PENN Entertainment Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 3, 2022

Key Takeaways

  • Record financial strength: Achieved a record $800 M in free cash flow in 2021 with lease-adjusted net leverage at 4.1×, enabling a $750 M share repurchase authorization.
  • Omni-channel growth strategy: Expanded its media business with theScore acquisition and Barstool Sports investment, while guiding 2022 net revenues of $6.07 B and a 37% EBITDA margin at core operations.
  • Interactive segment trajectory: Projects a $50 M EBITDA loss in 2022 (an improvement from prior estimates) with profitability expected in 2023 as it rolls out sports betting and iGaming in Ontario, Ohio, Maryland and other markets.
  • Retail resilience and innovation: Q4 revenues and adjusted EBITDAR surpassed 2019 and 2020 levels despite Omicron headwinds, and the rollout of cardless, cashless and contactless (3Cs) across properties is driving customer adoption.
  • ESG and community initiatives: Launched a $4 M STEM scholarship for HBCUs, a $1 M diversity scholarship program, and the My Heroes loyalty program approaching 100 k veterans and first responders.
AI Generated. May Contain Errors.
Earnings Conference Call
PENN Entertainment Q4 2021
00:00 / 00:00

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Penn National Gaming 4th Quarter Conference Call. I would now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations. Please go

Speaker 1

ahead. Thank you, Frank. Good morning, everyone, and thank you for joining Penn National Gaming's 2021 Q4 conference call. We'll get to management's presentation and comments momentarily as well as your questions and answers. But first, as our practice, I'll review the Safe Harbor disclosure.

Speaker 1

In addition to historical facts or statements of current conditions, today's conference call contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, These statements can be identified by the use of forward looking terminology such as expects, believes, estimates, projects, intends, plans, seeks, May, will, should or anticipates or the negative or other variations of these or similar words or by discussions of future events, strategies or risks listen only mode and uncertainties, including future plans, strategies, performance, developments, acquisitions, capital expenditures and operating results. Such forward looking statements reflect the company's current expectations and beliefs, but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, listen, including the company's reports on Form 10 ks and Form 10 Q. Penn National Gaming assumes no obligation to publicly update or revise any forward looking statements.

Speaker 1

Today's call and webcast will include non GAAP financial measures within the meaning of SEC Regulation G. And when required, a reconciliation of all non GAAP financial measures to the most directly comparable Financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website. With that, it's now my pleasure to turn the call over to your host, of the company's CEO, Jay Snowden. Jay, please go ahead.

Speaker 2

Thanks, Joe. Good morning, everyone. Here with me and why I'm missing, as usual, is our CFO, Felicia Hendrix, our Head of Operations, Todd George, as well as other members of my exec team, and we're all happy to jump in and answer questions you might have I thought before I get into prepared remarks, I first wanted to address the article about Dave Portnoy that list dropped last night from the same paywall subscription based publishers, the last article and which also happened to be on the same day of our earnings call Exactly 3 months ago. The allegations are from anonymous sources made about Dave and his personal life. Listen and Dave has responded publicly.

Speaker 2

Many of you have probably seen that, just as he did last time. So before we get started, I just wanted to listen only. I respectfully ask three things for the call today. 1, if you have read or plan to read the article, I would just recommend that you also read and watch Dave's response that he list of last night. 2, that like last time we give this time to play out, there undoubtedly will be more to come in the coming days, We provided a link to the slide presentation along with our earnings report listen this morning that if you haven't already opened or printed it out, I would suggest you do it now if you have access.

Speaker 2

Our prepared remarks will reference several of those slides today. So I'd like to start and spend some time on Slide 4 as it provides an appropriate backdrop for all of our comments today. Listen and I think it is helpful for context to highlight at a strategic level what it is that makes Penn truly different from the competition. We have the nation's largest portfolio of regional gaming assets that generate significant and sustainable free cash flow. In fact, 2021 was a record year of free cash flow at Penn that resulted in year end lease adjusted net leverage of 4.1 times.

Speaker 2

This balance sheet strength and financial flexibility has afforded us the opportunity to pursue the continued evolution of our differentiated omni channel strategy, listen, which includes a thriving and profitable media business anchored by theScore and our investment in Barstool Sports and a rapidly growing interactive business with a clear path listen to near term profitability and a long term path to meaningful value creation, a path that is not entirely contingent on TAM or scale list of our marketing spend, but one that is more in our control and based on a business model and margin profile that has unmatched list. I'm pleased to share that our Board of Directors has authorized a $750,000,000 3 year share repurchase program. Our strong financial position provides us with the ability to continue to grow our business and invest where appropriate, while also returning capital to shareholders in a rapidly evolving marketplace. If you move on to Slide 56, you can see that we had a strong finish to really what was a tremendous year for us at Penn With our 4th quarter revenues and adjusted EBITDAR exceeding both 2020 2019 levels despite the ongoing pandemic. I'm listen.

Speaker 2

I'm incredibly grateful for the hard work and dedication of our team members across the entire enterprise during this challenging time as they continue to deliver best in class service to our guests while managing the virus related impact on their own lives. In the Q4, we successfully advanced several of our long term strategic objectives. Most significantly, we closed on our acquisition of The Score, a transaction that provides us with another powerful sports media brand, loyal audience in full control of our product and technology roadmap. Looking ahead a year from now, we also have the opportunity to fully own Barstow Sports, which Together with theScore will mark our transformation into a major media and entertainment company. You will note in our release that we have created a new operating segment for Interactive, which listen to the long term profitability in the sports betting sector.

