PENN Entertainment, Inc. (NASDAQ:PENN) Q1 2023 Earnings Call Transcript

PENN Entertainment, Inc. (NASDAQ:PENN) Q1 2023 Earnings Call Transcript May 4, 2023

PENN Entertainment, Inc. beats earnings expectations. Reported EPS is $0.45, expectations were $0.37.

Operator: Greetings! And welcome to the PENN Entertainment First Quarter 2023 Results Conference Call. During the presentation all participants will be in the listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations. Please go ahead.

Joe Jaffoni: Thanks, Frank. Good morning everyone and thank you for joining PENN Entertainment’s 2023 first quarter conference call. We’ll get to management’s presentation and comments momentarily, as well as your questions and answers. During the Q&A we ask everyone to please limit themselves to one question and one follow-up. Now, we review the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today’s conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as expects, believes, estimates, projects, intends, plans, seeks, may, will, should or anticipates, or the negative or other variations of these or similar words, or by discussion of future events, strategies or risks and uncertainties, including future plans, strategies, performance, developments, acquisitions, capital expenditures and operating results.

Such forward-looking statements reflect the company’s current expectations and beliefs, but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today’s news announcement and the company’s filings with the Securities and Exchange Commission, including the company’s reports on Form 10-K and Form 10-Q. PENN Entertainment assumes no obligation to publicly update or revise any forward-looking statements. Today’s call and webcast will include non-GAAP financial measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today’s press release, as well as on the company’s website.

With that, it’s now my pleasure to turn the call over to the company’s CEO, Jay Snowden. Jay, please go ahead. .

Jay Snowden: Thanks, Joe. Good morning, everyone. I have here with me in Wyomissing, our CFO, Felicia Hendrix and our Head of Operations, Todd George, as well as other members of my executive team who can help answer questions that you may have during Q&A. As for the first time as an official member of our PENN family, we’re also joined by Erika Ayers, CEO of Barstool Sports. As you know, we completed our acquisition of Barstool on February 17, and our integration efforts to-date have gone as planned, but more on that in a moment. First, we’re pleased to report that PENN delivered another solid quarter with consistent retail performance across most of our portfolio. Our properties prove to be more resilient than initially anticipated, given the increased supply in a few markets and the ongoing uncertain macroeconomic environment.

Turning to Slide 4 in our investor presentation, PENN generated first quarter revenues of $1.67 billion and adjusted EBITDAR of $478.2 million, with strong performance in our Northeast segment helping to offset softer year-over-year results in the South. As you’ll see on Slide 5 and 6, our retail EBITDAR margins were negatively impacted by approximately 100 basis points due to the regional shift in our gaming revenues year-over-year to the Northeast, which has a higher blended tax rate of approximately 42% versus the South, which is approximately 22%. And to a lesser extent, the settlement of certain property litigation matters. Looking beyond the first quarter, April really was a story of two halves. We started the month off slowly with the Easter weekend, but finished strong in the final two weeks, including having our Number 1 company-wide slot volume weekend of the year so far in the last weekend of April.

Given our Q1 performance combined with current trends, we are increasing our prior revenue guidance for the year to reflect the acquisition of Barstool Sports, while maintaining our current adjusted EBITDAR guidance. Felicia will be providing more color on our guidance in a few minutes. Turning to Slide 9, we generated over 350,000 new signups this quarter for our industry leading customer loyalty program, which is a 13% increase year-over-year. 63% of our Q1 database growth came from our online offerings. Notably, in Q1 we saw the strongest growth rates in our 65-plus year old age segment and rated theoretical revenue. These guests appear to be returning to more normal pre-COVID behavior of late and are responding well to our added amenities and continued improvements in our non-gaming offerings.

At the same time, the 21 to 44 year old age demographic was stable in Q1 year-over-year after very strong growth throughout 2021 and 2022 and continues to grow significantly when compared to 2019. This age segment has grown from 13% of total rated theoretical in Q1’19 to 18.5% in Q1’23. Our VIP Play also remains strong in Q1 with year-over-year increase in both guest count and frequency of visitations. The positive momentum in our database comes at a perfect time as we recently launched PENN Play, our enhanced and rebranded customer loyalty program, which is designed to help better align all of our brands under the PENN Entertainment umbrella and create a more seamless omni-channel experience. Some of the new perks include the ability for day-one customers to begin immediately earning meaningful rewards just by signing up.

