Caesars Entertainment Inc (CZR) — Q3 2019 Earnings Call Transcript

Thank you. Good afternoon and welcome to the Caesars Entertainment Corporation, third quarter 2019 earnings conference call. Joining me today from Caesars Entertainment are Tony Rodio, Chief Executive Officer; and Eric Hession, Chief Financial Officer. A copy of the press release, earnings presentation slides, and the replay of this conference call are available in the Investor Relations section of our website. 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 will file our Form 10-Q. Before we get underway, I would like to remind you to reference slides 16 through 21. These slides 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 statement 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, note that Caesars Entertainment closed on the acquisition of Centaur Holdings in the third quarter of 2018. Therefore, U.S. GAAP results do not include Centaur Holdings prior to the acquisition in the third quarter of 2018 unless otherwise stated. Note that both adjusted results reflect hold versus our expectations. You can find reconciliations of GAAP and non-GAAP figures starting on slide 10. I will now turn the call over to Tony.

Thank you, Joyce. I'll provide a quick overview of our third quarter performance and recent developments before turning the call over to Eric to discuss the results in greater detail. First, a quick update on the merger with Eldorado. We filed our definitive proxy on October 11, and the shareholder votes for each of the companies will occur on November 15. We made significant progress on the integration planning, and we remain on track to close in the first half of 2020. Turning to the results; third quarter net revenues totaled $2.24 billion, up 2.3% year-over-year driven by growth across all of our business verticals and favorable hold in Las Vegas. Net revenues grew 0.7% year-over-year when adjusted for hold. Solid consumer demand in Las Vegas drove the higher revenues as we saw increased slot and table volumes, including an 18% increase in baccarat volumes, alongside an increase in hold, hotel occupancy, and ADR. Third quarter adjusted EBITDA totaled $638 million, up 6.3% year-over-year driven by revenue growth and corporate expense reductions in payroll, professional services, legal expenses, and risk management. Adjusted EBITDA margins expanded 100 basis points year-over-year to 28.5%. We are very pleased that we were able to deliver these strong results in the third quarter despite headwinds across our portfolio, including road closures in Indiana, which impacted visitations at Hoosier Park and Indiana Grand, also the temporary closure of the Colosseum at Caesars Palace and rooms at Harrah's Las Vegas for renovation, and a decrease in demand at our various properties. On a trailing 12-month basis, our domestic marketing costs represented 20.1% of gross revenue, reflecting a 20 basis point improvement in marketing efficiency year-over-year, while labor costs represented 23.4% of gross revenue, reflecting a 60 basis point improvement in labor efficiency. In September, we announced an agreement to sell the Rio for $516.3 million. The sale of this asset allows us to focus our capital resources on strengthening our portfolio of the Las Vegas Strip properties and is expected to result in incremental EBITDA growth at those properties. Importantly, we continue to hold marketing rights for our valuable seasonal rewards customers and will retain hosting rights to the World Series of Poker. We expect to close the sale by the end of 2019, subject to customary closing conditions. For the sale agreement, we will continue to operate The Rio for a minimum of two years pursuant to a lease agreement to be signed at closing, and the property will remain part of the Caesars Rewards network during that lease period. We continue to grow our sports betting business across the third quarter and are pleased with the progress we've made over the past year. We've recently expanded Caesars sports books to Iowa and Indiana and now have Caesars branded sports books across 29 locations in seven states: Nevada, New Jersey, Pennsylvania, Mississippi, Iowa, Indiana, and New York. Mobile sports betting is already live in Nevada and New Jersey, and we expect to launch in Pennsylvania pending regulatory approval. The new sports books are driving increased visitation and customer engagement across our portfolio, and we expect sports betting to be a key value driver for the company over the coming years. Now, I’ll turn the call over to Eric to review our financial results in more detail before getting to your questions.

