Good day, and thank you for standing by. Welcome to the Bally's Corporation Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. In order to ask a question during the session, please press the star key followed by the number one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star, then zero. I'd now like to turn the call over to Bobby Lavan, Chief Financial Officer for Bally's. Please go ahead, sir.
Morning, everyone, and thank you for joining us on today's call. The earnings release and presentation that accompany this call are available in the investor relations section of our website. With me on today's call, Lee Fenton, Chief Executive Officer, George Papanier, President, Retail, and Robeson Reeves, President, Interactive. Before we begin, we would like to remind everyone that comments made by management today will contain forward-looking statements. These forward-looking statements include plans, expectations, estimates, and projections that involve significant risks and uncertainties. These risks are discussed in the company's earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. In addition, during today's call, management will refer to certain non-GAAP financial measures. Reconciliations to the most comparable financial measures are included in the schedules in our earnings release.
We do not provide reconciliation of forward-looking non-GAAP financial measures due to our inability to project special charges within certain expenses. Today's call is also being broadcast live on our investor site and will be available for replay shortly after the completion of this call. Now handing it over to Lee.
Thank you, Bobby, and hello, everyone. We are one year on from bringing Gamesys into the Bally's family and the industrial logic remains as strong as ever. We now have a powerful global business with diversity of revenues and EBITDA. The casinos and resorts segment is going from strength to strength as the portfolio of properties goes into the next phase of integration. The interactive business had a tough COVID-driven comps to overcome and has been impacted with negative FX swing through 2022. Q3 has seen interactive move to greater stability and profitability. As promised, we continue to deliver strong free cash flow from what is now a globally and channel-diversified business. From table dealers to tech developers identify as Bally's team members. Integration beyond the brand on the casinos and resort side has begun, and we're starting to see the fruits of that labor.
Bally's Chicago is a game-changer for the group, and the early performance of Tropicana Las Vegas has been encouraging, and we're delighted to finally have a presence on the Strip. New Jersey iGaming climbed to a 3.5% market share in the quarter, with CPA significantly below our peers as we broaden the options available to our brick and mortar database. New Jersey is shaping our blueprint thinking for future states. For the third quarter, we had tremendous results in casinos and resorts. Lincoln outperformed, finishing just shy of double-digit revenue growth, coupled with a continued focus on margin and initial growth of the IGT JV. That JV goes from 23% to 40% on January 1 and will drive incremental earnings into 2023. Atlantic City had positive $9.5 million EBITDA to bring the year-to-date result to positive $1 million.
We do expect AC to be negative in Q4. Our EBITDA margin, Ex AC, was ahead of expectations at 39.5%. With a more integrated portfolio, we are now benefiting from cross marketing, cost efficiencies from purchasing power, and increased centralization, proving now our strategy to bring the properties together. In international interactive, the U.K. was slightly up year-over-year on a constant currency basis, delivering a record number for our U.K. business and the first positive quarter since Q3 2021. We expect that Q4 will also be positive in the range of high single digits. Performance was driven by more targeted marketing spend, more dynamic jackpot strategies, and enhanced customer journeys powered by machine learning. The UK white paper continues to be delayed following government leadership changes.
While ongoing delay brings some unwelcome uncertainty to the industry, it has given us ample time to prepare our business for a range of potential outcomes should the white paper be forthcoming in the near future. Asia continued some of the weakness we saw in the second quarter, being down 3.3% year-over-year on a constant currency basis. We are beginning to revise our marketing strategies to maintain profitability in the region. We have seen blips like this in Asia before. We remain confident in the market and our ability to grow the business. A new sportsbook there has launched in time for the World Cup, and the customer funnel is supported by free-to-play games from our SportCaller team. We will continue to harvest in Spain and wind down in the rest of Europe.
