PENN Entertainment Inc

SWB:PN1

Earnings Call Transcript 2021-Q3

[Operator]

Greetings and welcome to the Penn National Gaming Third Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. [Operator instructions]. I would now like to turn the conference over to Mr. Joe Jaffoni of Investor Relations, please go ahead.

[Joseph Jaffoni, Investor Relations]

Thank you, Frank. Good morning everyone. And thank you for joining Penn National Gaming's 2021 Third Quarter Conference Call. We'll get to management's presentation and comments momentarily, as well as your questions and answers. But first I'll review the Safe Harbor Disclosure. In addition to historical facts or statements of current conditions. Today's conference call contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. These statements can be identified by the use of forward-looking terminologies such as expects, beliefs, estimates, projects, intends, plans, seeks, may, will, should, or anticipates, or the negative, or other variations of these or similar words.

Or by discussion of future events, strategies, or risk, uncertainties, including future plans, strategies, performance, developments, acquisitions, capital expenditures, and operating results. Such forward-looking statements reflect the Company's current expectations and beliefs, but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the Company's filings with the Securities and Exchange Commission, including the Company's reports on Form 10-K and Form 10-Q. Penn National assumes no obligation to publicly update or revise any forward-looking statements. Today's call and webcast will also include non-GAAP financial measures within the meaning of SEC Regulation G.

When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release, as well as on the Company's website. Thank you for your patience with that, and it's now my pleasure to turn the call over to the Company's CEO, Jay Snowden. Jay, please go ahead.

[Jay Snowden, CEO]

Thanks, Joe. Good morning, everyone. Thanks for joining us for our third quarter earnings call. As usual, I have here with me in Wyomissing our CFO, Felicia Hendrix, our Head of Operations, Todd George, and other members of my executive team who can help answer your questions during the Q&A session. As you can see from our earnings release and corresponding investor presentation, we achieved many significant milestones during the third quarter. We successfully launched the Barstool Sportsbook mobile apps in 5 new states, which more than doubled the size of our footprint. And just this week we launched in Iowa, bringing our total to 10 live states. We also continue to grow and evolve our brick-and-mortar footprint.

During the quarter, we opened Hollywood Casino York in Pennsylvania to strong initial results, began to roll out our market-leading cashless, cardless and contactless 3Cs technology across the portfolio, and continued to see tangible benefits of our highly differentiated omni -channel strategy. On the core business side, the third quarter was really a tale of two halves for us. July started off with the same positive momentum we saw in the second quarter, with revenues up 10% over 2019 and adjusted EBITDAR up 40%. That momentum slowed beginning in the second half of August and into September due to Hurricane Ida, which affected us significantly in the South region, and the regional flare ups of the Delta variant, which combined impacted property adjusted EBITDAR and adjusted EBITDAR margins by an estimated $30 million and 85 basis points respectively.

Additionally, the other statement results -- reflects $7.5 million of expenses related to new state launches, of the Barstool Sportsbook app that I mentioned earlier this quarter. As well as $12.5 million for our share of the initial campaign expenses for the sport spending ballot initiative in California. Looking ahead, October reflects more of what we saw in the first half of the third quarter, with strong property level performance across our segments. With a few notable exceptions due to new competition in Colorado and Indiana and the residual effects of Pennsylvania's continued gaming expansion.

Engagement among our younger demographic continue to be strong, and is more than offsetting the decline we saw in our older demos in the quarter due to Delta. Further, our VIP segment, which grew 33% year-over-year in the third quarter continues to outperform. Notably, our retail Barstool Sportsbook concepts are continuing to stimulate database growth and increased frequency of visitation in the younger segments, while also boosting gaming and food and beverage spend. Our retail sportsbooks are now number 1 in [indiscernible] market share in the states of Indiana, Iowa, West Virginia, and Michigan. And we're excited to announce the recent opening of 2 new retail sportsbooks this week in Louisiana at L'Auberge, Baton Rouge and Boomtown, New Orleans with more to come in the coming weeks.

We cannot be more pleased with the momentum we are seeing in our interactive business, with monthly active users for the Barstool Sports Book and Casino, growing over six times what they were in September of last year. We have been able to achieve this growth while maintaining our disciplined approach to marketing, which has resulted in blended customer acquisition costs of under a $100 for the year. In addition to our increased footprint, new features to the Barstool Sportsbook app, including parlay plus, which is same game parlay and shareable bet slips have also driven performance. We're now seeing well over a 100,000 bets per week on parlay plus, which is leading to higher engagement and higher hold rates.

And the shareable bet feature is really helping to leverage our strength in social media with over 140,000 bets shared last week alone. I'm pleased to say that the Barstool Sportsbook is now tied also for first among all mobile sports betting apps in the Apple Store -- Apple App Store with a user rating of 4.8 on a scale of 5.0. With the return of football, we have successfully developed top-3 to top-5 handle market share positions in every state that has reported so far in September, while continuing our disciplined approach to marketing that I referenced earlier. In September, we proved the strength of our approach as one of only 3 operators in both Michigan and Pennsylvania to generate positive net gaming revenue, despite a relatively unfavorable hold percentage versus the competition.

Our Penn Interactive Team, which has obviously been very busy this quarter, also rolled out a Barstool-branded live dealer studio in New Jersey, which for those of you that caught it was being played in livestream last night by Big Cat and Logan Paul for some pretty amazing content. And also last week launched our first in-house developed digital iCasino game from our HitPoint acquisition called Barstool Blackjack. We expect these products to drive additional cross-sell from the Barstool audience, with further iCasino upgrades on horizon.

