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

PENN Entertainment, Inc. (NASDAQ:PENN) Q3 2023 Earnings Call Transcript November 2, 2023

PENN Entertainment, Inc. beats earnings expectations. Reported EPS is $1.21, expectations were $0.33.

Operator: Greetings, and welcome to the Penn Entertainment Third Quarter 2023 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations. Please go ahead.

Joseph Jaffoni: Thanks, Frank. Good morning, and thank you for joining Penn Entertainment’s 2023 Third Quarter Conference Call. We’ll get to management’s presentation and comments momentarily as with Q&A. During the Q&A, we ask that everyone please limit themselves to 1 question and 1 follow-up. Now I’ll review the safe harbor disclosure. 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 your host, Penn Entertainment CEO, Jay Snowden. Jay, please go ahead.

Jay Snowden: Thanks, Joe. Good morning, everyone. I have with me here in our CFO, Felicia Hendrix; and our Head of Operations, Todd George, as well as other members of my executive team, who can help answer your questions during the question and answer at the end. . And it was a pleasure to host many of you at our recent Investor Event at the M Resort in Las Vegas during G2E. For those unable to attend Mike Morrison, Head of Sports Betting and Fantasy Sports at ESPN and I spoke about our highly synergistic strategic alliance and the deep integration of ESPN BET across the ESPN ecosystem. I couldn’t be more pleased with the way our products and design, engineering, marketing and operations teams, ESPN and Penn, have seamlessly and tirelessly worked together to prepare us for this launch coming up on November 14 pending final approvals.

Yesterday, we released a teaser on the ESPN BET landing page featuring Sports Center anchor, Scott Van Pelt. If you haven’t seen it yet, there’s a link to the video on Page 10 in our investor presentation. And early last night, ESPN began exclusively using odds provided by ESPN BET for all editorial and other content. It’s all very exciting, but more on that subject in a bit. First, I will cover our results for the quarter. As provided in our earnings release, Penn generated third quarter revenues of $1.62 billion and adjusted EBITDA of $445.1 million and adjusted EBITDA margins of $27.5 million. Our property level performance was stable during the quarter, reflecting solid customer behavior, particularly from our rated traditional core customer.

We also saw the continued return of our 65-plus demographic and moderate growth in our spend per visit trends. All of this helped to offset softness in our unrated business in the South region, a couple of major road construction projects and increased supply in several markets, which we’ve covered. Overall, I’m pleased with the strength and resilience of our properties, particularly our casinos in Ohio, Kansas, Massachusetts and Missouri, the broader stability of our operations and performance this quarter highlights the benefits of our geographically diversified portfolio. As well as new and sustained customer engagement driven by the growth of our database and ongoing investment in our properties, leading our — including our leading retail sports betting offerings in key markets.

As we look ahead to the fourth quarter, we anticipate more of the same in terms of stability across most markets, offset by new supply pressures on the unrated and low end of our database, in addition to the onetime impact of ongoing union negotiations at Greektown in Detroit and road construction disruptions in Charlestown. Which started in September, but will thankfully conclude in December of this year. And in Black Hawk, Colorado. As it relates to overall company guidance, we anticipate ending the year within 1% of our full year retail EBITDAR guidance. For the Interactive segment, we estimate an EBITDA loss of approximately $100 million to $150 million for the fourth quarter, as we launch ESPN Bet in the next couple of weeks. Over the next 2 months, we look forward to breaking ground on all 4 of our retail growth projects.

As highlighted on Slide 14, our Hollywood Aurora and Hollywood Joliet projects provide us the opportunity to replace our existing dated Riverboat properties, which have experienced revenue declines over the last several years, due to new competition that we would expect to continue absent these relocations. The relocations also allow us to avoid significant capital investments on maintaining the existing river boats by building new destination quality facilities with enhanced amenities and significantly higher traffic counts from direct access to major interstates. As well as proximity to large third-party retail and entertainment offerings. As a reminder, the city of Aurora, who has been a great economic development partner throughout this process with Penn.

We’ll be providing $50 million in funding for the project there, and GLPI has committed up to $575 million. And then you have the hotel projects at 2 of our highest performing properties, Hollywood Columbus and the M Resort in Las Vegas. In Columbus, we’re building a 200-room hotel that’s fully connected to our casino. We think this will be a key economic driver in the ongoing resurgence of Columbus’ Westside and it will create a true regional destination. At the end, we’ll be nearly doubling the size of our hotel by building another tower with 380 additional rooms, which will allow us to accommodate the demand for larger group business. When considering the expected continuing revenue declines at Aurora and Joliet over the next few years, we expect these 4 growth projects to deliver a 15-plus percent cash-on-cash return on the aggregate project cost of $800 million.

