PENN Entertainment, Inc. (NASDAQ:PENN) This autumn 2023 Earnings Call Transcript February 15, 2024

PENN Entertainment, Inc. misses on earnings expectations. Reported EPS is $-2.37 EPS, expectations have been $-0.57. PENN Entertainment, Inc. isn’t one of many 30 hottest shares amongst hedge funds on the finish of the third quarter (see the details here).

Operator: Greetings and welcome to the PENN Entertainment Fourth Quarter 2023 Results Conference Call. [Operator Instructions] I’d now like to show the convention over to Mr. Joe Jaffoni, Investor Relations. Please go forward.

Joseph Jaffoni: Thanks, Frank. Good morning, everybody and thanks for becoming a member of PENN Entertainment’s 2023 fourth quarter convention name. We’ll get to administration’s presentation and feedback momentarily in addition to your questions and solutions. [Operator Instructions] Now, I’ll assessment the Safe Harbor disclosure. Today’s dialogue incorporates forward-looking statements. Forward-looking statements contain dangers, assumptions and uncertainties that might trigger precise outcomes to vary materially. For extra data, please see our press launch for particulars on particular danger components. With that, it is now my pleasure to show the decision over to the corporate’s CEO, Jay Snowden. Jay, please go forward.

Jay Snowden: Thanks, Joe. Good morning to everybody on the decision. As typical, I’m joined right here in Wyomissing by our CFO, Felicia Hendrix; and our Head of Operations, Todd George in addition to different members of the manager workforce. We present a hyperlink to our investor presentation, together with our earnings launch this morning. If you have not already opened or printed it out, I’d counsel you try this now as our ready remarks, we’ll reference a number of of these slides as we go alongside. At a excessive stage, 2023 was one other transformational yr for PENN Entertainment. We are the one firm within the {industry} that has a completely built-in sports activities media and sports activities betting platform together with an omnichannel base of belongings with which to drive cross-play and synergies because the database continues to develop at a fast tempo.

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The future appears to be like very promising given our distinctive place and long-term strategic benefits. On the retail aspect of the enterprise, we generated greater than $2 billion in property stage EBITDAR in 2023 from our industry-leading portfolio of regional gaming belongings and impressively delivered on our property stage margin objectives regardless of an unsure macroeconomic setting, due to our best-in-class operators and leaders throughout the nation. We additionally broke floor on 4 thrilling new retail progress initiatives in Illinois, Ohio and Nevada which we anticipate to finish by the primary half of 2026. As a reminder, we anticipate these will ship a 15%-plus return on the combination funding. The continued energy of our retail enterprise offers a stable basis as we proceed to put money into our high-growth digital enterprise which is able to create important long-term shareholder worth.

Speaking of the digital enterprise, earlier this month, we introduced that the founding household behind the rating, John, Benge, Abri and Noah Levy shall be transitioning from their management of the rating and PENN Interactive John departed earlier this week, whereas Bengem Abri and Noah shall be leaving in early April. We have been working carefully with the Levy’s over the past a number of months on this plan and timing to make sure a clean operational transition. Their departure comes at a pure inflection level for our interactive enterprise. We’ve achieved so much over the past a number of years, together with the completion of our proprietary tech stack, the profitable launch of the Score Bet in Ontario the migration of our tech stack into the U.S. and now the launch of ESPN BET.

Even extra importantly, we’ve got developed an extremely deep bench throughout PENN Interactive and we’ve got a number of gifted leaders able to step up and tackle extra duty within the coming months. I need to prolong my honest due to John, Benge, Abri and Noah for all of their onerous work and contributions to PENN interactive success. We are close to the conclusion of the month-long search course of for the brand new Head of Interactive and look ahead to sharing an replace on that with you within the close to future. Turning to Slide 6 in our investor presentation. On November 14, we efficiently and seamlessly launched ESPN BET concurrently in 17 states throughout the U.S. a primary within the {industry} and little doubt a testomony to the energy of our know-how groups.

Bolstered by the number one model in sports activities media, the launch resulted in a lot larger than anticipated registrations producing over 1 million new sign-ups to our industry-leading PENN Play Rewards program and increasing our digital database by over 50%. In reality, we acquired as many first-time depositors and betters within the first 2 months as we had anticipated we’d generate within the first full yr submit launch. Importantly, roughly 1/3 of those prospects are situated inside 50 miles of one in all our greater than 43 retail properties which units up properly for cross-selling and monetization as a part of our omnichannel technique. In addition, we noticed our common — excuse me, month-to-month energetic customers develop from almost 190,000 within the third quarter to greater than 770,000 within the fourth quarter.

