Caesars Entertainment, Inc. (CZR) on Q2 2022 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Caesars Entertainment Inc. 2022 Second Quarter Earnings Call. . I would now like to turn the call over to your host, Brian Agnew, Senior Vice President of Finance, Treasury and Investor Relations. You may begin. Brian Agnew: Thank you, Kevin, and good afternoon to everyone on the call. Welcome to our conference call to discuss our second quarter 2022 earnings. This afternoon, we issued a press release announcing our financial results for the period ended June 30, 2022. A copy of the press release is available on the Investor Relations section of our website at investor.caesars.com. Joining me on the call today are Tom Reeg, our CEO; Anthony Carano, our President and Chief Operating Officer. Bret Yunker, our Chief Financial Officer; and Eric Hession, Co-President, Caesars Sports and Online Gaming. Before I turn the call over to Anthony, I would like to remind you that during today's conference call, we may make certain forward-looking statements about the company's performance. Such forward-looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them. Forward-looking statements are also subject to the inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward-looking statements, please refer to the cautionary statements contained in our press release as well as the risk factors contained in the company's filings with the Securities and Exchange Commission. Caesars Entertainment undertakes no obligation to revise or update any of our forward-looking statements to reflect events or circumstances that occur after today's call. Also during today's call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G. The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the company's website at investor.caesars.com, by selecting the press release regarding the company's 2022 second quarter financial results. I will now turn the call over to Anthony Carano. Anthony Carano: Thank you, Brian, and good afternoon to everyone on the call. Our second quarter was a record quarter for our consolidated property portfolio. Adjusted EBITDA in the second quarter, excluding Caesars Digital, was $1.05 billion, versus $1.01 billion last year. Our Las Vegas segment delivered an all-time quarterly EBITDA record of $547 million, with revenues up 34% year-over-year. Our Regional segment delivered same-store adjusted EBITDA of $513 million, up 24% versus Q2 of '19. Caesars Digital reported a $69 million adjusted EBITDA loss, which was a dramatic improvement versus the first quarter of this year. In our Las Vegas segment, all areas of the business combined to contribute to the record EBITDA quarter. Excluding real rent payments, our Las Vegas segment generated EBITDA of $558 million and a 49% EBITDA margin. Occupancy improved significantly, reaching 97% as a result of strong demand and our ability to lift self-imposed occupancy caps. Strong occupancy when combined with the record ADR, resulted in the highest quarterly room hotel revenues for our Las Vegas segment and company history. Group and convention also posted an all-time quarterly EBITDA record, led by the strong performance of the CAESARS FORUM. Group room nights during Q2 '22 represented approximately 13% of occupied room nights in Las Vegas, up from 11% in the second half of '21. Forward group revenue pace for the remainder of the year and into '23 is up over double digits versus 2019. Our Vegas F&B operations delivered record profit during the quarter as well. And finally, results in our 55-plus segment, Las Vegas were up for the first time over 2019 since COVID began, and we're beginning to see a noticeable return to the market from international travelers. In the Regional markets, while results were down versus last year, operating results remained strong, especially versus 2019. Reported EBITDA of $513 million was up 24% to Q2 of '19 and up 29% when excluding impacts from the Lake Charles closure and construction disruption at Caesars Atlantic City. EBITDA margins improved 50 basis points to 36% on a same-store basis versus Q2 of '19, excluding Lake Charles and Caesars AC. July operating trends in our regional segment remained consistent with the trends we have seen post COVID. Our capital program remains largely unchanged. 90% of our room remodel programs in Atlantic City is now complete, and we look forward to several exciting food beverage concepts opening in October and November. Our land-based facility in Lake Charles is set to open in December and so is our expanded casino offering in Pompano. We expect to break ground on Caesars Danville in Virginia, Harrahs' Columbus in Nebraska and our casino expansion for Harrah's Hoosier Park during this quarter. Lastly, construction on our new hotel tower and additional entities at our New Orleans property is progressing well with the new Sportsbook and poker room set to open Labor Day weekend. These are all exciting projects that will generate a meaningful return on the investment for our company. As we look to the remainder of '22, we remain optimistic about our business as consumer trends remain healthy, especially versus 2019. As we mentioned last quarter, we remain encouraged regarding improving group and convention trends in Las Vegas, the return of the international consumer as well as the potential for the full recovery of our older demographic consumer, which has been the most impacted to COVID-19. I want to thank all of our team members for their hard work in 2022 so far. I'm extremely proud of our operating teams, their execution and their exceptional guest service. With that, I will now turn the call over to Eric Hession for some insights on the second quarter performance in our Digital segment. Eric Hession: Thanks, Anthony. The financial performance of our digital business improved significantly in the second quarter, both on a revenue and an adjusted EBITDA loss basis when compared to the first quarter of this year. As Tom previewed on our last earnings call, our strong gains in unaided brand awareness have allowed us to scale back our brand-related marketing spend. That reduction in combination with the reduced promotional investment environment translated into steadily improving results throughout the quarter. As we look to the back half of the