Caesars Entertainment, Inc. (CZR) Q1 2016 Earnings Report, Transcript and Summary

Hello, and welcome to today's webcast. My name is Ian, and I'll be your event specialist today. All lines have been placed on mute to prevent any background noise. Please note that today’s webcast is being recorded. We will have a question-and-answer session at the end of today’s presentation, and instructions on how to ask a question will be given at the appropriate time. [Operator Instructions]. It is now my pleasure to turn today's program over to Brian Blackman, Vice President, Investor Relations with Caesars Entertainment. Brian, the floor is yours.

Good afternoon, and welcome to Caesars Entertainment First Quarter 2016 Results Conference Call. Joining me today from Caesars Entertainment Corporation are Mark Frissora, President and Chief Executive Officer; and Eric Hession, Chief Financial Officer. A copy of our press release, certain earnings presentation slides and a replay of this conference call are available in the Investor Relations section of our Web site at caesars.com. The slides are available for download and will accompany Mark and Eric's prepared remarks for those of you on the phone that would like to follow along. Also, please note that prior to this call, we furnished a copy of this afternoon's press release to the SEC in a Form 8-K and will shortly file our most recent quarterly report on Form 10-Q for the first quarter of 2016. Before we get underway, I would like to call your attention to certain statements and information on slides 1 through 4, which we incorporate by this reference. Forward-looking statements, Safe Harbor disclaimer and our public documents cover this call and the simultaneous webcast at caesars.com. This call, the webcast and its replay are the property of Caesars Entertainment Corporation. It's not for rebroadcast or use by any other party without the prior written consistent of Caesars Entertainment Corporation. If you do not agree with these terms, please disconnect now. By remaining on the line, you agree to be bound by these terms. Today's call will include discussion of certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin, property EBITDA and certain supplemental financial information. Definitions of these non-GAAP measures, reconciliations to the nearest GAAP measures and the reasons management believe these measures provided useful information for investors can be found on Slide 3 and in the appendix to this presentation, beginning on Slide 26. As a reminder, Caesars Entertainment Corporation is a holding company with the following consolidated entities, Caesars Entertainment Resort Properties and Caesars Growth Partners, which includes two reportable segments, CGP Casinos and CIE. CEC also has a majority ownership of Caesars Entertainment Operating Company, but CEC's financial results do not include the results of CEOC and its subsidiaries following its Chapter 11 filing on January 15 of 2015. However, in addition to a review of CEC's reported financial information on this call, we will also discuss certain supplemental information regarding CEOC, including certain remarks that combine CEOC's results with those of CEC. CEC has committed to a material amount of payments to support CEOC restructuring, which would result in a reacquisition of CEOC’s operations if the restructuring is made on terms consistent with the current Restructuring Support Agreement for which CEC is a party. As a result, this non-GAAP supplemental financial information is presented as a benefit for users to understand the results of the entire Caesars enterprise, including CEOC and consistent with the management services provided across the systems property. This information is not preferable to GAAP results provided elsewhere in our presentation. The results are not indicative of future performance or the results post restructuring. As used during the call, the words company Caesars, Caesars Entertainment, we, our and us refer to Caesars Entertainment Corporation and its consolidated entities, unless otherwise stated or the context requires otherwise. As seen on today's agenda on Slide 5, we'll begin the call today with some remarks by Mark, whose comments will generally relate to the entire Caesars system, including our deconsolidated subsidiary CEOC. Eric will then review our financial results, before Mark concludes with some closing comments. I'd now like to open up the call and Mark, the call is yours.

