PENN Entertainment, Inc. (PENN) Earnings Call Transcript & Summary

Hi, everyone. I'm Thomas Allen, Morgan Stanley's U.S. gaming and lodging leisure analyst. I'm very happy to have Jay Snowden, the CEO of Penn National Gaming, to talk about life after COVID. Before we get into it, I'm going to read the disclaimer. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley Research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

So Jay, thank you very much for taking the time. So jumping right into it, COVID has had a meaningful impact on your business, the casinos across the country. Every one of your properties closed down now, all except for one in New Mexico has reopened. Can you talk about what you're doing to get customers comfortable coming back to your properties?

Yes. Look, it all, Thomas, as you can imagine, begins and ends with safety and comfort. That's something that we've really spent a lot of time on with our property leaders and our team members around training and processes and procedures every night when we shut down, the deep cleaning, and then what happens throughout the day. We've had some capacity limitations, as you know, at most of our properties, differing from one market to another. And I think that those have been actually quite helpful for us as operators to -- especially when we first reopened, making sure that we had appropriate distancing for our guests, whether playing table games or in our restaurants or sitting down at a slot machine. So we've gotten a ton of unsolicited feedback around how comfortable people feel during a time of discomfort. People leaving their home have to really think a lot about, where am I going? And is this a place that I feel like I can spend some time? And if yes, do I feel comfortable there? And there's been a lot of stats that have come out as recent as the last couple of days in Pennsylvania, and I believe, in New Jersey, where the regulators have actually published how many total COVID cases we've had with team members in the industry. And it's been well less than 1% of the total COVID cases in the states. So I think we're doing a great job as an industry. I think we're trying to do our part as a company. And our consumers have responded very positively that they feel comfortable. And we see it in their behavior as well, right? Because though they're coming less than they did pre-COVID, when they come, they're spending more time with us, which I think tells you everything you need to know about their comfort level.

Just from an infrastructure standpoint, what are you doing? I mean I think all your employees have to wear masks at all times, but what else are you doing?

Yes. So every market is a bit different, and we really rely on the local health officials and the regulators to help us think through what we might do in Mississippi or the Gulf Coast different than St. Louis, Missouri, different than Columbus, Ohio. So we're really to taking our leads. But the types of actions that you might see at the properties along the lines of required masks in some markets, highly encouraged in other markets, temperature checks before you come in, both on the team member side as well as on the guest side. And then you just have to have -- it has to be part of everything that you do. So you're cleaning and EVS and housekeeping teams have to be very present and very visible. And so we put more energy and more resources at that than maybe we had pre-COVID. As good a job as we did pre-COVID, it's just more top of mind post-COVID. And then, of course, you can imagine within our food and beverage areas, buffets have not reopened. May not reopen, honestly. I don't think that's something that guests are looking for any time in the near future, even long term, as you think about what the environment is in a buffet and what you're exposed to as opposed to most of our guests really preferring quick serve, grab-and-go, order off a mobile device or a kiosk, sit down, it gets delivered to you, disposable when you're done, you throw it in the trash and on you go. And then, of course, within the gaming area, really just spacing people out every 2 machines or every 3 machines. And in table games, half the seats or half of the positions in craps and roulette than we had pre-COVID.

And then you said you've gotten some really good feedback from customers around what you've been doing. Are you seeing any demographic shifts of kind of who are coming and who are not?

Yes, it's actually been -- I don't really know what we were expecting to see from a demo shift standpoint. We figured that, that 55-plus, 60-plus age demo would definitely be the softest when we were able to reopen, and that has happened. What we weren't anticipating is the growth that we've been able to achieve in that 21- to 39-year-old demographic. We're seeing growth that we've never seen before, in excess of 20% year-on-year. And then we're also seeing growth, Thomas, from our unrated business. So there's a lot of new people and a lot of younger people coming through the facility, which I think bodes really well as you look in the out quarters and the out years, if we do a great job converting those unrated guests to rated guests, and garnering some loyalty from the younger demographics. And we have a lot of work to do, obviously, from a cashless technology and the gaming experience, the non-gaming experience. We're working on a whole lot of things right now to make that experience more attractive for them. But I think what you're seeing is that, we have this opportunity to keep these newer customers, while at the same time, once there's good news around vaccine and effective treatments for COVID, that, that 55-plus segment, where visitation has really fallen off, I think people are going to feel comfortable with that age segment coming back to the properties. So we could end up in a scenario where the business we had comes back, and now, we've got this new segment of business that we've converted into loyal guests that may really act as a buoy for the industry and certainly for the company.

