Caesars Entertainment Inc (CZR) — Q4 2018 Earnings Call Transcript

Thank you, Sarah. Good afternoon and welcome to the Caesars Entertainment fourth quarter 2018 conference call. Joining me today from Caesars Entertainment Corporation are Mark Frissora, President and Chief Executive Officer; and Eric Hession, Chief Financial Officer. A copy of the press release, earnings presentation slides, and a replay of this conference call are available in the Investor Relations section of our website at caesars.com. Also, please note that prior to this call, we furnished a copy of the earnings release to the SEC in a form 8-K and we'll also file our Form 10-K. Before we get underway, I would like to remind you to reference slides 2 through 4, which include forward-looking statements, Safe Harbor disclaimers, and definitions of certain non-GAAP measures. Our comments today will include forward-looking statements as defined by the Private Securities Litigation Reform Act. Forward-looking statements reflect our expectations as of today's date and we have no obligation to update or revise them. Actual results may differ materially from those projected in any forward-looking statements due to unanticipated hold fluctuations, weather or other unforeseen circumstances that we do not control. There are certain risks and uncertainties, including those disclosed in our filings with the SEC that may impact our results. In addition, Caesars Entertainment Operating Company, or CEOC, emerged from bankruptcy on October 6, 2017, and Caesars Entertainment Corporation completed its merger with Caesars Acquisition Company, or CAC, on that date. We also deconsolidated the results of the Horseshoe Baltimore in the third quarter of 2017 and closed on the acquisition of Centaur Holdings in the third quarter of 2018. Therefore, U.S. GAAP results do not include CEOC for the first six days of Q4 2017, do not include Horseshoe Baltimore in Q4 2017, and do not include Centaur Holdings prior to the acquisition in Q3 2018 unless otherwise stated. Enterprise-wide results include CEOC in the prior year and include Centaur Holdings in the current year post acquisition and exclude the Horseshoe Baltimore in both years unless otherwise stated. And enterprise-wide hold-adjusted results reflect hold versus our expectation. You can find reconciliations of GAAP and non-GAAP figures starting on slide 26. I will now turn the call over to Mark. Please turn to Slide 6.

