Q3 2021 Penn National Gaming Inc Earnings Call

November 4, 2021

Please continue to stand by your conference will begin momentarily we thank you for your patience.

[music].

Greetings and welcome to the Penn National Gaming third quarter conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.

And if at any time during the conference you need to reach an operator, Please press star zero.

I'd now like to turn the conference over to Mr. Joe <unk> of Investor Relations. Please go ahead.

Thank you Frank Good morning, everyone and thank you for joining Penn National Gaming's 2021 third quarter conference call, we'll get to management's presentation and comments momentarily as well as your questions and answers, but 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 1095, 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 other variations of these or similar words or by discussion of future events strategies or risks and uncertainties, including future plans strategies performance developed.

Acquisitions capital expenditures and operating results.

Such forward looking statements reflect the companys current expectations and beliefs, but are not guarantees of future performance.

As such actual results may vary materially from expectations.

The risks and uncertainties associated with forward looking statements are described in today's news announcement and in the Companys filings with the Securities and Exchange Commission.

<unk> the Companys reports on Form 10-K and Form 10-Q.

Penn National assumes no obligation to publicly update or revise any forward looking statements.

Today's call and webcast will also include non-GAAP financial measures within the meaning of FTC 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.

Thank you for your patience with that and it's now my pleasure to turn the call over to the company's CEO Jay Snowden Jay. Please go ahead.

Thanks, Joe Good morning, everyone. Thanks for joining us for our third quarter earnings call as usual I have here with me and wild methane, our CFO Felicia Hendrix, our head of operations and Paul George and other members of my Executive team, who can help answer your questions during the Q&A session as.

As you can see from our earnings release and corresponding Investor presentation. We achieved many significant milestones during the third quarter. We successfully launched the Barstool Sports book Mobile App in five new states with more than double the size of our footprint.

And just this week, we launched an Iowa, bringing our total to 10 life State. We also continue to grow and evolve our brick and mortar footprint. During the quarter. We opened Hollywood Casino York in Pennsylvania to strong initial results began to roll out our market, leading cashless car less in contact with <unk> technology across the port.

<unk> and have continued to see tangible benefits of our highly differentiated omnichannel strategy.

On the core business side, the third quarter was really a tale of two halves for US July started off with the same positive momentum we saw in the second quarter with revenues up 10% over 2019, and adjusted EBITDAR up 40% that momentum slowed beginning in the second half of August and into September due to Hurricane Ida, which.

It us significantly in the South South region, and the regional flare ups of the Delta variant, which combined impacted property adjusted EBITDAR and adjusted EBITDAR margin by an estimated $30 million and 85 basis points respectively.

Additionally, the other statement.

Our results reflect $75 million of expenses related to new state launches of the Barstool Sports book App that I mentioned earlier this quarter as well as $12 $5 million for our share of the initial campaign expenses for the sports betting a ballot initiative in California. Looking ahead October reflects more of what we saw in the first half.

Of the third quarter with strong property level performance across our segments with a few notable exceptions due to new competition in Colorado, and Indiana, and the residual effects of Pennsylvania's continued gaming expansion.

Engagement among our younger demographic continues to be strong and is more than offsetting the decline we saw in our older demos in the quarter due to delta.

Further our VIP segment, which grew 33% year over year in the third quarter continues to outperform notably our retail Barstool sports book concepts are continuing to stimulate database growth and increased frequency of visitation in the younger segment, while also boosting gaming and food and beverage spend or retail.

Sports books are now number one in handle market share in the states of Indiana, Iowa, West, Virginia, and Michigan and we're excited to announce the reason opening of two new retail sports books. This week in Louisiana at La Bears Baton Rouge, and Boomtown, New Orleans with more to come in the coming weeks.

We cannot be more pleased with the momentum we are seeing in our interactive business with monthly active users for the Barstool Sports book in casino growing over six times, what they were in September of last year.

We have been able to achieve this growth while maintaining our disciplined approach to marketing, which has resulted in blended customer acquisition costs of under $100 for the year.

In addition to our increased footprint new features to the Barstool sports book App, including Parlay plus.

What's your same game parlay and Shareable Backflip have also driven performance. We are now seeing well over 100000, that's per week on parlay, plus which is leading to higher engagement and higher hold rates and the shareable that feature is really helping to leverage our strength in social media with over 140000 bats shared last week alone.

I'm pleased to say that the Barstool Sports book is now tied also for first among all mobile sports betting apps in the Apple store Apple App store excuse me what they use a rating of four eight on a scale of five pointed out.

With the return of football we have successfully developed top three top five handle market share positions. In every state that has reported so far in September while continuing our disciplined approach to marketing that I referenced earlier in September we prove the strength of our approach as one of only three operators in both Michigan and Pennsylvania to generate positive net.

Gaming revenue, despite a relatively unfavorable hold percentage versus the competition.

Our Penn Interactive team, which has obviously been very busy. This quarter also were also rolled out a barstool branded live dealer studio in New Jersey, which for those of you that caught it was being played and livestream last night by Big Kat and Logan Paul for some pretty amazing content and also last week launched our first in house developed digital IQ.

See now a game from our <unk> acquisition called Barstool Blackjack.

We expect these products to drive additional cross sell from the Barstool audience with further I casino upgrades on the horizon. All of this positive momentum will be greatly enhanced by our acquisition of the score which officially closed on October 19th with Barstools wide audience reach at the top of the customer acquisition funnel and the score is ability.

To engage and retain sports fans with its highly complementary content, we're creating a one stop destination for the consumer that simply doesn't exist today.

In addition, as the number one sports media App in Canada. The score is uniquely positioned to capitalize on the legalization of single event sports Wagering in Ontario, with the launch of the score back when the market opens which now looks likely to occur in Q1 of 2020 till we anticipate the score about app will be the brand we lead with in Canada.

We continue to lead with our Barstool Sports book App in the U S. But both brands will mutually benefit from the marketing support of Barstool sports and the integration with the sports media App.

Looking forward, we are focused on building a highly differentiated and fully integrated media and sports betting tech solution with our partners out before while opportunistically pursuing revenue growth, including new markets, such as Ontario. Despite these significant planned investments in product and marketing and the delayed la.

<unk> from what we initially anticipated in Ontario, we expect our interactive business to generate a loss of only approximately $20 million in the fourth quarter.

As I hope you've come to learn what really sets dependent apart from the competition as our strategy to buy and build whether it's brand experiences loyal customers products Tech stack versus the renting of eyeballs via aggressive traditional marketing tactics. Our goal continues to be developing bespoke products and features with features and promos that.

Our experiential fun and differentiated rather than relying primarily on paid advertising. Our promos often include unique that branded merchandise and VIP barstool experiences that simply can't be found elsewhere. We expect that this approach is the right long term strategy and will result in a best in class margin profile.

And loyalty and retention.

The power of our fully integrated Omnichannel and media strategy was on full display during our successful promotion and event held in late August at our Hollywood Casino Aurora property as you know, Illinois currently requires in person registration for new mobile sports Wagering player accounts patter casino by featuring a special promotion on the Chicago Bears.

This game, which culminated in a block party in the parking lot of our casino attended by key Barstool talent, we were able to drive nearly 10001st time deposits depositors over a five day period with minimal paid media expense that 10000 for context compares to we were averaging about 25% to 30 per day up until that.

<unk>.

Finally, before turning it over to Felicia for a brief overview of our financials I wanted to know how impressed we continue to be what the ability of our partners at barstool sports to leverage their growing and loyal audience by pursuing opportunities outside of traditional sports media or betting south unlocking huge new channels of future growth.

One bite pizza is one of the highest selling products in the frozen food section at Walmart stores across the country incredibly Barstool is now also representing over 135000 Collegian App collegiate athletes under the NCD ways, New name image and likeness rules and they are continuing to extend their established media footprint.

Hearing the broadcast rights to the Arizona Bowl as well as playing a prominent role in the recent J Paul versus Tyron would leave fight on Showtime, which featured commentary from Dave and Big Kat during the broadcast.

Now I'll turn it over to Felicia. Thanks.

Thanks, Jay and good morning, everyone. We reported revenues of $1 5 billion and adjusted EBITDA of $480 million in the third quarter revenues were 10% above the three 2019 levels and adjusted EBITDA was 17% higher there were a number of one time items that affected results in the quarter, which Jay discussed earlier.

A detailed breakout of these items can be found on slide five of our earnings deck, which was posted on our website. This morning.

As Jay mentioned, we achieved a major milestone last month as we closed on our almost 2 billion acquisition of score media and gaining and proudly welcome to score team into our Penn family. We are excited about what lies ahead and we continue our evolution into being North America's leading digital sports content and Entertainment company.

Several housekeeping items corporate expense, which is reported in our other segment with $27 8 million in the quarter, our cash rent payments with $228 5 million cash taxes were $47 9 million in cash interest with $21 7 million maintenance capex with $52 3 million and <unk>.

