Caesars Entertainment Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

Key Takeaways

  • Consolidated EBITDA exceeded $1 billion in Q2 2023, with the Las Vegas segment earning $512 million (its 2nd best Q2 ever) at 97.6% occupancy, the regional portfolio at $508 million, and Digital turning profitable with $11 million of adjusted EBITDA.
  • The Digital segment delivered $216 million of net revenue and $11 million of EBITDA vs. a $69 million loss last year, driven by a 180 bp increase in sports-betting hold, 27% growth in iCasino volume, and four major technology rollouts.
  • Las Vegas trends remain robust thanks to strong leisure and international demand, a busy events calendar, and a Group & Convention pipeline that—despite tough comps—is pacing for a record EBITDA year.
  • Regional operations opened two temporary facilities in Danville, VA and Columbus, NE with strong demand, held steady despite new competition, and are seeing solid returns from capital projects at Lake Charles, Pompano, Harris Hoosier Park and a late-’24 New Orleans opening.
  • Balance-sheet strength improved by acquiring the remaining stake in Horseshoe Baltimore and repaying a $250 million Term Loan B, resulting in a ~7% average cost of debt, 4x leverage heading lower, planned CapEx drop after 2023, and accelerating free cash flow for potential external growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Caesars Entertainment Q2 2023
00:00 / 00:00

Transcript Sections

Skip to Participants
Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Agnew, Senior Vice President of Corporate Finance, Treasury, and Investor Relations.

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

Thank you, Josh. Good afternoon to everyone on the call. Welcome to our conference call to discuss our second quarter 2023 earnings. This afternoon, we issued a press release announcing our financial results for the period ended June 30, 2023. 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 Chief Executive Officer; Anthony Carano, our President and Chief Operating Officer; Bret Yunker, our Chief Financial Officer; and Eric Hession, 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 forward-looking statements about the company's performance. These forward-looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them.

Brian Agnew
Brian Agnew
Senior VP of Corporate 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, materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward-looking statements, you should 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 forward-looking statements to reflect events or circumstances that occur after today's call. During today's call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G.

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

The GAAP financial measure is 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 today's 2023 second quarter financial results. I will now turn the call over to Anthony Carano.

Anthony Carano
Anthony Carano
President and COO at Caesars Entertainment

Thank you, Brian, and good afternoon to everyone on the call. We delivered another strong quarter with consolidated EBITDA exceeding $1 billion. Operating trends within our property portfolio remain strong. Despite a tough year-over-year comparison, driven by a single large convention event, our Las Vegas segment delivered its second-best Q2 Adjusted EBITDA of $512 million. Our regional portfolio delivered $508 million in Adjusted EBITDA, down slightly last year. Finally, our digital segment reported $11 million of Adjusted EBITDA, the segment's first quarter of profitability since we rebranded the Caesars Sportsbook in Q3 of 2021. Underlying demand trends in Las Vegas remained strong during Q2, with occupancy growth of 100 basis points to 97.6%. Total Las Vegas segment revenues were down 1%, as a result of exceptional performance last year in our group segment.

Anthony Carano
Anthony Carano
President and COO at Caesars Entertainment

Excluding real rent payments, Las Vegas generated $523 million of Adjusted EBITDA, with a margin of 46.3%. Las Vegas continues to benefit from strong leisure and casino guest demand, the return of international guests, an exciting events calendar, and the continued strength of the group and convention segment in 2023. While our group and convention segment EBITDA in Las Vegas was down year-over-year in the second quarter, pace for the remainder of 2023 points to another record EBITDA year for the segment. In our regional segment, revenues were up slightly and Adjusted EBITDA declined 1% to $508 million. We were excited to open two new temporary facilities this quarter in Danville, Virginia, and Columbus, Nebraska. Both properties opened to strong customer demand.

Anthony Carano
Anthony Carano
President and COO at Caesars Entertainment

While we face new competition in a few markets during the quarter, customer demand trends remained stable and similar to prior quarters. Our capital projects continued to deliver solid returns. Lake Charles and Pompano delivered strong quarters. Early returns in Danville and Columbus are exceeding plan. We are excited to finish work on the Harrah's Hoosier Park expansion this fall and continue to make progress on the permanent facilities in Danville and Columbus. Work in New Orleans is progressing nicely, and we continue to target a late 2024 opening. Construction has started on the Versailles Tower rebrand in Las Vegas, which is expected to be completed by spring of 2024. Finally, we recently opened a new show in Atlantic City called The Hook, which was accompanied by the opening of Superfrico Atlantic City as well.

Anthony Carano
Anthony Carano
President and COO at Caesars Entertainment

We have solid momentum heading into the second half of the year as we continue to deliver strong returns on project CapEx, drive profitability in our digital segment, and remain focused on operational excellence in our property portfolio. I want to thank all of our team members for their hard work in the first half of 2023. Our success is a direct result of their dedication our team members have and their commitment to delivering exceptional guest experiences every day. With that, I will now turn the call over to Eric Hession for some insights on the second quarter in our digital segment.

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

Thanks, Anthony. During the second quarter of 2023, we delivered another significant improvement in the performance of our digital segment versus last year. Our business reported $11 million of Adjusted EBITDA on $216 million of net revenue versus a $69 million EBITDA loss last year. Results this quarter represent our first full quarter of EBITDA profitability since rebranding to Caesars Sportsbook in Q3 2021. During the quarter, sports betting hold improved 180 basis points versus last year, and iCasino volume increased 27% year-over-year. Our performance this quarter continues to demonstrate the effectiveness of our targeted promotional investment and overall lower level of marketing within our existing customer base, as well as customers located in the new states.

