Bally’s Corporation (NYSE:BALY) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: Good day, and thank you for standing by. Welcome to the Bally’s Corporation First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. I’d now like to turn the call over to Jeff Chalson, VP of Corporate Development and Strategy for Bally’s. Please go ahead, sir.

Jeff Chalson: Good morning, and thank you for joining us on today’s call. The earnings release and presentation that accompany this call are available on our website in the Investor Relations section at www.ballys.com. With me on today’s call, our Chief Executive Officer, Robeson Reeves; George Papanier, Bally’s President; Bobby Lavan, outgoing Chief Financial Officer; and happy to welcome Marcus Glover, incoming Chief Financial Officer; pending regulatory approval. In addition, we are joined by Jaime Patel, Vice Chairman. Before we begin, we would like to remind everyone that comments made by management today will contain forward-looking statements. These forward-looking statements; include plans, expectations, estimates and projections that involve significant risks and uncertainties.

These risks are discussed in the company’s earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. In addition, during today’s call, management will refer to certain non-GAAP financial measures. Reconciliations to the most comparable financial measures are included in the schedules contained in our earnings release. We do not provide a reconciliation of forward-looking non-GAAP financial measures due to our inability to project non-recurring expenses and one-time items. Today’s call is also being broadcast live on our Investors’ website, and will be available for replay shortly after the completion of this call. Let me hand the call over to, Robeson.

Robeson Reeves: Thank you, Jeff, and hello, everyone. Before diving into our quarterly results, I’d like to address this morning’s press release announcing a number of changes to our senior management team. Bobby Lavan, our Executive Vice President and CFO, is leaving Bally’s to explore another opportunity. I would like to thank, Bobby for all his contributions, you will truly be missed. At the same time, I am pleased to welcome Marcus Glover as Bally’s incoming Executive Vice President and Chief Financial Officer, pending regulatory approval. Marcus, will lead us in the next stage of our growth, drawing on a deep operational gaming experience in financial acumen. Marcus, would you like to say a few words?

Marcus Glover: Yes. Thank you, Robeson. It’s a great time to join Bally’s. I’ve spent roughly two decades between Caesars and MGM, holding leadership roles across all functional areas. We have a great group of professionals at Bally’s, and I look forward to leveraging my experience and partnering with our team as we build upon the foundation that is in-place. Thank you, and back to you, Robeson.

Robeson Reeves: Marcus, thank you. I’m excited about what we can do together. Further, Charles Diao will be joining as Senior Vice President, Finance and Corporate Treasurer, reporting into Marcus, also pending regulatory approval. Rounding out these organizational changes, Jaymin Patel, a well-regarded Gaming Veteran and current Board member of Bally’s, was appointed Vice Chairman and will Chair the Operational Integration Committee, which is a newly created Board Committee that will focus on strengthening global processes for streamlining operations and reducing costs, as well as the creation of a global, coordinated corporate center. With that said, I am extremely pleased to report a very strong quarter for the company overall and discuss our achievements since I took over as CEO.

As you know, we’re now several months since my tenure, and I’ve had a chance to review each aspect of our business using the data driven analytical approach, I promise when I became CEO. I’ve also gotten to know our shareholders and stakeholders on a deeper level. While we are never satisfied and can always be stronger, I continue to be wholly impressed with our team globally. My excitement for the progress we have made towards the integration of Bally’s internal systems and its three operating businesses has never been greater. Over the past two weeks, there have been several positive material changes to our business operations. First, as I’m sure you are all aware, on Thursday, April 27, the UK government released its white paper review of the 2005 Gambling Act.

After four years of ongoing consultation, we are pleased this has been released, and we hope it will bring some clarity to UK gambling operators. We continue to review these proposed measures and will work constructively with both the government and Gambling Commission to find an effective solution, which ensures the reforms are appropriate and guarantee a safe and sustainable future. We are in a strong position, as we have been preparing our business strategy and compliance. We have already implemented several voluntary changes that are aligned with the white paper, including betting limits and so on. The regulatory framework in the UK has created a dynamic where smaller players are enabled to compete, leading some to exit, allowing larger players who are already highly compliant to consolidate the market and gain share, a trend we have highlighted before and which we believe will continue into the future.