North America Interactive continues to be in both development and ramp-up mode. New Jersey had $12 million of GGR and $8.3 million of NGR from our iGaming offer in Q3, showing discipline in bonusing and giving us a contribution margin in the mid-30s. We rolled out new lobby and more games from multiple partners during the period. We expect New Jersey iGaming to continue to grow and be profitable for the rest of the year. We are targeting 6-8 points of market share in 2023 after the implementation of omni-channel rewards, along with improvements in payment processing and marketing tools. Our Bally branded app in New Jersey continues to deliver a very attractive cost of acquisition for depositing players even before the marketing tech stack improvements that will be coming in 2023.
Different states will have different characteristics, and our focus is on creating the blueprint for states of a similar type before we invest in rollout. As I said, iGaming states are our priority and we will focus resources in markets including Pennsylvania and Ontario, as well as states that we believe will regulate iGaming in 2023. Our progress on sports has taken longer than we expected, and we will not support the sports-only markets with marketing dollars until we have comfortable markets of scale in the North American footprint. Our focus remains on the continued development of our product and the market blueprints rather than being overly aggressive on rollout. Now let me turn it over to Bobby to give you the financial highlights for the quarter.
Thanks, Lee. Casinos and resorts reported $119 million of EBITDA. This includes +$9.5 million of EBITDA for Atlantic City. Excluding Atlantic City, EBITDA margin was 39.5%, in line with our targets of high thirties. Adjusted EBITDA for the quarter excludes $3 million of rent to associated with the purchase of Tropicana Las Vegas, which we closed on September 26th. With the closing of Tropicana, we will begin reporting $5.6 million per quarter of rent as part of the operating rent going forward. International Interactive had approximately $76 million of EBITDA at a 33.5% margin. The UK was +0.1% year over year, and Asia was -3% on a constant currency basis.
As Lee discussed, marketing was reduced in the UK by 30% as we focus on profitability and highly efficient spend. North America Interactive had $20 million of negative EBITDA. In the quarter, there was approximately $7 million of EBITDA drag from non-core assets, which we are taking a hard look at. As noted in the press release, we will fully expense launch costs for states to open before being operational. This is a $4 million drag to 1Q + 2Q and a $6 million drag to 3Q + 4Q versus budget and previous forecasts. The cash outflows were budgeted to the balance sheet, and we are just adjusting the timing of taking these expenses. We have updated our 2022 financial forecast to reflect the adverse FX headwinds, the reset in Atlantic City and actual results for the first nine months of the year.
At current FX rates, we expect revenue to be $2.25 billion and adjusted EBITDA to be $540 million, which includes $75 million of North America Interactive EBITDA losses. We continue to focus on profitability and cutting costs, but some of those cost cuts will only occur with two months left in the year. We continue to expect ex-capital expenditures to be $250 million for the year. Pro forma for the tender, common shares outstanding at the end of the quarter were 47 million, and we have incremental warrants, options, and other dilution of 13 million shares. Sixty million shares outstanding is the right way to look at our shares outstanding. We ended the quarter with $3.3 billion of net debt.
We have ample liquidity to fund all of our announced projects and continue to invest with care in North America Interactive. Our long-term commitment is to be sub 5x debt to EBITDA, which we expect to hit in mid-2024. We expect the Biloxi-Tiverton transaction with GLPI to close in January 2023. With that, operator, let's open up the Q&A.
At this time, if you'd like to ask a question, please press star and one on your touchtone phone. You may remove yourself from the queue anytime by pressing star two. Once again, that is star and one to ask a question. We'll take our first question from Barry Jonas from Truist Securities.
Oh, great. Thanks for that. Can we maybe start by talking about how October has been trending?
Sure. Hi, Barry. October is doing well. Casinos and resorts is a continuation of the trend that we've seen in Q3. U.K. actually finished October up around 10% and Asia is just slightly down.
Great. Great. Just for a follow-up, you talk a little bit about evaluating money-losing businesses in North America, Interactive. Can you maybe give a little bit more color about that?