Well, thank you Tony. Please note that our consolidated results include Centaur unless otherwise stated. As Tony mentioned, Las Vegas results were strong in the third quarter. Net revenue totaled $973 million, up 6.9% year-over-year due to strength across all business verticals from favorable customer demand. Gaming revenues increased 17% due to $37 million of favorable year-over-year hold and increased gaming volumes. Total gaming volumes increased 2% year-over-year. Table volumes were up 2.5% led by baccarat up 18%, while slot volumes were up 1.7%. Las Vegas cash hotel revenues grew 8.1% year-over-year, marking the highest third-quarter Las Vegas cash hotel revenue in company history. Recall that we also achieved similar records in Q1 and Q2 of this year. Occupancy increased 290 basis points to 95.6%, and RevPAR increased 7% to $140. We experienced strong growth in the room nights from the group's segment and from direct bookings on our website, as well as from the leisure segment. We continue to see a healthy consumer environment in Las Vegas and expect hotel demand to remain strong throughout the remainder of the year, specifically with cash-paying customers. Food and beverage cash revenues increased $5 million or 2.5% year-over-year, primarily due to higher hotel occupancy levels and recent enhancements we made to our offerings. Caesars Palace saw the largest increase driven by the new Vanderpump Cocktail Garden and other premium outlets like Hell's Kitchen. Las Vegas EBITDA totaled $356 million, up 16% year-over-year or up 4.5% on a hold adjusted basis. EBITDA margins expanded 290 basis points to 36.6%, driven by solid revenue growth. Turning to the other U.S. segments, net revenues totaled $1.12 billion, down 0.5% as approximately $25 million of favorable impact from two additional weeks of Centaur results versus the prior year period was offset by unfavorable hold of $11 million year-over-year, and the increase in competition in Atlantic City and Southern Indiana. Additionally, construction disruption as we moved our casino from a boat to land in Southern Indiana impacted results. This move is expected to be complete in December. Other U.S. EBITDA declined 1.9% to $304 million due to the decrease in revenues but was up 1% to $309 million on a hold normalized basis. EBITDA margins contracted 40 basis points to 27.2%. On a hold normalized basis, our Atlantic City properties EBITDA was flat year-over-year. Our 'all other' segment, which includes unallocated corporate expenses, managed properties, and our international operations had net revenues of $144 million, down $6 million or 4% year-over-year, primarily due to decreases in table games volumes at our international properties. All other EBITDA loss increased $5 million to a loss of $22 million, due to lower performance at our London Clubs operations, which was partially offset by a reduction in corporate expenses year-over-year. As Tony noted, we reduced payroll, IT, and professional services expenses in the quarter. Looking ahead, our outlook in Las Vegas remains positive based on future demand indicators and results we've seen to date. In the third quarter, visitor volumes to Las Vegas increased 0.6%, convention attendance increased 8.3%, and deplaned passengers increased 3.9%. In the fourth quarter, we expect continued low single-digit revenue growth in line with year-to-date hold normalized growth trends, and we expect margins to improve slightly year-over-year. We view the overall demand environment as stable and modestly growing, led by non-gaming segments. Recall that we faced lower leisure demand in the latter half of last year and tapped our database to stabilize occupancy. This year in the fourth quarter, we are seeing stronger demand from cash-paying customers, which will increase hotel cash revenues year-over-year. We’re also seeing a strong quarter in group bookings, and we expect double-digit growth in room nights and high single-digit growth in group revenues for the fourth quarter. We anticipate an acceleration in Las Vegas led by our Caesars Forum Convention Center which is scheduled to open in March. Caesars Forum already has over 1.1 million room nights booked and $390 million in revenues through 2026, with 75% of those bookings in the first three years of operations. Total bookings for the Forum in 2020 are currently over $90 million, well ahead of our expectations. In the other U.S. segment, we anticipate net revenues to grow low single digits and margins to improve slightly year-over-year in the fourth quarter, with Centaur remaining a strong overall growth driver, despite annualizing the acquisition in the third quarter. We expect to continue to extract additional synergies and expect a positive lift in the fourth quarter from the recent legalization of sports betting in Indiana. Additionally, the expected December completion of the Southern Indiana boat-to-land project marks the end of an 18-month renovation and rebranding effort to transform the property into a premier Caesars asset. In the 'all other' segment, we expect to generate a larger operating loss for the full year compared to 2018 due to investments in technology infrastructure, sports sponsorships, and weakness in our international business. In the fourth quarter, we expect sports investments to increase, which will be partially offset by labor savings. From a liquidity perspective, we ended the quarter with approximately $1.3 billion in cash. As of September 30, our total revolver capacity was $1.2 billion with zero drawn. In the third quarter, we spent $106 million in same-store CapEx and $78 million in development CapEx. During the quarter, we also used excess cash to voluntarily repay $250 million of the CEOC term loan, bringing the balance down to $1.2 billion and our enterprise-wide gross lease-adjusted leverage down to 5.8x. Excluding the convertible notes and capitalizing our lease payments at 8x, our net leverage stands at 5.3x. For cash CapEx in 2019, we now expect a range of $400 million to $420 million in maintenance, which includes room renovations at Harrah's Las Vegas. We expect to spend approximately $275 million to $295 million for development-related CapEx, mostly for the Caesars Forum project and our investments in sports books across the U.S. This range excludes spending for the Korea projects which we are currently evaluating. Before we open the call for questions, please note that the purpose of today's call is to discuss our third quarter performance. While we look forward to answering any questions you have about Caesars, for more information regarding the proposed merger with Eldorado, please refer to our filings with the SEC.

