Caesars Entertainment, Inc. (CZR) Q2 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Kimberly, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Caesars Entertainment Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Jackie Beato, you may begin your conference.

Good afternoon, and welcome to the Caesars Entertainment Second Quarter Results Conference Call. Joining me today are Gary Loveman, Chief Executive Officer; and Eric Hession, Senior Vice President of Finance and Treasurer of Caesars. Following our prepared remarks this morning, we will turn the call over for your questions. A copy of our press release and a replay of this conference call will be available in the Investor Relations section of our website at caesars.com. Before I turn the call over to Gary, I would like to call your attention to the following information. The Safe Harbor disclaimer in our public documents covers this call and the simultaneous live webcast at caesars.com. The forward-looking statements made during this conference call reflect the opinion of management as of the date of this call. There are risks and uncertainties with such statements, which are detailed in our filings with the SEC. Please be advised that developments subsequent to this call are likely to cause these statements to become outdated with the passage of time. We do not intend, however, to update the information provided today prior to our next quarterly conference call. Further, today we are reporting second quarter results and first 6 months' results. These results are not necessarily indicative of results in future periods. Also, please note that prior to this call, we furnished a Form 8-K of this afternoon's press release to the SEC. Property EBITDA and adjusted EBITDA are non-GAAP financial measures. Reconciliations of net loss to property EBITDA and net loss to adjusted EBITDA can be found in the tables in our press release. This call, the webcast and its replay are the property of Caesars. It is not for rebroadcast or use by any other party without the prior written consent of Caesars. If you do not agree with these terms, please disconnect now. By remaining on the line, you agree to be bound by these terms. I would now like to turn the call over to our CEO, Gary Loveman.

Thanks, Jacqueline. Thanks to everyone for joining us on the call today. Following a strong start to 2012, the second quarter was marked by deteriorating economic indicators in the United States and uncertainty elsewhere in the world. It won't come as a surprise to any of you that the weakening U.S. economy has led to a more difficult operating environment for our company and for the gaming industry broadly. Despite the challenging environment, which impacted results in our core business, we made considerable progress in expanding our distribution network and we're optimistic about and committed to our capital efficient growth and investment strategy. While we invest our future, we're also maintaining a high level of discipline around our operating expenses. As you recall from our previous conversations, our strategic imperatives are to expand our distribution network into higher growth markets, both on land and online, leverage our scale to drive efficiency in the way we conduct our business and attract best-in-class talent, invest in our core brands to increase their relevance and reach and further strengthen our capital structure and balance sheet. During the second quarter, we saw weaker results in much of our core business amidst a different macro environment. While we're pleased to see visitation and occupancy in Vegas hold up during the quarter, gaming revenues were lower. In the Midwest, gaming results were slightly weaker, and Atlantic City continued to be a very challenging place and declining visitation and over-capacity continue to characterize that region. As I mentioned earlier, we saw exciting developments on our growth pipelines during the quarter. I would like to spend a moment updating you on our progress in this regard. First, in May, on the 14th, we opened Horseshoe Cleveland with our partner, Rock Gaming, to great fanfare. This opening, the first casino in Ohio, was gratifying for all of us. In the first 6 weeks of operation, more than 0.5 million people joined us there, and recently we've heard 1 million have now come through our doors. We enrolled more than 50,000 new Total Rewards members. We're encouraged by the early results and are working to fine-tune the property to maximize its performance. Our management team for Cleveland is included in the managed international and other line of our financial reports. Also, in Ohio, we're running ahead of schedule to open Horseshoe Cincinnati early next spring and anticipate installing VLTs at the Thistle Down racetrack also in 2013. Second, in June, we announced our plan to develop a Caesars-branded property in East Boston, center of the universe, if we're successful in winning a license there with our partners at Suffolk Downs. This property would be only the fifth to bear the flagship Caesars brand. We're excited to be pursuing a market that already attracts more than 20 million visitors annually, as the vibrant mix of historic sites, entertainment and of course, sports attraction and serves as a major business hub. We're optimistic about our prospects in Massachusetts and plan to submit our application to the Gaming Commission this fall. Third, here in Vegas, construction on the Linq project is progressing well. Following the demolition of the O'Sheas garage in the spring, the renovation of O'Sheas and the Imperial Palace is well underway. The foundation plinths for the High Roller observation wheel are complete. And last month, we received the Amusement and Transportation System Permit from Clark County, allowing construction an all elements of our wheel to proceed. Construction for the Linq central energy plan is taking place. New cooling towers are installed and operational. In the weeks ahead, structural steel and scaffolding will be become more visible as this project advances into its next stages. The project, at the center of the strip, promises to add significantly to the Vegas experience, bringing retail, entertainment, restaurants and bars to a location at the heart of our footprint here. The Linq and its tenants are designed to appeal to the growing population of younger visitors to Vegas. During the quarter, we appointed a dynamic and dedicated leader for this project. He's responsible for curating the Linq experience and ensuring the mix of tenants there will attract a younger demographic. We look forward to announcing some of those tenants with you in the near future. Also in Vegas, here at Caesars Palace, the Nobu Tower is on track to open by the end of the year and will begin taking reservations in October. The Nobu Tower brings a boutique hotel experience to Caesars Palace with a well-known and aspirational brand. This is a continuation of the reinvigoration of our flagship property and part of our strategy to attract new customers with fresh experiences while continuing to serve our long-time clientele. Finally, we're very pleased that last week, the state of Maryland's Video Lottery Facility Location Commission granted a license to our consortium, paving the way for us to begin building Harrah's Baltimore, which will feature 3,750 VLTs. The consortium is beginning to seek necessary permits, and construction is likely to begin in 2013 with an opening targeted for the second quarter of 2014. We are hopeful that when Maryland's General Assembly meets later this week in special session, it might move to allow table games in the state. Early results from competitive offerings in Maryland are indicative of the considerable demand that exists in this market. During the quarter, we also announced the sale of Harrah's St. Louis, which we expect to close by the end of the year. Like the growth projects I've described, the divestiture of this property is intended to help us generate the highest return on our capital. In the online space, we're pleased with the results of Playtika. Our social and mobile games were performing well. Also, within Caesars Interactive Entertainment, this year's World Series of Poker again attracted strong participation, and through ESPN's coverage, generated excitement around our brands and our casinos. The inaugural World Series of Poker, Big One for One Drop charity tournament with Guy Laliberte at the Rio last month, attracted significant attention.48 players participated in the $1 million buy-in tournament, which raised more than $5.5 million for the One Drop charity. We're optimistic about the potential legalization of online poker in the United States. Nevada granted 2 interactive gaming sort-of [ph] licenses for online poker recently, demonstrating progress toward making it the first state to have operational online poker in the near future. Caesars Interactive Entertainment has submitted an application to be an operator of the interactive gaming system here in Nevada, and we've made significant progress in establishing the infrastructure to support online poker operations in the U.S. in line with expected regulatory requirements. While we're optimistic and supportive of the federal legislative solution, as we have been for some time, we're also tracking and participating in state dialogues and supporting liberalization through the state-by-state route as well. Before I hand the call over to Eric to take you through our results in more detail, I want to update you briefly on our search for a permanent Chief Financial Officer. We've, of course, been active in speaking to and identifying candidates for this important role, that I'm confident we'll be able to fill the position with a terrific candidate who's the right fit for our company shortly. Eric?

