PENN Entertainment, Inc. ($PENN)

Greetings, and welcome to the PENN Entertainment First Quarter 2026 Earnings Call. I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead.

Thank you, Chelsea. Good morning, and thank you for joining PENN Entertainment's 2026 First Quarter Conference Call and Webcast. We'll get to management's comments and presentation momentarily as well as your questions and answers. [Operator Instructions] I'll now review the safe harbor disclosure. Today's discussion contains forward-looking statements. Forward-looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially. For more information, please see our press release for details on specific risk factors. It's now my pleasure to turn the call over to PENN's CEO, Jay Snowden. Jay, please go ahead.

Thanks, Joe. Good morning. I'm pleased to report PENN's diversified retail portfolio delivered another solid quarter as Retail segment adjusted EBITDA grew year-over-year. Our property performance was encouraging across the portfolio with particular strength in the West segment reflecting the ongoing ramp of M Resort's new Hotel Tower and impressive results from the team at Ameristar Black Hawk. In the Midwest segment, we delivered strong revenue and EBITDAR growth led by our properties in the Saint Louis market as well as continued momentum at the new Hollywood Joliet in Illinois. Results thus far from our first 2 development projects provide us continued confidence in the anticipated success from the upcoming openings of the Hollywood Columbus Hotel Tower on June 12 and the new Hollywood Casino Aurora on June 24, in addition to our new Council Bluffs property scheduled to open in 2028, all of which are subject to final regulatory approvals. As we've said previously, we anticipate our 4 development projects will generate 15% plus cash-on-cash returns on our aggregate project cost of $800 million, which is net of the $50 million contribution from the City of Aurora. Overall, increases in both visitation and spend per visit company-wide supported year-over-year theoretical revenue growth across all of our rated worth segments, representing the larger quarterly increase in 3 years for the Retail segment. Looking ahead, we continue to see solid trends into April despite higher gas prices and ongoing geopolitical uncertainty. Importantly, we are also beginning to see improving trends in those regions where we are anniversarying new supply, particularly in Bossier City, Louisiana and Council Bluffs, Iowa. Turning to the Interactive segment, we saw significant adjusted EBITDA improvement of approximately $78 million year-over-year in Q1, driven by nearly 15% year-over-year growth in iCasino revenue and approximately 5% year-over-year growth in online sports betting revenue and a significant reduction in marketing spend, coupled with continued cost management. This marks the first full quarter under our realigned digital strategy, which is focused primarily on our U.S. iCasino states and Canada, while operating under a more efficient cost structure overall. We're continuing to see positive trends in Ontario, including year-over-year growth in average monthly active users, online sports betting revenue and iCasino revenue. These results reflect the ongoing strength of theScore Bet brand in Canada and our realigned digital strategy, which we think bodes well for the anticipated July 13 launch of regulated iCasino and online sports betting in the province of Alberta. TheScore Bet has been approved as a registered gaming operator by the AGLC, and preregistration efforts have begun in the province. We expect our Alberta launch to result in a $20 million loss in 2026, within the range we previously provided on our quarterly earnings call in February. As Felicia will discuss in a moment, the resulting change to our prior breakeven guidance for 2026 Interactive adjusted EBITDA is entirely attributable to this $20 million investment in Alberta. Said differently, outside of Alberta, our breakeven interactive guide for the year is unchanged. Slide 5 of our investor presentation underscores our continued focus on our major pillars of growth as our Retail and Interactive segments along with our recently optimized corporate structure and maintenance CapEx spend drives significant improvement in free cash flow generation in 2026, which in turn strengthens our balance sheet as leverage declines and sets us up for an even stronger free cash flow story in 2027. I'll now turn it over to Felicia.

