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?

Jay Snowden: Yes. It’s a great question, Shaun. And it’s interesting because we’re in a sort of a peculiar spot right now in the U.S. that I’ll describe at a high level. We have our entire engineering and product teams really primarily focused on two things right now. One, of course, is the upcoming migration to our own platforms in the U.S., which will happen sometime in July later this summer, a lot of work going into the preparation for that. And then, of course, we are continuing to, as we always will, innovate and iterate around making sure that we have a best-in-class product in Ontario because that’s the platform that we’re going to be on here in the U.S. and across our portfolio across North America later this summer.

And so that’s really been where the focus has been where we have not been focusing understandably is that the platforms that we run on here in the U.S., which are third-party platforms, we have not been able to throw the resources at those to innovate and iterate and really focus on enhancement. So we’ve fallen a bit behind. And I think our market share in sports betting, this fall and this winter here in the U.S. has softened up a little bit, and we really haven’t been as focused on driving acquisition, knowing that our product isn’t as competitive currently here in the U.S. as it was compared to everybody else a year ago. And so we made the conscious decision that we’re okay with that. We want to focus on retention. Here in the U.S., we want to focus on both acquisition and retention in Ontario but we’re very pleased with the progress that we’re seeing across all metrics in Ontario that’s going to allow us to really lean in once we convert over and migrate to our own platforms in the U.S. second half of the year.

So you should expect us to be, I think, louder from a marketing standpoint as we head into football season €˜23, knowing that we have at that point platform and promotional capabilities and CRM capabilities, bonusing capabilities, parlay capabilities that we just don’t have in the U.S. today. So that’s sort of the way we’ve been thinking about it. We’ve been focused on iCasino growth across North America. We’re happy we’ve made some progress there in the fourth quarter. We’ve got a long way to go, but we’re seeing progress. And then generally speaking, OSB and iCasino, we’ve seen really nice trends in Ontario that we believe we can duplicate here in the U.S. second half of the year.

Shaun Kelley: Thank you very much. And maybe just as my follow-up to keep it short. Could you talk a little bit about the €“ just the €“ when you talk about the demographics on your kind of cohort slide by age type, I find this data like really fascinating. And can you just help us think about some broader implications here for how that spending might evolve and how you’re investing a little bit behind that? I know obviously, the retail sports book initiative has been there. But what other revenue streams are you seeing? What are some of the kind of broader implications of this shift as demographics change a little bit in the business?

Todd George: Yes. Shaun, this is Todd. I’ll take that. So a lot of our investment in the last few years as we sort of spot this trend coming out of the pandemic really involved not only our game offerings where maybe you’ll see now a bit of a greater mix of electronic table games, which allow you a different price point, so you can enter at a different level. But especially in the non-gaming amenities and the entertainment offering. So the way we’re looking at our hotels, and we just completed the Greektown hotel in the fourth quarter of last year, and it’s really been performing quite well. And then sticking with that property, just looking at some of the restaurant offerings as well as the first retail offering that we put in that features the Amazon just walk out technology starting to see that ramp up quite a bit.

And then a lot of the work we did around the 3Cs and making that more relatable to all the folks that have been coming in that use Venmo and Apple Pay in all of those different forms of currency that they are used to, they can now find those in our casino. So we’ve got a great road map in front of us. I think as Jay mentioned earlier, we’re just scratching the surface on that, but we’ve seen great results so far.

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

Joe Greff: Good morning, everybody. I know it’s early days in Ohio, but I was hoping you can talk a little bit about the impact of sports betting on land-based GGR and profitability. And then a follow-up on Interactive, you’re talking roughly about $25 million in positive EBITDA in that segment for the full year. Do you think it could be profitable in the first half? Or is it really weighted towards the second half? If you can give us some details on that? That’s all for me. Thanks.

