Caesars Entertainment, Inc. (CZR) Earnings Call Transcript & Summary

Hello. Thank you for standing by. Welcome to Caesars Entertainment Inc. 2024 Second Quarter Earnings Call. [Operator Instructions] After the speaker's presentation there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the call over to Brian Agnew, Senior Vice President of Corporate Finance, Treasury and Investor Relations. Sir, you may begin.

Thank you, Tawanda, and good afternoon to everyone on the call. Welcome to our conference call to discuss our second quarter 2024 earnings. This afternoon, we issued a press release announcing our financial results for the period ended June 30, 2024. A copy of the press release is available on the Investor Relations section of our website at investor.caesars.com. As usual, joining me on the call are Tom Reeg, our Chief Executive Officer; Anthony Carano, our President and Chief Operating Officer; Bret Yunker, our Chief Financial Officer; Eric Hession, President, Caesars Sports & Online Gaming and Charise Crumbley in Investor Relations. Before I turn the call over to Anthony, I would like to remind you that during today's conference call, we may make certain forward-looking statements under safe harbor federal securities laws, and these statements may or may not come true. Also during today's call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G. Please visit our press releases located on our Investor Relations website, for a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure. With that out of the way, I will turn the call over to Anthony.

Thank you, Brian, and good afternoon to everyone on the call. Our second quarter delivered consolidated net revenues of $2.8 billion and total adjusted EBITDA of $1 billion, both flat versus prior year. Our Las Vegas segment delivered a same-store second quarter net revenue record of $1.1 billion and our adjusted EBITDA of $514 million, beat the prior year by 1.2%. These results were driven by continued growth in hotel cash revenue as a result of higher year-over-year occupancy and ADRs and record performance from our food and beverage. Recent room renovations at our newly rebranded Versailles Tower at Paris and Colosseum Tower at Caesars Palace are driving above plan returns on investment driven by strong gains in cash ADRs. The group and convention segment also delivered an increase in occupied room night mix year-over-year and recent forward pace for 2025 has strengthened. Las Vegas [ EBITDAR ] margins of 46.6% were down only 40 basis points year-over-year despite increases in labor. We remain encouraged for operating trends in Las Vegas segment based on our forward expectations for continued strong occupancy and hotel pricing trends, coupled with the decrease in room inventory on the Las Vegas Strip. In our regional segment, adjusted [ EBITDAR ] for the quarter was $469 million, down 8% year-over-year. Results were driven by a combination of competitive pressures in certain markets, construction disruption, principally in New Orleans and a difficult comparison in Reno due to a large group event last year, offset by performance from our Danville and Nebraska properties. Despite revenue declines, [ EBITDAR ] margins in our regional segment were down only 100 basis points, reflecting strong cost discipline. During the quarter, we celebrated the opening of Harrah's Nebraska's permanent facility on May 17, the company's first property in the state, which is off to a strong start. We look forward to the completion of our newly rebranded Caesars property in New Orleans in October and the opening of the Danville permanent facility in December. Our elevated capital investment cycle is coming to an end, which will drive strong returns for the regional segment looking ahead. Our team members continue to deliver exceptional guest experiences as a result of their continued hard work and dedication. I want to thank all of our team members for their contributions to our strong results, which are a product of their commitment to excellence. With that, I will now turn the call over to Eric for some detail on the second quarter results in our Caesars Digital segment.

Thanks, Anthony. Caesars Digital delivered second quarter net revenues of $276 million, up 28% year-over-year and set a quarterly adjusted EBITDA record of $40 million versus $11 million in the year ago period. Including this quarter, we have now generated trailing 12-month EBITDA of $76 million. Our net revenue flow through to EBITDA in the quarter remained within our 50% range. Net revenues in our sports betting segment increased 19% year-over-year, driven by flat handle and hold of 7.2%, which improved 80 basis points versus last year. Our product on the sports side continues to improve and our customers are reacting positively to our increasing mix of parlay and in-game offerings. We continue to drive growth in our parlay wagers with the percentage of that type of wager growing 380 basis points year-over-year, consistent with the trends we've observed throughout the year. In July, we closed on the acquisition of ZeroFlucs, a leading sports betting technology company based in Australia. The ZeroFlucs team has already started contributing to the product innovation and driving hold improvements and customer engagement. In our iGaming segment, net revenues grew 50% for the second consecutive quarter, driven by a 33% increase in volume and a 30 basis point year-over-year improvement in hold. Caesars Palace online continues to grow as a percentage of our total iCasino revenues. We're actively enhancing the product offering by adding new and exciting game content, including exclusively designed Caesars themed games. We successfully completed the acquisition of WynnBET operations in Michigan in June, which sets the stage for the introduction of our new iGaming app, which will be branded the Horseshoe in early Q3. As we head back half of the year, we continue to be optimistic about the progress we're making in both sports and iCasino and we -- I believe we are well set up for a strong finish to the year. We now offer sports bank in 32 North American jurisdictions, 26 of which offer mobile wagering. I'll now pass the call back to Bret for some comments on the balance sheet.