Speaker 2

But I'd like to remind you that we are employing a very unique strategy list of expectations in the Q4 despite launching sports betting in Iowa and iCasino and sports betting in West Virginia, listen as well as some costs associated with the integration of theScore and an extremely aggressive competitive environment that's been well documented by many of you. We have all seen the incredible level of marketing spend in this space, which we all know is not sustainable in a competitive environment. We have not at Penn and will not jump into that fray as we remain focused on channeling our investments into ownable and differentiated products, of experiences and technology platforms for our end users that will have long term benefits versus spending irrationally on short term marketing initiatives with very questionable We are also very fortunate to have 2 dynamic and growing customer acquisition funnels in Barstool Sports and theScore, listen together with our leading portfolio of retail casinos and sportsbooks that provide us with highly effective organic marketing and monetization opportunities listen without the need to incur massive losses to compete, and we're going to stay committed to our strategy of leveraging these strengths. Looking ahead, we expect our Interactive business to lose approximately $50,000,000 in 2022, which is an improvement from our prior list.

Speaker 2

This estimate is inclusive of investments we are making to scale our operations and infrastructure in anticipation of bringing our technology in house list and launching in a minimum of 4 new jurisdictions. Regarding the cadence of the year, we expect to incur most of that EBITDA loss in the 1st three quarters as we launch in several new markets and prepare our products and technology stack for football season 2023 sorry, 2022. By 2023, we expect to be generating positive EBITDA in our Interactive division, as I've said before. And as listen. As I mentioned earlier, we see a lot of attention in the press about handle market share.

Speaker 2

And while that is a useful metric, particularly when a state first launches, it doesn't mean as much listen only mode when those incoming dollars generated from that handle are completely offset by marketing and promotions. While we think this point is becoming more widely understood, listen. Unfortunately, because of the varied ways the states report sports betting metrics, the investment community is forced to use handle to compare company performance in each state. Listen only mode. Fortunately, there are a few states that report net gaming revenue, which we believe is a more relevant measure of performance.

Speaker 2

You can see that in states like Pennsylvania and Michigan, Our NGR market share underscores the benefit of our profit focused strategy as shown on Slide 16 in our slide deck. And we are doing this while spending a fraction, a small fraction of what our competitors spend on marketing. Our performance in New Jersey, which is perhaps the list of the most competitive online sports betting market in the world is particularly notable as we captured meaningful share despite launching list of the most recent quarters of the year. Felicia and I regularly are asked when we can expect to see positive contribution margin following new state launches. As you will see on Slide 18, our low customer acquisition costs and high retention rates are providing a very short payback period, list specifically within 2 or 3 quarters of launching in a state.

Speaker 2

By the time we are in a state for a year, we typically achieve over a 2 times return on our initial investment in that list. This return is even faster, of course, and higher in states that also offer online casino. Slide 19 reinforces this point By illustrating the impact of our structural advantages versus the competition, we are confident our organic marketing strategy and market access list of the most important parts of our retail sportsbooks, list, which are highly profitable and provide significant opportunities for cross sell. We now operate 24 retail sportsbooks across the country, retail handle and revenue during the 1st 2 months of operation at temporary sportsbooks at our 5 casinos. We expect even greater upside when we complete the Barstool rebranding at our signature locations in Lake Charles, Baton Rouge and Bossier City.

Speaker 2

Speaking of Louisiana, following our recent launch of online sports betting there on January 28, we now operate online sports betting in 12 states list of the most recent quarters of the year. Looking ahead, we have several important milestones on the horizon, including anticipated launches in Ohio and Maryland, the establishment of remote mobile registration in Illinois in early March, which if you recall, we went live about a year ago and only had 1 month list of remote mobile registration before it reverted back to on prem. So that's a big deal for us in the state of Illinois. List and the recently announced launch date for sports betting and iGaming on April 4 in Ontario. And speaking of Ontario, just to quickly recap, on December 20, theScoreBet became one of the first mobile gaming operators to secure certification from GLI for its sports betting and iGaming platform in the province of Ontario.

Speaker 2

And just yesterday, the Alcohol and Gaming Commission of Ontario approved theScoreBet's registration as an Internet gaming operator. These are 2 important milestones before theScore bet can begin operations in the province on April 4, and theScore continues to work to satisfy all remaining requirements, including execution of an operating agreement with Igaming Ontario. Our team at theScore has been hard at work preparing for this launch in their home province for a long time, a province with a population of 15,000,000 people, which would rank as the 5th largest state in the U. S. On a population basis.

Speaker 2

And we believe the ScoreBet brand supported by the personalities at Barstool Sports will allow us to be very competitive in that highly lucrative market. As for our iCasino products, we made a number of upgrades during the quarter, including the introduction of our first in house developed games. These improvements have led to steady month over month growth this past fall in both handle and revenue for the Barstool Casino. I'm particularly pleased with the performance of our in house games, list, which have contributed over 20% of our Barstool Casino handle and revenue since their launch. Our ability to leverage Penn Game Studios and developing the games like Barstool Blackjack and Barstool Slots allows us to capitalize on cross sell from the Barstool audience, while also reducing third party content fees.

