PENN Entertainment Inc (PENN) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Penn National Gaming second quarter results conference call. [Operator Instructions]. As a reminder, this conference is being recorded Thursday, July 28, 2005.

I would now like to turn the conference over to Mr. Joe Jiffoni. Please go ahead, sir.

Thank you, operator, and good morning everyone. Thanks for joining Penn National's 2005 second quarter conference call. We'll get to management's presentation and comments momentarily, as well as your Q&A, but first I'll read the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements reflect the Company's current expectations and beliefs, but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks or uncertainties associated with the forward-looking statements are described in today's news announcement and in the Company's filings with the Securities and Exchange Commission, including the Company's reports on Form 10K and 10Q. Penn National assumes no obligation to publicly update or revise any forward-looking statements.

Today's call and webcast may also include non-GAAP financial measures within the meaning of SEC regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release, as well as on the Company's website.

With that, I'll now turn the call over to Peter Carlino, the Company's Chairman and CEO. Peter?

Joe, I want to know, does anyone understand what that meant? That's the new abbreviated version, folks. Good morning. But I'm not sure it's any clearer than the last thing that we offered. Well, welcome to this, our second quarter reporting call, another very good quarter for Penn National. And significantly, a number of nice events occurred since we talked to you last. First, I'll tell you I am here with Kevin DeSanctis and Bill Clifford, Robert Ippolito, Jordon Savitch, and Steve Snyder, so that we can give you as complete a picture as possible when we get to the Q&A.

But notably, Illinois settled the tax rollback question in a manner that I think was not unfavorable for us. We, in the industry, struck an agreement that allows the tax to roll back as it has already, and we hope to see a rollback shortly in the admissions charge, which is obviously an impediment to letting people through the front door. And while We've, quote, "guaranteed" an amount that -- a tax amount to the state that's comparable to last year, I think we're now free to run our business in a more aggressive way, can produce the kind of results we want, and it's good for the state and that's good for us, so that we think We're on a new road in Illinois and quite happy about that.

Pennsylvania, of course, is the big thing. The Supreme Court ruled favorably upon the recent slot legislation, which has allowed the regulatory process to unfold, and you can bet there's lots of fun going on in Harrisburg now as they try to figure out how to put this all together, handle new applications and get this process underway. But this is all good news for us, and we couldn't be more excited about the potential here in Pennsylvania.

And of course, Maine continues to roll along. We're under construction with our temporary facility, and in fact, we just saw investigators from the state here at the Corporate offices over the last couple of days who are completing investigations of individuals, as we move towards licensing of our slot facility in the state of Maine. So this is good stuff for Penn National.

Generally, as you see, our properties in the majority had good quarters and I think we feel pretty good about what has been happening here. Big focus and remaining focus for us, of course, is closing on Argosy. That has been a long, ongoing process, as you know, subject to fairly thorough and complicated regulatory processes. The FTC approval has been announced, is complete. We're pleased with that. We've passed approval through the majority of our jurisdictions, and we have just three remaining. We expect to -- in fact, we'll be in Missouri tonight. Headed out there, a team of us, for a presentation tomorrow that we hope will lead to a positive result in that state. We're very much looking forward to that. And then we have just two states remaining, two jurisdictions, and those are both jurisdictions where we're presently licensed, and that's Louisiana and the state of Illinois. And we hope that those will be favorably concluded through the month of August. And we can answer more questions about that, if you like, later.

So with that, I'm going to move immediately to the Q&A. I think the numbers speak pretty well for themselves and I've given you the highlights, so operator, why don't we open the floor to questions.

Absolutely. [Operator Instructions]. And our first question comes from the line of Larry Klatzkin of Jefferies & Company. Please proceed with your question.

Hey, guys. Good earnings. Congratulations. And Peter, congratulations on the FTC approval. Couple quick questions. One, are you going to be doing a temporary casino in Pennsylvania?

