- how long the mitigations last? And how they become -- and how they're eased? Yesterday, the governor indicated that he was going to evaluate things in the next couple of weeks. So we'll hope -- we're hopeful that they'll allow some indoor consumption. And once even some occurs, I think the overall effect will be really minimal.

That's helpful. And I guess, kind of more on related note. There seems to be a kind of a lot of moving parts to free cash flow, given the acquisition of Tom's Amusements. And I know you're buying terminals kind of on a forward basis. Could you just give us a sense on what free cash flow conversion as a percentage of EBITDA should be like on a normalized environment, maybe ex all those growth investments?

I can give you -- this is Brian. I can give you some ranges. Say, for example, on our current, what you've seen in Q3, probably free cash flow is about approximately around $6 million. You then have to deduct CapEx, but keep in mind, most of our CapEx is for growth purposes. To refresh maintenance CapEx runs us maybe $2 million to $3 million in a given year. So with that in mind, you have your -- what you've seen in Q3, you have this approximately $6 million a month of free cash flow, less however we spend for growth CapEx, purchasing equipment, and that could be about, I'd say, on average, about $2 million to $2.5 million per month.

Got it. And I guess, one last one, I'll sneak in here, if I can. Is there anything that you've kind of learned as you spent more time in Georgia over the last quarter?

I'd say the major lesson learned there is that we're going to have to be very prudent in choosing our business partners as there's a wide range of companies and operations, and some of them are more attractive to partner with and especially as a public company, we need to protect our brand and the ethics that we run our business. And there's individuals there that don't seem to be concerned about running the business with integrity.

[Operator Instructions] Your next question comes from the line of Steve Pizzella of Deutsche Bank.

Can you just talk about any insights that you might have to the type of customers you're seeing at your locations relative to the pre-pandemic visitation? We have heard from some of the regional gaming operators that they have been seeing a younger customer. I just wanted to see if that aligns with what you were seeing also?

I wouldn't say it's necessarily a younger customer. We're seeing some younger players. And there are, obviously, some older players that are less comfortable going out. But you got to remember, like our portfolio is so diversified geographically throughout the state that the kind of feelings or reaction to the COVID restrictions are very different depending on where you live. And so we're not seeing any major trend. But there is some individuals that -- who are elderly, they don't feel comfortable. And then for some of the younger individuals who may have gone to a casino where -- or gone to the movies or done some other activity, those players have trended towards us. And we're getting more of that visitation.

Okay. Great. And then can you -- just wanted to follow-up on the DraftKings deal. Can you just kind of talk us through the benefit that you received from it and any economics you could actually share from it?

So there's been -- as far as benefits, we've seen a few of our competitor locations decide that they wanted to move their business over to Accel when their contracts have finished because we're offering a benefit that's unique in this marketplace. So we've seen that. We're going to get some new customers. People also are opening up new establishments that want to have that feature for their guests. Financially, we, today, don't have a revenue share as we don't have a license for sports betting. But we are an affiliate and are receiving compensation from DraftKings as we're getting a lot of sign-ups from players and that benefits being shared with the establishments that the player signs up at. So -- or they acknowledge that they kind of got the information. So it's very early to measure that. But we have got a fairly significant amount of sign-ups since we kicked this off. And DraftKings is, I would guess doing well in the state of Illinois in terms of player acquisition and player communication. And we were a form of that communication.

Your next question comes from the line of John DeCree of Union Gaming.

Andy, I guess the first one is for you, perhaps. And then a follow-up maybe for Brian. And I'm not sure if you've added any more color. But with the equity raise in the quarter and adding some cash to the balance sheet. I think in your prepared remarks, you mentioned about possibly deploying that over the next 9 months or so. And I was wondering if you could give us any kind of more color guidelines as to where you'd be looking or prefer to spend that capital, would it be more likely in Illinois? Or something like you did with Tom's, perhaps in Georgia or another state, just kind of getting your sense of capital priorities?

There's lots of opportunities. There's still some significant things that we're working on in Illinois. And as we have the focus to explore into new markets and really establish ourselves, those opportunities are also presenting themselves. So I think you'll see us move in a couple of different directions. And hopefully, 2021 will be pretty acquisitive year.

Andy, that's helpful. And Brian, perhaps for you. With additional liquidity on the balance sheet, your leverage ratio comes down quite a bit, and I think kind of anticipating some growth capital being deployed in 2021, as Andy had just discussed, where do you feel the right kind of leverage ratio is for Accel kind of right now kind of with growth capital deployed and lift out and kind of is there a range that you guys feel comfortable with and want to be in?

Yes, John. I mean more recently, just because of a little bit of disruptions, we were as high as around 4. And typically, we might get -- obviously, we're delevering back. Historically, we've always been comfort around the 2 to 3 range, and then we would lever up if we did an acquisition and then kind of fall back down pretty quickly just because of our free cash flow. And -- but right now, like I said, we're below 4. And so it's kind of a -- historically, since we've been in business, we've done it that way. So typically, once everything levels off, we feel pretty comfortable around 2 to 3. Did I answer your question?

It does. That's perfect.

There are no further questions over the phone lines at this time. I call -- I turn the call back over to Andy Rubenstein.

Just wanted to thank everyone for listening today. Hopefully, the mitigation from our governor will be modified and reduced in the coming weeks. And for all of you that live in Illinois and around the country, please continue to wear your masks because they will only help our industry as well as to mitigate the effects of the COVID environment. Have a good day. Thank you.

This concludes today's conference call. You may now disconnect.