PENN Entertainment Inc (PENN) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen (technical difficulty) quarter 2003 earnings release conference call. At this time I would like to introduce Erin Williams, Vice President, Investor Relations and Treasurer, who will introduce the other speakers. Thank you. Ms. Williams, you may begin your conference.

Good morning, everyone, and welcome to the Argosy Gaming Company conference call. Speaking today are Dick Glasier, our President and CEO; and Dale Black, Senior Vice President and Chief Financial Officer.

Before I turn the call over to Dale, I need to remind everyone that we will be making some forward-looking statements, as defined in the Private Securities Litigation Act of 1995. We caution you 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. These include, but are not limited to -- competitive and general economic conditions in the market in which we operate; construction delays related to our capital expansion projects, the approval of cashless slots by the gaming boards and commissions that regulate the Company; the effects of future legislation or regulatory changes on the Company's operations; as well as other risks and uncertainties detail from time to time in our SEC filings.

The information in this call related to forward-looking statements may be relied upon subject to previous Safe Harbor statements as of today, and may continue to be used while this call remains in the active portion of our website. 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.

With that, I would like to turn the call over to Dale.

Good morning, everybody. I'm going to discuss the financial aspects of our quarterly performance before turning the call over to Dick, who will provide a little more color on the operations.

As you noticed in our press release, we reported earnings per share in the second quarter of 24 cents, versus 38 cents per share in the second quarter of last year. EPS was affected by several items in the second quarter.

First, similar to last year, since we record gaming and admission tax at the effective annual rate, we had to adjust in the second quarter for the impact of the gaming and admissions tax increase in Illinois in the first half of the year. This amounted to $6.2 million pretax. Of this amount, $2.8 million was related to our Joliet operation and $3.4 million was related to the Alton operation.

Secondly, the Indiana Legislature to enacted new legislation which changed the calculation of last year's gaming tax increase. Basically what we had to do was go back and adjust for one month's taxes for the month of July, which when we were not cruising, based on this new interpretation -- excuse me, when we were cruising and weren't dockside, and then the switch over. This onetime event amounted to about $5.9 million pretax. The combination of the Illinois and Indiana tax changes caused our effective gaming and admission tax rate for the quarter to be approximately 37.9 percent of casino revenues. We expect that the rate for 2003 as a year will be 35.5 percent, versus 30.7 percent in 2002.

Finally, the recent Illinois tax increase caused us to conclude that we have no use for the barge platforms that we previously had begun construction on in Joliet. Accordingly, we took a $6.5 million pretax charge to write down the barges.

Before the combination of these three items, our earnings per share for the quarter would have been approximately 60 percent -- or 60 cents per share, I'm sorry.

In the quarter, casino revenues grew at about 7 percent to $252 million, primarily due to the growth in Lawrenceburg and the barge opening in Joliet.

EBITDA, before the impact of the barge write down in Joliet and the $5.9 million Indiana tax change, would have been $57.6 million, versus the 54.3 that we reported last year. Both years include the effect on the Illinois tax increases.

Depreciation in the second quarter increased $1.5 million to 12.8 million, primarily due to the combination of some accelerated depreciation related to our Kansas City expansion and the completion of our construction project in Joliet.

Interest decreased approximately $1.5 million year-over-year, due primarily to lower borrowing levels.

You will notice in this quarter that our effective income tax rate has increased a little bit. This is due primarily to the higher taxes that we are experiencing in Indiana, and we expect our effective rate for the year to be approximately 46.5 percent.

On to our capital structure -- as we reported in our press release, we had capital expenditures of approximately $35 million in the quarter. We expect to spend approximately 80 to $90 million in the second half of the year, for an annual total of approximately 150 to $160 million.

As far as the capital expenditures go, this has been primarily related to our capital projects in Joliet and Kansas City, as well as the continuation of our maintenance capital program, which is -- a lot of that this year is going towards TITO, or the cashless slot machines.

As far as that goes -- TITO goes, we now have over 1000 machines, or approximately 40 percent of our machines, in Lawrenceburg are now cashless; 225 machines, or around 20 percent, in Kansas City; 300 machines, or 62 percent, in Sioux City; and we are under test in Baton Rouge with approximately 55 machines that are now TITO. Pending regulatory approval in Illinois, and a successful completion of our test in Baton Rouge, we still expect to be fully TITO by the end of next year.

I would like to point out that as it is right now, 58 percent of our machines across the Company are either order or are already TITO ready.

With that I will turn it over to Dick.

