PENN Entertainment, Inc.

Greetings and welcome to the Penn National Gaming first quarter conference call. During the presentation, all participants will be in a listen-only mode. Later, 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 the operator, please press star zero. It is now my pleasure to turn the conference over to Joe Giafoni. Please go ahead.

Thank you, Tina. Good morning, everyone. And thank you again for joining Penn National Gaming's 2021 first 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 overlooking statements within the meaning of the Private Security Litigation Reform Act of 1995, which involved risks and uncertainties. These statements can be identified by the use of forward looking terminology, such as expect believes estimates projects and pens plan seeks may will should Or anticipates or the negative or other variations of these are similar words. Or by discussions of future events strategies or risks and uncertainties, including future plans strategies performance developments acquisitions capital expenditures and operating results. Such overlooking statements reflect the company's current expectations and beliefs that are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and Form 10-Q. Penn National Gaming assumes no obligation to publicly update or revise any forward-looking statements. Today's call and webcast will also include non-GAAP financial measures within the meaning of SEC Regulation G. and 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 Penn National's CEO, Jay Snowden. Jay, please go ahead.

Thank you, Joe. Good morning, everyone, and thanks for joining us. Here with me and why I'm missing for her first official Penn earnings call, at least on this side, is our new CFO, Felicia Hendricks, so welcome, Felicia. We also have Todd George, our head of operations, here to help answer questions about our core business, as well as other members of my executive team who can help respond to your follow-up questions as needed. As you can see from our earnings release, our core business results are very strong and still ramping, actually, as we sit here in the second quarter. Meanwhile, our new online and retail barstool sportsbooks and iCasino offerings in Michigan and Pennsylvania continue to perform very well. Further, we managed to fully integrate our industry-leading My Choice Player loyalty program across all of our retail and digital offerings in time to take advantage of this momentum, which has significantly bolstered our unique omnichannel strategy and competitive advantages. At our land-based operations, the momentum has continued following the rollout of vaccines and the ongoing relaxation of COVID-19-related restrictions across the country. Our record first quarter results highlight the robust recovery in our land-based business, Benefiting from many actions taken in 2020, we generated adjusted EBITDA growth of 7% on a revenue decline of 6% over 1Q19, despite COVID-related property closures in January at a handful of our Midwest and Northeast properties, nearly a full closure of Zia Park in New Mexico, and some harsh winter weather in the South in February. More impressive is our performance in March and April. which reflects the additional easing of restrictions and an increase in the percentage of people vaccinated. Revenues grew 8% over the same two-month period in 2019, while adjusted EBITDA accelerated 29% to 410 million, and EBITDA margins increased 650 basis points to nearly 40%. We also note that spend per visit is much higher than it was pre-COVID. In fact, our visitation is now at or near 2019 levels in most of our markets. Importantly, the younger demographic continues to view gaming as a compelling entertainment option, while the 55 and over age group has been steadily returning to our casinos. We illustrate this point in our slide deck on page seven, where you can see that our 55 plus age segment continues to gain momentum, particularly in April, while growth from our younger age segments, 21 to 44, has accelerated since the beginning of the year. Further, unrated play is demonstrating unprecedented growth, which has provided us with the opportunity to convert these players to our My Choice Loyalty program through new member programs and incentives. Our rated play trends continue to accelerate. This strong top line demand, coupled with the structural changes we put in place at the start of the pandemic has resulted in remarkable and sustainable margin improvement even as our interactive business continues to scale. As it relates to our partners at Barstool Sports, they've been able to maintain their incredible momentum from 2020 into the new year with strong financial performance and audience growth. Barstool's promotion of Penn National's retail sports books has driven significant awareness and visitation to our land-based properties. This is especially true of those properties that have introduced Barstool branded sports books and we plan to open six more of them by the end of this year. In addition, progress continues on the development of several standalone Barstool branded sports bar locations. We're really excited about these projects and we're providing much more information along with our partners at Barstool in the next couple of months. On March 11th, we successfully launched the Barstool sports book app in Illinois ahead of the 2021 NCAA basketball tournament And just ahead of the return, thank goodness for us on timing, of the in-person registration requirement in the state. The initial results for the first 30 days of operations exceeded our expectations, thanks in large part to the loyal following of stoolies in the Chicagoland area, with better first-time deposit conversions relative to what we had generated in Pennsylvania or Michigan. During this period, we registered 54,700 new customers and generated total handle and gaming revenue of $67. the power of Barstool's social media reach was on full display upon the reinstatement of the in-person registration requirement in Illinois as they were able to help us drive an incredible 20,000 registrations during just a 36-hour period. Meanwhile, Barstool's creative promotions, exclusive vets, custom parlays have led to a leading position in Pennsylvania and Michigan based on handle, GGR, and NGR life-to-date market share despite limited external marketing spend. We expect our low customer acquisition costs, strong retention rates, unique promotions, exclusive betting features, and high adoption among casual bettors will drive outsized profitability over the long term. We continue to over-index a bit on GGR and NGR as compared to handle, and we anticipate this continuing to be a trend in the aggregate over the long term. The power of our MyChoice customer base combined with the fierce loyalty of Barstool's audience has allowed us to successfully cross sell our online offerings. In Michigan, for example, over 50% of our online sports betting monthly uniques place a wager on our iCasino product during the month of March, which was above our initial expectations. As we highlight on slide 17, our experience in Michigan has shown that a customer's value increases significantly when they play on multiple channels. which highlights the benefits of our 100% owned and controlled omnichannel strategy. With the introduction of online gaming, we have been able to generate twice as much combined revenue as we have traditionally generated at Greektown by engaging with consumers on our digital products in addition to the physical property. We are really excited about yesterday's launch of the Barstool iCasino product in Pennsylvania, which we believe will greatly expand our penetration and aggregate revenue in the state, particularly in the Philadelphia MSA where we currently do not have a land-based presence. Although we are pleased with the initial results of our first-generation Barstool iCasino product, we are really just scratching the surface of our potential in this space. Over the next few months, we will be adding significantly more third-party content to our Barstool Sportsbook app, which will help increase conversion of our My Choice database in both Michigan and Pennsylvania. In addition, we recently acquired Hit Point Studios, which will serve as the centerpiece of our newly formed Penn Game Studios and allow us to create customized barstool themed as well as casino branded content that we believe will lead to an even greater cross-sell opportunities. Before I hand it over to Felicia for a summary of our first quarter results and a review of our financials, I wanted to call special attention to the continued strides we're making on the ESG front. As you know, this is a topic that's very personal to me, and I know our board of directors and my executive team share my same level of commitment and enthusiasm on taking care of our people, our host communities, and our planet. Highlights from this quarter include the launch of a new $1 million annual diversity scholarship program. We're looking forward to providing up to 65 two- and four-year scholarships this year to the children of our team members, which reflects our commitment to equity in post-secondary education. In addition, We implemented a supplier diversity initiative with the goal of developing new opportunities for minority-owned businesses. And last month, we hosted company-wide Days of Learning, Days of Listening, excuse me, to gather feedback from our team members on all matters of diversity and inclusion. Finally, on May 15th, which is Armed Forces Day, we'll be launching a new initiative to honor our active-duty military, veterans, and first responders. We're calling it the My Heroes Program, which is an exclusive, fully integrated extension. of our My Choice Rewards program, and it's to provide our nation's heroes access to exclusive discounts and offers at all of our properties across the country. With that, I will pause and turn it over to Felicia.

