Caesars Entertainment - Earnings Call - Q4 2015

Transcript

Speaker 0

Good day and welcome to the Eldorado Resorts Fourth Quarter Results Conference Call. Today's conference is being recorded. At this time I'd like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead sir.

Speaker 1

Thank you, Melissa, and good afternoon, everyone, and welcome to Eldorado Resorts twenty fifteen fourth quarter conference call. Joining us today from the company are Chairman and CEO, Gary Carano and President and Chief Financial Officer, Tom Reed. On today's call, we'll review the company's fourth quarter financial results and the company's key strategic priorities for 2016. We'll then open the call to participants for questions and answers. This afternoon, Eldorado Resorts issued a press release announcing its fourth quarter financial results for the period ended December 3135.

The release is available in the Investor Relations section of the company's website at www.eldoradoresorts.com. Before we get started, I'd like to remind everyone that this call is being recorded and a webcast replay will be available for ninety days, the details of which are included in today's press release. During our call, we may make certain forward looking statements about the company's performance. Such forward looking statements are not guarantees of future performance and therefore one should not place undue reliance on them. Forward looking statements are also subject to the inherent risks and uncertainties that could cause actual results to differ materially from those expressed.

For additional information concerning factors that could cause actual results to differ from those discussed in our forward looking statements, you should refer to the cautionary statements contained in our press release as well as the risk factors contained in the company's filings with the Securities and Exchange Commission. LD Water Resorts undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances that occur after today's call. Also during today's call, the company may discuss non GAAP financial measures as defined by the SEC Regulation G. The GAAP financial measures most directly comparable to each non GAAP financial measure discussed and the reconciliation of the differences between each non GAAP financial measure and any comparable GAAP financial measure can be found on the company's website at ww.eldoradoresorts.com by selecting the press release regarding the company's twenty fifteen fourth quarter financial results. Thank you for your patience with that.

And at this time, it's my pleasure to turn the call over to the company's Chairman and CEO, Gary Carano. Gary?

Speaker 2

Thank you, Joe, and welcome, everyone, joining us today on this afternoon's fourth quarter conference call and webcast. This afternoon, we reported fourth quarter combined net revenues of $214,300,000 and adjusted EBITDA of $32,200,000 These results marked a 21.1% year over year increase in adjusted EBITDA. For the full year, adjusted EBITDA increased 9.2% to 160,200,000 on essentially flat revenues and our consolidated adjusted EBITDA margin improved 170 basis points to 17.8%. In addition to the very strong fourth quarter results, the big news in the quarter was our acquisition of MGM's 50% interest in the Silver Legacy Resort Casino in Reno and all of the assets of the Circus Circus Reno in November. This acquisition, which followed our successful integration in 2015 of the MTR assets acquired in 2014, was a great finish for what was truly a transformation of year for the company as our portfolio has grown to seven properties in five well diverse markets featuring nearly 11,000 slot machines and VLTs and over 300 table games and almost 5,000 hotel rooms.

Combined with our Eldorado property, we now own the three leading casino properties in Downtown Reno, all of which are physically linked. And for those of you that haven't yet been to Reno or haven't been there in quite some time, there is a noticeable resurgence taking place in the Reno market and getting more steam every day. With our Tri Property Complex, we are in a great position to increase our market share in a growing market as we apply our operating strategies and focus on guest service, food and beverage and other non gaming amenities across the entire three property complex. We are very enthusiastic about the long term health of the market and for our prospects of a sustained period of growth in the Reno market. As expected, the Reno acquisition was immediately accretive to our free cash flow.

And as Tom will review shortly, in 2016, we will continue our practice of prudent growth focused property CapEx while managing our assets for margin improvements and paying down debt. Taking a step back and looking at the accomplishments in 2015, our success is a direct reflection of our approach to bringing senior management closer to the day to day property operations to directly oversee our strategies to provide excellence in player and customer service while deploying fiscal discipline. At the same time, we implemented a range of return focused property enhancements across the portfolio that have delivered better player experiences and resulted in increasing levels of players visiting our properties. These facility enhancements include the further evolution of Cider Downs in Columbus with the opening of Brew Brothers Restaurant and Microbrewery in the fourth quarter to a very, very positive reception. Brew Brothers is optimally situated at the property to attract attention and growing traffic flow.

In fact, the New Hampton Inn that is under construction and will open at Soda Downs in the fourth quarter will be directly adjacent to Brewer Brothers. To further drive traffic at the property, we are now adding a new larger smoking paddy with approximately 120 new VLTs and this should open in early June. Our already strong results at Sutter Downs have improved as a result of these changes and finished the year with a 10.6% increase in fourth quarter revenue resulting in a 10% increase in adjusted EBITDA for the quarter. Other twenty fifteen facility enhancements across our portfolio delivered similar positive outcomes in helping to improve player experiences and driving our financial performances. The $5,000,000 facility enhancement program at Presque Isle Downs is now complete as we have added a new casino center bar and improved high limit gaming area and upgraded the slot product and the layout of the entire casino floor.

Again, you've seen upticks in the gross gaming revenues at Presque Isle Downs again, and this property ended up the year strongly with a 4.2% increase in revenue leading to a 40% increase in adjusted EBITDA. In 2016 we plan to transform the current clubhouse at Presque Isle Downs into Brew Brothers, an exciting restaurant and bar amenity. At El Dorado Reno, over 200 rooms were completely remodeled last year. And at Shreveport, we completely remodeled the exterior of the building and our high limit slot room.

Speaker 3

At Mountaineer, as you know, we've

Speaker 2

been impacted by a smoking ban that went into effect at the beginning of the third quarter. To help offset this impact, we quickly opened a new smoking patio at the property and the performance of the gaming options on this patio have been very favorable to date, although not at the level to come close to offsetting the impact from the smoking ban. Complementing our CapEx program, the changes we've made in operating strategies in 2015 generated tremendous success for us. As one example, Presque Isle Downs, we reviewed the marketing strategy that was in place at the time we acquired the asset and determined that a change could deliver better results for the property. By focusing on the locals market, instead of chasing unprofitable business further away, we were able to deliver more profitable revenue growth.

These are the types of strategies that we firmly believe focused and remain focused on as we continue to pursue profitable revenue growth as importantly driving property level EBITDA margins higher. We have a tremendous opportunity to continue to grow our business and I thank all of our team members for dedicating themselves to 2015 being a truly transformative and successful year for Eldorado Resorts and building on the success this current year 2016. It was a great team effort to integrate the MTR assets into our property portfolio and to quickly apply our operating culture and disciplines across these properties. And we are deploying the same strategies to quickly and effectively integrate the new Reno assets into our operations and our culture. We are excited in 2016 as we begin the next stage of evolution for Eldorado Resorts and believe it will be another year of creating new value for our shareholders.

With that, I'll turn the call over to Tom to review our fourth quarter property level consolidated results and some additional details on our balance sheet and capital structure before we open the call to Q and A. Tom?

Speaker 3

Thanks, Gary. As Gary talked about, this was a big year for us, a lot of moving parts, a lot of moving parts running through the financials. So I want to take you through and try to simplify this. If we start in Reno, Reno is really the biggest story driving us right now in the fourth quarter on a combined basis as if we'd owned the Tri properties for the entire quarter, EBITDA was up 55% on a revenue increase of about 9%. Now we closed on this purchase just prior to Thanksgiving.

So there really was not a lot done operationally in terms of combining the properties in the fourth quarter we just reported. In the first quarter, we have started to combine operations and drive room rate through the Tri properties. Reno was the only market that had a negative weather comp thus far in 2016. We had snow in this January that we didn't have last year. Despite that weather impact, RevPAR grew through the first two months of the year over 10%.

And the strong results that you see in the fourth quarter have continued. March sets up well. There's a number of groups coming into the Reno market that should give us a strong March. And the bowlers arrive in April. The bowling calendar this year in 2015, total attendance for the bowlers was about 15,000.

We expect it to approach three times that in 2016. And that's virtually entirely captured in the second quarter. So Reno is off to had a very strong finish to 'fifteen is off to a very strong start in 'sixteen. We feel great about Reno. If you look at Scioto, the results were extraordinary post the opening of Brew Brothers, certainly exceeded our expectations.

Revenue for the quarter was up over 10% as was EBITDA. And you guys have seen the monthly revenue numbers being reported in January and February. That strength has continued into 2016. The smoking patio, the additional smoking patio will be done by June. And the Hampton Inn is well underway.

A lot of the First Floor is framed as we speak and we expect that to be open on time in the fourth quarter of this year. So we think we have, in addition to rolling the Brew Brothers through this year's results, adding the smoking patio, adding the hotel, we think we will maintain very strong operating momentum in Columbus. And importantly, we continue to gain share in that market and the market continues to grow. So a very bullish story in Columbus. Presque Isle has been gratifying to us.

We've talked quite a bit with all of you about shifting our focus from the Cleveland market to the local Erie market as Gary described. That really started to click in the fourth quarter with revenue up 4% and EBITDA up 43%. That strength has accelerated in 2016. February was noticeably strong. I would caution that the first quarter of last year in Erie was just horrible weather.

So we have a good weather comp in Erie this year that's going to make our already strong first quarter results look even better. As Gary said, we're under construction with transforming the clubhouse restaurant into the Brew Brothers, adding an escalator. We'd expect that to be done by May and we're very optimistic on how our customers will receive that addition to the property. Shreveport has been a low single digit grower throughout the year. The fourth quarter we were up almost 2% in revenue, 52% in EBITDA.

We've taken a lot of free play out of that market and have taken costs out as well. We have really not seen a material impact from the energy price declines in the local Shreveport market. There's some shifting of kind of where business comes from. But on the whole, Shreveport has continued to perform strongly into 2016, maintaining the momentum it had in the last half of twenty fifteen. So we feel good about Shreveport as well.

For the year, Shreveport did $29,000,000 of EBITDA. And I point you back to prior to Margaritaville opening in the Shreveport market, we were doing $33,000,000 of EBITDA. So we're getting back toward that level and Margaritaville increased capacity in the market by almost 20%. So we're excited about Shreveport as well. Mountaineer is the property in our portfolio that keeps us humble.

As strong as we feel about what we're doing in the rest of the properties, Mountaineer continues to be a challenge for us. The smoking ban will anniversary in July and we would expect results to grow from there. But fourth quarter revenue was down 18%, EBITDA was down almost 48% for the year. We did $21,000,000 of EBITDA. We would expect 2016 to be lower than 2015, but expect that we can ultimately defend in the low 20s of EBITDA once we're through all of the noise here.

We've got a challenge there in terms of shrinking the footprint to reflect the new business levels, But we're feeling better about getting our arms around that. And it will be nice once we've anniversaried the smoking ban in July. As we shift to the financial statements, one of the things that I would tell you, you see a very large net income number for us. There's two accounting items that drive that. One, we had a very low basis in our joint venture interest in the Silver Legacy.

When we acquired MGM's interest in Reno, we had to write up our value for the 50% interest that we own in Silver Legacy. A larger piece of the accounting gain is when we merged with MTR, we were in a position where we didn't generate a lot of pretax income. And so MTR brought with it a large amount of NOLs, nine figures. And because we weren't generating a lot of pretax income, the accounts have you take a valuation adjustment against those NOLs as if you're not going to be able to use them. Given the changes in our financial structure, our balance sheet and our results since the MTR merger, our accountants have directed us to reverse some of that valuation allowance and that flows through our income statement and leads to the $2 plus of EPS.

If you look at EPS and you want to strip out those impacts, we did about $07 per share positive in the fourth quarter of twenty fifteen versus a $0.24 loss last

Speaker 4

year.

Speaker 3

As you look at our balance sheet, we did tap the revolver to close the Reno transaction in November. We shelved the equity offering. Total debt at the end of the year ended at $891,000,000 a little bit more than that. EBITDA of 160,000,000 We were looking our target for leverage remains below five times. One of the reasons we were comfortable shelving the equity offering was our results had improved to the point where we were going to reach that five times level much sooner than we anticipated when we announced the transaction in July.

As we sit here today, we will be pretty close to five times levered at the end of this current quarter. And by the end of the year, our leverage should be in the low fours. Interest expense post refinancing transaction, cash interest is $45,000,000 We'll spend about $35,000,000 in maintenance CapEx, dollars 15,000,000 in project CapEx, which takes us to 50,000,000 Most of that $15,000,000 of projects CapEx will be spent in Reno on projects that will help us to further drive room rate. We do not expect to be a cash taxpayer this year on the federal level. We should we pay about $1,000,000 of state taxes.

We will start to be a marginal federal taxpayer next year in 2017. Our cost savings program, we have already exceeded the $10,000,000 target in the first three quarters of that program. Our savings to date have totaled about $11,500,000 So we think once we anniversary that at the end of this quarter, we're going to be at about $15,000,000 of savings. So this has really been an extraordinary period for the company over the last two years really starting with the MTR merger, then the refinancing and the Reno transaction. And we are very, very optimistic about where we sit today, off to a very strong start in 2016 and really think we have our balance sheet set up well and our operations moving in the right direction, we feel very, very bullish about 2016.

And with that, I would open it up to questions.

Speaker 0

And our first question will come from Chad Beynon with Macquarie.

Speaker 5

Hi guys. Thanks for taking my questions.

Speaker 3

Hi Chad, how are you?

Speaker 5

Doing well, thanks. Congrats on the quarter and obviously closing on the properties in Reno. I wanted to start with that. So clearly, you've shown in the results here with just a few days kind of under your belt that this made a lot of sense and you've operated well thus far. And you gave us some of the data points for 2016, Tom, and that was helpful.

Guys, could you maybe help us think about the RevPAR opportunity? As you said, plus 10% already in kind of a tough weather situation. So firstly, help us think about RevPAR opportunities given the cluster and kind of what you've already learned. And then secondly from a cost standpoint, Tom, don't believe the cost, the $15,000,000 was identified from the Tri properties. Could you give us some color in terms of some synergies there?

Thanks.

Speaker 3

Sure. So the on the RevPAR, as you look into 2016 for Reno, the swing factor in Reno for the Tri Properties tends to be bowling attendance. So generally speaking, we would expect this year occupancy to exceed twenty fifteen. I can tell you what we've been seeing early on. Resort fees have went up by an average of about $7 per night across the Tri properties.

And that's been absorbed. And we've been seeing rate increases depending on the weekend for anywhere from 10 to $30 a night across the Tri properties. Weekdays this time of year is more muted. There's some gains but not we're not really pushing that. As you know, this is a low period of time for Reno.

But, you know, you're looking at significant opportunity. You know, as we went into this, we weren't really sure. You know, I think we've been talking about $5 or $10 of rate. That seems to be based on our early indications, we should be able to clear that bar fairly easily. And every dollar at twenty fifteen occupancy rates is $1,000,000 of EBITDA.

Remember that these properties at their peak did over $100,000,000 of EBITDA. And in the last twelve months even with the move in Reno, we're tracking at about $50,000,000 So there's a lot of room for additional business in the Tri properties. On the cost side, we've not put a target out there. I would characterize it as in the mid single digit millions of dollars in terms of opportunities in combining the properties at senior management level. The much, much larger opportunity for us in Reno is to drive rate.

And what we're finding is, logically you would think that people that are willing to pay more for a room are willing to spend more in your restaurants. They're willing to spend more gambling. And that's what we're finding early on.

Speaker 5

Okay, thanks. And then moving to Ohio, at least out of the data that we've seen, so far year to date, that's been one of the stronger markets. Your property continues to benefit from what you're doing, obviously, from the Brew Brothers opening, but also just being in the right markets. A, what do you think the outlook is for Columbus given where all of our expectations were when the market first opened up to gaming and we're seeing good growth? And then secondly, margin improvement may become a little bit harder just because of the tax rate and where you guys already are this early into the opening.

Will you have the opportunity to drive margins higher if revenue comes through? And that's all for me. Thanks.

Speaker 3

Yes. So the answer on margins is certainly we can move the margins higher in Ohio. But it's you're looking at a property that's running depending on the quarter 32% to 35% margin. So your gains are going to be in the hundreds of basis points. It's not going to be an enormous jump in margin.

We're heartened, as I said, that the market continues to grow. We continue to take share. We think we have pieces that will add with the smoking patio and the hotel in addition to Brew Brothers rolling through the full year having opened in October where we can maintain this momentum. And really what happened was we were running kind of 5% revenue growth for the first nine point five, ten months of the year. We opened Brew Brothers and that revenue growth has been in the double digits since then and continues strong.

So we're very bullish on Columbus. When we took it over, it

Speaker 4

was

Speaker 3

doing $95,000,000 of EBITDA. We took it to $54,000,000 And we think there's still a lot of upside from here with what we're currently allowed to offer at the property. Great. Thank you very much.

Speaker 0

Our next question will come from James Kaler with Bank of America Merrill Lynch.

Speaker 4

Hey guys, how are doing?

Speaker 3

Hi James. Getting slower with your trigger finger James.

Speaker 4

I'll let the equity guys take over. I guess just first, just to circle back on Reno. Maybe you can just talk a little bit more about the market broadly in terms of, like, where the customers are coming, where you're seeing strength. Is it customers from Northern California that are coming back? Is it a local business?

Is it people that are flying in because of the value proposition? And I guess sort of what's the outlook for the various sort of sub sectors of the customers?

Speaker 2

James, this is Gary. I think you hit all three. Airlift in Reno is we are seeing some new lift announced Oakland, Houston, the Southern California market. Air service is on the uptick in Reno. The Bay Area, as we all know, economy in the Bay Area, Sacramento is very positive and robust so we see more visits from our existing customers plus new customers coming to Reno that we haven't seen ever.

Also, as you know, the locals market with the advent of Tesla, of the various tech companies switch coming to the Reno area. Unemployment is at an all time low in recent years. Housing starts are on the uptick. So the locals market of which downtown continues to improve and gain market share, the locals economy is very strong. So all three of those are major factors in what we think why the renal economy is doing so well.

Speaker 4

Very good. Where does the Tesla development, where does that stand? It's still in the relative early stages of construction, right?

Speaker 2

The building is, I haven't been to it, if you fly over it, it's substantially under construction. I would say probably three quarters done along with the other buildings that are being constructed out there. That location is approximately 12 miles east of Reno, for those of you that don't know where it's located.

Speaker 4

Very good. And then I guess maybe just broadening it out, just on the customer side you're broadening out to the rest of your markets. Certainly January looks pretty good. February is looking surprisingly good. I know there was an extra day, but I think even adjusting for that and adjusting for weather, it seems like strengthening.

Do you get the sense that there's been some underlying improvement in customer behavior? Or is it more of just calendar and weather comps?

Speaker 3

I think calendar was a big piece of it. Super Bowl was entirely housed in January versus February. That's part of your shift. Weather in terms of our portfolio, weather hurt us a bit in Reno but was net positive because it was better in the Northeast. Our customers have been getting progressively more willing to spend.

That's been going on for a very long time. And there hasn't really been a pickup in the pace of their willingness to spend. It's kind of been gradual month over month, quarter over quarter for quite a while now. So we're pleased with the strength in our customer base. And as you know, we operate all across the country and we're seeing it everywhere.

Speaker 4

Okay. And then I guess just the other area that I wanted to talk about was on the balance sheet. Obviously, you laid out sort of what the credit profile should look like and you should be in the low 4s by the end of 'sixteen. I guess two questions. What is sort of your mid cycle or longer term leverage target A?

And B, how are you thinking about acquisitions? Do you think you need time to digest what you've done? Are you still actively looking at things? Do you think there are opportunities? And what would be the balance of debt and equity if you did find an opportunity?

Speaker 3

Yes. So we are we want to continue to grow. We have made conscious decisions as we've put these deals together that we want to remain on the field. As you know, you can't control when the right opportunity comes up in M and A. You've just got to be prepared to act when it does.

So we are actively looking. We feel very good about where we are with the MTR portfolio in terms of integration. The Reno transaction is much simpler from an integration standpoint since we were running legacy for such a long time. We want to continue to acquire. We've now bought over $100,000,000 of regional gaming EBITDA in the last eighteen months at a sub seven times headline multiple and really an effective multiple in the fives when you look at what we've done with the properties post ownership.

We think we can continue to do that. We like that we have five markets that are all meaningful contributors to the pie, kind of $20,000,000 and up. So if we're getting into new markets, you should expect us to be looking to add markets that would contribute that level or greater to the company. If we're looking at small if we're adding smaller assets, we should either be telling you a story that we can run it from an existing property or it came as a group of properties with other assets that fit that profile. We recognize that any company does have a limit to management bandwidth.

So we don't want to spend our time on assets that are doing 5,000,000 or $6 or $8,000,000 of EBITDA. And in terms of leverage profile, we do not want to push leverage beyond 5.5 times for any transaction. And we say that because once you reach 5.5 times, you get to an inefficient place in the debt capital markets where the Fed regulated banks have difficulty participating in the term loan market, which was an extremely strong market for us to tap. So 5.5 times is what we would solve for on the wide end. But absent a deal, you should expect us to be paying down debt.

And we want to be less than five times what we recognize if there's not a deal in the future, we can get down into the threes or lower than that. But we think that before we reach that level, we would we will have found the next transaction and be rolling that in.

Speaker 4

Very good. Thank you guys.

Speaker 0

Our next question will come from Susan Berliner with JPMorgan. Hi, good afternoon.

Speaker 3

Hi, Susan.

Speaker 6

So just I guess one question if you can just help with Reno margins because I think it's moved around a little bit more than we had anticipated. So can you help I know there's some seasonality in it but we had actually expect it to come in higher. So I'm wondering if there's any other one offs in that?

Speaker 3

Reno margins? Yes. Fourth quarter, you're going to you're at a seasonal low. So basically, the bulk of your business in the fourth quarter is going to be Thanksgiving week in the last week of the year. And we've got a lot of operating leverage in both directions in Reno.

So when the markets are when you're in those seasonally slower periods, our margins are going to be lower than they are at the peak. And then remember that in MGM's number or I'm sorry, in Circus Circus's number, MGM had corporate overhead loaded into it that we did not take out in our reporting, but we will take out going forward.

Speaker 6

Okay, that's helpful. And then Tom, I guess we were surprised by the revolver draw but obviously surprised by more cash. So I guess going forward how should we think about a comfortable cash level for you?

Speaker 3

I wouldn't expect us to get much lower than $50,000,000 of cash on the balance sheet. For December 31, you're going to run at elevated levels across your properties for New Year's Eve. But that is an area where we're going to be more diligent this year in sweeping cash out of the properties and paying down the revolver.

Speaker 6

Okay, great. Thanks so much.

Speaker 0

And that does conclude our question and answer session at this time. I'd like to turn the conference over to Gary Carano, the Chairman's Chairman the company's Chairman and CEO for closing remarks.

Speaker 2

Thank you very much. And we thank everybody for joining us today and look forward to talking to you again in a few months. Thank you very much and have a great day. Thank you.