Thanks, Gary, and thanks again, everyone, for joining our call. We reported second quarter net revenue of $2.17 billion, up 0.2% from the year earlier period. Adjusted EBITDA decreased 2.6% to $512.4 million compared with $526.1 million in the year ago period while adjusted EBITDA margins decreased 68 basis points. Income from operations declined 64.7% to $82 million. This was mainly due to $101 million impairment charge related to the Macau land concession and increase in property operating expenses associated with our online businesses and higher depreciation expenses associated with the Octavius Tower. We recorded a net loss in the second quarter of $241.7 million compared with a net loss of $155.5 million a year ago. Diluted loss per share for the quarter was $1.93. As Gary has already discussed, our results in the quarter were adversely affected by lower gaming revenues across most regions. We ended the quarter with approximately $21.7 billion face value of net debt, including $985 million of cash, not including restricted cash. System-wide, rated customer trips in the second quarter were down 1.6% from the prior year, while rated spend per trip was also down 1.9%. Hotel occupancy was flat, while cash ADR rose 2.7% compared to the prior year, with our system-wide hotel revenues up 3.8%. Turning to the regional markets. In Las Vegas, net revenues were down 0.7% for the quarter and property EBITDA fell by 8%, primarily due to weaker casino revenues, specifically in the VIP category. Net revenues and EBITDA were also negatively impacted by the Linq construction activities, which have affected Harrah's Imperial Palace and the Flamingo. For the quarter, total hotel revenues remain strong, increasing 4.4% year-over-year with occupancy decreasing 2.6 percentage points and cash ADR rising 4.5%. Trips increased 2.3% in the region compared to the prior year, while spend per trip decreased 3.3%. Spend per trip declined, as I had mentioned earlier, were led by the VIP segment with our retail segment showing gains. In the Atlantic City region, the region continues to face significant challenges. Net revenue and property EBITDA declined 8.6% and 20.4%, respectively, as visitation and gaming activity declined due to weak demand and an increase in competitive impacts. Lodger-rated trips fell 10.9%, while spend per trip increased 0.7% in the second quarter. Non-lodger-rated trips and spend per trip decreased 8.2% and 0.2%, respectively. The Atlantic City market continues to experience increases in supply, which have proven unable to grow the market and instead have redistributed existing business. Thus, we're actively considering ways to align our cost structure in the region with the current market opportunity. In our other markets, which encompass domestic markets outside of Las Vegas and Atlantic City, rated trips during the second quarter decreased 2.1% while spend per trip was down 2.7%. You should note that we have reclassify Harrah's St. Louis as a discontinued operation and its results are not included in these metrics. Turning to them specifically, in the Louisiana and Mississippi region, net revenues were up 2.3%, while property EBITDA was down 2.7%. The revenue increase is attributable to resumed play over the same period last year when floods closed 3 of our properties in Tunica, Mississippi. In the Iowa/Missouri region, net revenues decreased 2.3%, while property EBITDA increased 1.7%. During the quarter, we witnessed a pullback in VIP spend per trip, as well as declining trips. In the Illinois and Indiana region, net revenues decreased slightly, down 1%, while property EBITDA decreased 1.9% as we continue to see competitive pressures in the region. The competitive impact was slightly offset by the positive revenue impact of year-over-year flood-related impact that resulted in the closure of Southern Indiana and Metropolis in the prior year. In our other Nevada region, the net revenues declined 6.4%, while property EBITDA declined 12.7% as reduced operating expenses were unable to offset the decline in revenues. Declines in the region were a result of the declines in spend per trip, while trips increased in the region. In our managed international and other region, revenues increased 42%, driven by strong performance in our social and mobile gaming business, and management fees from our Horseshoe Cleveland property that began to flow into the reporting line during this quarter. Over time, we expect the managed piece of our business to become a meaningful revenue source as the new development projects come online. In summary, the improving demand dynamics we saw in the first quarter in many of our regions weakened during the second. Amid continuing volatility, we will seek opportunities to gain market share and be vigilant in managing our expense base. With that, I'll pass it back to you, Gary, for your final remarks.