We remain on track and on budget for the opening of our second category for Casino in Pennsylvania later, this year Hollywood Casino Morgantown.

Our balance sheet continues to be a key asset correct as we remain focused on growth even following our acquisition of the score total liquidity as of September 32021, with $3 4 billion, consisting of $2 7 billion in cash and our 700 million undrawn revolver traditional net debt with $45 million a decrease of seven.

The 1 million during the quarter, principally due to repayments under our senior secured credit facilities. Our lease adjusted net leverage was three nine times based on trailing 12 month EBITDAR as a reminder of our roughly 2 billion purchase of the score approximately $923 million was paid in cash and we estimate that.

With levering by half a turn.

This delta outbreak reminded us in the third quarter the environment remains uncertain, what the future looks bright and we believe we can continue to generate revenues and adjusted EBITDA above 2019 levels. We continue to maintain our current policy of not providing guidance and we will reevaluate quite a good quarter and with that I'll turn it back over to Jay.

Thanks Felicia.

I referenced hurricane Ida earlier in my remarks, it really is incredible when you stop to think about.

It think about it that this storm hit on August 29, 16 years ago to the day after Hurricane Katrina devastated much of the Gulf Coast I have been overwhelmed, but I have to say not surprised by the response from our team members across the country and the aftermath, which once again demonstrated the compassion and dedication of our Penn family has for one another.

With limited supply is available in New Orleans, and basic utilities completely disabled our sister properties quickly helps to provide temporary housing and much needed provisions. In addition, our Penn National Gaming Foundation established the Hurricane Ida Emergency relief fund for team members to apply for financial assistance for immediate needs.

Meanwhile, we continue to expand our support for our nation's heroes one of our newest partner organizations have a concussion legacy Foundation, which launched a special project focused on Cte and PTSD research on veterans. In addition in the wake of our country's withdrawal from Afghanistan, we are offering financial support to the no.

One left behind organization to provide funds to help Afghans special immigration visa recipients with food housing clothing, and a no interest loan program, which helps immigrant families become self sufficient.

One of our fellows from the U S Chamber of Commerce is hiring our heroes program, which helps active military personnel transition back into civilian life recently volunteered at Fort Pickett to help some of the 6000 temporary refugees there learn new job search skills to help acclimate to life in America also during the <unk>.

<unk> with female members comprising 44% of our corporate board of directors Penn has been recognized by two separate organizations for its board diversity efforts. We were named a champion of board diversity by the form of executive women, the greater Philadelphia region's Premier Women's organization and we will also be honored on November 10th at the womens.

Form of new Yorks annual breakfast of champions for leading the way of gender balance on corporate boards.

And with that I'd like to hand, it back over to Frank to open up the line for questions.

Thank you.

I would like to register a question. Please press star one on your telephone you will hear a threefold prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the three.

One moment please for the first question.

Yeah.

Our first question comes from Joe Greff with Jpmorgan. Please proceed.

Good morning, everybody.

I just wanted to lead off and talk specifically about on Ontario, and your approach there and how that the marketing.

The acquisition environment you anticipate.

<unk> versus what I would imagine be very different than what we're seeing here in the U S. I was hoping you could give us a sense of your approach there and what you anticipate.

Yeah happy to Joe I think first off worth worth noting that we initially thought Ontario was going to be ready to go live probably in December.

And the additional information we have at this point it looks like it's probably going to be more some time in Q1.

Call. It mid Q1 is probably the best most updated information we have at this point. So that's that's that from a timeline perspective, I think from a from an overall market perspective, we're obviously really excited we're leading in Ontario with the preeminent sports digital media brands.

<unk>, Canada, we feel really good about that and.

We're gonna be launching aggressively there we want to make sure that we really start at the at the starting at the starting line with everybody else and we have a really big Splash, we've got a great marketing launch plan in the works with the Levy family and our partners at the score I think Joe one of the things that really.

Stands to benefit US is that there are some advertising restrictions in Ontario, so there'll be a bit of a different market there.

You can advertise your brands, but you can't lead with big discounting type promotions, we welcome that environment, we have a very loyal audience in Canada to the score and what will be score bet similar to the loyalty we have with the brand that we lead with here in the U S with barstool. So we.

Back to be a major player in Ontario, when Theyre ready for Us to go live and we have a great plan in place and honestly if anything the slight delay in launch allows us to launch with a product that we feel even better about and hopefully get even more content ready to go on the eye casino side and Ontario, assuming.

They are ready to go live with sports and online casino at the same time.

Great and then just switching topics too.

Maybe how much of a strategic priority of Las Vegas strip asset.

We're opco is for you. Obviously you were involved in the Cosmo and that went to another buyer. We've heard this week from MGM last night and Caesars earlier this week about.

Their marketing strip assets can you talk about how.

How much of a strategic priority that is what you would sort of do with sort of the premier strip asset and putting it into your flywheel.

And then how do you think about valuing an opco relative to how your regional op goes or value.

Yeah.

It's been pretty public and we've confirmed that we were definitely involved in the bidding process for cosmopolitan I think Cosmo really stands in a class of its own that's a once in a lifetime opportunity to potentially get your hands on a one of a best in class assets really around the globe and so that was that was impaired.

But it for us because we felt as though it checked several strategic boxes for us.

Generally speaking I don't think its imperative that we have a las Vegas strip asset given the.

The differentiated approach that we have around omni channel I think that having representation across states.

Throughout the U S.

It is absolutely a strategic imperative for us and we've largely accomplished that goal.

If we were to find the right asset at the right location and the right price then of course, we would be interested.

We know that we have a very valuable regional database, we know what the right asset in Las Vegas that we could activate and really drive more of that visitation, that's already organically finding its way to Vegas, because you know people, who like to gamble like to Gamble in Vegas is the Mecca and so they're already going there would be great. If we had an asset where we could create.

Some retention value when they're in Vegas.

But we don't think that you know such.

Such a strategic imperative that we would chase an asset or overpay.

And that's how I feel currently so we'll kick the tires, if theres something out there we're going to be disciplined in our approach and yes, I think youre going to have to pay a higher multiple for our Las Vegas strip Opco.

Wood, and most or all regional markets, but I think you have to be thoughtful.

Buffalo and careful about that because.

As we all know there's a lot more maintenance capital requirements and intensity for Las Vegas assets and typically when you are an opco. Your your your rents your lease is largely fixed not entirely but largely fixed and so if you are the one that's continuing to invest in the property.

Away from the free cash flow and while EBITDA and eventually a free cash flow generation for the opportunity. So I just think there's a lot of.

Lot of variables I think you'd have to look at it asset by asset.

As they become available if they become available but you should have you you should assume that we are not going to be chasing anything that we don't believe we can get a good return on.

Great. Thanks, and just one final quick one.

Felicia whats the diluted share count pro forma for the score transaction.

I'll get back to you with that offline I just don't have that in front of me right now.

Yeah, I know, we issued 13 million shares associated with the score. So I'll just add 13 to whatever your last number lifestyle.

Thanks.

Our next question comes from Shaun Kelly with Bank of America. Please proceed.

Hey, good morning, everyone.

Jay just maybe a couple of questions on the online business helpful color on sort of your expectations around the fourth quarter loss could you talk a little bit about the revenue environment.

Heading into the fourth quarter. Obviously, you gave a couple of stats on your handle share, but maybe in a fair fight state like Arizona, How do you think you're holding up thus far with our new launch across the board how is barstool performing versus your to your longer term target our aspiration there.

Yeah, well, let me maybe I'll hit Arizona at the end, but I'll talk sort of at a high level.

As you think about the launch of <unk>.

The start of football season, this year on September 19th.

As I mentioned earlier, we were alive in nine states versus a year. Prior zero. We went live in week two actually in Pennsylvania last year. So if you look at sort of revenue environment.

From week, one of NFL and then all the way through the week nine last week and we have a slide on this in the Investor presentation. We really have shown tremendous handle growth week over week over week, I think we're averaging 9% handle growth week over week from week, one to week nine.

So we're very happy with what we're seeing I would also say that when you launched five states, which we did and I don't think anybody else came close to that many launches for the start of football season. This year, because we were a bit late to the game in some of these states.

That you have deposit and match that bonuses that have to kind of work their way through the system and so we had a 1000 dollar deposit in that match.

That was that was offered in those five states for September, which obviously lowers your N. G. R. After promotion you're N. G. R. Four it takes about four to five maybe six weeks for that initial offer that kind of work its way through what was thought what we're seeing in October and what we saw in October and are seeing in early November is that obviously it was theirs.

Less promotional dollar flowing through which means assuming that you have a more normal hold rates and I think you've probably heard Sean and we like everybody else definitely.

Definitely had a softer hold percentage in October favorites covered.

Significantly the first four weeks that reversed itself, we had a very good final weekend, but the first four weekends hold rate was lower than normal.

But if you sort of just look at an average hold and you look at what we were able to do in October and converting handle to G. G. R. Based on hold and then <unk> to <unk>, we feel really good about not only continuing to grow our handle market share, but being able to grow our N G. Our market share now N G. R. Unfortunately.