So I mean, I guess that's a good segue into talking about kind of the digital transformation of your business. You bought 36% stake in Barstool Sports Media, you own Barstool Sports' sports betting app, and you've given a number of companies market access to offer online sports betting, online gambling in states. And it sounds like you're really trying to drive an omnichannel approach for additional growth. Can you just talk about it a little bit more?

Yes. There's a lot there, but I'll sort of begin at the end, right?

I may have answered your question for you. I'm sorry.

It was well done. You're hired. Omnichannel. So that really is -- that's the focus of the company. And what we believe, Thomas, really is the differentiator for Penn, in that we own and control, both from a decision-making standpoint and economically, our core brick-and-mortar business and everything that we're doing around that, but we also control the economics and the decision around what we're doing from a digital perspective 100%, right? And I think most of our brick-and-mortar competitors maybe have some control or maybe are working on gaining full control of their online strategy, whereas Penn has that today and will have that as we move forward. So From our standpoint, and certainly from an economic standpoint, all -- it's all about acquisition of customers and getting them into this funnel of Penn National Gaming. Our loyalty program is called mychoice. We want to get as many people into that ecosystem as possible. Once they're in that ecosystem, to me, if you're 21 years and over, whether you like mobile technology, whether you like to visit a brick-and-mortar casino, whether you love sports, you love slot machines, you love blackjack, you love craps, and how you like to consume that form of entertainment, we don't care, because we're going to be able to offer it to you in whatever form you're looking for in the states where it's legal. We're -- obviously, 25 states now have legalized sports gaming. Not all are live yet, but 25, including Washington, D.C. A handful with online casino legalization. And I think you're going to see more conversation taking place around iCasino in 2021 in states like Indiana, in Illinois, in Iowa. There's a cluster of Midwest states. It's quite active right now. And so I think you look out to 2022, 2023, and what Penn, with our Barstool ownership position and relationship, is going to be able to offer in form of land-based products and digital products, sports, casino, and just getting people into that ecosystem and keeping them in that ecosystem. Because what we found, even in Pennsylvania, where we have launched online casino, is that the customers that engage with us, both online and Pennsylvania, as well as our brick-and-mortar casinos are the most valuable customers in our entire database.

You've had a metric on your last earnings call, what was it?

Yes. So we have seen that customers that engage with us both at our brick-and-mortar casino and online, their play is up 140% from what it was pre-COVID. So the way that it sort of -- it's sort of comprised as different, right? Because pre-COVID, most of it was brick-and-mortar only. But a lot of those customers, when we had to close down our brick-and-mortar in Pennsylvania, we introduced HollywoodCasino.com. And so post-reopening, they're spending some of their time still online, coming back to the casino. Some that are older are only playing online, but you look at it in total, and we're getting a lot more value from those customers than we were pre-COVID.

So I should have kind of started for the generalist better. So sports betting got legalized outside Nevada in May of 2018. Now, as Jay said, there are about 25 states have legalized, about 20 that are live. Online gambling is live in 5 states; 6, legalized. And that was a business that started earlier, but only really took off in the past couple of years. And so there's a good stat that our restaurant team says, that they think that -- we're obviously in the very early stages of digital transformation of the gaming industry. Our restaurant team believes that COVID accelerated that industry shift to digital by 3 years. Do you think that, that's a good analogy to make for the gaming industry? And I guess the follow-up to that question is, do you want a digital transformation?

