Q3 2023 PENN Entertainment Inc Earnings Call
Please continue to stand by your conference will begin momentarily we thank you for your patience.
[music].
Greetings and welcome to the Pan Entertainment third quarter 2023 results conference call.
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.
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> Investor Relations. Please go ahead.
Thanks, Frank Good morning, and thank you for joining Penn Entertainment's 2023 third quarter conference call, we'll get to management's presentation and comments momentarily as well as your Q&A.
During the Q&A, we ask that everyone. Please limit themselves to one question and one follow up.
Now I'll review, the Safe Harbor disclosure.
Please note that today's discussion contains forward looking statements forward looking statements involve risks risks assumptions and uncertainties that could cause actual results to differ materially for more information. Please see our press release for details on specific risk factors.
Now my pleasure to turn the call over to your host.
Penn Entertainments CEO Jay Snowden Jay Please go ahead.
Thanks, Joe Good morning, everyone I have with me here and while missing our CFO, Felicia Hendricks and our head of operations Todd George as well as other members of my executive team, who can help answer your questions. During the question and answer at the end.
And it was a pleasure to host many of you at our recent investor event at the M resort in Las Vegas during G. Two week for those unable to attend Mike Morris and head of sports betting in fantasy sports and ESPN and I spoke about are highly synergistic strategic alliance and the deep integration of E. S. P N that across the E. S. P N ecosystem.
I couldnt be more pleased with the way our products and design engineering marketing and operations teams at ESPN and Penn have seamlessly entire Leslie worked together to prepare us for this launch coming up on November 14th pending final approvals.
Yesterday, we released a teaser on the E. S. P N bet landing page featuring Sportscenter anchor Scott Van Pelt, if you haven't seen it yet there is a link to the video on page 10 in our Investor presentation and early last night E. S. P. N began exclusively using odds provided by ESPN bet for all editorial and other content. It's all very.
Citing but more on that subject in a bet first I will cover our results for the quarter.
As provided in our earnings release Penn generated third quarter revenues of 1.62 billion and adjusted EBITDAR of $445 1 million and adjusted EBITDAR margins of 27.5, our property level performance was stable during the quarter, reflecting solid customer behavior, particularly from our rated traditional core customer.
We also saw the continued return of our 65, plus demographic and moderate growth in our spend per visit trends. All of this helped to offset softness in our unrated business in the South region. A couple of major road construction projects and increased supply in several markets, which we've covered.
Overall, I'm pleased with the strength and resilience of our properties, particularly our casinos in Ohio, Kansas, Massachusetts in Missouri, the broader stability of our operations and performance this quarter highlights the benefits of our geographically diversified portfolio as well as new and sustained customer engagement driven by the growth of our database.
And ongoing investment in our properties, leading our including our leading retail sports betting offerings in key markets. As we look ahead to the fourth quarter, we anticipate more of the same in terms of stability across most markets offset by new supply pressures on the unrated and low end of our database. In addition to the one time impact of ongoing Union Nick.
<unk> at Greektown in Detroit.
And road construction disruptions in Charles town, which started in September, but well thankfully conclude in December of this year and in Black Hawk, Colorado.
As it relates to overall company guidance, we anticipate ending the year within 1% of our full year retail EBITDAR guidance for the interactive segment, we estimate an EBITDA loss of approximately $100 million to $150 million for the fourth quarter as we launch E. S. P. N bet in the next couple of weeks.
Over the next two months, we look forward to breaking ground on all four of our retail growth projects as highlighted on slide 14, our Hollywood Aurora and Hollywood Joliet projects provide us the opportunity to replace our existing dated riverboat properties, which have experienced revenue declines over the last several years due to new competition that we have.
Expect to continue absent those these relocations. The relocations also allow us to avoid significant capital investments on maintaining the existing riverboats by building new destination quality facilities with enhanced amenities and significantly higher traffic counts from direct access to major interstates as well as proxy.
Timothy to large third party retail and entertainment offerings.
As a reminder, the city of Aurora, who has been a great economic development partner throughout this process with Penn what we will be providing $50 million in funding for the project there and G. L. P. I has committed up to $575 million.
And then you have the hotel projects at two of our highest performing properties Hollywood Columbus, and the M resort in Las Vegas, and Columbus, We're building a 200 room hotel that's fully connected to our casino. We think this will be a key economic driver in the ongoing resurgence of Columbus is west side and it will create a true destiny regional destination at.
The M will be nearly doubling the size of our hotel by building another tower with 380 additional rooms, which will allow us to accommodate the demand for larger group business.
When considering the expected continuing revenue declines at Aurora and Joliet over the next few years. We expect these four growth projects to deliver a 15 plus percent cash on cash return on the aggregate project cost of $800 million, which is net of the 50 million contribution from the city of Aurora. These.
These projects will also contribute to our strong free cash flow generation upon opening in late 2025 in early 2026.
Turning again to the interactive segment as I mentioned at the outset. Our plan is to go live with E. S. P. N bad on November 14th subject again to final approvals, which will occur simultaneously in the 17 states in which we operate sports betting.
This allows us to take advantage of a very active Thanksgiving week sports calendar, which includes the N C. Double a college football rivalry week and the Super Bowl rematch of the Kansas City Chiefs, and the Philadelphia Eagles, which will be televised on ESPN Monday night football.
