PENN Entertainment Inc (PENN) 2004 Q1 法說會逐字稿

Good morning. Ladies and gentlemen, welcome to the Argosy Gaming Company first quarter 2004 earnings release conference call. At this time, I would like to introduce Erin Williams, Vice President of 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. With me 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 Reform 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 markets in which we operate, construction delays related 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 detailed 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 they continue to be used while this call remains in the active portion of or website. We undertake no obligation to publicly update any for 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.

Thanks, Erin. Good morning everyone. First quarter was truly exceptional for us at Argosy. Our GAAP EPS were 13 cents before consideration of 50 cents in charges related to our refinancing. Before the effect of those refinancing resulting in 63 cents per share compared to 50 cents last year or a 26 percent increase. Overall, our casino revenues increased 25 million, or 10 percent, while our EBITDA increased $9 million over last year or 15.5 percent.

There are several things that led to this strong operating performance this quarter. As it relates specifically for our properties, initial response for our Kansas City Casino has been outstanding. Casino revenues in Kansas City were up 56 percent year-over-year on a 53 percent increase in capacity. We were able to flow through 46.5 percent of this incremental revenue resulting in EBITDA of $11.8 million for the quarter versus 5.4 million last year. Our EBITDA margins in Kansas City were 31 percent in the first quarter. The opening there obviously went very well, we're very pleased with the initial results of that property.

We've also been encouraged by the fact that the Kansas City market has grown 10 percent in the first quarter. So that all of our growth isn't necessarily coming at the expense of our competitors.

At Lawrenceburg, we had a very strong year-over-year improvement with a 15.4 percent increase in casino revenues, and EBITDA of $36.5 million or nearly 25 percent ahead of last year. Our flow-through on our incremental casino revenue in Lawrenceburg was approximately 48 percent. Contributing to this strong performance has been the continued migration to TITO as approximately 70 percent of our casino floor in Lawrenceburg is now cashless. We continue to see the impact on a year-over-year basis in some of the marketing in operational changes that we implemented near the end of the first quarter last year. Also, better weather also contributed marginally for Lawrenceburg in the first quarter.

In Joliet, our EBITDA was essentially flat in spite of a $1.3 million increase in gaming admission taxes on $4.3 million less than revenue. The changes in operations since the management team made there last summer is substantially offset the impact of the taxes.

In Sioux City and Baton Rouge, our EBITDA grew at twice the rate of our pretty healthy revenue growth.

In Alton, we continued to operate at a competitive disadvantage in a pretty competitive market. Due to the tax structure in Illinois, and until last week, we didn't have any TITO gains. However, our management team there has taken some very positive steps in the first quarter, some changes in marketing that we implemented in the middle of the first quarter have had a pretty good impact on our revenues in the last half of the quarter and our results in Alton, while down year-over-year were in line with our expectations. Overall, companywide, I would say that the migration in TITO and the utilization of our data warehouse tool are having a positive impact on margins.

In our 2004 guidance forecast, we anticipated that corporate cost this would be up 6 to 8 percent which would place them in the 24 to $25 million range for the year. We now expect that this number is probably a million or two low for the year, but primarily due to our increased focus on development and as I mentioned -- as we mentioned in the first quarter, also we have had some increase in insurance costs that we expect to continue throughout the year.

Kind of below the operating line, depreciation increased in the first quarter over last year in line with the asset additions that we have put on in Joliet and Kansas City in the last -- since the first quarter of last year. While our debt levels remain similar to where they were this time last year, our interest expense decreased $800,000. Due to our refinancing completed in February and partially offset by the fact that we capitalized $800,000 in interest in 2003 that we didn't have this year.

Capital spending for the quarter was just under $31 million, consisting of approximately $10 million of our maintenance capital and almost $21 million of follow-on spending or not follow-on spending, but remaining spending that we had last left in Kansas City. We expect capital expenditures for the remainder of the year to be between 40 and $45 million.

As we noted in our press release, we had previously issued guidance of 162 to 172 for the year after an expected 53 cents in financing charges. Based on the results of our first quarter and our review of the rest of the year, we've altered that guidance to $1.73 to $1.83 after the impact of those refinancing charges.

And Taylor, with that, we will open the call up for questions.

(OPERATOR INSTRUCTIONS) Lawrence Klatzkin of Jefferies & Co.

Hi, guys. Great results. Could you talk a little bit more about what you're planning expansions at Riverside and Lawrenceburg and timing?

