PENN Entertainment, Inc. Q2 FY2022 Earnings Call

Greetings, and welcome to the PENN Entertainment Second Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. It is now my pleasure to turn the conference over to Joe Jaffoni, Investor Relations. Please, go ahead.

Thank you, Dina. Good morning and thank you everyone for joining PENN Entertainment's 2022 second quarter conference call. We'll get to management's presentations 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, believes, 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 risks, and 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 include non-GAAP financial measures within the meaning of SEC Regulation G. And when required, a reconciliation of the 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. With that, it's now my pleasure to turn the call over to the company's CEO, Jay Snowden. Jay, please go ahead.

Thanks, Joe. Good morning, everyone. Joining me today is our CFO, Felicia Hendrix, and our Head of Operations, Todd George, as well as other members of our Executive Team. As usual, we have provided a link to our investor deck and our earnings release, which we'll be referring to in our prepared remarks. So I'm sure you noticed our company's new logo and name change to PENN Entertainment. Over the past few years, PENN has transformed our business through a highly differentiated strategy, focused on organic cross-sell opportunities, which is reinforced by our investments in our market leading retail casinos, sports, media assets, owned technology, including a state-of-the-art fully integrated digital sports and online casino betting platform and an in-house iCasino content studio. Our new name maintains ties to our legacy while better reflecting our evolution into North America's leading provider of integrated entertainment, sports content, and casino gaming experiences. Next month, we'll also be celebrating the 50th anniversary of PENN National Race Course, which is where our company's story began. We're all proud of our heritage and how Peter Carino took over from his father and grew the company from that single racetrack into one of the top regional gaming companies in the country. I'm honored to follow in his and Tim Wilmott's footsteps and to help write this next chapter in our company's growth story. In terms of our results, as you'll see on slide six and seven, we had a good quarter with consistent performance across the portfolio. We beat consensus on both revenues and EBITDAR and generated sequential upside over last quarter, thanks in part to the performance of our Interactive segment and strong results at our retail operations, despite a tough comp against the second quarter last year. As highlighted on slide 10, our destination properties, which benefited from hotel remodels, new restaurants, entertainment, and Barstool branded Sportsbook performed particularly well in the second quarter. Our mychoice database has increased by over 1.2 million registrations over the last four quarters, driven by both our retail properties and our new interactive offerings, which provides significant opportunities for future growth. We are encouraged by the ongoing visitation and engagement growth in the VIP segment of our database. In addition to year-over-year increases and rated theoretical across all segments, except those at the age 65 and above, which is highlighted on slide 11, our unrated segment trends though down in the second quarter year-over-year, partly due to federal stimulus payments last year and more entertainment options outside of our casino offerings and online offerings available this year also reflect strong conversion of non-rated players into our mychoice loyalty program. Turning to slide 12, our 3 Cs cardless, cashless and contactless technology and omnichannel engagement also continue to drive our growth. Our mywallet cashless experience is now available at nine properties in three states, and we expect to roll the technology out to 12 additional properties by the end of this calendar year, pending regulatory approval. Guests that use our mobile wallet and who engage with us via online offerings are not only more loyal, but they also play at a higher spend level when visiting a property and generate a higher total value when engaging with us across multiple channels. Given our second quarter results and strong volumes in July, we've decided to maintain our current 2022 guidance range, which we notably increased last quarter to between $6.15 billion to $6.55 billion in revenue and EBITDAR of $1.875 billion to $2 billion. We believe that our property level EBITDAR margins are sustainable in this current revenue environment at approximately 37%. Turning to our Interactive segment. We experienced nearly 100% year-over-year revenue growth this quarter, excluding the impact of gaming tax reimbursements to third-party skin partners. We remain on track to deliver EBITDA losses of approximately $50 million for the year. The largest portion of the loss will occur in the third