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

We have recently introduced four significant pieces of new and exciting technology improvements that we expect will be well received by our customers. First, our new iCasino product, Caesars Palace Online, is now live in multiple states and pending regulatory approval in the others. The new iCasino product offers a significantly improved product and enhanced marketing capabilities, all combined with the compelling benefits of Caesars Rewards. Secondly, we recently transitioned our Caesars app in Nevada to our flagship Liberty product, which delivers a significantly improved product for our customers. Pending regulatory approval, we anticipate converting our William Hill product and our retail Sportsbooks to the Liberty platform at some point later this year. Third, we've started out rolling our net-native iOS Sportsbook app and anticipate reaching 100% adoption in August.

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

The new native app is receiving consistently higher performance feedback and will result in faster loading speeds, improved stability, and enhanced development speed. Fourth, we're on track to introduce our in-house player account management system starting state by state later this year, which will ultimately lead to a shared wallet that we anticipate rolling out in 2024. These four products have consumed significant amounts of technical resources over the past year, and we're very excited to introduce them to our customers. We now offer sports betting in 30 North American jurisdictions, 22 of which offer mobile wagering. We also operate iCasino products in six jurisdictions. I'll now pass the call to Bret for additional comments.

Bret Yunker
CFO at Caesars Entertainment

Thanks, Eric. As you'll see in our earnings release and subsequent to the quarter end, we successfully acquired the remaining minority equity interest in Horseshoe Baltimore, which allowed us to fully repay its $250 million Term Loan B, yielding significant interest expense savings given its high cost of debt. Pro forma for its repayment and the most recent rate hike from the Fed, our average cost of debt sits just inside of 7%, with annual net cash interest expense of approximately $800 million, which is well positioned to decline going forward, given continued debt reduction alongside built-in spread adjustments tied to declining leverage in our loan agreements. CapEx spend is also expected to crest in 2023 at just over $800 million, with several growth projects being completed either later this year or in 2024.

Bret Yunker
CFO at Caesars Entertainment

Coupling declining interest expense in CapEx with continued EBITDA growth sets up for accelerating free cash flow dynamics going forward. Over to Tom.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Thanks, Brett. Thanks, everybody, for joining us today. I'm very happy with the quarter. Strong quarter again for us, starting in Las Vegas. You know, keep in mind, we were up against the strongest quarter that we've, we've ever had in Las Vegas. We were missing a large group that comes once every three years to Caesars properties. That was in last year's numbers, not in this year's numbers. We telegraphed that last quarter, so that was known. What you saw last week in the Nevada numbers was June hold in baccarat was not as strong as it, it was, it was in the prior year. You know, we participated in that. I don't particularly like to talk about hold, but it, it's notable enough that I should in this quarter. You know, we're in the gambling business.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

What we're looking for is the volumes to come through the property, and they came through. We just didn't hold in June like we did in the past June. Both the miss in that of the, of the group from last year and the hold impact in June are dilutive to margins. The obviously, the group business for us is accretive to our overall Vegas margin, and then clearly revenue that would flow with normal hold is accretive as well. So as you're looking at margins on a year-over-year basis, keep that in consideration. As we look at forward, forward in Vegas continues to look very strong. We had a strong July. We feel very good about the remainder of third quarter, and then fourth quarter, you've got Formula One, first quarter of 2024, you've got Super Bowl.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

I've said in the past, I think Formula One is a 5% lift, not including whatever happens at the tables, really just from increased hotel revenue, that hotel and food and beverage revenue, that still seems to be the right zip code for us. Demand for F1, particularly at the high end, has been very, very strong for us. We feel very good as to how we are positioned ahead of the event, and we're anxious, like everybody else, to see how this event plays in Las Vegas as we look to future years. Super Bowl 24 is exceedingly strong from a demand standpoint. Where we sit today in terms of booked capacity versus a typical Super Bowl. We are dramatically ahead of and at higher rates than typically at this time, ahead of the Super Bowl.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

If you just anecdotally look at who's going to be getting our tickets, the average customer that will, will come to the game with us is substantially more valuable than prior Super Bowls. Vegas remains very, very strong for us. It feels very good. Really no discernible impact in terms of any recessionary concerns, any concerns about the consumer as we look out. The only thing to call out, Anthony talked about the Jubilee Tower at Bally being converted to Versailles at Paris. We'd expect those rooms to be back online before the end of the year. We don't expect the entire project to be done until first half of next year, but there will be some disruption in that tower at Horseshoe now that we're underway.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

If you look at the regional portfolio, really, the whole quarter is a testament to diversification. You know, we had what I, what I'm talking about in terms of the, the group miss, the missing group in Vegas and the, the hold impact in June. In the regional business, we've got a number of properties that are under competitive pressure due to competitive openings. You know, I'd call out Tunica is facing a property that opened about an hour closer to Memphis. That has pressured Tunica. We've got Council Bluffs, has been a bit pressured by casino capacity being added in Nebraska. Then we have Chicago properties, both in Illinois and Indiana, that are impacted by the expanded casino offerings in Illinois that have come online and continue to come online.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

You know, on the other side of that, what we've got is the fruits of our capital investment cycle that we're, as Bret said, we're reaching, we're cresting and reaching the end of. You've got new property in Danville, you've got projects in, both Indianapolis tracks. You've got Lake Charles now open, you've got the Atlantic City spend, as a result, our regional EBITDA, despite an, a super strong comp, we're just about flat year-over-year, which I think is going to compare well with, you know, others that you'll see over the next couple of weeks. Again, as you look to third quarter, off to a strong start, we're comping against a, an extremely strong third quarter of last year in regional, and, you know, it looks like we'll be able to beat that this year through July.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