Thanks, Jay. Our Retail segment generated revenues of $1.4 billion, adjusted EBITDAR of $471.4 million and segment adjusted EBITDAR margins of 33.2%. Our adjusted EBITDAR results benefited from a onetime favorable adjustment related to a legal accrual, which nets out to a $5 million benefit primarily in the South region. As it relates to 2026 guidance, based on our better-than-expected first quarter Retail results, we are increasing the midpoint of our 2026 retail revenue and adjusted EBITDAR guidance by $20 million and $12 million, respectively, to reflect the upside generated in the quarter. As a result, our revised guidance ranges are $5.73 billion to $5.86 billion for revenue and $1.88 billion to $1.98 billion for adjusted EBITDAR. As you think about the second quarter, as Jay mentioned, we continue to see stable strength trends carrying into April. And while this is the case, as we noted on our February earnings call, we do expect some temporary disruption in the quarter as the legacy Aurora Riverboat will be closed for about 2 weeks due to regulatory requirements prior to opening the new Hollywood Casino Aurora on June 24. The second half of 2026 should benefit from the contribution of all 4 of our development projects, and we expect adjusted EBITDAR to grow year-over-year in the mid-single digits. Our Interactive segment in the first quarter generated revenues of $358.3 million, including a tax gross-up of $185.8 million and adjusted EBITDA loss of $10.8 million. We now expect 2026 interactive revenues of approximately $1.6 billion, inclusive of an estimated tax gross up of about $820 million and an adjusted EBITDA loss of $20 million which, as Jay just mentioned, is entirely attributable to the Alberta launch. On the revenue side, our revised guidance now takes into consideration the online sports betting promotional spending associated with launching in a new market, particularly in the third quarter as well as further fine-tuning our online sports betting expectations for the year. Importantly, we are also seeing better-than-expected performance in stand-alone iCasino and in Canada, which is somewhat offsetting the factors I just mentioned, and is consistent with our Interactive segment strategic priorities. We continue to expect small losses in the second and third quarter, but note that the loss in the third quarter will be the largest loss of the year due to the Alberta launch. We expect the fourth quarter of 2026 to be profitable in the interactive segment. Overall, our first quarter '26 Interactive segment performance and outlook reflect the benefits of our increased emphasis on U.S. iCasino states and Canada as well as our more rationalized and nimble cost structure. We expect the other category adjusted EBITDAR to be negative $119 million 2026, unchanged from our original guidance back in late February. The table on Page 8 of our earnings release summarizes our cash expenditures in the quarter, including cash payments to our REIT landlords, cash taxes, cash interest on traditional debt and total CapEx. Of our total $95 million CapEx in the quarter, $65 million was project CapEx, primarily related to our 4 development projects. As we remain focused on delevering and strengthening our balance sheet, in March, we issued $600 million of unsecured notes due 2031 at an interest rate of 6.75% and use the proceeds to repay borrowings under our revolver. Accordingly, we ended the first quarter '26 with total liquidity of $1.7 billion, inclusive of $708 million in cash and cash equivalents. Subsequent to quarter end, on April 16, we refinanced our $1 billion revolving credit facility and refinanced approximately $447 million of our Term Loan A. In June, we expect to receive approximately $225 million in funding from GLPI for the new Hollywood Casino Aurora, which opens on June 24, and the remaining $21 million from the City of Aurora by the end of the year. We have elected not to take GLPI capital in connection with the construction of our Hollywood Columbus Hotel Tower [indiscernible] June 12. As we highlight on Slide 5 of our earnings deck, we expect to delever by at least 1 full turn for lease adjusted net leverage and by at least 2 full turns for traditional net leverage at year-end, driven by strong free cash flow generation throughout the year and more optimized CapEx spend. Total 2026 CapEx is now expected to be $420 million, down from our prior guidance of $445 million, that total includes $200 million of project CapEx and down from our prior guidance of $225 million and $220 million of maintenance CapEx, which is unchanged. The reduction in project CapEx reflects the timing shift in CapEx moving from '26 to '27 for the Council Bluffs relocation project, which is now expected to be completed in 2028. Importantly, this is only a change in our planned or date with no changes to scope or budget. We continue to expect total cash payments under our triple net lease to be $1 billion in 2026, and for cash interest expense, net of interest income, we now project $150 million, reflecting our $600 million notes offering and current interest rates. For cash taxes, our outlook is unchanged. We do not expect to be a cash taxpayer in 2026, given the favorable tax deductions enabled by the 1 big beautiful bill in addition to our acquired NOLs and various tax credits. Our basic can at the end of the first quarter was 133.4 million shares. We also have 4.5 million potential dilutive shares from the remaining convertible notes stub and about 1 million dilutive shares from RSUs and stock options. And now I'll turn it back to Jay.

All right. Thanks, Felicia. I said during our last earnings call that 2026 would be a year of strong execution for PENN, while we have the rest of the year still to deliver, I'm happy to report we're off to a great start. Looking ahead, we will remain laser-focused on improving our free cash flow generation while optimizing our corporate overhead and remaining disciplined with our capital. With that, let me please open the line for our first question, Chelsea.

[Operator Instructions] Our first question will come from Barry Jonas with Truist Securities.

Jay, if we look outside of your development projects, what do you think is driving your strong retail trends? I think the consumer is benefiting from higher tax refunds. But as you mentioned, they do have higher gas prices in general macro uncertainty to deal with.

Yes. I think it's really what you laid out, Barry. It's hard for us to know exactly what the drivers are. There's definitely puts and takes. Gas prices are higher. Although as I've said in the past, as you look at regional gaming over the last several decades, the -- really, the economic indicator that most closely correlates to behavior on the regional gaming side is going to be employment. And employment actually continues to be a really good story in the U.S. So gas prices may be a little bit of noise and headwind. The vast majority of our customers in the regional portfolio come within a 30-minute drive. So you're probably not making a decision on the price of gas as to whether you're visiting a casino once every week or 2 weeks or once a month because it's not going to cost you much to get there. And I would say, no doubt, we're seeing some benefit from tax refunds being higher year-over-year in that from what I read, 11%, 12%. And which is helpful. And I think we'll probably continue to see and feel that. I would say that April feels very much through the first 3 weeks, like a continuation of Q1, which is good. So we're not seeing any cracks in the armor. We're actually feeling really good as we look out for the remainder of the year. And remember, as it relates specifically to PENN in our portfolio, we're now fully anniversaried around the Bossier City new supply, which opened in February of last year. So you probably feel an impact through maybe March, but now that we're here in April, we're starting to see some nice trends on a year-over-year basis out of Bossier City. And then Council Bluffs, Iowa, we saw incremental supply hitting the Nebraska market across the state line probably through about now last year. So by the time you get to the second half of the year, feeling pretty good. You don't see any new supply really impacting us. There's a little bit of renovation competition in Baton Rouge, but that's not going to impact us by much, given our asset quality there in that market. And we're going to have all 4 of our growth projects up and running, 2 of them fully ramping with M Resort Hotel and Joliet, 2 just opened. I think the learnings we have from the hotel expansion at M and the water to land conversion at Joliet are going to make the Columbus and Aurora ramps probably a bit stronger and faster. It's going to take time, but there are learnings we're applying there. So overall, I think we're feeling good about the consumer generally, and we're feeling really good about the setup for PENN specifically as we move throughout the remainder of the year.

