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…

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 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. 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 make 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 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 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 kind of 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 kind of taking a more cautious approach. But we haven't seen anything in June, 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 kind of build on your current units?

Yes, it's really early to determine it. The challenges with Nebraska is, it has a very unique style game and a very underdeveloped gambling market. As you may be aware, casinos are or racino is 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. And they -- we don't expect them to perform anywhere close to the Illinois market, and we're investing early to see what we can develop, and we'll have better kind of information and data probably at around kind of 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 has the expectations evolved over the last 6 months?

Yes. Thanks, Steve. The -- we haven't really changed our approach. We're always evaluating acquisition opportunity as it's individual opportunity, and we've continue to proceed in a way that is thoughtful, and 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 that they were trying to price their businesses at going forward isn't a reality that we're going -- we had, obviously, substantial growth '18, '19, '20, '21, and -- but that can't continue at those levels. So there is -- there are still opportunities. We're evaluating them. I think -- so 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 19% to 20%. Can you talk about where do 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. A little too soon to tell what the overall margin would be, thinking of the competitive nature of the sort of -- excuse me, the Nevada, Montana markets, but I think the pro forma guide 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 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?

So when you see the Nevada Montana market, they're pretty stable. There's always opportunity to grow. It's not like Illinois where there's a huge organic growth path. Some of the ebb and flow from the Investor Day could just be naturally the cycling of locations, but overall, Century continues to grow, continues to perform really well. You can kind of see it combining, but in other cases, you might see -- and you'll remember that they have more terminals per location. So sometimes you're optimizing the mix. But overall, like we said on the call, Century is still outperforming our original estimates, which is great to see. And I would say, we're going to continue sort of combining our best practices and our growth playbook and their operating efficiencies to kind of build just a bigger and better 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 2Q? And maybe another way of putting that, can you bifurcate the gross units added in Illinois versus the removals in the 2Q?

Sure. Not as pronounced as Q1, which is why we didn't really address it. Certainly, a handful of locations 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 sort of stabilized now. And you can see, obviously, sequentially, we are starting to grow again.

Our next question is 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 we should think about kind of the pace of your expansion in the state?

Thanks, Greg. This is Andy. It's -- like I said, the type of equipment is so unique that there are not the traditional manufacturers that you see in the casinos nor even in the skill markets, and that's going to prohibit growth significantly. There's challenges in terms of getting inventory, and the type of play is definitely more similar to amusement play. We -- the typical location only has a few machines, and it's really going to take a while for the players to really embrace this as a gaming option. That being said, the market is not new, it's probably been operating for 3 to 4 years with kind of a nonregulated version prior to that. So we're, like I said, investing in the market, looking to see how the players develop, seeing if the -- there is real interest in a gaming entertainment and the types of facilities are somewhat similar to what you see in Illinois. Obviously, the population is significantly lower in Nebraska, and therefore, the games will be concentrated more in some of the tavern and truck stop types of environments. As far as regulations, they are regulated more like amusement skill market than they are a gaming market. The Nebraska regulators are very attuned to what's going on in the market and have been very helpful and really been collaborative and as we've moved into that market. But it's different, obviously, than a traditional route or casino market.

Great. I wanted to ask to -- just kind of curious on whether you think how -- I guess, how your new establishment win rate has trended in the quarter, and whether you believe you're continuing to gain 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 whether you still think you're gaining market share in the state?

So when you -- yes, so I'm trying to understand. So new establishments, the ones that are just coming online with us in Illinois, is that what you're asking?

I guess in terms of all new establishments that kind of turn on in the state, how many of -- or what percentage is kind of Accel winning? Would estimate and maybe how that's trended?

Okay. I'll let Matt answer that question.

Yes. So what I would say is, we're continuing to try more. Andy referenced on the call, our backlogs are growing, which is always a good sign. And when we quantify that, we're not talking about just pure signed agreements, but qualify, meaning, obviously, competitor locations, but also organics that are in municipalities with gaming had their liquor licenses, all of that. So generally speaking, we're still doing very well on that front. We always sort of kept the backlog closer to our vest, but the -- we're focused on -- obviously, the flip side of the backlog is getting the locations license and live, but all we can focus on is continuing to grow those backlogs, which we are, and then providing -- helping our locations through the licensing process. So like we've always said, Illinois still has room to grow. We look at it both the liquor licenses without gaming and VGTs per capita. It's certainly the market continues to get bigger, but we still see a good amount of growth in the future.

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

So the strategic -- our concept there was that they have an established route in the market. They're well positioned and a really good team of people that they have at VVS. And the actual multiple is kind of to be determined because as we look at this market, there is a significant earn out that as they will help us grow the market, we'll kind of be able to -- they'll be able to grow their payment with to expand. So like I said earlier, the -- a lot of the locations just have a few machines and as it expands, we're able to add more machines. The payment will increase, and then we'll have a better kind of concept or a more firm number as to what the multiple was.

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.