PENN Entertainment Inc (PENN) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Argosy Gaming Company's third quarter 2004 earnings conference call. At this time, I would like to introduce Erin Williams, Vice President and Treasurer, who will introduce the other speakers. Thank you, Miss Williams, you may begin your conference.

Good morning everyone. With me today are Dick Glasier, our President and CEO, and Dale Black, our Senior Vice President and Chief Financial Officer. Before I turn the call over to Dick, I need to remind everyone that we will be making forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. I would like to 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 project, the effects of future legislation or regulatory changes on the Company's operation, as well as other risks and uncertainties detailed from time to time in our SEC filings.

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 obligations to publicly update any of our forward looking statements that we will be making today whether as a result of new information, future events or otherwise.

And with that, I'd like to turn the call over to Dick.

Thank you, Erin. Good morning. We've reported 71 cents EPS for the quarter. Our operating results for the quarter were good and the performance at every one of our properties we're very proud of. I am going to just make a couple of other quick comments and turn it over to Dale. We know that this is a busy time of year for you and we want to make sure you have a chance to ask us some questions. Did want to point out for the quarter that we have improved our capital structure with an amended bank facility that Dale will talk a bit more about and that we have been moving ahead on our capital expansion plans during the quarter again.

We'll have some time to talk about that some more and Dale?

Thanks, Dick. Good morning, everyone. As Dick mentioned, we did report earnings of 71 cents a share this morning, compared to 56 cents last year and we did accomplish, in the third quarter, refinancing our senior credit facility as Dick mentioned right at the end of the quarter. I should note that in our earnings for the third quarter is a 6 cent gain on the sale of one of the boats that we formerly used in Joliet before we put our barge in.

And also we had, because the way the bank financing was ultimately structured, we did not incur an 11 cent charge that we had previously anticipated. Because of the structure, it simply was not as an amendment, we will continue to amortize those costs over the life of the agreement instead of taking the charge currently.

During the quarter, we had a 9.7 percent increase in net revenues from 243 million at about 266.5. A lot of things factored in that led to that. In Kansas City, we continued to benefit from our expansion which opened in December and a strong gaming market in that -- there this year.

Our revenue increased over 53 percent to approximately 35 million in the third quarter. Our market share was 21 percent compared to 15 percent in the third quarter of last year.

In Lawrenceburg, we experienced a 7 percent increase in revenues. Over 115 million. This has been consistent with our performance, really, throughout the last year. We had a real strong quarter, the fourth quarter of last year, and really have seen that trend continue on through now.

Also notable is the recent performance of our Sioux City property wherein our revenues increased 23 percent in connection with the recent relocation of the former Kansas City boat up at Sioux City. In September, our first full month of operation, our casino revenues increased 48 percent on a 28 percent increase in capacity.

During the quarter, our EBITDA rose to 71.6 million, from 63.1 million in 2003. Our margin was 26.9 percent this year compared to 26 last year.

I'd like to point out, though, that our effective gaming tax rate is about 2 percentage points higher this year. However our margins were aided by a 1.2 percent from the asset sale that I mentioned earlier.

You take all these things into consideration, kind of normalize the tax rate and factor out asset sales, effectively our margins were 1.7 percent higher than last year on an apples to apples basis.

Some of the things that have led to that as we continue to benefit from the designed benefits of the Kansas City Casino being on one floor vs. the old boat, we are seen some of the benefits at TITO now; and also some of the cost measures there were put in during the mid to latter part of the third quarter last year in Joliet and Alton have continued to -- mid to the end of part of the last third quarter of last year continued to see the benefits of that after the last year's tax increase.

One thing I'd like to point out, too, is if you kind of normalize the properties earnings for the first nine months of this year, doing what we just talked about in the third quarter, you remove any of that "non-operating items" or asset sales, make constant tax rates.

Our property EBITDA before corporate is up 20 percent over last year through the first nine months. We are very pleased with the operating performance of our properties and our property management team so far this year.

Also in the third quarter, our earnings were impacted year over year, from depreciation due to the opening of the Kansas City facility and the fact that we are now starting to accelerate the depreciation on our existing garage, now that our construction of the new garage is taking place.

Also lower debt levels and interest rates led to over a $3 million decrease in interest costs in the third quarter vs. third quarter of last year.

Onto the balance sheet. As we talked about at the end of September, we completed the refinancing of our senior credit facility; significantly reduced our borrowing cost going forward and also gives us greater flexibility as a company. The cost of our term loan borrowings has decreased by 1/2 percent or 50 basis points and the average on our bank line, the revolving portion of it, is about 7/8 of a percent.

