PENN Entertainment Inc (PENN) 2002 Q1 法說會逐字稿

Good day, and welcome to the Argosy Gaming Company's 2002 first quarter earnings conference call. I would now like to turn the call over to Argosy's Vice President of Investor Relations and Treasurer, Dan Marshall. Go ahead, sir.

Thank you, David, and I'd also like to say good morning to everyone. Welcome to our conference call. Joining me today is Jim Perry, President and Chief Executive Officer and Dale Black, Senior Vice President and Chief Financial Officer.

Today, as is customary, we're also broadcasting this call live via the Internet at our Web site, that's - that's plural - . A replay of this call will be made available through May 3rd, and may be accessed through our Web site or by dialing 402-220-1608. I would like to remind everyone that this call is being made available to all interested parties on a real-time basis.

Before I turn the call over to Jim, I would like to remind everyone that we'll be making forward-looking statements as that term is defined in the Private Securities Litigation Act of 1995. These forward-looking statements generally can be identified by phrases such as "we believe", "anticipate", "expect", "estimate", "foresee" or other words or phrases of similar import. In addition, statements that describe our business objectives, strategy, intentions, goals, or our earnings outlook are based upon the best information and judgement of management at the time of issuance. Investors are cautioned that forward-looking statements are not guarantees of future performance, and involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by our comments today. The information in this conference call related to projections or other forward-looking statements may be relied upon subject to our previous Safe Harbor Statement as of the date of this call and may continue to be used while this call remains in the active portion of our Web site.

Finally, I would like to point out that we undertake no obligation to publicly update any forward-looking statements that we will be making today whether as a result of new information, future events, or otherwise.

I'd now like to turn the call over to Jim Perry.

Thank you, Dan, and welcome to our first quarter conference call. I know that everybody's very busy today - it's that time of the year, so I'll try to be as brief with my comments and leave more time available for questions.

As I was driving home last night and after reviewing the press release, I kind of thought that maybe the best title for our press release this year would've been that "the best surprise is not a surprise", because we were able to communicate effectively at the beginning of the quarter what our expectations were and we were able to meet and somewhat exceed those expectations.

At the five properties that we've held for a period of time, other than Joliet, our sales were up five percent in the first quarter, without any significant expansion or development capital being spent year-over-year. And at those properties, the EBITDA was up seven percent. I think that reflects our continuing commitment to both increasing revenue as well as being able to flow through that revenue in increased EBITDA.

The one property that we did acquire last August, Joliet, has gone through a situation that in the first quarter this year are very similar to the situation at Lawrenceburg and Kansas City have experienced in previous years, i.e. a new competitor or major capital expenditures by our competitors in those markets. And, you know, obviously, have long held the position that we will not market against an opening or an expansion, that we will maintain our cost controls in place during that time, and that at the end of the project expansion by competitor, we'll come through it OK. And I think that our results in Lawrenceburg clearly reflect the success of that strategy.

In addition, Joliet being a new property, has gone - is going through the transition from being a property that has had several owners over the past several years, into an Argosy property. There are transition pains they will go through. I think most of those pains have been - have taken in the fourth and the first quarter this year, and I look forward for improvements off in Joliet. Once the Harris and Hollywood expansions kind of reach their full potential, then we can start building our business again. In the first quarter, on the capital side, we maintained our maintenance capital spending at our - at our properties. There was a minimalist - the minimalist amount of project capital spending in the first quarter, and we paid down debt to the tune of $43 million.

The status of our projects currently is that last week, the board has approved at our annual meeting an expenditure of approximately $6 million in Sioux City in order to upgrade the landing facilities at that property. And we believe that it will help us to reduce cost by moving our office space out of the downtown location next to the boat as well as improve our productivity by enhancing the physical appearance of the facility as well as being able to do a better job in our food and beverage operation there.

