Caesars Entertainment Inc (CZR) — Q2 2015 Earnings Call Transcript

Thank you. Good afternoon and welcome to the Caesars Entertainment Second Quarter 2015 Results Conference Call. Joining me today from Caesars Entertainment Corporation are Mark Frissora, Chief Executive Officer; and Eric Hession, Chief Financial Officer. A copy of our press release, the earnings presentation slide and a replay of this conference call are available in the Investor Relations section on our website at caesars.com. The slides are available for download on the Events and Presentation section and will accompany Mark and Eric's prepared remarks for those of you on the phone who would like to follow along. Also, please note that, prior to this call, we furnished on Form 8-K a copy of this afternoon’s press release to the SEC. Before we get on our way, I’d like to call your attention to the following information on Slide 1 through 4. The Safe Harbor disclaimer in our public documents covers this call and the simultaneous webcast at caesars.com. The forward-looking statements made during this conference call reflect the opinion of management as of the date of this call. There are risks and uncertainties with these statements, which are detailed in our filings with the SEC. Please be advised that developments subsequent to this call are likely to cause these statements to become outdated with the passage of time, but we do not intend to update the information provided today prior to our next quarterly conference call. Today, we are reporting second quarter 2015 results. These results are not necessarily indicative of results in future periods. Additionally, today's call will include non-GAAP financial measures, including property EBITDA, adjusted EBITDA and certain supplemental financial information.

Thank you, Jackie. I am pleased to join today’s call as President and CEO of Caesars Entertainment. Before I turn it over to Eric to review the details of our quarterly results, I would like to share my early impressions of the company and the opportunities that I believe lie ahead. Unless indicated otherwise, my comments relate to Caesars system-wide including our deconsolidated subsidiaries. Starting on Slide 6, as I briefly mentioned on our last call, since joining Caesars in February, I have spent much of my time learning about the business, meeting with the leadership team and visiting properties across the network. I am encouraged by what I have found thus far and we believe we have a solid foundation on which to grow and further transform Caesars into the world’s premier entertainment company. Over the coming months, the senior leadership team and I will continue our strategic review of the business and together develop a strategy to drive growth and enhance performance for the near and longer term. While we have not yet completed this process, I can assure you my focus will be on identifying opportunities to enhance growth, EBITDA margins and cash flow, all the while keeping employee and customer satisfaction high. Taking together, our focus on these priorities will play a critical role in improving all stakeholder returns. Our opportunities to strengthen performance range from initiatives that require minimum capital investment, such as improving supply chain management or growing the number of active total rewards members, to more intensive projects which could include investments in backend infrastructure and technology to yield greater efficiencies or expanding hospitality segments in destination markets. I would expect investments in Las Vegas room products which will drive cash ADR growth to be among the first and highest priorities. I have no doubt that further investments in hospitality will be a major component of our strategic plan. I’ll communicate more details of our strategy later this year.

Thank you, Mark. I’ll first start with continuing CEC’s consolidated results for the second quarter followed by a review of the company’s reportable segments and then discuss the supplemental information we have provided on our website which included CEOC’s second quarter performance as well as continuing CEC plus CEOC’s results. Slide 13 summarizes continuing CEC’s results which do not include our deconsolidated subsidiary CEOC. For the second quarter of 2015, continuing CEC net revenues increased 17% to $1.1 billion with a 56% increase in adjusted EBITDA to $347 million. As previously discussed, top line improvements were attributable to the openings of Horseshoe Baltimore and the Cromwell, the renovation of The LINQ Hotel, organic growth in the interactive entertainment business and strong hospitality performance. Review improvement marketing and operational efficiencies, favorable year-over-year hold as well as strong hotel and F&B margins led to the year-on-year improvement in EBITDA with margins expanding 747 basis points.

Continuing CEC reported a strong, very strong second quarter, which you can see on Slide 7. Net revenues for continuing CEC which as a reminder exclude CEOC increased 17% to $1.1 billion. Adjusted EBITDA grew 56% to $347 million. Adding CEOC to CEC on a supplemental basis, net revenues increased 8% year-on-year to $2.3 billion with a corresponding 42% increase in adjusted EBITDA to $647 million. Increased revenues were attributable to the openings of Horseshoe Baltimore and the Cromwell, the renovation of The LINQ Hotel, exceptional growth in the interactive entertainment business and strong hospitality performance. Marketing and operational efficiencies, favorable year-over-year hold as well as higher cash mix in hotel and food and beverage outlets were also contributors to results in the second quarter. As a result of all of these factors, the business delivered the highest quarterly EBITDA margin since 2007. Company’s system-wide performance is a testament to the contributions and commitment of our team across the company ranging from operators to the game developers and CIE and on to the marketing and analytics team in our corporate office. The significant improvement in EBITDA in the first half of the year reflected margins grew 591 basis points year-on-year, which was generated from the performance of new investments and disciplined expense management. Further, our continued improvements are still challenged by the fact that core gaming growth in the regions has not recovered to the extent seen in Las Vegas. As I mentioned earlier, hospitality’s substantial growth opportunity procedures and is an area in which we have found and focused our efforts over the last several years.

