Bally’s Corporation (NYSE:BALY) Q3 2023 Earnings Call Transcript

Bally’s Corporation (NYSE:BALY) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Good day, and welcome to the Bally’s Corporation’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I’d now like to turn the call over to Charlie Diao, Senior Vice President, Finance and Corporate Treasurer. Please go ahead, sir.

Charlie Diao: Good morning, and thank you for joining us on today’s call. The earnings release and presentation that accompany this call are available on our website in the Investor Relations section at www.ballys.com. With me today are the Chairman of the Board, Soo Kim; our Chief Executive Officer, Robeson Reeves; Bally’s President, George Papanier; Marcus Glover, our Chief Financial Officer; and Jaymin Patel, our Vice Chairman of the Board. 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. Reconciliation 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 non-recurrent expenses and one-time costs. Today’s call is also being broadcast live on our Investors’ website and will be available for replay shortly after the completion of this call. Let me hand the call over to Robeson.

Robeson Reeves: Thank you, Charlie, and hello, everyone. We are pleased to present our third quarter results where we continue to grow market share with a tight control of costs. Our operations perform well in competitive and mature markets. We have solid operating performance across our three business segments with consolidated revenues rising by 9.4% and consolidated adjusted EBITDA increasing by 6.4% year-over-year. We also reached several significant project milestones, strengthening our foundation for 2024 and beyond. Notably, we achieved a successful soft launch of our Chicago Temporary Casino at the Medinah Temple on September 9, culminating in a formal ribbon-cutting ceremony on October 3. Concurrently, we completed our Kansas City property transformation and redevelopment also in September within budget.

We see both investments in our C&R segment paying off in 2024 in growth and profit contribution as these investments bear fruit. Our Bally’s International Interactive division continues its impressive operating momentum in the U.K., where we also successfully launched the Bally’s branded iCasino app. We believe that Bally’s brand will drive revenue and profit growth and build brand equity in the U.K. market. In North America Interactive, we rolled out the new Bally Bet OSB app in four states and five retail locations on the Kambi and White Hat platforms. By year-end, our goal is for the rollout of our Bally Bet app in at least seven states in North America. Turning now to our operating fundamentals, I’ll first turn it to George to discuss our core Casinos & Resorts performance.

George Papanier: Thank you, Robeson. Well, we’ve had a very productive third quarter in Casino & Resorts, successfully opening a temporary casino at the Medinah Temple in Chicago, and we’ve delivered that project inside of budget, including a three-month delay due to regulatory sign-off. We also took over the concession to operate the Bally’s Golf Links at Ferry Point in the Bronx. While for competitive reasons we are limited in the information that we can share today, we can disclose that the golf course operates profitably from EBITDA and cash flow perspectives. Further details regarding our plans for the site will be disclosed in the future. The Casino & Resorts customer base remained resilient in the quarter as revenues increased 9.3% year-over-year, which includes a full quarter contribution from the Trop and approximately three weeks from the Chicago Temp.

Our portfolio is well-positioned, and we continue to take market share in our respective markets, which can be seen in the state’s monthly gaming data, and we outperformed in most states. Our Rhode Island and Kansas City casinos were once again revenue standouts, while Black Hawk and Quad Cities were also strong. While we are closely monitoring customer spending, outside of the three very specific instances, we haven’t seen major shifts in behavior. We did see a shift in behavior at the Trop in Las Vegas, at Bally’s Atlantic City, both destination markets, which are hyper-competitive. Additionally, as highlighted last quarter, Evansville continues to be impacted by newer HHR facilities across the Kentucky border. My team and I continue to take proactive measures to preserve our margins and profit performance across the portfolio.

From a marketing perspective, our efforts will be to continue finding ways to motivate our higher-tier customer segment, a strategy which has proven to yield solid results over time. As for the Trop, the next milestone is Major League Baseball’s vote on the A’s relocation plans scheduled for mid-November. We will hold off on announcement of any reinvestment plans until after the outcome is known. But we are excited about the unique value-enhancing development project and the strategic opportunities that it presents for our company. Turning to the Chicago Temp, we are seeing increasing volumes on a week-over-week basis, while operating only 20 hours per day in a soft opening environment. We expect to start operating 24 hours per day soon, pending regulatory approval.

