Caesars Entertainment Q2 2022 Earnings Report

Caesars Entertainment EPS Results

• Actual EPS: $0.16
• Consensus EPS: $0.25
• Beat/Miss: Missed by -$0.09
• One Year Ago EPS: N/A

Caesars Entertainment Revenue Results

• Actual Revenue: $2.82 billion
• Expected Revenue: $2.77 billion
• Beat/Miss: Beat by +$47.65 million
• YoY Revenue Growth: N/A

Caesars Entertainment Announcement Details

• Quarter: Q2 2022
• Date: 8/2/2022
• Time: N/A
• Conference Call Date: Tuesday, August 2, 2022
• Conference Call Time: 3:45AM ET

Caesars Entertainment (NASDAQ:CZR) is a casino-entertainment company that owns, operates and manages commercial casinos, resorts and gaming facilities primarily in the United States. Its properties offer casino gaming, hotel accommodations, restaurants, entertainment, nightlife, conventions and other leisure services, with a significant presence in Las Vegas and regional markets across the country.

The company operates a portfolio of well-known brands, including Caesars, Harrah’s, Horseshoe, Paris, Planet Hollywood, Flamingo, The LINQ and Caesars Sportsbook. In addition to its land-based properties, Caesars provides online sports betting and iGaming services through digital platforms in jurisdictions where those activities are permitted.

Caesars Entertainment traces its heritage to the opening of the original El Rancho Las Vegas in 1947 and the development of the Caesars brand beginning with Caesars Palace in 1966. The current company was formed after Eldorado Resorts completed its acquisition of Caesars Entertainment in 2020 and adopted the Caesars name. Tom Reeg serves as chief executive officer, and the company serves customers through casino-resorts and digital gaming operations in the United States.

Caesars Entertainment Q2 2022 Earnings Call Transcript

Key Takeaways

• Our consolidated portfolio delivered a record quarter with Q2 Adjusted EBITDA (ex-Digital) of $1.05 B (up from $1.01 B), including a record $547 M Vegas segment EBITDA (+34% YoY) at 97% occupancy.
• Regional segment posted same-store Adjusted EBITDA of $513 M (+24% vs Q2 2019) with margins up ~750 bps, and key expansions are underway in Lake Charles, New Orleans, Danville, Columbus and Hoosier Park.
• Caesars Digital narrowed its Q2 Adjusted EBITDA loss to $69 M (improved vs Q1), but remains unprofitable, with breakeven expected seasonally in Q4 2022 and full profitability by Q4 2023.
• The company generated strong free cash flow and reduced lease-adjusted net debt by $2 B over 18 months, lowering leverage to ~5.5× and planning further debt paydowns in H2 2022.
• Forward group revenue pace for the rest of 2022 into 2023 is up double digits vs 2019, driven by convention demand at the Caesars Forum and signs of returning international and older demographic travelers.

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Caesars Entertainment, Inc. 2022 second quarter earnings call. At this time, all participants are in a listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. I would now like to turn the call over to your host, Brian Agnew, Senior Vice President of Finance, Treasury and Investor Relations. You may begin.

[Brian Agnew, Senior VP of Finance, Treasury, and Investor Relations at Caesars Entertainment]

Thank you, Kevin, and good afternoon to everyone on the call. Welcome to our conference call to discuss our second quarter 2022 earnings. This afternoon, we issued a press release announcing our financial results for the period ended June 30, 2022. A copy of the press release is available in the investor relations section of our website at investor.caesars.com. Joining me on the call today are Tom Reeg, our CEO, Anthony Carano, our President and Chief Operating Officer, Bret Yunker, our Chief Financial Officer, and Eric Hession, Co-President, Caesars Sports & 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.

[Brian Agnew, Senior VP of Finance, Treasury, and Investor Relations at Caesars Entertainment]

Forward-looking statements are also subject to the inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward-looking statements, please refer to the cautionary statements contained in our press release, as well as the risk factors contained in the company's filings with the Securities and Exchange Commission. Caesars Entertainment undertakes no obligation to revise or update any of our forward-looking statements to reflect events or circumstances that occur after today's call. Also, during today's call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G.