Which is net of the $50 million contribution from the City of Aurora. These projects will also contribute to our strong free cash flow generation upon opening in late 2025 and early 2026. Turning again to the Interactive segment. As I mentioned at the outset, our plan is to go live with ESPN BET on November 14, subject again to final approvals, which will occur simultaneously in the 17 states, in which we operate sports betting. This allows us to take advantage of a very active Thanksgiving week sports calendar, which includes the NCAA College Football RivalReweek and the Super Bowl rematch of the Kansas City Chiefs in the Philadelphia Eagles, which will be televised on ESPN’s Monday night football In connection with the launch, ESPN will be implementing an initial wave of exclusive integrations across the ESPN ecosystem, which includes 200 million unique monthly users in the U.S., more than 12 million of whom are regular users of the nation’s #1 fantasy sports app at ESPN.

Following an initial advertising campaign, headlined by Sports Center anchors, Scott Van Pelt and L. Dunkin’, you’ll begin to see even deeper platform and media integrations with ESPN over the coming months. Providing an unmatched and eventually frictionless media and betting experience. Importantly, when we go live, our existing customers in the Barstool Sports book will be prompted to download ESPN BET and all of their account information and wallet will seamlessly transition over to ESPN BET. ESPN BET will be powered by our proprietary and proven technology platform, which has been driving impressive performance in Ontario for over a year now under the Score Bet brand. In fact, October represents a record month for us in GGR and NGR in both online sports betting and iCasino.

As you can see on Slides 12 and 13, we’ve had great success in terms of media integration, retention and cross-sell results, leading to double-digit market share in a highly competitive market. Notably, 73% of our total handle in Ontario comes from users already within the Score Media’s ecosystem. And in terms of cross-selling, there’s over 50% conversion, 5-0, of online sports betting players into iCasino. Besides SkyBet in the U.K., we think Ontario with the Score Bet, provides one of the best blueprints for success in the U.S. with ESPN BET. And with that, I’ll turn it over to Felicia.

Felicia Hendrix: Thanks, Jay. Our property level performance was stable in the third quarter, owing to our diverse portfolio and the investments we have made in the customer experience. Property level revenues were $1.42 billion and adjusted EBITDAR was $523.4 million. Adjusted EBITDA margins were 36.8%, in the quarter, we had roughly $10 million net of onetime good guys in the South segment. Interactive segment revenues were $196.3 million in the quarter and the adjusted EBITDA loss was $50.2 million. Our Interactive segment EBITDA in the quarter reflects lower curtailed marketing in the U.S., as we prepare to transition our online sportsbook to the ESPN BET brand. In addition, in the quarter, we recorded a tax gross-up of $103 million, compared to $63 million in the third quarter of 2022.

Further, given our divestiture of Barstool Sports on August 8, the third quarter ’23 will be the last quarter where the Interactive segment includes Barstool Sports results. From July 1 to August 7, Barstool Sports generated $18 million in revenues and a net loss of $7.8 million. Slide 4 summarizes our balance sheet and liquidity. We ended the third quarter with total liquidity of $2.3 billion, inclusive of our $1 billion undrawn revolver. Traditional net leverage as of September 30 was 1.4x and lease-adjusted net leverage was 4.7x. Notably, we also have no near-term debt maturities until 2026. You’ll find on Page 8 of our earnings release, a table that summarizes our cash expenditures for the quarter, including cash payments to our REIT landlords, cash taxes, cash interest and total CapEx. Of our $75 million of total CapEx in the quarter, $6.7 million was project CapEx. Our net income results include a pretax noncash loss on the divestiture of Barstool Sports, that we disclosed last quarter that we would record in the third quarter, the details of which will be in our 10-Q filed later today.

Our fully diluted weighted average common shares, as of September 30 was $150.9 million. Because the dilution for potential common shares was anti-dilutive, we use basic weighted average common shares outstanding. If we reported moderate net income for the quarter, our fully diluted weighted average common share count would have been 168 million shares. To further help you with your modeling for 2023, we expect ’23 corporate expense of $105 million, inclusive of our cash settled stock-based awards. Total CapEx for 2023 is approximately $345 million, net of insurance proceeds and inclusive of $45 million of project CapEx. For cash interest expense, we forecast $130 million for the full year, after roughly $38 million of interest income. And cash taxes will be roughly $70 million to $80 million for the full year.