Thanks, Eric. We find ourselves at a very interesting time in the industry here in the middle of 2012 as the fundamentals of the business have been weak. At the same time the opportunities for expansion are some of the best we've seen in a long time. So while we saw a decline in our core business during the second quarter, the reorganization of our company that we've described in recent years, including significant reductions to our operating expenses and the centralization of key functions have certainly helped our performance. We're optimistic about our strategies expanding our network, particularly through development of new properties in major urban markets, as well as via online channels. Through these efforts, we'll deepen relationships with the existing customers and attract many new ones to our growing network. With that, operator, we'll entertain questions.

[Operator Instructions] Your first question comes from the line of David Farber.

I got a couple questions. Gary, first, you, in some of your prepared remarks, you appeared slightly more guarded than in prior releases. I'm just curious, you even cited challenges to come. How do you think the outlook on the business may have changed if it did? And what you see today in the core business that you mentioned over the next year or so? And then I have a couple follow-ups.

I look on the world as changed, David. I think what you've seen in this last round of earnings release is not just like any companies that buy virtually every kind of industrial or commercial enterprise, consumer enterprise in the United States has been more foreboding about the future. And I think you see this reflected in the results of entertainment-oriented businesses like ours. So I think the world, since April, May, has gotten more difficult and that's reflected in -- both in my tone and in our results.

Okay. And then as far as sort of the back half of the year, are you guys seeing anything different post the quarter? Or is this still sort of more of the same that you sort of highlighted just a minute ago?

Well, I would just guide you to the state -- I mean, the beauty of this industry is the states release revenues about the business in a very transparent fashion quite quickly at the end of the month. So you'll start to see the July numbers shortly. You've seen, of course, the ones for June and I think you can take that as your guidance.

Okay. Another question, I guess, for Eric. Do you guys -- can you just remind us what the status is on CMBS and its maturity? Maybe what's required under the extension, when you guys might seek that, and just sort of an update on that would be helpful.

Yes, the CMBS has a extension option for 2 1-year extensions, so that one's in 2013 and then another's in 2014. There's a 50 basis point fee associated with that. And then the election to extend can be made anytime, starting approximately 6 months before the maturity at that time. What's involved is a series of officer certificates and then the payment of the 50 basis points.

Okay, that's helpful. And then just, obviously, we've seen a lot of volatility in hold in Las Vegas. Just curious how you guys feel like you held in the quarter and then any color around that would be helpful just so we can sort of gauge Las Vegas and what you're seeing there.

Sure. We, as you know, we normally don't comment on hold because we believe that across the basis of the company, we have a sufficient sample size to minimize that. I would say that there really wasn't any material hold impact this quarter.

Your next question comes from the line of Shaun Kelley with Bank of America.

You kind of struck at one of my key questions, it's the last one on VIP hold in Vegas. But Eric, maybe you can give us a little bit more color around -- I think you said -- were VIP trips down? Did I catch that correctly? Or was it more spend per trip in the VIP segment that hit you in Vegas?

It was the -- fee per trip was down, Shaun, in Las Vegas in the quarter, so -- and it wasn't really driven by hold in any degree. Trips were actually up slightly.

