Good afternoon, and welcome to the PlayAGS Second Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Julia Boguslawski, Chief Mark Officer and EVP of Investor Relations. Please go ahead..

Thank you, and good afternoon, everyone. Welcome to AGS' Second Quarter 2020 Earnings Conference Call. With me today are David Lopez, CEO; and Kimo Akiona, CFO.

We posted a slide presentation reviewing our key operational and financial highlights for the second quarter in 2020, which can be found on our Investor Relations website, investors.playags.com. Today's call is to provide you with information regarding our Q2 2020 performance in addition to our financial outlook.

This conference call includes forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events, including financial projections or future market conditions, is a forward-looking statement based on assumptions today.

Actual results may differ materially from those expressed in these forward-looking statements, and we make no obligation to update our disclosures.

For more information about factors that may cause actual results to differ materially from forward-looking statements, please refer to the earnings release that we issued today as well as risks described in our annual report on Form 10-K, particularly in the section of these documents titled Risk Factors.

Our commentary today will also include non-GAAP financial measures. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends.

These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings release issued today. Please refer to our filings with the SEC for more information.

With that, I'd like to turn the call over to our CEO, David Lopez..

Thanks, Julia, and good afternoon, everyone. I want to start this call by recognizing our AGS team. Despite uncertainty and hardship, our team has worked hard and adapted quickly to move our business forward, as well as having exercise discipline to help us protect the balance sheet so that we can navigate the near-term challenges.

I'm proud to see our team to rally together to help put AGS in the best possible position to emerge from this pandemic as a stronger and more nimble organization.

As we indicated on our last call, the second quarter was extremely challenging as we experienced closures of nearly all casino customers for the entire month of April and most of May due to the COVID-19 pandemic. This resulted in Q2 revenue down 77% year-over-year and an EBITDA loss of approximately $1.2 million.

We started to see casinos reopen in late May, which has led to approximately 75% of our domestic casino customers active in some capacity by June 30, representing around 15,000 EGMs from our domestic installed base with more than 11,000 of those turned on or active at the end of the second quarter.

Our Mexico EGM units remained largely off-line in Q2. However, we saw some modest reopenings in July anticipate more reopenings throughout August and September. Performance on slots that were active in June was better than we initially expected, benefiting from pent-up demand as well as other factors.

We're pleased to see that the undeniable success of the launch of the Starwall immersive video canvas, which was released pre-COVID and has seen significant or seen performance ranging between 2.5 to 3.0 times house average.

Given its consistent performance for two quarters now, there's a strong demand pipeline for Starwall, and we are strategically evaluating and prioritizing the opportunities to determine which installs will yield the greatest ROI.

We are also encouraged by what we're seeing with a few of our latest tiles on Orion Portrait, with performance greater than 3 times house average. These games are not only a validation of our talent of our team members who develop them, but also it reinforces our strategy of investing in some of the most creative talents around the world.

Kimo will go through some of the Q2 results in more detail, but I'll provide some high-level highlights on our business segment in the quarter. We placed more than 200 recurring Class II EGM units at the new Emerald Queen property in Washington, which is approximately 10% of their floor and 40% of the Class II section.

These units are performing very well, and Washington as a whole continues to represent a solid growth market for us over the next several years.

Although impacted significantly by Casino Closures, our cable games segment went live with our first site license at Downstream Casino in Oklahoma, which provides the casino with a full suite of AGS table content. 100% of Downstream's floor is now AGS table content through a two-year site license agreement.

We're also pleased to have sign a site license with Foxwood, which will go live in September.

Despite the slower cadence of the business, we still feel confident about securing more site licenses as this provides a way to help operators be more efficient with their operations, in addition to providing them with the best-in-class progressive platforms in a high-performing table game content.

In our Interactive business, we saw a significant year-over-year increase to $1.2 million in EBITDA, bolstered by revenues in both our social and Real money gaming segments.

This is our second quarter of EBITDA positive results for the business, where revenue growth was enhanced by our recent launch into Pennsylvania and Bay with our games now live in RUS street and Pars platforms as well as increased momentum in New Jersey.

Before I turn it over to Kimo, I want to recap the four key priorities for AGS for the balance of the year, which are outlined on slide three. First is cash preservation and careful expense and CapEx management.