In connection with the launch ESPN will be implementing an initial wave of exclusive integrations across the E. S. P N ecosystem.
Which includes 200 million unique monthly users in the U S more than 12 million of whom are regular users of the nation's number one fantasy sports app at ESPN.
Following an initial advertising campaign headlined by Sportscenter anchors, Scott Van Pelt and L. Duncan you'll begin to see even deeper platform and media integrations with ESPN over the coming months, providing an unmatched and eventually friction less media and betting experience importantly, when we go lives are existing customers.
<unk> and the Barstool sports book will be prompted to download E. S. P. N bet and all of their account information and wallet will seamlessly transition over to ESPN back.
ESPN back will be powered by our proprietary and proven technology platform, which has been driving impressive performance in Ontario for over a year now under the score that brands. In fact October represents a record month for us and G. G R and N G R and both online sports betting and casino.
As you can see on slides 12, and 13, we've had great success in terms of media integration retention and cross sell results leading to double digit market share in a highly competitive market, notably 73% of our total handle in Ontario comes from users already within the score medias.
Ecosystem and in terms of cross selling there's over 50% conversion five zero of online sports betting players into I Casino BC.
Besides sky bet in the U K, we think Ontario with the score about provides one of the best blueprints for success in the U S with ESPN bet and with that I'll turn it over to Felicia.
Thanks, Jay our property level performance was stable in the third quarter, owing to our diverse portfolio and the investments we have made in the customer experience property level revenues were $1.42 billion and adjusted EBITDAR was $523 $4 million adjusted EBITDA.
<unk> were 36, 8% in the quarter, we had roughly 10 million net of one time good guys in the SaaS segment.
Interactive segment revenues were $196 3 million in the quarter and the adjusted EBITDA loss was $50 2 million, our interactive segment EBITDA in the quarter reflects lower curtails marketing in the U S. As we prepare to transition our online sports book to the ESPN that brand in <unk>.
And in the quarter, we recorded a tax gross up of $103 million compared to $63 million in the third quarter of 2022 Fer.
Further given our divestiture of Barstool sports on August eight the third quarter 'twenty three will be the last quarter, where the interactive segment includes Barstool sports results from July 1st two August 7th Barstool sports generated $18 million in revenues and a net loss of $7 8 million.
Slide four summarizes our balance sheet and liquidity.
We ended the third quarter with total liquidity of $2 $3 billion inclusive of our $1 billion Undrawn revolver traditional net leverage as of September 30th was one four times and lease adjusted net leverage was four seven times, notably we also have no near term debt maturities until 2026.
You will find on page eight of our earnings release, a table that summarizes our cash expenditures for the quarter, including cash payments to our REIT landlords cash taxes cash interest and total capex of our $75 million of total capex in the quarter $6 $7 million. This project Capex.
Our net income results included a pre tax noncash loss on the divestiture of Barstool sports that we disclosed last quarter that we were at a record in the third quarter, the details of which will be in our 10-Q filed later today or.
Our fully diluted weighted average common shares as of September 30th was $150 9 million because the dilution for potential common shares with anti dilutive. We use basic weighted average common shares outstanding if we reported moderate net income for the quarter, our fully diluted weighted average common share count would have been 100%.
68 million shares.
To further help you with your modeling for 2023 we expect 23 corporate expense of $105 million inclusive of our cash settled stock based awards.
Total capex for 2023 is approximately $345 million net of insurance proceeds and inclusive of $45 million of project Capex.
For cash interest expense, we forecast $130 million for the full year after roughly $38 million of interest income and cash taxes will be roughly $70 million to $80 million for the full year and with that I'll turn it back to Jay.
Thanks in closing I wanted to cover the slides we included at the beginning of our presentation, which are meant to help remind investors of pens ability to generate significant free cash flow and grow our overall cash position even in the event even in the events of an unforeseen economic downturn. So.
So let's start with slide five where we show how much free cash flow our retail operations have generated over the last 12 months after maintenance capex on a GAAP basis on slide six which is worth spending a couple of minutes on we lay out an illustration of our cash generation bridge over the next three years, we start with our current cash balance and <unk>.
At three years of our retail free cash flow is calculated on a TTM basis. This cash flow is meant to be illustrative as our <unk>.
LTM free cash flow include slightly lower maintenance capex than our typical $200 million a year and our leases are subject to modest annual escalators as you know.
The biggest variable of course will be our operating performance over the period for purposes of this illustration, we conservatively discounted our annual retail free cash flow to be 80% of our L. T M retail cash flow and extrapolated. This over three years and we did not include any contribution from our growth projects, but.
But regardless of whatever assumptions you want to make about the strength of the economy. Our properties are going to generate a significant amount of free cash flow over the next three years that will support our growth initiatives.
Next as I mentioned earlier Penn plans to take advantage of available financing from G. L. P. I and the 50 million dollar contribution from the city of Aurora in connection with our for retail growth projects. So that our total capital outlay. When these assets open in late 2025 in early 2026 will be $225 million.
And finally, while we anticipate accumulated EBITDA losses of an interactive of approximately $300 million over the next three years you can see that we expect to grow our total cash position by more than $1 billion over this three year period.