Our Kansas City project, as we stated in the press release, is ready to go. Once we are assured that there will be no substances impact of a new tax in Missouri, which at present time, that we don't think is going to happen. And we have ordered the barge for Joliet. We are in the process of constructing that barge subject to Illinois Gaming Board approval and we look forward to that project. We think that the results of the other two properties in that market have indicated that there's a real benefit both on the operating side, on the revenue side, as well as on the cost side of a barge. And we look forward to the construction and the introduction of that new barge in that market.

And with that, David, I'd be glad to entertain any questions.

At this time, if you would like to register your question over the phone, please press the number one on your touch-tone keypad now. You can withdraw your question by pressing the pound key.

Once again, to register for a question over the phone, please press the number one on your touch-tone phone now.

We will take our first question from the site of David at Merrill Lynch. Go ahead, please.

Hey, Jim - could you bring us up to speed just quickly on exact cost of the - of the two projects and timing given this kind of postponement in Kansas City?

Our current thinking is that the Kansas City project has a base cost of about $90 million, with a contingency of 15. It's a very large contingency, but it's a contingency of 15. And I would tell you that if we get in the ground in late May or early June, we're in about an 18-month construction schedule.

Joliet barges is currently about a $60 million project with a $10 million contingency. And we expect the barge's to be delivered either late this year or early next year, and we think there's probably a nine to 12-month construction once they reach the site. So we're talking about again, late 2003 for the opening of those two projects. Sioux City, the project there will start this summer and be completed by the end of the year.

OK - just to follow up on current operations, same store, can you keep up kind of the same store EBITDA growth rate in the mid to high single digits or does that sort of to wane as the year goes on?

I think that we're going to see it continuing about where we are, David. I think we may take a little bit of hit in the - in the second quarter, because the second quarter is always our toughest quarter. It has been for the last years just because I think it's more weather-related and activity - other activity-related.

We have - we're getting - we introduced some cashless slots up in Sioux City and Iowa and they've - they're performing very well. We think that the likelihood of cashless hitting some of the other states is - we're optimistic that by the end of the year, cashless will be in place in other jurisdictions as well. I think approximately a third of our machines are capable of going cashless, so I think we're ahead of that curve and will be able to introduce that product, which helps to both increase revenue and reduce cost.

I think our data warehouse project will be ready to hit the ground in July with cleaning up our database and making our access to our customer bases more customer and employee friendly. And I think we'll start to see the impact of that results in the fourth quarter and the first quarter of next year.

So I'm optimistic that we will continue to see some revenue growth. I'm a little bit concerned and all about the opening of the barge in St. Louis. I think that they're going to be very aggressive at opening and I think we could, in fact, not be a lot of growth potential there. But I think we'll come out of that just fine.

thank...

Baton Rouge - year-over-year we're going to start not having the extra three percent tax, so I think we'll see improvement there. The hotel is starting to actually generate some positive EBITDA on a monthly basis, so I - we got year-over-year improvement there. The city continues to do well.

And Lawrenceburg, now that project is really focused on making money at the levels of revenues they're generating, we are starting to really see the kick in of both our consistent operating performance there as well as our location. So I'm optimistic of that .

Great - thank you.

Thank you, David.

We will take our question - next question from the site of Dennis at McDonalds Investments. Go ahead, please.

Yeah - good morning, guys.

Good morning.

Good morning.

I had a couple of simple questions and then one clarification I needed.

Number of shares outstanding for the quarter both just outstanding and the diluted number?

The diluted number is 29.4 million and the basic earnings per share is 28.8.

OK - and what was the cap ex? Jim alluded to kind of normal maintenance cap ex, what was the total cap ex in the quarter?

$8.1 million.

8.1 - OK - and then, Jim can you explain to me the rules in Illinois for the size of the casino and what a large new barge will do for you in terms of more customers there? Isn't there some limit either on positions or on square footage?

There's a limit on a number of positions the State of Illinois - the act calls for 1,200 positions as being the maximum and the state counts the slot machines as .9 of a position. So technically if you're all slot machines, I think you'd come out with 1,320. We have some capacity availability to the - about 120 machines in Alton and we're full - we're loaded up to full compliment of positions at Joliet.