[Brian Agnew, Senior VP of Finance, Treasury, and Investor Relations at Caesars Entertainment]

The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the company's website at investor.caesars.com by selecting the press release regarding the company's 2022 second quarter financial results. I will now turn the call over to Anthony Carano.

[Anthony Carano, President and COO at Caesars Entertainment]

Thank you, Brian, and good afternoon to everyone on the call. Our second quarter was a record quarter for our consolidated property portfolio. Adjusted EBITDA in the second quarter, excluding Caesars Digital, was $1.05 billion versus $1.01 billion last year. Our Las Vegas segment delivered an all-time quarterly EBITDA record of $547 million, with revenues up 34% year-over-year.

[Anthony Carano, President and COO at Caesars Entertainment]

Our regional segment delivered same-store adjusted EBITDA of $513 million, up 24% versus Q2 of 2019. Caesars Digital reported a $69 million adjusted EBITDA loss, which was a dramatic improvement versus the first quarter of this year. In our Las Vegas segment, all areas of the business combined to contribute to the record EBITDA quarter. Excluding REIT rent payments, our Las Vegas segment generated EBITDA of $558 million and a 49% EBITDA margin. Occupancy improved significantly, reaching 97% as a result of strong demand and our ability to lift self-imposed occupancy caps. Strong occupancy, when combined with a record ADR, resulted in the highest quarterly room hotel revenues for our Las Vegas segment in company history. Group and convention also posted an all-time quarterly EBITDA record led by the strong performance of the Caesars Forum.

[Anthony Carano, President and COO at Caesars Entertainment]

Group room nights during Q2 2022 represented approximately 13% of occupied room nights in Las Vegas, up from 11% in the second half of 2021. Forward group revenue pace for the remainder of the year and into 2023 is up over double digits versus 2019. Our Vegas F&B operations delivered record profits during the quarter as well. Finally, results in our 55+ segment in Las Vegas were up for the first time over 2019 since COVID began, and we're beginning to see a noticeable return to the market from international travelers. In our regional markets, while results were down versus last year, operating results remained strong, especially versus 2019.

[Anthony Carano, President and COO at Caesars Entertainment]

Reported EBITDA of $513 million 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 750 basis points to 36% on a same store basis versus 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 and November. Our land-based facility in Lake Charles is set to open in December, and so is our expanded casino offering in Pompano.

[Anthony Carano, President and COO at Caesars Entertainment]

We expect to break ground on Caesars Danville in Virginia, Harrah's Columbus in Nebraska, and our casino expansion for Harrah's Hoosier Park during this quarter. Lastly, construction on our new hotel tower and additional amenities at our New Orleans property is progressing well with the new sportsbook and poker room set to open Labor Day weekend. These are all exciting projects that will generate a meaningful return on the investment for our company. As we look to the remainder of 2022, we remain optimistic about our business as consumer trends remain healthy, especially versus 2019. As we mentioned last quarter, we remain encouraged regarding improving group and convention trends in Las Vegas, return of the international consumer, as well as the potential for the full recovery of our older demographic consumer, who has been the most impacted by COVID-19.

[Anthony Carano, President and COO at Caesars Entertainment]

I want to thank all of our team members for their hard work in 2022 so far. I'm extremely proud of our operating teams, their execution, and their exceptional guest service. With that, I will now turn the call over to Eric Hession for some insights on the second quarter performance in our digital segment.

[Eric Hession, Co-President of Caesars Sports and Online Gaming at Caesars Entertainment]

Thanks, Anthony. The financial performance of our digital business improved significantly in the second quarter, both on a revenue and an adjusted EBITDA loss basis when compared to the first quarter of this year. As Tom previewed on our last earnings call, our strong gains in unaided brand awareness have allowed us to scale back our brand-related marketing spend. That reduction, in combination with a reduced promotional investment environment, translated into steadily improving results throughout the quarter. 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 sportsbooks to our Liberty tech stack by the end of 2022, greatly enhancing the customer experience.