year, we expect a number of significant product enhancements for our customers in key areas such as cash out speed, customer service and parlay and alternative line offerings. We also anticipate converting all of our Caesars' branded apps and sportsbooks to our Liberty tech stack by the end of 2022, burly enhancing the customer experience. In addition, our marketing teams will have new and enhanced ways to deliver offers and promotions to customers, ensuring that they receive them in the most cost-effective way. We continue to believe that scale is important for our digital sports betting and iCasino and poker offerings and pending regulatory approvals plan to expand into states and jurisdictions where allowed. We currently offer sports betting in 25 North American jurisdictions, 18 of which are mobile. IGaming is currently live in 5 jurisdictions, while poker is in 4. As a result, we will continue to remain focused on growth through new state launches, investing from a tech perspective on product enhancements and remaining acutely focused on our expenses. I'll now turn the call over to Bret Yunker, our CFO. Bret Yunker: Thanks, Eric. Second quarter was outstanding from an operating perspective. And if you look back the past 18 months, we've now reduced debt by $2 billion alongside acquiring and standing up our Digital business. Our most recent debt reduction came from $730 million of proceeds from the sale of William Hill International business, $100 million of that was executed through open market debt repurchases below par. The other $630 million were applied to our 2025 term B that happened in July. We continue to produce strong free cash flow with an expectation to reduce debt further in the back half of 2022. I'll turn it over to Tom. Thomas Reeg: Thanks, Bret. I'm going to provide some more color on the quarter where we are now and some conversations that I've had with investors over the last 30 to 60 days. Starting in Las Vegas, $558 million of EBITDA free the real lease payment is up almost 10% over the prior record in Vegas, which was last year's third quarter also post merger. Vegas, coming into the quarter, the monthly cash revenue -- hotel revenue record in Vegas was $91 million. We exceeded that in April, May and June, and we're on pace in 2022 to generate over $1 billion in cash room revenue in Vegas for the first time. Group business has come back extremely strong. We're seeing wash rates at or below historical levels as the pent-up demand for business travel starts to itself in Vegas. That was about a $200 million EBITDA business in the prior Caesars pre-foreign convention center. We're pacing about 40% above that as we sit here today. So obviously, with the addition of FORUM, which was not in operation pre-pandemic, but extremely strong results for us. The strength in Vegas has continued into the third quarter. You should expect to see kind of normal seasonality in August when it's just a little cooler than the surface of the sun. You should see -- expect to see occupancy track back to the mid-90s from the high 90s, but we'd expect to be back in the high 90s September and beyond, and that's what our forward bookings show us. So Sean and his team in Vegas have done an absolutely fantastic job. We've done all of this with Caesars Palace torn up for most of the year with our front entrance work. That finishes in September. So in this quarter, we should be pretty well done with everything you've seen at the front entrance of Caesars, which should eliminate construction disruption there. We've opened Vanderpump and Nobu and Paris. And I'll be out for the Martha Stewart restaurant opening in a couple of weeks in Paris. So that property is transforming as well. So we're extremely excited about that. If you move to regionals, you still have the drag in Atlantic City. Caesars, in particular, is under heavy construction as you might be hearing from numerous others. In a number of industries, it's difficult to bring in your construction projects on time, given supply chain issues. So we were hopeful that all that would have been done prior to 4th of July, the bulk of it should be done by the end of August. So you're seeing -- you should see Atlantic City numbers start to firm up. New Orleans is starting to track back toward where it was before, but still is a laggard among the regionals. And then Lake Charles will open before the end of the year. Remember that's about a $15 million LTM EBITDA drag, should be something north of a $65 million LTM swing once it opens. So we're excited about that. We've got it on the Atlantic City projects coming online. We've got Horseshoe Indianapolis and is less than a year into it and Hoosier Park with a similar table expansion, should come online towards the end of the year. So we're excited about the dollars that we've got out there and the returns that we're going to get on them. In terms of brick-and-mortar, obviously, there's a lot of discussion about the broader economic picture. My first point would be we've done what we've done in 2 consecutive quarters of falling DP. The average recession since the depression, I think, is 10 months. So we're hoping that we're -- for the end of this current environment. But the consumer continues to hold up quite well for us. We've seen unrated play that has softened offset by strength in rated play particularly at the higher end of our database. We've seen international come back to Vegas really in the last 4 weeks, so we're excited about that. And obviously, the stimulus checks were a boom in last year's second quarter and early in the third. But July for us was -- July of '21 was our best month ever, and we're neck and neck with that in '22. Particularly hard to talk about Digital. Obviously, that's been a topic of conversation for a number of quarters. If you'll recall, we headed into last -- we closed the William Hill deal 100 days before the opening kickoff of NFL season. And when you do a U.K. acquisition, there's no prepping before close. You start from a standing start on day 1. Eric Hession, Chris Holdren, their team did a great job of standing up the app, getting our brand out there and making us competitive out of the box. As I said on the last call, we got to about 15% nationwide handle share, again, both states that we're in, states