Caesars Entertainment Inc (CZR) — Q2 2022 Earnings Call Transcript

Thank you, Kevin, and good afternoon to everyone on the call. Welcome to our conference call to discuss our second quarter 2022 earnings. This afternoon, we issued a press release announcing our financial results for the period ended June 30, 2022. A copy of the press release is available on the Investor Relations section of our website at investor.caesars.com. Joining me on the call today are Tom Reeg, our CEO; Anthony Carano, our President and Chief Operating Officer; Bret Yunker, our Chief Financial Officer; and Eric Hession, Co-President, Caesars Sports and Online Gaming. Before I turn the call over to Anthony, I would like to remind you that during today's conference call, we may make certain forward-looking statements about the company's performance. Such forward-looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them. Forward-looking statements are also subject to the inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward-looking statements, please refer to the cautionary statements contained in our press release as well as the risk factors contained in the company's filings with the Securities and Exchange Commission. Caesars Entertainment undertakes no obligation to revise or update any of our forward-looking statements to reflect events or circumstances that occur after today's call. Also during today's call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G. The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the company's website at investor.caesars.com, by selecting the press release regarding the company's 2022 second quarter financial results. I will now turn the call over to Anthony Carano.

Thank you, Brian, and good afternoon to everyone on the call. Our second quarter was a record quarter for our consolidated property portfolio. Adjusted EBITDA in the second quarter, excluding Caesars Digital, was $1.05 billion, versus $1.01 billion last year. Our Las Vegas segment delivered an all-time quarterly EBITDA record of $547 million, with revenues up 34% year-over-year. Our Regional segment delivered same-store adjusted EBITDA of $513 million, up 24% versus Q2 of '19. Caesars Digital reported a $69 million adjusted EBITDA loss, which was a dramatic improvement versus the first quarter of this year. In our Las Vegas segment, all areas of the business combined to contribute to the record EBITDA quarter. Excluding real rent payments, our Las Vegas segment generated EBITDA of $558 million and a 49% EBITDA margin. Occupancy improved significantly, reaching 97% as a result of strong demand and our ability to lift self-imposed occupancy caps. Strong occupancy when combined with the record ADR, resulted in the highest quarterly room hotel revenues for our Las Vegas segment and company history. Group and convention also posted an all-time quarterly EBITDA record, led by the strong performance of the CAESARS FORUM. Group room nights during Q2 '22 represented approximately 13% of occupied room nights in Las Vegas, up from 11% in the second half of '21. Forward group revenue pace for the remainder of the year and into '23 is up over double digits versus 2019. Our Vegas F&B operations delivered record profit during the quarter as well. And finally, results in our 55-plus segment, Las Vegas were up for the first time over 2019 since COVID began, and we're beginning to see a noticeable return to the market from international travelers. In the Regional markets, while results were down versus last year, operating results remained strong, especially versus 2019. Reported EBITDA of $513 million was up 24% to Q2 of '19 and up 29% when excluding impacts from the Lake Charles closure and construction disruption at Caesars Atlantic City. EBITDA margins improved 50 basis points to 36% on a same-store basis versus Q2 of '19, excluding Lake Charles and Caesars AC. July operating trends in our regional segment remained consistent with the trends we have seen post-COVID. Our capital program remains largely unchanged. 90% of our room remodel programs in Atlantic City are now complete, and we look forward to several exciting food beverage concepts opening in October and November. Our land-based facility in Lake Charles is set to open in December and so is our expanded casino offering in Pompano. We expect to break ground on Caesars Danville in Virginia, Harrah's Columbus in Nebraska and our casino expansion for Harrah's Hoosier Park during this quarter. Lastly, construction on our new hotel tower and additional entities at our New Orleans property is progressing well with the new Sportsbook and poker room set to open Labor Day weekend. These are all exciting projects that will generate a meaningful return on the investment for our company. As we look to the remainder of '22, we remain optimistic about our business as consumer trends remain healthy, especially versus 2019. As we mentioned last quarter, we remain encouraged regarding improving group and convention trends in Las Vegas, the return of the international consumer as well as the potential for the full recovery of our older demographic consumer, which has been the most impacted by COVID-19. I want to thank all of our team members for their hard work in 2022 so far. I'm extremely proud of our operating teams, their execution and their exceptional guest service. With that, I will now turn the call over to Eric Hession for some insights on the second quarter performance in our Digital segment.