We would welcome that but it is only reported in Tuesday's, So, Michigan and Pennsylvania, you actually get a really good look as to how operators are running the business in terms of what's driving handle what is <unk> and ultimately in addition to paid media, where we play a very different game than most everybody else also how much of that.

Handle is being driven by promotions and so you can actually see what MGR looks like every other state it's either just handle.

<unk> handle and G. G R and you don't really have the visibility to MGR.

So we feel as you see that slide that shows the momentum we have on handle from week one through week nine you should assume that we feel just as good and in some cases, even better of what the MGR trending looks like from week, one to week nine assuming a normal hold rate.

Now, Arizona to your last question I have zero visibility at this point into what the market looked like that has not been reported unless it came out this morning, but I have not seen that yet.

As we compare Arizona to other state launches I would say, it's sort of for us. It's in the middle of the pack, it's better than some states then it's not quite as good as some larger of the larger population states like Illinois, and Pennsylvania for Us.

Super helpful and maybe just as my follow up.

Could you just give us an update on the online casino offering I mean, I think each quarter, you kind of give us a little bit more but obviously youre working through that product offering and.

When do you think youre going to have that at the.

The place that you kind of want to have it to maybe either support broader marketing or just a bigger push through the channels that you already have.

Yeah. Great question, we are I feel as though our product offering currently is significantly better than it was when we launched in Pennsylvania and when we launched in Michigan. So we did have a little bit of paid media.

Promotion in Michigan around high casino, because we know that the product is so much better than it was when we launched there in early 2021.

So that tells you something obviously, we felt from a product offering perspective, if you look at the library.

<unk> content library of manufactured different manufacturer of content, we have a much better offering today than we did I still don't think our casino offering is where it needs to be and I don't think its ultimately as competitive with best in class product offerings.

In the states, where we're alive, but it's getting a lot better. So we're going to continue to think about reinvesting and driving acquisition to online casino as we feel better and better about the product.

We as I mentioned earlier, we just went live with live dealer in New Jersey, that's actually Barstool themed and last night was amazing content watching Dan Dan Katz, Big Kat and Logan, Paul and several others are at Barstool, where plane live blackjack all in the same room and as a fan you can.

Watch them on the live stream you can download the App. If you are in a state where we're where we're live like New Jersey, where they were last night and you can bet behind them, which is what a lot of people were doing behind Logan, Paul and Big Cat and some of the other personalities.

At Barstool, So we can do things that others simply can't do or don't have the personalities or content creators that anybody would care to bet.

Behind so I think from an online casino perspective, as we continue to develop and launch new products and the overall offering as more competitive you're going to see us continue to ramp up how much we support that from a marketing standpoint, and I think you'll see our market share reflective of growth.

As we make those investments all around we are already seeing momentum and again, we are not where we ultimately want to be an online casino, but truth be told and I think I've said this before we had to prioritize we relate to the the online game in terms of launching products.

We prioritize.

Having a great and we've delivered on that a great sports betting product four eight on a scale of five on the Apple App store, we wanted to get live in as many states as possible. We have a great sports betting brand to lead with an amazing audience that we can activate and have done that and ultimately that ends up being ddos acquisition tool.

Do you have for conversion from online sports to online casino and so we've got a lot of runway in front of US I would say from our online sports betting perspective in terms of product and capability, we're probably third or fourth inning and still have lots of improvement in front of us that we are pursuing from an online casino standpoint, we're in the top of the FERC.

We're nowhere near where we know we'll be and need to be but we're making progress.

Thank you very much.

Thanks, Sean.

Our next question comes from Brian <unk>.

<unk> with Craig Hallum Capital. Please proceed.

Good morning, Jay Felicia, Thanks for taking our questions.

Hey, Brian.

Curious if you're willing to comment Caesars fan dual they're seeing their online businesses expect to inflict profitability sometime in 2023, I guess without getting too specific but given what you guided Q4, two of only $20 million loss. How do you think about Penn interactive cannot be profitable sooner than those and then.

Is it even possible to potentially be profitable all of next year.

This is these are topics that we welcome obviously, given what we've been able to do in our strategy and the differentiation really.

Here's the way I would sort of describe 2022 and 2023 it at a high level.

Said before that.

This is pre acquisition of the score that we thought we would be breakeven or better from a Penn interactive standpoint in 2022, I absolutely still stand by that we have however acquired the score.

And we're making real significant investments in the score around technology and the score is already currently live on their own Pam in the U S and their own promotional engine. So far so great I mean, the results that they're seeing around not just stability and.

Feedback and ratings.

We're all good but I think importantly, what they are finding already is that when you and this is why obviously, we're pursuing our own tech stack, but when you have your own Pam you can really create personalization and customization. So it's almost as though if you have 1 million customers in your ecosystem you have a million sports books right everybody's experiences a bit.

<unk>.

And what they've been able to do already with their promotional engine and what theyre seeing around retention value and people coming back to that more often is pretty significant now it's early innings, but we're just encouraged by what we're seeing because we know that's just the tip for us in terms of what can be done and so from a 2020.

Two standpoint, we will not be profitable I'll wait to give a number on that until we're providing maybe guidance for 2022.

It also will depend on when we go live in Ontario, because that's a huge revenue revenue driver for us to offset some of those expenses that were not able to offset yet as it relates to the score.

So $20 million loss for Q4 more to come on 2022, you can probably annualize that 20 per quarter for 2022 to be safe for now and I think we'll be there or better for 2022, even when you include the investments in Tech stack 2023 is going to be the year of hockey stick growth for us.

Because everything comes together.

Score is going to be live completely vertical on their own tech stack before football season, 'twenty two and then we have the whole football season in March Madness.

To make sure everything is as we want it to be including managed trading services and risk management completely vertical and then we bring that tech stack back to the U S and we will convert over in the U S. Before football season, 2023, so profitability is definitely going to be there in 2023.

And it would be there in 'twenty two if we werent also going vertical on tech stack, but we're happy to be doing that.

Very helpful too.

Two quick ones on on the financials Felicia on that $30 million you commented impact on Hurricane Aida and Covid can you break that out between the two and then secondly, you live with cashless cartilage contactless to seven properties any financial metrics, you can give to share on potential revenue uplift and or margin impact.

From those initiatives and those are really adopting locations.

Yes, Ryan I'm going to ask Todd George to address those two questions.

Thanks, Ron.

Thanks, J b the breakdown between either in the Delta Varian I'd say that the we have a material amount of our EBIT are generated from the southern region. So we had a I would skew a little bit heavier towards the hurricane versus the delta.

Delta is kind of spread out and there were pockets around the U S but.

We generated quite a bit from both Louisiana and Mississippi. So.

Focus more of the order impact there from a <unk>. So very early innings, you heard Jay using analogy before but we are so pleased with what we're seeing with each launch. So now we're three properties in Pennsylvania.

Two casinos in two risks.

Ohio and with each launch we're getting greater adoption.

Initially we thought we would see a greater adoption from the younger demographics, but.

We're pleasantly surprised that it's actually going across all demographics.

What we're seeing is that if you look at our normal guests to a casino.

Take that as your baseline we're seeing great growth from people that are app users as well as even greater growth for people that are downloading the wallet and playing with wallet.

A lot of that just comes from removing friction as well as increased time on device not standing in line. So.

Very early and I think we will have more to report in future quarters. After we roll this out at other properties.

Thanks, Good luck and I'll hop back.

Thanks Ryan.

Our next question comes from Barry Jonas.

Securities. Please proceed.

Great. Thanks.

Could you talk a little bit about the strategy behind the Standalone Barstool sports sports bars, as well as pizza and any other new growth channels there.

Is the intent for these to be meaningful profit centers at some point for pan or are they more as marketing vehicles to drive gaming.

Yeah, Great question, Barry I would say a little bit of both it really depends on which of those opportunities that you're talking about.

I'll take the one by frozen Pizza as an example, and I'll only share of course, whatever Erika and Dave Portnoy have shared publicly but.

They've sold hundreds of thousands of frozen pizza is just in the first few weeks of offering those in Wal Mart across the country.

I know it has blown away expectations in that Walmart.

Know how to handle demand, but its been overwhelming for them and a lot of the different geographies around the country. So that's probably an opportunity to do both it is going to be good financially, but it also importantly is going to be great for just continuing to build out the brand and the top of funnel.

Everybody who's shopping for frozen Pizza is already a barstool fan or maybe in some cases has even heard of barstool, but theres a lot of social media buzz around frozen pizza.

A lot of people sharing their purchases.

Re ratings of the pizza and so it is a great brand builder and I sort of put the other ones that we've talked about in the similar category of the Standalone Barstool sports bars, which will essentially serve as because there'll be in markets, where mobile sports betting is live and legal they'll essentially serve as.

<unk> sports books, because we can make sure that it is a great digital experience inside of those sports bars, and some people are going to go there to socialize. Some people are going to go there to meet up with friends and we're going to go there to watch games and some people are going to go there to bet on games. So it really allows us to continue to build the brand.

