Caesars Entertainment Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2022

There are 14 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Caesars Entertainment Inc. 2022 Second Quarter Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to turn the call over to your host, Brian Agnew, Senior Vice President of Finance, Treasury and Investor Relations.

Operator

You may begin.

Speaker 1

Thank you, Kevin, and good afternoon to everyone on the call. Welcome to our conference call to discuss our Q2 2022 earnings. This afternoon, we issued a press release announcing our financial results for the period ended June 30, 2022. A copy of the press release is available on the Investor Relations section of our website at investor. Caesars.com.

Speaker 1

Joining me on the call today are Tom Reeg, our CEO Anthony Carano, our President and Chief Operating Officer Brett Jonker, our Chief Financial Officer and Eric Hession, Co President, Caesars Sports and Online Gaming. Before I turn the call over to Anthony, I would like to remind you that during today's conference call, we may make certain forward looking statements about the company's performance. Such forward looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them. Forward looking statements are also subject to the inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward looking statements, Please refer to the cautionary statements contained in our press release as well as the risk factors contained in the company's filings with the Securities and Exchange Commission.

Speaker 1

Caesars Entertainment undertakes no obligation to revise or update any of our forward looking statements to reflect events or circumstances that occur after today's call. Also during today's call, the company may discuss certain non GAAP financial measures as defined by SEC Regulation G. The GAAP financial measures most directly comparable to each non GAAP financial measure discussed and the reconciliation of the differences between each non GAAP financial measure and a comparable GAAP financial measure can be found on the company's website at investor. Caesars.com By selecting the press release regarding the company's 2022 Second Quarter Financial Results. I will now turn the call over to Anthony Corrado.

Speaker 2

Thank you, Brian, and good afternoon to everyone on the call. Our second quarter was a record quarter for our consolidated property portfolio. Adjusted EBITDA in the 2nd quarter, excluding Caesars Digital was $1,050,000,000 versus $1,010,000,000 last year. Our Las Vegas segment delivered an all time quarterly EBITDA record of $547,000,000 with revenues up 34% year over year. Our Regional segment delivered same store adjusted EBITDA of $513,000,000 up 24% versus Q2 of 2019.

Speaker 2

Caesars Digital reported a $69,000,000 adjusted EBITDA loss, which was a dramatic improvement versus the Q1 of this year. In our Las Vegas segment, all areas of the business combined to contribute to the record EBITDA quarter. Excluding real rent payments, Our Las Vegas segment generated EBITDA of $558,000,000 and a 49% EBITDA margin. Occupancy improved significantly reaching 97% as a result of strong demand and our ability to lift self imposed occupancy caps. Strong occupancy when combined with a record ADR resulted in the highest quarterly room hotel revenues for our Las Vegas segment Group and convention also posted an all time quarterly EBITDA record, led by the strong performance of the Caesars Forum.

Speaker 2

Group room nights during Q2 2022 represented approximately 13% of occupied room nights in Las Vegas, up from 11% in the second half of twenty twenty one. Forward group revenue pace for the remainder of the year and into 23 is up over double digits versus 2019. Our Vegas F and B operations delivered record profit during the quarter as well. And finally, results in our 55 plus segment, Las Vegas, We're up for the first time over 2019 since COVID began, and we're beginning to see a noticeable return to the market from international travelers. In our regional markets, while results were down versus last year, operating results remained strong, especially versus 2019.

Speaker 2

Reported EBITDA of $513,000,000 was up 24% to Q2 of 2019 and up 29% when excluding impacts From the Lake Charles closure and construction disruption at Caesars Atlantic City. EBITDA margins improved 7.50 basis 36% on a same store basis for Q2 of 2019, excluding Lake Charles and Caesars AC. July operating trends in our regional segment remain consistent with the trends we have seen post COVID. Our capital program remains largely unchanged. 90% of our room remodel programs in Atlantic City is now complete, and we look forward to several exciting food and beverage concepts opening in October November.

Speaker 2

Our land based facility in Lake Charles is set to open in December and so is our expanded casino offering in Pompano. We expect to break ground on Caesars Danville in Virginia, Harris Columbus in Nebraska and our casino expansion for Harris Hoosier Park during this quarter. Lastly, construction on our new hotel tower and additional amenities at our New Orleans property is progressing well with the new sports book And poker, I'm set to open Labor Day weekend. These are all exciting projects that will generate a meaningful return on the investment for our company. As we look to the remainder of 2022, we remain optimistic about our business as consumer trends remain healthy, especially versus 2019.