And with that, I’ll turn it back to Jay.

Jay Snowden: Thanks. In closing, I wanted to cover the slides we included at the beginning of our presentation, which are meant to help remind investors of Penn’s ability to generate significant free cash flow and grow our overall cash position, even in the event of an unforeseen economic downturn. So let’s start with Slide 5, where we show how much free cash flow our retail operations have generated, over the last 12 months, after maintenance CapEx on a GAAP basis. On Slide 6, which is we’re spending a couple of minutes on, we lay out an illustration of our cash generation bridge over the next 3 years. We start with our current cash balance and add 3 years of our retail free cash flow, as calculated on a TTM basis. This cash flow is meant to be illustrative as our LTM free cash flow, includes slightly lower maintenance CapEx than our typical $200 million a year.

And our leases are subject to modest annual escalators, as you know. The biggest variable, of course, will be our operating performance over the period. For purposes of this illustration, we conservatively discounted our annual retail free cash flow to be 80% of our LTM retail cash flow and extrapolated this over 3 years. And we did not include any contribution from our growth projects. But regardless of whatever assumptions you want to make about the strength of the economy, our properties are going to generate a significant amount of free cash flow over the next 3 years, that will support our growth initiatives. Next, as I mentioned earlier, Penn plans to take advantage of available financing from GLPI and the $50 million contribution from the City of Obora in connection with our 4 retail growth projects so that, our total capital outlay when these assets open in late 2025 and early 2026 will be $225 million.

And finally, while we anticipate accumulated EBITDA losses of Interactive of approximately $300 million, over the next 3 years, you can see that we expect to grow our total cash position by more than $1 billion, over this 3-year period. And going back to the interactive losses anticipated, you should expect those to occur mostly in year 1 and year 2, with year 3 inflecting to breakeven or modestly positive EBITDA. Which bridges nicely to the ranges of EBITDA, we provided on our last earnings call when you get to 2027. Of note, we anticipate our leverage ratio peaking in Q3 of next year and then coming down by roughly a full turn every 4 quarters thereafter. I hope this all helps for modeling purposes and clarify how we intend to grow our business in the near term.

As Felicia covered during her remarks, we have total liquidity of $2.3 billion, inclusive of our $1 billion undrawn revolver. We also have no near-term debt maturities until 2026. An exciting new growth catalysts on the retail and interactive fronts. With all that being said, we have $750 million remaining under our December 2022 share repurchase authorization and we’ll be active and opportunistic over the next few quarters if our stock continues to remain undervalued. And with that, we’ll open up the line for questions. Frank?

See also 15 Best ARK Stocks To Buy Now and Top 25 Online Shopping Sites in the World.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from Carlo Santarelli with Deutsche Bank.

Carlo Santarelli: Jay, I just wanted to kind of dig into the comments that you just made. So from the slide, you’re basically assuming about $1.7 billion of retail cash flow over each of the next 3 years. That doesn’t include the, I want to say, $120 million you guys kind of anticipate on the developments, even though that will be stunted towards the end. But the 80% that you took, acknowledging free cash flow could be a little bit sensitive to EBITDAR and you want to provide yourself some room, is that indicative of a guidance? Or is that more just being conservative just to show kind of the strength of the balance sheet and the cash position?

Jay Snowden: Yes. Carlo, it’s entirely the latter. We just felt like let’s be conservative here because you can anticipate — everybody’s got a theory on what’s going to happen from a macro perspective over the course of the next 12, 18, 24 months. So for us to take TTM. And the one thing you said that I would just clarify, it’s not — that’s 3 years total worth of retail free cash flow, not each year, so that $1.7 billion there. We just need it to be conservative. There’s no other reason. And if you want to trim it at 90% or 95% or 72% or keep it what it is on a TTM basis, any of those work. The point of the slide is to show you that even if you take a really conservative view of free cash flow generation, the investments that we’re making in the 4 retail growth projects and our total cumulative loss in Interactive anticipated over the next 3 years, we’re still building our overall cash position by north of $1 billion.