[Eric Hession, Co-President of Caesars Sports and Online Gaming at Caesars Entertainment]

In addition, our marketing teams will have new and enhanced ways to deliver offers and promotions to customers, ensuring that they receive them in the most cost-effective way. We continue to believe that scale is important for our digital sports betting, iCasino, and poker offerings, and pending regulatory approvals plan to expand into states and jurisdictions where allowed. We currently offer sports betting in 25 North American jurisdictions, 18 of which are mobile. iGaming is currently live in five jurisdictions, while poker is in four. 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 Bret Yunker, our CFO.

[Bret Yunker, CFO at Caesars Entertainment]

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

[Tom Reeg, CEO at Caesars Entertainment]

Thanks, Bret. 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 30-60 days. Starting in Las Vegas, $558 million of EBITDA, pre the Rio lease payment, is up almost 10% over the prior record in Vegas, which was last year's third quarter, also post-merger. Vegas coming into the quarter, the monthly cash revenue, hotel revenue record in Vegas was $91 million. We exceeded that in April, May, and June, and we're on pace in 2022 to generate over $1 billion in cash room revenue in Vegas for the first time. Our group business has come back extremely strong.

[Tom Reeg, CEO at Caesars Entertainment]

We're seeing wash rates at or below historical levels as the pent-up demand for business travel starts to evidence itself in Vegas. That was about a $200 million EBITDA business in the prior Caesars pre-Forum Convention Center. We're pacing about 40% above that as we sit here today. 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 third quarter. You should expect to see kind of normal seasonality August when it's just a little cooler than the surface of the sun. You should expect to see occupancy track 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.

[Tom Reeg, CEO at Caesars Entertainment]

Sean McBurney and his team in Vegas have done an absolutely fantastic job. 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. 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 à Paris 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. We're extremely excited about that. If you move to regionals, you still have the drag in Atlantic City. Caesars, in particular, is under heavy construction.

[Tom Reeg, CEO at Caesars Entertainment]

As you might be hearing from numerous others in a number of industries, it's difficult to construct projects on time given supply chain issues. We were hopeful that all that would have been done prior to Fourth of July. The bulk of it should be done by the end of August. You should see Atlantic City numbers start to firm up. New Orleans is starting to track back toward where it was before, but still is a laggard among the regionals. Lake Charles will open before the end of the year. Remember, that's about a $15 million LTM EBITDA drag should be something north of a $65 million LTM swing once it opens. We're excited about that. We've got the Atlantic City projects coming online.

[Tom Reeg, CEO at Caesars Entertainment]

We've got Horseshoe Indianapolis is less than a year into it, and Hoosier Park with a similar table expansion should come online toward the end of the year. 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, you know, brick-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 two consecutive quarters of falling GDP. The average recession since the Depression, I think, is 10 months. We're hoping that we're toward the end of this current environment. The consumer continues to hold up quite well for us. You know, we've seen unrated play that has softened, offset by strength in rated play, particularly at the higher end of our database.

[Tom Reeg, CEO at Caesars Entertainment]

We've seen international come back to Vegas really in the last four weeks, so we're excited about that. You know, obviously, the stimulus checks were a boom in last year's second quarter and early in the third. July for us, July of 2021 was our best month ever, and we're neck and neck with that in 2022. Particularly heartened to talk about digital. Obviously, that's been a topic of conversation for a number of quarters. If you'll recall, we closed the William Hill deal 100 days before the opening kickoff of NFL season. When you do a U.K. acquisition, there's no prepping before close. You start from a standing start on day one.

[Tom Reeg, CEO at Caesars Entertainment]

Eric Hession and Chris Holdren, their team, did a great job of standing up the app, getting our brand out there and making us competitive out of the box. As I said on the last call, we got to about 15% nationwide handle share, again, both states that we're in, states that we're not in, and our unaided awareness got to a point where we were comfortable pulling back on advertising spend. We have pulled back on planned $hundreds of millions that we were planning to spend. We don't think our competitors have followed us. We think they're still spending, and our share has been stable. If you look at our losses in the second quarter, each month improved on the month before. May was a smaller loss than April. June was a smaller loss than May.

[Tom Reeg, CEO at Caesars Entertainment]

Obviously, we finished July two days ago, so I'm talking about preliminary numbers. Digital for July was nearly break even for the company. I would expect as we get into football season, which is clearly our acquisition period in this business, you're gonna see some modest losses return as we as we acquire new customers. Given that we damn near turned profitable in July, I'm extremely confident that we will be a profitable business at least by the fourth quarter of 2023. I view that business as, you know, we have made a bet that I told you was $1 billion through last quarter, so you've gotta add the $69 million of losses in this quarter.