And going back to the interactive losses anticipated you should expect those to occur mostly in year, one and year two with your three inflicting to breakeven or modestly positive EBITDA, which bridges nicely to the ranges of EBITDA. We provided on our last earnings call when you get to 2027.
Of note, we anticipate our leverage ratio, peaking in Q3 of next year, and then coming down by roughly a full turn every four quarters thereafter.
I hope this all help for modeling purposes, and clarifies, how we intend to grow our business in the near term as Felicia covered during her remarks, we have total liquidity of $2 3 billion inclusive of our $1 billion Undrawn revolver. We also have no near term debt maturities until 2026.
An exciting new growth catalysts on the retail and interactive fronts.
With all that being said, we have $750 million remaining under our December 2022 share repurchase authorization and we'll be active and opportunistic over the next few quarters. If our stock continues to remain undervalued and with that we'll open up the line for questions Frank.
Thank you.
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As a reminder, we ask that you ask one question and one follow up.
One moment please for the first question.
Our first question comes from Carlo Santarelli with Deutsche Bank. Please proceed.
Hey, thanks, everyone.
I just wanted to kind of dig into the comments that you just made so from the slide you're basically assuming about 1 billion seven of retail cash flow over each of the next three years that doesn't include the I want to say $120 million you guys kind of anticipate on the developments, even though that'll be stunted towards the end.
But the 80% that you took I acknowledging free cash flow could be a little bit sensitive to EBITDAR and you want to provide yourself some room.
Is that indicative of every guidance or is that more just being conservative just to show kind of the strength of the balance sheet and the cash position.
Yeah Carlo it's entirely entirely the ladder, we just felt like let's be conservative here because you can.
Anticipate everybody's got a theory on what's going to happen from a macro perspective over the course of the next 12 18 24 months so for us to take T. T M and the one thing you said that I would just clarify its not that's three years total worth of retail free cash flow not each year. So that's 1.7 there.
We just did that to be conservative there's no other reason and if you want to.
Trim, it at 90% or 95 or 72 or keep it what it is on a TTM basis any of those work. The point of this slide is to show you that even if you take a really conservative view of free cash flow generation the investments that we're making in the four retail growth projects in our total cumulative loss and interactive anticipated.
The next three years, we're still building our overall cash position by North of $1 billion. I think this gets lost sometimes when people drill down too much on this month last month next quarter. The three year look I think shows you how we're thinking about growing the company and also remaining extremely liquid and.
Continuing to grow our cash position.
Great. Thank you and then and then if I could just a follow up.
I know you mentioned kind of a $100 million to $150 million <unk> loss as it pertains to ESPN back.
I know theres, a lot of variables and how things go in and whatnot, but you know as we think about 'twenty 'twenty four in that segment.
What kind of guideposts could you.
Could you kind of outline for us in terms of how youre thinking about the investment over the course of 2024.
Yeah. It's a great question Carlo will provide more detail obviously in February when we're putting out guidance for 2024, but I think at a high level you should expect the interactive losses to sort of be at their peak between Q4, and then Q1, because youre going to be launching.
You've got a lot of first time deposit match promo dollars running through the system and you sort of capture not just N F L, but youre going to cap capture NBA youre going to capture and H L. And then when you get into Q1, you're going to capture college basketball, you're Gonna have College football Championship and Super Bowl, So I think that.
Where you're going to see sort of peak.
But from a leverage perspective that the leverage number will peak in the third quarter, because youll be sort of on a TTM, including Q4 of this year plus the first three quarters of 2024, that's sort of the way I would anticipate it but it will definitely be showing losses every quarter in 2024, and then we'll talk more about what that.
Looks like cadence wise and twenty-five and then rolling into 'twenty six but as I provided at the in the prepared remarks, you should think about the first two years of launch of E. S. P. N bet to be really where those cumulative losses are and then in the third full year is where you would anticipate us inflect into <unk>.
Even in better probably modest EBITDA growth in that third year, and then that bridges you right into 2027 and the ranges that we provided on our last call.
Yeah.
Our next question comes from Shaun Kelly with Bank of America. Please proceed.
Hi, good morning, everyone. Thanks for taking my questions.
I just wanted to go back to Q2 things first I think in the prepared remarks, Jay you mentioned being within 1% of overall company guidance I just wanted to kind of clarify just does that imply we're within 1% of the mid point or is that more conservative than that.
Then as my follow up if we could just talk a little bit more about some of the programming around the ESPN that launch.
Turning to see some operators, particularly those that are that are launching focus on specific states and I guess youre, obviously able to launch very broadly given your market access, but I wanted to kind of get your thoughts on are there state road map or two that we should be particularly focused on either given your prior success with barstool or kind of.
What are you going to Frontload some of the marketing just so we get a sense of what's possible here under the partnership as the data starts to come in.
Yes, no both good question, Sean and yes to be clear when I mentioned within 1% of company guidance, we're talking about the midpoint of guidance. So you're correct on that.
As it relates to E. S. P N bed in specific states.
I don't know that I would look at one particular state I mean, obviously the ones that are going to be probably the most important long term for us are states that have both online sports betting and online casino.