Let me now turn the call over to Mark.

Thank you, Jackie. I am pleased to join today’s call as President and CEO of Caesars Entertainment. Before I turn it over to Eric to review the details of our quarterly results, I would like to share my early impressions of the company and the opportunities that I believe lie ahead. Unless indicated otherwise, my comments relate to Caesars system-wide including our deconsolidated subsidiaries. Starting on Slide 6, as I briefly mentioned on our last call, since joining Caesars in February, I have spent much of my time learning about the business, meeting with the leadership team and visiting properties across the network. I am encouraged by what I have found thus far and we believe we have a solid foundation on which to grow and further transform Caesars into the world’s premier entertainment company.

Thank you, Mark. I’ll first start with continuing CEC’s consolidated results for the second quarter followed by a review of the company’s reportable segments and then discuss the supplemental information we have provided on our website which included CEOC’s second quarter performance as well as continuing CEC plus CEOC’s results. Net revenue declined 2% year-on-year to $1.2 billion and adjusted EBITDA increased 42% to $303 million. The revenue decrease was primarily attributable to lower year-on-year reimbursable expenses from our managed properties. Excluding these reimbursable expenses, revenue was up 1% driven primarily by improvements in hotel and entertainment revenues which were partially offset by declines in casino and F&B revenue segments.

As I mentioned earlier, hospitality’s substantial growth opportunity procedures and is an area in which we have found and focused our efforts over the last several years. While the majority of our hospitality investments have been concentrated in Las Vegas, offerings have also been expanded in the regional markets. On the next several Slides, you can get a sense of projects across the Caesars system that are currently underway or have been recently completed.

Hey, good afternoon.

Hey, good afternoon.

So I wanted to start with I guess your commentary Mark on July. I was wondering if you could talk about gaming and I guess on a - I guess apples-to-apples comparison because I know some of the comps which is the regional markets were easier, when you are talking about July, you are seeing any notable increases besides your comps from last year?

We saw sequentially from June to July and improvement in July in general and we saw an increase year-over-year in pretty much all markets. So is that answer your question?

Sure. And then just with regards to the resort fees, I guess Eric, can you remind us when those were implemented last year?

So it’s two drivers that are causing the increase, one is that we’ve expanded the number of our segments that book into the hotel that receive fees and then in addition we had increased our resort fees in January, so we had actually implemented them broadly prior to that.

Okay, great. And then was there any change I guess companywide or any of the entities with regards to maintenance CapEx?

No. No change with respect to maintenance CapEx.

Okay and I guess will just see that in the various SEC filings in REIT entity? And that’s you have -

Are you talking about total CapEx or the specifically made?

Yeah, specific to Q2 CapEx or you asking about the range of the expected CapEx?

Both actually.

Yeah, so for - I can give you that, now for Q2 CEOC spent 37 million, this is total CapEx. CERP spent 50 million, CGP spent 70 million and CES spent 6 million. As I mentioned earlier, the full year estimate are unchanged and we continue to be pacing well to hit all those ranges we previously provided.

Great and just a couple other follow-ups, I guess with regards to the AC convention center, I think you said you are 30 million less but I know there is reimbursement coming from the state?

Yeah, Susan, I think we talked about how it works for the prorated reimbursement from a spent that we spent the CapEx first and so that process continues throughout the build.

And Jackie, is there any amount that you expect to get back in 3Q or 4Q that you could provide to us?

No, we don’t have specific estimates on when we are going to get those.

Okay and then just on the CGPH side, the project CapEx spent there for the LINQ and what’s remaining there?

We - as you know the LINQ is open at this point, so we are basically paying invoices related to the project that have come in delayed behind when the assets put into service. We have approximately $25 million left that we anticipate coming in on that project.

Great and if I could sneak one and you guys didn’t talk about the performance of the LINQ and I was just wondering if you could talk about that at all?

Yeah, so we’re still very pleased with the response we are getting, the experience is great for the real the feedback we get from the customers is very positive. In prior periods we did breakout the actual EBITDA performance because it was a new asset but now that we’ve annualized it and it’s been reflected in both periods. We haven’t been breaking it out and we don’t plan to going forward.

Hi guys, good afternoon. How are you?

Hi David.

Hi Mark - for the conference calls, I had a couple of questions, first I wanted to just tackle CERP for a minute, the margin was again better than we had expected which is promising. I am just curious what is driving that, you know at two quarters now at the 30, so what’s driving that and then what are your expectations for CERP margin into the back half? And then a couple of follow-ups, thanks.