The operating performance at each of our properties was either in line with our own internal expectations or better than we had expected. And as Dale point out, we had a very good quarter in Lawrenceburg. Revenues were up about 15 percent. The shift to the dockside operations was an important factor for the increase, but as we mentioned in our last call, we were also going to refocus our marketing efforts to grow the retail business and shift demand to midweek, where we have more capacity. And that marketing shift and the efforts by the management at Lawrenceburg has worked out nicely for us.

Just to clarify, the increase in the revenues at Lawrenceburg resulted in EBITDA being up year-over-year, even with the increase in the tax rate in Indiana, as well as the absorption of the onetime charge of 5.9 million that Dale explained associated with last year's tax increase in Indiana. So we did have a really terrific second quarter in Lawrenceburg.

As most of you know, we opened up a new casino barge in Joliet in the middle of May. The facility has been very well received by our guests, and rave reviews in the press, and even by some of our competitors. The opening took place without any major disruption, which was something that we had planned very carefully, and our operating team in Joliet did a great job of managing the transition to the new facility.

In terms of the new casino, it's a marked improvement from the old casino, which was on two separate boats, and it's really turned out to be terrific and we hope that many of you have a chance to see it at some time.

Just in terms of sort of before and after the opening, we looked at the two weeks just before the opening in May, and then looked at the first two weeks of June; admissions in Joliet were up over 40 percent. And full-year month in June revenues were up 11 percent year-over-year, while the overall Illinois market was down 3 percent in gaming revenues.

In the Chicago mini-market, which is our boats plus two others in the Joliet and Aurora area, our share in June was just over 33 percent, and that compares to 29 percent in the first quarter for us. We had hoped to get up to 33 percent or better by some time later this year, and obviously we are very pleased we were able to do it in the first month of operations in June.

The success at Joliet with our new facility does give us more comfort in the decision we took last year to expand the Kansas City property. Some of the same architectural and design features will be carried over to Kansas City. That will be a 60,000 square foot casino. Construction is on schedule, and we anticipate that will open some time near the end of the year and that would include close to 1800 cashless slot, so the whole facility will have the TITO machines in it.

We did, in the pavilion areas, just opened up the new buffet, and that's been very successful as part of the overall product improvements there. We've had some disruption from the construction work, but it's been within the range that we are expecting. Revenues at Kansas City in the second quarter were down about 5 percent. We will be going through over the next few months some of the worst disruption, but we're very excited about the new facility, and we will keep you informed as a project unfolds.

In the press release we detailed the results for the other three properties. I won't go into those. All in all we've had -- we have done very well operationally and our operations teams at each property have done a terrific job.

Needless to say, the tax increase in Illinois has taken a bit of wind out of our sales. Certainly in Joliet it's a bittersweet situation. We have a great new facility, it's very successful, and now we have to look how we can operate Joliet and Alton in a difficult tax environment in Illinois. I continue to believe, and I know most of those in the industry believe, that an increase and gaming positions and a more reasonable tax rate will generate far more income for the state of Illinois than the new legislation, and a more favorable tax environment would certainly have a much more positive economic driver for the state. The industry may not have been as effective as it should have been in communicating what we needed to communicate on a grass-roots level in the past, and Argosy and the industry really does need to work better to do a more informed job of educating our guests and the general public as to the contribution that the casino industry can make in Illinois and elsewhere.

In the meantime, we've already begun adjusting our marketing programs in both Alton and Joliet. We reduced the number of hours of operations for our restaurants and modified certain food and beverage pricing. We eliminated more participation games. We will be reducing the number of table games at both properties and adding additional slots. We're working with the state regulators in making other changes. We're finalizing the procedures with the state so that we can begin charging admissions at Joliet in the next few weeks. We won't be charging admissions at Alton because of the competitive situation with the Missouri casinos. And we have requested the gaming board to approve a change in the hours of operations, reducing the hours from 22 to 18 hours.

We think that these changes will have -- will be able, on the costs side, to offset some of the tax increases and we think something in the neighborhood of 15 to 25 percent of the tax increase can be offset. That's a target that's based on our best guess and we will just see how that plays out, and we will be making additional changes based on the initial results.

Argosy continues to focus on how we can create shareholder value beyond our existing operations. We can do that by investing in growth opportunities that really do generate strong returns for the long-term; we can pay down debt; we can return capital to our shareholders. We reduced debt in the quarter, and of course we pay down debt whenever we have excess cash. Our goal is to maintain a solid balance sheet, with leverage ratios in the four times range.

