Accel Entertainment, Inc. (ACEL) Earnings Call Transcript & Summary

Good afternoon. Thank you for attending today's Accel Entertainment to acquire Fairmount Holdings conference call. [Operator Instructions]. I'd now like to turn the call over to Derek Harmer, General Counsel and Chief Compliance Officer. You may proceed.

Good afternoon, and welcome to today's call. Participating on the call are Andy Rubenstein, Accel's Chief Executive Officer; Mat Ellis, Accel's Chief Financial Officer; and Mark Phelan, Accel's President of U.S. Gaming. Earlier today, we announced that Accel had entered into a definitive agreement to acquire Fairmount Holdings, the owner of the FanDuel Sportsbook & Horse Racing. Please refer to our website for the press release and accompanying investor presentation 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. 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 press release and the accompanying investor presentation available on our website and filed with the SEC as well as other risk factor disclosures in our filings with the SEC. Any projected financial information presented in this call is for illustrative purposes only and should not be relied upon as being predictive of future results. The inclusion of any financial forecast information in this call should not be regarded as a representation by any person that the results reflected in such forecast will be achieved. 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 press release and accompanying investor presentation and other materials in the Investor Relations section of our website. I would now like to turn the call over to Andy.

Thanks, Derek, and good afternoon, everyone. We're excited to be with you today to announce a compelling transaction in the U.S. local gaming market, one that builds on the core capabilities we've honed over the last 15 years as a growth company with attractive returns on capital and free cash flow. On today's call, I'll kick us off with an overview of the deal and a refresher on how Accel creates value. Mat will dig into our capital allocation playbook and Mark will cover this exciting deal in a bit more detail. Finally, I'll reframe the Accel value proposition before we take your questions. Let's start with what we're most excited to share today. Accel Entertainment is acquiring the FanDuel Sportsbook & Horse Racing in Collinsville, Illinois, broadening its reach in the attractive local gaming market. Here are the highlights: Today's transaction extends Accel's local gaming footprint with the purchase of the only active horseracing venue in the greater St. Louis area, and 1 of 2 active horse racing venues in Illinois. This deal includes an organization gaming license to offer casino gaming positions as well as a partnership with FanDuel to participate in sports wagering in Illinois. In this transaction, Accel is purchasing Fairmount Holdings, the owner of the FanDuel Sportsbook & Horse Racing for 3.5 million Accel shares, approximately $35 million in consideration. We are purchasing from co-owners, William Stiritz, former CEO of Post Holdings and Ralston Purina and Rob Vitale, CEO and Chairman of Post Holdings. This compelling deal builds on Accel's strong distributed route-based platform with an advantaged single site real estate light local gaming asset. In the transaction, we're acquiring an active racetrack with 65 race days and approximately 435 races annually. The preliminary suitability by the Illinois Gaming Board to develop a casino that's yet to be constructed and a master sports betting license used in a revenue share agreement with FanDuel. Looking ahead, Accel is committed to maintaining Fairmount's rich horseracing history, including further supporting the mission of the Illinois Racing Port to enhance the Illinois horseracing industry. From here, we'll be implementing capital-efficient plans to build temporary and permanent casino facilities, improve the quality of the horse racing experience, and we will have a partner on food and beverage amenities. As part of this, we've engaged with RRC Gaming Management, including Tony Rodio, former CEO of Caesars Entertainment; and Holly Gagnon, current CEO of HGC Gaming Hospitality and former CEO of several casino companies, including the Seneca Gaming Corporation. Stepping back, this transaction is a compelling first move into an advantaged single site, real estate light local gaming asset, a gaming niche which is defined by convenience, lower CapEx requirements, favorable competitive dynamics and an attractive high return. Before we dive deeper into the deal, this is a great time for me to take a step back and talk about Accel Entertainment, who we are, how we create value, why this deal fits well, and what makes our equity risk reward so compelling. First, I want to focus everyone on the $15-plus billion gross gaming revenue opportunity in the local gaming market that we compete in. This is a market that has historically grown low to mid-single digits with very attractive profitability, cash flow and returns. We segment this broad target market into a couple of buckets. Non-destination single-site gaming making up approximately 60% of our addressable TAM. These are casinos that generate less than $75 million of annual GGR and they represent about 14% of the entire U.S. Class III commercial casino market. Broad-based gaming, our legacy core franchise, making up nearly 1/3 of our TAM, and cardroom, charitable gaming and historical horse racing making up the rest. We're a proven leader in this attractive space, a market where most assets remain unconsolidated with favorable acquisition pricing. Much of this space is ignored by larger gaming companies as individual opportunities are too small to move the needle and also ignored by financial buyers who lack operational expertise. Our business model works well across these local gaming markets as our core strengths are building local relationships, providing superior player experiences with unique gaming technology and deploying capital nimbly to sustain attractive returns on capital. Now let's take a closer look at who we are, where we compete, and how we built long-term success in distributed or route-based gaming. Distributed gaming is legal and regulated in 11 states. In these state markets generally adhere to 2 basic business models. Revenue share, which is defined by law and the retailer and the gaming operator must be separate indices or revenue share, which is negotiated between the retailer and the gaming operator and either entity could be both. Accel was formed in 2009, and the Illinois market remains key to our core operations, home to our corporate headquarters and 2/3 of our workforce. Today, we are a leading distributed gaming operator in the United States. We own and operate approximately 25,000 regulated electronic gaming machines in approximately 4,000 retail partner locations in 7 states. Organically and inorganically, over 15 years, we've scaled an attractive franchise with over $180 million of adjusted EBITDA, strong and improving free cash flow conversion and low balance sheet net leverage of just over 1.6x. Looking out a few years, our route-based business has 4 growth levers. Organic growth in Illinois, Nebraska and Georgia through both newly licensed establishments and competitor locations, greater share of location economics across own establishments, inflecting profitability in Nebraska and Georgia with favorable legislation and operational execution. And finally, future opportunities in states likely to legalize local gaming in the future. Breaking our model down a little more, we create value in 3 ways. First, we support our retail partners' growth with low staffing burdens due to our self-service technology. Second, we instill player loyalty and create memorable player experiences. And third, we maintain collaborative and reliable partnerships with regulators across 11 different regulatory structures. And since our founding, we've been very disciplined in our capital allocation. Since 2012, Accel has created a robust capital allocation process to add hundreds of locations per year, deploying equipment with a targeted 1.5-year payback period. Since 2009, we've acquired approximately 85 operating companies had accretive synergized multiples. Since our IPO in 2019, we've also bought approximately $124 million of the asset we know best, our own undervalued equity. And our returns on capital have grown to the low teens, well above cost of capital. With that overview, I'll hand it to Mat to talk through Accel's current footprint and key financial metrics in a bit more detail. Mat?

