PENN Entertainment, Inc.

Greetings and welcome to the Penn National Gaming fourth quarter conference call. During the presentation, all participants will be in the listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. I would now like to turn the conference over to Mr. Joe Giaffone, Investor Relations. Please go ahead.

Thank you, Frank. Good morning, everyone. And thank you for joining Penn National Gaming's 2021 fourth quarter conference call. We'll get to management's presentation and comments momentarily, as well as your questions and answers. But first, as is our practice, I'll review the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as expects, believes, estimates, projects, intends, plans, seeks, may, will, should, or anticipates, or the negative or other variations of these or 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 forward-looking statements reflect the company's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with 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 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. With that, it's now my pleasure to turn the call over to your host, the company's CEO, Jay Snowden. Jay, please go ahead.

Thanks, Joe. Good morning, everyone. Here with me and while I'm missing, as usual, is our CFO, Felicia Hendricks. our head of operations, Todd George, as well as other members of my exec team, and we're all happy to jump in and answer questions you might have later on the call. I thought before I get into prepared remarks, I first wanted to address the article about Dave Portnoy that dropped last night from the same paywall subscription-based publisher as the last article, and which also happened to be on the same day of our earnings call exactly three months ago. The allegations are from anonymous sources made about Dave and his personal life. And Dave has responded publicly. Many of you have probably seen that, just as he did last time. So before we get started, I just wanted to respectfully ask three things for the call today. One, if you have read or plan to read the article, I would just recommend that you also read and watch Dave's response that he posted last night. that like last time, we give this time to play out. There undoubtedly will be more to come in the coming days, just as what transpired three months ago. And then lastly, that we keep today's call focused on Penn and our earnings release and our exciting and unique future outlook. So with that, let me jump into prepared remarks, throw my readers on here that my team's never seen me wear before, but I'm getting old. We provided a link to the slide presentation along with our earnings report this morning that if you haven't already opened or printed it out, I would suggest you do it now if you have access. Our prepared remarks will reference several of those slides today. So I'd like to start and spend some time on slide four as it provides an appropriate backdrop for all of our comments today. There's been so much focus the last few months on online sports betting handle and questions about paths to profitability. that I think it is helpful for context to highlight at a strategic level what it is that makes Penn truly different from the competition. We have the nation's largest portfolio of regional gaming assets that generate significant and sustainable free cash flow. In fact, 2021 was a record year of free cash flow at Penn that resulted in year-end lease adjusted net leverage of 4.1 times. This balance sheet strength and financial flexibility has afforded us the opportunity to pursue the continued evolution of our differentiated omnichannel strategy, which includes a thriving and profitable media business anchored by the score and our investment in Barstool Sports and a rapidly growing interactive business with a clear path to near-term profitability and a long-term path to meaningful value creation. A path that is not entirely contingent on TAM or scale or marketing spend, but one that is more in our control and based on a business model and margin profile that has unmatched structural advantages that I'll cover in more detail a little later. Given this unique competitive positioning and confidence in our future growth prospects, I'm pleased to share that our board of directors has authorized a $750 million three-year share repurchase program. Our strong financial position provides us with the ability to continue to grow our business and invest where appropriate while also returning capital to shareholders in a rapidly evolving marketplace. If you move on to slides five and six, you can see that we had a strong finish to really what was a tremendous year for us at Penn with our fourth quarter revenues and adjusted EBITDA exceeding both 2020 and 2019 levels despite the ongoing pandemic. I'm incredibly grateful for the hard work and dedication of our team members across the entire enterprise during this challenging time as they continue to deliver best-in-class service to our guests while managing the virus-related impact on their own lives. In the fourth quarter, we successfully advanced several of our long-term strategic objectives. Most significantly, we closed on our acquisition of The Score, a transaction that provides us with another powerful sports media brand, loyal audience, and full control of our product and technology roadmap. Looking ahead a year from now, we also have the opportunity to fully own Barstool Sports, which together with The Score will mark our transformation into a major media and entertainment company. You will note in our release that we have created a new operating segment for Interactive, which delivered very impressive results, certainly relatively speaking. I think there is a misperception right now in the market that there is no clear path to near-term or even medium-term profitability in the sports betting sector. But I'd like to remind you that we are employing a very unique strategy, and we are already seeing the benefits of our disciplined marketing approach and numerous structural advantages. In fact, our interactive segment exceeded our EBITDA expectations in the fourth quarter, despite launching sports betting in Iowa and iCasino and sports betting in West Virginia, as well as some costs associated with the integration of the score and an extremely aggressive competitive environment that's been well documented by many of you. We have all seen the incredible level of marketing spend in this space, which we all know is not sustainable in a competitive environment. We have not at Penn and will not jump into that fray as we remain focused on channeling our investments into ownable and differentiated products, experiences, and technology platforms for our end users that will have long-term benefits versus spending irrationally on short-term marketing initiatives with very questionable returns. We are also very fortunate to have two dynamic and growing customer acquisition funnels in Barstool Sports and The Score. Together with our leading portfolio of retail casinos and sports books that provide us with highly effective organic marketing and monetization opportunities without the need to incur massive losses to compete. And we're going to stay committed to our strategy of leveraging these strengths. Looking ahead, we expect our interactive business to lose approximately $50 million in 2022. which is an improvement from our prior $80 million EBITDA loss for the year and obviously pales in comparison to the anticipated losses of the competitive set. Importantly, this estimate is inclusive of investments we are making to scale our operations and infrastructure in anticipation of bringing our technology in-house and launching in a minimum of four new jurisdictions. Regarding the cadence of the year, we expect to incur most of that EBITDA loss in