Thanks, Eric. Strong free cash flow generation of over $100 million in Q2 was applied to permanently reduce our 2030 Term Loan B. Our refinancing activity over the past 2 years has significantly extended our maturity profile with our nearest maturity now 3 years away. We continue to monitor the capital markets to opportunistically lower our cost of debt. As Anthony noted previously, our elevated capital investment cycle is nearing completion and we expect to see CapEx coming down by roughly $200 million in 2025, setting the stage for increase in free cash flow. Over to Tom.

Thanks. To dig a little more deeply into numbers starting in Regional. April was a terrible month for us when we last talked to you. We're obviously -- in April, you had the Easter calendar shift. That wasn't clear how the month would shake out. But if you look at the decline in Regional year-over-year, April was more than 100% of that. May and June, both were up year-over-year. If you look at Caesars specific items in the quarter, New Orleans were at peak construction disruption in the center of the casino right now. That's going to continue for the next month or so. So that hits us in this quarter as well. Reno, those of you who have followed us a long time know that one of the biggest groups in Reno are the bowlers. This year's Bowling Group is about 20% of the size of last year. So we're missing well over 40,000 direct room nights from them and likely more as they book through other channels. And the combination of those 2 items in the quarter cost us $25 million -- over $25 million of EBITDA, and those will continue into the third quarter. The bowlers left end of July last year. New Orleans Construction will complete Labor Day. In addition, Churchill's Terre Haute property impacted Indianapolis in the quarter, and we anniversaried the temporary opening in Virginia for about half of the quarter. So as I look forward, I'd expect third quarter looks something like this. Fourth quarter, we get the benefit of a full quarter of New Orleans rolling out it's new product. Recall that we've got about $80 million there of incremental gaming revenue that -- with the way taxes work in New Orleans would be without casino tax to us and then expect Virginia to open before the end of the year. So I would expect we'd be a grower in the fourth quarter, third quarter probably looks similar to this. And then we feel good about '25 in regional. In Vegas very pleased with the quarter. Keep in mind, we had about $20 million of headwinds between union contract raises plus employees in venues that weren't open last year. So restaurants that were under construction and opened subsequent to second quarter last year. So to fade that [ 20 ] and grow. I'm particularly heartened that hold was a non-event in the quarter. We were in our range. And the difference quarter-over-quarter was less than the increase in EBITDA. Obviously, we held margins well. Anthony mentioned the 2 hotel remodels that we did, Colosseum performing quite well. Versailles has knocked the cover off the ball for us. That's -- Versailles rooms are up $65 in ADR year-over-year. That's almost 60% lift, and that's before the rooms with the balconies came online. Just recently, and the connector should open in this quarter that should have further tailwinds on that tower that's been our most successful hotel renovation in possibly the history of Caesars certainly since we've been involved. So excited about that. Rest of the year looks strong. Expect Vegas to post growth. I know that that's not what's been reflected in estimates, but we feel very good about the rest of the year and into '25. Eric talked about digital, another quarter of nearly 30% net revenue growth, 50% flow-through, which is what we've told you that we expect to deliver. July is off to a fantastic start. Growth is in excess of that target. So we feel good about third quarter and then we'll get into -- by the end of this quarter, we'll be into football. So feel very good about where digital is headed. Expect that the Horseshoe brand, the second brand in iCasino can help us build on the gains that we've had since we rolled out Caesars Palace online. So momentum in digital is quite strong for us and all of the targets that we've laid out in the past still seem well within our grasp. So feel very good about that. And then as Bret and Anthony both hit on, we will roll out -- we'll finish our CapEx cycle that we entered into when we closed the merger in 2020 with the opening of Virginia by the end of the year. That will bring that CapEx down a couple of hundred million gross CapEx over $500 million. And coupled with what's going on in digital in the brick-and-mortar portfolio, we're going to see a significant lift in free cash flow. As we stated you should expect us to be looking for what we'll do with that free cash flow. We continue to plan to reduce debt to reduce leverage. At current levels in the stock, I wouldn't be surprised -- you shouldn't be surprised if you see us become a buyer of stock as we get to that inflection point. And with that, I will turn it back for questions.

