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

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

Thank you, Tasha. Good morning, everyone, and thank you for joining PENN Entertainment's 2026 Second Quarter Conference Call and Webcast. We'll get to management's comments and presentation momentarily as well as your Q&A. [Operator Instructions] I'll briefly review the safe harbor disclosure, and then we'll get right into the call. Please note that 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, and good morning. I'm joined here by Felicia Hendrix and Aaron LaBerge as well as other members of the senior management team. As you'll see from our release and investor presentation, we continue to execute against our 2026 strategic priorities during the second quarter. We're on track to deliver more than 20% year-over-year adjusted EBITDAR growth this year, driven by strong performance across our retail portfolio and significant adjusted EBITDA improvement in our Interactive segment. This growth, combined with our corporate overhead optimization is benefiting cash flow growth, which in turn is enabling us to delever our balance sheet this year faster than originally expected. PENN's best-in-class property level management teams delivered impressive results for the Retail segment, achieving record quarterly revenues in Q2. This performance was reflected across the portfolio with 9 properties setting Q2 records for both revenues and adjusted EBITDAR. We also saw another quarter of year-over-year growth in rated revenue, supported by meaningful contributions from mid- and high worth customer segments as well as growth in unrated revenue, which has now increased in 5 of the last 7 quarters, underscoring broad-based consumer demand. This momentum continued through July. Slide 8 in our investor presentation highlights the combination of internal growth drivers and external market tailwinds that support our longer-term retail growth outlook, including our PENN Play loyalty program and omnichannel strategy, our strategic investments in both gaming and non-gaming amenities, our ongoing retail development project pipeline, limited new competitive supply and third-party investments that are helping to drive economic growth in a few of our key markets. The Interactive segment delivered another quarter of meaningful adjusted EBITDA improvement year-over-year as we continue to execute on our strategy of focusing on growth in our U.S. iCasino and Canadian operations to improve profitability. Our U.S. Hollywood branded standalone casino app generated quarter-over-quarter as well as year-over-year growth, achieving record revenues in Q2. Our Ontario gaming operations continue to gain momentum, supported by strong growth in OSB revenues, aided by solid World Cup engagement and cross-sell of the reactivated World Cup OSB user base into iCasino. Revenue in the quarter was negatively impacted by customer-friendly online sportsbook outcomes, particularly in June during the NBA Finals and World Cup as well as lower volumes in part due to our reduced marketing spend on lower value and unprofitable customer segments. Importantly, this shift is improving our marketing efficiency and is consistent with our disciplined approach to managing the interactive business that we outlined earlier this year. Notably, while our OSB hold rate was flat year-over-year to date, our OSB net win rate improved. We saw encouraging interactive engagement trends during the World Cup. Approximately 70% of our Sportsbook users placed a World Cup wager with approximately 45% of those World Cup betters placing a soccer wager for the first time. This event served as a meaningful engagement and reactivation opportunity for us heading into the NFL season. On July 13, we launched the Score Bet Sportsbook and Casino and our standalone iCasino apps, the Score Casino and Hollywood Casino in Alberta, Canada. While still early, we are encouraged by our Alberta user and handle volumes on a per capita basis and believe our exclusive strategic partnership in Canada with the Toronto Blue Jays will complement the strength of the Score Bet brand there. Our expected investment in Alberta remains approximately $20 million for the year, and our 2026 Interactive segment adjusted EBITDA guidance is unchanged at a loss of $20 million, which Felicia will discuss in more detail in a few minutes. But first, I want to cover some updates on our exciting retail development projects. Hollywood Casino Joliet, which opened last August, continued to deliver strong results in Q2, and that momentum has continued into early Q3. Our team there, excuse me, is doing a great job. Meanwhile, M Resort continues to capture previously unmet demand and drive enhanced property performance following the opening of our new hotel tower last December. M Resort generated record net revenue and adjusted EBITDAR in Q2. And notably, we hosted 3 of our top 5 largest groups by revenue ever during the quarter. We recently opened our new hotel tower at Hollywood Columbus on June 12, strengthening our position as the leading regional gaming destination in the state of Ohio. The property generated an all-time net revenue record in July, the first full month with the hotel open. Over the hotel's first 1.5 months of operations, we have seen outer market guests account for 85% of hotel cash revenue, which again speaks to it being a regional gaming destination. Additionally, over that same time frame, rated guests have increased their average daily work by 10% when staying at the hotel. Our final of the 4 growth projects, Hollywood Casino Aurora, opened on June 24, and while still early, has been showing strong growth KPIs, approximately doubling admissions, slot volumes, table volumes and non-gaming revenues versus prior year levels. Our hotel is also attracting higher worth customers with our rated guests generating 21% higher average daily worth when staying at the property. The property is also driving trial and expanding our reach in the market as 20% of our guests since opening have been new to Hollywood Aurora. Additionally, 25% of our guests since opening were reactivated customers. Up next in the pipeline will be the relocation of Hollywood Council Bluffs, which is expected to open in 2028. This project will convert a first-generation Riverboat Casino license into a modern and more efficient land-based facility that will connect seamlessly with our existing 444-room hotel. We believe the new property will greatly enhance our competitive positioning in the greater Omaha market. The project has an anticipated construction budget of $180 million to $200. That budget, the programming and the design will be very similar to the new Hollywood Joliet in Illinois. And with that, I'll turn it over to Felicia.