Jay Snowden: Yes. We will grab both of those, Joe. I’ll hit the second 1 first and Todd can hit the Ohio question, which is a good one. I would say, as you think about sort of the cadence on the interactive side for 2023 by quarter, you should think about the first two quarters both being pretty breakeven-ish, maybe a little positive, a little negative, not a lot of movement there. Third quarter is where we will have some negative numbers, not significant, but they will be negative as we really plan for football season, September being the first month of both college and NFL. And so we will be starting to lean in from a marketing standpoint, but you won’t have an entire quarter of the volumes that come with it. And then the fourth quarter is where you should really expect to see the highest levels of profitability that get you to that positive number for the year. That would be the cadence that I would think about for 2023.

Todd George: Thanks, Jay. And Joe, as it relates to the Ohio properties. This was really our most successful launch for Barstool Sportsbook and the property teams and the corporate marketing, everybody just working so well together. And what we’ve seen also would have been good if maybe we could have launched a day earlier or Ohio State would have won that game because then we would have picked up another huge day. But Jay and I were just talking last weekend one of our properties in Ohio had an all-time record for volumes since opening, beating out New Year’s Eve. And it was really amazing to see. So again, what we’ve seen in other states with that 21 to 44-year-old demo coming in, experiencing things for the first time. It’s really been a great complement to our existing database that’s in there. So I could not be more pleased with the way we’re looking at it right now with all four of our Ohio properties exceeding budget in prior year.

Jay Snowden: And just to be super clear on that all-time volume record day, that was last Saturday, which was not a holiday weekend. It was just a Saturday in January. So we do attribute a good portion of that to the addition of retail sports betting, the influx of €“ for the most part, younger customers coming in, being introduced to new people and people realizing once they come in, there is a lot of fun things to do other than just bet on sports, but to do some gambling and partaking the restaurant and entertainment offerings. So Yes, very encouraging. I think Todd and the team have done a great job in all these markets, and we’re just €“ we’re getting smarter every time we launch in a new state in terms of the collaboration between interactive and retail and really planning for omni-channel effect as opposed to just for what’s our market share in to handle the first month.

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

Ryan Sigdahl: Good morning, Jay and Felicia. I want to stay on Interactive, so congrats on the positive EBITDA in Q4, likely the only operator from our standpoint that will probably report that here in Q4. But given the Mattress Mack World Series loss, your previous expectation was likely for a swing to a loss potentially in the quarter. Given that what went better to report that $5 million of positive EBITDA? Was it primarily the cost side or the user side?

Jay Snowden: Yes. I would say, as you look at it, probably better results in Ontario than we had expected, which is great for lots of reasons. And then we have seen some progress. Again, we’re not where we want to be yet in iCasino, but we have grown our market share in iCasino as you can see in one of the slides that we provided. So I would say those are the two primary reasons. The cost structure is really it’s quite predictable. We’re €“ this is what happens when you’re on third-party platforms and then you’re working on a migration. But we have ramping up of our own internal resources while we’re still paying full cost for third-party resources on the outside, but at least the ramp that you’re seeing in engineering and product and other areas is part of our budget, part of our plan and not surprising, quite predictable.

So the cost structure really shouldn’t be a surprise throughout the year. It’s really going to depend on what happens with revenues, what happens with hold percentage those things would tend to fluctuate the results more so than the cost structure.

Todd George: Yes. Agree with all that. The only other thing I would add, and Jay touched on this earlier. The great thing for us, and it’s a little bit unique to our business model with the partnerships that we have. But keeping that CPA low, especially as we launch into these new states, always helps with that expense structure as well.

Ryan Sigdahl: And then for my follow-up, just curious any thoughts on Massachusetts with the recent launch live with the three retail sportsbooks there and then your plans hit over the next couple of months. Thanks.

