Caesars Entertainment Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 15 speakers on the call.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Agnew, Senior Vice President of Corporate Finance, Treasury and Investor Relations.

Speaker 1

Thank you, Josh, and good afternoon to everyone on the call. Welcome to our conference call to discuss our Q2 2023 earnings. This afternoon, we issued a press release announcing our financial results for the period ended June 30, 2023. A copy of the press release is available in the Investor Relations section of our website at investor. Caesars.com.

Speaker 1

Joining me on the call today are Tom Reeg, our Chief Executive Officer Anthony Carano, our President and Chief Operating Officer Brett Juncker, our Chief Financial Officer and Eric Hession, President, Caesars Sports and Online Gaming. Before I turn the call over to Anthony, I would like to remind you that during today's conference call, we may make forward looking statements about the company's performance. These forward looking statements are not guarantees of future performance and therefore, one should not place undue reliance on them. Forward looking statements are also subject to the inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward looking statements, You should refer to the cautionary statements contained in our press release as well as the risk factors contained in the company's filings with the Securities and Exchange Commission.

Speaker 1

Caesars Entertainment undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances that occur after today's call. Also during today's call, the company may discuss certain non GAAP financial measures as defined by SEC Regulation G. The GAAP financial measure is most directly comparable to each non GAAP financial measure discussed and the reconciliation of the differences between each non GAAP financial measure and the comparable GAAP financial measure can be found on the company's website at investor. Caesars.com by selecting the press release regarding today's 2023 Q2 financial results. I will now turn the call over to Anthony Carano.

Speaker 1

Thank you, Brian,

Speaker 2

and good afternoon to everyone on the call. We delivered another strong quarter with consolidated EBITDA exceeding $1,000,000,000 Operating trends within our property portfolio remained strong Despite a tough year over year comparison driven by a single large convention event, our Las Vegas segment delivered its 2nd best Q2 Adjusted EBITDA of $512,000,000 Our regional portfolio delivered $508,000,000 in adjusted EBITDA, down slightly to last year. And finally, our Digital segment reported $11,000,000 of adjusted EBITDA, the segment's 1st quarter of profitability since we rebranded to Caesars Sportsbook in Q3 of 2021. Underlying demand trends in Las Vegas remained strong during Q2 with occupancy growth of 100 basis points to 97.6%. Total Las Vegas segment revenues were down 1% as a result of exceptional performance last year in our group segment.

Speaker 2

Excluding real rent payments, Las Vegas generated $523,000,000 of and adjusted EBITDA with a margin of 46.3%. Las Vegas continues to benefit from strong leisure and casino guest demand, The return of international guests, an exciting events calendar and the continued strength of the Group and Convention segment in 2023. While our Group and Convention segment EBITDA in Las Vegas was down year over year in the Q2, pace for the remainder of 23 points to another record EBITDA year for the segment. In our regional segment, revenues were up slightly and adjusted EBITDA declined 1% to $508,000,000 We were excited to open 2 new temporary facilities this quarter in Danville, Virginia and Columbus, Nebraska. Both properties opened to strong customer demand.

Speaker 2

While we faced new competition in a few markets during the quarter, customer demand trends remained stable and similar to prior quarters. Our capital projects continue to deliver solid returns. Lake Charles and Pompano delivered strong quarters and early returns in Danville and Columbus are exceeding plan. We are excited to finish work on the Harris Hoosier Park expansion this fall and continue to make progress on the permanent facilities in Danville and Columbus. Work in New Orleans is progressing nicely and we continue to target a late 'twenty four opening.

Speaker 2

Construction has started on the Versailles Tower rebrand in Las Vegas, which is expected to be completed by spring of 'twenty four. And finally, we recently opened a new show in Atlantic City called The Hook, which was accompanied by the opening of Super Freako Atlantic City as well. We have solid momentum heading into the second half of the year as we continue to deliver strong returns on project CapEx, Drive profitability in our digital segment and remain focused on operational excellence in our property portfolio. I want to thank all of our team members for their hard work in the first half of twenty twenty three. Our success is a direct result of their dedication Our team members have and their commitment to delivering exceptional guest experiences every day.

Speaker 2

With that, I will now turn the call over to Eric Hession for some insights on the second and our Digital segment.

Speaker 3

Thanks, Anthony. During the Q2 of 2023, we delivered another significant improvement in the performance of our Digital segment versus last Our business reported $11,000,000 of adjusted EBITDA on $216,000,000 of net revenue versus a $69,000,000 EBITDA loss last year. Results this quarter represent our 1st full quarter of EBITDA profitability since rebranding to Caesars Sportsbook in in Q3 2021. During the quarter, sports betting hold improved 180 basis points versus last year and iCasino volume increased 27% year over year. Our performance this quarter continues to demonstrate the effectiveness of our targeted promotional investment and overall lower level of marketing within our existing customer base as well as customers located in the new states.

