Caesars Entertainment Inc (CZR) — Q2 2016 Earnings Call Transcript

Thank you and good afternoon. Welcome to the Caesars Entertainment second quarter 2016 results conference call. Joining me today are Mark Frissora, President and Chief Executive Officer, and Eric Hession, Chief Financial Officer. A copy of our press release, certain earnings presentation slides, and a replay of this call are available in the Investor Relations section on our website at caesars.com. The slides can be downloaded and will accompany Mark and Eric’s prepared remarks for those joining us by phone who wish to follow along. Please note that prior to this call, we submitted a copy of today’s press release to the SEC in a Form 8-K and will soon file our most recent quarterly report on Form 10-Q for the second quarter of 2016. Before we begin, I would like to highlight some statements and information on slides one through four, which we reference here. The forward-looking statements and Safe Harbor disclaimers in our public documents apply to this call as well as the webcast available at caesars.com. This call, the webcast, and its replay are the property of Caesars Entertainment Corporation and are not for rebroadcast or use by other parties without prior written consent. If you do not agree to these terms, please disconnect now. By remaining on the line, you agree to our terms. Today's call will include a discussion of certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin, as well as supplemental financial information. Definitions of these non-GAAP measures, reconciliations to the nearest GAAP measures, and reasons management believes these measures provide useful information for investors can be found on slide three and in the appendix starting on slide 26. These non-GAAP measures are not preferable to GAAP results found elsewhere in the presentation or discussed during the call. As a reminder, Caesars Entertainment Corporation is a holding company that encompasses Caesars Entertainment Resort Properties and Caesars Growth Partners, which comprises two reportable segments: CGP Casinos and CIE. CEC also has a majority ownership in Caesars Entertainment Operating Company. However, CEC’s financial results do not include those of CEOC and its subsidiaries following its Chapter 11 filing on January 15, 2015. In addition to reviewing CEC’s reported financial information during this call, we will discuss certain supplemental financial information regarding CEOC, including remarks that combine CEOC’s results with those of CEC. CEC has committed to significant payments to support CEOC's restructuring, which could lead to the reacquisition of CEOC's operations if the restructuring aligns with the current support agreement to which CEC is a party. Therefore, this non-GAAP supplemental financial information is provided to help users understand the results of the entire Caesars enterprise, including CEOC, and consistent management services across all properties. The results are not indicative of future performance or results post-restructuring. As mentioned during this call, the terms company, Caesars, Caesars Entertainment, we, and our refer to Caesars Entertainment Corporation and its consolidated entities unless stated otherwise or the context requires. As outlined on today's agenda on slide five, we will start the call with remarks from Mark, who will cover issues related to the entire Caesars Enterprise, including our deconsolidated subsidiary CEOC. Eric will then review our financial results before Mark offers closing comments, and we will then open the floor for your questions. I now turn the call over to Mark.