quarter due to our contribution to the California sports betting ballot initiative, along with the start of football season in new markets like Ontario and Kansas, and we remain on track to be profitable starting in the fourth quarter of this year. As highlighted on slide 13, our Barstool-branded retail sportsbooks are resonating with the younger demographics and creating meaningful cross-sell opportunities. Our recently converted Barstool Sportsbook in Lake Charles, Louisiana, set a new standard for retail sportsbook experiences, and we are seeing very encouraging results from the edition. We are on track to open the Barstool Sportsbook at L’Auberge Baton Rouge this fall. And based on our ongoing success in Louisiana, we are optimistic about our upcoming sportsbook launches in Kansas and Ohio where we have similar market-leading properties bolstered by large casino databases. And with the legislature recently approving sports betting in Massachusetts, the birthplace of Barstool Sportsbook and also home to our Plainridge Park Casino, we're excited to add yet another possible retail launch by the end of this year. And mobile wagering is anticipated in 2023. Turning to slide 14. Our early results following the successful launch of theScore Bet mobile app in Ontario on April 4 demonstrate the strength of the brand in Canada and the benefits of our fully integrated media and betting ecosystem. This allows us to drive significantly stronger results and a greater than 50% cross-sell into iCasino. When we acquired theScore, we discussed an interactive roadmap that included theScore Bet working towards transitioning to a proprietary risk and trading platform in the summer of 2020. I'm extremely pleased to share that last month we successfully deployed our risk and trading platform on theScore Bet, which completed the vertical integration of our sportsbook operations in Ontario. I want to thank all of our team members at theScore who worked so diligently on this project over the last couple of years and executed this launch on schedule, allowing us to be live in Ontario with a significantly enhanced product ahead of the fall season. Custom building all components of a sportsbook infrastructure is a massive undertaking, which clearly demonstrates the industry-leading technology, engineering and product expertise that we have in-house at PENN between theScore, PENN Interactive and our corporate product and engineering teams. This sets us up very well for the future. As we talked about previously, the benefits of a vertically integrated online betting operation are numerous. You'll see on slide 16, we've broadened theScore Bet offerings and increased event props and in-game wagering options. Second, owning all components of this platform unlocks greater personalization and media and betting integration capabilities, allowing us to create bespoke user experiences that are meaningfully engaged and subsequently retained customers. Third, we will realize valuable savings over the next 18 months on third-party platform costs while driving wider margins. And finally, we're operating on a faster, more reliable platform that provides shorter timeframes to build and launch new features. We also remain on track to transition the Barstool Sportsbook in the U.S. to theScore player account management and trading platform in the third quarter of 2023. And we are working with our existing providers here in the U.S. to ensure a smooth transition process. Post-migration, we'll begin to realize the full benefits of our in-house technology stack including meaningful cost synergies and improved marketing and promotional capabilities. Turning to slide 17 and 18, our PENN Game Studios continues to develop highly engaging content. This quarter, we also introduced 97 new third-party slot and table game offerings across our iCasino platform. And we have a deep pipeline of future customized and third-party iCasino content for both Barstool and theScore Bet. As you'll see on slide 19, we continue to build momentum on the media front as well, with theScore growing revenues year-over-year in the second quarter double-digits and monthly sessions were up 20%. Barstool has also continued to expand its audience and reach, while always looking for new outside-of-the-box growth opportunities. Looking forward, we believe there is upside for the media business as we begin to realize the benefits of cross promotion with Barstool Sportsbook and additional monetization opportunities. Before I turn it over to Felicia, I also want to note, as highlighted in our deck, that we were once again very active on the ESG front this quarter, particularly with our ongoing diversity, equity and inclusion efforts. We recently came in fourth out of 40 gaming companies in the all-in diversity projects, benchmark DE&I survey. In addition, recently, Forbes Magazine rated us 139 out of 500 of America's Best Employers for Diversity, which is the highest ranking of any publicly traded gaming company. With that, I'll turn it over to Felicia.