That's particularly encouraging for us. Now, flipping to digital, digital was a loss last year. You know, we've talked a lot about inflecting to positive and driving real EBITDA through that vertical, and it's spectacular to see our first full quarter of positive EBITDA, as Eric detailed. I laid out pretty specific targets in terms of where we can be in digital, looking out to 25 on our last call, and then I went to some conferences where a lot of you told me there's no way we'll get there. I would tell you, every number that I laid out 90 days ago or so, I'm 100% confident that we're going to hit them. You know, every metric that I look at going forward is at or above where we were 90 days ago when I laid out those targets.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

I tell you, I'm reiterating those targets as we look forward. Big, you know, on the tech side, those are big moves for us. It's very, you know, you put them in a list, and I don't really know that the impact is emphasized enough. You know, when we took over William Hill, William Hill had one employee working on iGaming. We were on old technology that was limited in a whole number of ways. We soft launched Caesars Palace Casino about two weeks ago. We're waiting on approval in a couple of jurisdictions that I expect any day now, and then you'll see a full launch of the product, but I'd encourage you to go take a look. It's a casino-first entry into our digital business.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

You know, in terms of capabilities, bonusing, segmentation, you know, proprietary games, live dealer, it is light years beyond what we've been operating under, that, as Eric said, grew iGaming revenue 27% in the quarter. We are fully aware that we have significant competition in the iCasino space. We, we don't expect that we're just going to come in and run everybody over, but we feel like we've got the product to start to build market share, and wrapping that into Caesars Rewards has been, and will continue to be, powerful for that business. You, you look at the quarter, second quarter of last year was the best second quarter that we ever had, the second-best quarter that we had ever had, and we topped it in EBITDA this year.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

You know, the, the turn in digital and regional holding its own offset the loss of that group in Las Vegas. This is exactly how we built this business, and, you know, it's, it's great to see it come together. One more point on digital, you know, moving to Liberty in Nevada is an enormous lift. You know, we were operating on the equivalent of a Commodore 64 computer in the old technology, and now we have the state-of-the-art Liberty app that we operate in all of our jurisdictions. This is a dramatic leap for us in Nevada.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

If you think about the Super Bowl happening and all of the visitors that will come to the state and our market position in the state, now we have the app to, that, that's competitive with what they've got at home, whether it's with us or somebody else, that's going to be a giant customer acquisition opportunity for us, so we're particularly excited about that. I would expect that 95% of our handle in Nevada will be on Liberty by the middle of this month, and virtually all of it by kickoff of football season. We feel really, really, this is our third NFL kickoff since we launched our digital business. In terms of how I feel heading into the season, I think we are very, very well positioned as we head in.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

You know, Bret talked about, you know, we continue to pay down debt. You know, conventional leverage now is around 4x and going lower. Would expect that to go lower. Given where we are in the capital cycle, where we are with the performance of the business, you know, we're starting to look at, you know, what do you do with the free cash flow that will be generated in 2024 and 2025, and is there a return of capital piece, or is there an external opportunity that, you know, could be interesting to us? I'd tell you, as, you know, sitting here today, three years after the Caesars transaction closed, you know, we're, you know, 30, 60 days beyond the first time where I'm feeling where we can be offensive from an external opportunity standpoint.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

It has been a long road to get through, you know, everything that happened with, you know, COVID, the merger. We really, really feel like we're on strong footing as we head forward. You know, the cash flow machine here is going to continue to accelerate as, you know, results continue to improve, digital continues to deliver, improving cash flow, interest expense goes down. We really feel strongly about where we sit today. With that, I'll open it up for questions from the audience.

Operator

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from Joseph Greff with JPMorgan. You may proceed.

Joseph Greff
Joseph Greff
Managing Director at JPMorgan

Good afternoon, everybody. Tom, given what you've said today, tonight, about Las Vegas trends, how aggressive of a scenario is it for you to experience year-over-year net revenue growth in the 3Q? I would imagine the answer for that, with respect to the 4Q is not aggressive, given that one booking. Then I have a follow-up on digital.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Yeah, Joe, we feel good about third quarter. You know, I'm looking at forward occupancy over the next three months, you know, in the range of, let's call it, 96%-98%, depending on the property. Feel very, very good about third quarter. One thing to keep in mind in Vegas is that I didn't touch on in my remarks, is Rio, we anticipate it will leave the portfolio October 1st. You know, as you're looking to kind of second and third quarter results at the Rio, that's a revenue producer, but a drag on EBITDA. It doesn't produce enough EBITDA to offset its lease payment in the second and third quarter. As that comes off in the fourth quarter, that'll be accretive to EBITDA and margins.

Joseph Greff
Joseph Greff
Managing Director at JPMorgan

Great. On, on digital, maybe this is a, a, a question for, for Eric, but whoever wants to answer it. How do you think about the conversion of OSB and i, you know, gross gaming revenues into net revenue, into next year? And then specifically on iGaming gross revenues, you know, we noticed it increased sequentially, with $80 million in the 2Q versus $75 million in 1Q. How do you think about the segment's growth going forward? Is iGaming presently EBITDA positive, and did it account for all or more than 100% of the 2Q EBITDA results? Thanks.