Thank you, Steve. I'll provide a high-level overview of our performance in the fourth quarter and full year of 2018 and then give a few updates on our business before turning the call over to Eric to discuss our results in greater detail. First, I'd like to address the recent 13D filing from entities affiliated with Carl Icahn disclosing ownership of 9.78% of Caesars outstanding shares. We regularly engage with our shareholders and consider their ideas and input regarding shareholder value. The board and management have engaged in discussions with Mr. Icahn and his representatives, and we expect to continue a constructive dialogue. We intend to carefully evaluate Mr. Icahn’s suggestions, including his request for board representation and will provide updates in due course. Now turning to the results. Caesars Entertainment delivered another year of solid operating performance driven by our ongoing focus on continuous improvement programs and the realization of benefits from our growth initiatives. This resulted in full-year adjusted EBITDAR growth of 4.6% and the highest quarterly enterprise adjusted EBITDAR margin in over a decade at 27.5%. Key highlights in 2018 include closing the acquisition of Centaur Holdings, announcing high-profile sports entertainment partnerships, and expanding our sports betting business to new jurisdictions. We also began construction of the new Caesars Forum Convention Center on the Las Vegas Strip and introduced several new Caesars branded resorts as part of our asset-light strategy. For the full year, enterprise-wide net revenues were $8.4 billion, up 2.7% year over year driven by the acquisition of Centaur. Excluding Centaur, net revenues were flat as growth in Las Vegas was offset by declines in Atlantic City due to competitive pressures and unfavorable year-over-year hold at our international properties. The competitive environment in Atlantic City remains challenging due to increased promotional activity from new entrants. Full-year adjusted EBITDAR totaled $2.3 billion and was up 4.6% year-over-year or 1.4% excluding Centaur. Hold-adjusted EBITDAR was $2.3 billion, up 4.1% year over year. Marketing and operational efficiency efforts remained a key driver of performance throughout the year. Domestic marketing costs and labor costs improved in 2018. Domestic marketing costs represented 20.1% of our gross revenue, down 160 basis points year over year, while labor costs represented 23.6% of our gross revenue, down 30 basis points year over year. Domestic marketing performance represented a full-year record. Fourth-quarter enterprise-wide net revenues were $2.1 billion, up 7.4% year over year or 1.2% excluding Centaur as we benefit from an improved demand environment as well as our ability to leverage our casino database in Las Vegas following third-quarter softness. Las Vegas RevPAR grew 10.9% year-over-year in the quarter. Strength in Las Vegas was partially offset by ongoing competitive pressures in Atlantic City due to the new entrants. Enterprise-wide adjusted EBITDAR of $567 million was up 12.1% year over year or 4.3% excluding Centaur. Gains from ongoing efficiency efforts drove performance while we maintained rational and disciplined marketing reinvestment in Atlantic City. Before I turn the call over to Eric, let me provide some key business updates since our last earnings call. Slide 7, the Centaur Holdings acquisition closed in July and performance has been strong post-acquisition as we've realized operational and expense synergies from the integration. Post-acquisition, Centaur's fourth-quarter 2018 EBITDAR grew 21% year-over-year compared to 5% year-over-year in the second quarter of ‘18 prior to the transaction. Strong EBITDAR growth in the fourth quarter illustrates our effective cost management and ability to drive operating efficiencies in a short amount of time. We remain confident delivering continued synergies and achieving our goal of $200 million of EBITDAR contribution in two full years, which represents an accretive implied multiple of less than six times. This reflects financing the acquisition with the sale leaseback of Harrah's Las Vegas and is inclusive of synergies. Slide 8, recently we've announced several partnerships that continue to raise Caesars profile among professional sports fans with both the NFL, Turner Broadcasting, and Bleacher Report. Building on several successful relationships with NFL teams, last month, we announced an exclusive sponsorship with the NFL, making Caesars Entertainment the first-ever official casino sponsor in the history of the league. Caesars holds exclusive rights to use NFL trademarks in the US and UK to promote our casino properties. Furthermore, Caesars will be hosting existing customers and attracting new customers at prominent high-profile NFL events, including the Super Bowl, combine, and draft. Following our partnership with the NFL, two weeks ago, we announced a groundbreaking agreement with Turner Broadcasting and sports media hub Bleacher Report to develop gaming-themed content for sports fans around the globe. The partnership includes a new Bleacher Report production studio to be built at Caesar's Palace, which will function as Bleacher Report's third national studio. Bleacher Report will produce daily video and social content from Caesars Palace as well as satellite locations at our other Las Vegas properties. Caesars will be able to leverage the strengths and established media company and access Bleacher Report's over 22 million followers to expand the Caesars rewards database. Caesars, in turn, has also partnered to create four televised specials annually which will highlight Caesars assets and can be used to provide a unique experience for Caesars guests. The deal also includes sponsorship and media opportunities across Bleacher and Turner's content. We are excited to partner with a leading digital destination for millennial and Gen Z sports fans to amplify our sports gaming experience for guests, enhance professional sports, and reach a new generation of gaming customers. We also made further progress developing our sports betting business; our sportsbook in New Jersey and Mississippi saw solid sequential increases in volume during the fourth quarter. We are creating three sportsbook locations in Atlantic City with several more in the pipeline pending legislation. In late January, we expanded our sports betting offering to Pennsylvania, including a sportsbook at Caesars Harris, Philadelphia casino and racetrack. In Las Vegas, we continue to test new and innovative sports entertainment experiences as part of our broader casino innovation strategy. At the recently renovated The Book at the LINQ Hotel and Casino, fans can find a wide range of experiences including rentable fan bases for sports viewing, eSports, virtual reality games, skill-based slot games, LED screens, and soon to become digital table games and an innovative bar experience. Slide nine, our customer database represents an important performance driver for Caesars. Recently, we announced the rebranding of Total Rewards, our industry-leading 55 million member loyalty program to Caesars Rewards. The rebranding follows research that demonstrates several important benefits of extending our flagship Caesars brand to our loyalty program. It unifies all properties under the luxury Caesars brand, increasing guest awareness and association of our properties with the brand. The change enables premium pricing through better brand positioning, maximizing the fair share premium earned by our Caesars reward network properties, and creates additional value over time by extending our iconic brands to new cities around the world. Caesars rewards allows us to better unify our loyalty members across our properties and regions under our most recognizable brands, Caesars. By leveraging the premium Caesars brand, we'll be able to better connect Caesars’ brand standards and brand prestige across our portfolio both domestically and internationally. The new program will offer new ways to earn hotel stays, as well as access to unique special events, including New Year's Eve parties, celebrity golf outings, and famed sporting events. Caesars rewards offer our most loyal customers an opportunity to not only earn points across our global portfolio but also be rewarded with unique experiences. We're excited about this opportunity to strengthen our unrivaled customer rewards program. Slide 10, Caesars continues to make progress on our asset-light and non-gaming initiatives. The newest branded property in our Caesars portfolio, Caesars Public in Scottsdale, Arizona, will break ground in the second half of ‘19. The property marks our first non-gaming hotel in the US as part of our plans to expand our brands and loyalty network into premier destinations through our licensing strategy. Caesars Republic Scottsdale will be located adjacent to the region's premier luxury retail destination, Scottsdale Fashion Square, and will be a four-star hotel developed by HCW Development and operated by Ambridge Hospitality. This development follows the opening of Caesars Bluewaters Dubai resort in the fourth quarter. I would also like to highlight a recent achievement involving our sustainability efforts. The Carbon Disclosure Project, has recognized Caesars as a leader in our efforts and actions to manage carbon emissions and address climate-related issues across our supply chain within the supplier engagement category. Out of the 5,000 companies that participated, Caesars was the only company that was recognized from the gaming sector. I am pleased with our accomplishment in 2018. We achieved a record full year adjusted EBITDAR margin marking four years of margin expansion while achieving record customer service scores and making investments in the company's long-term growth. We once again outperformed our peers in Las Vegas across key performance indicators for the fourth consecutive year, which Eric will discuss in more detail. We successfully expanded the Caesars Entertainment Network through the accretive acquisition of Centaur and execution on our asset-light strategy, beginning with the opening of Caesars Bluewater Dubai and with more to come in 2019. Also, we made important investments in innovation in our core gaming business and emerging areas like sports betting. In summary, we are successfully executing on the plan that we set out at Emergence and we have a clear path forward to creating significant shareholder value. Eric will review this and our financial results in more detail now.

