Caesars Entertainment, Inc. (NASDAQ:CZR) Q3 2023 Earnings Call Transcript

Caesars Entertainment, Inc. (NASDAQ:CZR) Q3 2023 Earnings Call Transcript October 31, 2023

Caesars Entertainment, Inc. beats earnings expectations. Reported EPS is $0.861, expectations were $0.27.

Operator: Good day, and thank you for standing by. Welcome to the Caesars Entertainment Inc. 2023 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Agnew, Senior Vice President of Corporate Finance, Treasury and Investor Relations.

A wide shot of a casino in night light, picturing the high stakes of iGaming and sports betting.

Brian Agnew: Thank you, Josh, and good afternoon to everyone on the call. Welcome to our conference call to discuss our third quarter 2023 earnings. This afternoon, we issued a press release announcing our financial results for the period ended September 30, 2023. A copy of the press release is available on the Investor Relations section of our website at investor.caesars.com. As usual, joining me on the call today are Tom Reeg, our CEO; Anthony Carano, our President and Chief Operating Officer; Bret Yunker, our CFO; and Eric Hession, President, Caesars Sports and online gaming. Before I turn the call over to Anthony, I would like to remind you that during today’s conference call, we may make certain forward-looking statements about the company’s performance.

Such forward-looking statements are not guarantees of future performance. and therefore, one should not place undue reliance on them. Forward-looking statements are also subject to the inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our comments today, you should refer to the cautionary statements contained in our press release and also the risk factors contained in our company’s filings with the Securities and Exchange Commission. Caesars Entertainment undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that occur after today’s call.

Also during today’s call, the company may discuss certain non-GAAP measures as defined by SEC Regulation G. The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed, and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the company’s website at investors.caesars.com, by selecting the press release regarding the company’s 2023 third quarter financial results. With the disclaimer out of the way, I will now turn the call over to Anthony.

Anthony Carano: Thank you, Brian, and good afternoon to everyone on the call. We delivered the strongest consolidated adjusted EBITDA quarter in the history of the company, led by a new all-time quarterly adjusted EBITDA record in our regional markets, profitability in our digital segment and continued strength in our Las Vegas segment. All three segments grew adjusted EBITDA year-over-year. Starting with our Las Vegas segment. Demand trends remained healthy during the third quarter with occupancy increasing to 96.6% versus 93.6% in the prior year. Total Las Vegas segment revenues were up 4%, driven by higher occupancy and higher ADRs, which drove record cash hotel revenues, record gaming revenues and record food and beverage revenues.

Excluding real payments, our Las Vegas segment generated $494 million of adjusted EBITDA with a margin of 44%. During the quarter, our group segment also delivered an all-time Q3 record for adjusted EBITDA. As we look to the remainder of the year, Las Vegas continues to benefit from strong leisure and casino guest demand, a robust events calendar and the continued strength of the group and convention segment. We’re looking forward to the inaugural F1 race in November, the culmination of significant planning and infrastructure improvements executed by the city, in order to deliver a great event. Heading into ‘24, we are also excited for Las Vegas to host the Super Bowl in February, in addition to many other new and exciting events planned throughout the year.

Las Vegas continues to benefit from one of the strongest event calendars in the United States. In our regional segment, revenues were up 2% versus last year, and adjusted EBITDA grew to $575 million, the best regional quarter on record. Stable guest demand, combined with excellent performance from our completed capital projects and newly opened facilities helped to offset competitive pressures in a few of our markets. Our regional segment is benefiting from a diversified portfolio across the United States. Turning to our capital projects. We are anticipating a Q4 opening for our Harrah’s Hoosier Park property expansion, and we expect to have the new Versailles Tower rooms in Vegas, online by the end of the year. 2024 is a busy year, and we expect to complete the permanent facilities in Danville, Virginia and Columbus, Nebraska, as well as the new hotel tower and completely remodeled Caesars New Orleans project.

We are looking forward to a strong finish to 2023. Consumer demand remains strong, and our capital projects are winding down. We will continue to remain focused on operating cost efficiencies, harvesting returns on project capital and driving long-term EBITDA growth. I want to thank all of our team members for their hard work. Our success is a direct result of the dedication of our team members and their commitment to delivering exceptional guest experiences every day. With that, I’ll now turn the call over to Eric for some insights on the second quarter in our digital segment.