[Operator Instructions]. Our first question comes from the line of Joe Greff with JPMorgan.

I want to start with a question on Las Vegas. Obviously, the results were nicely ahead of what we and the Street were forecasting and margins of knocking on 47%, nothing to sneeze at there. Going through some of the various biggest KPIs that you put in the queue. If I make certain assumptions for slot win, it looks like the contra gaming revenue or at least the relationship between casino revenue and gross gaming revenue was very favorable. I mean the best it's been in 4 or 5, 6 quarters here. Can you talk about maybe what's driving that and maybe the sustainability of that? And obviously, that would lead to a continuation of pretty good margins.

So Joe, I'd say from our standpoint, the -- our approach to promotions in Vegas has not changed at all. I'm not looking at my Q. So I don't know what numbers that you're looking at. But we're -- what we found is we have pricing power in Las Vegas. We've known that for quite some time. We've got a great team here that has continued to raise the bar. If you look back to the second quarter of '22 was our all-time EBITDA record. So we're comping 2 years ago was our all-time EBITDA record. That was State Farm. That was a lot of international business coming and paying back. That was pre-union contract. There's about $76 million of headwinds since that quarter. So 2 years ago, you had $76 million of stuff, whether it was lower expenses or revenue like the State Farm that doesn't recur every year. And our EBITDA is down a little under $30 million from that quarter. So that speaks to our team. We've been able to -- despite $76 million of headwinds, we've eaten through $50 million of that. I think that's a testament to how our guys operate out here, and we're pretty proud of that.

Great. And then my second question, it's for you, Tom or for Eric in digital. Clearly, you're doing a good job on the iCasino side of things, and I'm presuming that has a much higher margin than OSB revenues. And I know you have a target out there of $500 million in EBITDAR. And if you look at the next couple of years in consensus numbers, no one's sort of forecasting that. But it looks like this year, you could be pacing to do or knock on a couple of hundred million of EBITDAR in the segment. Is that close to how you're thinking about it internally? Obviously, taking into account what your forecast in the next couple of quarters?

Yes. So a couple of things. I agree with you that iCasino is going to be more profitable from a margin perspective than Sports as you look at ultimately more states legalizing, but if you look at the states that are legal now and their tax rate, the delta between margin and iCasino and sports betting is not as large as you would suspect. Last quarter, I laid out -- we were $1 billion of net revenue last year. We were about [ 50 ] of EBITDA, a little less than that and talked about growing 30% on the topline, 50% flow through, that should get you in the neighborhood of $200 million, and we're well on our way there this year. So I feel good about that. The key will be, can we do it again next year? And then we get the roll off of the partnership contracts that also will flow to the bottom line, and that's how we get to the same $500 million we've been talking about for 3 years now. You'll believe it at some point.

Next question comes from the line of Carlo Santarelli with Deutsche Bank.

Tom, everybody, Anthony, Bret. I was -- I just had 2 questions, both of which more or less relate to kind of the back half of the year in Las Vegas. The first one, and I just want to make sure I understand this properly. Tom, you talked a little bit about the $20 million of incremental costs, some of which are the bulk of which related to the culinary union contract. That contract, if I'm not mistaken, and this is where I'm looking for clarity, we'll see its next escalator in October, which means that in the 3Q, presumably the only increase you should see from that would relate to whatever you might have under accrued in the 3Q last year, so relatively minimal. Is my understanding of that correct?

That's accurate, Carlo.

Okay. And then second one, obviously, World Series of Poker is happening right now. You guys kind of have obviously had that in the properties and has historically been a pretty good cash generator for you, not just for the tournament itself, but gaming play in general. Could you comment a little bit about kind of the holistic impact that brand is having across the assets at present?

