Caesars Acquisition Company's (CACQ) CEO Mitch Garber on Q2 2014 Results - Earnings Call Transcript

Aug.12.14 | About: Caesars Acquisition (CACQ)

Caesars Acquisition Company (NASDAQ:CACQ)

Q2 2014 Earnings Conference Call

August 11, 2014 08:30 AM ET

Executives

Joyce Thomas - IR

Mitch Garber - President and CEO

Craig Abrahams - CFO

Analysts

Kevin Quinn - Goldman Sachs

Susan Berliner - JPMorgan

Adam Krejcik with Eilers Research

James Keller - Bank of America

William Frohnhoefer - BTIG

Operator

Good morning, welcome to today’s conference Caesars Entertainment Corporation 2Q 2014 Conference Call. My name is Tiffany and I will be facilitating the audio portion of today’s interactive broadcast. All lines have been placed on mute to prevent any background noise. For those of you on the stream please take note of the options available in your event console. During the question-and-answer period, enter your questions into the Q&A field of your event console and click submit. (Operator Instructions). Please note this event also features streaming audio, which will allow you to listen to the show through your PC speakers.

At this time I would like to turn the show over to your host Joyce Thomas.

Joyce Thomas

Good morning and welcome to the Caesars Acquisition Company, not Caesars Entertainment Corporation conference call where we will discuss second quarter 2013 results for Caesars Growth Partners under the [indiscernible].

Joining me today from Caesars Acquisition Company are Mitch Garber, Chief Executive Officer and Craig Abrahams, Chief Financial Officer. Following the prepared remarks we will turn the call over for your questions. A copy of our press release and replay of this conference call will be available in the investor relations section of our Web site at caesarsacquisitioncompany.com.

Before I turn the call over to Mitch, I would like to call your attention to the following information. The Safe Harbor disclaimer in our public documents covers this call and the simultaneous live webcast at caesarsacquisitioncompany.com. The forward-looking statements made during this conference call reflect the opinion of management as of the date of this call. There are risks and uncertainties with such statements, which are detailed in our filings with the SEC.

Please be advised that the developments subsequent to this call are likely to cause these statements to become outdated with the passage of time. We do not intend, however, to update the information provided today prior to our next quarterly conference call. Further, today, we are reporting on second quarter first half 2014 results. These results are not necessarily indicative of results in future periods.

Also please note that prior to this call we furnished a Form 8-K of this morning’s press release to the SEC. Adjusted EBITDA is a non-GAAP financial measure. Reconciliations of net income and loss to adjusted EBITDA can be found in our press release. This call, the webcast and its replay are the property of Caesars Acquisition Company. It is not for rebroadcast or use by any other party without the prior written consent of Caesars Acquisition Company. If you do not agree with these terms, please disconnect now. By remaining on the line, you agree to be bound by these terms.

I would now like to turn the call over to our CEO, Mitch Garber.

Mitch Garber

Thank you Joyce and welcome to today’s call. It’s worth nothing that I am in our offices in Tel Aviv today with Playtika’s CFO, Arik Sandler. Caesars Growth Partners reported strong operating performance in the second quarter. Revenue and adjusted EBITDA were up 31.8% and 19.1% year-over-year respectively, driven by robust growth at Caesars Interactive Entertainment and consistent results in the casino properties and development segment.

CIE’s performance was driven primarily by excellent results in our social and mobile games business. CGP’s casino portfolio which includes four Las Vegas properties benefited from a good quarter and the successful opening of the Cromwell. In May we completed the purchase of the Cromwell, The Quad, Bally's Las Vegas and Harrah's New Orleans. We’re excited about the addition of these assets to our Company and we’re exploring several capital improvement projects throughout the overall portfolio.

In Las Vegas we are making good progress on the conversion and rebranding of the Quad to the LINQ Hotel & Casino. The LINQ Hotel occupies a critical location at the entrance to The LINQ Promenade and its transformation will create a property that complements the rest of the LINQ experience. We anticipate Phase 1 of the renovations which includes 1,000 rooms, the lobby and some retail to be completed in the fourth quarter with the remainder expected in the first half of next year.

The property will have 2,256 new rooms in suites, all with floor to ceiling windows and views of the strip High Roller a completely renovated lobby area with a signature bar, an all-new pool area, spa and a variety of retail offerings. The LINQ Hotel will also feature the 21,000 square foot vortex roof deck, a multipurpose venue for weddings, fashion shows, live concerts and more. We expect these enhancements to drive improved operating performance at the property.