I don't know just based on the information that we've seen from ESPN I'm not sure I'd say that they you know have states that they're super strong and the brand is weak in other states. So you don't really see that it's really based on population as the popularity of E. S. P. N. So I wouldn't.
Double click on any one state I think we're really approaching this now that we have the scale, we do being live in 17 states. It's a national platform and most of our marketing efforts certainly from a paid and earned media perspective will be more on the national side, and then promotional the it'll be a lot more regional and local lives but.
I don't I wouldn't point, you to any one or two states at this stage.
Okay.
Okay.
Our next question comes from Barry Jonas with Trust Securities. Please proceed.
Great. Thank you good morning.
Operating margins were nearly 37% for retail in the quarter.
More recently, you've talked about 36% I think you mentioned some softness in the south margins. There were really strong. So I'm just curious if there are any call outs for flow through and how we should think about the total margin range from here.
Yep, and Barry and make sure you caught it Felicia did mention that we had roughly there's always puts and takes in every quarter. When you got 40 something businesses across the country and we had roughly $10 million of one time good guys in the South region that certainly benefited the business results, they're a little bit.
But even when you put when you include that $10 million or take it out of EBITDA I think youll see that margins were still pretty healthy all things considered very close to that 36% number.
And I would but I would remind everyone to our fourth quarter seasonally is always the softest quarter and not that it's going to be any softer. We don't think that's this year compared to third quarter than it historically has but you should look at what that drop in margin is between third and fourth quarter. The last two years and that's sort of what we anticipate again happening this year just due to.
Seasonality in calendar are really no. Other reason the business as we mentioned earlier is really stable other than the one time callouts of new supply and road construction.
Got it and then just as you think about sort of the longer term opportunity to work with ESPN personalities.
Around ESPN ESPN bet.
How should we think about it being similar and maybe how different than your experience with barstool personalities.
Yeah, I mean look.
It's.
It's similar in the sense that you're working with individuals who are pretty passionate in the kit or in the case of the ones. We're talking about on both sides very passionate about sports and sports betting.
But every one of them is different in terms of what their preferences are and how much they like to talk about the betting aspect of of sports Entertainment.
I think what we found in our discussions with the team at ESPN is that there's a tremendous amount of excitement it wasn't hard for ESPN to find the first two personalities to get involved in creative and commercials and I think you'll see more and more of that as we get into 2024.
This is a big deal I've mentioned this before and I think you guys will all start seeing you know.
We no longer have to speculate and who's right and who's wrong about how committed to ESPN that ESPN is we know what we see and hear and engage with them about every day and you'll start seeing that and that includes the personalities, but the list is pretty long in terms of our involvement in excitement on the E. S. P N side.
Our next question comes from Brad <unk> with Barclays.
Please proceed.
Great. Thanks, everybody good morning, and thanks for the question.
On ESPN bet in the launch in and it looks like it sounds like you guys have a fair amount of momentum here building under the service. So sometimes we just kind of think about what could go so right that it might go wrong and worry about that and so and so one thing that popped into my mind is just you're getting so much volume.
On day, one or two or three and you never had that level of volume before and I'm just curious if.
If you if youre able if you've been able to stress test the system and how comfortable and confident you feel that that that that youre going be able to handle that throughput.
Yeah, I'll say a couple of things Todd obviously jump in if you have anything to add to this as well we've been.
Part of why we decided to launch in November Despite having announced this partnership in August we probably could have rushed to try to get ready for close to the start of football season, but there were really two things driving the decision one let's make sure that the product is first class. When we launch don't you know you have one.
You have to make a first impression and we had a number of enhancements to the app that we wanted to make in advance of launch, which we've done and we wanted the re skin to really feel all things ESPN at ESPN that by the time. We went live we've had time to do that and no alleviant. The product team have done an amazing job getting us ready for the launch.
Yeah, Oh, sorry, I'll, just say it and then on the on the load testing side that was the other factor really driving the dates and our engineering team has done a great job of really thinking through load testing preparation, we have had plenty of time to order additional servers and hardware to prepare.
For what we anticipate with volumes being the highest we've ever seen and you know we sort of we used information that was that's out there around top players in the space and how much volume per second that's per second on Super Bowl and.
The nice thing about launching on November 14th is that it's a Tuesday, and you've kind of built into this before you get to Thursday night football, which is a big deal but not.
What will not what superbowl is certainly and then by the time you get into the weekend. So we've thought about this and again pending final approvals in November 14th at the date.
Jimmy mostly NBA NHL, and maybe a little bit of college football for a couple of days then you roll into NFL. One game and then you get to a rivalry weekend that weekend and roll right into Sunday and then the Big Monday Night football game. So we feel really good.
Benji and team have been spending a lot of time and load testing has probably been the biggest piece of preparation honesty, along with the product enhancements Todd if you want to add anything.
No I think you've covered it in the second half just the Capex went through rather quickly and thank you to our vendors for working with US all the new servers are in and the example that you used really was the guiding force, where we tested it compared to Super Bowl volumes of the market leaders. So we feel.
Really really comfortable that.
We will be ready to handle going into such a busy time of year.
That's super helpful. And then a bit of a more nuanced question on the customer experience sort of on day. One I think you just said Jay earlier in the prepared comments that.