What you see, Dennis, is clearly the benefit of going to a single deck has both customer appeal as well as cost efficiency. Customers like to be able to be on a one-floor casino. They'd like to be able to see around. It's easier for them to understand where their - the crowds are less. You know, it's kind of a standard. It gives you more of a Las Vegas feel, and has much more appeal. You get higher ceilings on a - on a barge so therefore, you can do a better job of evacuating smoke and those types of things. If you want to have an entertainment feature in your casino, you only have to do it once. And it creates a feeling of a whole casino.

On the cost side, the efficiencies are in things such as the cage, service bars, and also the - at the slower time, i.e. Tuesday morning at 10:00, the same number of slot attendants can be cover a large - much larger area, so you can be more efficient with your payroll. So I think what you see at the casinos that have instituted barges, is that not that they cut employees, but those employees who are handling more customers can do it more efficiently and more effectively. That's the benefit we hope - we think we'll find more than hope.

Then you won't get necessarily more customers through?

Well, you'll get more customers because it has a broader appeal, because the customers would much rather come to a barge casino that looks like a "Las Vegas casino" than a boat that has three stories with bulk heads. In Joliet's case, we have two boats that have five different levels of gaming.

So if Mary and Bob on a Saturday night want to come to a casino and Bob wants to play slots and Mary wants to play table games, they're - they could be, you know, a 10-minute walk apart. Whereas, on a barge casino, they can, you know, be relatively side by side. That is more appealing to a broader base particularly of not core customers, but of retail customers. The people we talk about the who come forth five times a year, they come out, they have dinner, and they gamble a little bit.

We've always talked about the fact that those customers are far more profitable than your poor business. So we think there's a - and I think when you look at the admission numbers at Harris and Joliet, you'll see that there's just a lot more bodies through the place.

OK - but not necessarily on a Saturday night when they'd be packed anyway.

Well, not necessarily on a Saturday night, you're right.

OK - thanks.

We will take our next question from the site of at Morgan Stanley. Go ahead, please.

Hi. I was wondering if you could tell us what you'd expect cap ex to be for the year?

Yes - cap ex for the year is about $30 million maintenance cap ex. And project cap ex is about 40 to $50 million depending on timing.

OK.

And would you expect to have any disruption at either of the facilities from the - either at Kansas City or Joliet from the expansions?

Not this year, I don't see any significant disruptions.

...

When we get into the - further down the road in Kansas City, I think next year, we may see some disruption of the existing facility. And the installation of the barge in Joliet, my gut is it will cause one to two weeks of disruption and that would be late 2003.

OK - and the contingency numbers that you gave, are those included in those numbers or are those on top of the total numbers?

Those are on top of the total numbers.

OK - terrific. Thanks a lot.

We'll take our next question from the site of David at Bank of America Securities. Go ahead, please.

Hello, good morning.

Good morning.

A couple of questions, can you review your thoughts in terms of the outlook for regulatory change in Missouri and how that effects Kansas City? In other words, if they raise the taxes, are you likely not to pursue that project? And also, can you talk about any changes you're contemplating in terms of management structure at the property or corporate levels?

Yeah - as it relates to the impact of the tax raising in Missouri, if there is an owner's tax increase in the state of Missouri, a significant tax increase in the state of Missouri without some corresponding opportunities to enhance our revenue stream, then I would tell you that we are not committing to the project. That may mean we need to do a different project. It may mean that we need to come up with some other solution. But it would be very difficult for me to commit maybe not your money but our shareholder's money to a project that I didn't believe was going to create a return. But we're there now, but doing it in a face of an owner's tax increase would be a mistake. As it relates to - there are other options for us. You know, we have a rental agreement with the city, we have other kinds of things, so we could look for other ways to get around should they increase the tax. But I'm not sure that I - that those are all available to us.

As it relates to the management, as I've said for the past year, I felt that the company is continuing to develop it's depth and it's bench strength so it's positioned with it's management team to grow the company as well as with it's balance sheet to grow the company.