Thank you, Mark. I'll provide a more detailed discussion of our enterprise-wide fourth-quarter 2018 results. To clarify, our comments include CEOC results and Centaur, but exclude Horseshoe Baltimore from the previous year unless stated otherwise. In the fourth quarter, our net revenue in Las Vegas reached $949 million, an increase of 7.8% year over year, driven by strong hotel performance, favorable hold compared to last year, and lower performance due to the previous tragedy. The fourth-quarter performance in Las Vegas saw gains across nearly all sectors, including increased gaming volumes, along with growth in food and beverage and the hotel segment. The rise in gaming volumes was spurred by a 3% increase in baccarat slots and table games. Hotel cash revenue grew by 8% year over year, with RevPAR at $139, which is an 11% increase year over year. Cash ADR stood at $164, up 6% year over year, and hotel occupancy reached 93.8%, a 4-point improvement year over year. We also saw food and beverage revenue rising in the fourth quarter, thanks to the opening of several new outlets, including Hell's Kitchen and Pronto by Giada. Our adjusted EBITDAR for Las Vegas was $351 million, marking an 18.2% increase year over year, or an 8.9% growth when adjusting for hold. Overall, the fourth-quarter performance of our Las Vegas properties indicates stability, despite the temporary downturn we experienced in the third quarter. In 2019, we still anticipate modest growth in Las Vegas, which I will elaborate on later in the call. We were satisfied with our Las Vegas performance in both the fourth quarter and the entire year of 2018, as our results surpassed those of our peers in net revenue growth, adjusted EBITDAR growth, and adjusted EBITDAR margins for both the fourth quarter and the full year. The net revenues from other US operations were $1.0 billion, an increase of 9.3%, including Centaur, or a decrease of 3.8% on a same-store basis. Atlantic City was the main contributor to the same-store decline, facing competitive pressures from new entrants who have significantly ramped up promotional activities. We estimate these factors impacted EBITDAR by $20 million during the quarter. The adjusted EBITDAR from other US operations reached $320 million, an increase of 10.6%, and we estimate it would have risen by 1.9% if excluding both Centaur and Atlantic City. In the all-other segment, both revenues and adjusted EBITDAR decreased year-over-year in the fourth quarter, primarily due to unfavorable hold at our international properties and rising costs attributed to our ongoing IT cloud-based transformation and growth initiatives, which are essential for improving future business performance. From a liquidity standpoint, we concluded the quarter with about $1.5 billion in enterprise-wide cash. We currently have $100 million drawn on our CRC revolver, which results in approximately $1.1 billion of available revolver credit. Cash capital expenditures for the year amounted to $419 million for same-store CapEx, which included significant room renovations at a couple of properties, along with $146 million for development CapEx that covers initial expenses on the Caesars forum and some expenditures in South Korea. Thanks to our effective working capital management, about $65 million of same-store CapEx and around $35 million of development CapEx incurred in 2018 were paid in the first quarter of 2019. Excluding the convertible notes and capitalizing on our cash lease payments at eight times, our net leverage is approximately 5.5 times adjusted EBITDAR, while our traditional debt net leverage stands at around 4.3 times. There were no further share repurchases or debt repayments in the fourth quarter. Although we are committed to reducing our debt, we believe it is wise to maintain flexibility as we assess the highest return opportunities for our cash in 2019. Our focus remains on a balanced capital allocation strategy, and we reaffirm our target of gross lease-adjusted leverage of 4.5 times by the end of 2021. Regarding our outlook for 2019, we will offer quantitative and qualitative insights to help understand the business drivers. We will not be providing traditional adjusted EBITDAR guidance as our focus is on long-term growth and development. Our operations may experience fluctuations from quarter to quarter, particularly in Las Vegas due to several factors, including conference schedules, holidays, entertainment, and sporting events. Nonetheless, for the full year, both Las Vegas and the company demonstrated stable results.