that we're not in. And our unaided awareness got to a point where we were comfortable pulling back on advertising spend. So we have pulled a planned hundreds of millions of dollars that we were planning to spend. We don't think our competitors have followed us, they're still spending. And our share has been stable. And if you look at our losses in the second quarter, each month improved on the month before. So May was a smaller loss than April. June was a smaller loss than May. Obviously, we finished second quarter -- sorry, we finished July 2 days ago, so I'm talking about preliminary numbers, but Digital for July was nearly breakeven for the company. So I would expect as we get into football season, which is clearly our acquisition period in this business, you're going to see some modest losses return as we acquire new customers. But given that we damn near turned profitable in July, I'm extremely confident that we will be a profitable business at least by the fourth quarter of '23. And I view that business as we have made that -- I told you it was $1 billion through last quarter. So you've got to add the $69 million of losses in this quarter. I told you in last quarter's call that I'd expect us to end up at about $1.5 billion of cumulative EBITDA losses. It doesn't look like we will get near that $1.5 billion on the way the business is performing now. And so we are -- we want to prove the concept. We've proved we could carve out a significant piece of the business. Now we want to prove we can make a profit, and then we'll talk about fighting for additional share on the other side of that. But we are extraordinarily pleased with where Digital is in a short period of time and really excited about this football season where we come in with our legs under us rather than running as fast as we can to keep up. So the last piece I want to touch on is leverage, which is a popular topic these days. We have a long track record. We do an acquisition and then we delever. And Bret has told you, while we were standing up Digital with those $1 billion of EBITDA losses in the trailing 12 months, we paid down $2 billion of debt. We expect to continue to pay down debt. If you look at this quarter, even with the Digital loss, we're at about $1 billion of EBITDA. We've got -- we have some capital that's coming online, some returns that are coming online. The Digital business continues to improve. So if you just use -- and to be clear, I'm not giving any guidance. I'm looking at this quarter. If you look at a $4 billion business, our net debt -- lease adjusted debt is a little under $22 billion. So we're under 5.5x levered today. We're generating somewhere between $1.5 billion to $1.75 billion of free cash flow. Now a lot of that is going into growth capital for the time being. But if you think about a recession, of course, you've seen how we behave in a recession, you saw how we behave in a pandemic. The growth capital would start to shut off. But if you look at prior recessions, you're looking at a business that should be mid- to high single-digit revenue declines at worst in Regional, less in Vegas with what's going on now. If you run that at a 50% flow-through, we're still doing about $1 billion of free cash flow a year. So we're very good about where we are leverage-wise. As you know, we have an ongoing sales process for a strip asset that's governed by the VICI agreements and ends about another month to run. So I'm not going to provide play by play there, but know that we are in very good shape, balance sheet-wise. We would like to collapse the CRC bucket for those of you who follow our debt into our parent company. You should expect that we'd be exploring that as soon as the markets open up, and we'll be kicking maturities out as well. So we don't -- for all the hindering about leverage and balance sheet all of a sudden, we really don't stress about that at all. We feel very good about the position we're in and where we're headed going forward. So those are my prepared remarks, let me flip it to the operator for questions. Operator: . Our first question comes from Carlos Santarelli with Deutsche Bank. Carlo Santarelli: Tom, could you just talk a little bit about, obviously, the decline in Digital spend was significant. And I know during the last quarter, you spent considerable time kind of talking about what we would and what we're seeing on TV and in advertisements. As you guys make your transition now towards a profitable breakeven business that's sustainable going forward, where does kind of that advertising bucket lie in terms of the aggregate spend? Is that just something now that kind of run rate where it is? Or will we see incremental stuff that might have been contracted for extended periods of time to fall away as we move forward? Thomas Reeg: Thanks, Carlo. So you'll see this fall, if you're watching TV, part of our ESPN deal includes advertising buys. So you'll see some commercials largely on ESPN, and you'll see some local ads that run locally as well. And then you'll see a little bit in iGaming as we -- as that product gets toward where we're comfortable with moving customers on to our app. So you'll see -- I mean, compared to last fall, it's going to seem like we've left the year entirely, but you will run into a commercial or 2 depending on where you are and what you're watching. Carlo Santarelli: Okay. Great. And then just as a follow-up. Tom, if I look at the Regional markets in general, could you kind of talk a little bit about what you're seeing out there? Obviously, we see plenty of GTR. And that's been relative to 2021, just given the difficulty in comparisons. But from a promotional standpoint, are you seeing any behavior that's any different than what we've seen over the last couple of months, quarters? Thomas Reeg: Nothing that's material to our business. I described the regional business as everybody had more money in his or her pocket a year ago from the transfer payments from the government. So that's both unrated play, that's softness of some of that business has disappeared. That's also rated play that played up last year versus historical levels. But we are quite comfortable that we should be running, let's call it, well into double digits, above 19% EBITDA in regional. And regional margins should be up 600, 700, 