Thanks, Andy, and good afternoon, everyone. For the next few minutes I'll dive into how Accel's disciplined and prudent capital allocation has steadily diversified our business over time. We've compounded growth in our installed base of gaming terminals at 27%, 15% in Illinois alone and a meaningful growth contribution from machines in other states that are reaching increasingly profitable scale. These entries into new states have been accomplished through prudent tuck-in transactions and steady scaling from these initial toeholds in new states. Our revenue split has steadily diversified as well with new states earlier in their penetration and profit curve scaling nicely and inflecting their profitability over time. Looking now at our impressive fundamental financial track record. From 2019 to 2023, our revenue is compounded at 29% per year. This revenue has yielded healthy gross profit growth of 25%, even as we steadily diversified from our Illinois core in the new states. We convert over half of this gross profit to strong EBITDA at robust mid-teens margins. More than half of this EBITDA converts to discretionary free cash flow, which we partially deploy in growth CapEx to support market penetration, retention and growth. To reiterate, investors should expect less growth CapEx and meaningful improvement in our free cash flow conversion in coming years as total CapEx ticks downwards the level closer to depreciation. Finally, we generate returns on capital well above cost of capital with ROICs in the low teens, as Andy highlighted earlier. From here, we expect low single-digit revenue growth in our core business delivered with tightening discipline around growth CapEx and operating costs. This low single-digit revenue growth should yield mid-single-digit EBITDA growth as new state scale and continued expense discipline takes hold. And lower growth CapEx should allow us to deliver high single-digit free cash flow growth to reinvest in the promising new asset we're announcing today. Now on to the main event, a discussion of the exciting transaction we're announcing today. For that, I'll turn it over to Mark.