Introduce new people to the brand we're picking.

High density population areas for these sports bars will give exact locations later, when Erika and Dave are ready to announce that but the first two are going to be in the Philly area as well as in Chicago, and we anticipate both of those opening up in the next couple of months unless something changes and.

We've got several more in the queue, we will share more details around current performance of the existing ones that opened as well as our plans for building out new ones probably on our next call, but we're very excited about it. It's obviously a great opportunity and again, it's something that we can do that really no one else in the space can because the barstool branded.

<unk> has a different affiliation and base of loyal fans.

Who really care about the brands and feel like they're a part of the brands and so whether you are talking about those two examples or NCWA collegiate athletes, where we're obviously building relationships with.

College athletes when they are relatively early in life and pre professional career and I think that's great right now its all about barstool and how barstool can help them as a media company.

In our lifestyle company and down the road, maybe that evolves into.

Our relationship around sports betting for those that are interested in betting on sports. So I think that it's probably for US primarily brand building, but there is definitely going to be financial components to it as well, especially when you consider the average age of the.

Sports App user with US is late twenties, 28, and a half years old I don't know whatever everyone else's is I know, it's a lot older than that and so as you think about lifetime value. We just want to continue to feed the funnel and <unk>.

28, and a half years old average age on the sports betting App is terrific. When you think about what those spend levels may be when they're in their <unk> and <unk>.

Yes, I guess that touches on my follow up question, which is I'm curious as Youre building out Penn Interactive.

What you're learning about the differences and similarities between the online and the land based player and if longer term down the road, how youre thinking about potential cannibalization.

Yes, it's a great question and maybe Todd and I can tag team. This one there's a lot of really good data we've been asked US now for a while and Pennsylvania and actually in Michigan, you know close to a year.

There's some really really interesting.

Facts that we're sort of uncovering in the states, where we are alive with with brick and mortar casinos as well as online casino so call it, Pennsylvania, and Michigan one of the things that we're finding which I find fascinating is that when you look at the online casino VIP business.

Roughly half of that online casino VIP business, where customers that we knew we had a relationship with previously.

But of that 50%, 60% of them had gone dormant K. So we've reactivated this has been such an amazing reactivation tool for us for whatever reason they had gone dormant and our database whether that was because they moved elsewhere in the state or.

Whatever reason it might be they decided they didn't want to visit the casino anymore, but 60% of those that were reactivated.

Or excuse me, 60% of them of the Vips were reactivated who are no longer visiting our casinos as a regular customer and 10% of those also started coming back to our brick and mortar casinos. After they were reactivated with online casino. So that that's really powerful as I take a step back and think about it and.

Youre definitely seeing I think it's been well reported that in the states that are live with online casino you haven't seen the brick and mortar casinos in those states bounce back the same way versus 2019 as you have seen in states that don't have online casino offerings.

I think thats to be expected there is no doubt you'll get some people that are spending up some are splitting wallet summit moved over entirely to online casino and I think that's why it's really important to run a profitable online business, because if you're moving people and their spend around you want to make sure I mean from our perspective, we're indifferent you want to play on.

But that's great you want to play in the brick and mortar. That's also great. Because we know we have best in class margin profile long term that we just wanted to develop the relationship and make sure. We have best in class products, but I'll I'll pause there and see if Todd has anything he wants to add to that.

Jay I would only add a few items one you touched on the fact that we have a 100% of of the online component. We don't have a JV like some of the others in our our industry do so again to Jay's point.

We have 100% of the upside the other thing we're very uniquely positioned in the states that are offering online gaming because we don't have a brick and mortar presence in new Jersey. So a lot of this is really brand new business to us.

A lot of it drives the database and then we can mobilize those people around the country to through our operations and then in Pennsylvania, and the bulk of the population residing in and around Philadelphia. Our properties are not located close to Philadelphia. So a lot of that represents brand new play as well.

Again, an opportunity to grow the database that can then.

Should be shared across our properties around the U S and similar with Detroit in the Michigan area.

The Detroit area, we have a large amount of our databases within that 30 to 50 minute drive.

So as we're growing that business its coming from outside of that soon as well.

Great. Thanks for all the color.

Okay.

Our next question comes from Bernie Mcternan with Needham and company. Please proceed.

Great. Good morning, Thanks for taking the questions.

Wanted to focus in on the live event at the Hollywood Casino in Illinois, the 10001st time depositors significant step up of what you've been adding previously how does the retention I know it's early days, but how is the retention and game engagement of those users and payers look relative to the overall base.

Yeah.

We were we were very curious to see what kind of retention value. We would have with the 10000 given that it was driven around an event and you don't know at the time you do the event what is the motivator is it to be in person with Dave and Dan and crew on property is it too.

Just take advantage of the promotional offer and the bet on the bare so we really we didn't know going in.

We're expecting about a 1000 to 500 people to come in and visit us in deposit so it obviously blew away our expectations.

I've been very pleased with the retention that we've seen from the 10000, we saw a noticeable uptick from a handle perspective relative to the first few weeks of the football season. I think we ran this in week four if I'm not mistaken and if you look at our Illinois handle and week four it was the best week, we had but weak.

Five through week nine were all better than weeks one through three.

By a pretty good variant so.

It's turned out to be in hindsight, a great event, and we learned a lot from it and I think it really shows the power of Omnichannel. When we do something that is maybe initially digitally focused but you have an on premise experiential event component to it you can really put these these opportunities on steroids and get more out of the events than you anticipated.

So I think you can expect us to take the learnings and do more around that not necessarily just Aurora.

But other parts of the country other states and I think we've been.

It's been interesting to I think a big part of the reason why you're seeing this week over week over week handle growth for us from week one to week nine is that we've been able to one where in more states, obviously, but number two we've been able to get get out right a year ago, We were live in one state and co.

Covid was still keeping people, mostly inside whereas right now the barstool crew every week, we hit one of the nine states that we're in sometimes multiple times a week.

And we're doing on Prem events, and if you looked at I don't know how many of you saw it but it would be worth going back and looking at the game day events that the Barstool crew did last weekend at Michigan State in East Lansing, and if you look at the crowd that was at the Barstool events an apartment complex next door the stadium.

First is the ESPN event, it wasn't even close and.

That's exciting, but we weren't able to do that last year and every week. When we do these on Prem events, you'll see the states. We're in C. A significant pop in first time deposit registrations first time deposits handle and we're doing a much better job. After the fact around retention because we've learned a lot around what works and what doesn't from last year being at once.

Date to now having scale in nine states. So.

Feeling really good about that overall and lots more to come.

Got it that's helpful. And then just wanted to touch on market access spent $7 5 million on the ballot initiatives in California, What's your outlook for potentially bringing OSB to that state and then while we're on the topic of market access just any thoughts on New York.

Yes happy to hit both of those so, California was actually $12 5 million. We're one of I believe it's seven operators that are working on this.

<unk> initiatives together and everybody wrote the same check.

We'll have to see I mean, California is.

The ballot initiative I think the fact that there are significant license fees upfront the way that the bill is constructed as well as a large portion of the taxes go go back to really two areas, one homelessness and mental health support which is a big issue and a lot of states, California in particular.

<unk> as well as some of the dollars channel back to the tribal entities in California. So I think that it's been constructed in a way that is good for the state and good for those that operate casinos in the state today.

It's going to take a little bit of time to play out obviously, we're going to be pretty deep into signature gathering mode here in the coming weeks and months and there's been a little bit of opposition. So we're trying to understand that and we actually want to do this in a way where it's completely complementary to the ballot initiatives that the tribes already had.

Out there before we announced this ballot initiative in the language around the valid initiatives. So.

We're trying to make sure that we're doing this in a complementary way and that we're including all of the right part is as we think about the California opportunity. So more to come obviously very early and I'll have more updates I think quarter to quarter as we have a better feel for the polling already looks good pulling can change over time.

Signature gathering effort, it's just going to take us a little bit of time to see where we are but I still feel good about the team the dollars that we've put forth the campaign initiative.

New York, New York is an interesting one.

I have discussed in New York with my team Ad-nauseum and I've.

I feel the same way today that I felt day, one which is I feel really mixed about new York because of the way that the gaming law is structured and the fact that the tax rate.

Being self imposed with a minimum of 50%.

And when you keep in mind that that 50% taxes. In addition to a really high.

License fee as well as that 50% tax is on growth.

Pre promo spend not net.

I don't think anybody is going to make money operator, the state's gonna make money I don't think a single operator will make money in New York. So I've always struggled with the would you rather be in or not I think objectively speaking you'd probably rather be in and not be in.

But it's one of those states, where if you're not in youre not crushed by that either.

Maybe from a from a Tam perspective, and from a revenue perspective, but I think it's just going to be.