We embrace regulation and recognize that gaming is a public private partnership. Secondly, on Tuesday, May 2, we announced partnership agreements with Kambi and White Hat Gaming, fulfilling our promise to partner with best-in-class technology providers to drive our North America sports betting platform. The North America infrastructure we had in-place for sports was inefficient. I own that. And with these new partnerships in-place, our cash burn and development costs will go down sharply. Our spend will be performance driven. In the future, as the sports product scales, we have the opportunity to acquire a license to a limited part Kambi’s online and retail technology source code at our option. We will evaluate this as our North American sports betting business grows.

These partnerships will leverage Kambi’s and White Hat’s proven technology integration and track record of executing quick launches to support the expansion and enhancement of Bally’s online and retail sportsbooks, driving further customer engagement with the Bally’s brands. Kambi will provide its suite of omni-channel products, trading capabilities, content solutions and liability management to deliver online and retail sports betting entertainment. While, White Hat will supply its PAM Solution which includes, its proprietary cashier, multiple RGS integrations and its traveling wallet. Bally’s intent to derive deal synergies by integrating these technologies with our state-of-the-art data and marketing technology stacks playing to our strengths.

As a result, we will significantly reduce the fixed costs associated with powering Bally Bet’s OSB platforms by transitioning to a variable cost model based on a percentage of net gaming revenue generated. These cost savings coupled with driving further engagement in the Bally’s brand will better position the company to deliver near and long-term results for investors, while simultaneously reducing our economic risk. Importantly, as mentioned above, we have also reserved the rights to acquire a license to a limited part of Kambi’s online and retail technology source code is certain performance metrics are achieved in the future. By the end of 2023, Bally’s anticipates that these partnerships will provide omni-channel support to power Bally Bet’s platform across seven states and at four retail gaming locations.

It is our intention to also leverage these partnerships globally, as we consider launching OSB in the UK and Europe as well. Post our OSB re-launch, we’ll be back on a path to diversify our revenues and EBITDA streams with ample cross-sell opportunities between our retail and digital businesses. This in turn will support our vision of becoming a premier, full service vertically integrated casinos and resorts online sports betting and iGaming company, allowing us to leverage our Bally’s brand globally. Turning to our operating segments. The Casinos & Resorts segment continues to show its strength despite certain markets being severely impacted by inclement weather such as Lake Tahoe, which was hurt by unprecedented snowfall, and Evansville, which was impacted by tornadoes late in March, as George and his team continue to execute at an extraordinary level.

In fact, we generated record 1Q revenues of $329 million, that’s up 9.4% year-on-year and EBITDA of $105 million. We’re starting to see the full benefits of the casino assets we acquired last year being integrated into our business and property improvements and cost controls we have been implementing throughout the portfolio taking hold. Importantly, as we discussed earlier this year, our portfolios near-term CapEx cycle has peaked as several of our growth projects have come to or are nearing completion. This includes our upgrade of our flagship Twin River’s casino in Lincoln, Rhode Island, which was finished in April, and as a Kansas City expansion spend comes to an end this summer, our progress in Atlantic City should also be noted. We are certainly on our way to delivering consistently strong operating performance for the foreseeable future.

We look forward to the opening of the Chicago temporary casino in late summer 2023, which is on-track to generate $50 million plus EBITDA in 2024. We’ll also advancing the full build of Bally’s Chicago permanent facility, which is expected to open in 2026, which has an estimated run-rate in excess of $250 million EBITDA. We believe there is unquestionable pent-up consumer demand for this project, and we couldn’t be more excited to begin producing results. Our core casino and resorts customer remains highly resilient despite rising economic headwinds with trends in April remain inconsistent with the 1Q results, outside of a slight calendar shift. While we’re keeping a close eye on spending trends and the health of the consumer generally, we haven’t seen any signs of material impact on our business.