Thanks, Jay. Our Retail segment generated record quarterly revenues of $1.5 billion and adjusted EBITDAR of $517.2 million, which reflects year-over-year growth of approximately 4% in revenues and 6% in adjusted EBITDAR, respectively. Adjusted EBITDA margins were 34.4% and flow-through improved quarter-over-quarter and year-over-year, reflecting our property team's efforts to manage costs across the board, including labor, marketing and G&A efficiencies. Importantly, we saw strong performance across the portfolio, including, but not limited to, contributions from our 4 recently completed development projects. Underscoring this point, same-store revenues and adjusted EBITDAR grew approximately 2% and 4%, respectively, in the quarter. We're raising our full year 2026 retail revenue and adjusted EBITDAR guidance to reflect the better-than-expected results in the second quarter and an increase in our prior assumptions for the second half of the year. The midpoint of our revised 2026 revenue guidance is $5.87 billion. And for adjusted EBITDAR, our new guidance is $1.963 billion at the midpoint, which implies a 50 basis point year-over-year improvement in adjusted EBITDAR margins for the second half of the year at the midpoint. Our new guidance implies the continued expectation for retail adjusted EBITDAR to grow year-over-year in the mid-single digits, more specifically at a rate similar to the 5.6% growth we just reported for the second quarter. We expect normalized seasonality in the second half of the year. Our Interactive segment generated revenues of $349.4 million in the second quarter, including a skin tax gross-up of $185.5 million and adjusted EBITDA loss of $9.5 million. On the revenue side, we experienced solid growth across our key focus areas, U.S. iCasino and our Canadian operations, which was somewhat offset by customer-friendly online sportsbook outcomes and lower volumes, as Jay touched on earlier. On the adjusted EBITDA side, we delivered another quarter of meaningful improvement year-over-year, reflecting disciplined execution of our strategy to drive profitability. We are fine-tuning our 2026 Interactive segment revenue guidance to $1.57 billion from our prior $1.6 billion to reflect recent and current operating trends. Our new guidance includes a skin tax gross-up of roughly $830 million, up from $820 million prior and assumes modest year-over-year growth in both OSB and iCasino for the second half with iCasino growth higher than OSB growth. We continue to expect an adjusted EBITDA loss of $20 million in our Interactive segment for 2026, inclusive of a $20 million investment for our Alberta launch. As we have guided previously, the third quarter is expected to be the largest quarterly loss of the year given our investment in Alberta, and we expect the fourth quarter Interactive segment adjusted EBITDA to be positive. We expect the other category adjusted EBITDA to be negative $119 million for 2026, unchanged from our original guidance back in late February. The table on Page 9 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 $98 million of CapEx in the quarter, $58 million was project CapEx, primarily related to our development projects. We ended the second quarter with total liquidity of $1.9 billion, inclusive of $887 million in cash and cash equivalents. In April, we refinanced our $1 billion revolver, which is currently undrawn and our $447 million Term Loan A facility, both now mature in 2031. And in May, we repriced and extended our Term Loan B facility, which now matures in 2033. Also in May, we repaid the remaining $106.7 million principal balance of our 2.75% convertible notes due 2026, which eliminates 4.5 million potentially dilutive shares associated with the notes. And in June, we received approximately $225 million in funding from GLPI for the new Hollywood Aurora. We elected not to take GLPI capital in connection with the construction of our Hollywood Columbus Hotel Tower. Following these transactions to strengthen our balance sheet, our nearest maturity is now our $400 million 5 5/8 notes, which are due in January 2027. As we highlight on Slide 5 of our earnings deck, our near-term deleveraging goals have improved since we provided them in April, benefiting from an improvement in our cash flow outlook. Specifically, the $31 million increase in the midpoint of our retail adjusted EBITDA guidance flows fully into cash flow given our reiteration of our maintenance CapEx and other uses of cash for 2026. While we are reiterating our maintenance CapEx guidance of $220 million, 2026 project CapEx has been refined to $180 million from our prior $200 million guidance given a shift of some spend from 2026 into 2027, which brings our total 2026 CapEx guidance to $400 million from our prior $420 million forecast. We continue to expect total cash payments under our triple net leases to be $1 billion in 2026. For 2026 cash interest expense, net of interest income, we continue to project $150 million. And for cash taxes, our outlook is unchanged. We do not expect to be a cash taxpayer in 2026. Our fully diluted weighted average common share count at the end of the second quarter was 135 million shares. RSUs and stock options are diluted by about 2 million shares annually. And as I just mentioned, we repaid the remaining convertible notes in May, which removes the related dilution from the share count calculation going forward. I'll now turn it back to Jay.