On day, one all will all wake up and be prompted to download ESPN bet. If we already have barstool app on our on our phones.
I think we were expecting that it might sort of download itself at some point and maybe it's maybe it's just.
Semantics, but is that something that could be considered a minor extra layer of friction or how do you kind of foresee that.
Playing out for the consumer experience.
Yeah, I think there's plenty of examples of companies that have done this before.
Felicia you use when all the time.
If you if you used HBO Max and then when it just went to Max and when you open the app it constituted download the new App and then he could use all your prior credentials the whole thing. It takes like two seconds. That's experienced that will have on with ESPN that and part of the thinking there.
Also is that you started to get it you get an opportunity to just reset everything.
In terms of the history and the ratings and the comments and all of that stuff just reset so it'll be consistent all focused on E. S. P N bed and no historical information in the App. When we go live again pending final approvals on November 14th.
Okay.
Our next question comes from Sam <unk> with Macquarie. Please proceed.
Good morning, Thanks for taking our questions.
Jay you previously mentioned that you hope to grow the overall overall size of the market given the strength and reach of the ESPN brand.
I was wondering if that changes your strategy in the earlier stages of your launch as it relates to pricing hold rates and retention and then as a follow up are there any stats or data points that we can look to as we think about.
Retention rates for new sports betters versus more experienced sports betters. Thanks.
Yeah, I would say, let's sort of let's let's put a put that one on hold in terms of how are we thinking about retention of existing versus new what I would say is that the first part of your question in terms of growing the Tam that's a that's a big focus for us and we.
Where we have a great starting point, we have roughly 2 million digital customers within our ecosystem that we picked up obviously the bulk of that with Barstool Sports book and then we've got Hollywood Casino the historical database there social gaming.
We've got a pen play so we've got a pretty big digital database that we're gonna be able to cross sell those 2 million people to ESPN bed and we know their history. We know them, we know them very well and then of course E. S. P. N. The brand the brand equity we think that we can really grow the market with a lot on the <unk>.
Syed of casual betters, who maybe have that once or twice or intrigued by it and they really trust the ESPN brand and so there's there are our opportunity to cross sell from the ESPN media ecosystem into ESPN bet, we really like our chances there, particularly with the $12 million in their fantasy date.
Debase Theres, a high propensity to bet on sports as we know with fantasy players.
But look I think one of the things that we've talked about internally in terms of what what does success look like is that we want to see whatever that market share is in the first couple of months.
We want to see that continue to grow over time, what we don't and that will speak to the product and the retention. What we don't want to have is a giant splash in the first month or two and then you leak market share like that that would not be deemed a success. So.
As you're thinking about retention and we'll share more of the Kpis. Obviously after we launch we don't have any as we sit here today, but we'll be able to share a lot more by the time, we're getting together in early February and then of course, we talked on our last earnings call about in Investor Day, which we still plan to do we had initially said before year end, but as we thought about it more we're just not.
I'm going to have enough information to share if we try to jam it in before year end. So we will do it sometime in Q1, most likely sometime between Super Bowl and the start of March Madness, good time of year to do it and we'll have two to three months of results under our belt. So I'd say stay tuned in terms of the kpis around retention, but at a very high level, we want to continue to bill.
Our market share over time and not have it be a giant shotgun day, one and then you slowly leaf market share that that's not the goal and that's why I think you'll find that our approach in terms of how we're marketing and how we're investing in customers and promotional dollars paid media.
How we're thinking about integrations, that's all going to continue to build over time, that's not that's not going to be that we go out there day, one or month, two or month, three and try to bring everybody into the ecosystem. We want to build this thing over time.
Our next question comes from Joe Stauff with Susquehanna. Please proceed.
Hey, good morning.
I wanted to ask a couple of questions maybe on your Ontario market.
That being sort of the analog.
Yes.
<unk>.
I guess.
Look at the Bath and you did indicate say double digit market share so you're growing with the market on a year over year basis.
It certainly seems just kind of based on the numbers as well and I'm wondering if if you've seen any changes in that market. We're.
And operator gets more aggressive.
Say with promotional spend or not.
Or or do you think that market has kind of.
Stabilized in terms of where everyone's market share.
Is today say versus last quarter or the previous quarter I guess, that's the first question and then the second question is.
Again in the same market, Ontario.
Do you see anyone in the Ontario market, there's a large number of them with an effort to have.
Integrated product offering like you have media to sports to sports spoke to casino.
Good question, So I'll hit the second one first because I think it's the easier of the two and the answer is no. We don't see any of the competitors in Ontario or in the U S that have really focused on this deep integration between sports media and sports betting and I think we've got it to a point in on.
Ontario, where.
It's you know it's pretty frictionless.
Hesitate to really hang on that word because it you know when people made me sort of define that differently, but if you don't know when you're in this score media App and you're populating a bet slip and then when you're ready to place. The bet you click and it takes you right over the score bet you place your transaction.
And you move right back over the score and finished reading your story or whatever you were doing checking scores and stats et cetera, and we envision getting there very quickly here in the U S with ESPN and the great news about the integrations that we've been able to execute and deliver on in Ontario is that our friends at ESPN have experienced that and.