Speaker 2

As we mentioned last quarter, we remain encouraged regarding improving group and convention trends in Las Vegas, The return of the international consumer as well as the potential for the full recovery of our older demographic consumer, which has been the most impacted to COVID-nineteen. I want to thank all of our team members for their hard work in 2022 so far. I'm extremely proud of our operating teams, Their execution and their exceptional guest service. With that, I will now turn the call over to Erik Aschen for some insights on the 2nd quarter performance in

Speaker 3

our digital segment. Thanks, Anthony. The financial performance of our digital business improved significantly in the Q2, both on a revenue and an adjusted EBITDA loss basis when compared to the Q1 of this year. As Tom previewed on our last earnings call, our strong gains in unaided brand awareness have allowed us to Scale back our brand related marketing spend. That reduction in combination with the reduced promotional investment environment translated into steadily improving results throughout the quarter.

Speaker 3

As we look to the back half of the year, we expect to add a number of significant product enhancements For our customers in key areas such as cash out speed, customer service and Parlay and alternative line offerings. We also anticipate converting all of our Caesars branded apps and to our Liberty Tech stack by the end of 2022, greatly enhancing the customer experience. In addition, our marketing teams will have new and enhanced ways to deliver offers and promotions to customers, ensuring that they receive them in the most cost effective way. We continue to believe the scale is important for our digital sports betting, iCasino and Poker offerings and pending regulatory approvals plan to Expand into states and jurisdictions where allowed. We currently offer sports betting in 25 North American jurisdictions, 18 of which are mobile.

Speaker 3

IGaming is currently live in 5 jurisdictions, while Poker is in 4. As a result, we will continue to remain focused on growth through new state launches, investing from a tech perspective on product enhancements and remaining acutely focused on our expenses. I'll now turn the call over to Brett Jonker, our CFO.

Speaker 1

Thanks, Eric. 2nd quarter was outstanding from an operating perspective. And if you look back past 18 months, We've now reduced debt by $2,000,000,000 alongside acquiring and standing up our digital business. Our most recent debt reduction came from 730,000,000 Proceeds from the sale of William Hill's international business, dollars 100,000,000 of that was executed through open market debt repurchases Hello par. The other $630,000,000 were applied to our 2025 Term Loan B that happened in July.

Speaker 1

We continue to produce strong free cash flow with an expectation to reduce debt further in the back half of twenty twenty two. I'll turn it over to Tom.

Speaker 4

Thanks, Brett. I'm going to provide some more color on the quarter, where we are now and some conversations that I've had with investors over the last 30 to 60 days. Starting in Las Vegas, dollars 558,000,000 EBITDA pre the real lease payment is up almost 10% over the prior Record in Vegas, which was last year's Q3, also post merger. Vegas, in coming into the quarter, the monthly cash revenue hotel revenue record in Vegas $91,000,000 We exceeded that in April, May June, And we're on pace in 2022 to generate over $1,000,000,000 in cash room revenue in Vegas For the first time, our group business has come back extremely strong. We're seeing Wash rates at or below historical levels as the pent up demand for business travel Starts to evidence itself in Vegas.

Speaker 4

That was about a $200,000,000 EBITDA business in the prior Caesars pre Forum Convention Center, we're pacing about 40% above that as we sit here today. So obviously, with the addition of Forum, which was not in operation pre pandemic, But extremely strong results for us. The strength in Vegas has continued into the Q3. You should expect to see And at normal seasonality, August, when it's just a little cooler than the surface of the sun, you should see expect to see Occupancy tracked back to the mid-90s from the high-90s, but we'd expect to be back in the high-90s September and beyond, and that's what our forward bookings show us. So, Sean McBurney and his team in Vegas have done An absolutely fantastic job.

Speaker 4

We've done all of this with Caesars Palace torn up For most of the year, with our front entrance work, that finishes in September. So in this quarter, we should be pretty well done with everything you've seen at the front entrance of Caesars, which should eliminate construction disruption there. We've opened Vanderpump and Nobu at Paris, and I'll be out for the Martha Stewart restaurant opening In a couple of weeks at Paris, so that property is transforming as well. So we're extremely excited about that. If you move to regionals, You still have the drag in Atlantic City.