Thanks, Jay. It's great being here and being part of this tremendously talented team. Over the past few months, I've been asked by many of you what the biggest surprise was for me once I joined Penn. Having covered the company for over 20 years, I would say that there were more pleasant discoveries than surprises and three standouts. The first is the depth of the bench across the entire company. The level of talent, creativity, and commitment to excellence at Penn is seen in every aspect of the company and at every level. The second is transparency. Jay's commitment to transparent communication is well known and respected by the investment community, and that ethos is no different internally. And finally, Penn's commitment to diversity and inclusion and community service is certainly inspiring. So with that being said, we're very proud of our first quarter results, especially given COVID-related closures in January and the late in the quarter reopening of Zia Park. Revenues of $1.27 billion and adjusted EBITDA of $447 million after corporate overhead of $24 million, which as you know is reported in the other segment, represented 94% of 2019 revenues and 107% of 2019 EBITDA pro forma for a full quarter of Greektown, which is above our previously stated goals. Pro forma margins increased 434 basis points. Adjusting for the COVID related closures and excluding Penn Interactive, Our EBITDA flow through was even more impressive as our adjusted EBITDA increased 12% compared to the first quarter of 19 on a 9% decline in revenues. On this adjusted basis, pro forma EBITDA margins increased more than 700 basis points. Our Midwest and South regions reported record EBITDA and margins in the quarter despite COVID related closures in January and uncharacteristically harsh weather in the South in February. Our performance in the south segment was particularly noteworthy as the region generated margin improvement of 1,100 basis points compared to the same period in the first quarter of 2019. While cost savings, efficiencies, and a rational marketing and promotional environment certainly benefited results, the less restricted COVID protocols drove revenue growth as compared to the first quarter of 2019, which bodes well for the remainder of our portfolio as regions continue to reduce restrictions and open back up. Last week, for example, Mississippi removed all mandatory restrictions in the state. In the Midwest, adjusting for our property closures in the first quarter, that segment also reported an impressive EBITDA margin gain of nearly 900 basis points despite competitively unfavorable COVID restrictions in certain markets. Our balance sheet remains a key strength for us. Total liquidity as of March 31st, 2021 was $2.7 billion, consisting of over $2 billion in cash and a fully undrawn revolver. Traditional net debt was $353 million compared to $578 million as of 12-31-2020. Our lease adjusted net leverage was 4.5 times based on 2019 adjusted EBITDA. CapEx in the quarter was 25.7 million, of which 9.1 million pertain to our Hollywood York project that we expect to open in August, and 1.7 million for our Hollywood Casino Morgantown development that we plan to open by the end of the year. Despite the ramp in vaccine distribution, the U.S. remains in a pandemic, which creates uncertainty. As such, we will continue our pause on providing guidance, which we will reevaluate quarter to quarter. I'll now turn it back to Jay.

Thanks, Felicia. In addition to these impressive results, we had many other notable accomplishments in the quarter, including being added to the S&P 500. And just last week, Moody's upgraded our senior secured rating one notch and moved our outlook to stable. As I look ahead, I remain excited about really every aspect of our business. The recovery is well underway at our land-based casinos, as evidenced by the strong trends we saw in March, which continued into the second quarter. Meanwhile, at Barstool, they remain focused on driving top-of-the-funnel growth. Our differentiated strategy has earned us market-leading positions in Michigan and Pennsylvania in terms of handle, GGR, and NGR. And we remain on track to be live in eight states by football season and 10 or more states before the end of this year. Further, we remain busy at work on a variety of growth initiatives, all with a focus on driving shareholder value well into the future. With that, Tina, I'd like to turn it over to you and open the line up for questions.