It's going to be a margin killer I think it's going to be an EBITDA the tractor and New Jersey. We're live in in a lot of the New York residents live in North Jersey, and Manhattan, which is easy to get over and I think that competitively New Jersey is just going to be able to do things and offer things that New York.

Kent.

I'm not seeing anything that is I don't think New York is has their own prerogative in terms of how they want to structure the law and they are pursuing that and if we're in and we'll play by the rules I think that if if we end up as one of the operators and New York that you know if if nobody can make money, we'll lose beliefs, because we can rely on.

The barstool audience organically and turn that on and activate it in ways that we've done in other states without having to get into the paid media shotgun approach I don't know who is going to be able to afford doing really any of that given the tax rate would be the highest in the country or at least tied with new Hampshire, and we know drafting that's been cleared very difficult to make money in new Hampshire. So.

It's a long answer because it's a pretty complicated issue that's our that's our position on New York.

Yes, I appreciate the comments thanks Jay.

Thanks.

Our next question comes from Thomas Allen with Morgan Stanley. Please proceed.

So why don't I gaming typically when we look at international markets I gaming is more fragmented than sports betting and the U S. We're seeing.

Basically the opposite if not just concentrated how do you think that I will turn out and like how are you thinking about it affecting your company.

Can you maybe I'm not sure I follow the question Thomas I'll make sure I answer what you're what you're shooting for yes.

Gaming you typically see like the <unk> and.

National market and I gaming space.

Typically you typically see the largest share companies would like 10% to 15% share in the U S. Right. Now you see certainly certainly were one of your peers was about 30% market share.

Do you think it will continue to be so concentrated or do you think over time that market is going to be like more like the international markets.

And then how are you thinking about it in terms of your opportunity. Obviously, you have a massive casino database, which is similar to the peer that has a lot of market share.

Yeah, Okay I got you.

Here's my thoughts overall on market share I think that it's very early to be declaring what's going to be in the next five years on either side sports betting or online casino.

Do think that companies that have.

Built in structural advantages I think on the on the online casino side that would be your existing casino operator, so obviously in the states where I casino is legal have a built in advantage of a database that they can market to <unk>.

Just like the sports betting operators, the DFS companies than us with Barstool have a built in advantage because you have a database you can market too.

Organically so market share I think is going to continue to shift around it's obviously competitive.

There will likely be some consolidation in the mix as well so I don't have any reason to believe that.

The ultimate market share results in terms of fragmentation are going to look a whole lot different than over in Europe or parts of Europe.

I don't know, if there will be 30% or 40% operator single single operator market share sort of quote unquote winter. If it is going to be more lots that are in that sort of 10% to 20% market share.

The numbers around what you're seeing in places, where you've opened up retail sports books on the table game side, and and maybe some benefits to foster.

Yeah taught anything you want to add to that that would be on at least had previously so the trends continue you know the the great thing for US and you know Jane I kind of talk about this at the close of every month. It's we all expected as your reference to growth and table games business, but we're also seeing some conversion over to <unk>.

Thoughts, we're seeing conversion over to electronic table games, which are really been able to grow quite a bit. This year and then obviously the increase in food and beverage as a specialty or bar stool branded retail Sportsbooks feature.

Feature a pretty robust food and beverage component as well so it's more experiential.

That has been.

Really the.

Across every property across every region. So we're excited to to get Louisiana as J touchdown. In his opening remarks, we've got the temporary sportsbooks two of them open this week, but we'll be converting those two barstool branded sports books in the upcoming months. So we really looked.

For that as keeping that Texas customer coming over you had mentioned.

Really being able to reactivate the inactive that has been the case a lot in Indiana with the Cincinnati customer coming back to Indiana in the Chicago customer coming back to East Chicago, Indiana. So everything you touched on is what we continue to see.

And Thomas unless you have any other follow ups I'm always sensitive to everyone time, and we're right at 10 o'clock So Frank.

Thomas is anything else I.

Think we'll probably start there.

Thank you.

Alright, Thanks, Thomas and thank you everybody else for joining us. This morning, we look forward to catching up with you again likely in very early February for our queue for earnings how to go about.

That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.

Everyone.

[music].

Please press Star Zero I would now like to turn the conference over to Mr. Joe <unk> of Investor Relations. Please go ahead.

Thank you Frank Good morning, everyone and thank you for joining Penn National Gaming's 2021 third quarter Conference call.

We'll get to management's presentation and comments momentarily as well as your questions and answers, but first I'll review the safe Harbor disclosure.

<unk> acquisitions capital expenditures and operating results.

Such forward looking statements reflect the company's current expectations and beliefs, but are not guarantees of future performance.

Actual results may vary materially from expectations.

The risks and uncertainties associated with forward looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the Companys reports on Form 10-K and Form 10-Q.

Penn National assumes no obligation to publicly update or revise any forward looking statements.

Today's call and webcast will also include non-GAAP financial measures within the meaning of SEC regulation G. When required a reconciliation of all non-GAAP financial measures to their 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.

Thank you for your patience with that and it's now my pleasure to turn the call over to the company's CEO Jay Snowden Jay. Please go ahead.

Thanks, Joe Good morning, everyone. Thanks for joining us for our third quarter earnings call as usual I have here with me and wild methane, our CFO Felicia Hendrix, our head of operations, Todd George and other members of my Executive team, who can help answer your questions during the Q&A session as.

And just this week, we launched an Iowa, bringing our total to 10 lives States. We also continue to grow and evolve our brick and mortar footprint. During the quarter. We opened Hollywood Casino York in Pennsylvania to strong initial results began to roll out our market, leading cashless heartless and contact with <unk> technology across the.

Oh and have continued to see tangible benefits of our highly differentiated omnichannel strategy.

US significantly in the South South region, and the regional flare ups of the Delta variant, which combined impacted property adjusted EBITDAR and adjusted EBITDAR margin by an estimated 30 million, an 85 basis points respectively.

Additionally, the other statement.

Engagement among our younger demographic continues to be strong and is more than offsetting the decline we saw in our older demos in the quarter due to delta.

Whether our VIP segment, which grew 33% year over year in the third quarter continues to outperform notably our retail Barstool sports book concepts are continuing to stimulate database growth and increased frequency of visitation in the younger segment, while also boosting gaming and food and beverage spend or retail.

We have been able to achieve this growth while maintaining our disciplined approach to marketing, which has resulted in blended customer acquisition costs of under $100 for the year.

In addition to our increased footprint new features to the Barstool sports book, App, including Parlay plus what.

Whats your same game parlay and Shareable Backflip have also driven performance. We are now seeing well over 100000 per week on parlay, plus which is leading to higher engagement and higher hold rates and the shareable that feature is really helping to leverage our strength in social media with over 140000 bats shared last week alone.

With the return of football we have successfully developed pop three top five handle market share positions. In every state that has reported so far in September while continuing our disciplined approach to marketing that I referenced earlier in September we prove the strength of our approach as one of only three operators in both Michigan and Pennsylvania to generate positive net.

Gaming revenue, despite a relatively unfavorable hold percentage versus the competition.

Our Penn Interactive team, which has obviously been very busy. This quarter also also rolled out a barstool branded live dealer studio in New Jersey, which for those of you that caught it was being played and livestream last night by Big Kat and Logan Paul for some pretty amazing content and also last week launched our first in house developed digital IQ.

See now a game from our <unk> acquisition called Barstool Blackjack.

To engage and retain sports fans with its highly complementary content, we're creating a one stop destination for their consumer that simply doesn't exist today.

In addition, as the number one sports media App in Canada. The score is uniquely positioned to capitalize on the legalization of single event sports Wagering in Ontario, with the launch of the score bet when the market opened which now looks likely to occur in Q1 of 2020 till we anticipate the score about <unk> will be the brand we lead with in Canada.

While we continue to lead with our Barstool Sports book App in the U S. But both brands will mutually benefit from the marketing support of Barstool sports and the integration with the sports media App.

These significant planned investments in product and marketing and the delayed launch from what we initially anticipated in Ontario, We expect our interactive business to generate a loss of only approximately $20 million in the fourth quarter.

As I hope you've come to learn what really sat dependent apart from our competition is our strategy to buy and build whether it's brand experiences loyal customers products Tech stack versus the renting of eyeballs would be aggressive traditional marketing tactics. Our goal continues to be developing bespoke products and features with features and promos.

And loyalty and retention.

By featuring a special promotion on the Chicago Bears game, which culminated in a block party in the parking lot of our casino attended by key Barstool talent, we were able to drive nearly 10001st time deposits depositors over a five day period with minimal paid media expense that 10000 for context compares to we were averaging about 25%.

To 30 per day up until that point.

One bite pizza is one of the highest selling products in the frozen food section at Walmart stores across the country incredibly Barstool is now also representing over 135000 collegian at collegiate athletes under the N C double as new name image and likeness rules and they are continuing to extend their established media footprint.

Securing the broadcast rights to the Arizona Bowl as well as playing a prominent role in the recent J Paul versus Tyron would leave fight on Showtime, which featured commentary from Dave and Big Kat during the broadcast.