Thank you, Brian. I’m pleased to report that Caesars Entertainment delivered another strong first quarter in 2016 building on last year’s great results. Starting on Slide 6, net revenues for continuing CEC, which excludes CEOC, increased 7% to $1.2 billion and adjusted EBITDA grew 16% to $349 million. Our first quarter results include a $237 million charge related to the restructuring of CEOC. Eric will provide more details on our financial results in his prepared remarks. Looking more broadly at enterprise-wide performance, which adds CEOC to CEC, net revenues grew 4% to $2.3 billion and adjusted EBITDA increased 14% to $653 million. Enterprise-wide adjusted EBITDA margins expanded 263 basis points in the first quarter to 28.5%, a first quarter historical record for the enterprise as adjusted EBITDA margins were 200 basis points higher than 2007. As I have discussed in past quarters, we are focused on a balanced strategy of increasing margins and cash flows through both revenue growth and efficiency initiatives while simultaneously driving even higher levels of employee engagement and customer satisfaction. We achieved these objectives in the first quarter by delivering improved financial performance as well as solid year-over-year gains in customer service scores. Many of the drivers that we have talked about over the past four quarters continued to improve enterprise-wide performance this quarter. The Interactive Entertainment business continued to grow revenue and profit, due to a combination of increased unique paying users and growth in average revenue per user. Another key contributor to our top line growth was a strong increase in lodging revenues, particularly at the LINQ Hotel. Enterprise-wide cash ADR rose 9% due to an increase in resort fees, improved hotel yield and greater pricing power as a result of our reinvestment in the hotel product, particularly on the Las Vegas strip. Additionally, the success of the initial Jennifer Lopez’s residency at Planet Hollywood contributed to an increase in the entertainment business revenues. Partially offsetting these positive drivers was lower gaming revenues due to an unfavorable hold impact when comparing to the prior year period as well as softness in the Southeast properties from oil and gas related weakness. We also experienced continued pressure at Harrah's New Orleans from the smoking ban. The top line strength coupled with our ongoing efficiency initiatives enabled us to achieve enterprise-wide margin expansion. The majority of these initiatives annualized in the first quarter making year-over-year comparisons more difficult as the year progresses. Collectively, these results also begin to include the ongoing work to execute our cornerstone initiatives, which will provide a solid foundation for future progress. The cornerstone initiatives, which are listed on Slide 7, are invigorating our hospitality and loyalty marketing programs, investing in Caesars’ infrastructure to enhance long-term value, instituting a continuous improvement-focused operating model and finally inspiring a sales and service culture. Before I turn the call over to Eric, let me update you on these four priorities which will be critical components of our business transformation. Turning to the first cornerstone initiative on Slide 8, we are implementing actions to enhance our hospitality and loyalty programs including total rewards with the goal of expanding our customer base and enhancing our member benefits. To derive even more benefits from the program, we are focused on increasing distribution of the total rewards database, which increases the value for every property in our system. Additionally, we continually look for ways to strengthen the value proposition of our rewards program. For example, we recently announced a new marketing alliance with the Atlantis resort in the Bahamas. As a result of this arrangement, Caesars will offer a Las Vegas style island gaming destination as a new benefit to our total rewards members. Investing in our infrastructure is another key priority and we have focused this investment on our hotel, entertainment and food and beverage offerings as shown on slides 9 through 11. On the lodging front, there is particular focus in the Las Vegas market, which continues to experience strong growth and key towards [ph] some indicators with year-over-year increases in visitation, occupancy and ADR rates. At the end of the first quarter, we had completed approximately 29% of the more than 4,800 planned room renovations in Las Vegas for 2016. Enterprise-wide, we have completed approximately 32% of the more than 5,700 planned room upgrades. The completed renovations at our various Las Vegas properties are receiving positive customer reviews. Further, they have been a meaningful contributor to our improved financial performance demonstrating that our Las Vegas hotel investments are paying off. As we conclude room renovations, we anticipate a ripple effect of increases in gaming, food and beverage and other ancillary revenue in addition to improvements in our key hotel metrics of cash ADR and room revenue. However, as is common with any renovation project, there will inevitably be some inventory disruption while rooms are out of service, which we will work to mitigate. We are also differentiating our hotel offering on the strip by using technology to deepen our connection with customers. Last year, we piloted a self-service check-in kiosk at three hotels in Las Vegas to expedite the guest arrival process. As a result of positive customer reviews and reduced check-in times, we are planning to deploy additional kiosk to another five properties later this year. Beyond our room product, we are actively investing in other hospitality channels such as entertainment to ensure our properties remain a preferred destination in Las Vegas. As I mentioned earlier, entertainment revenue was a contributor to our performance in the first quarter. With the launch of new residencies with Jennifer Lopez and Lionel Richie as well as extensions with Britney Spears and Pitbull, we have increased the number of shows at Planet Hollywood by around 30% in 2016 compared to the last year. We continue to explore options to diversify and enhance our Las Vegas entertainment lineup in ways which will appeal to guests of all age groups in taste. Along with entertainment investments, we continually evaluate and refresh our food and beverage offerings as another way to increase traffic to our Las Vegas properties. In March, we opened the Montecristo Cigar Bar at Caesars Palace offering guests premium cigars, food, cocktails and spirits in a contemporary and inviting space. Most recently, we announced that In-N-Out Burger we joined a lineup of new dining outlets opening at the LINQ Promenade later this fall. This will be the very first shift location for this extremely popular burger brand. We believe it will rapidly become a popular choice for loyal In-N-Out fans as well as first-time visitors who are looking for a high-quality quick dining experience. The third cornerstone initiative on Slide 12 is our continuous improvement-focused operating model. Over the last year and into the first quarter of 2016, we have begun engineering a more efficient and productive enterprise through various marketing and operational initiatives. On the marketing front, we continued to improve overall customer yields by leveraging a more sophisticated approach to incentives. Operationally, we have assembled a focused executive team to direct the lean efficiency program. These initiatives are expected to remain a high priority for our management team throughout 2016 and beyond. Lastly, as seen on Slide 13, we are instilling a sales and service culture focus throughout the enterprise to enhance the guest experience and customer loyalty. We have already trained a significant proportion of new employees on new marketing tools, including sales training which empowers them to recommend appealing ancillary products, services and experiences. These actions have resulted in improved year-over-year customer satisfaction as measured by Q1 2016 customer service and net promoter scores. Moving to Slide 14, as we look to the future, we foresee that gaming innovation will be an essential tool to transform the casino industry’s growth trajectory. Our strategy is twofold. First, create unique, appealing gaming environments unlike traditional gambling floors and second, deploy distinctive, innovative games unlike traditional casino products. While we are still in an easy phase of this journey, we are investing in the on-property experience with test pilot programs, working with vendors to deliver new games with skilled based components and aggressively trailing new products. We are partnering with some of the most innovative consumer space designers to create a new environment within the casino. We believe that creating a casino of the future could also help reenergize the core slot player while concurrently attracting and engaging millennial and Gen X customers. I look forward to updating you as we make more progress on this potentially transformational objective. Let me now turn the call over to Eric for a more detailed review of this quarter’s results.