My pleasure. If you would like to register a question or comment, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment, please, for our first question. And that first question comes from Joe Graff of J.P. Morgan. Please go ahead.

Good morning.

Jay, on the digital side, maybe you can just kind of start with maybe what you have learned over the last several months here in the states in which you've launched with respect to customer engagement, acquisition, and promotion. What have you learned about the technology component side of things and any views of acquiring or bringing that technology in-house?

Sure thing, Joe. Good morning. Thank you for the question. Well, there's been a lot of learnings. We just went live, as you know, in September. And so, you know, we got through our first football season, our first March Madness, and we're now live in three states. We're going to be live in Indiana here in a couple of weeks in time for the Indy 500 and for the NBA playoffs, which we're really excited about. And, you know, a total of eight states by football season. So we're going to be in a much different position by the time we get to football season 21 versus where we were in September of 20. Some of the learnings that come to mind, we know that based on our differentiated approach and our fully integrated media partnership with Barstool, we have the best CPAs in the industry, and it's not even close. Our CPAs are running well under $100 right now across all three states that we operate in, which sets you up so well for the long term as it relates to having dry powder. And we're going to be a lot more aggressive in terms of spending to acquire customers as we head into football season 21 than we were in football season 20 because we now have scale. We were launching in one state a year ago, football season starts September, and this year we're going to be in eight states. So we're going to take advantage of that great margin profile that we have. I think sometimes it gets lost with all the noise. I think all the focus right now is on you know, monthly handle. And I think the focus should be much more focused on what is the real strategic differentiation between these approaches? Um, what does that margin profile look like in the short term, medium term and longterm? Um, you know, we've scaled our, we've scaled our business up. We have, you know, hundreds of people on Penn interactive and we're live in three states. And, um, you look at our Q1 results and we generated obviously, you know, nice revenue growth and interactive from Q4 to Q1. And we broke even. Nobody else can say that. And I'm not saying that we're going to break even every quarter. It's going to be quarter to quarter. And certainly we're going to be opportunistic as it relates to what we want to do, especially come football season in terms of spending more money to drive more acquisition. So TBD, but the fact that we're, you know, alive in three states and have ramped up our staff the way that we have. And all the expenses that come with launching in states, and you can still break even an entire quarter when every other major competitor is burning hundreds of millions of dollars, I think says a lot. We have a very different customer mix. If you look at the online offerings, our customer mix is a lot younger. The lion's share of our audience is 21 to 27 years old. I think that bodes really well for the future prospects of Penn, both online as well as in our brick-and-mortar casinos. I highlighted earlier some of the success that Barstool branded retail sports books. You see what it's doing, not just in terms of driving market share as it relates to the retail sports book, where Indiana, as an example, we have the top two retail sports books in the state, but we're also picking up casino market share. And so just bringing in all of these younger customers, we provided a slide that shows age segment growth, and we're really thrilled about what we see there. One of the things that we've obviously learned as well is that we have a very differentiated approach as it relates to unique promotions and content and the way that we engage and focus on retention is different than others in the space. And I think that's great for us long term. We've done a lot of work at Penn looking at the UK model because it's been around for a long time. You look at what sky bet was able to do from kind of 2008, 2010, that range to where they are today. And, you know, they had a very differentiated approach that probably wasn't, um, as appreciated in the early days as it turned out to be. And I think that their approach and our approach are quite similar. Um, we've spent a lot of time on that and, you know, we're really modeling ourselves on sky bet and what they were able to do over time. in the UK. And that approach was being different. And then last but not least, we're very focused on product improvement and our tech stack. I think we have two really good B2B partners in Canby and White Hat Gaming. I don't envy B2B businesses. It's always tough because you don't own it, but you hear about every problem that ever comes up. And I think there's certain aspects of our tech stack that we definitely want to have more control over over the long term. That doesn't mean something is imminent. It just means that we're learning a lot as we're still in the infancy and there's certain things that make more sense to have control and ownership of, especially as it relates to anything that touches the end user. And we're very active right now. Part of why you see the growth in corporate expense from Q4 to Q1 is that I've got Chris Rogers and our business development folks really busy looking at potential opportunities as it relates to M&A in partnerships and We also, of course, I guess as it relates to the corporate overhead growth from Q4 to Q1, we're very busy lobbying right now in states like New York and Florida to make sure that we have an opportunity to operate when all is said and done and the dust settles. So I think at a high level, Joe, it's kind of a simple question with a long answer, but we have a differentiated approach. I think it's going to really prove out here as time goes. And the fact that we're able to have low teen market share in the states that we've launched in, and we're not losing money, and we're still scaling the business, I think bodes really well for the future.

Great. Thank you. And then just a follow-up. You have $2.7 billion of liquidity, incredibly low leverage. How do you use that to your advantage? Are there larger-scale acquisitions? I mean, not things like Perryville, but something that's more needle-moving. In which areas, you know, are there potential external growth opportunities driven by M&A?