Thanks, Anthony. The financial performance of our digital business improved significantly in the second quarter, both on a revenue and an adjusted EBITDA loss basis when compared to the first quarter of this year. As Tom previewed on our last earnings call, our strong gains in unaided brand awareness have allowed us to scale back our brand-related marketing spend. That reduction in combination with the reduced promotional investment environment translated into steadily improving results throughout the quarter. As we look to the back half of the year, we expect a number of significant product enhancements for our customers in key areas such as cash-out speed, customer service and parlay and alternative line offerings. We also anticipate converting all of our Caesars' branded apps and sportsbooks to our Liberty tech stack by the end of 2022, thereby enhancing the customer experience. In addition, our marketing teams will have new and enhanced ways to deliver offers and promotions to customers, ensuring that they receive them in the most cost-effective way. We continue to believe that scale is important for our digital sports betting and iCasino and poker offerings and pending regulatory approvals plan to expand into states and jurisdictions where allowed. We currently offer sports betting in 25 North American jurisdictions, 18 of which are mobile. iGaming is currently live in 5 jurisdictions, while poker is in 4. As a result, we will continue to remain focused on growth through new state launches, investing from a tech perspective on product enhancements and remaining acutely focused on our expenses.

Thanks, Eric. The second quarter was outstanding from an operating perspective. If you look back over the past 18 months, we've now reduced debt by $2 billion alongside acquiring and standing up our Digital business. Our most recent debt reduction came from $730 million of proceeds from the sale of the William Hill International business, $100 million of that was executed through open market debt repurchases below par. The other $630 million was applied to our 2025 term B that happened in July. We continue to produce strong free cash flow with an expectation to reduce debt further in the back half of 2022. I'll turn it over to Tom.

