Q2 2021 Penn National Gaming Inc Earnings Call
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Greetings and welcome to the Penn National Gaming second quarter earnings and acquisition of the score media and gaming conference call.
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I would now like to turn the conference over to Joe to Phony Investor Relations. Please go ahead.
Thank you read on good morning, everyone and thank you for joining Penn National Gaming Conference call to review the company's 2021 second quarter results and todays announcement that Penn National has agreed to acquire score media and gaming there are.
Investor presentations on the Penn National website for both the quarterly results.
Results of the transaction is we'll get to management's presentation and comments momentarily as well as your question and answer.
First I'll review the Safe Harbor disclosure.
In addition to historical facts or statements of current conditions. Today's conference call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, which involve risks and uncertainties.
These statements can be identified by the use of forward looking terminology such as expects believes estimates projects intends plans seeks may will should or anticipates or the negative or are the variations of these or similar words or by discussion of future events strategies or risks and uncertainties, including future plans strategies performance developments acquisitions.
<unk> capital expenditures and operating results.
Forward looking statements reflect the company's current expectations and beliefs, but are not guarantees of future performance as.
As such actual results may vary materially from expectations the.
The risks and uncertainties associated with forward looking statements are described in today's news announcements and in the company's filings with the Securities and Exchange Commission, including the company's reports on form 10-K and form 10-Q.
Penn National Gaming assumes no obligation to publicly update or revise any forward looking statements.
Today's call today's call and webcast will include non-GAAP financial measures within the meaning of SEC regulation G. When required a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website.
You for your patience with that and now it's my pleasure to turn the call over to Penn CEO Jay Snowden Jay. Please go ahead.
Thanks, Joe Good morning, everyone and thanks for joining us for our second quarter earnings call and I would say more importantly, the exciting announcement of the acquisition of <unk> media and gaming.
With me here and while I'm ethane, our CFO Felicia Hendrix, our head of operations part George as well as other members of my executive team.
And later on Jon Levy founder and CEO of the scoreboard will join me to discuss our exciting new partnership that we announced this morning.
Also be joining a bit by barstool founder, Dave Portnoy, and Barstool sports CEO Erika nardini to get their perspective on the deal as well.
But first I'll begin today's call with the highlights of our record financial results this quarter, which exceeded our pre announced ranges.
This is a reflection of the ongoing recovery in regional gaming and it speaks more specifically to the outstanding job that Todd and his operating teams both here at corporate and at the property levels are doing to help drive our continued margin improvement and boost higher spend per visit from our existing 55, plus age group, while finding new ways to attract younger patrons looking for alternative energy.
And options.
We also saw impressive revenue growth and near breakeven EBITDA results across our Penn Interactive segment, we're preparing to launch the Barstool sports book App in 4 or 5 more states by the start of NFL season next month and by the end of this calendar year, we expect to be live in at least 10 states. While also introducing several new features to the App.
Such as same game, parlay, and Shareable Backflip, which we're really excited about with greater operating scale and leverage improved products and unique value, creating marketing strategies. We believe we are extremely well positioned for a strong fall as we roll into barstool sports favorite time of the year football season.
Which provide provides a nice segue to our pending acquisition of the score which is the number 1 sports App and sports media name in Canada and in the third most popular sports App and sports media name in North America. When we add the score is unique integrated media and betting platform and modern state of the art technology to the massive audience of barstool.
Sports and it's wildly popular personalities and content will be creating north America's leading digital sports content gaming and technology company.
Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies will be acquiring the score for approximately $2 billion on cash and stock.
The scores shareholders will receive $17 in cash and zero point to 398 shares of Penn National common stock for each the score share, which implies a total purchase consideration of U F $34 per the score share based on Penn National's <unk>.
5 day volume weighted average trading price as of July 32021.
We are uniquely positioned to seamlessly serve our customers with the most powerful ecosystem of sports gaming and media in North America, ultimately, creating a community that does not exist. Today. This transaction will allow us to provide state of the art mobile sports betting and I casino with highly customized and and have enhanced and game wagering opportunities along.