Because there are still many unknowns for the foreseeable future, we will continue to be prudent in how we reintroduce any costs back to our business. Second, we will also focus on the targeted strategic rollout of new games and products to customers where we can generate the highest ROI.

Third, we will focus on getting more of our recurring EGM units back in service where it is within our control. Operator capital budgets are deeply constrained for the remainder of the year. And as a result, we will lean on initiatives that can strengthen our recurring revenue streams.

And finally, we will protect our strong corporate culture to ensure AGS' success for the long run. With that, Kimo will walk you through some financials..

continued game conversions, strategic selling of certain parts of the installed base where it makes the most sense and rolling out our new suite of premium products. We are being very selective and strategic as to how we roll out Starwall, Orion Rise and Orion Curve into the market, allocating capex only to the highest ROI opportunities.

Based on the consistent performance of our initial installs, we believe that there continues to be opportunity for these premium products to help improve yield moving forward.

Moving on to our Table segment on slide seven, in the second quarter, revenues of approximately $674,000 and adjusted EBITDA loss of $126,000 were both down year-over-year as a direct impact from casino closures.

Our table installed base grew 17% year-over-year, of which 65 units were added sequentially, largely driven by a notable install of Super four progressives at the Semino's Coconut Creek property in Florida in the second quarter.

In our Interactive segment on slide seven, total revenue was up 94% to roughly $2.2 million, driven by increases in revenue in our real money gaming business. The recent launch of our content into Pennsylvania contributed to this lift as well as the signing of more operators in New Jersey.

RMG revenues also grew year-over-year due to increased momentum in new markets across Europe. David mentioned our launch on both Rush Street and Parks platforms in Pennsylvania. And additionally, we signed several new operators in New Jersey, such as Harris, World Series of Poker and 888.

Adjusted EBITDA was $1.2 million in the second quarter, driven by revenue increases in combination with appropriate cost management through the period. We did see play levels positively impacted as a result of COVID-19. However, we believe that we've reached the right scale with our business to continue to profitable.

Finally, for the quarter, capital expenditures decreased 74% to $3.9 million in the second quarter compared to $15.1 million in the prior year period, as we saw a significant reduction of EGMs placed on lease. The current quarter included growth capex attributable to the Emerald Queen install that David mentioned earlier.

In terms of what we're seeing over the next six months, we believe customer budgets will continue to be impacted for not only the remainder of the year, but also for 2021.

Post Q2, we've continued to be more of our domestic recurring units turned back on, but the impact of the pandemic may delay any new reopenings and could possibly result in new closures if COVID-19 cases continue to rise. Texas remains one of our key jurisdictions that has yet to reopen since the shutdowns occurred back in March.

There's no clear time frame for when these properties will be operational again, but having those units active will provide a fairly significant lift to recurring revenue.

In our International segment, casinos in Mexico have slowly begun reopening their doors for the past month, but we don't expect a large number of these units to be back active until Q4.

Our Table business saw approximately 60% of its units in service in the month of June, and we're already seeing greater progress with additional jurisdictions and units coming back online in Q3.

For the rest of the year, Tables will continue to be impacted by limitations to operator budgets as well as it relates to taking new products as well as prohibitive social distancing measures in the pit.

However, as David touched on earlier, we have multiple opportunities for site licenses, and we'll see more signed agreements go into effect over the next six months.

Although we've seen healthy increases in our Interactive segment, our expectations moving forward are that revenues remain fairly stable and will continue to grow the business as we expand into new markets and sign on additional operators.

Overall, despite some of the current challenges, we are working hand-in-hand with our customers to help maximize their floor mix, identify opportunities for efficiencies and determine optimal layouts and game themes to strengthen performance on their floors.

There are still opportunities for our high-performing content, which has become more important than ever given the current restrictions on the floor. We remain committed to helping our customers manage through the challenges of the current operating environment and emerge stronger in the long term.

With that, we will now move to the Q&A portion of the call..

Thank you. [Operator Instructions] And the first question will come from David Katz with Jefferies. Please go ahead..

Hi. Afternoon, everyone.