In that vain, this past quarter we promoted Arnie who's our General Manager in Lawrenceburg to a regional position over Lawrenceburg, Baton Rouge, and Kansas City. And we promoted Brenda who's in charge of Alton to be responsible for Alton, Joliet, as well as Sioux City. I think that that helps to develop the depth that we need to be able to grow the company with our operating team. Those two individuals have been particularly successful at their properties, and I think that they can provide the kind of guidance and leadership should we acquire more assets.

Our balance sheet certainly enables us to do that as we continue to pay down debt. And people recognize the value and the earnings potential of riverboat assets.

At the corporate level, I have also said that the shareholders - I have an obligation to the shareholders to make sure this company is positioned to grow. And with that, we will continue to look for good people who we think can have a positive impact on the company as it goes forward. We don't have any current plans. But the board and I have been discussing how to make sure that this company can take advantage of all the opportunities that are available to us in the coming years. And we continue to work on that project.

OK - thanks.

Real quickly as a follow-up, do you - are you - do you have GMs in place right now at Lawrenceburg and Alton?

Yeah - Larry has been promoted to the Lawrenceburg property subject to regulatory approval in the state of Indiana. The casino operations director at the Alton property, Rich , has been promoted to General Manager of that property. And we're currently in the search for a new general manager at Kansas City.

Very good - thanks.

Yep.

We'll go to our next question from the site of Lawrence at . Go ahead, please.

Hi, Larry.

Hey, Jim - how you doing?

Good.

Great results. I decided not to grab the first, so you ...

You made somebody poor in here today, Larry.

Listen, is there going to be much disruption in Joliet while you're doing the work?

No, I do not think so. The barge is being constructed by a barge company in Southern Indiana. When it's ready to move, it'll move up through the locks and be assembled at another - you won't even probably be able to see the construction of the barge on the river near the current location. Then when it is completed, the boats will sail away and the barge will be moved into place. Actually, we'll probably have one boat in place the entire time while we're moving the other barge in. And then the other boat will shut down and the barge will open.

OK.

How much more impact do you think on your numbers are going to be at the new barge open given how well Hollywood's doing and Harrah's is doing? And that their product, you know, their dockside barges do?

Yeah, I think that, you know, you - I reflect on this all the time because I kind of expected this question might come up, Larry. We're up against the first against last year in Joliet where the property was closed for sale. And I expect that during that period of time, if I were Mr. and his team, I would've done everything I could to maximize EBITDA in the short term. And I think that was the wise and prudent thing for them to do and they did it.

And our first quarter results are down at the EBITDA level about a million five from that number. So we have both the year-over-year "sale hype" going on, we have the opening of Harrah's, and then about half way through the quarter we have the opening of Joliet. And despite all that, despite the transition issues related from being a "Empress/ " property to an Argosy property, in the transition - just normal transition things that go on during that, the property was down a million five. I expect to begin to stabilize that in the second quarter.

But then we're going to run against the ultimate or the next opening in Hollywood, which we think will put an impact sometime this summer for them, and it could put a little pressure on us. Although in the summer time with that location I think we can hold our on. And we'll get into the fourth quarter and we'll be year-over-year with Harrah's and almost year-over-year with Hollywood. So I suspect that, you know, we'll be back on track and growing by the end of the fourth quarter.

So I'm - but I - the negative impact has not been as great as a lot of people thought it was going to be to the EBITDA of the property. It has impacted the revenue stream far greater than it's impacted the EBITDA.

OK - even when Hollywood opens the second half?

Well, it's going to have an impact, no doubt it. I mean, I - you know, that - I was asked the question at the annual meeting last week you know, does that make you nervous? And I said, well, actually, it makes me sleep a lot easier because I know when we build our barge, we're going to have a much more positive impact. Because we're still the only one that's got 300 acres to support it.

So I - it may - you know, you go to Kansas City where you're not quite sure about the growth and you're really cutting, you know, making sure you're doing the right thing. Whereas, this kind of becomes a "no-brainer" in Joliet, not that I would ever say that anything we do is a "no-brainer", I suppose.

But, I mean, the fact is is that this barge is going to have real positive results going forward and if we could get it done in a week, we'd get it done in a week. But the prudent way to do it is the way we're doing it, and it'll be over by the end of next year, I think, or at the worse, the early part of 2004.

All right. Well, good, Jim - thanks.

Thank you, Larry.

Lastly, is there any chance you're going to be putting a parking barge into Baton Rouge? Is that still a ?

It can be done. It's physically possible. My belief in Baton Rouge is that you have two-prudent operators in that market. You do not want to get into a capital war. And that there's a limited amount of revenue available to the two boats, and both of us should focus on making sure that we take care of the customers that are there and not get into a capital expenditure war to try to pick up share from each other.

Yeah - how about the rumor, which is probably not true, that they're considering maybe buying you out?

Well - yeah, I always say about rumors, you know, I'm always the last one to know. I don't think it makes a lot of sense for us right now. But that doesn't mean that our board would not, you know, we'll always sell something if it makes sense for our shareholders. And we'll always buy something if it makes sense for our shareholders. We're going to do the right thing.

All right. Well, thanks, Jim.

Thank you.

We will take our next question from the site of Bill at Prudential Securities. Go ahead, please.

Thanks, guys - how are you doing?

Good.

Hi, Bill. lerner: Two questions, one, could you just talk - you were - you mentioned it, but can you talk a little bit about any current plans to the extent you're willing to - for you - for that - for the 300 acres next to Joliet? And then number two, just want to get a little more comfort with this, with respect to the property, how should we think about this new highway between Kentucky and Indiana that opens in the spring of '03 that apparently should result in easier access to the - to the ? Thanks.

The 300 acres in Joliet is kind of the - opens up the creative juices. I've said that when we purchase the property that we're probably a year, year-in-a-half away from coming up with a plan. And now that we're just getting our barge plan kind of finalized and that we know what we're going to be building there as it relates to the barge, I think we need to move on to the next step, which is to start to entertain all the possibilities that are available.

The main goal of our business will be to create or be part of - and that means either our capital, or some kind of joint venture capital, or - it doesn't necessarily need to be our capital - a project that will have a broad retail appeal particularly during the times when we're not as our peak. Which means broad retail appeal from 6:00 p.m. on Sunday night until 6:00 p.m. on Friday, which will create an opportunity for us to increase the revenue - the casino revenue that the boat generates. It will not be a golf course and it will not be a kid theme park. Beyond that, we will - we are beginning the process of discussing with a whole variety of joint - potential joint venture partners as well as internal decisions about where we go from there. And I suspect that that process will take approximately a year before we're willing to announce and commit to anything publicly.

So I am willing to commit that we are in the process of beginning to look at all of our options. I think that process realistically takes about a year.

As it relates to the new roads from, I think, Interstate 71 or 75, one of those two interstates...

... that goes from between Cincinnati and Louisville, and at the connection to , I don't believe that road will have a significant impact on our results in Lawrenceburg. For sake, I hope it has a real positive result for them, but I don't think it has a negative result for us.

We still have lines at our property. We still have waiting lines at the peak. Our location is, you know, is tough to beat in terms of access and convenience to the extent that that road will enable them to have more access and be able to make it a little bit easier for people to get there. It's still, for that convenience business mid-week, you know, still a much shorter drive to Lawrenceburg, and I think that it will not have a significant impact on our business.

Thanks very much.

Yep.

We will take our next question from the site of of UBS Warburg. Go ahead, please.

Thank...

Hello, .

Hi, how are you?

Good.

Couple of clarifications, the new unit cap ex this year, the 40 to 50 million, is that kind of assuming starting Kansas City at the end of May assuming that things go right in Missouri?

Yes, that does include the cost associated with starting the project in Kansas City, the completion of the barge in for Joliet and includes Sioux City.

And then '03 cap ex, do you have a rough estimate for us?

I have it - I - Bill got it.

On the - on the total - on the project capital, if the - if you take 40 to 50 this year, then that would leave next year would be about 100 to 120.