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

Yeah, sure. Maybe I'll grab this one, Joe. So from a reinvestment perspective, and you can see this in the Q that was published simultaneously with the call today. Our reinvestment levels as a percentage of volume was around 1%, and our reinvestment as a percentage of gaming revenues was around 22% in total. That's on the lower end, I think, from a percentage of volume, is where you'll see it going forward. The reinvestment for existing customers tends to be below that, and then depending on how many new customers we sign up, that'll bring that number up slightly, just generally because second quarter has fewer signups, given, you know, no football and no start of sports.

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

That range on a percentage of volume, I think, will range between that 1% and 1.25% kind of going forward. From a reinvestment perspective, that's kind of how I would think about it. From a volume perspective, from the iCasino side and just from a general business side, you know, as Tom mentioned, that's an area where we really feel quite optimistic about. We're finally gonna have a competitive product out in the market that we can use to work with our existing database, to have those customers that we know and that are loyal to the Caesars Rewards program move over to the online casino side.

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

It was difficult to have that discussion with the customers when they had to go through the sports betting app each time to get to the casino, and so they won't have that. In addition, you know, some of the things Tom also touched on, we haven't been able to really do segmented marketing in any degree so far with the existing tech that we had. The new system that we have will allow us to create segmentation, and it'll allow us to reinvest like we do on the casino side and to use a lot of those experiences. From that standpoint, when you look forward, we're very excited about the iCasino product and the ability to slowly grow some share, and ultimately drive the profitability of the business towards those targets that Tom laid out.

Joseph Greff
Joseph Greff
Managing Director at JPMorgan

Thank you.

Operator

Keep it up, positive. Thank you. One moment for questions. Our next question comes from Carlo Santarelli with Deutsche Bank. You may proceed.

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

Hey, guys. Good afternoon. Tom, obviously, kind of a little bit of a change in some of your thoughts around the ability to kind of be aggressive, as you put it, with external opportunities. Could you maybe talk a little bit about how you foresee needs or things that you think, you know, you guys could obviously do to enhance growth going forward, et cetera, and kind of the driver behind maybe that comment?

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Yeah. The key is we're getting toward the end of a capital cycle, right? As New Orleans runs off, we don't have the, you know, any of the chunky projects that we've had going really since the merger on our plate. You know, there's some meaningful projects in particular markets, but you're not looking at the $300 million, $400 million, $500 million capital outlays. From a balance sheet and cash flow perspective, you get to a point where you're going to be generating a lot of free cash flow, and you look at, what do I do with it? You know, we, as a team, have delivered a lot of value over the last decade to stakeholders through external opportunities, of course, we're going to look for that for potential future opportunities now that we're in a position to tackle those.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Don't read that as a lack of confidence in the growth potential of the existing portfolio. You know, as I said, last quarter, we're on a run rate of about a little over $4 billion of trailing EBITDA. We think there's $500+ million available to us in the digital business, and something similar to that in the brick-and-mortar business, as we get returns from the projects that have recently come online and are still to come online, and that should push us toward a $5 billion company.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

You know, as you look at what do I do with cash flow when, you know, paying down leverage might be generating diminishing returns in terms of shareholder value, then you start to think of, am I distributing that cash flow in some form or fashion, or am I putting it to work elsewhere? We've got a great track record of putting it to work elsewhere, so we'll explore that as we move forward.

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

Great, thanks. If I could, just one follow-up. As you guys think about, you know, the various moving parts in Las Vegas through the back half of the year, you, you obviously have the Rio, which, which you noted is coming out, that adds somewhere in the ballpark of 100 basis points to your, to margins. You have the, the, the labor negotiations that are ongoing, presumably. You know, obviously, then you have Formula One. Do you see the back half of the year as kind of being, it's flattish to, to, to up margins, kind of net over the, the last six months, a reasonable expectation?

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Yeah, I think that's a reasonable expectation, expectation, Carlo. Touching on the labor agreements, labor agreements, expired by contract at the end of May. We're operating under everybody on the Strip is operating under extensions. As we speak, there is work being done in terms of a new contract. I think that, you know, you're talking about complex stuff that takes a little while, but I'd expect that we'll have, you know, new agreements by the fall, and I'm not expecting a whole lot of drama around them.

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

Great. All right. Thank you, Tom. Appreciate it.

Operator

Thank you. One moment for questions. Our next question comes from Dan Politzer with Wells Fargo. You may proceed.

Dan Politzer
Dan Politzer
Director and Equity Research Analyst at Wells Fargo

Hey, good afternoon, everyone, and thanks for taking my questions. I wanted to touch on digital first. To the extent that the hold, I think you called out, was 6.4%. It was up 108 basis points year-over-year. How do you think about sports betting hold and growing it over time? What do you kind of see as kind of the guideposts as you kind of maybe get to that 2025 level where you would see that high EBITDA flow through?

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

It's a great question. I think we've made a lot of improvements over the last kind of year, year and a half, with respect to just the trading team getting more experienced, but also on the tech side. I think as we go forward, you know, you will continue to see a higher % of customers not betting straight wagers. Whether that's, you know, an in-play or a player prop or same-game parlay-type wagers that generally have a higher hold %, that's gonna contribute to the increase. I suspect at this point, we're probably gonna get to somewhere, say, 7.5%-8%, which I think is, you know, a reasonable expectation given where we see the mix of our business.

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

We do have a lower hold percentage here in Las Vegas and, and in Nevada, due to the size of the straight wagers that we take in the state, that'll drag it down a bit. Overall, I think, I think getting to that 7.5%-8% is a reasonable expectation.