the first three quarters as we launch in several new markets, and prepare our products and technology stack for football season 2023. Sorry, 2022. By 2023, we expect to be generating positive EBITDA in our interactive division, as I've said before. And as I mentioned earlier, we see a lot of attention in the press about handle market share. And while that is a useful metric, particularly when a state first launches, it doesn't mean as much when those incoming dollars generated from that handle are completely offset by marketing and promotions. While we think this point is becoming more widely understood, unfortunately, because of the varied ways the states report sports betting metrics, the investment community is forced to use Handel to compare company performance in each state. Fortunately, there are a few states that report net gaming revenue, which we believe is a more relevant measure of performance. You can see that in states like Pennsylvania and Michigan, our NGR market share underscores the benefit of our profit-focused strategy, as shown on slide 16 in our slide deck. While we, like all operators, have seen volatility from month to month based on hold and always will with the return of football season, we have gained traction pretty much across the board with our online sports betting revenue more than doubling in the fourth quarter. And we are doing this while spending a fraction, a small fraction, of what our competitors spend on marketing. Our performance in New Jersey, which is perhaps the most competitive online sports betting market in the world, It's particularly notable as we captured meaningful share despite launching three years or more after our primary competitors. Felicia and I regularly are asked when we can expect to see positive contribution margin following new state launches. As you will see on slide 18, our low customer acquisition costs and high retention rates are providing a very short payback period, specifically within two or three quarters of launching in a state. By the time we are in a state for a year, we typically achieve over a two times return on our initial investment in that state. This return is even faster, of course, and higher in states that also offer online casino. Slide 19 reinforces this point by illustrating the impact of our structural advantages versus the competition. We are confident our organic marketing strategy and market access footprint will lead to outsized profitability over the long term. This doesn't even factor in the impact of our retail sportsbooks, which are highly profitable and provide significant opportunities for cross-sell. We now operate 24 retail sportsbooks across the country, and we estimate that our total retail market share outside of Nevada is 12%. In Louisiana, we generated over half of the state's retail handle and revenue during the first two months of operation at temporary sportsbooks at our five casinos. We expect even greater upside when we complete the Barstool rebranding at our signature locations in Lake Charles, Baton Rouge, and Bossier City. Speaking of Louisiana, following our recent launch of online sports betting there on January 28th, we now operate online sports betting in 12 states and iCasino in four. Looking ahead, we have several important milestones on the horizon, including anticipated launches in Ohio and Maryland. The establishment of remote mobile registration in Illinois in early March, which if you recall, we went live about a year ago and only had one month of remote mobile registration before it reverted back to on-prem. So that's a big deal for us in the state of Illinois. And the recently announced launch date for sports betting and iGaming on April 4th in Ontario. And speaking of Ontario, just to quickly recap, on December 20th, the score bet became one of the first mobile gaming operators to secure certification from GLI for its sports betting and iGaming platform in the province of Ontario. And just yesterday, the Alcohol and Gaming Commission of Ontario approved the SCORBET's registration as an internet gaming operator. These are two important milestones before the SCORBET can begin operations in the province on April 4th, and the SCORBET continues to work to satisfy all remaining requirements, including execution of an operating agreement with iGaming Ontario. Our team at the SCORE has been hard at work preparing for this launch in their home province for a long time, a province with a population of 15 million people, which would rank as the fifth largest state in the US on a population basis. And we believe the SCOREbet brand, supported by the personalities at Barstool Sports, will allow us to be very competitive in that highly lucrative market. As for our iCasino products, we made a number of upgrades during the quarter, including the introduction of our first in-house developed games. These improvements have led to steady month-over-month growth this past fall in both handle and revenue for the Barstool Casino. I'm particularly pleased with the performance of our in-house games, which have contributed over 20% of our Barstool Casino handle and revenue since their launch. Our ability to leverage Penn Game Studios in developing bespoke games like Barstool Blackjack and Barstool Slots allows us to capitalize on cross-sale from the Barstool audience while also reducing third-party content fees. We see opportunity to expand our iCasino share this year as we refine our omnichannel strategy to better leverage our growing My Choice database, which is now over 25 million members. Turning to the retail side of the business, we saw strong property level performance across our segments most of the quarter, with some softness in late December due to Omicron and the increase in COVID-related restrictions. Our properties are still seeing strong visitation from the younger demographics and we are continuing to reimagine our casinos with offerings such as our market-leading retail, barstool sportsbooks, and other food and beverage and entertainment options that will help to drive long-term retention of this demographic. Overall, we continue to benefit from a rational and stable marketing and promotional environment and feel confident that the EBITDA flow-through achieved in the second half of 2021 is sustainable, barring any unforeseen macro or competitive developments. In December, we celebrated the opening of Hollywood Casino Morgantown, our fourth casino in Pennsylvania, and the 44th property in our industry-leading portfolio. Like its sister property that opened last August in York, Pennsylvania, this state-of-the-art casino about an hour outside of Philly is built for the future with our new technologies and customer conveniences, including our three Cs, cardless, cashless, and contactless MyWallet experience. The property also features the latest evolution of our Barstool Sportsbook, Tony Luke's famous cheesesteaks, and several other F&B and entertainment amenities. We're encouraged with the early results at Morgantown as we were able to reach into a new market with approximately 80% of our rated business being driven by new members to our active database. The three Cs are now live at all of our Pennsylvania properties and our four casinos in Ohio. And we are excited about the potential to introduce this technology to additional properties across the portfolio pending regulatory approvals. Our three C's solution removes friction from transactions and reduces wait times and lines while also bolstering our marketing capabilities. Our My Choice Loyalty app now has nearly 750,000 downloads, up 23% during the fourth quarter. And we now have 30,000 users of MyWallet, which provides our customers with a seamless mobile wallet solution to connect directly to their favorite games. And with that, I'll now turn it over to Felicia.