Good morning, everyone, and welcome to the Inspired Entertainment Second Quarter 2020 Conference Call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. Please note today’s event is being recorded.

I'll begin today's conference call by referring you to the Company's Safe Harbor statement that appears in the second quarter 2020 earnings press release, which is also available in the Investors section of the Company's website at www.inseinc.com.

This Safe Harbor statement also applies to today's conference call as the Company's management will be making certain statements that will be considered forward-looking under securities laws and rules of the SEC.

These statements are based on management's current expectations or beliefs and are subject to risks, uncertainties and changes in circumstances. In addition, please note that the Company will discuss both GAAP and non-GAAP financial measures. A reconciliation is included in the earnings press release.

With that completed, I would now like to turn the conference call over to Lorne Weil, the Company's Executive Chairman. Mr. Weil, please go ahead..

Thank you, operator. Good morning, everybody, and thanks, once again, for joining our second quarter conference call. With me this morning, as usual, are Brooks Pierce, Dan Silvers and Stewart Baker.

It would be an understatement to say that the second quarter of this year forced us to adapt to circumstances that hopefully only come once in a lifetime or maybe even less often than that.

For years, we have adhered to the paradigm articulated many years ago by Jack Welch that it's easy to make money if you don't have to grow, and it's easy to grow if you don't have to make money, but the real test of the management team is its ability to be able to do both.

So just when we thought we had it figured out the first time, we were hit by the impact of the triennial review. And then when, as I think, clearly evidenced by our strong performance in the fourth quarter of 2019, so two quarters ago, we thought we had it figured out a second time. And then, of course, we encountered COVID.

So temporarily, the paradigm had become, not can you make money and grow at the same time.

Comparatively speaking, that's actually, right now looking to be pretty easy, but can you still make money while with virtually no warning, your revenue suddenly shrink by 75%? We think of the fourth quarter of 2019 as an effect, our benchmark quarter because it was the first quarter in which we had integrated the Novomatic acquisition and its attendant revenue and full cost structure, but also unfortunately the last quarter that was unimpacted by COVID.

Between the fourth quarter of 2019 and the second quarter of 2020, our revenues declined indeed by 75% from about $66 million in the fourth quarter of 2019 to $16.5 million two quarters later. So a drop in quarterly revenue of $50 million.

And yet I think actually somewhat miraculously, we were able to earn $2 million in EBITDA in the second quarter as it happens compared to about $17.5 million in the 2019 benchmark. We remain cash positive throughout. And at the end of the quarter, we had about $40 million in cash.

We managed to achieve this because at the onset of COVID, we were able to drive an uninterrupted acceleration in our online business, aided hugely by product development efforts that, fortunately, were underway when COVID started, and were deliberately never cut back.

In a moment, Brooks will talk about some of these developments and the tremendous concomitant expansion in our customer base. And we combined this with very aggressive furloughing staff, which saw our headcount declined temporarily from over 1,800 to about 300.

And so on the basis of the foregoing, as we have reported previously, we were able to very successfully amend our debt agreement, establish new debt covenants and give ourselves very significant runway going into the quarters ahead.

Our overarching thesis, which we articulated during our call last quarter was that our retail business could recover relatively quickly because it consisted primarily of small wide area local venues located predominantly in Europe, which, at least comparatively speaking seem to have the coronavirus more under control.

Towards the latter part of the second quarter, we began to see this scenario play out successfully in Greece and then from there, Italy and the UK. At the same time, our online business continues to be extremely robust, while our cost structure overall is not returning to pre-COVID levels, at least in part due to synergies in the Novomatic merger.

As our retail network continues to reopen, the key performance indicators, income per machine per day, or virtuals income per shop per day as examples, have continued to be very positive with respect both to the same time last year as well as the levels that prevailed immediately pre-COVID.

Again, in a moment, Brooks will talk in some detail about the development in each of our markets, and we'll explain that although we have seen an enormous rebound in our retail revenue, we are not 100% there yet. And so we would not expect in the upcoming third quarter to have reached the level of our benchmarks Q4 2019.

Assuming the dynamics we are currently seeing continue, we would expect to get closer to this benchmark in the fourth quarter of this year.