Eric Hession: Thanks, Anthony. During the third quarter, we delivered another positive adjusted EBITDA result and a significant improvement versus the same quarter last year. Caesars Digital generated $2 million of adjusted EBITDA versus a $38 million EBITDA loss last year, demonstrating significant and continued year-over-year flow-through improvements. Caesars represented a second consecutive quarter of EBITDA profitability in our Digital segment and makes us positive now on a trailing 12-month basis as well. During the quarter, online sports betting handle increased 14% and iCasino handle improved 38%. Revenues were negatively impacted by lower year-over-year hold in both our online sports betting and iCasino segments, which we believe to be temporary.

We continue to remain balanced with our promotional spend during the quarter with a focus on investing in our best customers, resulting in an overall promotional spend being among the lowest in the industry. During the quarter, we delivered our new stand-alone iCasino app, Caesars Palace Online, the product features enhanced game content and functionality in addition to facilitating segmented marketing. The results of which drove monthly GGR and NGR in its first full month of operation to a record. We anticipate realizing increasingly positive results in the months ahead. Turning to online sports betting. We launched several new product features for football, including SGPs for NCAA, a live streaming product for nationally broadcast NFL games, a bet with reward credits feature and improved payment options.

As we head into 2024, we believe that our product in both sports betting and iCasino are significantly improved from prior periods and quite competitive. We have an exciting and robust technology plan, which will have a focus on retention enhancements. I will preview these with you over the coming calls. But initially, we plan to continue to roll out our proprietary TAM, which will enable a shared wallet and to improve the customer experience through enhanced application stability, ease of use and app speed. We now offer sports betting in 30 North American jurisdictions, 24 of which offer mobile wagering. We also operate iCasino in six jurisdictions. I’ll now pass the call back to Bret for additional comments.

Bret Yunker: Thanks, Eric. Year-to-date, we’ve applied over $700 million of cash flow to debt reduction and the acquisition of the remaining equity interest in our Baltimore asset. Our leverage continues to reduce as we repay debt and grow EBITDA, with our total net leverage under our bank credit facility declining to 3.9 times as of September 30, resulting in a 25 bps reduction in our term loan A and revolver spreads to 150 bps over SOFR. Cash CapEx, excluding Atlantic City and our joint venture project spend, is expected to land at just over $800 million for 2023. We’re looking forward to posting a strong fourth quarter heading into 2024. Over to Tom.

Tom Reeg: Thanks, Bret. The group has detailed, it was an extremely strong quarter for us, all-time record for the company. Those of you who’ve been on calls, going back for quite some time. This should be a familiar story for you. Vegas remains quite strong in terms of headwinds in Vegas in the quarter. Know that we are accruing for the anticipated expenses that will come with the new union contract, which I will touch on a little bit more momentarily. We had Rio left the system on October 2. So kind of — went out the door, in terms of how it was performing in the third quarter. We had more significant disruption in the Versailles Tower than we anticipated. We thought we were going to keep a fair amount of it active. But as you open the walls of a building that is as dated as that particular building, you find all sorts of surprises.

We took the whole tower out of service, so fewer rooms, labor cost headwinds, Rio as a drag. We still beat year-over-year. The margin — the slight margin reaction you see is related to labor costs, as Rio comes offline October 2, you should expect us to recover that margin percentage, if not more going forward. I know there will be questions on the union contract. We are in active dialogue with the unions. I’m involved with the union. I’m involved personally in the discussions. I’m optimistic we will reach a solution. You’ve heard me say before, we have done quite well as a company post-merger, post-pandemic, our employees should and will participate in that. So you should expect that when we reach agreement on a contract, it’s going to be the largest increase that our employees have seen in the four decades since we started interacting with the culinary Union.