The Cromwell situated at the busiest intersection on the Las Vegas strip celebrated a successful grand opening on May 21st, followed by the debut of Drai's Beach Club and Night Club during Memorial Day weekend and the opening of Giada's Restaurant on June 3rd. Drai's and Giada have received extremely positive early feedback. Giada generated rave reviews and enough demand to begin serving lunch which commenced in mid-July.

Drai's produced significant buzz locally and across the U.S. by industry reporters, visitors and guests. It has already made its mark as the hot new club in town with an ideal location, one of a kind roof top access and amazing view of the strip.

In terms of new projects we’re just a few weeks away from opening the Horseshoe Baltimore, which is on schedule and on budget. The property is located in close proximity for the most densely populated areas of Baltimore and is blocks from Camden Yards and Raven Stadium. We believe our location, our city integrated approach and the approximately 1 million total reward members in the surrounding Baltimore DC metro area will give the property a strong competitive advantage over the competition in the vicinity.

We expect to capitalize on the significant tours in the Downtown area in addition to the strong base of local guests. Also on the development front CGP submitted its application at the end of June to New York State Gaming Facility Location Board for a license to develop Caesars New York. The proposed project is an $880 million luxury casino resort in Woodbury, New York. Caesars Entertainment would be the management of the property. We are excited about this opportunity, which exemplifies the type of high growth project, that CGP was established to pursue.

Turning to the Interactive Entertainment segment, the social and mobile games business continues to exhibit strong performance. We generated record results from focusing on monetization, releasing new game content and increasing distribution. In our real money gaming business, we intend to continue to capitalize on the opportunities in New Jersey and potential new states. We are confident in a further state-by-state rollout and are excited about the new slot content in mobile app for caesarscasino.com later in Q3 in New Jersey.

The 45th Annual World Series of Poker was the biggest ever to-date with the new all-time high total entries of 82,360 people. In July, we announced the November 9, the final nine players in the main event will play for coveted title, prize of $10 million and the WSOP Gold Bracelet. The tournament proves as expected to enhance our Nevada online WSOP real money business.

Let me now please turn it over Craig, our CFO to review Growth Partners financial performance.

Craig Abrahams

Thank you, Mitch. Starting with CIE, revenue was $144.6 million, an increase of 95.4% over the same period last year primarily due to organic growth in social mobile games, the acquisition of House of Fun in February of this year and revenue from Real Money Online Gaming. Adjusted EBITDA was 44 million, up 119% from a year ago due to the strong performance in the Social Mobile Games business partially offset by marketing expenses for Real Money Online Gaming. Within the CIE, the Social Mobile Games business posted a 19.1% increase in revenue year-over-year 16% sequentially.

We grew paying users to 539,000 and average revenue per user to $0.26 at the end of June primarily from launching new content and features on our existing game titles. We are thrilled with the performance of our team and remain encouraged by positive operating metrics and improvements in monetization of the user base. In real money online gaming, we are pleased with the market share generated from the New Jersey and Nevada. In New Jersey, we maintained our market share during the quarter of 27% based on numbers provided by the New Jersey DGE.

These figures include revenues we made today which operates under our license in New Jersey. As we noted on our last call, higher marketing and operating costs were expected to last to the first half of the year and we now expect these costs to continue. We remain [indiscernible] in attracting in new customers and enhancing our infrastructure. We remain optimistic about our growth prospects in the state with the expected launch of mobile application for Caesars Casino and future third-party content on Harrah’s Casino.

In Nevada, we witnessed increased online activity during the quarter primarily from the World Series of Poker at Rio which ran from late May through early July. Regarding the casino properties in development segment, Q2 net revenue increased 13.6% to $294.1 million driven primarily by the opening Drai's and Giada at The Cromwell and favorable trends in the nongaming areas in the remaining properties with modest improvement in gaming.

Gaming revenue increased from both higher slots and table wins while nongaming revenues were attributable to the ongoing success of the Britney Spears residency at Planet Hollywood and strong hotel revenues from the recently rebranded Jubilee Tower at Bally's. As a reminder, the rebrand and renovation commenced at the Quad during the first half of this year and is not expected to be complete until the second quarter 2015. Also to note operating results from the four purchased properties are reflected for a full quarter and full first half in 2014 and 2013 in our earning tables.

From a balance sheet perspective, total consolidated debt outstanding in CGP was 2.26 billion which includes debt that CGPH of $2 billion. Consolidated cash as of June 30, 2014, was $495.6 million, which does not include cash of 452 million that CGP received in July 2014 as part of a no purchase transaction. In addition, on August 7th, CGP made a pro-rata distribution of the CEOC notes due 2016 and 2017 to its managing members Caesars Acquisition Company and Caesars Entertainment Corporation. This distribution gave CAC and CEC flexibility to realize value from the disposition of sales of senior notes.

With that, I will turn back over to Mitch to his final remarks.

Mitch Garber

Thanks a lot Craig. Overall, we’re very excited about what the future holds for CGP and the growth prospects for the Company. In the interactive segment, there are a number of opportunities to expand our social and mobile games business and continue to grow organically as we continue to believe there is upside potential in the U.S. real money online gambling business as additional states regulate online gaming. For CGP's casino properties, we have added four destination assets to the business and expect the investments we’re making there to drive improved returns. We look forward to continuing to enhance our portfolio with the eminent opening of Horseshoe in Baltimore.

Before I open it to Q&A, I would like to remind everyone that we do not comment on pending litigation. Operator, that concludes our remarks for today and we are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Kevin Quinn with Goldman Sachs. Your line is open.

Kevin Quinn - Goldman Sachs

I was just wondering if you can provide some thoughts on Amaya Gaming's pending acquisition of the Oldford Group assets and how you think that may impact the U.S. online gaming market both from a potential acceleration of growth in jurisdictions as well as the competitive landscape.

Mitch Garber

Sure, this is Mitch. Thanks Kevin. We’re going to limit our comments. I would say a couple of things. Number one, I think we all agree that from a capital finance perspective it was a tremendous transaction. How it will impact U.S. real money online gaming is really unclear to anyone. And I think we’ve been very consistent in what we said which is that regulators have become very knowledgeable in a very short period of time about online gaming and licensing online gaming operators. And the PokerStars where now Amaya -- with the PokerStars asset will go through that very stringent licensing process that we all do go through and regulators, and legislators will make decisions on their applications as they do on ours and on any other party. So certainly PokerStars has been a Poker company to be reckoned with. And we leave decisions about how that will impact the market and whether they'll enter the market at all to the regulators. On the other hand, we’re partners with Amaya PV [ph] transaction because we use their software platform for our casino games under the Caesars brand in New Jersey. And I know and like there their CEO personally. And I think we’re going to -- we’re going to monitor the situation and take the time to take positions as we need to take positions.

Kevin Quinn - Goldman Sachs

Great. If I could ask another question related to your commentary, I think you said there’s a million total rewards members in the Baltimore DC Corridor. I was wondering can you quantify how many of those members use Atlantic City as their primary gaming destination.

Mitch Garber

I cannot and I'm in Tel Aviv. The other speakers are in Las Vegas and I’m quite certain that they don’t have that asset on their figure tips, but Joyce Thomas can endeavor, if we would disclose it to provide it to you.

Kevin Quinn - Goldman Sachs

Okay. And just one final one on Friday’s announcement with the private placement of the CEOC notes. I was just wondering, do you guys have a buyer lined up yet for those notes?

Mitch Garber

Craig do you want to answer that?

Craig Abrahams

So on Baltimore, that’s not information that we’re going to disclose on the call. So I am sorry about that. As far as it relates to CEOC bonds, we’ll look for ways to optimistically monetize those. And I can’t really give any further detail at this time.

Operator

Your next question comes from the line of Susan Berliner with JPMorgan. Your line is open.

Susan Berliner - JPMorgan

I wanted to start with, I was wondering if you could talk about the traffic coming from the Lincoln wheel and are you seeing, I guess traffic as you’d expected coming to your property?

Mitch Garber

Craig, you want to jump in?

Craig Abrahams

Sure. So I think if we look at the Quad, we’re still seeing some disruption there from the fact that one of the hotel towers is under construction. We are seeing traffic coming up off of the LINQ and it is helping increase performance of the property, but we don’t expect to see the full benefits until that property is complete at the end of the second quarter of 2015.

Susan Berliner - JP Morgan

Okay. And can you guys provide any color with regards to the restricted group's EBITDA at least?

Joyce Thomas

So, Su this is Joyce. We’re filing the CGPH 8-K which is the quarter in a couple of days. That will have CGPH total and so the restricted group won’t be disclosed.

Susan Berliner - JP Morgan

Okay. And lastly, I guess on Rock Gaming can you let us know, I guess a timeframe -- I thought they were going to convert to equity. It seems like that hasn’t happened yet. Is that correct?

Craig Abrahams

It has not happened yet, that’s correct. And it’s still pending and it’s likely going to be a near term event.

Mitch Garber

Looks like it on a convert upon regulatory approvals.

Operator

Thank you (Operator Instructions) Your first question comes from the line Adam Krejcik with Eilers Research. Your line is open.

Adam Krejcik - Eilers Research

A Couple of questions here from me. First on the EBITDA for the Interactive business, 30% this quarter. Just wondering what’s that margin look like if we’re to strip out the iGaming, the incremental cost there, what’s kind of potential EBITDA margin when you get that business to breakeven or even profitable over the upcoming periods and maybe not exact, just ballpark would be helpful?

Mitch Garber

Thanks Adam. We don’t disclose the breakout on EBITDA between the Real Money Online Gaming Business and the Social Mobile Games business. I think as we referenced in the last call, we continue to invest in marketing expenses in New Jersey and that can well decrease from the first quarter, that continued to exist in the second quarter and so that business offset the possibly the documents from the Social Mobile Games business. So while I can’t give clarity there, you're right. As the New Jersey business continues to ramp, we'll hope to see that gap.

Adam Krejcik - Eilers Research

Okay, do you guys have an updated timeline? I think you said on this call that you’re going to continue invest in marketing in the second half. Is a goal to kind of get to a breakeven run rate by the fourth quarter or next year? Just what’s kind of the bigger strategy, bigger picture strategy assuming just these current two states that you’re in?

Mitch Garber

Yes, sorry, Adam, we don’t disclose kind of forward projections on breakeven but I think I can say with the later launch of our mobile casino product and the third-party content on both our casino platforms, it has delayed our [indiscernible] into the second half of year.

Adam Krejcik - Eilers Research

Okay fair enough. Then moving on Mitch -- and to the extent that you can talk about it a little bit, but California, it looks like any possible legislation got pushed out from this year to 2015. I guess how confident are you that something potentially gets done next year? And then related to that, how big of an issue does this bad act or [ph] clause remains, is that really the hold up in your opinion? And do you guys have a firm stance one way or the other or you just kind of observe and then kind of weigh in as things progress?

Mitch Garber

I think we'll weigh in as way things progress. Obviously we’re disappointed that any potential law passage has been shelved for 2014, but we’ve already started our lobbing effort for 2015 quite heavily. I think that the trades have come a long way actually in some forms of consensus even though it’s still apart. So if I look at where we were year and half ago and where we are today, I think we’re close to a bill and I think we have let cooler heads prevail and come up with reasonable language for everybody, for a bill to ultimately pass. But we’re not going to make our positions clear and I think that we have the ability to influence some of the decisioning and we’ll cross each bridge as we come to it. But at the end of the day, we want a bill in California and no-bill is not serving anyone’s purpose at all, it’s a huge market. And we want a piece of that market. We want do business in California and we expect in 2015 it is going to become a reality.

Adam Krejcik - Eilers Research

Okay great and then in terms of the competitive landscape, you’ve touched briefly upon the Amaya PokerStars, but how about just on the suppliers? There's also been some other big deals and maybe this doesn’t impact your social game business but the Bally Scientific Games, IG tech, just a lot of M&A in this sector. Kind of any commentary on how this impacts you guys and the competitive landscape and how you think you will kind of prevail in the where we are?

Mitch Garber

Well, I would say that actually none of those transactions you’re talking about except for the Amaya transaction has we think any realistic chance of affecting our numbers and our growth and our future. Obviously the Amaya acquisition of PokerStars is a very meaningful acquisition of what could be a very meaningful competitor. But although the transaction will not in my view impact our Social Mobile Games business at all and they won’t impact, I don’t think our Real Money Games business either.

Adam Krejcik - Eilers Research

Okay and then last one, do you guys have any comments or have you ever considered entering into this daily fantasy sports business? It seems like it’s getting more and more attention here. And from a regulatory standpoint, some of the big organizations appear to begin [indiscernible] NFL or even kind of [indiscernible]. Is that something you guys whatever considered and asset like that and then similarly just in Nevada, some of your peers offer mobile sports wagering. Is that also a potential avenue that guys could explore given that you guys are heavily focused on interactive side of the things?