We have a shared vision of getting there and here in the U S. As quickly as possible. So it's not as though there is a disagreement or a different vision for how we want to integrate and how they want to cross sell and as you mentioned before a couple of slides that we included on 12 and 13 about Ontario.
Speaks to 73% of the wagers and handle in our ecosystem coming from those that were media users before we launch. So that's three quarters, it's very strong and then our ability to cross sell within our App from sports betting into online casino a greater than 50% those are great result.
<unk> and.
I would say.
We mentioned are shown in this slide 13, what our growth is year over year and then I also highlighted we actually broke every record in October its preliminary obviously, we have to audit through everything but our preliminary results in October were on a G. G R and N G. R. A basis the best month that we've ever delivered in Ontario, So we have.
Tremendous momentum in the market has only gotten more competitive there's over 40 operators and over 70 competing brands in Ontario, and we continue to grow our business.
At or above market growth levels as you can see in the slides there.
Especially on the online casino side, as we get more and more effective of cross selling between online sports betting and online casino. So I don't and into the first part of your question I don't we really don't see anything crazy from a promotional standpoint in Ontario from anybody.
There might be waves of remember you've got sort of a moratorium on being able to advertise what your promotions or its more brand advertising, but you'll see waves of some companies being more aggressive during certain times of the sports calendar, but generally speaking, it's pretty stable promotional which I think makes the growth story that we've been able to deliver on.
More impressive and what gets us even more confident for our ability to execute here in the U S.
Our next question comes from John Decree with CBRE.
Please proceed.
Good morning, Thanks for taking the questions.
Maybe one I guess kind of element to your housekeeping, but.
On slide six with the free cash flow bridge rupee.
If you could just kind of clarify the net cumulative investment in digital interactive a $300 million is.
Is that true.
Translated to kind of cumulative EBITDA losses.
This includes some capex just if you could kind of help us frame that a little bit.
Yeah, there's not a ton of Capex that goes into the interactive side now that we've built out the team and we've gotten ready for E. S. P. N bet launch there'll be some.
But it's not at the magnitude for example of what you see on the retail casino side of things. So the reason we provided the range of 200 to 400, we wanted that to be all inclusive so that would be EBITDA loss and capex investment over the three year time horizon and again as I mentioned before the losses are really accumulate in the first two years and then we.
It's a pain inflicting and starting to see some positive EBITDA in the third year.
Got it thanks, Jay and then maybe on the.
It's at the property level earlier question the margins were pretty strong I realize there was $10 million of one time benefits in there, but still pretty good margins conversation that we still have often as opex inflation I'm curious if you could give us your views on what youre seeing in terms of utility.
Wage inflation labor inflation.
What if any kind of outlook for where you have visibility in your business that would be helpful.
Okay.
Oh, Thanks, I'll take that this is Todd.
So we we actually have been looking at this a lot. We've got a great team that has really helped us on the utilities front, we've completed several projects coming out of Covid.
Around energy efficiency, so we've really been able to mitigate some of that as well as locking in futures for a lot of the utilities that we use so we have been very fortunate and very prepared to kind of deal with this so we haven't seen that yet and then on the wage and labor front I would say that.
Yeah, there's some some wage and labor creep, there and we specifically called out Greektown and what's happening there but.
But for the most part you are looking at this new dynamic where you can do more with less labor a lot of the technology initiatives that we have in place have made us a more efficient operation. So we're able to mitigate a lot of that as well.
The one area, where I believe some of our competitors have mentioned this on their calls where there you're seeing some cost creep, but certainly on the insurance side property insurance, it's just the market right now plus.
Concern around Hurricanes and things of that nature and of course cyber insurance is not going down, especially after what's happened not just in our industry, but in so many of late so you're definitely seeing some cost creep on the insurance side, but as Todd mentioned I think he and our operations team have done an amazing job.
Have have have a good handle on all of this and obviously the margins that we've delivered on include includes some of those headwinds.
Our next question comes from Dan Pulitzer with Wells Fargo. Please proceed.
Hey, good morning, everyone and thanks for taking my question.
Just one here on interactive I mean, I think that you gave a lot of good commentary on how to think about the cadence of the losses going forward, but I guess as we kind of try to unpack three Q and look at.
You are kind of scale and operating expenses you gave a few pieces related to barstool, and then theres market access fees in there, but any way to help us think about kind of the run rate of your fixed cost in this business and do you feel like you're at a scale, where it will really start to see that EBITDA start getting flattish as you maybe get that GTR share that you've aspired to.
Yes.
I'm trying to keep it largely focused in what we've said already Dan just because I think the way we sort of laid out what you can anticipate in the next couple of years versus year three speaks to the timing of inflection.
We anticipate having a successful launch having a stable platform throughout that launch period growing the business over time and.
That is your thinking about the cadence I think Carlo asked the question earlier, we gave some information on kind of what you should expect for for next year. So I don't know if Felicia Todd do you have anything to add there, but I don't really have anything else in terms of what to expect I.
I think he said it I just don't I'm, Dan unless you have a specific question I think I've covered what they are saying.
Well.
Yeah, I guess another way to ask it is is the incremental losses from kind of where we are today is that our marketing and advertising or are you assuming any incremental.
Fixed cost adds in there as you maybe add engineers are some administrative stuff.
