PENN Entertainment, Inc. (NASDAQ:PENN) Q4 2022 Earnings Call Transcript

PENN Entertainment, Inc. (NASDAQ:PENN) Q4 2022 Earnings Call Transcript February 2, 2023

Operator: Greetings and welcome to the Penn Entertainment Fourth Quarter Results Conference Call. I would now like to turn the conference over to Mr. Joe Jaffoni, Head of Investor Relations. Please go ahead.

Joe Jaffoni: Thanks, Frank and good morning everyone and thank you for joining Penn Entertainment’s 2022 fourth quarter conference call. We will get to management’s presentation and comments momentarily as well as your questions and answers. Now, I will 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 the company’s CEO, Jay Snowden. Jay, please go ahead. .

Jay Snowden: Thanks, Joe. Good morning, everyone. I am here in Wyomissing with 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 during Q&A. As you can see from our earnings release and corresponding investor presentation, we wrapped up another solid year at Penn despite ongoing macroeconomic headwinds throughout the year and severe weather in certain parts of the country in December. Revenues for the fourth quarter were $1.59 billion, and we generated $468.3 million in adjusted EBITDAR. For the year, our results were slightly above the midpoint of our revenue and EBITDAR guidance ranges. We also ended the quarter on a high note with strong performance across the portfolio between Christmas and New Year’s, which has continued into January.

Slide 6 in our earnings deck illustrates our year-over-year revenue growth was driven by our Interactive segment, which despite the Mattress Mack $10 million winning bet on the Astros in the World Series was profitable in the fourth quarter with several successful state launches and impressive growth in Ontario. On Slide 7, you will see for 2023, we are guiding to a revenue range of $6.15 billion to $6.58 billion and an adjusted EBITDAR range of $1.875 billion to $2 billion. This guidance includes our new growth opportunities, including the transition of Barstool Sportsbook to our own proprietary technology platform in the U.S. this summer. It does not reflect our acquisition of 100% of Barstool Sports, which we plan to close on later this month and we will update in our guidance next quarter.

Notably, we are anticipating a roughly $100 million swing in profitability in our Interactive segment in 2023 as we are just beginning to scratch the surface of what we believe will be a tremendous long-term growth opportunity for us. On the retail side, we felt it was prudent to build into our guidance some element of conservatism given the relatively uncertain economic times and increased supply in some of our key markets, including Council Bluffs, Lake Charles and Chicago Lands. Nevertheless, as we sit here today, we are not seeing a slowdown in business volumes as January was actually a very strong month for us. Turning to Slide 9, our focused marketing strategy and new technology enhancements generated approximately 1.3 million new rated customers last year in our mychoice database.

Approximately 300,000 of these guests signed up in the fourth quarter, representing a 15% year-over-year increase. Notably, over 50% of our database growth in the fourth quarter came from our online offerings. On Slide 10, we show the steady annual increase in play from our younger demo with the 21 to 44-year-old segment growing from 10.8% of total retail theoretical in 2017 and to 18.5% in 2022. To further capture and retain this group, we are continuing to reimagine our properties with best-in-class retail sports books, new games, greatly enhanced technology, refreshed hotel offerings and new third-party restaurant concepts. During the quarter, we also saw a meaningful increase in our mychoice app downloads and the adoption of our industry-leading cashless, cardless and contactless technologies, which we call 3C’s and is highlighted on Slide 11.

With the launch of Missouri last week, the 3C’s are now active in 21 properties representing approximately 70% of our total retail company-wide EBITDAR. As a result of the continued rollout of this technology at new properties as well as increased engagement in our current 3C’s properties, we had 136,000 mywallet customers and received $80 million in total mywallet deposits as of year end, which represents significant sequential growth. As we have emphasized in the past, those guests who use the digital wallet demonstrate superior loyalty through increased visitation, time on device and total theoretical. And our effective cross-marketing efforts combined with our ability to deliver a seamless, best-in-class customer experience has led to a 25% increase in guests who engage with us across multiple channels.