Yeah, I am. And Felicia, feel free to jump in here as well. I love the position that we're in right now as it relates to the balance sheet. We've never been in a position like this, certainly since we spun off our real estate and to have net traditional leverage of like $300 million is amazing. And to have our leverage levels at four and a half times. So we have, You know, we're out. We're busy right now, Joe. And I think that there's a few boxes that we'd still like to check as it relates to technology stack. There's some opportunities that could be small, medium or large, depending on what you're looking at. We're looking at all right now. There could potentially be something that's international that comes along with that technology approach that could be compelling over the long term. And, you know, we're going to continue to look at if there's any other potential, you know, sort of widening, broadening of the funnel opportunities as it relates to acquisition. You know, the Barstool partnership has paid in spades for us. And I think there's some other potential media organizations and offerings that could make a lot of sense if connected to us. with what we're doing and just make that note that we've built a little wider and a little deeper. So we're actively kicking tires on a lot of things. I think you should expect us to be relatively active this year heading into next year. Thank you for your time.

If I may add, and Joe, thanks for the question on our balance sheet because I mentioned in my prepared remarks some things that were pleasant discoveries. And I do want to comment on one other that's been really evident to me. in the short time that I've been here. And I also don't think it's something that the investment community is thinking enough about. And currently, that's the power of our operating leverage and our market-leading levels of free cash flow conversion, which is only going to get stronger as we grow revenues in EBITDA. So if you think about it based on our minimal and stable cash needs today, as increasing revenue drives higher EBITDA, our free cash flow should grow even faster. And that further bolsters our balance sheet It puts us in an even stronger position to both reinvest in our business and then to pursue the strategic growth opportunities that Jay just talked about.

Thank you. The next question comes from Bernie McTiernan of Needham & Co. Please go ahead.

Good morning. Thanks for taking the question. Just a follow-up. Jay, you mentioned being more aggressive to acquire customers in the upcoming NFL season. I was wondering if You could just provide any color on what you expect this to mean. You mentioned the virtual sports book early on in your prepared remarks, but does this mean more promo, TV spots, other external marketing, or something else?

Sure thing, Bernie. Look, I think less traditional is what you should continue to expect from us. I think there are, for us, unorthodox but really effective ways. We talked about the Barstool-branded sports books in the casino. We talked about standalone sports bars in key markets, TBD. We're going to have more to share on that very soon. Investing at Barstool in new talents, potentially new verticals, and potential media partnerships and or acquisitions. I think we're going to be more aggressive in how we think about locking up more influencers and affiliates. And I think there's some sponsorship and partnership opportunities out there that can make a lot of sense for us as it relates to both digital and our core business. that's the nice thing about having this omni-channel approach where you control and own 100% of it because You know, once we just want to get people into the ecosystem. And so you can invest in your core business. You can invest in standalone on-prem. You can invest in digital media. And as long as it widens the funnel and brings more people into the ecosystem, we just want to keep them there. And, you know, we're confident we're going to be able to drive really healthy margins in all aspects of our business. So we really don't care where people decide to spend the majority of their time and wallet with us. I would not, Bernie, expect us to be you know, the linear TV and radio competitor to the others. I'm in Pennsylvania this week, and when I'm here, I listen to sports talk radio, and I'm a sucker, so I watch the Sixers, even though they let me down every year in the playoffs. And I will tell you that every commercial is noise about sports betting. I mean, it's overwhelming. You don't even know who's advertising to you. We're not going to play in that space. I think that is very low ROI return. And I'm a big believer that that creates zero loyalty. I think you're moving promiscuous customers around or chasing the next promo and the switching costs. This is actually something I know I'm going on a bit of a tangent Bernie, but I think it's important to bring up lifetime value is something that's thrown around a lot. And it's interesting because people are calculating lifetime value is if that customer is going to be loyal to you forever. This is not like switching cell phones. This is not going from your Apple phone to Android and Apple touches every element of your life. I'm stuck with Apple forever. I can't switch. Switching costs with sports betting apps takes about three minutes. You download the app, you register, you deposit, and then you gamble. And I think what's going to happen over time is that the winners that have a real strategic structural advantages And media integration and loyal audiences, whether that's some combination of a, you know, daily fantasy sports database or a casino database or a very strong following Of a media asset like barstool. I think those are the ones that are going to have sort of bulletproof market share as time goes and all just really aggressive spend on commercials and linear I don't think that's going to be the business that sticks around. I think that's going to be the business that continues to jump from app to app. So that's my perspective. But, yes, we're going to be more aggressive. We finally have scale as we head into football season, but we'll be doing it in different ways.

Great. I appreciate that. And I do think this is the year the Sixers will probably get the better of my Celtics for what it's worth. And then just a follow-up on iGaming. Do you think there's the same opportunity to kind of, let's call it barstool eyes, I gaming. Um, if we think of both sports betting, betting in Illinois, 54% of betters using the barstool exclusives. So showing the content driven acquisition strategy, um, acquisition strategy is, is working in sports betting. Is there that same opportunity? I gaming, like I'd imagine some sort of, you know, live dealer with barstool personalities could be pretty interesting or is the opportunity really about converting the my choice customers?

