Bally's Corp (BALY) 2021 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Bally's Corporation Fourth Quarter 2020 Year-end Earnings Conference Call. (Operator Instructions) Please be advised that today's conference call is being recorded. (Operator Instructions)

I'd now like to turn the call over to Bobby Lavan, Senior Vice President Finance and Investor Relations at Bally's. Please go ahead, sir.

Good morning, everyone, and thank you for joining us on today's call. The earnings release and presentation accompanying 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 Papanier, President Retail; Robison Reed, President Interactive; and Steve Capp, Chief Financial Officer.

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 filings. 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 and presentation. 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 Relations site and will be available for replay shortly after the completion of this call.

Now let me hand it over to Lee.

Thank you, Bobby, and hello, everyone. With our first full quarter together as an enlarged Bally's, I'm extremely excited about the potential across our business for 2022 and beyond. We closed Gamesys, the largest of our acquisitions to-date on October 1 of last year, and we've made significant progress on integration to this point. Let me give you just a few highlights. We prepared and got approved the consolidated group budget based on a clear set of strategic goals for 2022. In the next week, we will unveil our purpose and values to our global employee base, which will be at the heart of how we grow our business over the coming years. We have started to see the first fruits of our omnichannel vision with the launch of Bally Eye Casino in New Jersey.

Our data project, which will be a key enabler to allow us to further optimize our business performance is well underway. We are on track with our rollout of Bally Bet 2.0. We continue to build top-of-funnel awareness, grow our customer data sets and see increasing engagement on our free-to-play products. We have rationalized the Gamesys public co-spend to the tune of approximately $5 million. We launched the Bally's Foundation in the U.K. to improve global employee buy-in and global awareness, and we will launch the same in the U.S. in the next few months. And as we continue to drill down into the business, we are finding best practices among the teams, which will drive efficiencies for us in the longer term.

Bringing together a wider array of assets with geographically dispersed teams and a number of business lines is not without complexity. So I'd like to give my heartfelt thanks to all of the Bally's team for the passion with which they have approached all of the integration work streams. As we've stated before, we are a unique combination with equal revenues coming from U.S. retail casinos and the global digital business. We believe in customer centricity driven by great service, great data and great analytics. We do not need to be first to market with an inferior product. Customers will always have choices and your first impression is more important than timing of launch. We will launch when the product is right, and we're willing to miss short-term gains to build long-term trust and value with our customers. With the continued rational spending on sports betting, we have concentrated our North American Interactive focus on building full selling product that is U.S.-centric and easy to use for the mass market.

We will begin to market our 2.0 product in Arizona and New York in the first half of 2021. We've also accelerated our efforts to go live in Ontario with regulated iGaming, and we expect to launch there in the summer, and we'll add additional state launches through the second half of the year. Bally Eye Casino launched in New Jersey in December, and I'm very pleased with the early results. As you know, one of the core plans of the rationale in bringing together Bally's and Gamesys was to enable a lower cost of acquisition into digital products. We've seen very positive early momentum through our cross-sell campaign from the AC database into iCasino, with sign-ups above our expectations across the board that's actually delivering double-digit database conversion in the higher-value segment. The cross-sell campaign has enabled our blended CPA to come in under $200 and has brought in customers with predicted LTVs, circa 2x compared to what we've seen on our Virgin iCasino brand in the same state. We plan to increase our cross-sell campaigns further in Q1 2022.

Naturally, we'll also evolve this proposition as we go forward, and that was illustrated with the addition of live casino to the product on Monday of this week. We continue to focus on a differentiated omnichannel strategy where we drive awareness of the Bally's brand using free-to-pay products to optimize customer acquisition, providing cost structural advantages for our Interactive business. A great example of this is the $100 million March Madness bracket challenge that we will launch on the 7th of March, leveraging our properties, our extensive partnership with Sinclair and our free-to-play expertise to deliver an extremely cost-effective marketing campaign. As we introduced in the third quarter, we're going to report our business with 3 primary segments: Casinos & Resorts, International Interactive and North America interactive.

So turning to Casinos & Resorts. We have a large portfolio of regional gaming assets that generate significant and sustainable cash flow. 2021 was a record revenue, EBITDA and free cash flow year. For 2021, pro forma for acquisitions completed in the year, excluding Atlantic City, revenues were $983 million and EBITDA was $395 million, showing a 40% EBITDA margin. Fourth quarter gave us EBITDA of $83 million on revenues of $278 million; excluding AC, EBITDA of $88 million on revenues of $247 million showing a 36% EBITDA margin. In the seasonally lower fourth quarter, we were negatively impacted by COVID and the previously mentioned smoking ban in Shreveport. In addition, in response to market conditions, we brought back some amenities in November, December that caused a little offside with COVID and the impact of poor weather. We've pulled back those amenities in January and the past few weeks have seen the return of strong margins.

2021 pro forma, as if all acquisitions closed at the beginning of the year, we would have had revenue of approximately $1.15 billion. Going into '22, we expect revenues to be flat or slightly up from that level, EBITDA in the range of $385 million to $395 million. We expect that Atlantic City will contribute $150 million of revenues and no EBITDA. Excluding AC, we expect EBITDA margins to be in the 38% to 39% range. This includes a January that had $5 million of headwinds due to COVID and particularly poor weather. Volumes have bounced back in line with expectations in February, inflationary pressures, particularly on the wage side of the main headwinds into '22. But we expect the market to be rational and continue to expect that we will maintain most of the margin gains over 2019.

Our FTE count at the casinos at the end of Q4 '21 was down 26% over Q4 '19, and we expect it to hold at that level through '22. We have $180 million of capital expenditures in the properties in '22 with the key highlights being Atlantic City, where we'll add 750 new hotel rooms and several new amenities that will be in service by Memorial Day; at Lincoln, where we'll build out 50,000 square feet and have a significantly enhanced Asian offering; in Kansas City, the investment will extend into 2023, but provide significant upside to an already successful story with the addition of 40,000 square feet of land-based facility housing nongaming amenities. In addition, we will finalize the full Bally's rebranding of our properties by the second quarter.

Moving to International Interactive, which is primarily operations in the U.K. and Asia. 2021 was a record revenue, EBITDA and free cash flow. In terms of revenues for the full year, on a constant currency basis, U.K. was plus 10% year-on-year and Asia was plus 18%. Tough comps in Q4 meant on a constant currency basis, U.K. was down 5% and Asia up 8%. Handling the U.K. was only up 1%, but a more than 4% move down in house edge led to a result slightly below expectations. For January, our house edge came back to normal levels. Q4 average monthly active users were down 3% year-on-year, while deposits picked up 4%. We continue to believe that the average bet size, customer profile, responsible gaming standards and a lack of dependence on VIP business puts us in a favorable position as the U.K. progresses of the Gambling Act Review.

We have always been and will continue to be the leader of best practices in the market illustrated by our recent GamCare accreditation for the Safer Gambling Standard at Level 3, which is the highest level any company can achieve. In Asia, in the fourth quarter, revenues were plus 8%, while total handle was plus 14% and deposits were up by 15%. Our new [new Ugado] brand continues to take share. And during Q4, we moved to 24/7 customer care to the market. Slots is now our largest product segment and even when you combine live and RNG casino, and we believe this demonstrates wider adoption of online gaming in the market. We were a first mover out there and can say that the data is pointing us tremendous opportunities in both short and long term. In 2021, 34% of NGR was from customers acquired over 2 years ago, and this is up from 22% in 2019 and 2020. Having a strong and growing long-term customer base allows us to be more competitive and continue to invest while maintaining strong growth and cash flow.

In the U.K. for 2022, we expect low to mid-single-digit growth. For H1, we have some tough COVID comps, although we expect the year-on-year decline we saw in Q4 to be the low point. We expect Asia to deliver double-digit growth. Spain, rest of Europe and Rest of World will have revenues of $50 million to $60 million compared to $68 million in 2020 was due to the closure of noncore markets. We expect a total revenue of approximately $1.15 billion, assuming GBP USD rate of 1.35. Segment EBITDA margin should stay at our long-term guidance of 28% to 29%. We will spend approximately $30 million on capital expenditures, consistent with the historic spend on platform development.

Lastly, North America Interactive, which comprises our growing B2C operations and supported B2B operations. The business continues to grow quarter-on-quarter, $19 million revenue in the quarter compared to $11 million in Q3. EBITDA losses of $8 million in the quarter, which is within the range that we expected and compares to approximately $5 million of losses in the third quarter. Bally Eye Casino launched in December, and we have good momentum through January and into February. Brand awareness is strong and improving through the visibility given across Bally Sports. The North American Interactive, we project 2022 to have $125 million of revenue and a negative $60 million of EBITDA and $30 million of capital expenditures. The capital expenditures are primarily software development costs required for our state-by-state launches.

Our corporate segment is projected to be $50 million and our rent, which does not include any rent associated with Tropicana Las Vegas, is $46 million. We will announce additional details on Tropicana in the coming months, but we continue to be excited about the opportunity in Vegas, and we are in advanced discussions with potential development partners. We expect to be in a position to communicate our chosen partners and plans by the half year ahead of completion in early Q3. Putting all of this together, it gives us a headline net revenue of $2.4 billion to $2.5 billion and adjusted EBITDA of $560 million to $580 million and that includes $60 million of EBITDA losses in North America Interactive. Capital expenditures include $120 million of growth capital at the properties, $60 million of maintenance plus $60 million at Interactive, split between North America and International and $30 million of onetime CapEx related to integration.

Prior to turning to Steve, I want to update you on our ESG efforts. Gamesys was a leader in ESG in the U.K., and Bally's will be a leader in the U.S. Bally's have now established an official ESG committee of the Board. The long-standing Gamesys Foundation in the U.K. has been renamed the Bally's Foundation and we'll spend more than GBP 2.5 million this year on efforts in the U.K. We are also setting up a foundation in the U.S. to invest in the communities that we serve. From an ESG reporting perspective, SASB reporting will go live in Q1 '22 and the UN Social Development Goals reporting framework will be set in the second quarter. In the coming months, we will have a dedicated ESG section on our website, but most importantly, we're increasing our responsible gaming awareness programs across our entire company, giving back to the community, maintaining a healthy relationship with our customers has always been a priority of our culture.

Now let me hand over to Steve.

Lee, thank you. Mostly housekeeping for me. For the quarter, we reported net revenues of $548 million. This reflects a full quarter of interest revenues, of course, under our new segment reporting structure. Additionally, we filed an 8-K this morning that has a recast for the past 7 quarters that should help satisfy your modeling requirements. For the quarter, adjusted EBITDA was $119.1 million. This includes $5.7 million loss at Bally's AC that we will continue to call out as we work through the seasonal loss profile at that property. Also in the quarter, we repurchased $87 million worth of common shares at an average price of just under $40. Total share count, which assumes full conversion of Sinclair warrants and options and other contingent shares of $66.5 million, and the schedule for this is included in our 10-K materials.

Total debt outstanding at the end of the quarter was $3.53 billion, and cash on balance sheet was just over $200 million. A few modeling assumptions. Depreciation and amortization for '22 will be approximately $400 million, which includes $265 million of purchase price amortization from the Gamesys transaction. Cash taxes will be approximately $30 million, primarily international and state taxes. We estimate our GAAP effective tax rate to be 20% for 2022. Stock compensation will be approximately $30 million. As Lee discussed, we will have $180 million of property-related CapEx with Bally's AC front-end loaded. The $60 million of interactive CapEx is spread evenly throughout the year. The $30 million of corporate CapEx will be front-end loaded as well.

And so with that, operator, we are prepared to take questions.

(Operator Instructions) We will take our first question from Lance Vitanza with Cowen.

I have 3, if I can. The first is the status of new U.K. gaming regulations, maybe we'll just start there. If you could comment on that.

Thank you, Lance. Well unfortunately, due to the pressures really on government time, the schedule for the white paper looks to have shifted out a little again, not pleased about that, but we are where we are. As I mentioned in the remarks, we've got a very mass-market base and the relatively low spend per customer compared to others in the market. So we think we're well positioned for potential changes that might come through the review. It's worth remembering that whenever we faced any prior regulatory change in the U.K. over the past 20 years, even when it'd have a short-term impact on us over the midterm 1 to 2 years, we've always been net gainers.

So I continue to believe that, the further change to the regulatory landscape in the U.K. through the review and of course, we don't know exactly what it will be, is most likely to consolidate share in the larger players and see smaller players exit the market. Indeed, we actually saw someone exit the market earlier this week and hand back their license in the U.K. So we feel disappointed that the timeline keeps shifting out but we're expecting to see white paper in May and typically that would be kind of 90 days consultation around that white paper. And then it will depend whether it needs an act of parliament to enact anything in that white paper as to when it could have an impact on the market. It doesn't need an act, it could be in by Q4 or Q1 of '23, if it needs an act, it's probably mid to second half of 2023.

Okay. I guess the next question would have to do with New York and how you are thinking about your marketing in approaching that market?

So we wouldn't think about our marketing in the year much different way, other than obviously with an eye on the margin, because of the tax rate and then we will elsewhere. I mentioned database cross-sell, even though we have another property in New York today, we do actually have a thorough data base for New York players and that's because actually AC database is as large with players based with New York addresses and it is with close with New Jersey addresses.

So we also have a large chunk of Pennsylvania players in that database as well. So that's going to be our first point of call, right? And we'll be going there and we'll be looking to leverage our digital expertise in terms of marketing, but we'll be approaching it cautiously and I don't think you'll see the same kind of tactics from Bally's that you see with other players with very, very significant spend above the line.

Okay. And lastly from me before I jump back in the queue is, could you just talk about how the integration of the technology is going? And obviously, the Gamesys technology is key, but also some of the deals that were put together before you arrived, Bet.Works, et cetera. How is all of that being integrated and how would you describe where we are in the process of getting everything to really gel?

It's been -- there's been some Herculean efforts I would describe from the technology teams over the last 4 months. I think they've done an amazing job in starting to do all of that plumbing, it's not an easy task, right, when you bring technologies together. We've already got working now, the PAM from Gamesys, all of the data flowing and the data architecture, rollout and the sports engine from Bet.Works now actually now rebranded to Evolve as part of our single platform, all of that plumbing is happening and we now can take bets end to end. So -- whereas 4 weeks ago, we didn't have absolute surety on that, that is all now up and working.

So I think the teams have done an amazing job in terms of pulling that together. IT is another area where we want to progress and we'll be very focused very focused on making sure that all of the Interactive asset wasn't just Bet.Works that you mentioned, but all of the other Interactive businesses that were required pre-Gamesys, all get on to the same common working platforms as well, which is incredibly important for us enjoyment adults and just communicating more effectively, but I guess the short answer is very pleased with how the technology has started to come together. It's been a ton of work from everybody and that's emboldened us to say that -- we talked about launching in H1. We know we're definitely launching in H1 and we know we're definitely launching in Arizona and New York in H1.

And we'll take our next question from [Ricardo Cantero] with Deutsche Bank.

First to begin, I was wondering if you guys could comment on what maximum leverage level do you guys feel that the set of assets can withstand on consolidated basis and on a restricted group basis? So any comment on that maximum leverage that you will feel comfortable having with this portfolio and does that allow everybody to leap comfortably would be very helpful.

We're -- [Ricardo], thanks for the question. We're comfortable with where we are, of course. Of course, the main way that we'd like to bring leverage down is to drive our profits and drive our profit lines, but we're definitely comfortable with where we are. I don't know, Steve, if you have got any further comment on that?

[Ricardo], yes, just a little bit. As we mentioned, when we marketed frankly, the equity in the bonds last year, this is a, we think, a healthy place for this growing company to be where we are now kind of low 5s, if you will, cash flow leverage. We do intend to delever over time. The CapEx profile that Lee mentioned in his dialogue is less than half of our consolidated EBITDA. And obviously, we have the ability to manage that along the way as appropriate vis-a-vis leverage. So it's never a static situation. It's quite fluid over time. But we are mindful of leverage, and we intend to work it down over time. By the way, it's a 2-part equation. There's the debt and the cash flow side as North American Interactive ramps into 2023, that level will be impacted favorably as well as our recovery, we think, from Omicron setbacks in 2021. That's all I have, Lee.

Perfect. If I could squeeze one in on the Interactive front. It seems like your expectation for the burn is going down from $80 million to $60 million. Is this related to timing launches getting into 2023 or is it more related to you guys being more conscious in some of your assumptions, particularly now that some of your peers might be recurring to lower media spend?

I'd say a little bit of both. It's -- yes, it's partly timing and partly us just being cautious in terms of where we want to go on the build-out and partly indicated a little bit by the positive cross-sell news that we've had from Bally Eye Casino in New Jersey, that's kind of good news. It's early days there, but we're comfortable with the guide to $60 million.

We'll take our next question from Dan Politzer with Wells Fargo.

So I guess, first on some of your real estate that you own at your casinos, can you just walk us through -- are there any property-specific nuances that would limit flexibility for sale leasebacks? And I ask that thinking about Rhode Island, where I know you just renegotiated something this past summer that gave you more flexibility. So are there any other properties that are encumbered? And maybe, I guess, can you talk about what -- is there anything special about Rhode Island that would limit flexibility?

George, can you pick that one up?

Sure. Dan, Tahoe is -- our Tahoe property is currently under a lease arrangement. Other than that, we have the ability to monetize any of the other assets. As far as Rhode -- and obviously, that will be depending on our kind of strategic plan going forward. So in Rhode Island, there's really nothing, especially as part of the previous legislation that was passed for IGT that prohibits us from monetizing any of those properties to sale leaseback.

Got it. And then just switching to North America Interactive. Your Chairman recently spoke about some challenges that are kind of well-known out in the market. I mean how do you view the opportunity to gain share? Is this something you're going to chip away at over time or are you going to make a big splash with the large media campaign? And does this strategy kind of coincide with the reduction from the $80 million burn to $60 million?

No. There was never a big brash media campaign where we were going to plow tens and tens of millions into that. It's something where we will chip away over time, and we will leverage the assets that we have. We think we have some phenomenal assets and strategically made the right choices in terms of trying to create a differentiated customer funnel. We have a long-term deal with Sinclair which one, gives us legitimacy in sports; and 2, I think, makes the Bally brand very evident, and we think we can leverage that a lot further. And we've got significant free-to-play capability, which we help -- which we believe helps massage that funnel. So I don't know if I like the phrase chip away over time, gain steadily, incrementally and sustainably over time is probably where I would place us rather than the big all-out media campaigns.

All right. That's fair. And just if I could squeeze in one more quickly. The special committee, is there any expectation for when investors can expect an update on how things are kind of progressing there?

Dan, I can't say any more than beyond what's already been released, right? We've formed the special committee of the Board, they will be considering the proposals. I think it was announced here the day that they've appointed advisers now. So those advisers need to do their work and consult back with the special committee and -- but there's no set timing that I know of or can give you now.

We'll take our next question from Jeff Stantial with Stifel.

Apologies if I missed this, but I wanted to talk to the North America losses on the online front a bit more. As it stands at your current rollout plan, do you have a sense yet when you might see the peak from a quarterly EBITDA loss perspective? And how are you thinking about the timing to inflect EBITDA positive, all things considered?

So in terms of the guidance, we've said probably $60 million in '22. We would expect that to probably repeat in '23 as we roll out into further states. And in terms of getting to profitability, I mean, obviously, we're early into this. So that hasn't -- that has some challenges that could change along the way, but we would expect to get to profitability at some point in 2024.

Okay. Great, Lee. That's very helpful. And then for my follow-up, I wanted to touch on the prospects and a following with on Dan's questions on more real estate monetization here. We've seen some favorable cap rate comps out there more recently, and there's comments from your Chairman suggesting there's potentially some value not being realized in your portfolio on the real estate front by the public markets. All things considered, has this changed your view on potentially monetizing some of your wholly owned assets or do you still view this most as a financing mechanism to fund more inorganic growth on the brick-and-mortar front?

Yes. So I mean, listen, you've seen us do some sale leaseback over time. We've tended to do it when we've got a strategic reason to do it. And I think that remains to be our outlook. So they are -- that is a big asset that we hold within the portfolio, right? We've got so many properties that are unencumbered. So we'll look at it -- we'll predominantly look at it when we've got something strategic that we think we can leverage off the back of it.

(Operator Instructions) We will take our next question from David Katz with Jefferies.

This is Cassandra asking for the team. I just want to get on the bid for downtown Chicago license, when can we expect a decision from the city?

So the date in terms of decision from the city is pushed out a little bit. So we're now expecting a decision in April, whereas previously that was expected in March. We continue our dialogue. We continue to be excited about the opportunities as long as it's on the right terms. And -- but we're expecting a final decision from April.

Got it. And for Tropicana Las Vegas, I assume that will also be rebranded once the acquisition close. Can you talk about maybe potential capital requirement there and update on the strategic plan for that property?

So we're not going to do that today, Cassandra, because as I mentioned in my remarks, we're in a number of discussions with development partners. Very excited about the potential opportunities, but we're not actually in a position today to say what those plans are. We said we will confirm those plans before the end of the half year ahead of completion on that property in early Q3.

And we'll take our next question from Barry Jonas with Truist Securities.

I wanted to start with share repurchases. There was a nice level in the quarter. How are you thinking about that going forward?

Thanks, Barry. So we obviously purchased a fair amount in the run up to the end of the year. We continue to keep that in mind. And we continue to look at that on a basis alongside other opportunities for our cash investments. But right now, we're not active in the market, and we'll see how we go from here.

Great. Then shifting to Gamesys, you talked about customer acquisition reset in December, which I believe is the Google auction. Just how should we think about that going forward?

We have had somewhat of the bounce back. So our trend line in the U.K. has been somewhat consistent with our peers as we pass through some very tough comps. We were further impacted by the house edge that I mentioned, which was actually the second lowest quarter ever on record for us. And then we saw the cost of acquisition inflation in the Google auction in the second half of '21. And we decided let's be -- we wanted to be disciplined in that spend and not chase.

And you saw a bit of that impact on revenue in Q4. We're very happy with current trends in the U.K. and we're back at where we would expect to be in terms of levels of acquisition. So I don't think that you can't say it's not going to happen again, but it's not happening currently. And so we're back on track in terms of where we would expect to be in terms of levels of FTDs and the spend to achieve them.

Great. And then if I could sneak one in. I recently had the opportunity to see Twin River Lincoln. And I was just hoping to get more color on the construction there, maybe your thoughts on ROI and really the player base you're targeting? Are you looking to kind of reclaim some lost business or do you expect you're going to significantly grow the market?

Yes. Thanks, Barry. So clearly, a big Asian focus there, but maybe George is super close to that. Maybe you want to add some color?

Sure. So we broke ground on this project in September, which we'll again expand the gaming floor by 40,000 square feet. It will also allow us to create, what Lee referred to, what we're building is a destination Asian targeted gaming and amenities, which will include an Asian food hall, a featured bar, signature water feature. We had a topping off ceremony at the beginning of February. Additionally, we're going to be adding 14,000 square feet of Korean spa, and that will be constructed within our hotel where we already have 4,000 square feet that is vacant. We expect everything to be online for Thanksgiving in 2022. It's a bit of a defensive strategy, but clearly, it's to reintroduce customers that we have split trips with primarily Encore that we'd like to recapture back into providing more visitations to us.

And there are no further questions at this time. I will turn the call back over to Lee for any closing remarks.

Just would like to thank you for your time this morning, and thank you for your continued attention on the business. I think we've got a tremendous opportunity with the assets that we pulled together over the last 24 months at Bally's. And we're only really just getting going in terms of realizing what they can do once combined. So thank you for your time, and I wish you a great rest of day.

And this does conclude today's program. Thank you for your participation. You may disconnect at any time.