On the retail sportsbook side, we recently opened temporary sportsbooks at our 4 casinos in Ohio. Based on the results to-date, we are anticipating our permanent Barstool Sportsbooks, which are on track for Q1, will perform very well in a state with such passionate, knowledgeable sports fans. With the addition of Massachusetts this week, the birthplace of Barstool Sports, we now operate 31 retail sportsbooks across 14 states with market share of approximately 18%, excluding Nevada. This obviously positions us well for the upcoming Super Bowl, March Madness and beyond. As I mentioned, our Interactive segment generated positive EBITDA €“ adjusted EBITDA in the fourth quarter inclusive of expenses related to our online sports betting launches in Maryland and Ohio in an unfavorable sports betting outcome in the World Series.

Following our successful playbook in Kansas and Maryland, as you will see on Slide 13, our omnichannel marketing approach in Ohio led to Barstool Sportsbooks’ strongest launch to-date. Our deep customer database, retail footprint and powerful Barstool Sports marketing engine contributed to a record number of first-time depositors at launch despite minimal external marketing expense. Importantly, more than 50% of our online handle came from our existing database. As highlighted on Slides 14 and 15, we are seeing improved iCasino results, thanks to our strong performance in Ontario with our iCasino GGR and Penn Game Studios handle experiencing significant year-over-year growth. Our ability to continually introduce new games, including proprietary content from Penn Game Studios sets the stage nicely for future growth.

For example, we have got theScore Bet branded Blackjack games set to launch in the first quarter of this year. Ontario is now our top market in North America for both sports betting and iCasino with strong growth and positive trends through our first NFL season, including record gross and net revenues in December. We were able to maintain our market share in Ontario this quarter despite a 50% increase in the number of operators in the province, which I think really speaks to the quality of our products and the stickiness of theScore Media ecosystem. Turning to Slide 16, the transition of theScore Bet to our fully owned tech platform last summer has provided us with advanced trading and promotional tools that have led to impressive metrics relative to our performance in the U.S., including an approximately 85% increase in 3-month retention, an almost 20% improvement in our cross-sell rates to iCasino, and a 114 basis point increase in our hold rates.

Our success in Ontario is very promising in terms of the upcoming migration of the Barstool Sportsbook and Casino to this tech platform later this summer. Despite well-known headwinds currently in the digital media and advertising space, as you will see on Slide 17 and 18, theScore Media business and Barstool Sports continued to produce impressive revenue and engagement results driven by compelling content and an exceptional product experience. In October, we completed the initial integration of the Barstool Sportsbook into theScore Media app. This was great timing considering theScore’s mobile media audience is more engaged than ever with a 35% year-over-year increase in sessions during the fourth quarter and meaningful annual user session growth.

Meanwhile, Barstool Sports achieved record revenues in 2022 while investing in and expanding into new verticals, including producing and broadcasting live sporting events, such as the Barstool Invitational College Basketball tournament on November 11 and the Arizona Bowl on December 30. We are excited about the upcoming acquisition of the remainder of Barstool Sports in February later this month and look forward to welcoming them to the Penn Entertainment family. As you have often heard us say, the combination of Barstool’s vast loyal audience with theScore’s fully integrated media and betting platform will provide us a powerful top of funnel for new customer acquisition and organic cross-selling opportunities like those that we are seeing in Ontario today.

Finally, before turning it over to Felicia, I want to take a moment to congratulate our entire team for the significant progress we made last year on our ESG journey. We have come a long way in a relatively short amount of time in partnership with our Board’s Nominating and Corporate Governance Committee as well as our internal ESG and diversity committees. I am particularly proud of Penn being named by Forbes Magazine last year as the top publicly traded gaming company on their list of America’s best employers for diversity. In addition, Penn was once again an employer of First Choice in the Annual Bristol Associates Spectrum Gaming Executive Satisfaction survey and Penn Interactive came in first place in their iGaming and mobile sports betting category as well.

As it relates specifically to the fourth quarter, we finalized our Scope 1 and 2 greenhouse gas emissions assessment and plan to publish it in April, along with our inaugural SASB disclosure as part of our 2022 Corporate Social Responsibility report. In addition, we completed our mandatory company-wide diversity, equity and inclusion training and will soon begin the second phase of training focused on our leadership teams. Finally, I am proud to report that Penn Interactive received RG Check iGaming Accreditation from the Responsible Gambling Council for its online gaming operations. Penn Interactive is the first U.S. operator to undergo this accreditation process which is widely regarded as one of the most comprehensive responsible gaming accreditation programs in the world.