Speaker 2

List. We see opportunity to expand our Icasino share this year as we refine our omni channel strategy to better leverage our growing My Choice database, list, which is now over 25,000,000 members. Turning to the retail side of the business. We saw strong property level performance listen across our segments most of the quarter with some softness in late December due to Omicron and the increase in COVID related restrictions. Our properties are still seeing strong visitation from the younger demographics, and we are continuing to reimagine our casinos with offerings such as our market leading retail, of Barstell Sportsbooks and other food and beverage and entertainment options that will help to drive long term retention of this demographic.

Speaker 2

Overall, we continue to benefit from a rational and stable marketing and promotional environment and feel confident that the EBITDAR flow through achieved in the second half list of 2021 is sustainable barring any unforeseen macro or competitive developments. In December, we celebrated the opening of Hollywood Casino Morgantown, our 4th casino in Pennsylvania and the 44th property in our industry leading portfolio. Like its sister property that opened last August in York, Pennsylvania, this state of the art casino about an hour outside of Philly is built listen for the future with our new technologies and customer conveniences, including our 3 Cs, cardless, cashless and contactless My Wallet experience. The property also features the latest evolution of our Barstool Sportsbook, Tony Luke's Famous Cheesesteaks and several other F and B and Entertainment amenities. We're encouraged with the early results at Morgantown as we were able to reach into a new market with approximately 80% of our rated business The 3 Cs are now live at all of our Pennsylvania properties and our 4 casinos in Ohio, listen and we are excited about the potential to introduce this technology to additional properties across the portfolio pending regulatory approvals.

Speaker 2

Our 3 Seas solution removes friction from transactions and reduces wait times and lines while also bolstering our marketing capabilities. Our My Choice loyalty app now has nearly 750,000 downloads, up 23% during the 4th quarter, And we now have 30,000 users of My Wallet, which provides our customers with a seamless mobile wallet solution to connect directly to their favorite games. And with that, I'll now turn it over to Felicia.

Speaker 3

Thanks, Jay. As referenced as Jay referenced, we generated record free cash flow in 2021 of list of approximately $800,000,000 as well as record net leverage of 4.1 times. Given our strong financial positioning, listen as well as our confidence and improved visibility in our overall business. We not only received Board authorization for a $750,000,000 share repurchase program, We're also reinitiating guidance. For 2022, we're providing a net revenue range of $6,070,000,000 list, which implies a 37% EBITDA margin at our core operations.

Speaker 3

We believe these ranges capture the uncertainty that still exists in most consumer sectors while also appropriately bracketing our financial expectations for the year. I'd like to provide you with several other metrics to help your modeling. For 2022, our corporate expense is expected to be $100,500,000 inclusive of our cash settled stock based awards. Maintenance CapEx is expected to be roughly $300,000,000 We expect total interest expense of $566,000,000 of which $95,000,000 Cash interest, cash taxes of $159,000,000 and an annual share count of roughly 187,000,000. Our new interactive reporting segment that we added this quarter reflects our view that the results of our interactive operations represent strategic and high growth component of our overall operations.

Speaker 3

The Interactive segment, which was previously reported within the Other segment, Corporate expense will continue to be reported in the other segment in addition to standalone racing operations, list of other joint ventures and management contracts in the Heartland Poker Tour. As a result of this change in reportable segments, We recast previously reported segment information to conform to the current management view for all prior periods presented, which you can find in this morning's release. These changes have no impact to our company's consolidated financial statements. Before I hand it back to Jay, I'll just leave you with a few housekeeping items. In the Q4, corporate expense inclusive of cash settled stock based awards was $24,300,000 Our cash rent payments were 200 and list of $55,300,000 with total CapEx at $102,100,000 Our balance sheet remains a key asset for us.

Speaker 3

Total liquidity as of December 31, 2021 was $2,500,000,000 consisting of $1,900,000,000 in cash and our $700,000,000 undrawn revolver. Traditional net debt was $886,000,000 an increase of $841,000,000 during the quarter, principally due to a cash payment of approximately 923,000,000 of the acquisition of the SCOR. And as Jay mentioned earlier, our lease adjusted net leverage was 4.1 times, a record low for the company. Our balance sheet gives us the flexibility to be opportunistic in a dynamic marketplace and to return capital to shareholders through share repurchases. And with that, I'll turn it back to Jeff.

Speaker 2

Thanks, Felicia. As you saw in our release, we're continuing to expand on our ESG initiatives listen as well and look forward to sharing our 2021 corporate social responsibility report in April in conjunction with our proxy filing. Highlights from the quarter include the launch of a $4,000,000 STEM scholarship fund and internship program at Historically Black Colleges and Universities list in states in which we operate. In addition, we started a new pilot program to help mentor and develop our hourly and early career team members listen only mode of communication with the company. We also kicked off our annual $1,000,000 diversity scholarship program for the children of team members and are now reviewing applications for the 2021 2022 school year.

Speaker 2

In our inaugural year, we awarded over $1,000,000 in listen to the Q4 year scholarships to 58 individuals, the majority of whom were 1st generation college students, which is an awesome story. We expect this year's program to be similarly successful, and I look forward to sharing more details with you next quarter. In other positive Penn news, earlier this week, we were honored To come in 2nd place out of 34 companies as an employer of 1st Choice in the annual Casino Gaming Executive Satisfaction Survey list by Bristol Associates and Spectrum Gaming. I believe that now marks 6 or 7, maybe 8 years in a row that we finished 1st or second in this anonymized survey. We're also proud to report that in the iGaming and Mobile Sports Betting division, Penn Interactive came in 1st place out of 28 organizations.

