Good morning, everyone, and welcome to the Inspired Entertainment Second Quarter 2021 Conference Call. [Operator Instructions].

I'll begin today's conference call by referring you to the company's safe harbor statement that appears in the second quarter 2021 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 the 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 be discussing 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, everyone, and thank you for dialing in to our second quarter conference call. I'm joined this morning, as usual, by Brooks Pierce; our CFO, Stewart Baker, who will, once again, have a speaking role; and Dan Silvers. We will try and keep our comments relatively brief. So we have plenty of time for Q&A.

Looking back on the second quarter, we can say with a modest degree of satisfaction that the narrative followed the script pretty well. Across both business units and geographies, our retail operations opened in stages during the quarter and by mid-July, we're pretty much operating full tilt, a couple of weeks later than we had originally expected.

Notwithstanding the strong and immediate resurgence of our retail business, our online revenues continue to accelerate through the second quarter, most recently with iGaming establishing record revenue in July and performing very, very strong so far in August now.

Going back over the last year or so, we've talked about looking to return to the earnings standard that we established in October 2020, which was both the peak profitability month following the Novomatic acquisition and, at the same time, the peak month prior to the November 2020 lockdown.

At this point, we can say that July 2021 was solidly ahead of October 2020, despite July not having fully opened until July 19, and August is looking even stronger. Accordingly, midway through the third quarter, we're comfortable reaffirming our earlier third quarter EBITDA guidance of $28 million to $30 million.

At the same time, we are committing increasing resources to our principal growth initiatives, including perhaps most importantly, our retail and online initiatives in North America, whereas Brooks will discuss in more detail.

We're seeing impressive results in the iGaming, Virtual Sports and video lottery channels, and quickly laying a strong foundation for an exciting new business in iLottery. As importantly, we achieved a couple of critically important financial milestones during the quarter.

As Barry Jonas pointed out in his very thoughtful and very comprehensive initiating report, we were one of the first companies -- first gaming companies to go public through merging with the SPAC.

Since the time of the SPAC merger, our largest shareholder Vitruvian, through its land game entity, has been an extraordinarily supportive shareholder as helpful and supportive of a major shareholder as anyone could want.

The nature of the beast is that we struggled with the twin issues of the perceived Vitruvian overhang and the associated diminished liquidity.

But as many of you know on this call, and we are enormously grateful for your enthusiasm and commitment, we were able to assist Vitruvian in selling their entire position thereby, simultaneously eliminating a very large overhang and bringing in dozens of new institutional shareholders, which we think should greatly enhance our liquidity.

We crossed another important financial milestone during the quarter as well, in this case with respect to our debt. When we acquired the Novomatic Technology business in the fourth quarter of 2019, we put in place a new debt facility that both 100% debt financed the acquisition and refinanced the debt we had at the time.

Having now got to where the Novomatic businesses are operating at full potential, together with the projected synergies, we feel that both the acquisition itself and the associated financing are far more than justified.

But, at the same time, particularly in the aftermath of the COVID shutdowns, that facility was less than optimal from several points of view. And our new facility positions us much more favorably. Stewart will address this in a little more detail in a moment.

And with that, I'll hand it over to Brooks who will discuss in greater detail our operations, and I think you'll find this very interesting.

Brooks?.

Thank you, Lorne. And I'll update on the progress that we're seeing across the 4 segments of our business and the momentum we're carrying forward in each of these into the third quarter. So starting with gaming business. We're back to operating in full with no restrictions now and are encouraged by the results that we're seeing.

In the U.K., our LBO gaming machine performance is back to pre-COVID levels. In Greece, we've seen the business return as well with performance actually exceeding pre-COVID levels. And Italy is also showing positive trends with our plan still intact to transition to a game and content provider only model by the end of the year.

In North America, we continue to see strength in our game performance and pipeline in Illinois market. We're proud of the performance of the terminals delivered previously to WCLC, Western Canada, and are encouraged by the game performance in that market and believe it bodes well for further penetration into the Canadian VLT market.

As we've said on previous calls, we expect to enter other VLT markets this year and early in FY '22, and have just recently hired a very experienced VP of North American Sales to help drive our growth plans.