Great. And then just for a follow-up, maybe for Felicia. I think your free cash flow targets look very strong this year. How confident are you in hitting them and then maybe growing off these levels into 2027 and beyond? And then just sneaking in, how should we think about potential uses?

Yes. We feel confident. That, it's kind of in a asking us about the confidence in our guidance, and we feel good about it. As Jay just said, we feel good about the consumer generally and specifically. And we are -- and we've talked about our pillars, and one of those pillars of growth is increasing our free cash flow production into going forward, especially given our rightsized CapEx and all the other kind of resizing of our overall core structure. So we're in a good place. Obviously, we've had -- we continue to improve in our Interactive segment. generating smaller losses throughout the year as we get into the fourth quarter generating profitability. So again, we feel good on our free cash flow profile and our free cash flow growth looking forward. And then as we get into 2027, and we think about our return of capital, right, obviously, looking at share repurchases, continuing to delever. As you can see on Slide 5 of our -- the earnings slides this morning, we expect to generate net lease adjusted net leverage in the ranges of 5.3 to 5.7x this year. So that's a significant decrease from 2025 over a turn lower in our traditional net leverage over 2x lower in 2026. We expect that to continue to decrease into 2027. And then we're in a very good place as we look at typical -- ou typical uses of capital, inclusive of share repurchases and investing growth into our -- investing in our continued growth pipeline and then clearly continued delevering.

Yes. I would just -- I mean, sort of take a step back, we're going to generate $3 plus of free cash flow per share this year. Our stock is trading just under $15 as of yesterday. So you've got a 20% free cash flow yield. A tremendous amount of confidence in the ability to deliver on that this year. And in every category, the story gets better in '27. So we're not going to guide yet for '27, but you should assume everything looks better, which means that free cash flow story and the free cash flow yield is even more compelling as you look out to what is now not that far away, given we're in April '26.

Our next question will come from Brandt Montour with Barclays.

So I just wanted to start off with digital. I was hoping you could talk, Jay, a little bit more about how that business progressed throughout the first quarter. Presumably, you continue to build iGaming stand-alone momentum and perhaps some further cost rationalizations. But we did see the industry iGaming growth slow in March. And so just wondering how you would sort of characterize how your contribution margin exited the first quarter in terms of your trajectory toward breakeven?

Yes. Happy to Brent, and I guess the backdrop here, again, specifically for PENN is that we really have shifted our focus, the last, call it, 6 months and certainly, throughout Q1 from the OSB only states in the U.S. to much more of a focus. And when I say focus, that's going to be prioritization of OpEx and customer acquisition is on Canada.as well as the states in the U.S. that offer both iGaming as well as OSB. So from our perspective, the progression through the quarter looked quite good. Actually, February was kind of like the one softish month that we had. January was solid. March was solid. And we continue to see really good momentum on the stand-alone Hollywood iCasino side of things. So overall, I'd say we're feeling comfortable. I think we're focused in the right areas. And there is some pressure on the customer acquisition cost side as it relates to U.S. sports betting, and that's been, I think, well covered because of prediction markets and then others in online sports betting space kind of stepping up to respond to that. That's not really a big focus of ours right now. Our focus is on, as I mentioned, Canada, getting ready for the Alberta launch. We feel really good about the setup there. We've done obviously a lot of analysis on what worked for us with the Ontario launch. What maybe didn't, we're doing more of the right things, and we expect to deliver market share results in Alberta that would look very similar to what we've generated in Ontario, where we continue to have momentum. So I think our story may be a bit unique, and Canada is really in a lot of our results Hollywood stand-alone iCasino in the U.S., driving results in OSB being maybe less important overall to the Interactive story. So we're feeling good about the momentum we have internally at PENN. Aaron, feel free to add.

Yes, Canada growth in March was very strong. And I just think it's important to note our stand-alone casino growth is very heavy. We're setting record revenues there. Growth in acquisition continues to be strong. As Jay said, we're seeing some softness on the OSB side, but we're offsetting that with our disciplined spend and reinvestment in the areas that matter, as Jay said, casino, specifically stand-alone in Canada, both look really good. going out of this quarter and to last quarter..

Yes. And then lastly, and I think it's implied by what Aaron and I just covered, but our retention really in the U.S. post rebrand is exactly where we expected it to be. It's been very strong with our higher worth customers, which has been the primary focus. We've lost some of the unprofitable and lower worth. That was by design as we pulled back on reinvestment and some key strategic areas, and we're feeling really good about having a handle on everything, which is important as we look out through the remainder of the year. We knew when we put out the original guide for Interactive that we had some wiggle room on the marketing spend, reinvestment cost structure. And so it's -- we can make adjustments real time, which is what we're doing in Q1 and we'll continue to do throughout the year. I think you'll see really nice momentum in Canada and the U.S. as we close out the year with a profitable fourth quarter.

That's great. Just following on to that because the last bit of that answer, Jay, you talked about marketing spend. In the deck, I think it says marketing spend was down 65%, over 65%. I think we were looking for 50%. And so is that that is sort of efficiencies that you found in the quarter? Or is that sort of timing? How should we think about the rest of the year in terms of that sort of extra savings that you've outlined for the first quarter?