So in general, our margins are being driven by marketing efficiency, if you will we’re getting much better at identifying customers that are profitable in those that we give things away that we probably shouldn’t because it doesn’t make sense, we are not driving incremental volume. So those efficiencies are helping out a lot. And then also our labor productivity in operations is a significant improvement year-over-year hence driving tens of millions of dollars of improvement in the operating results. And then in terms of sustainability, we believe that all of this is sustainable, these margins are sustainable and that we’ve got other incremental projects today that will continue to drive this kind of productivity improvement as well as we think the marketing efficiencies will continue as well.

Okay, that’s helpful. And then just following through that, if in fact we are able to see sort of better margins into the back half, what would you intend to do with the incremental free cash flow, you sort talked about projects, I am curious specifically on LINQ or CERP in general, would you use the free cash flow for what projects and would pay down potentially if that’s something to be curious about, or excuse me, interested doing on the CERP side?

David, I’ll take the first half and then Mark can feel free to jump in on this if I miss anything. But - you’re right at the entity we’ll start to generate significant free cash flow as we continue to move forward. As we talked the assets in this portfolio consist of some rather large hotels. We mention that we think the returns from renovating those rooms are quite appealing right now, particularly in Las Vegas and also in Atlantic City with respect to the new convention center coming on. And so we are starting to evaluate which hotel tower to renovate and what sequence to maximize the returns. I think you’ll see starting a renovation at a hotel tower Paris here in Las Vegas shortly. And then as we move into next year, we’ll evaluate some other hotel towers as well. In combination with that we’ll evaluate the potential to pay down the remaining balance on the revolver as well. So it’s going to be a balancing effort based on the results and where we see the best opportunities.

Got it. Okay, that’s helpful. And then CEOC side of the house, we’re not six months into the year, just curious sitting here today with the outlook you talked about, how do you feel about the plan EBITDA you set up in the beginning of the year? Is that attainable, is it reasonable or is it potentially too conservative, any thoughts around that and what you see for the balance of the year for CEOC?

I mean on our remarks, we pretty much said that we expect to meet or beat our expectations. In terms of any other color, that’s about the best I can do because our business has obviously some inherent volatility that goes into the luck components the whole component and so we want to make sure we’ve given you numbers then expectations you count on.

Okay, understood. And then just sort of the as an operator all the three larger segments, I am just curious from the day-to-day and may this question is for Eric if he can help, what sort of reliance you might have on the parent company, any thoughts around there if you could help us and are there any legal issues that could impact surplus growth with respect to the parent or thoughts around that would be helpful? And that’s it, thanks.

So, David, I’ll just remind you that the parent is essentially a holding company. It has the three end primary assets that it owns is a 100% of CERP, it consolidates CGP and then has 89% ownership in the CEOC which is deconsolidated. So that’s about all we can say, there are no real assets, there are no properties, there are no suppliers. Yeah so the point is it’s just a holding company. So it’s - other than that there is nothing significant.

Good afternoon. Thanks for taking the questions. Just had a follow-up just Sue’s question, did you say July was better than June or did you say it was better than second quarter trends?

I think it’s in general probably let’s see I would say June for sure and I wouldn’t say broadly the second quarter because as you May was kind of blowout for everyone in the industry because of the fight that was here in Vegas.

Okay, that’s fair. Just a quick question on baccarat play, would you say are people still coming to the market and just not spending at the level they did in the past or have people just completely stopped coming?

To some extent year-over-year there is a tough comp, so we should understand that. Secondly, I think you know we expect the business to begin to slowly come back to historic levels as the issues that surround what’s going on in China and the premier stand on gambling in general lighten up and we’ve had a lot of, as you know, kind of different things that have occurred within Vegas in terms of regulations and tighter environments here and I think that also makes sometimes the larger gamblers in China a little slower to come. So there are a lot of different drivers. In general, the whole industry is experiencing this so we are not unique to the industry how we feel that we are doing a lot to make sure we market ourselves as one of the top Asian playhouses with Caesars and plan at Hollywood and Paris and a lot of the facilities that we have within the strip itself.

Great, maybe just a question on status of let’s say room renovations in terms of how many rooms were offline this quarter versus the first quarter and versus a year ago, maybe Eric or Jackie can comment. And perhaps when you’ll see those rooms go back to a normal cadence of being offline?

Yeah, so Kevin, as you know we had a major renovation going on as a link and rooms started to come back online in October of last year and they fully came back online early in the second quarter. So you would have seen during both the fourth quarter and the first quarter some significant room outages particularly at that property. As we move forward, again, you’ll see some construction disruption from room renovations but we are planning to stagger the room renovations to ensure that we don’t have a significant number of hotel rooms out at any one time such that they would materially impact the operations. And as I mentioned, when we do analysis in terms of the returns from these projects we take into account the potential disruption from having the rooms out and we still believe these are extremely high return projects.

Great, just one final on the 250 to 300 million of projected cost savings, would - give an update in terms of how much progress you’ve made on reaching that goal to date?

I think we try to steer clear of giving projections on it but we feel bullish about how well we’ve done year-to-date and what we’re likely to do by the end of the year. So that’s the best I can tell you at this point.

That’s all at this point. Thank you so much for joining our call.