The increase in the Illinois taxes has affected our EBITDA and our free cash flow going forward. That means we have some reduced flexibility to make capital investments and return capital to our shareholders in the near term.

Looking at growth opportunities, we've been very active in looking at a number of different opportunities, and our focus is of course to do something that generates a return greater than our cost of capital.

It is interesting that there was a lot of discussion late last year and the beginning of this year that there would be an expansion of gaming in Kentucky and Maryland, Ohio, Kansas, Pennsylvania, Nebraska, Massachusetts. So far none of these states have passed new gaming legislation. On the one hand, that's a positive for those that were concerned about how Argosy would be affected by new competition; on the other hand, it's likely there will be some kind of proposal next year, at least in some of those states. And at some point I do think there will be additional risinos (ph) or riverboats or casinos in some of those states. Of course that's why we're working hard to see if we can make a transaction that does make sense in the right state. That's not to say we're going to do a deal to do a deal.

There has been a lot of focus on dividends recently. The Argosy Board will be evaluating the possibility of issuing a dividend, and that is assumed (ph) made in the context of the Company's capital structure goals and the future capital expenditures needed to grow Argosy.

With that I'd like -- operator, could we open the call to questions?

(CALLER INSTRUCTIONS)

Robin Farley, UBS.

I have a couple of questions. One is, I wonder if you could address maybe what your interests may be? There is a lot of talk about the Venions (ph) properties being for sale. If you could talk about what your interests may be -- even if you can't say specifically, just in general terms whether a transaction like that would be something of interest to you?

My impression is that over the last couple of years there's been various different discussions throughout the industry of something with Horseshoe. Argosy has looked at that before and I don't want to perpetuate the rumors. We're not actively looking at that.

And just a follow-up question or two on your comments -- you mentioned reducing -- offsetting some of the tax impact in Illinois and you mentioned some specifics. When you talked about offsetting 25 percent of the impact, does that require -- you are including those things that would require state approval like reduced hours?

Yes. The reduced hours at this point is the one that is most visible in terms of requiring the regulator approval. All the other activities that I have mentioned in some form have either been implemented or agreed or communicated or noticed or in the works. So it's a combination of things that are either in the works or still pending regulatory approval.

My last question is just to clarify on something in Dale's opening comment. You mentioned the accrual in the second quarter. It sounded like you said it was higher for Alton than for Joliet.

Yes. The reason for that is Alton -- Joliet is already over the limit where a big chunk of the recent Illinois tax increase was at the lower levels of revenue and Joliet was already over that level by halfway through the year, where Alton is still going to be impacted more by some of those steps in the second half of this year. That was an impact that really only affects 2003 between the two properties more than on an ongoing basis.

That make sense. Thank you.

Harry Curtis, J.P. Morgan.

Quickly, more of a a prosaic question. Your corporate expense was a bit higher than the recent run rate. Do you think it's going to continue at that level, and if you could give us a sense of why it was higher?

There's a couple things in there. One, we have, like several companies this year, spent a lot of money on consultants and lobbyists in the different states with all the activity going on, and our general increase in development activities has increased a little bit. Secondly, we have -- we are experiencing, on a year-over-year basis, some increases in insurance. We had been able to in the past to purchase some of our insurance under three-year contracts that have been expiring over the last year or so we're still working with, and that has caused a slight increase in our expenses. And thirdly, about a year ago we completed the design and construction of our data warehouse, and our costs have increased a little bit as it relates to the support of that activity.

As far as the run rate goes, I would anticipate that somewhere in this range is probably what you could expect going forward, although they may be a little higher than normal this quarter.

The second question -- just going back to Ohio and Kentucky -- what are you thinking about why the gaming expansion proposals failed in those states? And do think anything really changes much in '04?

What I'm hearing is that it's likely that there won't be much activity in Ohio until the end of '04. One of the senior legislators in Ohio said that the earliest a referendum would be "allowed" to proceed Ohio would be November of '04. There was -- and I think we all could read a lot of the publications and articles coming out of Ohio; they could not agree on structure, and there was a lot of political discussion. And that's happening in every state. Kentucky -- I think that I would have to bet -- I would suggest Kentucky is probably behind Ohio in terms of likelihood; but again anything could happen.

What do you think, given the support now of the horseman (ph), I would have guessed that it would have been ahead of Ohio, but you're closer to it. Can you give me a sense of what the roadblocks there are?