You want to take the first, Aaron? .

Yes. Well, the decrease in marketing spend is also inclusive of what we're spending with ESPN, and the rest of that is just focused efficiency across the markets that are working as we just talked about. So clearly, we were spending a lot more in OSB only states, which weren't as profitable for us. So we've shifted that -- were focused in hybrid states that have both iCasino and sports betting. And of course, stand-alone is showing a lot of great momentum. So we're spending there. And then Canada is starting to pick up as well, so we're spending there. So as Jay said, we have a lot of levers to move around to make sure our marketing is working in the best way for us, and that's what we've been doing.

But there's nothing really onetime driving that decrease year-over-year. Brandt. I think it's just us continuing to get better and smarter and be more judicious in terms of where we're allocating marketing dollars every week, every month, every quarter. [indiscernible] will continue. There'll be a little bit of noise as you get to Q3 just with the Alberta launch. So I wouldn't say bake it in for the rest of the year because of third quarter a little bit of noise. But we're feeling really good about having a handle on the cost structure, the marketing, the reinvestment, delivering the best returns, where to invest in customer acquisition, where to maybe pull back a bit, and all that with a focus on getting this thing to breakeven or better as we move throughout the remainder of the year and into 2027.

Yes. We're just continually monitoring results, and we're investing where we see opportunity and where it's effective, and we'll continue to do that throughout the year.

Our next question will come from Dan Politzer with JPMorgan.

First, just kind of general on kind of the regional gaming landscape as you see it. Obviously, there's been news flow on potential M&A. I guess where do you stand as you think about your balance sheet and leverage improving relative to potential opportunities if there were assets to come on the market or fall out of any large transaction?

Yes. I would say, Dan, we're obviously staying close to the headlines as you guys are, and we'll see what does or doesn't develop here. Feel better about our balance sheet today than I felt in years, and that's great. And as you look out to the end of the year for us to have our lease-adjusted net leverage back into the [ mid-5 ], call it, the midpoint of what we have here is at [ 5.5 ], maybe a little bit better and traditional net leverage in the low 2s. And then you look out to 2027, whereas if you were looking at doing something from an M&A perspective, it's probably going to take you out to [ 27 ] just because it takes time in our highly regulated industry to transact. So you're looking at leverage levels that would be lower, low eyes on a lease-adjusted basis and into the high 1s, somewhere in that range from a traditional net leverage. So we're going to have -- it doesn't mean that we would pursue. It'd have to be the right price, the right asset, right market or plural for each one of those. But it does mean that we're going to have more capacity. And we know that -- the history of PENN, M&A is very accretive, just given our overall operating structure. We have the industry's best tax adjusted EBITDAR margins in the space. We've got a great asset portfolio, a very valuable database that can help improve the results of assets that we can acquire. So we would definitely be interested in taking a look at the right asset, at the right -- in the right market at the right price. And we're going to have the optionality to do that. So I wouldn't say it's going to be something that we're placing calls to do proactively, but if there's assets on the market that are exciting and interesting and attractive from a price perspective, we'll definitely take a look.

Got it. And then just turning to Interactive in the quarter, your iCasino net revenue is up 15%, the online sports book up 5%. How should we think about over the course of the year? It seems likely that iGaming is going to be up more, but I don't if you can kind of put some parameters how to think about the growth of each of those segments for maybe the full year.

Yes. We obviously have assumptions built out in our model and our guide for the rest of the year. I think you will definitely see higher growth from iCasino than you will from OSB. And it really depends also on where the -- how the market is growing. But I would expect for us to be at or above market growth in iCasino and OSB, probably -- again, on a net basis, probably close to where market growth is, handle definitely lower. But we think on a net revenue basis at that market is probably the right way to think about it.

Our next question will come from Joe Stauff with Susquehanna.

Jay, I wanted to ask if you could just maybe an update on Joliet and the progress thus far, maybe in the in the months and the outlook in terms of the ramp? And then the second question is on Alberta. I know the the launch dates kind of moving around. But illustrating, let's say, early July, what are you allowed to do going into that launch really to leverage, obviously, your brand in Canada, especially around the NHL playoffs with Edmonton being built, I guess, 1/3 of the population.

Yes, I'll take the Joliet question. And then, Aaron, you can respond to Alberta. Joliet, we continue to feel really good about it, Joe. I would say that every month, we feel a little bit better because not only are we really seeing strong results on the revenue side. You saw the slide where we share we're continuing to break records from a gaming revenue and non-gaming revenue perspective every quarter and then the end of the quarter in March was our best month ever for Joliet, both in slots and tables. So same thing [indiscernible]. We're feeling really good about these investments and our ability to generate incremental revenue and incremental EBITDAR and EBITDA. I would say, based on our learnings for Joliet, by the time we hit the 12-month mark in August, we're going to be feeling pretty good about the margin improvement as well from pre versus post. Whereas the first kind of 6 to 9 months revenues are much higher, but you're figuring things out on the cost side, and you've got all your restaurants open and entertainment programs most days of the week. And then you start to dial it back with your learnings. And so we're in that dial back and optimization phase with Joliet while continuing to see database trends improve. Very excited about month-to-date, what we're seeing in Joliet in April, in addition to what we saw in Q1. So I think we're right where we expect it to be, and it's a good template for what we expect with Aurora applying those same learnings and the time frame to ramp again about 12 months. And then again, M Resorts, there's a lot of learnings that we can apply to our Columbus hotel that's going to open here at the end of June as well.