Our early success bodes properly for our deliberate launches in North Carolina and New York this yr which I’ll discuss in a second. Given the early success in buyer acquisition and retention, we now anticipate the digital section to inflect to roughly breakeven in 2025 and begin producing significant EBITDA and free money circulation in 2026 and past. Turning to Slide 7 and eight. You’ll see that sturdy early retention and constant person acquisition have led to regular month-over-month will increase in money deal with at the same time as our promotional bills have began to normalize. Our January money deal with was 289% larger than prelaunch money deal with in October of ’23, whereas our promotional bills as a proportion of deal with went down from 32.2% in November to 2.8% this January.

According to the most recent sensor tower knowledge which has similarities to different knowledge sources you might have seen akin to Aptopia, we’ve got persistently held the quantity 3 rating and share of weekly energetic customers amongst our high friends, offering a basis for even better deal with and GGR share beneficial properties as we develop our share of pockets and monetization per person. The ESPN BET numbers on the chart on Slide 8 exhibits regular acquisition and retention throughout the board, at the same time as our promotional expense started to taper. On our preliminary promo supply at launch was proper consistent with our opponents and we lowered that provide by 50% upfront of the Super Bowl given the extra leisure play surrounding the sport. Meanwhile, the whole time spent on ESPN BET in line with the sensor tower knowledge additionally continued to ramp properly as we added new options and integrations which is able to solely speed up now that we are able to focus extra of our product and engineering groups power on product enhancements, particularly within the areas of same-game parlays, participant props and dwell betting versus time-consuming migrations and launches, one thing we’re all very enthusiastic about.

All of that is very promising because it pertains to each top-of-funnel demand for ESPN BET and early retention success. The vital takeaway right here is the ESPN BET app is proving to be sticky within the early days because of our sturdy manufacturers and UI, UX which is able to enhance from right here with product enhancements and deeper integrations with ESPN within the coming quarters. As you may see on Slides 9 and 10, ESPN BET has helped us attain new demographics of sports activities followers which are incremental to our digital database, leading to a 63% better year-over-year parlay combine and better volumes for non-NFL video games, significantly the NBA. While these parlay outcomes are a transparent enchancment from the place we have been prelaunch, we nonetheless have an extended technique to go on this space and you may see important enhancements all through 2024.

We additionally noticed a 35% improve in our proportion mixture of females in our digital database. These knowledge factors exhibit the potential for ESPN BET to assist broaden the enchantment of sports activities betting to the extra informal higher and develop the general market, an vital purpose of ours from day 1. Notably, earlier than the launch of ESPN BET, general market deal with grew by greater than 17% year-over-year January to October 2023 within the states with publicly out there knowledge in our market evaluation. After ESPN BET general market deal with is up almost 30% and year-over-year from November by way of December 2023 and it is up over 25% even while you exclude ESPN BET. ESPN BET has and continues to deliver new sports activities followers and betters into the sports activities betting ecosystem. ESPN BET has additionally helped increase our Hollywood-branded iCasino enterprise which has seen a virtually 280% improve in month-to-month energetic customers, offering a platform for future progress with new proprietary content material persevering with to roll out from our PENN sport studios.

As we have emphasised previously, when prospects have interaction with us throughout a number of channels, their worth goes up greater than 6x over those that have interaction by way of just one channel and we proceed to see loads of upside as we enhance our iCasino choices. As illustrated on Slide 13, in reference to the launch, ESPN carried out an preliminary wave of unique BET mode integrations throughout the ESPN ecosystem which incorporates our 6-pack odds integration. This offers for a seamless click-through from the ESPN sport solid to a buyer’s desired guess on the ESPN BET app. This could be very highly effective as there are over 28 million month-to-month energetic customers on the ESPN media app. You ought to anticipate extra BET mode integration all through 2024. I stated on the outset of our partnership with ESPN that we would be getting important worth for our advertising {dollars} by allocating our $150 million per yr to the one finest model and platform within the U.S. to succeed in sports activities followers and potential betters.

We’re already seeing that with a strong menu of promotion and integration throughout all of ESPN’s platforms, together with conventional linear promoting, digital media, in program integration, bods attribution, database advertising alternatives and entry to among the greatest personalities in sports activities media for particular occasions, promotions and social media engagement. As I discussed, we’ve got simply scratched the floor on these integrations and there is considerably extra to return, all included as a part of our deal that we are going to unveil all through 2024 and into 2025. Our preliminary ESPN BET promoting marketing campaign was headlined by Sports Center anchors, Scott Van Pelt and L. Duncan. We then added spots with NBA legend Kendrick Perkins, the host of Get Up, Mike Greenberg, adopted by our most up-to-date business with sports activities betting analyst, Aaron Dolan, that launched in the course of the Super Bowl week.