Speaker 4

Caesars, in particular, is under heavy construction As you might be hearing from numerous others in a number of industries, it's difficult to Bring in your construction projects on time given supply chain issues, so we were hopeful that all that would have been done Prior to 4th July, the bulk of it should be done by the end of August. So you're seeing You should see Atlantic City numbers start to firm up. New Orleans is starting to track back toward where it was before, It still is a laggard among the regionals and that Lake Charles will open Before the end of the year, remember that's about a $15,000,000 LTM EBITDA drag Should be something north of a $65,000,000 LTM swing once it opens. So we're excited about that. We've got the Atlantic City projects coming online.

Speaker 4

We've got Horseshoe Indianapolis It is less than a year into it and Hoosier Park with a similar cable expansion should come online toward the end of the year. So we're Excited about the dollars that we've got out there and the returns that we're going to get on them. In terms of Yes. Break and mortar, obviously, there's a lot of discussion about the broader economic picture. My first point would be, We've done what we've done in 2 consecutive quarters of falling GDP.

Speaker 4

The average recession since the Depression, I think, is 10 months. So we're hoping that we're toward the end of this current Environment, but the consumer continues to hold up quite well for us. We've seen Unrated play that has softened, offset by strength in rated play, And particularly at the higher end of our database, we've seen international come back to Vegas really in the last 4 weeks, so we're excited about that. Obviously, the stimulus checks were A boom in last year's Q2 and early in the third, but July for us, it was July of 2021 was our best month ever, and we're neck and neck with that in 2022. Particularly Hard to talk about digital.

Speaker 4

Obviously, that's been a topic of conversation for a number of quarters. If you'll recall, We headed into last we closed The William Hille Deal 100 days before the opening kickoff of NFL season. And when you do a UK Acquisition, there is no prepping before close. You start from a standing start on day 1. Eric, Pash and Chris Holden, their team did a great job of standing up the app, getting our brand out there and making us competitive out of the box.

Speaker 4

As I said on the last call, we got to about 15% Nationwide handle share, again, both states that were in, states that were not in, and our Unaided awareness got to a point where we were comfortable pulling back on advertising spend. So we have pulled a Plan 100 of 1,000,000 of dollars that we are planning to spend. We don't think our competitors have followed us. We think they're still spending and our share has been stable. And if you look at our losses in the second quarter, each month improved on the month before.

Speaker 4

So May was a smaller loss than April. June was a smaller loss in May. Obviously, we finished second quarter I'm sorry, we finished July 2 days ago, so I'm talking about preliminary numbers, but digital for July was nearly breakeven for the company. So I would expect as we get into football season, which is clearly our Acquisition period in this business, you're going to see some modest losses return as we acquire new customers. But given that we damn near term profitable in July, I'm extremely confident that we will be A profitable business at least by the Q4 of 2023.

Speaker 4

And I view that business as we have made a bet I told you it was $1,000,000,000 through last quarter. So you've got to add the $69,000,000 of losses in this quarter. I told you In last quarter's call, and I'd expect us to have end up at about $1,500,000,000 of cumulative EBITDA losses. It doesn't look like we will get near that $1,500,000,000 the way the business is performing now. And so we are We want to prove the concept.

Speaker 4

We've proved we could carve out a significant piece of the business. Now we want to prove we can make a profit and then we'll talk about fighting for additional share on the other side of that. But we are Extraordinarily pleased with where digital is in a short period of time And really excited about this football season where we come in with our legs under us rather than running as fast as we can to keep up. So the last piece I want to touch on is leverage, which is a popular topic these days. We have a long track record of we do an acquisition And then we delever.

Speaker 4

And Brent has told you while we were standing up digital with those $1,000,000,000 of EBITDA losses in the trailing 12 months, we paid down $2,000,000,000 of debt. We expect to Continue to pay down debt. If you look at this quarter, even with the digital loss, we're at about $1,000,000,000 of EBITDA. We've got the we have some capital that's coming online, some returns that are coming online. The digital business continues to improve.

Speaker 4

So if you just use and to be clear, I'm not giving any guidance. I'm looking at this quarter. If you look at a $4,000,000,000 business, our net debt, lease adjusted debt is a little under $22,000,000,000 So we're under 5.5 times levered today. We're generating Somewhere between $1,500,000,000 $1,300,000,000 of free cash flow. Now a lot of that is going into growth capital for the time being.

Speaker 4

But if you think about a recession, of course, you've seen how we behave in a recession. You saw how we behave in a pandemic. The growth capital would start to shut off. But if you look at prior recessions, you're looking at a business that Should be mid to high single digit revenue declines at worst in regional less in Vegas with what's going on now. If you run that at a 50% flow through, we're still doing about $1,000,000,000 of free cash flow a year.