Thank you, Brian. I’m happy to share that Caesars has built upon our strong performance from 2015 and the first quarter of 2016 by achieving solid results in the second quarter. These outcomes are a result of the strategic initiatives we have implemented over the past year and a half, aimed at enhancing operational efficiency and investing in our hospitality assets, which have improved our revenue and margins. For CEC, excluding CEOC, net revenues rose 8% to $1.2 billion, while net income fell to a loss of $2 billion, primarily due to an estimated accrual of about $2 billion for CEOC's bankruptcy support and an increase in stock-based compensation expenses. Eric will provide more insights shortly. Adjusted EBITDA for CEC increased by 12% to $388 million, with the margin rising 113 basis points to 31.5%. Overall, including both CEC and CEOC, net revenues grew 2% to $2.4 billion, and adjusted EBITDA was up 8% to $697 million, with the margin expanding 145 basis points to 29.5%. The main contributors to our second quarter revenue and EBITDA performance remain the same as those I outlined for the first quarter. We continue to see growth in hospitality revenues, mainly in lodging and entertainment in Las Vegas, with cash ADR reaching a record high for the quarter, increasing by 7.5% year-over-year. The Interactive Entertainment business also saw growth from an increase in unique paying users and average revenue per user. However, these gains were somewhat offset by lower gaming volumes in regional markets, particularly in the Southeastern United States, where volumes dropped notably in May and June, in line with broader industry trends. Recently, Caesars Interactive agreed to sell Playtika, our social and mobile games division, for $4.4 billion in cash. Since acquiring Playtika in 2011, it has developed into a leading mobile and social gaming company. However, the World Series of Poker and our real-money online gaming operations will continue as part of Caesars Interactive. We expect the sale to bolster the cash position at Caesars Growth Partners. As mentioned in previous quarters, our cornerstone initiatives are vital for achieving further margin expansion and cash flow improvement. These initiatives not only drive revenue growth but also enhance employee engagement and customer satisfaction. Details on our engagement metrics for employees and customers were included in our 2016 Citizenship Report, released this morning and available on our website, reflecting our commitment to socially responsible initiatives with our stakeholders. We are also enhancing our hospitality and loyalty programs to broaden our customer base and boost engagement, receiving recognition for our improvements, including awards from Loyalty360 and TripAdvisor. In May, we earned a gold award from Loyalty360 for our Total Rewards mobile app, which provides our customers with access to offers, room bookings, and information about our properties. Furthermore, in June, 20 hotels in our network received TripAdvisor’s 2016 Certificate of Excellence, signifying our commitment to enhancing hotel amenities and customer service, with several new resorts recognized this year, including Caesars Palace. Speaking of Caesars Palace, this iconic resort is celebrating its 50th anniversary this weekend, boasting the highest EBITDA performance in its history for the second quarter. We have organized a month-long series of exciting events, starting with a controlled closure of the Las Vegas Strip for a July 4 fireworks display. The grand celebration this weekend will feature a gala hosted by me alongside Howie Mandel, with performances from legendary entertainers, including Jennifer Lopez. Regarding infrastructure investment, particularly in our hotel rooms, it remains a top priority. By the end of the second quarter, we have completed about half of the room renovations planned for 2016 in Las Vegas, which has seen strong hotel performance. Cash ADR has risen approximately 7%, and the pricing environment remains favorable due to positive trends in leisure and group markets. Nationwide, we have completed about 60% of planned room upgrades. It is vital to note that we are focusing our investments on infrastructure improvements with efficiency and customer engagement in mind. All new properties are built to Green Building LEED standards and all Caesars’ North American hotel properties are Green Key Eco-rated. We see significant potential for enhancing hotel performance through ongoing investments and renovations. Properties that have undergone renovations have experienced increases in cash ADR by $25 to $40, depending on the peer group. In addition to boosting room revenues, these investments are expected to enhance gaming, food and beverage, and other ancillary income. We are also improving hotel performance through better yield management. Our technology investments are aimed at differentiating our hotel product on The Strip and enhancing the overall customer experience. Last year, we tested self-service check-in kiosks at three Las Vegas hotels, and we have since expanded their presence to Caesars Palace and Flamingo, with plans to introduce them at Paris soon. We've also started a Connected Room pilot at The Cromwell, allowing guests to manage various aspects of their stay through a handheld device. As part of our hotel upgrades, we’re also focused on enhancing the quality of our food and beverage options and entertainment offerings to attract more visitors, as shown in our recent presentations. In May, we opened Brioche by Guy Savoy at Caesars Palace, offering fine coffee and French pastries, alongside new outlets like MR CHOW and the Montecristo Cigar Bar, which are performing well. The LINQ Promenade and High Roller have also shown improved performance, thanks to adjustments in our marketing strategy and tenant mix, with exciting additions to come, including In-N-Out Burger and Gordon Ramsay's Fish & Chips. Our entertainment offerings have also been strong, with positive customer reception to our resident headliners and added show dates in 2017. Recently, Pollstar ranked The AXIS and the Colosseum among the top venues for their classes in the US based on ticket sales. As we transition to our continuous improvement model, we are enhancing efficiency and quality through process improvements and technology investments, like the kiosks previously mentioned. Our various marketing and operational initiatives continue to yield success, although some have led to reduced slot gaming revenues in specific markets while improving marketing efficiency. We have managed to reduce operational costs despite inflationary wage pressures from union negotiations in our major markets. Highlights of these initiatives are laid out in our Citizenship Report, including investments in health and wellness that have effectively lowered health claims costs. Our sustainability initiatives have also significantly impacted cost savings while fulfilling our social responsibilities. Enhancing efficiency remains a central focus for our management team. We are fostering a sales and service culture to improve the customer experience through employee training, including implementing an online concierge system and hotel inventory database. Last year, our training investments exceeded 1.6 million hours, equipping our employees with new skills for more efficient service. We are embracing new technologies to better engage with guests and deliver a personalized experience, resulting in year-over-year improvements in service quality and net promoter scores. The TripAdvisor recognition further confirms our progress. These service improvements and accolades stem from our team's hard work and dedication to providing outstanding service. Lastly, I want to highlight our gaming innovation efforts, focusing on re-engaging our core slot player market and attracting millennials and Generation X through new games and a modernized experience. Investing in technology, particularly mobile, is vital for enhancing the gaming experience. The introduction of mobile enrollment for the World Series of Poker and mobile slot dispatch has improved customer efficiency, with players now able to register and pay for tournament entries via mobile devices and self-service kiosks, significantly reducing wait times. I will now turn the call over to Eric for a detailed review of this quarter's results.

