Caesars Entertainment Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 30, 2024

There are 16 speakers on the call.

Operator

Hello. Thank you for standing by. Welcome to Caesars Entertainment Inc. 2024 Second Quarter Earnings Call. At this time, all participants are in a listen only mode.

Operator

After the speakers' presentation, there will be a question and answer session. I would now like to turn the call over to Brian Agnew, Senior Vice President of Corporate Finance, Treasury and Investor Relations. Sir, you may begin.

Speaker 1

Thank you, Towanda, and good afternoon to everyone on the call. Welcome to our conference call to discuss our Q2 2024 earnings. This afternoon, we issued a press release announcing our financial results for the period ended June 30, 2024. A copy of the press release is available in the Investor Relations section of our website at investor. Caesars.com.

Speaker 1

As usual, joining me on the call today are Tom Riegg, our Chief Executive Officer Anthony Carano, our President and Chief Operating Officer Brett Juncker, our Chief Financial Officer Eric Hession, President, Caesars Sports and Online Gaming and Charisse Crumbley in Investor Relations. 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 under Safe Harbor federal securities laws and these statements may or may not come true. Also during today's call, the company may discuss certain non GAAP financial measures as defined by SEC Regulation G. Please visit our press releases located on our Investor Relations website for a reconciliation of the differences between each non GAAP financial measure and the comparable GAAP financial measure. With that out of the way, I will turn the call over to Anthony.

Speaker 2

Thank you, Brian, and good afternoon to everyone on the call. Our 2nd quarter delivered consolidated net revenues of $2,800,000,000 and total adjusted EBITDAR of $1,000,000,000 both flat versus prior year. Our Las Vegas segment delivered a same store 2nd quarter net revenue record of $1,100,000,000 and our adjusted EBITDAR of $514,000,000 beat the prior year by 1.2%. These results were driven by continued growth in hotel cash revenue as a result of higher year over year occupancy and ADRs and record performance from our food and beverage. Recent room renovations at our newly rebranded Versailles Tower at Paris and Colosseum Tower at Caesars Palace are driving above plan returns on investment driven by strong gains in cash ADRs.

Speaker 2

The Group and Convention segment also delivered an increase in occupied room night mix year over year and recent forward pace for 2025 has strengthened. Las Vegas EBITDAR margins of 46.6 percent were down only 40 basis points year over year despite increases in labor. We remain encouraged for operating trends in Las Vegas segment based on our forward expectations for continued strong occupancy and hotel pricing trends coupled with a decrease in room inventory on the Las Vegas Strip. In our regional segment, adjusted EBITDAR for the quarter was $469,000,000 dollars down 8% year over year. Results were driven by a combination of competitive pressures in certain markets, construction disruption principally in New Orleans and a difficult comparison in Reno due to a large group event last year, offset by performance from our Danville and Nebraska properties.

Speaker 2

Despite revenue declines, EBITDAR margins in our regional segment were down only 100 basis points reflecting strong cost discipline. During the quarter, we celebrated the opening of Harrah's, Nebraska's permanent facility on May 17, the company's first property in the state, which is off to a strong start. We look forward to the completion of our newly rebranded Caesars property in New Orleans in October and the opening of the Danville permanent facility in December. Our elevated capital investment cycle is coming to an end, which will drive strong returns for the regional segment looking ahead. Our team members continue to deliver exceptional guest experiences as a result of their continued hard work and dedication.

Speaker 2

I want to thank all of our team members for their contributions to our strong results, which are a product of their commitment to excellence. With that, I will now turn the call over to Eric for some detail on the Q2 results in our Caesars Digital segment.

Speaker 3

Thanks, Anthony. Caesars Digital delivered 2nd quarter net revenues of $276,000,000 up 28% year over year and set a quarterly adjusted EBITDA record of $40,000,000 versus $11,000,000 in the year ago period. Including this quarter, we have now generated trailing 12 month EBITDA of $76,000,000 Our net revenue flow through to EBITDA in the quarter remained within our 50% range. Net revenues in our Sports Betting segment increased 19% year over year driven by flat handle and hold of 7.2%, which improved 80 basis points versus last year. Our product on the sports side continues to improve and our customers are reacting positively to our increasing mix of parlay and in game offerings.