And I'll conclude and hand things over to Brooks by saying, absent the second COVID spike in Europe, we are urged regarding 2021 as we build on a very simple three-legged platform, the continued reopening of our retail network, the tremendous strength in our online business, and the reconfiguration of our cost structure, which is – into the future will be considerably more advantageous.

And so with that, I'll hand it over to Brooks..

Triple Crown Showdown. We hope to be able to announce similar events like this in the very near future. Also in this segment, we've announced a number of deals in North America and worldwide with some key operators, such as DraftKings and FanDuel and expect launches with many of these operators in Q3 and Q4.

Interestingly, we also launched our first virtuals contract in the social gaming space with a company called FendOff and the early numbers have been very encouraging and lead us to believe that this is yet another channel for expansion of our virtuals business going forward.

The retail virtuals business which was entirely shutdown for the period due to COVID has also recovered very well, with Greece, again, leading the way with improved numbers over their pre-COVID levels.

Our UK and Italian virtuals businesses are also open again and have approached pre-COVID levels as well with little softening of the demand for our online virtuals, even with the expansion of live sports and retail back, being open.

We think this bodes very well for the future of this key segment of our business, and look forward to reporting our progress on the recovery and the launches of the new customers as mentioned.

Our interactive slot business, moving on to that side, has shown dramatic growth in quarter two with 60% growth over quarter one and 86% growth over quarter two 2019 on a pro forma basis.

We've seen similar levels through July, and we believe that this growth is a result of both a combination of a number of factors, but it's predominantly due to the caliber and quantity of games we are releasing, including two major titles this summer with the launch of Centurion Megaways and Reel King Megaways, leading to record high turnover in this segment.

We've also expanded our footprint into North America, specifically into New Jersey where we are seeing excellent results. And in the near future, upon receipt of licensing approvals, we will expand into Pennsylvania and Michigan as that market opens up.

From a strategic standpoint, we want to expand beyond the core businesses and we've moved into the core markets.

And we've expanded our presence into other markets like Sweden and are in the very early days in Greece, but with the popularity of our product in the Greece market already, we are seeing some very encouraging numbers coming out of Greece online.

Many of our key customers and other parts of the business, like our SBG and virtuals business are also key customers of the RGS, or the interactive slot segment, including William Hill, Betfred, Flutter, GVC and Bet365.

This portfolio approach strengthens our relationships with these customers and we work hand in hand with them as they expand into other markets.

Finally, some commentary on the acquired businesses and the markets – the NTG acquisition that Lorne referenced before and the markets they serve in the UK, including pubs, motorway services and holiday parks.

COVID impact on these businesses has been more pronounced as pubs have had to restrict machine utilization for social distancing requirements as have leisure parks that have had to reduce the number of reservations that they can accept as well as restricting the number of people that are allowed in gaming and arcade venues.

Pubs only started opening on the 4th of July in the UK and performance on a per unit basis has been solid, but we haven't seen yet the full return of the numbers of machines that we had pre-COVID.

The numbers have improved sequentially each week, and we expect to get back to pre-COVID levels, but the recovery is taking a little longer and the impact of Scotland's not allowing either gaming and pubs where the opening of holiday parks has impacted the business.

We are managing expenses very closely, as Lorne talked about, in each part of the business, but losing a month or two in the holiday parks business that only operates for five or six months per year is tough and will be difficult to make up in 2020.

So in summary, we've had some very strong headwinds in each of the last few years, as Lorne mentioned, with the implementation of the stakes reduction due to the triennial and then obviously, the impact of COVID thus far this year.

But we are very encouraged by the performance of the business as it has returned and are confident that as we go through the rest of this year and into 2021, that the thesis we had on this portfolio of businesses will be confirmed, the pipeline of opportunities and launches this year and the reduction in our operating expenses throughout all of the businesses will lead to margin improvement and a much stronger business going forward.

With that, let me pass it back to Lorne..

Okay. Thanks, Brooks. That was a great recap. Normally at this point, I would turn the program over to Stewart to give a detailed financial overview, but I think considering the unusual nature of this quarter and the fact that basically every answer would be due to COVID, due to COVID, due to COVID, we’ll skip Stewart’s report for this quarter.