800 basis points from pre-pandemic. So I would call that kind of the new normal as it were in this environment where you don't have that little bit of a bubble that you had last year. And this is part of what drove the Caesars acquisition for us, right? You remember when we were 2 markets, and if something happened in 1 of those 2 markets, it was a problem for the company. We wanted to become more and more diversified now. We're more diversified than anybody out there domestically. And what we saw is last year, Regionals carried Vegas when Vegas was struggling with people getting on planes and with virus-related restrictions. And what you're seeing this year is regionals aren't quite as strong as they were last year, but Vegas is picking up the slack. So it's doing -- it's working as we -- as it was designed when we put the company together. Carlo Santarelli: And Tom, just to clarify that, when you say up 600, 700, 800 basis points relative to '19 -- sorry, you didn't say 800, I heard 600 and 700. That was -- that's on the current portfolio, which was I believe, if I'm doing the calculation right, around a 28% margin? Thomas Reeg: Yes. I'd say you're running 35% plus now. And then you're going to have Atlantic City construction roll-off, which should certainly improve revenue and margins. And then you're going to have Lake Charles come on, which should be a significant swing for us. Operator: Next question. Our next question comes from Joe Greff with JPMorgan. Joseph Greff: Just a question touching on price elasticity in Las Vegas, especially in light of airfares that are much more expensive now than history and for the driving traffic coming from Southern California with higher gas prices. Are you seeing any segment either on a net worth basis, on an age basis that's exhibiting spend reduction in relation to higher hotel rates, food and beverage pricing and such? And is the sensitivity on that maybe greater during seasonally slower period like you mentioned August when things are obviously pretty hot -- heated in Las Vegas? Thomas Reeg: I can't point you to anything in particular, a 55-plus has started to come back in Vegas, like they've not come back since pandemic. We talked about international has returned quite recently, which is a great sign for us. But we're -- when you're running 97% at these rates with up 10% over our prior record, really everything is going great in Vegas. And as we headed into Board meeting last week, earnings call this week, we checked with our booking channels, are we seeing any softness in Vegas bookings? And what came back is we've actually seen a pickup over the last 2 or 3 weeks. So it is extremely strong. I can't -- there are not strong enough words to convey how well it's going in Vegas for us. Joseph Greff: Great. And just going back to Digital and your comments there. Obviously, it sounds like the improvements both on a revenue basis and then the narrowing of EBITDA losses there. It sounds like it's largely Caesars specific and not necessarily a function of seasonality and/or the environment getting less irrational in terms of promos or customer acquisition costs. Is that a fair assessment? And then I'll add a part B to this. When we think about the losses for the next couple of quarters, and I know there's seasonality in the 4Q with football, do we -- would you expect that EBITDA loss in both the 3Q and 4Q to be below that $100 million level or approximating that 2Q $70 million, $69 million EBITDA loss level? Thomas Reeg: I would expect forward -- I expect we will not have a quarter of $100 million quarterly EBITDA loss in Digital again. We can talk about modeling off-line, but that business -- and we've had a lot of conversations about this, right? How are you going to become positive? The key factor to think about in the third quarter is you had no significant new states coming online. And so your business became dominated by existing customers rather than new acquisition customers. And I can't stress enough that the cost of the acquisition cost versus the retention cost is a dramatic difference. So I would expect this football season for everybody. You're going to have New York and Louisiana who were very late last year. So you're going to have a fair amount of acquisition activity there. You're going to have some natural acquisition activity, but you don't have a new state of scale coming online to Ohio in January. So we feel pretty good certainly for ourselves. And I can't speak for what others are doing. We got almost $0.5 billion of what we were anticipating spending in marketing in the last 3 quarters of '22. So this is a dramatic pivot for us. We're heartened that we haven't seen share deterioration and particularly with what we've seen in profitability. And you know we're really not wanting to lose money when we don't need to. And we've got a long track record of really turning highly subsidized businesses on the brick-and-mortar side into a far more profitable business. It's the same thing that we're doing in Digital. When we started Digital, we didn't have the ability to segment customers. And now we -- so you -- in effect, underinvest in your customers and overinvest in your worst. That's no longer the case. So you can be far more precise in what we're doing, and we see the fruits of that every day as results come in and it's great to see. Operator: Our next question comes from Steven Wieczynski with Stifel. Steven Wieczynski: Tom, you mentioned in your prepared or so-called prepared remarks, unrated play. You saw that slowing. And I guess the first question, is that across both Regionals and Vegas? And then the second question there would be, have you seen any spend pattern changes in your database tiers, meaning that low tier-rated player? Has there been any softness there? Thomas Reeg: So no difference in the unrated across markets. It's just casino play in general, doesn't move the needle as much in Vegas as it does in regional. In terms of tiers of customers, I think if you go to the lowest and the properties on the Mississippi River for us in the South, those started softening in January, February for us. And then have been stable, but you're talking about a couple of properties that are $20 million of EBITDA to $4 billion. So nothing that is material to the enterprise. Steven