[Tom Reeg, CEO at Caesars Entertainment]

I told you in last quarter's call that I'd expect us to have end up at about $1.5 billion of cumulative EBITDA losses. It doesn't look like we will get near that $1.5 billion the way the business is performing now. We wanna prove the concept. We've proved we could carve out a significant piece of the business. Now, we wanna prove we can make a profit, and then we'll talk about fighting for additional share on the other side of that. 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.

[Tom Reeg, CEO at Caesars Entertainment]

The last piece I wanna 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 de-lever. Bret has told you while we were standing up digital with those $1 billion of EBITDA losses in the trailing 12 months. $2 billion 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 billion of EBITDA. We have some capital that's coming online, some returns that are coming online. You know, the digital business continues to improve. If you just use. To be clear, I'm not giving any guidance. I'm looking at this quarter.

[Tom Reeg, CEO at Caesars Entertainment]

If you look at a $4 billion business, our net debt, lease-adjusted debt is a little under $22 billion. We're under 5.5x levered today. We're generating somewhere between $1.5 billion and $1.75 billion of free cash flow. Now, a lot of that is going into growth capital for the time being. 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. If you look at prior recessions, you're looking at a business that should be a mid- to high-single-digit% revenue declines at worst in regional, less in Vegas with what's going on now.

[Tom Reeg, CEO at Caesars Entertainment]

If you run that at a 50% flow through, we're still doing about $1 billion of free cash flow a year. 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 VICI agreements. It has about another month to run, so I'm not gonna provide play by play there. Know that, you know, 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, you know, as soon as the markets open up, and we'll be kicking maturities out as well.

[Tom Reeg, CEO at Caesars Entertainment]

For all the hand-wringing about leverage and balance sheet all of a sudden, we really don't stress about that at all. We feel very good about the position we're in and where we're headed going forward. Those are my prepared remarks. Let me flip it to the operator for questions.

[Operator]

Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone keypad while we compile our Q&A roster. Our first question comes from Carlo Santarelli with Deutsche Bank. Your line is open.

[Carlo Santarelli, Managing Director of Gaming and Lodging Equity Research at Deutsche Bank]

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

[Tom Reeg, CEO at Caesars Entertainment]

Thanks, Carlos. You'll see this fall, if you're watching TV, part of our ESPN deal includes advertising buys. You'll see some commercials largely on ESPN. You'll see some local ads that run locally as well. You'll see a little bit in iGaming as that product gets toward where we're comfortable with moving customers onto our app. You'll see. I mean, compared to last fall, it's gonna seem like we've left the air entirely, but you will run into a commercial or two, depending on where you are and what you're watching.

[Carlo Santarelli, Managing Director of Gaming and Lodging Equity Research at Deutsche Bank]

Okay, great. Just as a follow-up, you know, 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, you know, we see plenty of GGR, and that's been, you know, spotty relative to 2021 just given the difficulty in comparisons. From a promotional standpoint, are you seeing any behavior that's any different than what we've, you know, seen over the last couple of months, quarters?

[Tom Reeg, CEO at Caesars Entertainment]

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. That's both unrated play that's softened, so some of that business has disappeared. That's also rated play that played up last year versus historical levels. We are quite comfortable that, you know, we should be running, you know, let's call it well into double digits above 19 EBITDA in regional and regional margins should be up, you know, 600, 700, 800 basis points from pre-pandemic. 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. You know, this is part of what drove the Caesars acquisition for us, right?

[Tom Reeg, CEO at Caesars Entertainment]

You remember when we were two markets, and if something happened to one of those two markets, it was a problem for the company. We wanted to become more and more diversified. Now we're more diversified than anybody out there domestically. What we saw is last year, regionals carried Vegas when Vegas was struggling with people getting on planes and with virus related restrictions. What you're seeing this year is regionals aren't quite as strong as they were last year, but Vegas is picking up the slack. It's working as it was designed when we put the company together.