Thank you, Bret. I’d like to share more details about the current quarter and some discussions I’ve had with investors in the past 30 to 60 days. In Las Vegas, we reported $558 million of EBITDA, excluding the real lease payment, which represents nearly a 10% increase over the previous record set in last year’s third quarter after our merger. Coming into the quarter, our hotel revenue record in Vegas stood at $91 million per month, and we surpassed this in April, May, and June. We are on track to achieve over $1 billion in cash room revenue in Vegas for the first time this year. The group business has shown a strong recovery, with wash rates matching or dropping below historical levels as the pent-up demand for business travel materializes in Vegas. Previously, this accounted for around $200 million in EBITDA before the foreign convention center, and currently, we are pacing about 40% above that. The addition of FORUM, which was not operational before the pandemic, has contributed to these impressive results. The momentum in Vegas has carried into the third quarter. We expect typical seasonal fluctuations in August, where occupancy may dip back to the mid-90s from the high 90s, but we anticipate a return to high 90s levels in September based on our forward bookings. Sean and his team in Vegas have done an outstanding job under challenging conditions, particularly with Caesars Palace undergoing significant renovations for most of the year, which we expect to complete in September. This will reduce construction disruptions at the entrance of Caesars. We have also opened Vanderpump, Nobu, and Paris, and I will be attending the opening of the Martha Stewart restaurant in Paris in a couple of weeks. The property is undergoing a significant transformation as well. In the regional markets, Atlantic City continues to face challenges, especially with Caesars under extensive construction, which is reflective of delays being faced across various industries due to supply chain issues. While we hoped for completion before the Fourth of July, most work is expected to finalize by the end of August, which should help stabilize Atlantic City’s performance. New Orleans is slowly returning to previous performance levels but remains among the laggards in the regional markets. Meanwhile, Lake Charles is set to open before the year’s end, which should initially create a $15 million EBITDA drag but is expected to yield a significant swing with over $65 million in EBITDA once operational. We are enthusiastic about the upcoming projects in Atlantic City, including Horseshoe Indianapolis and Hoosier Park, which will introduce similar table expansions later this year. Regarding brick-and-mortar operations, there is ongoing discussion about the broader economic environment. I want to stress that we’ve managed to achieve growth in two consecutive quarters despite falling economic indicators. Historically, the average recession lasts about 10 months, and we hope we are nearing the end of this phase. The consumer demand remains robust for us. While we are observing a slight decline in unrated play, this is compensated by strength in rated play, especially among higher-tier customers. Recently, we’ve seen a resurgence in international visitors to Vegas over the past month, which is encouraging. Last year’s second quarter saw a benefit from stimulus checks, and despite that, July 2021 was our best month ever, with July 2022 performing similarly. Turning to Digital, which has been a frequent talking point for several quarters, we completed the acquisition of William Hill only 100 days before the NFL season kickoff, which meant we had no prior preparation for the U.K. operations. Eric Hession, Chris Holdren, and their team have successfully launched the app, established our brand presence, and made us competitive from the start. Currently, we hold about 15% of the nationwide handle share in the states we are operating in and even in states where we are not. Our unaided brand awareness has reached a level where we felt comfortable reducing our advertising spend, having scaled back a planned expenditure of hundreds of millions of dollars. Our competitors, however, are still active in their spending. Our market share has remained steady, and we were encouraged to see losses declining each month over the second quarter, with Digital approaching break-even status in July. As we enter the football season, typically our prime customer acquisition period, some modest losses may return as we attract new customers. However, given our near-profitability in July, I am quite optimistic that we will achieve profitability by at least the fourth quarter of 2023. I view our Digital business as having already reached a cumulative loss of $1 billion last quarter. We were estimating total cumulative EBITDA losses of around $1.5 billion, but current business trends suggest we may fall short of that figure. Our focus now is on proving our business model, having successfully carved out a substantial market share, and we aim to demonstrate profitability before considering further market expansion. We are very pleased with the rapid progress of Digital and are excited about the upcoming football season, as we enter it from a strong position rather than scrambling to catch up. Lastly, I want to address the topic of leverage, which has become increasingly prominent recently. We have a proven track record of acquiring companies and subsequently decreasing our debt. As Bret mentioned, while establishing our Digital platform amid $1 billion in EBITDA losses over the past year, we have managed to reduce our debt by $2 billion. We expect to continue this trend in the second half of 2022. In the last quarter, despite the Digital losses, we generated around $1 billion of EBITDA. With capital and returns coming on board, along with an improving Digital business, we are in a solid financial position. To clarify, I’m not providing specific projections, but if you look at our current metrics, our net debt—lease-adjusted—is just below $22 billion, giving us a leverage ratio of under 5.5 times. Our estimated free cash flow ranges around $1.5 to $1.75 billion, most of which is currently being allocated to growth initiatives. However, should a recession occur, we would naturally scale back growth expenditures. Historical trends indicate that during a recession, we might experience mid- to high single-digit revenue declines at worst in the regional markets, with potentially less impact in Vegas given current conditions. Even under those circumstances, our free cash flow could remain around $1 billion annually, which speaks to our strength regarding leverage. We are also in an ongoing sales process concerning our strip asset, aligned with VICI agreements, which is set to wrap up in about a month. While I won’t elaborate further on that, I want to emphasize that our balance sheet remains strong. We aim to consolidate the CRC bucket into our parent company once market conditions allow and will also work on extending maturities. Despite ongoing discussions about leverage and balance sheet strength, we are not overly concerned; we feel confident about our current financial position and the path ahead. Those are my prepared remarks, and I’ll now hand it over to the operator for questions.

Tom, could you just talk a little bit about, obviously, the decline in Digital spend was significant? I know during the last quarter, you spent considerable time talking about what we would and what we're seeing on TV and in advertisements. As you guys make your transition now towards a profitable breakeven business that's sustainable going forward, where does kind of that advertising bucket lie in terms of the aggregate spend? Is that just something now that kind of run rate where it is? Or will we see incremental stuff that might have been contracted for extended periods of time to fall away as we move forward?