We are talking with the Board about moving ahead in Kansas City at our property there, and we hopefully will have some news in the next quarter in terms of the scope in timing of that. It is clear that there is a strong market. We have been able to expand the overall market. I think the market is up about 10.5 percent for the first quarter, and the last year or two the Kansas City market has been growing two or three percent; so when you have a great product out there, you really can expand the market. Part of our strategy there is a product that is a strong entertainment product with a lot of retail opportunities in food and beverage and that is working well. And we're looking at adding additional parking and we have mentioned for sometime, a hotel. We hope to be able to give you more guidance on that very soon.

How about in Lawrenceburg?

In Lawrenceburg, our situation there is that we have been working with the City of Lawrenceburg to give us some rent relief. We ended up paying quite a bit of taxes and rents, gaming revenues in Lawrenceburg clearly if we can come to an agreement with the city, it would make a lot of sense for us to expand our gaming capacity there. I'm optimistic; some people would say I should be cautiously optimistic, that we will be able to move ahead. Again, I think we will be making some progress in the next few months because I am cautiously optimistic that the city will work with us. We have a couple of different alternatives in terms of how we would expand the facility in Lawrenceburg and we need to work that through with the city and Indiana gaming regulators. But I think we're making progress.

How do you expand the boat? Do you get a bigger boat or do you have room on the boat?

Well, we think we have come up with some interesting ideas on that. Let's not get ahead of ourselves. We do have a way to expand and there is a variety of different ways and it's just a matter of how big our investment would be.

Second thing is you guys have a lot of free cash flow going forward, I guess the next 21 months you get close to 200 million of free cash flow. What do you do with it? Do you guys consider a dividend? Are you still looking for acquisitions? What is the plan for that cash?

We discussed with our Board probably every meeting the free cash flow and the opportunities we have. As we have said, we are focused on looking for development activities. Beyond for example, Lawrenceburg and Kansas City. In the longer run, if we cannot find something that does make sense in terms of getting a return on the invested capital, we would certainly look at dividends. It is not quite time yet. We think we have opportunities to pursue.

That makes sense. The last thing is, the Indiana tax, I guess you guys are fully accrued and -- or did you do a partial accrual? Is there any effect at all for the Indiana tax? You guys are pretty clean on that?

We are accrued -- we're current on that absent any penalties or anything that might be obsessed. That we have accrued the tax liability and the interest.

If Argosy -- I mean if Aztar wins their appeal, do you guys then have a big, big reversal coming?

I think that is a possibility somewhere down the line depending on how this thing goes. I think there's going to be a while before it plays itself out. Obviously, what happened last week isn't a very positive first step. And we and everybody else in the industry have a long way to go before this thing is resolved.

All right. Congratulations and great earnings.

Robin Farley of UBS.

Great. I have a couple of questions. One is after such a strong first quarter, your guidance for the year goes up but backing out the strong performance in Q1, it kind of suggests that the next three quarters would be below consensus estimates. Is that because you were being conservative, or is there something you think is going to change in terms of your performance from Q1 as we head into the rest of the year?

Robin, we gave a full-year guidance. We have increased it 10 cents. What we would like to be able to do is go through another quarter and see how things are shaping up. The second half of last year was -- we had a strong second half, and we would like to see how things are going to shape up. But we have increased our guidance to the street.

Okay. Just to clarify a comment you made a moment ago about Lawrenceburg. You mentioned you have different alternatives or different options there for expanding. Did you means that you have other alternatives if the city doesn't work with you this issue, or did you mean after issues with the are resolved? And then you have --?

We have looked at different ways to add capacity to the facility there. Depending on what we work out with the city, that could affect our view in terms of what kind of scope of that expansion would be.

Great. Last question is, what is your sense right now of whether taxes are rolled back in '05?

We are optimistic they will be.

Okay. Great. Thank you.

Dennis Forst at Key McDonald.

Dale, I wanted to ask about depreciation. You said it has gone up in line with assets? Is that a pretty normalized number now? Other than for some minor TITO increases for the rest of the year?

I think the number for the first quarter is essentially in line with the full year guidance that we gave.

The Riverside assets are all fully in there?

They were all on the books as of the first of the year.

The other question had to do maybe you or Erin can help me understand the tax accrual at Joliet. What was the percentage this year versus last year for gaming tax?

We really haven't, Dennis, we haven't given any specific numbers out on our property-by-property basis. We have just talked about the number on a companywide basis was up 1 percent. But if --

Was it higher in this year's first quarter than last year?

Yes. $4 million higher.

The dollars of accrual was 4 million. I guess I can work back from there.

I'm sorry Dennis; the taxes in Joliet were 1.3 million higher on $4 million less in revenue.

That would suggest the (inaudible)

Yes. Do you use a full-year estimate of what your revenues are going to be and then figure out the tax accrual?

Right.

If revenues are higher than you expect the next couple quarters you will have to have some adjustment to the rate?

Exactly.