[Carlo Santarelli, Managing Director of Gaming and Lodging Equity Research at Deutsche Bank]

Tom, just to clarify, that when you say up 600-800 basis points relative to 2019, as far as you can say, I heard six, seven. That's on the current portfolio, which was, I believe if I'm doing the calculation right, around a 28% margin.

[Tom Reeg, CEO at Caesars Entertainment]

Yeah. I'd say you're running 35%+ now, and then you're gonna have Atlantic City construction roll-off, which should certainly improve revenue and margins. Then you're gonna have Lake Charles come on, which should be a significant swing for us.

[Carlo Santarelli, Managing Director of Gaming and Lodging Equity Research at Deutsche Bank]

Great. Thank you, guys.

[Operator]

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

[Joseph Greff, Managing Director at JPMorgan]

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 drive-in traffic coming from Southern California with higher gas prices. Are you seeing any segment, either on a net worth basis, on an age basis, that's exhibiting, you know, spend reduction in relation to, you know, higher hotel rates, food and beverage pricing and such? Is the sensitivity on that maybe greater during seasonally slower periods, like you mentioned August, when things are, you know, obviously, you know, pretty hot and heated in Las Vegas?

[Tom Reeg, CEO at Caesars Entertainment]

I can't point you to anything in particular. You know, 55+ 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. You know, we're, when you're running 97% at these rates with, you know, up 10% over our prior record, really everything is going great in Vegas. As we headed into, you know, board meeting last week, earnings call this week, we, you know, we checked with our booking channels, are we seeing any softness in Vegas bookings? What came back is we've actually seen a pickup over the last 2 or 3 weeks. It is extremely strong. There are not strong enough words to convey how well it's going in Vegas for us.

[Joseph Greff, Managing Director at JPMorgan]

Great. Thank you. Just going back to digital and your comments there, obviously it sounds like the improvements both on a net 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, you know, less irrational in terms of promos or customer acquisition costs. Is that a fair assessment? Then I'll have a part B to this.

[Joseph Greff, Managing Director at JPMorgan]

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

[Tom Reeg, CEO at Caesars Entertainment]

I expect we will not have a quarter of $100 million quarterly EBITDA loss in digital again. We can talk about modeling offline, but that business is you know, we've had a lot of conversations about this, right? How are you gonna become positive? You know, the key factor to think about in the third quarter is you had no significant new states coming online, and so your business became dominated by existing customers rather than new acquisition customers. I can't stress enough that the acquisition cost versus the retention cost is a dramatic difference. I would expect this football season for everybody, you're gonna have New York and Louisiana were very late last year. You're gonna have a fair amount of acquisition activity there.

[Tom Reeg, CEO at Caesars Entertainment]

You're gonna have some natural acquisition activity. You don't have a new state of scale coming online till Ohio in January. We feel pretty good, certainly for ourselves. I can't speak for what others are doing. We cut almost half a billion dollars of what we were anticipating spending in marketing in the last three quarters of 2022. 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. You know, we're really not one to lose money when we don't need to. 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.

[Tom Reeg, CEO at Caesars Entertainment]

You in effect under invest in your best customers and over invest in your worst. That's no longer the case. 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.

[Joseph Greff, Managing Director at JPMorgan]

Thanks for the thoughts, Tom.

[Operator]

One moment before our next question. Our next question comes from Stephen Grambling with Stifel. Your line is open.

[Stephen Grambling, Analyst at Stifel]

Hey, guys. Good afternoon. Tom, you mentioned in your prepared or so-called prepared remarks unrated play you saw that slowing. I guess the first question is that across both regionals and Vegas? 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?

[Tom Reeg, CEO at Caesars Entertainment]

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 tiers 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. You're talking about a couple of properties that are, you know, $20 million of EBITDA out of $4 billion, so nothing that is material to the enterprise.

[Stephen Grambling, Analyst at Stifel]

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, you know, is the delay, and I'm not sure if even that's the right term, but, you know, 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 it is as it was, let's say, you know, a year ago.