So that’s well deserved. It’s anticipated in our business model. And as I said, everybody should be participating in the results that we’ve been delivering. In terms of regional, I know that a lot of you are expecting fairly dramatic moves in terms of what’s happening with the customer. have been for many, many months, if not quarters, by this point. That’s not what we’re seeing. We’re seeing stability in the customer. We’re seeing weakness in properties that have competitive openings that we’ve named before, Tunica, Chicago market being chief among them. If you want to hang your hat on something that feels soft, Atlantic City feels soft, but that’s not particularly news at this point. The returns from our projects that have come online like Charles, Virginia, Horseshoe Indianapolis have been quite strong and have offset the weakness in the properties that are competitively impacted.

And as you saw, we set an all-time quarterly record for EBITDA and margin was stable. So we feel very good about regional, I would point to — moving forward New Orleans is in the midst of the significant construction project that we’ve got going on there. It’s particularly disruptive now and for the next quarter or two, basically one-third of the floor, the casino floor is tore up on any given day as we run — as we do the heavy work at that level, we topped off the hotel tower. We’re on target to open that expansion completely, well in advance of Super Bowl of ‘25. And we also have, obviously, F1 coming to Vegas, feel very, very good and no change in what we’re expecting in terms of lift in the quarter in the neighborhood of 5%, which is what I told you a year ago, we’d expect to deliver that.

At the high end, the amount of credit play that we have in the market, that week will exceed New Year’s Eve. So it’s an extraordinary event from a high-end perspective, Super Bowl and Vegas is filling in the same way, extremely strong high end as well. So we feel very good about those events. Digital, Eric touched on, our hold continues to grow in excess of 30%. You know that, that’s based on the way we’ve been operating, that’s not promotional-driven. That’s actual handle growth. We got dinged on hold in the quarter but still delivered a positive EBITDA quarter. We’re particularly pleased with the way the fourth quarter has begun in digital. Excited about the momentum that we’ve got in online casino now that we’ve launched Caesars Palace Online and what we’ll be able to deliver in the coming quarters.

As we have discussed, we are nearing the end of a significant capital cycle. So as New Orleans winds down, you should expect our project CapEx budget to come down. Our EBITDA is growing in both brick-and-mortar and digital. So our free cash flow is growing. We continue to use our free cash flow to pay down debt and reduce leverage. That’s what you should expect until we see leverage in the 4 times or below lease-adjusted area. So we feel very, very good about how the business is performing how it’s coming together, looking forward, we feel very good about what we see in front of us. We see, of course, the volatility that you see in share prices in the space, not just us. It’s not reflective of what’s going on in the business. And we’re just going to keep delivering numbers until that volatility subsides.

And we expect the market to recognize the value in our equity. And with that, I’ll open it up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Carlo Santarelli with Deutsche Bank. You may proceed.

Carlo Santarelli: Hey, guys. Thank you. Anthony, I believe you were talking about some of the event calendar for 2024 as it pertain to Las Vegas. I was wondering if you could perhaps provide — kind of an update on where you guys are in terms of group pace and how you’re thinking about kind of — in the year, for the year experienced this year relative to what you could perhaps see next year?

Anthony Carano: Yes. Thanks, Carlo. Group pace, as we said, set a record in this quarter, we see an extremely positive calendar going into getting better by the day. I think mix is around 15% to 16% this year, should pace up to about high teens next year.

Carlo Santarelli: Perfect. And then, obviously, you guys benefited from some of the favorable baccarat results in the market in the 3Q. I was just wondering, I mean, we’ve seen a pretty healthy stretch here of materially higher baccarat holds. Is there anything that your folks are noticing just in terms of the changing dynamics that we seem to be seeing coming out of — at least the Nevada published data as it pertains to baccarat?

Anthony Carano: No, we had a really good quarter in baccarat last quarter, Q2. Q3 normalized for us. We’re seeing a really strong return of the international customer, a diversified return of the international customer, and we think that will continue to grow this quarter with F1. A lot of interest in international for both F1 and the Super Bowl. And then anticipating a great New Year’s and Chinese New Year’s for next year, for international.

Carlo Santarelli: Great. Thank you.

Tom Reeg: Carlo, on a consolidated basis for the quarter, hold didn’t have a material impact one way or another for us.

