Q3 2019 Earnings Call
Good day and welcome to the Eldorado resorts in 2019 third quarter earnings Conference call Today's conference is being recorded.
This time I like to turn the conference over to Mr., Joe to Pony Investor Relations. Please go ahead.
Thank you Stephanie good afternoon, everyone and welcome to Eldorado Resorts 2019 third quarter conference call joining us today for the company, our Chief Executive Officer, Tom Reeg, President and Chief Operating Officer, Anthony Corona, and Chief Financial Officer, Brett younger Okay. It's called will review the company's third quarter financial results and the old in the company's ongoing progress against its key.
<unk> strategic priorities, including the status of El Dorados proposed acquisition of Caesars Entertainment.
And open the call to participants for questions.
Good afternoon, Eldorado issued a release announcing its third quarter financial results for the period ended September Thirtyth 2019 releases available in the Investor Relations section of the company's website at Www Dot Eldorado resorts Dot com.
Before we get started go back to remind everyone that because its cosby reported and a webcast replay will be available for 90 days. The details of which are included in today's press release.
During today's call we may make forward certain forward looking statements about the company's performance such forward looking statements are not guarantees of future performance and therefore, one should not place undue reliance on them.
Looking statements are also subject to the inherent risks or uncertainties that could cause actual results to differ materially from those expressed.
Additional information concerning factors that could cause actual results to differ from those discussion are forward looking statements you should refer to the cautionary statements contained in our press release as well as the risk factors contained at the company's filings with the U.S. Securities Exchange Commission.
I do want to resorts undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances that occur after the call.
Also during today's call the company May discuss non-GAAP financial measures as defined by FCC regulation G.
The GAAP financial measures <unk>, most directly comparable to each non-GAAP financial measure discussed and a reconciliation of the differences between each non-GAAP financial measure I mean, and a comparable GAAP financial measure can be found on the company's website at www Dot Eldorado resorts dot com by selecting the press release regarding the company's 2019 third quarter financial results.
Thank you for your patience with that and at this time, it's now my pleasure to turn the call Liberty Company CEO , Tom Reeg I'm glad please.
Thanks, Joe.
Good afternoon, everyone.
We're pleased to report strong third quarter results.
EBITDA up about 8% on a same store basis to just under 198 million for the quarter.
Hi against a plus 12.5%.
From last year, So I think we're facing the most difficult comp in the space and we posted the strongest same store EBITDA growth.
Our margins increased by over 300 basis points to just under.
30% consolidated EBITDA margin for the quarter.
We shared our integration or I'm, sorry, our synergy targets in both the Tropicana and Grand Victoria acquisitions during the quarter.
And had some notable standouts.
And the central region in particular that.
Cleanest region in terms of looking at you know what happens with properties as we.
As we bring them into our system that was their assets the longest of which in Elgin we own sense.
I guess stuff last year.
So we're quite pleased with the performance there you can see that we had some.
Hi.
We still had some weather impact in the south although not enough to make a material difference.
To that consolidated corridor that is not as a material differences the first.
Couple of quarters, the year, but you can see the south was hit by tropical storms and you'll see that in the numbers, but generally speaking very pleased.
With the quarter from a performance perspective, and our business we spent.
The bulk of the last four months since we announced the Caesars acquisition.
Digging further into.
Caesars organization. It operations, we were quite pleased with the quarter that they reported yesterday.
Particularly in Las Vegas, a their Las Vegas operation is.
Performing extraordinarily well a cash revenue revpar growth basis.
Generating solid EBITDA gains versus its peers.
You've seen that they've started to make some moves.
On the cost side that are similar to things that we might do as weak as we.
Entered afraid there.
In terms of timing of the transaction our shareholder vote.
On both sides is November 15th weeks on Friday, we continue to work through regulatory and and I Trust you can see in our release, we're still targeting a first half of 2020.
In closing date, if I were to place a bad today I'd be betting on a first quarter close versus the second quarter close, but we're going through regulatory and anti trust in real time.
In terms of what we're finding we thought we went fine.
Strength at the operating management level in the properties in Caesars. We spent the last couple of months visiting every.
Caesars property and meeting their management teams letting them take us through.
The properties in their views on where the properties are today, where they can go.