Thanks, Felicia. With the second quarter under our belt, 2026 continues to be a year of strong execution for us, and I can't thank our team members across PENN enough. We delivered record quarterly retail segment revenue, raised our retail guidance, continued to improve Interactive profitability and further strengthened our balance sheet. During the remainder of the year, we remain focused on growing cash flow, reducing leverage, optimizing our corporate overhead and maintaining a disciplined approach to capital allocation. And with that, Tasha, we can open up the line for questions.

[Operator Instructions] We'll take our first question from Daniel Politzer with JPMorgan.

This was going pretty quickly, so I think I got my math right, but the online sports betting or the interactive core revenues, I think you reduced by $40 million, but you did hold your adjusted EBITDA guide for $20 million loss. Can you kind of walk through the puts and takes to that a bit? And were there some cost savings and labor efficiencies in there that you'd call out?

Yes. There's labor efficiencies. We continue to find efficiencies in our cost structure related to technology as well as we look at third-party vendors. And of course, our marketing expenses are down as well. So it's mainly marketing and cost structure improvements.

Got it. That makes sense. And then on the land-based side, obviously, some strong margin improvement there. As you think about kind of the rest of the year and the cadence, I think usually, first quarter through third quarter, it's roughly the same and you step down in fourth quarter, but you have the properties that you recently opened continuing to ramp. So can you give us an idea of how to think about margins and the expansion from here going forward?

Yes, happy to, at least as it relates to the second half of the year. So we beat on revenues, 4% EBITDAR, 6% in the second quarter, and that's exactly what we're guiding to do in the second half of the year as well, kind of just mirroring on a year-over-year basis, the performance in the second quarter. So I think I would look at that the same way for third quarter and for fourth quarter. To your point, Dan, fourth quarter is the lightest revenue, lightest EBITDAR and lightest margin quarter of the year, but we would expect to see the same 4% revenue, 6% growth -- sorry, EBITDAR growth in the fourth quarter. So from -- if you sort of shake all that out, our margins -- EBITDA margins were higher by about 55 basis points in the second quarter year-over-year, and we're anticipating the second half of the year to be right around 50 basis points improvement, both third quarter and fourth quarter, if that makes sense.

We'll take our next question from Brandt Montour with Barclays.

So I wanted to start out with iCasino. Obviously, you called out iCasino first grew quarter-over-quarter, year-over-year. It's hard for us to see it in the reported numbers, right? We see iGaming reported down slightly quarter-over-quarter and the overall iGaming growing low single digits year-over-year, but we know that's not the same mix. So could you just kind of maybe flesh out iCasino first growth cadence and trajectory to help us get a sense for how the back half could trend?

Yes. So we're seeing strong growth on our standalone casino product, and we have since we launched. So the somewhat softness there is related to the play from our sportsbook app where people are cross-selling into casino. And so the volume softness there has affected revenue there. But we still feel really good about our standalone business and casino through the end of the year.

Okay. And then on the overall sports business, Jay, you gave us some qualitative commentary on hold with the overall message that hold was an impact. Any way you could maybe quantify that just given we're dealing with small numbers here on a net basis, and so it could actually swing the complexion of the overall digital results here.