Yep. Well, Bernie, you could have been sitting in our boardroom as we had these conversations. And you saw late last week that we announced the formation of – sorry, I think it was Monday, actually – the formation of Penn Studios and our acquisition of HitPoint. That's exactly what we have in mind. And we've been actually working with HitPoint while we were working on getting the deal done on developing really bespoke content with our partners at Barstool. So, yes, you should anticipate – Dave Portnoy blackjack games and big cat craps and roulette and their dealers and their players and they're interacting and talking with you and there's all sorts of fun stuff that we have we have planned and I think the other thing to keep in mind is that You know, we we launched by casino in Michigan because we don't want to miss out and we want to make sure that we're giving people an opportunity to convert from sports into casino and We will be the first to say our I casino product is not today where it needs to be. It's a little bit bare bones. I think we have 60 different titles and slot and table games that we offer. It's like one fifth to one tenth of what our competitors offer. And we're going to get that ramped up, I think, by football season this upcoming year. to call it September of this year, you're going to see the Barstool iCasino is going to be not just offering more well-known content from the Cygames and IGTs of the world, but you're going to see some content that we create ourselves through our studio. And I think case in point, if you heard BetMGM talk about how much, what percentage of their sports betting audience they've converted over to iCasino. We're not there yet. You know, we're at 50%. I think they're at like 70 or 80 or 90 or so. It's a very high percentage and we need to have better content and that's what we're working on. But yes, you should expect us to do much like on the sports betting side. We're going to do things differently and really, you know, take advantage of tapping into that loyalty that comes with the Barstool names. Got it.

Thanks, Jay. Thanks for taking the questions.

Thanks, Bernie.

Thank you. The next question comes from Sean Kelly of Bank of America. Please go ahead.

Hi, good morning, everyone, and welcome, Felicia. Good to hear your voice.

Thank you.

So, Jay, two things I wanted to touch on. First, just to stick with online and digital, you talked about the low-teen market share, and I think we've all been kind of staring at some of the sequential market share patterns. And I just wanted to get your kind of thoughts on, you know, when you guys launch in some of these, in some of the new markets, you seem to do exceptionally well given, you know, the barstool penetration. Then we tend to see things kind of level out a little bit, you know, over time, just given that, you know, where you are in market versus not and probably some of the follow through there. You know, just how are you kind of thinking about that pattern as it moves over time, as you start to gain a little bit more scale across markets? And what should investors expect kind of as you look at it, what KPIs are you watching to really judge how your assets are performing?

Yep. No, it's a great question, Sean. We obviously are, we talk about this every day and there's a couple of things to keep in mind. One, take Michigan as an example. It's, uber, uber expensive from a marketing standpoint right now. Everybody is just, it's a gold rush for how much you can spend to drive the more promiscuous customers around from app to app. And we're not playing in that game right now. You know, we obviously headed into football season 21 are going to have more scale, as I mentioned earlier, and so it makes a lot more sense for us to spend more and be more aggressive when you have scale. And you can work on more regional and national marketing approaches, as opposed to very localized very expensive with very little long term or alive. So that's one number two. I think every market is going to be a bit different. If you look at our results in Pennsylvania, they've been remarkably consistent. We've been in that low teen 12% to 15% market share, whether you're looking at handle, GGR, NGR, pretty much every month since we launched in September. And so you really don't see the volatility in Pennsylvania. It's been pretty much clockwork month to month for the most part. And the other thing that I would mention is that, and I don't think this will surprise anybody, but the Barstool folks, especially when you're talking about Portnoy and Big Cat, their top sport is football. And I think that what hurt us in Michigan is, you know, we launched right at the very end of football season. We got basically the AFC-NFC championship weekend, a little bit in Super Bowl, and then we headed into, you know, basketball and hockey, which, you know, is going to be, I think we're going to be competitive, but I think we're probably going to be most competitive during the September through January months because of football season. And so the drop off in Michigan, I think you're going to see that start to self-correct as you get back into football season, especially with some more marketing spend and efforts to get it ramped up once we have more scale. So we're not, you know, I continue to go back to, you know, what matters over the long term. And I think that there seems to be an overreaction to monthly handle, and I think you need to take a step back and really look at the strategy, the margin profile, the business model, and what does it look like over a period of much more than a month or two. And let's get through another football season. Give us a second full season to get through. We've learned a lot, and we're confident with where things are going to shake out.

And maybe just to switch gears, but we've made it, I think, this far without talking too much about the kind of core brick-and-mortar business. I think what investors are asking us a lot about is just trying to understand how much of what we're seeing in March and April is truly sustainable in our eyes versus a lack of entertainment options, some of the stimulus funding, possibly some sort of one-time pent-up demand. You guys seem to have a lot of data available. Around that, you've broken it out by cohorts for us. So I just want to get your thoughts and if you kind of tailor it to both a little revenues and a little bit on the margin front too, just trying to kind of get our arms around what's real and repeating versus what's one time.

Yep. Todd, you want to grab that one? Thanks, Jim. Thanks, Sean. Great question. And I think it's what everyone has been asked in our industry as we've kind of gone through this. So obviously, we're encouraged by the revenue and the EBITDA performance trends. Revenue, it's a combination of many things. There is obviously pent-up demand. There's stimulus money in the marketplace. There's a lot of things driving that, as well as you acknowledge the lack of entertainment offerings. But I would also point to we're seeing it across all different groups, and that's everyone from unrated all the way to the high-end customers, which are more your core gamers. Q1 and definitely March and April, The trends are even more encouraging in the south, Mississippi, as they removed really any restrictions. We're seeing volumes, visitation, handle, drop well over 100% of 2019 numbers. And similar in Louisiana. There was a group of us last week that went to Louisiana and visited four of our properties in Louisiana and It was amazing to see. In a big way, you wouldn't even realize that there was a pandemic going on. So it was really encouraging to see people out there enjoying themselves, having a great time, being at the pool, spending time at tables, dining in restaurants. So it was really where we see the rest of the country going. To your point on margin, in the past, we've kind of provided a framework of 9,100 and with a goal of saying that on 90% of 2019 volumes, we could get to 100% of 2019 EBITDA, which really, when you do the math, equates to about a 350 basis point margin improvement. We obviously feel that that number is now a little conservative. This has been discussed internally maybe more than any other performance metric coming out of the first quarter. I think we all got to a point where we feel the margin performance will continue to be driven by volumes. And as we're holding out into the younger demographic, as we're seeing the 55-plus come in after vaccines, those volumes remain steady. And through the first now five days of May, the trend continues from April. So very optimistic, very encouraged as we move into the rest of the year.

