Caesars Entertainment, Inc. quarterly report, Q2 FY2022

Caesars Entertainment, Inc. — Q2 2022 Form 10-Q Summary

Business context and reporting period

Caesars Entertainment is a geographically diversified gaming and hospitality company operating 51 domestic properties in 16 states, with approximately 53,200 gaming machines, 2,900 table games and 47,500 hotel rooms as of June 30, 2022. It also operates retail and mobile sports betting, online gaming and horse-racing wagering through Caesars Digital.

The filing covers the three and six months ended June 30, 2022. Comparability with 2021 is affected by the April 2021 William Hill acquisition, the August 2021 consolidation of Horseshoe Baltimore, and various divestitures.

Financial performance and key metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Net revenues	$2.821 billion	$2.502 billion	$5.113 billion	$4.294 billion
Operating income	$602 million	$590 million	$592 million	$806 million
Net income attributable to Caesars	$(123) million	$71 million	$(803) million	$(352) million
Net loss per diluted share	$(0.57)	$0.34	$(3.75)	$(1.68)
Adjusted EBITDA	$978 million	$1.004 billion	$1.274 billion	$1.539 billion
Adjusted EBITDA margin	34.7%	40.1%	24.9%	35.8%

Q2 operating margin was approximately 21.3%, compared with approximately 23.6% in the prior-year quarter. The six-month operating margin was approximately 11.6%, compared with approximately 18.8% in 2021.

Q2 revenue increased 12.7%, led by Las Vegas revenue growth of 33.6%, higher hotel occupancy, food and beverage volumes, and increased entertainment and convention activity.
Food and beverage revenue increased 50.2% in Q2 and 69.1% for the six-month period; hotel revenue increased 31.1% and 47.6%, respectively.
Las Vegas Q2 Adjusted EBITDA increased 29.3% to $547 million, while Regional Adjusted EBITDA declined 14.8% to $513 million.
Caesars Digital generated Q2 revenue of $152 million and Adjusted EBITDA of negative $69 million. Six-month Adjusted EBITDA was negative $623 million, primarily reflecting promotional incentives and marketing investments.
Sports betting handle was $2.631 billion in Q2 and $7.321 billion for the six-month period; iGaming handle was $2.090 billion and $4.267 billion, respectively.
Net cash provided by operating activities was $116 million for the six months, down from $672 million in 2021. Capital expenditures were $471 million, compared with $177 million in the prior-year period.

Debt, liquidity and balance sheet

Cash and cash equivalents were $997 million at June 30, 2022, compared with $1.070 billion at December 31, 2021. Total cash, cash equivalents and restricted cash were $1.544 billion.
Total debt was $14.194 billion, including $13.751 billion of book debt and $12.523 billion of long-term financing obligations. Long-term debt reported on the balance sheet was $13.668 billion.
Available revolving capacity was approximately $2.180 billion before specified commitments and restrictions. Management reported total cash and available revolver resources of approximately $3.052 billion.
Interest expense was $559 million in Q2 and $1.111 billion for the six-month period. Variable-rate borrowings totaled approximately $6.5 billion; interest-rate swaps fixed the rate on $1.3 billion, leaving approximately $5.2 billion exposed to variable rates.
The company was in compliance with applicable debt and lease financial covenants at June 30, 2022.
Stockholders’ equity declined to $3.711 billion from $4.541 billion at year-end 2021, primarily reflecting year-to-date net losses and other comprehensive losses.

Material changes versus the prior comparable period

Revenue increased, but profitability and cash generation weakened as higher operating costs, digital promotional spending, inflationary pressures and lower Regional segment performance offset Las Vegas gains.
Regional gaming volumes softened: Q2 table-game drop declined 7.1% and slot handle declined 10.3%; Regional Adjusted EBITDA margin fell to 35.3% from 40.4%.
Caesars Digital handle expanded substantially, but promotional and customer-acquisition investments caused a $616 million year-over-year deterioration in six-month Adjusted EBITDA.
Operating expenses increased 16.1% in Q2 and 29.6% for the six months, including higher casino, food and beverage, hotel, general and administrative, and depreciation expenses.
Discontinued operations generated losses of $157 million in Q2 and $386 million for the six months, largely attributable to William Hill International and related impairment charges.
On July 1, 2022, after the reporting date, Caesars completed the sale of William Hill International to 888 Holdings for approximately £2.0 billion of enterprise value. Net proceeds received by Caesars were $730 million, all of which was used for debt reduction, including repayment of the related bridge financing and subsequent debt repurchases.

Guidance, outlook, risks and unusual items

No formal consolidated revenue or earnings guidance is provided in the filing. Management expects capital requirements to increase for property expansion, renovations, rebranding, Caesars Digital technology migration and entry into new markets.
Estimated remaining 2022 capital expenditures were $775 million to $1.025 billion, including $405 million to $560 million for growth and renovation projects and $55 million to $75 million for Caesars Digital.
Management expects approximately $484 million of debt service and approximately $600 million of lease payments to VICI and GLPI during the remainder of 2022, before the benefit of July debt reductions.
Management stated that current liquidity, operating cash flows, committed borrowing capacity and asset-sale proceeds should be sufficient for operations, capital requirements and debt service for the next twelve months, while noting uncertainty related to COVID-19 and capital-market access.
Key risks include high leverage, rising interest rates, inflation, lower discretionary consumer spending, labor and supply-chain shortages, COVID-19 disruptions, intensified casino and online betting competition, regulatory approvals, digital customer-acquisition costs and compliance with debt and lease covenants.
Caesars recorded $503 million of impairment charges on William Hill International assets held for sale during the first six months, including $174 million in Q2.
Lake Charles remained closed following Hurricane Laura. Insurance proceeds produced a $38 million gain in the first six months, and the replacement Horseshoe Lake Charles property was expected to open in the fourth quarter of 2022.
Caesars has submitted COVID-19 insurance claims expected to exceed $2 billion; insurers have denied coverage and litigation is ongoing. The filing states that the outcome cannot be assured.
Caesars is required to invest $325 million at Harrah’s New Orleans by July 15, 2024; $64 million had been spent as of June 30, 2022. It also held $189 million of restricted cash for New Jersey capital expenditures.

Most important facts for investors to verify

Whether the July 2022 William Hill International sale and application of the $730 million proceeds materially reduced net debt and future interest expense.
The pace at which Caesars Digital can reduce promotional and marketing spending while improving its negative Adjusted EBITDA.
Regional casino visitation, gaming volumes and margins amid inflation, reduced government stimulus and new competition.
Available liquidity after planned 2022 capital expenditures, lease payments, debt service and required regulatory spending.
Exposure to variable interest rates and the transition away from LIBOR, including the maturity of the company’s interest-rate swaps on December 31, 2022.
The outcome and potential recovery from the greater-than-$2 billion COVID-19 insurance litigation.
Completion, cost and timing of the New Orleans, Lake Charles and other renovation and expansion projects.