Bally's Corporation

Good day and thank you for standing by. Welcome to the Bally's Corporation third quarter 2022 earnings conference call. At this time all participants are in the 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 the star key followed by the number one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance please press star then zero. I'd now like to turn the call over to Bobby Levan, Chief Financial Officer for Bally's. Please go ahead, sir.

Good morning, everyone, and thank you for joining us on today's call. The earnings release and presentation that accompany this call are available in the investor relations section of our website. With me on today's call are Lee Fenton, Chief Executive Officer, George Papineer and 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 financial measures are included in the schedules in our earnings release. We do not provide 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 this call. Now handing it over to Lee.

Thank you, Bobby, and hello, everyone. We are one year on from bringing GAINSYS into the Bally's family and the industrial logic remains as strong as ever. We now have a powerful global business with diversity of revenues and EBITDA. The casinos and resorts segment is going from strength to strength as the portfolio of properties goes into the next phase of integration. The interactive business had a tough COVID-driven comp to overcome and has been impacted with negative FX swing 322. The Q3 has seen Interactive move to greater stability and profitability. As promised, we continue to deliver strong free cash flow from what is now a globally and channel diversified business. The optimal integration of our combined assets remains unfulfilled for now, as we still have work in progress but we have made significant strides towards fulfilling that vision. The awareness of the Bally's brand continues to grow, and employees from table dealers to tech developers identify as Bally's team members. Integration beyond the brand on the casinos and resort side has begun, and we're starting to see the fruits of that later. Bally's Chicago is a game changer for the group, And the early performance of Tropicana Las Vegas has been encouraging, and we're delighted to finally have a presence on the strip. New Jersey iGaming climbed to a 3.5% market share in the quarter, with CPA significantly below our peers, as we broaden the options available to our bricks and mortar database. New Jersey is shaping our blueprint thinking for future states. For the third quarter, we had tremendous results in casinos and resorts. Lincoln outperformed, finishing just shy of double-digit revenue growth, coupled with a continued focus on margin and initial growth of the IGT JV. That JV goes from 23% to 40% on January 1 and will drive incremental earnings into 2023. Atlantic City. had 9.5 million positive EBITDA to bring the year-to-date result to positive 1 million. We do expect AC to be negative in Q4 as we continue our progress on right-sizing the cost structure there. We have seen further growth in the higher tiers of our database across the portfolio, helped by a more aggressive push on tables in our more recently acquired properties. Our EBITDA margin, XAC, was ahead of expectations at 39.5%. With a more integrated portfolio, we are now benefiting from cross-marketing, cost efficiencies from purchasing power, and increased centralization, proving our strategy to bring the properties together. In international interactive, the UK was slightly up year over year on a constant currency basis, delivering a record number for our UK business and the first positive quarter since Q3 2021. We expect that Q4 will also be positive in the range of high single digits. Performance was driven by more targeted marketing spend, more dynamic jackpot strategies, and enhanced customer journeys powered by machine learning. The UK white paper continues to be delayed following government leadership changes, and while ongoing delay brings some unwelcome uncertainty for the industry, it has given us ample time to prepare our business for a range of potential outcomes should the white paper be forthcoming in the near future. continued some of the weakness we saw in the second quarter, being down 3.3% year over year on a constant currency basis. We are beginning to revise our marketing strategies to maintain profitability in the region. We have seen blips like this in Asia before. We remain confident in the market and our ability to grow the business. Our new sportsbook there has launched in time for the World Cup, and the customer funnel is supported by free-to-play games from our sport-caller team. We will continue to harvest Spain and our wine down in the rest of Europe. North America Interactive continues to be in both development and ramp-up mode. New Jersey had 12 million of GGR and 8.3 million of NGR from our iGaming offer in Q3, showing discipline in bonusing and giving us a contribution margin in the mid-30s. We rolled out new lobby and more games from multiple partners during the period. We expect New Jersey iGaming to continue to grow and be profitable for the rest of the year. We are targeting six to eight points of market share in 2023 after the implementation of omnichannel rewards, along with improvements in payment processing and marketing tools. Our Bally branded app in New Jersey continues to deliver a very attractive cost of acquisition for depositing players, even before the marketing tech stack improvements that will be coming in 2023. Different states will have different characteristics, and our focus is on creating the blueprint for states of a similar type before we invest in rollouts. As I said, iGaming states are our priority, and we will focus resources in markets including Pennsylvania, in Ontario, as well as states that we believe will regulate iGaming in 2023. Our progress on sports has taken longer than we expected, and we will not support the sports-only markets with marketing dollars until we are comfortable that we've got the user experience and the technology where we want it. Yesterday, in Ontario, we launched our first combined casino and sportsbook app. We will continue to focus on being eye-gaming-led in Ontario, which we expect to become one of the most significant markets of scale in the North American footprint. Our focus remains on the continued development of our product and the market blueprints, rather than being overly aggressive on rollout. Now, let me turn it over to Bobby to give you the financial highlights for the quarter.

Thanks, Lee. Casinos and resorts reported 119 million of EBITDA. This includes positive 9.5 million of EBITDA for Atlantic City. Excluding Atlantic City, EBITDA margin was 39.5% in line with our targets of high 30s. Adjusted EBITDA for the quarter excludes 3 million of rent to GLPI associated with the purchase of Tropicana Las Vegas, which we closed on September 26th. With the closing of Tropicana, we'll begin reporting $5.6 million per quarter of rent as part of the operating rent going forward. International Interactive had approximately $76 million of EBITDA at a 33.5% margin. The UK was plus 0.1% year-over-year, and Asia was minus 3% on a constant currency basis. As we discussed, marketing was reduced in the UK by 30% as we focused on profitability and highly efficient spend. North America Interactive had $20 million of negative EBITDA. In the quarter, there was approximately $7 million of EBITDA dragged from non-core assets, which we are taking a hard look at. As noted in the press release, we will fully expense launch costs for states before being operational. This is a $4 million drag to 1Q plus 2Q and a $6 million drag to 3Q plus 4Q versus budget and previous forecasts. The cash outflows were budgeted to the balance sheet, and we are just adjusting the timing of taking these expenses. We have updated our 2022 financial forecast to reflect the adverse FX headwind reset in Atlantic City and actual results for the first nine months of the year. At current FX rates, we expect revenues to be $2.25 billion and adjusted EBITDA to $540 million, which includes $75 million of North America Interactive EBITDA losses. We continue to focus on profitability and cutting costs, but some of those cost cuts will only occur with two months left in the year. We continue to expect capital expenditures to be $250 million for the year. Pro forma for the tender, common shares outstanding at the end of the quarter were $47 million, and we have incremental warrants, options, and other dilution of 13 million shares. So 60 million shares outstanding is the right way to look at our shares outstanding. We ended the quarter with $3.3 billion of net debt. We have ample liquidity to fund all of our announced projects and continue to invest with care in North America Interactive. Our long-term commitment is to be sub 5X debt to EBITDA, which we expect to hit in mid-24. And we expect the Biloxi-Tiverton transaction, the GLPI, to close in January of 23.

With that, operator, let's open up the Q&A.

At this time, if you'd like to ask a question, please press the star and 1 on your touch-tone phone. You may remove yourself from the queue anytime by pressing star 2. Once again, that is star and 1 to ask a question. We'll take our first question from Barry Jones from Truist Securities.

Great. Thanks for that. Can we maybe start by talking about how October has been trending?

Sure. Hi, Barry. October's doing well. So casinos and resorts is a continuation of the trend that we've seen in Q3. UK actually finished October up around 10%, and Asia's just slightly down.

Great, great. And then just for a follow-up, you talk a little bit about evaluating money-losing businesses in North America interactive. Can you maybe give a little bit more color about that?

Sure. Well, listen, as you know, we, you know, we pulled together a fairly large number of assets in a pretty short space of time. And, you know, we, we've now had 12 months of looking at that and lifting that picture together. You know, the assets that are not showing us a near term path to profitability, you know, will be of course under the microscope as they should be. So we're, we're, we're evaluating how that all knits together and we'll, we'll make the decisions quickly in terms of what doesn't work now that we have our stack pulled together.

Okay. So more identifying sort of like more non-core, but the overall strategy remains.

Yeah. Overall strategy remains non-core. We're identifying effectively what becomes non-core.

Perfect. All right. Thank you so much.

Thanks, Ben.

The next question comes from Lance Bethando from Cowan.

Hey, good morning. This is Jonathan for Lance. My first question is regarding the white paper. So I understand Paul's colleague is replacing Damian and Colin. What were your first impressions with the replacement? Can we expect the white paper to be one of his top priorities given everything that's going on in the UK? So what was the first question? Can you repeat the first question again? Sure. Just what was the first impression with the new person in charge of the white paper?

OK. So yeah, we have a new minister now. I think it's our fifth minister in 12 months responsible. But we have a new minister, Paul Scully, who's the minister for the gambling white paper, also the minister for tech. First impressions are relatively positive. They have a big in-tray at DCMS, but I think the first impressions are positive, pro-business guy, and nothing to concern us. Expectations in terms of where it sits in the packing order is difficult to call, but the DCMS has two big things on its ticket at the moment. One is the online harm still and one is the gambling review. You may have seen that the new prime minister has said that he's there to deliver the manifesto promises that were given before by the Boris Johnson elected government, and that included the gambling review. So we expect them to push on, but we don't necessarily expect it to be the top of the priority list. Understood.

And just on, on my last one, um, so I understand like, um, the Lincoln facility, right? Like should that transaction ultimately like materialize, um, what kind of projects will are out there that that we can find interesting to, to use the proceeds of the lease back with.

Yeah. I mean, you know, we have, you know, right now the focus is Chicago. um but you know long term we think that you know acquisitions in the casino space will continue and we think that there's opportunities outside the us from a profitable respect on interactive side so we we have a multi-year path for cash needs we feel very comfortable today with chicago but as we continue expanding we'll look to a potential sale lease back on lincoln you know, but that's a few years down the road.

Okay, understood. Thank you.

Our next question comes from Jesse from Stateful.

Great morning, guys. Thanks for taking our questions. You know, starting on the brick-and-mortar segment, really nice performance on the margin side. Looks like I'll call it 300 bps quarter-on-quarter. Bobby, I was just hoping you could sort of break down the sequential drivers there a bit more. How much is seasonality versus... Some of the centralization efforts you talked about in the prepared remarks versus maybe just operating leverage quarter on quarter. If there's any way to frame it there, it would be helpful.

Yeah, I mean, the biggest step up is Atlantic City has really turned around. So that's, you know, exciting for us. And we implemented some cost restructuring in August that's, you know, flowing through, but also the property just, you know, really outperforms. The other margin step up is as the IGTJV continues to roll in. That's ultimately a significant margin driver for us because EBITDA comes in without revenue. Ultimately, this is the first quarter where we have a full year. Remember, we closed Evansville, Quad, and Mont Bleu in the second quarter of 21, and we've We rebranded the properties, we started centralizing a bunch of the different back office functions, and we're really focused on just the portfolio as a whole. George, you can add to that.

Bobby, you stated it pretty accurately. In addition to that, we've been able to maintain the labor reductions primarily through FTEs. We're ranging around a 25% reduction since 2019, and that's pretty sticky, so we've been able to maintain that other than the slight offsets from increases in wages.

Okay, great. That's very helpful. Thank you both. And then moving to the international interactive side of the business, Lee, could you just provide some color on what you see as the biggest drivers of the softness in Asia. I know we've talked about, you know, some impact as consumers, you know, play in USD, but live in yen. Is that the main driver or does anything else, you know, driving that 3% contraction in common currency?

Yeah, I think it's largely macro factors, which are driving that Asian region. You know, we've operated in Asia for many years and you see different slowdowns from time to time. Um, whether it's macro or whether it's sometimes sentiment from gaming gets the occasional dip, and that makes your marketing more challenging. But, you know, it's somewhat the nature of the beast in pre-regulated markets, and we're confident that the region will be in growth.

Okay, perfect. Very helpful. Thank you both. I'll pass it on. Thank you.

Our next question comes from David Krantz from Jefferies.

Hi, this is Cassandra asking on behalf of David. I just want to go back to, thank you for taking my question, and I'd like to go back to the margin question. 39.5 excluding Atlantic City is pretty good, but as we look forward, are there more levers to pull, or is there any more room for margin improvement at this point?

There is. You know, the biggest one is the IGTJV.

which is $15 million plus of EBITDA. We'll have no revenues next year. So it's a 60-40 JV with IGG. So we're going to see a good step up. On the cost side, we are very focused on centralization. And we've started trying to bring our teams together, whether it's procurement, finance, HR, and so we can really support the casinos more aggressively. I'd also say Atlantic City is zero EBITDA on 150-plus million of revenues. So as that continues to have more profitability, we're very excited about what it does to our margins.

Great. Thank you. And if I may ask another one, you said you will refocus your efforts in North America Interactive, especially on the sports side. But you have this partnership or asset in kind of Sinclair. So how do you think about that partnership going forward? How has that worked out so far for you?

So we continue to get a huge amount of benefit from the naming branding that we have with Sinclair. And we continue to work on a watch and bet feature that can work across those RSNs. So, you know, continues to form part of our plan. and we think we get tremendous better branding benefit from it. The reality is, you know, I said earlier, we haven't gone as quick as we would have liked on our own sports products, and we need to have that in a position that we're excited about to really take full advantage. So the partnership with Sinclair continues.

Great.

Thank you very much.

Thank you.

Our next question comes from Jordan Bender from JMP Securities.

Great. Thanks for taking my question. So TROP now closed. You have a slide in your deck talking about evaluating potential development opportunities. We got comments in the last couple days that the commissioner of baseball seems to think the A's will end up in Vegas. Is putting a stadium on this plot of land still in the cards for you guys? Or are you guys thinking more of just a rebrand or renovation of that asset?

No, I think that's still very much on the cards for us. I mean, obviously, they've got to make some decisions and some choices, but we've been in discussions and discussions with other partners as well. I mean, our focus right now is laser focused on the property side, on the development of the tent at Chicago. But we're very much looking at the long-term plan for the Tropicana property. And that includes whether or not we could put a diamond in the middle.

Great. And then you obviously have some pretty close ties with the state of Rhode Island. Is there any conversations between you guys and the state on potentially legalizing iGaming?

So, yes. But we would be very keen to see iGaming in Rhode Island as we would in any other state. But of course, Rhode Island is very close and where we're headquartered. So we'd love to see iGaming rolled out there. And we think there is positive sentiment towards that happening.

Great. Thank you. Thank you.

The next question comes from Jan Pulitzer from Wells Fargo.

Hey, good morning, everyone, and thanks for taking my questions. So, Bobby, on North America Interactive, you guys are forecasting now 75 million loss in 2022, but it sounds like at the same time you guys are, you know, kind of pivoting more, you know, at least publicly to focus more on iGaming and sports. How should we think about kind of the progression, you know, 2023, 2024 of that $75 million loss? Should it get better? Does it turn positive? And if so, you know, give us some guideposts.

Yeah, I mean, it will be better than it is this year. As we called out, there's about $7 million in the third quarter of losses that we view as non-core slash we need a plan to make them at least flat to positive. You know, the iCasino in New Jersey continues to ramp. You know, very excited about early results in Ontario. We'll have iCasino in Pennsylvania next year. And we'll be minimizing the losses related to sports betting. And in the end, that's what North America Interactive should be. And so the trajectory is positive. And we're feeling very confident about that. We just need to really look inside at that $7 million of losses and have it pass. Because just burning money for money's sake, because that was where the market was, a few years ago is not where we're going in the future.

Okay, got it. And then, have you guys given a long-term leverage target as we think about these projects getting layered in and, you know, the Chicago financing?

We'll be sub-5 in 24.

Got it. Thanks so much. Thank you.

Our next question comes from Ricardo Chinchilla from Deutsche Bank.

Hey guys, thank you so much for taking the question. I was wondering if you could provide the regulatory EBITDA for leverage calculation purposes and the leverage compared to the one that you report to Rhode Island?

