Caesars Entertainment Inc (CZR) — Q4 2019 Earnings Call Transcript

Thank you. Good afternoon. And welcome to the Caesars Entertainment Corporation fourth quarter and full-year 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 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 our earnings release to the SEC in a Form 8-K and will file our Form 10-K. Before we get underway, I would like to remind you that today’s conference call will contain forward-looking statements that we’re making under the Safe Harbor provisions of Federal Securities Law. The company’s actual results could differ materially from the anticipated results in those forward-looking statements. In addition, we may discuss non-GAAP measures. Please refer to slide 21 through 26, which includes forward-looking statements, Safe Harbor disclaimers, and definitions of certain non-GAAP measures, and slides 12 to 16, which include tables reconciling GAAP and non-GAAP figures. I will now turn the call over to Tony.

Thanks, Joyce, and thanks everyone for joining. We have what we believe is a really good story, and we’re excited to share it with everybody. I’ll provide a quick overview of fourth quarter and full-year performance and recent developments before turning the call over to Eric to discuss our results in greater detail. First, an update on the merger with Eldorado. On November 15th, stockholders from both Caesars and Eldorado approved the merger of our two companies. Additionally, we received regulatory approvals from a number of jurisdictions and are making progress toward obtaining approval from other jurisdictions in the coming months. We continue to make progress on the integration planning and expect to close the transaction in the first half of 2020. Now the results, Caesars delivered another strong year of operating performance. Starting with the fourth quarter, net revenues totaled $2.2 billion, up 2.6% year-over-year, driven by strength in Las Vegas and growth across all regions, primarily in Iowa and Indiana due to the opening of new sportsbooks. Solid consumer demand in Las Vegas resulted in higher revenue, primarily within our Hotel segment, as we saw a higher cash customer mix versus the prior year and an increase in occupancy. Adjusted EBITDA was $586 million, up 3.4% year-over-year, driven by revenue growth and corporate expense reductions in payroll, professional services, and legal expenses. Excluding the sale of Rio, adjusted EBITDA totaled $575 million, up 4% year-over-year. Adjusted EBITDA margins expanded 20 basis points year-over-year to 27%. For the full-year, enterprise-wide net revenues were $8.7 billion, up 4.2% year-over-year, driven by strong performance and favorable hold in Las Vegas and a full-year of Centaur results. Adjusted EBITDA totaled $2.42 billion, up 4.7% over the prior year. Hold adjusted EBITDA was $2.4 billion, up 2.9%. Our domestic marketing costs were 20% of gross revenue, reflecting a 10-basis-point improvement year-over-year, while labor costs represented 23.4% of gross revenue reflecting a 30-basis-point improvement. As a result of our focus on cost controls, we’ve removed approximately $100 million of annualized expenses since the start of 2019. We’re very pleased that we’re able to deliver these strong results to close the year 2019. We also have closed the previously announced sale of Rio in Las Vegas to Dreamscape Companies in December and received $470 million in cash. In January, we announced the sale of Harrah’s Reno to CAI Investments for $50 million of net proceeds, which will be split 75% to VICI and 25% to Caesars. In addition to capital investments we’ve made over the last few years that paid off as we’re seeing good results from these various projects. Since installing table games at both Centaur properties and opening Southern Indiana’s new land-based property, all three have increased gross gaming revenue by 35% to date, tracking well ahead of our expectations. We’re also excited about the opening of Caesars Forum here in Las Vegas in March, which has exceeded bookings and revenue expectations to date. For its first full year of operation, Caesars Forum has already booked over 240,000 room nights and $119 million in revenue. We have also booked more than $1.3 million room nights representing $460 million in revenue so far through 2026. We continue to grow our sports betting business across the quarter and are pleased with the progress we’ve made over the past year. We now have 29 seasons branded sportsbooks across seven states. As a result of these installations, we have seen an increase in visitation, food and beverage revenue coming particularly in Iowa, Indiana, and Mississippi. We have licenses approved to launch mobile sports betting in Pennsylvania, Indiana, and Iowa, and plan to do this over the course of the first half of this year, subject to regulatory approval. We reiterate our view of sports betting as being a key value driver for the company and anticipate expanding our footprint to more markets over time. As we looked at the first quarter of 2020, we are seeing an acceleration of the performance that we saw in 2019. Las Vegas is performing very strongly with gaming volume exceeding our expectations, up 9% in January, and non-gaming generating solid performance as we continue to see strong customer demand. In addition, regional properties continue to perform well due to the addition of sports betting and capital investments I mentioned earlier, along with our focus on cost controls. Now I will turn the call over to Eric.