Moving over to the Interactive business, as you'll have seen in the release that we are continuing to see tremendous growth in this part of the business, 69% year-over-year. I think it's important to note that we are really in the early days of the story.

To give you some context, North America has vaulted to our second largest market behind the U.K., and that is with only approximately 65% customer penetration in New Jersey, only approximately 40% penetration with just 2 customers in Michigan, and we're not licensed yet, in Pennsylvania and would hope to be yet this year.

Additionally, we see opportunities on the horizon in Canada, where we already supply content to a lot of Quebec very successfully, as well as additional states like Connecticut once the regulatory framework is finalized.

We are continuing to release high-performing content with our games making the top list of a number of operators and consistently releasing up to 4 or 5 new games each month. We just released our first online separate game in New Jersey called Bullion Bars – Grab the Gold, and it's doing amazing numbers thus far.

As mentioned in the release, July was our highest revenue number in the Interactive segment in a month in our history, and we're confident that we can continue to grow this business, not only in North America, but in the U.K., Greece, Italy, and some future markets such as Spain, Holland, and Romania. Moving over to Virtual Sports.

Our strategy has been to continue to innovate the product with our existing customers to drive player engagement and to get wider distribution of our product, particularly in North America.

The result in our existing business that we're seeing in the last 2 months of the second quarter and the first month of the third quarter, are very encouraging as our retail segment is coming back strong and growing, while the online part of our virtuals are maintained and even slightly growing over the same period, producing overall growth in revenue, EBITDA and margin percentage.

The second quarter and the first part of the third quarter were exciting with the launch of the VPP product with BetMGM in New Jersey and with plans to take this product to their market in Michigan. We also have contracts and expect to launch with Caesars, FanDuel Resorts and others in New Jersey yet this year.

We worked with our operators to build player awareness and acceptance of this product. As most of you know, it's fairly new in North America. And we will continue to report on this progress of these initiatives.

We've launched -- in virtuals, we've launched some new products into Italy, Greece and Turkey, and the early results are extremely encouraging.

Also mentioned on the product side, we started to show our Home Run Derby product and think that this will be a popular addition to our lineup of Virtual Sports, particularly in markets like Latin America and Asia as well as North America.

Finally, we continue to show double-digit percentage growth in our Derby Cash product with Pennsylvania Lottery, but our launch with the DC Lottery, which we had hoped would be the third quarter has now been delayed until the fourth quarter.

In summary, we feel very good about the growth and development of this segment of the business, particularly on the online side with all our new customers being added. Moving over to the Leisure business. It's showing progress as we've been talking about for some time with the restrictions finally lifting in full on July 19.

The holiday parks, in particular, have had their best month since 2019 in July and we've seen that continuing to build as we are heading into the busiest month of the year, August, of course, for that part of the business. The staycation phenomenon in the U.K. has really helped both our holiday parks as well as our motorway services business.

We're very encouraged by the trends we are seeing in the pub sector post the elimination of the social distancing requirements, and we can see a direct correlation in machine performance. Second half of July and the first 2 weeks of August have seen significant improvements in footfall, both in pubs and in our machine income.

As Lorne mentioned, we also have plans -- we've spoken about our plans to enter the iLottery market, and we've made very good progress on that front in the second quarter. We've demonstrated several games and game concepts to a number of potential lottery customers and have received some very positive feedback.

Still early days for this segment, but our experience in the lottery world, alongside our strong game development capabilities and positive feedback, makes us feel very bullish on this opportunity over the next 12 to 18 months.

In summary, we believe that the strategy and operating plans that we've been discussing on these calls over the last few quarters, is coming clearly to fruition, and we look forward to reporting back as we progress on these initiatives. With that, I'll hand it over to Stewart..

Thanks, Brooks. So I won't run through all the numbers and explanations in the quarter because the answer will inevitably be due to the nature and timing of lockdowns in either the current period or the comparative period. But I did want to give a little bit more detail on 3 areas. So firstly, the ramp-up during the quarter.

Just to give you a bit more color here. So April was mainly locked down with the only meaningful land-based revenue coming from gaming machines and betting offices in the U.K. for the second half of the month. But even these were operating with a number of restrictions, including only 2 of the 4 machines available to play.