In addition, members can now earn loyalty points across all of our business verticals, interactive, as well as retail gaming and

and in marketplace, featuring popular retailers where they can redeem gifts and earn tier points and PENN cash on everyday items. Members also have access to entertainment experiences with PENN partner brands including Live Nation and Choice Hotels. PENN Play is supported by our industry leading 3C’s technology, which we’ve talked about before and which is currently deployed at 21 of our properties, collectively representing 70% of our retail EBITDAR. We’ve grown our total PENN Wallet customers to 195,000 and received $104 million in total PENN deposits as of the end of the first quarter. As we’ve emphasized in the past, those guests who use the digital wallet demonstrate superior loyalty through increased visitation, time on device and total theoretical.

And as you’ll see on Slide 11, our effective cross-marketing efforts, combined with our ability to deliver a seamless best-in-class customer experience has led to a significant increase in guests who engage with us across multiple channels, which is the key to our future growth. Our interactive segment saw revenue improvement during the first quarter, driven in part by our acquisition of Barstool Sports, as well as our recent Sportsbook launches, including Ohio and Massachusetts. In addition, as highlighted on Slide 17 and 18, we’re continuing to generate impressive results from theScore Bet and iCasino in Ontario, where we’re live with our fully-owned best-in-class tech stack, which has helped generate record gross revenues from sports betting in March and six-month retention rates that are 118% higher than the U.S. On the iCasino side in Ontario, we had our ninth consecutive record month for GGR through March, and 26% higher online sports betting to iCasino cross-sell than in the U.S., which we attribute in large part to our in-house promotional engine.

Our success in Ontario provides us with a blueprint for improved performance for the Barstool Sportsbook and Casino after we complete our migration to this platform in July. Having full control of our product roadmap in the U.S. will enable us to connect with our customers on a more personalized level and quickly add new features in betting markets to the Barstool Sportsbook, while also enhancing our iCasino products with new content and bonus mechanics. In addition with an improved customer experience post migration, we will be well positioned to drive stronger loyalty and retention, while offering seamless crossplay in our omni-channel ecosystem. As I mentioned at the outset of our call, our integration efforts with Barstool Sports thus far has been going very smoothly, and we’ve enjoyed exploring new opportunities for growth across numerous verticals.

On the media side, Barstool demonstrated strong audience and viewership growth in the first quarter, achieving record cross-platform views, up more than 40% from the prior year and growing more than 60% in both YouTube subscribers and TikTok followers. During the quarter, Barstool Golf’s new partnership with the PGA tour also led to co-brand and merchandise with the players in waste management tournaments. Meanwhile, theScore’s mobile business is also delivering strong results in both revenue and engagement metrics, with total user sessions up 22% year-over-year. theScore’s award winning Digital App, Media App is providing its highly engaged audience with up-to-date scores, news, community chat features and betting lines, proving to be a perfect second-screen for watching live sports and another strong acquisition funnel for our retail and digital offerings.

And with that, I’ll now turn it over to Felicia.

Felicia Hendrix : Thanks, Jay. We reported another solid quarter. Our retail properties generated adjusted EBITDAR of $511.2 million and adjusted EBITDAR margin of 35.5%. The combination of a stronger mix of revenues from our high-tax geographic segments, combined with the settlement of certain property litigation matters, created a headwind of roughly 100 basis points to the first quarter ‘23 adjusted retail EBITDAR margin. Our interactive segment EBITDAR results of a loss of $5.7 million reflects our January 1 sports betting launch in Ohio, our March 10 launch in Massachusetts, and low-holds in January and February. Roughly half of the loss was due to low-holds and half was attributable to Barstool Sports due to seasonality in the sports calendar.

