Yahoo Finance Caesars Entertainment, Inc. (NASDAQ:CZR) Q1 2024 Earnings Call Transcript
Caesars Entertainment, Inc. (NASDAQ:CZR) Q1 2024 Earnings Call Transcript April 30, 2024
Caesars Entertainment, Inc. misses on earnings expectations. Reported EPS is $-0.73148 EPS, expectations were $-0.03. Caesars Entertainment, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by and welcome to Caesars Entertainment Inc. First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder today’s program is being recorded. And now I would like to introduce your host for today’s program Brian Agnew, Senior Vice President of Corporate Finance, Treasury and Investor Relations. Please go ahead.
Brian Agnew: Thank you, Jonathan, and good afternoon to everyone on the call. Welcome to our conference call to discuss our first quarter 2024 earnings. This afternoon, we issued a press release announcing our financial results for the period ended March 31, 2024. A copy of the press release is available in Investor Relations section of our website at investor.caesars.com. As usual, joining me on the call today are Tom Reeg, our CEO; Anthony Carano, our President and COO; Bret Yunker, our CFO; Eric Hession, President, Caesars Sports and Online Gaming; and my colleague Charise Crumbley in Investor Relations. Before I turn the call over to Anthony, I would like to remind you that during today’s conference call, we may make certain forward-looking statements under safe harbor federal securities laws, and these statements may or may not come true.
Also during today’s call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G. Please visit our press releases located on our Investor Relations website for a reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure. I will now turn the call over to Anthony.
Anthony Carano: Thank you, Brian, and good afternoon to everyone on the call. During the first quarter, consolidated net revenues of $2.7 billion declined 1% and total adjusted EBITDAR of $853 million declined 10% year-over-year. We faced several transitory issues during the quarter, including low table hold in our Las Vegas segment and inclement winter weather in our regional segment, plus a loss on the launch of sports betting in North Carolina. Despite these transitory issues, there were several bright spots during the quarter, including record Q1 occupancy in Las Vegas driven by strong visitation, 23% OSB net gaming revenue growth and 54% iCasino net gaming revenue growth in our digital segment and sequential improvement in operating results in our regional segment each month during Q1.
Despite the hold related headwinds in Las Vegas during the quarter, our Las Vegas segment delivered $440 million of adjusted EBITDAR, which is the second best Q1 on record. Occupancy in Q1 reached 97.6%, a new Q1 record, which also drove a record for Q1 cash hotel and food and beverage revenues during the quarter. In our regional segment in Q1, we delivered $433 million of adjusted EBITDAR down 3% versus last year, driven by unfavorable winter weather during the first six weeks of the quarter. Regional trends improved each month throughout the quarter with March delivering positive revenue and EBITDAR growth. Similar to prior quarters, outside of the negative weather impacts, we continue to face new competition in a few markets and construction disruption in New Orleans, which was partially offset by our new temporary facilities in Danville, Virginia and Columbus, Nebraska.
Turning to CapEx. In 2024, we will finish several construction projects that we expect to generate strong returns and will complete an elevated CapEx cycle for the company. The permanent facility in Columbus, Nebraska will open on May 13, construction in New Orleans should finish by Labor Day and the permanent facility in Danville is expected to open by year-end. All three of these projects will deliver strong returns on capital to drive growth in our regional segment. I want to thank all of our team members for their hard work so far in 2024. Our strong results are a reflection of their dedication to delivering exceptional guest service. With that, I will now turn the call over to Eric Hession for some insights on the first quarter performance in our digital segment.
Eric Hession: Thanks, Anthony. Caesars Digital delivered $282 million in net revenues, up 19% year-over-year and generated $5 million of adjusted EBITDA during the quarter. Results in our digital segment were driven by strong momentum in both Online Sports Betting and iCasino during the quarter. As Anthony mentioned, online sports betting net revenues grew 23% and iCasino delivered 54% net revenue growth. The strong performance in these two verticals was offset slightly by declines in our retail and other segments. In our online sports betting segment during the quarter, hold increased roughly 80 basis points year-over-year. However, despite the increase, it was at the lower end of our expected range due to less favorable results around Super Bowl and March Madness.
Despite the unfavorable large event outcomes, parlay mix improved approximately 400 basis points year-over-year during the quarter, driven by our improved user interface and pricing uptime. Higher parlay mix gives us confidence in our ability to continue to improve holds throughout 2024 and beyond. iGaming set new quarterly records for active customers, volume, GGR and net gaming revenue driven by the success of our new Caesars Palace Online app, which despite only launching roughly seven months ago, now makes up more than 50% of the net gaming revenues in this segment. Customers continue to respond favorably to the product interface, game content and improved loyalty marketing. iCasino remains a critical component of our digital growth strategy for 2024 and beyond.
During the quarter, we also successfully launched mobile sports wagering in North Carolina. We are encouraged by the early results and have signed up new customers at a faster pace than prior state launches, translating into a higher, initial market share. We remain focused on several key priorities for the remainder of the year. On the sports betting side, work continues on our proprietary TAM which will enable shared wallet across state lines. We expect to deliver this important functionality across all the jurisdictions in which we operate by the middle of 2025. We will also continue to improve our product on the sports betting side, enhancing our same-game parlay, live wagering and internal pricing. On the iCasino side, we will continue to add additional game content and functionality and are on track to launch our new iCasino brand in the second half of 2024.