Wieczynski: Okay. Understood. Second question, Tom, in terms of the Strip asset sale? I know you're probably very limited in terms of what you can say. But is the delay -- and I'm not sure if even that's the right term. But is the delay here really more around the rate and the funding environment versus the demand environment? Just I guess what I'm trying to understand is if the demand for Strip assets is still as strong as where as it was, let's say, a year ago? Thomas Reeg: So just to be clear, we've talked about this on other calls. It's very clear the time line that is laid out in the VICI documents that govern this. So we launched early this year, the deadline is by the end of the summer. And every deadline I've ever seen in deal land, the work goes into that deadline. For us -- and there's -- there are plenty of interested parties. Obviously, the financing environment is what it is. And if that's going to impact what someone will pay, there is a level where we're not going to chase it. I'm very happy to just clip the free cash flow and come back later. But as we have discussed, this is a discretionary trade for us. We still think we can get it done within the parameters that we had set at the outset. But we are -- we certainly recognize we live in a market that moves day-to-day. And if financing conditions change, the outcome might change. But this has become -- for me, it's kind of amusing because when I first started talking about we're to sell our Vegas Strip asset, that the response from full sell-side and buy side was why would you want to sell the Vegas Strip asset? Look at how great it is. And we said there are times in the market that you don't have to go back very far, that where -- we didn't -- we wouldn't want to have owned this many rooms. And now the conversations have turned to, oh my god, can you get this done? This is critical. This is a change in you, not in us. This has been discretionary from us, for us from day 1, and it remains so. So regardless of what level of fear is coursing through the investment community, we put our heads down and we do the work. And if we have a trade that makes sense for us, we'll do it. If we don't, we're fine with. That's far more than I wanted to say about the Vegas Strip asset sales, so no more questions on that. But that's where we are. Operator: Our next question comes from Barry Jonas with Truist. Barry Jonas: Auto traffic to Vegas has slowed according to Citywide, the LVCVA data. Curious if you're seeing anything like that across your database with California visitation? Thomas Reeg: Yes. We've just reported a record quarter, told you July is very strong as well. I mean yes, there is a seasonal in Vegas, third quarter is lower than second quarter because it's 120 degrees. But beyond that, we're really seeing no change in Vegas activity. Unidentified Company Representative: The June traffic at the airport was record levels as well. Thomas Reeg: That's right June seats in Vegas set a record. Barry Jonas: That's helpful. And then just as a follow-up, any thoughts on the Centaur option here? Thomas Reeg: For us, you should not expect us to exercise the put. You'll have to ask VICI what their intentions are on the call. But in any event, like any option, I would expect if VICI intends to exercise, they would be looking toward the end of the option period. But I don't know that's a supposition if I was in their shoes, not that I'm telling that. Operator: Our next question comes from Shaun Kelley from Bank of America. Shaun Kelley: Just two questions on the Digital side. Tom, I was just intrigued by the comment around, you will not get near to the $1.5 billion of losses. I think you it on a quarterly basis, but any chance we could get you to help us set a new kind of overall level for us or not quite prepared to do that? Thomas Reeg: Hard to do in front of football season. We're at -- what are we at? We're at $1 billion, we're at $1.069 billion now. I'd say think about that neighborhood for the next couple of quarters and then improving to inflection to positive at worst in the fourth quarter next year. Shaun Kelley: Super. And then one for either the group or for Eric specifically. But we're thinking about the Digital strategy, 2 parts here. One is obviously, you pulled back some kind of -- has the market overall changed very much as it would relate to promotional spending? And just kind of how are you seeing that cadence work? And then for your own product lineup, can you just talk a little bit more about how you kind of hope to make some inroads on online gaming? Maybe just the product road map on the iCasino side a little bit, given the strength of your database, we've always thought that, that's a huge opportunity for Caesars. Unidentified Company Representative: Yes, Shaun, sure. So in terms of what our competitors are doing, we really haven't seen much of a change at this point. We don't know exactly what their plans are for football, but we've heard no indications that they're changing the original strategy. We believe that the performance that we had in the second quarter and as we head into July and the next few months, support our notion we can pull back. And that customers are more sticky than we had originally thought. And that, that's allowing us to be able to have the large reduction to still maintain kind of the revenue levels we were at. In terms of the iCasino, I would say you're exactly right. And quite frankly, that's an area that I think all of us around the table are probably the most with. We really haven't gained the traction that we want and given our knowledge of how to use those customers and to market to them and to segment to them and what they're looking for in terms of game type based on the retail business, we should absolutely be a market leader in the iCasino space. We've been challenged from a tech perspective as well as from a marketing perspective. And unfortunately, that is lagging the sports betting side. So later in the fourth quarter, we're going to be making some enhancements on the tech side, so that we'll be able to do segmented marketing. And some other things we'll be able to do free spins coming up, which are all basic things that you'd expect would be in place. But unfortunately, they were just difficult from a tech perspective. So