Speaker 3

We continue to drive growth in our parlay wagers with the percentage of that type of wager growing 3 80 basis points year over year, consistent with the trends we've observed throughout the year. In July, we closed on the acquisition of 0 Flux, a leading sports betting technology company based in Australia. The 0 Flux team has already started contributing to the product innovation and driving hold improvements and customer engagement. In our iGaming segment, net revenues grew 50% for the 2nd consecutive quarter, driven by a 33% increase in volume and a 30 basis point year over year improvement in hold. Caesars Palace online continues to grow as a percentage of our total iCasino revenues.

Speaker 3

We're actively enhancing the product offering by adding new and exciting game content, including exclusively designed Caesars themed games. We successfully completed the acquisition of WinBet operations in Michigan in June, which sets the stage for the introduction of our new iGaming app, which will be branded the Horseshoe in early Q3. As we head to the back half of the year, we continue to optimistic about the progress we're making in both sports and iCasino and I believe we are well set up for a strong finish to the year. We now offer sports betting in 32 North American jurisdictions, 26 of which offer mobile wagering. I'll now pass the call back to Brett for some comments on the balance sheet.

Speaker 4

Thanks, Eric. Strong free cash flow generation of over $100,000,000 in Q2 was applied to permanently reduce our 2,030 Term Loan B. Our refinancing activity over the past 2 years has significantly extended our maturity profile with our nearest maturity now 3 years away. We continue to monitor the capital markets to opportunistically lower our cost of debt. As Anthony noted previously, our elevated capital investment cycle is nearing completion and we expect to see CapEx coming down by roughly $200,000,000 in 2025, setting the stage for increasing free cash flow.

Speaker 4

Over to Tom.

Speaker 5

Thanks. To dig a little more deeply into numbers starting in regional, April was a terrible month for us. When we last talked to you. We were obviously in April, you had the Easter calendar shift. It wasn't clear how the month would shake out.

Speaker 5

But if you look at the decline in regional year over year, April was more than 100% of that. May June both were up year over year. If you look at Caesars specific items in the quarter, New Orleans, we're at peak construction disruption in the center of the casino right now. That's going to continue for the next month or so. So that hits us in this quarter as well.

Speaker 5

Reno, those of you who followed us a long time know that one of the biggest groups in Reno are the bowlers. This year's bowling group is about 20% of the size of last year. So we're missing well over 40,000 direct room nights from them and likely more as they book through other channels. The combination of those two items in the quarter cost us $25,000,000 over $25,000,000 of EBITDA and those will continue into the Q3. The bowlers left end of July last year.

Speaker 5

New Orleans construction will complete Labor Day. In addition, Churchill's Terre Haute property impacted Indianapolis in the quarter and we anniversaried the temporary opening in Virginia for about half of the quarter. So as I look forward, I'd expect Q3 looks something like this. 4th quarter, we get the benefit of a full quarter of New Orleans rolling out its new product. Recall that we've got about $80,000,000 there of incremental gaming revenue that with the way taxes work in New Orleans would be without casino tax to us and then expect Virginia to open before the end of the year.

Speaker 5

So I would expect we'd be a grower in the Q4, Q3 probably look similar to this. And then we feel good about 25 in regional. In Vegas, very pleased with the quarter. Keep in mind, we had about $20,000,000 of headwinds between union contract raises plus employees in venues that weren't open last year. So restaurants that were under construction and opened subsequent to Q2 last year.

Speaker 5

So to fade that 20 and grow, I'm particularly heartened that hold was a nonevent in the quarter. We were in our range and the difference quarter over quarter was less than the increase in EBITDA. Obviously, we held margins well. Anthony mentioned the 2 hotel remodels that we did, Colosseum performing quite well. Versailles has knocked the cover off the ball for us.

Speaker 5

That's Versailles rooms are up $65 in ADR year over year. That's almost 60% lift and that's before the rooms with the balconies came online just recently and the connector should open in this quarter that should have further tailwinds on that tower that's been our most successful hotel renovation in possibly the history of Caesars, certainly since we've been involved. So excited about that. Rest of the year looks strong. Expect Vegas to post growth.

Speaker 5

I know that that's not what's been reflected in estimates, but we feel very good about the rest of the year into 2025. Eric talked about digital, another quarter of nearly 30% net revenue growth, 50% flow through, which is what we've told you that we expect to deliver. July is off to a fantastic start. Growth is in excess of that target. So we feel good about Q3 and then we'll get into by the end of this quarter, we'll be into football.