Speaker 3

We have recently introduced 4 significant pieces of new and exciting technology improvements that we expect will be well received by our customers. First, our new iCasino product, Caesars Palace Online is now live in multiple states and pending regulatory approval in the others. The new iCasino product offers a significantly improved product and enhanced marketing capabilities, all combined with the compelling benefits of Caesars Rewards. Secondly, we Recently transitioned our Caesars app in Nevada to our flagship Liberty product, which delivers a significantly improved product for our customers. Pending regulatory approval, we anticipate converting our William Hill product and our retail sportsbooks to the Liberty platform at some point later this year.

Speaker 3

3rd, we've started out rolling our net native iOS sportsbook app and anticipate reaching 100% adoption in August. The new native app is receiving consistently higher performance feedback and will result in faster loading speeds, improved stability and enhanced development speed. And 4th, we're on track to introduce our in house player account management system starting state by state later this year, which will ultimately lead to a shared wallet that we anticipate rolling out in 2024. These four products have consumed significant amounts of Technical Resources over the past year, and we're very excited to introduce them to our customers. We now offer sports betting in 30 North American jurisdictions, 22 of which offer mobile wagering.

Speaker 3

We also operate iCasino products in 6 jurisdictions. I'll now pass the call to Brett for additional comments. Thanks, Eric. As you'll see in

Speaker 4

our earnings release and subsequent to the quarter end, we successfully acquired the remaining minority equity and Trust in Horseshoe Baltimore, which allowed us to fully repay its $250,000,000 Term Loan B, yielding significant interest expense savings given its high cost of debt. Pro form a for its repayment and the most recent rate hike from the Fed, our average cost of debt sits just inside of 7% with annual net cash interest expense of approximately $800,000,000 which is well positioned to decline going forward Given continued debt reduction alongside built in spread adjustments tied to declining leverage in our loan agreements. CapEx spend is also expected to crash in 2023 at just over $800,000,000 with several growth projects being completed either later this year or in 2024. Coupling declining interest expense and CapEx with continued EBITDA growth sets up for accelerating free cash flow dynamics going forward. Over to Tom.

Speaker 5

Thanks, Brett. Thanks, everybody, for joining us today. I'm very happy with the quarter, strong quarter again for us, starting in Las Vegas. Keep in mind, we were up against The strongest quarter that we've ever had in Las Vegas. We were missing a large group that Comes once every 3 years to Caesars Properties that was in last year's numbers, not in this year's numbers.

Speaker 5

We Telegraph that last quarter. So that was known. What you saw last week in The Nevada numbers was June hold in Baccarat was not as strong as It was in the prior year. We participated in that. I don't particularly like to talk about hold, but It's notable enough that I should in this quarter.

Speaker 5

We're in the gambling business. What we're looking for is The volumes to come through the property and they came through, we just didn't hold in June like we did in the past June. Both The miss in that of the group from last year and the hold impact in June Our dilutive to margins, obviously the group business for us is accretive to our overall Vegas margin and then Clearly revenue that would flow with normal hold is accretive as well. So as you're looking at Margins on a year over year basis, keep that in consideration. As we look at Forward in Vegas continues to look very strong.

Speaker 5

We had a strong July. We feel very good about The remainder of Q3 and then Q4, you've got Formula 1. Q1 of 2024, you've got Super Bowl. I've said in the past, I think Formula 1 is a 5% lift, not including whatever happens at the tables really just From increased hotel revenue that hotel and food and beverage revenue that still seems To be the right zip code for us, demand for F1, particularly at the high end has been very, very strong for us. We feel very good as to how we are positioned ahead of the event and we're anxious like everybody else to see how this event plays in Las Vegas as we look to future years.

Speaker 5

Super Bowl 24 is exceedingly strong from From a demand standpoint, where we sit today in terms of booked capacity versus a typical Super Bowl, we are Dramatically ahead of and at higher rates than typically at this time The head of the Super Bowl. And if you just anecdotally look at who's going to be getting our tickets, the average customer that What will come to the game with us is substantially more valuable than prior Super Bowls. So Vegas remains very, very strong for us. It feels very good. It's really no Discernible impact in terms of any recessionary concerns, any concerns about the consumer As we look out, the only thing to call out, Anthony talked about the Jubilee Tower at Bali being converted to Versailles at Paris, we'd expect those rooms to be back online before the end of the year.

Speaker 5

We don't expect the entire project to be done until first half of next year, but there will be some disruption in that tower at Horseshoe now that we're underway. If you look at the regional portfolio and really the whole quarter It's a testament to diversification. We had what I'm talking about in terms of The group miss the missing group in Vegas and the hold impact in June. In the regional business, we've got a number of properties that are under competitive pressure Due to competitive openings, I'd call out Tunica is facing a property that opened About an hour closer to Memphis. That has pressured Tunica.