But the way things are looking now, the third quarter should be back to looking pretty normal, and you can all look forward to hearing from Stewart a quarter from now. And so with that, operator, we can open the program up to questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from David Bain with ROTH Capital. Please go ahead..

Great. Thank you. Very helpful color, and congratulations on navigating through COVID, and hopefully have that maybe even stronger in some ways. Can you help us a little bit further, maybe Brooks, on the retail landscape in the UK? I think you’re trending around 16,000-ish machines pre-COVID.

Where you are, maybe as a percentage of that? And what kind of the market is – are there more William Hill openings versus GVC? Or is competition all fairly level at this point in terms of number of post – hopefully post-COVID reopening?.

Yes. And in terms of – and David, we talked about this before.

One of the things that we've seen in the resilience of the business is, as even as shops close, a big portion of that revenue shows up in the adjoining areas, so even though William Hill closed kind of 120 shops, and the easiest way to calculate that from our last numbers is just take 120 times four, and that's the number of machines that are less than what we had going in.

But the things that we had seen in the past are holding true. And I think even William Hill and some of the others, GVC in their reporting talked about the fact that they're actually holding up and doing kind of similar numbers with fewer numbers of shops. So it's certainly proving to be resilient.

I don't know, Stewart, if you have any more color on that..

Yes, sure. Thanks, David. I mean, only to add a little bit more to what Brooks was saying there. Since just on a numbers basis of machines, as we said, Scotland is still closed, and Scotland traditionally accounts for about 10% of volume, a little bit less than that in terms of total income. So those aren’t live yet. We hope they will be relatively soon.

And then there's only a handful of – relatively handful of number of schools, which haven't opened up. So approaching the high 80s in terms of – high 80s in terms of percentages of machines open. And then as Brooks said, now they're performing very well, those are turned on..

I was just going to add – David, it's Lorne..

Hi, Lorne..

Where we do – as Brooks pointed out, where we do see that one of our customers closes, let's say, 100 shops, but the revenue was picked up in other shops then that actually significantly benefits us because our cost structure is primarily driven by the number of shops we have to communicate with, the number of shops we have to send maintenance guys, too.

So if we have 100 less shops, but we're getting the same revenue, then our margins are actually going to go up..

Interesting. Thank you. And just final two, if I could. Just as a follow-up to that. Is there any data on how betting shops have performed in the past during UK recessionary time? Or has that been fairly resilient? I’m just trying to find some numbers on that..

My recollection going back to, I guess, 2007, when we were still at Scientific Games, and we had bought what is now the Scientific Games, a competitor to us in the betting shops in the UK is that the business – and I don't have any statistics, but I can tell you anecdotally the business historically is remarkably resilient to the economic downturns and economic impacts..

Got it. Okay. And then final one, just on interactive. If we can delve just a little bit more deeply. I was hoping to bifurcate that revenue a little further. You gave some figures like the $1.2 million from the Acquired Business Service, the remainder is in Virtual Sports, but I don't know what percentage.

Just trying to get a kind of a dollar estimate, maybe a geographic breakdown, although with expanding carriers, I know that's going to change.

And then any kind of potential regulatory happenings that we should monitor, I mean, there's been some things in the press, but it doesn't look like much of substance, but wanted to get your take?.

Stewart, you can handle the numbers part, I can tell you in terms, David, just to make sure I understand your question. You're asking about the RGS, the online slot part of the business. Or you’re asking about the….

Correct..

Okay. Yes. So in terms of – in the short-term in North America, for us, obviously, it's all in New Jersey right now, but we're going through the licensing process in Pennsylvania. And I think you – I'm sure you know, Michigan is looking like it could happen either this year or the beginning of next year.

There's a number of markets that we are not participating in yet that we will. Spain probably being the first one, foremost. And then as we look into next year, it's looking like both Germany and Holland will regulate and become kind of black markets as well – or legal markets as well.

So we certainly – I think we had talked about in the release, one of the main things that we've focused on is not only the caliber and quality of our content. And it's interesting.