Speaker 5

So feel very good about where digital is headed. Expect that the Horseshoe brand, the 2nd brand in iCasino can help us build on the gains that we've had since we rolled out Caesars Palace online. So momentum in digital is quite strong for us and all of the targets that we've laid out in the past still seem well within our grasp. So feel very good about that. And then as Brett and Anthony both hit on, we will roll out we'll finish our CapEx cycle that we entered into when we closed the merger in 2020 with the opening of Virginia by the end of the year.

Speaker 5

That'll bring net CapEx down a couple of 100,000,000 gross CapEx over 500,000,000 And coupled with what's going on in digital and the brick and mortar portfolio, we're going to see a significant lift in free cash flow. As we stated, you should expect us to be looking for what we'll do with that free cash flow. We continue to plan to reduce debt to reduce leverage at current levels in the stock. I wouldn't be surprised you shouldn't be surprised if you see us become a buyer of stock as we get to that inflection point. And with that, I will turn it back for questions.

Operator

Thank Our first question comes from the line of Joe Greff with JPMorgan. Your line is open.

Speaker 6

Good afternoon, everybody. I want to start with a question on Las Vegas. Obviously, the results were nicely ahead of what we and Street were forecasting and margins of knocking on 47%, nothing to sneeze at there. Going through some of the various Vegas KPIs that you put in the queue, if I make certain assumptions for slot win, it looks like the contra gaming revenue or at least the relationship between casino revenue and gross gaming revenue was very favorable. I mean, the best it's been in 4 or 5, 6 quarters here.

Speaker 6

Can you talk about maybe what's driving that and maybe the sustainability of that? And obviously, that would lead to a continuation of pretty good margin.

Speaker 5

So Joe, I'd say, from our standpoint, the our approach to promotions in Vegas has not changed at all. I'm not looking at my queue. So I don't know what numbers that you're looking at. But we're what we found is we have pricing power in Las Vegas. We've known that for quite some time.

Speaker 5

We've got a great team here that has continued to raise the bar. If you look back to the Q2 of 2022 was our all time EBITDA record. So we're comping 2 years ago was our all time EBITDA record that was State Farm, that was a lot of international business coming and paying back that was pre union contract. There's about $76,000,000 of headwinds since that quarter. So 2 years ago, you had $76,000,000 of stuff, whether it was lower expenses or revenue like the State Farm that doesn't recur every year.

Speaker 5

And our EBITDA is down a little under $30,000,000 from that quarter. So that speaks to our team. We've been able to despite $76,000,000 of headwinds, we've eaten through $50,000,000 of that. I think that's a testament to how our guys operate out here and we're pretty proud of that.

Speaker 6

Great. And then my second question, it's for you, Tom, or for Eric in digital. Clearly, you're doing a good job on the icinos side of things and I'm presuming that has a much higher margin than OSB revenues. And I know you have a target out there of $500,000,000 in EBITDAR and if you look at the next couple of years in consensus numbers, no one's sort of forecasting that. But it looks like this year you could be patient to do or knock on a couple of $100,000,000 of EBITDAR in the segment.

Speaker 6

Is that close to how you're thinking about it internally? Obviously, taking into account what you're forecasting in the next couple of quarters?

Speaker 5

Yes. So a couple of things. I agree with you that iCasino is going to be more profitable from a margin perspective than sports as you look at ultimately more states legalizing. But if you look at the states that are legal now and their tax rate, the delta between margin at iCasino and sports betting is not as large as you would suspect. Last quarter, I laid out we were $1,000,000,000 of net revenue last year.

Speaker 5

We were about $50,000,000 of EBITDA, a little less than that and talked about growing 30% on the top line, 50% flow through that should get you in the neighborhood of $200,000,000 and we're well on our way there this year. So, feel good about that. The key will be, can we do it again next year? And then we get the roll off of the partnership contracts that also will flow to the bottom line and that's how we get to the same $500,000,000 we were talking about for 3 years now. You'll believe it at some point.

Speaker 6

Great. Appreciate the comments. Thanks, Tom.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Carlo Santarelli with Deutsche Bank. Your line is open.