Thanks, Jay. This morning, we reported second quarter revenues of $1.6 billion and adjusted EBITDAR of $504.5 million. Our second quarter 2022 results are particularly noteworthy, given that they comp against an all-time record high second quarter in 2021 and despite economic headwinds, our same-store revenues were down just 2.7% year-over-year and impressively, were up 3.5% sequentially. At the property level, our rated segment actually increased 1% year-over-year and was up almost 4% sequentially. Based on the consistency of our demand trends, as Jay mentioned, we are reiterating our 2022 revenue and EBITDAR guidance. As we noted in our press release earlier this morning, we continued our share repurchase program in the quarter. During the three months ended June 30, 2022, we repurchased $167 million of shares at an average price of $30.16 per share under our $750 million share repurchase authorization. Subsequent to quarter-end, we repurchased an incremental 3 million shares at an average price of $31.46 per share for an aggregate amount of $95 million. In total, since the inception of our share repurchase program, we have repurchased $487 million of shares at an average price of $35.36 or 12.4 million shares in total, leaving $313 million under our authorization. To put this in context, in October 2021, when we closed theScore acquisition, we issued 13 million shares at an average price of $77.3. So, to date, we've almost entirely offset the dilution from that transaction at over a 50% discount. Now moving onto some further details regarding the quarter. In the second quarter, corporate expense, inclusive of cash settled stock-based awards, was $23.6 million. Our cash rent payments to our REIT landlords was $231.8 million, cash interest on traditional debt was $17.5 million, cash taxes net of refunds received were $44.5 million, and total CapEx was $60 million, of which $58 million was a combination of maintenance and return-generating projects, including hotel room renovations, the 3 Cs and our Barstool retail sportsbook. The balance was project CapEx associated with our Category 4 Hollywood York and Morgantown Casinos in Pennsylvania. As of June 30, 2022, we had 178 million fully diluted shares outstanding. Regarding certain 2022 modeling metrics, we expect 2022 corporate expense of $98 million, inclusive of our cash settled stock-based awards. Our total CapEx forecast remains roughly $300 million, of which $100 million is return-generating discretionary projects. And as Jay will discuss further in a moment, we have many levers to pull to protect our free cash flow in a recessionary environment, including reassessing our current CapEx plan. We are continually evaluating our project pipeline, and there are various ways we can simultaneously deliver the high-quality experience our guests have come to expect, while also remaining prudent with our cash outflows. For cash interest expense, we forecast $116 million for the full year, cash taxes will be $107 million for the full year net of refunds received, and for the full year, our fully diluted shares are expected to be $175 million, which is before any incremental share repurchases. As a reminder, in early May, we entered into a second amended and restated credit agreement with our various lenders, which provides for a $1 billion revolving credit facility that is undrawn, and upside from our prior $700 million revolver, a five-year $550 million Term Loan A facility and a seven-year $1 billion Term Loan B facility. The proceeds from the credit facilities were used to repay the existing Term Loan A facility and Term Loan B1 facility balances. The transaction was leverage neutral. As of June 30, 2022, we ended the quarter with total liquidity of $2.7 billion, inclusive of $1.7 billion in cash and lease adjusted net leverage of 4.27 times. As a reminder, inclusive of our real estate leases, 85% of our total debt is fixed rate. And with that, I'll turn it back to Jay.

All right. Thanks, Felicia. In sum, our theme for the second quarter was consistent performance and execution as the competitive environment has largely remained stable. That being said, we recognize that the media continues to beat the drum on a potential looming recession whether organic or at this point a self-fulfilling prophecy, and economic uncertainty and low visibility obviously creates a challenge in terms of modeling our business. As such, we have provided you with a few slides at the end of our investor presentation that illustrate what the potential impacts of a hypothetical recession might look like for us at different revenue levels. We certainly have a lot of experience from dealing with the pandemic over the last two years and learning what levers can be pulled in the case of an economic turndown. In addition, as you can see on slide 23, regional markets, as a reminder, performed far better than the Las Vegas Strip following the 2007/2008 downturn. And our geographically diversified footprint helps protect against local economic pressures, while the growth in our younger demographic and ability to offer both retail and interactive experiences provide us with an advantage against changes in consumer behavior. Finally, turning to slide 25. If we do start to see revenues decline in a meaningful way, we are prepared to offset approximately 45% of the impact through aggressive cost mitigation measures, including adjusting our offerings, labor management, marketing spend, and pricing strategies to help keep costs in line. Bottom line, our strong balance sheet, flexible business model, and disciplined approach to CapEx provide us with multiple levers to maintain free cash flow in an economic downturn. And with that, we'll now open it up to questions, Dina.

Thank you. Our first question is coming from the line of Joe Greff with JPMorgan. Please go ahead.