Sure. Well, listen, as you know, we, you know, we pulled together a fairly large number of assets in a pretty short space of time. You know, we've, we now have
12 months looking at that and knitting that picture together. You know, the assets that are not showing us now that we have our stack pulled together.
More identifying sort of like more non-core, but the overall strategy remains.
Yeah. Overall strategy remains non-core. We're identifying effectively what becomes non-core.
Perfect. All right. Thank you so much.
Thanks, Ben.
The next question comes from Lance Vitanza from TD Cowen.
Hey, good morning. This is Jonathan in for Lance. My first question is regarding the white paper. I understand Paul Scully is replacing Damian Collins. What were your first impressions with the replacement, and can we expect the white paper to be one of his top priorities given everything that's going on in the U.K.?
Sorry, what was the first question? Can you repeat the first question again?
Sure. Just what was the first impression with the gambling white paper, also the Minister for Tech? First impressions are relatively positive. They have a big in-tray at DCMS. I think the first impressions are positive, pro-business guy, and nothing to concern us. Expectations in terms of where it sits in the pecking order is difficult to call, but the DCMS has two big things on its ticket at the moment. One is the Online Safety Act and one is the Gambling Act review. You know, you may have seen that the new Prime Minister has said that he's there to deliver the manifesto promises that were given before, by the Boris Johnson elected government, and that included the Gambling Act review.
We expect them to push on, but we don't necessarily expect it to be the top of the priority list. Understood. Just on my last one, I understand, like, the Lincoln facility, right? Like should that transaction ultimately, like, materialize, what kind of projects are out there that we could find interesting to use the proceeds of the sale-leaseback with?
Well, yeah, I mean, you know, we have, you know, right now the focus is Chicago.
Mm-hmm.
you know, long term, we think that, you know, acquisitions in the casino space will continue. We think that there's opportunities outside the U.S. from a profitability perspective on interactive side. We have a multiyear path for cash needs. We feel very comfortable today with-
Mm-hmm.
Chicago, but as we continue expanding, then we'll look to.
Thanks for taking our questions. You know, starting on the brick-and-mortar segment, really nice performance on the margin side. Looks like I'll call it 300 basis points quarter-on-quarter. Bobby, I was just hoping you could sort of break down the sequential drivers there a bit more. How much is seasonality versus some of the centralization efforts you talked about in the prepared remarks versus maybe just operating leverage quarter-on-quarter? Just any way to frame it there would be helpful.
Yeah. I mean, the biggest step up is Atlantic City has really turned around, so that's, you know, exciting for us. We implemented some cost restructuring in August that's, you know, flowing through, but also the property just, you know, really outperformed. You know, the other margin step up is as the IGT JV continues to roll in, you know, that's ultimately a significant margin driver for us 'cause the EBITDA comes in without revenues. Ultimately, you know, this is the first quarter where we have a full year. You remember we closed Evansville, Quad, and MontBleu in the second quarter of 2021. You know, we've rebranded the properties. We've started centralizing a bunch of the different back office functions, and we're really focused on just the portfolio as a whole.
I don't know, George, if you'd add to that.
Yeah. You know, Bobby, you stated it pretty accurately. You know, in addition to that, we've been able to maintain the labor reductions primarily through FTEs. I think we're ranging around a 25% reduction since 2019, and that's pretty sticky, so we've been able to maintain that other than the slight offsets from increases in wages.
Okay, great. That's very helpful. Thank you both. Then moving to the international interactive side of the business, you know, Lee, could you just provide some color on what you see as the biggest drivers of the softness in Asia? I know we've talked about, you know, some impact as consumers, you know, play in USD but live in yen. Is that the main driver or there's anything else, you know, driving that 3% contraction in constant currency?
Yeah, I think it's largely macro factors which are driving that Asian region. You know, we've operated in Asia for many years and you see different slowdowns from time to time, whether it's macro or whether it's sometimes sentiment from gaming gets the occasional dip. That makes your marketing more challenging. You know, somewhat the nature of the beast in pre-re-regulated markets, but more confident that the region will be in growth.