We are pleased to report that.
Their property level management team across the board is generally quite strong.
Should adapt well and quickly to our operating style where they have.
Much more of a saying what happens again.
Business and we're excited to get there.
In terms of our announced synergy targets, we've announced 500 million as.
Synergies post closing as most of you are aware.
We are supremely confident and that number growing increasingly confident as we dig deeper into the organization and indeed, we think that those synergies will be heavily front end loaded.
So we feel very good about where we're headed with Caesars about where caesars is on its own and on.
Well, where our own business is I tell you also in Caesars.
We're excited to see areas, where we think we can drive.
Shareholder value, that's not just you're generating more free cash flow or EBITDA at the property level.
We see opportunities to.
Yeah to monetize assets in Caesars that we've started on a path toward in other transactions and some unique areas within Caesars that we think will drive.
Material incremental value to shareholders beyond just a multiple of <unk>.
EBITDA or free cash flow yield.
So we're very we're very pleased with how the quarter finished the consumer remains strong for US as you go into fourth quarter on our side OLED. Your fourth quarter is always the most difficult to.
Forecast because so much of the business is collapsed into a handful of weeks around the holidays and we are facing a plus almost 22% same store sales comp. So we're facing a difficult comp, but we feel good about where the consumer is.
Hey, good about what we'll post in the fourth quarter.
So with that I'll turn it to Anthony for more specifics on the properties.
Thank you Tom and good afternoon, everyone on the call I'd like to take a few minutes to provide you with some third quarter operational highlights the third quarter was strong with four out of our five regions delivering adjusted EBITDA growth led by the central region at 22.3% growth year over year.
Looking at our five operating segments I'll begin with East segment, where adjusted EBITDA increased 5.3% year over year to 57.2 million and the adjusted EBITDA margin Rose 190 basis points to 30.7%.
All three properties in the east generated year over year growth in adjusted EBITDA during the quarter.
Scientists adjusted EBITDA rose for the 19th consecutive quarter.
LTM EBITDA in Atlantic City, now ahead of the LTM period preceding the hard rock notion openings.
Adjusted EBITDA for the South region was down 7.2% to 24.7 million on a 10.6% decline in net revenue.
Results in the South segment were negatively impacted by Hurricane variant, Dorian, which impacted Pompano and lake Charles during the quarter.
Our property level operating teams reacted quickly and despite the weather headwinds in the south regions adjusted EBITDA margin improved 85 basis points to 22.9%.
Now turning to the West region, EBITDA improved 1.4% year over year to 49, and a half million dollars results improved sequentially in the third quarter in the West region. Following the completion of our best Blackhawk renovations late in Q2 of 19.
The west regions that adjusted EBITDA margin improved 200 basis points to 32.7%.
Revenues in the Midwest declined, 4% and segment adjusted EBITDA Rose, 1.2% to 35.7 million.
For the six properties in the Midwest achieved year over year increases in adjusted EBITDA. The Midwest adjusted EBITDA margin increased 190 basis points to 37.2%.
Finally, similar to Q2, our central region delivered an exceptionally strong third quarter with EBITDA growth of 22.3% on a 2.4% decline in net revenues.
All three assets in this segment delivered double digit year over year gains in adjusted EBITDA.
Our ability to run these assets more efficiently is evident in the 630 basis point improvement in the segment's EBITDA margin <unk>, 31.4% during the quarter.
As I reflect upon our Q3 results are diversified portfolio 26 regional gaming assets had a solid quarter delivering 8% same store adjusted EBITDA growth.
Our recently acquired assets are performing well and our property level teams continue to find ways to improve operating margins as evidenced by the 330 basis point improvement and consolidated margins this quarter.
I'm excited about the opportunities ahead, as we look forward to closing the Caesars acquisition.
With that I'll now turn the call over to Brent for some additional insights on the third quarter financial performance and detailed on our balance sheet capital structure right Yep, great. Thanks, Anthony <unk> third quarter was very productive from my perspective.
We ended the quarter with 2.95 billion of debt and over 200 million of cash on the balance sheet.
During the quarter, we paid down 70 million of our term loan and year to date, we've repaid over 300 million of debt.
In the third quarter, we spent 38 million on Capex and we continue to estimate full year 2019 capex.