Speaker 2

So Congratulations to everybody at Penn and Penn Interactive. Our support of our nation's heroes also continues. We are approaching 100,000 customers enrolled in our My Heroes loyalty program, which provides special benefits for veterans, active duty and first responders. When we hit that milestone, our properties will be of contributing $100,000 to local veterans groups in their communities. Also in conjunction with this year's Army Navy football game, list of the VIVA Latroupes promotion, matching certain first time deposits and raising $200,000 to support the Fisher House Foundation list and Semper Fi and America's Fund Veterans Organizations, yet another example of how our marketing approach can be a win win for our bottom line and those in need in our communities.

Speaker 2

So let me just reiterate how excited I am for the significant milestones ahead of us over the next 12 months to 24 months, listen, including several new state and province launches, the debut of theScore's proprietary risk and trading platform in Ontario, the list of the Q4 of 'twenty three. So with that, Frank, we'll turn it over to you and we'll open it up for our first question. Thank

Operator

First question comes from Joe Greff with JPMorgan. Please proceed.

Speaker 4

Good morning, everybody. My first question is a multipart one and relates to your 2022 guidance list and related commentary. One, what's your assumption for same store land based revenue growth? How much of the and how much of the $6,200,000,000 or so in Revenues relates to Interactive, I know you gave us sort of EBITDA metric for Interactive for this year.

Speaker 3

Joe, we're not going to comment on Interactive guidance at this point on the revenue side. We have given you the historical levels and we've given you the EBITDAR, but we're just not at the place yet where we're going to start talking about on the revenue side. Listen. And I'll turn it to Todd for the same store.

Speaker 5

Thanks, Felicia. Joe, basically, we're looking at relatively flat, lift some upside in the South, but we are going to have some headwinds related to our Council Bluffs property, which we'll see new competition coming from Nebraska Just one more in Lake Charles with Horseshoe, the former Isle property being rebranded as a Horseshoe in Q3. But All in all, it will be minimal growth on a same store basis due to those being offset by some of the other properties.

Speaker 2

I would only add to Felicia and Todd's comments just from a sort of quarter to quarter cadence perspective, Joe, that Q2 is going to be really hard to match. I think for everybody in the industry that was definitely sort of as good as it gets high watermark. So listen. As you think about quarterly modeling, I think Q1, assuming that omicron impact really does fade away here as we enter February and We can get some bad weather events on weekdays versus weekends, which would be nice, which didn't happen in January. But I think you should expect Q1 In Q3 and Q4, probably pretty close to in line with what we saw in 2021, somewhere thereabouts, I think is a decent way to model quarter by quarter.

Speaker 5

Yes, great to add, Jay. Again, Joe, excellent point by Jay on Q1 because we are we do have a somewhat favorable comparison As last year, especially in the Midwest, there were a lot of restrictions still in place.

Speaker 6

Got it. And then, Felicia, you list.

Speaker 4

You gave us a breakdown on different 2022 items such as maintenance CapEx. Can you repeat that? Was $300,000,000 the right number?

Speaker 3

Yes. And Joe, thanks for that question. Why is that

Speaker 4

so high?

Speaker 3

Yes. Historically, it's been about $200,000,000 and there's some there's a list. A few items in there now, revenue enhancing investments, such as investing in barstool sportsbooks, our retail sportsbooks. List. On the hotel side, we're renovating our hotels with a very new and exciting prototype.

Speaker 3

Also, our investments in technology and 3 Cs are in that number. So I would use even as you're modeling out past 'twenty two, For the near term, I would use $300,000,000 as your new maintenance CapEx number for a while.

Speaker 6

Okay. And My last question,

Speaker 4

I was going to ask something on Barstool and Dave and maybe I'll ask that offline after the call. But Jay, just thinking about Ontario and the anticipation of the market dynamics there and competition there. When you think about Ontario versus some of the U. S. Markets, what's different about Ontario?

Speaker 4

What's similar to Ontario versus the list of some of the maturing online sports betting markets in the U. S.

Speaker 2

Yes. Good question, Joe. And I honestly, I think there's probably more list of the references and similarities as I look at any of the individual states here in the U. S. For a couple of reasons.

Speaker 2

1, Canada has been a gray market for some time now. But the regulators list of the markets in Ontario are requiring those gray market operators to go through, some KYC and regulatory requirements before they relaunch list post April 4. So I think that'll be interesting to see how that plays out versus maybe some of the U. S. Markets, not so much Gray operators, it was more of a dynamic or maybe people were betting illegal offshore with bookies, whereas it was really gray.

Speaker 2

They were there. It wasn't illegal or legal, just kind of gray. So we'll have to see how that competitive dynamic with gray market operators in Canada plays out. One of the other factors that I think is encouraging versus what we've seen in all the U. S.

Speaker 2

States is that there are advertising list of restrictions in Ontario as it relates to gaming and you cannot advertise promotions or discounting to your business, which we welcome. And so it's going to be a lot more about, I think, just educating. We'll spend some money when we launch there because you're list. We'll know who those legal operators are going forward, but I like the fact that you can't just put your business on sale and heavy list to get people to download and deposit and bet, which is what we've seen here in the U. S.