Thank you, Tony. Please note that our consolidated results include Centaur unless otherwise stated. As Tony mentioned, we generated strong Las Vegas results again in the fourth quarter. Net revenue totaled $989 million, up 4.2% year-over-year due to strength across all business verticals as we saw favorable customer demand. Gaming revenue increased 1.4%, primarily due to the higher mix of cash customers in the hotel this year versus the prior year. Las Vegas hotel revenue increased $9 million or 3.2% year-over-year, while occupancy increased 120 basis points to 95.1%, and RevPAR increased 2.1% to $141.9, despite the addition of 26,000 more room nights available compared to the prior year. We experienced more demand from our FIT customer segment and double-digit year-over-year growth within our group segment. As of today, we continue to see a healthy consumer environment in Las Vegas and expect hotel demand to remain strong. Food and beverage revenues increased $8 million or 3.1% year-over-year, primarily due to higher hotel occupancy levels and enhancements in our offerings. Caesars Palace saw the largest increase driven by the new Vanderpump Cocktail Garden and Hell’s Kitchen, as well as an increase in banquet revenue due to the higher hotel Group mix. Hell’s Kitchen has performed extremely well since opening, generating almost $40 million of revenue in 2019 alone. Other revenues grew $19 million year-over-year, mostly due to an increase in entertainment revenue from higher ticket sales and prices for shows at the newly renovated Colosseum at Caesars Palace and also at the Flamingo. Las Vegas EBITDA totaled $363 million, up 3.4% year-over-year, or up 3.6% on a hold adjusted basis. The performance was due to the increase in revenues offset by an increase in operating expenses related to the Rio rent expense equal to $3.8 million. Due to the short-term nature of our lease agreement to manage the Rio rent payments, they will be recognized as an operating expense instead of as an interest expense for financing obligation. As a reminder, the annual rent for the Rio is approximately $45 million or $11.25 million per quarter going forward. Excluding the Rio, Las Vegas EBITDA totaled $352 million, up 4.5% year-over-year. Turning to the other U.S. segments, net revenues totaled $1 billion, up 1.8% year-over-year, driven by strength across all markets. Notably, as Tony mentioned, Indiana and Iowa generated solid performance primarily due to our new sportsbooks that drove higher visitation, which in turn translated into higher gaming volumes. Our Southern Indiana land-based property opened in December and we also saw an increase in gaming revenue due to strong demand for the new asset. Other U.S. EBITDA increased 7.8% to $248 million, or up to 7.3% on a hold normalized basis, due to increased revenues and excellent cost controls. EBITDA margins improved 130 basis points to 24%. The Atlantic City properties EBITDA improved by $4.5 million over the prior year due to higher revenues across verticals coupled with improved operating expenses. The all other segments include our unallocated corporate expenses, CIE managed properties, and our international operations. Our all other segments net revenues totaled $148 million, down $4 million or 2.6% year-over-year, primarily due to decreases in volumes at our international properties. All other EBITDA loss increased $11 million to a loss of $25 million primarily due to a $10 million increase at our high-end international properties, and a $15 million increase in our sports betting partnership investments, all of which were partially offset by a $7 million increase in CIE performance and a $7 million reduction in labor and consulting expenses at corporate. Looking ahead, our outlook as of today in Las Vegas and in the regional markets remains positive based on demand indicators and the results we’ve seen today. We believe the overall demand environment is improving with continued non-gaming growth leading the way. We continue to anticipate a strong 2020 in Las Vegas led by the Caesars Forum Convention Center, which is scheduled to open in March. We also expect the addition of the CON/AGG Conference in March, the NFL Draft in April, which will be hosted in front of the Caesars Forum, and the Raiders home games in the fall to provide a meaningful boost for visitation within the city. We look forward to continuing to activate our strong partnership with the NFL, as they bring the draft and the Raiders to Las Vegas. From a liquidity perspective, we ended the year with approximately $1.8 billion of unrestricted cash. As of the end of December, our total revolver capacity was $1.2 billion. During the fourth quarter, we spent $136 million on maintenance CapEx and $76 million in development CapEx primarily consisting of spend for Caesars Forum and the sportsbooks. Before we open the call for questions, please note that the purpose of today’s call is to discuss our fourth quarter performance. We look forward to answering any questions you have about Caesars or for more information regarding the proposed merger with Eldorado. Now, we’ll open the call for questions.