International Interactive had a strong start to the year with continued content, marketing and jackpot optimizations taking place. The UK business has remained strong, growing 9.6% in the first quarter on a constant currency basis well ahead of the market. The formula of ARPU up, FTD’s up, while CPA is significantly down, is playing out and will drive performance throughout the rest of the year. April results are up 13% year-on-year. In Asia, the changes we have implemented over the past several months continue to produce results with trends remaining positive in the quarter, despite facing difficult comparisons. Note, comparisons do get easier from here. While International Interactive margins settled in the low mid-30s from the record 39%, we generated in 4Q, we believe we can sustain margins at or above these levels as the changes we have implemented are structural.

This is inclusive of our plans to reinvest in our core UK including launching the Bally’s brand and the OSB and Japan businesses. We also seek growth opportunities in rest of Europe, Asia and rest of world, including Brazil. Turning back to North America Interactive, we continue to be iGaming first. We’re executing well in New Jersey where our shares surpassed 4% in February, well on our way to achieving our 6% to 8% longer term share goal. Ontario continues to progress and we’re excited to launch in Pennsylvania in May. Overall, our iGaming business is generating positive returns and we are very optimistic about this. We also look forward to potential iGaming legislation in Rhode Island, as the bill was recently introduced into the legislature.

In summary, our goals for the remainder of 2023 include opening the Chicago temporary casino on time and on budget this summer. Raleigh, North America interacted in a profitable way, including increasing our iGaming market share. Launch OSB in seven states and in markets outside of North America. Harness our omni-channel data capabilities and grow the Bally’s brand globally. It is important to note that in addition to the above initiatives, we remain keenly focused on growing our revenues and EBITDA for our core Casinos & Resorts and our International Interactive segments. Before turning to Bobby, I’d once again like to thank him for his leadership and contributions and wish him well in his next endeavor. Bobby, over to you for a review of our financial results.

Robert Lavan: Thanks Robeson. Moving to the segment details. For the quarter, we are pleased to have achieved strong results across all three of our segments, Casinos & Resorts, International Interactive, and North American Interactive. We generated revenues of $598.7 million plus 9.2% year-over-year. Adjusted EBITDA of $126.4 million plus 10.2% year-over-year despite, higher rents in the quarter, and adjusted EBITDAR of a $157.6 million after accounting for rent expense of $31.2 million. Our adjusted EBITDA margin was 21.1% versus 20.9% in 1Q, ’22, and our adjusted EBITDAR margin was 26.3%. Casinos & Resorts reported a $105.1 million of EBITDAR. This includes negative $800,000 of EBITDAR for Atlantic City. Excluding Atlantic City and Tropicana, which are lower margin properties, EBITDAR margins were 37.8% for the core portfolio.

EBITDAR margins were 32% compared to 1Q ‘22 EBITDAR margins of 29.1% for all casinos and resorts. Additionally, while most of the portfolio performed well, with strengthened our Rhode Island Properties, Atlantic City and Kansas City. Our results were negatively impacted by material weather disruptions in Tahoe. Similarly, towards the end of March, our Evansville property was negatively impacted by tornadoes, which struck the area. A cumulative effect of Tahoe and Evansville caused a $3.5 million shortfall at those two properties. Including the impact of both, we are still pleased with how Casinos & Resorts segment performed for the quarter. International Interactive generated $80.2 million of EBITDA at a 32.6% margin. The UK was plus 9.6% year-over-year, and international as a whole was up 7.2% on a constant currency basis.

Performance was driven by continued revenue strength in the UK, addition to content, marketing, and jackpot optimizations taking place. As we mentioned in our last earnings call, we continue to invest in the business. This includes launching the Bally’s brand across Europe. Inclusive of this incremental spending our long-term International Interactive EBITDAR margin targets remain in excess of 30%. North America Interactive generated a negative $10.5 million of EBITDAR. We continue to be iGaming first and are very pleased with the performance year-to-date in New Jersey. New Jersey is contributing over $1 million of profit contribution a month, and growing as we scale into certain variable cost service providers, lots of momentum here. Ontario continues to progress, but we are still tweaking certain aspects of the business, and we’ll be launching Pennsylvania in May.