With highly engaging personalized sports and media content and real time scores stats on videos. We believe this powerful new flywheel will result in best in class engagement retention and loyalty and this larger cross promotion ecosystem will provide us with multiple growth channels that transcend our current business vertical.
In the near term will just be scratching the surface of where we can ultimately take this company.
The transaction also provides us with a path to full control of our own tech stack with a deep pool of engineering talent.
<unk> developed a modern player account management system and is currently on the process of finishing up the development of an in house managed risk and trading service platform built specifically for the North American market that should lead to significant savings in third party platform costs and more importantly allow us to broaden our product offerings, providing the myth.
<unk> for operating at what we believe will be industry, leading margins. In fact, we expect to realize margin improvement of 500 basis points or more over time for Penn Interactive.
We ended the score intend to tap into that pool to expand the scores tech team there as the business continues to scale on.
Also want to reinforce that we intend to operate the score as a stand alone business much like we have with barstool, which will remain headquartered in Toronto.
Finally, it goes without saying that this transaction reflects the deep respect we have had for the score brands over the years and what John and his family have created we have known the levy family for years and like our Barstool acquisition, we don't want to come in and change who they are which is what has made them. So successful a large part of what we love about both barstool and the scores there.
<unk> voice, they're scrappy nature and entrepreneurial spirit, we want the score to keep on doing what it does best and are proud to have John and his entire team and family bring their unique perspective to our Penn National family. This is going to be a long term partnership.
So with that I'd like to turn it over to Jon Levy.
Yeah.
So thanks, very much Jay and as Jay mentioned.
We've been strategic partners with Penn in the U S. Since 2019.
And over that time, it's been great getting to know Jay and his team.
Who really do share the same culture and like us are proud to be disruptors.
We quickly realized that where we shared a common vision and approach related to its roots rapidly growing opportunity in media gaming all across North America.
Admired how Penn and strategically built their business and when this opportunity arose it was clear that there was a natural alignment.
Bringing together 2 companies who've developed large and loyal customer basis.
Can't wait to joined forces with poor with Penn and leverage our respective strength to create the most powerful sports media gaming and content company in the market. We will combine to create a first of its kind company, which brings together world class technology.
Really engaging sports content and unparalleled reach enabling us to uniquely serve users like no 1 else can.
And obviously has a massive retail footprint across the U S. But their approach to online gaming is also equally appealing.
Like us tenants many of the strategic decision to build their gaming operation around the strategy that originally integrates media and bedding.
Through barstool, leveraging their Hugh Hugh Suhr hugely influential content machine, it's been apparent how the powerful strategy how powerful this strategy can be our product led approach to integrating media embedding with technology accomplishes the same objective.
Through its entirely complementary way, we look forward to collaborating with day, Erica and Barstool team as we leverage our unique brands large audience and respective approaches to serving sports fan.
Now I'd also like to thank our team at the score for helping US build this truly incredible organization.
For years, the team maintained the dedicated focus and attention to understanding how to empower the fan experience.
That effort has driven the innovation and ultimate success across all of our verticals sports media esports and gaming.
This concentrated unified mission took us headfirst into the regulated gaming industry going to path less traveled for media companies and actually becoming the sports book.
We knew there was a better way to serve sports book Betters.
In a few years, we built an innovative technology led integrated media and gaming operation that has poised us for success across North America, including the highly anticipated upcoming rollout of commercial sports betting right here on our home turf.
At this enormously potential and demonstrated ability to execute that as excited our partners at Penn and their shared vision of where we can take it that has excited us.
That very much includes the opportunity here in Canada with Penn support we will continue to invest in building, our Canadian operations growing our footprint and extending expanding our work force, including our technical capabilities.
Technology has always been the foundation of our organization since we since we began with apps on our flipped homes.
We have built it into a world class technology platform and will continue to pioneer on that front setting the standard for digital sports media and gaming.