Yes. So I'll talk about the holistic, Eric can talk about specifics of actual World Series. This was our best World Series ever from a financial perspective. It fills a lot of rooms on the east side of the Strip, at a time when it can be, as we've noticed recently, almost 120 degrees here. So a good time to have a group of -- a significant group of gamblers in-house, we see benefits in our hotel. We see benefits in table games. We see benefits in slot play and in our food and beverage that's all ancillary and hard to quantify, but Eric can talk about the actual economics of the event for us.

Yes, Carlo, if you -- it shows up in our P&L and that other line. It's basically the World Series of Poker Plus the skin revenues that we received from renting our skins in other states. As Tom mentioned, we had a record growth Series of Poker here at the venue in Las Vegas. From an economic perspective, it's actually very consistent. The online poker does okay, but doesn't make a huge amount of money and then the royalty streams and the land-based casinos where the economics are. It makes between $20 million and $25 million for the year as a whole and then the balance and that's an EBITDA number. And then the balance is going to be the skins that you see there in that other line.

Great you guys. And then if I could, just one quick follow-up. Anthony, you mentioned '25 group pace for Las Vegas had strengthened in the period. Could you kind of give some parameters, i.e., what's booked? What you expect mix could be pace things of that nature?

Yes, Carlo, I think we'll see about mid-single digits above this year. And going up into the mid-teens of mix for the market, so a tick up there as well. Team has been doing a great job in future bookings and is really, as I said, come in very strong in the last couple of months for '25.

Our next question comes from the line of Brandt Montour with Barclays.

I first want to talk about the hotel room rate. If we back into room rates, out of the queue, at least from what we can see, it seems like nice acceleration of room rate in Las Vegas quarter-over-quarter. I was curious, Tom, if you want to speculate on how much of that -- well, there's some from -- obviously from Rio leaving? Also, you mentioned the dynamics of hotel supply coming out of the strip and maybe there's just incremental compression that you're finding and you're able to -- you're just able to yield up your assets here sequentially. How do you think about that? And is it -- how do you feel about the sustainability of that into the rest of the year?

Yes, Brandt, we have with we've not seen a lot of elasticity when it comes to pricing in Vegas. So we have continued to take price kind of across the board, not just rooms, restaurants, ATM fees, pool cabanas. There's just a massive amount of demand for Vegas and that has continued. And if you look at where we're driving -- we're driving a lot of it through non-gaming and gaming is holding up well. And so that leads to more EBITDA overall, which is great.

Okay. Great. And then maybe for Eric over in digital, hoping you could talk a little bit about the dynamic with handle looking flat year-over-year in this quarter. I know we talked about this last quarter, and you're getting a lot of growth from parlay mix and stepped-up hold there. How long can that dynamic carry you in terms of your getting overall OSB revenue growth to compound to the longer-term EBITDA -- to get to the longer-term EBITDA targets that you guys have laid out? Is that sustainable? Or do you need to go back and start growing player counts and volumes again here in the medium term?

Yes. It's a good question. And it's been a couple of quarters that we've had basically flat volume and increased hold and thus increased revenues on the sports betting side. We've taken some actions from a reinvestment perspective, and then also from a wagering perspective that have impacted the volumes. And one way to think about it is, as I mentioned on previous quarter, we had just recently been able to launch our new marketing system that allows us to provide segmented marketing, trigger-based marketing in a much more customized approach. Prior to that, we were investing with a much more peanut butter spread approach, and it caused us to be overinvesting in some of the lower end of the database. So we've reduced that. And as you'd expect, the volumes have dropped off, but the profitability has gone up. And so the business that we are getting isn't really business that you'd be too concerned about losing because it was unprofitable. I think that what you'll start to see is revenue growth start this quarter, and it will accelerate as we start to lap some of the actions that we took. So I do think you'll see solid volume growth starting and the hold will continue to grow. And so that should compound as we head into the back half of the year.

Our next question comes from the line of Dan Politzer with Wells Fargo.

First on Regionals. Tom, you mentioned that most of the decline in the quarter was coming from April and that June was actually up. As we look at the gross gaming revenues for what's reportable, it looks to tell a different story. So when you mentioned that, are you talking about net revenues? And how do we kind of reconcile this? Is there a dynamic with promotions going on that is also worth maybe talking about?

Dan, we've known each other a long time. I only talk about EBITDA. So whatever is going on in gross gaming revenue, I'm not paying attention to. We have not changed our promotional profile in any piece of our business. We were off, what, 30-something for the quarter and [ 25 ] plus of that was New Orleans and Reno, as I described. So the regional business as a whole continues to bump along. Obviously, as we've seen, you've got months that are not as strong and others that are stronger. April for us, as I said, was more than 100% of the decline. Both May and June grew in EBITDA, but there's nothing we're doing in promotions, nor are there anything we see others doing that we need to respond to in that segment.

