PENN Entertainment, Inc.

And welcome to the Penn Entertainment First Quarter 2024 Results Conference Call. I would now like to turn the conference over to Joe DeFone, Investor Relations. Please go ahead.

Thanks, Shelby. Good morning, and thank you for joining Penn Entertainment's 2024 First Quarter Conference Call. We'll get to management's presentation and comments momentarily, as well as your questions and answers. And during the Q&A session, we ask that everyone please limit themselves to one question and one follow-up. Now I'll read 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 terminologies 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 Entertainment 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. Thanks for your patience with that. It's now my pleasure to turn the call over to Penn Entertainment's CEO, Jay Snowden. Jay, please go ahead.

Thanks, Joe. Good morning, everyone on the call. I'm joined here and while I'm missing by our CFO, Felicia Hendricks, and our head of operations, Todd George, as well as other members of the executive team. And I thought it best to take a step back and cover a few important topics related to the Penn Digital and Omnichannel journey. a few reminders and clarifications, as well as some facts that are sometimes missed. And most importantly, I wanted to spend some time talking about what you can expect from us later this year as we head into 2025 and beyond. When we announced the ESPN Alliance in August of last year, we highlighted an exciting, differentiated vision and strategy for our digital and omnichannel future at Penn, the foundation of which has been consistent with our thinking since PASPA was overturned in 2018. which is to be at the forefront and to deliver on the powerful and inevitable convergence of sports media and sports betting in a way that no one else can replicate. Building a significant database of younger, highly engaged online sports betting bettors and fans, building long-term relationships via best-in-class product and experiences, and eventually providing them with compelling cross-sell opportunities over time to other offerings throughout the Penn ecosystem. a truly unmatched omni-channel strategy. The path to getting to this point has not been without some bumps in the road, as no nascent digital strategy ever is, but we are now strongly positioned to deliver on our vision and deliver on the shareholder value that comes with it. We were introduced to our friends at ESPN at a critical time. Disney and ESPN had gone through a journey of their own over the last several years as it relates to the sports betting opportunity in the U.S., ultimately deciding in 2023 that they wanted to go all in with their brands and find the right partner. They were looking for a partner that had relevant experience, access and relationships at the state level across the country, a proven and fully owned technology stack, which Penn had from its acquisition of the score, experienced operators, a shared vision, and a company culture that aligned with ESPN to ensure a productive long-term relationship. They, similar to Penn, had concluded that sports betting and sports media were rapidly converging and sports fans were looking for, even expecting, a fully integrated sports betting experience with ESPN. ESPN ultimately chose Penn, and ESPN Bet was subsequently launched in November of last year. On that same call in August of last year, we also provided an interactive financial outlook for 2027 that included market share scenarios of between 10% and 20% for online sports betting in the U.S., a range which we still feel very confident about. And I'll break down the reasons for this confidence shortly. Though we were very excited about ESPN Bet, we indeed knew it would take us time to build a sizable database, deliver on a best-in-class online sports betting and iCasino product, introduce deep, exclusive integrations with ESPN, and build strong long-term relationships with our bettors, users, and fans on ESPN Bet. Our overall launch has gone very well in most areas, which I will cover in a bit, and there are also a couple of areas for improvement, as there always are, and we will spend some time covering those and the associated action items as well. We have built a very solid foundation. We are now live in 19 jurisdictions in North America, with New York coming before the start of this upcoming NFL season. And we have successfully built a database of over 3.5 million unique digital bettors over the last 3.5 years, a number that we thought would take much longer to deliver. With our primary acquisition and investment phase in today's available markets now largely behind us, Our key focus is on monetization via engagement, retention, and reactivation, and making sure we deliver a best-in-class product. We are committed with our partners at ESPN to being a top player in online sports betting with ESPN Bet, and we are also committed to being a top player in iCasino with the Hollywood Casino brand and the industry's best in omnichannel execution, given our geographically diversified portfolio of premier regional casinos across the U.S., combined with a rapidly growing and highly valuable database of PenPlay members that is currently expanding by well over a million new members per year over the last few years, a database that has quickly moved from 25 million total members to over 30 million members and will continue to grow at a similar 1 million plus annualized rate for the foreseeable future. The things we are going to be able to do with this database, particularly with new AI tools and capabilities, is extremely exciting down the road, but conversation for another day. During the first quarter, we achieved record quarterly online sports betting iCasino handle. Our OSB results were negatively impacted by a slightly lower handle per user than we modeled and well-documented unfavorable hold in the quarter, which continued through March Madness with the favorite UConn winning their matchups by large margins throughout the tournament and ultimately the national championship. Our hold percentage has been better to start Q2, with April coming in at over 8% in the aggregate across the U.S., We believe 7% to 8% is a good target range for us over the next few months as we continue to improve the product and operational performance and that we can grow our overall hold percentage from there as we get to the fall and introduce our enhanced home screen experience, parlay offerings, and deep integrations with ESPN, which I'll cover in a