This marketing campaign with Aaron is our first product and integration-focused marketing campaign which we anticipate will assist drive continued consciousness of ESPN BET and our direct integration with the ESPN Media app. Meanwhile, L. Duncan and Aaron Dolan hosted a Super Bowl get together on the M Resort at our property in Las Vegas. And I’m pleased to announce we’ll be rebranding Greektown’s market-leading Sportsbook to ESPN guess simply in time for the NFL draft in Detroit. In addition, ESPN regional radio expertise shall be internet hosting occasions all year long in our retail sports activities e-book. We look ahead to further ESPN BET retail launches at key properties as we proceed to create significant cross-sell alternatives. Looking forward to the remainder of 2024, we’re excited to introduce ESPN BET in North Carolina which is anticipated in March and New York anticipated previous to soccer season in every case, after all, topic to regulatory approvals.

While the financial mannequin in New York is certainly difficult, we look ahead to bringing ESPN BET to the biggest regulated on-line sports activities wagering market in North America. These 2 new jurisdictions shall be extraordinarily environment friendly for us. As highlighted on Slide 16, our ESPN annual nationwide advertising spend per capita shall be diminished by 20%, with the addition of North Carolina and New York which is able to take our addressable on-line sports activities betting U.S. inhabitants from 37% to 46% and considerably increase our attain and scale. Very vital for us as most of our ESPN and off-channel advertising spend is nationally targeted. As famous within the launch this morning, the Interactive section EBITDA losses for the fourth quarter have been larger than anticipated. The majority of that miss was pushed by the excessive quantity of consumers acquired by way of ESPN BET which resulted in elevated promo expense that negatively impacted internet revenues.

And, to a lesser extent, unfavorable maintain because of customer-friendly sports activities outcomes. The first 2 weeks following the launch of ESPN BET in November occurred to be 2 of the bottom maintain proportion weeks of all the NFL season. Looking forward, we anticipate that first quarter 2024 interactive EBITDA losses shall be roughly half of our fourth quarter ’23 interactive EBITDA outcomes. And for Q1 to be the biggest EBITDA loss quarter of the yr for us in 2024. For all the yr of 2024 on a same-store foundation, we anticipate an EBITDA loss commensurate with what we noticed in This autumn at round $330 million, demonstrating the highest line momentum and efficiencies on the associated fee aspect. Due to the two state launches this yr in North Carolina and New York which we introduced on Tuesday, we’re forecasting a complete EBITDA loss in 2024 of roughly $400 million.

As talked about earlier, we now anticipate 2025 being round breakeven and 2026 to ship significant optimistic EBITDA and free money circulation. Before turning it over to Felicia, I’d wish to thank our property leaders and all of our workforce members for delivering one other quarter of actually stable property stage efficiency. Notably, 10 properties unfold throughout our portfolio achieved their highest ever fourth quarter income. These outperformers helped offset the influence of provide pressures in just a few of our key markets in addition to continued softness in our south area. This additional demonstrates the advantages of our geographic range and distinctive omnichannel technique. The introduction of latest applied sciences and our ongoing reimagination of our properties, whereas offering a best-in-class buyer expertise is continuous to drive demand for PENN.

As you understand, our industry-leading buyer loyalty program, PENN play, is supported by our 3 Cs know-how which is now deployed at 21 properties collectively representing roughly 70% of our retail EBITDAR. During the quarter, we have additionally grown our complete PENN pockets prospects to 110,000 and we have acquired $300 million in complete PENN deposits. As we have typically stated, these visitors who use the digital pockets demonstrates superior loyalty by way of elevated visitation, time on gadget and complete theoretical finish. And with that, I’ll flip it over to Felicia.

Felicia Hendrix: Our property stage segments reported one other stable yr. Fourth quarter ’23 EBITDA outcomes of $476 million exceeded the implied steering we supplied on our third quarter name, regardless of headwinds of roughly $10 million from the Detroit union negotiations and highway closures. And as Jay highlighted, our Interactive section is displaying early indicators of sturdy momentum. As typical, you’ll discover on Page 12 of our earnings launch a desk that summarizes our money expenditures within the quarter together with money funds to our REIT landlords, money taxes, money curiosity and complete CapEx. Of our complete $152 million in CapEx within the quarter, $16 million with mission CapEx, primarily associated to our 4 retail progress initiatives. We ended 2023 with complete liquidity of $2.1 billion, inclusive of $1.1 billion in money and money equivalents.