Yeah, well said, Todd. One thing I would add, and Todd sort of highlighted it, is You should anticipate our margin profile looking a lot like it does right now as long as the revenues continue to be what they've been the last couple of months. And, you know, that's what we're seeing right now. It's tough to predict what's going to be in this environment three months, six months, 12 months, 15 months from now. But the margin profile, thanks to Todd and the operations team out in the field, we feel great about how sustainable it is as well as long as the volumes are there.

Thank you very much.

Thank you. The next question comes from John Decree of Union Gaming. Please go ahead.

Good morning, everyone. Thanks for taking my question, and congratulations, Felicia, for helping on the other side of this conference call. Jay, there's a slide in your deck that talks about your GGR market share at a couple properties where you have a rebranded barstool sports book. And, you know, I was wondering if you could talk a little bit about, if you've seen anything early on, the crossover play from retail sports betting to online sports betting, places where you have a rebranded sports bet. Are you seeing those customers play in the retail location and then go home and play online? Or are they two very different customers? I know it's early, but I was wondering if you could kind of talk about the value of that retail sports book presence.

Yeah, and Todd, you can help me with this one. Here's what we're seeing is that customers that are coming in to bet in these Barstool-branded retail sports books, many of them, most of them, have never been to the property. And while they're on property, they're engaging in table games mostly, a little bit in slots actually, and a lot in food and beverage, not surprisingly. I think what's most interesting for us is that One of the things we have not been able to do really at all since we acquired Barstool, and this is something that Dave and Erica and Big Cat and others at Barstool are the most excited about, as are we, is this on-prem activation of their audience. So even though we've opened these Barstool-branded sportsbooks, it's still with very limited capacity. Blackjack games that are every other seat and slots are every other slot and bars are half shut down or entirely shut down. So when you think about We're seeing early results that are very encouraging, but I get a lot more excited thinking about how much stronger those volumes can be when we can really activate the audience. Todd?

Yeah, well said, Jay. The only thing I would add, John, really the stickiness to your question. Now that everybody is in the MyChoice program, so whether you're spending time with us online or actually at the property, you're earning loyalty, you're earning rewards. So we've seen a nice uptick from there. So obviously the brand loyalty, I think as people find their way back into the casinos, they are over-indexing if they're gambling with us online as well as in the sports book. So it's a really encouraging trend and definitely saw a nice increase after everything was pulled into the loyalty program.

That's great. That's a great, helpful color. If I could ask one more, Jay and Felicia, on a high level, going back to one of Felicia's comments before, as revenue ticks up in a recovery, EBITDA will tick up and ultimately your free cash flow will accelerate. And where the balance sheet is today in a position that, you know, it hasn't been as long as we can remember. Jay, I think you were pretty clear in where you would spend investment dollars in unique areas. talking acquisitions like your content acquisition earlier this week, but the big picture, the amount of cash flow that we see you guys being able to generate in our model, how do you think about uses of cash and deploying that cash, the different buckets, and is there an opportunity to continue to grow and invest in your digital business and perhaps think about shareholder returns or, um, dividends or, or even, you know, pay down a little bit of debt. You have just want to kind of get your senses as cashflow accelerates here. Um, you know, how you look at deploy it in addition to reinvesting in the digital business.

Yeah. Thanks John. Um, you know, I think for now, um, you know, you've all heard Jay talk many times and also today, right. About investing in the business and that's inclusive of growing our online channel and solving for our tech stacks. So, you know, That's really where we are today. Our cash balance certainly gives us a lot of dry powder to pursue a number of different growth strategies. You know, but over time, you know, regarding return of capital, that's definitely something we'll consider down the road if something's discussed. But, you know, right now we're very much focused on our growth.

I mean, if you look at, John, if you look at, you know, we don't provide this level of detail month by month, but the March-April results, we sort of provided a slide of you're looking at roughly a little over $200 million at the corporate level of EBITDA and close to 100 million of free cash flow each of those two months. I'm not saying you should run rate all of that because March is a strong month and we don't know how long, what we're seeing now, but the operating leverage of this business is tremendous. And the EBITDA to Felicia's point earlier, EBITDA to free cash flow conversion, I think is gonna be maybe tops or close to tops in the industry.

Thanks, Jen. Thanks, Felicia.

Thank you. The next question comes from Steven Grambling of Goldman Sachs. Please go ahead.

Thanks. Jay, you gave the sky that analogy on the online sports book. As you look at your metrics, in that segment across things like size of that frequency and customer concentration without perhaps disclosing those stats specifically, how do you think you compare to peers in the market and can you provide any color in how you think about how fragmented your customer base is as we think about more of a mass market customer versus perhaps peers more concentrated?