Hi. Thank you, Tony. Eric, thank you for the color. Just in terms of, clearly, today yesterday Coronavirus, front of mind for everyone unfortunately from a market perspective, and I just wanted to ask kind of several part question. For starters, are you guys seeing anything in kind of the last few weeks that has impacted or changed visitation, changed behavior as it pertains further to booking trends and what you’ve seen in your bookings for out periods, namely from international regions? And then lastly, is there anything you guys are doing at present at the property level to potentially further safeguard from any issues?

Yeah. Thank you for the question, it is obviously on top of everybody’s mind. To date, we are pleased and pleasantly surprised to say that we’ve seen no business impact whatsoever. As a matter of fact, we’re off to a great start in 2020 from our VVIP business from Asia. I credit that to Gary Selesner and his Asian marketing team. They do a great job of cultivating that business. They take a number of trips each year and they spent quite a bit of time there in December, and they had teed up what they thought was going to be a real strong first quarter from that segment, and that has come to fruition. Going forward, we have a number of metrics in dashboards and items that we track on a daily basis to see if we get a precursor to any downturns. And again, I’m happy to report that we have not seen that yet. We are working on contingency plans should the situation begin to affect business here, but again, so far, so good.

And then, Tony, if I could follow up on, I think, you mentioned 240,000 room nights this year associated with the convention center and $100 million of hotel room revenue on the books associated with events, or sorry, maybe not this year, in the year post opening.

Yeah.

How much of that...

Go ahead. I am sorry.

No. I was just going to ask how much of that is incremental relative to stuff that was maybe previously contemplated at other venues or is that just kind of $100 million of incremental revenue on top of what you’d be doing in some of your other venues?

I don’t have the exact percentage, but I can tell you that the vast majority of that is incremental. We have seen a little bit of a follow-up at the properties. But collectively between what we’re booking there and what we’re seeing at the individual property convention spaces, we are still well above our forecasts.

The only thing that Carlo is that the revenue of $100 million includes both the room revenue and the banquet revenue component.

Great. Thank you, Eric. Thanks, guys. I appreciate it.

Thank you.

Hi. Great. Good afternoon and thank you for taking my question. Maybe to build off the same kind of exposure question on thinking about maybe the high-end business, it sounds like, Tony, you mentioned the business doing exceptionally well right now. But I think for investors sort of knowing a little bit of exposure across to a large company would be helpful. Could you give us a little bit more color both on kind of Las Vegas and I think this is pretty concentrated at Caesar’s Palace, as well as in the more of the international piece of the business? Any ballpark metrics or anything you give us to think about or quantify exposures for that kind of VVIP or high-end Asian play, I think, would be helpful?

And I’m going to get Eric to correct me if I’m wrong, but I believe our overall profitability for the whole company is around 1% that comes from the VVIP business in Asia. But having said that, it’s off to a great start in 2020, so I would say through the first quarter, it’s going to uptake from there.

So it’s not a huge exposure. Our bigger concern going forward, depending upon which way this Coronavirus goes, is if we start to see cancellations of the domestic travel to Las Vegas for the fear of interacting with Asian clientele, but again, we have not seen that to-date, and obviously, we haven’t had any cases of the Coronavirus here in Las Vegas.

