PENN Entertainment Inc (PENN) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Argosy Gaming Company fourth 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. Ms. Williams, you may begin your conference.

Thank you, Operator. Good morning, everyone. Thank you for joining us. 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 Dick, 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, uncertainties regarding regulatory approvals of the proposed transaction with Penn National Gaming, competitive and general economic conditions in the markets in which we operate, construction delays related to our capital expansion projects, 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 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'll be making today, whether as a result of new information, future events, or otherwise. And with that, I would like to turn the call over to Dick.

Thank you, Erin. Good morning. Dale and I will be fairly brief in giving you comments and give you a chance to ask us questions coming up in just a moment. Three weeks ago, our shareholders approved the merger agreement with Penn National. 90 percent of those voting -- or 90 percent was the amount that voted in favor of the deal. I suspect many of you have questions as to when the transaction is likely to close. Penn National and Argosy continue to say the second half of 2005. And at this point, we really can't give you any clearer guidance than that.

Let me turn to our operations. We continue to have excellent results. Dale will talk about that in more detail. I would like to give you an update on a couple of the capital projects that we have been talking about the past 6 months or so. In Kansas City, we have begun construction of a new parking garage. That's on schedule. We expect the first phase of that garage to open up this summer. And the hotel construction will be starting in about a month or so, and we are happy to report that we just completed the bidding process for the construction of the hotel, and we are comfortable that we should be on track with the costs there.

In Lawrenceburg, we have mentioned in the past that we were able to work out an agreement with the city. It is a $50 million subsidy for capital improvements. That project has been put on the back burner a little bit because of the Penn merger. But we have been moving ahead the past few weeks on that project, and as I've mentioned in the past, we were looking at several different alternatives. Our focus now is for a new boat and additional parking. The project cost of that could be more than 150 that we mentioned before and, of course, that's before the $50 million subsidy. And we will keep you updated as we go through the regulatory approval process to complete that project. The project wouldn't start until later this year. With that, Dale, why don't we go through some of the results.

Thanks, Dick, good morning, everybody. As you know, this morning we released earnings for the fourth quarter and for the year, kind of closing the final chapter on what was a very eventful 2004 for Argosy, both operationally and financially. For the year, our net revenues grew 9 percent, topping $1 billion for the first time in the Company's history, and we reported 18 percent growth in EPS from $1.76 last year to $2.07 this year. Some of significant things that happened over the year that impacted our performance included the following -- As we've talked about throughout the year, the successful completion of our TITO integration project helped us in a number of ways, in that it put a lot better experience out there for the customer and gave us some labor efficiencies and other operating efficiencies by going cashless.

Each of our properties performed very well in 2004; however, events at 3 of our properties sort of stand out on top of just the standard operating performance. The tremendous acceptance of the new property in Kansas City allowed that property to achieve a 55 percent increase in revenue and over 125 percent increase in EBITDA. The renovation and relocation of the old Kansas City boat to Sioux City in September helped lead to a 17 percent annual increase in revenue and 32 percent increase in EBITDA at that property for the year. The percentages from the time that we opened are greater than those. That is just the impact it had on the annual numbers. And then strong operating performance, along with the successful negotiation of a $5 million-a-year credit in the City of Lawrenceburg led to a record-year for that property.

Additionally, throughout the year, we were able to refinance some of our long-term debt, along with our senior credit agreement, coupled that with a decrease in debt level throughout the year resulted in almost an $11 million decrease in interest expense. In addition, we had several nonoperating items, if you will, that impacted EPS in 2004. First, as you know, we incurred $26 million in expenses related to the refinancing we talked about above. Secondly, we sold one of the boats formerly used in Joliet for a $3.2 million gain.

During fourth quarter we reached an agreement with the State of Indiana regarding -- over the nondeductibility of the gaming taxes for state income tax purposes for prior years at less than what we had previously accrued. Primarily because of the rate we had accrued interest on that liability. And finally, we incurred about $3.8 million of cost in the year related to the pending merger with Penn. The combined impact of all of these items was a reduced EPS by $0.50. I should also point out that 2003 had about $0.26 of nonoperating items which negatively impacted EPS. Stated otherwise, without these items, 2004 EPS would have been approximately 2.57 and 2003 would have been 2.02. Fourth quarter our EPS was $0.60, including $0.03 in net charges out of the things that we talked about above, compared to $0.46 last year.

Before we turn the call over to questions, I would like to remind everybody that we have agreed in the merger agreement with Penn not to give guidance for future events in 2005 related to operations or financial performance, so please keep that in mind as you ask your questions because we won't -- we can't answer really guidance type questions. And with that, Lisa, we'll turn the call over to questions.

[OPERATOR INSTRUCTIONS]. Your first question comes from Robin Farley with UBS.

Thanks. I wonder if you could talk about what changes you might be seeing in the Chicago market with the change of management at the Hammond property? What you might be seeing differently in the market there?

Robin, we're not seeing too much difference other than it is a difficult market given the tax situation. It continues to be very competitive, and because of the high tax rate in Illinois, frankly, we were not able to do our normal marketing programs that we think would generate more revenue and profitability for our property, as well as all the properties in Illinois.

But outside of that, with the change in management at the Hammond, Indiana property that you are not seeing that has any change on that property's marketing anything like that?

You know, Robin, we have actually got 6 people here in the room and everybody is shaking their heads, including our Senior Operations person. No, we're not.

Okay were great. Sounds good. Thanks.

Your next question comes from Dennis Forst with Keybanc.

Good morning, talking about Illinois, do you have any thoughts on the upcoming July potential change in the tax?

Somehow I knew this question was going to come up.

You should have a good answer then. [Laughter].

It's interesting because we obviously try to evaluate constantly all states and we were talking about this last week and everybody who -- at our Company's focus on it sort of shakes their head and says, it is a matter of what the Governor is going to do. And so he has been making comments, but not talking specifically about gaming, and I think this will be a hot issue going forward, but really we can't handicap it for you.

Okay. Dale, do you have the capital expenditures for the fourth quarter and the year? And maybe an outlook for '05?

Yes. For the quarter, the CapEx were just over $15 million and 75 million for the year.

And any outlook for '05?

Not other than what we had talked about previously. Like I said, we -- we've agreed not to give guidance, although I would say generally that, we are going to maintain our cap -- our maintenance capital program pretty much on par with where it has been in the past. And the Kansas City project is moving along the schedule that we talked about previously with the garage expected to be, open sometime later this summer and then the hotel by kind of the end of the following year.

Most of the capital for the hotel would be in '06.

Gotcha. Okay. Then lastly, the nonoperating cost, that 2.8 from the merger and then the offset, where were those costs in the income statement? Or the cost in the --?

The tax piece is in the income tax expense line. The rest of it are in SG&A.

Okay. But the --?

In the corporate expenses.

But the $0.03 deductibility of Indiana was -- is in income taxes?

Income taxes, yes.

Okay, great. Thanks.

Your next question comes from David Anders with Merrill Lynch.

Hey, guys. Dick, could you clarify -- I missed the Lawrenceburg commentary about the CapEx. You said it could have been 150 million, and that was with or without the -- a $50 million credit. What did you say exactly?

David, we had indicated earlier that the alternatives that we were looking at we anticipated project costs in the range of 150 million before the $50 million subsidy. Our focus now is a project that is somewhat bigger than that to include a new boat and additional parking. And we can't give you more specifics on the capital this time because we are still working through some of the project scope, as well as working with the Coast Guard and the Corps -- Army Corps of Engineers, and the Indiana Gaming Commission, and we will have more guidance on that throughout the year. Does that help, David?

There is no response from that line, sir. I think he disconnected. Your next question comes from Larry Klatzkin from Jefferies & Company.

Hi, guys. It's actually David Barron out of Jefferies. How are you? Just a quick question. Do you expect there to be any disruption at the Kansas City with the hotel expansion or no?

Well, when we went through the project 2 years ago, -- a year and a half ago, there was disruption of about 5 to 10 percent of revenue. We anticipated the -- much lower because of the phasing. There could be some disruption. We don't believe it will be that significant.

Great. Also I see your corporate was a little bit higher this quarter than we were expecting. Was that just -- a lot due to the merger or --?

A lot of that is, yes.

Okay. So that's good. That's pretty much it. Thanks so much.

Your next question comes from Ryan Worst with C.L. King.

Hi, thanks. Dale, do you just have a capitalized interest number for the quarter? And the rest of my questions have been answered. Thanks.

Yes, it was -- there was nothing in the fourth quarter.

Okay, great. Thanks.

[OPERATOR INSTRUCTIONS]. Your next question comes from Sanford Schmidt with The Telegraph.

Yes, can you explain for the layman, the person not involved in the financial markets, the tax situation in Illinois and how it affects your operations in Illinois, particularly Alton? And whether the tax situation affects the viability of those operations?

Let me briefly comment on it and then we would be happy to talk to you in more detail, since I think most of the people on the line understand this.

Right.

But a year and a half ago, Illinois increased the tax rates that made it less profitable for us at the Illinois properties, as well as for our competitors. And we thought the best way to operate that was taking a series of operational changes, including reduced number of hours, changing the mix of gains, as well as how we market. And all those factors have resulted in net lower profitability, really driven by the higher tax rate in some mitigation by the other actions that we have taken.

And we look forward as an industry for Illinois to bring taxes back into line, certainly with what other states have done, because we think it would result in a win-win situation. So -- but we would be happy to call you and talk to you more about that.

Okay, thanks. Do that, please.

Your next question comes from David Rainey with Akre Capital.

Yes, thank you. Sorry if I missed this earlier, but what did you spend on maintenance CapEx this year? And can you break it down into the pieces that are related to Ticket-in/Ticket-out and those that are not?

Our total maintenance capital for the year was about $40 million. In general, probably in the range of 25 to $27 million of that was for slot or slot-related projects. Including not just the games, but also redemption kiosks and things like that related to TITO.

And most of that was then for TITO?

Right.

And so, therefore, you would expect that spend to have a useful life much greater than a year?

Yes.

Yes. [Laughter].

Okay. So the difference, which is about 15 -- 13 to $15 million?

Approximately, yes. It is just other, upkeep on the property.

Sure.

Things like that.

And so I believe you said earlier in the Release that you think you will be close to 100 percent TITO where you want to be by the end of '05?

We are essentially 100 percent TITO now with the exception of Baton Rouge.

Okay. So would we expect that your spend rate on the 25 to 27 million for slots and slots-related activities in '04 would be the same in '05 or would it be different?

It is down slightly, but we continue to spend capital to keep the games fresh.

Okay.

Because we have found that that's the best way to generate revenues and profitability.

But it would likely be lower going forward because you are almost 100 percent done?

But you are always spending money on slot profits.

You typically have to -- we have always replaced approximately 20 percent of our games every year.

Okay. Super. Thank you.

At this time, there are no further questions.

Thank you for joining us. And the Management will be here today and if you have any additional questions, please call us. Thank you.

This concludes today's Argosy Gaming Company fourth-quarter 2004 earnings conference call. You may now disconnect.