Now with Penn, we have the opportunity to leverage it on a much larger scale.
This combined entity truly creates a unique market leadership position across media gaming and technology and we could not be more excited with the opportunity I think I head on.
On a personal note I'd like to thank <unk> for being a great partner. These past few years and express how much bench and I look forward to continuing to work with them.
Now obviously in a much closer capacity as we continue to head up the score as part of this new combined company with that now I'll turn it back to Jay.
Thanks, John.
Now I'd like to turn it over to Dave Portnoy, Erika Nardini to say a few words as well, Dave It's all yours.
Yeah, Thanks, Joe So I'm Super excited.
And you know things come full circle on until there's a little bit, but even before we were involved with Jay and Penn when the churn on guys invested on the first company really the only company. When they said is there anybody else that you guys think you're synergistic with that could really grow exponentially what youre doing my answer was.
The score so Erika and I met with John way back when I had a meeting we didn't have the resources at the time to pull it off.
But I think what makes boswell successful on that is what has made the barstool and Penn relationship work is we really know the market. We know the gambling space, we know sports gambling.
And I've been a user of the score for I don't even know how long I was trying to check when I installed the app on my phone, it's going to be at 10.15 years. So we're super excited I think it's so synergistic with what they do and what we do and continues the belief I know Jane I Havent and John.
John and I have which is controlling the media and having the entire ecosystem where people get scores they get info and they can also placed the wager. It just fits so perfectly and I've said all along the company as everyone's spending that I would watch.
On.
On to work with is the score so it's been a long time coming.
But we just see the world the same way and continues on the belief.
The convergence of media sports gambling in the next step so I couldnt be more excited and it's a company that I know well and have believed in and really just the vision of where we want to go so super excited.
And then this is just something on top of that.
Have so much respect for John and his entire family and what the score has become in the end the business they've created day exactly right. The first company we met with after pass though was repealed was the score.
Such a profound respect for what they've created in Canada.
So blown away by how they think about community the type of tech that they're creating the way, they're innovating around information and betting and we believe that those things coupled with Penn strength and footprint and our brand can create a company that will have an incredible amount of synergy.
We also couldn't be more excited to be partnering with a Canadian company and we were ready to go to them on.
Okay.
Awesome, Thanks, Eric Thanks, Dave.
Well, let me let me before we open it up to questions. Let me just close it out by reiterating a few things and I think you heard it loud and clear from Jon Levy from Dave and from Erika debt.
So all of US there. So there's really a shared vision of where we're headed and it's not really where everyone is today.
We look at this transaction and this partnership is it's not just about sports betting and it's not just about media, it's not just about pack or gaming.
It really does transcend any 1 of those individual verticals from our perspective.
And to really become best in class and have a really successful flywheel you have to have the best and widest variety of content a mall.
And tech platform Omnichannel assets Smart engineers best in class marketers.
And we believe strongly the score Barstool sports on Penn National combined check every box.
We're here today to announce that we're doubling down on the belief that we have the best strategy and today with this partnership will be making the moat that we built wider and deeper. So that's the way we're talking about excited to answer your questions and with that read I will hand, it over to you.
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Our first question comes from the line of Joe Greff with J P. Morgan. Please proceed with your question.
Good morning, everybody.
My question to the change going into today. So obviously you saw relates to today's.
<unk> acquisition news.
First first question related to this J D.
You referenced in the slide deck and the press release cross marketing or other cross promotions between the score on Barstool sports.
Are you planning to lead with 1 over the other depending if you're looking at the U S markets versus the Canadian market.
How integrated the brands being on the front end for our consumers.
Yeah, No great question, Joe and as you can imagine we spent quite a bit of time talking about this as a group we actually had really good productive discussions with the levy family and Dave and Erika and Big Cat a couple of weeks ago in New York in Israel really strong consensus that leading with the score Brad.
And in Canada of course makes tremendous sense and we're all excited to do that we think that much of the barstool audience is already familiar with the score.