Okay. And look, I know there were some big hold movements in the quarter across the VIP segment. So I guess, secondarily, just kind of, as you guys looked at adjusting down operating expenses, maybe both in Vegas, but I think specifically in Atlantic City, can you kind -- can you just give us a sense of what else you're able to do there? Is it largely on the labor front? Is there anything else you guys were able to do promotionally to reduce cost in the market -- in the markets there? Kind of how you're thinking about rightsizing some of those businesses without -- with competition not really growing the market the way you thought it might?

Well, this is Gary. I don't think it has much to do with promotional actions. That's a term, by the way, I think you know I'm not very fond of. I think we -- I'd rest on that just for a moment. We are always trying to make our marketing as impactful at the margin as it can be through efforts to solicit incremental visits from our guests that are based on what our testing control methods tell us lead to decisions that the customers might not otherwise have made. And I distinguish that from just a general level of promotion that the market might or might not otherwise have that characterizes it. But with respect to cost, remember, a lot of Atlantic City's structural cost elements were put in place literally in the late 70's, and we've been busy trying to attack those in the last several years as revenues have been on the wane. So those have included property cash reductions, significant regulatory modernization, some degree of modification of the services available in the facilities at all hours of the day, at all days of the week to reflect the declining number of visits that the market is experiencing and so on, the expanded spans of control for management and some direct labor reductions. So it's really an all-out effort to see if we can continue to modify the expenses that we experienced there to try to restore margins. As you know, our margins in Atlantic City are under tremendous pressure as revenues continue to decline. Many of the properties there operate unprofitably for reasons that are very hard to understand. And so we continue to look at all manners of adjustment we can make to try to keep our operating expenses as low as possible.

That's helpful, Gary. And then, I guess, one last strategic one for me would be, just wanted to kind of get your, I guess, your big picture thoughts again on the St. Louis transaction. Obviously, near term, it may not be the most favorable multiple, but it's going to -- relative to kind of where you guys are trading at, but it's going to depend a lot on how you redeploy some of that capital. So just giving us a sense for where you're looking to maybe put some of that capital that you received to work. Any kind of priorities around that would be helpful.

Shaun, I'd ask you to think about this as a portfolio rebalancing decision. We have, in St. Louis, a market where there was a perfect combination of a buyer who found that market very attractive and a seller who felt less enthusiastic about that market. The proceeds are then available to us to support the investment we need in markets that we consider to be a greater strategic merit to us. These are the Bostons, the Baltimores, the Clevelands, the Cincinnatis online investments and ongoing renovation expenses in some of our strategic markets. So harvesting some of the heavy capital that exists in the wholly owned portfolio and redeploying it into places where we're putting smaller amounts of investment to work to generate management fees and grow our network, that's a very appealing movement and it can't be judged just on multiple arbitrage. As your question anticipates, it has to be seen in the context of the redeployment of proceeds. And I think on that basis, it is -- given that if we expect it to close shortly, that it will work very well for us.

Your next question comes from the line of Susan Berliner with JP Morgan. Susan Berliner - JP Morgan Chase & Co, Research Division: I guess I want to start with a few questions on the development. Gary, I was wondering if you could update us first on, I guess, your opinion on federal online, if it's something that you think will happen in the next year or 2, or you expect more state-by-state over the next year or 2.

I want to -- Susan, I appreciate the question. I'm going to be a little reluctant to try to handicap this carefully. I would just couch my answer in a perhaps obvious point, which is you can't legalize online gaming if Congress is unable to act on anything. And I think the circumstance we found ourselves in is that there's a series of pressing issues before the U.S. Congress, the fiscal cliff perhaps being the most substantial of these, and as you all observed, the Congress hasn't been able to act even on these rather fundamental issues. In that context, it's hard to see how something on Internet poker happens in the near term. We continue to believe that the logic of such an action is compelling. We know that the majority leader favors it. I know, from having spoken to virtually anyone who's relevant to this, that there is a tremendous base of support at the federal level. But it ultimately requires a legislative action in a Congress that hasn't had many in this session. And for that reason, it's very hard to predict when it might happen, whether now or before the recess, subsequent to the recess in lame duck or in a new Congress after the election. In any case, we will continue to pursue it. At the same time, we are much more active now on the state-by-state process than we have been historically, working in Nevada, Delaware, California and other states as we anticipate to be the early adopters in a state-by-state process. Susan Berliner - JP Morgan Chase & Co, Research Division: Great. And then I guess just turning over to the Linq in Baltimore. Eric, can you remind us of the timing on the Linq? I think it was supposed to be 2 Half '13. I didn't know if there was any more specifics about the retail stores opening, as well as the wheel.

Yes, I'm going to -- I'll intercede here briefly. The Linq -- the retail portion of the Linq is anticipated to open before the end of '13 and the wheel in the second quarter of '14. Susan Berliner - JP Morgan Chase & Co, Research Division: Okay. And then I guess, just with Baltimore, can you remind us of what kind of cash you'll be putting into that joint venture and what the ownership breakout is?