Speaker 7

Hey, Tom, everybody, Anthony, Brett. I was I just had two questions, both of which more or less relate to kind of the back half of the year in Las Vegas. The first one and I just want to make sure I understand this properly. Tom, you talked a little bit about the 20,000,000 dollars of incremental costs, some of which are the bulk of which related to the culinary union contract. That contract, if I'm not mistaken, and this is where I'm looking for clarity, we'll see its next escalator in October, which means that in the 3Q, presumably, the only increase you should see from that would relate to whatever you might have under accrued in the 3Q last year, so minimal.

Speaker 7

Is my understanding of that correct?

Speaker 5

That's accurate, Carlo.

Speaker 7

Okay. Thank you. And then second one, obviously World Series of Poker is happening right now. You guys kind of have obviously had that in the properties and has historically been a pretty good cash generator for you, not just for the tournament itself, but gaming play in general. Could you comment a little bit about kind of the holistic impact that brand is having across the assets at present?

Speaker 5

Yes. So I'll talk about the holistic Eric can talk about specifics of actual World Series. This was our best World Series ever from a financial perspective. It fills a lot of rooms on the east side of the Strip at a time when it can be, as we've noticed recently, almost 120 degrees here. So a good time to have a group of a significant group of gamblers in house.

Speaker 5

We see benefits in our hotel. We see benefits in table games. We see benefits in slot play and in our food and beverage that's all ancillary and hard to quantify. But Eric can talk about the actual economics of the event for us.

Speaker 3

Yes. Carlo, if you it shows up in our P and L on that other line. It's basically the World Series of Poker Plus, the skin revenues that we received from renting our skins in other states. As Tom mentioned, we had a record World Series Poker here at the venue in Las Vegas. From an economic perspective, it's actually very consistent.

Speaker 3

The online poker does okay, but doesn't make a huge amount of money. And then the royalty streams and the land based casinos where the economics are. It makes between $20,000,000 $25,000,000 for the year as a whole and then the balance and that's an EBITDA number. And then the balance is going to be the SKUs that you see there in that other line.

Speaker 7

Great. Thank you, guys. And then if I could just one quick follow-up. Anthony, you mentioned 25 group pace for Las Vegas had strengthened in the period. Could you kind of give some parameters, I.

Speaker 7

E. What's booked, what you expect mix could be, pace, things of that nature?

Speaker 2

Yes, Carlo, I think we'll see about mid single digits above this year and going up into the mid teens of mix for the market. So a tick up there as well. Team has been doing a great job in future bookings and is really, as I said, come in very strong in the last couple of months for 2025.

Speaker 7

Great. Thanks everyone.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Brent Mantua with Barclays. Your line is open.

Speaker 8

Hi, everybody. Good afternoon or good evening and thanks for taking my question. I first want to talk about the hotel room rate. If we back into room rates

Speaker 5

out of the queue, at least from what

Speaker 8

we can see, it seems like nice acceleration of room rate in Las Vegas quarter over quarter. I was curious, Tom, if you want to speculate on how much of that? Well, there's some from obviously from Rio leaving. Also, you mentioned the dynamics of hotel supply coming out of the Strip and maybe there's just incremental compression that you're finding and you're able to yield you're just able to yield up your assets here sequentially. How do you think about that?

Speaker 8

And is it how do you feel about the sustainability that into the rest of the year?

Speaker 5

Yes, Brent. We have with we've not seen a lot of elasticity when it comes to pricing in Vegas. So we have continued to take price kind of across the board, not just rooms, restaurants, ATM fees, pool cabanas, there's just a massive amount of demand for Vegas and that has continued. And if you look at where we're driving, we're driving a lot of it through non gaming and gaming is holding up well. And so that leads to more EBITDA overall, which is great.

Speaker 8

Okay, great. Thanks for that. And then maybe for Eric over in digital, hoping you could talk a little bit about the dynamic with handle looking flat year over year in this quarter. I know we talked about this last quarter and you're getting a lot of growth from Parley mix and stepped up hold there. How long can that dynamic carry you in terms of you're getting overall OSB revenue growth to compound to the longer term EBITDA target to get to the longer term EBITDA targets that you guys have laid out?

Speaker 8

Is that sustainable? Or do you need to go back and start growing player counts and volumes again here in the over the medium term?