200 million.
We expect to begin construction on our Lake Charles Land based project later this quarter, we anticipate receiving 385 million of gross proceeds from the century asset sale before the end of this year and 230 million from twin River proceeds in the first half of 2020, we plan to use these proceeds to pay down.
Debt.
With that I'll turn the call back to Tom.
Thanks, Fred will turn it back to the operator for any questions.
Thank you at this time, we will open the floor for questions if you'd like to ask a question do you May proceed Starkey followed by the one key and your Touchtone phone now.
You did your phone. Please make sure you every function is turned out to let you signaled to reach I quit now.
I didn't hear me press Star one ask a question. My first question is coming from Carlo Santarelli with Deutsche Bank.
Hey, Steve Zone for Carlo Thanks for taking my questions last night, she Cesar CEO , Tony Rodeo mentioned that they know see 75 to 100 million Ocas assays.
Do you think about that in terms of your $500 million synergy targets and the timeline for realization of your synergies.
Well, what I tell you as.
See as in any merger agreement.
Our operating covenants in terms of what each company can do.
Between signing and closing fall semester operating our business as.
Hi.
Independent entities at this point, so Caesars is making those decisions as.
They make material decisions if there's if it reaches a certain threshold immateriality.
We all kind as well Tony has been with us.
Through all of our due diligence in the last.
Four months falls property and in Las Vegas, you know keys heard a lot at the same things that.
We've heard weve it we've been discussing.
Publicly and privately what we would.
We intend to do once we take over so you should expect that saw what Tony is tackling or things that we would have started tackling at closing so we get to accelerate that a little bit and see the benefits quicker than we have and other transaction.
Okay, great. Thanks, and then just one follow up given the value Caesars brings to you with respect to their sports partnerships, how do you foresee the monetization.
Can you repeat that question get closer to Mike We can't hear you.
Yes, given the value Cesar brings to you with respect to their sports partnerships.
Do you foresee the monetization of said value.
Well I tell yet we have our partnership with William Hill, Caesars has a lot of its own.
For expanding partnerships.
As we come together, it's an obvious time to figure out how are we going to tackle sports going forward.
That's a.
That's clearly a much higher growth business.
In the core casino operating business I think if we can find a path where we can.
Spotlight that value so that it's not buried in a.
Giant casino operating company, you should expect that we'd explore.
The ability to do that.
Okay, great. Thank you.
Thank you. My next question comes from David Katz with Jefferies.
Oh, Hi afternoon, everyone.
Tom you I I mean, I think a lot of the operating discussion is it's quite clear.
But you did mention in your opening remarks about other embedded value.
I I assume that the previous question would be under the heading of no other value drivers within the combined entity.
I would assume that you know the pompano discussion, which we've had.
Would be under that heading also what other kinds of things would you know include either generally or specifically under the heading and if there is any incremental updates since June two we on you know pompano, that's discuss about would love to hear it.
Sure take the second one first on Pompano, we still expect.
Zoning to be complete.
Yeah. The early 2020, that's just spend.
Bureaucratic in terms of how long it takes theres no controversy in terms of what we're doing a third party interest in the project has been meaningfully stronger than either of us either us or cordish anticipated.
Going into the scope has expanded abate you've seen some.
You know some public meeting or.
Data that's come out out of Florida, and a lot of what's in there is accurate in terms of what we're pursuing you should expect to see.
Construction in earnest and 2020, yet in terms of.
What else is out there yes, you know sports is an opportunity Caesars has a lot of excess real estate, both in and out of Las Vegas that could be use for.
Future development false for ourselves or in a partnership theirs.
Lots and lots of entities that wed like to get close to or on the Vegas strip as you know Caesars owns a lot of land in that area and there could be opportunity.
Caesars has.
You know payment streams embedded in the business that others in the past have monetized at particularly attractive attractive capitalization rates. So you have those sorts of opportunities as well so non <unk>.
Not just improving free cash flow and.
Operating casino EBITDA, but extracting value from.
The pieces of Caesars, we think this will be a.
Much more to even more target rich environment than we have seen historically.
Got it.
I think that's it for me thank you very much.
Thank you. Our next question comes from Steve Lesinski with Stifel.