Thank you, Mark. I’ll start with a review of CEC’s consolidated results followed by a review of the company's reportable segments and supplemental information, which includes CEOC’s performance as well as enterprise-wide results that include CEOC. Slide 18 summarizes CEC’s results, which do not include CEOC as it is no longer consolidated. For the second quarter of 2016, CEC’s net revenues rose 8% to $1.2 billion. Net loss was $2 billion compared to net income of $500 million in the second quarter of 2015. Diluted loss per share for CEC was $14.25 compared to diluted earnings per share of $0.10 in the year-ago period. Net income and earnings per share results were largely driven by restructuring-related accruals, which I'll discuss in a moment. Adjusted EBITDA grew 12% to $388 million, with a margin increase of 113 basis points. Revenue in the quarter was driven primarily by strong growth in hospitality revenues in Las Vegas, organic growth in social and mobile games at CIE, and gaming revenue growth at Horseshoe Baltimore. This was partially offset by lower gaming revenues, primarily in Atlantic City and Las Vegas. Year-over-year improvement in adjusted EBITDA was mainly due to the net revenue increases and improved hotel customer mix and efficiency initiatives. Earnings performance for CEC was primarily attributable to an accrual of approximately $2 billion in the second quarter related to CEC’s estimate of the amount it will pay to support the restructuring of CEOC as well as a $66 million expense related to the fair value adjustment of CIE stock based on compensation awards. We believe our accruals represent the best estimate of our obligations under the restructuring. However, because negotiations between the various parties are ongoing and the amended plan is pending ultimate approval by the Bankruptcy Court and also pending the receipt of the required gaming regulatory approvals, our accruals are subject to change. As such, we believe our operational performance is best represented by the improvement in adjusted EBITDA. All those are estimated to have a positive effect on operating income of between $5 million and $10 million in the quarter relative to our expectation and there was a minimal effect when comparing to the prior year's period. Turning to slide 19 and the performance of Caesars Entertainment Resort Properties, second quarter net revenues were down 1% year-over-year to $562 million. The year-over-year decline in revenues was primarily due to lower gaming volumes in Las Vegas and Atlantic City as well as unfavorable hold, partially offset by hotel revenue growth. In Las Vegas, a large part of the gaming volume decline was driven by a calendar shift in the World Series of Poker by a week from Q2 to Q3, as well as construction disruption from the room renovations at Paris Las Vegas where there are over 10,000 room nights out of service due to renovation. Additionally, CERP’s Las Vegas properties faced a tough year-over-year comparison due to the record month of hotel revenues in May of last year. In Atlantic City, Harrah's hotel and banquet revenues were a bright spot where gaming revenues continue to be challenged, primarily due to event timing, plain program scheduling and the Meeting Professionals International convention in June, which we hosted. We continue to be mindful of a softening trend in gaming revenues at this property and are taking a targeted approach to addressing certain customer segments. Service net income was down $9 million year-over-year to $8 million and net profit margin was 1.4%. The decline in net income was largely attributable to accelerated depreciation due to the ongoing room renovation projects. Adjusted EBITDA declined 2% year-over-year to $179 million, with adjusted EBITDA margins decreasing 30 basis points. The decline in EBITDA was primarily due to lower gaming revenues, which more than offset the benefits from marketing efficiencies, improved hotel customer mix and better performance of The LINQ Promenade. Hotel is estimated to have a positive effect on operating income of between zero and $5 million for the quarter relative to our expectations and an unfavorable zero to $5 million when compared to the prior-year period. Slide 20 summarizes the performance of Caesars Growth Partners, which delivered another strong quarter. Net revenues grew 17% to $672 million. Net income decreased 60% to $15 million, equating to a net profit margin of 2.2%, with the year-over-year decline mainly driven by higher stock-based compensation expense at CIE. Adjusted EBITDA grew 33% to $214 million, with margins expanding 389 basis points year-over-year. Revenue performance was primarily driven by organic growth in CIE’s social and mobile games business, gaming volume increases at Horseshoe Baltimore, and strength in hospitality revenues. Looking at the CGP Casino Properties segment within the CGP business, on slide 21, net revenues were $423 million in the second quarter, up 9% year-over-year. Revenue growth was primarily attributable to gaming revenue growth at the Horseshoe Baltimore facility, increases in entertainment revenue