So the leverage we report to Rhode Island was about 650.

And that's still the leveraged EBITDA?

Sorry, the EBITDA was 650. The leverage is 5.3.

Okay, perfect. Thank you.

Remember, that's on a gross debt basis.

Got it. In terms of, you know, when you think about your project next year and the current state of the capital markets, is there a way in which you guys could, you know, rethink about the 1.1 billion loan with any other funding sources that you guys think that maybe you would be required to put in more equity into the project you know if you could comment on you know how much more equity would you guys be willing to put in just to kind of lower the rate or make the transaction a little bit more feasible given the current set of capital markets that would be very helpful

Yeah, let me clear up some confusion that's in the market. That 1.1 billion comes in between 23 and 26. I have a billion of liquidity when we close the Biloxi-Tiverton transaction, which should be very beginning of January. So if the capital markets don't clear up, right, then I can put more capital in And at some point, I'll be able to get a construction loan. I don't need that construction loan really until closer to the completion of the deal. Obviously, I want that because we want to maintain as much liquidity at the parent for flexibility for M&A and other strategic options. But we're pretty good. You know, we're close and focused on a land sale leaseback in Chicago because we think that that's a core part of the capital structure, which we talked about before. But really, you know, we are not dependent on the capital markets as it relates to Chicago until 24-25. Perfect.

Thank you so much. One last one for me. You guys show in your forecast that you're still expecting to – repurchase or you know 100 million in 23 and 24. you know how flexible are you guys with you know share repurchases and if you start seeing you know a slowdown in the you know in trend would you guys uh cut this or you know what other levels can you pull to you know just improve uh liquidity given the construction projects that you guys have yeah again we have a billion of liquidity

after those share repurchases. We are continuing to deliver returns to shareholders through share buybacks, but we'll evaluate with the macro environment. As we said, October was strong. I understand we're not seeing it. We are, as I've expressed to the investment community, we are preparing for it in 23 from a cost cut perspective. And I think you saw the fruits of that labor in the third quarter on the casino side. And ultimately, you know, but if the macro changes hard, the priority is funding Chicago.

Perfect. Thank you so much for your answers. Thank you.

And once again, that is starring one to ask a question. Our next question comes from Chad Beyond from Macquarie.

Hi, good morning. Thanks for taking my question. Firstly, can you just talk about any updated intentions for a downstate casino in New York, kind of how this fits in your plan and current capital structure? Thanks.

No, well, Chad, I'd say, you know, early days, we remain interested in many opportunities, and New York's one of them. And we've said we'll continue to look to see if we can get into the mix there, but nothing to report right now.

Okay.

Thanks, Lee.

And then back on the international interactive, squarely focusing on the UK, you know, clearly we've been watching that market, and there's been reports of just higher inflation and maybe a weakening consumer. You know, what you guys talked about clearly tells a slightly different story. But can you just kind of, you know, give us any trends in terms of if you saw any differences throughout the quarter, if it got better, if it was stable? I mean, it sounds like this is something you're pretty comfortable with, given your history in the market and invisibility, but just wanted a little bit more color there.

Yeah, so Chad, I think that, you know, we'll speak to the e-commerce market and and have a very long-term customer base here. And so I guess that the term I would use is ultra-optimization in terms of everything that we're doing in the UK. But I don't know, Robeson's here. Maybe, Robeson, you can give a little more color in terms of what you've seen.

Yeah, so as Bobby said, we've cut acquisition marketing by 30%. We're still seeing the same value of revenue coming through from a reduced cohort of players. We've made significant other optimizations which have essentially driven more winning experiences for all of our players across the player base, which has driven up active days, driven up ARPUs in a sustainable way, and driven up retention, which gives me a lot of comfort that we have growth in Q4. That would be positive, and I expect to see continuing great margins there.

So we have had a little uptick in R2 in the quarter, but nothing crazy, right? And actually R2 in Q3 22, only very slightly ahead of R2 in Q3 21. Great.

Thank you both. Thank you.

It appears we have no further questions. I will now turn the call back over to the speakers for any closing remarks.

Thanks, everyone.

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