All this positive momentum will be greatly enhanced by our acquisition of theScore, which officially closed on October 19th. With Barstool's wide audience reach at the top of the customer acquisition funnel, and the theScore's ability to engage and retain sports fans with its highly complementary content, we're creating a one-stop destination for the consumer that simply doesn't exist today. In addition, as the number 1 sports media app in Canada, theScore is uniquely positioned to capitalize on the legalization of single-event sports wagering in Ontario with the launch of theScore Bet when the market opens, which now looks likely to occur in Q1 of 2022.

We anticipate theScore Bet app will be the brand we lead with in Canada, while we continue to lead with our Barstool Sportsbook app in the U.S. But both brands will mutually benefit from the marketing support of Barstool Sports and the integration with theScore 's media app. Looking forward, we are focused on building a highly differentiated and fully-integrated media and sports betting tech solution with our partners at theScore, while opportunistically pursuing revenue growth, including new markets such as Ontario. Despite these significant planned investments in Product and Marketing and the delayed launch from what we initially anticipated in Ontario, we expect our interactive business to generate a loss of only approximately $20 million in the fourth quarter.

As I hope you've come to learn, what really sets PENN apart from the competition is our strategy to buy and build, whether it's brands, experiences, loyal customers, products, tech stock, versus the renting of eyeballs via aggressive traditional marketing tactics. Our goal continues to be developing bespoke products and features, with features and promos that are experiential, fun, and differentiated, rather than relying primarily on paid advertising, our promos often include unique bets, branded merchandise, and VIP Barstool experiences that simply can't be found elsewhere. We expect that this approach is the right long-term strategy and will result in a best-in-class margin profile and loyalty and retention.

The power of our fully-integrated omni -channel and media strategy was on full display during our successful promotion in event held in late August at our Hollywood Casino Aurora property. As you know, Illinois currently requires in-person registration for new mobile sports wagering player accounts at a casino. By featuring a special promotion on the Chicago Bears game, which culminated in a block party in the parking lot of our casino attended by key Barstool talent. We were able to drive nearly 10,000 first-time depositors over a 5-day period with minimal paid media expense. That 10,000 for context compares to -- we were averaging about 25 to 30 per day up until that point.

Finally, before turning it over to Felicia, for a brief overview of our financials, I wanted to note how impressed we continue to be with the ability of our partners at Barstool Sports to leverage their growing and loyal audience by pursuing opportunities, outside of traditional sports media or betting. Starts unlocking huge new channels of future growth. One Bite Pizza is one of the highest selling products in the frozen food section at Walmart Stores across the country. Incredibly, Barstool is now also representing over 135,000 collegiate athletes under the NCAA new name image and likeness rule.

And they're continuing to extend their established media footprint, by securing the broadcast rights to the Arizona Bowl, as well as playing a prominent role in the recent Jake Paul versus Tyron Woodley Fight on Showtime, which featured commentary from Dave and Big Cat during the broadcast. Now I will turn it over to Felicia.

[Felicia Hendrix, CFO]

Thanks, Jay. And good morning, everyone. We've reported revenues of $1.5 billion and adjusted EBITDA of $480 million in the third quarter. Revenues were 10% above 3Q 19 levels and adjusted EBITDA was 17% higher. There were a number of one-time items that affected results in the quarter, which Jay discussed earlier. A detailed breakout of these items can be found on slide five of our earnings deck, which was posted on our website this morning. As Jay mentioned, we achieved a major milestone last month as we closed on our almost $2 billion acquisition of Score Media and Gaming, and proudly welcome to Score Team into our PENN family.

We're excited about what lies ahead, and we continue our evolution into being North America's leading digital sports content and entertainment Company. As for several housekeeping items. Corporate expense, which is reported in our other segment was $27.8 million in the quarter. Our cash rent payments were $228.5 million. Cash taxes were $47.9 million, and cash interest was $21.7 million. Maintenance capex was $52.3 million. And we remain on track and on budget for the opening of our second Category 4 casino in Pennsylvania later this year, Hollywood Casino Morgantown. Our balance sheet continues to be a key asset for us as we remain focused on growth, even following our acquisition of theScore.

Total liquidity as of September 30th, 2021 was $3.4 billion consisting of $2.7 billion in cash and our $700 million undrawn revolver. Traditional net debt was $45 million, a decrease of $71 million during the quarter, principally due to repayments under our senior secured credit facilities. Our lease adjusted net leverage was 3.9 times based on trailing 12-month EBITDAR. As a reminder, of our roughly $2 billion purchase of theScore, approximately $923 million was paid in cash, and we estimate the transaction was levering by half a turn. As the Delta outbreak reminded us in the third quarter, the environment remains uncertain while the future looks bright and we believe we can continue to generate revenues and adjusted EBITDAR above 2019 levels, we continue to maintain our current policy of not providing guidance, and we will re-evaluate quarter-to-quarter. And with that, I'll turn it back over to Jay.