Yeah, great question. And I sort of know what I know just based on what we have visibility and what we hear from our competitors, Stephen. So some of this would just be speculation, but in terms of what we know ourselves is that I mentioned earlier, we know that the lion's share of the sports betters in our ecosystem are young. They're, you know, they're, they're younger than 30 or 21 to 29. Um, they over index there more than what I'm hearing competitors say about where their average age is maybe more in the, you know, 30 to 35 ours is, you know, 25 as an average age and the average bet size, not surprisingly for us is a bit lower. especially in Michigan. We're seeing there it's, you know, Illinois and Pennsylvania, it's sort of where we thought it would be. Michigan, the average bet size has been lower, but you're seeing our hold rates in Michigan higher. And so we're getting a lot of parlay bets in Michigan, a lot of casual betting, recreational betting. And I think that's great. That's what Skybet has been doing in the UK for a long time. And if you look at Skybet's hold percentage over the last seven or eight years, They tend to over index on hold and and GGR versus handle. It's still early to say exactly how that's all going to play out for us. But based on, you know, sort of life to date in the states that we've been in and now including Illinois. Our hold rates are higher than the competition. And I think that's because we have a younger more casual better And when you think about lifetime value, I'd rather have an average better at 25 than anything older than 25 because they're in the ecosystem. So I don't know exactly how that compares to everybody else, but just based on what I've heard, what I've read from our competitive set, and then what we've seen internally, that's what I think the difference is and how we really do line up quite well to describe that model in the UK.

That's helpful. And then as a follow-up, this is perhaps asking Sean's question on the sustainability of results in a different way. I think you had previously talked about achieving 2019 levels of EBITDA, 10% lower revenues. Is that still how we should think about maybe sustainable levels of margin improvement, or has your view changed longer term, given what you've seen in the business?

I think Todd said it pretty well, Stephen, earlier. that now feels conservative based on what we're seeing in the business. And, um, if revenue levels are sort of at where they're at now and that's sustained, I think you're going to see us pumping out margins like we're pumping out now. That's the way you should think about it.

Awesome. Best of luck. Thanks.

Thank you. The next question comes from Barry Jonas of Truist. Please go ahead.

Hey guys. Uh, thanks. Thanks for all the color. Uh, I had a question about Vegas, you know, with the sale of Tropicana to another operator. How do you think about the need to be back in that market longer term?

Yeah, I think Vegas Strip is a great market. And I think when you look at the Penn story, could you envision down the road there being a sort of hub and spoke as it relates to our on-prem retail strategy? Absolutely. It has to be the right asset at the right location. And it has to be an asset that we feel like is, you know, representative of a destination that we want to send people to. And, you know, we have some struggles with trough and, you know, that's in the rear view mirror and it wasn't for, you know, a lack of, you know, trying and database conversion and all of that. And, you know, I think we actually executed quite well, but at the end of the day, You need to have a property that's at a great location and is competitive from an amenity standpoint. So I would say based on everything that we have going on as a company, it's not imperative. It's not something that we feel like has to be done and we have a timeline associated with that. But we will absolutely be taking a look if there's quality assets for sale in Vegas and with our balance sheet and with our database. I think we feel very comfortable making an investment if it was, um, if it was the right opportunity for us, but not something that is imminent. We're not out there making offers to people, but if there's a good asset on the market, we'll definitely be taking a look.

Okay, great. And then just as a follow up, you know, I think a few quarters ago you mentioned, uh, live and betting was lagging some, some of your internal goals. I actually, I think it was Felicia's question, but, uh, curious where that is now. I didn't make that out, Barry. I'm sorry. Can you repeat that? Yeah, I said a few quarters ago you mentioned why in-game betting was lagging your internal goals. I'm just curious where you think that stands now.

Yeah. So I think probably for the market, as you look at how popular in-game betting is over in Europe, and I don't think we get to those levels in the U.S. I think part of why in-game is so popular there is because soccer is the most popular sport, which is lends itself to in-game betting. Basketball would blow your head off trying to do in-game, and football with hurry-up offense can be more challenging as well. But I do think that you're probably going to end up somewhere north of 50% in-game, and we're not there. We're more in that 35% right now, which is a little higher than the last time we reported. But I think it's going to take a little bit of time, and honestly, I think it's going to take you know, having great content and great products. And, you know, we talked about, you know, creating more specialized bespoke content both within iCasino and sports now that we have created a studio. And so, you know, that's going to be very focused on in-game over time. And I think you'll see those numbers continue to grow.

Great. Thanks so much, Jack. Thanks, Barry.

Thank you. The next question comes from Ryan Segal of Craig Hallam Group. Please go ahead. Good morning. Thanks for taking our questions.

Jay, you mentioned sub-100 CPA, very impressive there relative to the industry. I guess I just want to break that down. I know we've talked a lot about this, but be very clear, I guess, because there's a lot of misinformation, I think, about promotions reported by states on a monthly basis versus external marketing. How do you think about spend between those two, promotions and external marketing, and then has your strategy changed there versus your initial expectations kind of from your early learnings in Pennsylvania, Michigan, Illinois, et cetera? Yeah, no, happy to share that.