Dan Politzer
Dan Politzer
Director and Equity Research Analyst at Wells Fargo

Got it. Then just pivoting, Horseshoe Baltimore, I know you, you know, acquired the remaining stake in that. I think Vici has a ROFR option on that, as well as one for Caesars Virginia. As you think about that deleveraging path, and things are obviously moving in the right direction, can you maybe talk about other ancillary options as it relates to your regional portfolio and the possibility that there's, you know, maybe an avenue with Vici where you can get a bunch of cash in the door?

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Yeah. Look, Dan, I'm not short on cash, that's really not something I'm targeting. There are ROFRs on both Baltimore and Virginia. I wouldn't anticipate either being exercised.

Dan Politzer
Dan Politzer
Director and Equity Research Analyst at Wells Fargo

Understood. Thanks.

Operator

Thank you. One moment for questions. Our next question comes from Steven Wieczynski with Stifel. You may proceed.

Steven Wieczynski
Steven Wieczynski
Managing Director at Stifel

Hey, guys. Good afternoon. Okay, Tom, following up on Carlo's question, we, we now have gotten a bunch of questions from investors about, you know, your commentary that, you know, you would take this, this excess free cash flow, and in your words, you know, put it to use, elsewhere and have a great track record of doing that. Not sure what else you might say there, but can you elaborate a little bit more on maybe just what that means, and maybe also give us some examples of that?

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Short answer is no. I, I, I won't give you, except maybe I'll-- maybe we'll buy Stifel. Steve, it's-

Steven Wieczynski
Steven Wieczynski
Managing Director at Stifel

Good.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

You know, you know who's out there. You know what's possible. You know that there are, you know, at our size, it's not as easy to find targets that, A, move the needle and, B, are actionable from an antitrust perspective, but there's not zero targets available out there. You know, as we get to the free cash flow levels that we get to, given what we have generated in the past in terms of returns, it shouldn't be surprising to anybody that we're gonna look for opportunity to do that again.

Steven Wieczynski
Steven Wieczynski
Managing Director at Stifel

Okay. I didn't think you'd give me much of an answer, but that's, that's great. I hope you do buy us, then I can come deal craps for you in one of your casinos. The second question, you know, Tom, you talked about June in Vegas. You know, you had the negative hold you witnessed across, you know, baccarat play. I-- look, I, you know, I know high-end isn't super, super important to you guys, but can, can you just give us any color around what you're seeing, business, especially on the international front, and, you know, maybe how those folks, you know, have or will, you know, be coming back into the market?

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Yeah, Ben, it has been very strong. From a volume standpoint, our volumes at the high end, both domestic and international, continue to build. We've put in quite a bit of effort. You know, Caesars had a very strong international business when we arrived. Unfortunately, those players weren't traveling. It's great to see that come back. You know, in the interim, we've continued to build on the domestic business. You know, to give you an anecdotal idea, Steve, I get a hit sheet every day, and in 2021, I, you know, if I looked at it on a Saturday or Sunday morning, there might be one player there. That was a significant swing at our results.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

On a typical Saturday, Saturday, Sunday, I've got five to 10 players that are, you know, at a minimum, several hundred thousand dollar line of credit, so you've got a much more balanced book. You've got a lot more volume, so it's really continued to build. Obviously, you know, events in the second half or, you know, in, in the fourth quarter with F1 and the first quarter with Super Bowl are fantastic high-end events. As I said in my remarks, you know, demand for both of them at the high end is extremely encouraging, you know, several months out.

Steven Wieczynski
Steven Wieczynski
Managing Director at Stifel

Okay, gotcha. Thanks, Tom. Really appreciate it.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Yeah.

Operator

Thank you. One moment for questions. Our next question comes from Stephen Grambling with Morgan Stanley. You may proceed.

Stephen Grambling
Stephen Grambling
Managing Director at Morgan Stanley

Hey, thanks. Two follow-ups. First, on the digital side, I think I heard you say, there's some planned investment into the Caesars Palace app. Does that mean that we should be anticipating, you know, a step up in marketing and increased promo spend on iGaming in the near term?

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

You should expect us to be visible in terms of promoting the app, but nothing anywhere close to what you saw when we launched the sports app. I would describe us right now in iCasino as, and for the last couple of years, as invisible from a marketing standpoint. It will become visible in the next month or so, but that's in all of the guideposts and markers that I've given you. You know, you should be expecting third quarter, you know, for the digital business, as I said before, is a coin flip as to which side of breakeven we're on, but we should be close. The fourth quarter should be a significantly positive quarter. Then we should be positive from then on out.

Stephen Grambling
Stephen Grambling
Managing Director at Morgan Stanley

That's helpful, and, and my follow-up, is just taking one more crack, at it on the going on offense comments. Is, is that comment more directed at domestic or international, and do you generally view that more on the digital or physical casino side? Thanks.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

We are not, obviously, we have Canada as a property we manage internationally. We're entirely domestic at this point, but we are economic animals. If there's something that were to make sense outside the U.S., we're willing to get on a plane, but I would expect it would be domestic, and I'm not thinking about a big digital acquisition.

Stephen Grambling
Stephen Grambling
Managing Director at Morgan Stanley

Fair enough. Thanks so much.

Operator

Thank you. One moment for our next question. Our next question comes from Brandt Montour with Barclays. You may proceed.