Sure. Great. And then my other question is beyond maybe the broader operating expense landscape. I mean, at least versus our expectations looks like the regional properties I think did very well on margins this quarter with market growth. The Las Vegas piece is probably a little bit slimmer. But these numbers can bounce around quarter-to-quarter. So just maybe, Eric or Tony, your thoughts on the broader labor cost environment? What did you call it out a little bit earlier at the beginning of the year and also just how much more room you have on some of the operational improvements to kind of drive margin growth? I think you’ve done some stuff on professional expenses and things like that?

We have made significant progress, and our operating entities are currently achieving strong margins. As I mentioned earlier, we've enhanced our marketing and labor efficiency. I've highlighted the $100 million in costs we've eliminated, primarily from our corporate structure, with about $11 or $12 million coming from individual businesses by reducing our slot participation games. This has yielded positive results, especially in regional markets, where we believe it hasn't had a negative impact. Consequently, we're considering a second phase of removing more of those games. In the corporate area, we've seen reductions through various means, including a voluntary severance plan, and we decided not to pursue a licensing opportunity in Japan. We're also managing our IT functions more effectively and scaling down several projects, leading to a significant reduction in contract labor. We're continuously evaluating opportunities for further cost reductions at the corporate level, but I would say that most of the potential savings have already been realized before the merger.

Great. Thank you very much.

Hey, guys. Good afternoon, and thanks for taking my questions. Can you just talk broadly about the level of inbounds maybe that you’re still getting on some of your gaming assets, specifically on the strip, and maybe what the buyer pool kind of looks like there?

Quite frankly, inbound for strip properties is pretty much non-existent. Our phones are open and willing to take calls, and if we get a call, we certainly would evaluate it to see if it makes sense for the business as a strategic decision. But right now, from a strip standpoint, there are no active discussions and we have had no inbound inquiries.

Okay. And then just pivoting to sports betting, can you tell us maybe about the impact you’ve been seeing across properties? I know you mentioned you called out $69 million in additional EBITDA at Iowa and Indiana, but I guess to what extent is that being driven directly by sports betting versus being more of a function of increased visitation and maybe crossover play?

First of all, sports betting outside of Las Vegas is not a major contributor, and while I don't have the exact figure, I believe it's around the $6 million profit range generated from the sportsbooks. However, we have seen significant increases in visitations that have led to additional revenue from food and beverages as well as gaming. For example, in Biloxi, Mississippi, we have experienced a remarkable 300% increase in cash beverage sales since the sportsbooks opened. This is achieving exactly what we expected: increasing foot traffic in the properties and positively impacting all revenue streams while also contributing its own EBITDA.

Okay. Then maybe just the last one on Centaur. Is there any update on the timing for sale leaseback and have you started to have any conversations with VICI or maybe even inbounds from other REITs?

No. No update on the timing there and no active discussions.

All right. Great. Thanks so much, guys.

Thanks.

Good afternoon, everybody. Just a follow-up on your comment about the inbound strength of Asian play. It’s a tough question to ask, but given the fact that it’s so contagious, what health precautions are you taking?

Well, that’s the thing I mentioned, we’re looking at contingency plans and operational plans right now. We’re actually looking to work together collectively here in the market as well as with government agencies, and I can’t tell you that we have everything ironed out right now, but we are embarking on those types of plans as we speak.

Thank you. My follow-up question is regarding the $100 million in expenses you have removed. What is the annual increase in your union contract costs that offsets these expenses? I would like to know what the net savings are if you are encountering costs elsewhere.

Well, first of all, I would tell you that the $100 million is a complete net savings because those increases would have happened regardless. Number one. Number two, we budget for on an annual basis, and again, Eric, correct me if I’m not exactly right, I mean, the 2% to 3% increase for salaries across the whole portfolio, including union and we typically come in under that. So I don’t know if we have broken it out as far as how much of that is union?

Yeah. We generally don’t provide that information, and we look at it in more aggregate and we include things like energy pricing, which recently has been going the other way, as well as the wages, but a lot of it is the benefits and other extra expenses associated with just running the business from a cost perspective. When we put our budget together, we estimate those and then try to find ways to offset them through cost savings in other areas.