Now I'll turn it over to Felicia.

Thanks, Jay and good morning, everyone. We reported revenues of $1 5 billion and adjusted EBITDA of $480 million in the third quarter revenues were 10% above the three key 19 levels and adjusted EBITDA was 17% higher there were a number of one time items that affected results in the quarter, which Jay discussed earlier.

Detailed breakout of these items can be found on slide five of our earnings deck, which was posted on our website. This morning.

As Jay mentioned, we achieved a major milestone last month as we closed on our almost 2 billion acquisition of score media and gaming and proudly welcome to score team into our Penn family. We are excited about what lies ahead and we continue our evolution into being North America's leading digital sports content and Entertainment company.

Several housekeeping items corporate expense, which is reported in our other segment with $27 8 million in the quarter, our cash rent payments with $228 5 million cash taxes were $47 9 million and cash interest was $21 7 million maintenance capex with $52 3 million and <unk>.

We remain on track and on budget for the opening of our second category for Casino in Pennsylvania later, this year Hollywood Casino Morgantown.

1 million during the quarter, principally due to repayments under our senior secured credit facilities. Our lease adjusted net leverage was three nine times based on trailing 12 month EBITDAR as a reminder of our roughly 2 billion purchase of the score approximately $923 million was paid in cash and we estimate the transaction.

With levering by half a turn.

Without the outbreak reminded us in the third quarter the environment remains uncertain, what the future looks bright and we believe we can continue to generate revenues and adjusted EBITDA above 2019 levels. We continue to maintain our current policy of not providing guidance and we will reevaluate quicker to quicker and with that I'll turn it back over to Jay.

Thanks, Felicia I referenced hurricane Ida earlier in my remarks, it really is incredible when you stop to think about.

It think about it that this storm hit on August 2900, 16 years ago to the day after Hurricane Katrina devastated much of the Gulf Coast I've been overwhelmed, but I have to say not surprised by the response from our team members across the country and the aftermath, which once again demonstrated the compassion and dedication of our Penn family has for one another.

Left behind organization to provide funds to help Afghans special immigration visa recipients with food housing clothing, and a no interest loan program, which helps immigrant families become self sufficient.

One of our fellows from the U S chamber of Commerce of hiring our heroes program, which helps active military personnel transition back into civilian life recently volunteered at Fort Pickett to help some of the 6000 temporary refugees there learn new job search skills to help out acclimate to life in America also during the call.

Order with female members comprising 44% of our corporate board of directors Penn has been recognized by two separate organizations for its board diversity efforts. We were named a champion of board diversity by the form of executive women, the greater Philadelphia region's Premier Women's organization and we will also be honored on November 10th at the womens.

Form of new Yorks annual breakfast of champions for leading the way of gender balance on corporate boards.

And with that I'd like to hand, it back over to Frank to open up the line for questions.

Thank you.

We'd like to register a question. Please press the one four on your telephone you will hear a threefold prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the three.

One moment please for the first question.

Yeah.

Our first question comes from Joe Greff with JP Morgan. Please proceed.

Good morning, everybody.

Just wanted to lead off and talk specifically about on Ontario, and your approach there and how that you know the marketing are the acquisition environment you anticipate.

Being versus what I would imagine be very different than what we're seeing here in the U S. I was hoping you could give us a sense of your approach there and what you anticipate.

Yeah happy to Joe I think first off worth worth noting that we initially thought Ontario was going to be ready to go live probably in December.

And the additional information we have at this point it looks like it's probably going to be more some time in Q1.

Call. It mid Q1 is probably the best most updated information we have at this point. So that's that's that for them from a timeline perspective, I think from a from an overall market perspective, we're obviously really excited we're leading in Ontario with the preeminent sports digital media brands across Canada, we.

Feel really good about that.

And you know we're gonna be launching aggressively there we want to make sure that we really start at the at the starting at the starting line with everybody else and we have a really big Splash, we've got a great marketing launch plan in the works with the Levy family and our partners at the score I think Joe one of the.

Things that really stand to benefit us is that there are some advertising restrictions in Ontario, so there'll be a bit of a different market. There you.

Back to be a major player in Ontario, when they're ready for us to go live and we have a great plan in place and honestly if anything the slight delay in launch allows us to watch with a product that we feel even better about and hopefully get even more content ready to go on the eye casino side in Ontario, assuming that.

They're ready to go live with sports and online casino at the same time.

Great and then just switching topics too.

Maybe how much of a strategic priority the Las Vegas strip asset.

Well I'll go is for you. Obviously you were involved in the Cosmo and that went to another buyer. Yeah. We've heard this week from MGM last night's Caesar's earlier this week about.

Their marketing strip assets can you talk about how much of a strategic priority that is what you would sort of do with sort of the premier strip asset and putting it into your flywheel.

And then how do you think about valuing an opco relative to how your regional op goes are valued.

Yeah.

It's pretty been pretty public and we've confirmed that we were definitely involved in the bidding process for cosmopolitan I think Cosmo really stands in a class of its own that's a once in a lifetime opportunity to potentially get your hands on a one of a best in class assets really around the globe and so that was that was impaired.

Or are there for us because we felt as though it checked several strategic boxes for us.

Generally speaking I don't think it's imperative that we have a las Vegas strip asset given the.

The differentiated approach that we have around omni channel I think that having representation across states.

Throughout the U S.

It is absolutely a strategic imperative for us and we've largely accomplished that goal.

If we were to find the right asset at the right location and the right price then of course, we would be interested.

We know that we have a very valuable regional database, we know what the right asset in Las Vegas, but we could activate and really drive more of that visitation thats already organically finding its way to Vegas, because you know people, who like to gamble like to Gamble in Vegas is the Mecca and so they're already going there would be great. If we had an asset where we could creep.

Get some retention value when they're in Vegas.

But we don't think that you know such.

Such a strategic imperative that we would chase an asset or overpay.

Thoughtful and careful about that because.

As we all know there's a lot more maintenance capital requirements and intensity for Las Vegas assets and typically when you are an opco. Your your your rents your leases is largely fixed not entirely but largely affects them. So if you're the one that's continuing to invest in the property.

Takes away from the free cash flow and while EBITDA and eventually a free cash flow generation for the opportunity. So I just think there's a lot of there's a lot of variables I think you have to look at it asset by asset.

As they become available if they become available but you should have you you should assume that we are not going to be chasing anything that we don't believe we can get a good return on.

Great. Thanks, and just one final quick one.

Felicia whats the diluted share count pro forma for the score transaction.

Yeah, I'll get back to you with that offline I just don't have that in front of me right now.

Yeah, I know, we issued 13 million shares associated with the score so ill just add 13 to whatever your last number west zone.

Thanks.

Okay.

Our next question comes from Shaun Kelly with Bank of America. Please proceed.

Hey, good morning, everyone.

Jay just maybe a couple of questions on the online business helpful color on sort of your expectations around the fourth quarter loss could you talk a little bit about the revenue environment.

Heading into the fourth quarter. Obviously, you gave a couple of stats on your handle share, but maybe in a fair fight state like Arizona, How do you think you're holding up thus far with a sort of new launch across the board how is barstool performing versus your to your longer term target our aspiration there.

Yeah, well, let me maybe I'll hit Arizona at the end, but I'll talk sort of at a high level.

As you think about the launch of <unk>.

Or the start of football season, this year on September 19th.

As I mentioned earlier, we were alive in nine states versus a year. Prior zero. We went live in week two actually in Pennsylvania last year. So if you look at sort of revenue environment.

You have deposit and match that bonuses that have to kind of work their way through the system and so we had a 1000 dollar deposit in that match that.

That was that was offered in those five states for September, which obviously lowers your N. G. R. After promotion you're N. G. R. Four it takes about four to five maybe six weeks for that initial offer to kind of work its way through what we thought what we're seeing in October and what we saw in October and are seeing in early November is that obviously, there's a lot.

Promotional dollar flowing through which means assuming that you have a more normal hold rates and I think you've probably heard Sean and we like everybody else.

Definitely had a softer hold percentage in October favorites covered.

Significantly the first four weeks that reversed itself, we had a very good final weekend, but the first four weekends hold rate was lower than normal.

But if you sort of just look at an average hold and you look at what we were able to do in October and converting handle to G. G. R. Based on hold and then G. G to N. G. R. We feel really good about not only continuing to grow our handle market share, but being able to grow our N G. Our market share now N G. R. Unfortunately.

We would welcome that but it is only reported in Tuesday's, So, Michigan and Pennsylvania, you actually get a really good look as to how operators are running the business in terms of what's driving handle what is G. G. R and ultimately in addition to paid media, where we play a very different game than most everybody else also how much of it.

Handle is being driven by promotions and so you can actually see what the MGR looks like every other state it's either just handle.

<unk> handle and G. G. R and you don't really have really have the visibility to N G. R.

So we feel as you see that slide that shows the momentum we have on handle from week one through week nine you should assume that we feel just as good and in some cases, even better of what the N. G are trending looks like from week, one to week nine assuming a normal hold rate.