Brandt Montour
Brandt Montour
Director and Equity Research Analyst at Barclays

Hey, good evening, everybody. Thanks for taking my question. Tom, just maybe some thoughts on the broader sort of U.S. leisure trends. You, you sounded obviously confident that you're not seeing any type of recessionary, you know, activity or anything. There's just a, a lot of sort of crosswinds and lumpiness across, you know, the broader lodging landscape at the low end, and there's been a lot of talk from other hotel operators, called, you know, calling it normalization. Just curious if you think you're seeing any normalization in Las Vegas, and if there's any difference at the low end of your database or of your properties versus sort of the middle, more maybe the middle tier.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Yeah, Brent, we're not really seeing anything I can speak to that's material in terms of softness at any level of property. The only property that, you know, if you're looking at the next quarter, I'd expect to be soft is the Rio, and that's because we're transitioning out of the property, and a lot of the rated business has already come out of there. That's obviously unique to that particular property. It, it feels really strong out here. I'm out, you know, we're out here today. Volumes are, you know, as they've been for a year and a half now, continue to be very strong. As I told you, I'm looking at forward occupancies, depending on properties, at 96%-98%, so it's really hard to tell you anything that would give you a bearish stance on Vegas.

Brandt Montour
Brandt Montour
Director and Equity Research Analyst at Barclays

Great, that's super helpful. Maybe just in Atlantic City, curious if you, if you want to comment on, on how that's performed sort of through peak summer here. I think you're sort of disruption-free this summer, sort of versus your underwriting or expectations heading into the season.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Yeah, we are disruption-free really since right before July 4th. We are finishing up the entrance to Caesars Palace. I was out there for the opening of The Hook and Superfrico, and, you know, really pleased with the way the renovation work has turned out. All that's left is the Nobu Hotel tower at Caesars, which should be done by the end of the year. Yeah, I would say in terms of expectations, you know, Atlantic City is not as strong as I would've hoped it would be, but it's fine. Yeah, obviously, it's within that regional business that was flat in 2Q, and I'd expect to grow a little bit in 3Q.

Brandt Montour
Brandt Montour
Director and Equity Research Analyst at Barclays

Perfect. Thanks, everyone.

Operator

Thank you. One moment for questions. Our next question comes from Shaun Kelley with Bank of America. You may proceed.

Shaun Kelley
Shaun Kelley
Senior Research Analyst and Managing Director at Bank of America

Hi, thank you for taking my questions. Maybe first for just Eric, just wanted to ask about on the digital side, maybe at a very high level, could you help us think about, you know, as your expense base is increasingly normalized and, you know, you continue to get your product roadmap where you want it to be, how do you kind of think about flow-throughs in the digital business of sort of perccent changes in revenue to EBITDA? You know, what sort of, you know, either, kind of a directional amount that, that makes sense, or, or could you help us think about some of the key levers or line items that, that you could drive improvement from, just as we get out into kind of 2023, 2024, and beyond?

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

Yeah, sure. I think, you know, if you, if you go back to the prior discussions and calls we've had about the reductions in some of the expenses that we're currently incurring, that we don't think will be, you know, burdened with going forward from either, you know, the marketing, the team deals, some of the other fixed expenses like that, you can see those rolling off over time. In terms of the, the balance of the expenses, I think those are gonna, you know, might increase a bit, like labor and some of the others. Broadly speaking, the true variable expenses that we have are really, you know, taxes, the reinvestment levels, and then super variable things like credit card processing fees, and so forth.

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

In aggregate, those should be around 50%, so that once you break the break-even level, like we have this past quarter and going forward, you should see quite strong flow-through on every incremental dollar that we get. Then for the next two years anyway, it'll be juiced by the falloff of the fixed marketing expenses that we currently have in the cost structure.

Shaun Kelley
Shaun Kelley
Senior Research Analyst and Managing Director at Bank of America

50% on variable and, and possibly greater than that when we factor in some of those, those fixed expenses, if I'm kind of summarizing that right. Does that make sense?

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

Yeah, I think that's a good way to look at it. You know, if you look at this quarter, it's over 100%. That's because we're cutting, you know, more dramatically than I would anticipate going forward on that fixed side.

Shaun Kelley
Shaun Kelley
Senior Research Analyst and Managing Director at Bank of America

Great. No, it, it makes a ton of sense. Thank you for that.

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

Yeah.

Shaun Kelley
Shaun Kelley
Senior Research Analyst and Managing Director at Bank of America

Then, you know, one sort of bigger picture one, for, for Tom, but, you know, Tom, you, you kind of mentioned in the prepared remarks a little bit about, your longer-term goals from 90 days ago and, and standing by those. I just, I just sort of wanted to kind of hit it specifically. Was there, like, something specific you had in mind, and, and maybe I'm just not in on the, on either the comment or the, or the joke? Just was there a specific area was that really directed at free cash flow? Was that directed at the 50%, you know, return on, you know, digital investment, sort of all of the above?

Shaun Kelley
Shaun Kelley
Senior Research Analyst and Managing Director at Bank of America

Was there just something you were specifically trying to kind of get across relative to where we sat, you know, 90 days ago?

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

No, it's all of the above. Three years ago, we told you we think we could generate better than 50% annual EBITDA return on the cumulative losses we generate in building the business. We got to about $1.1 billion of cumulative loss before we inflected to positive, which suggests $500 million, a little over $500 million of annual EBITDA at maturity, which I defined as, you know, sometime in 2025. You know, when I laid those markers out last quarter, I got some skepticism back, and I would tell you, 90 days later, I'm even firmer in my conviction that we'd meet or exceed those numbers in that time frame.

Shaun Kelley
Shaun Kelley
Senior Research Analyst and Managing Director at Bank of America

Thank you very much.

Operator

Thank you. One moment for questions. Our next question comes from Barry Jonas with Truist Securities. You may proceed.