Speaker 5

We've got Council Bluffs Has been a bit pressured by casino capacity being added in Nebraska. And then we have Chicago properties, Both in Illinois and Indiana that are impacted by the expanded casino offerings in Illinois that have come online and continue to come online. On the other side of that, what we've got is The fruits of our capital investment cycle that we're as Brett said, we're reaching We're cresting and reaching the end of, you've got new property in Danville, you've got projects in At both Indianapolis tracks, you've got Lake Charles now open, you've got the Atlantic City spend. And as a result, our regional EBITDA despite a super strong comp, we're just about Flat year over year, which I think is going to compare well with others that you'll see over the next couple of weeks. Again, as you look to Q3 off to a strong start, we're comping against An extremely strong Q3 of last year in regional and it looks like we'll be able to beat that this year through July.

Speaker 5

That's particularly encouraging for us. Flipping to digital, digital was a loss Last year, we've talked a lot about inflecting to positive and driving real EBITDA through that Vertical and it's spectacular to see our 1st full quarter of Positive EBITDA, as Eric detailed, I laid out pretty specific Targets in terms of where we can be in digital looking out to 25 on our last call and then I went to So conferences where a lot of you told me there's no way we'll get there. I would tell you every number that I laid out 90 days ago or so, I'm 100% confident that we're going to hit them. Every The metric that I look at going forward is at or above where we were 90 days ago when I laid out those targets. So I tell you I'm reiterating those targets as we look forward.

Speaker 5

Big on the tech Those are big moves for us. It's very you put them in a list and I don't really know that the impact is Emphasize enough, when we took over William Hill, William Hill had one employee working on iGaming. We were on old technology that was limited in a whole number of wins. We soft launch Caesars Palace Casino about 2 weeks ago. We're waiting on approval in a couple of jurisdictions that I expect any day now.

Speaker 5

And then you'll see a full launch of the product, but I'd encourage you to go take a look. It's It's a casino first entry into our digital business. And In terms of capabilities, bonusing segmentation, proprietary games, live dealer, It is light years beyond what we've been operating under that, as Eric said, grew High gaming revenue 27% in the quarter. We are fully aware that we have Significant competition in the iCasino space. We don't expect that we're just going to come in and run everybody over.

Speaker 5

But we feel like we've got the product to start to build market share and wrapping that into Caesars Rewards has been and will continue to be powerful for that business. So You look at the quarter, Q2 of last year was the best second quarter that we ever had, the second best quarter that we had ever had and we topped it in EBITDA this year. So the turn in digital and Regional holding its own, offset the loss of that group in Vegas. So this is exactly how we built this business. And it's great to see it come together.

Speaker 5

One more point on digital, Moving to Liberty in Nevada is an enormous lift. We were operating on the equivalent of a Commodore 64 computer in the old Technology, and now we have the state of the art Liberty app that we operate in all of our jurisdictions. This is a dramatic leap for us in Nevada. If you think about the Super Bowl happening and All of the visitors that will come to the state and our market position in the state and now we have the app to That's competitive with what they've got at home, whether it's with us or somebody else. That's going to be a giant customer and acquisition opportunity for us.

Speaker 5

So we're particularly excited about that. I would expect that 95% of our handle In Nevada, we'll be on Liberty by the middle of this month and virtually all of it by kickoff of football season. So we feel Really, really this is our 3rd NFL kickoff since we launched our digital business. In terms of How I feel heading into the season. I think we are very, very well positioned as we head in.

Speaker 5

So Brett talked about We continue to pay down debt. Conventional leverage now is around 4 times and going lower. I would expect that to go lower given where we are in the capital cycle, where we are with The performance of the business, we're starting to look at what do you do with the free cash flow that will be generated in 2024 2025. And is there a return of capital piece or is there an external opportunity that It could be interesting to us. I'd tell you as sitting here today 3 years after the Caesars transaction closed.

Speaker 5

We're 30, 60 days beyond the first time where I'm feeling where we can be Offensive from an external opportunity standpoint. So it has been a long road to get through Everything that happened with COVID, the merger, we really, really feel like we're on Strong footing as we head forward. And the cash flow machine here is going to continue to accelerate as Results continue to improve. Digital continues to deliver improving cash flow. Interest expense goes down.

Speaker 5

We really feel strongly about where we sit today. And with that, I'll open it up for questions from

Operator

Thank you. Our first question comes from Joe Greff with JPMorgan. You may proceed.

Speaker 6

Good afternoon, everybody. Tom, given what you've I said today tonight about Las Vegas trends. How aggressive of a scenario is it for you to experience Year over year net revenue growth in the 3Q, I would imagine the answer for that with respect to the 4Q is not aggressive given that one book. And then I have a follow-up on digital.

Speaker 5

Yes, Joe, we feel good about Q3. Looking at Forward occupancy

Speaker 3

over the

Speaker 5

next 3 months in the range of, let's Let's call it 96% to 98% depending on the property. So feel very, very good about 3rd quarter. One thing to keep in mind in Vegas is that I didn't touch on in my remarks is Rio, We anticipate it will leave the portfolio October 1. As you're looking to Kind of second and third quarter results at the Rio, that's a revenue producer, but a drag on EBITDA. It doesn't produce enough EBITDA to offset its lease payment in the second and third quarter.