Jay Snowden: Yes. I appreciate it, Ryan. I mean look, we have high expectations for sports betting in Massachusetts for obvious reasons. Barstool was founded there, huge following. They €“ we’re celebrating Barstool’s 20th year since being launched in 2003. So there is long-term relationships and loyalty there with the audience. And based on what we’re seeing in Ohio, and again, we haven’t seen market share results, all we’re seeing is our own numbers, but we’re feeling really good about our launch in Ohio. We expect that to be one of our top-performing states, not just from a total revenue. Obviously, there is a significant population there, but we think from a market share standpoint as well and we expect Massachusetts to be very similar.

And just a reminder for those that may not know, we’re only live currently as of yesterday with retail sportsbook, which was great timing, at least to be in time for Super Bowl wagers. We won’t be live with mobile until right before March Madness is what the regulators currently have planned. So we will be live in March. And I think we will have a lot more information as we get on our Q1 call in early May about both Ohio and Massachusetts.

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

Bernie McTernan: Great. Good morning. Thanks for taking the questions. To start, the $100 million swing in interactive profitability, how much of that is driven by just organic growth versus synergies, whether it’s revenue synergies or cost synergies?

Jay Snowden: Well, we don’t €“ we actually have synergies kind of working against us in €˜23, like I have said, because we have got redundancy on third-party cost platform costs that really carries through the end of the year, while we continue to ramp up building out our own product and engineering team. So, it’s certainly less synergy, and it’s a lot more us growing the business and us having improved retention results, cross-sell from sports betting into iCasino results the second half of the year. Those are the factors. And of course, we also highlighted in one of our slides that we are seeing the benefit of increased hold percentage. So, if you look at in the U.S., I think we are the lowest average hold percentage of all of the top six players.

We think that, that will start to reverse itself once we are on our own tech stack and our own player account management, and then control more of the trading services. We have great partners, third-party partners today. But I think what you are seeing when you have control of the product roadmap and you can put more of those offerings front and center for the consumer that you can start to move the whole percentage in the right way with €“ especially with the retail masses that are betting mostly on parlays. We are still sitting at right around 20% of total wagers in the U.S. on parlays. I think that’s a lot lower than most of our competitors. So, we look forward to that. I think those are the enhancements, but it’s going to be for 2023 profitability much more around growth and synergies.

I think 2024, you will hear a lot more from us on the cost synergy side as some of those third-party costs start to roll off.

Bernie McTernan: Understood. And when the complete buying of Barstool happens in two weeks, is there anything that we should expect? I know we should get guidance on a later time. But operationally or anything to call out that once you have 100% control of it, it could be acting differently.

Jay Snowden: I think certainly, more deeply integrated cross-sell opportunities. We have got all sorts of things. We actually €“ we are just in Miami for an executive retreat and spend a lot of time on this as an executive team along with Erica. And so I think more to come. We will spend some time on this in May on our Q1 call. Erica will join us on the call, and we are happy to €“ we will probably have a few slides on that. Happy to answer questions about it, but rather not get into it today until after we have closed on the full acquisition.

Operator: Our next question comes from Brandt Montour with Barclays. Please proceed.

Brandt Montour: Hey everybody. Good morning. Thanks for taking my questions. So, I wanted to actually follow-up on one of those points, Jay, the parlay mix in Ontario and the parlay mix in the U.S. If you look at the Slide 16, you guys talk about whole outperformance in Ontario. I assume that’s because of the parlay mix there that you are able to get from being on your own tech stack. Is that the extent of the upside for the U.S.? And maybe another way of asking it is the Ontario parlay mix up to, let’s say, the market leader where you see it there? Is there more to go essentially?

Jay Snowden: Yes. I think there is more to go, Brandt, even though we are seeing that delta between full performance in Ontario versus the U.S., I would say that we are still in the very early innings in Ontario as it relates to our parlay offerings. So, if you compare to what we are doing in Ontario to what €“ some of the top players in the U.S. are doing, there is still a pretty significant delta. And I think you can see that even our hold percentage in Ontario being higher than it is in the U.S., that whole percentage still trails where the top three or four players are in the U.S. So, I would say there is probably a couple of hundred to 300 basis point opportunity longer term for us to improve our hold percentage given where we are currently run rating here in the U.S. versus where we ultimately anticipate being.