Good morning, everybody. Thank you for taking my question. Jay, my question on the land-based casino side of things, referring specifically to slide 11, the database highlights slide, where you talk about the changes in deal-by-age demographics. When you look at that 21 to 54-year-old bracket to those younger first three buckets, how does that win compare to 2019 levels? And then how do you contrast it with that 55-and-older, including that 65-and-older bracket when you look at it relative to 2019?

Great question, Joe. The growth compared to 2019 is significantly more pronounced than what is shown here. When we began seeing substantial growth in younger demographics starting in 2021, we were looking at growth rates of 50%, 60%, and even 70%. Now, surprisingly to all of us at PENN, we are experiencing growth on top of that significant increase from 2021. To answer your question directly, in the second quarter, the youngest demographic of 21 to 34 recorded a 90% growth compared to 2019. The 35 to 44 age group was up 55% compared to 2019, and the 45 to 54 age group saw a 34% increase relative to 2019. This demonstrates considerable growth. What pleases me most is the additional growth on top of what we observed in 2021. We also noted a 10% growth in the 55 to 64 age group. However, the 65-and-older segment continues to show declines not only compared to 2021 but also versus 2019, with a decline of 20% from 2019 in that older demographic. This indicates potential for improvement as we move forward, especially as the older segment becomes more comfortable returning to normalcy post-COVID and following the vaccination rollout. In 2021, that older segment experienced declines of up to 40% compared to 2019, which later dropped to 30%, and currently sits at about 20%. A quarter or two ago, we even reached the high-teens decline compared to 2019, but we still have significant ground to cover with a 20% drop in that older segment.

Got it. And then the 55 to 65-and-older, those two older buckets, historically, they accounted for what percentage of rate of play? And how does that compare to more recent trends?

The oldest segment makes up about a third of our overall revenue, while the 55 to 64 age group accounts for around 25% of total revenue. This segment presents significant opportunities, especially since there has been a 20% decline from the oldest segment, which represents a third of our database.

Thank you, Jay. Switching to interactive, could you discuss your comments about achieving profitability in the fourth quarter for both OSB and iCasino? Will you be profitable in the third quarter, excluding what we might consider one-time investments? Additionally, could you provide insights on the ramp in Ontario and how it compares to other U.S. markets, as well as any challenges in Ontario that we may have previously considered, particularly regarding the transition from a gray market? I would appreciate your updated thoughts on Ontario.

Sure, I'll provide what I can about Ontario shortly. As you know, Joe, we haven't publicly disclosed much yet, so our information is somewhat restricted, but I'll share what we're able to. Regarding your first question, yes, I can confirm that profitability is already present in the U.S. interactive business, particularly from the second quarter onwards and continuing into the third quarter, with a positive outlook for the fourth quarter as well. While we have made some one-time investments, like the launch in Ontario and enhancements to our tech during the second quarter, and further investments as we prepare for the upcoming football season in Ontario and Kansas, we remain optimistic. We anticipate being profitable in the fourth quarter, primarily within the online casino segment, and overall as well, even if the profit isn't massive. Achieving profitability when the rest of the market isn't is a significant milestone for us, and we have confidence in our performance based on our current observations and planned product launches. In terms of Ontario, we're pleased with the initial outcomes for both online sports betting and online casino. A notable portion of our current volume is coming from customers already in theScore media ecosystem, with over half of those moving from media to active sports betting. We believe this conversion rate can improve further. Seeing a conversion rate exceeding 50% at the outset of a quieter sports season is promising as we look forward to the busy football season ahead. We've been dedicating time with our partners at theScore to understand potential differences between Ontario and the U.S. regarding sports popularity. While hockey is more favored in Canada, football remains the top sport across North America. We expect NFL and College Football seasons to generate significant interest. Ontario has a solid tax rate of around 20%, with some deductions bringing it to the high teens for both online sports betting and online casino operations. The presence of long-established gray market operators like Bet365 has also informed our focus on attracting new users into the ecosystem and converting media followers into sports bettors. We've been effective in that regard. We plan to invest a little in advertising differently in Canada compared to typical U.S. state launches, mostly for educational purposes, as many users have been unknowingly betting with gray market operators. Our goal is to ensure they recognize the advantages of the legal market now available, which offers more options than before April 4. We expect to allocate some funds for advertising leading into the football season. Overall, we are performing as well as anticipated in Ontario, and we believe we'll capture a double-digit market share in both online sports and online casino. While we await public numbers, we are confident that will reflect our performance.

Great. I have a quick follow-up regarding the profitability in interactive. With the potential opportunities in states like Ohio and Massachusetts, does that mean you will need to invest in that segment, resulting in losses before you achieve profitability again?

We assumed, Joe, and what we just laid out in terms of fourth quarter profitability that Ohio regulators have been very clear that the first day of legalization is going to be January 1.

Jan 1, right?

We are not planning to include significant investments in Q4, perhaps just a small amount of paid media for a few days or a week, but nothing substantial. In Massachusetts, regulators have been preparing for this for a long time, which means they have a shortened timeline to launch. It's likely that retail will launch first, followed by mobile. We anticipate that mobile might go live in early 2023, but if it happens in late 2022, it could have a slight impact on our profitability in the fourth quarter, though nothing significant. We believe we can remain profitable even if these timelines shift slightly.

Our next question is coming from the line of Shaun Kelley with Bank of America. Please go ahead.

Hey. Good morning, everyone. Jay, I just wanted to tackle sort of the operating environment. You had a number of comments in there and do appreciate all the database commentary as well, that's super interesting. Just as we think about like basics. Can you just give us kind of the lay of the land as it relates to the promotional environment, particularly at some of the lower end and maybe in some of the more competitive markets? I think in places like Pennsylvania, St. Louis, maybe in Mississippi, just area like that, where we have started to hear about promos coming out or increasing. And could you just kind of compare that to. Is that happening, but destination is offsetting that? Or some of the destination properties are offsetting that? Or is that maybe not as big of a deal as some of us make out of it?

I would start by saying the latter. I think a lot is being made out of this, a lot about what the promotional environment is. I think if you look at Pennsylvania specifically, there's a lot of moving parts because you have a number of Category 4 satellite casinos that have opened over the course of the last 18 months. In Pittsburgh, we have two, one in New York, one in Morgantown. So, you're seeing some shift because new supply has entered the marketplace. And I think the existing operators or existing properties are trying to figure out what is that right mix of reinvestment now that there is more competition. So, Pennsylvania to me is a one-off. And then with regard to Mississippi, St. Louis or any of the other markets, in each of these markets, I think are unique in a variety of ways. We're not seeing or feeling a heightened promotional environment in Mississippi or in St. Louis. We may have a property that just launched a new restaurant or two. And so you might reinvest a little bit more for a couple of months to showcase your new amenities or your new renovated hotel products or a new sportsbook or some of that. But I think you can see from the margin stability and the land-based business. We declared late in 2021 that we felt that 37% property level margin is something that you could bank on at PENN, and we've now delivered that four quarters in a row. And so, if the promotional environment were what's been talked about, I don't think you would see the consistency in margin delivery the way that it's being delivered, not just by us, but by the competitive set as well.

Great. And just my follow-up would be, you gave a little color on the sort of unrated segments, and I believe that being down year-over-year given just some of the more entertainment options and stimulus. Is that level of play still up from 2019, though? And just kind of help us get a sense of how did that trend also just across the quarter? Is it still deteriorating? Or has that sort of leveled off just as we've lapped maybe the bulk of some of those payments that occurred a year ago?

There are many factors to consider in answering that question. We highlighted several at the start. First, our property and interactive teams have done an excellent job of moving unrated players into the mychoice database ecosystem. This transition is crucial because if players are not rated, we lack a relationship with them, making it difficult to engage without having their names, email addresses, or phone numbers for notifications. This is a significant aspect. Additionally, there was a lot of money circulating from the stimulus payments in the second quarter of 2021. Few businesses experienced such an influx of unrated clientele as we did in 2021, which naturally led to a decrease in 2022. Furthermore, there are now more entertainment options available where consumers can spend their discretionary income and time, such as movie theaters, restaurants, bars, nightclubs, sporting events, and concerts, which have mostly returned to their pre-pandemic levels in 2022, unlike in 2021. Therefore, the decrease in unrated activity year-over-year was anticipated. A lot of this is due to our successful efforts in transitioning people to the database, which is positive. The encouraging news is that, aside from the 65-plus age segment—where we still see a 20% decline compared to 2019—all other age groups, both rated and unrated, have shown significant growth compared to 2019. Overall, this is a positive situation for us, except that we must continue working on reversing the decline in the 65-plus age group.

