Caesars Entertainment's Management Presents at J.P. Morgan Gaming, Lodging, Restaurant & Leisure Management Access Forum (Transcript)

Mar. 8.13 | About: Caesars Entertainment (CZR)

Caesars Entertainment (NASDAQ:CZR)

March 08, 2013 12:45 pm ET

Executives

Donald A. Colvin - Chief Financial Officer and Executive Vice President

Eric Hession - Vice President of Finance and Treasurer

Analysts

Joseph Greff - JP Morgan Chase & Co, Research Division

Joseph Greff - JP Morgan Chase & Co, Research Division

All right. Good morning, everybody. We're excited to have with us this morning the team from Caesars Entertainment. We have Donald Colvin, Chief Financial Officer; and Eric Hession, Treasurer. As you guys know, this will be a Q&A fireside chat session. I'll lead off, and we will open it up importantly to your questions.

Question-and-Answer Session

Joseph Greff - JP Morgan Chase & Co, Research Division

It's been a busy time for Caesars. I guess it's always been a busy time for Caesars. Maybe what would be helpful to get us going is just review fundamentally how you're viewing the gaming markets that you operate in. Maybe we can look in sort of 3 silos or buckets, the Las Vegas Strip, the Atlantic City, Eastern region market and then everything in between.

Donald A. Colvin

Well, to start off, I'll take a quick stab at that. I mean, obviously, there were certain natural events, catastrophes that took place last year that had a bad impact on the fourth quarter results, particularly, Hurricane Sandy in Atlantic City. And so we certainly saw that, and we announced that it impacted the revenue in the $35 million range, impacted our EBITDA in the $25 million range. But that aside, hopefully, there'll be no more hurricanes, natural catastrophes this year. But we have had a few snowstorms in the same area that have been rather disruptive. I think it's fair to say that the year did not start strong for gaming companies in North America. The combination of like a 20-year decline in disposable consumer income, which was provoked by increased taxes, acceleration of certain payments into 2012 and delays in payments of tax refunds, all well-documented in internal memos from Walmart, et cetera, are indicative that it was a slow start. But that said and done, things have not really gotten much worse. I think it's fair to say we are not sitting here shaking in our shoes. And even if I look at the numbers and look forward, there's good reason we are optimistic, though certainly, our EBITDA bottom line results will improve the first quarter over the fourth quarter. And probably also, adjusting for Sandy, we should still see improvement. So clearly, that's depending upon a strong finish to the quarter. But these things are rather positive for that even if the weather here is not too positive this weekend. There's a huge weekend in Vegas. We've got the NASCAR here and bringing with it thousands -- tens of thousands of people. So there was an absence so far certain events in January, particularly the later Chinese New Year, and this took place in February. So we started to see reversal to what we would say with more of the expected mean in February. And as we go through the quarter, enter into March now, we have certainly seen things stabilizing. So we're not in a panic mode. And we, as a company, have launched a lot of initiatives to improve our performance, independent of what the macro gives us. Now when I say that, we're not counting on the macro to build us out, but we would rather avoid big hurricanes and natural catastrophes. When you look at the different market segments, clearly, we have mentioned Atlantic City has been badly hit by economic and natural elements, and I think that's well-publicized. I'd say the rest of the country, with the exception of Vegas, is kind of, I would classify it, hanging in there. And then on the Vegas Strip area, signs are relatively positive. And I think that would be my overview of where we stand. I don't know, Eric, would you like to add anything to that?

Eric Hession

Yes, I think that was a good overview. Donald, the only thing I would add, when you look at some of the particular markets, you can -- we've definitely taken some actions to control the expense base, in particular, from Atlantic City's perspective. Unfortunately, we were challenged because it's 5 years of consecutive revenue declines. But if you look back at the third quarter, we did show EBITDA growth year-over-year. And then in the fourth quarter, unfortunately, there was the hurricane, but we would have also shown growth. So we had a significant step-down in our cost bases on the Atlantic City market. And there are still more of that type of opportunity, maybe not to the same degree. But in terms of where we're focusing this year from an operating perspective, we continue to believe that there are enhanced efficiencies that we can take and continue to remove cost from the business, as Donald mentioned, so that in a flat economic environment, we're still able to perform reasonably well.

Joseph Greff - JP Morgan Chase & Co, Research Division

Great. Since you ended with New Jersey, Atlantic City, perhaps you can share with us your thoughts on the opportunity now that New Jersey online has been signed by the governor. How do you think about the size of the market? How do you think about market share? How do you think about set of costs and if you have a sense of any kind of timeline in which you can open?