Yeah, good afternoon guys.
So so Todd you talked about your property because it's all the seasons assets and you touched on a.
The management side of things, but no there any other high level take away is in terms of what you guys learns either what needs fixing if anything or even you know what those guys might do better than you guys that's impossible.
I'd say you know the specter of.
Is there a ton of Capex out there that.
Hasn't been.
Rents today, there's really not.
A material amount theres, some hotel towers that will touch.
In may.
Non Vegas markets, but nothing that's.
An extraordinarily big numbers that we're generally pleased with.
The shape of the assets.
In terms of what they do better than us their rewards program is.
Light years beyond ours, what they do and.
E Commerce and social is well ahead of what.
We do their table games business generally is far more developed than ours, all of which I think can drive.
Substantial incremental value.
Through our own properties, while at the same time were.
We're converting their operating style to ours in their property. So we think theres going to be.
Synergy opportunities from an operating cash flow standpoint.
On both sides in this transaction.
Okay, and if I could add on that a little bit Tom I think you guys have talked about that 500 million synergy target does not include any no real contribution from Rightsizing of player reinvestment spreads across their portfolio next to make sure that's still a statement.
I still think there's no some considerable upside.
You know as Youve gives you go through that process.
That's still a fair statement.
And then last question real quick you.
I know you talked about on this call, though the 500 million certain targets, but I don't think <unk>, if I missed I apologize, but yeah I don't think I heard you talk about the 10 dollar.
Free cash flow numbers that still leaves their number in play.
Yeah, we still see a path to.
Four to four and a half billion dollars of.
EBITDA out of the combined portfolio.
Which would lead to free cash flow in excess of $10 share.
Okay. That's it for me thanks, guys appreciate it.
Thank you next question comes from Harry Curtis with <unk>.
Can you give me did your families I mean.
Sorry about that can you hear me.
Yes.
Okay very good.
The.
Twist on the on the last question about a.
Giving property managers managers more so more autonomy.
Were there when you visited with them, where there any consistent strategies that that that they are likely to adopt with less corporate influence.
I mean, I think the the opportunity is.
There's a tremendous amount of inefficiency and their system.
And.
Yeah, it's very difficult to target the.
In the local customer from thousands of miles away.
So.
As an example, it takes them.
Scitor Billy longer, let's say somewhere between two and three times as long.
For them to produce direct mail to their customers.
Uh huh.
That's really a function of all of the sausage, making that it has to go through.
Tell you that.
At the.
Yes. So that's the that's one piece is.
Marketing.
Another piece is the.
Food and beverage operations that we take a different pack than they do.
Theres, an opportunity there where else would we say.
He.
Property level guys taking control.
Would be.
Scitor Lee.
Different than the way that weren't doing it.
Mostly marketing.
Mainly marketing.
And that's.
Like I said, both time to market and the way that you attack.
Your customer base is going to be very different if it's driven by the local level then out in Las Vegas, and Caesars also runs.
As.
Almost like a Vegas and a non Vegas company.
So as you have needs in me corporate.
Infrastructure at Caesars when you are outside of Las Vegas, it's difficult to get the attention that you need.
On a timely basis, because understandably they're focused on.
Hi, Good Vegas, where more of their cash flow is generated.
That speaks to why it needs to be awful lot of this stuff needs to be relocated to the local level.
Okay. So following up on that I. It sounds to me like the key corporate that keep functions that that they that Caesars corporate has maybe had there are some on the scale. If that's the right term has been marketing and food and beverage yeah.
Are there any other ones that you think really need to be more at the property level.
I mean, they've had it everywhere the way I went.
The way I would characterize it is non customer facing responsibilities.
Can you an RV estimation effectively be consolidated at the corporate level.
When you're talking about customer facing responsibilities does need to be as close to the customer as.
They can be and in Caesars case everything is centralized at this point effectively.
Okay very.
Very good that clarifies it thank you very much.
Thank you again as we come I never like to ask a question. You May proceed star one now our next question concept years church any with Wolfe research.
Hey, good afternoon, everybody. Thanks for taking my question.
So Tom I heard you on your comments about just fourth quarter being little bit more difficult to forecast than a typical quarter, but.