Felicia, with that, I will hand it over to you.

Felicia Hendrix: Thanks, Jay. As mentioned, we achieved solid revenues of $1.59 billion in the fourth quarter with adjusted EBITDAR of $468.3 million and a 29.5% adjusted EBITDAR margin. For the year, our results were slightly above the midpoint of our revenue and EBITDAR guidance ranges. Our retail properties generated adjusted EBITDAR of $487.1 million. Now while we typically do not like to callout weather, the severe storms and freezing temperatures prior to the holidays did have an impact on demand, in particular at our properties in the Midwest. Importantly, as the weather broke, demand returned and we saw strong performance from Christmas to New Year’s, which continued through January. For the Interactive segment, we reported adjusted EBITDA of $5.2 million.

Corporate expense in the fourth quarter, inclusive of cash settled stock-based awards was $23.6 million. Cash payments to our REIT landlords was 239 €“ I am sorry, $231.9 million, cash taxes were $26.5 million, and cash interest on traditional debt was $29.1 million. Total CapEx for the quarter was $73.8 million, of which $1.9 million was project CapEx, mostly associated with our Category 4 Hollywood Morgantown Casino. Our fully diluted weighted average common shares outstanding as of 12/31/2022, was $168.7 million. As you know, we are guiding to a 2023 revenue range of $6.15 billion to $6.58 billion and an EBITDA range of $1.875 billion to $2 billion. This guidance does not include Barstool Sports and we will provide more color on the acquisition on our next earnings call.

While we maintain our view that we can sustain retail EBITDA margins of 37% in a normalized environment, our outlook for 2023, which conservatively incorporates an uncertain economy and new supply in some markets implies a retail EBITDA margin closer to 36%. For the Interactive segment, our guidance assumes a roughly $100 million EBITDA improvement from 2022 results of a loss of $75 million. To further help your modeling for 2023, we expect €˜23 corporate expense of roughly $110 million, inclusive of our cash-settled stock-based awards. The year-over-year increase is primarily driven by the continued centralization of certain administrative and support functions. Total CapEx for 2023 will be $413 million and let me break that down for you as there are several moving parts.

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$25 million of the $413 million is insurance proceeds, which is an offset to CapEx. For project CapEx, we are estimating $87.5 million for the year as design work begins at our 4 growth properties: Aurora, Joliet, Columbus and M Resort. $200 million is maintenance CapEx and $100 million is growth CapEx on ROI generating projects such as new hotel remodels, the continued rollout of our Barstool retail sportsbooks and technology investments at our properties. On February 17, we expect to complete the acquisition of the remaining 64% interest in Barstool Sports that we do not own. The remaining interest will be acquired for approximately $388 million and we expect to use $320 million of cash to complete the purchase inclusive of the repayment of debt and transaction expenses.

For cash interest expense, we forecast $164 million for the full year 2023 and cash taxes will be roughly $155 million for the full year of 2023. Our weighted average fully diluted common share count for the year, assuming no further share repurchases, is projected to be $168.1 million. Now speaking of shares, we repurchased 2.9 million shares in the fourth quarter for $91 million at an average price of $31.69 per share. This brings our total purchases in 2022 to 17.6 million shares for $601 million or $34.23 per share. Subsequent to quarter end, we repurchased an incremental 1 million shares for $31.5 million or $31.20 per share. We currently have $118 million remaining on our February 3, 2022 $750 million authorization. As a reminder, we received Board approval for further $750 million share repurchase authorization this past December.

We continue to believe that our current stock price does not reflect our intrinsic valuation nor does it capture the momentum we faced this year and beyond. As we think about the cadence of our share repurchase program going forward, we will balance this view with our cash needs for €˜23, which includes via acquisition of Barstool Sports as well as keeping our powder dry for additional growth opportunities. Further, we remain committed to our balance sheet strength. As such, managing our lease-adjusted net leverage in the near-term will also be a factor in determining the cadence of future share repurchases. So as you think about our share repurchase activity for the remainder of 2023, you should assume that we will continue to be opportunistic, but also prudent which could lead to lower share repurchase activity this year compared to 2022.