It's all in I mean, I don't yeah, there's it's not one of those things driving that's why we wanted to do this three year look of an.
There's so many factors that go in whats your hold percentage is going to be what's your handle market share.
What's your promo costs in percentage of handle and G. G are going to be and what's your paid media and I think this what we provided here on the three year outlook includes all of that including ramping on the staffing side with engineers and product team members and marketing folks and operators. We've done a lot of ramping as you can imagine over the course of the last.
Three four months in anticipation of this launch we've hired hundreds more people for our call Center. For example, so there's a lot of that ramping that has gone into the third quarter results that we just reported but we don't have any of the benefits yet of ESPN bat launch. So that's why you see the loss there there were some one time noise on the media.
As well there'll be disclosed and Felicia covered.
But you should assume Dan that this range. We provided on the three year includes all of that and that our thoughts around how we're going to spend both on channel with E. S. P. N from a marketing perspective $150 million per year, and then off channel they'd be roughly that same number that that thought process.
And approach has not changed as we show you what this three year outlook looks like.
Okay.
Our next question comes from Stephen Grambling with Morgan Stanley. Please proceed.
Hey, Todd I would just clarify some of the guidance commentary I think you've previously talked to $1 75 to two for EBITDA for the year.
Want to make sure that if we're looking at some of the puts and takes into <unk> that my math, maybe gets around $650 million just if you could provide some.
Some brackets around what at least <unk>, we should be looking at in terms of the brick and mortar business. Thanks.
Yeah, the the midpoint for the brick and mortar business for the year is $2.0 billion to $2 billion.
When we say within 1%, we're talking about brick and mortar we gave separate guidance for interactive of between 101 hundred $50 million in losses for the fourth quarter.
That's helpful. Great and then one other quick follow up so I think on the digital side.
This past quarter was a little bit elevated relative to people's expectations, and I know you kind of touched on this a little bit but.
Does that include some one time things or is that also reflected both kind of like a new.
This level of cost that we should be layering the ESPN deal on top of.
You were talking about the third quarter Interactive result, Steven correct, yes.
I mean.
Excuse me there is one time in there that Felicia covered on the media side as we closed out our ownership of Barstool sports from July to August eight.
And then beyond that it's really two things one we literally spent no money on marketing because we're switching brands on November 14th So it doesn't make sense to spend money on the brand that you were using previously and so.
So, but you should assume in there that we had significant ramp on the.
Payroll side of things, because we're getting ready for a launch and we expect to be at a certain level of scale and volume that we have not seen before so that number incorporates all so it's sort of like you've got the the downside of <unk>.
Preparing for the launch, but you don't have any of the upside of the revenues that come with the launch that's what really drove the three Q I wouldn't use the three huge number for any purposes of modeling out the future.
Our next question comes from David Katz with Jefferies. Please proceed.
Hi, good morning, everyone.
For taking my question I appreciate all the detail.
If I can just ask with respect to the digital.
Is there any sort of cross yogurt benefit that you could point to potentially.
The land based business.
Do you have any sort of insight or data.
Can support that.
My follow up out there upfront which is.
We've seen other operators as they go on the journey of digital.
Tuck ins.
To enhance product.
Or the or their tech stack in some way should we be anticipating there'd be any dose. Thank you.
David I'll tackle the second one first and then I'll ask Todd to tackle the first part of your question well, Let me answer the Tucking question. This way, which is we don't feel like we're missing anything today, we've made our investments that certainly the significant ones to get to a point, where we've got a very strong brand to lead.
With in Canada that has proven out to be a very successful investment of course, the technology that we acquired as part of the score acquisition. We've now fully migrated to the U S and we're ready to go with ESPN bed on our own proprietary tech stack and so are there little things that you could think about investing in or.
Owning to make your product better faster.
Offer more markets and features.
Perhaps but we don't as we sit here today, we certainly don't feel at launch like we're missing anything and we've got to go make.
Make an acquisition larger small to take the app to the next level, it's really about from our perspective on the product side is continuing we've been so focused on migration I think we've got a lot of ideas on the product road map on how to enhance features and markets for example.
And a lot of the effort over the course of the next 12 18 months is going to be on going deeper and deeper on integrations with ESPN throughout E. S. P N bet to make it as seamless and frictionless as we all envision and accomplish a lot of the things that we've already done in Ontario, We know how to do it we've got the template and they will be executing on that.
Here in the U S as well, but I don't anticipate certainly not in the near term you'll be hearing from us on acquisitions.
Acquisitions.
Then things can change, but we feel like we've got we're in a really strong position as we sit here today Todd I'll, let you answer the first question, Thanks, Jay and David Great question.
We refer to this as kind of our our omnichannel approach in.
For the last several years, Jay myself, Jennifer Weissman from marketing you've kind of talked about this and really you can see this dynamic for us not only here, but on a property basis, we have multiple properties in the same market and we can see the value of that consumer when they play with us across <unk>.
Article properties.
Take that example, and then just apply it somebody that joins us through online channels and then visits of property.
Plays up at a significant multiple and we have goals as a leadership team around making sure that we're introducing.
Our other offerings to these consumers, whether they find us through online channels or through a property because the multiples that we're seeing and I think in the future. We'll have more data around this and be able to talk in more detail, but it's very encouraging to see how much more valuable they are when they play one two or three different.