Yes, Sue, we haven't disclosed the exact amount that we're going to be putting in, but the ownership breakout will be roughly 52% for Caesars and then the other percentages will be broken up by their -- by the other 3 partners. As you know, it's going to be a $300 million plus project overall. But as we've done with our other projects, development projects recently, we do plan to finance this with project-specific debt so that the investment, from our perspective, will be much less. Susan Berliner - JP Morgan Chase & Co, Research Division: Great. And then my last question is just a housekeeping. If you can just tell us what was outstanding on the revolver and then what the cash breakdown was at the 3 entities?

Yes, the revolver was undrawn at the end of the quarter. And from a cash perspective, CEC consolidated cash was $934 million, CEOC cash was $607 million, and CMBS -- I'm sorry. . .

We're in the process of a revision here, just bear with us a moment.

The consolidated cash balance was $985 million, CEOC is $658 million, CMBS is $206 million and the remainder is at the parent.

Your next question comes from the line of James Taylor with Bank of America Merrill Lynch.

I guess, just to follow up a little bit on the consumer more broadly and then at Vegas specifically. Without being forward-looking, can you give us any indication as to how you guys saw the consumer? Obviously, you guys get a very good view of the consumer on a regular basis. Most of the guys who reported -- indicated that things were kind of okay in April and May and June and even July really showed a pretty meaningful slowdown. Is that similar to what you experienced in. . .

Well, first, I don't want to sound pedantic about this, but you need to crosscheck their comments with the state revenue releases and see if those aggregate very well. But I think you saw what the state reported for revenue for the jurisdictions in the latter months of the second quarter and they weren't especially appealing in many instances. So I think what we observe here is very similar to what other entities that are now involved in facing high-end consumer demand are experiencing and that is that there is a trepidation on the part of consumers to spend at the rate they have historically. The usual instance in our case is that our customers can still visit and have a very entertaining experience and spend substantially less simply by reducing their average wager while they're with us in Las Vegas. As an example, they can still be in a nice hotel and eat well and go to the shows and sit at the pool and do all the things they enjoy, but restrict their expenditures through their gaming decisions. And that's, to a large degree, what Eric's numbers reflect. It's one of the challenges of this business. We're still facing the same number of guests. We're servicing the same number of visitors, putting them in bed, waking them up, parking their cars and the like, but the amount of revenue we enjoy is a bit diminished from that. There's no reason that I can see in the immediate future that would suggest the general macroeconomic conditions that have led to that results are going to be much different.

Understood. I guess just a follow-up on Las Vegas. I mean, Las Vegas, obviously, has been a bright spot for Caesars as well as for the industry since coming out of the downturn. It seems like that may be showing a bit. Can you talk a little bit about the group business and the conference business, which has been at a bright spot. How is that business in this quarter? And then what is the outlook like for the rest of this year and into '13?

I think the general trend remains favorable. What was different this year was that the late-arriving group and meeting business was softer than people anticipated, and I think this was true around the city. So when we do our plans at the end of the calendar year, we have on the books, let's call it, 3/4 of the demand that we'll experience in the forthcoming year, but a portion of it is late arriving and the late-arriving portion was weaker this year than we had anticipated or than it had been historically. So I doubt that much of that is going to change in the remainder of this year. But I think, as we look forward to 2013, I think it's likely to be a little bit more encouraging.

Your next question comes from the line of Dennis Forst with KeyBanc.

Gary, can you give us an idea of what's going to be taking place in Maryland and maybe handicap what will be resolved?

I don't know.

And I don't mean the Red Sox versus Orioles.

No, I mean, it has the capacity to look like some of the Greek parliamentary debates. The -- it's very hard to predict what's going to happen in Maryland. And I'm not a resident. I've been in Annapolis a few times in the last several months to offer our view on the circumstances there. And I think -- what I do know is that all the 3 senior leaders of the state, the Speaker, the Senate Majority Leader and the Governor, favor the addition of table games to the casinos of Maryland and they recognize that the casinos need that feature to be attractive to out-of-state visitors and to compete with their neighbors. So that's encouraging, that's a big deal. The political issue has been around what has to be given to get that result, and you know that the Senate President has been seeking a license in his Prince George's County to facilitate that decision. And it'll just come down to how the 3 of them work that out. I think, in the event nothing happens, we proceed just as Eric described a few moments ago, and we're happy to do so. In the event there's a deal that facilitates table games and provides relief to the existing licensees, as we've said repeatedly, we're very happy with a deal of that sort. Assuming there's tax relief in the licensees on the slot tax, then I think we have an even better business. But how that goes, Dennis, is really -- it's very hard to tell.

Okay. But you're committed to building in Baltimore regardless of what happens in Maryland.

Let me -- yes, if nothing happens -- I don't want to say regardless of what happens because who know what could happen. But if nothing were to happen, we're committed to go under the status quo. And I don't think anything will happen that will be noticeably adverse to that circumstances, but I guess I could be surprised. I think either we will see nothing happen or we'll see table games introduced, either on its own or with a fixed license with a delayed start, and either of those would be favorable for us.