Speaker 4

So we feel very good about where we are leverage wise. As you know, we have an ongoing sales process for A Vegas strip asset that's governed by the DICI agreements and has about another month to run. So I'm not going to provide Play by play there, but know that we are in very good shape balance sheet wise. We would like to collapse the CRC bucket for those of you who follow our debt into our parent company, you should expect that we'd be exploring that As soon as the markets open up and we'll be kicking maturities out as well. So we don't For all the hand wringing about leverage and balance sheet all of a sudden, we really don't Stressed about that at all.

Speaker 4

We feel very good about the position we're in and where we're headed going forward. So those are my prepared remarks. Let me flip it to the operator for questions.

Operator

Our first question comes from Carlo Santarelli with Deutsche Bank. Your line is open.

Speaker 5

Hey, thanks everybody, and thanks for the comments. Tom, could you just talk a little bit about obviously the decline in digital spend I know during the last quarter, you spent considerable time kind of talking about what we bought and what you're seeing on TV and in advertisements. As you guys make your transition now towards a profitable breakeven Business that's sustainable going forward. Where does kind of that advertising bucket lie in terms of the aggregate spend. Is that just something now that kind of run rates where it is?

Speaker 5

Or will we see incremental stuff that might have been contract

Speaker 4

Thanks, Carlos. So you'll see This fall, if you're watching TV, part of our ESPN deal includes Advertising buys, so you'll see some commercials largely on ESPN. You'll see some local Ads that run locally as well. And then you'll see a little bit in iGaming as we As that product gets toward where we're comfortable that moving customers onto our app. So You'll see I mean compared to last fall, it's going to seem like we've left entirely, but you will run into a commercial or 2 depending on where you are and what you're watching.

Speaker 5

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

Speaker 4

Nothing that's material to our business. I describe the regional business as Everybody had more money in his or her pocket a year ago from The transfer payments from the government. So that's both unrated play that's Softens, so some of that business has disappeared. That's also rated play that played up last year versus historical levels. But we are quite comfortable that we should be running, let's call it, well into double digits above 2019 EBITDA in regional and regional margins should be up Yes, 600, 700, 800 basis points from pre pandemic.

Speaker 4

So I would call that kind of the new Normal as it were in this environment where you don't have that little bit of a bubble that you had last year. And this is part of What drove the Caesars acquisition for us, right? You remember when we were 2 markets and if something happened to one of those 2 markets, It was a problem for the company. We wanted to become more and more diversified. Now we're more diversified than anybody out there domestically.

Speaker 4

And what we saw is last year, regionals carried Vegas when Vegas was struggling with People getting on planes and with virus related restrictions And what you're seeing this year is regionals aren't quite as strong as they were last year, but Vegas is picking up the slack. So it's doing It's working as we as it was designed when we put the company together.

Speaker 5

And Tom, just to clarify that when you say up 6, 700 basis Points relative to 2019, sorry, I didn't say 8, I heard 6, 7. That's on the current portfolio, which was, I believe, if I'm doing the calculation right, around a 28% margin?

Speaker 4

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

Speaker 5

Great. Thank you, guys.

Operator

One moment for our next question. Our next question comes from Joe Greff with JPMorgan. Your line is open.

Speaker 6

Good afternoon, everybody. Tom, just a question touching on price elasticity in Las Vegas, Especially in light of airfares that are much more expensive now than history and for the driving traffic coming from Southern California with higher gas prices.

Speaker 5

Are you seeing

Speaker 6

any segment either on a net worth basis, on an age basis that's exhibiting Spend reduction in relation to higher hotel rates, food and beverage pricing and such, And is the sensitivity on that maybe greater during seasonally slower periods, like you mentioned August when things are Obviously, pretty hot and heated in Las Vegas.

Speaker 4

I can't Point you to anything in particular, you have 55 plus has started to come back in Vegas like they've not Come back since pandemic. We talked about international has returned quite recently, which is a great sign for us. But we're when you're running 97% at these rates with Up 10% over our prior record, really everything is going great in Vegas. And as we Headed into Board meeting last week, earnings call this week, we checked with Our booking channels, are we seeing any softness in Vegas bookings and what came back is we've actually seen a pickup over the last 2 or 3 weeks. So it is extremely strong in Vegas.

Speaker 4

I can't there are Not strong enough words to convey how well it's going in Vegas for us.