We decreased debt by about 42 million in the third quarter to $805 million at the end of September. And our debt to LT and EBITDA is approximately three times right now.

In the third quarter our capital expenditures were approximately $14 million just roughly half on project capital and half on maintenance capital. We are 95 percent TITO at the end of the third quarter. We are 100 percent, at each of the locations except for Baton Rouge and Sioux City and most of that by design.

As Dick mentioned, we have started construction on the garage site in Kansas City, which is the first portion of our $75 million project for the garage and the hotel there. We expect the garage to be opened in August of next year and the hotel by the end of 2006.

We are continuing to evaluate alternatives for our expansion project in Lawrenceburg and expect to finalize the decision near the end of this year.

Looking into the fourth quarter, we think that project capital expenditures will be $10 to $12 million, primarily related to Kansas City and maybe a little spending on the Lawrenceburg project. And then total capital expenditures in the quarter will be between $15 and $20 million.

We had previously announced guidance for the year of $1.73 to $1.83 per share. This guidance anticipated the 11 cent charge, which I mentioned earlier, didn't occur and also did not anticipate the 6 cent impact of the asset sale. Given these factors, we now expect earnings to be in the range of $1.95 to $2 for the year after consideration of the 52 cents that we wrote off earlier or not -- earlier in the year in connection with our bond financing.

With that we'll turn the call over to questions.

(OPERATOR INSTRUCTIONS) Larry Klatzkin, with Jefferies & Co.

Couple of quick questions. One, Ohio. The track you are buying. What is the timing of closing on that is and what would its revenue and EBITDA be? What pace is it at?

We really don't -- we just signed the agreement so we now know exactly when it will close. I mean, we have to go through the licensing in Ohio for whatever it takes to get a racetrack. It could close before the end of this year, but we will see. Right now, the revenue and the EBITDA -- the EBITDA impact is very negligible at this point. I think the track's operating essentially at breakeven on an EBITDA basis.

Okay. Second thing is, capitalized interest for the quarter?

It's almost $13,000.

How about CapEx and depreciation for '05?

We haven't given any guidance of any kind on '05 yet. And really can't until we kind of figure out what we're going to do and how much we're going spend at Lawrenceburg next year.

As far as this -- you're going to amortize this 11 million charge over the life. How long is the life and are you (MULTIPLE SPEAKERS) the interest expense or D&A?

The agreement is five years and it's just like any other deferred financing costs. It runs through interest expense.

But it's over five years?

Yes. And just continues on its normal track like it was. What happened was, we initially thought we were going to do a new deal and we ended up amending our previous agreement for a couple cost reasons and also ease of some of the security documents and stuff like that. And the -- what when you do an amended transaction this is how the accounting rules say that you account for it.

And then, the Tribe in Kansas City. What's that look like if it's a possibility and what kind of risk does that present to you guys?

This is Dick. The governor -- the background is that earlier this year, the governor was moving towards state-owned casinos. And, effectively, she did not get support for that. Just recently, she has negotiated the compact with two tribes, the Sacafox (ph) and the Kickapoo. I think I pronounced those right. And but that compact has not been ratified.

There will likely be a lot of political discussion back and forth. And there will probably be lawsuits because part of that compact even indicates that maybe exclusive rights which other tribes might argue with.

The bottom line is, don't know if it would, if the compact would get approved; but most importantly, neither tried has land in trust. Which for those of you who have some background in this whole Native American area, that alone can take three to five years. So it is unlikely that anything is going to happen in the near future. Sorry to be so longwinded.

No. Good answer. That's it for me other than you guys think the tax cut in Illinois takes place in July?

I think we've been saying for three quarters now that we are cautiously optimistic. There is the veto session in Illinois that's going to start soon. At one point, it was -- the thinking was that there probably wouldn't be much discussion of gaming. But it could very well be that Mayor Daley in Chicago will be pushing hard for a Chicago Casino which, then, could cause a lot of dialogue and very well could accelerate the tax situation in Illinois. But it's too early to tell.

So, overall, we are optimistic that there will be a rollback again. There's going to be a lot of dialogue coming out of the veto session maybe. And, certainly, as we go into next year, particularly in the spring, there will be more dialogue.

You guys corporate of the same pace make sense, Dale?

Yes I think if you annualize at the nine-month rate, would probably -- the third quarter was probably a little bit higher than a run rate.

Robin Farley, with UBS.

On the Ohio racetrack, it looks like it maybe would be a small earnings drag, potentially, after that closed. Is this about right?

Those sales said it is historically operated just above break even.