Okay. And then in Boston bidding, the actual RFP and licensing process is probably still a year away. Is that accurate?

Well, the commission has been releasing schedules on its website and you should consult that to see what their latest view is. My understanding is they'll -- they will begin a review of qualifications this fall, they'll solicit proposals early in '13 and make a decision perhaps late in '13. They haven't said in what order they would so, whether they would look at the east license first and work their way west or what they would do. Assuming that the deal with the walkable ads [ph] continues through a compacting and land and truck process, then there would be only 2 for them to consider. So one would hope that could go fairly expeditiously in late 2013.

We have a follow-up question from the line of David Farber with Credit Suisse.

Just -- I'll try my hat at this. How do you guys balance debt repurchases between the OpCo and I guess, what we know as propco? Then just more specifically, if you could, sort of what drives sort of one versus the other, sort of your thought process there? That would be helpful, then I'm really done with questions.

Okay. Well, you're welcome to ask as many as you like. I'm going to take a swing at this and then Eric will come back and correct it and expand on it. From an operational point of view, none of the folks that run these casinos ever think about whether the facility is in the CMBS or the operating income. So we run it as if no such distinction exists. Now of course, because of the obligations of the independent credit, there are all sorts of things after the fact we have to do to protect the lenders to each body of assets. But from an operating point of view, there's nothing -- we don't treat customers differently or move them between properties differently or have different types of cost structures or management assignments or any of the sort based on whether the asset sits in the CMBS pool or in the OpCo. Eric, you want to elaborate on that?

Yes, from a financial standpoint, it really is about allocating resources and determining where we're going to get the best return from our various investment opportunities. So when we look at the various possibilities that are available to us, including investment in the core business, investment and expansion of other developments, repurchases of certain debt, we try to balance all that together to determine what is ultimately going to provide the best return and then move forward on that basis.

And even dollar, would you prefer to play from the CMBS side versus the OpCo side?

I missed the first part of that; say it again.

I was just curious, even dollar, if you guys have a preference for propco versus OpCo, understanding that the business is run from a corporate higher level. Just curious how you guys think about that.

Well, I'm still not following you. Preference for what? Where the customer would go or preference for how the debt would be paid or...

No, from the capital structure perspective, just simply if both the CMBS and the OpCo were trading at the same level, how you think about buying one versus the other totally away from the business.

Okay, I think it would just bear on our strategies for the refinancing of both vehicles. I think Eric is paid to strategize about how these maturities are structured and which ones are addressed in what order. So I think he would form a view as to whether an incremental purchase of one category or the other would be the best to support our long-term strategy for each.

Yes, and I think, it's clear, obviously, that you have to look at other factors besides just the price. And so I think that all those things come into our decision when we decide to pursue one or the other.

And David, I would add, within the CMBS, there are several layers to the CMBS. It's a very highly textured category, so there are senior portions of that and much more junior portions. They trade at quite disparate prices. So there's a lot of complexity in these things. This is how Eric has such good job security.

Your next question comes from the line of Greg Roselli with USB (sic) [UBS].

So in the first release, you hinted briefly at using some of the St. Louis proceeds to buy back some OpCo debt. I didn't really hear much of that in your comments earlier. Just as it relates to the proceeds and kind of in general, can you talk about how, in the back half of the year, you might want to continue to attack the OpCo debt?

Yes, I'll say a word about St. Louis and Eric can elaborate. Under the rules of the debt structure, only a portion of the monies that we get out of that will be used for debt repurchase. The majority of them will be used for anticipated CapEx expenditures. And those will go towards some of the things I've described. A little bit of capital in the existing portfolio plus -- therefore, offsets monies that would otherwise have been used to that end that we can use to support our development agenda. Eric, you want to say anything to that?

Yes. Greg, just again, at this point, we can't really provide a lot of direction in terms of specifically what -- where we're going to deploy the money. And as I said, we evaluate each of the opportunities. And based on how the opportunities present themselves throughout the years, we'll take different actions. As Gary noted, the requirements of the credit agreement do have us reinvesting those proceeds in the restrictive subsidiary group. And to the extent that they're not used, they are used to repurchase the first lien debt. Now that does, of course, being able to use those funds to invest in the core business does free up liquidity for other purposes. And I think that's where we talked about being able to redeploy that capital more efficiently.

Got you, I appreciate that. Then can you just kind of, you mentioned it earlier, just kind of give us your overall thoughts on especially in what sounds like a troubled environment, the fact that you're still buying back the med [ph] debt at the CMBS?

We're going to take a look at opportunistic -- almost at opportunistic opportunities, which would not have been -- we're going to look at opportunities to repurchase CMBS debt in the junior tranches, if the pricing is fortuitous. I think there's really not much more to it than that. We always have to look at the use of incremental liquidity in the existing business versus the purchase of discounted debt. You know we've done a lot of the latter over the last several years and we'll continue to look at that carefully.