We now offer sports betting in 31 North American jurisdictions, 26 of which offer mobile wagering. I’m very pleased with the progress we made this first quarter. Excluding the effects from new state launches, our net revenue flow through to EBITDA was over 50%, consistent with our expectations and setting the stage for continued profitable growth in the years ahead. Now I’ll turn it over to Bret.
Bret Yunker: Thanks, Eric. We had an active first quarter on the capital market side, refinancing $4.4 billion of parent-level debt, eliminating the CRC credit entity and extending debt maturities to 2031 and beyond. On April 26, we closed on a new $425 million bank financing at the joint venture level for our Danville property. This facility will be used to cover all remaining CapEx requirements for the permanent casino that is expected to open in December. 2024 CapEx, excluding our Danville JV, is expected to be $800 million. We look forward to using strong free cash flow generation to continue to repay debt and reduce leverage toward our stated goals. Over to Tom.
Tom Reeg: Thanks Brett. We are not in the habit of delivering quarters that look like this, so I want to go through detail on how we got there and want to talk about whether anything fundamental has changed in the business. This is the kind of answer the questions I would have if I was in your seat. If you look at the biggest buckets, this was kind of a kitchen sink type quarter for us. Everything that could go wrong did for us. The biggest pieces are hold in Las Vegas, weather across the country that was well understood and you’ve seen with others and then losses around the launch of North Carolina in digital. There is others that I will touch on that are more minor, but there is well over $75 million of what’s clearly one time negatives for us in the quarter.
So if I look at kind of the, where we came out of the quarter and the way the business was operating fundamentally during the quarter, it looks more, in my estimation, like a flattish quarter, notwithstanding the EBITDA that we posted. Starting in Vegas, our typical hold is range of 20% to 23% tables in Vegas, we were 15% for the quarter. So 500 to 800 basis points below normal range, midpoint of that is 650, and that’s on 850 million of drop. So you can see that’s a very, very large piece of what of the shortfall in the quarter. This is – table hold is a typical bell curve. We were certainly in the second standard deviation to the negative. We are completely comfortable that this reverses over time. You will have quarters that are the reverse.
I am sure you – as you are listening, you can think of some in recent history that were two standard deviations to the positive. Unfortunately, not for us, but our time will come. This was not an instance of a few players beating us, this was kind of a repeated butt kicking, broadly based throughout the quarter. If you look at our volumes, slots were about flat. As Anthony said, Hotel and F&B hit set first quarter records, and both Hotel and F&B overcame – the revenue overcame the increases in union cost to deliver more profitability to us. So volumes were great. People are still here. We just didn’t hold. And if you think about running these properties at over 97% occupancy, you are fully staffed. There is no opportunity to make up hold.
So it’s particularly negative on the operating leverage side when you don’t hold. We have the additional impact of Adele and Colosseum, shifted dates from March into the fourth quarter that impacts this quarter, but that’s revenue and EBITDA that we will pick up in the fourth quarter with the rescheduled dates, so largely a nonevent other than in this quarter’s numbers. If we look at forward, as we sit here today, I’m looking at April, May, June, each month is forecast at 98% occupancy in the market. Our cash rates are depending on the month, up 8% to 14%. So Vegas remains very, very strong. I’m not a guy who likes to talk about hold. So I’m hoping this is the last time I talk about it this year. But if you presume normal hold and what we see in front of us on a forward basis, I would expect Vegas to grow for each of the last three quarters of the year.
We’re in about a little over $70 million hold out of the quarter. I don’t know that we’ll make up that entire $70 million that probably needs hold benefit on the right side of the range, but I’d expect we’re eating at that throughout each quarter the rest of the year. Moving to Regionals. We were down 3%. As I said, weather was a significant impact that everybody knows about. Absent weather, Regionals would have been up year-over-year for us. We are particularly optimistic about the rest of the year, particularly the second half, continue to believe that Regionals will grow on a full year basis for us. Anthony talked about New Orleans and Danville coming online to give you an addition to Columbus, Nebraska, which will start cash flowing in the next couple of weeks.
So that’s dollars we’ve spent that has no EBITDA attached to it until it opens two weeks from now. But if you start in Danville, that’s a property that’s operating in a temporary structure at the highest win per unit numbers in our entire system, which reflects unmet demand. We almost double our capacity when we opened the permanent facility at the end of the year. That’s – that will be dilutive to margins because the permanent facilities – I’m sorry, the temporary facility is operating in excess of 60% margins, but it’s accretive to overall EBITDA. And then if you think about New Orleans, as that opens Labor Day and you think about returns, recall that the way New Orleans runs its gaming tax regime in the City of New Orleans.