Speaker 2

In most states. And then lastly, of course, we think we have We're in a really strong position because I think it's somewhere close to 20% of people in Ontario have the SCOR Sports Media app on their phone. And so you think about the ability to convert from sports media to sports betting when you can do both on the same app and see all the live odds. If you're just in there checking scores, you're going to know very quickly if you're a ScoreMedia app user that we are now offering live sports betting with the ScoreBet app. So I think we're in a really strong position.

Speaker 2

Obviously, we're going to be very focused on conversion of list of sports media to sports betting. We're going to definitely make sure that everybody in Toronto and Greater Ontario that they definitely know that we're now live and that it's a legal market and that there are legal operators that have offerings there. So what we see all plays out, certainly our expectation is to be list of kind of no lower than low double digit market share from an online sports betting perspective. And maybe on the online casino side, We'd like to start off in the mid to high single digit range and then just continue to grow both of those from beginning.

Speaker 4

Great. Thank you.

Speaker 2

Thanks, Joe.

Operator

Our next question comes from Bernie MacNeurian with Needham and Company. Please proceed.

Speaker 7

Great. Thanks for taking the question. Good morning. I was wondering if I could just pry a little bit in terms of the 2023 interactive guidance, if What meaningful means? Are we talking tens of 1,000,000 of dollars or maybe something bigger than 100,000,000

Speaker 2

Yes, I would say stay tuned, Bernie. I mean, I don't want to get too far ahead of ourselves. It will be real EBITDA Really depends on the Ontario launch and momentum and is Ohio live yet and Maryland. But I think once we hit that point of being profitable, which hopefully is late 'twenty two, you should expect that to just go forward ramping into 'twenty three.

Speaker 7

Understood. And thinking about that $50,000,000 investment Going into profitability in 2023, is it possible to break down maybe the $50,000,000 into some buckets, whether it's U. S, Canada and the tech stack, not sure if those are the right three to think about, but if there's a way to kind of bracket it out?

Speaker 2

Yes. At a high level, Bernie, I would say that you should think about our interactive operation in the U. S. Listen only as a standalone as being profitable in 2022, which I think is noteworthy, but we didn't want to over highlight that because at the end of the day, it's still net negative There's going to be continued ramping and scaling of our headcount and our infrastructure listen as we are continuing to hire lots of engineers and product development people working on our tech stack. So there's a lot of staff ramping that's Going into the technology investments, which is actually going very well and we're so pleased to have a big office in Toronto where we can recruit people.

Speaker 2

And then of course the Penn Interactive office in Philadelphia where we do the same thing. There's definitely going to be an investment listen to Ontario at launch because of the education investment that I mentioned earlier of just making sure people in Ontario know that you have live and legal sports betting options as opposed to maybe gray market ones that have been offered for a long time in that marketplace. So when you throw all that into the pot is where you get to approximately a negative $50,000,000 EBITDA. But if you just think about the

Operator

Our next question comes from Barry Jonas with Truist Securities. Please proceed.

Speaker 8

Hey, guys. Can you talk about the health of the consumer in this rising inflationary environment? How much of that weighs into your guidance beyond the new supply risks you talked about?

Speaker 5

Hey, Barry, this is Todd. Great question. What we've seen, I mean, obviously, last year, there was some stimulus money floating around through many of the quarters, but Encouraging take omicron out and some calendar noise in December. What we saw In Q4, it's continued into January outside of weather, especially the second half. We actually just We're coming off the best weekend that we had in January was actually this last weekend and that was with we actually had property closures I feel that we're seeing increased visitation in many of our properties, but really much of the story as it was last year continues into this year where a higher value per trip.

Speaker 5

So people are still coming in and they're spending to the levels

Speaker 8

Great. And then just Jay, maybe just a high level follow-up question. As the overall North American interactive market develops, has anything changed In your view relative to the size, scale or maybe timing of Penn's long term opportunity?

Speaker 2

Well, there's always the big question that we can never answer with accuracy is what is the TAM going to be, list. When are more states going to legalize online gaming? How many states will there be at full list of the questions that we unfortunately list. I think we have a perspective on. But no, I think that the way we view this opportunity from the beginning and we still do is that Online sports betting is an unbelievable acquisition tool for us.

Speaker 2

It's not ever going to be as high margin listen to the online casino or brick and mortar casino. But because of our structural advantages, we think we can run industry best margins in online sports betting. We have marketing advantages. We're going to have technology advantages. Of course, we have access advantages given our footprint.

Speaker 2

So it really things have, I guess, played out mostly how we thought they would. We want to continue to improve our market share in online casino. We have not performed as well there as we anticipated performing, and we're on top of that. We have created Penn Game Studios, which has list put out some fantastic bespoke product and content that we're already seeing over 20% of our handle in online casino coming from games that we created. And that's very encouraging as we'd love to see that get to 50% plus down the road and we've only launched a few games up to this point.

Speaker 2

So I think we're very pleased with the things that we have within our control. We think the launches this year, in particular, Ontario Latino perspective in Ohio, as well as Louisiana. And then of course in Ontario, we talked about that already. So, no, I wouldn't say that the outlook is different Other than the big question has been and continues to be, what is the ultimate TAM going to be? Because I mentioned in our prepared remarks, from our perspective, We've got a model that is built to make money and that's what we do at Penn.

Speaker 2

And whether that TAM is $20,000,000,000 $30,000,000,000 $50,000,000,000 We're going to be in the business of making really good margins and generating cash flow.