Yes. Well, the answer to your last question is a big yes, and we had actually been lobbying regulators for the last couple of years to allow us move toward a cashless, contactless, cardless solution inside of our casinos. You can imagine, Thomas, the tens of millions of dollars a year that we spent accounting for cash, moving cash, transporting cash, storing cash, counting cash. It's just -- it's a lot of effort. It's a lot of energy. And certainly, what we have found is that now, the consumer of today is asking for it, right? So it's not just the operators asking the regulators. It's also the end user, the customer who's asking the regulator for this technology. And so from our standpoint, this is something that had to happen. And I think that, Thomas, whether you're talking about the restaurant industry or you're talking about retail industry, the gaming industry, Satya Nadella, the CEO for Microsoft said this very early on in COVID, which is, "COVID has really accelerated the digitalization of life by about 3 years." And I agree with him on that I don't think this is specific to restaurant industry, gaming. You name it. I think this really has impacted everything we do, how we consume, what we consume as consumers, and you're going to see this, I think, rapid acceleration. COVID is going to act as an accelerant for all things technology, and I think we're well positioned as a company given our investment in Barstool and the digital products that we have launched and are continuing to launch throughout 2021.

And just -- I mean, I guess -- sorry, you still have a big brick-and-mortar presence. Are you worried about cannibalization of that business at all?

Well, given what we've seen in Pennsylvania, I'm encouraged, Thomas. I -- if we do this right, and we're able to drive a similar margin profile for our digital business as we see in our brick-and-mortar, bring it on, right? Like, we want to make sure that the customer has the form of product that they're looking for that they can engage with. And if they want to sit at home and do that on a device or if they want to come into a casino, if they want to do a little bit of both, as long as it's within our ecosystem, and we have great products both on the brick-and-mortar, land-based side as well as the digital side, I want the consumer to be able to engage however they want to. That really was the driving force behind us wanting to go omnichannel, because we operate in 20 states, more than any other gaming company in the U.S., and online sports betting is just -- it's legalizing so fast, so rapidly, even faster than we had anticipated, having access to this opportunity in 20 states without friction costs and having to pay others to get access to that opportunity is a really big deal for us. And what I think, again, really differentiates and separates us from the competition.

Yes. So when I get asked the cannibalization question, I usually say, look, my head's on the sand, right? Like there is a shift to doing stuff more online. My companies, like Penn, and you probably are one of the leaders here, fully realize that and are doing things to focus your business in that direction. But if you look at other more mature markets like Australia, Italy, that have opened up online gambling and betting much earlier than the U.S. did, and you could actually use online poker as a good analogy from the early opts in the U.S., it's actually typically not cannibalized brick-and-mortar that much, because gambling and betting is somewhat of an intimidating product, right? Like it's not just intuitive. A lot of things aren't intuitive. And so it introduces the activity to a lot more customers that then come into the ecosystem. And I think that's what you're seeing in Pennsylvania, right?

Well, we are. I think the better proxy, Thomas, is New Jersey, because online casino has been legal now for 5.5 years. And if you look at what's happened to the land-based businesses, pre-COVID, I think post-COVID, I don't -- it's hard to really understand what is impacting what because there's capacity constraints and limitations on the offerings. But if you look at that first 4.5 years post-online casino launch in New Jersey, you saw the brick-and-mortar business in New Jersey, in Atlantic City, the first year, it dropped for competitive reasons. And then year 2, year 3 and year 4, you saw this online business growing by 20% CAGR, and you saw the land-based business growing by low single-digit CAGR over that same period of time. So whether you're looking at Pennsylvania, you're looking at New Jersey, which are the only 2 states we really have to use as an example so far, I'm encouraged by what I'm seeing. It's hard to say what's going to be 3 years or 5 years from now. But I can assure you, we're going to be live in every market where it's legal, both online and brick-and-mortar. And so for us, it's about just we want them in the ecosystem, as I said earlier, and staying loyal to Penn National Gaming.

Yes. On the New Jersey anecdote, it's interesting because you had 2 casinos reopen in Atlantic City partially because they now had an opportunity to do online gambling and sports betting, which they didn't when they closed.