mainly due to The AXIS theater at Planet Hollywood, higher hotel revenues primarily The LINQ hotel, and favorable year-over-year hold. Net income increased $21 million year-over-year to $19 million, with a net profit margin of 4.5%. Adjusted EBITDA increased 25% to $114 million, with adjusted EBITDA margins expanding 362 basis points year-over-year. EBITDA performance was mainly driven by net revenue increases and efficiency initiatives. Hold was estimated to have a positive effect on operating income for the quarter of between zero and $5 million relative to our expectations and a favorable zero to $5 million effect when compared to the prior-year period. Moving to slide 22 and the Interactive Entertainment business, second quarter net revenues increased 34% to $249 million. Net income decreased $43 million to a net loss of $4 million and net profit margin was minus 1.6%, primarily due to higher stock-based compensation expense. Adjusted EBITDA rose 43% to $100 million with margins increasing 253 basis points year-over-year, mainly driven by strong results in the social and mobile games business due to a combination of increased unique paying users and growth in average revenue per user. Monthly unique paying users grew to 891,000 in the second quarter, up from 796,000 last year. And average revenue per user per day increased to $0.40, up from $0.31 in the prior-year period. Slide 23 shows the supplemental information on CEOC’s second quarter performance. Net revenues were $1.2 billion, down 3% year-over-year as strong gaming volumes and F&B revenue growth in our Las Vegas property were more than offset by gaming volume declines in the regional market and in our international portfolio. Caesars Palace experienced broad-based gaming revenue increases and favorable year-over-year hold. Softness in the regional markets was primarily concentrated in the Southeast and mainly attributable to lower slot volumes. Our international properties experienced both unfavorable hold and lower volumes. Additionally, hotel revenues at Caesars Palace were impacted by over 19,000 room nights out of service in the quarter due to renovations at the Julius and Augustus Towers which concluded in July. Adjusted EBITDA increased 2% to $309 million and margins grew 122 basis points from the prior-year period, primarily due to higher collections and efficiency initiatives. Hold was estimated to have a positive effect on our operating income of between $10 million and $15 million in the quarter relative to our expectations and between zero and $5 million when compared to the prior-year period. Now, let’s take a look at additional supplemental information for the entire enterprise for the second quarter on slide 24, which includes CEOC. Caesars enterprise-wide net revenues rose 2% from the prior year to $2.4 billion, mainly due to strong performance in CIE social and mobile games business; gaming revenues growth at Caesars Palace and Horseshoe Baltimore; higher hotel and entertainment revenues, primarily in Las Vegas; and favorable year-over-year hold. This was partially offset by gaming volume weakness in the regional and international market. As Mark mentioned previously, gaming volume weakness seen in regions during May and June appear to have been industry-wide. Caesars’ enterprise-wide adjusted EBITDA increased by 8% year-over-year to $697 million and margins increased 145 basis points, primarily attributable to net revenue increases, improved hotel customer mix, and higher collections. We continue to expect inflationary cost pressures, including salaries and benefits to persist for the remainder of the year and will remain diligent in managing these pressures through our continuous improvement efforts. Hold is estimated to have a favorable effect on operating income of between $15 million and $20 million for the quarter relative to our expectations and between zero and $5 million when compared to the prior-year period. While EBITDA margins in the second quarter improved year-over-year, margin expansion has slowed as a result of more challenging comparisons as the majority of our efficiency programs were fully implemented in the first quarter of 2015. Going forward, we continue to expect to be adversely affected by ongoing restructuring efforts, largely in the form of elevated expenses across many parts of our business, which may accelerate during the remainder of this year. Lastly, ongoing room renovations across our hotel portfolio will result in inventory disruptions, which we will attempt to mitigate. Slide 25 provides a summary of quarter-end liquidity and projected capital expenditures for the CEC consolidated entities. As a result of our investments in high-return low-risk areas such as room renovations and our continuous improvement operating model, the underlying performance of the enterprise continues to improve, which has resulted in greater cash flow generation. We will continue to look for opportunities to optimize our cash flow through efficiencies and profitable growth investments to drive value for our stakeholders. I’ll now turn it back to Mark for his closing comments.