But at the EBITDA line so on the EPS line maybe a couple of cents of an earnings drag?

It might. Our intent is to operate it essentially as a breakeven. We'll see and we will have more guidance for you next quarter. As Dale said we're just in the midst of completing the closing.

As you can well understand, the interest here is to give us a little bit of insurance policy for what might happen in Ohio. Not in the near future in all likelihood, but years for now.

Along those lines, is there anything in the agreement that allows the original owner to participate if gaming were to come to Ohio? Or is all potential upside from that, all of that belongs to Argosy?

It all belongs to Argosy.

On your Q4 guidance, backing out charges and gains and things like that, it looks like the guidance is a bit below consensus numbers for Q4. And, yet, Q3 came in nicely ahead of consensus at the different operations.

Well I'm not really concerned with the consensus. If you kind of back end every thing, we are essentially saying our guidance is exactly where was at the end of the second quarter. And we have narrowed the gap a little, we had a 10 cent gap in what we had guided people towards and we've narrowed that gap, the range a little bit.

When you say guidance is the same as it was at the second quarter, you are not counting the 6 cents of gain in (MULTIPLE SPEAKERS).

Yes I am.

I'm sorry?

If you take the guidance, adjust for the 6 cents, and adjust for the 11 cents that we didn't incur, you back into the same number that we had at the end of the second quarter.

Are there any of your properties in particular where you're concerned about results in the fourth quarter changing from the trends that we're seeing here in the third quarter?

Well, Dale mentioned that in Lawrenceburg last year they had a very strong fourth quarter. But we continue to be on track in terms of Lawrenceburg's performance. So if you look more at the trend of it, I think that would be good guidance.

There's a little bit more depreciation also in Kansas City. Is that right Dale?

Yes.

Because with the construction project, we have accelerated the depreciation on the old garage which will eventually be raised the middle of next year.

And then also you mentioned that in Joliet and Alton you -- I think just now anniversaried the cost savings from last year. Are you suggesting also the comps will get tougher for those two properties in Q4? Or maybe I'm reading more into what you said.

Yes I think you may be reading a little bit more. We just -- I would say we just started to see them in the third quarter. Mid to late part of the third quarter last year. It took us a little while to react, frankly, once the tax increase went through.

So they are running at a higher pace now than they were at this time a year ago, but that is a factor.

Dennis Forst, with Key McDonald.

I had couple of questions. Assuming that the tax rollback does take place in Illinois, will you loosen up the cost side, the advertising side, the promotional side? Or will you keep that relatively tight?

I guess we would not characterize it as loosen it up but we would change the marketing approach, which would result in higher marketing costs. We would focus more efforts on the lower end of the database but, more importantly, on the retail side.

Which you haven't been focusing on currently?

Well, we have been focusing on not overspending in that area. So it is fair to say that marketing costs will go up. And our strategy of course is to get a return on those higher marketing costs.

Yes, simply, there are people now that under the current tax structure that we really can't afford to market to that could become profitable customers for us, again, in the future.

Right, okay, thanks Dale. On a different matter, the bigger picture matter, where are you focusing your attention for growth? Can you give us in general, is Pennsylvania on your radar screen, the UK? Where are you looking?

It's interesting that you ask it that way. First of all, we do see significant growth opportunities in Lawrenceburg. That's something that is really more like a year and a half, two years away. Kansas City as well. We continue to have conversations with people in Pennsylvania. We are now moving into almost our second period; we're close to two years having conversations there.

Don't know if we will eventually get one of the remaining licenses. But it's early on the radar screen. And we have had some conversations, actually, very recently in the UK.

Again, I think the UK is something that, years from now, it will be a good return. But it is going to be a long time in the future.

Is there any thought about a cash dividend?

We have commented upon this in the past. The board has been looking at it. We really thought that it was best to go through a little bit longer cycle, seeing what development opportunities we had. The board will look at it at the next board meeting just as it has in the past. There is no particular plan right now to do that but, again, we are generating some very nice strong cash flows. And at the right time, probably would make some sense, but --

That's why I asked the question.

Yes but not -- we have no specific plans. The board has not taken any action obviously.

David Anders, with Merrill Lynch.

Two questions. First, Dale, when is the accelerated depreciation pushed through on the parking garage and, secondly, if you'd comment a little on the performance of Alton, both in the quarter and going forward, the competitive environment there. And what if anything are you going to be doing there?

I will take the first question and then Dick and I probably both a little bit on the last one. The depreciation on the garage pretty much will end at the end of the second quarter next year. Oh -- February.

