Bally's Corporation

Good day and thank you for standing by. Welcome to the Bally's Corporation first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. In order to ask a question during the session, please press star followed by the one key, that is star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to turn the call over to Bobby Levan, Chief Financial Officer of Bally's. Please go ahead, sir.

Good morning, everyone, and thank you for joining us on today's call. The earnings released that accompany this call is available in the investor relations section of our website. With me on today's call are Lee Fenton, Chief Executive Officer, George Papineer, President Retail, and Robeson Reeves, President Interactive. Before we begin, we would like to remind everyone that comments made by management today will contain forward-looking statements. These forward-looking statements include plans, expectations, estimates, and projections that involve significant risks and uncertainties. These risks are discussed in the company's earnings release and SEC filing. Actual results may differ materially from the results discussed in these forward-looking statements. In addition, during today's call, management will refer to certain non-GAAP financial measures. Reconciliations to the most comparable GAAP financial measures are included in the schedules contained in our earnings release. We do not provide a reconciliation of forward-looking non-GAAP financial measures due to our inability to project special charges within certain expenses. Today's call is also being broadcast live on our investor site and will be available for replay shortly after the completion of the call. Turning it over to Lee.

Thank you, Bobby. Hello, everyone. Good to be with you today. It has not been that long actually since we last reported, but in that short time there has been some change and we have achieved one very important milestone. The momentum we saw in casinos and resorts in late February continued through April. Atlantic City was positive in March and April, which is an exciting turn for that property. The removal of mask mandates and the return of smoking in Rhode Island drove the highest performance there since early 2019. On the interactive side, on a constant currency basis, the business was off 1% year on year, which was driven by a balance of some weakness in the UK and continued strength in Asia. In the UK, the consumer wallet has shrunk due to inflationary pressure, and we need to reset our operating structure to accommodate the change. We've already started to remove some lower performance marketing spend and we will execute on efficiencies from our larger global portfolio. Structurally, we have the tailwinds of a long-term pathway on growth in Asia, as well as the high growth opportunity set to invest in in North America. During the quarter, North America Interactive was in ramp-up mode. Valley iCasino in New Jersey continues to build, and Virgin iCasino transferred to the Valley's license during this quarter. We launched Live Dealer in New Jersey, and additional proprietary games are being deployed, including Bally's Blackjack. Bally's has now overtaken Virgin in terms of actives and revenue. Additionally, we will wind down providing B2B services to Tropicana this quarter, and that will free up resources and accelerate our B2C business. The New Jersey business is tracking well, and we view that lower cost of acquisition with circa $200 CPA and streamlined infrastructure to be our model as we roll out additional states over the coming months and years. We launched in Arizona yesterday with our foundational 2.0 product and New York will follow later this quarter. This is a significant milestone for us and represents a huge effort by the team and I'm proud of all the work that's been done to bring our technology stacks together. Arizona is a key market for us with our groundbreaking WNBA partnership, marketing spend with the Diamondbacks, and our media partnership with Sinclair. In New York, we will be cautious as we keep a keen eye on marketing spend and how to navigate a high-tax environment in sports betting. We're on track to launch in Ontario in the summer. In the second half, we will focus on states where there are iCasino opportunities or where we expect there to be iCasino opportunities in the near term. In April, we signed our partnership with the Cleveland Browns for market access in Ohio, taking our market access footprint to 18 states. Jumping into some of the segment details, casinos and resorts reported an 85 million EBITDA at 30.4% EBITDA margin. This includes 5.6 million of Atlantic City losses of which more than 3 million were in January. Excluding AC, EBITDA was 91 million compared to 89 million in 1Q19. 1Q19 is pre-Boston Encore opening, so our comps get easier as the year progresses. There was approximately 5 million of weather impact in an unusual January. AC delivering positive EBITDA in March is proof that the new rooms and heightened amenities can bring that property back toward historical performance levels. More than 700 rooms will be completed for Memorial Day, approximately $60,000 per key. A new lobby bar and outdoor beer hall will revitalize the property. We started a Bally's AC launch campaign that will bring awareness to the property and our iCasino which will help drive customer acquisition efficiencies for the omnichannel experience. A list of mass mandates and smoking bans drove Lincoln's monthly profitability in March to the highest level since early 2019. There, we are currently operating significantly above our long-term forecast and we're cautiously optimistic for the full year potential of our marquee property. Most of our properties continued their momentum in April, but we're watching the lower income consumer very carefully, and we're aligning resources accordingly. Moving to international interactive. On a constant currency basis, the overall business was down 1%, which includes the wind down in non-core geographies. Our UK business was down 9%, offset by our Asia business, which was ahead 16%. The rest of the world business was flat, which on an overall basis is slightly below our expectations. Top line performance in the UK continues to be challenging, as we lacked tough comps. We delivered a 30% growth in Q1 of 21. The Q1 slowdown was ARPU rather than ACTIVS driven, as we saw some tightening in consumer spending. A combination of UK consumer weakness, market friction in front of new regulations, and a significantly weaker FX lowers our top line expectations for our business in the UK. We will align and redirect resources accordingly to maintain our earnings levels from the business. As a note, FX impacts top line but actually has a de minimis impact on earnings. Asia continues its double digit growth path. Our new Ugado brand continues to take share Slots consolidated their position as our largest product segment, even when you combine live and R&G casino, and we believe this demonstrates wider adoption of the online gaming in the market. We're a first mover out there. I can say that the data is pointing us to tremendous opportunities in both short and long term. We will be launching sports betting in June that offers us another opportunity to accelerate the business. We continue to expect Asia to deliver double-digit growth that throughout the year will help offset any slowdown in the UK. On an EBITDA basis, Spain and rest of the world performed in line. We will continue to profitably wind down the non-core market. Moving on to North America Interactive. We've made good progress in the business leading up to a full launch calendar. New Jersey had 600,000 in revenues In January, it jumped to $1.5 million in March, which is a great ramp. Sportcaller, Telescope, and our various B2B businesses continue to provide low-cost acquisition opportunities while we wind down Bet.Works business with the score that will come to an end in July. Our new bespoke front end combined with the Game Assist PAM and data analytics is a big step forward for the business. Throughout the year, we will launch sports integrations with our Sinclair partnership and multiple iterations to our sportsbook products. In the quarter, EBITDA loss for North America Interactive was $19 million as we accelerated development costs to make our state-by-state rollout more scalable. Now I will turn you back to Bobby for some more details on financial performance.

Thanks, Lee. The quarter started weak with unusual weather in casinos and resorts. and negative momentum in international interactive that carried over from fourth quarter. To give some context, casino resorts EBITDA was 19 million in January versus 39 million in March. In the UK, on a constant currency basis, UK revenues were minus 11% year over year in January versus minus 5% in March. Needless to say, we have some performance to make up for in 2022. but April has been strong. Additionally, we are increasing our cost savings from the GAMESIS transaction from $5 million disclosed last quarter to $10 million on an annualized basis. We believe this will continue to grow, particularly once North America Interactive launches RAMP. I wanted to take this time to address our foreign exchange currency position. Our February 2022 forecast was set at 1.35 GBP to USD. With the volatility in the market and various central bank dynamics, GBP to USD has moved 7% since our guide. While GBP to USD moves impact our UK business top line reporting in dollars, it has very low impact on our EBITDA. Our top line on the international interactive business is approximately 30% USD, 60% GBP, and 10% other currencies. Our cost our 20% USD, 55% GBP, and 25% Euro. The FX move tempers our top-line guidance, but also moves our interactive EBITDA margins up. We will continue to monitor the situation. Our North American business had minus 19 million in EBITDA, driven by developer time on ramping launches for the rest of the year. We expect these investments to subside as we progress through the year. Software development costs for Interactive were $15 million, which is the right place for the rest of the year. Corporate was minus $13 million, slightly higher than expected due to front loading of our charitable donation programs. Rent of $11 million was in line. As we announced on April 1st, 2022, we closed the first part of the Tropicana acquisition related to sale leasebacks of Quad Cities and Blackhawk. We view these transactions as part of the larger Tropicana project and will report the rent for those properties as part of transaction costs until we announce the larger project. More to come on Tropicana in the coming months. For the full years, we expect revenues to be at the low end of our previously announced guidance of $2.4 to $2.5 billion due primarily to FX and some slowdown in the UK. Our EBITDA guidance remains the same in the range of $560 billion. to 580 million, with efficiencies offsetting the slowdown in the UK. Our capital expenditure guidance remains the same, with 180 million of property-related capex, 60 million of interactive capex, and 30 million of one-time corporate integration capex. Maintenance capex remains in the 100 million range. Thank you, and turning it back to the operator for Q&A.

Thank you. At this time, if you would like to ask a question, please press the star 1. on your touch-tone phone. You may remove yourself from the queue at any time by pressing the pound key. Again, that is star one to ask a question. We'll pause for a moment to allow questions to queue. Thank you. Our first question will come from Jeff Stanchel with Stifle.

Hey, good morning, guys. Thanks for taking the questions. My first question is going to be on morning. My first question here is going to be on the international interactive business. You called up the tightening in the UK. There's some FX headwinds. Just, just curious, how does this play into your prior guidance for this segment, which called for mid single digit top line growth at about 20 to 29% margins? Just how should we think about those targets in light of some of these headwinds you're calling out?

Yeah. Thanks, Jeff. Um, yeah, we have, I think it's common across the industry. I've seen some slowdown in the UK. UK spending has been tightening, inflationary pressures out there. I'd say we're now projecting to low single-digit growth in the UK, but we're aligning our cost base to maintain the profitability and the earnings flow from the UK. I think you'll see margins nudge up from the 29, maintain our earnings, but we're expecting

uh weakening on the top line okay perfect that's that's helpful and encouraging maybe if we just hang on that for a second you know the inflationary pressures i guess what what are you seeing like one of your data gives you you know gives you comfort to lead to this conclusion versus you know maybe the softening being something more of a function of of covid tailwinds just just taking you know more than a year to really come out of the business what leads you to think it's the inflationary pressures that's really driving this softening? Is it something between the low and the high end of your database? Just kind of what data are you seeing that kind of brings you to that conclusion?

Well, really, the retained actives are steady, right? So we continue to see activity, which is always the first thing that we look for. Are people engaged? They are still engaged. But we've just seen a weakening since January, a weakening in authors. So you've got AUD, which are, you know, off circa 7% to 9%, depending on the month. But we've still got the activity, which is, you know, which is a good thing. It's why we think that it is mostly about, you know, the contraction of the consumer wallet in the UK, particularly with the significant rise in energy costs.

Understood. That's helpful. And if I might just squeeze in one more, you know, on the North America interactive rollout, I think 19 million in losses was a bit more than most folks were expecting, especially with the bulk of the rollout coming in the back half of the year. You know, you previously guided to 60 million in losses for the full year. Is that still intact or should we think about something more in the 80 to 100 range? That's all for me. Thanks.

Yes, thanks, Jeff. We are holding to that now. We had a heavy lifting Q1, right? We built the foundational 2.0 app, and we're now reallocating some of the resources that helped us do that back to International Interactive now that we're out the door. You combine that with a growing iCasino business and more efficiencies on the B2B side of the business, that makes us optimistic to hold to the guidance. But there's always the chance that we could decide to I put our foot to the floor on the rollout plan, but we haven't made that call now, so we're sticking with where we were. Very helpful. I'll pass it on. Thanks, Lee. Thank you.

Thank you. Our next question will come from Barry Jones with Truist Securities.

Great. Thanks for taking my question, and congrats, Bobby, on the new role. Maybe just as a first question, can you give any color on the strategic review and the conclusion?

Yeah. Morning, Barry. Obviously, we are, you know, we're limited in what we can say here, but I'll pass this one over to our new CFO, Bobby Levin, who can give you a bit more color.

Thanks, Barry. You know, the committee hired world-class financial and legal experts who did A lot of analysis had discussions with representatives of Standard General and worked hard to get to what was the best interest of the shareholders. The committee worked hard with its advisors, assessing, among other things, in terms of Standard General's proposal and the fact that it was financed in significant part from sale-leaseback transactions, valued prospects, including the synergies we expect to realize and other opportunities we hope to be available, and recent historical trading prices and other factors. So at the conclusion of the review, Standard General and Valleys could not reach an agreement, so the committee decided to terminate discussions. And while it is not an alternative, we are pursuing a tender offer to return significant amounts of capital to shareholders.

Great. And then in regards to the proposed tender offer, as well as other developments you're pursuing, whether that's Vegas or other cities, how do you think about financing? And maybe walk us through how you see net leverage progressing for the company.

Yeah, I mean, Barry, as you know, tenure rules are very strict. So, you know, the commencement of the offer is subject to obtain committed financing, and we are evaluating all the options with our advisors. So stay tuned. As it goes to net leverage for the business, you know, right now on a sort of gross debt to EBITDA basis, and we're at somewhere between 5.25 and 5.5, you know, we would expect that to be a comfortable position in the short term as we build out our North American interactive business and we invest in our sort of growth opportunities. So we're not going to, you know, bring that down anytime soon, but there is a way to reduce leverage and that is growing the denominator.

What's the max number, even in the short run, you'd be willing to entertain?

Yeah, so we, you know, Right now, we have gross debt to EBITDA in current covenants with Rhode Island. So that's a focus for us.

Got it. If I could sneak one more in. Lee, any updates on the UK regulatory review? I know we're getting close to potentially getting a white paper, but just curious if any updated thoughts that you can share there.

Yeah. So, obviously, delay on delay in terms of getting the white paper out. We actually had the minister in to visit us a couple of weeks ago, which was good. I had the opportunity to delve in with him. Key focus for us on the gambling out review, of course, it covers many different bases because it covers both retail and online. But our focus is around affordability and any of the affordability measures because we think that's where any impact could come. I think there's growing noises in the UK that we don't want to be requesting documentation from players at relatively modest levels of spend. I think that message is getting through and certainly we felt that the Minister took that on board when we met with him a couple of weeks ago. There's a real pushback from fellow Conservative MPs not wanting to go down the nanny state route of requesting documents at low levels of spend. That's the key thing we're looking to make sure doesn't happen. I was pleased to see that, I think it was yesterday or the day before, the Gambling Commission reported yet another fall in the problem gambling rates. So that will show that we've been going in a positive direction for a long time now. and we're hopeful that the changes that are implemented won't be too impactful to what we do. As I've said many times, you'll know, Barry, that any change in regulation I think is likely to benefit the scaled players and that we will take share over time off the bat. Yep.

All right. Thank you so much, guys. Appreciate it.

Thank you.

Thank you. Our next question will come from Ricardo Chinchilla with Deutsche Bank. Ricardo, your line is open. Please make sure your phone is not on mute.

Hey, guys. Thanks for taking the question. I was wondering if you could provide some color on what potential funding mechanisms would you guys have if you were awarded the Chicago project, or if you guys were decided to do a significant renovation at Tropicana, which any caller also on that development would be very appreciated.

Hi, Ricardo. Morning. We've said for a long time that we've got a very substantial land bank that we will tap for significant strategic opportunities for the business, and I think that we can do that for Chicago, where we could win that bid. And I think the same would be true for Tropicana, although we've long said that we would do that with an investment partner. So more to come on that, as I think Bobby mentioned, that we'll be talking much more about both those projects over the coming months.

Great. And, you know, just from a timing perspective, when you think about all the balls in the air that you guys have at the moment, to some extent we continue to get investor questions on, you know, how you're going to manage to do them all at the same time. And if you could provide, like, a timeline on, you know, when would you be potentially starting a project in Tropicana, any further development on rivers, you know, what would be – sorry, on – Chicago one would that start then you know how long you could potentially take even your your current plan so any timing on those potential developments and other in all of your other CapEx projects just to for us to have a clear picture of the spend levels would be very helpful sure so just one comment from me and then I'll pass it out to George to give a bit more color from our perspective obviously we need to

win a bid in Chicago to be able to proceed. But George might be able to give a bit more color on what the timing would be should we do that, depending on the timing of the announcement. And then in terms of Tropicana LV, we've said that we'll close that in Q3. So anything that we're going to do there, we will give more color on over the next couple of months. But we'll be back to you as soon as we have the details. George, do you want to give a bit more?

Sure. So in Chicago, the RFP requires the opening of the temporary facility in approximately one year, but that's after the licensing. So maybe that's a year, year and a half to a year and nine months off. And then three years subsequent to the temporary opening, there will be the opening of the permanent facility.

Got it. One last one for me. Given that you guys reaffirmed your guidance, can you just point out if there is any potential impact that you guys are forecasting from the UK regulatory review? And, you know, if you could, you know, give us some, you know, based on what your discussions have been with regulators, any range of a potential impact, even preliminary on what that review could be for your business?

Well, we've already, for the last two years, we would say, been operating in line with a lot of the policies and practices which are being promoted by the UK Gambling Commission for the review. Obviously, we have to wait and see what the white paper says in terms of where any particular thresholds or levels are set. But we've been adapting our business and adapting our operation to take account of most of what's been coming forward as proposals in the UK. So we're not putting out impact today in terms of how that review might go because we think that most of what will be proposed in the UK, we're already operating inside of.

Got it. Thank you so much for taking my questions.

Thank you. Thanks, Raquel.

Thank you. Our next question will come from Dan Pulitzer with Wells Fargo.

Hey, guys. Good morning, and congrats, Bobby, on the new position. I wanted to touch on the regionals. Could you talk a little bit about the trends that you're seeing across the database? I know you mentioned you're monitoring the low-end consumer, but to what extent can you maybe opine on the low-end, middle-end, and maybe even the high-end, if there's any discernible differences across your database. But also, which properties should we be paying particular attention to as we think about that low-end consumer? Thanks.

Yeah, okay. Hi, Dan. Yeah, so we're watching really the only kind of headwind that potentially could occur is inflation as we're living through this. But we're closely watching the impact of inflation It certainly is on the lower household income segment of our database, but that's currently being offset still by some pent-up demand, especially in our older age demographic. There's more comfort that COVID is behind us, and we continue to see growth in our higher-worth customer segments. And we're dealing with that through the rate sizing of the cost structure. So when we came out of COVID, obviously we came out with a very fixed cost structure. And you feel from the variable side of our business, which is just as business increases or decreases, we have a nice kind of a query and approach that mitigates any shortfalls in revenue, but certainly allows us to quickly react to certain revenue opportunities.

Got it. And then just in terms of all the kind of potential projects out there, you know, we have Chicago, New York, Japan are also thrown out too as areas where you're interested in. How should we think about, you know, the typical cash on cash returns, you know, for these casinos or potential projects? I think for Chicago, the proposed cost is around $1.75 billion. So I wanted to, you know, get a sense of the return expectations there. And is that all in, including land licensing fees, et cetera? Thanks.

So, Bobby, why don't you hit on it? Yeah, I mean, we always under a sort of at least a 15% return unless there is a significant active interactive dynamic, but 15% is what we're underwriting on those projects.

Got it. And then just, just on one last one on the drop Las Vegas. And as you think about this project and the possible iterations, it could, you know, it could come out and, you know, how do you think about the impact of rising costs, inflation, materials costs, economic uncertainty on, on your plans there?

George, do you want to pick that one up? Sure. So, you know, obviously we're monitoring kind of the economic conditions right now, but anything we do there, you know, would be really focused on a longer-term development opportunity. As we mentioned a little earlier, you know, we would probably bring a development partner into that. So, you know, that's still to be seen.

Understood. Thanks so much. Thank you.

Thank you. Our next question will come from David Katz with Jefferies.

Hi, good morning. Thanks for taking my questions. One for you, Lee. I'd love your opinion or your perspective on entering U.S. markets other than day one. We've seen players enter on day one, take a certain approach in terms of how aggressive they are with spending, capturing market share. you know, versus entering markets, you know, say weeks, months, you know, down the road where it is tended to be a bit less aggressive. I'd love your perspective on sort of those strategies and markets where you're entering.

So, morning, David. We've reiterated many times in terms of how we look to approach the market, and it isn't with a similar approach. let's say hyper-aggressive marketing spend that you've seen from some others. We mentioned also earlier that, you know, we're going to lean into a number of launches that really leverage the opportunity set that we believe we've created, right? So states where there's iGaming opportunities or we think there's going to be pretty near-term iGaming opportunities are ones where we will have a particular focus, you know, I think, you know, states like Illinois and Indiana, et cetera, where we also have physical casinos and we have a media presence. So, you know, we've been, even though we haven't had our 2.0 sports book out there until yesterday, you know, we've been, it doesn't mean we haven't been active, right? We've been doing a lot in building our top of funnel, both awareness, whether it's through Valley Sports, or through free-to-play opportunities that have been building our data set. So that's where we continue to focus. We will look very hard at return on investment from our marketing and stay disciplined.

Understood. And just second, with respect to the land-based business, you mentioned earlier a considerable land bank, and I want to make sure I interpreted your comment properly. I took it to mean that there is real estate value within the land-based properties as it exists today that you could use to fund either Chicago or other improvements or other capital expenditures within the land-based portfolio. Is that how you're thinking about it? Yeah, you understood it correctly.

Okay, perfect. Thank you. Thanks, David.

Thank you again for the question. Please press star one to join the queue. Our next question comes from Steven Grambling with Goldman Sachs.

Hi, thanks. Maybe another follow-up just on the tender. I guess determine the magnitude, the 300 to 500. I guess why was that the appropriate range?

Yeah, I mean, that was where the board felt a good amount was, but we can't comment more than that.

And is the tender offer, you know, kind of the ultimate end result of that review, or would you say that there's also other opportunities that you could think about that are still being evaluated?

This is the ultimate end of the review. You know, the board is always evaluating ways to drive long-term shareholder value.

Great. Thanks. That's it for me.

Thank you. Our next question comes from Jeff Stanchel with Stifle.

Hey, thanks. I just want to circle back. You know, I just want to clarify and be crystal clear on the guide. So I don't think the biggest impact is FX, which is compositional and impacting revenue. You know, is it fair if revenues are at the low end, but that's all compositional, that the prior EBITDA guide is still squarely in line with how you were thinking about things back in Q4? Yeah, that's correct, Jeff. Just wanted to clarify on that. That's all for me. Thanks, guys. Thank you.

Thank you, ladies and gentlemen. This concludes today's event. You may now disconnect.