bit. Admittedly, we have not been as tight and accurate with our financial forecasting in the early days of ESPN bet, which is not representative of our long-term track record or internal expectations at Penn. You should expect that we are currently operationalizing our digital business at this stage with the same energy and focus as you have witnessed from us on the land-based side of the business for a long time. That is a track record we are very proud of. With that said, keep in mind we are in the process of doing something that has never been done before in our space by launching in 17 states simultaneously with a new sports betting brand, and we are gathering real-time learnings and experiences so that we can fine-tune and improve our assumptions and inputs as we go. It is inherently more difficult, as most of you know, to forecast a digital business because of the number of variables, some of which, like hold, are oftentimes beyond our control. Nevertheless, we take pride in being best-in-class operators at Penn, and that is no different in the digital parts of our business. We are simply at a different stage in the cycle than others in OSB&I gaming, given the timing of our ESPN bet launch. We hold ourselves to a very high standard and are committed to getting this forecasting tighter and more accurate as we move forward, as we now have six months of ESPN BET data and results to reference and model off of. With all that said and at a high level, here are where things stand at Penn with regard to the digital business currently, all of which bode very well for the future. We launched ESPN BET across 17 states simultaneously, and our technology platform performed near flawlessly. ESPN bet attracted significantly more registrations and first-time deposits than our internal assumptions and even the most bullish of predictions, garnering over 1 million new to Penn online sports betting first-time deposits in just the first two months of operation, having done so with competitive at-market promotional offers. We did not have to over-reinvest to deliver these results. This speaks to the power of the ESPN brand. We continue to attract new first-time deposits at a healthy pace, showcasing the effectiveness of ESPN as an ongoing organic acquisition channel. ESPN Bet has performed very well from a product stability perspective and has received over 140,000 ratings in the iOS App Store, more than all but three of our competitors who have all been live in the App Store for years longer than us, with a cumulative App Store rating of 4.8. According to sensor tower data, ESPNBet has consistently been running in the mid to high teams and weekly active online sports betting users from a nationwide market share perspective. And we are not yet live in the most populous online sports betting legal state in the U.S., New York, which will happen, as I mentioned earlier, prior to the start of this upcoming NFL season. All of this has been accomplished despite launching ESPNBet only three months after finalizing and announcing our strategic alliance with ESPN. and doing so with an app that we knew, while competitive, had ground to quickly make up in a few key feature categories that we have covered, such as parlays and player props. Given our focus for the last 15-plus months has been on tech migrations, rebrands, and new state launches. That is all changing now, and the primary focus for our engineering and product teams is on quickly closing the gap on competitors from a feature and UI UX perspective. We have indeed been pleased with all these early data points and achievements, but we also recognize not all the results are where they need to be at this stage. In addition to the impact of hold I've already discussed, we also know monetization is a huge opportunity for us. We have seen a lower spend per user so far with ESPN bet than market average and compared to our internal expectations. We believe we can chalk this up to two primary factors. Number one, we've grown the TAM and brought new bettors into the ecosystem due to the broad reach and strong brand equity of ESPN, the number one name in sports in the U.S. for decades, that are currently more casual bettors. We should expect their engagement with the app and overall spend to grow over time as they become more comfortable, experienced, and knowledgeable with the app and sports betting in general, and the integrations with ESPN become deeper and more seamless so any friction between ESPN's ecosystem and and ESPN bet is eliminated. We are also seeing this new casual segment is much more likely to engage with parlay bets, which bodes well for us as we expand our offerings. Number two, we are not yet generating our fair share of wallet with experienced and VIP bettors commensurate with our weekly active user share by virtue of our parlay, same-game parlay, player prop, and live betting features currently trailing the market. Here's the encouraging news in addressing these two items. We just announced last week that Aaron LaBerge will be joining us as our new Chief Technology Officer at Penn. Aaron comes to us from Disney, where he had an amazing career of over 20 years, and where he was most recently the CTO for Disney Entertainment and ESPN. In addition to his many accomplishments and accolades over the years, Aaron was deeply involved in the technology due diligence of Penn Interactive, and felt that our new, fully-owned, built-for-North America proprietary technology stack, along with our talented technology teams, were what would make Penn the perfect partner for ESPN to launch ESPNBet. Now he gets to lead those efforts from inside Penn. He will be starting soon, and in the meantime, continues to be deeply involved in our joint development plans from a product and ESPN integration perspective. Aaron is not only one of the most accomplished and widely respected CTOs in the country, he's a strong leader, collaborator, and business partner. He will act as an immediate accelerant, turbocharging everything we are working on with ESPN, and his expertise in sports betting, fantasy, and media will be truly complimentary to this extremely talented executive team I am already surrounded by at Penn. We will plan on hosting an investor day at G2E in Las Vegas later this year, so you can get a chance to meet Aaron in person and hear from him and Todd and the rest of the senior team at Penn on where we're going in 2025 and beyond with many of the things we've covered this morning, as well as many other forward-looking topics. The bottom line is ESPNBet will very soon be a best-in-class product, which is a perfect segue. We provided in the investor presentation this morning a sneak peek of what you can expect to see at the beginning of the NFL football season in early September from a product and feature enhancement perspective. which will include things like dark mode and improved home screen experience and navigation, and a much more competitive parlay, same-game parlay, and player plot market offering and overall experience. From an ESPN integration standpoint, our partners at ESPN are continuing to build deeper betting integrations into the ESPN Sports Media app. We've already seen the benefits of these integrations, as ESPN bet received nearly 300,000 unique visitors in March alone from ESPN media users who clicked on the deep links. And this number will go up over time, obviously, as we add additional integrations and connectivity. We are especially excited about the upcoming account linking initiative between ESPNBED and ESPN later this fall, which, of course, unlocks the potential to deliver an unmatched level of personalization and user engagement in the industry. The initial benefits to account linking will include deeper and more customized integrations in the ESPN Media app. Once accounts are linked and we know your favorite sports, sports teams, and players, we can deliver personalized betting options only found on ESPN Bet. And the same can be said about ESPN Fantasy app, the largest and most popular in the U.S., with 12 million active users and growing every year. When accounts are linked and we know the players on your fantasy roster, there are all sorts of unique and exciting offers, bespoke promotions, and prepackaged betting options we can get in front of fantasy players on the app to drive highly engaging content and retention. You will start to see some of this at the start of the NFL season and additional features added throughout the football season and in 2025. And of course, a little further down the road, there are integrations with ESPN's new direct-to-consumer streaming offering later in 2025. More to come on that as we get closer, but you can start to imagine the possibilities with account linking and deeper integration. This is all happening in the coming quarters. These are initiatives our collective teams are working on together as we speak. We were all in Bristol just a couple of weeks ago, dozens of leaders from both Penn and ESPN, and the collective teams could not be more aligned and excited about how deep we can go and will go with all of these differentiated ESPN integrations. ESPN has been and continues to be an amazing partner. Both sides have a shared vision and are laser focused and deeply committed to make an ESPN bet a top name in online sports betting over the coming years. So let me summarize strategically and financially how things are playing out at Penn. 2024 is going to be an investment year with ESPN bet and the groundbreaking of our four exciting retail growth projects. Leverage will peak in Q3 before quickly coming down once we get to Q4 and moving forward from there. We have a very solid balance sheet with nearly $1 billion in cash, a fully undrawn revolver of $1 billion, and we generate significant free cash flow, as all of you know as a company. We are adding Aaron LaBerge to the team on July 1st. We will quickly get our online sports betting product to be closer to parity over the coming quarters, and 2025 will be a year of de-levering the balance sheet. As monetization improves with ESPN Bet, we launch our standalone Hollywood iCasino app early in the year, which will drive improved results, as we have seen from several of our competitors, and also make significant progress on our four retail growth projects. And then you get to 2026, a little over a year and a half from now, and that's incredibly exciting. We'll be going live with all four growth projects in the first half of the year, and we will also be generating positive cash flow from our interactive unit, an interactive unit that will be continuing to grow its database and market share efficiently and profitably by offering sports fans and iGaming customers unique features, offerings, integrations, and experiences only found at ESPN Bet and Hollywood Online Casino. Please keep in mind that Disney and ESPN did not agree to this alliance with Penn to be number four or number five in the market. Aaron LaBerge joining the team, I think, certainly speaks to that. or for the Penn annual marketing spend commitment. Neither of those are really needle-moving outcomes for ESPN. We are both in this to deliver best-in-class digital betting products and unique omnichannel experiences for our loyal customers, users, and fans, and to be on the podium competing long-term for profitable market share, all of which will result in the delivery of significant value for our shareholders. The future is very promising. The two most challenging quarters from a digital P&L perspective are now behind us, We greatly appreciate the investors that have and continue to support us and trust us. We don't take that lightly and are deeply committed to making sure you'll be rewarded for that decision. I covered a lot on the interactive front, and I encourage you to spend time going through our investor presentation, which provides much greater detail on most, if not all, of these topics. As you look at the retail business in Q1, our highly diversified retail segment was very resilient, improving sequentially each month despite the challenges of some pretty extreme weather across our portfolio in January and early February. However, visitation subsequently rebounded with stable trends persisting into April. Notably, were it not for the weather impacts and slightly lower spend per user from OSB, we would have met or exceeded our guidance and consensus for the quarter. Our best-in-class team of operators continue to drive strong performance by leveraging our industry-leading customer loyalty program, PenPlay, our highly efficient capital improvements, and our market-leading retail sportsbook offerings. Speaking of which, on April 25th, we successfully opened our first ESPN Bet retail sportsbook at HollywoodDetroit.com. for a multi-day NFL draft activation, including live draft coverage by ESPN at our casino. We look forward to additional ESPN bet retail launches at key properties as we continue to create meaningful cross-sell opportunities to capitalize on the incredible growth we have seen in our database. And with that, I'll now turn it over to Felicia.