We anticipate our liquidity to stay sturdy all through 2024 and we’ve got no debt maturities till 2026 that are our $330 million convertible notes. As we beforehand guided on our third quarter earnings name, we proceed to anticipate our lease-adjusted internet leverage to peak within the third quarter of ’24. While third quarter leverage shall be larger than initially anticipated given the demand-based energy of our ESPN BET launch within the fourth quarter, ’23. This improve is non permanent and we may also delever extra rapidly. By year-end 2025, we’ll return to pre ESPN BET leverage ranges. And in 2026, we’ll generate significant EBITDA and free money circulation from the Interactive division. Thinking about this one other approach, our path to document free money circulation could be very clear, following a yr of funding in 2024 and delevering in ’25, 2026 shall be an thrilling inflection level for us given the excessive EBITDA to free money circulation conversion of our interactive enterprise which when mixed with the free money circulation generated by the present core enterprise, plus the 4 retail progress initiatives that shall be coming on-line in early 2026, will place us extraordinarily properly to drive shareholder worth.

I’ll now present steering for our Retail and Interactive segments. For the total yr 2024, we anticipate retail revenues to vary from $5.6 billion to $5.75 billion and adjusted EBITDA to vary from $1.905 billion to $2.025 billion. Our steering components in excessive January climate, new provide in Nebraska, Illinois and Louisiana, highway development in a few markets and average upward wage stress. For the Interactive section in 2024, we anticipate to generate revenues of $1.28 billion to $1.415 billion and an adjusted EBITDA loss vary of $420 million to $380 million. These ranges embrace our launches in North Carolina and New York. On a same-store foundation, we anticipate an adjusted EBITDA lack of round $330 million. To make it easier to with modeling the interactive section revenues, you need to assume that our 2023 tax gross up of roughly $400 million stays flat year-over-year in 2024 and different revenues inclusive of skins, social gaming and media is roughly $200 million in 2024.

As Jay talked about earlier, within the first quarter of 2024, we anticipate the Interactive section adjusted EBITDA loss to be roughly 1/2 of our fourth quarter interactive EBITDA outcomes and for the primary quarter ’24 to be the biggest EBITDA loss quarter of the yr. We anticipate 2024 company expense of roughly $105 million, inclusive of our money settled stock-based awards. Total CapEx for 2024 is roughly $500 million, inclusive of $275 million of mission CapEx for our 4 growth initiatives. For money curiosity expense, we forecast $170 million for the total yr after roughly $13 million of curiosity earnings. For money taxes, we’re projecting to be in a refund place of roughly $15 million. And as you consider our share rely for 2024, our fundamental share rely as of the top of 2023 was $152 million and we sometimes have roughly $15 million of diluted shares inclusive of the 14 million share dilution from the converts.

And with that, I’ll flip it again to Jay.

Jay Snowden: All proper. Thanks, Felicia. As you noticed in our launch, we’re persevering with to increase on our company social duty efforts. As we glance again on the yr, I’m very happy with the continued progress of our range, fairness and inclusion initiatives that are deservedly gaining loads of consideration Newsweek named PENN, one in all America’s best workplaces for range. And Forbes named us for the third straight yr as one in all America’s finest employers for range. Time Magazine went as far as to call us one of many world’s finest firms for 2023. Meanwhile, on the group entrance, we supplied greater than $7 million in help to native charities and veterans targeted organizations and greater than $17 million in financial growth grants in 2023, along with the greater than 8,000 volunteer hours from our workforce members to assist these in want.

And on the environmental aspect, we accomplished our inaugural Scope 3 Greenhouse Gas stock and established carbon abatement targets for 2024 and past. You can learn extra about these — all of those initiatives in our 2023 CSR report which is scheduled to be revealed in April together with our proxy submitting. In closing, we’re persevering with to see a secure client setting and wholesome working developments in our retail companies. And on the digital aspect, I need to reiterate that our partnership with ESPN shouldn’t be your typical media sports activities e-book business settlement. Ours is an unique strategic long-term alliance that, as I discussed, has the potential to ship distinctive merchandise, experiences and integrations which are unmatched. And after all, with that may come engaging returns for our shareholders.

We had 3 main objectives with ESPN BET for the primary a number of months submit launch. Number one, execute on a profitable launch, each when it comes to top-of-funnel demand and app stability, competitiveness and efficiency. Number two, develop the market, given the sturdy model fairness and attain of ESPN together with the media integrations. And quantity three, present a differentiated expertise and worth proposition to make sure lasting relationships and product retention. So far, we’re off to an incredible begin on all 3 and have constructed an incredible basis for our upcoming launches in New York, North Carolina and past. So with that, Frank, we’ll open it up for questions.

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