Thanks, Eric. Summarizing our discussions on slide 27, we're pleased with our second quarter performance, which increasingly reflects progress executing our cornerstone initiatives. Our focus on enhancing hospitality assets is a key business performance driver, while our efficiency initiatives are enabling us to maintain the margin improvements we've achieved over the last six quarters. By continuously improving the operating model and investing in the business, we will be able to accelerate revenue growth and drive productivity gains. The goal of this approach is to further improve margins and cash flow, while also further improving customer and employee satisfaction. While macroeconomic indicators are currently mixed for consumer spending, regional gaming markets in our industry have shown some recent softness, which we will continue to monitor. Nevertheless, we are somewhat encouraged by our recent market share gains in certain markets. We will continue to stay focused on our balanced approach to running the business, an equal focus on revenue generation and cost management as well as customer and employee satisfaction. We believe that this approach, along with executing our stated strategic initiatives, is the best hedge against uncertain economic trends. As always, amid the backdrop of ongoing restructuring efforts at CEOC, we're focused on operating as efficiently as possible to maximize value for all stakeholders. Over the last several months, we’ve made significant progress in the CEOC bankruptcy case, as outlined on slide 28. We’re optimistic that achieving these milestones puts us on a path to resolving the unit’s bankruptcy. Yesterday, we announced the signing of a new restructuring support agreement with a significant portion of CEOC second lien holders. This milestone signals continuing progress in CEOC’s negotiation efforts with its lenders to bring that entity out of bankruptcy. The RSA will become effective upon the signing of the RSA by creditors holding at least 50.1% of the aggregate outstanding amount of CEOC’s obligations by the end of August. Further, if consenting creditors holding at least two-thirds of the aggregate second-lien bond claims sign the RSA, we could potentially have a fully consensual deal ahead of CEOC’s confirmation hearing in January. We will now open the line up for Q&A. We’d ask that you please keep your questions focused on the business performance.