Yes. And then in Alberta, look, we feel really good about our launch there. Obviously, theScore brand in Canada is very strong. It's actually the #1 media sports brand in the market. We have as many people on the score in Alberta as we do in Ontario, so it's very strong. But we have a, look, full-scale marketing plan that we're building towards that's going to start in July. The date is no longer moving around, it's July 13. So we will have a full-scale launch then. We're already in market with preregistration. We're going to be active from a brand and performance marketing perspective. And look, we've launched in Ontario and enjoy a very nice market share there today. It's a big part of our gaming business, and we expect to see similar market share there based on the investments we're going to make. So we feel really good about everything that's going on there. And look, we have a great partnership with the [indiscernible], which ultimately is a national team there as well. And so we're going to be leaning on that. So I think if you were in Region Day, if you're in Ontario, you're starting to see theScore brand all around the city and the same thing is going to continue in Alberta, and we're going to leverage all of our assets, and we're expecting a very successful launch.

Our next question will come from Jordan Bender with Citizens.

It looks like you have the Washington D.C. sports betting market. I guess following the rebrand and now what you see in the business with its settling. Any change to philosophy around operating in certain states, whether size or tax rates?

Good question, Jordan. That's something that we're always evaluating. I would say, generally speaking, that staying in OSB only markets. If we can get those to be close to breakeven from a contribution margin perspective is going to make sense for us. As you think about iGaming, maybe eventually passing from a legislative perspective in many of these states, if not eventually all of those states. Your #1 feeder into iGaming is the cross-sell from online sports betting, 60% of our online gaming business and the states that offer both came from or sourced from online sports betting initiation. So that's obviously compelling. And if you're not losing money in a state and you've got volume of customer activation and retention and you've cultivated relationships, it makes sense to stay in those markets. That's certainly our view of it, but we're going to continue to look at each market individually. DC, we didn't have much volume. So it didn't make sense for us there. But I would say everywhere else, as of the last time we analyzed, it made sense to stay in the game.

I mean that's the beauty of having a scale platform that we do is you can launch and operate at an efficiency level that is even or better than it doesn't really cost you anything to stay there. D.C. was really the only obvious thing for us to look at currently. There's no really plans to change our footprint right now.

Understood. Felicia, I think your comments from last call, [ 0.2 ] sports betting and gaming margins maybe being a little bit under what you expected for the quarter. Is it fair to assume there was a couple of million of bad holds in the EBITDAR number in 1Q?

Yes. I think that's fair.

Yes. We came in at 8.4% versus a structural hold of 9%. So that was some of the impact in Q1. But overall, we were pretty close to where we expected to be. So we didn't really call it out. And generally speaking, March Madness just doesn't hold as well as other sports because you don't have the same game parlay volumes there that you do with NBA, that you do with NFL, that you do with [indiscernible] . So we weren't disappointed. But I think Q2, it's more likely to be sort of at that structural hold number of 9% or better depending on how things go for the playoffs in NBA and NHL.

Our next question will come from John DeCree with CBRE.

Jay, you probably touched on this a little bit, but maybe to ask directly on the kind of progress of an omnichannel strategy. Can you talk a little bit about where your kind of iGaming customers are coming from? Are there cross-selling from OSB? Is that kind of activating the retail database? Just kind of curious as to how that strategy is going and kind of how customers are kind of coming into the system and bring around?

Yes. It's obviously been a big focus continue to be for us, John, given where the industry is, and I think important where it continues to head I think having a digital and a retail relationship with your consumer is absolutely critical [indiscernible]. So we're happy today with our ability to execute on that. Specific question on iGaming. I mentioned roughly 60% of that business comes directly from online sports betting, and you should assume that in the states where we have a retail footprint, so less to New Jersey, but more on the Pennsylvania and Michigan side that most of the rest of our business does come from our Retail database. And then you've got some organic, of course, through the brands and through performance marketing efforts and customer acquisition investment, things of that nature. So I would say overall, we're continuing to get better. We have -- we're continuing to work on our system integrations to make it a lot more automated, and that's going to be better for the customer experience from an omnichannel perspective. The ideal scenario, and I don't think we're that far away from it, would be one platform, one app and one wallet for everything. And obviously, it all integrates with your retail experience when you're on-premise. So feeling really good about omnichannel execution. I think we do it very well relative to the rest of the market. And that story is only going to get better as we continue to invest in resources and capital allocation over time.

Yes. And look, we've got a lot of early growth from our database as Jay mentioned, Pennsylvania, Michigan. But the brand is really strong. And so as we start doing brand and performance marketing to continue that growth, which you see in our numbers, it's just really building on itself. So it's a nice kind of 1, 2 punch to leverage your database and then support that with marketing and then pulling new users. And we're not seeing signs of that stuffing based on our marketing spend. And so - you can see that in our casino growth numbers, and we expect to continue that success especially in hybrid states.

Our next question will come from Shaun Kelley with Bank of America.

Jay or Aaron, I just want to build on that last question a little bit. I think, Jay, you mentioned 60% of iGaming coming from some form of sports betting cross-sell. I mean maybe just more broadly or overall, I think we've seen this slowdown in OSB trends, and you can see it in the 5% growth rate number. So kind of what's the offset for PENN? Because, again, I'd say your data looks like it is outperforming what we're seeing in the broader market. We're seeing that the correlation between OSB slowdown and iGaming down a little bit for those that rely on cross-sell. So what's kind of working for you guys to kind of stay above that trend? It sounds like Ontario is [ 1 point ], but anything else you could provide for color there would be helpful.