I wanted to just go back over some of the commentary in case I missed a couple of details and be just specific about what the cash flow outlook is to the degree that you can discuss it, right, with should we be expecting that EBITDA is turning positive? And what does the trajectory look like to getting to cash flow neutral next several quarters?.

Yes. So we'll take the first part of your question, David. So EBITDA breakeven. So when we exited the quarter, so in June, we were actually EBITDA breakeven and our expectation for Q3 going forward, right, is that we'll be above that.

To go to your cash flow question, I think as it relates to reaching free cash flow generation or being at the breakeven point, I'd say that will be closer towards the ending of the year. I would say we'll exit Q4 being EBITDA or sorry, free cash flow positive. That's our expectation..

Got it. And with respect to some of the growth that we saw in Interactive, I know you touched on this a bit.

But would you classify that as we should be thinking about that as accelerating as we move forward from what we saw there, right, because of the go lots?.

So David, this is David. So I think that our results are aided by the accounts and the go-lives that Kimo mentioned, which is obviously going to help us going forward. There's more openings, if you will, our integrations to come, both in Europe and in the U.S. that should be helpful.

As a reminder, I think that it's full transparency that some of our numbers are win dated, if you want to use a track and field term but going forward, how our road to growth in interactive will come just getting more of them online, getting more operators, more countries online. But in the end, we're confident we can continue to grow the business.

But yes, of course, there's a piece of that did come from COVID. Now like a lot of things, you hope that some of that has some stickiness, right, to it. If they found the online environment, I believe, a lot of folks will stick to it as well..

So if I can just take one more quick follow-up, right? I mean the wind dated reference, I appreciate right.

Are you able to gauge or measure? Or what do you think is the degree to which that growth has happened just because the world has been shut down and people are playing all things digital and they just swap back to an in-person visit versus you hope that some of it is sticky, but do you have any sort of measurements or data that you're able to capture yet?.

So I think that I think it's a bit tricky to capture exactly what those numbers are. I'm going to point to social as sort of like the example there. When we started to look at social, we saw a pretty significant lift once COVID hit.

That said, social had actually took a positive turn for us pre-COVID, which sort of throws a monkey wrench in our theory and starts to mess with the numbers when you try to do analytics on it. So I think we have to wait and see a little bit. And when all casinos are open, how it impacts both social and real money gaming.

We've taken a couple of looks at it. It's difficult to tell exactly what it is. But I think that social example that I just gave you, it confuses matters a little bit because we were actually beginning to see lift well before COVID had hit us at all..

Thank you very much. Appreciate it..

Thank you. The next question is from Brad Boyer with Stifel. Please go ahead..

Yeah, thanks for taking the questions guys. First one for David or Kimo, whoever wants to take it. Just around the rationalization of the Oklahoma install base. Obviously, we had some more units come out this quarter as well telegraphed an expected.

I guess, just trying to get a sense of where are we in that rationalization process? And how do you sort of balance rationalizing that installed base or sort of your renewed and heightened focus around capital efficiency here in light of some of the challenges created by COVID?.

Yes. Thanks, Brad. I'll start and maybe Kimo can add a little bit. We're pretty sure that there's quite a bit of optimization to do there. We've talked about in the past we believe we can go in, and I'll use one of our high flying products as an example.

That if we go in and we install six Starwalls, and I say six Starwalls one six-pack configuration of Starwall. If we went in and installed six and removed 10 units that are on the floor, we feel pretty strongly that we can make more money and have fewer units on the floor. That's the overall thesis. I don't know that we're too far down the path there.

So we've got a lot of that runway ahead of us. COVID really put everything on pause. The unit reductions that you saw had a lot to do with planned sales that we've discussed on previous calls. So some planned sales there are really what's driving the number in Oklahoma, at least the majority of it. We probably have a little bit more of that.

And then as we had said in the past with that base, the integrity based, we're going to hold on to the stuff that we think will provide cash flow and revenue for us going forward as long as we can. And those will be the units that we hold on to. So it's still early in the game, but there's a little bit more to go.

We've done some significant selling, I guess, you could say, over the past, I think, three quarters, if that makes sense, I think three quarters now. And so there's a little bit more selling to go. And then we'll see where we settle in with exactly what units will keep..