[Jay Snowden, CEO]

Thanks Felicia. I referenced Hurricane Ida earlier in my remark. It really is incredible when you stop to think about it that this storm hit on August 29, 16 years ago to the day after Hurricane Katrina devastated much of the Gulf Coast. I've been overwhelmed, but I have to say not surprised by the response from our team members across the country in the aftermath, which once again demonstrated the compassion and dedication our PENN family has for one another. With limited supplies available in New Orleans, and basic utilities completely disabled our sister properties, quickly helps to provide temporary housing and much needed provisions. In addition, our Penn National Gaming's Foundation established the Hurricane Ida emergency relief fund, for team members to apply for financial assistance for immediate needs. Meanwhile, we continue to expand our support for our nation's heroes, one of our newest partner organizations is the Concussion Legacy Foundation, which launched a special project focused on CTE and PTSD research on veterans. In addition, in the wake of our country's withdrawal from Afghanistan, we're offering financial support to the No One Left Behind organization to provide funds to help Afghan Special Immigration Visa recipients with food, housing, clothing, and a no interest loan program which helps immigrant families become self-sufficient. One of our fellows from the U.S. Chamber of Commerce is hiring our Heroes Program, which helps active military personnel transition back into civilian life. Recently volunteered at Fort Pickett to help some of the 6,000 temporary refugees there learn new job, search skills to help acclimate to life in America. Also during the quarter, with female members comprising 44% of our Corporate Board of Directors, PENN has been recognized by 2 separate organizations for its board diversity efforts. We were named a Champion of Board Diversity by The Forum of Executive Women, the Greater Philadelphia Region's premier women's organization, and we will also be honored on November 10th at the Women's Forum of New York's Annual Breakfast for -- of Champions for leading the way of gender balance on corporate board. And with that, I'd like to hand it back over to Frank to open up the line for questions.

[Operator]

Thank you. [Operator instructions]. One moment please for the first question. Our first question comes from Joe Greff with JP Morgan. Please proceed.

[Joe Greff, JP Morgan]

Good morning, everybody. Jay, I just want to lead off and talk specifically about Ontario and your approach there, and how that -- the marketing -- the acquisition environment you anticipate being versus what I would imagine be very different than what we're seeing here in the U.S. I was hoping you give us a sense of your approach there, and what you anticipate.

[Jay Snowden, CEO]

Yeah. Happy to, Joe. I think first off worth noting that we initially thought Ontario was going to be ready to go live probably in December. And the additional information we have at this point, it looks like it's probably going to be more sometime in Q1, just call it mid - Q1, is probably the best, most updated information we have at this point. So that's from a timeline perspective. I think from an overall market perspective, we're obviously really excited. We're leading in Ontario with the preeminent sport’s digital media brand across Canada. We feel really good about that. And we're going to be launching aggressively there. We want to make sure that we really start at the starting line with everybody else, and we have a really big splash.

We've got a great marketing launch plan in the works with the [indiscernible]family and our partners at theScore. I think Joe, one of the things that really stands to benefit us is that there are some advertising restrictions in Ontario, so there'll be a bit of a different market there. You can advertise your brands, but you can't lead with big discounting type promotions. We welcome that environment. We have a very loyal audience in Canada to theScore and what will be theScore Bet, similar to the loyalty we have with the brand that we lead with here in the U.S. With Barstool.

So we expect to be a major player in Ontario when they're ready for us to go live. And we have a great plan in place. And honestly, if anything, the slight delay in launch allows us to launch with a product that we feel even better about, and hopefully get even more content ready to go on the iCasino side in Ontario, assuming that they're ready to go live with sports and online casino at the same time.

[Joe Greff, JP Morgan]

Great. And then just switching topics to how much of a strategic priority the Las Vegas Strip assets were Opco is for you. Obviously, you were involved in the Cosmo and that went to another buyer. We've heard this week from MGM last night, and Caesars earlier this week about their marketing strip assets. Can you talk about how much of a strategic priority that is, what you would do with a premier strip asset and putting it into your flywheel. And then how do you think about valuing an Opco relative to how your regional Opcos are valued?

[Jay Snowden, CEO]

Yeah. It's pretty -- been pretty public, and we've confirmed that we were definitely involved in the bidding process for Cosmopolitan. I think Cosmo really stands in a class of its own. That's a once in a lifetime opportunity to potentially get your hands on one of the best-in-class assets really around the globe. And so that was imperative for us because we felt as though it checks several strategic boxes for us. Generally speaking, I don't think it's imperative that we have a Las Vegas Strip asset given the differentiated approach that we have around omni -channel.

I think that having representation across states throughout the U.S. is absolutely a strategic imperative for us, and we've largely accomplished that goal. If we were to find the right asset at the right location, and the right price, then of course we would be interested. We know that we have a very valuable regional database. We know what the right asset in Las Vegas that we could activate, and really drive more of that visitation that's already organically finding its way to Vegas, because people like to gamble and Vegas is the Mecca. And so they're already going, it would be great if we had an asset where we could create some retention value when they're in Vegas.

But we don't think that's such a strategic imperative that we would chase an asset or overpay. And that's how I feel currently. So we'll kick the tyres if there's something out there. We're going to be disciplined in our approach. And yes, I think you're going to have to pay a higher multiple for a Las Vegas Strip OpCo than you would in most or all regional markets. But I think you have to be thoughtful and careful about that because, as we all know, there's a lot more maintenance capital requirements and intensity for Las Vegas assets.

And typically, when you are an OpCo, your rent, your lease is largely fixed, not entirely, but largely fixed. And so if you're the one that's continuing to invest in the property, it takes away from the free cash flow and -- well, EBITDA and eventually free cash flow generation for the opportunity. So I just think there's a lot of variables. I think you have to look at its asset by asset as they become available -- if they become available, but you should assume that we're not going to be chasing anything that we don't believe we can get a good return on.

[Joe Greff, JP Morgan]

Great, thanks. And just what one final quick one, Felicia, what's the diluted share count proforma for the Score transaction?

[Felicia Hendrix, CFO]

Joe, I will get back to you with that offline. I just don't have that in front of me right now.

[Jay Snowden, CEO]

Yes. I know we issued $13 million shares associated with the Score, so just add 13 to whatever your last number was, Joe.

[Felicia Hendrix, CFO]

I'll get back to this

[Joe Greff, JP Morgan]

Thank you.

[Felicia Hendrix, CFO]

another person takes.

[Operator]

Our next question comes from Shaun Kelley with Bank of America. Please proceed.

[Shaun Kelley, Bank of America]

Hey, good morning everyone. Jay, just maybe a couple of questions on the online business. Helpful color on your expectations around the fourth quarter loss. Could you talk a little bit about the revenue environment, heading into the fourth quarter. Obviously, you gave a couple of stats on your handle share. But maybe in a fair fight state like Arizona, how you think you're holding up thus far with a new launch across the board. How is Barstool performing versus your longer-term target or aspiration there?

[Jay Snowden, CEO]

Yes. Well, let me -- maybe I'll hit Arizona at the end, but I'll talk sort of at a high level. As you think about the launch of -- or the start of football season this year on September 9th. As I mentioned earlier, we were live in 9 states versus a year prior, 0. We went live in Week 2, actually, in Pennsylvania last year. So if you look at revenue environment from Week 1 of NFL, and then all the way through to week 9 last week. And we have a slide on this in the investor presentation. We really have shown tremendous handle growth week over week over week. I think we're averaging 9% handle growth week-over-week from week 1 to week 9.

So we're very happy with what we're seeing. I would also say that when you launch 5 states, which we did. And I don't think anybody else came close to that many launches for the start of football season this year, because we were a bit late to the game in some of these states, that you have deposit and match-bet bonuses that have to work their way through the system. And so we had a $1,000 deposit and bet match that was offered in those 5 states for September, which obviously lowers your NGR. After promotion, your NGR 4 -- it takes about 4 to 5, maybe 6 weeks for that initial offer to work its way through. What we're seeing in October -- and what we saw in October and are seeing in early November.

Is that obviously there is a lot less promotional dollars flowing through, which means assuming that you have a more normal hold rates, and I think you've probably heard John and we, like everybody else, definitely had a softer hold percentage in October. favorites covered, significantly the first 4 weeks that reversed itself in a very good final weekend, but the first 4 weekends. Hold rate was lower than normal. But if you just look at an average hold, and you look at what we were able to do in October and converting handle to GGR based on hold and then GGR to NGR.

We feel really good about, not only continuing to grow our handle market share, but being able to grow our NGR market share. Now NGR, unfortunately, we would welcome this, but is only recorded in two states. So Michigan and Pennsylvania, you actually get a really good look as to how operators are running the business in terms of what's driving handle, what is GGR and ultimately, in addition to paid media, where we play a very different game than most everybody else. Also, how much of that handle is being driven by promotions. And so you can actually see what NGR looks like. Every other state, it's either adjust handle, or its handle in GGR and you don't really have the visibility that NGR.

So we feel -- as you see that slide that shows the momentum we have on handle from week 1 through week 9, you should assume that we feel just as good, and in some cases even better of what's the NGR trending looks like from week 1 to week 9, assuming a normal hold rate. Now Arizona, to your last question. I have zero visibility at this point into what the market looks like, that has not been reported unless it came out this morning. But I have not seen that yet. As we compare Arizona to other states launches, I would say it's sort of for us. It's in the middle of the pack. It's better than some states, and it's not quite as good as some larger -- of the larger population states like Illinois and Pennsylvania perhaps.

[Shaun Kelley, Bank of America]

Super helpful. And maybe just as my follow-up. You could just give us an update on the online casino offering. I mean, I think each quarter you give us a little bit more, but obviously you're working through that product offering. And when you think you're going to have that at the place that you want to have it, to maybe either support broader marketing, or just a bigger push through the channels that you already have.

[Jay Snowden, CEO]

Yeah, great question. We -- I feel as though our product offering currently is significantly better than it was when we launched in Pennsylvania, and when we launched in Michigan. We did have a little bit of paid media and promotion in Michigan around iCasino. because we know that the product is so much better than it was when we launched there in early 2021. So that tells you something obviously we feel from our product offering perspective, if you look at the library of slot content, the library of different manufacturer content. We have a much better offering today than we did. I still don't think our iCasino offering is where it needs to be. And I don't think it's ultimately as competitive with best-in-class product offerings in the states where we are live.

But it's getting a lot better. So we're going to continue to think about reinvesting in driving acquisition to Online Casino, as we feel better and better about the product. We -- as I mentioned earlier, we just went live with live dealer in New Jersey that's actually Barstool themed, and last night was amazing content watching Dan cats, Big Cat, and Logan Paul and several others at Barstool we're playing live Blackjack all in the same room, and as a fan, you can watch them on the live stream.

You can download the app if you're in a state where we're live, like New Jersey, where they were last night, and you can bet behind them. Which is what a lot of people were doing behind Logan Paul, and Big Cat in some of the other personalities at Barstool. So we can do things that others just simply can't do or don't have the personalities, or content creators than anybody would care to bet behind. So I think from an online casino perspective, as we continue to develop and launch new products and the overall offering is more competitive, you're going to see us continue to ramp up how much we support that from a marketing standpoint. And I think you'll see our market share reflective of growth as we make those investments all around, we're already seeing momentum.

And again, we're not where we ultimately want to be in online casino, but truth be told, and I think I've said this before, we had to prioritize. We were late to the online game in terms of launching products. We prioritize having a great -- and we've delivered on that, a great sports betting product, 4.8 on a scale of 5.0 on the Apple App Store. We want to get live in as many states as possible. We have a great sports betting brand to lead with, an amazing audience that we can activate and have done that. And ultimately that ends up being the best acquisition tool you have for conversion from online sports to online casino.

And so we've got a lot of runway in front of us. I would say from an online sports betting perspective, in terms of product and capability, we're probably third or fourth inning and still have lots of improvement in front of us that we're pursuing. From an online casino standpoint, we are in the top of the first, we're nowhere near where we know we will be and need to be. But we're making progress.

[Shaun Kelley, Bank of America]

Thank you very much.

[Jay Snowden, CEO]

Thanks, Shaun.

[Operator]

Our next question comes from Ryan Sigdahl with Craig-Hallum Capital. Please proceed.

[Ryan Sigdahl, Craig-Hallum Capital]

Good morning, Jay, Felicia. Thanks for taking our questions.

[Jay Snowden, CEO]

Hey, Ryan.

[Ryan Sigdahl, Craig-Hallum Capital]

Curious if you're willing to comment, Caesars, FanDuel, they're seeing their online businesses expect to inflect profitability sometime in 2023, I guess without getting too specific, but given what you guided Q4, two of only 20 million loss, how do you think about PENN Interactive? Can that be profitable sooner than those, and then is it even possible to potentially be profitable all of next year?

[Jay Snowden, CEO]

This is -- these are topics that we welcome, obviously, given what we've been able to do, and our strategy and the differentiation really. Here's the way that I would describe 2022 and 2023 at a high level, I've said before that, this is preacquisition of theScore that we thought we would be break-even or better from a Penn Interactive standpoint in 2022. I absolutely still stand by that. We have

[Jay Snowden, CEO]

however, acquired theScore, and we're making real significant investments in theScore around technology. And theScore has already currently live on their own PAM in the U.S., and their own promotional engine. So far so great. I mean, the results that they're seeing around not just stability and feedback and ratings are all good, but I think importantly what they're finding already is that when you, and this is why obviously we're pursuing our own tech stack, but when you have your own PAM, you can really create personalization and customization. So it's almost as though if you have 1 million customers in your ecosystem, you have 1 million sportsbooks, right.

Everybody's experience is a bit different, and what they've been able to do already with their promotional engine and what they're seeing around retention value, and people coming back to bet more often is pretty significant now it's early innings, but we're just encouraged by what we're seeing, because we know that's just the tip for us in terms of what can be done. And so from a 2022 standpoint, we will not be profitable. All the way to give a number on that until we're providing maybe guidance for 2022. It won't be in the hundreds of millions negative; it will be under a 100 million. I just don't have an exact number for you now, but it's going to be all around investing in product and technology stack.

I think it also will depend on when we go live in Ontario, because that's a huge revenue driver for us to offset some of those expenses that we're not able to offset yet as it relates to the Score. So $20 million loss for Q4, more to come on 2022, you could probably annualize that 20 per quarter for 2022 to be safe for now, and I think we'll be there or better. For 2022, even when you include the investments in tech stack, 2023 is going to be the year of hockey stick growth for us, because everything comes together. The Score is going to be live, completely vertical on their own tech stack, before football season '22.

And then we have the whole football season and March Madness to make sure everything is as we want it to be, including managed trading services, and risk management, completely vertical. And then we bring that tech stack back to the U.S. and we will convert over in the U.S. before football season 2023. So profitability is definitely going to be there in 2023 and it would be there in 22 if we weren't also going vertical on tech stack, but we're happy to be doing that.

[Ryan Sigdahl, Craig-Hallum Capital]

Very helpful. Two quick concerns on the financials, Felicia, on that 30 million you commented impact on Hurricane Ida and COVID, can you break that up between the two? And then secondly, you're live with cashless, cardless contactless at seven properties, any financial metrics you can give to share on potential revenue uplift and or margin impact from those initiatives in those early adopting locations.

[Jay Snowden, CEO]

Yes, Ryan. I'm going to ask Todd George to address those 2 questions.

[Todd George, Head of Operations]

Thanks, Ryan. And thanks, J.B. The breakdown between Ida and the Delta variant, I'd say that we have a material amount of our EBITDA -- are generated from the Southern region. So we had a -- I would skew a little bit heavier towards the Hurricane versus the Delta variant. Delta was kind of spread out, and there were pockets around the U.S. but we generate quite a bit from both Louisiana and Mississippi. So focused more of the Ida impact there. From a 3Cs. So very early innings, you heard Jay using an analogy before, but we are so pleased with what we're seeing with each launch.

So now we're 3 properties in Pennsylvania and two casinos, and two raise casinos in Ohio. And with each launch we're getting greater adoption. Initially, we thought we would see greater adoption from the younger demographics, but we're pleasantly surprised that it's actually going across all demographics. What we're seeing is that, if you look at a normal guest to a casino, tick that as your baseline, and we're seeing great growth from people that are app users, as well as even greater growth for people that are downloading the wallet and playing with wallet. A lot of that just comes from removing friction as well as increased time on device not standing in line. So very early and I think we'll have more to report in future quarters after we roll this out at other properties.

[Ryan Sigdahl, Craig-Hallum Capital]

Thanks. Good luck, and I'll hop back.

[Jay Snowden, CEO]

Thanks, Ryan.

[Operator]

Our next question comes from Barry Jonas with Truist Securities. Please proceed.