Speaker 3

Yes. It's a good question. And it's been a couple of quarters that we've had basically flat volume and increased hold and that's increased revenues on the sports betting side. We've taken some actions from a reinvestment perspective and then also from a wagering perspective that have impacted the volumes. And one way to think about it is, as I mentioned on previous quarter, we had just recently been able to launch our new marketing system that allows us to provide segmented marketing, trigger based marketing and a much more customized approach.

Speaker 3

Prior to that, we were investing with much more peanut butter spread approach and it caused us to be over investing in some of the lower end of the database. So we've reduced that. And as you'd expect, the volumes have dropped off, but the profitability has gone up. And so the business that we are getting isn't really business that you'd be too concerned about losing because it was unprofitable. I think that what you'll start to see is revenue growth start this quarter, and it will accelerate as we start to lap some of the actions that we took.

Speaker 3

So I do think you'll see solid volume growth starting and the hold will continue to grow. And so that should compound as we head into this back half of the year.

Speaker 1

Perfect. Thanks everyone.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Dan Politzer with Wells Fargo. Your line is open.

Speaker 9

Hey, good afternoon, everyone. Thanks for taking my questions. First on the regionals, Tom, you mentioned that most of the decline in the quarter was coming from April and that June was actually up. As we look at the gross gaming revenues for what's reportable, it looks to tell a different story. So when you mentioned that, are you talking about net revenues and how do we kind of reconcile this?

Speaker 9

Is there a dynamic with promotions going on that is also worth with maybe talking about?

Speaker 5

Dan, we've known each other a long time. I only talk about EBITDA. So whatever is going on in gross gaming revenue, I'm not paying attention to. We have not changed our promotional profile in any piece of our business. We were off what 30 something for the quarter and 25 plus of that was New Orleans and Reno, as I described.

Speaker 5

So the regional business as a whole continues to bump along. Obviously, as we've seen, you've got months that are not as strong and others that are stronger. April for us, as I said, was more than 100% of the decline, both May June grew in EBITDA. But there's nothing we're doing in promotions nor are there anything we see others doing that we need to respond to in that segment.

Speaker 9

Got it. That's helpful. And then in terms of the M and A environment, there's obviously been a lot in the headlines lately. Is there do you view

Speaker 1

your stock price here as

Speaker 9

a limiting factor to getting involved? Or are there opportunities that you could see notwithstanding where your stock is trading, just given some of the headlines that we've seen out there?

Speaker 5

I'd say we're just reading the same headlines you are. We're not there's we're not even tangentially involved in whatever's happening at Penn, which I know that's where your question is going. In terms of what we'll do, we I've said before that we are mindful that we've generated a lot of shareholder value through M and A, through external opportunities. The M and A that we've driven value through in the greatest form have used stock as a significant portion of our payment for those assets. I'm not an issuer of stock at $36 wherever it was today.

Speaker 5

We're going to be a even more significant free cash flow producer as these as the project spend runs down. So that will open up a leg of shareholder returns. So you should expect us to start buying in some of our stock. If the stock moves to a different neighborhood, that can change. We I think all things equal, we'll drive more value if we continue to execute external opportunities, but I'm not going to give our stock away.

Speaker 5

So that's where we sit today.

Speaker 9

Got it. And then if I could just sneak in one quick clarification. You mentioned for the regionals in the Q3, it will look similar to the Q2. I'm assuming that was declining by a similar amount year over year, correct?

Speaker 5

Yes. We have the same we're dealing with all three that impacted us in the second quarter, in the third quarter. So New Orleans peak disruption till Labor Day. Terre Haute, obviously, we're going through, I guess, the second quarter 2nd full quarter since opening. And then the Reno Group impact extended into July last year.

Speaker 5

So all three will be headwinds. This quarter, I think you start to flip toward the end of the quarter as New Orleans opens and then as you get to Q4 and Virginia opens, I'd expect we're growing in that segment again. Recall that the win per position in the temporary in Virginia is the highest in the entire enterprise and will be about doubling gaming capacity when we move to the permanent. So that should be a strong driver. And I've already hit on the way the New Orleans casino revenue will flow through in the initial stages.

Speaker 9

Got it. Super helpful. Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Steven Wieczynski with Stifel. Your line is open.

Speaker 10

Yes, hey guys, good afternoon. Tom, another quick clarification here. When you were talking about Vegas for the second half of this year, were you basically saying that you think you can grow EBITDA for the full year, year over year in Vegas? Did I hear that right?