Hi. Thank you. So I want to start, I guess, with the consumer. I know you guys talked about the consumer gaming spend being lower in the regional markets and it sounded like it continued into July. And I was wondering if you can talk about what you're hearing from your customers. Is it just slot play? Is it at all with regards to F&B as well?

Sure. I’ll start and then Mark can add some context. We did notice some softness in May and June, and it trended a bit into July, but not as weak as we've seen in May and June. A lot of the weakness was focused around the southeastern part of the United States, which we believe is adversely affected by the oil and gas price situation. And then the rest of the central division also experienced slight weakness that was not in the same line that we have seen through the first four months of the year, which is why we mentioned it here. We also continually take an approach by evaluating all of our marketing campaigns and all of our operating strategies to try to mitigate any weakness that we see. And so, as we mentioned in the materials earlier, we’ll be very vigilant to make sure that we’re able to maintain our margins and that we do react appropriately as we see these threats coming through. From the Vegas perspective, though, I would say that the Vegas market, we continue to be optimistic. The demands for the market from the free and independent traveler are continuing to be strong. And then to address your question directly from the food and beverage perspective and the entertainment perspective, the consumers do seem to be purchasing those products in a strong way. So we’re not concerned about that side.

And then just turning to CapEx, I didn't see in the slides or in the press release CapEx at each entity. Can you go over that? And then just discuss what, I guess, the major renovations are at CERP and CGP.

Sure. I can run through them here. So, at CERP, in the second quarter, we spent $32 million of capital, CGP was $21 million, CES was $2 million, and then CEOC was $38 million, for a total of $93 million. We did provide in the materials an updated range of CapEx, which you’ll see was slightly higher on the bottom end, but we kept the top end of the range the same. The predominant projects that we have coming up in the second half of the year are room renovation projects. At CGP, we’re embarking on a significant room renovation effort at Planet Hollywood. And at CERP, that's predominantly focused on room renovations at Paris right now.

Great. And then I just want to try to figure out – I guess, with the CIE, congrats on that. Can you guys talk about what the proceeds will be used for? And then, if you can talk about if there are any other potential assets for sale such as Baltimore.

Due to the recency of the sale, we’re not commenting at this point on the use of the proceeds. There was some disclosure around the payments that can be made for professional services, minority investors in the entity and a few other distributions. But other than that, we’ll comment on that at a later date. And then with respect to additional asset sales, again, nothing to comment on there. We don't have, at this time, any plans to divest further assets.

Great. Thank you.

Sure.

Hi, everyone. Thank you. Just wanted to go back quickly to some of the color you provided on the regional gaming customer. And I was wondering if you're seeing any change in the promotional environment with some of your competitors in the regions where perhaps the consumer is a little softer.

Yeah. I would say, at this point, consistent with what we’ve been trying to undertake for the last six quarters really, we've been trying to rationalize our investment with respect to the various segments, particularly in Midwest regions, but also in Las Vegas to some degree. We really drive down to that particular segment level and try to titrate our marketing efforts to achieve the maximum results that we can. We have seen a moderating competitive dynamic in terms of reinvestment levels, but I would say that that’s also been fairly consistent now for the last six months. So a little bit different than in 2015. So, at this point, I would say that there really don't seem to be any strong trends from an increasing reinvestment perspective for many of the competitors that we see. And this is broadly speaking, of course, across the portfolio.

Okay, very helpful. And to switch gears into Las Vegas, I think some, obviously, really good data points as it relates to the non-gaming business that are pretty consistent across the board. I was wondering if you can add a little more color to your views on the gaming business, the casino floor, if you’re expecting any particular growth in that area or any improvements in terms of casino revenue growth in Las Vegas.

I’d say, broadly speaking, in contrast to the non-gaming side where we are definitely seeing an increase in both hotel demand, the food side and the entertainment side, the gaming side has been up a few percent for the past six months. We did have a strong second quarter with respect to the baccarat business. But at this point, it's too early to tell whether that’s going to continue. And as you know, that's certainly been a challenged segment for the prior five or six quarters before that. As Mark mentioned in his notes, we’re actively searching for new product offerings that we can deliver to the floor. We do plan to roll out three test areas across our brand, with one of them being in Las Vegas that we believe will contain new products that will be very appealing to the millennial generation and will help really drive people in and reenergize the gaming side.

Great. Thanks, Eric. Really appreciate the questions.

Sure, thank you.

Right. Thank you very much. And I’d like to thank everyone for joining us this afternoon for our second quarter earnings announcement and we look forward to joining you again for the third quarter. Have a very good day.