Brandt Montour: Okay. Great. Thanks. That’s helpful. And then a follow-up on your comments about the second half of this year and getting louder. And I don’t €“ I know you probably don’t want to give out any competitive information, but what does that really entail? Is it something we should be considering in terms of increased marketing spend? Is it more organic, the type of marketing that you guys have tended to do? Anything that you can provide there would be helpful. Thank you.

Jay Snowden: Yes. I would say both. We are €“ you will see us, I think a little more aggressive. You shouldn’t expect to see us running TV commercials every weekend, anything like that. But I think you will see us be more aggressive on paid media, probably more of a focus on digital than anything else there, a lot more heavy leaning in on the organic and cross-sell opportunities and user acquisition. Our partners at theScore and Barstool, I think being even louder, knowing that we have a great platform to showcase to our audience. So, you should expect us to just be more aggressive. But we are going to do it in a way where we still think we can drive profitability in the fourth quarter and then obviously, have some real momentum going into 2024, where we are picking up some market share. We are doing it in a profitable way and take those learnings into €˜24 and beyond.

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

John DeCree: Hi everyone. Thanks for taking all the questions. Maybe to shift gears a little bit. Jay, there has been some more rumblings in Texas and Georgia about possible regulating of gaming and that type of stuff. I know it’s still probably a long road in both states. But curious if you have a view on what’s happening there. We usually have a pretty good sense of that type of stuff? And then maybe secondarily, any thoughts on potential additional iGaming regulation around the country?

Jay Snowden: Yes, happy to hit those. I would say, first, on the iGaming side, not a lot of momentum as we look at legislatively 2023. We are of the opinion that something will start to move probably in the Midwest, whether that’s Illinois or in Indiana or in Iowa. And once that happens, as we have seen historically in our industry, it just starts to move a lot faster by neighboring states. So, I wouldn’t know how to handicap whether or not something happens in €˜23. It’s not real active right now. Honestly, from our perspective, that’s fine. I think we are going to be a lot more prepared for iGaming generally and competitively on a platform that we feel really good about once we get to the second half of €˜23 and beyond.

So, if it’s a little bit on the slower side, no problem. But I think something will start to go, if not this year, feel pretty confident. In 2024, you will see a state or maybe a couple of states continue down that path. It’s only €“ our perspective would be it’s a matter of time for the states that have legalized and launched online sports betting, it’s natural to eventually also legalize online casino, like we have seen in Pennsylvania and New Jersey and Michigan. And so it’s just €“ we will see how that plays out. As it relates to Georgia, not a lot to say on Georgia, we don’t have any real history there. So, we are sort of reading what you are reading. We have lobbyists that keep us connected. There seems to be more of an appetite in both states, Georgia and Texas now than there has been really ever.

But take that all with a grain of salt because there really wasn’t any interest for a long time, and now there is a little interest. So, Texas is like we have a pretty good pulse on. We have been making strategic investments in horse racing in Texas for a long time over a decade now. And we are the owners. We have ownership and/or controlling positions in a number of racetracks in Texas that we think sets us up really well if and when something does happen in Texas. It’s very early in this legislative cycle for this year. As you know, Texas, the legislature only meets every 2 years. There is a lot more conversation and openness this legislative cycle than we have really ever seen. There seems to be a support on the health side and from the Governor and the Senate is really a TBD.

But we are very active. We are very engaged. I have been spending a lot of my own personal time on this in Texas because we believe it could be a real significant opportunity and exciting one for the company. And I would say stay tuned as we know more, we are happy to share, but it’s so early, and I don’t like trying to handicap outcomes, regulatory or legislative way.

Operator: Our next question comes from Joe Stauff with Susquehanna. Please proceed.