Boy, you asked a tough question right out of the box, Larry.

Sorry about that.

And the answer is, we don't know. We really don't know, because the process of license here is not clear. Regulations were just issued for the casino licensees just, I think, last week or within the last two weeks. We're sort of looking through them. There's some vagueness, at least as I read them, in understanding exactly what some things mean. There's not clarity on a whole bunch of issues. Let me give you one. You recall that there's a guaranteed minimum local tax that has to be paid of $10 million. Will it apply to the temporaries? And it's not clear to us that we could afford to open a temporary facility, pay all the taxes anticipated and have it make economic sense. So, these are grey areas, nothing that we're particularly worried about, but it will become known, I think, as the Gaming Commission gets better organized around some of these questions.

Suffice it to say that we're preparing our application right now. The -- let's call it the permanent application, which must be submitted, as I understand it, and Jordon, correct me if I'm wrong, prior to asking for a conditional license anyway. In other words, you have got to have the full license application in hand. We may choose to, depending on how the process unfolds, to make our application and just go for the prime facility. So look, whatever is going to maximize revenue for the state and for this Company, at the earliest possible moment, is what we'll do, and I guess the best answer I can give you now is we're just not sure what that will be. Just have to wait and see what happens.

Okay. That's a fair comment. As far as Tunica, you seemed to buck the trend and have a nice gain there with a margin gain. Can you guys talk about what's going on Tunica and why you guys are beating the system?

I'm going to let Kevin handle that, but you know that the bottom line is a great management team. But Kevin, why don't you address that?

Yes, I think that's pretty much the case, Larry. We have a good management team down there, but if you look at it from a revenue perspective, we did not achieve any revenue increases in Tunica for the quarter. So it was a little bit of margin improvement, and generally, there's only two places you can make any margin improvement. One is in payroll and the other is in marketing, and that's really what these guys have been focused on a little bit. So it's pretty straightforward. There's nothing magic about it. I do underline that in all of our facilities, and particularly Tunica, our management teams have been doing a very good job.

All right. And then the Illinois tax cuts came -- took in place -- July is pretty much over. How's the first month of the new tax rate? How are you seeing things?

Well, I'll just sort of follow up on that. Our management team in Illinois, they don't expect any quick turnarounds on this. We've been spending the last year or so doing everything we possibly can to be efficient in that operation. I don't think there's any magic bullet where you can just turn on the faucet and increase revenue. What we have noticed is that we're starting to achieve some increased revenue, and we're taking that to the bottom line, so that's good. But I think it's going to be a bit of a slow process, keeping in mind that we've started to allow folks to come in. We've taken the admission charge off and we've started to market much more broadly to the segments while being very, very cautious about maintaining the margin. So we didn't get -- it's going to be a nice, slow growth process at our property in Illinois and up to this point this year, they've had a pretty good year.

All right. And then as far as you guys sniffing around in other new locations like, let's say, Atlantic City or maybe a Donald property, can you guys talk about that at all or -- ?

No. Larry, the quick answer is we have one focus now and that's Argosy, and it's our second focus and our third focus. And even after that occurs, as it will, we'll have a lot of busy people trying to make sure that that integration is as successful as we intend, smooth, happy and all the other stuff that you would expect. So those are really our goals. And if you ask, when all of that happens in some indeterminate time in the future, will we look elsewhere? The answer is of course, but that's clearly not the case today. Look, we've got some full stuff happening, as I outlined. It's called Argosy, Pennsylvania, Maine. There's no shortage of stuff to do here.

All right. Well, congratulations on good results, guys.

Thanks.

And our next question comes from the line of George Smith of Davenport. Please proceed with your question.

Hi. You just made it pretty clear that the Argosy was your first focus. Does that mean you would not consider partnering with Magna in Oklahoma, Pennsylvania and/or Florida?

They're pointing their fingers at me. We certainly haven't talked to Magna about that possibility. