PENN Entertainment, Inc.

Greetings and welcome to the Penn Entertainment second quarter and ESPN transaction 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 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 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 Entertainment's second quarter and ESPN Transaction Conference call. We'll get to management's presentation and comments momentarily, as well as your questions and answers. During the Q&A, we ask that everyone please limit themselves to one question and one follow-up. Now we'll review the safe harbor disclosure. Excuse me. Please note that today's discussion contains forward-looking statements. Forward-looking statements involve risks, assumptions, and uncertainties that could cause actual results or differ materially. For more information, please see our press release for details on specific risk factors. With that, it's now my pleasure to turn the call over to the company's CEO, Jay Snowden. Jay, please go ahead.

Thanks, Joe. Good morning, and thank you for joining us. Last night, we announced exclusive long term agreement with us online sports betting with the worldwide worldwide leader in sports. Excuse me. I'm here this morning in New York City with my executive management team, including our CFO, Felicia Hendricks, our head of operations, Todd, George and Chris Rogers, who oversees business development and strategy at Penn and work very closely with me on the establishment and structure of this partnership with the. I plan to focus my comments this morning primarily talking about this transformational agreement and the future launch of ESPN debt. So we'll take questions when I conclude my prepared remarks about any and all aspects of our business. We look forward to combining Penn's operational expertise, wholly owned and cutting-edge proprietary tech stack, expansive market access, and rapidly growing Penn Play database with the number one sports brand in both the U.S. and Canada with ESPN in the score. This powerful new strategic alliance with ESPN will create a best-in-class user experience and allow us to significantly expand our digital footprint and online market share while simultaneously and efficiently growing our customer database. We are particularly excited about the level of integration ESPN Bet will have in the broader ESPN ecosystem, with 105 million-plus monthly unique digital visitors, an audience of more than 370 million across social platforms. over 25 million ESPN Plus subscribers, and the nation's number one fantasy database. ESPN has unparalleled reach within the world of sports. We look forward to receiving exclusive promotional services across all of ESPN's platforms, programming, and content, including access to ESPN's popular roster of sports media personalities. I would like to spend a bit of time talking about what makes this deal so unique and special. First, it really starts with the brands. ESPN has built up decades of brand affinity through its customer-centric approach and is truly synonymous with sports content in this country. We are firmly convinced that we will be getting significant value for our marketing dollars by allocating those funds to the single best brand and platform in the U.S. to reach sports fans and potential bettors. With a robust menu of promotion and integration across all of ESPN's platforms, including one traditional linear advertising platform, Two, digital media. Three, in-program integration. Four, odds attribution. Five, database marketing opportunities. And six, access to some of the biggest personalities in sports media. This is not a typical media sportsbook commercial agreement. This is an exclusive and comprehensive alliance that will redefine the sports betting landscape with a highly aligned partner that long-term, like us, wants to see ESPN bet at the top. We have seen firsthand the power of integrating media with betting from our experience with the Scorebet in Ontario. Despite operating in one of the most competitive jurisdictions in North America with over 70 operators, many of whom competed in that market for years and years prior to full legalization when the market was gray, we have been able to achieve sustained double-digit market share in both online sports betting and online casino in the province. by leading with Ontario's top digital sports media brand, The Score, and utilizing our best-in-class technology, which has been built from the ground up with the North American markets and comprehensive media integrations not only in mind, but as top priorities. This is a proven playbook and will be effective here in the United States as well. Between ESPN's portfolio of premier sports rights, massive social media following, deep fantasy database, and best-in-class sports media apps, we have the opportunity to dramatically transform the way fans engage with sports content and betting here in the U.S. markets. Importantly, with this deal, ESPN now becomes a highly aligned, long-term strategic partner for Penn. As outlined on slide 10 in our investor presentation, which was posted on our website last night along with our AK, Penn has granted ESPN approximately $500 million of warrants to purchase 31.8 million Penn common shares that will vest ratably over 10 years. Upon ESPN bet meeting certain U.S. online sports betting market share performance thresholds, ESPN could receive bonus warrants to purchase up to an additional 6.4 million Penn common shares. ESPN will also have the option to designate a non-voting board observer, and upon completion of year three of our agreement, they'll be able to designate at their discretion a member to our corporate board of directors, subject of course to regulatory approvals. Over the last several years, we have made significant investments in technology, and we are confident that our newly launched product, combined with the unrivaled brand and reach of ESPN, will catapult ESPNBet into a strong podium position in this space. We believe we can achieve substantial EBITDA in our interactive segment over the coming years, and this will translate to very strong free cash flow generation for the company and value creation for our shareholders. We have learned a lot over the last few years about the recipe for success in the sports betting industry, which we have highlighted on slide eight in our investor presentation. It all starts with brand recognition among sports fans, and, as I noted earlier, there is not a brand more powerful in this space than ESPN. We also know that access to customers is vital. Between ESPN's unrivaled reach, including the largest fantasy database, as I mentioned earlier, in the U.S., and our casino database of over 27 million customers, we certainly check this box. course product and customer experience excuse me are also paramount and this is why we have been so focused over the last several years on developing our own state-of-the-art technology which we fully and successfully migrated to across the United States last month finally our relationship with ESPN will allow us to create deep media integrations that will provide highly efficient customer acquisition as well as increased engagement and loyalty and friction-free access to betting on the sports teams players and events they love all this will lead to compelling cross-sell opportunities into online casino retail gaming and more in short we believe we have all the necessary ingredients to win in order to to reach this goal we will be continuing to make strategic investments in our interactive segment for the remainder of 2023 and into 2024 we will be focused on launch execution sustainable market share growth, and continuing to iterate upon our best-in-class technology. As we sit here today and for lots of reasons, including competitive ones, I'm not going to get into specifics regarding the impact of this partnership on our guidance for the remainder of the year. What I can tell you is that we anticipate launching ESPN VET sometime this fall, around the middle of football season, certainly before Thanksgiving. We are committed to spending $150 million in annual cash payments to ESPN for marketing services over the initial 10-year term, which we expect will generate a very strong return on investment. Additionally, we will likely spend a similar amount on off-channel marketing, meaning outside of ESPN. We also anticipate an additional amount of promotional spending as we launch the ESPN VET products and welcome newly engaged fans as first-time and reactivated depositors in the ecosystem. During this product launch, we anticipate our leverage to increase slightly to approximately five times over the next several quarters, after which time you should expect us to quickly de-lever organically given our free cash flow generation. Bottom line, we are in this to win, and we'll continue to invest where we see attractive CPAs and where we can produce strong returns. Now pivoting for a moment, we are still seeing stable consumer and overall business trends and healthy operating margins in our core business. Guidance for our retail segment remains unchanged for the remainder of the year. So even with additional investment in our interactive segment, we will continue to generate positive free cash flow as a company and remain focused on maintaining a healthy balance sheet and leverage ratio. This is not a bet-the-company type of transaction, but we are extremely excited about this partnership and strongly believe it will be a transformational one for Penn. As highlighted on slide 9, looking out a few years, we believe this business can generate an incremental adjusted EBITDA in our interactive segment of approximately $500 million to well over $1 billion per year. I would like to point out that these EBITDA ranges include the $150 million in annual cash payments to ESPN, which in our view is a very efficient allocation of the marketing dollars we would have otherwise spent to support the sportsbook. The online sports betting and online casino space is a sizable opportunity, and we are fully committed to leveraging our numerous built-in advantages, now including the power of ESPN media assets, to help fully realize this opportunity. We plan to host an investor day before the end of this calendar year, but we will provide you with more color regarding our near-term and longer-term strategy, as well as key metrics and financial targets regarding our new partnership with ESPN. As part of this transaction, we are selling Barstool Sports back to its founder, Dave Portnoy. Dave, Erica, Big Cat, and everyone at Barstool have been great to work with over the last three and a half years, and we're the ideal partners to help us launch and rapidly scale our digital footprint across 16 jurisdictions in the U.S. With the sale, Barstool will now be able to return to what it does best. provide unique and authentic entertainment content to their loyal fan base without the restrictions and guardrails that come from being owned by a publicly traded, licensed, regulated gaming company. I really can't thank Dave, Erica, and Dan and the rest of the Barstool team enough for their partnership in helping us to get to where we are today in terms of online sports betting. We gained a tremendous amount of knowledge and experience with them over the last several years. More importantly, Barstool helped us grow our digital database by over 1.5 million people since launching the Barstool Sportsbook three years ago. Our new relationship with ESPN will enable us to build on this successful foundation as we move forward. It's truly a momentous day for us at Penn, for the folks at Barstool. We certainly can't wait to roll up our sleeves and get started with our partners at ESPN starting today. Before opening the line for questions, a few words about our second quarter earnings. We continue to see solid and stable property level performance across our portfolio with each month showing sequential improvement. Second quarter finished strong with our best month of the quarter in June, and that momentum is carried over into Q3, where we just closed the books on a very strong July and had a good first week of business here in August as well. During the quarter, as I briefly mentioned earlier, we successfully completed the full-scale migration of our U.S. digital sportsbook and online casino offerings to our proprietary in-house technology platform, which was a huge milestone achievement for our company. The state-of-the-art tech platform continues to drive strong results for the score bet in Ontario, and our improved product will provide the foundation for meaningful growth in the U.S. once we rebrand to ESPN bet later this year. I want to thank and congratulate the nearly 500 members of our interactive team who seamlessly executed this massive technology project with a lot of skeptics following more than 18 months of hard work. And as always, I want to give a special thanks to all of our property leaders and team members throughout our organization for continuing to provide a best-in-class experience for our rapidly growing customer database at our properties around the country. We look forward to numerous cross-sell opportunities to come with our new online products. And with that, Frank, I'm happy to open up the line for questions.