Thank you, Mark. I’ll start with a review of continuing CEC’s consolidated results followed by a review of the company’s reportable segments and supplemental information, which include CEOC’s performance as well as continuing CEC plus CEOC results. Slide 16 summarizes continuing CEC’s results, which does not include CEOC as it is no longer consolidated. For the first quarter of 2016, continuing CEC net revenues rose 7% to $1.2 billion and adjusted EBITDA grew 16% to 349 million with a margin increase of 239 basis points. This translated into a diluted loss per share for continuing CEC of approximately $2.12 compared to a diluted earnings per share of $46.12 in the year ago period. Earnings performance was primarily attributable to the deconsolidation of CEOC in the first quarter of 2015 and an additional accrual of 237 million in the current quarter related to CEC’s estimate of the amount it will pay to support the restructuring of CEOC as negotiations among all parties associated with the restructuring are ongoing, this amount will likely change. As such, we believe our operational performance is best represented by the strong improvement in adjusted EBITDA. Revenue in the quarter was driven primarily by organic growth in the social and mobile games within our Interactive Entertainment business and strong hospitality growth, particularly in Las Vegas. This was partially offset by lower gaming volumes with the non-Las Vegas properties and an unfavorable hold impact on a year-over-year basis. On the hospitality side, the business experienced a 12% increase in room revenues mainly due to the growth at the LINQ Hotel. Cash ADR grew 10% as a result of improved hotel yield, increases in cash resort fees following the expansion to all properties in 2015 and a stronger pricing environment in Las Vegas. We also saw increased demand for entertainment and food and beverage offerings at our strip properties. The year-over-year improvement in adjusted EBITDA was mainly due to net revenue increases, improved hotel customer mix and efficiency initiatives. Hold was estimated to have a positive adjusted EBITDA impact of between $0 million and $5 million in the quarter relative to our expectations, but an unfavorable $0 million to $5 million adjusted EBITDA impact when comparing to the prior year period. Turning to Slide 17 in the performance of Caesars Entertainment Resort Properties. First quarter net revenues were flat year-over-year at 528 million as lower slot gaming volumes at our non-Las Vegas properties and Harrah’s Las Vegas were offset by strong hotel cash ADR performance due to the resort fees and improved hotel yield, and to a lesser extent other revenue increases driven by Harrah’s Atlantic City conference center. Construction disruption affected revenues at Harrah’s Las Vegas as we had a number of rooms out of service from the renovations taking place at the property. Adjusted EBITDA at CERP declined 3% year-over-year to 158 million and margins declined 76 basis points. The decline in EBITDA was primarily attributable to lower gaming revenues and higher labor expenses, which more than offset the benefits from marketing efficiencies and improved hotel customer mix. A meaningful portion of the increase in labor expenses at CERP was related to the ramp up of the Atlantic City convention center. As the conference center fully ramps, we expect to become more efficient in our labor management and hotel yielding capitalizing on the project’s strong bookings. Hold was estimated to have a positive adjusted EBITDA impact of between 0 million and 5 million for the quarter relative to our expectations and there was a minimal impact when comparing to the prior year period. Slide 18 summarizes the performance of Caesars Growth Partners, which experienced a strong quarter. Net revenues rose 14% to 644 million and adjusted EBITDA grew 31% to 194 million. Margins expanded 402 basis points on a year-over-year basis. Revenue performance was driven primarily by organic growth in CIE’s mobile and social games business and higher hotel revenues at the LINQ Hotel, which had 82% more hotel rooms online in the quarter compared to the prior year as a result of the renovations completed in the second quarter of 2015. Looking at the CGP Casino Properties segment within the CGP business on Slide 19, net revenues were 416 million for the first quarter, up 7% year-over-year. This performance was primarily attributable to higher hotel revenues at the LINQ Hotel, which experienced a 21% lift year-over-year in cash ADR due to the renovations as well as higher food and beverage and gaming revenues and increases in entertainment revenue at Planet Hollywood. This was partially offset by ongoing revenue pressure at Harrah’s New Orleans as the property has experienced double digit declines in gross gaming revenues since the city’s smoking ban went into effect. Adjusted EBITDA for the CGP Casino segment increased 24% to $105 million and margins expanded 345 basis points due to net revenue increases and efficiency initiatives. Hold was estimated to have a minimal negative adjusted EBITDA impact in the quarter relative to our expectations and an unfavorable 0 million to 5 million adjusted EBITDA impact when comparing to the prior year period. Looking ahead, Harrah’s New Orleans annualized the smoking ban in late April, so the