Speaker 5

You did not. I'd expect Vegas to grow in the second half of the year, both third and fourth quarter. We would as I said on last quarter's call, we would need a swing in hold that offsets our hold impact from Q1 to be a grower for the year.

Speaker 10

Okay. Thank you for that. And then in the just going through the Q and I know you don't have it in front of you, but there was a comment in the regional segment, which basically said, you saw a little bit of a decline in your gaming volumes, which was basically a mix shift. Basically, your rated play remained steady with some growth, but the unrated play had some reduction there. And I'm just wondering if that unrated play reduction, is that pretty much across the entire portfolio?

Speaker 10

Or are there certain geographies where you're seeing a little bit more pressure on that unrated play?

Speaker 5

I would say there is always variability in a portfolio of our size. The you feel it more in unrated than rated, where unrated is worse off than, call it, the average regional property, it's due to a competitive opening in the same geography. So if you think about how does Terre Haute affect us, we had people that were coming from a couple hours away from Indianapolis to the West. And now you've got you've lost some of them for good because Terre Haute is much more convenient. And then you're going to have a battleground somewhere in between you like you have at other properties.

Speaker 5

And if I'm looking at unrated versus rated, it's like it's more unrated and the decline in unrated in that property would be more than our typical regional because of that competition.

Speaker 10

Okay, got you. Thanks, Tom. Appreciate it.

Speaker 1

In the interest of time for the remaining participants asking questions, can we please limit it to one question And then we'll try to take some follow ups. We've got a bunch of people in the queue that we want to get to.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Shaun Kelley with Bank of America. Your line is open.

Speaker 11

Hi, good afternoon, everyone. Thanks for taking my question. Just in the spirit of time, Eric, I wanted to go back to sort of the CAC or promotional environment a little bit and just in terms of what you're seeing in digital. Obviously, 50 percent flow through in the quarter is great. Have you seen any environmental change and especially as you're thinking about ramping or seeing ramping volumes on the OSB side?

Speaker 11

Because I think there's some increasing trepidation about flow through rates as we start to look into the 3rd Q4? And obviously, I think there's a lot of expected competition in new products expected to be rolled out, particularly right around the NFL season opener? Thanks.

Speaker 3

Yes, sure. I would say that over the last kind of 2 to 3 months, we've seen the cost of acquisition drop fairly significantly on the sports betting side. It's kind of across the board, both on paid search, paid social. The affiliates are contractually based, but even there to a little bit degree. So from the sports betting side, I would say that the intensity has dropped from acquiring customers.

Speaker 3

On the casino side, I would say that the costs have remained pretty constant for us throughout the year. On the casino side, we definitely target a certain CAC for each of the channels and then we'll don't go above that. In certain instances, we're not able to satisfy the amount of money we would have spent otherwise because the demand is not there. And it does drop off in the summer to some degree. So I would expect that our spend would go up just in aggregate dollars as we head into the 3rd Q4, particularly in late August September as everybody signs up for football.

Speaker 3

But in terms of the cost per acquisition, I'm seeing nothing at this point that would indicate a real change from the trends in the last few months.

Speaker 11

Thank you very much.

Operator

Thank you. Please stand by for our next question. Our next question comes from

Speaker 4

Hello?

Operator

Steven, your line is open. Check to see if you're on mute.

Speaker 5

Hey, there. I couldn't hear that was

Speaker 12

my name. It's a brief tap for a second. Can you hear me?

Speaker 13

Yes, you're good.

Speaker 12

Yes. So and one other on digital, given the strong flow through and as you open up Horseshoe iCasino, should we anticipate any kind of investment behind that that could reverse some of the operating leverage we've seen? And is there any thoughts that you can provide on how quickly you think that brand launch could build from here?

Speaker 5

No on launch costs eating into flow through. You saw us launch Caesars Palace online with generating this kind of flow through. I'd expect nothing different here. Eric, you want to speak up on expectations of how to build?

Speaker 3

Yes. We're launching it slightly differently than we did with Caesars Palace, where we're going to do effectively one state at a time. So pending regulatory approvals, we're going to launch in Michigan in September timeframe. And then we'll roll out into the other states throughout the year ending in Ontario in Q1. So from that standpoint, it will be a little bit different.