Thanks, Carlo. This fall, if you're watching TV, part of our ESPN deal will include advertising buys. You'll notice some commercials primarily on ESPN, along with some local ads. You'll also see some presence in iGaming as we approach a stage where we're ready to move customers onto our app. Compared to last fall, it will feel like a new experience, but you might encounter a commercial or two depending on where you are and what you're watching.

Okay. Great. And then just as a follow-up. Tom, if I look at the Regional markets in general, could you kind of talk a little bit about what you're seeing out there? Obviously, we see plenty of GTR. And that's been relative to 2021, just given the difficulty in comparisons. But from a promotional standpoint, are you seeing any behavior that's any different than what we've seen over the last couple of months, quarters?

Nothing that's material to our business. I described the regional business as everybody had more money in their pockets a year ago from the transfer payments from the government. So that's both unrated play; that softness of some of that business has disappeared. That's also rated play that played up last year versus historical levels. But we are quite comfortable that we should be running, let's call it, well into double digits, above 19% EBITDA in regional. Regional margins should be up 600, 700, 800 basis points from pre-pandemic. So I would call that kind of the new normal in this environment where you don't have that little bit of a bubble that you had last year. This is part of what drove the Caesars acquisition for us, right? You remember when we were two markets, and if something happened in one of those two markets, it was a problem for the company. We wanted to become more and more diversified. Now we're more diversified than anybody out there domestically. What we saw is last year, Regionals carried Vegas when Vegas was struggling with people getting on planes and with virus-related restrictions. What you're seeing this year is regionals aren't quite as strong as they were last year, but Vegas is picking up the slack.

And Tom, just to clarify that, when you say up 600 or 700 basis points relative to 2019, I remember you mentioned 600 and 700. That was on the current portfolio, which I believe was around a 28% margin.

Yes. I'd say you're running 35% plus now. And then you're going to have Atlantic City construction roll-off, which should certainly improve revenue and margins. You're going to have Lake Charles come on, which should be a significant swing for us.

I have a question regarding price elasticity in Las Vegas, particularly considering that airfare prices are significantly higher than in the past and the impact of increased gas prices on visitors from Southern California. Are you noticing any segments, either by net worth or age, that are reducing their spending in response to higher hotel rates, food, and beverage prices? Is this sensitivity potentially greater during slower seasons like August when temperatures are quite high in Las Vegas?

I can't highlight anything specific; however, the 55-plus demographic has begun to return to Vegas after being absent since the pandemic. We recently discussed the resurgence of international travelers, which is very promising for us. Operating at 97% capacity with a 10% increase over our previous record indicates that everything is going exceptionally well in Vegas. As we approached our Board meeting last week, we checked our booking channels for any potential declines in Vegas bookings. What we discovered is a notable increase in bookings over the past two to three weeks. The demand is incredibly strong, and words can't adequately express how well things are going for us in Vegas.

Great. Returning to the Digital segment and your comments, it seems that the improvements in revenue and the reduction in EBITDA losses are primarily specific to Caesars rather than due to seasonality or a less competitive environment regarding promotions or customer acquisition costs. Is that an accurate evaluation? Additionally, considering the expected losses in the upcoming quarters, especially with the seasonality in the fourth quarter related to football, do you anticipate that the EBITDA loss in both the third and fourth quarters will remain below the $100 million mark or be close to the approximately $70 million or $69 million EBITDA loss seen in the second quarter?

I expect that we won't experience another quarter with a $100 million quarterly EBITDA loss in Digital. We can discuss the modeling later, but it's clear that our business has shifted focus from acquiring new customers to serving our existing ones, especially since there haven’t been any new significant states launching recently. The cost difference between acquiring new customers and retaining current ones is substantial. This upcoming football season should see increased activity in states like New York and Louisiana, which were slow to start last year. However, we won’t have a new state of scale opening in Ohio in January. We're optimistic about our performance, although I can't comment on others'. We're looking to spend nearly $0.5 billion on marketing in the last three quarters of 2022, marking a significant change for us. We're pleased that we haven't seen a decline in our market share, particularly in light of our profitability. We aim to avoid unnecessary losses. Historically, we've successfully turned heavily subsidized brick-and-mortar businesses into profitable ones, and we’re applying the same strategy in Digital. Initially, we lacked the ability to segment customers in Digital, but now we can do so more effectively, and we're witnessing positive results from this approach daily.