Dave and Dan They were Super excited and you heard Dave talk about day, they've been following the score and they've known the Levy family.
<unk> had been using their app over ESPN or any of the alternatives forever and so leading with the score brand in Canada makes a lot of sense and of course there'll be a lot of cross promotion.
Really get an opportunity to market to that barstool audience that we are also the score leading in Canada and I think.
In the U S.
Barstool of course is a super strong brand, it's going to be our lead brand in the U S. But we do have a nice optionality. We have number of states, where the score has already launched and are continuing to build out their market share and go live in 4 or 5 states already in the U S and so we've got a lot of options I think that what's most exciting Joe.
From my perspective, and I think that John and Erica and David I'll Echo. This debt. We felt like we have 2 of the Premier Sports Media brand in North America and.
You know our business model is a bit different than everyone else I sort of look at what the competitors are doing in this space and it feels to me like a rental model and.
We're planning to to buy than to build and to do something that's really differentiated but it's built for the long term we.
We have built and structural advantages that we've talked about before whether it's access and now it's totally vertically verdict vertical tech stack.
Graded media and betting capabilities and engagement.
And we've got 2 amazing brand. So we'll see how this plays out but for sure. The Lee brand in Canada will be the score on the lead brand in the U S will be barstool.
Great. Thank you and then on slide 17, you have some illustrative.
Scenarios for market share and.
Revenues and margins.
And that's for North America as a whole within that what are your underlying assumptions for the Canadian market.
And market share, which I would imagine.
Given the scores.
Presence.
Second it's the hometown team.
And its historical presence there.
We'd give you higher market share than sort of that 10% top 3 that you've been targeting in North America.
Yes. So if you if you actually flipped to slides 18, and 19 Youll see that we estimated on North American Tam of $30 billion, which is sort of down the middle of their terms are all over the place because theres still a number of pending state.
States and provinces opportunities between the U S and Canada, and when we say $30 billion, that's combined sports betting and casino and so we've laid out a number of scenarios. There of what you know in terms of what your margin improvement opportunities would be a 500 basis points. If your market share were anywhere between that.
19% range.
Always been sort of targeting that midpoint of 13%. We think that that's something that is very achievable for us and we think that's achievable for us in the U S and in Canada.
So I think that's a good baseline Joe is there upside to that we would feel good about what that potential is down the road, especially once we have full control of the product roadmap and we are 100% on our own tech stack, both in Canada and in the U S. So I think those 2 slides are the ones to really run.
<unk> there and of course, not just from a market share perspective, and a margin improvement perspective, but I think overall Tam and where we expect to be market share wise, it's laid out quite well. So you've got the nice thing about this transaction, you've got natural sort of easy to calculate cost synergies and then I think you know it's a lot of.
When you start focusing on the revenue potential because in all of the assumptions that we've made here on these 2 slides, which are I think quite quite exciting there is nothing in there around opportunities in media. There is nothing in there about opportunities in other verticals, where we think this company, meaning Penn National is going to be focused down the road.
What we're building here again really transcends any of the verticals that we're currently in it's much bigger than that.
And then 2 final quick ones here.
As a reference to.
EBITDA accretive in year, 2 after a period of investments what level of investment.
Are you thinking about right now on.
Once the deal closes in that first year or 2.
And then you referenced in the medium term $200 million of incremental EBITDA.
Much of that comes from.
Increased share in Canada versus the margin benefit.
From bringing the tech stack and I know you have a broken up between 90 and 1 thing I think that 90 includes other things beyond just that the benefits of controlling the tech stack.
Yes, so from a synergy standpoint, and that's laid out pretty well I think on slide 17, you can see the breakdown of where we see cost synergies versus revenue synergies. So it's sort of like a.
40% are cost synergies and 60% of revenue synergies I think is the best way to look at it.
And then can you remind me of your first question so.
Of the <unk>.
Just in terms of how much that $200 million of the $110 million of the $200 million.