Speaker 6

Great. Thank you. And just going back to digital and your comments there, obviously, it sounds like the improvements both on a new revenue basis and then the Narrowing of EBITDA losses there, it sounds like it's largely Caesars specific and not necessarily a function of seasonality and or the environment getting Less irrational in terms of promos or customer acquisition costs. Is that a fair assessment? And then I'll add a Part B to this.

Speaker 6

When we think about the losses for the next couple of quarters, and I know there's seasonality in the 4Q with football, Do we would you expect that EBITDA loss in both the 3Q and 4Q to be below That $100,000,000 level or approximating that 2Q $70,000,000 $69,000,000 EBITDA loss level? And that's all for me.

Speaker 4

I would expect forward I expect we will not have a quarter of $100,000,000 Quarterly EBITDA loss in digital again. We can talk about modeling offline, but that business and We've had a lot of conversations about this, right? How are you going to become positive? The key factor to think about in the Q3 is you had no significant new states coming online. And so Your business became dominated by existing customers rather than new acquisition customers.

Speaker 4

And I can't stress enough that the cost of the acquisition cost versus the retention cost It's a dramatic difference. So I would expect this football season for everybody. You're going to have New York and Louisiana were very late last year. So you're going to have a fair amount of acquisition activity there. You're going to have some natural acquisition activity, but you don't have a new state of scale coming online till Ohio in January.

Speaker 4

So we feel pretty good certainly for ourselves. I can't speak for what others are doing. We cut Almost $500,000,000 of what we were anticipating spending In marketing, in the last three quarters of 2022. So This is a dramatic pivot for us. We're heartened that we haven't seen share deterioration And particularly with what we've seen in profitability.

Speaker 4

And you know, we're really not one to lose money when we don't need to. And we've got a long track record of really turning Highly subsidized businesses on the brick and mortar side into far more profitable business. It's the same thing that we're doing In digital, when we started digital, we didn't have the ability to segment customers. And now we so you in effect under invest in your best customers and over invest in your works. That's no longer the case.

Speaker 4

So you can be far more precise in what we're doing and we see the fruits of that every day as results come in and it's great to see.

Speaker 6

Thanks for the thoughts Tom.

Operator

One moment for our next question. Our next question comes from Steven Wieczynski with Stifel. Your line is open.

Speaker 7

Hey, guys. Good afternoon. Tom, you mentioned in your Prepared or so called prepared remarks, unrated play, you saw that slowing. And I guess the first question, Is that across both regionals and Vegas? And then the second question there would be, have you seen any spend pattern changes in your database Tiers meaning that low tier rated player, has there been any softness there?

Speaker 4

So No difference in the unrated across markets. It's just casino play in general doesn't move the needle as much in Vegas as it does in Regional, in terms of peers of customers, I think if you go to The lowest end, the properties on the Mississippi River for us in the South, Those started softening in January, February for us and then have been stable. But you're talking about a couple of properties that are $20,000,000 of EBITDA to $4,000,000,000 So nothing that It's material to the enterprise.

Speaker 7

Okay, understood. Second question, Tom, in terms of the Strip Asset sale, I know you're probably very limited in terms of what you can say, but is the delay and I'm not sure if even that's the right term, but is the delay here really more around the rate and the funding environment versus the demand environment? Just I guess what I'm trying to understand is If the demand for strip assets is still as strong as where as it was, let's say, a year ago?

Speaker 4

So Yes. To be clear, we've talked about this on other calls. It's very clear the timeline that It is laid out in the VICI documents that govern this. So we launched early this year. The deadline is by the end of the summer and every deadline I've ever seen in Deal and the work grows into that deadline.

Speaker 4

For us and there is There are plenty of interested parties. Obviously, the financing environment is what it is. And if that's going to impact 1, someone will pay. There is a level where we're not I'm not going to chase it. I'm very happy to just clip the free cash flow and come back later.

Speaker 4

But as we have discussed, This is a discretionary trade for us. We still think we can get it done within the parameters that We had said at the outset, but we are we certainly recognize we live in a market that moves Day to day and if financing conditions change, the outcome might change. But this has become For me, it's kind of amusing because when I first started talking about where to sell a Vegas Strip asset, the response from Both sell side and buy side was why would you want to sell a Vegas Strip asset, look at how great it is. And we said there are times in the market that you don't have to go back very far We wouldn't want to own this many rooms. And now the conversations have turned to, oh my god, can you get this done?