With the acquisition of 100% of Barstool Sports on February 17, we now record 100% of Barstool Sports revenue and EBITDAR in our interactive segment. As we show on Slide 7 of our slide deck, our total first quarter ‘23 revenues include $28.2 million from Barstool Sports post acquisition. As a reminder, previously with our 36% interest in Barstool Sports, we did not record any Barstool revenues on our P&L and only recorded our portion of Barstool’s net income or loss, including adjustments to our interactive segment adjusted EBITDAR one quarter in a year. I’d like to take a moment to talk about the cadence of Barstool Sports revenues, as their business media is obviously different from gaming. The first quarter is Barstool’s weakest quarter given that Ad Sales start the year soft, and the third and fourth quarters are the strongest quarters due to the ramp of Ad Sales as well as the Sports Calendar.

So as you think about modeling Barstool, I would keep this cadence in mind. Now regarding overall company guidance, our new revenue range is $6.37 billion to $6.81 billion, up from the prior $6.15 billion to $6.58 billion, and assumes revenues of roughly $220 million to $230 million from Barstool for the year from the time of the 100% acquisition on February 17. On a full year standalone basis, we expect Barstool to generate 2023 revenues of approximately $250 million. Regarding EBITDA, our 2023 guidance of $1.875 billion to $2 billion is unchanged given first quarter performance and our expectations for Barstool Sports EBITDA to be breakeven for the year. Our land-based Casino outlook continues to take into consideration new competition in Nebraska, Kentucky and Lake Charles and ongoing competition in Chicago Lands, and also continues to imply a retail EBITDA margin of approximately 36%, given the competition, gaming tax mix and the economy.

For our interactive segment, we expect the fourth quarter to be profitable, while the second and third quarters should look very similar to each other. Given the like sports calendar build up to our migration in the second quarter and our third quarter ramp into football season on our new technology, the losses in the second and third quarter should be greater than the losses we reported in our interactive segment for the first quarter, with the fourth quarter more than offsetting the year-to-date cumulative losses from the first through third quarters. Now, onto the numbers. Corporate expense in the first quarter inclusive of cash settled stock-based awards was $26.3 million. Cash payments to our REIT Landlords was $233.2 million; cash taxes were $1.1 million and cash interest on traditional debt was $46.4 million.

Total CapEx was $63.2 million of which $9.2 million was project CapEx, mostly associated with our four new development projects. Our fully diluted weighted average common shares outstanding as of March 31, 2023 was $169.5 million, which reflects $2.4 million shares issued for the purchase of Barstool Sports. There are a few additional items on our P&L that I’d like to call out, the details of which you will find in our 10-Q filed later today. For the quarter, we reported again on the Barstool Sports acquisition of $83.4 million, reflecting an adjustment to fair market value. We also reported a gain on REIT transactions of $500.8 million, which reflects a net benefit to our balance sheet following the amended and restated PENN Master Lease and the subsequent lease reclassifications associated with our four new growth projects.

You’ll likely notice the impact of the amended and restated PENN Master Lease on our income statement. The majority of the year-over-year increase in G&A, all of the year-over-year decrease in D&A and the majority of the decline in interest expense are all due to the lease reclassifications. Importantly, none of these changes affect our cash rent payments to GLPI or VICI. To further help you with your modeling for 2023, we expect ’23 corporate expense of roughly $105 million, inclusive of our cash settled stock based awards. Total CapEx for 2023 and all of its components is in line with our prior guidance of $388 million net of insurance proceeds. For cash interest expense, we forecast $133 million for the full year 2023 after roughly $30 million of interest income.

Cash taxes will be roughly $155 million for full year 2023 and our weighted average fully diluted common share counts for ‘23 assuming no further share repurchases is projected to be $169.1 million. We repurchased $1.6 million shares in the first quarter for $50 million, at an average price of $30.36 per share. Subsequence to quarter end we repurchased an incremental 647,000 for $19 million or $29.21 per share. We have $80 million remaining under our February ’22 authorization and $750 million remaining under our December ‘22 authorization. In the first quarter we ended the year with $2.3 billion in liquidity, inclusive of $1.3 billion in cash and cash equivalents. Traditional net debt at the end of the quarter was $1.4 billion, an increase of roughly $300 million from December 31, 2022 due to a lower cash balance reflecting a net cash payment of approximately $315 million for the acquisition of Barstool and recent activity under our share repurchased program.

We ended the quarter with lease adjusted net leverage of 4.6x compared to 4.4x on December 31, 2022. 85% of our debt is fixed rate if you include our leases, and our nearest debt maturity is in 2026. We expect our least adjusted net leverage to end the year at roughly 4.5x. And with that, I’ll turn it back to Jay.