Okay, perfect. Very helpful. Thank you both. I'll pass it on.
Thank you.
Our next question comes from David Katz from Jefferies.
Hi, this is Cassandra asking on behalf of David. Thank you for taking my question, and I'd like to go back to the margin question. 39.5% excluding Atlantic City is pretty good. As we look forward, are there more levers to pull or is there any more room for margin improvement at this point?
There is. You know, the biggest one is the IGT JV, which is $15 million+ of EBITDA. We'll have no revenues next year. So it's a 60/40 JV with IGT, so we're gonna see a good step up. You know, on the cost side, we are very focused on centralization and, you know, we've started trying to bring our teams together, whether it's procurement, finance, more aggressively. I'd also say, you know, Atlantic City is zero EBITDA on a $150 million+ of revenues. So as that continues to have more profitability, we're very excited about what it does to our margins.
Great. Thank you. If I may ask another one. You said you will refocus your efforts in North America Interactive, especially on the sports side. You have this partnership or asset in kind of Sinclair. How do you think about that partnership going forward? How has that worked out so far for you?
We continue to get a huge amount of benefit from the name and branding that we have with Sinclair, and we continue to work on a watch and bet feature that can work across those RSNs. You know, it continues to form part of our plan, and we think we get tremendous re-branding benefit from it. The reality is, you know, I said earlier, we haven't gone as quick as we would have liked on our own sports product, and we need to have that in a position that we're excited about to really take full advantage. The partnership with Sinclair continues.
Great. Thank you very much.
Thank you.
Our next question comes from Jordan Bender from JMP Securities.
Great. Thanks for taking my question. Trop now closed. You have a slide in your deck talking about evaluating potential development opportunities. We got comments in the last couple of days that the commissioner of baseball seems to think the A's will end up in Vegas. Is this putting a stadium on this plot of land still in the cards for you guys, or are you guys thinking more of just a rebrand or renovation of that asset?
No, I think that that's still very much on the cards for us. I mean, obviously, they've got to make some decisions and some choices, but we've been in discussions with other partners as well. I mean, our focus right now is laser focused on the property side, on the development of the Bally's Chicago, but we're very much looking at the long-term plan for the Tropicana property. Yes, but we would be very keen to see iGaming in Rhode Island as we would in any other state. Of course, Rhode Island is very close and where we're headquartered. We'd love to see iGaming rolled out there, and we think there is positive sentiment towards that happening.
Great. Thank you.
Thank you.
Our next question comes from Dan Politzer from Wells Fargo.
Hey, good morning, everyone, and thanks for taking my questions. So Bobby, on North America Interactive, you guys are forecasting now $75 million loss in 2022. But it sounds like at the same time, you guys are, you know, kind of pivoting more, you know, at least publicly to focus more on iGaming than sports. How should we think about kind of the progression, you know, 2023, 2024 of that $75 million loss? Should it get better? Does it turn positive? And if so, you know, give us some guideposts.
Yeah. I mean, it will be better than it is this year. As we called out, there's about $7 million in the third quarter of losses that we view as non-core slash we need a plan to make them at least flat to positive. You know, the iCasino in New Jersey continues to ramp, you know, very excited about early results in Ontario. We'll have iCasino in Pennsylvania next year, you know, and we'll be minimizing the losses related to sports betting. In the end, that's what North America Interactive should be. The trajectory is positive. You know, we're feeling very confident about that.
We just need to really look inside at that $7 million of losses and have a path because just burning money for money's sake, because that was where the market was a few years ago, is not where we're going in the future.
Okay, got it. Have you guys given a long-term leverage target as we think about these projects getting layered in and, you know, the Chicago financing?
We'll be sub 5 in 2024.
Got it. Thanks so much.
Thank you.
Our next question comes from Ricardo Chinchilla from Deutsche Bank.