Carlo Santarelli: Yes. No, no, no. No, I was just referring to the baccarat piece specifically and more of the market data that you — I think you guys said. Yes. Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from Joe Greff with JPMorgan. You may proceed

Joe Greff: Good afternoon, guys. I want to lead off with a question for Eric here. Obviously, a significant increase in iGaming, handle up 38% year-over-year, and that’s great. Can you talk about the path for growth from here? What are some of the drivers to continue that accelerating momentum, particularly when you think about other brands or reskinned apps and how that could drive growth there, Eric.

Eric Hession: Yes, sure. Thanks, Joe. Yes, we feel like from a volume perspective, we had a very solid quarter, both sports and iCasino, up 38%. And keep in mind, during the quarter, we didn’t have our app with the exception of basically for one month as we were putting it in for the first two months of the quarter. So again, most of the upside from the new app is going to accrue in the fourth quarter and into next year. We feel that there’s a lot of opportunity to improve the integration of the various game vendors that will give us more insight into the actual workings of the game and see what customers are playing and where the spins are. We also have an opportunity to improve our CRM. As we mentioned during prior calls up to about a couple of months ago, we weren’t able to do segmented marketing.

And so now with our new app and with some of the new technology, we feel like that’s going to really benefit us heading into next year. And then to your point, we are exploring the possibilities of adding another skin to the portfolio, as there are a number of states where we have additional licenses that we’ve reserved and would plan to potentially roll that out later in 2024. So all of those things contributing to the overall improvement, but what I would say is that the thesis of the new iCasino app is following exactly the script. We’re seeing a much higher percentage of slot players, which if you recall on our prior app, it was heavily table focused, and then as a result, we’re seeing improved hold in that particular app, which we think over time will ultimately create a whole lot more value for us.

Joe Greff: Great. And then a question for you, going back to Las Vegas in the third quarter, casino revenue flat year-over-year. Food and Beverage hotel and other, all up to varying degrees nicely year-over-year. Table game drop, was down 6%. Was there anything specific to there, Anthony, or Tom, that you would call out, in the Q you do reference that the Las Vegas segment had faced some challenges related to construction disruption and road work on the Strip. Obviously, it didn’t impact food and beverage and hotel to what extent was that a driver?

Tom Reeg: I mean you could name a lot of things that impact that, but a big impact on casino revenue has shifted mix out of your database or tour travel into group business. Those customers spend more money outside of the casino floor than those that they’re placing. So you’re going to see some of that, you wouldn’t really — and obviously, table games drop particularly in Caesars Palace, where we are today is dependent on when your big customers come and visit. And so there’s — I don’t want to say seasonality, but there’s volatility in that number based on when those customers show up.

Joe Greff: Great. And then just related to Las Vegas, Tom, do you think you benefited at all from a competitor’s cybersecurity issue, which may have hurt them or which definitely hurt them based on their disclosures. Did you have an outsized benefit that you would call out?

Tom Reeg: No, I wouldn’t call out a benefit, I would tell you. One thing I know for certain after this quarter is nobody benefits from a cybersecurity incident.

Joe Greff: Thank you, guys. Have a good day.

Operator: Thank you. [Operator Instructions] Our next question comes from Dan Politzer with Wells Fargo, you may proceed.

Dan Politzer: Hey, good afternoon. First, this is maybe for Tom or Anthony. As you think about next year and we’re kind of rounding out this year here, how do you think about the growth in the segment — between the segments as it relates to Las Vegas and regional, obviously, Tom, you mentioned in Las Vegas, you’re seeing the Versailles Tower, maybe shifted a little bit later than anticipated. And then in the regional segment, you have new properties ramping but also some new competition. So any high-level thoughts preliminarily as we think about the growth path here next year? Thanks.

Tom Reeg: Yes. So I’d say on the Versailles Tower, timing really hasn’t changed. What changed is, we had to take far more rooms out of service than we anticipated before we started opening up walls. We’ll still — as Anthony said, be getting rooms back before the end of the year. We think that’s a driver in Las Vegas. I would be — we’re in the middle of budgeting right now. And I would say if you’re budgeting modest growth in both Vegas and regional and significant growth in digital, you’re consistent with what we’re thinking.