Barry Jonas
Barry Jonas
Managing Director at Truist Securities

Great. Good afternoon. MGM just announced a comprehensive deal with Marriott. I know you guys have a partnership with Wyndham. Curious how you think about your overall positioning here.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

I feel fine. Those, those types of partnerships are useful from a loyalty branding perspective for the databases. You know, at the scale of the company that we've got, there's nothing out there that we're missing that I expect would materially move the needle for us.

Barry Jonas
Barry Jonas
Managing Director at Truist Securities

Great. Then, you know, Q3 last year, we were talking a lot about rising energy costs. Curious to get the impact this quarter, and I'm also wondering how the heat maybe affected player visitation, if at all.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Yeah. You're remembering correctly, August, September last year, in particular, we had some unhedged utility costs, primarily in Nevada that bid us, we're in a much, much better position over the next 60 days, the same 60 days as last year. I expect those costs to be lower. You know, in terms of weather, there's I can certainly probably come up with weather that impacted us in various places during the quarter. Obviously, it's very hot everywhere recently, but there's nothing to point to as a reason for particular weakness or strength in our markets based on the weather recently.

Barry Jonas
Barry Jonas
Managing Director at Truist Securities

Great, thanks so much.

Operator

Thank you. One moment for questions. Our next question comes from David Katz with Jefferies. You may proceed.

David Katz
David Katz
Managing Director at Jefferies

Hi, evening, everyone. I, I'd like to just go back to the digital, if I may, and just, you know, looking at the Q and reflecting back on some of the discussions we had about some of the, you know, media partnerships, et cetera, there are still some meaningful commitments, capital-wise, in terms of those costs. If you could shed a little light on how much of that starting to roll off is important for, you know, hitting these targets, these profitability targets, versus how much of it is just execution on getting the new apps rolled out and, you know, doing the business.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Yeah, we've talked in the past about, you know, going from zero to 500, kind of a three-legged stool with each leg similar in terms of impact. You know, one is continued execution in the OSB arena that we've discussed in terms of continuing to grow, continuing to drive EBITDA there. The second piece is our iCasino share moving toward our OSB market share. Then the third piece is the roll-off of partnership and talent contracts over the next three years.

David Katz
David Katz
Managing Director at Jefferies

Those are relatively equal in size?

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Yeah, I would say of the three, just basic blocking and tackling is the largest, but it's not dramatically.

David Katz
David Katz
Managing Director at Jefferies

Yeah.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Large as the other two.

David Katz
David Katz
Managing Director at Jefferies

Got it. Okay, and if I may, as my follow-up, just focusing on the regional business and trying to think through, you know, what, what it's becoming, where, you know, we look at CapEx, and we're always a little sensitive to CapEx that may give the appearance of being defensive as, you know, competition ramps up, you know, pretty much across the regions. I suppose what I'm asking is: Is this what it is, where, you know, it's not going to be a lot of growth? You know, there'll be some capital redos that are necessary at some point, but, you know, for the most part, right, or what we're looking at today kind of is what it is, to, to repeat myself a little bit.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Look, that's really a macroeconomic question. Obviously, if you had asked that question five years ago, none of us saw what was coming, you know, from a virus standpoint and the structural improvements in the business in response to that. It's hard for me to say, you know, yeah, this just is what it is as far as the eye can see. You know, we always do 52 quarterly reviews each quarter, where we're going through the P&L of each individual business with the leaders, and we are in properties that we have improved, you know, 2 and 3x in EBITDA, we still see opportunity to continue to grow as we move forward. We don't view this as there's not growth available to us in the regional portfolio.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Then obviously, we've got project spend that comes online, you know, and I'd be careful in lumping, you know, defense. There's, there's varying levels of defense, right? If I'm in a market where my property is just hasn't been touched in a long time, and that's impacting my performance levels, I can certainly see a case where you put in some money to change that, and you may characterize that as defensive. I think that's growth from where you're starting from. Now, if you take a case of, you know, a property that, you know, let's use our Tunica property as an example. If a property opens an hour closer to the feeder market, there's very little I can do from an investment standpoint that's going to change that outcome. These are convenience-based properties to begin with.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

That was the realization that led us to changing the subsidies all the way back in the MTR days. You know, I don't view it as a mistake if and I'm not referring to us. I see others that are investing in properties that have been around a long time, but they're behind now, based on what's brought to market. You know, you can choose to continue to erode and see what you can do cost-wise, or you can say, "I'm gonna put some money in this and change my fortunes." You know, I can see people making different decisions, say, faced with similar circumstances.

David Katz
David Katz
Managing Director at Jefferies

Okay. Thank you for the fond memories of MTR. Appreciate it.

Operator

Thank you. One moment for questions. Our next question comes from Chad Beynon with Macquarie. You may proceed.

Chad Beynon
Chad Beynon
Managing Director at Macquarie

Afternoon. Thanks for taking my question. You've gotten a lot of digital, I wanted to pile on that. We, we get a lot of questions around live dealer, given how big the demand is in Europe and, and the market cap of the leading player over there. Eric, maybe for you, as it relates to your optimism around iGaming in general, is this expected to be a major piece of the business going forward? Given, I guess, the branding, the marketing, you know, some of the IP that you have, would you consider doing this in-house or use third-party exclusive vendors, to have the Caesars experience? Thanks.