Very clear. Thank you very much.

Our next question is coming from the line of Steve Wieczynski with Stifel. Please go ahead.

Hey. Good morning. This is Jeff on for Steve. Thanks for taking the questions. I wanted to start on the brick-and-mortar.business and maybe follow up on Shaun's question in a slightly different way. If you look across the various markets, are you sensing any weakness anywhere, just given potential belt-tightening amidst higher gas prices and other inflationary pressures? We've heard Mississippi, Louisiana, Pennsylvania, all mentioned this earnings cycle, but just curious what you're seeing for your portfolio specifically?

We frequently get this question, Jeff. Looking at the monthly state reported numbers, Louisiana is our top performing state in the portfolio, so we aren't experiencing any issues there. Our focus isn't so much on geography but rather on the market dynamics, competitive landscape, and how our casino amenities stack up against the competition. Older properties with limited amenities are facing some challenges, particularly in lower worth segments. Fortunately, most of our assets are quality properties, many of which have been built or acquired in the last decade, and those attracting mid to high-end customers continue to perform well. While we've heard reports of softness in some areas, we aren't seeing that across the majority of our properties or markets. There are indeed pockets of softness linked to limited amenities and lower worth customers, potentially due to a decline in unrated play. However, overall consumer health remains strong. Internally, we've discussed that even if we're anticipating a recession, it's important to remember that recessions vary. Comparisons to 2007-2008 are understandable but not entirely relevant. Back then, financial markets and real estate values were in turmoil, leading to soaring unemployment and significant impacts on consumer finances. Currently, while inflation is affecting living costs, unemployment remains low, wages are rising, and home values are generally stable or increasing. This indicates that consumers' feelings about spending are shifting from goods to services, which is evident in the performance of lodging and gaming companies. The current economic landscape will not mirror the experience of 2007-2009; there will be differences, including geopolitical factors that were not present previously. Nevertheless, the consumer remains healthy and eager to spend on leisure. We just wrapped up July with great results and have no major concerns looking forward. In regional markets, we don't book hotels months in advance, but current daily trends in gaming and non-gaming spending are promising, with healthy trends and good margins. Our interactive business is also growing, and our brick-and-mortar casinos are stable with strong margins. This is a long response to your question, but I wanted to give you the full context.

That's extremely helpful and was a perfect transition. You addressed part of my next question at the end. I agree with the comparisons to 2008 and 2009 given the current situation. I wanted to focus on the cost aspect in case we enter a recession, especially since your analysis suggested that 45% of the revenue decline could be mitigated through cost reductions, which is really interesting and encouraging. Could you elaborate on the methodologies you used to estimate that 45%? Is it primarily based on what you experienced during the COVID shutdown? I'm really curious about what cost measures you're considering, particularly if you're looking at a decline in spending per visit versus a decline in visitation, if that makes sense.

It does. What I can tell you is that this was not a guess. This involved weeks of detailed analysis based on our experiences, particularly from the 2007 to 2009 period, when many of us at PENN were working in the business and made decisions that ultimately didn’t pan out. Back then, we often tried to spend our way out of a downturn, which ended up adversely affecting our EBITDA and margins. I don't think we'll make that mistake again. The gaming industry has more varied strategies now, with both public and private companies competing for market share. Currently, there's a stronger emphasis on increasing profits or growing revenues in a profitable manner. This sentiment appears to be a common theme across earnings calls. Many are clearly contemplating how to navigate the current environment while remaining disciplined and careful in their decisions. We've gained valuable insights from past experiences, including when COVID forced us to close casinos and gradually reopen, which helped us understand the difference between essential and non-essential amenities, as well as how customer preferences shift during challenging times. Another important factor to consider is operating leverage. Our company has consistently worked to maximize margins without pursuing unprofitable ventures. However, our diverse portfolio also means we face the highest blended gaming tax rate in the industry. This can make it harder to grow margins during favorable times compared to other companies that operate primarily in markets with lower tax rates like New Jersey or Nevada. When your blended tax rate approaches 30%, it can limit your positive operating leverage compared to others. Fortunately, we are more knowledgeable, experienced, and better prepared for challenges now than we were back in 2008 and 2009, and certainly more so than we were during the COVID pandemic.