Now, Arizona to your last question I have zero visibility at this point into what the market looked like that has not been reported unless it came out this morning, but I have not seen that yet.

Super helpful and maybe just as my follow up.

Could you just give us an update on the online casino offering I mean, I think each quarter, you kind of give us a little bit more but obviously youre working through that product offering and.

When do you think youre going to have that at the place that you kind of want to have it may be either support broader marketing or just a bigger push through the channels that you that you already have.

And promotion in Michigan around <unk> casino, because we know that the product is so much better than it was when we launched there in early 2021. So that tells you something obviously, we felt from a product offering perspective, if you look at the library a slot content library of manufacturer different manufacturer of content, we have a.

Better offering today than we did I still don't think our casino offering is where it needs to be and I don't think it's it's ultimately as competitive with best in class product offerings and.

We as I mentioned earlier, we just went live with live dealer in New Jersey, that's actually Barstool themed and last night was amazing content watching then Dan Katz, Big Kat and Logan, Paul and several others are at Barstool, where plane live blackjack all in the same room and as a fan you can watch them.

On the live stream you can download the App. If you are in a state where we're where we're live like New Jersey, where they were last night and you can bet behind them, which is what a lot of people were doing behind Logan, Paul and Big Cat and some of the other personalities.

At Barstool, So we can do things that others simply can't do or don't have the personalities or content creators that anybody would care to bet.

We prioritize.

Having a great and we've delivered on that a great sports betting products four eight on a scale of five point on the Apple App store, we wanted to get live in as many states as possible.

Have a great sports betting brand to lead with an amazing audience that we can activate and have done that and ultimately that ends up being Ddos acquisition tool you have for conversion from online sports to online casino and so we've got a lot of runway in front of US I would say from our online sports betting perspective in terms of product in case.

Ability, we're probably third or fourth inning and still have lots of improvement in front of us that we are pursuing from an online casino standpoint, we're in the top of the firm.

Nowhere near where we know we'll be and needs to be but we're making progress.

Thank you very much.

Thanks, Sean.

Our next question comes from Ryan Macdonald with Craig Hallum Capital. Please proceed.

Good morning, Jay Felicia, Thanks for taking our questions.

Hey, Brian.

Curious if you're willing to comment Caesars fan dual they're seeing their online businesses expect to inflict profitability sometime in 2023, I guess without getting too specific but given what you guided Q4, two of only 20 million loss. How do you think about Penn interactive cannot be profitable sooner than those.

And is it even possible to potentially be profitable all of next year.

This is these are topics that we welcome obviously, given what we've been able to do in our strategy and the differentiation really.

Here's the way I would sort of describe 2022 and 2023 it at a high level I have said before that.

This is pre acquisition of the score that we thought we would be breakeven or better from a Penn interactive standpoint in 2022, I, absolutely still stand by that.

We have however acquired the score and we're making real significant investments in the score around technology and the score is already currently live on their own Pam in the U S and their own promotional engine. So far so great I mean, the results that they're seeing around not just stability.

Feedback and ratings are.

Current.

Two standpoint, we will not be profitable I'll wait to give a number on that until we're providing maybe guidance for 2022.

It won't be in the hundreds of millions negative it'll be under $100 million I. Just don't have an exact number for you now, but it is going to be all around investing in product and technology stack I think it also will depend on when we go live in Ontario, because that's a huge revenue revenue driver for us to offset some of those expenses that were not able to offset yet as it relates to the score.

Because everything comes together.

Score is gonna be live completely vertical on their own tech stack before football season, 'twenty two and then we have the whole football season in March madness to.

And it would be there in 'twenty two if we werent also going vertical on tech stack, but we're happy to be doing that.

Very helpful too.

From those initiatives and those are really adopting locations.

Yeah, Ryan I'm going to ask Todd George to address those two questions.

Thanks, Ron.

Thanks, J b the breakdown between the Ida and the Delta Varian I'd say that the we have a material amount of our EBITDAR generated from the southern region. So we had a I would skew a little bit heavier towards the hurricane versus the Delta variant Delta was kind of spread out and there were pockets.

Around the U S but.

We generated quite a bit from both Louisiana and Mississippi. So.

Focus more of the order impact there from our three CS So very early innings, you heard Jay using analogy before but we are so pleased with what we're seeing with each launch. So now we're three properties in Pennsylvania and.

Two casinos in two race, who knows in Ohio, and with each launch we're getting greater adoption.

Initially we thought we would see greater adoption from the younger demographics, but we're.

We're pleasantly surprised that it's actually going across all demographics.

What we're seeing is that if you look at our normal guests to a casino.

Take that as your baseline we're seeing great growth from people that are app users as well as even greater growth for people that are downloading the wallet and playing with the wallet.

A lot of that just comes from removing friction as well as increased time on device not standing in line. So.

Very early and I think we will have more to report in future quarters. After we roll this out at other properties.

Thanks, Good luck and I'll hop back.

Thanks Ryan.

Our next question comes from Barry Jonas with Securities. Please proceed.

Great. Thanks.

Could you talk a little bit about the strategy behind the Standalone Barstool sports sports bars, as well as pizza and any other new growth channels there.

The intent for these to be meaningful profit centers at some point your pen or are they more as marketing vehicles to drive gaming.

Yeah, Great question, Barry I would say a little bit of both it really depends on which of those opportunities that you're talking about.

Take the one by frozen Pizza as an example, and I'll only share of course, whatever Erica and they importantly have shared publicly but.

They've sold hundreds of thousands of frozen pizza is just in the first few weeks of offering those in Wal Mart across the country.

I know it has blown away expectations in that Walmart.

Know how to handle demand, but its been overwhelming for them and a lot of the different geographies around the country. So that's probably an opportunity to do both it's gonna be good financially, but it also importantly is going to be great for just continuing to build out the brand and the top of funnel.

Everybody who's shopping for frozen Pizza is already a barstool fan or maybe in some cases has even heard of barstool, but theres a lot of social media buzz around frozen pizza.

A lot of people sharing their purchases.

Re ratings of the pizza and so it is a great brand builder and I sort of put the other ones that we've talked about in the similar category of the Standalone Barstool sports bars, which are essentially serve as because there'll be in markets, where mobile sports betting is live and legal they'll essentially serve as.

Introduce new people to the brand we're picking.

We've got several more in the queue, we will share more details around current performance of the existing ones that opened as well as our plans for building out new ones probably on our next call, but we're very excited about it. It's obviously a great opportunity and it's again, it's something that we can do that really no one else in the space can because the barstool branded.

<unk> has a different affiliation and base of loyal fans.

Who really care about the brands and feel like they're a part of the brand and so whether you are talking about those two examples or anti double a collegiate athletes, where we're obviously building relationships with.

College athletes when they're relatively early in life and pre professional career.

I think that's great right now its all about barstool and how barstool can help them as a as a media company.

Life style company and down the road, maybe that evolves into.

Our relationship around sports betting for those that are interested in betting on sports. So I think that it's probably for US primarily brand building, but there is definitely gonna be financial components to it as well, especially when you consider the average age of the.

<unk> 28, and a half years old average age on the sports betting App is terrific. When you think about what those spend levels may be when they're in their <unk> and <unk>.

Yes, I guess that touches on my follow up question, which is I'm curious as Youre building out Penn Interactive.

We're learning about the differences and similarities between the online and the land based player and if longer term down the road, how youre thinking about potential cannibalization.

There's some really really interesting.

<unk> that were sort of uncovering in the states, where we are alive with with brick and mortar casinos as well as online casino so call it, Pennsylvania, and Michigan one of the things that we're finding which I find fascinating is that when you look at the online casino VIP business roughly half of that online casino VIP business where customers.

That we knew we had a relationship with previously.

But of that 50% <unk>.

60% of them had gone dormant K. So we've reactivated this has been such an amazing reactivation tool for us for whatever reason they had gone dormant and our database whether that was because they moved elsewhere in the state or.

Whatever reason it might be they decided they didn't want to visit the casino anymore, but 60% of those that were reactivated.

Excuse me, 60% of them of the Vips were reactivated who are no longer visiting our casinos as a regular customer and 10% of those also started coming back to our brick and mortar casinos. After they were reactivated with online casino. So that that's really powerful as I take a step back and think about it and.

I think thats to be expected there is no doubt you'll get some people that are spending up some are splitting wallet.

And that moved over entirely to online casino and I think that's why it's really important to run a profitable online business, because if you're moving people and their spend around you want to make sure I mean from our perspective, we're indifferent you want to play online with US great you want to play in the brick and mortar. That's also great because we know where we have best in class margin profile long term.

We just wanted to develop the relationship and make sure we have best in class products, but I'll I'll pause there and see if Todd has anything he wants to add.

Jay I would only add a few items one.

Touching on the fact that we have 100% of of the online component. We don't have a JV like some of the others in our industry do so again to <unk> point.