Yes. Well, I'll jump in and then you can go ahead to jump in. I would say overall, the way to think about it would be we're -- Ontario clearly is an area of strength for us. And then the launch of the Hollywood stand-alone casino. We haven't -- we're just now starting to anniversary those launches from late Q4 and early Q1 of '24 into 25. And so for us, it's still being relatively new as a stand-alone with that brand lead. And for us, that's very compelling given that's the flag on our properties, brick-and-mortar properties in Pennsylvania and Michigan, and we're continuing to put some extra weight into Canada. So in the areas where you would expect us to have some brand equity and we do have brand equity in those markets. We're leaning in and why we're seeing maybe performance a little bit better than the market. We would expect that to continue because we're we're continuing to learn what's working, what's not, but it's definitely Ontario and Hollywood stand-alone driving most of that.

Yes. I mean, Ontario, obviously, the strength of theScore brand really helps us, so the sports book is growing, and therefore, that cross-sell number, which is really high, drives gaming revenue. But we actually have seen growth in our stand-alone score casino as well, which we're investing in. So that's a nice kind of 1,2 punch in Canada. In the U.S., obviously, cross-sell is important, but if you're getting lower gaming volumes, then it's going to affect your casino revenue on that cross-sell which is why we've been offset somewhat by the success we've seen in Hollywood. So we're moderating between the two. They're both still super important to a healthy business, but we are seeing more growth on the casino-only side. But we're really focused on making sure that we can still continue to drive OSB in hybrid states because the cross-sell is important.

And then just as a quick follow-up, could we just get a quick legislative update on -- there are a few proposals out there, maybe as many as in years past, but still things, I think, on the [indiscernible] Michigan around potential iGaming OSB tax increases, some proposal in Ohio, discussions around, I think, Massachusetts and Arizona. So some of these are maybe not as big of a focus as you kind of focus a little bit more purely in iGaming, with Michigan in particular? And then Maine as well, if you could just give us a couple of quick thoughts.

Happy to. I would say, generally speaking, on the states that you mentioned, it's still relatively early in the process. We need to see how it plays out. I would say that since prediction markets have really gotten aggressive on spending, and it appears there's some impact, at least on the customer acquisition cost side and potentially on the OSB handle side of things, the legislators at the state level and lawmakers, the leaders that we're speaking to, understand that now would not be a good time to be thinking about raising taxes on the incumbent operators, especially on the brick-and-mortar side. So I would say those conversations have been ongoing but productive. As it relates to Maine, there is litigation pending with regard to the iGaming legislation that passed the -- we'll see how that plays out. We're obviously not happy with how that was put together in Maine as one of the two land-based operators who have paid hundreds of millions of dollars in taxes and invested a lot of money and employ a lot of Mainers in the state. So if that does end up being implemented the way that it was proposed [indiscernible] PENN to be investing X to 0 in the state of Maine going forward.

Our next question will come from Chad Beynon with Macquarie.

Wanted to ask about the Chicago market. I know the VGT bill to permit restaurants in [indiscernible] County and Chicago was passed. And it looks like restaurants can start that in the third and fourth quarter. Just given your presence in the area, I know you're a little further out kind of into the burbs, but do you think there will be any impact from this? And is anything factored into the guidance in the back half?

I would say, no, in terms of impact, just given where our properties are located, to your point, chain in the burbs. Aurora, our primary competitor is [indiscernible] and we don't really compete with folks that live or would plan on spending the majority of their gaming budget in downtown Chicago, just given the traffic and commuter dynamics in Chicago lands. And same thing with Joliet, our primary competitors, [indiscernible] in Joliet, that won't change. If anything, I would say we're excited about being able to -- remember, we have a Prairie State Gaming VGT Route Operation business in Illinois that does quite well for us, continues to grow both on the top line and on the bottom line. So we anticipate actually participating in the expansion of VGTs in the Greater Chicago area, and that should be overall for us. We think that positive.

Interesting. And then just with the increase that you've seen on the retail customer, what's the current status or update on cashless gaming. I know you guys were a leader with that. It's taking a little bit longer to kind of hit maybe some of the returns. We did hear from a strip operator this quarter that's kind of stepping away from that. But do you think this will continue to progress and maybe with some of that retail business coming back, you could see some more green shoots there?

Yes. I would say the dynamic on the cashless side for us is the customers who are engaged with cashless love it and use it almost every time they visit us in our retail properties, and we see a lot stronger retention and LTV with those customers. So we're not planning to do anything wildly different. We're looking to continue to improve the experience overall. And that won't change. I think we continue to make the experience better, particularly as we think about new openings like Joliet and Aurora and what adoption looks like. It's probably more an education thing than anything else. I think those that, like I said earlier, have engaged with our cashless product, do like it. But the percentage is overall of those that do engage is still below where we want it to be. So we're continuing work on that. But overall, I would expect adoption to continue to improve over time.

Our next question will come from Jeff Stantial with Stifel.

Just one from us on the retail business. It seems to us just looking at news flow that there's a bit more pushback recently against on regulated skill gains and other [indiscernible] ray market distributed gaming. You saw pretty recently the rate Governor [indiscernible]. [indiscernible] seems to be starting some legal enforcement, is the court case makes like Pennsylvania? . Jay, just curious to get your sort of high-level views on this trend, if you agree that seems to be shifting against these machines. And in particular, how much of a tailwind that you think this could be if machine counts go down materially in any of these key states?