Hey, thanks everyone and nice performance in the quarter. Tony, if I could, you obviously talked a lot on the last call about some of the efforts that you guys have collectively made in terms of cost reduction, and obviously based on the performance in the quarter, it seems that some of that stuff is flowing through. To the extent you can, can you kind of talk about where you are in that process and what you are kind of targeting at this stage and a timeline for it? I think that would be very helpful.

Okay, thanks Carl. Yeah, on the last quarterly call I think I had mentioned that it was my goal to take $25 million to $50 million worth of cost out of business by the time we got to the closing of the transaction. I'm happy to say today that I would now make that estimate somewhere between $75 million to $100 million, and I think it's going to be on the higher end of that. It comes in a variety of buckets. From a property standpoint, we've eliminated a number of slot participation games across the whole portfolio. We've also reduced consultants and outside contractors and professional services. We’ve suspended our international efforts and pursuits for licenses in Japan and other jurisdictions, and then just natural attrition, particularly here at corporate as people have left. We take a very cautious approach about filling those positions. We don't want to hire people into harmful situations if it's a position that may be part of a larger synergy down the road. Lastly, a few weeks ago we launched a voluntary severance program which had approximately 50 people raise their hand here at corporate; this again allows us to eliminate the cost between now and the closing, while providing them the benefits they would have received if they had stayed through closing. So I think it was a win-win for everybody. So again, I would say now it's about $75 million to $100 million, and we are beginning to see it flow through, but I think you'll see more of the flow through as we get into the first quarter, because a lot of those voluntary severances will be accepted over the course of the next couple of months.

Great! Thank you. Then something a little bit more detailed, I guess probably best for Eric. You talked about it a little bit in the prepared remarks. When you – based on kind of prior experience and I know you guys have done this before, but with respect to the Southern Indiana boat, obviously during the disruptive period here, we’ve certainly seen from a gross revenue perspective some decline. Can you talk a little bit about the impact that you foresee on a year-over-year basis, maybe to the extent you can EBITDA, even if it’s on a percentage basis, just in terms of the uplift you foresee from the cost savings as well as what you would have expected to be a stronger revenue performance?

Yeah, it is a great question, and we do have experience as we’ve moved other properties from the boat to land. There are two real drivers; one is on the cost side, you no longer have to maintain the boat, which includes sometimes captains and dredging expenses and so forth, and so the downside of the project from a return standpoint is really limited, and you can get about a 6% to 8% return simply by looking at the costs that you're pulling out of the business by moving from boat to land. Then on the other side, you create a much better environment for your customers, both from the field perspective and also in the gambling perspective of the casino, and what we’ll typically see there is ultimately another kind of 5% to 10% change. So we target around a 15% return on these projects, and I have no reason to expect that we wouldn’t be able to get that.