Yes. We -- the quick math, easy math on that is it's roughly $3 million impact hold for the quarter. So we would have been closer to a $6.5 million loss had we come in flat year-over-year on hold.

We'll take our next question from Barry Jonas with Truist.

Curious if you could maybe just give a little more color about the Aurora ramp relative to Joliet. And then as we think about Council Bluffs, given all the similarities with Joliet, should we expect a similar ROI and ramp there as well?

Yes, I'll tackle the second one first just because it's top of mind. I would say, yes, with regard to the similarities between Council Bluffs and Joliet, budget, programming, design. And I think even from a ramp perspective, we would expect, just like we did for Joliet to sort of get those margins where you would expect them to be maybe by month 12 to month 15. We're getting really close, I think, on the Joliet side now. We're anniversarying the opening of that property here in a matter of days. And we're happy with the trajectory of the margins. You see some of that in the Midwest segment where we had a really strong quarter. So I think so from a -- as you're thinking about Council Bluffs in '28, that's probably going to be the best property and the best model to look at in terms of how Joliet ramped over time. Aurora, remember, we have a hotel now 225 rooms. We did not have a hotel at the old location. So we are seeing really strong demand from VIP segment, customers that we did know, but we're seeing much higher play when they visit us now because they're staying in the hotel. We're seeing an uplift of over 20% when they stay in the hotel from what their worth was previously at the old facility. That's, I think, very good news. When Joliet first opened, if you recall, the growth on a year-over-year basis was kind of in that 55% to low 60% year-over-year. It's been growing -- since then, the last several months have been closer to call it, 75%, 80% year-over-year. And it's only 1 month. So I don't want to underwrite this, but just in sharing what we're seeing in the business. Certainly, we're happy with the results, and we shared some of the KPIs for Aurora, but the business has almost essentially doubled in the first full month. Again, things will settle. You get some benefit of everybody coming to see the property in that first month, but we're very pleased with what the response has been and the feedback we're getting is very positive.

That sounds great. Just as a follow-up, Yesterday, we heard from a large OSB operator that they're going to be leaning into reinvestment. I'm not sure what other competitor responses will be, but maybe just comment on that, if anything in your interactive strategy could change as a result? Or do you see any potential risk to your financial outlook depending on how this plays out?

Yes. It's a good question. We read or heard the same commentary. I guess, the way we're thinking about it, Barry, it hasn't changed in terms of our approach because we anticipated football season being quite the arms race this year. You're going to have prediction markets that are targeting customers for the first football season ever given the time line of when they actually went live was close to Super Bowl last year. So we already assumed it was going to be a very aggressive irrational marketing spend, advertising and new customer acquisition approach this football season. I think this just speaks to it being aggressive not only from a prediction market standpoint, but maybe some of the incumbent OSB digital-only players as well. So it doesn't change the way we're thinking about it. I think it is a very competitive marketplace out there right now. Michigan is a good example. It's been quite the aggressive environment there with a couple of private operators that have launched in the last couple of quarters, and we've held up quite well in Michigan. And so we would expect to hold up well in football season. We already assumed in our projections for the remainder of the year that it would be very competitive, and we think we're faring quite well in states like Michigan, where we're already seeing an environment like that.

We'll take our next question from Joe Stauff with Susquehanna.

First question I wanted to ask you is, just to clarify, I don't think so, but within your guide for the year on retail, are you assuming anything with respect to potential benefit in Pennsylvania following the Supreme Court ruling?

We are not building any of that in, Joe. We -- the way that we guided, we basically guided the beat in Q2 and then an incremental $10 million for the second half of the year is the quick math there. And we're coming off of a strong month in July. So I mean one of the things -- the questions that we have been fielding in some investor meetings was is the first half of the year as good as a guess kind of thing for regional gaming because of the tax return being higher this year. And I would say, certainly within our portfolio, we don't believe that's the case. And we have a slide in our presentation that lays out the tailwinds and sort of the lack of headwinds coming at us right now, and we do feel that momentum continuing into the second half of the year. But that's the quick math on the guide.

And what do you think about like any tailwind that you might expect, say, in Pennsylvania, whether it be in the fourth quarter? I know there's an October 15 deadline or maybe that is some sort of tailwind in '27?