Joe Stauff: Thank you. Good morning. Jay, I wanted to ask you with respect to Ontario, it’s obviously a very important market, given the assets that you have there and pretty meager or slim information. And so can you maybe comment a little bit about just the competitive landscape, you have some pretty heavy competition from incumbents and kind of what you guys are doing that’s encouraging and is leading to some initial success.

Jay Snowden: Yes. It’s a good question. Look, Ontario is the most competitive market by far that we operate in. I can’t speak for every operator. But you have got every major U.S. and international operator in Ontario, some of which were there for many, many years when it was a great market. And so for us to be able to showcase results and momentum that we have in our slide deck on Slide 15, we are highly encouraged by that. And really, there is only two things to point to. theScore, obviously has a lot of history in the market, a lot of loyalty with a fan base to, for a long time, knew theScore more, the check scores and updates on their favorite teams and getting conversations and community features about their favorite teams and their favorite games and about betting on sports and all of that.

So, that’s theScore Media ecosystem. Certainly, it was a boost. We acquired a very strong brand in Ontario, very strong in the U.S. as well, but predominantly in Ontario. So, I think that’s a huge piece. Then of course, we talked a lot about the platform and the capabilities that we have are very different than what we have to work with here in the U.S. And so that makes us feel really good about the migration in the U.S. and being able to compete on a level playing field and be in control of what’s in your product roadmap queue, what you are prioritizing the capabilities. So, those are the two factors. And for us, it’s also been impressive in that our market share, as we calculate it based on the limited information that’s been supplied publicly by the Ontario regulators there is that our market share is holding steady despite an influx of additional operators.

As I mentioned in our prepared remarks, we saw the number of operators operating in Ontario from Q3 to Q4 grow by over 50%, and yet we held on to our market share and continue to really grow our business through football season both in online sports betting, online casino. And really excited about online casino because the cross-sell results in Ontario have been much stronger than what we have seen here in the U.S.

Joe Stauff: Makes sense. And then your investments that you will make, I guess this year in 2023, Felicia, provided some numbers in terms of project CapEx, but what does that mean, I guess for specific retail Barstool’s branding and any other sort of cashless investments that you are going to make and expand into 2023 and what are your plans there?

Jay Snowden: I would say and Felicia, you can jump in here. But if I understand your question correctly, Joe, when Felicia broke down the CapEx plans for the year, what you saw is that a total number of, call it, $400 million and roughly $87 million, $88 million, and I call it, $90 million of that is going towards the four growth projects that we talked about earlier in the year, the two in Illinois, the hotel in Columbus, Ohio and the hotel at M Resort in Las Vegas. So, the rest of the $300 million, think about it is exactly how we talked about 2022. You have got $200 million in maintenance, and then you have got $100 million that we sort of consider discretionary spend and €“ but does have a return associated with it. And that $100 million would be going towards the exact types of projects that you are referencing, us launching more Barstool-branded retail sportsbooks.

3C’s roll out, although we have gotten a lot of that work done behind us. We have got more hotel renovation, entertainment additions, food and beverage, that’s really the focus for that last $100 million. And we are very pleased with the early returns that we saw on the $100 million that we spent on those projects in 2022, which is why we are doing more of that in €˜23. So, outside of the growth, the four big projects, our CapEx plans for €˜23 look almost identical to what they look like in €˜22. Felicia, I don’t know if there is anything more to add

Felicia Hendrix: No, that’s exactly right. And I think just to underscore that point is that while we are investing in these new growth projects, it’s business as usual for us elsewhere.

Operator: Our next question comes from Steve Wieczynski with Stifel. Please proceed.

Steve Wieczynski: Yes. Hey guys. Good morning. So Jay, I want to go back to guidance for this year. And I think it was the Barry’s €“ I think it was the first question on the call. But obviously, you called out those potential headwinds in front of you. And new competition is going to be it is what it is, and you have a pretty good handle on what that’s going to look like. But I want to ask, if the consumer stays pretty much status quo. I mean what you are seeing right now through January. Is it fair to think that there actually could be upside to the upper end of your guidance range?