Speaker 4

This is critical. This is a change in you, not in us. This has been discretionary from us, for us, from day 1, And it remains so. So regardless of what level of fear is coursing through the investment community, we put our heads down and we do the work. And if we have a trade that makes sense for us, we'll do it.

Speaker 4

If we don't, we're fine with it. That's far more than I wanted to say about the Vegas Strip asset sales, so no more questions on that, but that's where we are.

Speaker 7

Very clear. Thank you, sir. Appreciate it.

Operator

One moment for our next question. Our next question comes from Barry Jonas with Truist. Your line is open.

Speaker 1

Great, thanks. Auto traffic to Vegas has load according to citywide DLBCVA data. Curious if you're seeing anything like that across your database with California visitation?

Speaker 4

I think we just reported a record quarter, told you July is very strong as well. I mean, yes, There is a seasonal in Vegas. 3rd quarter is lower than 2nd quarter because it's 120 degrees, but beyond that, we're really seeing no change in Vegas activity.

Speaker 2

June traffic At the airport, it was record levels as well.

Speaker 4

That's right. June, seen Santa Vegas set a record. That's helpful. And then just as

Speaker 1

a follow-up, any thoughts on the Centaur option here?

Speaker 4

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

Speaker 4

All right. Thank you, Tom.

Operator

One moment for our next question. Our next question comes from Sean Kelly with Bank of America. Your line is open.

Speaker 8

Hi, good afternoon, everybody. Just two questions on the digital side. Tom, I was just intrigued by the comment around you will not get near to the $1,500,000,000 of losses. I think you tackled it on a quarterly basis, but Any chance we could get you to help us set a new kind of overall level for us or not quite prepared to do that?

Speaker 4

Hard to do in front of football season. Yes. We're at what are we at? If we're at $1,000,000,000 we're at $1,069,000,000 now. I'd say, think about That neighborhood for the next couple of quarters and then improving to inflection to positive and worse in the Q4 next year.

Speaker 8

Super. Thank you. And then, one for either the group or for Eric specifically. But Yes. So we're thinking about the digital strategy, 2 parts here.

Speaker 8

One is, obviously, you pulled back some kind of has the market overall Change very much as it would relate to promotional spending and just kind of how are you seeing that cadence work? And For your own product lineup, could you just talk a little bit more about how you kind of hope to make some inroads on online gaming? Maybe just the product Roadmap on the Icasino side a little bit given the strength of your database, we've always thought that that's a huge opportunity for Caesars.

Speaker 3

Yes, Sean, sure. So In terms of what our competitors are doing, we really haven't seen much of a change at this point. We don't know exactly what their plans are for football, but we've heard No indications that they're changing the original strategy. We believe that the performance that we had in the Q2 and as we head into July and the Next few months support our notion that we can pull back and that customers are more sticky than we had Originally thought and that that's allowing us to be able to have the large reductions and still maintain kind of the revenue levels we were at. In terms of the I Casino, I would say you're exactly right.

Speaker 3

And quite frankly, that's the area that I think all of us around the table are probably the most disappointed with. We really haven't gained the traction that we want and given our knowledge of how to get those customers and to market to them and to segment to them And what they're looking for in terms of game type based on the retail business, we should absolutely be a market leader in the Icasino space. We've been challenged from a tech perspective as well as from a marketing perspective. And unfortunately, That is lagging the sports betting side. So later in the Q4, we're going to be making some enhancements on the tech side, So that we'll be able to do segmented marketing and some other things, we'll be able to do free spins coming up, which are all basic Things that you'd expect would be in place, but unfortunately, they were just difficult from a tech perspective.

Speaker 3

So I do agree with you that, that is an area of opportunity. And I think if you were to look starting in the Q4 into next year, you're going to see us start to make some real progress there.

Speaker 8

Thank you very much.

Operator

One moment for our next question. Our next question comes from David Katz with Jefferies. Your line is open.

Speaker 9

Hi, afternoon, everyone. Thanks for working my question in. If we could talk about just the Vansprint margins, so that we can look 90 days Seems like a world away. I know at one time we were talking about 5%. Is that Is it still a neighborhood where we think we can live either near term or long term?

Speaker 4

Well, the 5.58% were 49% in the quarter. World Series of Poker happened in the largely In the Q2, that's additive to EBITDA. It's about 100 basis point drag on margins. So from an operating perspective, we were at 50% in the second quarter. If you think about Forward, obviously, got a little bit of seasonality, 3rd quarter.