Mitch Garber

I think we’re both of those things. If I had a dollar for every person that's mentioned daily fantasy sports to us that would be a good business in itself. So it’s a very good point. We haven’t yet found the right entry point. We haven’t seen that the business is actually a big enough monetizing business today to make a real dive into it but it’s certainly very interesting. Fantasy sports is a very interesting business and we’re absolutely going to look at both of those areas that you just mentioned and we are looking at them actively.

Adam Krejcik - Eilers Research

Okay, appreciate the color and congrats on the strong growth this quarter.

Operator

Your next question comes from the line of James Keller with Bank of America. Your line is open.

James Keller - Bank of America

I don’t know if this is something you guys are willing to disclose but could you give us same-store EBITDA for the interactive and casino business? And then maybe some sort of same-store RevPAR statistics, just to try to get through some of the ways of all the different moving pieces.

Craig Abrahams

Jim, its Craig. So in terms of same-store, the way we disclose the brick and mortar segment is same-store effectively with the exception of the launch of Cromwell coming online. As it relates to the interactive segment we did close House of Fun in mid-February and so there was mix of growth organically as well as from House of Fun. But we don’t disclose that breakdown.

Operator

Your next question comes from the line of William Frohnhoefer with BTIG. Your line is open.

William Frohnhoefer - BTIG

Just real quickly, wanted to get a sense of -- I notice there has been kind of seasonal kind of trackable decline in MAUs in the second quarter. Wondering what -- and if we see rebound later, I'm assuming that the similar kind of seasonality is going to take place here. What are the right parameters kind of look at, kind of the ebb and flow of MAUs, as you guys continue to kind of improve monetization along the line here?

Mitch Garber

So as we think about the business, much more of our focus has been on monetization and conversion. So MAUs in the social mobile games industry is a metric widely used and we disclosed it for that purpose. It’s subject to a variety of factors, sometimes out of our control in terms of how platforms your accountants may use or based on traffic or other things. So I think much more of our focus is on the monthly unique paying number that you see us disclose as well as daily active users and increasing that conversion. So I think you saw we had an excellent quarter and I was out without growth in MAUs or DAUs.

William Frohnhoefer - BTIG

So unique payers is the key metric there. Just trying to figure out exactly how it translates through. And then I guess the second factor I wanted to bring up was the general weakness. You guys also have been able to maintain pretty strong market share in New Jersey online, real money online gaming. I was wondering if you have a view on the larger structure that of that market that really is a matter of -- we spoke about California earlier on the call being able to integrate more states into online games with a hope somewhere down the road of being able to share on a tax basis and get states to work together. But I am just wondering structurally what are you seeing with Real Money Online Gaming in New Jersey since the constraining the size of the market despite your market share retention.

Mitch Garber

There is a lot of different areas to answer that question I think. New Jersey has been for us a learning experience. We think that there was still a large percentage of the population in New Jersey that don’t know you can gamble legally online. We have been late to launch our mobile casino product which we think is going to increase our business there. The technology that is being used has had problems and those problems are being slowly but surely rectified and I am talking about geo-location problems. The problems with deposits issuing banks, not allowing their credit cards to be used for Internet gaming.

So if we put all those things together and more people know about it, it becomes easier to log in and easier to deposit and we have a mobile casino product. I think we’ll be in a better position to answer the question of what the market looks like than we are today.

William Frohnhoefer - BTIG

And then I guess finally, just a little bit of clarification on the CEOC Notes and the new distribution to members to CEOC to CZR. Just wondering -- there is no potential past there in terms of allocations to individual shareholders of CZR, CZRQ. This is a placement an offering memo that’s being done solely CACQ, CZRQ to third parties and not really just a pass through of notes, is that correct?

Mitch Garber

Yes there is no distribution. Right now they have been distributed to the managing members and we’re trying to determine sort of what are the next steps now, but there is no plan to distribute further at this point.

Operator

There are no further questions in queue at this time. I turn the conference back over to our presenters.

Mitch Garber

This is Mitch Garber speaking again from Tel Aviv on behalf of Craig and Joyce in Las Vegas and Arik Sandler, who is with me here. I want to thank everybody for joining the call today. And we obviously welcome you to stay in touch with us through Joyce obviously and we’ll be prepared to answer as many of the questions that you have as we can. So we’ll see you again next quarter. Thanks again.

Operator

This concludes today conference call. You may now disconnect.

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Caesars Acquisition (NASDAQ:CACQ): Q2 Net Income of $12.8M. Revenue of $438.7M (+31.8% Y/Y) beats by $23.1M.