There’s a flat tax until you reach a certain level of gaming revenue. As we sit here today on an LTM basis, we’re about $75 million below where that property moves to a variable rate versus a flat tax. So if you think about it in terms of returns on the project, the first $75 million of incremental gaming revenue generated has no incremental gaming tax to us. So obviously, as extraordinarily high flow-through. So that’s Regionals in Vegas. One more thing on Regionals. If you think about trajectory, Regional EBITDA in January for us was down more than 20%, in February was down about 4% and in March was up about 10%. And if you look at this quarter, it’s hard to talk much about April in terms of predictive effect since April is the least important month of the second quarter, but we feel good about the quarter and the rest of the year.
Digital – an exciting story for us I may be repeating some of Eric’s numbers, but if you look at Digital, North Carolina for us was a much more successful launch in terms of customer acquisition than we were anticipating. And then what we have seen in recent states, we didn’t make any change to how we promoted into it. It’s really a comment on the strength of our database in North Carolina. But our first month market share was almost 9% of the market, which is about 3x what we’ve been doing in other new launch states. So as a result, North Carolina was negative 11% of net revenue in the quarter and negative $20 million of EBITDA. So if you strip out that launch, we were $25 million of EBITDA. OSB revenue was up 33% and iCasino, as Eric said, which was not impacted by North Carolina was up 54%.
So tremendous momentum in Digital for us in the quarter, and that was despite, as others have talked about March Madness, Super Bowl were not great from a hold perspective, our hold was up, our parlay percentage was up over 20% versus the same quarter last year. So our efforts to increase our hold are bearing fruit. As you can see, we are almost 100 basis points better in the queue, despite poor sports outcomes. On the Caesars Palace’s online launch, as Eric said, we’re now in our seventh month post-launch and that business is already doing more than 50% of our revenue in iCasino. It’s doing exactly what we anticipated in terms of creating an iGaming customer base that looks like our database, looks like our database looks like our physical floors, SKUs female, SKUs to slots, you should expect us to continue to build on that momentum.
We’d anticipate launching a second brand very similar to the first before the end of the year. That should allow us to continue that momentum. There’s been a lot of talk for a lot of quarters about, gee, can you get to $500 million? I’ve talked about the legs of the stool that get us there. If we look at it in a different way, in terms of what I see as I look at how we build this business, we did $1 billion of net revenue in digital in 2023. We reported $40 million of EBITDA on a hold adjusted basis fourth quarter, that’d be $60 million, whether you use $40 million or $60 million, start there. The industry is growing at 30% this year. We’re growing. We should be growing at least at that given our iGaming is growing considerably faster than the market.
As Eric said, our flow through was in excess of 50% in this quarter. So if you take the billion, you have us grow at the market level and you flow that through, it’s very easy for you to do that math. If you do that again in 2025, that should get you to something like $1.7 billion of revenue and something over $400 million in EBITDA. That does not include any benefit from the partnerships that roll off in the 2024, 2025 time frame. That’s how I get to the $500 million target in 2025 that very few of you believe that I see as really simple math and continuation of what’s already happening in this business. If you want to quibble with me whether $500 million is a full year 2025 number or we’re run rating at that level in 2025 and don’t quite get to $500 million.
I’m happy to have that discussion. I’d say that’s certainly up for debate. But the idea that we’re not going to do $500 million to me looks highly unlikely. And as I look at that target now, I look at that as a point in time, and we’re going to continue to move past that. We are going to generate more than $500 million of digital EBITDA. It’s just a matter of when we’re going to generate that. So we feel very, very, very good about what’s going on in digital and that it really matches the progress against markers that we laid out when there was no one in the space laying out any similar markers. Before we launched in August of 2021, we laid out how much we spend, what we thought the return could be and we are right on that pace, if not had at this point.
So feel fantastic about where digital is today. In terms of capital, we’re spending a lot of capital this year. I’ve talked about on prior calls, we walked into a lot of capital spend when we did the Caesars merger. Caesars had already agreed to make the New Orleans investment that finishes Labor Day. They had already won the license in Danville. The permanent opens at the end of the year. And New Jersey gently encouraged us to spend the $400 million in CapEx in New Jersey. That’s in the rearview mirror at this point. So as we report this quarter, we are one quarter closer to the step-down in CapEx spend and the increase in free cash flow that I’ve talked about as our opportunity to move to offense, whether offense is buying in stock that in my estimation seems attractive or if we’re in a different ZIP code potentially looking outside for growth opportunities.
You’re really – as we sit here at the end of April, you’re about five months away from that. So we – you should expect a step down in gross CapEx in 2025, that’s in excess of $500 million. Brett told you, we just closed on our Danville credit facility, so the funding from Danville doesn’t come through our balance sheet this year. So we really feel good about where we’re sitting, what the rest of the year looks like. But as I said, we’re not in the habit of reporting quarters like this. I wanted to give everyone a sense of where I see the business and where I see what this quarter looked like. You’ll all do with that what you will. But we anticipate getting back to quarters like we’ve been printing for the last 10 years, starting with the next one.
And with that, I’ll open it up to questions.
Operator: Certainly. [Operator Instructions] And our first question comes from the line of Carlo Santarelli from Deutsche Bank. Your question please.
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