[Tom Reeg, CEO at Caesars Entertainment]

Just to be clear, we talked about this on other calls. It's very clear the timeline is laid out in the VICI documents that govern this. You know, we launched early this year. The deadline is by the end of the summer, and every deadline I've ever seen in deal land, the work grows into that deadline. You know, for us, there are plenty of interested parties. Obviously, the financing environment is what it is. If that's going to impact what someone will pay, there is a level where I'm not going to chase it. I'm very happy to just clip the free cash flow and come back later. You know, as we have discussed, this is a discretionary trade for us.

[Tom Reeg, CEO at Caesars Entertainment]

We still think we can get it done within the parameters that we had set at the outset. We certainly recognize we live in a market that moves day to day, and if financing conditions change, the outcome might change. This has become. For me, it's kind of amusing because when I first started talking about we're gonna 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." We said, there are times in the market that you don't have to go back very far, that we wouldn't want to own this many rooms. Now the conversations have turned to, "Oh my God, can you get this done?

[Tom Reeg, CEO at Caesars Entertainment]

This is critical." This is a change in you, not in us. This has been discretionary for us from day one, and it remains so. Regardless of what level of fear is coursing through the investment community, we put our heads down and we do the work. If we have a trade that makes sense for us, we'll do it. If we don't, we're fine waiting. That's far more than I wanted to say about the Vegas Strip asset sale, so no more questions on that. That's where we are.

[Stephen Grambling, Analyst at Stifel]

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.

[Barry Jonas, Managing Director at Truist]

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

[Tom Reeg, CEO at Caesars Entertainment]

No. I think it's. We've just reported a record quarter. Told you July is very strong as well. I mean, yeah, there is seasonality in Vegas, third quarter is lower than second quarter because it's 120 degrees. Beyond that, we're really seeing no change in Vegas activity.

[Eric Hession, EVP at Caesars Entertainment]

June traffic at the airport was record levels as well.

[Tom Reeg, CEO at Caesars Entertainment]

That's right. June seats into Vegas set a record.

[Barry Jonas, Managing Director at Truist]

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

[Tom Reeg, CEO at Caesars Entertainment]

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

[Brandt Montour, Director and Equity Research Analyst of Gaming, Lodging, and Leisure at Barclays]

Got it. All right. Thank you, Tom.

[Operator]

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

[Shaun Kelley, Managing Director at Bank of America]

Hi, good afternoon, everybody. Just two questions on the digital side. Tom, you know, I was just intrigued by the comment around, you know, you will not get near to the $1.5 billion 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?

[Tom Reeg, CEO at Caesars Entertainment]

Hard to do in front of football season. You know, we're at, what are we at? If we're at $1 billion, we're at $1.069 billion now. You know, I'd say, you know, think about that neighborhood for the next couple of quarters and then improving to inflection to positive at worst in the fourth quarter next year.

[Shaun Kelley, Managing Director at Bank of America]

Super. Thank you. One for either the group or for Eric specifically. As we're thinking about the digital strategy, you know, two parts here. One is, you know, obviously you pulled back some, you know, kind of has the market overall changed very much as it would relate, you know, to promotional spending and just kind of how are you seeing that cadence work? You know, for your own product lineup, can 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.

[Eric Hession, EVP at Caesars Entertainment]

Yeah, Sean, sure. In terms of what our competitors are doing, we really haven't seen much of a change at this point. We don't know exactly what their plans are for football, but we've heard, you know, no indications that they're changing the original strategy. We believe that the performance that we had in the second quarter and as we head into, you know, July and the next few months, you know, 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 iCasino, I would say you're exactly right.

[Eric Hession, EVP at Caesars Entertainment]

You know, 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 deal with 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. Unfortunately, that is lagging the sports betting side. Later in the fourth quarter, we're going to be making some enhancements on the tech side so that we'll be able to do segmented marketing and some other things.

[Eric Hession, EVP at Caesars Entertainment]

We'll be able to do free spins coming up, which are all basic things that you'd expect would be in place, but unfortunately, they were just difficult from a tech perspective. I do agree with you that that is an area of opportunity. I think if you were to look starting in the fourth quarter into next year, you're gonna see us start to make some real progress there.

[Shaun Kelley, Managing Director at Bank of America]

Thank you very much.

[Operator]

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

[David Katz, Managing Director at Jefferies]

Hi. Afternoon, everyone. Thanks for working my question in. If we could talk about just the Strip margins. Look, 90 days seems like a world away. I know at one time we were talking about, you know, percent. Is that still a neighborhood where we think we can live, either near term or long term?