Hey, guys. Thank you so much for taking the question. I was wondering if you could provide the regulatory EBITDA for leverage calculation purposes and the leverage compared to the one that you report to Rhode Island.
The leverage we report to Rhode Island was about 6.5.
That's still the leverage. You know, when you think about your project next year and the current state of the capital markets, is there a way in which you guys could, you know, rethink about the $1.1 billion loan with any other funding sources? Do you guys think that maybe you would be required to put in more equity into the project? You know, if you could comment on, you know, how much more equity will you guys be willing to put in just to kind of lower the rate or make the transaction a little bit more feasible given the current state of capital markets, that would be very helpful.
Yeah. Let me clear up some confusion that's in the market. That $1.1 billion comes in between 2023 and 2026. I have $1 billion of liquidity when we close the Biloxi-Tiverton transaction, which should be the very beginning of January. If the capital markets don't clear up, then I can put more capital in, and at some point I'll be able to get a construction loan. I don't need that construction loan really until closer to the completion of the deal. Obviously, I want that because we wanna maintain as much liquidity at the parent for flexibility for M&A and other strategic options. We're pretty good.
You know, we're close and focused on a land sale leaseback in Chicago because we think that that's a core part of the capital structure, which we talked about before. Really, you know, we are not dependent on the capital markets as it relates to Chicago until 2024-2025.
Perfect. Thank you so much. One last one for me. You guys show in your forecast that you're still expecting to repurchase for $100 million in 2023 and 2024. You know, how flexible are you guys with share repurchases? If you start seeing a slowdown in trend, would you guys cut this or what other levers can you pull to just improve liquidity given the construction projects that you guys have?
Yeah. Again, we have $1 billion of liquidity after those share repurchases. You know, we are continuing to deliver returns to shareholders through share buybacks, but we'll evaluate the macro environment. As you know, as Lee said, you know, October was strong. You know, I understand. You know, we're not seeing it. You know, we are, you know, as I've, you know, expressed to the investment community, we are preparing for it in 2023 from a cost-cutting perspective. I think you saw the fruits of that labor in the third quarter on the casino side. Ultimately, you know, but if the macro changes hard, the priority is funding Chicago.
Perfect. Thank you so much for your answers.
Thank you.
Once again, that is star one to ask a question. Our next question comes from Chad Beynon from Macquarie.
Hi. Good morning, and thanks for taking my question. Firstly, can you just talk about any updated intentions for a downstate casino in New York, kind of how this fits in your plan and current capital structure? Thanks.
No. Well, Chad, I'd say, you know, early days we remain interested in many opportunities, and New York's one of them. We've said we'll continue to look to see if we can get into the mix there, but nothing to report right now.
Okay. Thanks, Lee. Then back on the international interactive, squarely focusing on the U.K. You know, clearly we've been watching that market, and there's been reports of just higher inflation and maybe a weakening consumer. You know, what you guys talked about clearly tells a slightly different story. But can you just kind of, you know, give us any trends in terms of if you saw any differences throughout the quarter, if it got better, if it was stable? I mean, it sounds like this is something you're pretty comfortable with, given your history in the market and visibility, but just wanted a little bit more color there.
Yeah. Chad, I think that, you know, we're well steeped in the U.K. market and have a very long-term customer base here. I guess the term I would use is ultra-optimization in terms of everything that we're doing in the UK. I don't know. Robeson's here. Maybe, Robeson, you can give a little more color in terms of what you've seen.
Yeah. As Bobby said, we've cut marketing, acquisition marketing by 30%. We're still seeing the same value of revenue coming through from a reduced cohort players, which gives me a lot of comfort that we have growth in Q4. That was positive, and I expect to see continuing great margins there. We have had a little uptick in ARPU in the quarter, but nothing crazy, right? Actually, ARPU's in Q3 2022 only very slightly ahead of ARPU's in Q3 2021.
Great. Thank you both.
Thank you.
It appears we have no further questions. I will now turn the call back over to the speakers for any closing remarks.
Thanks, everyone.