Extremely helpful color. Thanks very much and congrats on the strong quarter.

Thanks, Jeff.

Our next question is coming from the line of Barry Jonas with Truist Securities. Please go ahead.

Hey, guys. I wanted to start around labor. Any updates in terms of what you're seeing from labor shortages or wage growth? Thanks.

Not much has changed, Barry, but I would say that trends are improving every day. We're noticing an increase in applications for open positions across most of our markets. There are still some areas experiencing wage pressure for certain roles on both the land-based and interactive sides. However, the current environment is significantly better than it was two months ago, and certainly much better than at the start of 2022. It was quite challenging then, as we struggled to get applicants for roles despite offering competitive wages close to $100,000 a year and providing free training to get them started quickly. Now, we are seeing a rise in applications and reduced wage pressure, and the overall situation is definitely improving.

That's great. And then, I was hoping to get a little more color on the 3 Cs, specifically, maybe if you could elaborate on your full vision of enabling omnichannel engagement, when do you think we could see everything in full force as well?

We're not sharing many details about the early results yet, but we are very encouraged. More people are signing up for our mychoice app and our mywallet features, and we are currently operational in three states. We want to achieve a certain scale before we start releasing data to the public. Our results show an increase in visit frequency and spending per visit among those using our multi-channel services, including the mychoice app and mywallet. One key reason for acquiring theScore is their impressive technology and teams, which, when integrated with our team at PENN Interactive and our corporate engineering and product teams, will enhance our services. We envision creating a unified wallet for all our offerings—both retail and digital—though this likely won't happen until 2024. Currently, we have separate digital wallets for our interactive services and land-based properties. We expect to launch the combined wallet across all our businesses pending regulatory approval. It will take some time to realize this vision, but we are already witnessing significant benefits from these technology improvements.

Great. Thanks so much, Jay.

Our next question is coming from the line of Chad Beynon with Macquarie. Please go ahead.

Morning. Thanks for taking my question. In terms of the cash on the balance sheet at the end of the quarter, any undrawn revolver that you talked about? Can you help us think about capital allocation? And within that, can you remind us on the Barstool opportunity to take that in-house in the next 12 months? Thanks.

Thank you for the question. We are proud of our strong balance sheet, ending the quarter with lease adjusted net leverage of 4.7 times. We have also completed more than half of our share repurchase authorization in just seven months. The cash on our balance sheet presents us with numerous opportunities. We believe the market is underappreciating our valuation, which puts us in a good position to take advantage of this dislocation. Moving forward, we will continue to monitor market conditions and be opportunistic with our share repurchases, while considering other opportunities that arise. We are pleased with our leverage and expect our free cash flow generation to support organic deleveraging, further strengthening our balance sheet. We will maintain our focus on low leverage, capitalize on favorable market conditions, and explore growth capital opportunities.

Great. Thanks Felicia. And then within the analysis that you talked about with operating leverage, can you also remind us on the lease agreements. I don't believe you're exposed to any CPI inflationary pressure, like some other companies in the space, but can you just kind of remind us on the escalators how that will look over the next five years?

You're right, Chad. We do not have fixed escalators in most of our leases. For those unfamiliar, we provide details in our 10-Q. Essentially, our master leases, specifically the PENN and Pinnacle Master leases, include three components of our rent: land-based, percentage rent, and building base. The percentage rent is adjusted every five years under the PENN Master Lease and every two years under the Pinnacle Master Lease, except for Columbus and Toledo, which is adjusted monthly based on revenue changes. The largest portion, our building base rent, has an annual escalator of up to 2%, but this is contingent on an adjusted revenue to rent ratio of 1.8:1. Therefore, these escalators are not fixed and are not linked to CPI.

Perfect. Very helpful. Thank you very much.

Our next question is coming from the line of David Katz with Jefferies. Please go ahead.