Tom, you mentioned in your prepared or so-called prepared remarks, unrated play. You saw that slowing. And I guess the first question, is that across both Regionals and Vegas? And then the second question there would be, have you seen any spend pattern changes in your database tiers, meaning that low tier-rated player? Has there been any softness there?

So no difference in the unrated across markets. It's just casino play in general. It doesn't move the needle as much in Vegas as it does in regional. In terms of tiers of customers, if you go to the lowest and the properties on the Mississippi River for us in the South, those started softening in January, February for us. Have been stable, but you're talking about a couple of properties that are $20 million of EBITDA to $4 billion. So nothing that is material to the enterprise.

Okay. Understood. Second question, Tom, regarding the Strip asset sale? I know you're likely limited in what you can share. But is the delay really more related to the rate and the funding environment rather than the demand environment? What I'm trying to understand is whether the demand for Strip assets remains as strong as it was a year ago.

To clarify, we've discussed this in previous calls. The timeline outlined in the VICI documents is clear. We launched at the beginning of this year, and the deadline is set for the end of summer. In deal-making, it’s typical for work to align with deadlines. We have numerous interested parties, but the current financing climate is a factor. Depending on its impact on pricing, there might be a point where we won't pursue it. I am content with maintaining cash flow and revisiting this later. We still believe we can achieve this within our initial parameters, but we acknowledge the market is variable. Changes in financing conditions could alter outcomes. It’s interesting because when I first mentioned selling our Vegas Strip asset, the reaction was confusion over why we would sell something so good. We argued that there are moments in the market where owning this many rooms could be questionable. Now, the narrative has shifted to concerns about whether we can complete the sale. This has always been a discretionary decision for us, and it continues to be. Regardless of the fear in the investment community, we stay focused and do the necessary work. If a deal aligns with our goals, we'll pursue it; if not, we are fine with that. That’s more than I intended to discuss regarding the Vegas Strip asset sales.

Auto traffic to Vegas has slowed according to Citywide, the LVCVA data. Curious if you're seeing anything like that across your database with California visitation?

Yes. We've just reported a record quarter, told you July is very strong as well. Yes, there is a seasonal in Vegas; the third quarter is lower than the second quarter because it's 120 degrees. But beyond that, we're really seeing no change in Vegas activity.

The June traffic at the airport was record levels as well.

That's right, June seats in Vegas set a record.

That's helpful. And then just as a follow-up, any thoughts on the Centaur option here?

For us, you should not expect us to exercise the put. You'll have to ask VICI what their intentions are on the call. But in any event, like any option, I would expect if VICI intends to exercise, they would be looking toward the end of the option period. But I don't know; that's a supposition if I was in their shoes.

Just two questions on the Digital side. Tom, I was just intrigued by the comment around, you will not get near to the $1.5 billion of losses. I think you referenced it on a quarterly basis, but any chance we could get you to help us set a new kind of overall level for us or not quite prepared to do that?

It's challenging to make predictions with the football season approaching. Currently, we are at $1.069 billion. I would suggest keeping that figure in mind for the next few quarters, with the expectation that it will improve, ideally turning positive by the fourth quarter next year at the latest.