Got you. And I get a lot of questions on how 2015 approaches you're going to look to refi and roll the CMBS debt. Can you give us just a bit of color on the structure there and in general, how you'd have to affect the refi?

Again, I'll just say a word and let the expert take over. There isn't a CMBS market left in the world, as far as I know. So we will gradually try to reduce the CMBS outstandings to a more modest level and then refinance it under more traditional terms. The cash flow of the -- the net cash flow circumstances of the CMBS properties are generally superior to the CEOC properties and make them a more easily refinanced category. So as we knock down the outstanding there a bit, we'll bring it to a level where I think it will be manageable under conventional circumstances. Eric, you want to add anything to this?

Yes, there's not a lot to say. I think it's over 2 years away. And as I mentioned before, there are a number of opportunities and ways to deal with the maturity. And so as we progress, we continually think about those. And I think the circumstances that we find ourselves in at the time when we have to get more serious about the ultimate refinancing when they mature is what's going to dictate the approach that we take.

Eric suggests that this was something we'll have addressed well before 2015.

Okay, that's very helpful. Two more quick ones. You've said publicly that you're exploring some debt-for-equity swaps. Any update on that? Can you tell us where your head's at?

Well, we still like the idea, if we issue equity at the right pricing. $8 and change is not a compelling price to receive for issued equity, so that has not been to our liking at the moment. But in the event equity markets for casino stocks improve, then that's something we would certainly wish to consider and we have an existing authorization from our Board to do so.

And along those lines, if you wanted -- at any given point you've had the authorization and the shares available just to affect a debt-for-equity swap. Is there anything else technically that we're waiting on?

No.

Okay. And then on a quick online gaming question. I know in Nevada, you guys were looking into potentially compacting with some other states to open up your player pool without necessarily having to get legislative approval in other states. Have you guys explored this concept? And is it something that can happen a bit more rapidly than waiting for a vote and have legislators elsewhere to approve this?

Yes. That will happen, I think, Greg, very quickly after any other states approve. Now the states -- every state that would be a part of a pool will have to have its own independent approval of online gaming. So at the moment, you have the 2 overwhelmingly popular states of Delaware and Nevada who could pool. That, of course, doesn't do a great deal of good. But once you get a bigger state, like California or New Jersey as the examples that are perhaps most likely, then you could begin to see the smaller states pool quite quickly. The existing legislation permits that under the Justice Department's interpretation of the Wire Act, so we would see that as something that we'd be pursuing very quickly.

Got you. Just to be clear, it is my understanding that other states have to approve gaming on their own relieved [ph] before they're able to pool with Nevada.

Yes. In any state that you would be in, resident or a visit or 2, would have to have its own independent approval of online gaming in order for your activity there to be pooled with another approved state.

Got you. Okay. I've been hearing some other views on that but I've got a lot more homework to do there, so I appreciate that. And then I guess lastly, in Atlantic City, you mentioned you're losing trips to some competitors in the northeast. It doesn't seem like your new competitor in AC, at least on the gaming side, has had a huge impact yet. Can you tell us where else you're losing that business to?

Well, Pennsylvania, predominantly. But there's lots of suitors for those who are taking customers out of Atlantic City. So Rebel, while they've had very disappointing results, they're not trivial. They're still consuming $13 million, $14 million of gaming revenue a month, which is near declining margin. Then you have Maryland. You may have seen today Maryland Live! posted $35 million in gaming revenue in its month of July, which is a handsome number with only video lottery terminals. And of course, Pennsylvania has generally had year-on-year growth in its casino revenues, both in the aggregate and in a same-store basis. So there's -- and of course, Aqueduct. How could I forget Aqueduct? So there's quite a lot of predation on Atlantic City and we're losing a little bit in all those places.

Has the impact of Aqueduct in Maryland been in line or ahead of what you were expecting?

Well, Maryland, it's too early to tell. I haven't seen any analysis for July. There's not a lot of trips into Atlantic City that initiate in Maryland, so I doubt that's been a big deal. Aqueduct was painful initially and then abated a bit in the more recent weeks, but it's still a meaningful hit. And I'm sure my friends in Connecticut would say the same thing. I'm not speaking for them, but I would think Aqueduct has been effective in moving customers both north and south.

Your next question comes from the line of Kevin Coyne with Goldman Sachs.

Just a question on the capital markets. I know, as you are continuing the search with the -- for the CFO, does that preclude you from potentially tapping what have been attractive debt markets? Or would you wait until that person's onboard?

No, not at all. I have a very capable seasoned treasurer here, despite his definite youth, who's done a lot for us already. I have some people in my 2 principal shareholder groups who are exceptionally capable at this kind of work. So I have lots of help on capital market transactions.

I agree Eric's more than capable. Just a question on the VIP weakness, I'm not sure if you mentioned it. Is that perhaps on the international visitors side? Or maybe if you can give us some color? Is this the type of visitor that maybe fluctuates if there's uncertainty in the stock market? And do they reign back spending because of that?

