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Good day, and welcome to this 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. Please go ahead, sir.
Thank you, Shannon, and good afternoon, everyone, and welcome to Eldorado Resorts 2017 Fourth Quarter Conference Call. Joining us today from the company are Chairman and CEO, Gary Carano; Chief Operating Officer, Executive Vice President, Anthony Carano; and President and Chief Financial Officer, Tom Reeg. On today's call, we'll review the company's fourth quarter financial results, success with the integration of the Isle of Capri operations and progress against the company's other key strategic priorities. We will then open the call to participants for questions. This afternoon, Eldorado Resorts issued a press release announcing its fourth quarter financial results for the period ended December 31, 2017. 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 90 days, the details of which are outlined 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. Eldorado Resorts undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that occur after the call.
Also during today's call, the company may discuss non-GAAP financial measures as measured -- as defined by SEC Regulation G. The GAAP financial measure most directly comparable to each non-GAAP financial measure discussed and the reconciliation of the differences between each non-GAAP financial measure and the comparable GAAP financial measure can be found on the company's website at www.eldoradoresorts.com by selecting the press release regarding the company's 2017 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?
Excited to be here today reporting some great results of the fourth quarter. Net revenue is at $428 million, basically flat with pro forma year ago levels, while we grew adjusted EBITDA by 16% to $91 million, reflecting a 300 basis point improvement in our consolidated EBITDA margins. For the full year, pro forma net revenues were down 2% to $1.8 billion, while the group pro forma adjusted EBITDA up almost 9% to $407 million. Our growth initiatives and operating results made 2017 a year that highlighted the transformation of Eldorado Resorts into a true regional gaming powerhouse. Our acquisition of Isle of Capri in early May diversified our operations into new markets and our integration success with these assets over the last 8 months of the year, again, demonstrated what we believe is a core strength of Eldorado. Namely, our ability to acquire properties in accretive transactions and then operate them in a manner that unlocks previously unrealized upside performance. We've accomplished this now several times in our history, first with the acquisition of Eldorado Shreveport, next with the acquisition of the MTR assets, followed by the acquisition of Circus Circus and a 50% interest which we did not own of the Silver Legacy in Reno and then finally with the acquisition of Isle of Capri. In each case, we have successfully grown property level adjusted EBITDA across the acquired portfolios by focusing on providing great guest service, excellence combined with rational marketing and promotional programs to ensure we drive profitable revenue. We continue to see upside in the Isle assets. We're still in the early innings of effecting changes in our marketing spend across all our properties and customer segments to drive more profitable revenue as well as our continued work on managing our direct labor costs. As you can see from this quarter's results, we also continued to capitalize on opportunities at our legacy properties also. With that, let me turn the call over to Anthony. Anthony?
Thank you, Gary, and good afternoon to everyone on the call. In a moment, Tom will review the fourth quarter results in detail, with color around our 4 regional reporting segments and their respective performance in the period. But let me first provide some high-level operating perspectives. The fourth quarter, again, demonstrated strength across the property portfolio as each of our regions generated material EBITDA growth led by the East and the West. We had 9 properties grow EBITDA by greater than 14% in the fourth quarter led by Lake Charles, Pompano, Black Hawk and Reno. We were able to dig deeper into the Isle properties during the quarter after the initial discovery period following the deal closing. We have found and continue to find opportunities in customer acquisition, traditional advertising, food and beverage operations and labor throughout the portfolio. As Gary highlighted, we are still in the early stages of optimizing the acquired Isle assets, even as we have already achieved our targeted $35 million in synergies. And while we are further along the path at our legacy properties, we continue to see opportunities to drive additional profitable revenue from them. We also continue to reap the benefits of the growth capital that we invested over the past few years, such as the smoking patio we had at Mountaineer, the new Brew Brothers restaurant at Scioto Downs and Presque Isle and the new hotel at Scioto Downs. These investments drive true returns on their own but also have contributed to growing gaming volumes. More recently, as you know, we have been working on comprehensive upgrades at our Reno Tri-Properties. The upgrades were undertaken against the backdrop of what continues to be a very favorable economic growth in the region, for which the longer-term outlook continues to be positive. Downtown Reno has been significantly revitalized over the last few years, and development in the area is ongoing. More broadly, the region continues to be attractive to new business, investment, and it was recently reported that the 107,000-acre Tahoe-Reno Industrial Center is now nearly sold out. A recent report from the Kauffman Foundation notes that the Reno-Sparks-Tahoe region ranks #1 in the country for the highest startup density for MSA size class, ranks #3 in the country for the most business friendly tax climate and ranks ninth among the top 100 places to live in the country. In terms of our Tri-Properties investment programs, we have completed to date upgrades to more than 1,000 hotel rooms and suites, updated food and beverage operations across the facilities, created new public spaces in all 3 properties and opened a new poker room and sportsbook.
On our third quarter conference call, we discussed our plan to pull forward additional growth capital in Reno Tri-Properties based on the exceptional returns we have generated thus far. In 2018, we expect to spend an additional $37.5 million on growth projects in Reno, including renovation of more than 1,200 rooms and suites across the Tri-Properties and a beautiful new spa at the Silver Legacy. With Safari club and Interbike coming to Reno in the first quarter of 2019 and a larger bowling group in the second quarter, we should be in great shape to continue our strong momentum as these projects come online. I think the progress we've made throughout 2017 in integrating the Isle assets, including exceeding our targeted synergies, continuing to focus on effective marketing and promotional programs so that we are generating higher profitability across the portfolio, and our success with and the returns we are generating from our capital investment initiative in Reno demonstrate the potential of the Eldorado platform. I'll echo what Gary said earlier, in that we continue to have levers to pull to further grow the company both organically as well as through accretive acquisitions going forward. With that, I'll now turn the call over to Tom to provide some detailed insights on the fourth quarter financial performance and additional details on our balance sheet and capital structure before we open the call to Q&A. Tom?
Thanks, Anthony. This is when the fun starts with these acquisitions. When you go into these deals, you get a look from the outside as to what you think might be possible once you own these assets, then you close the transaction and you spend the first quarter or so kind of getting your legs underneath you and figuring out what the real opportunities are. And then this quarter is really the first quarter where you see us starting to execute across the Isle portfolio post transaction. What's gratifying for us is, obviously, we had a strong quarter. All of the -- each region contributed. And as Anthony and Gary went through, most of our properties contributed meaningfully to EBITDA growth. That's validation of our strategy. I talked to a lot of you about, I think that we're doing something different in terms of customer acquisition. And you can see -- I hope that you see the fruits of that in terms of just relative performance versus our peers. And I'll go into some specific examples in a moment. The -- we had a mix of top performers in the quarter out of both legacy portfolios; Lake Charles, Black Hawk, Pompano on the Isle side, all had extremely strong quarters. Reno and Scioto, in particular, out of the legacy Eldorado portfolio continued the strength that they've been generating for quite a while. In the West, Reno RevPAR was up 15% for the quarter. So we're continuing to show kind of mid-teens RevPAR growth even though we're lapping significant RevPAR growth quarters. So that's heartening to see. We think a lot of that has to do with -- obviously, it has to do with economic backdrop, a lot of it has to do with growth CapEx that we put into the Reno market. Black Hawk actually outperformed Reno a little bit on a growth basis this quarter. So it had just an extremely strong quarter, the Denver market remains very strong. On -- to kind of talk you through how we think we're -- or what it looks like the way that we approach things versus prior owners, I talk about there's a colossal amount of waste in the regional gaming space in terms of chasing customers and that you don't get a lot of value following monthly GGR from us. So I want to take you through Pompano for a little -- for a moment here, and the quarters they had. Pompano, I got a lot of calls during the quarter about GGR. Total revenue was down 7.5% percent during the quarter. And I talk to you a lot about what's real revenue and what's just promotional cycling through the property.
In the quarter, we cut customer acquisition costs, player reinvestment on rated play by over 40% at Pompano. While we did that, casino net profit improved by over $1 million just out of the casino. We cut our food loss by more than 50% in the quarter. And again, this is really just the start of what's happening there. Our labor savings flowed through. So on a 7.5% revenue decline at Pompano, EBITDA was up almost 30%. And EBITDA margin was up over 700 basis points. So when we talk about what we're doing and we're doing something differently, and I hear back "Well, we hear that from other people they're cutting marketing" nobody is doing it on this scale that I'm aware of. And you see the results that it's driving. We've continued to drill down on the Isle assets, and we found areas of opportunity that we were not aware that -- with their property, labor levels being chief among them. Lake Charles, you know that we took that back during the quarter. So we kept the $20 million deposit on a $134 million purchase. So the way I look at that is we just bought this asset for $114 million of purchase price. And it's -- it was doing a little bit less than $15 million of EBITDA when we took it over. We have a property in Shreveport that does marginally better on the revenue line and does more than twice as much EBITDA as Lake Charles. So we see a substantial opportunity there in the existing asset. EBITDA margin in the fourth quarter almost doubled at that property. So we're making significant changes in these properties. There's an -- there could be an opportunity there to move to land-based. If you move that thing to land base, your sub-$15 million of EBITDA almost certainly is over $30 million. So we're just really excited with what we're finding in the Isle portfolio. When we announced the Isle transaction, what we said was we saw a path to 25% consolidated EBITDA margins in the company. As we got into the assets last quarter, we told you we think we could do better than 25%. I would tell you that, that number keeps climbing the longer that we own these assets. I think we can ultimately get these -- our consolidated EBITDA margin into the high 20s. And I don't know that that's the end of the game. We don't see the end of the runway yet. And if you look at Isle in its former state, it was doing a little over $200 million of EBITDA. And I would tell you by the time we're through with the portfolio, I would expect our total EBITDA out of those assets to exceed $300 million. So we've really got a lot of momentum here. The tax reform act, you saw the balance sheet adjustment that we had that flowed through the income statement in the quarter. But I don't know that we could have written a better tax bill for our specific situation. We've got just on a -- from a rate standpoint, I think we'll save in excess of $40 million of cash taxes over the next 2 years versus where we were before. The way that your capital is treated now, you're incentivized to pull forward growth CapEx projects that have the right ROI that would have been waiting, and you can see that we've done some of that. So you get into situation where your -- you pull forward CapEx projects that historically have had -- have demonstrated high ROI, and it reduces your cash tax bill. I would expect us to be a de minimis federal cash taxpayer in 2018.
So we've got a lot going for us. We had a very good finish to 2017. As we start 2018, we experienced the same crappy weather that everybody experienced in the Midwest and the South and the East in January. But what I would say is we have the benefit of an easy comp in Reno, and Reno's comps have been quite strong. And then we have the savings from the -- we have the savings that were rolling through Isle. So yes, we were impacted by weather. What I would tell you is January is the least important month of the year from a contribution standpoint. So we think that will be a minor blip and was -- we have some offsets as well. So we still feel very good about both first quarter and 2018 as a whole. And with that, I'll open it up to any questions that you have.
[Operator Instructions] We first go to Chad Beynon with Macquarie.
Want to start with margins. You guys did a phenomenal job in the quarter. And then Tom, your comments of raising that goal is certainly something that's nice to hear for investors. Can you help us think about, how we should think about that goal in certain targets, particularly, in light of the CapEx that you talked about that will be going on in 2018? Does that kind of delay the coiled spring of margin improvement to 2019? Or do you still expect to kind of continue on this path as expected in 2018?
Yes, I would say we'd expect to be materially better in '18 and better than that in '19. '19 has some calendar benefits in Reno in terms of group business that should accelerate as this growth CapEx is coming online. So '19 should be a particularly strong year for us. But the timing is -- we feel good about both '18, '19 from a margin expansion standpoint. We don't know how long we can keep going as you see in our numbers. You know that the East region has -- is predominantly legacy Eldorado properties, and it's still having very strong year-over-year improvement in EBITDA and EBITDA margin. And we're, what, over 3 years post the acquisition of MTR. So we're learning this as we go through in terms of what's possible and how far we can go. And we have not -- in the reduction in customer acquisition costs, there is not a single market in our 20 properties where we've had to stop. So we're still going.
Great. And then my follow-up separately on Lake Charles. The first three quarters of the year, at least from a GGR perspective, that property was down roughly 10% on average. In the fourth quarter, that improved. So this is kind of before you took it back and implemented some of your strategies on the revenue and EBITDA standpoint. So first off, could you help us think about, if that market is starting to recover just kind of post flood? And if you're seeing customers come back to the market? And then secondly, if you can quantify, if there was any margin impact just bringing this back into your portfolio, because I believe it was more of a lower-margin property.
Yes. So it is a below-average margin property, even with the improvement in the fourth quarter. So it brings down our consolidated margin some. The market seems to be doing fine post hurricane. There is no -- I can't tell you that there is a dramatic spike in terms of a lot of FEMA money coming in where you see -- in areas like you've seen in the past. I would tell you from a revenue standpoint, in '18, I would expect a lot of noise in our reported GGR number there. This is -- we took over Shreveport in a -- from a free-fall bankruptcy that was highly contested. The property was doing $7 million of EBITDA and was kind of in a death spiral. And in terms of the shape of how they were operating it, I think that was doing a little bit better than Lake Charles when we took it back. So I mean, there is a tremendous amount of opportunity in Lake Charles. They were spending a lot of money chasing business that just didn't make any sense. And you're going to see that online very quickly, and it's going to lead to some noise in the GGR numbers.
We next move to Danny Valoy with Deutsche Bank.
Just on the $37.5 million you plan to spend in Reno in 2018, can you quantify any disruptions you're expecting? And was there any disruption from the renovation in the 4Q numbers?
There was no disruption in the 4Q. We will likely continue construction longer into the peak period this year than we did last year, so we may have a floor or 2 that's out of service at peak times. But frankly, we think we'll be able to make that up in rate. So we wouldn't expect to see much in the way of disruption in the Reno numbers in '18.
Great. And just a quick one on M&A. Now that there are 3 gaming REITs, are you seeing more M&A activity in the space? And along with that, have your thoughts changed around holding on to real estate or disposing lower EBITDA assets?
No, there is a lot of chatter that I've heard others talk about. We would echo it. There's -- it seems to be an active environment in terms of discussion. I would say from where we sit, I'm reasonably optimistic that we'll be able to find something that fits our goals of buying assets that we end up buying for 3 to 6x what we're doing with that asset post transaction. I'm optimistic that we'll find opportunities that we can execute on if you're looking out in the medium term.
Next question comes from Dan Politzer with JPMorgan.
So with respect to the comment on tough weather you and peers have mentioned, that you've seen in January and your strategy of limiting marketing and promotional spend, how would you characterize the traffic you're seeing? And have you seen any impact regarding that strategy? And I guess, also, as you look out across the different markets you're in, are there any markets where they're not as much impacted by weather and what are the trends there?
I would say absent weather, the trends are not materially different than they were at the end of last year. You have -- Midwest, South and East have all had a combination of snow and cold that you had seen going through the regional numbers. Reno has had spectacular weather versus a very difficult first quarter last year, weather-wise. But -- so you had 2 different questions there. From a weather standpoint for us, you've got impact in 3 regions, but you've got a significant offset in the West and then you've got us reducing the -- still rolling through the reduction in costs out of Isle. So we still look fine. And in terms of -- I think the second question was, have we had -- seen any impact on traffic based on cutting back marketing? Other than unprofitable players showing up less and showing up profitably when they do, no, we haven't seen an impact.
Got it. And just on Pompano. In the past, you've talked about expanding that property, maybe with a JV. Can you guys give us if there's any update there on that?
I would say that's a -- an enormous opportunity in front of us. You should expect that we're working to be in place to develop the undeveloped land at Pompano in a way that would provide significant value through the venture where we do the development, and that it would stimulate significant visitation to the casino that would generate significant incremental revenue and EBITDA. And I am optimistic that we can -- we would be in a position to talk about that some point in the first half of this year.
And just one last quick one on your CapEx. So you're doing $37 million in Reno. Roughly half your $150 million is project CapEx. So other than Black Hawk, where are you spending the balance of that project CapEx?
It's a mix. So Anthony can touch on that.
We're doing a Brew Brothers restaurant in Waterloo, Iowa; Colorado in the fourth quarter; rooms and spa in Reno.
Boonville also. Boonville gets a Brew Brothers -- new one there.
On the growth side, Dan, Reno and Colorado are about 80% of that number. The rest is kind of a smattering of Brew Brothers that were a couple of million apiece in some of the Midwest markets.
Next question comes from David Katz with Jefferies.
So I wanted to just follow up on the CapEx question just given the change in status for Lake Charles. And it may not be necessarily the most straightforward issue. But my last visit to the property was some time ago, but I could certainly see and accept arguments that it could use -- it could benefit from some investment as it is right now versus contemplating a land-based replacement for it. Are you thinking about allocating any capital specifically to that property? Or is it entirely just a -- an operating story for the moment?
For the moment, it's an operating story waiting for the result of the legislature this session. We'll -- I would say we're certainly going to invest in the property as we do all of our properties. But from -- on a materiality standpoint, the opportunity is, if they go land-based, since you're familiar with it, you could put a box that would connect the hotel and the parking garage, kind of replacing where the escalator and the atrium are. So you bring your casino right to the front door and those -- that -- a box like that costs in Iowa about $55 million. So you can do it fairly reasonably with a higher return on investment.
So all you have to do, David, is get Louisiana to approve the legislation, and we're very excited about that opportunity.
Got it. If I can ask just one more. And obviously, the margin improvement across the board is impressive. One of the issues, Tom, that we've talked about in the past is looking at the margin opportunity in the context of the gaming tax rates in which you operate. And is it fair to look at the West region, where Reno presumably has the lowest gaming tax base relative to the others, as having more opportunity than the others, irrespective of Isle versus legacy properties. If you could just sort of comment on that notion, I'd appreciate it.
I would say that's accurate, but you have to keep in mind the size and scale of the Tri-Properties introduces a lot of operating leverage to your equation, so that -- that's going to be a big factor in terms of the margin that you can get to there. I would point to, as a region, we've got the Midwest into the low 30s now even in the fourth quarter, which is a relatively low volume period of time, with an average tax rate in the high 20s. So there's -- we're not worried about running out of opportunity regardless of the tax rate that we're in.
Got it. And if I can ask one last one, specifically about the Isle assets where, over time, they could approach a $300 million number. Given some of us, and myself included, propensity to get ahead of ourselves, if you could just talk about trajectory to make sure we're thinking about it in a measured way.
Yes, I mean, what I would say is, you think in round -- I think in round numbers, and I wouldn't take this as guidance. But what I would say is 28% on our current revenue base is about $500 million of EBITDA. And I only choose that because that's a round number. Does it seem possible that we can get there out of this portfolio? Yes, it does. And does it seem possible we can ultimately get beyond that? It's too early to say that. But we're feeling better about that all the time as we run these assets. I would say, looking at what I've seen in terms of estimates, where you're in the kind of the mid-400s this year and the high 400s next year, that all seems eminently achievable to me. But if everybody ran out and said, "we're going to get to a 30% EBITDA margin next year," you are ahead of yourself -- you're ahead of us.
We'll next move to Patrick Scholes with SunTrust.
Just a question on -- when you talk about and discuss strong returns and then -- at your Reno Tri-Properties and some of your developments and your projects and then talk about additional investments, I'm just curious can you give us sort of a quantification of what a strong return might be as far as return on invested capital? And then going forward, what level of ROIC or return do you look for when choosing projects?
Our hurdle rate is typically 15%-plus. I would tell you that my analysis of second half of the year in Reno of '17 suggests our ROI on our growth CapEx from last year was in excess of 50%, 5-0, and it leaves no question that we should be pursuing more, particularly in Reno.
Next question comes from John DeCree with Union Gaming.
Tom, perhaps one for you that I wanted to circle back to that you mentioned in your opening remarks that seems to be pretty significant for the whole industry, but I think you sized it up really well was tax reform and what it means for you from a free cash perspective going forward. I think first, just wanted to see if you could clarify, I think, you mentioned $40 million over the next 2 years in kind of savings. Wasn't sure if that was per year or over the next 2 years combined?
That's over the next 2 combined, the $40 million.
Got it. As you kind of think about cash, where you talked about some growth CapEx coming forward based on the returns in Reno that you're seeing and some other projects that you might have as well as the opportunity for depreciation and tax benefits. But when you kind of think about the balance sheet and deleveraging and other uses of cash, then how do you kind of prioritize those kind of after you address some of that really high-value, high ROI CapEx?
Yes, #1 priority is continue to grow through acquisitions. We think there is nothing unique about Isle in terms of the way that they operated their properties. We think that most regional operators have -- operate similarly. Obviously, some are better than others, but we think there's a large opportunity set in terms of us doing the same thing operationally that we're doing in the assets that we bought. So we want to keep going there. We -- in the interim, we use free cash flow to pay down debt. With EBITDA rising, our leverage is going to continue to come down quickly. I would say, if we were in a position where leverage was headed down sub-4x, and we didn't have an acquisition opportunity in front of us, I think we'd be looking to return capital to shareholders. My inclination now is that we'd lean toward dividend versus buyback. And so you know where your model puts us as to when we would be in that position. I would tell you, as we sit here today, I'm optimistic we would have an acquisition before we got there.
Got it. That's helpful. Appreciate that. And then wanted to cycle back, a lot of time that we've spent on this call, on margin. But one item that I think is worth talking about a little bit more is wage inflation. It's something that a lot of your peers have kind of started to talk about. I think in the opening remarks, you talked about adjusting and rightsizing property labor levels. So I guess the first part of the question is, are you guys facing some wage inflations as well? And then the second part is, given what you can do on kind of managing and adjusting labor levels, is it really a nonissue for you as you guys think about just improving margins across the property level?
I would say across the entire portfolio, it's a nonissue. There are markets where, particularly in the West, Reno and Denver, are tight labor markets, costs are increasing, but you'll notice that those are markets where our top line is growing. So that it's swamping the impact of the tight labor market. So yes, we're experiencing some of the things that others have pointed to, but we're not experiencing any material wage inflation in markets where we're not seeing significant top line growth.
Next question comes from Andrew Berg with Post Advisory Group.
Just a quick update on the balance sheet. Where does debt stand at the end of the period, actual levels in terms what you repaid on the term loan at this point?
The term loan is in the neighborhood of $950 million at the end of December.
We next move to Steve Emerson with the Emerson Investment Group.
This is a off-the-wall question. But is there any way to, on the back of an envelope, give what an approximate EBITDA should be for the hotel portion of the business? And I'm only looking at this because hotels enjoy a mid-teens EBITDA multiple.
Yes, I mean, what I would say is, you can see our hotel revenue. Our hotel revenue is dominated by Reno, which is going to be more cash than comp, so it's a reasonable -- our hotel revenue is a reasonable approximation. And hotel margins will run, depending on the property, 60% to 70%. So that should get you to your EBITDA margin. And if you want to throw a cap rate on that, you can get -- do on the back of the envelope.
Excellent. And should we then allocate a portion of the G&A, et cetera, to that or not relevant? It's too hard to unscramble the egg.
Yes, I mean, now you're getting more -- even deeper. I guess, yes, I would probably allocate some G&A to it.
And gentlemen, there are no further questions in the queue at this time. I'll turn it back to you for closing remarks.
Thank you very much. And thank you, everybody, for joining us today. It was a great quarter. Excited to report to you, and we'll see you again in May when we report our first quarter. Thank you very much.
Thank you, ladies and gentlemen. That does conclude today's conference. We thank you for your participation. You may now disconnect.