Jay Snowden: Yes. I don’t know how else to answer that. If the trends that we are seeing in January, if that status quo for the remainder of the year, then there would be upside to the midpoint of the range that we provided. We took a haircut to what we anticipated seeing in €˜23, just to build in some level of recessionary concern conservatism really because that’s what we continue to read from those that do this for a living is that something is going to happen later this year. If that something doesn’t happen and what we are seeing in the business today, if the labor market hold steady and housing market holds steady and spend per visit and visitation throughout the year looks like it does in January, then yes, the guidance is going to be conservative.

Steve Wieczynski: Okay. Thanks Jay. And then second question, either for you or Todd. I don’t think you guys talked or mentioned at all labor so far on the call. And just could you give us any kind of quick update on what you are seeing out there from a labor perspective? And has the availability of labor gotten any better for you guys?

Todd George: Sure, Steve. So the second part of that question is a little bit easier to answer it. Yes, we have seen a pickup in inflow of applications and candidates for most of our jobs. So, that’s actually been very encouraging. So, we are able to go at more full capacity with most of our offerings. On the first part, there is pockets where there is a little bit of upward pressure. I would say Colorado with some of what they have just recently passed from a minimum wage standpoint. But much of our portfolio, it’s more kind of status quo. We are not going backwards by any means. But there is more pressure, I guess just from a state mandate or a Federal mandate for minimum wage. But overall, there is a little bit more flow, so it offsets the need to pay up for talent.

Operator: Our next question comes from Stephen Grambling with Morgan Stanley. Please proceed.

Stephen Grambling: Thanks. Just a couple of quick follow-ups on interactive. First, on the implementation of the tech stack, how should we be thinking about the cadence of the rollout? Are you targeting a simultaneous introduction across states or doing any kind of testing at the state level and rolling out over time. And then as a follow-up on your comments about ramping marketing costs or marketing expenses and promotions maybe post implementation. How do you think CPAs are changing in the legacy markets not Ohio, or how might they change as states mature?

Jay Snowden: Yes. So, the first part of your question, Stephen, around the tech stack cadence is we planning to go live across all states in the U.S. at one time. We are targeting baseball all-star weekend when there is literally nothing going on in the sports world in the U.S. we have been working very closely and continue to with our regulators in preparation for this. We feel really confident in the plan. And we have got of course, contingencies that you can imagine based on any adjustments that we need to make for that plan between now and July. But that is the plan right now for us to go live all at one time and to be live for 1.5 months before we have the influx of volume with college football and NFL starting up. So, that’s the tech stack plan.

And then from a CPA perspective, we are seeing that the promotional environment is more rational. You are seeing a little less spend from an advertising perspective for paid media across the online sports betting space, which means that CPAs are a little more attractive, certainly a new market like Ohio that we just launched in, in Maryland and Kansas. Massachusetts will see once mobile goes live. But to your question around some of the markets that have been live now for a year, 2 years, 3 years, we are seeing CPAs there that are a little more attractive than they were a year ago. And so that’s part of what gives us some level of optimism not just having an improved product and tech stack going into football season here in 2023, but also an environment where I think there is much more of a focus from all of the top operators to get to profitability.

We welcome that. It’s been our focus. We got there in Q4. We think we are definitely confident we will be there for the year in 2023. But it allows us to be a little bit more aggressive maybe when the environment is a little bit more efficient, a little bit more attractive from a CPA perspective.

Operator: Mr. Snowden, I will now turn the call back to you. Please continue with your presentation or closing remarks.

Jay Snowden: Great. Thanks everyone for joining us this morning. I appreciate your time and look forward to speaking with you in early May to cover Q1 results.

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.