In conjunction, we plan to implement our core marketing campaign to increase frequency of visits that will capitalize on a rapidly growing database. With the continued ramping of this property, we remain confident in our financial expectations to generate approximately $50 million-plus of annual adjusted EBITDAR. Importantly, last week we received approval from the IGB to operate the Temp for an additional year, or three years total until September 2026, when we expect our permanent casino to be completed for opening. Regarding the Chicago permanent facility, by the end of 2023, we will have accounted for the majority of the soft costs outlined in the budget shared when the project was announced in 2022. We expect construction of the permanent facility to commence in the second half of 2024, once the tribute company [Technical Difficulty] the premises in July, with an anticipated property opening in September of 2026.

As for financing the hard costs of the permanent facility, which under the host community agreement calls for a spending of $1.34 billion, we will communicate our plans once detailed construction plans are finalized and financing commitments are in place. It’s important to note that the hard costs in 2024 are earmarked for demolition and site preparation, which represents finite expenses. As a result, our capital requirements for the Chicago permanent casino project in 2024 are limited, with the bulk of construction expenses expected to ramp in 2025 and 2026. Our core portfolio’s near-term CapEx cycle has peaked as our growth projects have reached completion, and we are now focused on driving increased profitability in our core casinos in 2024, ramping up the Chicago Temp, communicating a concrete timeline for the Trop to bring clarity to our employees, guests, and our company, and preparing to submit our bid to operate a casino in New York at our Ferry Point location.

Now I’ll turn it back to Robeson.

Robeson Reeves: Thank you, George. Bally’s International Interactive continues to show strength, particularly in the U.K., where net revenues increased by an impressive 13.1% year-over-year in our reported financial results. We continue to gain incremental market share due to our timely adaptations in response to regulatory policy changes in the U.K. market. Our strategy and operating formula of increasing actives, average revenue per user and first-time depositors while reducing cost per acquisition continues to yield positive results. In North America Interactive, we remain focused on expanding our iGaming footprint and maintain positive momentum. Our share in New Jersey continues to gradually increase, and we remain on track to achieve our medium-term market share goal of 6% to 8%.

Early results in Pennsylvania remain encouraging since our launch in June 2023. Ontario remains an opportunity as we build our player database. Overall, our iGaming business is already generating positive returns, and we’re optimistic of its continued growth and contribution. We are all hands on deck in preparing for market launch of iGaming in Rhode Island in March 2024, and look forward to introducing iGaming in a state where we have a deep database and significant brand presence. We are committed to growing our Bally Bet OSB business with prudent financial approaches and disciplined marketing investments, given our belief that OSB is the path to iGaming. In terms of our near-term outlook, as you saw in our press release, we have updated our full year 2023 adjusted EBITDAR guidance range for the remainder of the year.

This reflects the later opening of our Chicago Temporary facility and an expected sustained pullback for the Trop that the A’s project ramps up. We’re also considering potential foreign exchange headwinds at Bally’s International Interactive despite continued operating momentum due to the recent strengthening of the U.S. dollar. Our three operating segments are well positioned heading into 2024 and will be focused on execution to realize a future that is very bright. In Casinos & Resorts, we’ll benefit from a full year of growth CapEx investment projects that we completed in 2023 at Twin Rivers and Kansas City. Next, as George pointed out, we are beginning to build momentum in Chicago as we recently received regulatory approvals to expand our marketing initiatives.

Consumer feedback from our patrons has been positive, and we have begun to build and leverage our database. Further, we should continue to gradually benefit from a full year of the smoking ban reversal in Shreveport. Recall, revenue fell significantly when the smoking ban was first implemented and we are now starting to build that back. We expect International Interactive’s top line to remain solid on a constant currency basis driven by robust underlying market share trends in the U.K. iCasino and the launch of Bally’s OSB offering in the U.K. in 2024. In Asia, we continue to look for market stabilization after several months of increased volatility and [Technical Difficulty]. We’ve implemented changes to tighten marketing investment and are working diligently to realize financial efficacy from these operations.