Okay. That's helpful. And then just wanted to see if you could provide a little bit more perspective around some of your new products that are out in the market. I mean, we all kind of you gave us some disclosure around Starwall. It sounds like you have some pretty good new game themes on the Orion Portrait.

It seems like some of your investments on the R&D front are finally starting to bear fruit.

Any additional perspective or color you could provide around that?.

Yes. I appreciate it. Thanks. So we feel really good about the investment that we've made. I think it's been almost three years ago that we decided to make the investment in Australia. We decided that we go into Australia to establish an R&D team.

That R&D team there is fantastic and a lot of the things that we see, in particular, on Orion Portrait right now that are doing fantastic, come out of our studio there. That's not to say that we don't look to big things big things from both Austin, Reno, Atlanta, etc. You mentioned Orion Portrait.

We've got, I think, now somewhere four or five games that are performing fantastically. I think maybe a couple of those games are in the RAC and bacon sort of category as far as performance goes. I think it's encouraging to see that we're still putting out hits on Portrait. That's what our customers want.

That's a big base of units that are sold out there. But then, of course, you mentioned Starwall is doing fantastic.

I think we've only got three systems in place, if you will, three, six packs out there, but we have a number of units in the pipeline, a considerable number of units As you can imagine right now, what we're doing and what we've said in the script is we're prioritizing those looking for those that are sort of the higher RPD generating units that will go in first.

So we've got a good pipeline there. And then, of course, there's rise in curve. And I know we don't talk a lot about rise in curve at the moment, but lots of promise there. We feel good about the lineup of games that we've got coming on curve, rise as well. I just actually had a couple of updates before the call.

But I think this all goes into the umbrella of we've made these investments. We've always felt good about them. 2019, we didn't really see that investment yielding a ton of fruit.

But yes, timing is not great with COVID and a pandemic, but those games are doing fantastic now, and we can really see the depth and breadth of a portfolio, not just from a cabinet point of view because I don't want to say making cabinets as easy.

But making gains is really the tricky part, and that's where we're building a lot of confidence in building a great portfolio..

Okay. Helpful. And then one last one for me. Just I think a key theme for everyone through this whole COVID situation has been using a period in which there's really no day-to-day operations to sort of manage and trying to find inefficiencies in your business.

Is there anything you'd like to highlight as far as just sort of cost efficiency measures that have sort of been born out of this whole unique situation that we are currently living through? And that's all for me. Thanks..

Brad, so well, obviously, there's so many areas we can mention. We've obviously, trade shows have been canceled. But we have taken a very close look at those. And I think that they'll be examined closely, more closely in the future as to what trade shows vendors should be participating in. Along with that, it's OpEx and CapEx across the board.

I guess I'd focus more on capex, at least from my perspective, as to, "Hey, this has given us pause as to what's worked well for us in the past? Where have we made sort of the right turns and where have we made the wrong terms." And I guess, looking back and having time to reflect on it, looking at cash with sort of a more discerning eye has been something that we've been doing.

So I think that's where we're making most of our tweaks and where you'll see those adjustments going forward..

Perfect. Thanks guys..

Thanks..

Thanks. The next question is from Chad Beynon with Macquarie. Please go ahead..

And thanks for taking my question guys. Regarding your comment on your goal of working with operators to turn on more EGMs.

Are there opportunities to rework daily fee or rev share agreements, at least, in the near-term to improve the installed base, particularly given some of the results that you talked about on Starwell? Are you willing to do that? Or are the operators willing to have a discussion around that to maybe improve kind of your active units on the floor? Thanks..

So Chad, what we're doing is I don't want to say that we're negotiating, but I'd say more than anything, we're using our relationships. There's a number of casinos out there that either half their units are turned off or 1/3 of their units are turned off. And what we're doing is we're negotiating, using relationships, being creative.

We haven't done really any hard-core pricing changes. We've held the line on average sale price, although albeit there hasn't been a lot of capital being spent right now. But on the lease side, we've held pretty steady, and we're we've just been creative in using our relationships, moving things around the floor to try to get as many of our units.

We'll call it active or on so that we can generate revenue. As far as Starwall goes, pipeline is pretty rich. And the interest is high. So mostly, that's us being discerning and saying, where do we want to go with those right now in the midst of a pandemic and where do we want to sort of press pause and be patient..