Speaker 5

So as that comes off In the Q4, that will be accretive to EBITDA and margins.

Speaker 6

Great. On Digital, maybe this is a question for Eric, but whoever wants to answer it. How do you think about the conversion of OSP and Gross gaming revenues into net revenue into next year. And then specifically on Igaming gross revenues, We noticed it increased sequentially, it was $80,000,000 in the 2Q versus $75,000,000 in the 1Q. How do you think about the segment's growth going forward?

Speaker 6

Is iGaming presently EBITDA positive and did it account for all or more than 100% of the 2Q EBITDA results? Thanks.

Speaker 3

Yes, sure. Maybe I'll grab this one, Joe. So from a reinvestment perspective, And you can see this in the queue that was published simultaneously with the call today. Our reinvestment levels as a percentage of volume was around 1% and our reinvestment as a percentage of gaming revenues was around 22% in total. That's on the lower end, I think from a percentage of volume is where you'll see it going forward.

Speaker 3

And for existing customers tends to be below that. And then depending on how many new customers we sign up, that'll bring that number up slightly Just generally because Q2 has fewer sign ups given no football and no start of sports. So that range on a percentage of volume, I think it will range between that 1% and 1.25% kind of going forward. So from a reinvestment perspective, that's kind of how I would think about it. From a volume perspective, from the Icasino side and just from a general business side, As Tom mentioned, that's an area where we really feel quite optimistic about.

Speaker 3

We're finally going to have a competitive product Out in the market that we can use to work with our existing database to have those customers that we know and that are loyal to the Caesars Rewards The program move over to the online casino side. It was difficult to have that discussion with the customers when they had to go through the sports betting app each time to get to the casino. And so they won't have that. In addition, some of the things Tom also touched on, We haven't been able to really do segmented marketing in any degree so far with the existing tech that we had. The new system that we have will allow us to Create segmentation and it allow us to reinvest like we do on the casino side and to use a lot of those experiences.

Speaker 3

So from that standpoint, when you look forward, we're very excited about the Icasino product and the ability to slowly grow some share and ultimately drive the profitability of the business towards those targets that Tom laid out.

Speaker 6

Okay. Thank you. EBITDA positive.

Operator

Thank you. One moment for questions. Our next question comes from Carlo Santarelli with Deutsche Bank. You may proceed.

Speaker 7

Hey guys, good afternoon. Tom, obviously kind of a little bit of a change in some of your thoughts around the ability to kind of be I said, as you put it with external opportunities, could you maybe talk a little bit about how you foresee needs or things that you think You guys could obviously do to enhance growth going forward, etcetera, and kind of the driver behind maybe that comment.

Speaker 5

Yes. So we're key is we're getting toward the end of a Capital cycle, right? As New Orleans runs off, we don't have the Any of the chunky projects that we've had going really since the merger on our plane. There's So meaningful projects in particular markets, but you're not looking at the $300,000,000 $400,000,000 or $500,000,000 capital So from a balance sheet and cash flow perspective, you get to a point where you're going to be generating A lot of free cash flow and you look at what do I do with it. We as a team have delivered A lot of value over the last decade to stakeholders through external opportunities.

Speaker 5

So Of course, we're going to look for potential future opportunities now that we're in a position to tackle those, but don't read that as A lack of confidence in the growth potential of the existing portfolio. As I said, Last quarter, we're on a run rate of about a little over $4,000,000,000 of trailing EBITDA. We think there's $500,000,000 plus available to us in the digital business and something similar to that in the Brick and mortar business as we get returns from the projects that have recently come online and are still to come online. And that should push us toward a $5,000,000,000 company. But as you look at what do I do with Cash flow when paying down leverage might be generating diminishing returns in terms of Shareholder value, then you start to think of am I distributing that cash flow in some form or fashion or am I putting it to work elsewhere?

Speaker 5

And we've got a great track record of putting it to work elsewhere. So we'll explore that as we move forward.

Speaker 8

Great. Thanks. And if

Speaker 7

I could just one follow-up. As you guys think about the various moving parts in Las Vegas Through the back half of the year, you obviously have the RIIO, which you notice coming out that at somewhere in the ballpark of 100 basis points To margins, you have the labor negotiations that are ongoing presumably. And obviously, then you have Formula 1. Do you see the back half of the year as kind of being flattish to up margins kind of Has that over the last 6 months a reasonable expectation?

Speaker 5

Yes, I think that's a reasonable expectation, Carlo. And touching on the labor agreements, Thanks, Carlo. And touching on the labor agreements, labor agreements expired by contract at the end of May. We're operating under everybody on the strip is operating under extensions. As we speak, there is work being done In terms of a new contract, I think that it's you're talking about complex stuff that takes a little while, But I'd expect that we'll have new agreements by the fall, and I'm not expecting a whole lot of drama around them.