Speaker 4

4th quarter, you might just point drag on margins. So from an operating perspective, we were at 50% in the second quarter. If you think about Forward, obviously, you got a little bit of seasonality in Q3. Q4, You might have read, we're going to have some entertainment come online. That's a lot of revenue sales, But that's going to impact Vegas margins.

Speaker 4

So you're going to have when that particular entertainer starts, You're going to have a lot of revenue run through that goes to the artist, a little bit of profit to us and a better customer on the floor.

Speaker 9

So 50 is where we're going to where is it still a comfortable place for us to hang up? Okay.

Speaker 3

Yes.

Speaker 9

I'm good.

Speaker 6

Yes.

Speaker 9

Very much.

Operator

One moment for our next question. Our next question comes from Daniel Politzer with Wells Fargo. Your line is open.

Speaker 10

Hey, good afternoon, everyone, and thanks for taking my questions. So I want to hit on regionals first. I mean, I think the margins over the course of the quarter, if you can just kind of any color on how they how the cadence was, I think, because March was, I think, in the High-30s and then how it pays over the course of the quarter. And then certainly, I get there is some disruption from Lake Charles and Atlantic City. But as we think about the Q3 relative to Q2, it's typically those are your best 2 quarters of the year.

Speaker 10

So I wanted to make sure that's still kind of in play at this Fine. Thanks.

Speaker 4

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

Speaker 10

Got it. And then, in Las Vegas, I know there was some flooding recently. I wanted to check if has that been Fully cleared up at this point, how should we think about the impact, if any, in the Q3?

Speaker 4

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

Speaker 10

All right. And then just one last one. I think you mentioned that group was pacing up in Vegas around 40% versus 2019, including obviously Forum. I mean, how should we think about that on a I guess, excluding Is it still tracking up and what's really driving that? Is it pricing?

Speaker 10

Is it just food and beverage, additional business or just volume?

Speaker 4

It's all of that. It's volume. It's you've seen what we've done In other segments, the business that we run versus how they were run prior, the banquet business that comes online is It's accretive to margins, even the 50% margins in Vegas. And Michael Massari and his team have done a fantastic job of building a great calendar for us. And all of that comes together for a great outcome.

Speaker 4

For us to give you an example, Harrah's In the Q2, nearly 20% of room nights at Harrah's were group nights, and that's a property that had

Speaker 10

Got it. Thanks for all the

Operator

color. One moment for our next question. Our next question comes from David Bain with B. Riley. One moment.

Operator

David Bain, your line is open.

Speaker 11

Great. Thanks so much. First, I was wondering, you gave some color on structural forward growth drivers in Vegas and You touched on the associated revenue with conventions. Can you big picture international? Is that a $50,000,000 to $60,000,000 business?

Speaker 11

And then you also mentioned the 55 year old demographic returning, just kind of wondering kind of where we are, if you can quantify where that was prior to COVID versus today?

Speaker 4

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

Speaker 11

Okay, great. And then one more if I could. One industry report cited that the OSB, your OSB is looking at a black label site for VIPs. Do you see Tom segmentation Coming to online, can you take kind of what you've done offline to online and create margin outperformance, if you will? I mean, Is that something we miss when we structure our iCasino and OSB models at maturity looking at international, Even before consideration of the land based benefits, how does that trend?

Speaker 4

Yes, I mean that wrapping it into Caesars Rewards, it should At maturity, it should be just like the brick and mortar business. So we should be able to Get more share of wallet from our best customers and not overspend on Small customers, which is the same idea as brick and mortar. I will say one of the things that you miss And I see Mist in analysis of digital is As we launched as all of our peers launch, you saw all these sports partnerships created, Branding partnerships, affiliate relationships, all for customer acquisition at launch, as these states launch, That runs $250,000,000 through our digital business today. Those are all contracts that run off depending on the contract 2 to 5 years after they were signed. Now as you get into a more mature business, you're not going to be recutting those deals or you're not We're cutting them at the levels that you started at.

Speaker 4

So that's going to be extremely accretive to EBITDA As those as the business is seasoned, and I know that's the case for everybody in the business.

Speaker 11

Okay, great. All right. Thank you very much.

Operator

And one moment for our next question. Our next question comes from Chad Beynon with Macquarie. Your line is open.

Speaker 12

Hi, good afternoon. Thanks for taking my question. In terms of sports betting California initiatives, I believe there's 7 or 8 companies that Backed one of the bills. Can you talk about how you're positioned there? And more importantly, are there states in the U.