expected declines in gross gaming revenues and corresponding declines in EBITDA to moderate. Additionally, we expect growth at the LINQ Hotel to revert to more normalized levels starting in the second quarter as the property will annualize the renovations in May. Moving to Slide 20 in the Interactive Entertainment business, first quarter net revenue increased 29% to 228 million and adjusted EBITDA rose 41% to 89 million. Adjusted EBITDA margins expanded 344 basis points year-over-year. Performance was mainly driven by strong results in the social and mobile games due to a combination of increased unique paying users and growth in average revenue per user. Monthly unique paying users grew to 922,000 in the first quarter, up from 762,000 last year and average revenue per day increased to $0.35 from $0.31 in the prior period. Slide 21 shows the supplemental information on CEOC’s first quarter performance. Net revenues were relatively flat year-over-year at $1.2 billion as positive hold at London Clubs International properties was offset by unfavorable hold at Caesars Palace in the quarter. Adjusted EBITDA increased 13% to 304 million leading to a 289 basis point increase on margins primarily due to marketing efficiencies, higher collections on markers and favorable property taxes. Hold was estimated to have a positive adjusted EBITDA impact between $5 million and $10 million for the quarter relative to our expectation but an unfavorable $5 million to $10 million adjusted EBITDA impact when comparing to the prior year period. Hospitality amenities at Caesars Palace continue to perform well. The rebranded Julius Tower has received positive feedback from both returning and new customers with all but one floor of suites now completed. Conversely, the challenging VVIP environment continues to adversely affect baccarat volumes and we expect this dynamic to play out for the remainder of 2016. At the end of the first quarter, certain CEOC subsidiaries transitioned the management responsibility of ThistleDown Racino over to Rock Gaming and its subsidiaries. Horseshoe Casino and Horseshoe Cleveland will transition at the end of the second quarter. Now let’s take a look at additional supplemental information for the entire enterprise for the first quarter on Slide 22, which includes CEOC. Caesars enterprise-wide net revenues rose 4% from the prior year to $2.3 billion mainly on strong performance in the social and mobile games business at CIE and hospitality growth in Las Vegas primarily in lodging. This was partially offset by an unfavorable hold impact year-over-year. As noted earlier, the growth in room revenue is mainly attributable to the performance of the LINQ Hotel as well as strong cash ADR growth due to resort fees, improved hotel yield and pricing strength. Adjusted EBITDA increased 14% year-over-year to $653 million and margins increased 263 basis points primarily attributable to the net revenue increases, improved hotel customer mix and efficiency initiatives. Though we experienced some inflationary cost pressures including salary and benefits in the first quarter, we were able to manage these pressures through our continuous improvement efforts. We expect these headwinds to persist and we will remain vigilant in offsetting these increases. Hold was estimated to have a positive adjusted EBITDA impact of between $10 million and $15 million in the quarter relative to our expectation but an unfavorable $10 million and $15 million adjusted EBITDA impact when comparing to the prior period. Looking ahead, though we experienced margin expansion in the first quarter related to our improved operating model, year-over-year comparisons become more challenging as the year progresses. The majority of the efficiency programs that led to our outstanding performance in 2015 were fully implemented in the first quarter of 2015. We also expect to be adversely affected by ongoing restructuring efforts, largely in the form of elevated expenses across many parts of our business, which may accelerate during the remainder of this year. Lastly, ongoing room renovations across our hotel portfolio will result in inventory disruptions, which we will attempt to mitigate. On Slide 23, you can see a summary of quarter end liquidity and projected capital expenditures for the CEC consolidated entities. As you may recall, CEC is a holding company and as such is a non-cash generating entity. While the cash forecast at CEC currently contemplates liquidity to be sufficient through the end of the year. If CEOC does not emerge from bankruptcy on a timely basis, CEC cash balance will be consumed by the expenses associated with the CEOC restructuring unless we identify additional sources of liquidity to meet CEC’s ongoing obligations as well as to meet its commitments to support the CEOC restructuring. Within our subsidiaries, CERP and CGP, the improvement in our financial performance has led to strong cash flow generation enabling reinvestment in high return projects such as room renovations. We are focused on increasing cash flow and specifically adjusted EBITDA as we believe this drive long-term value. We will do this by being more productive through our continuous improvement-focused operating model in addition to taking a thoughtful approach to capital allocation. I’ll turn it back over to Mark for his closing comments now.