I think this gets lost sometimes and people drill down too much on this month, last month, next quarter. The 3-year look, I think, shows you how we’re thinking about growing the company and also remaining extremely liquid and continue to grow our cash position.

Carlo Santarelli: And then if I could, just a follow-up. I know you mentioned kind of a $100 million to $150 million 4Q loss as it pertains to the ESPN BET. I know there’s a lot of variables in how things go and whatnot. But, as we think about 2024 in that segment, what kind of guidepost could you kind of outline for us in terms of how you’re thinking about the investment over the course of 2024?

Jay Snowden: Yes. And it’s a great question, Carlo. We’ll provide more detail, obviously, in February when we’re putting out guidance for 2024. But I think at a high level, you should expect the Interactive losses to sort of be at their peak between Q4 and then Q1 because you’re going to be launching. You’ve got a lot of first-time deposit, match promo dollars, running through the system and you sort of capture not just NFL, but you’re going to capture NBA, you’re going to capture NHL. And then when you get into Q1, you’re going to capture college basketball, you’re going to have, call it, football championship and Super Bowl. So I think that’s where you’re going to see sort of peak. But from a leverage perspective, that the leverage number will peak in the third quarter because you’ll be sort of on a TTM, including Q4 of this year plus the first 3 quarters of 2024.

That’s sort of the way I would anticipate it, but we’ll definitely be showing losses every quarter in 2024. And then we’ll talk more about what that looks like cadence-wise in ’25 and then rolling into ’26. But as I provided at the — in the prepared remarks, you should think about the first 2 years of launch of ESPN BET, to be really where those cumulative losses are. And then in the third full year is where you would anticipate us inflecting to breakeven and better, probably modest EBITDA growth in that third year. And then that bridges you right into 2027 and the ranges that we provided on our last call.

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

Shaun Kelley: I just want to go back to two things. First, I think in the prepared remarks, Jay, you mentioned being within 1% of overall company guidance. I just wanted to kind of clarify just does that imply we’re within 1% of the midpoint? Or is that more conservative than that? And then as my follow-up, if we could just talk a little bit more about some of the programming around the ESPN BET launch. We’re starting to see some operators, particularly those that are launching focus on specific states? And I just — you’re obviously able to launch very broadly, given your market access, but I wanted to kind of get your thoughts on, are there a state road map or 2 that we should be particularly focused on, either given your prior success with Barstool or kind of where you’re going to front load some of the marketing, just so we can get a sense of what’s possible here under the partnership as the data starts to come in.

Jay Snowden: Yes. No, both good question, Shaun. And yes, to be clear, when I mentioned within 1% of company guidance, we’re talking about the midpoint of guidance. So you were correct on that. . As it relates to ESPN BET in specific states, I don’t know that I would look at one particular state. I mean, obviously, the ones that are going to be probably the most important long term for us or states that have both online sports betting and online casino. I don’t know, just based on the information that we’ve seen from ESPN, I’m not sure I’d say that they have states that they’re super strong, and then the brand is weak in other states. You don’t really see that. It’s really based on population as the popularity of ESPN. So I wouldn’t double collect on any one state.

I think we’re really approaching this now that we have the scale we do being live in 17 states. It’s a national platform, and most of our marketing efforts, certainly from a paid and earned media perspective, will be more on the national side. And then promotionally, it will be a lot more regional and localized. But I don’t — I wouldn’t point you to any 1 or 2 states at this stage.

Operator: Our next question comes from Barry Jonas with Truist Securities.

Barry Jonas: Property margins were nearly 37% for retail in the quarter. While more recently, you talked about 36%, I think you mentioned some softness in the South, margins there were really strong. So I’m just curious if there are any callouts for flow-through and how we should think about total margin range from here?

Jay Snowden: Yes. And Barry, I make sure you caught it. Felicia did mention that we had roughly — there’s always puts and takes in every quarter, when you got 40-something businesses across the country, and we had roughly $10 million of onetime good guys in the South region that certainly benefited the business results there a little bit. But even when you put — when you include that $10 million or take it out of EBITDA, I think you’ll see that margins were still pretty healthy. All things considered, very close to that 36% number. And I would — but I would remind everyone, too, fourth quarter seasonally is always the softest quarter and not that it’s going to be any softer. We don’t think this year compared to third quarter than it historically is, but you should look at what that drop in margin is between third and fourth quarter, the last 2 years, and that’s sort of what we anticipate again happening this year, just due to seasonality and calendar, really no other reason.