Donald A. Colvin

Well, I think there's a lot of movement at the state level, and there's some new -- every day, we get a new announcement. So clearly, New Jersey has set the wheels in motion. And I think the thing on -- is there's still some uncertainty in how they will regulate this and how quickly they will have the rules and the structure in place. And will it be those that are already there with bricks and mortar establishments? Will they be allowed to take off first? Or will everyone be held back to the stocking blocks together? So there's some uncertainty. We are trying to value what the market could be. It's certainly difficult and that the range of numbers are all over the place. You're seeing numbers in the $5 billion, $6 billion range for poker more, depending on when. So there's a big variation. It certainly would appear to be a great opportunity. And the sooner we can hit the ground, the more we believe we can capture. So we think our social gaming strength is a big plus in this market, and our social gaming business is doing very well. So that's certainly a tremendous advantage in taking benefit from this opportunity, but it's still early days yet because we don't have a strong framework on what will be the regulatory environment. Will there be legal changes? What other states will join in? But clearly, it's an exciting time for this opportunity, and you can see the movement in the stock prices of many companies involved in this to see that investors are rightfully excited about this opportunity. But I think you have to give us a little bit more time to get more clarity from the authorities before we're able to start to put a more precise framework and a timeline on this opportunity.

Joseph Greff - JP Morgan Chase & Co, Research Division

One of the relatively new initiatives that you've talked about recently was the consideration of this into a strategic -- sorry, Caesars Growth Venture Partners, CGVP, just rolls off the tongue. Can you talk about the strategic rationale there? What other items are you considering to, I guess, implement? What is currently now just a consideration?

Donald A. Colvin

Well, this was part of a disclosure we made in relationship to the last bond offering of a few weeks ago, $1.5 billion offering that we made. We always believe it's important to be as transparent as possible. And one of the things that was motivating us, too, there were a lot of rumors on the street, that were thinking we were going to do some things we weren't actually planning to do. So part of this disclosure was to address the -- to set the record right. And Caesars Venture Partners is an interesting opportunity where we were transferring some unencumbered assets with growth opportunities into a new vehicle, and it was a way to attract new capital into our structure. And anyone here who has looked at our balance sheet can probably determine that some more capital is not a bad thing. And so it was a vehicle, and I personally think it was and still remains an excellent idea. There is no certainty that we will complete this. Many of the questions are around the transfer from the existing structure to the new structure of certain assets. And we labeled them, in particular, CIE, Planet Hollywood, in certain debt. And what I can assure everyone is that we are making sure this is a very robust process, and assets that are transferred will be valued independently by the independent directors of our board, advised by their own independent lawyers and advised by an independent investment bank. So it is a robust process put in place to ensure transparency in valuation and a reasonable market valuation. My own feeling is this would be a good thing for the company, as I say, more sources of capital, when you look at our balance sheet, is a positive, give us -- gives us more flexibility. It can allow us a vehicle to finance certain opportunities that our existing balance sheet may be challenged to finance. It can give us access to lower cost of capital. So it's a positive thing. But it's not certain, and we need to continue to work on this and figure out if this vehicle will be attractive enough to attract and to interest new investors. So it's still work in process, and we're hopeful that over the next 2 or 3 months, we'll be able to give some more certainty to this process. So I think that's basically my main observation again. Eric, have you got -- am I missing anything out here?

Eric Hession

No, I think that was a great summary. If you take a step back and look at our capital structures, you noted the -- we have certain limitations on our ability to pursue certain projects and to be able to maximize some of the opportunities we have. And through discussions, our sponsors indicated that they'd be interested in putting in additional equity. And so the objective was to try to find a structure where that could be facilitated, as well as to try to raise as much additional equity as possible without having significant dilution on the shares that we currently have outstanding. And I think this is a very creative and effective solution to be able to pursue that. And what we'll end up is that we'll have 2 vehicles: one that's essentially equity-financed, with the exception of the debt that comes over with Planet Hollywood; and the other that's got significantly more debt financing on its side. And so for various projects, one versus the other might be more appealing in terms of the relative cost of capital, the relative drain in terms of the time to cash flow from the investment period. And I think that will just allow us to be more dynamic and be able to potentially be more aggressive on some of the expansion opportunities that we see coming down the road.

Joseph Greff - JP Morgan Chase & Co, Research Division

How much EBITDA does CIE generate roughly?

Eric Hession

We haven't broken that out yet.

Joseph Greff - JP Morgan Chase & Co, Research Division

Yes, okay. But at some point, presuming you move forward with this, that is something that you would obviously disclose?

Eric Hession

Yes, it will be extremely clear in this document when we file it because we're transferring that asset into the venture and the other equity holders.

Joseph Greff - JP Morgan Chase & Co, Research Division

And specifically, it will be broken out or will it be lumped in with Planet Hollywood and other stuff or...

Eric Hession

I don't think we're to the point where that's been determined, but I think to make a investment decision, the equity holders are going to want to know what the breakdown is.

Donald A. Colvin

I think we believe that we'll be satisfied during this quarter, and we're happy to share that with you once we have a certainty that the process is going to move forward. And right now, it's still work in process. And once we can take it to the next stage, we will certainly have many questions specific to specific assets and on their EBITDA generation and the outlook for these assets, and we will endeavor to be as transparent as possible.

Joseph Greff - JP Morgan Chase & Co, Research Division

Great. Last year, you entered into an agreement with Penn National to sell your St. Louis casino. How do you view asset dispositions at this point going forward?

Donald A. Colvin

Well, I think that was a useful portfolio adjustment. We have many properties in North America, and we are always open to look at opportunistic portfolio adjustments. Clearly, we have a big presence in the strip here in Vegas, and we are very comfortable on the longer-term outlook. Unfortunately, we're not the only people to find attractive here. Last week, others are also seeing it very attractive, so they're kind of endorsing our big investments here in Vegas. But clearly, with the large range of assets that we have, there's always good opportunities to swap that portfolio and concentrate more in other areas. So we're certainly open to ideas. There are certain vehicles out there like REITs that certainly offered interesting arbitrage opportunities. So, I mean, I'd say that our door is always open to suggestions. I know that Eric is the recipient of most of the inbound calls, and I think your phone has been ringing quite a lot recently.

Eric Hession

Yes, that's right. Donald, when you have the 53 properties, there are a lot of people that are always interested in our assets. I think the one thing to keep in mind is that we do have some restrictions in terms of the use of the proceeds from our asset sales. And, in particular, if we were to sell an asset within the restricted group of CEOC, those proceeds have to be reinvested in the particular restricted group or used to buy back first lien debt at par. Both of those are good options. However, if we're selling assets at a multiple that would then require -- that would then imply a leveraging transaction. If we don't redeploy those funds efficiently or into a market where the investing community applies a higher value, then ultimately, we're not creating equity value and we're not creating growth. So I think a large scale disposition of that type would have to be something more strategic in nature rather than just purely for cash flow, unless the price was deemed to be outstanding.

Joseph Greff - JP Morgan Chase & Co, Research Division

Great. You have a very active development pipeline both here up the street, as well as regionally. Can you review some of those projects and what the return thresholds you envisioned for those projects?

Eric Hession

Sure. I'll kind of walk through them briefly. We just opened Cincinnati with -- as part of our Rock Ohio Caesars joint venture. We own 20% of the joint venture, and we also receive a management fee from the property. It opened earlier in the week, and we're very excited about the potential there. We have Thistledown also as part of that joint venture that should open in about 1.5 months, probably mid-May, pending regulatory approval and the finalization of our construction schedule. That will round out the 3 casinos that are part of that particular joint venture. From a development standpoint, also, for new properties, we have been awarded the license in Baltimore. We expect that we should be financing that shortly and begin construction as soon as we've resolved a few legal issues. And then we're also active in the Boston process with the Suffolk Downs property, where we think we have a great position, great team and a very good opportunity to win that license. When you look at the other activities that aren't necessarily new builds, they've really been focused here in Las Vegas. And if you look at our deployment of capital, that's really where it's been in the last, say, 1.5 years and where we'd expect the majority of that to be deployed this year and next year. And those are mainly focused on non-gaming-type activities that are non-capacity addition in terms of hotel or gaming product. And I'm specifically referring to the Linq project with the 200,000 square feet of retail space, as well as the wheel, the 550-foot wheel that's going to anchor the facility. We think that, that's really going to change the dynamic of what people do during the day when they come to Las Vegas. It will be a very affordable, fun environment where people can come visit, go to -- participate in great food, great beverage, great entertainment, also ride the wheel, which will also be very affordable. And then while they're there, they'll be part in our essential zones. So we have the properties to the left, to the right and across the street. And we would expect that, that's going to contribute to ancillary gaming, ancillary food and beverage. And, in particular, we believe that it will also provide a push to our ADRs, in particular, at The Quad and at the Flamingo, due to the proximity of the association with Linq. If you move to the -- down south, on the same side of the strip, we've also financed the Bill's redevelopment. That will consist of a 65,000-square-foot nightclub on the roof. It will be a fabulous location, unobstructed by the sun, so it will have the daytime component with pools. We're going to renovate all the hotel rooms, as well as the casino space. The club will be managed by Drai Management Group, and very shortly, we're going to announce a third-party brand that we'll use to flag the hotel. We're very excited about that as well. And then when you add on the capital that we've deployed at Caesars Palace, in particular, changing out all the restaurants, building the buffet, adding the ultra villas that we have in the Octavius Tower, we really feel like the Las Vegas market is, in particular, from our perspective, a great place to invest, and we'd expect to see the fruits of these investments once they come online in 2013 and '14.

Joseph Greff - JP Morgan Chase & Co, Research Division

What level of disruption are you seeing with the wheel construction and the Linq construction?

Donald A. Colvin

The -- all these operations have been disruptive, whether it be the investments in Caesars Palace we just opened in Nobu Tower and Restaurant. So that was disruptive because nothing was happening there. The Quad casino had been significantly disrupted by the building taking place. And we are in the middle of room renovation. I think what is exciting for us, taken on from Eric's remarks, is lots of this pipeline is just coming on now, and it wasn't in our 2012 numbers. And that is one of the strong underpinnings why I see that we are encouraged by our prospects, independent of the macro, provided it's not catastrophic, which will be a problem for many people. But we are driving our own initiatives. We're driving lots of efficiency in our cost structure, centralizing -- purchasing, centralizing many initiatives, labor productivity, et cetera, et cetera. And then as Eric mentioned, lots of these new initiatives are just coming online now. If you look at the timing, the Augustus Tower -- sorry, Octavius Tower was opened last year. We didn't have a full annualized Octavius Tower. Back in our buffet, the best #1 buffet in Vegas just opened at the end of last year. It's a great success. Nobu Tower opened this year. Nobu Restaurant opened this year. We are renovating the Bally's, one of the Bally's towers. It's in process now. It should be opened in the second half. We are projecting to renovate a large number of The Quad rooms to be ready for the end of the year when we have the social space opened, in conjunction with the biggest observation wheel in the world, and that will be coming online in the second half. The Quad Casino, I think we just opened up a part of that recently. The social space there, 220,000 square feet, will open up in the fourth quarter. So the great advantage of discussing all this here in Vegas is you can just stroll down the street to the center of the strip, which is just along -- half a mile along the road, and you can see the remarkable position that we occupy in that central strip area, starting off from Planet Hollywood, moving through all our different casinos, Paris, what will be the new Bill's, The Quad, the Flamingo, et cetera, on one side of the strip, and then the majestic Caesars Palace on the other side. And you can see how it all really ties together. So I would invite you to do that and also look at this observation wheel that Eric mentioned. I mean, this will be the biggest observation wheel in the world, and it stocks smack in the center of our properties. So we see lots of opportunities. We will not have the disruption at the end of the year that we now have that has certainly had a big negative impact on the revenue from The Quad and also the Flamingo and, say, maybe Harrah's to some extent, too. And clearly, the old Bill's is now closed, so we're not getting any revenue from that. So all of these elements, with a strict control on the cost, will really place us in a great position to exit the year with a much stronger cash flow than we exited last year.

Joseph Greff - JP Morgan Chase & Co, Research Division

Great. That's great. That might be a good segue. On a positive note, a good segue into some questions from the audience.

Unknown Analyst

Can you talk about the development pipeline? Clearly, you guys have a lot of good projects going, but given the leverage [indiscernible] and as it goes to more of the cash flow, should more of the cash flow go to paying down debt? Did you have -- these are the goals you need to leverage the company? If it is a goal, what's sort of plan [indiscernible]?

Donald A. Colvin

Well, that's an excellent question. I think they -- you got to have -- there's 2 elements of -- 3 different ways you can make these things happen. You can just say all cash goes to paying down debt, but I think that's not a very smart business decision because there are certainly great ROI opportunities if you just take what I think is fantastic opportunity, it's just renovating the rooms in The Quad. The type of ADR we get from these rooms now is not high. How should I put it modestly? And the F&B revenue we get from these rooms is next to negligible. And so an investment there is a tremendous opportunity for us to internally generate more revenue and more cash flow. So it's a combination of many different factors. We think we have to invest in the cash generation, revenue generation activity. We have to invest in keeping our costs down. So we're looking at cost-effective investments in our buildings, making them more energy-efficient, a low energy consumption, lights, many activities like that, which can have very high ROIs. And then also look at how you can create an equity story. And in combination with an equity story, you can then start to build up your equity value, which gives you more access to more sources of capital, which can then be used to positively transform the term of your debt, the rates on the debt and the absolute amount of the debt. So there's many different factors that all interplay together, and I think we've got a pretty good mixture of things. I mean, I'm a new guy coming to the company, and one of the things I find very encouraging is that the decisions from management have certainly placed us in a great position to generate organically more cash flow coming from the business. So you have to invest to make that happen, but the return on that investment, by giving us more access to the capital markets, particularly the equity side of the capital markets, gives us the key to start this positive transformation of our balance sheet. And we've already made a lot of improvements, especially with the amend and extend transactions of this year and last year. Hopefully, as we build up more of an equity story, we can use the new sources of finance to allow us access to cheaper sources of capital and paying down more principle in the debt as well.

Joseph Greff - JP Morgan Chase & Co, Research Division

How do you think about maintenance CapEx going forward? You're obviously reinvesting a lot in Las Vegas and making sure those properties are fresh. Outside of Las Vegas, what are your carrying costs on maintenance there? And how do you view them over the next couple of years?

Donald A. Colvin

We run a capital investment committee. It meets more or less every week, and we rank the opportunities that we have. I think most industries is fair to say that if you don't put any constraints on the business, there'll be tons of investments that have low returns. And one of the advantages of having some kind of process is you ration capital to the highest priority investments. But there is no specific number. We will do what is best within the constraints, depending what the market gives us. We will be investing between $1.1 billion and $1.2 billion this year. We said that on the conference call, which I think is a significant investment by any means. And in the regional markets, we continue to invest to upgrade our properties to refreshen the rooms, et cetera. But there's no specific number. We will do what makes best sense in light of the prevailing economic conditions and where we see the highest return. I don't know if you would add anything to that?

Eric Hession

Yes, the only thing I would add is that if you take a step back in the history of our capital spend, we certainly cut capital in the depths of the recession in 2009, '10, and then we kind of got back a little bit in '11, '12 even more. And we've said all along that there has been some deferred maintenance primarily that's been in Las Vegas, and it's been in the room renovations, mainly because they're the big, single project drivers of capital spend. We've renovated a number of rooms in 2012, some in '11. And then as we look into 2013, as Donald mentioned, that's really where we're focusing. So a big piece of that increase in the core CapEx is really focused in Las Vegas and it's on the rooms. We've also done a lot with some of the food and beverage that we consider generally maintenance, but in a lot of cases, it's growth, if we put in a new restaurant such as the ones we've done at Caesars that are step changes in terms of the appeal to the customer. So when we think about the CapEx, there's no question, we're catching up, and this year will be higher than you'd expect on a run rate basis.

Donald A. Colvin

You don't even need to go as far as Caesars to find a new restaurant. We have the Gordon Ramsay BurGR restaurant just across the road in Planet Hollywood, if your feet can't take you as far as Caesars.

Joseph Greff - JP Morgan Chase & Co, Research Division

Great. Next question from the audience? How are you thinking about reinvesting on your slot for -- across your portfolio?

Donald A. Colvin

We are -- a couple of things. We talked about cost reductions, and one of the things we're doing is we are converting a lot of operating leases to owned leases, a owned equipment for slot. So we are certainly see that as an opportunity to generate more cash flow. So that's one of the activities we're pursuing this year. And then we've also taken a pretty extensive analytic review of where the slot machines are positioned and seeing how we can optimize the positioning. And we're seeing some positive returns on that. And then we've also been refreshing a lot of our park of slot machines because it looks like the more modern ones, the newer machines has a higher yield than the older machines. So that's all part of an investment program for this year, the refreshing the park, optimizing its disposition on the gaming floor and doing some buyouts of leases to improve our cash flow.

Joseph Greff - JP Morgan Chase & Co, Research Division

Okay, great. All right. We're at our 40-minute slot. Thank you very much.

Donald A. Colvin

Thank you.

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