Speaker 7

Great. All right. Thank you, Tom. Appreciate it.

Operator

Thank you. One moment for questions. Our next question comes from Dan Politzer with Wells Fargo. You may proceed.

Speaker 9

Hey, good afternoon, everyone, and thanks for taking my questions. I wanted to touch on digital first. To the extent that the hold, I think you called out was 6.4%. It was up 108 bps year over year. How do you think about sports betting hold and growing it over time?

Speaker 9

And what do you kind of see as kind of the guideposts as you kind of maybe get to that 2025 level where you would see that high EBITDA flow through?

Speaker 3

Yes, it's a great question. I think we've made a lot of improvements over the last Kind of year, year and a half with respect to just the trading team getting more experience, but also on the tech side. So I think as we go forward, You will continue to see a higher percentage of customers not betting straight wagers. So whether that's You know, an in play or player prop or same game parlay type wagers that generally have a higher whole percentage that's going to contribute to the increase. I suspect at this point, we're probably going to get to somewhere, say, 7.5% to 8%, which I think It is a reasonable expectation given where we see the mix of our business.

Speaker 3

We do have a lower hold percentage Here in Las Vegas and in Nevada, due to the size of the straight wagers that we take in the state That will drag it down a bit. But overall, I think getting to that 7.5% to 8% is a reasonable expectation.

Operator

Got it.

Speaker 9

And then just pivoting, Horseshoe Baltimore, I know you've acquired the remaining stake in that. I think VICI has a ROFR option on that as well as one for Caesars, Virginia. So can as you think about that deleveraging path and things are obviously moving in the right direction, Can you maybe talk about other ancillary options as it relates to your regional portfolio and the possibility that there's maybe an avenue with VICI where you can get a bunch of cash in the door.

Speaker 5

Yes. Look, Dan, I'm not short on cash. So That's really not something I'm targeting. There are ROFRs on both Baltimore and Virginia. I wouldn't anticipate either being exercised.

Speaker 9

Understood. Thanks.

Operator

Thank you. One moment for questions. Our next question comes from Steven Wieczynski with Stifel. You may

Speaker 3

proceed. Hey, guys. Good afternoon. So, okay, Tom, following up on Carlo's question, we've now have gotten a bunch of questions from investors about your commentary that you would take This excess free cash flow and in your words put it to use elsewhere and have a great track record of doing that. So not sure what else You might say there, but can you elaborate a little bit more on maybe just what that means and maybe also give us some examples of that?

Speaker 5

Short answer is no. I won't give you It makes sense. Maybe we'll buy Steve full. Steve, it's Good. You know who's out there.

Speaker 5

You know what's possible. You know that there are at our size, it's not as easy to Find targets that, A, move the needle and, B, are Actionable from an antitrust perspective, but there's not 0 targets available out there. And As we get to the free cash flow levels that we get to, given What we have generated in the past in terms of returns, it shouldn't be surprising to anybody That we're going to look for opportunity to keep to do that again.

Speaker 3

Okay. I didn't think you'd give me much of an answer, but

Speaker 10

that's great. And I

Speaker 3

hope you do buy us, then I can come deal craps for you in one of your So second question, Tom, you talked about June and Vegas. You had Yes. The negative hold you witnessed across backrest line. Look, I know high end isn't super, super important to you guys. But can you just give us any color around what you're seeing business, especially on the international front and maybe how those folks have or will be coming back into the market?

Speaker 5

Yes, Ben. It has been very strong. From a volume standpoint, Our volumes at the high end, both domestic and international, continue to build. We've put in Quite a bit of effort. Caesars had a very strong international business when we arrived.

Speaker 5

Unfortunately, Those players weren't traveling. It's great to see that come back. In the interim, we've continued to build on The domestic business, so to give you anecdotal an anecdotal idea, Steve, I get a hit sheet every day. And in 2021, if I looked at it on a Saturday or Sunday morning, There might be one player there. That was a significant swing in our results.

Speaker 5

Now on a typical Saturday, Sunday, I've got 5 to 10 players that are At a minimum, several $100,000 line of credit. So you've got a much more balanced book. You've got a lot more Volume, so it's really continued to build. Obviously, events in the second half or In the Q4 with F1 and the Q1 with Super Bowl are fantastic high end events. And as I said In my remarks, demand for both of them at the high end is extremely encouraging Yes, several months now.

Speaker 3

Okay, got you. Thanks, Tom. Really appreciate it.

Speaker 11

Yes.

Operator

Thank you. One moment for questions. Our next question comes from Stephen Grambling with Morgan Stanley. You may proceed.

Speaker 12

Hey, thanks. Two follow ups. First on the digital side, I think I heard you say, there's some planned investment into the Caesars Palace App. Does that mean that we should be anticipating step up in marketing and increased promo spend on iGaming in the near term?