And the only color I would add to that as well, there is a little bit of noise in that market given the competitive effect of Derby, Kentucky.

Great! Thank you very much guys.

Hey, so big news in the quarter as you signed The Rio. Can you just talk about what kind of loss EBITDA you think that that’s going to generate for Caesars? Thanks.

Well, I mean I think we anticipate being able to maintain the vast majority of that. I don’t know Eric if you have an exact number in terms of what our forecasts were, but the ability to retain the World Series of Poker, being able to retain our Caesars Rewards customers, and still managing the property for the next two years, we think that a lot of that business is just going to be transferred over to our other eight properties in Las Vegas.

Okay, and then on Atlantic City, you mentioned in your prepared remarks. I believe you said that hold adjusted EBITDA was flat in the quarter. How did that compare to expectations and kind of what’s the outlook for your AC segment going forward? Thanks.

Well, my expectation is that we begin to turn that around. I mean Atlantic City certainly from the last number of quarters and since the new competition opened has been going in the wrong direction, and before you can turn something around and move it in the right direction, first you have to stop the decline, and I think we've accomplished that. We are testing some new marketing initiatives that are more targeted towards specific customers, decliners, and inactive customers that we feel we've lost market share to our competitors. So I'd like to think that we're going to be able to show improved trends there over the balance of the fourth quarter, and more importantly into 2020.

Helpful, thank you.

Thanks.

Hi, good afternoon everyone. You guys provided great color on just the overall Las Vegas operating environment and maybe some of the core or future KPIs. I was wondering if you could do a little bit of the same, just sort of the regional markets. You know I think Eric, you mentioned or maybe it was you, Tony, a little bit about Centaur and some of the progress there. Is that and kind of Southern Indiana going to be the primary drivers for growth in 2020, and any other pluses and minuses, and just what are you seeing broadly speaking in terms of the core regional consumer at this point?

The Indiana properties show promise due to the first phase of new tables being introduced. We anticipate growth over the next few phases, although we won't be able to add as many table games as we would prefer in those venues. The second phase will require some building expansions. There's definitely potential at the Indiana properties this year. The transition from boats to land will also contribute positively. We expect further growth as sports betting becomes more widespread. In New Orleans, while it may not impact 2020, we believe there is significant potential due to our extended lease and the planned investment of $325 million, which must be deployed by 2024. We consistently operate at full occupancy and purchase an additional 30,000 to 50,000 rooms from non-gaming hotels. Overall, we have substantial potential in New Orleans, though it likely won't materialize this year. However, we are facing some competitive challenges. The opening of Totally Live is anticipated for late 2020, which will impact both Philadelphia and Atlantic City. Additionally, gaming expansions are occurring in Arkansas and Oklahoma, and the expansion of video gaming terminals in Illinois, along with historical racing games in Kentucky, continues.

Great, thank you very much. And then, you know sort of your latest update on the direct marketing side and some other reductions you’ve been able to deploy there. Just kind of where are we in your general strategy there? You know is that going to be sort of modest incremental improvement from here or sort of any kind of new programs or initiatives that you’re excited about, understanding that it's a bit of a transitional period to roll out anything too new.

Yeah, I think that it's more continuing to do business as usual. I think the guys here, the marketing team, have done a fantastic job. There are always some exceptions, like in Atlantic City, where I think that we kind of weren’t as aggressive as we should have been in light of the new competition. So by and large across the other regional markets and here in Las Vegas, we are continuing to test new programs. We're even doing some testing here in Las Vegas, but there's not going to be a wholesale dramatic change to our marketing approach from a direct marketing standpoint.

Thank you for taking the questions.

Hi, good afternoon. You guys have mentioned favorable hold in the other sector of about $11 million. So does that imply that the favorable hold impact in Vegas was around $26 million?

No, it was the other way, Harry. Sorry, we had a negative of about $11 million. That’s on a year-over-year basis in the regions, and then a positive of $37 million in Vegas. So a net positive of around $25 million for the company.

I see, I misunderstood.