[Tom Reeg, CEO at Caesars Entertainment]

Well, at the 55.8%, we're 49% in the quarter. World Series of Poker happened largely in the second quarter. That's additive to EBITDA. It's about 100 basis points drag on margins. From an operating perspective, we were at 50% in the second quarter. If you think about forward, obviously got a little bit of seasonality third quarter. Fourth quarter, you might have read we're gonna have some entertainment come online. That's a lot of revenue build, but that's going to impact Vegas margins.

[Tom Reeg, CEO at Caesars Entertainment]

You're gonna have, when that particular entertainer starts, you're gonna 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.

[David Katz, Managing Director at Jefferies]

50s, where is still a comfortable place for us to hang out. Okay?

[Tom Reeg, CEO at Caesars Entertainment]

Yes.

[David Katz, Managing Director at Jefferies]

I'm good.

[Tom Reeg, CEO at Caesars Entertainment]

Yep.

[David Katz, Managing Director at Jefferies]

Very much.

[Operator]

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

[Daniel Politzer, Equity Analyst at Wells Fargo]

Hey, good afternoon, everyone, and thanks for taking my questions. 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 the cadence was, you know, I think because March was, I think, in the high 30s and then, you know, how it paced over the course of the quarter. Certainly I get there is some disruption from Lake Charles and Atlantic City. You know, as we think about the third quarter relative to second quarter, you know, it's typically those are your best two quarters of the year. Wanted to make sure that's still kind of, you know, in play at this point. Thanks.

[Tom Reeg, CEO at Caesars Entertainment]

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

[Daniel Politzer, Equity Analyst at Wells Fargo]

Got it. 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 third quarter?

[Tom Reeg, CEO at Caesars Entertainment]

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

[Daniel Politzer, Equity Analyst at Wells Fargo]

All right. 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, you know, on a, I guess, excluding Forum, is it still tracking up? What's really driving that? Is it pricing? Is it, you know, just food and beverage, additional business or, you know, just volume?

[Tom Reeg, CEO at Caesars Entertainment]

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

[Daniel Politzer, Equity Analyst at Wells Fargo]

Got it. Thanks for all the color.

[Operator]

One moment for our next question. Our next question comes from David Bain with B. Riley. One moment. David Bain, your line is open.

[David Bain, Managing Director at B. Riley]

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-$60 million business? And then you also mentioned the 55-year-old demographic returning. Just kind of wondering where we are, if you can quantify where that was prior to COVID versus today.

[Tom Reeg, CEO at Caesars Entertainment]

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. The younger cohorts are up more. That's, in terms of order of magnitude, a much bigger piece of the business for us than international. International's a good story for us, but it's far smaller than 55 and over.

[David Bain, Managing Director at B. Riley]

Okay, great. One more if I could. You know, one industry report cited that the OSB, Euro 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, you know, looking at international, even before consideration of the land-based benefits?

[David Bain, Managing Director at B. Riley]

How does that trend?

[Tom Reeg, CEO at Caesars Entertainment]

I mean, that wrapping it into Caesars Rewards, it should at maturity be just like the brick-and-mortar business. 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, that I've seen missed in analysis of digital is, as we launched, as all of our peers launched, you saw all these sports partnerships created, branding partnerships, affiliate relationships, all for customer acquisition at launch, as these states launch. That runs a quarter of a billion dollars through our digital business today. Those are all contracts that run off, you know, depending on the contract, two to five years after they were signed.

[Tom Reeg, CEO at Caesars Entertainment]

Now, as you get into a more mature business, you're not gonna be recutting those deals, or you're not gonna be recutting them at the levels that you started at. So that's gonna be extremely accretive to EBITDA as those, as the business is seasoned. I know that's the case for everybody in the business.

[Operator]

Okay, great. All right. Thank you very much. One moment before our next question. Our next question comes from Chad Beynon with Macquarie. Your line is open.