Okay. And then on your international business, you made some comments in terms of where Mexico is. I think we're all expecting somewhat of a lag to the U.S. in terms of general businesses being turned on.

But as we think about how that business should fare, I guess, is that kind of your assessment that it should be a couple weeks or maybe a couple of months behind the U.S.? And then on the Philippines, should we assume that this effort becomes more of a 2021 initiative versus, I think, what was what we expected to be more of a late 2020 initiative?.

Yes. Thanks. So I'll start with Philippines. That's probably the more clear picture. Not a lot going on there right now. I'd say that's more of a delayed topic. And good read on that, it's going to be more of a 2021 thing than a 2020 item for us to focus on.

We're not really sure when anything is going to become terribly active in the Philippines, at least, not at the moment. Mexico has got, I think, between I think it's somewhere between 10% and 12% are units are active, turned on right now. They're a little bit more than a couple of weeks behind us as far as the pandemic goes.

I think the encouraging things that we've heard is that folks that go down and either have gone down on business or come down for pleasure, have said that, by and large, in the country, they're taking it very serious. A lot of use of mask, a lot of use of social distancing, cleaning everything appropriately.

So I think that we're probably looking at August and September, we'll see more significant reopenings, and we'll see that 10% to 12% ticked up quite a bit. But they're definitely a little bit further than a couple of weeks. They're probably about a month to two months behind the U.S. on the reopening schedule..

Thanks, David. Appreciate it..

Thanks, Chad..

The next question will be from Barry Jonas with SunTrust. Please go ahead..

Hey guys. This is Jeff on for Barry. First off, for a just curious in markets where you are seeing flare-ups in case counts? What's been your experience there? Are you seeing any real meaningful impact to yields? Or just any color or data points you can provide there would be helpful..

Yes. It's interesting. I don't see really a correlation unless something just has been shut down. I mean, outside of being a casino being shut down, if the casinos have remained open, I believe what I think mostly or at least heard is just much more stringent controls by casinos.

In each state, I'm not going to mention any state in particular, it seems like as things have flared up, the casinos have really locked down 100% mask usage inside casinos, hand sanitizer stations everywhere, more people on the floor performing cleaning, social distancing, more machine shutdown, things like that.

But we can't really correlate anything in particular with our product performance. We've seen things flare-up in a couple of states, but it hasn't really directly or even indirectly seem to impact the RPD in those states..

Okay. Great.

And then just given we've seen a spike in interest in electronic tables and cashless majoring and other sort of social distance offerings, how are you thinking about maybe development or moving into any kind of new tangential products or offerings for the gaming floor?.

We're open to a lot of things. I think that there a couple of those items that you mentioned are very in particular, e-tables is a very competitive space. I think that on the cash side, there are a couple of companies that are very focused on it. We'll monitor over the coming months and quarters and years to see what might make sense for us.

No immediate plans. I think right now, we'll stick to what we're good at, and we'll stick to table games. And slots and interactive. Obviously, we're focusing a little bit more energy on interactive right now, which obviously is important during the pandemic, but no immediate plans there..

Okay. Great. And just last one for me. Just given the strength in Gaming, I've been the earnings recovery relative to non-gaming, which seems to be less of a focus for operators on lease in the near term.

Do you think we see some reallocation of capital by operators to the casino floor from these other non-gaming amenities whether near-term during the recovery phase or even potentially in longer term?.

I want to pound my fist and shout, yes. But listen, I think I'll temper my enthusiasm there and say that we would certainly hope that over time, it would at least return back to normal levels. We don't see that prior to the end of the year necessarily.

But our aim would be for some of that to come back into play and be at more normal levels next year would be fantastic. Then allocating more to the floor. We'll wait and see. I'll talk to more operators over the coming months. I think right now, they're more focused on just an efficient integration, doing the best with what they have on the floor.

And I think it plays into some of the things that we've done, which is we go we're going out there and we're optimizing by swapping out game titles, maybe moving machines around the floor where we think they'll perform better.

And just trying to be a good partner with the casinos because obviously, whether it's a purchase gain or a lease game, flat fee or even a participation game. The better we do in that scenario for them, the better partner we are long term..