Maybe you can walk us through some of the puts and takes as to why fourth quarter should be better or worse than the 8% same store growth rate that you put up in the third quarter and I guess, maybe talk me out of why fourth quarter shouldn't be better than that just given some of the weather challenges you had in the third quarter and then you don't have the Reno housing agreement for a full quarter.
In the fourth quarter.
Well, you're in a low volume corridor.
Where there's going to be.
The lower your volumes volumes the more volatility you have generally.
The business if if the biggest reason I would caution you on.
Fourth quarter expectation that isn't a cop, we're up against plus 22%.
On a same store basis and there was.
In that number there was some positive hold in Atlantic City. So.
No I would say to expect us to accelerate from here in this quarter.
As aggressive given the comp.
Okay. Thank you and then just shifting gears to I guess the asset sale topic.
Can you help us think about how youre thinking about that.
In the next few years and what I'm really trying to understand is your thought process on if there's a gross number that you're targeting if it's a property count that you're targeting or if it's a mindset that you're just going to keep selling assets. If the multiples are attractive enough. How do you think about that how do you size up that opportunity.
Well you have some.
Pre closing activities.
Caesars announced the Rio transaction, we've announced.
The sale of Kansas City, and Vicksburg to twin River since we announced.
The Sears Caesars deal you should expect some.
Additional modest.
Sale announcements pre closing was that the the ultimate impact to that is will be borrowing.
Presuming all those transactions close over a billion dollars less.
A fun that transaction then we.
Then we presented at the time of the announcement of the deal because real it was not in their twin River was not in there and then any subsequent asset sales were not in there you should expect us to be always looking at non core assets. So.
The smaller assets in the portfolio, we've talked about we intend to sell one Las Vegas asset.
On the strip post closing that remains the case and that our intention is to see.
Yeah, how did that sales process go how did that impact the system once that property was removed.
From it.
And well make decisions from there I would generally say yeah.
Personally I think the.
So propco Opco model will prove itself out through a cycle I.
I think that once it does.
I think multiples will start to expand because the specter of what happens to an opco.
In a downturn will be answered it I think it'll be in our interest.
Oh and as much of our portfolio as we can't stop at that point.
We were be about 50, 50 owned and leased at closing.
We'd like to maintain in that area for the foreseeable future, but you know outside of what I've described in terms of the smaller noncore stuff and I Vegas strip asset sale.
I'd say, we're not contemplating.
Anything beyond that but I'd also tell you.
And our company everything is for sale every day, so if somebody came to us Wes.
And offer for any asset that was in the best interest of our stakeholders, we would be less.
Great. Thank you and one quick follow up if I may and I apologize if I missed this but what was the weather impact to EBITDA in the quarter.
We didn't quantify that Jerry you can see in May.
South numbers, we were down for the quarter.
I would presume we wouldn't have been down say for weather.
Okay. Thank you very much.
Thank you. Our next question comes to Barry Jonas with Suntrust.
Hi, guys.
No, but some good color on a potential sales just curious from my FTC perspective, any any additional color you can give in terms of any potential forced divestments.
We're working through the process, we've talked to you about.
Asset markets, where you should expect us to be.
Active in.
Northwest, Louisiana and in the Tao area and.
Beyond that we're not expecting any.
Divestitures posts are pre closing that are related to closing the transaction.
So nothing in Atlantic City that.
Well, we don't know at this point Barry.
Okay.
And then just a housekeeping corporate kenan meaningfully below our model in a in Q3, just curious if that's driven by permanent cost savings or it's just something shifted around.
Well keep in mind, that's corporate and all there so.
Sports betting activity through the JV flows through there now too.
You can look at our.
The corporate number that's in me income statement in the back of the.
Uh huh.
But the earnings release and in the 10-Q.
Well give you a straight corporate number and you'll see a.
In the queue, you'll see the stock compensation, that's noncash against that.
Got it thanks a lot.
No.
Thank you again, if you like to ask a question you Me Press Star. One My next question comes from John degree with Union gaming.
Everyone. Thanks for taking the questions.
Or maybe Brett one up you were alley about net leverage I, you've talked about some of the moving parts with asset sales heading and I'm wondering if you give us a little bit of color on where you expect net leverage to to be on the existing business.