However, we did need to incur most of the costs. So April was a breakeven month from an EBITDA point of view. May was a month where in the U.K., most of the machines were turned on partway through the month and EBITDA was approximately $2 million. And this leaves June with EBITDA of about $6 million.

And I think it's important to understand this was still not a normal month. Although we needed to incur the majority of the costs, not all the markets were fully open for the whole of June or they were operating with restriction, which have now fallen away.

So for example, Italy reopened in stages during the month, and the pubs and holiday parks in the U.K. still have a number of machines turned off. So as Brooks mentioned, it was only really from the 19th of July, the restrictions fully dropped away, and we consider this to be the point where we fully opened up.

And secondly, in June, product sales were lower than we would believe the normalized level is. So as we saw last year, these take a little bit longer to ramp up to normal levels, a bit longer than the recurring income. But the visibility in the pipeline gives us confidence that they will actually and indeed are returning to normalized levels.

So the second topic I wanted to briefly touch on with the net loss for the 3 months of nearly $44 million, which is approximately $25 million higher than we would have expected on the suppressed level of revenue we saw in the quarter.

Now strangely or perversely, the 2 items which led to the accounting charges totaling this amount were actually driven by positive events. Firstly, the charge in relation to the increased warrant liability of about $11 million.

This is a little strange and the better we do as a company, the higher the stock price, the higher the liability, and the higher the P&L chart.

Secondly, whilst the refinance results in a reduced cost of capital, pushes out maturity and removes a number of restrictions, it does mean that we needed to write off the fees in relation to the old financing of approximately $14 million, the majority of which was structuring fees.

And the final topic I wanted to talk about was cash, which at the start of the quarter was about $41 million and at the end was approximately $25 million, so a reduction of about $16 million. Now quarterly cash flow are naturally susceptible to small changes in timing of payments in and out and this quarter was no different.

So I think it makes a bit more sense to look at the 6 months as a whole, and these decreased by about $22.5 million. Now the refinance in the quarter was broadly net neutral after repaying off the prior debt, the swap, and the legal fees.

But the timing did mean that after about -- sorry, that we paid about 8 months of interest during the first half, which totaled about $17.5 million. In addition, we didn't see much benefit in terms of receipts from opening up partway through the quarter, given the time taken between revenue and then receiving the cash.

But we did have a lot of the cash expenditure given the nature of the large proportion of our cost base being staff costs, which are obviously incurred in month. So after cash flows approximating to about 6 months of lockdown, we are confident now that we're going to be in a period of positive cash flows going forward.

And whilst we don't typically give cash forecast, I will say that we are projecting the cash position at the end of the quarter we're now in to be in the mid- to high $30 million.

So hopefully, that explains a bit why we're confident, adjusted EBITDA, accounting profit, and cash flows are all very much on an upward trajectory with some large negative headwinds in the quarter we're reporting on today. So with that, I'll hand back to Lorne for closing remarks before we open up to Q&A..

[Operator Instructions]. And the first question comes from Barry Jonas with Truist..

Wanted to start with the COVID resurgence that we've been seeing. Guidance reiteration, I think, is very positive.

But how should we think about your positioning across the segments in light of some of the resurgence we're seeing?.

Brooks, do you want to try that?.

Well, yes, maybe, Barry, you can just -- when you mean positioning across the segments, would -- maybe just elaborate on what you mean by that?.

Well, as you look across your different business units, how do you feel the business can respond to increased Delta COVID cases? Obviously, hopefully, we're not moving towards full lockdowns.

But if we start seeing increased restrictions, should -- how should we think about that flowing to the business? Or do you feel like you can sustain any incremental increases, whether it's masks, or any other sort of restrictions you might see in your units?.

Sure. Sure. Well, I think in terms of, again, assuming all of the venues are open, we've seen in the past where our customers have had to wear masks and it hasn't had a meaningful impact on the business. So I think the only way it would really have a meaningful impact on the business is if some of the operations were shut down.

Stewart's probably as good an expert on the U.K., but I think all of us have probably read about how the U.K., in particular, is doing extremely well as it relates to COVID, and that's obviously a big portion of our market.

But I think for us, what we've done is we've built a ton of resilience, and with the growth of our online businesses kind of across the geographies certainly, what we're seeing is even when the retail business has come back in full, there's no diminishing of the online business.