[Barry Jonas, Truist Securities]

Great. Thanks. Can you talk a little bit about the strategy behind the standalone Barstool Sports bars, as well as Pizza, and any other new growth channels there. The intent for these to be meaningful profit centers at some point for Penn, or are they more as marketing vehicles to drive gaming.

[Jay Snowden, CEO]

Yeah. Great question, Barry. I would say, a little bit of both. That really depends on which of those opportunities that you're talking about. Take the One Bite Frozen Pizza as an example, and I'll only share of course whatever Erika and Dave Portnoy have shared publicly. But they've sold hundreds of thousands of frozen pizzas just in the first few weeks of offering those, in Walmart’s across the country. I know it has blown away expectations, and at Walmart, they know how to handle demand. But it's been overwhelming for them in a lot of the different geographies around the country.

That's probably an opportunity to do both. It's going to be good financial aid, but it also importantly is going to be great for just continuing to build out the brand and the top of funnel. Not everybody who is shopping for frozen pizza is already a Barstool fan or maybe in some cases of even heard of Barstool. But there's a lot of social media buzz around frozen pizza and a lot of people sharing their purchases and ratings of the pizza. And so it's just a great brand builder. And I put the other ones that we've talked about in a similar category. The standalone Barstool Sports bars, which will essentially serve as -- because they'll be in markets where mobile sports betting is live and legal, they'll essentially serve as satellite sportsbooks, because we can make sure that it's a great digital experience inside of those Sports bars.

And some people are going to go there to socialize, some people are going to go there to meet up with friends, some are going to go there to watch games, and some people are going to go there to bet on games. So it really allows us to continue to build the brand. Introduce new people to the brand, we're picking high density population areas for these sports bars. We'll get exact locations later when Erika and Dave are ready to announce that. But the first two are going to be in the Philly area, as well as in Chicago. And we anticipate both of those opening up in the next couple of months, unless something changes, and we've got several more in the queue. We'll share more details around current performance of the existing ones that open as well as our plans for building out new ones, probably on our next call.

But we're very excited about it. It's obviously a great opportunity. And again, it's something that we can do that really, no one else in the space can, because the Barstool brand has a different affiliation and base of loyal fans who really care about the brands and feel like they are part of the brand. And so whether you're talking about those 2 examples or NCAA collegiate athletes, we're obviously building relationships with college athletes when they're relatively early in life and pre -professional career. And I think that's great right now. It's all about Barstool and how Barstool can help them as a media Company and a lifestyle Company. And down the road, maybe that evolves into a relationship around sports betting for those that are interested in betting on sports.

So I think that it's probably for us primarily brand-building, but there's definitely going to be financial components to it as well, especially when you consider the average age

[Jay Snowden, CEO]

of the Sports app user with us is late 20s, I think 28.5 years old. I don't know whatever everyone else's is. I know it's a lot older than that. And so as you think about lifetime value, we just want to continue to feed the funnel and 28.5 years old average age on the sports betting app is terrific when you think about what those spend levels may be when they are in their 30s and 40s.

[Barry Jonas, Truist Securities]

Yes. I guess that touches on my follow-up question, which is I'm curious as you're building out Penn Interactive, were you learning about the differences and similarities between the online and the land-based player. And if longer-term down the road, how you're thinking about potential cannibalization.

[Jay Snowden, CEO]

Yes, it's a great question, and maybe Todd and I can tag team this one. There’s a lot of really good data. We've been asked as now for a while and Pennsylvania and actually in Michigan, close to a year, there's some really, really interesting facts that were sort of uncovering in the states where we're alive with brick-and-mortar casinos as well as Online Casino they call it Pennsylvania and Michigan. One of the things that we're finding which I find fascinating is that when you look at the Online Casino VIP business, roughly half of that Online Casino VIP business, where customers that we knew, we had a relationship with previously. But of that 50%, 60% of them had gone dormant.

So we've reactivated, this has been such an amazing reactivation tool for us. For whatever reason they had gone dormant in our database, whether it was because they moved elsewhere in the state or whatever reason it might be. They decided they didn't want to visit the casino anymore. But 60% of those that were reactivated -- or 60% of them, of the VIPs were reactivated, who are no longer visiting our casinos as a regular customer, and 10% of those also started coming back to our brick-and-mortar casinos after they were reactivated with online casino. So that's really powerful, as I take a step back and think about it. And you're definitely seeing, I think it's been well-reported, that in the states that are live with online casino, you haven't seen the brick-and-mortar casinos in those states bounce back the same way versus 2019, as you have seen in states that don't have online casino offerings.

I think that's to be expected. There's no doubt you get some people that are spending up. Some are splitting wallet. Some have moved over entirely to Online Casino. And I think that's why it's really important to run a profitable online business because if you're moving people and their spend around, you want to make sure -- I mean, from our perspective, we're indifferent. You want to play online with us, great. You want to play in the brick-and-mortar, that's also great because we know we have best-in-class margin profile long term. We just wanted to develop a relationship and make sure we have best-in-class products. Well, I'll pause there and see if Todd has anything you want to add to that.

[Todd George, Head of Operations]

Jay, I would only add a few items. 1, you touched on it. The fact that we have a 100% of the online component. We don't have a JB like some of the others in our industry do so. Again to Jay's point, we have a 100% of the upside. The other thing we're very uniquely positioned in the states that are offering online gaming, because we don't have a brick-and-mortar presence in New Jersey, so a lot of this is really brand-new business to us. A lot of it drives the database, and then we can mobilize those people around the country to our operations. And then in Pennsylvania, and the bulk of the population residing in and around Philadelphia.