I do agree with you that, that is an area of opportunity. And I think if you were to look starting in the fourth quarter into next year, you're going to see us start to make some real progress there. Operator: Our next question comes from David Katz with Jefferies. David Katz: If we could talk about just the margins so that we can -- look, 90 days seems like a world away. I know at one time, we were talking about 4%. Is that -- it's still a neighborhood where we think we can live either near term or long term? Thomas Reeg: Well, at the 558 we're 49% in the quarter. World Series of Poker happened in the -- largely in the second quarter. That's additive to EBITDA. It's about a 100 basis point drag on margins. So from an operating perspective, we were at 50% in the second quarter. If you think about forward, obviously got a little bit of seasonality third quarter, fourth quarter drag on margins. So from an operating perspective, we were at 50% in the second quarter. If you think about forward, obviously, you got a little bit of seasonality third quarter. Fourth quarter, you might have read, we're going to have some entertainment come online. That's a lot of revenue sales, but that's going to impact Vegas margins. So you're going to have -- when that particular entertainer starts, you're going to have a lot of revenue run through that goes to the artist, a little bit of profit to us and a better customer on the floor. David Katz: So 50% is where we're going to we're -- is still a comfortable place for us to hang out? Okay. Thomas Reeg: Yes. Operator: Our next question comes from Daniel Pulser with Wells Fargo. Daniel Politzer: So I want to hit on regionals first. I mean, I think margins over the course of the quarter, if you could just kind of any color on how the cadence was? I think, because March was, I think, in the high 30s. And then how pace over the course of the quarter? And then certainly, I get there is some disruption from Lake Charles and Atlantic City. But as we think about the third quarter relative to the second quarter, it's typically -- those are your best 2 quarters of the year. So I wanted to make sure that's still kind of in place at this point? Thomas Reeg: Yes, that's still in play. I would say, month-to-month in the quarter was not a dramatic move across that many properties. So you should figure that the business was running at about the 36% level or so for the bulk of the quarter. Daniel Politzer: Got it. And then in Las Vegas, I know there was some flooding recently. I wanted to check has that been fully cleared up at this point? And how should we think about the impact, if any, in the third quarter? Thomas Reeg: I just put my life jacket off all the way over. It's -- there's no impact to the business at all. It's some good social media footage. Daniel Politzer: All right. And then just one last one. I think you mentioned that group was pacing up in Vegas around 40% versus 2019, including, obviously, FORUM. I mean how should we think about that on a -- I guess, excluding FORUM, is it still tracking up? And what's really driving that? Is it pricing? Is it just food and beverage, additional business or it's just volume? Thomas Reeg: It's all of that. It's volume. It's -- you've seen what we've done in other segments of the business that we run versus how they were run prior. The banquet business that comes online is -- it's accretive to margins, even the 50% margins in Vegas. And Michael Massari and his team have done a fantastic job of building a great calendar for us, and all of that comes together for a great outcome. Just to give you an example, Harrah's -- the second quarter, nearly 20% of room nights at Harrah's were grouped nights. And that's a property that had effectively zero prior to the FORUM Convention Center opening. Operator: Our next question comes from David Bain with B. Riley. David Bain: Great. First, I was wondering, you gave some color on structural forward growth drivers in Vegas. And you touched on the associated revenue with conventions. Can you big picture international? Is that a $50 million to $60 million business? And then you also mentioned the 55-year-old demographic returning. Just kind of wondering kind of where we are if you can quantify where that was prior to COVID versus today? Thomas Reeg: So directionally, 55 and over is now above in Vegas for the first time since pandemic, but it is still trailing younger cohorts on a comparable basis. So the younger cohorts are up more. That's a much -- in terms of order of magnitude, that's a much bigger piece of the business for us than international. International is a good story for us, but it's far smaller than 55 and over. David Bain: Okay. Great. And then one more, if I could. One industry report cited that the OSB Euro SB is looking at a black label site for VIPs. Do you see, Tom, segmentation coming to online? And can you take kind of what you've done offline to online and create margin outperformance, if you will? I mean is that something we miss when we structure our iCasino and OSB models at maturity, looking at international even before consideration of the land-based benefits? How does that trend? Thomas Reeg: Yes. I mean, wrapping it into Caesars Rewards, it should -- at maturity, it should be just like the brick-and-mortar business. So we should be able to get more share of wallet from our best customers and not overspend on small customers, which is the same idea as brick-and-mortar. I will say one of the things that you missed that I see missed in analysis of Digital is as we launched -- as all of our peers launched, you saw all these sports partnerships created, branding partnerships, affiliate relationships, all for customer acquisition at launch as these states launch. That runs $0.25 billion through our Digital business today. Those are all contracts that run off -- depending on the contract, 2 to 5 years after they were signed. Now as you get into a more mature business, you're not going to be recutting those deals or you're not going to be recutting them at the levels that you started at. So that's going to be extremely accretive to EBITDA as those -- as the business is seasoned. And I know that's the case for everybody in the business. Operator: Our next question comes from Chad Beynon with Macquarie. Chad