Thanks, Eric. Summarizing our discussion on Slide 25, we are pleased with this quarter’s adjusted EBITDA and adjusted EBITDA margin growth, and our ability to drive operational growth and efficiency year-over-year. Hospitality was the primary driver of revenue growth in the quarter. We expect hospitality to remain a business driver as our upgraded room products come online and as positive Las Vegas trends are projected to continue. That said, we recognize the importance of enhancing core gaming growth and we are focused on offering more compelling gaming products in new and exciting environments. Furthermore, our marketing and operational efficiency initiatives have established a baseline for our business. As we ramp up our lean efficiency program in 2016, we will identify incremental and sustainable process efficiencies, which will also enable us to upgrade the customer experience and enhance employee engagement. Looking briefly at April, the business performed well, particularly in Las Vegas driven by strong hotel demand. As we move to the second quarter, we continue to focus on margin management through the implementation of continuous improvement techniques and an acceleration of our revenue initiatives. As always, amid the backdrop of ongoing restructuring efforts at CEOC, we are focused on operating as efficiently as possible to maximize value for all stakeholders. We will now open up the line for Q&A. We’d ask that you keep your questions focused on the business performance. Operator?

[Operator Instructions]. Your first question comes from the line of Susan Berliner with JPMorgan. Your line is open.