In North America Interactive, we’re gearing up to launch iGaming in Rhode Island alongside the continued rollout of the Bally Bet OSB app in multiple jurisdictions. In iGaming across New Jersey, Pennsylvania and Ontario, GGR is annualizing at $100 million with 18 months of operations in New Jersey and more recent launches in PA and Ontario. We have the experience to take share in mature markets. Although some additional costs are anticipated in half one ’24, operations are expected to improve financially as we continue to grow and scale the North America Interactive business. To this point, we have initiated a reduction of our tech organization as we will be shifting Hat PAM in North America to White Hat for both iGaming and OSB given our successful experience with it to date.

This is a major step towards our goal of creating a seamless customer experience and will also ensure better operational focus as our North America teams won’t have to deal with the complexity of managing two separate customer support processes across our iGaming and Bally Bet platforms. Given the revenue share nature of the White Hat agreement, we expect success-based scaling of certain operating costs, which is an important consideration when we drive towards a profitable North America business. We will lose $60 million at the EBITDA level this year, $30 million next year, and expect to break even in 2025. Turning to corporate. We’re working on centralizing support functions and shared services, procurement and supply chain consolidation and implementing best practices to manage our cost structure and realize improved operating efficiencies.

Earnings aside, I’d like to dig deeper into our growth pipeline and provide updates on our announced strategic development projects. As previously indicated, and as George just spoke to, we are highly anticipating next steps in terms of our Oakland A’s relocation plans to our Las Vegas Tropicana site. MLB’s vote is scheduled for November. The strategic opportunities this development presents for our company are highly compelling and we’re excited by the value that this transaction has created for us. Remember we bought the Trop for $150 million in cash with a 50-year lease. Now we have the A’s investing $1.5 billion, including $380 million of public funds into this land, which although we have some short-term pain, this is an extremely valuable asset.

Regarding the Chicago permanent facility, as George has also mentioned, we are continuing to make progress with our plans and expect the construction process to commence in the second half of ’24 with an anticipated September 2026 opening. I also want to reiterate that our obligations in 2024 are limited primarily to the demo [Technical Difficulty] preparation, which have finite costs. We have to meet our host community agreement for the permanent facility, which means we will spend a total of $1.34 billion on project costs. We have $1.2 billion remaining, the bulk of which is expected to ramp in 2025 and 2026. We will remain extremely tight with costs and scope as we will be spending to that number. We will also be communicating additional details about our plans regarding Bally’s Golf Links at Ferry Point as we prepare a formal bid under the New York Request for Applications process, which is ongoing.

Remember, everyone wants New York, but we are the only one with local community support behind us. Regarding Bally’s International Interactive in the U.K. specifically, we continue to gain incremental share and are excited for the rollout of online sports betting in 2024. International Interactive segment margins remain robust, having stabilized in the low to mid-30%s, and we’re confident in our ability to sustain or exceed these levels. This includes in our plans to reinvest in our core U.K. and Asia businesses as we pursue selective growth opportunities in international markets that fit our return criteria. Turning back to North America Interactive. We’re eagerly anticipating our iGaming launch in Rhode Island, which holds the potential to be transformative as a development for us, along with the continued rollout of Bally Bet online sports betting across many states through 2024.

Following the Bally Bet rollout, we hope to leverage a common technology platform to cross-sell between our retail and digital businesses. This in turn supports our vision of becoming a premier full-service multifaceted company in the Casinos & Resorts, iGaming, and OSB sectors, allowing us to leverage the Bally’s brand in a converged marketplace. In summary, our goals heading into 2024 encompass building upon the momentum of our Chicago Temporary Casino, growing North America Interactive iGaming market share profitably, rolling out Bally Bet across multiple states, and growing the Bally’s brand globally, including launching OSB in the U.K. market where we have a scaled market presence and a deep database of patrons. In addition to our growth initiatives, it is important to underscore that our team remains committed to increasing revenues and adjusted EBITDA for our core Casinos & Resorts and Bally’s International segments.

As discussed earlier this year, our core portfolio’s near-term CapEx cycle has peaked and expansion projects have reached completion. Before handing to Marcus, I would like to reiterate how pleased I am with what the team is doing for me. Marcus, over to you, and thank you all again.

Marcus Glover: Thanks, Robeson. As Robeson pointed out, our immediate focus remains closing out a strong 2023, which saw our company grow and evolve as we executed our growth initiatives. Moving into 2024, we are equally excited as the foundational elements are in place to foster continued growth across all three of our operating business segments. We remain committed to streamlining and enhancing our operational and financial performance while managing our development pipeline. Although our company is young, our outlook is promising, and we’re excited about the many opportunities that lie ahead. For the third quarter, we generated approximately $633 million, which is an increase of 9% year-on-year, and adjusted EBITDAR of $173 million, which is an increase of 6% year-on-year, after accounting for rent expense of $32 million.

For our cash-generating segments of Casino & Resorts and International Interactives, our adjusted EBITDAR margin was 33% and 35%, respectively. Our Casino & Resorts portfolio demonstrated solid top-line results characterized by year-over-year organic growth in Rhode Island, Kansas City, Black Hawk, and Quad Cities, which helped offset continue [Technical Difficulty] in Atlantic City, Evansville, and Tropicana. As George mentioned during his earlier commentary, we made the decision not to implement operational changes at the Tropicana until after Major League Baseball votes on the A’s relocation plans. As communicated before, Chicago experienced a several-week opening delay. We are working diligently on the revenue ramp, having recently begun marketing to our database, which is building nicely.

Admissions over the first 30 days of the soft launch were very impressive at 157,000 admissions. Overall, Casino & Resorts reported revenues of $359 million, a 9% year-over-year increase, and $180 million of adjusted EBITDAR, including a full quarter contribution from the Tropicana and three weeks from the Chicago Temp. Excluding Atlantic City, Tropicana, and the Chicago Temp, EBITDAR margins were solid 38% for the core portfolio. Including these properties, EBITDAR margins were approximately 33%. Valley’s International Interactive generated revenues of $244 million, which is an increase of 7% year-on-year, and $85 million of adjusted EBITDAR, 12% increase year-on-year, at a 35% margin. Earnings were once again driven by an impressive strength in the UK business, which was a robust 13% for the quarter, that’s in United States dollar, a result of our content and marketing optimization continuation.

Looking ahead, as we previously discussed, we are committed to continuing investment in our business. We see potential for responsible growth and extending the reach of the Bally’s brand and the Bally’s Bet OSB capabilities. We took our first step this past quarter, and we launched the Bally’s brand in the U.K. Our long-term target for the Bally’s International Interactive segment’s adjusted EBITDAR margin remains north of 30%. North America Interactive generated revenues of $30 million and a negative $18 million of adjusted EBITDAR. In iGaming, we gained incremental market share in New Jersey. Pennsylvania has performed well since our June launch, and we are building the business prudently. The early results have increased our excitement for the upcoming launch of iGaming in Rhode Island, where we will be the sole provider.

Turning to Bally Bet, we successfully rolled out our new app in four states and launched sports in five retail locations. Our marketing efforts will be measured as we look at OSB as a funnel for future iGaming growth opportunities, and as an additional way to reach our core Casino & Resorts customers. The U.S. domestic rollout schedule remains full heading through the fourth quarter, and will be live with OSB in the U.K. in 2024. As Robeson mentioned earlier, we remain laser-focused on managing cost effectively. We will grow the business prudently, and as we more fully transition to a variable cost model, now including consolidating our U.S. PAM onto the White Hat platform for iGaming and Bally Bet. This will lead to a better user experience for our customers, as well as create internal operating efficiencies.

Corporate expenses for the third quarter came in at just under $13 million. As we mentioned last quarter, we are managing our controllables and remain focused on continuing our integration efforts and centralizing resources to support our operating segments where advantageous. We are confident in our expense management measures moving forward. Turning to guidance. On an operating basis, we are keeping a close eye on consumer spending patterns and general economic conditions for impacts to our core Casino & Resorts customers. Should our indicators demonstrate headwinds, we will act swiftly and engage in actions to minimize profitability exposure and maintain our strong margin profile. With that said, for the company overall, we are tweaking our fourth quarter outlook.

As you saw in our press release, our updated full year revenue forecast is $2.4 billion to $2.5 billion of revenue, and our adjusted EBITDAR guidance range is $640 million to $655 million. These changes contemplate the delayed opening of our Chicago Temp facility, the decision not to reinvest in the Tropicana, and considers the strengthening of the U.S. dollar impact in our FX exposure. While we don’t take this change to our guidance lightly, our confidence heading into 2024 remains high. This begins with the full year benefits of our growth projects completed in 2023 at Twin River in Kansas City and the ramp of our database at the Chicago Temp facility within Casino & Resorts. We will also benefit from a full year of smoking ban reversal in Shreveport.

Additionally, we expect Bally’s International Interactive to remain strong on an operating basis, particularly in the U.K. where we are taking share and our North America Interactive loss is expected to be reduced by half. We are maintaining our 2023 capital expenditure guidance of $160 million, excluding Chicago in aggregate, as we complete our CapEx expansion cycle. At the quarter-end, shares outstanding were approximately 45.6 million, and we have incremental warrants options and other dilution of approximately 13.1 million shares. 58.7 million shares outstanding is the right way to look at our capital structure. We have more than $178 million of cash on our balance sheet and $3.3 billion of net debt. I reiterate my enthusiasm for 2024 and beyond.

It is quite exciting to be part of the Bally’s team at such an important point along our journey. We will continue to grow with approximately $650 million of EBITDAR, accounting for rent of $126 million, roughly interest expense of about $265 million, CapEx on a run rate of about $120 million a year. Exclusive of all development costs and projects, we are in the range of generating a robust pre-tax cash flow of between $150 million to $175 million in our core business. The pipeline of projects ahead of us in all three of our operating segments is highly compelling and aligned with our strategic direction and focus on growth. Casino & Resort development and expansion anchored by our Chicago project, the enhanced value we created in Las Vegas and the exploration of the New York RFA, our domestic iGaming growth driven by New Jersey, Pennsylvania and the expected launch in Rhode Island, the strength in our Bally’s International Interactive business, particularly in the U.K. where we continue to gain shares, and continued focus on our balance sheet management addressing the untapped real estate value in our portfolio.

Thank you all for listening, and now we will open up to Q&A. Operator, I’ll pass it back over to you.

Operator: Thank you, sir. [Operator Instructions] Our first question comes from Barry Jonas, Truist Securities.

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Q&A Session

Barry Jonas: Hey, guys, good morning. Can you maybe walk us through the path or ramp you expect in Chicago for the rest of this year and next year? Thanks.

Robeson Reeves: Hey, Barry. I’ll let George start off with that question.

George Papanier: Hey, Barry, how you doing? So, Barry, let me just first start with that, we delivered the construction of Chicago Temp early, and we waited for regulatory approval, and then we opened it inside of the budget. So, we’re effectively in a soft opening environment and only operating 20 hours per day. We anticipate IGB approval to go to 24 hours. Hopefully, we see that by year-end. Our business is ramping. We’re showing week-over-week growth, and our [database] (ph) is going from 0 to 27,000 customers in under two months. And they’ve not been marketed to at this point because marketing requires IGB approval as well. So, we submitted a pretty robust marketing plan to the IGB and have received approval to launch for the first week in November.

So early GDR results reflect strong table games business already. We already rank second in the state in total win, and that’s growing rapidly, and that’s without any marketing associated with it. So, I expect to continue to ramp this business for the first six months of operations, and based on early results and how positive the customers reacted to the property, I’m feeling pretty good about achieving an annual run rate of about $50 million plus in EBITDAR.

Barry Jonas: Got it. And do you think — I mean, you previously talked about $50 million to $60 million for 2024. Is that still possible? I think that was communicated last quarter. Is that still a reasonable outcome?

George Papanier: Yeah, after the first quarter, we should be on an annual rate of $50 million plus.

Operator: Our next question comes from Chad Beynon, Macquarie.