In terms of the Digital strategy, can you just talk a little bit more about how you hope to make some inroads on online gaming? Maybe just the product roadmap on the iCasino side a little bit, given the strength of your database? We've always thought that's a huge opportunity for Caesars. Yes, Shaun. Sure. In terms of what our competitors are doing, we really haven't seen much of a change at this point. We don't know exactly what their plans are for football, but we've heard no indications that they're changing the original strategy. We believe the performance we had in the second quarter and as we head into July and the next few months support our notion we can pull back. Customers are stickier than we had originally thought, allowing us to have the large reduction to still maintain kind of the revenue levels we were at. In terms of the iCasino, I would say you're exactly right. Quite frankly, that's an area that I think all of us around the table are probably the most excited with. We really haven't gained the traction that we want given our knowledge of how to use those customers and to market to them, to segment them and what they're looking for in terms of game type based on the retail business. We should absolutely be a market leader in the iCasino space. We've been challenged from a tech perspective as well as from a marketing perspective. Unfortunately, that has lagged the sports betting side. Later in the fourth quarter, we're going to be making some enhancements on the tech side, so that we'll be able to do segmented marketing, and some other things we'll be able to do free spins coming up, which are all basic things that you'd expect would be in place. But unfortunately, they were just difficult from a tech perspective. I do agree with you that is an area of opportunity. If you look starting in the fourth quarter into next year, you're going to see us start to make some real progress there.

Can we discuss the margins? It feels like 90 days is a long time. At one point, we anticipated a margin of 4%. Is that still a range we believe we can achieve in the near or long term?

At $558 million, we achieved a 49% margin for the quarter. The World Series of Poker took place mainly in the second quarter, which contributed positively to EBITDA but also had about a 100 basis point negative impact on margins. Therefore, our operating margin was 50% in the second quarter. Looking ahead, we expect some seasonality in the third and fourth quarters, and as you may have heard, we will have new entertainment coming online. This will generate significant revenue, although it will also affect the margins in Las Vegas. When this entertainer begins, we will see a large revenue flow that primarily goes to the artist, resulting in a smaller profit for us but potentially enhancing the customer experience on the floor.

So 50% is a comfortable place for us to be.

Yes.

I want to focus on the regional performance first. Could you provide some insight into how the margins progressed throughout the quarter? March seemed to be in the high 30s. How did the pace change during the quarter? I understand there were some disruptions in Lake Charles and Atlantic City. Considering the comparison between the third and second quarters, typically these are your strongest quarters of the year. I just wanted to confirm that this trend is still expected to hold true at this stage.

Yes, that's still in play. I would say, month-to-month in the quarter was not a dramatic move across that many properties. You should figure that the business was running at about the 36% level or so for the bulk of the quarter.

Got it. And then in Las Vegas, I know there was some flooding recently. I wanted to check, has that been fully cleared up at this point? And how should we think about the impact, if any, in the third quarter?

I just put my life jacket off. There's no impact to the business at all. It's some good social media footage.

All right. And then just one last one. I think you mentioned that group was pacing up in Vegas around 40% versus 2019, including, obviously, FORUM. I mean how should we think about that? Excluding FORUM, is it still tracking up? And what's really driving that? Is it pricing, is it just food and beverage, additional business or it's just volume?

It's all of that. It's volume. You've seen what we've done in other segments of the business that we run versus how they were run prior. The banquet business that comes online is accretive to margins even at the 50% margins in Vegas. Michael Massari and his team have done a fantastic job of building a great calendar for us, and all of that comes together for a great outcome. Just to give you an example, Harrah's the second quarter, nearly 20% of room nights at Harrah's were grouped nights. That's a property that had effectively zero prior to the FORUM Convention Center opening.

Great. First, I was wondering, you gave some color on structural forward growth drivers in Vegas. You touched on the associated revenue with conventions. Can you big picture international? Is that a $50 million to $60 million business? And then you also mentioned the 55-year-old demographic returning. Just kind of wondering where we are if you can quantify where that was prior to COVID versus today?

So directionally, 55 and over is now above in Vegas for the first time since the pandemic, but it is still trailing younger cohorts on a comparable basis. The younger cohorts are up more. In terms of order of magnitude, that's a much bigger piece of the business for us than international. International is a good story for us, but it's far smaller than 55 and over.

Okay. Great. And then one more, if I could. One industry report cited that the OSB Euro SB is looking at a black label site for VIPs. Do you see, Tom, segmentation coming to online? Can you take what you've done offline to online and create margin outperformance? Is that something we miss when we structure our iCasino and OSB models at maturity, looking at international, even before consideration of the land-based benefits? How does that trend?