I think it's a good question, Joe. I don't want to sort of bake it into our assumptions until we know how this plays out. Recall that when the Supreme Court ruled those skill games to be illegal, they gave the legislature 120 days to try to figure out if there's going to be enabling legislation to regulate and tax. And so we have to see how that plays out. We obviously have a big seat at the table. We have 4 land-based casinos in the state of Pennsylvania and are well connected in Harrisburg. So I think we'll just have to see how that plays out over the course of the next -- I think the date is sometime in October.

And if I could just squeeze...

Real quick, sorry. I would say along to your question, Missouri did come to a similar conclusion. The Attorney General in Missouri has been doing a great job of shutting down these skill-based gains. I don't think it's by coincidence that our Missouri properties have been performing very well over the last couple of quarters, not that they haven't previously, but the last couple of quarters, our results in St. Louis and Kansas City have been very strong.

Yes, I appreciate that. And if I could just squeeze something in. Is there -- Aaron, is there anything different within, say, the Alberta kind of operating framework that would suggest that you couldn't get a similar amount of share that you have in October, Ontario in Alberta?

I don't think so. I mean, first of all, our product has never been better. We're going into a competitive market, but we're spending aggressively relative to what we did in Ontario. And early results from a handle perspective, even though it's a slow sports calendar are very encouraging. So we anticipate to be very aggressive, and we hope to have the same and similar market shares to what we enjoy in Ontario. That's the focus, and it's looking good so far.

Yes. Certainly, that's our target, Joe, to your point. And so we figure with it being a more competitive sort of starting gate in Alberta that we needed to be a little bit more aggressive in our spend per capita, and we're feeling good about that decision so far.

We'll take our next question from Jordan Bender with Citizens.

There's been a couple more assets that have been put up for sale at least publicly on the retail casino side since the last time we spoke. So curious to get your temperature on M&A? And could you look to Vegas just kind of given what you know today?

Yes, it's a good question, Jordan. I mean, look, I'd like to be in the position that we are right now at PENN, where we have several compelling options as we think about capital allocation. This year, the big focus has been on delevering, and we're having some real quality and conversations with long-only investors about the balance sheet and the direction of our leverage profile. And that's going to continue to be a big focus for us at PENN to get that lease adjusted net leverage down below 5x. We're heading there quickly, which is great as you look out to the end of the year and certainly in early 2027, get that traditional net leverage down below 2. Again, we're headed there very quickly. So that's clearly a priority for us. We'll continue to be certainly over the next 12 months. Share repurchases continue to sound and look very good. Our free cash flow yield on 2027 consensus is still sitting pretty close to 20%. That doesn't make sense to me, but certainly makes buying back shares a lot more attractive anywhere in those sort of mid- to high-teen levels, and that's where we've been trading. And then lastly, we're -- it's early, but we've been very happy with the results with these 4 growth projects, and we do have other growth projects that we've been analyzing, 3 right now that we're feeling really positive about. And we believe that there's a level of predictability with those investments because we've done it before. I think we know what to expect. It's a little bit more proven versus you're taking a shot on M&A, it's less proven. So in terms of what the return profile will be. So it's not to say that we wouldn't look. It's just to say that we're probably, in that case, going to wait for an inbound, and it's going to have to check several boxes for us. It's going to have to, with a high level of confidence, deliver a better return than what we can do in some of these other capital allocation categories. And I think it's also going to have to be something that adds strategic value for us in terms of like geographic location as it get us to a new market or a bigger presence in a market that we enjoy being in.

Great. I appreciate that color. And then a follow-up on the iGaming side of the business, it seems like a big focus, especially in the back half of the year. Can you just kind of talk to as you think about your investment or your customer acquisition within iGaming, how are you focusing that on direct versus cross-sell from sports into iGaming?

Well, we're going to continue to focus on growing casino. Clearly, standalone is on a hot growth path. We're going to lean into that. Casino in general, has very attractive CACs, customer acquisition costs. So we're exploiting that currently. On the Sportsbook side, we are planning to grow through the end of the year. If you remember, we rebranded from ESPN BET to theScore Bet in December. And as sort of that audience normalizes, what we've realized is theScore brand, while still small and growing in the U.S. is very loyal. And so we're taking care of those users. We saw a lot of engagement and reactivation through the World Cup, and we're keeping those people engaged through football. So we feel good there. So cross-sell should continue as the Sportsbook business grows as well, but very focused on Hollywood.