So I think we've built what we feel is both in terms of geography, but in product mix and everything else, a very sustainable business regardless of what happens with COVID..

Great. That's really helpful. And then I wanted to touch on virtuals. What do you think needs to happen in the U.S.

for virtuals to hit the same penetration levels as maybe you've seen in European countries like Greece? Any structural reason it can't get there over time?.

Well, I think it's -- go ahead, Lorne..

You go ahead, Brooks, and I'll jump in there..

Sure. Well, I think the biggest thing, Barry, is going to be -- it's going to be customer education process because clearly, there's not the familiarity with it as there is in Europe. And it's very, very early days with BetMGM.

But I think the combination of they're getting behind it, and promoting it, and introducing it to their players, we're already starting to see kind of meaningful increases pretty much on a daily basis as people get used to the product. And I think BetMGM has done a very good job of putting it not only in their casino tab, but also on the sports tab.

And they're out marketing it and promoting it and trying to cross-sell with sports betting. So I'm encouraged by the early numbers we're seeing with BetMGM and would expect that kind of all the other operators will kind of follow on lockstep..

What I would add to that, Barry, it's Lorne, is I think it's just going to take a little bit of time for both the operators, as Brooks said, and the players to understand what the distinct advantages of Virtual Sports is.

And it might be worth taking a second just to talk about that because there are 3 or 4 that I think are very important that are clearly understood in other parts of the world, and we're just getting there in the state. But the first, obviously, is it's great because it can be bet on at any time, whether there is live sports or not.

So if it's late in the evening or a dark day for live sports, there is an infinite number of things to bet on. And for people who happen to love baseball or football, you could bet on it any time during the year, not just in the natural season. The second is that from the point of view of the operators, they can set the margin anywhere they want.

And there is absolutely no risk. So unlike betting on live sports, which can be very competitive in terms of margins. And clearly, there's always a risk that the outcome of the games is not where the line predicted, there are none of these issues with Virtual Sports. So from a financial point of view, it's a tremendous product for operators.

And there are a number of people who really like the idea of watching a sporting event and betting on it, but they're intimidated by what they think is the complexity of sports betting and the fact that they're playing in a pool with players who are much better informed and are much more sophisticated than they are, whereas in Virtual Sports none of this comes into play.

So it's a much more comforting product for sports fans who may not be mathematicians. And so I think as people start to get this, and we're already beginning to see it, that the product will get more and more traction in North America..

And the next question comes from Chad Beynon with Macquarie..

Regarding the -- your Interactive success, you noted that you're expanding with new customers. And I believe you said you're deploying 4 to 5 new games per month.

Can you just talk about how you're leveraging the studios or these games that are working in the land-based environment and how this should look going forward? And then maybe just talk a little bit more about how we should think about the momentum given that you're still getting started in some states and with some key partners?.

Sure.

Brooks?.

Yes, I think we are leveraging. I think, Chad, we talked about this before. We really do have an omnichannel strategy.

Interestingly, though, what you'd see in North America because we're less penetrated in the gaming machine market, we're actually -- at least, the data is showing us that for the non kind of big 4 gaming suppliers, we're actually the highest producing content on an interactive basis.

So our content is resonating across markets where we don't have the retail exposure like we would in the U.K., or Greece, or Italy where pretty much all the players will have seen our products and know our brands and our games by going into the retail shops.

So that gives us a lot of encouragement for the growth prospects in North America, and we've spent a fair bit of time, as you've seen with the success in our retail for -- in both Illinois and Western Canada, we've had our game designers and developers spending a lot of time looking at this market.

So we're now designing kind of bespoke content for the North American markets. I mentioned the stepper game, which probably wouldn't resonate so well in Europe but is doing phenomenally in North America. So I think it's a combination of a number of things, but it certainly makes us feel good about the progress in that side of the business..

Great. And then, Lorne, I know you're not giving annual guidance. I know before you had talked about an $80 million number post synergies. I think that was given pre-COVID.

So given that you're reiterating the 28 to 30 in the third quarter, you talked about August potentially being a record, is there any reason why on a forward TTM basis, those prior goals may actually be conservative here? Just any color around how to think about seasonality and kind of the go-forward there..