Yes. Integrating it into Caesars Rewards, ultimately, it should function similarly to the brick-and-mortar business. We should be able to capture a larger share of spending from our best customers and avoid overspending on smaller ones, which aligns with the brick-and-mortar concept. One aspect that was overlooked in the analysis of Digital is that when we and our competitors launched, numerous sports partnerships, branding partnerships, and affiliate relationships were established for customer acquisition as new states were legalized. This currently accounts for around $0.25 billion in our Digital business. These contracts typically last between 2 to 5 years after signing. As the business matures, you won't be renegotiating those deals, or they won't be renegotiated at the same levels as when they were initiated. This maturation will significantly enhance EBITDA as the business evolves. I believe this applies across the industry.

In terms of sports betting, California initiatives, I believe there are 7 or 8 companies that have backed one of the bills. Can you talk about how you're positioned there? More importantly, are there states in the U.S. where you would potentially take a hard pass given maybe a higher buy-in or a higher tax rate?

I find it hard to think of a place in the U.S. where we wouldn't want to go if the opportunity arises. There might be a very small state with a high tax rate where it could be less likely, but our goal is to be present everywhere. Regarding California, we are not involved in any initiatives. We strongly desire to see sports betting and iCasino available in every jurisdiction possible. We have a long-standing relationship with various tribes across the country, managing their assets through multiple contract renewals since we acquired Caesars, which is a unique situation. We aim to avoid conflict with tribal interests as their partners, so we have remained neutral in California and expect to maintain this stance in any state where there may be tensions between tribes and commercial interests.

Great. I wanted to ask about your hypothetical 50% flow-through. I know it was mainly a hypothetical scenario concerning revenue declines, and you were emphasizing strong free cash flow. In a situation where revenues are decreasing, are there fixed costs, perhaps in labor or other operating expenses, that you could potentially cut? We understand that marketing expenses are already quite low, and we're aware of how rent and lease payments function. In this hypothetical scenario, are there specific areas where you could reduce some of your fixed operating expenses?

Yes, Chad, absolutely. We've experienced the pandemic firsthand. The amount of cost reductions available in our businesses is significantly greater than we anticipated before the pandemic, and we were already advocating for substantial cost cuts. One positive aspect of the pandemic for us is that it revealed what our customers were willing to accept in a softer market. For instance, we realized the flexibility in operating hours for non-gaming amenities. The strategies we can employ in a softer environment differ greatly from what was commonly believed before the pandemic. The 50% flow-through and top-line impacts are much higher than we expected. I mention this to highlight that even in such a scenario, we would still be generating $1 billion in free cash.

Okay. Great. Tom or anyone, I wanted to just get a sense for how you're feeling about your Las Vegas room rate pricing power from here and outside of rooms being removed from the system like with the Rio, what inning do you feel like you're in in terms of pushing rate just based on your present occupancies, which are really high?

I mean I think what you're going to see is the return of group is going to help us grind rate higher because that's going to push out our lowest rate customers. That's what's happening. Keep in mind, we're about to cycle through where we'll be comping against self-imposed occupancy caps because of labor levels last year. You're going to see even more significant flow-through as we get towards the end of the year with those caps off. We feel extremely positive about the forward occupancy and rate environment in Vegas. As I said, we're on pace to do better than $1 billion of cash room revenue, which has never happened in Caesars.

Okay. And then just one follow-up. Curious to hear about this Empire days, Las Vegas promotion you guys launched today, if this is a regular way type of set of promotions, if it's sort of new or it's more offense or defense? Any other ways that you can activate the Caesar Reward system here for any various pockets of softness that we might see in the next 6 to 12 months?

Yes. This is a typical room sale that goes on every year. There’s nothing in particular to call out there. We're running at 97%. July was 96.5% occupancy. We don’t have a lot of extra room to fill at this point. We feel very good about Sean and his team in revenue management for us and have a great degree of confidence in the results that will drive going forward.

All right. Thanks for your time, everybody. We will talk to you after the third quarter.