One of the things that we got from the NTG acquisition were all these titles, one of which was Reel Kings, and we made a Reel Kings Megaways game, which has been the absolute highest performing game that we have in the market. So there's a lot of synergies that we've gotten from the NTG acquisition.

But clearly, this is – on a going forward basis, and you're reading about it in the states as well, it sure seems like the dominoes are starting to fall to expand this product line across more geographies. So that's my view. And Stewart, I don't know, in terms of any numbers you want to give..

Yes. I mean in terms of numbers, David, it's almost like we anticipated the question, so thanks for the tee up. Actually, in the appendices at the back of the earnings release, we've added a breakdown of online revenues on a pro forma basis leading to the online virtuals, Interactive and then the acquired Interactive business.

So you see there the online virtuals has more than doubled and has the kind of legacy Interactive, if you want to refer to it as that. And then there's also been growth in the Interactive side of the acquired business..

Okay. Thank you. Very helpful. Thank you..

Our next question comes from Chad Beynon with Macquarie. Please go ahead..

Hi, good morning, and thanks for taking my questions. I wanted to ask about SBG, I guess, and NTG customers at this point. And understanding that each market is different, I guess what we've seen in the U.S.

is a little bit of a migration towards a younger player where the 55, 60-year old and older customers have been a little hesitant in terms of coming back.

I'm not sure if you have the tracking information or just anecdotal feedback, but are you seeing these types of trends in your markets as well which when that 60-year old customer gets comfortable, again, maybe you do see a little bit of a benefit in the next couple of months? Thanks..

In terms of the demographics, we don't have access to that information, but I think something that is kind of interesting is what we see. Because we're Server-Based, we can actually see kind of every keystroke.

So what we're seeing is that people are coming into the – to use our products and are actually staying significantly longer than they had stayed in the past and are spending more money when they're in the facilities.

But we believe that they're actually maybe going less frequently than they have in the past, which kind of, if you take the combination of all that is probably explains a fair bit about the recovery, but also, hopefully will make it such that as more and more people get comfortable going into these environments that we could see an uplift as well..

Okay. That makes sense. Thanks Brooks.

On the cost containment measure, and I guess the second quarter result, which I think came in ahead of your expectations and analysts expectations, is there a quicker opportunity to bring back maybe some of these roles? Or I guess, more importantly, how should we think about R&D, how you guys may have been thinking about some cost cuts at the beginning of COVID, and then maybe how that looks now given your cash position?.

Sure.

Well, I think one of the things, again, maybe if you try and find the silver lining in this COVID stuff, is we made the conscious decision, even though, as Lorne mentioned, the total numbers of people that we furloughed were, obviously, very substantial, but we made the conscious decision to maintain our R&D resources and then just refocus them on our online businesses that we had actually been spending a lot of time and effort and money on previously.

So we actually got to a product that we didn't really talk about, but what we call Virtual Plug-and-Play, VPP, which allows us to integrate online virtuals much faster than we've done in the past.

So we spent a lot of time working on that in terms of integrations, and then obviously in terms of the RGS side of the business, more and more slot content.

So we made a conscious decision to maintain in this time period, even though it cost us a little money, the technical resources and we just refocus them on the businesses that were actually up and running and you can see from the results, that probably was – was probably a smart thing to do..

Okay, great. Lastly, just on the announcement with the Western Canada Lottery Corporation.

Brooks, are there other opportunities like this in these types of markets? I know you kind of walk through some of the strategic drivers in the near-term, but are there other opportunities, I guess, in North America to have some of these major placements like you announced here?.

Yes. I mean, I think certainly one of the things that we wanted to do was, I think Chad as you know, our results in Illinois has been extremely strong. And obviously, we kept all of the potential customers aware of that. And then Western Canada made the purchase.

I think they purchased from us and one other supplier, which is kind of unprecedented, but certainly, we think that all of the G2S markets.

So Oregon, clearly, the rest of the Canadian provinces that have G2S will be key customer potentials for us as well as frankly, some of the markets that would probably, I would say, would be in the next tier down for us would be in the West Virginia’s, Montana's et cetera, et cetera.

But I think long-term, we certainly – as we're getting traction in the markets, we certainly over the long-term think about where we can take this product beyond just the route-based markets where we are today..