Got it. That's helpful. And then in terms of the M&A environment, there's obviously been a lot in the headlines lately. Is there -- do you view your stock price here as a limiting factor to getting involved? Or are there opportunities that you could see notwithstanding where your stock is trading, just given some of the headlines that we've seen out there?

I'd say we're just reading the same headlines you are. We're not -- there's -- we're not even tangentially involved in whatever is happening at [ PENN ]. I know that's where your question is going. In terms of what we'll do, we -- I've said before that we are mindful that we've generated a lot of shareholder value through M&A, through external opportunities. The M&A that we've driven value through in the greatest form have used stock as a significant portion of our payment for those assets. I'm not an issuer of stock, [ $36 ], wherever it was today. We're going to be an even more significant free cash flow producer as these -- as the project spend runs down, so that will open up a leg of shareholder returns. So you should expect us to start buying in some of our stock. If the stock moves to a different neighborhood, that can change. We -- I think all things equal, will drive more value if we continue to execute external opportunities, but I'm not going to give our stock away. So that's where we sit today.

Got it. And then if I could just sneak in one quick clarification. You mentioned for the regionals in the third quarter, it will look similar to the second quarter. I'm assuming that was declining by a similar amount year-over-year, correct?

Yes. We have the same -- we're dealing with all 3 that impacted us in the second quarter, in the third quarter. So New Orleans peak disruption until Labor Day. Terre Haute, obviously, we're going through, I guess, the second quarter -- second full quarter since opening and then the Reno group impact extended into July last year. So all 3 will be headwinds. This quarter, I think you start to flip toward the end of the quarter as New Orleans opens. And then as you get to fourth quarter and Virginia opens, I'd expect we're growing in that segment again. Recall that the win per position in the temporary in Virginia is the highest in the entire enterprise and we'll be about doubling gaming capacity when we move to the permanent. So that should be a strong driver. And I've already hit on the way the New Orleans Casino revenue will flow through in the initial stages.

Our next question comes from the line of Steven Wieczynski with Stifel.

Tom, another quick clarification here. When you were talking about Vegas for the second half of this year, are you basically saying that you think you can grow EBITDA for the full year, year-over-year in Vegas? Did I hear that right?

You did not. I'd expect Vegas to grow in the second half of the year, both third and fourth quarter. We would -- as I said on last quarter's call, we would need a swing in hold that offsets our hold impact from first quarter to be a grower for the year.

Okay. And then in the -- just going through the Q, and I know you don't have it in front of you, but there was a comment in the regional segment, which basically said -- you saw a little bit of decline in your gaming volumes, which was basically a mix shift. Basically, your rated play remains steady with some growth but the unrated play had some reduction there. And I was just wondering if that unrated play reduction, is that pretty much across the entire portfolio? Or are there certain geographies where you're seeing a little bit more pressure on that unrated play?

I would say there's always variability in a portfolio of our size. This -- you feel it more in unrated than rated, where unrated is worse off than, call it, the average regional property. It's due to a competitive opening in the same geography. So if you think about how does Terre Haute affect us, we had people that were coming from a couple of hours away from Indianapolis to the West, and now you've got -- you've lost some of them for good because Terre Haute's much more convenient and then you're going to have a battle around somewhere in between you like you have at other properties. And if I'm looking at unrated versus rated, it's like -- it's more unrated and the decline in unrated in that property would be more than our typical regional because of that competition.

In the interest of time for the remaining participants asking questions, can we please limit it to one question and then we'll try to take some follow-ups. So we've got a bunch of people in the queue that we want to get to.

Next question comes from the line of Shaun Kelley with Bank of America.

Just in the spirit of time, Eric, I wanted to go back to sort of the [ CAC ] or promotional environment a little bit and just in terms of what you're seeing in digital. Obviously, 50% flow-through in the quarter is great. Have you seen any environment -- environmental change and especially as you're thinking about ramping or seeing ramping volumes on the OSB side? Because I think there's some increasing trepidation about flow-through rates as we start to look into the third and fourth quarter. And obviously, I think there's a lot of expected competition in new products expected to be rolled out, particularly around the NFL season opener.