Speaker 8

That's great. Thanks so much.

Operator

Our next question comes from Orion Siedal with Craig Hallum Capital Group.

Speaker 9

Good morning, Jay and Felicia, and congrats on the strong business trends and good to see the buyback authorization as well. Curious on Interactive. I know there's been several questions, but the loss You were previously expecting a couple of months ago $100,000,000 give or take in 2022, it's half that now. I guess first was New York in that previous assumption? And then secondly, what's changed positively versus a few months ago?

Speaker 2

Yes, Happy to. Honestly, when we put that when we talked about this on our last earnings call, New York was Not in our assumption because we hadn't heard one way or the other. So we wouldn't have built that in, because we just didn't know at that time on the call. It really over the course of Q4, we just continued to operate, I think smart. List.

Speaker 2

We're going to do in terms of pressuring our margins and maybe moving customers. I've been blown away, impressed at the listen only mode. The resiliency and the retention that we see in the online sports betting space, as we shared in a number a couple of our slides And as you saw throughout the Q4, we didn't change the way we market in the Q4. And it was And we didn't jump into the fray yet. We grew our market share and we were operating at better margins than we anticipated.

Speaker 2

We had built in a little bit of flex there of what if we need to spend a little bit more in marketing to hold on to our base. Listen to the call. Instead, what we saw as we said we probably would, which was football season came back, we saw our market shares in states that we've been live in like Michigan and Pennsylvania And we did all that without participating in the really aggressive discounting that we see from most of the others. We're really pleased with how we see the Interactive business, and that's why we anticipate the loss being less in 2022 than we did just a quarter ago.

Speaker 9

Great. Then just moving on to the retail side with 1. You have the CCC you can share kind of before or after of what that looks like from either a play standpoint, a margin standpoint, etcetera. Thanks. Good luck.

Speaker 5

Yes. Thank you. So a couple of things. We're live in Pennsylvania and Ohio. And Today, what we're seeing, obviously, the whole goal with this was to remove friction.

Speaker 5

And so we've been able to improve service times. We're obviously taking people out of the lines at the cage and at the Players Club. So that has helped and it all drives more time on device, more time playing. So that all helps. And then we've seen this adoption that you would normally see from the younger demographic.

Speaker 5

And really this is what we thought we would see, but Now working into the older demographics 30s, 40s. So we're seeing actually people that are engaging with us with the app list. They're more engaged and they're making more trips, but this is a very encouraging trend for us as we look to roll out into the other states. So It's really kind of proof of concept. It was in Pennsylvania.

Speaker 5

And now moving into Ohio, we're starting to pull these trends together and we'll have more to talk about listen as we have more time and more people adopting the technology.

Speaker 2

And Todd, do you want to maybe also highlight the demographic trends we're seeing by age in the Q4 and even into I think it's very encouraging when you think about technology launch and how sticky these relationships have become.

Speaker 5

Yes, great point, Jay. Really last year, and I think we've talked about this in some of the other calls, That younger demographic is what everybody was trying to solve for and how to get the younger demographic into casinos. So Q4 was not unlike the other quarters. And really that under 35 demographic was up about 40% year over year and then the 35% to 44% was up high 30%. And the part that's been missing, we actually started to be able to see some of that coming back that 55% to 64% was up about 6% and then the 65% plus that will be the one that But then as Jay spoke to in his opening remarks, when we had that bit of a flare up, that part is still lagging behind.

Speaker 5

And we feel that once we can move some of these things behind us, that will be the last segment that comes back. But especially with these younger demographics that we're seeing, What I would throw the unrated play segment in there as well, that was still up 12% for the quarter. So all of these are greatly encouraging

Speaker 2

Todd hit it earlier in terms of some new competition, a couple of pockets across the U. S. That when you pull those list of impacted properties out. Our margins obviously look even better. I think we picked up another over 1,000 basis points 100 basis points when you pull those out.

Speaker 2

So it is something that I'm not sure was modeled well enough into people's list of estimates in terms of how they thought about Q4 and how they think about 2022. I think the fact that we're going to we're anticipating coming in at the property level of Roughly 37% margins, which is going to be 500 basis points plus better than 2019 list. It is really impressive given that we've got Chicagoland and Nebraska, Colorado. You've got some pockets of new competition or new supply entering these markets.

Operator

Our next question comes from Stephen Grambling with Goldman Sachs. Please proceed.

Speaker 10

Jay, you noted that the opportunity to buy the remainder of Barstool. What are the key considerations list that you are evaluating and determining the right ownership level. And would the leadership team and or content creators at Barstool have to be licensed at certain ownership levels or would that impact their ability to create certain types of content or even bet on the app? Thanks.

Speaker 2

Yes. I mean, we couldn't be more excited about moving our ownership position up from its current 36%. And we anticipate in the at the 3rd anniversary Obviously, it naturally contractually goes up to 50% as we've disclosed before and then there's put call rights after the 50%. We anticipate taking that to 100%. So there really isn't sort of a decision process.

Speaker 2

We look forward to being list of the owners of Barstow, 100%. They've been great partners of ours. It's a hyper growth, Sports Media business. They've grown their revenues list over the last 2 years, somewhere close to 150% in total. And it's profitable, which most Smaller sports, they're not even that small anymore.