Speaker 3

I also would tamper the expectations just Horseshoe is a great brand and it really we feel like it's going to resonate with a lot of customers. But Caesars is even a better brand. And quite frankly, that's going to be the flagship app that we have and it's got a year's lead over the Horseshoe. So I would expect the Horseshoe to perform very strongly, but I don't think it will command the market share that Caesars App will.

Speaker 12

Great. Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Barry Jonas with Truist Securities. Your line is open.

Speaker 3

Hey, guys. Illinois recently raised its OSB tax rate. Curious if there are ways you can talk about maybe to offset that higher tax? And at the same time, does that graduated tax system in the state offer you maybe an opportunity to gain share? Thanks.

Speaker 3

Yes. Because it's a graduated tax, I think we're not in favor of tax increases at all, but a graduated tax is certainly favorable, I think, to a flat tax. The impact to us is under $5,000,000 a year. We're not planning to change our behavior based on that change. If some of the others that are impacted more change their reinvestment levels or their odds or some other type of action that they take in the state, it's potentially beneficial to us.

Speaker 3

But at this point, I haven't really seen anything that would indicate that that's happening.

Speaker 10

Got it. Thanks.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of John DeCree with CBRE. Your line is open.

Speaker 4

Thanks everyone. Maybe one more on the M and A front. Tom, I think your views on the buy side are pretty clear. Curious if you could speak to your strategy or any thoughts on possibly selling some stuff or calling the portfolio on the non core side that might not maybe fit the overall enterprise at this point?

Speaker 5

Yes, John. How do you like Agnew laying down the hammer? But John, on sales, you shouldn't expect that we're going to sell any operating casino assets. As I said previously, there are non core, non operating casino assets in the portfolio that I think could trade at a significantly accretive multiple for us. And you should expect us to try to take advantage of those opportunities.

Speaker 5

So no change there.

Speaker 4

Thanks, Tom. I'll get out of the queue quickly to avoid the jackhammer.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of David Katz with Jefferies. Your line is open.

Speaker 14

Afternoon, everyone. One more for Eric. As we get to that 500, can you paint a picture for us as to what the mix looks like between iGaming and sports betting, how much of each? Anything qualitative would help us. Thank you.

Speaker 3

Sure. I think that the growth rates the relative growth rates of the 2 sports betting and iCasino are going to continue. As we mentioned, the Caesars Palace online app continues to grow as a percentage of our iCasino business. So it's accelerating at a faster than 50% pace, obviously, since it's just over a year old. And then I think that the Horseshoe app will be incremental to that.

Speaker 3

And so you'll see the high casino app continue to grow at a significantly faster pace than the sports betting side. From the sports betting side, we do feel like there's still going to be solid growth there, but it's probably going to be more like you're seeing now where it's in the 20% range. And so over time, the relative revenues from those 2 will converge. And as Tom mentioned, we do have a slightly higher blended tax rate on the casino side. So the flow through is a little bit lower on that incremental revenue.

Speaker 3

But eventually, I think that the

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Chad Beynon with Macquarie. Your line is open.

Speaker 15

Afternoon. Thanks for taking my question. In terms of Vegas, Tom, first off, thanks for the commentary in terms of growth in the back half of twenty twenty four. With respect to Q2, did you see any major difference in terms of the tiers of the property? And then I guess more importantly, since we've seen some capacity come out, should we expect that there's a rising boat effect?

Speaker 15

Or does that actually help some of your mid end properties given what's come out of the market? Thanks.

Speaker 5

Yes, Chad. So I've seen the rhetoric around maybe the non luxury properties are underperforming luxury. That's not what we're finding in our portfolio. All of our properties are performing in similar fashion, obviously. Caesars Palace has the bulk of our highest end business, so it's the most volatile from a table games perspective.

Speaker 5

But in terms of visitation, pricing power growth, they all look pretty similar for us.

Speaker 15

Thank you very much. Appreciate it.

Speaker 5

And then I'm sorry. On closing the Mirage, I think that's a mixed bag for us. I think it's helpful in terms of there's less rooms in the market. We'll get our share of those rooms. But given its proximity to our existing properties, we think that it served a bit of a feeder feeders to our other assets.