Hi. Good afternoon.

Hi, Susan.

So I wanted to start with I guess CapEx spend at the various entities for the quarter and I guess specifically on CERP as well – if you can give it for all three, but specifically on CERP, can you talk about the impact from room renovations? Can you quantify that at all and also help us think about the rest of the year?

Sure, Sue. From an impact standpoint, we did have a large quantity of rooms out of order due to the renovations primarily at Caesars Palace and at Harrah’s Las Vegas. We didn’t quantify the impact of that but we obviously tried to mitigate it through revenue management techniques. It was, however, in our view slightly larger than we had originally anticipated. And as we move throughout the year, we’re going to learn from the revenue management opportunities to ensure that that doesn’t repeat itself in future quarters. From a CapEx standpoint, you’ll see on the CapEx that we guided by credit, we did reduce our CapEx guidance slightly for CERP and CGP mainly due to timing. Also CES, we reduced fairly significantly and on that what we’re realizing is that a lot of the information technology initiatives are moving from posted initiatives into cloud-based solutions, so they’re more expense oriented than capital. And then CEOC was largely the same, slightly higher than we had projected at the end of the quarter.

And can you give us the actual amounts you spent at each entity?

Yes. Hi, Sue. It’s Jacquie. How are you?

Good, Jacquie. Welcome back.

Thanks. CERP were at 26.5, CGP 18.9, CES 4.7.

Great. And then I didn’t see – I saw you guys put revolver balances but I didn’t see actual debt balances and I guess specifically for CERP, the cash came in a lot higher. So I guess if you could help us with what the debt balances were at least at CERP and CGPH? And why is the cash balance I guess so much higher? I know you have that coupon payment but I’m assuming you had [indiscernible] during the quarter?

Yes, Sue, this is Eric. The amortization would have been the only reductions in the debt balances other than revolver repayments that you can see. I think you’re probably referring to the ECF offer --

Yes.

And we did not make any ECF repurchases due to the calculation and in particular the fact that it included committed CapEx that’s anticipated to be spent in 2016 and future years. So that’s the reason why ECF payments weren’t required. We’ll use the cash, as we’ve talked about, for reinvestment in our facilities and also to pay down our revolver and such.

Okay, great. So I guess the debt balance is just the revolver and the terms on amortization that’s it. That would be the only change.

That’s correct.

Okay, great. I’ll get back in line. Thanks.

[Operator Instructions]. There are no further questions at this time.

Operator, thank you very much. I’d like to thank everyone for joining us on today’s first quarter results call and we look forward to joining you for the second quarter report later on in a few months. Thank you very much.