I'll give a quick answer and Eric will be more precise. It's more broad. There are periods, I think you heard from my competitors and from us, that Golden Week was not quite as buoyant a period as everyone had anticipated it might be. But then there were other periods since then that were a little better on the high-end Asian play category. Broadly, VIP weakness has been felt across many different categories. I have not been a big advocate of the view that's it's linked to stock market volatility. I think it's generally much more connected to liquidity generally. A lot of our VIP players, especially domestics, are independent business people whose gaming is a function of how much liquidity they have in their own personal finances, and they don't tend to be liquidating stocks to go gambling. They use liquidity that they have in their lives from other sources. So I think as they see business conditions either more favorably or more skeptically, that influences their spending on leisure.

Yes, just a follow-up. I think, as Gary pointed out earlier, that the trips from that VIP category in the second quarter for Las Vegas were up 3.2%. And it was really the spend per trip that impacted it. And it's a function of when customers come to Las Vegas, they just elect to spend less than they did in prior year periods.

Okay. Just turning to online gaming. I know a lot of the social media companies are seeing valuations get a lot of pressure because they haven't incorporated a mobile strategy. And I was just wondering, are you doing that from the start, incorporating that? And will there be regulatory issues with that where perhaps they want it to be more tethered or landline based so they know where the people are gambling?

Well, let me -- I'm going to respond about social gaming. Playtika has had a very, I think, a very effective mobile strategy for some time, so I would just ask you to go to the rankings of applications that are available to you and to the public at the iOS centers and take a look and see whether Apple or the Android or the equivalent Amazon places and see how actively people are using the Playtika games on mobile. I think we've been very pleased with that strategy. I don't see any regulatory issues there. This is social gaming, it's not gambling. There's no regulatory involvement at all, whether a person is at their home computer on Facebook or whether they are playing on their Android held in their hand.

But if you go state by state, like if a New Jersey resident's in New York, will they still be able to get...

Now if you're talking about for-money gaming. I misunderstood you. It was only with respect to social gaming. Wherever the person is located is what will carry the day. So if you are a New York resident, your phone is in your hand and you're standing on the Las Vegas strip, you will be able to gamble while there. That's my understanding. Now there's a lot of technical issues to be worked out to make that happen, but that would be the interpretation we understand to be the case.

Okay. And just one final one. With the timing of this write-down of the Macau land concession, was there anything that changed over there that caused you to have to write that down now versus previously?

Right. It's just an ongoing process that we undertake. Our Chief Accounting Officer and our external auditors look at the value of these assets and periodically make adjustments to them based on a typical probabilistic rating of different uses of the property and keying to that adjustment.

Your final question comes from the line of Peter Dalena with Citigroup.

Well, I have a question in regards to the cost structure in respect to Project Renewal. We're about 6 quarters into Project Renewal, which we expected to cut about $400 million a year. But it appears that, at least for the 6 months so far this year, that costs are flat in a mostly stagnant top line environment. Are the cost cuts from Project Renewal being offset by cost increases inflation elsewhere in the business? Or is there other noise in the numbers? And then how should we think about costs in the future? Should we be lowering that $400 million a year cost target?

Again, for the final time, I'll say a word and then let Eric finish up. Your -- the way you posed the question is right. We describe Project Renewal as a secular reduction in cost off the 2010 cost base that the company experienced. And we've been describing those adjustments off that base. Now against those trend reductions in expenditure have been other increases. Things like property taxes, collective bargaining wage and benefit increases, rising cost of health care for employees and the like. So you see the benefit of renewal being faded to some degree by the secular increase in costs that are coming into the business independent of the 2010 base. Eric, what would you say with respect to the forward-looking renewal benefit?

Yes, we still -- in the quarter, we experienced about approximately $42 million worth of savings, and we'd expect to have about $147 million left on the program. The other thing I'd add that should be reflected in our cost structures is we did open the Octavius Tower at the beginning of the year and that's a sizable venture in terms of staffing.

But if you think about the $400 million a year target, I mean, should we think of that as almost 3/4 of that being offset by other inflationary pressures and other cost increases? Or has it not been that significant?

I think it's a difficult question to answer because it depends on the time frame that you're looking over. Inflationary pressures come throughout the period. And so while we make all the efforts that we can to minimize them, some of them do result in increased base cost structure. So I think in this particular quarter, when we had a relatively flat net revenue period, the increase in those costs show up more clearly than when we have a revenue growth base.

Okay. And let me sneak in one final housekeeping question. Did Caesars issue any additional equity or purchase any operating company debt during the quarter?

We issued a small amount of both. We issued 15,000 shares during the period and we purchased approximately $5 million of debt. And that's in addition to the previously disclosed CMBS purchase that we made at the end of -- sorry, rather the first few days of the second quarter which was in our prior earnings release.

So operator, I think that concludes our call this afternoon. Thanks, everyone, for joining us.

This concludes today's conference call. You may now disconnect. Thank you, and have a great day.