Speaker 5

So you stayed at Mirage. And if you went walking, you probably ended up at 1 of our properties. So I really don't think that's going to be a material driver in either direction. I think we'll benefit from a little more occupancy be able to yield a little bit better, but we lose that 3,000 plus rooms in the neighborhood that would have you feed each other.

Speaker 15

Interesting. Thank you very much.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Jonathan Novartis with TD Cowen. Your line is open.

Speaker 13

Hey, good afternoon, everyone. Tom, in the Q3 of 2022, you said that VICI having cleared with Cesar that they had the intention to exercise the option on the Centaur assets. I know it's been a lot since then, but has the current regional performance changed this? Or do you still expect to get around, but I think you mentioned $2,500,000,000 gross proceeds. And just if you were to get those $2,500,000 or whatever it ends up being in net proceeds, would all of that be earmarked to repay that?

Speaker 13

Or can we expect some capital return as well? Thank you.

Speaker 5

Yes. Thanks for the question. VICI, you'd have to ask them there that is their option in terms of calling the real estate under the Indianapolis assets by the end of the year. We have a put option that we will not exercise. We've been pretty clear on that since we had this option became into existence.

Speaker 5

The proceeds are formulaic, so 1.3x coverage, 13 times EBITDA. The last I checked, that gets to like $2,200,000,000 something like that. If we were to get those proceeds that would the bulk of those you should expect would pay down debt. But yes, you should also expect that there would be some return of capital element as well. Great.

Speaker 5

Thank you.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Jordan Bender with Citizens JMP. Your line is open.

Speaker 3

Good afternoon, everyone. In your queue, you give sports sponsorship obligations. That number has increased pretty substantially in the last several years, which I assume is just driven by the online business. My question is, in the event that we face some consumer weakness across really any part of your portfolio. Do you have the flexibility to reduce your exposure to some of that?

Speaker 5

Yes. So those sports sponsorship deals were all signed as we launched the Caesars Sports app in 2021. They had varying terms. So some have rolled off already ESPN being the big one that rolled off as they launched ESPN bet. We have still significant pieces that roll off or mature in a bulk of them in early 2026, and we expect to see significant savings there that will flow directly to bottom line.

Speaker 1

Great. Jordan, just to be clear, those contractual obligations have been declining on a go forward basis in the queue. We can go through it offline afterwards. Okay. Sounds good.

Speaker 1

Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Daniel Guglomo with Capital One Securities. Your line is open.

Speaker 6

Hi, everyone. Thank you for taking my question. For each segment, it looks like you all found expense efficiencies this quarter versus last quarter. Is there anything specific across the company that you all can point to there? And can we expect those margin levels to main to hold through their second half to understanding there's some seasonality there?

Speaker 5

Yes. I really can't point to an overarching big one. It's a lot of little stuff. Like if you looked at our Vegas quarterly review, there's a full page of things that both on the revenue or expense side added a few $100,000 or maybe $1,000,000 or 2. It's just this is kind of who we've been since we've become a public company in terms of constantly trying to run more efficiently and that's what you're seeing as a result of that, I would expect margins save for seasonality to hold up well.

Speaker 5

Obviously, we've held up in the face of a significant lift in labor costs in Vegas. We're not going to see anything in any of our segments that's nearly that impactful. And as we talked about in Carlo's earlier question, we're through year 1, the subsequent lifts in Vegas are much smaller than the year 1 lift was.

Operator

Great. Thank you. Thank you. Please stand by for our next question. We have a follow-up question from the line of David Katz with Jefferies.

Operator

Your line is open. Your line is open, David. Check to see if you're on mute.

Speaker 14

Sorry about that. Thank you for taking the follow-up. I just wanted to follow-up on the comment, Tom, about regionals. I think what you're referencing for 3Q is a similar decline of down 8%, not a similar number of $469,000,000 of EBITDA, correct?

Speaker 5

Yes. And I don't even know that I'm pointing to 8%. I'm telling you, we're facing the same headwinds that we faced in the Q2. So I would expect Q3 regional to fall short of 2023. Don't take that as I'm telling you it's 8%.

Speaker 5

I'm just telling you we're facing the same stuff.

Speaker 14

Yes. Got it. Thank you. Appreciate it.

Operator

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Tom Reeg for closing remarks.

Speaker 5

All right. Thanks, everybody. Enjoy the rest of the summer.

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Earnings Conference Call
Caesars Entertainment Q2 2024
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