Chad Beynon: Good morning. Thanks for taking my question. I wanted to ask about the guidance. I understand you kind of kept the same bracket from a revenue perspective, bringing it down by $100 million. But in terms of the $2.4 billion, kind of the low end for the year, that would imply year-over-year negative growth versus Q4 ’22. Since then, you’ve added Trop, you’ve added the Temp, you have some projects, FX is actually a positive from a year-over-year perspective. So, it sounds like — the quarter actually went pretty well. I understand the Temp was a little bit late in terms of opening, but can you just kind of help us think of a scenario where revenues would come in at that low end, or was that just kind of a simple bracket down, and that might be very conservative? Thank you.

Marcus Glover: Yeah, Chad, a couple of things, and then I’ll allow my colleagues to opine as appropriate. A couple of things come into play. One is obviously the FX exposure we have on some of the currency, but also if you think about where we are in terms of some of our respective markets, there are some competitive pressures we’re experiencing that we’re going to market our way through where it makes sense. And so that has some implication. But you also got to take into account a little bit of what’s going on with Tropicana, where we had it last year for a full quarter with some of the noise around Oakland A’s and the implications of what we may do with that property and the lack of investment until we find out the Oakland A’s announcement.

There could be a little bit of pressure there, but we feel pretty confident that there’s some opportunity to minimize that impact on the lower end and make it more so toward the middle or the high end of that range. And so we still feel pretty confident we have some items at our disposal to minimize that impact.

Chad Beynon: Okay. That’s helpful. Appreciate that. And then just in terms of capital allocation, good free cash flow kind of forecast for next year on the core business, and it sounds like a lot of the permanent Chicago CapEx will be in ’25, ’26. Is there availability to buy back some stock here given the dislocation in the market, or is the cash on hand kind of earmarked for kind of standard cage cash, working capital, and some of the near-term things? Thank you.

Marcus Glover: Chad, best way I’ll answer that is, look, we’re always — our free cash that we have, we’re always assessing the best use of that cash. We understand where the market is pricing our equity right now, and it’s a very attractive price.

Operator: Our next question comes from Dan Politzer, Wells Fargo.

Dan Politzer: So, one of the areas we get the most inbounds on is obviously Chicago, and I think you guys laid out some — had some comments on financing kind of TBD, but if there’s any way to just kind of help us think about or frame potential avenues that might be possible where you could maybe access additional capital? And just as we think about that CapEx ramp, it sounds like second half of 2024 and 2025 is the bulk of that remaining $1.2 billion of spend. So as you think about the opening, is there any way to do a phased opening or kind of have that not be so chunky in terms of that relatively short timeframe?

Marcus Glover: Yes, I’m going to let Charlie Diao to answer that on our team.

Charlie Diao: As you know, we have a $500 million facility with [Luval] (ph) on the land lease, of which $200 million was to make the purchase of the land, and $300 million are available to draw. Obviously, we have not announced this yet relative to our construction — our path to construction financing, but be assured that’s what we’re focused on. When we have something to announce, we shall, and you can expect a substantial portion of the rest of the $1.2 billion will be — there’s $300 million from Luval, and there’ll be some significant amount for construction financing. So Luval facility is only for the land, so the security for construction and progress would be for the construction lender.

Dan Politzer: And just pivoting, in terms of the regional portfolio, this is probably a question for George. As it relates to margins, I think you guys called out possible uptake in marketing spend at some of your properties, just given the competitive pressures. How do you think about, broadly, your OpEx structure as it relates not just to marketing, but maybe some of the other pressures that some of your peers have called out, whether it’s labor, insurance, utilities, et cetera?

George Papanier: Well, first, let me just tell you that we’re very careful with our fixed costs. We focus on variable costs to meet demand. So, when you look at it without Chicago [AC] (ph) and Trop, we’re over 38% when comparing the last year total in our total portfolio, and that’s — remember the Trop was acquired mid-Q3. So any additions to staff or in variable positions and — are targeted for revenue generation opportunities, which is really the way we measure it is based on the return on that investment. So we know how to operate, and we’ve been able to sustain margins. As a matter of fact, we’ve improved 10 basis points in margins from Q2 without Chicago and Trop. So, other than labor costs, we’re still seeing the market being pretty rational from a marketing perspective, although in some markets they’re starting to become a little bit more aggressive. But we really focus on spending for return.