Beynon: In terms of sports betting, California initiatives, I believe there are 7 or 8 companies that have backed one of the bills. Can you talk about how you're positioned there? And more importantly, are there states in the U.S. where you would potentially take a hard pass given maybe a higher buy-in or a higher tax rate? Thomas Reeg: Sure. I struggle to think of a jurisdiction we would not go to in the U.S. if it opens. I guess, if you think of a very small state that puts up an enormous tax rate, that's a small possibility, but we want to be everywhere. In terms of California, we're not part of either initiative. We have a strong -- what -- we want to see sports betting in every jurisdiction that we can find. We'd love to see iCasino in every jurisdiction we can find. We have a decade-long relationship with a number of tribes across the country where we've been managing their assets through multiple contract renewals, which was a unique position when we bought Caesars. I've never seen that before. And we don't want to be in opposition to tribal interest when we're their partners. So we've remained neutral in California throughout. You should expect that to be the case in any state where tribes are at odds with the commercial interest. Chad Beynon: Great. And then I wanted to ask you about your kind of hypothetical 50% flow-through. And I know that was more of just kind of, again, a hypothetical if revenues declined and you were really just trying to make the point of strong free cash flow. But within that, I guess I wanted to ask in an environment where revenues are declining, are there some fixed costs, maybe in labor or other OpEx, where you could reduce costs? Obviously, marketing is at pretty low levels. We all understand how the rent -- the lease payments work. But yes, in this hypothetical situation, are there areas where you could kind of trim some of your "fixed" OpEx? Thomas Reeg: Yes. Chad, without question. You just saw us live through the pandemic. And the amount of cost that you can cut in these businesses is far beyond even what we thought prior to the pandemic, and we were among the most vocal that there were significant costs to be cut. So one of the benefits of the pandemic for us is you got a sense of what your customer -- what they were willing to tolerate in a softer environment. And I'm thinking in terms of hours of operation for nongaming amenities. The -- what you can do in a soft environment is far different than what the world believed pre-pandemic. So, I think the -- both the 50% flow-through and the top line hits are far in excess of anything that we're expecting. I really said that to illustrate that even in that scenario, we'd be generating $1 billion of free cash. Operator: And next question from with Barclays. Unidentified Analyst: Okay. Great. Tom or any one, I wanted to just get a sense for how you're feeling about your Las Vegas room rate pricing power from here and outside of rooms being removed from the system like with the Rio, what inning do you feel like you're in, in terms of pushing rate just based on your present occupancies, which are really high? Thomas Reeg: I mean I think what you're going to see is the return of group is going to help us grind rate higher because that's going to push out our lowest rate customers. That's what's already happening. And keep in mind, we're about to cycle through where we'll be comping against self-imposed occupancy caps because of labor levels last year. So you're going to see even more significant flow-through as we get towards the end of the year with those caps off. So we feel extremely positive about the forward occupancy and rate environment in Vegas. As I said, we're on pace to do better than $1 billion of cash room revenue, which has never happened in Caesars. Unidentified Analyst: Okay. And then just one follow-up. Curious to hear about this Empire days, Las Vegas promotion you guys launched today, if this is a regular way type set of promotions, if it's sort of new or it's more offense or defense? And just any other ways that you'd like to share that you can activate the Caesar Reward system here for any various pockets of softness that we might see in the next 6 to 12 months? Thomas Reeg: Yes. This is a typical room sale that goes on every year. So there's nothing in particular to call out there. We're running at 97%. July was 96.5% occupancy. So we don't have a lot of extra room to fill at this point. So we feel very good about and his team in revenue management for us and Sean as the operating leader in Vegas. We couldn't have done better in terms of what we inherited in that group and have a great degree of confidence in the results that will drive going forward. Operator: I'm not showing any further questions at this time. I'd like to turn the call back over to Tom for any closing remarks. Thomas Reeg: All right. Thanks for your time, everybody. We will talk to you after the third quarter. Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.CZR Ratings Summary
CZR Quant Ranking
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Raymond James Initiates Coverage on Caesars Entertainment with a Strong Buy Rating
- Raymond James has initiated coverage on Caesars with a Strong Buy rating, indicating confidence in Caesars Entertainment's growth and market strategy.
- The opening of Harrah's Columbus Nebraska Racing and Casino highlights Caesars' expansion into new markets and its ability to attract guests, contributing to the positive outlook.
- Despite facing a significant data breach, Caesars's financial metrics and market activities suggest resilience and potential for recovery.
On Monday, May 20, 2024, Raymond James initiated coverage on NASDAQ:CZR with a Strong Buy rating, a significant endorsement for Caesars Entertainment Corporation. This bullish outlook came at a time when CZR's stock was priced at $34.94, reflecting confidence in the company's future performance. Caesars Entertainment, a major player in the casino and entertainment industry, has been expanding its footprint, as evidenced by the opening of its first property in Nebraska, Harrah's Columbus Nebraska Racing and Casino. This move not only marks the company's entry into a new market but also demonstrates its growth strategy and commitment to expanding its brand presence.