Hi. Good morning. Thanks for taking my question. I covered a lot of ground, and I just wanted to touch on one of the slides in the deck, slide 19, where you talk about the media performance. And I think you do have kind of the Interactive segment in your press release. And I'm trying to unpack that just a little bit. In terms of what the media opportunity is? What the media productivity is today, and where it could really go? And I think this slide refers to theScore, but there's obviously some Barstool opportunity there too. If you can just sort of help us with that media piece. I think that segment has about $155 million of revenue, and there's a tax gross-up in there, that's $55 or so. That's what I'm trying to get at.

Yeah. And I'll be able to help you get at some of it, David, maybe not as helpful as you're hoping, because we currently don't own 100% of Barstool. We own 36% as an investor. And so, you have 36% of cash flow flowing through, but we don't reflect any of their revenue. And so, it is a bit noisy as it relates specifically to theScore, their revenues were public, obviously, before we acquired them, and we're talking double-digit revenue growth on that base of revenue. We experienced the same thing in Q1. So, we feel really good about the momentum. I would say in terms of a more detailed outlook as to what this media segment within interactive might look like, obviously, stay tuned. Once we close on the full acquisition of Barstool in Q1 of next year, we'll probably show you a lot more detail and we'll be able to show you on a combined basis what Barstool and theScore media business looks like. And I think not just as it relates specifically to the P&L, but how we're thinking about the ecosystem that we're continuing to build out and different products and services and ideas and monetization opportunities with that audience down the road that we've been working on for some time now and we're very excited about.

If I can just follow that up and maybe give us a sense for how big that can become one day at some untimed future in the total picture? Is it something you expect will be modeling out separately at some point in time?

I do, David. I think that probably makes sense at some point down the road, we will not be doing that in 2023. We would expect media to be blended in with our interactive businesses within the Interactive division. But I could see a day where we're breaking those two out separately. And look, the way that we think about the media assets today is these are high growth businesses. These are businesses that continue to attract new audience. And I think it's incumbent on us to think about how we harness all of that in a way that creates long-term value and monetization opportunities. And again, we have a lot in front of us, obviously, with sports betting and online casino as we continue to ramp and more states legalize, Ontario ramp all of that. Those will not be the only places where we're planning to grow our overall earnings from the media assets that we've acquired.

Okay. We have time for one last question. Our next question is coming from the line of Ryan Sigdahl of Craig-Hallum Capital. Please go ahead.

Great. Good morning. First, I appreciate the slides, especially the recession consideration. I think those were nicely done and helpful. Curious on Ontario, I know you can't give a lot of detail there. But any qualitative statements, I guess, you can make on the comparison before and after the tech transition?

It's still quite early, Ryan, and this is a slow time for sports. We will be able to provide more betting options and personalization related to the app experience and our CRM activities. I believe that by next quarter, we will be in a better position to address that question thoughtfully. However, with our only major sport being regular season baseball, there's not much information to share in these initial weeks. We will have more insights as we approach the start of the football season in September and October, and we will have more to discuss during our next call in early November.

Maybe just a follow-up, any glitches or outages, I guess, we haven't heard of any. So, I think no news is good news in that respect, but anything to call out there?

I believe you may have put a hex on us, Ryan. I'm knocking on wood as I respond. However, as Benjie Levy mentioned recently, things have gone even better than expected in the best-case scenario. So far, so good. We're noticing strong volumes, especially now that it’s baseball season. The advantage of the roadmap and timeline we've established with key milestone dates is that we're live with our complete proprietary tech stack since July 2022. This gives us not just a 12 to 13-month window to work on the migration back to the U.S., but also the opportunity to test our tech stack under high volume during football season and March Madness, all while we have a significant number of users and volume before transitioning back to the U.S. and converting across all our platforms this summer. So far, everything is going well. We will keep you informed as we approach football season.

Thanks, Jay.

Thanks, Ryan.

And we have no further questions at this time. I'll be turning the call back to you.

All right. I appreciate everybody's time this morning for dialing in, and have a great rest of the summer. We look forward to speaking with you for third quarter results sometime in early November. Have a good one.

That concludes the conference call for today. We thank you for your participation and ask that you please disconnect your lines.