Overall, our iGaming business is generating positive contribution margins, which we anticipate will continue to strengthen. Turning back to sports betting, as we announced on May 2, and as Robeson, talked about earlier, we’ve partnered with Kambi and White Hat Gaming to power our online and retail sports betting business, Bally Bet. Bally’s intends to integrate these technologies into our proprietary database and marketing technology stacks. By transitioning to a leased based partnership model, we’ve reduced our fixed cost and will now operate under a much more economical variable cost structure, based on a percentage of net gaming revenue generated. This is more efficient model and will better position the company to manage our risk by limiting our expenses, while preserving our upside earnings potential.

Additionally, our restructuring program we announced in January has gone deeper and there are cloud and infrastructure costs that we have not cut yet that we can reduce with the signing of Kambi. Bally Bet is expected to re-launch across seven states in a four retail gaming locations by the end of 2023, beginning in the very near-term. We will also leverage these partnerships in the UK and Europe as well. We continue to focus on profitability and cost cuts through our business segments, having incurred $16.8 million in restructuring charges in 1Q ‘23. The cuts were implemented quicker and deeper than originally anticipated, we’ve announced our restructuring plans for International and North American Interactive businesses earlier this year.

Today, we haven’t seen any material change in consumer spending patterns at our Casinos & Resorts outside of the specific weather impacts called out for 1Q and a slight calendar shift in April. We do begin to witness a material change. We have a handful of levers we can pull to maintain a strong profile. So, turning to guidance. With all the previous spoken, we are upgrading our guidance to tighten the range to $665 million to $700 million of EBITDAR. This reflects FX rates and our confidence in the strength of our business globally. It also considers our belief that the white paper released by the UK government, won’t have any impact on our International Interactive financial results. Corporate expense for the quarter came in $3.5 million higher than our expectations due to one-time cost and some carryovers from 2022.

We do not expect this to be the run-rate, and you should look at the run-rate back down to $13 million to $14 million. We’re reducing our 2023 capital expenditure guidance from $170 million to $160 million with maintenance CapEx at the casinos of $50 million, gross CapEx at the casinos of $70 million and we are lowering our software development cost projections for the year to $40 million. We continue to evaluate our software development cost and expect that to continue to shrink throughout the year. During the quarter, we repurchased 1 million common shares for an aggregate purchase price of $19.8 million. Separately, we also went into the market and repurchased $15 million of our face value 2023 — 2031 bond for $10.6 million. At the quarter’s end, shares outstanding were 45.8 million and we have incremental warrants options and other dilution of 13.8 million shares.

59.5 million shares outstanding is the right way to look at our capital structure, with more than $344 million of cash on our balance sheet and $3 billion of net debt as of the end of the quarter. We have ample liquidity to fund all of our announced projects and will invest with care in North America. Our long-term commitment is to be sub five times debt-to-EBITDA, which we continue to expect to hit in mid-2024. Lastly, as announced this morning, I’ll be moving on for another opportunity. I believe in the value of the Bally’s story, particularly Chicago, our iCasino growth trajectory, and a unique way we look at sports and growth in the International Interactive segment, not to mention the untapped real estate value in our portfolio. Thank you for your time and consideration, and I look forward to supporting Marcus and the rest of the team from the sideline.

Let’s open the call up to Q&A, operator.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from Barry Jonas with Truist Securities. Please go ahead.

Operator: The next question comes from Jeff Stantial with Stifel. Please go ahead.

Operator: The next question comes from Chad Beynon with Macquarie. Please go ahead.

Operator: The next question comes from Dan Politzer with Wells Fargo. Please go ahead.

Operator: The next question comes from Lance Vitanza with TD Cowen. Please go ahead.

Operator: The next question comes from Jordan Bender with JMP Securities. Please go ahead.

Operator: The next question comes from Ricardo Chinchilla with Deutsche Bank. Please go ahead.

Operator: It appears we have no further questions at this time. I will now turn the program back over to CEO, Robeson Reeves. Please go ahead.

Robeson Reeves: Thank you everyone for your time. We will speak to you all very soon and all the best, Bobby. And I’m glad we had a strong quarter. So, thank you for listening. Bye-bye.

Operator: This does conclude today’s program. Thank you for your participation. You may disconnect at any time.