Speaker 5

You should expect us to be visible in terms of promoting the app, But nothing anywhere close to what you saw when we launched the sports app. So I would describe us right now in Icasino as and for the last couple of years as invisible from a marketing standpoint. It will become visible in the next month or so, but that's in the all of The guideposts and markers that I've given you, you should be expecting 3rd quarter For the digital business, as I said before, is a coin flip as to which side of breakeven we're on, but we should be close. The 4th quarter should be a significantly positive quarter, and then we should be positive from then on out.

Speaker 12

That's helpful. And my follow-up, just taking one more crack at it on the going on offense comments. Is that comment more directed at domestic or international? And do you generally view that more on the digital or physical casino side? Thanks.

Speaker 5

So we are not obviously, we have little we have Canada as a Property we manage internationally, we're entirely domestic at this point, but we are economic animals. If there's something that Where it makes sense outside the U. S, we're willing to get on a plane, but I would expect it would be domestic, and I'm not thinking about a big and Digital

Speaker 7

Acquisition. Fair enough. Thanks so much.

Operator

Thank you. One moment for our next question. Our next question comes from Brad Montour with Barclays. You may proceed.

Speaker 10

Hey, good evening everybody. Thanks for taking my question. So, Tom, just maybe some thoughts on the broader sort of U. S. Leisure Trends, you sounded obviously confident that you're not seeing any type of recessionary activity or anything.

Speaker 10

There's just a lot of sort of Crosswinds and lumpiness across the broader lodging landscape at the low end and there's been a lot of talk from other hotel operators calling it normalization. Just curious if you think you're seeing any normalization in Las Vegas and if there's any difference at the low end of your database or of your properties versus sort of the middle, maybe the middle tier.

Speaker 5

Yes, Brian. We're not really seeing anything I can speak to that's Material in terms of softness at any level of property. The only property that if you're looking at the next quarter, I'd expect to be soft as the RIIO and that's because we're transitioning out of the property and a lot of the rated business has already come out of there, but that's obviously unique to that particular property. It feels really strong out here. We're out here today.

Speaker 5

Volumes are as They've been for a year and a half now, continue to be very strong. As I told you, I'm looking at forward occupancies Depending on properties, 96% to 98%. So it's really hard to tell you Anything that would give you a bearish stance on Vegas.

Speaker 10

Great. That's super helpful. And then maybe just in Atlantic City, curious if you want to comment on how that performed Sort of through peak summer here, I think you're sort of disruption free this summer, sort of versus your underwriting or expectations heading into the season.

Speaker 5

Yes. We're kind of we are disruption free really since right For 4th July, we are finishing up the entrance to Caesars Palace. I was out there for the opening of The hook in Superfrigo and really pleased with the way the Renovation work has turned out. All that's left is the Nobu Hotel Tower at Caesars, which should be done by the end of the year. Yes, I would say in terms of expectations, Atlantic City is not as strong as I would have hoped it would be, but it's fine.

Speaker 5

And Yes, obviously, it's within that regional business that was flat in 2Q and I'd expect to grow a little bit in 3Q.

Speaker 11

Perfect. Thanks everyone.

Operator

Thank you. One moment for questions. Our next question comes from Shaun Kelley with Bank of America. You may proceed.

Speaker 8

Hi, thank you for taking my questions. Maybe first for just Eric, just wanted to ask about on the digital side, maybe at a very high level, could you help us think about As you start as your expense base is increasingly normalized and you continue to get your product roadmap where you want it

Speaker 7

to be, How do you kind of

Speaker 8

think about flow throughs in the digital business of sort of percent changes in revenue to EBITDA? What sort of either kind of a directional amount that makes Or could you help us think about some of the key levers or line items that you could drive improvement from, just as we get out into kind of 2023, 2024 and beyond?

Speaker 3

Yes, sure. I think if you go back to the prior discussions and calls we've had about the reductions And some of the expenses that we're currently incurring that we don't think will be burdened with going forward from either the marketing, the team deals, some of the other fixed Expenses like that, you can see those rolling off over time. In terms of the balance of the expenses, I think those are going to might increase a bit like labor and some of the others. But broadly speaking, The true variable expenses that we have are really taxes, the reinvestment levels and then Super variable things like credit card processing fees and so forth. And in aggregate, those should be around 50%.

Speaker 3

So that once you break the Breakeven level like we have this past quarter and going forward, you should see quite strong flow through on every incremental dollar that we get. And then for the next couple of years anyway, it'll be juiced by the fall off of the fixed marketing expenses that we currently have in the cost structure.

Speaker 8

So 50% on variable and possibly greater than that when we factor in some of those fixed expenses, if I'm kind of summarizing that right. Does that make sense?

Speaker 3

Yes, I think that's a good way to look at it. If you look at this quarter is over 100%. So but that's because we're cutting more dramatically than I would anticipate going forward on that fixed

Speaker 8

Great. No, it makes a ton of sense. Thank you for that. And then, one sort of bigger picture one for Tom. But Tom, You kind of mentioned in the prepared remarks a little bit about your longer term goals from 90 days ago and standing by those.