Great. Thank you very much guys. Best of luck..

Thanks Chad..

Thanks Chad..

[Operator Instructions] Our next question comes from Ryan Sigdahl with Craig-Hallum Capital Group. Please go ahead..

Good morning, guys. Thanks for taking our questions..

Good morning..

Good morning..

Just want to start just for clarification. You noted strong performance in July on an average customer gross win per unit per day basis, so up year-over-year, tracking above pre-COVID levels.

What percent of machines were turned on in that equation?.

Brooks, can you answer that?.

I think, Stewart you probably actually have the – you probably have the most up-to-date numbers..

So in terms of – hey Ryan, so in terms of the Server-Based Gaming numbers, pretty much all of Greece is back on to where it was pre-COVID. Italy is approaching a high 80% as is the UK. So as we say, on a machine-by-machine basis, they're performing at those income levels pre-COVID..

Got it. So that was the kind of the ratio in the quarter as well..

Yes..

All right. And then just on OpEx, going forward, you guys have cut a lot of costs, some temporary, some permanent, the way it sounds in the quarter.

Can you break out kind of what the number is or quantify it, permanent versus temporary, and then what the timeline is to bring back those temporary costs?.

[Indiscernible].

Yes, sure..

So I mean, Ryan, I think it's a good question. And if you think about SG&A, where it was in the quarter versus, say Q4, [indiscernible] the last quarter, it was down significantly, so down nearly 70% and clearly a lot of that was temporary, right.

We'd love to be able to keep a lot of costs out, but we're not going to be able to keep that out permanently. And a lot of that is furloughing. Some of the reduction is permanent for the synergies, which we haven't really talked about, I guess, this quarter, but are performing well and on track to where we said before.

And then there's a split between the temporary savings and the permanent savings. And our challenge is clearly to try to keep as many costs from coming back as we can. I think like everyone, we've seen ways of operating during the lockdown time and there's ways of eliminating costs. So clearly, not all costs will come back.

And yes, it's difficult to quantify at the moment exactly how much of that will be. It’s certainly a challenge of ours. And I'd say it's going to be a meaningful number, and it’ll be a seven-digit number per quarter, but putting an exact number on that is….

And then last one for me. So it seems encouraging performance metrics since reopening.

Any commentary you can give about when we can expect an inflection back to free cash flow generation?.

Well, I think – you want me to take that one?.

Yes..

Yes, Stewart..

Yes. I think, as we said, the revenues are encouraging well, recovering. They're not where they are or not where they were before, but they're on their way up, and SG&A is on its way down on a long-term trend. The other big component of that is CapEx and actually we're seeing opportunities.

And again, if we look for silver linings, it’s the – I think CapEx will be reduced over the next 12 months compared to where it would have been. We don't make predictions. We don't put them down in terms of when free cash flow has come back on a quarter-by-quarter basis.

But if you think about those different components, I think, you can see that we've got a clear path to getting back there in a relatively short-term..

That’s it for me guys. I'll turn it over. Thanks. Good luck..

This concludes our question-and-answer session. I would like to turn the conference back over to Lorne Weil for any closing remarks..

Thank you, operator. I don't really have anything to add to what we've talked about so far. I think generally where we are right now is at or ahead of where we had any reason to expect we would be when the whole COVID thing started back in March. July was very good, it’s extremely good. We think August will be better.

As we've said, the KPIs continue to remain solid as more of the retail market opens up. The opening up of the retail market and the coming back on of live sports does not seem to be having a much of any impact on the online business.

And as Stewart said, our costs, when all of the retail world is back, we will definitely be, let's say, more attractively structured than they were before the COVID. So everything seems to be moving the way we want.

And I wish we could be somewhat more precise in terms of guidance, but I think everyone can appreciate that in this environment that's difficult. But again, I would point everyone back to what we consider to have been our benchmark quarter in the fourth quarter of 2019.

And in effect that's guiding the way we are thinking about the evolution of the business. And I think it's one that you can use as well. So thank you for calling in this morning. And we look forward to hearing or speaking to you in another quarter. Thanks. Bye..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..