Speaker 2

Sports Media businesses don't make money, they burn quite a bit. And so we're really excited for the 3rd anniversary. And listen. In terms of what is the structure and how does that impact certain things from a licensing perspective, I would just say TBD on that one. Those are list of things that we're continuing to work through internally.

Speaker 2

It won't just be we acquire Barstool and then we don't list. I think there's going to be some structural implications as well, and we're working through all of that behind the scenes. So you should expect to hear something before the end of the year.

Speaker 10

Got it. That's helpful. And then on the buyback, maybe this is for Felicia. I know that you have a 3 year window there, but is that generally the cadence that we should think through or is this purely opportunistic or will it be viewed more as a consistent buyback? And if it is opportunistic, is there any kind of upper bound on leverage ranges that you'd be willing to go to take advantage of the stock?

Speaker 3

Yes. Thanks, Stephen. I don't think we're going to talk about the cadence of our buyback program, but it is a 3 year program. And like you said, we are going to be opportunistic. Obviously, it also gives us the opportunity to offset stock option dilution.

Speaker 3

So it puts us in a much stronger place than we've been in for the past list of buyback or growth, and we're in this great situation where it's not an either or for us, right? We can continue our buyback program and pursue growth opportunities at the same time given our balance sheet. And regarding the leverage Looking at that level as being kind of where our focus is, you're probably not going to Yes, do anything that would be meaningfully levering. So as I said before, we're not going to talk about an optimal level, but we really like where we are now. But I would think about it as a 3 year program and us being opportunistic as things come up.

Speaker 2

Yes. I would just add, Stephen, I know you know this. I think it's lost sometimes We could use the majority of that authorized share repurchase level in 2022 and have it not be a levering event for us. So marketplace. We'll see how things play out.

Speaker 2

We'll see how the cadence works out. It felt like a natural time for us to institute that authorization.

Operator

Our next question comes from Shaun Kelley with Bank of America. Please proceed.

Speaker 6

Jay, I just wanted to go back to your comment, I think maybe it was in Felicia's part of the prepared remarks You talked about the 37% core margin. Just to be kind of clear on what's in that, is that excluding Interactive on both sides, so both revenue and obviously both corporate and losses from the online side or investments for the online side. So that's kind of the first question on just clarifying that. And then the second would be, I think that's actually a little bit better than what you did this quarter. So what would be driving Improvement, if I'm doing the math right.

Speaker 2

Yes. You are doing the math right, Sean. It's apples to apples. It excludes Interactive. It list.

Speaker 2

And there was some omicron impacts during the busiest week of the year, Christmas to New Year's, as We definitely felt a bit of a fall off from what we were seeing earlier in Q4 and what you would have anticipated as a normal ramp heading into the holidays. So we feel like 37% is a good target. It's going to be aggressive, but we think we can achieve that internally. Todd and Our team of regionals and our general managers have and continue to do an amazing job of sharing best practices and Just looking under every rock and making sure that we're thinking about the business differently as we launch new technologies. So we'll It's very difficult in this environment, as you can imagine, Sean, that we debated this guidance thing over and over and over again because one thing we know is the number we gave will be wrong.

Speaker 2

I don't know if it's listen. Directionally, we feel like we gave a number that we hopefully we can beat or exceed. But if there are new variants and casino restrictions and shutdown in some markets are it's very difficult to anticipate, but 37% at the property level feels achievable for us in 2022. Yes. The only

Speaker 5

thing I would add, and Jay touched on it, that week between Christmas and New Year's is really it's what saves December or the time from Thanksgiving to New Year's Eve. So when that Saw the spike in Omicron, it really made it difficult. But also the way the calendar laid out, you typically have a weekend between Christmas and New Year's. And Obviously, with Christmas holiday following on the weekend and New Year's Eve following on the weekend, you kind of lost the extra days where you outperform and over index. So I think with all that and then the seasonality again, Q4 is kind of a tough comparison.

Speaker 5

Our 37%, it doesn't mean that we're 37% every single month. There is some seasonality in there.

Speaker 6

It's really encouraging. Thanks for the detail. And then just as my follow-up, UJ, kind of zooming out a little bit, kind of curious on TheScore, it's an interesting acquisition and obviously there's a lot of directions you can take it. But could you talk about Just sort of getting maybe some more content and traction for that app here in the United States and what might it take to convert maybe some of that business into actual revenue. Obviously, its usage and its loyalty is extraordinary.

Speaker 6

It's kind of trying to figure out how sizable that might be in the next couple of years.

Speaker 2

Yes. And remember, when we announced our acquisition of Viscor, list coming soon in terms of legalized online sports betting, online casino. Number 2, it's a very healthy and fast growing media business listen to retention. They really just don't lose users. When people download the app, they use it a lot and they stay in the ecosystem.

Speaker 2

And of course, last, this is a technology company that listen. Long term, those are the reasons why we made it happen. Last one, culturally, we are very aligned with the Levis and It gets back to your question in terms of the U. S. Where they didn't jump into the fray either.

Speaker 2

They didn't burn through list of tens of 1,000,000 or 100 of 1,000,000 of dollars of paid media expense. They want to make sure that they launched. They're live in 4 states. We're live with them in 4 states here in the U. S.

Speaker 2

We don't plan on them going live in more states in the U. S. Because we're going to work on list of the Barstool Sportsbook into theScore Media app across the U. S. And so they've really been able to just sort of perfect what they do and list.