Comes from what you think the opportunity is in Canada with enhanced share.
With the score.
On the fold.
Yes, and then you had also asked I believe about.
Sort of what costs are we what are the investments over the course of the next year since we said EBITDA accretive for year 2.
We're gonna be.
I guess, taking a step back there there's a couple of things coming up for football season. This year and then soon thereafter that are really exciting for us 1.
Gonna have real scale for the first time last year football season, and week, 1 we rely on <unk> zero States, we squeezed in week, 2 in Pennsylvania, and we got into Michigan at the very very end of last football season.
Football is all of our favorite sport at Penn at Barstool, and I won't speak for historically, it's probably somewhere between football on hockey.
But I would say that for us to have scale this year.
The big difference and so we're going to be investing I think more nationally from a marketing standpoint, and you've been reading about some of those.
Sponsorships and actually announced last week, Dave and Erika spoke about.
Not just being a keep the title sponsor, but also having distributed distribution rights in broadcast right.
As it relates to the Arizona Bowl. So there are some things that we're able to do when you have scale that you can't really do when you're only live in 1 state.
Dave has a golf match coming up with Brooks kept Guy in September. We also are going to be the lead sponsor for the J qualified that's coming up at the end of August and what's nice about each 1 of these opportunities and the ones that we certainly look for is that it's not just going to be barstool logo here or the score logo there.
Sure.
These are.
Deeply integrated we're able to use our content creators are able to use Dave and big cat and others at Barstool to not just put the name on it but also to really make it.
On entertaining experience when people are are tuned in to watch or listen to these events. So I think youre going to see that theres, a lot of investment going into our marketing capabilities to widen the funnel going into football season. So we can continue to grow our market share.
The last several months our focus has really been on just getting ready to go live in 4 or 5 more states by football season kind of a slow sports calendar, but we're ramped up and ready to go for football season at Barstool.
The score is ramped up and ready to go and we think Ontario is gonna be ready to go live in sort of December January February timeframe, so theres going to be clearly significant investments in Ontario.
For the score as they get ready to launch and then we're going to continue to invest in improving the products and capabilities that we have here in the U S as well as in Canada, There's a lot of investment going in.
And even with all that said because.
Or are built and structural advantages, we think will be probably breakeven from a Penn interactive and the score combination in 2022, and then you'll see that EBITDA ramp really start to hockey stick in 'twenty 3 and beyond.
Great. Thank you very much good luck. Thanks.
Thanks, Joe.
Thank you. Our next question comes from Bernie Mcternan from Needham and company. Please proceed with your question.
Great. Good morning, everyone John Jay Congrats on the deal just Big picture question for me, there's a lot of moving pieces with Barstool Penn media assets. It's early days, but as you mentioned media right to the Arizona Bowl partnerships with Influencers athletes like low to Paul all the content that Dave and team are putting out with barstool.
Sports betting apps, leading media App now and sports I'm sure there's going be more added to the mix, but could you just take some time and just show where you're focused on what your vision is for kind of what barstool and Penn will look like as sports betting and sports media continue to converge.
Well I mean look on what I would tell you is that it's going to be an absolute evolution and the things that we announced last week weren't even on the table 2 months ago. So it's a great question Bernie I think the opportunities for us as a company with a great companies and brands of Barstool and the score really are endless.
I don't look from my perspective, there is no better top of funnel.
Brands in the U S from a sports media entertainment perspective than Barstool, nobody knows how to engage an audience acquire customers.
Attract eyeballs the way that bar store does their brilliant at it and the brilliance is really on the phone with Dave and Erika and of course, Big Cat and the team at Barstool and I look at the score in a day.
They're also very very strong on the acquisition side and where they are even stronger is on the engagement and on the retention side, because there really isn't any 1 better at delivering personalized content again I've been on the score App for years myself in on it.
Yankee fan and.