Okay. That’s great. Thank you very much.

Thank you.

Thanks.

Hi. Good afternoon, everyone. I wanted to go back to a topic that you touched on earlier around sports betting. And Tony, I was listening carefully to some of the commentary around F&B increases, which are substantial but somewhat fundamentally different from an increase in GGR. Do you have any specific statistics around growth in or improvement in GGR as a result of sports betting rolling out? And my follow-up, however, at the beginning is have you been able to measure any of the total rewards loyalty members that are engaging in sports betting or any background on that yet?

The encouraging aspect is that many individuals engaging in sports betting in the Midwest and South were previously inactive total rewards customers. We have observed a significant reactivation of these customers, who are also contributing to other gaming activities. We’re experiencing approximately a 10% increase in foot traffic at properties with sportsbooks. However, it is challenging to determine how much of the increase in GGR can be attributed to sports betting versus other marketing efforts or environmental factors like changes in weather year-over-year. Specifically, at Centaur properties in Southern Indiana, we made major capital investments, which have led to impressive results. There is a lot of variability, making it difficult to pinpoint the exact impact on GGR, but we consistently see about a 10% increase in foot traffic at these properties.

And if, I mean, it’s certainly not in any way taking pocket share away from GGR and towards sports betting, as far as you can tell?

No, definitely not. We are seeing a significant increase in incremental GGR from customers who had previously visited us and are now returning, especially in those markets where they need to be on-site to place their bets.

Great. Thank you so much.

Great. Thanks. I guess I’d start with Vegas results for the quarter. I think overall results were better than we had modeled, but flow-through was perhaps a little bit lighter than we’d expected anything you’d call out there on the flow-through side?

We had a number of items that came in the last quarter or the year that we don’t necessarily think would repeat themselves that put a little bit of pressure on the flow-through. I think, per Shaun’s question earlier, there is a more volatility in the flow-through here in Las Vegas, due to the mix of revenue, as it shows up whether it’s in the casino or the hotel or the food and beverage. And for the year, our margins were up approximately 120 basis points, and we achieved a 37.5% margin here in Las Vegas. So, broadly speaking, I think the flow-through is good for the whole year and as we look into next year, there may be some volatility again between quarters, but for the year, we would expect great flow through again.

Yeah. And the other thing I would add is going into 2020, a lot of the cost savings initiatives, we really didn’t get the full like the voluntary severance program that I mentioned earlier; a lot of those people didn’t exit the company until the end of the year. So we’re not seeing the full benefit of the whole $100 million until 2020, and I think it’ll creep higher than that as we get closer and closer to the transaction.

Okay. I mean, I guess, how much of that $100 million do you think was actually recognized in 2019 just to be clear?

We didn’t really get started until the second half of the year. I don’t have an exact number, but if I had to estimate, I would say it’s likely around $25 million to $35 million. I noticed that several people in the room agree with that assessment, so I think that’s a reasonable estimate.

Great. Great. And then Tony, you talked about reductions to the participation footprint. Just curious if you’re offsetting that with any slot purchases and I guess while you’re at it, curious what the...

Yeah. What we’ve seen is it’s really worked for us when we replace the participation games with newly acquired product, and the results that we’re getting at the new product is almost as good as doing, as well as the participation games. There have been a couple of locations and a couple of isolated situations where we think that it hurt us, and we’re adding back, but the net number is going to continue to go up, because we’ve seen much more positive results due to that than negative.

Great. Great. And then just the last one, it gets clear Vegas is a strong setup for 2020, but curious when your thoughts beyond that, several new properties and entertainment venues are going to be coming online after that, just curious how you think about more of the medium- to longer-term setup.

I would argue that having more catalysts for additional traffic is beneficial for everyone. A rising tide lifts all boats; the MSG Event Center is going to contribute positively, even though I'm not exactly sure when it will launch. It will generate more interest and traffic into the city, along with the expansion of the Las Vegas Convention Center. I see all of these developments as positive.

Great. Thank you so much, guys.

Thank you.