Thank you, Mat. Turning now to Fairmount Park, which builds on the profitable cash generative foundation Andy and Mat just walked through. As Andy suggested at the opening of our call, we're acquiring FanDuel Sportsbook & Horse Racing in Collinsville, Illinois for approximately $35 million. At the election of the sellers, Bill Stiritz, former CEO of Post Holdings and Ralston Purina, and Robert Vitale, CEO and Chairman of Post Holdings, Accel will fund the transaction with 3.45 million shares of its common stock. This strategic transaction builds on Accel's strong distributed route-based platform and is a first mover expansion into the local gaming market. The acquisition, we're excited to announce today includes a Sportsbook, a master sports betting license in partnership with FanDuel Sportsbook for retail and mobile sports betting in Illinois. The racetrack -- racetrack operations of the only active horseracing venue in the Greater St. Louis metropolitan area, off-track bidding. Currently, 3 active OTB locations with 6 open opportunities to develop future OTBs within the State of Illinois. In terms of the fundamentals we're underwriting here. Fairmount Park currently generates modest adjusted EBITDA and Accel sees significant opportunity to improve existing operations. Accel plans to invest $85 million to $95 million, this is in addition to the $35 million for the existing assets and casino license to fund a temporary casino and subsequently a permanent casino in addition to track improvements. Once the permanent casino is right at scale, Fairmount Park is expected to generate $20 million to $25 million of adjusted EBITDA in 5 years or less. In terms of the time line, the temporary facility should open mid-2025 and the permanent facility is planned to open mid to late 2027. We're excited that the acquisition is expected to be accretive to adjusted EBITDA and free cash flow at an implied multiple of approximately 5.5x. Importantly, much of this opportunity takes advantage of our core expertise and we've identified key partners to operate and advise on some elements of this project. For the horse track and parimutuel betting, we will build on Fairmount's long-term horseracing management team with selected consultation from outside industry experts. For the casino, we're engaged with RRC gaming management, including Tony Rodio, former CEO of Caesars Entertainment, for casino development and operations and Holly Gagnon, current CEO of HGC Gaming Hospitality and former CEO of several casino companies, including the Seneca Gaming Corporation. In Food and Beverage, we're discussing food and beverage partnerships with several experienced F&B operators currently. In sports betting, we're assuming the existing long-term relationship with FanDuel Sportsbook, the #1 sportsbook in Illinois. Broadly, these partners will complement Accel's expertise in retail gaming, regulatory partnerships and capital allocation. The Fairmount track currently runs 65 race days, approximately 435 races per year and we plan to improve the overall quality of racing for owners, trainers and fans in support of the Illinois horse industry and to comply with state legislation. In terms of the road ahead, we will invest in 2 stages. We will build out a temporary casino in the existing grandstand building of the track, with 200 slot machines, 4 to 6 table games and existing food and beverage outlets. This will be relatively capital light and intended to open in about a year. From there, we'll erect a permanent casino on-site with detailed plans for 500 slot machines, 24 table games in a FanDuel Sportsbook. We're excited to take your questions on this transaction and its compelling strategic logic. Before we do, we want to spotlight what makes Accel such a compelling risk reward investment and what drew Bill and Rob to seek equity in this transaction. Andy?

Thanks, Mark. To frame up Accel in a powerful illustration, we've compared our business to unweighted composites averaging Las Vegas strip operators and publicly listed regional gaming companies. As you can see here, Accel has lower margin than peers, but is good or better free cash flow conversion and superior returns on capital. We view this higher ROIC as the key measure of our skill as owners and capital allocators. As noted earlier, our growth CapEx in route-based gaming will continue tapering from here, closer to maintenance levels, further boosting cash returns ahead and freeing up funds to reinvest in our new Fairmount asset. Turning now to Accel's equity risk reward. In spite of a compelling fundamental financial profile with strong and improving free cash flow, Accel trades at a low double-digit free cash flow yield and a mid-single-digit enterprise value to EBITDA multiple. This represents a discount to blended peers. We think we're a hidden gem with even more upside unlocked by the transaction we've described today. Wrapping things up. We are an experienced local gaming operator with a strong track record of organic and inorganic growth, generating attractive free cash flows and adjusted EBITDA returns. We are owned and operated by founders that are governed by and aligned with incentivized owners with deep expertise in local gaming. Given our core capabilities and strong balance sheet, this acquisition is a natural extension of our distributed route-based gaming platform. Through FanDuel Sportsbook & Horse Racing, we are entering a complementary segment with low competitive intensity and it demonstrated right to win. With that, Mat, Mark and I welcome your questions.