So everything that they that they do is so real time customized personalized in and when you're in their App you Youre attracted in there for maybe a headline or a highlight or some stats or or scores and then once you're in there. It's seamless you also want to bet on the game you can do it right there and it takes you to the score bet. So this integration.
Between media and betting I think is we're going to do it better than anybody else, because we own that entire ecosystem and that entire experience. So when you combine the power of barstool from an acquisition standpoint, the strong brand. It is just getting bigger and bigger every day, both as it relates to.
Sports and media and Entertainment and then you look at what the score does best.
We think we're building something that's best in class on something that can't be duplicated.
Got it and then at the time on the Barstool acquisition you went over.
A lot of details on the barstool demographics of the core users on it still leaves.
Any sense in terms of the overlap is between the core users of the score in Barstool.
Yeah, I'm happy John to have you talk a little bit more about the demographics of the score and I would tell you that from my perspective, we know that there is there is some overlap but we also know this is largely incremental especially when you are talking about their user base in Canada, but go ahead John.
Absolutely and I think Jay sort of hit the nail on the head we've been building the brand.
In Canada, but actually throughout North America for a whole bunch of years.
And you.
You know.
2 thirds of all of our users come from the state probably most highly engaged audience of any sports digital sports Media company.
And the key factor of the Jay did mentioned is with respect to.
The retention and the engagement that we get from the users there on our App. We can tell on very personalized we can tell what's going on on a.
Almost on a minute by minute basis on Sundays people are bang on the App left right and center and you know why they're doing that is because predominantly they're betting on sports and really the experienced in Canada is exactly it's exactly the same.
Our presence in Canada.
Leading digital mobile sports.
Company in Canada, where like second or third throughout North America.
On the footprint, we have flow there on our social platforms is is quite frankly enormous and.
And if.
There is just right there is going to be some overlap, but the opportunity here to collaborate with Penn sitting sort of as the core.
On to collaborate with.
So with Barstool is enormous and in just in terms of the type of.
Efforts that we're going to do.
It's pretty traditional stop that youre seeing from the other media companies like like Jay suggested you know in it.
<unk> goes on Billboards and I joke about sponsoring hotdog eating contest and all that sort of stuff our whole approach to sports and I believe barstools as as well as just a centric approach to connecting with the end user with the sports fans and.
We do connect I think we connect in somewhat different ways, obviously and I think that's what makes it so complementary where kind of like.
2 sisters of our brothers in this family and they're gonna be all sorts of ways that we can.
Collaborate and dig deeper and extend this relationship and.
And then when you when you put the power of 1 of the reasons. The Penn was so excited and interested in the score was because with the technology that we built over the years because it gives them the.
Absolute control to be able to do whatever your mind can think up so when we come up with different promotions that the other guys can't think that low marketing campaigns or some of the wild and crazy stuff that that Dave and Barstool is going to come up with so you don't have to wait around to be able to implement their stuff and you guys are at Barstool will tell you that 1 of the.
1 of the bigger opportunity is everything has to be immediate you come up with an idea and you got presented to the sports fan right off the top and you'll have to be able to deal with it instantaneously.
1 of them.
On the last thing I'll comment that part of why the technology works. So good and why it opens up so many opportunities specifically in terms of revenue generation.
As most of Youre aware 40 to almost 50% of all Wagering magazine game well. If you don't have the technology that allows you to avoid that spinning wheel of debt. While people are trying to you know.
Consume this content.
The indication that they want to make a bad instantly on price a wager instantly.
You lose the momentum the universe ability to do that so I think when you put all this together.
I think Jay mentioned earlier, if you look at Penn and what they've gotten out it ticks all the boxes and and this is something that we saw in talking to Jay years ago.
Your first deal we did with day was our access deal I guess over 2 years ago, now, which gave US a footprint of 11 states in the U S.
And even back then we could see that there was a real tight shared vision and it was the same culture and and now with the resources and scale to accelerate what we're doing.
Throughout North America, and predominantly in Canada, where.
We tap into that big resource pool.
It really is a very very.