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

Yeah, sure. You know, I'd say it, it's definitely gonna be a major part of the business going forward. If you look at our current Sportsbook app, which is, or sorry, the casino app, which is part of the Sportsbook, we have a disproportionately high percentage of table games action versus slot action, and thus, a high percentage of the live dealer, just because of that, larger denominator on the table games side. Going forward, the standalone Caesars Palace app is going to have a higher percentage of slots business than table, but it's still going to have live dealer. Of the overall table games, we do expect that live dealer product to be a sizable percentage. Going forward, it's absolutely a key component of the business.

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

I would say, previously, we haven't had as much exposure to that. We haven't had branded games. We haven't had dedicated games. We haven't had a lot of the product that's out there. Just we haven't incorporated it into the app, which we will on the new Caesars Palace app. In terms of the question about doing it in-house or through a third party, we're definitely gonna wanna have some branded, customized games, but I don't see us bringing it in-house at this point, anywhere in the near future.

Chad Beynon
Chad Beynon
Managing Director at Macquarie

Okay, thanks. Appreciate it. Then just in terms of legislation that we should be keeping an eye on, I believe North Carolina is out there, potentially talking about some expansion of land-based gaming, and then on the iGaming front, you know, that'll probably roll into Q1 of 2024. Anything else that we should be watching or you're keeping an eye on, you know, in the legislative session? Thanks.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Not in particular. I mean, from a jurisdictional standpoint, the most relevant to us in the near term is New York land-based license issuance, and that's, we're deep into that and hopeful.

Chad Beynon
Chad Beynon
Managing Director at Macquarie

Thanks, Tom. Appreciate it.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Thanks, Chad.

Operator

Thank you. One moment for questions. Our next question comes from John DeCree with CBRE. You may proceed.

John DeCree
John DeCree
Head of Institutional Investor Research at CBRE

Hi, everyone. Thanks for taking my questions. Maybe one for, for Bret Yunker on the balance sheet. You mentioned in your prepared remarks. What was the, the decision to pull the trigger on Horseshoe Baltimore? Obviously, the, the cost of debt made sense, but the timing, was it, you know, contractual? The, you know, was it a negotiated or the parameters of that buy out of your partner, something that you guys just, just kind of did on your own? I don't know if you could share what you paid for, for the minority interest.

Bret Yunker
CFO at Caesars Entertainment

Yep. On the minority interest, you know, always we're opportunistic around pulling in assets at the right valuation. We, we took that in for a little under $70 million. You'll see that in the Q. And once we collapsed and owned 100% of it, you look at that cost of debt, the term, Term Loan was pre-payable at par, and was mid-9s on the interest rate with our nearest maturity. In my land, that's called a no-brainer in terms of what to repay next with our free cash flow.

John DeCree
John DeCree
Head of Institutional Investor Research at CBRE

All right. Perfect. Thanks for the detail. Then maybe one for Tom or Eric. You've got to cover a lot of ground on digital, but it looks like a pretty successful World Series of Poker for you. Obviously a great, a great brand. I know online poker, you know, isn't a big industry right now, but it's, you know, it's kind of one of your strong suits. As you think about your iGaming business going forward, are there some opportunities on the poker side and with the World Series of Poker brands that you could see going forward?

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

Yeah, look, you're, you're absolutely right. It was a all-time record World Series of Poker, you know, both from a prize money perspective, participants perspective, but also from the ability to really provide contribution to the properties that hosted it. You know, we moved it to the Horseshoe last year, so it's kind of the first year that it was branded as a Horseshoe, and it really drives a lot of activity to the property, a lot of food and beverage, a lot of hotel revenues. It's really great for us from a portfolio perspective, in addition to the direct revenues that it drives to the, to the, you know, from the, the actual tournament itself.

Eric Hession
Eric Hession
President of Caesars Sports and Online Gaming at Caesars Entertainment

From an online perspective, we really don't see much movement in terms of new states legalizing, so it's, it's kind of a business that is kind of flat at this point. It, it vacillates between going up and down based on, on how customers go. From a brand perspective, we think it's definitely accretive to the company and does provide these incentives for customers to come to the brick-and-mortar locations for the tournaments.

John DeCree
John DeCree
Head of Institutional Investor Research at CBRE

Got it. Thanks, Eric. I appreciate the color.

Operator

Thank you. I'd now like to turn it back to Tom Reeg for any closing remarks.

Tom Reeg
Tom Reeg
CEO at Caesars Entertainment

Thanks, everybody, for your time, attention, and support, and we will talk to you in November if we don't see you at a conference sooner.

Operator

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Executives
    • Brian Agnew
      Brian Agnew
      Senior VP of Corporate Finance, Treasury, and Investor Relations
    • Anthony Carano
      Anthony Carano
      President and COO
    • Eric Hession
      Eric Hession
      President of Caesars Sports and Online Gaming
    • Tom Reeg
      Tom Reeg
      CEO
Analysts
    • Bret Yunker
      CFO at Caesars Entertainment
    • Joseph Greff
      Managing Director at JPMorgan
    • Carlo Santarelli
      Managing Director of Gaming and Lodging Equity Research at Deutsche Bank
    • Dan Politzer
      Director and Equity Research Analyst at Wells Fargo
    • Steven Wieczynski
      Managing Director at Stifel
    • Stephen Grambling
      Managing Director at Morgan Stanley
    • Brandt Montour
      Director and Equity Research Analyst at Barclays
    • Shaun Kelley
      Senior Research Analyst and Managing Director at Bank of America
    • Barry Jonas
      Managing Director at Truist Securities
    • David Katz
      Managing Director at Jefferies
    • Chad Beynon
      Managing Director at Macquarie
    • John DeCree
      Head of Institutional Investor Research at CBRE
Powered by Quartr