For €˜22, we ended the year with $2.6 billion in liquidity, inclusive of $1.6 billion in cash and cash equivalents. Traditional net debt at the end of the quarter was $1.1 billion, an increase of roughly $190 million from December 31, 2021 due to a lower cash balance reflecting our share repurchase activity. We ended the year with lease-adjusted net leverage of 4.4x compared to 4.1x on December 31, 2021. 85% of our debt is fixed rate, if you include our leases and our nearest debt maturity is in 2026. And with that, I will turn it back to Jay.

Jay Snowden: Alright. Thanks, Felicia. In closing, as we look back on 2022, it was another transformative year for Penn in which we undertook a successful rebrand of our company to Penn Entertainment. We opened 6 new retail sportsbooks, went live in a number of online sports betting jurisdictions and announced 4 new retail growth projects in Illinois, Ohio and Nevada. And this was a huge year for us on the technology front as the migration to our own tech stack in Ontario was a tremendous milestone and we cannot be more pleased with the results thus far. With full control of our product roadmap, we have been able to quickly add new features and betting markets to theScore Bet including our own same game parlay offering, which has led to a noticeable increase in hold, both compared to our pre-migration track record in Ontario as well as what we are seeing here in the U.S. More importantly, our advanced promotional capabilities are helping to deliver higher retention and higher revenue per player metrics in Ontario than in the U.S. This experience gives us confidence that there is meaningful upside for the Barstool Sportsbook and iCasino once we complete our tech stack migration this summer and are able to offer a product that is on par with our competitors.

Looking ahead, I continue to be excited about our long-term potential in the iCasino space, beginning with the migration to our own player account management system, which is performing very well in Ontario. We are also taking steps behind the scenes to better connect our brands from a marketing perspective and to provide a more seamless omnichannel experience for our customers, which we think can have a meaningful impact on both our retail and online casino offerings. We have also heard a lot about the promotional environment getting more rational or becoming more rational in the online sports betting space. And I think we are starting to see this play out to some extent. For instance, our CPAs in new markets such as Ohio are very attractive compared to prior state launches.

And we think this trend could certainly continue throughout this year. As you know, thus far, we have remained very disciplined and relied primarily on organic customer acquisition rather than external marketing spend. And this strategy has yielded impressive results as we were able to generate positive EBITDA in Q4 despite the cost of redundant tech stacks and abnormally low hold, which we covered earlier. Looking forward, as I noted last quarter, we think there will be an opportunity to be more aggressive from a marketing perspective post-migration second half of this year to our €“ when we convert to our own tech stack in order to profitably grow our market share, particularly as others are potentially pulling back. But we will continue to be measured in our approach is reflected in our EBITDAR guidance.

Strategically, we certainly continue to play the long game. I look forward to sharing more information on these topics in future quarters. And with that, Frank, I think we can go ahead and open up the line for questions.

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Q&A Session

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

Barry Jonas: Thank you. Good morning, guys. For the 2023 guidance, specifically land base, could you maybe break out what’s in there for general macro-related headwinds as opposed to the specific hits you’re assuming from new supply threats? And I guess also, does the 36% margin guidance just reflect lower revenues or are there rising costs like labor also in there? Thanks.

Jay Snowden: Yes. I’ll try to hit that at a high level. I know Todd will have some comments on that as well. I mean here’s the approach, Barry that we took for 2023 guidance. We €“ as we built out our budget, from bottom up property by property and Interactive and at the corporate level. We included some anticipated impact in a few of our markets, which we mentioned earlier, Lake Charles, Council Bluffs, Chicago land. And we came up with a number. But based on what we’re continuing to read from €“ and look, we’re not €“ there is no economist on this team. We’re not experts in that area, but we are continuing to read what all the banks are continuing to say and anticipate for 2023. And so we decided to put some level of conservatism, we took a haircut to the number that we organically came up with just based on what we know about current trends, what we know about new supply in key markets and felt like that’s probably the prudent approach for 2023.

If €“ what I would say at a high level is that what we’re seeing in the business today on the retail side and interactive, if that is status quo for the year, then the midpoint of guidance will end up being conservative, but it’s way too early to say if that’s how it’s going to play out. We felt like it was the appropriate approach going into a new year. I think we’re the only gaming company out there right now that’s providing guidance. So felt like being conservative in how we do that was probably the best approach. But Todd, you may have other things to add.