Okay, great, thanks, that's all for me. I appreciate all helpful color..

Thanks..

The next question is from John DeCree with Union Gaming. Please go ahead..

Hi, Everyone. I think most of my questions were already answered, but wanted to circle back on the RPD performance of active units that you've seen that's been quite well. And I think you've alluded to it, David, in some of the prior questions. But wondering if we could dig a little deeper and get a sense of your views.

I think in the press release and prepared remarks, you talked about pent-up demand CARES Act.

But as you watch that RPD trend, just wondering if you kind of have a view on a level of sustainability if you start to kind of bifurcate how much you think was pent-up demand or lack of entertainment options? Just wondering if you could just give us a little bit more detail on your views as to how RPD might play out over the next three or six months based on time what you've seen so far?.

Right. So I think, obviously, RPD is going to be a fairly mixed bag. If you look at some of our RPD numbers, it looks like some of our RPD is up 20% to 30% in some locations. So we obviously have to look to the competitive landscape, the floor in general and say, how are we indexing. There's a couple of areas where we've indexed a little bit higher.

We would hope those aren't anomalies, but that's where we've also done quite a bit of optimization like in Oklahoma. On the flip side, I think that there's again, wind dated a bit. The pent-up demand, you've got the CARES Act money, you've got the lack of entertainment options.

Those are all pushing those numbers up high, right? It seems like it really pushed our numbers up pretty considerably from our RPD point of view.

That said, I think that I'll go back to one of the answers I gave on the online side, which is in the casinos, there are some reports, there are some reports that we don't have all of our regular customers back, right? We don't have a certain band of customers, a certain age.

I'm going to say, those that are maybe my age and up not all of them have seemed to return to the casino and that some of a younger generation have come. This is anecdotal. This is from just a few operators.

And I think that the hope there would be just like many other things, is that when folks are introduced to something because other options aren't available, when the world opens up again, maybe I'll say, gaming, can steal share. Forget about AGS, right? And forget about any particular vendor.

But perhaps, what we'll see is that gaming in general is an entertainment option will take some share from some other things that have closed over this time. I think that's how we view it right now. Stickiness of that RPD is difficult to say.

Bear in mind, some of these places, only 50% of the machines are open, or 30% or closed or something of the like. So those are obviously pushing our numbers up higher when the demand is there, the CARES Act money is there, the lack of entertainment options are there and then some of the machines are close. So we'll wait and see.

We're watching closely as new machines come back online, or I should say, actually, old machines come back as live machines. And we'll watch closely, clearly in August here as some of that CARES Act has evaporated..

That's helpful. David, I appreciate the additional color. And just one more on a slightly separate topic. It's probably moving on the for-sale side.

We've talked already about operators being cash constrained and not really buying slots right now, but with trade shows canceled our G2E and others, how important are those trade shows to you for the sales process and getting your product out there at this point? And as you think of the back half of the year and into next year as some of those capex dollars hopefully come back to slots? How does the sales process change at this point absent those trade shows?.

I'll tell you what, I think, I'll start with our sales team has really been fantastic in being creative and staying in front of our customers in any whatever form that is, whether that's local visits here and there, mask on, of course, right, or whether it's been via Teams or Zoom or anything of the like doing virtual meetings.

As far as the lack of physical trade show, we'll be okay. I mean, I think this industry knows how to operate without it. If folks start to travel, we'll have our showroom open right here at AGS, of course. On top of that, we have some virtual ideas that we'll explore. I think the more important topic will just be the return of capital here.

If that capital should return, the vendors in this industry as a whole. And I'll speak as a whole for the industry. I think that all of us are very creative. We're very customer centric, very customer-focused as an industry. And I don't think that the lack of a G2E or any particular trade show is going to hurt us anymore than this pandemic has.

I think the key is to get those capital dollars flowing again, in general. And all of us, including AGS, of course, we'll do our job and get out there and see our folks..

Thanks again for all the questions are answers..

Ladies and gentlemen, this concludes our question-and-answer session and thus concludes today's call. Thank you for joining PlayAGS' second quarter 2020 earnings conference call. You may now disconnect. Take care..