Our properties are not located close to Philadelphia, so a lot of that represents brand-new play as well. Again, an opportunity to grow the database that can then be shared across our properties around the U.S. And similar with Detroit, in the Michigan area. The Detroit area, we have a large amount of our databases within that 30-to-50-minute drive. So as we're growing that business, it's coming from outside of that zone as well.

[Barry Jonas, Truist Securities]

Great. Thanks for all the color.

[Operator]

Our next question comes from Bernie MacKinnon with Needham & Company. Please proceed.

[Bernie Mcternan]

Great. Good morning. Thanks for taking the questions. Just wanted to focus in on the live event at the Hollywood Casino in Illinois that the 10,000 first-time depositor’s significant step-up of what you've been adding previously. How's the retention and I know it's early days, but how is the retention in game engagement of those users and payers look relative to the overall base?

[Jay Snowden, CEO]

Yeah. We were very curious to see what kind of retention value we would have with the 10,000 given that it was driven around an event, and you don't know at the time you do the event, what is the motivator? Is it to be in-person with Dave, and Dianne, and crew on property? Is it to just take advantage of the promotional offer and the bet on the dare. So we really -- we didn't know going in.

We were expecting about a thousand to 1500 people to come in, and visit us, and deposit. So it obviously blew away our expectations. I've been very pleased with the retention that we've seen from the 10,000 we saw a noticeable uptick from a handle perspective relative to the first few weeks of the football season, I think we ran this and week four if I'm not mistaken. And if you look at our Illinois handle and week four it was the best week we had. But week five through week nine were all better than weeks one through three by a pretty good variant. So it turned out to be, in hindsight, a great event, and we learned a lot from it.

And I think it really shows the power of omni -channel when we do something that is maybe initially digitally-focused, but you have an on-premise experiential event component to it. You can really put these opportunities on steroids and get more out of the events than you anticipated. So I think you can expect us to take the learnings and do more around that, not necessarily just Aurora, but other parts of the country, other states. And I think we've been -- it's been interesting too. I think a big part of the reason why you're seeing this week over week over week handle growth for us from Week 1 to Week 9 is that we've been able -- well 1.

we're in more states obviously, but 2. we've been able to get out, right? A year ago, We were live in one state, and COVID was still keeping people mostly inside. Whereas right now, the Barstool crew, every week we hit one of the 9 states that we're in, sometimes multiple times a week. And we're doing on - prem events. And if you looked at it, I don't know how many of you saw it, but it'd be worth going back and looking at the game day event that the Barstool crew did last weekend at Michigan State in East Lansing. And if you look at the crowd that was at the Barstool event in an apartment complex next door the stadium versus the ESPN event, it wasn't even close.

And that's exciting, but we weren't able to do that last year. And every week when we do these on - prem events, you see the states we're in -- see a significant pop in first-time deposit -- registrations, first-time deposits, handle. And we're doing a much better job after the fact around retention, because we've learned a lot around what works and what doesn't from last year being in 1 state to now having scale in 9 states. So, feeling really good about that overall and lots more to come.

[Bernie Mcternan]

Got it. That's helpful. And then just wanted to touch on market access. You spent $7.5 million on the ballot initiative in California, what's your outlook for potentially bringing OSB to that state. And then while we're on the topic of market access, just any thoughts on New York.

[Jay Snowden, CEO]

Yes. Happy days hit both of those. California was actually $12.5 million. We're one of seven operators that are working on this valid initiatives together, and everybody wrote the same check. We'll have to see. I mean, it's California is, I think, the ballot initiative. I think the fact that there's significant license fees upfront, the way that the bill is constructed, as well as a large portion of the taxes go back to really two areas, one, homelessness and mental health support, which is a big issue and a lot of states, California in particular, as well as some of the dollar s channel back to the tribal entities in California.

So I think that it's it's been constructed in a way that is good for the state and good for those that operate casinos in the state today. It's going to take a little bit of time to play out. Obviously, we are going to be pretty deep into signature gathering mode here in the coming weeks and months. And there's been a little bit of oppositions, so we're trying to understand that. And we actually want to do this in a way where it's completely complementary to the ballot initiatives that the tribes already had out there before we announced this ballot initiative and the language around the ballot initiatives.

We're trying to make sure that we're doing this in a complementary way and that we're including all of the right parties as we think about the California opportunities. So more to come, obviously, very early and I will have more updates. I think quarter-to-quarter, we have a better feel for -- the polling already looks good. Pooling can change over time, and signature gathering efforts is just going to take us a little bit of time to see where we are. But I feel so good about the team, the dollars that we've put for the campaign initiative. New York, so New York's an interesting one.

I have discussed New York with my team [indiscernible] and I've -- I feel the same way today that I felt at day one, which is I feel really mixed about New York because of the way that the gaming law is structured. And the fact that the tax rate is being self-imposed with a minimum of 50%. And -- when you keep in mind that that 50% taxes in addition to a really high license fee, as well as that 50% tax is on growth pre -promo spend, not net. I don't think anybody is going to make money, operator wise. The state's going to make money, I don't think a single operator will make money in New York. So I've always struggled with the -- would you rather be in or not? I think objectively speaking, you'd probably rather be in than not be in.