Plus the 30 million of maintenance?

Right.

OK - great.

And that's assuming we get everything - you know, that basically assumes we get everything done by the end of next year.

OK.

And your tax rate going forward, should we use the effective tax rate in this quarter? It's a little different than...

Excuse me, , your voice is fading out.

Sure. The tax rate going forward, can you just clarify what we should look for?

It's been pretty consistent for the last several - last couple of years. I don't think it'll change too much.

Yeah, but even with the accounting changes of the effective rate might look different?

And then last question is if you could talk about you mentioned potential disruption in Kansas City next year, how long do you think that will last and kind of roughly starting when assuming that, you know, if you started late May of this year?

I think you'll probably see some impact starting in the February and March time frame next year. And I think it goes through probably six months. But I don't want to alarm you. I think that the process that we've gone through helps to minimize the impact of that - those changes. I just have been around the business long enough to sit down there and say despite the participations of the general manager and our construction guy will say they'll be able to do this, and it'll be seamless to the customer, it's never been that way as long as I've been in the casino business. So I want to make sure that we don't create an artificial hurdle for these people.

OK - great. Thank you.

Once again, if you would like to register for a question, please press the number one on your phone.

We will take our question from Mike at Kennedy Capital. Go ahead, please.

Yeah - good results today.

Just curious have you - have you thought about maybe a small or have you seen any small mid-Western properties that may be attractive for you that, you know - you know, maybe offsetting to any type of disruption that you would anticipate from your construction activities? Is that a - is that a - is that an option for you at this point?

We - I don't - small mid-Western properties kind of have an interesting - it's depending on how you define small and how you define mid-Western.

I will tell you that I don't see anything right now. In other words, there's no information I have right now that there's anything that appeals to you as an artist, the investor, that creates value for you that I know about.

I do believe that some time over the next three years there's going to be - there's going to be another kind of further consolidation phase. I mean, kind of rises on available of cash and other issues. And I think the company's well positioned to take advantage of an opportunity. But I don't see anything in the short-term that would lead itself to an increase of free cash flow per share that gives you the same kind of potential that the internal projects do.

So I think for now in order to keep our balance sheet - balance sheet in shape, absent of greater opportunity that exist out there to increase free cash flow per share, we're just going to focus on paying down debt and we're going to internally - internal projects that we have.

There is the prospect of going in the south county in St. Louis. I found out yesterday through the Internet that we're not going to get it. It kind of surprised me and I suppose that if you're willing to go out and say that, you must be pretty sure. Although I know there's a lot of other people out there and my experience in gaming over the past 10 years, I've been pretty sure that we're going to get something and it didn't quite happen that way. So we'll see what happens in .

Was that - is that a - the one in St. Louis, was that due to a voter?

No, that was a - that was an announcement made by the competing bidder for the project who said they were going to get it.

Oh - I see - oh.

And the Indiana - the Indiana - I think the press release mentioned a special legislative session that may come up here in the near term. I mean, would you expect them to again revisit the 10 percent ownership rule and the - or what do you think might come out of that?

I don't think they'll revisit the 10 percent ownership rule unless they address the whole issue of casino taxes, the expansion of gaming, the adding of pool tabs at the race tracks, and down - and at the downtown locations in Indianapolis, and address the issue of . And it's my belief based on what I've heard most recently, is that if that gets too big an issue in a non-budget year, it doesn't need to be addressed this year by any kind of requirement of the state legislature or the constitution.

So it's unlikely to - it's unlikely there's going to be a change in the tax rate in the short term. It doesn't mean it's not going to happen. Anything's always open. But I just don't think it's - based on what we've heard so far, it's going to happen. And because if the tax thing doesn't happen, then I'm not inclined to think that the restriction on is going to happen.

OK.

Well, thanks very much and...

Thank you.

... Jim. operator: There are no further questions at this time. So I would like to turn the call back over to Argosy President and CEO, Jim Perry.

OK - thank you all very much, and have a great day.

The conference call has ended. You may now disconnect your lines.