You know at the end of year, when you get to closing kind of pro forma for the pending asset sales and then.
What's your thoughts on on net leverage kind of post closing and you're kind of thoughts on targets and when you might get to your target net leverage ratio.
Hey, John its Brett.
Still Uh huh.
Expecting to be mid fives on a net rent adjusted basis once you're a pro forma for closing.
That sales and expected synergies.
Okay, and ultimately John our our intention would be to drive leverage.
Towards three times and below on a gross lease adjusted basis.
Okay. Our primary use of free cash flow will be to pay down debt.
Okay.
Then just switching gears a little bit it we spend some time talking about synergies.
With the integration of Caesars on the horizon, but you mentioned a youve been we're anniversarying Tropicana and Elgin here.
Reached synergy targets there in prior acquisitions, you've been able to to exceed those arguably there synergies are just ongoing operational improvements I was wondering Tom if you could talk a little bit about what you see across the existing portfolio today and how much opportunity. You think there is a with with what you have today not including Caesars.
Yeah, I would tell you that we continue to see.
Hi opportunity in assets that we've owned for a very long time, we've got growers.
We have on back to.
Frankly, the 19th Seventys indicates of Reno, but growing ASI auto continues to be high single digits low double digit grower every quarter.
We're now seeing growth out of Atlantic City.
You're seeing continued strong results out of the Midwest I should have pointed out in the Midwest you had some lingering flooding issues early in the quarter as well.
Otherwise that that the Midwest would've looked a little better as well. So you know, we really look across the entire portfolio and see continued opportunity across the board just from basic blocking and tackling and then you add on.
You know projects like we've talked about and.
Up an l. moving land based in Lake Charles.
You know our recent activity and.
Colorado in terms of upgrading that facility that should bear fruit and then you plug that system into.
Caesars rewards, where you have markets like.
Denver and Columbus in Saint Louis in South, Florida, where Caesars really didnt have a feeder into their system. Those are very large markets. We think those are markets that should benefit.
The most from plugging into Caesars warrants.
Got it if I could tell them wanted to follow up on your comments about real estate a little earlier to prior question. We saw a big print with a blog you on the strip and a general view I think across the markets that did valuations are on rise, particularly in Las Vegas, and what you might be able to do with.
Caesars portfolio has that changed your view or expectations on on valuation for the strip asset that you might be.
Looking to to market or sell at some point and or the timing of when you may want to do that is there I.
I guess any sense of urgency to de lever or will you kind of take it as the market goes.
Hi, It doesn't change the timing of what we're looking to do we certainly were.
I'm very happy to see where MGM printed blog <unk> real estate, where even happier that there's a new capital and the real estate investment area, that's coming into the space, We think that that's the.
The tip of the iceberg, we think theres going to be others that are interested as well we think that will.
Improved the value of our assets, but you know we want to.
Yeah, we want to manage our leverage down that's why we're talking about selling an asset.
Quickly post closing the transaction, but we're not in a hurry to run out sell assets, we think that.
Value of Vegas real estate is going to continue to climb as you have more capital that becomes interested in making those types of investments, but both the.
Philosophy, our trade and the Circus Circus trade.
For a spectacular trains from our standpoint, we feel very good about what were buying and our ability to create value from those assets moving forward.
Sounds good thanks for the additional color guys and congratulations on the solid quarter.
Thanks, John .
Thank you. Our next question comes from David thing, It's a proper capital.
Oh, great. Thank you I just had one question. It was a quick follow up on I believe the initial a question just for clarity of the additional 25 to 50 million of the announced cost reduction Runrate estimate by Caesars can you just give us a broad range of what may overlap from <unk>.
If standpoint with your your one 500 million dollar synergy target.
I mean, I don't want to get to that level of granularity, David but you can see that.
The categories that were mentioned yesterday.
By Tony were.
Similar to what we've been talking about since June .
Yes, you should expect that Theres, a fair amount that we would have done.
Closing, that's kind of get started to get done.
A little bit earlier.
Okay.
Alright, great. Thanks, so much.
[laughter].
[noise] thinking there no additional questions at this time I'd like to now I'll turn it back to our presenters for closing remarks.
Hi, Thanks, everybody for your participation will speak to you so.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.
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