I guess I've heard that there's not a lot of interest in having more racetracks in Kentucky. The inter-politics of what's happening in the state, and the lobbying by the horseman, I don't think I have any more us insight than you. I would say that when Dale and I are were going around early last year talking to investors, there were several people that said, "Kentucky is going to happen, no question about it, and it's going to happen in the next four months." Frankly I can't remember who that investor was, but he was wrong.

Joe Greff, Fulcrum Global Partners.

A question in Chicagoland. Have yet to see any meaningful increased -- meaningful competition from the Indiana guys? And I guess broadly can you comment on what you're seeing from the Harrah's properties with the rollout of their new total rewards program?

I will say that we were seeing a lot of pressure over the last year from several of the Indiana properties. The statistics show that the Indiana properties are doing better than the Illinois Chicagoland properties. I don't think -- I think that's going to continue. They have an advantage with the tax structure there. I would hope that eventually some folks in Illinois would notice that as part of the grass-roots support that we need to communicate.

We're not seeing anything -- we're not feeling anything specific from Harrah's with -- they're very good competitors, but we haven't seen anything -- significant change with their rollout of their total rewards program.

Back on the question regarding new operator, so far in July you haven't seen any increased marketing efforts on their part?

I can't say that I can -- I haven't seen it.

Amy Marsell (ph), Jefferies & Co.

I have a couple of housekeeping questions, like the capitalized interest for this quarter?

800,000.

And also, can we get any guidance for CapEx, DNA or interest for next year?

The only thing we said historically about that is that we expect our maintenance capital next year to be approximately $40 million again. At this point in time, we don't have any planned expansion projects into next year, other than what ever carries over from Kansas City. And we haven't given any sort of guidance at all related to any of the income statement items for next year.

Now how about the construction disruption in Kansas City? Can we have any kind of details, so we can quantify a little better for the next two quarters?

We've been running at about a 5 percent impact. If I had to guess, it's going to be between 5 and 10, because, as I mentioned, the third quarter we're going to working on the entrance area. The operating team is doing a lot of things to offset that and create additional energy and entertainment activity. So far they've been successful. They always said there would be some disruption, and it will probably be a little bit more, but other than saying between 5 and 10, that's about all we can say. And that was sort of in line with our thoughts.

David Henson (ph), Boston Partners.

Dennis Forst, McDonnell Investments.

I wanted to ask Dale about debt levels at the end of the year. Given that you're going to spend 80 to $90 million to finish up Kansas City, isn't it likely that debt will ratchet back up closer to the 900 million level by the end of the year?

It's quite likely. We will more than likely, if not almost assuredly, be a net borrower in the second half of the year.

Lastly, I think Dick had mentioned about dividend and the Board addressing that issue. When is the next Board meeting?

We tend to have four to six Board meetings a year. We don't have one scheduled now, so I can't give you -- I do not want to create an anticipation as to when we might make some announcement. I can't give you a specific date.

I assume that the people on this call would be involved in making a recommendation regarding a dividend to the Board. I'm just wondering what the feeling is among Dick, Dale and Erin about a dividend, and whether that would makes sense in this environment.

I think we have to -- certainly there is an appetite by most investors to do that. As I said, we have to look at that, balancing our capital structure situation and our ability to grow through expanding our operation. So I don't want to say something that in effect it doesn't allow our Board to have have all the information to make a decision at the appropriate time.

Operator, maybe we could take one or two more calls.

David Henson (ph), Boston Partners.

I apologize in advance if you said this before; I'm trying to listen to two calls. My question is did you guys comment on your earnings guidance for the remainder of 2003 or just your outlook for H2 (ph) in general?

No, we have not provided any additional guidance for the rest of the year.

Doesn't mean you're affirming what's already out there, or you just don't have any guidance that the company --

We don't have any guidance out there that the Company has issued.

Kevin Roche (ph), Penn Capital Management.

A quick question for you, and I think you had touched on this earlier, I'm having problems with my phone. In an expansion would you guys be looking to acquire additional properties, or would that -- would you look for kind of a new build in various areas that you're looking, or markets that you're looking to get involved in?

We've looked at both.

Is there a -- are you favoring either way, or is it just -- you're just still kind of exhausting all options before acting on that?

There is probably more opportunities for green field or starting new because people who have good properties price them accordingly. You have to really look for an existing property where you think you can add something. So we've been looking at both, but the numbers are really in terms of something that is new.

Next question would be that you had touched upon that you are reducing hours in Illinois. Is that correct?

We have already begun reducing some hours of operations for activities within the properties, such as food and beverage. The gaming -- we're required to work with the state regulators in coordination of changes in hours of the facility itself. And that process, which I said we wanted to go from 22 hours of operations down to 18 hours, that's still being worked through the Illinois Gaming Commission.

Thank you.

David Foss (ph), Banc of America Securities.

Can you talk a little bit about Kansas City next year, in terms of quantifying what you think the market will grow as a result of your expansion versus how much you think will be coming out of existing players?

Maybe Dale and I can both comment. Dale?

Sure. I guess it's a little bit hard to say. We definitely think we're going to grow the market over there. What we've talked about before is that when we look at this project, and looked at historically our property had ran in about the 18 percent of market share range. That has dipped a little bit below that sometimes recently. Our goal, if you will, is to get to the point where we get a 22 or 23 percent share of the market in Kansas City. I do think the market will grow a little bit. It's hard to say how much. I think our research that we did before we built the project has shown that customers do drive past our facility when they have the time to go to the others now, just because of the -- quite frankly, our asset doesn't compete with some of those nicer properties and the new one definitely will.

The second thing is -- reason for that is the growth in the market has gone to the other competitors also because for the fact that even with the boat that we have now, we are capacity constrained during the peak times. And with a 50 percent increase in capacity in that property, we should be able to offset a lot of that and give people the excuse to come to our property as opposed to driving past it.

In terms of Joliet, and Alton for that matter, how should we think about revenues as they come out of the regulators over the next couple of months? Should we be looking for conceivably flat or down revenues at the property? Or would that be surprising?

We can't really give you guidance on that. It would not be surprising if revenues were flat or down somewhat. But, that is why since -- we're really never been in a situation like this where we have to really changed around how we market the property, and hours of operation, and the management of the games, etc. So this is really a new area for us and certainly at the time of our next call we will be able to give you much more guidance.

In terms of acquisition, would you be interested in investing in one of two potential opportunities in the St. Louis market?

You're talking about the bankruptcy of the President (ph)?

Right, and the bid for the South St. Louis license.

We have looked at both of those and South St. Louis is probably of more interest to us. So yes, we're involved in those.

Fantastic.

Ryan Worst (ph), CL King.

I was wondering if you could talk about any investment possibilities or opportunities at you're existing properties that you may consider.

Yes. As we have commented before on this, in Lawrenceburg we run at significant capacity levels and it's probably as busy a casino as there is in the country. I'm not sure there is any that is more busy at times. Under the right circumstances, and especially some support from the local politicians where we pay a rent for the use of the land, we could envision expansion, especially to do some things in terms of additional product offering that would make the property even more competitive, should there be gaming eventually in Ohio or even Kentucky. And we have various different alternatives, and there's been discussions, and continuing discussions, with the city. It is a priority for us. We are looking at doing one more step maybe in Kansas City. Kansas City does not have a hotel. It would be premature to comment on that beyond the fact that the management team over the last couple years has considered it, and we're continuing to consider it. And in Joliet, which we thought had one of the biggest opportunities, that property is located right by two very major interstates. Will County (ph) is the fastest-growing county, or at least it was, in Illinois. We have over 300 acres there. So we would definitely like to do something. But the tax environment has to change in Illinois for us to make that decision.

Thanks.

One more call, operator.

Mike Warner (ph), Kennedy Capital.

I had two questions. One is, in the absence of investment and growth opportunities, would it be safe to assume you're going to use your cash flow to pay down your debt levels going forward?

Yes. We always think it's a good idea to do that. And we've also said that we would look at other ways to return capital to our shareholders.

One thing that was brought up I think on the prior caller was -- or that you mentioned was that the land that surrounds the Joliet property. If the tax environment continues to be onerous in that state, what would be the possibility of -- and you may have already explored this -- selling that land to a real estate an development (multiple speakers) --

-- a mall outlet.

Or a strip mall that is not specifically tied to gaming, per se, but you would see some sort of cash inflow from that perspective, I guess. Yes, and that has been looked at. We think there could be better alternatives than that in a more rational tax environment. So we will have to see. But that is -- the idea of real estate play (ph), of course, is always there, again because that location is incredible. Good luck to you. Thank you very much.

Thank you for joining us today, and the management is here, and if you have additional questions we will be happy to work with you on that today. Thank you again for joining us.

Thank you for participating in today's Argosy Gaming Company conference call.

This call will be available for replay beginning at 1:00 PM Eastern time today through 11:59 PM Eastern time on August 12, 2003. The conference ID number for the replay is 1713239. Again, the conference ID number is 1713239. The number to dial for the replay is 706-645-9291. Again, that number is 706-645-9291. Thank you.

(CONFERENCE CALL CONCLUDED)