I mean, look, I view those two as very different. I mean, by definition, CPA is cost per acquisition, and so that's very much focused on how much did you have to spend to get that customer to download something your app and to place a bet and I think that from our standpoint, the promotional spend is much more about retention. We are laser focused on retention and that's why I think you'll see us maybe spend a little bit more on promos as it relates to a percentage of GGR. It's also very tax efficient in a number of these markets and as you're looking at spending hard cash on paid media that maybe it's attracting a little bit more of a promiscuous customer versus investing in somebody who's already in your ecosystem and making sure they have compelling reasons and compelling content and compelling promotions to stay within the ecosystem. We view those two things very differently. So CPA for us, obviously being as low as it is, begs the question of, well, what should it be? I think it should be higher, but we just want to make sure that we're being thoughtful around what we spend, where we spend it, and that it's going to create long-term ROI. We'll be as aggressive as we need to be as long as we believe we're attracting customers that we can keep within our ecosystem.

Great. And then just on New York, mobile sports betting, a fairly complex and confusing licensing structure there, also expensive. I guess, do you think there's an ROI opportunity for a competitive bid in the state?

I think you said it well, Ryan. We view it the same way. It's a conundrum. We'll have to see how this plays out. We're very active right now in talking to a number of our comp set because the way that this was structured, you can actually go in on bids with multiple platform providers. It is complicated. I think money can be made. but the tax rate obviously is going to be hugely important and we'll have to see how that plays out. I would say that if anybody can sort of monetize in an environment like that, I think that we're set up better than anybody because of our low CPAs and the fact that we have such a loyal audience that we don't have to spend money attracting to get into our ecosystem. So I don't want a high tax rate, trust me, and I don't think a high tax rate benefits the state at all. But if it's a higher than average tax rate, I think that is an environment we know we can still create long-term value and profitability.

Thanks, Jay. Good luck, guys.

Thanks, Ryan. Let's go with Tina. One more question, please.

Perfect. Our final question comes from Steve Wichinski of Stiefel. Please go ahead.

Yeah. Hey, guys. Thanks. Good morning. Thanks for squeezing me in. Felicia, welcome. I mean, I'm shocked you don't want to talk about cruise operators anymore in this environment. So, you know, so anyway, Jay, I want to ask a bigger, bigger picture question around sports betting. And there's obviously TAM estimates out there that are, I mean, they're all over the map. And, you know, my question specifically around the gray market money. Um, you know, my, my question actually is, you know, how do you guys think about attacking that, that gray market and converting those folks from a gray market type of setup into a legal entity? Like, you know, like yourselves or somebody else. And, you know, do you see this as a risk longer term that converting those, those folks might be more difficult than originally expected?

It's a great question. I, and I think that's a, that's an industry question even more than it is a pen question. And I think that, um, certainly our competitors are doing their part by advertising all day, every day in the markets that are legal to make sure people understand that it is now legal and pretty easy. As I mentioned, it's a three minute transaction. So I think, you know, we all have to, some of those illegal operators have really good products. They've had them out there for decades. And so we all collectively have to continue to create a really good UI UX and make sure that we have features and functionality that are as good, if not better than some of those offshore operators. And I think, you know, if you, when you pull people, AGA has done this, we've done it internally at Penn as well. And you ask people, you know, would you prefer to bet with legal versus illegal? It's not like people want to bet. A lot of people don't know. And so I think some of this over time, you know, is Bovada, is that an option? And I think people over time are going to realize that, you know, which ones are legal and regulated. And which ones aren't, but it's not going to happen overnight. I just think what you're going to see is our ability to convert sort of gray market betters into black market. You're going to see that just continue to grow and get better over time, especially as more states legalize. We have more scale. The industry has more scale and it becomes more sort of common knowledge as to where it's legal and where it's not. Um, but I, I think that's, that's an industry effort more so than it is even necessarily a pen effort.

Got it. And then, and then Jay, I thought it was, and if you talked about this earlier, I apologize if I missed it, but you know, I thought it was interesting. You talked about, or, you know, you know, you guys wrote in the release about being, you talked about being a disruptor to the gaming industry. And, you know, to me, that almost sounds like a, a threat. So, you know, I guess, can you expand a little bit more about what you guys actually meant by that statement?

Well, I don't view it as a threat, so I'll be clear on that. I view it as the way that we look at the space and you know, we, we were a first mover in a lot of areas. We were a first mover in creating the industry's first REITs. We were a first mover on investing in social casino businesses. We were a first mover in pursuing route operations when it was at its infancy. Um, when we acquired Barstool, um, that raised a lot of eyebrows of, wow, is that going to work? And so, I think what we're saying fever or attempting to say is that we've been disruptive. We're going to continue to be disruptive and I think this current environment. Of convergence of different industries and verticals is a very comfortable place for us. We like when it's sort of chaotic. And somebody's got to step through the chaos and figure out how to create a compelling strategy and vision. We think we're set up really well as a team to do that. We live and breathe this every day. And when I say this, it's not just gaming, it's sports, it's entertainment, it's media, it's tech. It's, you know, all of the adjacent industries that we see coming together, and we think we're set up really well, and we've got some ideas on how we can really, like I said, you know, sort of, you know, make the moat that we've built wider and deeper, and you should be expecting to hear more from us on that.

Okay, great. Thanks, guys. Appreciate it. Thanks, Steve.

Thank you. I'll turn the call back over to you for any closing remarks.

That's all I have. Really appreciate everybody taking the time to join us this morning, and we'll be in touch with all of you soon. Thank you.

Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.