Todd George: Jay, I think all that’s right. The only maybe a couple of other items, Barry, we continue to be impressed and very pleased with the industry and our approach to marketing. So we continue to envision a very rational marketing approach for all of us. But we do see some potential labor dollar increases. But much of that offset with our improvements in technology the way we’re looking at the business from a yielding and especially those non-gaming amenities. So to Jay’s point, it’s really a conservative approach the continuing evolution of our business model and adding a little bit of room for labor increases.

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

Chad Beynon: Hi, good morning, thanks for taking my question. One more just on the land-based side, you just kind of went into some details in terms of how you’re thinking about it in €˜23, but dissecting the 3 months in the fourth quarter and then maybe going even a little bit more into January, Jay, you talked about continuing trends. As we saw the equity markets become more volatile and as we saw interest rates rise and more fears around the housing market. Was there any change in terms of what you saw from a spend per visit standpoint? I know that’s kind of been leading the recovery visitation is still well off of prior levels, but it’s really that spend per visit within the different tiers. Just wondering if you saw anything kind of ebb and flow throughout the quarter if it was consistent? Thanks.

Jay Snowden: It’s actually been really interesting as we look back at €˜22 because, Chad, to your point, there are periods of time where it just sort of softens up a little bit. You notice it from a visitation and spend per visit perspective. We saw a little bit of that in June. And then July 4 came around and we were right back hitting on all cylinders going forward. We did hit a little period of softness. Some of it was due to weather, which has been highlighted by us and others. And then there was just a little bit of general malaise kind of mid-November through mid to late December. And so we’re kind of looking at that, like is this the start of something new. Then we got to the holidays robust between Christmas and New Year’s as good as any year I can remember.

And then the momentum has really continued on through January, much stronger January this year than last year. You’ll see the state numbers starting to come out. There is probably several factors. There could be a little bit of what we lost potentially in December moved over to January. So not really sure exactly how those dynamics play out. But certainly, trends currently feel good. But yes, we did see a little pocket of softness, somewhat due to weather and just a little malaise.

Todd George: Yes, Chad, the only €“ this is Todd. The only thing I would add is, to your point on impact on interest rates. I do think we €“ there is a lot of factors that go into that. So the other thing that we did see across the country and especially in some of our key markets, the decrease in gas pricing, a lot of that just due to supply and demand and relatively mild winter, that all factors into that equation as well. So when you start looking at that, we’re actually seeing numbers that are in line or slightly above the spend per visit from last year and significantly above where they were in 2019.

Jay Snowden: Todd just triggered a thought for me as well. And this is something that we’ve highlighted before having been asked the question a whole lot in 2022 about what could potentially cause a recession and impacts our customer behavior. And I’ve been doing this now for a long time. It’s come up on 25 years. And I would say, looking back over those years that there is really only two economic factors that we’ve seen over the years that are really tightly correlated to customer behavior and customer health, at least as we talk about our core consumer, which is the labor market. And whether you’re looking at jobs, unemployment percentage, wage growth, it’s actually in great shape. It was encouraging, I think, yesterday to watch Chair Powell talk about starting to see the beginning of disinflation and how he’s €“ my words, not his, but paraphrasing that he’s cautiously optimistic that they can potentially get this inflation level back down to desired levels without seeing any real erosion as it relates to employment.

That would be ideal because that certainly has a very tight correlation for our consumer. And housing is the other one, which, though it’s come down off its peaks, it’s really held in relatively well. So those are the two that we continue to keep an eye on. Those seem to have a much bigger impact overall to consumer behavior and visitation and spend per visit patterns in our businesses than anything related super tightly to a gas price move of 5% or 10%. I mean the big shifts that Todd mentioned, that’s different, but slight shift in gas prices or interest rates really don’t seem to affect consumer behavior on our end.

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

Shaun Kelley: Hi, good morning, everyone. Jay, I was hoping we could delve into kind of the core online trend a little bit more in the quarter. You showed some really strong GGR growth in the iGaming side. And obviously, Ontario continues to gain some momentum. Can you help us think about what you saw in kind of core OSB year-on-year? Obviously, there is a pretty big hit from Mattress Mack, but could you help us think about sort of the growth rate and trend you saw there?