Sorry. At the end of the first quarter next year. We had -- we anticipate sometime next spring taking that garage down. And it could very well be before the other one is finished.

As it relates to the -- I think you're really more curious about what is happening in the St. Louis market.

Correct.

The Merstar (ph) and Harrah's continue to be aggressive in their marketing of those properties. As you know, they have significant asset investments in those two properties. Our property and Alton cannot compete in terms of the pure asset side.

So we are carving out our niche. We are not chasing what we would think is marginal marketing dollars. My sense is that both of those properties to our West Harris and AmeriStar continue to be pretty aggressive in their marketing programs and Harris's new hotel facility expansion has opened up and I think that is helping them.

So things are in pretty good shape for them and we are continuing to go after the players that we think are profitable for us.

Kevin Ferris (ph) with Intrust (ph).

Couple of questions. One, Dick, what was that cash from operations in the quarter?

We are looking through a bunch of papers to give you that.

Okay. I'll give you my next question then while you look for that. I was wondering if you guys can provide any type -- based on the size of the market in Toledo, realizing that it is an insurance policy and a couple of years out in the future, potentially. But how many slots do you think that place could support?

Well the legislation allows up to 3000 currently and --, yes, the proposed legislation. Actually, maybe it isn't -- I can't remember. It's 20 -- it's either 3000 or 2500 and we think that that property will draw nicely from the Toledo area to almost into the South Detroit area. But I think it's really too early to give us -- for us to give any kind of guidance in terms of the potential.

Again we've just completed, just about to complete the acquisition. So that is something that we will be looking at, but again, it doesn't appear that there is any strong chance that there will be gaming in the next few years in Ohio.

Right. I am just trying to -- I understand it is insurance. I'm just trying to quantify how big it is.

Yes and I don't think we are going to provide any guidance on it.

Kevin, on your other question, I am going to have to get back to you, if that is okay. Because the cash-flow statement is a nine-month cash-flow statement. We don't --

Okay well, do you have cash from operations nine months?

Yes it's 147.5. One forty seven point five million.

David Vas, with Banc of America.

Hello. Good morning. You guys have talked a little bit about internal growth prospects, UK, Pennsylvania, etc. But you haven't mentioned the third leg of the stool which would be acquisitions and maybe even divestitures. Could you take a shot at that?

Well we have no plan for selling any of our properties. They continue getting -- gaming licenses continue to be very valuable. The operating performance of Sioux City is a point, is a good example, where a number of years ago that property was essentially not generating any cash flow and it certainly is now.

In terms of looking at acquisition of properties, we continue to do that. I have to say, things are a little pricey in the market. And I think there is some good property out there but things are a little pricey.

Okay. Last thing with the purchase of the racetrack in Ohio. Is it -- do you consider it to be defensive or are you now thinking that Ohio gaming could be a good thing for you in the aggregate?

I think we will be talking more about that next year. But it is -- we felt that, given our operations in Indiana and Lawrenceburg that, at the right price, it would make sense to acquire a track in Ohio. And so it is really -- it's strategic, it's defensive, and that's really the primary reason.

Nice quarter. Thanks.

Dennis Forst with Key McDonald.

Dale, I was just thinking about your comment on the depreciation at Riverside. When you take down the current parking garage, there may be a six-month time period where you won't have enclosed parking. Is that going to be an issue for customers?

We are looking at the timing of when we would bring that garage down.

Why would you need to bring it down so much before the opening of the other one?

Yes. One of the things that we have done, though, is we have acquired some additional service slots which will mitigate that garage. That garage is about 600 spaces. So there could be some disruption in the middle of '05 and we are working through how we can minimize that disruption. The reason that we are moving ahead at maybe a little bit faster pace on the construction side of the hotel is that there is a backlog of construction contractors that could very well get underway in '05 in the entire Kansas City market area. And we are doing this because we want to make sure that we don't end up with higher construction costs than necessary.

And why would it take so long to build a 200 room hotel? It just seems like if that's not going to open until the end of '06, even if you started building in the middle of '05, it shouldn't take 18 months, should it? Just to build a tower?

Yes. Yes.

It just seems like a long time. And you have to take down the old garage before -- well, before you open the new one?

Well we don't have to and that was my point. That if we wait, we could be faced with a higher construction cost for the hotel.

Okay so taking down the old garage facilitates starting the hotel sooner?

Yes. Exactly.

Okay. There's the answer. Thanks.

At this time, there are no further questions. Miss. Williams, are there any closing remarks?

Well. Thanks for joining us. The management team will be here available if you have some additional questions or calls. Thank you.

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