Yes. I would say that we're feeling better about where seeing sit in states like Pennsylvania and Missouri than we probably ever have. The still game legal case is going to be in front of Pennsylvania State Supreme Court in the next couple of months. We'll see how that goes. But we obviously have a very strong opinion as to skill games and legality and from our perspective, legality of those devices in most of these markets, if not all. And in the case of Missouri, you've got an attorney general there that we think is doing a fantastic job of really stepping up and shutting these devices down. The argument is always interesting to me that you've got, in many cases, bar and tavern owners that have these machines, they say, "Well, we need the machines or else, we may not have a profitable operation." But the reality is these are -- they're illegal. I don't think that we would make that argument in really any other areas of life. So if you're operating illegal machines and the State Attorney General says shut them down, they need to be shut down, and they probably should never have been in operation in the first place. So we're definitely feeling encouraged by what we're seeing in Pennsylvania and Missouri. There's still time for things to play out. So we'll stay close to that. And clearly, if that moves in the direction that we hope it does, it would create some sort of a tailwind for us on the retail side. It's hard to measure given a variety of variables that we would have to see how it plays once implemented. But I would imagine that would be ultimately a tailwind for us.

Our next question will come from Ben Chaiken with Mizuho.

A few on Aurora. I guess, how long will you be in transition? Presumably, there'll be some downtime from your comments? I'm guessing it's largely in May. And then is there anything notable that this opening and project versus Joliet uliet. I guess my perception is that the surrounding area around Aurora is a little more developed versus Joliet. And then lastly, what are some of the learnings you alluded to earlier in the Q&A, I think you described it, if I caught you correctly, Jay, it's potentially stronger and faster?

Yes. Happy to, Ben. The Aurora project, you're correct, it will be roughly a 2-week operational shutdown. That will happen in June, and it happens literally right before we open. So you should expect that to happen maybe a little bit late May, but the rest of that is going to be in June. It will be entirely in the second quarter of 2026. And I would say having done it once before and worked with closely with the Illinois regulators, we expect this to go smoothly given that the Joliet transition also went smoothly. The biggest difference between Aurora and Joliet, definitely surrounding area, to your point, the rock run development around Joliet, it's just now starting to come out of the ground. We have 250 residential units that are going up adjacent to our Joliet property that will be open, we believe, by the end of this calendar year. There's a 250-plus room hotel that's going to be opening soon or breaking ground soon, excuse me, in '26 and opening by the end of '27 is what we're told. That will be walking distance to Joliet. So it's going to be, I think, for Joliet, a really good long tail in terms of the upside for that property as good as the start has been. It should just get better and better over time. Aurora, we're expecting there to be a ramp that's going to continue to improve over time as most new openings do. But I think the biggest difference is that it is a more mature area. We're adjacent to the Chicago premium outlet mall, which generates millions of visits a year. We're going to have a hotel at Joliet, over 200 rooms with suites, a spa. We don't have that at Joliet. The casino floor is going to be larger. We're going to have more F&B entertainment space, outdoor entertainment. So think about Aurora just being sort of a bigger and a few more amenities offer versus Joliet, but in an area that's very mature, and it's right off the interstate. So we're feeling pretty bullish about that Aurora opening given what we've seen in Joliet so far.

Okay. That's super helpful. And then one just on Alberta. What were some of the considerations when you're thinking about customer acquisition and marketing? You talked about strategies that worked and didn't work with Ontario. And then related, are there any nuances you can share about your expectations, whether that's player behavior or market size?

Well, the consideration that when we launched in Ontario, it was a lot less competitive. So there's a lot more applicants and people in market for Alberta. So that was -- that's a factor that we're looking at. And of course, leaning on theScore brand, I think, is going to help us break through some of that noise. And then in terms of the players, it's hard to tell because we don't -- they're not playing today. So right now, we're modeling them as similar behaviors as what we see in Ontario, and we'll adapt from that.

Our next question will come from Trey Bowers with Wells Fargo.

I just wanted to dig back in a little on digital. Just as we look through the balance of the year, is there any kind of incremental detail you can give us on the cadence. When you say a small loss, should we look to Q1 is kind of a good idea of what Q2 and Q3 should look like and then get to a Q4 level of kind of exit profits? Just any further detail to kind of set some bogeys out there would be great.

Yes. Happy to, Trey. I think Q2, looking very similar to Q1, maybe a touch better, but right in that range of Q1 in terms of small loss. Q3 would be a loss a little bit larger just because you have the Alberta launch sitting in Q3 for the first 3 months of that market. And then Q4, to be profitable and get us to a total loss for the year of $20 million. So that's the cadence that I'd be thinking about.

Okay. Perfect. And then as a follow-up, just going back to your comments on M&A earlier in the call. Just with the shares where they are, how do you think of kind of a hurdle rate for M&A just versus buying your own stock, especially given you even referenced the 20% plus free cash flow yield?