[Operator Instructions] The first question is from the line of Steve Pizzella with Deutsche Bank.

Maybe we could just start, I get a little [ back ] first, I guess, how does this deal come about? Why go in this strategic direction? And I guess, why now?

Thank you, Steve. And starting with kind of how we developed. We had the opportunity presented to us by the bank representing the property, and they had identified us as a potential good partner, as Rob and Bill were looking for a reliable business partners to take over the reins at the track and kind of take the project to the next level. And so for our purposes, this was a natural adjacency to the locals market that we have developed an experience over the last 13 years, operating not just in Illinois, but across the country. And as we've expanded out of the 6 machines in the Illinois market, we've gone to 15 machines in Nevada and 20 machines in Montana, where we operate those establishments ourselves. There's a lot of similarities in working with the local player, maintaining the slot machines, optimizing them the cash collection that we believe that we are the leader in that industry throughout the United States. So when this opportunity presented itself, it was a natural for us to look at. We quickly identified where we needed to bring in expertise, identifying Tony Rodio and Holly Gagnon as partners in this project. And we will be soon naming a food and beverage partner and we will also be involved in this. So this is -- the timing was right. We have grown as a company. We have developed a management team that we believe is second to none in this industry. And this is adjacent to our existing business in the metro-east market, which we are the leader in providing gaming entertainment and we feel very comfortable with that customer base, and we think we'll be bringing a new fresher form of gaming entertainment to that market. And yes, now is the time as we've got good partners in Bill and Rob. And as we have in the past, when we find the right partners, that's when the deal makes sense.

And then as we think about just kind of incorporating it into our models, can you talk about the timing of the CapEx coming up the -- some of the expectations for the temporary facility and assumptions for how you get to the $20 million to $25 million of adjusted EBITDA at steady state?

I'm going to have Mark kind of provide some color on that as he's working more directly on the project and managing the capital investment.

Steve, as we stated in the press release, we're expecting to go live with the temp by mid-'25 and then with a permanent Phase 2 construction project, hopefully, by the end of '27. The temp has about -- we're estimating about 200 slot machines, whereas the permanent we have about 500. We can kind of probably take it offline in terms of the specifics we used to back out the gaming revenue, but we're looking for roughly $60 million to $65 million of gross gaming revenue, steady state with margins in the high 20s on gaming. And then you can back that out and then added to what we make off the Sportsbook and Horse Racing at the track.

And then just one final one from us. Can you just talk about what are kind of the economics you're getting from the Sportsbook? And I guess, how long is that contract? Is there any, I guess, contract risk on renewals? Anything you could add there?

Thanks, Steve. I will let Mark again provide some color on the relationship.

So Steve, it's a long-term contract. I'll kind of leave it at that, but it's over 10 years. And in terms of the economics, that's proprietary, but it's an attractive relationship and it's definitely one of the reasons why we were attracted to the asset in the first place. So we're looking forward to partner with the #1 Sportsbook operator in the state of Illinois.

The next question is from the line of Chad Beynon with Macquarie.

Congrats on the announcement here. Mark, maybe one more for you just in terms of kind of the details of the project. Can you talk about, I guess, what needs to happen from like an approval standpoint from the Illinois Gaming Control Board? Is there anything that you need after this is closed in terms of additional plans, scope, et cetera? And then the second part of that is, are there expected -- are there any other details in terms of like maximum slot machines, minimum slot machines expected spend? Or the details that you provided, was that more kind of Accel's controllables? Was there anything that was guardrailed by the Illinois Gaming Control Board with the project?