Speaker 12

S. Where you would potentially take a hard pass given maybe a higher buy in or a higher tax rate? Thanks.

Speaker 2

Sure.

Speaker 4

I struggle to think of a jurisdiction we would not go to in the U. S. If it opens. I guess If you think of a very small state that puts up a ginormous tax rate, that's a small possibility, but we want to be In terms of California, we're not part of either initiative. We have A strong what we want to see sports betting in every jurisdiction that we can find.

Speaker 4

We'd love to see Icasino in every jurisdiction we can find. We have a decade long relationship with A number of tribes across the country where we've been managing their assets through multiple contract renewals, which With a unique position when we bought Caesars, I've never seen that before. And we don't want to be In opposition to tribal interest when we're their partners. So we've remained Neutral in California throughout, you should expect that to be the case in any state where Our tribes are at odds with the commercial interest.

Speaker 12

Great. Thanks, Tom. And then wanted to ask you about your kind of hypothetical 50% flow through. And I know that was more of Just kind of, again, a hypothetical if revenues decline and you were really just trying to make the point of Strong free cash flow. But within that, I guess I wanted to ask, in an environment where revenues are declining, Are there some fixed costs, maybe in labor or other OpEx, where you could Reduced cost, obviously, marketing is at pretty low levels.

Speaker 12

We all understand how the rent, the lease payments work. But Yes. In this hypothetical situation, are there areas where you could kind of trim some of your fixed OpEx? Thanks.

Speaker 4

Yes. Chad, without question, you just saw us live through the pandemic and The amount of cost that you can cut in these businesses is far beyond even what We thought prior to the pandemic and we were among the most vocal that there were Significant costs to be cut. So one of the benefits of the pandemic for us is you got a sense of what your customer What they were willing to tolerate in a softer environment. And I'm thinking in terms of Hours of operation for non gaming amenities, what you can New in a soft environment is far different than what the world believed pre pandemic. So I think the Both the 50% flow through and the top line hits are far in excess of anything that we're expecting.

Speaker 4

I really did that to illustrate that even in that scenario, we'd be generating $1,000,000,000 of free cash.

Speaker 12

Appreciate it. Thanks, Tom.

Operator

And one moment for our next question.

Speaker 4

And I'll

Operator

take a question from Brad Montal with Barclays. One moment. And your line is open.

Speaker 13

Okay, great. Thanks for squeezing me in here. Tom or Ernie, what

Speaker 4

I wanted to just get

Speaker 13

a sense for how you're feeling about your Las Vegas room rate pricing power from here Now outside of rooms being removed from the system like with the Rio, what inning do you feel like you're in in terms of pushing rate just based on your present occupancies, which are really high.

Speaker 4

I mean, I think what you're going to see is the return of group It's going to help us grind rate higher because that's going to push out our lowest rate Customers, that's what's already happening. And keep in mind, we're about to cycle through where we'll be comping against Self imposed occupancy caps because of labor levels last year. So you're going to see Even more significant flow through as you get toward the end of the year with those caps off. So we feel extremely positive about the forward Occupancy and rate environment in Vegas, as I said, we're on pace to do better than $1,000,000,000 of cash Room revenue, which has never happened in Caesars.

Speaker 13

Okay. Thanks for that. And then just one follow-up. I'm curious to hear about this Empire Days Las Vegas promotion you guys launched today. If this is a regular way type set of promotions, if it's sort of new or if it's more offense or defense And just any other ways that you'd like to share that you can activate the Caesars Reward system here for any various pockets of softness that we might see in the

Speaker 5

next 6 to 12 months.

Speaker 4

Yes. This is a typical Room sale that goes on every year, so there's nothing in particular to call out there. We're running at 97 percent July was 96.5% occupancy. So We don't have a lot of extra rooms to fill at this point. So we feel very good about Pavan and his team, in revenue management for us And Sean, as the operating leader in Vegas, we couldn't have done better in terms of what we inherited in that group and Have a great degree of confidence in the results they'll drive going forward.

Speaker 5

Great. Thanks so much.

Operator

And I'm not showing any further questions at this time. I'd like to turn the call back over to Tom for any closing comments. And I'm not showing any further

Speaker 4

All right. Thanks for your time, everybody. We will talk to you after the Q3.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful

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Earnings Conference Call
Caesars Entertainment Q2 2022
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