But it's one of those states where if you're not in, you're not crushed by that either, maybe from a TAM perspective and from a revenue perspective. But I think it's just going to be, it's going to be a margin killer. I think if It's going to be an EBITDA detractor, and New Jersey, we're live in and a lot of the New York residents live in North Jersey and Manhattan, which is easy to get over. And I think that competitively, New Jersey is just going to be able to do things and offer things that New York can't. I'm not seeing anything that is -- I don't think -- New York has their own prerogative in terms of how they want to structure the loss, and they're pursuing that.

And if we're in then we'll play by the rules, I think that if we end up as one of the operators in New York, that if nobody can make money, we'll lose the least, because we can rely on the Barstool audience organically, and turn that on and activate it in ways that we've done in other states without having to get into the paid media shotgun approach. I don't know who's going to be able to afford doing really any of that given the tax rate would be the highest in the country, or at least tied with New Hampshire. And we know DraftKings has been cleared, very difficult to make money in New Hampshire. So it's a long answer because it's a pretty complicated issue. That's our position on New York.

[Bernie Mcternan]

Yes. I appreciate the comments. Thanks, Jay.

[Operator]

Our next question comes from Thomas Allen with Morgan Stanley. Please proceed.

[Thomas Allen, Morgan Stanley]

So iGaming typically when we look at international markets, iGaming more excitement at sports betting. And you add, so we're seeing basically the opposite, if not just is concentrated. How do you think that will turn out and like, how are you thinking about it affecting your Company?

[Jay Snowden, CEO]

Can you maybe I'm not sure I follow the question, Thomas, I'll make sure I answer what you're shooting for.

[Thomas Allen, Morgan Stanley]

Yes. So in iGaming, you typically see like the international markets and in iGaming, specifically, you typically see the largest share companies would like 10% to 15% share. In the U.S. right now you see certain one of your peers was about 30% market share. Do you think it will continue to be so concentrated, or do you think over time that market is going to be like -- more like the international market. And then how are you thinking about in terms of your opportunity. Obviously, you have a massive casino database, which is similar to the peers that has a lot of market share.

[Jay Snowden, CEO]

Yes. Okay. I got you. Here's my thoughts overall on market share. I think that it's very early to be declaring what's going to be in the next 5 years on either sides, sports betting or online casino. I do think that companies that have built-in structural advantages, I think on the online casino side, that would be your existing casino operators, who obviously in the states where iCasino is legal, have a built-in advantage of a database that they can market to. just like the sports betting operators, the DFF companies, and us with Barstool have a built-in advantage because you have a database you can market too organically.

So market share, I think, is going to continue to shift around. It's obviously competitive. There will likely be some consolidation in the mix as well. So I don't have any reason to believe that the ultimate market share results in terms of fragmentation are going to look a whole lot different than over in Europe or parts of Europe. I don't know if there will be 30% or 40% operator -- single operator market share "winner" if it's going to be more loss that are in that 10% to 20% market share. we'll have to see how it plays out, but I think that some companies have built-in advantages.

The thing that's always tough also to peg, Thomas, around questions on online casino is that there's really only three states of any real population that are live today. And those are continuing to, I think, evolve and we'll see what market share looks like. I think even in those states that will look different in two years, in three years than it does today, certainly from our perspective, we know because our product is only going to get better and we can really take advantage of converting sports bettors in those states, as well as our database, because in Michigan and Pennsylvania, we have casinos there.

But I don't know what states are going to be live and legal and obviously there are some states where we are super well-positioned if it comes, we have four casinos in major markets in Ohio. We have the top-of-class assets in Louisiana. And all the major population centers. And that states, Missouri, we're very well-positioned in Kansas City and St Louis. The list goes on Illinois, Indiana, we've got multiple properties in so many of these states. I think we're really well-positioned. But I think it's going to take a little bit of time to play out.

[Thomas Allen, Morgan Stanley]

Helpful. And then just my follow-up. One of the attractions of retail sportsbooks is bringing in a different demographic, or maybe attracting some players back, the like of cable games over slot machines. Any updated numbers around what you're seeing in places where you've opened up retail sportsbooks on the table game side, and maybe some benefits to [Indiscernible]. Thanks.

[Jay Snowden, CEO]

Yeah. Todd, anything you want to add to that that we've said -- beyond what we've said previously.

[Todd George, Head of Operations]

So the trends continue. The great thing for us, and Jay and I kind of talked about this at the close of every month, that we all expected as you referenced a growth in table games business. But we're also seeing some conversion over to slots. We're seeing conversion over to electronic table games, which has really been able to grow quite a bit this year. And then obviously the increase in food and beverage as -- especially our Barstool -branded retail sportsbooks feature a pretty robust food and beverage component as well, so it's more experiential.

That has been really the -- across every property, across every region. So we're excited to get Louisiana. As Jay touched on in his opening remarks, we've got the temporary sportsbooks, 2 of them open this week, but we'll be converting those 2 Barstool branded sportsbooks in the upcoming months. So we really look for that as keeping that Texas customer coming over. You had mentioned really being able to reactivate the inactive. That has been the case a lot in Indiana, with the Cincinnati customer coming back to Indiana and the Chicago customer coming back to each Chicago and Indiana. So everything you touched on is what we continue to see.

[Jay Snowden, CEO]

And Thomas, unless you have any other follow-ups, I'm always sensitive to everyone's time and we're right at ten o'clock. So Frank, unless Thomas has anything else, I think we'll probably stop there.

[Thomas Allen, Morgan Stanley]

Thank you.

[Jay Snowden, CEO]

Alright. Thanks, Thomas. And thank you, everybody else for joining us this morning. We look forward to catching up with you again, likely in very early February for our Q4 earnings. Have a good one.

[Operator]

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day everyone.