And if I could just add some color onto the Las Vegas results, because I don't want that to minimize the tremendous results we had across the whole portfolio in Las Vegas. As Eric mentioned in his comments, for the third straight quarter we had record hotel cash revenue. You would think that would come at the expense of gaming volumes because we're putting more cash customers in the room, but we were able to grow our slot volume and our table volumes by 2%. Our baccarat volume increased by 18%. Food and beverage revenues continue to escalate as well, and we continue to do very well from an entertainment standpoint. Overall, because of the closure of the Colosseum for two months, it wasn't quarter-over-quarter up, but on an event-by-event basis, it's certainly up. For example, we just had Guns N’ Roses in the Colosseum, and with the changes that we made to the facility, it provides a great customer experience. We're able to do more throughput in terms of beverage sales, and the bookings for next year are very exciting from an entertainment standpoint. So I think overall, Las Vegas is just achieving extremely well.

Yeah, we agree with that. I did want to sneak in another follow-up question, particularly regarding the 18% lift in baccarat, which seems quite significant. Do you think that you guys were taking share, or do you sense that there is a stabilization in the baccarat market? What do you think accounts for the outperformance other than brilliant management?

Well, I agree with that, but it's not solely from my standpoint. First and foremost, I wanted to give credit to the management team here at Caesars Palace. They've done a great job in cultivating and creating relationships with that business. As a matter of fact, we’re just coming back from a business trip to further those efforts. I think also the capital dollars that we’ve deployed with our villas and those experiences are second to none. I don’t know what the exact numbers are, but I’d have to believe that 18% is a mixture of gaining market share as well as overall growth, but I think it primarily comes from our senior management team at Caesars Palace and the Asian marketing team.

And last question, just turning to sports betting. So far in the 29 books that you've got operating, and then the mobile live in New Jersey and Nevada, how much accretion, if any, or how close are you to EBITDA creation as a result of sports betting? And maybe you could delineate between those states that have mobile and those that don’t.

Sports betting, in and of itself, is certainly driving incremental EBITDA, but I think that that's the smallest component of what we're benefiting as a result of the sports betting legislation. If you look at a property like Hammond, leading up to our opening the sports book, revenues for the few quarters before that had been down a point or two. In the two months since we've opened the book, our revenues are up approximately 4%. We're seeing significant lift in our food and beverage sales and a significant increase in foot traffic, which is positively affecting our gaming volumes. So yeah, we're making money from sports betting alone, but we're making even more from the increased traffic it's creating.

Yeah, and we're seeing it across the board. If you look at the books that we opened in Iowa, Mississippi, and Indiana, they’re all having similar effects, with some larger magnitude than others, but there's no question that they are definitely influencing customer visitation trends and have a direct impact on the amount of food and beverage that we’re selling.

Got it! Very helpful, thank you.

I think we lost David.

Hey guys, this is Jeff Stantial on for Barry. Just curious, you mentioned some puts and takes earlier for 2020. I just wanted to get your thoughts on the competition coming online later in the year in Indiana with the Gary project and then thinking through into later next year, into 2020 and beyond, some of the new builds in Illinois. Just curious your thoughts on those.

Well, certainly I think that those are also headwinds as well. I mean, the good thing appears to be some political uncertainty about the gaming property and the license in downtown Chicago, which I think would have the greatest impact. I don't know if we've forecasted the impact from Gary, but it certainly is going to be a little bit of a headwind. The expansion of adding – going from 5 to 6 VGT’s in Illinois is going to impact our businesses beyond Gary; I mean, Hammond, Joliet, as well as Metropolis. I think the bigger impact on the VGT isn’t just the six units; I think the bigger impact is that customers can wager more and win more, thus making it a more compelling and enticing product for people who just want a convenient gaming option.

The only thing I’d add to that is broadly speaking, when we look across the entire portfolio and we're in the middle of our planning process for next year, we do see less competitive disruption this coming year compared to what we've experienced this year and the prior year. It just happens to be concentrated in the markets that you called out, but broadly speaking, it's less than in prior years.

Okay, great, thanks. That’s all from me. I appreciate the color, guys.

Thank you.