Speaker 2

Try a lot of things with their new PAM and promotional engine here in the U. S. In preparation for Ontario. So I would expect that You should see improvements in the U. S.

Speaker 2

In terms of our ability to convert theScore Media list ecosystem to Barstool Sportsbook as we throw more effort at that in the second half of this year around football season. And we'll have more information to share with you as the quarters track on. But the focus right now is on building out the tech stack and a very successful launch in Ontario.

Operator

Our next question comes from Chad Beynon

Speaker 11

Congrats on the results. On Slide 15, you laid out the handle in the gross gaming revenue for the sports book. It appears that your the conversion or the hold rate is Higher than what some of your peers have been talking about. I'm assuming that's just because of the lower reduction from promos, which Jay, you Also highlighted as a big strategy. But I'm wondering if you can just talk about how you see hold rates long term and then any mix of pregame listen to the question and answer session versus endgame that you're happy to disclose for the quarter?

Speaker 11

Thanks.

Speaker 2

Yes. Hold percentage, it's sort of like talking about blackjack listen. Some quarters work for you, some work against you. There are times where you can have a really good hold in a quarter and then Mattress list. Match Mac beat you for $5,000,000 and there goes your hold for the quarter.

Speaker 2

And we have the balance sheet to be able to fade action like that, which is why Mattress Mac and VIP list. I think that over the long term, we've sort of modeled in somewhere in that 7%, maybe 7.5% hold. And if you look at our life to date results across All of our online sports betting launches, that's about where we are. I think we're at like 7.1, 7.2, somewhere in there. I would imagine I don't know, Chad.

Speaker 2

I would imagine that's probably going to be about average for industry. We list. We are really placing a significant focus on our in game offerings and we launched football season this year was the first listen to the football season this year that probably drove some of the whole percentage premium that you're referencing. And also, we just tend to be More discipline around what we're giving customers to generate the revenue. We try to give them enough to be somewhat competitive and to make sure that exceed your total revenue brought in, which is what we're seeing with a lot of the competitors on an NGR basis, when you think about their total marketing reinvestment.

Speaker 2

So anyway, I think from a whole percentage standpoint, you should probably just model in somewhere in that 7% to 7.5% range. I would like to see our Those percentages will continue to be outsized as opposed to pre match. Some sports in the U. S, it's just hard for in game. Basketball moves too fast.

Speaker 2

List of the best in game betting sports and we will be live at the start of baseball season whenever they get through this labor listen for us because if you only have pre match in baseball, it's just a long slow game. And in game, it keeps the fun going throughout and Keeps you engaged as you're consuming that content. So I would expect to see some improvements in terms of how we list performed during baseball season this year with better products, and we've made other enhancements to our app as well. And we'll see what happens to hold percentage in baseball season now that we have that product.

Speaker 11

Thanks, Jay. And then from a land based portfolio standpoint, there were a few assets that traded in 2021 in Vegas and it appears that there's a few more for sale in 2022. Just wanted to take your temperature on how important the consideration for a destination property is at

Speaker 2

Look, it would be nice to have 1 in the portfolio. I just would really stress that we're not going to take something that we

Speaker 5

list. We can't get

Speaker 2

a return on and there's been a couple of transactions recently, but actually 3 transactions recently in Las Vegas and They were at valuations that we weren't comfortable with. One of them, I think, that was worth stretching for because of list of the condition of the property and how new it is, but you should not expect Penn to be a leading bidder if it's an irrational competitive bid process. With all of that said, we have the balance sheet to do things that not every company can do. And so if the price is right and the property is right for us and the location is something we're comfortable with, we would probably take a look at it. Thanks, Chad.

Speaker 2

And Frank, we'll take one more question.

Operator

Next question comes from Ben Chaikin with Credit Suisse. Please proceed.

Speaker 12

Hey, how's it going? Thanks for taking my question. Just a quick clarification from earlier. I believe it might have been in response to Sean's question. You were mentioning taking some of the attributes of the Barstool Sportsbook and adding it to the SCOR app in the U.

Speaker 12

S, if I heard you correctly. Is that in line with the strategy you've been thinking all along or are you emphasizing the score in the U. S. A little more than previously maybe? Again, more of a clarification there.

Speaker 12

Thanks.

Speaker 2

Yes, happy to Ben. And when we announced that we were acquiring the SCOR, what I had said at the time, which is by the way consistent, not to say we won't change our mind on things, but on this one, we really haven't Changed our mind, which is that we will be leading with the ScoreBet brand in Canada and supporting it with barstool personalities and content, but really pushing list of that audience to theScore bet and in the U. S. The exact opposite where we'll continue to lead with Barstool Sportsbook Sports betting brands in the same market gets confusing. And we felt like just keeping it simple list and focusing on one brand in the U.

Speaker 2

S. Versus the other brand in Canada was the best course for us. With all that said, we might find a year from now that I was wrong and we want to have both brands in both markets and we're launching Barstool Sportsbook in addition to the SCOR in Canada and vice versa here in the U. S. But as of right now and Really since we started talking to our partners at theScore of the Levy's and as we talked about it with Dave and Dan and Erica and our team internally here at Penn, We all agree that was the right approach, single brand Canada, single brand in the U.

Speaker 2

S.

Speaker 12

Makes sense. I appreciate it. Thanks.

Speaker 2

Thanks, Ben. Thank you everybody for joining us this morning, and we look forward to speaking to you again in 3 months.

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