Yes. I think you're going to have to be careful because we don't -- or at least haven't been in the practice of doing annual guidance.

But I think given what we're seeing now that the really the coming back full blast of our retail businesses has not, in any way, attenuated the growth that we're seeing in the -- in our online business and some of the other trends that Brooks talked about.

I would say that I'm cautiously optimistic given what we're seeing and being mindful of Barry Jonas' questions about the potential impact of COVID.

But taking everything that we see now together, I think I'd feel pretty good that going ahead, we're going to -- in the same way that July is comfortably outpacing October 2019 in terms of our -- what we've called our par earnings month, I think in the same way we feel that we're running comfortably ahead of that $80 million par annual target, yes..

[Operator Instructions]. The next question comes from Ryan Sigdahl with Craig-Hallum Capital Group..

One follow-up on that last question. But given the U.K. didn't fully reopen until mid-July, and we're still kind of working through the reopenings, it seems like early in the quarter.

Is it reasonable to assume that, that normal for Q3 would actually be better than where you guided to?.

Well, certainly, the logic would say that, yes. I mean, if we weren't fully open until the 19th of July, but we're still comfortable with 28 to 30, then I think you could deduce that had July been opened for the entire month, that we would be running ahead. I just think that that's kind of the math, right? Yes..

Fair enough.

And then just as you look at the retail across countries, are you seeing greater upside in the return of foot traffic and players? Or is it really the average play per player? Or is it both?.

Brooks..

Yes. I mean, I'll take a crack at it and Stewart can add, if he likes. I think what we're seeing and, in particular, in the U.K. is it's not necessarily that the footfall and at least in the betting shop business has changed that much. It's just that people are coming in and they're staying a little bit longer and so playing a little bit more.

I would say, in the pubs, it is a direct correlation to footfall because up until July 19, you had to reserve a table, you couldn't get a drink at the bar.

But after July 19, and there's -- you can see it in the numbers with the increase in footfall in the pubs and the ability for people to go into a pub and kind of move around the machine income is kind of clipping each week is getting better and better.

So I think -- I don't know if that answers your question, but that's -- it's a little bit of a combination of both, but I'd say it's primarily footfall in the pub side and kind of player staking in the betting shop side..

And then as it relates to Greece, you said above pre-COVID levels.

Do you think that's pent-up demand? Or do you think there's structural reasons that, that can be sustainable?.

Yes. I think it is a bit of pent-up demand, but I think it's also we've -- because of COVID and the restrictions with regulators, et cetera, et cetera, we hadn't had a chance to get new content into Greece, which we now have been able to do, and we're seeing a pretty direct correlation with the new content and the increased play.

So it seems sustainable to me..

Brooks, you might want to add to that, the fact that every -- so often in Greece in the machine side of our business, which is critically important component of what we're doing in Greece, they reallocate the number of machines to all the suppliers based upon the performance in the preceding x period of time.

And as a result of this last go around, even though we already are by a considerable margin, the largest supplier in Greece, we're going to get an increased allocation. So further reinforcing what's happening with the player base will be the fact that we will have a meaningful -- a greater number of machines operating in Greece as well..

Great. One more for me. I think you mentioned 65% online penetration in New Jersey, 40% in Michigan.

First, did I get those right? And then second, what's the main constraint there of getting closer to 100%?.

Yes, you did get those right, and it all really has to do with customers and some of it is timing of -- but probably the biggest customer that we have a contract signed with but we haven't integrated with yet, and I won't go into the rationale behind that, is FanDuel.

So FanDuel is the biggest customer that you would see that we haven't added, but we have a contract and we'll add them as is Rush Street. So I would guess that by the end of -- certainly by the end of the third quarter, Rush Street will be on in the markets and hopefully, soon thereafter FanDuel.

And I think when you see those, it will be much closer to 100% in both markets..

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. Thank you, everybody, again for joining this morning. I hope at least some part of our enthusiasm has been contagious. I think we're as positive about the business right now as we could possibly be. The outlook, I think, is terrific. All the businesses are operating as well as they possibly can.

And we look forward to speaking to you all again in another quarter, at which point, hopefully, the outlook that we've been talking about today will become even more positive and more clear. So thank you very much. Operator, I think we're done. Thanks..

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