Lot of it drives the database and then we can mobilize those people around the country through our operations and then in Pennsylvania, and the bulk of the population residing in and around Philadelphia. Our properties are not located close to Philadelphia. So a lot of that represents brand new play as well again, an opportunity to grow the database.

And then you know.

It should be shared across our properties around the U S and similar with Detroit in the Michigan area.

The Detroit area, we have a large amount of our databases within that 30 to 50 minute drive.

So as we're growing that business its coming from outside of that zone as well.

Great. Thanks for all the color.

Okay.

Our next question comes from Bernie Mcternan with Needham and company. Please proceed.

Great. Good morning, Thanks for taking the questions.

Just wanted to focus in on the live event at the Hollywood Casino in Illinois, the 10001st time depositors significant step up of what you've been adding previously how does the retention I know it's early days, but how is the retention engagement engagement of those users and payers look relative to the overall base.

Yeah.

To just take advantage of the promotional offer and the bed on the bare so we really we didn't know going in.

We were expecting about a 1000 to 500 people to come in and visit us in deposit. So it obviously blew away our expectations I've been very pleased with the retention that we've seen from the 10000 west.

Saw a noticeable uptick from a handle perspective.

Relative to the first few weeks of the football season, I think we ran this in week four if I'm not mistaken and if you look at our Illinois handle and week four it was the best week, we had but week five through week nine were all better than weeks one through three.

By a pretty good variance so.

So I think you can expect us to take the learnings and do more around that not necessarily just Aurora.

But other parts of the country other states and I think we've been.

Covid was still keeping people, mostly inside whereas right now the barstool crew every week, we hit one of the nine states that we're in sometimes multiple times a week.

And we are doing on Prem events, and if you looked at I don't know how many of you saw it but it would be worth going back and looking at the game day events that the Barstool crew did last weekend at Michigan State in East Lansing, and if you look at the crowd that was at the barstool events and an apartment complex next door the stadium.

Versus the ESPN event, it wasn't even close and that's.

That's exciting, but we weren't able to do that last year in every week. When we do these on Prem events, you'll see the states, we're in and see a significant pop in first time deposit registration first time deposits handle and we're doing a much better job. After the fact around retention because we've learned a lot around what works and what doesn't from last year being an <unk>.

<unk> to now having scale in nine states. So.

Feeling really good about that overall and lots more to come.

Got it that's helpful. And then just wanted to touch on market access spend $7 5 million on the ballot initiatives in California, What's your outlook for potentially bringing OSB to that state and then while we're on the topic of market access just any thoughts on New York.

Yes happy to hit both of those so, California was actually $12 5 million.

One of I believe it's seven operators that are working on this.

<unk> initiatives together and everybody wrote the same check.

We'll have to see I mean, California is.

As well as some of the dollars channel back to the tribal entities in California. So I think that it's been constructed in a way that is good for the state and good for those that operate casinos in the state today.

It's going to take a little bit of time to play out obviously, we're gonna be pretty deep into signature gathering mode here in the coming weeks and months and there's been a little bit of opposition. So we're trying to understand that and we actually want to do this in a way where it's completely complementary to the ballot initiative that the tribes already had.

Out there before we announced this ballot initiative in the language around the valid initiatives. So.

Trying to make sure that we're doing this in a complementary way and that we're including all the right parties as we think about the California opportunity. So more to come obviously very early and I'll have more updates I think quarter to quarter as we have a better feel for the polling already looks good pulling can change over time.

Signature gathering effort that just going to take us a little bit of time to see where we are but I still feel good about the team the dollars that we've put forth the campaign initiatives.

New York, New York is an interesting one.

I have discussed in New York with my team Ad-nauseum and I've.

I feel the same way today that I felt day, one which is I feel really mixed about new York because of the way that the gaming law is structured and the fact that the tax rate.

Being self imposed with a minimum of 50%.

And when you keep in mind that that 50% taxes. In addition to a really high.

License fee as well as that 50% tax is on growth.

Pre promo spend not net.

I don't think anybody is going to make money operator, while the state is going to make money I don't think a single operator will make money in New York. So I've always struggled with the would you rather be in or not I think objectively speaking you'd probably rather be and not be in.

It's one of those states, where if youre not in youre not crushed by that either.

Maybe from a from a Tam perspective, and from a revenue perspective, but I think it's just going to be.

Kent.

You know if if nobody can make money, we'll lose the lease because we can rely on the barstool audience organically and turn that on and activate it in ways that we've done in other states without having to get into the paid media shotgun approach I don't know who is going to be able to afford doing really any of that given the tax rate would be the highest in the country or at least.

Tied with New Hampshire, and we know drafting has been cleared very difficult to make money in new Hampshire. So.

It's a long answer because it's a pretty complicated issue that's our that's our position on New York.

I appreciate the comments thanks Jay.

Yes.

Our next question comes from Thomas Allen with Morgan Stanley. Please proceed.

Thanks.

A lot of I gaming typically when we look at international markets either means more fragmented in sports betting and the U S. We're seeing.

Basically the opposite if not just concentrated how do you think that will turn out and like how are you thinking about it affecting your company.

Can you maybe I'm not sure I follow the question Pablo <unk> to make sure I answer what you're what you're shooting for yes, So and I gaming you typically see like that.

International markets and I gaming space.

Typically you typically see the largest share companies with like 10% to 15% share in the U S. Right. Now you see certainly certainly were one of your peers was about 30% market share.

Do you think it will continue to be so concentrated or do you think over time that market is going to be like more like the international markets.

And then how are you thinking about it in terms of your opportunity. Obviously, you have a massive casino database, which is similar to the peer that has a lot of market share.

Yep, Okay I gotcha.

Here's my thoughts overall on market share I think that it's very early to be declaring what's going to be in the next five years on either side sports betting or online casino I do think that companies that have.

Built in structural advantages I think on the online casino side that would be your existing casino operator, who obviously in the states where I casino is legal have a built in advantage of a database that they can market to <unk>.

Like the sports betting operators, the DFS companies than us with Barstool have a built in advantage because you have a database you can market too.

Organically so market share I think is going to continue to shift around it's obviously competitive.

There will likely be some consolidation in the mix as well so I don't have any reason to believe that.

The ultimate market share results in terms of fragmentation are gonna look a whole lot different than over in Europe or parts of Europe.

I don't know if there will be 30, or 40% operator single single operator market share sort of quote unquote winter, if it's going to be more lots that are in that sort of 10% to 20% market share.

We'll have to see how it plays out but I think that some companies have built in advantages. The thing that's always tough also to peg Thomas around questions on online casino is that there's really only three states of any real population that are live today and those are continuing to I think evolve and we'll see what market share looks like I think even in those states that will look different.

In two years and three years than it does today certainly from our perspective, we know because our product is only going to get better and we can really take advantage of converting sports betters in those states as well as our database because in Michigan and Pennsylvania, we have casinos there.

I don't know what states are going to be live in legal and obviously there are some states, where we are super well positioned if it comes we have four casinos in major markets in Ohio, we have the top of class.

Assets in Louisiana, and all of the major population centers and that states, Missouri, we're very well positioned in Kansas City and St. Louis.

The list goes on Illinois, Indiana, We've got property multiple properties and so many of these states. So I think we're really well positioned but I think I'm going to take a little bit of time to play out.

Helpful. And then just as my follow up.

One of the attractions of retail sports books is bringing in it.

A different demographic or maybe attracting.

Some players back.

I'd like to play table games over slot machines.

Outdated numbers around what Youre seeing in places, where you've opened up retail sports books on the table game side and maybe some benefits the thoughts there.

Yeah, Todd anything you want to add to that that we've said beyond what we've said previously.

So the trends continue.

The great thing for us.

And I kind of talk about this at the close of every month is we all expected as you referenced the growth in table games business, but we're also seeing some conversion over to slots were seeing conversion over to electronic table games, which have really been able to grow quite a bit this year and then obviously the increase in food and beverage as.

Especially our barstool branded retail sports books feature.

Future are pretty robust food and beverage component as well so it's more experiential.

That has been.

Really the.

Across every property across every region. So we're excited too.

Louisiana as Jay touched on in his opening remarks, we've got the temporary sports books two of them opened this week, but we'll be converting.

Those two barstool branded sports books.

In the upcoming months here, we really look for that as keeping that Texas customer coming over you had mentioned.

Really being able to reactivate the inactive that has been the case a lot in Indiana with the Cincinnati customer coming back to Indiana, and the Chicago customer coming back to East Chicago and Indiana. So everything you you touched on is what we continue to see.

And Thomas unless you have any other follow ups I'm always sensitive to everyone's time, and we're right at 10 o'clock So Frank.

Thomas is there anything else I think we'll probably stop there.

Thank you.

Alright, Thanks, Thomas and thank you everybody else for joining us. This morning, we look forward to catching up with you again likely in a very early February for our Q4 earnings.

Okay.

That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line have a great day everyone.

Q3 2021 Penn National Gaming Inc Earnings Call

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