Speaker 8

And I I just sort of wanted to kind of hit it specifically. Was there like something specific you had in mind and maybe I'm just not in on the on either the comment or the joke, but just was there A specific area that was that really directed at free cash flow? Was that directed at the 50% return on digital investment, sort of all of the above? Was there just Something you were specifically trying to kind of get across relative to where we sat 90 days ago?

Speaker 5

No, it's all of the above. 3 years ago, we told you We think we could generate better than 50% annual EBITDA return on the cumulative losses we generate in Building the business, we got to about $1,100,000,000 of cumulative loss before we inflected to positive, Which suggests $500,000,000 a little over $500,000,000 of annual EBITDA at maturity, which I defined as sometime in 2025. And When I laid those markers out last quarter, I got some skepticism back. And I would tell you 90 days later, I'm even firmer in my conviction that we meet or exceed those numbers in that timeframe.

Speaker 8

Thank you very much.

Operator

Thank you. One moment for questions. Our next question comes from Barry Jonas with Truist Securities. You may proceed.

Speaker 3

Great. Good afternoon. MGM just announced a comprehensive deal with Marriott. I know you guys have a partnership with Wyndham, But curious how you think about your overall positioning here?

Speaker 5

I feel fine. I know Those types of partnerships are useful from a Loyalty branding perspective for the databases. At the scale of The company that we've got where there's nothing out there that we're missing that I expect would materially move the needle for us.

Speaker 3

Great. And then Q3

Speaker 7

last year, we were talking

Speaker 3

a lot about rising energy costs. Curious to get the impact this quarter. And I'm also wondering how the heap maybe affected player visitation, if at all.

Speaker 5

Yes. So you're remembering correctly, August, September last year in particular, We had some unhedged utility costs primarily in Nevada that bid us. We're in a Much, much better position over the next 60 days, the same 60 days as last year. So I expect those costs To be lower. In terms of weather, there's I can certainly probably come up with Whether that impacted us in various places during the quarter, obviously, it's very hot everywhere recently, but there's nothing to

Speaker 11

Great. Thanks so much.

Operator

Thank you. One moment for questions. Our next question comes from David Katz with Jefferies. You may proceed.

Speaker 13

Hi, evening everyone. I'd like to just go back to the digital, if I may. And just looking at the queue and reflecting back Back on some of the discussions we had about some of the media partnerships, etcetera. There are still some meaningful commitments Capital wise in terms of those costs, if you could shed a little light on how much of that starting to roll off It is important for hitting these targets, these profitability targets versus how much of it is just to execution on getting the new apps rolled out and doing the business.

Speaker 5

Yes. So we've talked in the past about Yes, going from 0 to 500 kind of a 3 legged stool with each leg similar in terms of impact. One is continued execution in the OSB arena that we've discussed in terms of Continue to grow, continuing to drive EBITDA there. The second piece is our Icasino share moving toward Our OSB market share and then the 3rd piece is the roll off of partnership and talent contracts over The next 3 years.

Speaker 13

And those are relatively equal in size.

Speaker 5

Yes. I would say of the 3, just basic blocking and tackling is the largest, but it's not Dramatically large, yes, there are 2.

Speaker 13

Got it. Okay. And if I may, as my follow-up, just focusing on the regional business and trying to think What it's becoming, where we look at CapEx and we're always a little sensitive to CapEx But may give the appearance of being defensive as competition ramps up pretty much across the regions. I suppose what I'm asking is, is this what it is, where it's not going to be a lot of growth? There'll be some capital redos that are necessary at some point.

Speaker 13

But for the most part, Right. Or what we're looking at today kind of is what it is, to repeat myself a little bit.

Speaker 5

Look, that's really a macroeconomic question. Obviously, if you had asked that question 5 years ago, none of us saw what was coming from a virus standpoint and the structural improvements In the business in response to that. So it's hard for me to say, yes, this just is what it is as far as the eye can see. We always so we do 52 quarterly reviews each quarter We're going through the P and L of each individual business with the leaders and we are in properties that we have improved 2 and 3x in EBITDA, we still see opportunity to continue to grow as we move forward. So We don't view this as there's not growth available to us in the regional portfolio.

Speaker 5

And then obviously, we've got Projects then that comes online. And I'm careful in lumping Defense, there's varying levels of defense, right? If I'm in a market where My property is just hasn't been touched in a long time, and that's impacting My performance is, I can certainly see a case where you put in some money to change that. And You may characterize that as defensive. I think that's growth from where you're starting from.

Speaker 5

Now if you take a case of a property that let's Use our Tunica property as an example. If a property opens an hour closer to the feeder market, There's very little I can do from an investment standpoint that's going to change that outcome. These are convenience based Properties to begin with, that was the realization that led us to changing the subsidies all the way back in the MTR days. But I don't view it as a mistake if and I'm not referring to us. I see others that are investing in properties that

Speaker 3

have been Around a long

Speaker 5

time, but they're behind now based on what's brought to market. You can choose to continue to Erode and see what you can do cost wise or you can say, I'm going to put some money in this and change my fortunes. And I can see People making different decisions, say, faced with similar circumstances.