The grand opening of Harrah's Columbus Nebraska Racing and Casino was a landmark event for Caesars, showcasing the company's ability to launch significant ventures and attract guests with a variety of gaming activities. The successful opening, complete with a ribbon-cutting ceremony and the excitement of a guest winning the first jackpot, underscores the potential for Caesars to capitalize on new opportunities in untapped markets. This expansion into Nebraska could be a key factor driving the Strong Buy rating from Raymond James, as it highlights Caesars' proactive approach to growth and its ability to successfully introduce its brand to new audiences.
However, Caesars Entertainment has also faced challenges, notably a significant data breach affecting over 65 million Caesars Rewards members. This cyberattack, compromising sensitive personal information, represents a substantial setback for the company, potentially impacting customer trust and loyalty. The ongoing investigation by Levi Korsinsky, LLP, into the breach and the possibility of compensation for affected members, adds a layer of uncertainty to Caesars' operational landscape. Despite these challenges, the Strong Buy rating suggests that analysts at Raymond James may see these issues as surmountable in the context of the company's overall growth trajectory and market strategy.
Financially, CZR is navigating a volatile market, with its stock experiencing fluctuations and currently trading at $34.94, down 1.63% from its previous close. The stock's performance, with a year-to-date low of $34.58 and a high of $60.27, reflects the dynamic and sometimes unpredictable nature of the entertainment and casino industry. Despite these challenges, Caesars' market capitalization of approximately $7.56 billion and a trading volume of 3,966,429 shares indicate a solid foundation and investor interest in the company's future.
In summary, the Strong Buy rating by Raymond James for Caesars Entertainment comes at a pivotal time for the company, as it demonstrates growth through expansion while navigating cybersecurity challenges and market volatility. The opening of Harrah's Columbus Nebraska Racing and Casino represents a significant step forward in Caesars' strategy to enter new markets and enhance its brand presence. Despite the data breach setback, the company's financial metrics and market activities suggest resilience and potential for recovery, aligning with the optimistic outlook provided by Raymond James.
Caesars Entertainment Reiterated With Buy Rating at Deutsche Bank
Deutsche Bank analysts maintained a Buy rating and a $60.00 price target on Caesars Entertainment (NASDAQ:CZR). The analysts noted a reduction in the fourth-quarter 2023 estimates for Caesars Entertainment, with lowered forecasts in each of the company's three key segments: Las Vegas, Regional, and Digital. The revision is based on factors such as feedback on Formula 1, slower regional performance up to November, and widely known challenges in the online sports betting (OSB) industry.
The analysts anticipate that these changes won't surprise investors and expect consensus forecasts to adjust downwards in the upcoming weeks. Caesars Entertainment plans to announce its earnings on February 20, and considering the debt maturities in 2025 and an improved debt market, there might be a refinancing announcement alongside the earnings, similar to last year's early announcement on January 23, 2023.
The analysts continue to see Caesars Entertainment's shares as offering a strong risk-reward balance, assuming no significant macroeconomic downturns. The shares are currently providing a 15% free cash flow yield based on their conservative 2025 forecasts, which are below consensus. The analysts expect significant debt reduction and financial leverage improvements to benefit equity holders. Coupled with modest expectations for 2024, this presents a favorable situation for the company.
Caesars Entertainment Investor Meeting Takeaways
Deutsche Bank provided its key takeaways from Investor Meeting with Caesars Entertainment, Inc. (NASDAQ:CZR) management, including CEO Tom Reeg. The analysts found the tone of the meetings to be largely balanced and consistent, with strategic priorities focused on (1) continued debt/leverage reduction, (2) operational prudence, and (3) Digital execution.
On the digital strategy, management outlined the path to $500 million in annual EBITDA with margins in the mid-20% range helped by rolling off uneconomical partnerships and driving higher hold. The company expects its digital sports betting to be 55% of the run rate EBITDA, with iCasino making up the balance, though with higher margins (over 30%).
According to the analysts, another positive driver is the debt-to-equity conversion path given its lease structures. They estimate that the company will exit 2024 with approximately 4.9x debt to adjusted EBITDA leverage. The analysts reiterated their Buy rating and $70 price target on the stock.
Caesars Entertainment Investor Meeting Takeaways
Deutsche Bank provided its key takeaways from Investor Meeting with Caesars Entertainment, Inc. (NASDAQ:CZR) management, including CEO Tom Reeg. The analysts found the tone of the meetings to be largely balanced and consistent, with strategic priorities focused on (1) continued debt/leverage reduction, (2) operational prudence, and (3) Digital execution.
On the digital strategy, management outlined the path to $500 million in annual EBITDA with margins in the mid-20% range helped by rolling off uneconomical partnerships and driving higher hold. The company expects its digital sports betting to be 55% of the run rate EBITDA, with iCasino making up the balance, though with higher margins (over 30%).
According to the analysts, another positive driver is the debt-to-equity conversion path given its lease structures. They estimate that the company will exit 2024 with approximately 4.9x debt to adjusted EBITDA leverage. The analysts reiterated their Buy rating and $70 price target on the stock.