Jay Snowden: Thanks Felicia. In closing, I want to call special attention to our 2022 Corporate Social Responsibility Report, which was published on April 25, and is available for download on our website. I’m really proud of how much our ESG initiatives have grown over the last two years since we had issued our first report. I want to thank the members of our ESG and Diversity Committees, as well as our Boards Nominating and Governance Committee, which helps to oversee and guide our efforts and all of our property and interactive leadership teams across the country for their continued support of our ESG journey. Slide 22 detailed some of our most recent activities including holding numerous events to drive open and meaningful conversation around DE&I, providing disaster relief to those affected by tornadoes in Mississippi and Barstool’s efforts to help raise awareness for mental health issues on college campuses.

So before I turn it over to the operator, I just wanted to extend a giant thank you to all of our retail Casino interactive and media team members for continuing to give us 110% every day, and provide best-in-class service and experiences to our customers, guests and fans across North America. And with that Frank, I’ll turn it back over to you to open it up for questions.

Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question comes from Barry Jonas with Truist Securities. Please proceed.

Operator: Our next question comes from a Joe Greff with JPMorgan. Please proceed.

Operator: Our next question comes from Carlo Santarelli with Deutsche Bank. Please proceed.

Operator: Our next question comes from Shaun Kelley with Bank of America. Please proceed.

A – Jay Snowden: Yeah, I’ll hit that first and then Erika can jump in onto the second part of your question summer. We’re obviously not commenting on personnel issues on the call or publicly; something that happened inside the company that we dealt with. We felt like we dealt with it appropriately, and I would also say that you’ve been following us and the relationship and I think the public markets and financial community has gotten to know Barstool pretty well over the last three plus years and there’s going to be some drama sometimes. There’s going to be some things that pop up here and there and we’ll manage through those as we always have. It’s one of the strongest sports media brands certainly in the U.S. if not the world; its high growth.

We’ve got tremendous people at Barstool, tremendous IP, great leadership, and have a very exciting future ahead of us. But Ericka, feel free to jump in on any of the cultural questions or anything else that you want to address.

Operator: Our next question comes from Chad Beynon with Macquarie. Please proceed.

A – Jay Snowden: Yeah Chad, I would say that it’s obviously well covered, well documented. It looks like there’s probably no movement here in 2023. There absolutely could be in 2024, it’s really hard to handicap, because it does depend on a number of factors, probably well-known but not worth getting into on a year-to-year basis. I think the way we think about this is that it’s only a matter of time and the states that have already legalized online sports betting, that is online gambling, and so online Casino is very likely to come. It’s a question of what does that cadence look like? Is it staggered? I think once you get a state or two in the Midwest, it usually becomes an arms race for tax revenue purposes and so it’ll probably start to move faster once you get to Indiana, Illinois or Iowa, it will probably start to move from there, so nothing eminent.

I’m not going to try to bring out a crystal ball and say exactly what that might look like in ‘24 or ’25. I would say that from our perspective, given the timing of our technology and product migration this summer, this is actually setting up quite well for us, because we have an inferior product today and we don’t believe that’s going to be the case the second half of this year and as we head into ’24. We’re going to be in a position to be able to launch, standalone online Casino Apps and today it’s all mixed in with what we do on the online sports betting side. And so we’ve got a lot in front of us that’s exciting, and so the timing of legalization being maybe pushed off to ‘24, ‘25 and start to really roll from there, we think that sets up very well for PENN.

Operator: Our next question comes from Ryan Sigdahl with Craig Hallum Capital. Please proceed.

Operator: Our next question comes from Bernie McTernan with Needham & Company. Please proceed.

A – Jay Snowden: I think Bernie, we might do that down the road, but I think it’s too early and we’re trying to keep the results within the Interactive at a pretty high level. So I would say more to come. As you would imagine advertising is the biggest driver, but we’re not going to get into exact breakdowns on the revenue mix today.

Operator: Our last question comes from John DeCree with CBRE. Please proceed.

Jay Snowden : Thanks John and thank you all for dialing in this morning and we look forward to speaking with you again next quarter. Have a good one!

Operator: That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day everyone!