Yes. Trey, you can appreciate this is a topic that we spend a lot of time on at the Board level, and we'll continue to. We're constantly evaluating what those options are for us from a capital allocation perspective. You would imagine that something on the M&A side would have to look really cash -- free cash flow accretive to us, to invest there. And it's not to say that we wouldn't find something, it's just to say that if you've got a free cash flow yield at 20-plus percent, that's what you have to measure it against. And there's some different variables that you would add to the equation. But generally speaking, that's pretty straightforward. And we think that there could be potentially depending on the market and the value that our database could deliver and our operating cost structure could to an acquisition, that you can get a really nice return in that same neighborhood, but there's no doubt that our stock is very attractive at these levels and especially as you look out to 2027.

Our next question will come from Bernie McTernan with Needham & Co.

Want to start on the retail guidance rates for this year was really only flowing through the 1Q beat. So I was just hoping you can talk about that. And was it just a earlier than expected impact from the growth projects? Or just any other color you can provide could be helpful.

Yes, happy to, Bernie. I would say it's still early in the year. So we're feeling really good about what we see in April, but didn't want to get ahead of ourselves. There's a lot of geopolitical macro noise, and it seems every day, every week, the markets are fluctuating. So I would just say, based on where we are in the calendar year, was more of a factor than anything if the trends that we're seeing -- that we saw in Q1 and are seeing in April continue, then we would have guided higher than what we ultimately did, but we just wanted -- want some more time under our boat. Obviously, we want to get the two new properties opened up, with Columbus and Aurora, and then we'll have more share. The next time we're on the call will be in August, and we'll be in a position to, I think, be even more clear about what the rest of the year looks like.

Okay. And I was hoping we asked a question on OSB and maybe peel back the onion a little bit. OSB revenue growing 5% this quarter. It seems like MAUs were down. So presumably, handle was down. So the growth in higher GGR hold and in lower promotional intensity. And so I was just hoping you could frame what the runway would be if MAU trends and handle trends stay this way, >what the runway would be to keep stable to slightly growing that OSB revenue base would be?

Well, I mean, you hit it. I mean hold is helping us as our volumes are down. But obviously, we're going to focus on maintaining volumes and growing them slightly. Although our plan was to our volumes were going to go down as part of our new structure and our new focus. So obviously, casino volumes are important. Canada is important. And OSB and hybrid [indiscernible] are important. But we are focused on getting volumes up in flat. If flat, to up. So that's going to be our continued focus here. But we did see that softness as you noted. But luckily, we held well and we continue to make improvements in our risk and trading. We have a lot of confidence in and how we're holding and improvements we're making as we move forward. So we think [indiscernible] is going to continue to help us as well as volumes are flat.

I would just say, too, that as you look on a year-over-year basis, that the MAU declines have been pretty consistent. So it's not as though these are further accelerating in the wrong direction. It's been very stable on a year-over-year basis from a post rebrand perspective as you look throughout Q1. So the goal really is to do that here in 2026, have stability and then to start to hopefully see some growth in those MAUs and continue to see growth in [indiscernible] as you move throughout this year and next year. And we're very focused on our higher worth customers on the sports betting side. That's working for us. Retention in those areas has been, I'll say, fantastic, and we expect that to continue. So we want to be above the flat mark in terms of OSB net revenue. We accomplished that here in Q1. We want to continue to accomplish that as we move through the rest of the year and into '27.

Why don't we take one more question, Chelsea?

All right. Our last question will come from Stephen Grambling with Morgan Stanley.

Just sticking with the OSB or actually really just the overall digital, a clarification on turning profitable in the fourth quarter. Would you anticipate that you could be profitable even if we kind of strip out the licensing or skin revenue? And then as we look longer term, what are some of the ways that you think through how Canada versus the U.S. kind of ex the skins will contribute to EBITDAR going forward, if there's any kind of puts and takes to think about in each?

Yes. Look, Stephen, we'll have a lot more to share on those questions as we move throughout the year. Overall, for Q4, based on what we're anticipating right now, obviously profitable overall inclusive of the skin revenue. And I would say probably pretty close to breakeven without the skin revenue. It's not a little bit positive. Again, we just need more time under our belt from a post rebrand perspective. But that sets up very nicely as we head into 2027. We obviously want to get this business to profitability overall. And then you want to get to profitability after skin revenue. And we're going to do that. Obviously, the trends are moving in the right direction from an NGR, from a cost structure and from a contribution profit perspective, and that will continue to get stronger and stronger every quarter as we move forward as we conclude the year and then head into '27.

And maybe I know you're going to have more data under your belt, and we'll see where our market share kind of continues to track. But is there any reason to believe that the margin structure kind of long term would be different in Canada versus the U.S. as we think about them on an apples-to-apples basis kind of excess skin revenue?

Yes. I mean, look, Canada is going to be our strongest margin market in North America, and part of that is driven by volume and market share, and part of that is driven by tax rate and the fact that you have iCasino and OSB. So there's no doubt, Canada for us is going to be market #1 from a margin and profitability perspective. But obviously, we're in a lot more markets in the U.S. And the states that have both OSB and iCasino, we're going to see much stronger margins than the OSB only states. But again, we're of the opinion it's probably a matter of time before many of these OSB only states turn to some form of iGaming and we want to stay in the business and be ready when that day comes.

Thank you. We've now reached our allotted time for questions. So I'd like to turn the call back over to management for any additional or closing remarks.

All right. Thanks, everyone, for dialing in. I know it's a busy morning in the space. And Chelsea, thank you, and we look forward to speaking to all of you again in August.

Thank you, ladies and gentlemen. This brings us to the end of today's meeting. We appreciate your time and participation, and you may now disconnect.