Channels. So if they played a property if they bet with us through online sports betting.
And then especially in those states that have online casino offerings, we're really unlocking some value there.
Our next question comes from Jason <unk> with Canaccord Genuity. Please proceed.
Great Good morning, and thanks for taking the question.
First of all in terms of the <unk>.
Since the migration in early July on understanding that it's tough to compare apples to apples to prior to that because of the level of marketing investment, but just within the existing customer base have you seen a similar uplift in hold rates are partly mix.
In the U S relative to what you've observed in Ontario.
It's been similar.
We actually have had we're coming off of a very strong hold month in October both in Ontario, as well as in the U S.
It's still early days I mean, obviously, we're continuing to make a number of enhancements and updates to the app in the U S. Between full migration in July until you got to the start of football season, and then from the start of football season. So when we go live with ESPN bet in November So I think it will be much more comfortable.
<unk> sharing stats and Kpis with you around some of the questions. You asked post ESPN that launch when we've got more marketing activities and more promotions going in.
We now have a featured that on our home on our home page, which is fantastic and that we can start to drive behavior in merchandise differently than we were in the past around.
Some of the integrated betting options with ESPN and the personalities there in parlays same game, partly as we can do that dynamically throughout a given day or weekend. So the product continues to get better and better and I think we'll wait on some of those kpis until we launch with ESPN.
Great. That's helpful and just one quick follow up in the press release, you called out some of the positive impact at your land based properties in the presence of the retail sports books.
I'm curious has there been any termination surrounding the potential to use the ESPN branding around those and what are the plans as you transition away from the Barstool brand here in the next few weeks.
Yeah, Great question. So we're almost completely D seemed removing the barstool theme they are sitting there as as a sports book now.
Really.
Honoring kind of the local markets that we operate in.
We're working with ESPN ESPN has sent their representatives to several of our properties.
And to date.
Feedback has been great. So we'll talk about where we can take this brand at our retail locations and.
Find something that works for both of us.
Our next question comes from Orion signal with Craig Hallum capital.
Please proceed.
Hey, good morning, guys.
I was having a hard time, keeping up with with the new guidance. So could you just clarify exactly what you're guiding to I thought I heard sales and then you talked to EBITDA last in the last I don't believe you updated in Q2 and the last Ics Q1, which included barstool for the full year. So I guess can you specify sales versus <unk>.
<unk> versus margin and then specifically what metric, we should be thinking plus or minus 1% relative to.
Yeah, Ryan sorry, if there was any confusion I don't think we referenced sales at all or margin, we're talking about EBITDA on the retail side of the business at the midpoint for the year was $2.0 billion to $2 billion and we believe we'll end the year on the retail side within 1% of that number interactive separately.
<unk> will be between 100 and $150 million EBITDA loss for the fourth quarter.
Our next question comes from Daniel Gould GMO with capital One Securities. Please proceed.
Hello, everyone. Thank you for taking my questions.
Just on the brick and mortar side. It seems like the gaming named it near term development projects have traded a little better over the last few months.
Highlighted in your development coming out would you ever think about accelerating any of those developments or adding additional properties to the pipeline.
Dana I would say for now there's there's not a plan to do anything on an accelerated basis, it's sort of it's really driven by the market and supply chains and construction schedule. So theres not a lot you can or would do to accelerate those I think the timeline that we've provided for those between.
End of 'twenty five in early twenties, Texas, that's the right timeline to think about we're always looking at opportunities to invest in our in our businesses.
You don't always have an opportunity to relocate properties I mean, these aurora in Joliet projects are.
Sort of a once in a decade, you get a chance to greatly improve your location and greatly upgrade your offerings. Both on the gaming and non gaming side go from a river boat to land based and all the efficiencies that come with that and you get out of the deferred maintenance capex mode and into growth mode. So we couldnt be more excited about those two and of course.
The hotels at EM and Columbus are long overdue, we've had demand for hotel addition, at EM and a new hotel, but the first one at Columbus.
For years and for lots of reasons, we just we couldn't or didn't pull the trigger but we're always looking internally at projects like that and there could be more down the road. We don't have anything right now that we're ready to announce Todd if you want to add anything yeah, great Great answer Jay I think the only thing I would add is these are already fairly aggressive timelines for all the reasons that Jay mentioned, especially with the timeline.
And the Labor force and everything else so.
Again, we feel very comfortable that we can hit these targets.
And to Jay's point constantly look at our capital to work.
Four options that are out there, but these these four make a ton of sense.
Great. Thank you and then just on the funding side for those for development.
They're a timeframe for when you would need to decide how and when you would get the funding from <unk>.
No. Thanks.
No. There's no there's no timeline on what we've said in the past is that we will take the funding at the end of the project. So as we're opening and if you think about it we wouldnt want to take the funding before they open because then we would be paying rent on projects that were not generating EBIT. So you wanted to have that matching.
And so I would as you model it out I would assume that we take the funding.
As the projects complete.
Mr. <unk> there are no further questions at this time.
Alright, great Frank and thanks to everyone for dialing in and great questions and we look forward to speaking with you again in February.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line have a go.
Great day, everyone.
Yeah.
Uh huh.
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