[Chad Beynon, Managing Director at Macquarie]

Hi, good afternoon. Thanks for taking my question. In terms of sports betting California initiatives, I believe there's seven or eight companies that have backed one of the bills. Can you talk about how you're positioned there? More importantly, are there states in the U.S. where you would potentially take a hard pass given maybe a higher buy-in or a higher tax rate? Thanks.

[Tom Reeg, CEO at Caesars Entertainment]

Sure. 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, you know, a small possibility. But we want to be everywhere. In terms of California, we're not part of either initiative. We want to see sports betting in every jurisdiction that we can find. 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 was a unique position when we bought Caesars. I'd never seen that before. You know, we don't want to be in opposition to tribal interests when we're their partners.

[Tom Reeg, CEO at Caesars Entertainment]

We've remained neutral in California throughout. You should expect that to be the case in any state where tribes are at odds with the commercial interests.

[Chad Beynon, Managing Director at Macquarie]

Great. Thanks, Tom. Wanted to ask you about your kind of hypothetical 50% flow through, and I know that was more of just kind of a, again, a hypothetical if revenues decline, and you were really just trying to make the point of strong free cash flow. Within that, I guess I wanted to ask, in an environment where revenues are declining, are there some, quote-unquote, "fixed costs," maybe in labor or other OpEx, where you could, you know, reduce costs? Obviously, marketing is at pretty low levels. We all understand how the rent, the lease payments work. Yeah, in this hypothetical situation, are there areas where you could kind of trim some of your, you know, quote-unquote, "fixed OpEx?" Thanks.

[Tom Reeg, CEO at Caesars Entertainment]

Yeah, Chad, without question. You just saw us live through the pandemic and the amount of costs 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. 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. I'm thinking in terms of, you know, hours of operation for non-gaming amenities. What you can do in a soft environment is far different than what the world believed pre-pandemic. I think both the 50% flow through and the top-line tips are far in excess of anything that we're expecting.

[Tom Reeg, CEO at Caesars Entertainment]

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

[Chad Beynon, Managing Director at Macquarie]

Appreciate it. Thanks, Tom.

[Operator]

One moment for our next question.

[Operator]

Check for a question. Brandt Montour with Barclays. One moment. Your line is open.

[Brandt Montour, Director and Equity Research Analyst of Gaming, Lodging, and Leisure at Barclays]

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

[Tom Reeg, CEO at Caesars Entertainment]

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

[Brandt Montour, Director and Equity Research Analyst of Gaming, Lodging, and Leisure at Barclays]

Okay, thanks for that. Just one follow-up. Curious to hear about this Empire Days Las Vegas promotion you guys launched today, if this is a regular way type set of promotions, if it's sort of, you know, new or if it's more offense or defense, and just any other ways that you'd like to share that, you know, you can activate the Caesars Rewards system here for any, you know, various pockets of softness that we might see in the next six to 12 months.

[Tom Reeg, CEO at Caesars Entertainment]

Yeah, this is a typical room sale that goes on every year, so there's nothing in particular to call out there. You know, we're running at 97%. July was 96.5% occupancy, so we don't have a lot of extra rooms to fill at this point. 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.

[Brandt Montour, Director and Equity Research Analyst of Gaming, Lodging, and Leisure at Barclays]

Great. Thanks so much.

[Operator]

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

[Tom Reeg, CEO at Caesars Entertainment]

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

[Operator]

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

Participants

Executives

• Anthony Carano, President and COO
• Brian Agnew, Senior VP of Finance, Treasury, and Investor Relations
• Eric Hession, Co-President of Caesars Sports and Online Gaming
• Eric Hession, EVP
• Tom Reeg, CEO

Analysts

• Barry Jonas, Managing Director at Truist
• Brandt Montour, Director and Equity Research Analyst of Gaming, Lodging, and Leisure at Barclays
• Bret Yunker, CFO at Caesars Entertainment
• Carlo Santarelli, Managing Director of Gaming and Lodging Equity Research at Deutsche Bank
• Chad Beynon, Managing Director at Macquarie
• Daniel Politzer, Equity Analyst at Wells Fargo
• David Bain, Managing Director at B. Riley
• David Katz, Managing Director at Jefferies
• Joseph Greff, Managing Director at JPMorgan
• Shaun Kelley, Managing Director at Bank of America
• Stephen Grambling, Analyst at Stifel