What was the number shares outstanding in the quarter and why do you not put that in the end of the releases?

I believe it is on the balance sheet.

But that is the number of shares -- what about fully diluted shares?

It is essentially the same. It is not very substantial.

29.4 million or 29.5 million shares.

Fully diluted?

Yes.

Good enough. Thanks a lot.

Ray Tieman (ph) of Jefferies & Co.

I was hoping you could just do one more follow-up for me. Bank line? Availability and outstanding at this close of the quarter?

We have only got less than $1 million outstanding on the line. And no, no, I'm sorry, I am reading the wrong number. I apologize.

That is what you hoped it would be.

I was reading the interest for the quarter. It is 40 million, 53 million at the end of March.

Okay. What does that leave you available?

It is a 400 million line.

I will do the math. Current pricing on that is LIBOR plus what?

About 225.

Okay. Bigger questions now. Iowa passes some legislation. It looks like there is six counties that have approved or indicated publicly to referendums that they would like to have a boat. Your boat has done pretty darn well. You obviously expect the future to be brought with the new boat coming in from KC. Do you think that one of those six counties would like to have an Argosy vessel in it going forward?

We have not spent a lot of time in development in Iowa. We did actually look at one county that turned out to reject gaming. But we haven't spent a lot of time in Iowa and so we don't really have much of a comment with regards to Iowa. But, if something would makes sense, we would be there, but we haven't -- we don't know too much about it frankly.

Okay. I have been reading more and more about Ohio again. I know it is one of the topics that you guys are totally on top of. Just up-and-down and up-and-down and not really sure where it goes?

Yes, I think it will eventually get back to where it started.

Lastly, I wanted to mention Baton Rouge. Tremendous margin improvement in Baton Rouge. What is the secret and can I -- should I expect to see a few hundred and fifty basis point pick up the whole year?

I don't think necessarily for the whole year, but we did have a great quarter down there. We have been able to increase our marketshare down there over last year's amounts pretty profitably. When you're having those kinds of revenue increases, thee flowthrough had a relatively strong market conditions for us. The flowthrough generally comes at 40 percent or so.

We have a good management team down there, and they understand the market, and we are getting the right marketing and promotions out to the people, and they are running a very tight ship.

Thank you very much and congratulations on a very fine quarter.

Linda Weller (ph) of Telegraph (ph) .

Could you please specify for the Alton Belle Casino the taxes that you have paid more on the revenues like you did with Joliet? I believe you said you paid a 1.5 million more taxes on $4 million less revenue?

I'm trying to pull up the numbers right now. But the tax rate, the Illinois gaming tax rate has gone up and it has affected both. Our Illinois properties and frankly we would probably have more pain in Alton because of not only the taxes but the competitive situation for the Missouri properties don't have the same kind of tax rate.

Right. Can you specify what you have done with (indiscernible) and Alden in the last part of the quarter? You kind of mentioned -- Dale mentioned a little bit about turning things around recently and also where they are out with the TITO?

To answer your first question, the gaming emission taxes in Alton were just under 1.4 million higher in the first quarter than they were last year.

And the revenues are down.

Yes, the revenues are down $2 million.

Okay.

I think there is approximately 150 to 200 TITO machines. I think Dale may have the exact numbers, they started going in --.

We are at 153 TITO machines right now. We opened on April 7th with 100. With the state's cooperation, we expect to be fully TITO capable by the end of August. Finally, your last question, just towards the end of the first quarter, we did some things promotional-wise with entertainment and marketing promotions, and a little bit of targeted marketing that has had a positive impact on our revenues in getting the right people on the casino floors at the right time in Alton over the last several weeks.

Okay. Thank you very much.

Chad Garrison of St. Louis Business Journal.

Good morning. I have a question concerning the Joliet property. I see where revenue for the first quarter is down compared to last year, and I thought that you all had put significant investment in that property and I'm just curious why that hasn't picked up such as Kansas City?

It is really a bittersweet situation. We did spend over $40 million for a new barge facility. It was not as extensive as the project that we put into Kansas City, but the reality is that tax rate went up significantly, and we made a number of changes to focus our marketing spend on those customers that would be profitable to us in light of the higher tax rate. So, we reduced the number of table games, we reduced the amount of promotional material, marketing expenses and comps, as well and probably the most important is that we now charge admissions to get onto the casino floor, which tends to have a significant effect on what we would call our retail or non database play. All of those factors have resulted in a reduction of revenue. And right now, the Missouri, Kansas City boat probably has a tax rate of 15 to 20 percent less than in Joliet. 15 to 20 percentage points less. So, when you significantly change the tax structure, it has a -- can have a significant effect on the operating environment in which we have to run our casinos.

Sure. When is that tax to roll back in 2005?

By July 1st of next year -- of 2005.

July 1st? Okay. How concerned are you all with the proposed new casino for downtown St. Louis? What impact that, as well as the one proposed for the county could have on the Alton property?

The South County or South County region area would not have an effect on the Alton. So, the downtown would have some. We think we have a very good product in following for the area north of the city, so while it would have some effect, we don't think it will have a critical effect.

Okay. With the TITO machines, last question, how does that benefit you all? Do people tend to play longer, spend more money with TITO machines? What is the consensus there kind of like industrywide?

Overtime, everybody, or all of the major operators will have TITO. It has great player appeal, people like it. It is easier; it is quick for people to move from one game to another so there is a lot of player appeal. There is some operating efficiencies that the operators have because of not having to deal with all the (inaudible)

Say the expense of the outfit games with TITO technology and what you're spending on the Alden Bell Casino?

The machine costs about 10,000 to $12,000 apiece. Some machines over the last few years that operators have bought were TITO ready though.

Okay.

We need to go to the next question. We will be glad to spend more time with you later on.

David Barteld of Wells Fargo.

Good morning, guys. Actually, a follow-up on the TITO. At this stage of the rollout, can you give us any quantification about what your experience has been on the expense side? Is that something that you can talk about even in generalities in a range or something like that?

I think it is hard to say. Like you said, it is hard to say exactly what the impact of TITO has been, because we've had so much other things going on with the company in the last year or so with swapping out assets and things like that. It is interesting though that I think if you compare just first quarter to first quarter, our labor and benefits as a percentage of revenue has decreased as a company over 100 basis points. Part of that is no doubt due to TITO. Part of it no doubt is due to the fact that we are operating more efficient facilities in Kansas City and Joliet right now as well, moving from the riverboats to barge-based structures.

Very good. Weighted average shares. Was that at the 29.5 during the quarter?

Yes.

The tax rate going forward 46.5 still a good number to use?

I don't see any reason to change it at this point.

Thank you very much.

Steve Close (ph) of J.P. Morgan.

Actually most of my questions were answered. I just wanted to clarify one thing. If the tax rate rolls back in Illinois in July of '05, the admissions tax rolls back as well along with that? Is that correct?

No it doesn't.

It does not? So admissions tax stays where it is but the other rates return to pre-July '03 levels?

Yes.

Thank you.

(OPERATOR INSTRUCTIONS) Dennis Forst at Key McDonald.

Just wanted to understand these marketing changes that took place in Alton. Also, was that part of the cause for the selling G&A being up 23 percent in the quarter?

Part of it. Part of the reason is overall across the company; the first piece of that increase in proportion was revenue. We also had a little bit of incremental spending in Kansas City with our grand opening expenses there. But, the part of thing at Alton is we feel that the last part of last year when we were making the changes in Illinois, we might have cut a little deep. It had a bigger impact on our revenue than what we initially had anticipated that it would. We have looked at ways to -- we're looking at ways all of the time to try to optimize our EBITDA in both the Illinois markets and we have had to make some tinkering along the way.

Going forward, SG&A is probably going to increase closer to revenue gains?

We talked about that a little. The biggest thing in there probably, Dennis, is the fact that we have guided up our corporate costs a little bit which are in SG&A.

They are. The corporate costs you said are going to be in the 26, 27 range for the year?

Probably.

Which would indicate quarterly numbers below the first quarter 7.4 million?

Yes.

Great. Thanks.

David Vas of Banc of America.

Very nice quarter. As I look out a couple of years, it looks like you're likely to have more competition at Alton, and possibly also at Kansas City and Sioux City with respect and Native American gaming. Given that, how would you sort of classify what you're thinking in terms of capital allocation on development? Is it for Greenfield or are you thinking more in terms of acquisitions?

Our focus has not been aimed at Greenfield. There has been some of that. So, it has been more focused with existing EBITDAs or a situation where we might be able to expand on something. We have had some conversations in the Native American area which you can say is Greenfield.

Okay. Thanks.

Lawrence Klatzkin of Jefferies & Co.

What do you do with the old Sioux City boat?

Sell it.

You sell it? How much do have it on the books for and how much you think you may get that amount?

It is on the books for about $2.5 million and we will see what it is worth in the market.

All right. You bought it for like 6, didn't you -- a long time ago?

Frankly, Larry, that was so long ago I don't remember what we bought it for.

All I know it's pretty well depreciated down now.

I think it was a city in Europe that used to circle Manhattan.

We bought it from the guys in Peoria.

But I think it was a dinner boat. That was my only question. Thanks.

There are no further questions at this time.

Thank you for joining us and the management team is available for additional questions if you want to call us later.

This concludes today's conference call. You may now disconnect.