I would say that our group's business, which is projected to be up mid-single digits in revenues year-over-year and our rooms on the books currently up 4% year-over-year in Q1. However, we expect EBITDAR flow through in Las Vegas to be impacted throughout the year by a combination of labor headwinds as we contend with the tight labor market and wage inflation, as well as incremental investments in security across our properties. We expect to be able to partially offset these expense increases through ongoing operational initiatives.

In the other US segment, we expect growth in 2019 to largely be driven by an incremental $80 million to $85 million of adjusted EBITDAR contribution from Centaur. Recall, we closed on the Centaur acquisition in July of 2018. We expect the ongoing competitive promotional environment in Atlantic City to offset this performance by approximately $40 million of adjusted EBITDAR, half of which is expected to occur in the first quarter. We anticipate the competitive pressure in Atlantic City to moderate beginning in the third quarter once we annualize the effects of the new entrants in that region. We also expect some competitive headwinds at certain of our properties in the Midwest as supply continues to grow. Lastly, we continue making important investments in our business to drive future growth, including incremental operating expenses to further expand our sports business and the continuation of our enterprise-wide IT transformation.

In summary, we are successfully executing on the plan that we set out at Emergence and we have a clear path forward to creating significant shareholder value. Eric will review this and our financial results in more detail now.

We are pleased with how Centaur is performing. As you can see, the EBITDAR was up significantly and a little bit faster in terms of realizing those synergies than we had anticipated. The revenues were generally flat because the marketing programs hadn't yet kicked in and so that should happen in 2019 as we move forward. So we're pleased with how it's worked out. It's very consistent with the model, consistent with what we've said before. We're leaning towards prioritizing debt reduction at this point. However, we are always open for accretive transactions, and should those be available and should they make sense from a domestic bolt-on acquisition perspective, we'd certainly look at them and pursue them.

Mark, just wanted to start with your agreement to remain in your role through the end of April. In the press release, you announced that the process of replacement is still ongoing. Wondering if you or Eric could provide a little bit more commentary in terms of kind of where we are in the process, if there's anything else that you can provide outside of what was in the release? Thank you.

I think the best way to characterize it is that we’re far along in the process. We’ve completed the interviews and have a strong list of potential candidates for this position. The committee feels comfortable that we are advanced enough in the process to ensure a smooth transition.

So the first one on Las Vegas; can you give an update on what you're seeing as it relates to leisure and transient demand and I guess have you seen much stabilization over the past six or eight months or has it still been kind of ebbing and flowing with the calendar, the citywide calendar?

I think, I mean Eric and I can both maybe answer this. It's certainly stabilized since the third quarter. So I think it's clear in our demand that we're getting for the business has stabilized, and even the rate decline has completely dissipated. But, I wouldn't characterize it as a strong demand pattern, but I would say that it's stable.

Yeah, I agree. We continue to be able to, as we demonstrated, backfill with casino hotel rooms in periods of weak demand from an occupancy perspective. But I would say echoing Mark's commentary that the ability to really drive price is somewhat limited, at least in the fourth quarter and into the first quarter.

Eric, would you mind giving some more detail on what you're seeing on the cost side and how does that differ between Las Vegas and the regional markets?

Sure. I guess, I'll look at it on our two primary categories of expense, which is labor and marketing. On the labor side, we're definitely seeing incremental labor cost pressures at a higher level than we have in the past years. Company-wide, we're estimating about an $80 million increase and that's associated with union wage increases, merit wage increases for non-union employees, 401(k) returning to a normalized match, and then health benefits. And in aggregate, it's about $80 million, which, as I mentioned, is higher than in prior years. So, we have efforts to try to offset that through productivity, but that's definitely a headwind that we'll have to work through this year.

Just starting with Vegas. I'm curious if you have any updated thoughts around resort, parking, or other fees and an impact on visitation. Maybe what direction do you think those fees will move going forward?

At this point, we don't have any current plans to change our existing structure. We are mindful of the potential negative impact on our profitability and revenue growth if we become too enthusiastic or pursue initiatives that don't provide value. Resort fees are related to many of the services we offer to guests at no cost. Our aim is to ensure that any additional charges create value for the customer. So, with that, we'll wrap up the call. Thank you and we look forward to giving you an update at the first quarter.