Speaker 13

Okay. Thank you for the fond memories of MTR. Appreciate it.

Operator

Thank you. One moment for questions. Our next question comes from Chad Beynon with Macquarie. You may proceed.

Speaker 14

Afternoon. Thanks for taking my question. You've gotten a lot of digital, but I wanted to pile on that. So We get a lot of questions around LiveDealer, given how big the demand is in Europe and the market cap of the leading player over there. So Eric, maybe for you as it relates to your optimism around iGaming in general.

Speaker 14

Is this expected to be a major piece You said the business going forward and given, I guess, the branding, the marketing, some of the IP that you have, would you consider doing this in house or use 3rd party exclusive vendors

Speaker 3

to have the Caesars experience. Thanks. Yes, sure. I'd say it's definitely going to be a major part of the business going forward. If you look at our current sports book app, which is sorry, the casino app, As part of the sports book, we have a disproportionately high percentage of table games action versus slot and Action.

Speaker 3

And so that's a high percentage of the live dealer, just because of that larger denominator on the table game side. Going forward, the standalone Caesars Palace app He is going to have a higher percentage of slot business than table, but it's still going to have live dealer And of the overall table games, we do expect that live dealer product to be a sizable percentage. So going forward, it's absolutely a key component of the business. I would say previously we haven't had as much exposure to that. We haven't had branded games.

Speaker 3

We haven't had dedicated games. We haven't had a lot of the product that's out there. Just we haven't incorporated it into the app, which we will on the new Caesars Palace app. In terms of the question about doing it in house or through a third party, we're definitely going to want to have some branded customized games, But I don't see us bringing it in house at this point in the anywhere in the near future.

Speaker 14

Okay. Thanks. Appreciate it. And then just in terms of legislation that we should be keeping an eye on, I believe North Carolina is out there potentially talking about some Expansion of land based gaming and then on the iGaming front, that will probably roll into Q1 of 2024. Anything else that we should be watching or you're keeping an eye on in the legislative session?

Speaker 14

Thanks.

Speaker 5

Not in particular. I mean from a jurisdictional standpoint, The most relevant to us in the near term is New York land based license issuance and that's We're deep into that and hopeful.

Speaker 3

Thanks, Tom. Appreciate it.

Speaker 5

Thanks, Chad.

Operator

Thank you. One moment for questions. Our next question comes from John DeCree with CBRE. You may proceed.

Speaker 11

Hi, everyone. Thanks for taking my questions. Maybe one for Brett on the balance sheet. You mentioned in your prepared remarks. What was the decision to pull the trigger on Horseshoe Baltimore, obviously, the cost of debt made sense.

Speaker 11

But timing, was it contractual? Was it negotiated? Were the parameters of that buyout of your partner, something that you guys just kind of did on your own and I don't know if you could share what you paid for the minority interest?

Speaker 4

Yes. On the minority interest, We're opportunistic around pulling an asset at the right valuation. So we took That in for a little under $70,000,000 you'll see that in the queue. And once we collapsed and owned 100% of it, you look at that cost of debt, The term loan was pre payable at par and was mid-9s on the interest rate with our nearest maturity. So In my land, that's called a no brainer in terms of what to repay next with our free cash flow.

Speaker 11

Perfect. Thanks for the detail. And then maybe one for Tom or Eric. You've got to cover a lot of ground on digital, but looks like a pretty successful World Series of Poker for you. Obviously, A great brand.

Speaker 11

I know online poker is in a big industry right now, but it's Kind of one of your strong suits as you think about your iGaming business going forward. Are there some opportunities on the poker side and with World Series of Poker brands that you could see going forward?

Speaker 3

Yes. Look, you're absolutely right. It was an all time record World Series of Poker, both from a prize money perspective, participants perspective, But also from the ability to really provide contribution to the properties that hosted it. We moved it to the Horseshoe Last year, so it's

Speaker 7

kind of the 1st

Speaker 3

year that it was branded as a horseshoe. And it really drives a lot of activity to the property, a lot of food and beverage, a lot of hotel revenues. So it's really great for us from a portfolio perspective in addition to the direct revenues that it drives From the actual tournament itself. From an online perspective, we really don't see much movement in terms of new states legalizing. So it's kind of a business that is kind of flat at this point.

Speaker 3

It vacillates between going up and down based on how customers go. But From a brand perspective, we think it's definitely accretive to the company and does provide these incentives for customers to come to the and Brick and mortar locations for the tournaments.

Speaker 11

Got it. Thanks, Eric. I appreciate the color.

Operator

Thank you. I'd now like to turn it back to Tom Reeg for any closing remarks.

Speaker 5

Thanks everybody for your time,

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now

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Earnings Conference Call
Caesars Entertainment Q2 2023
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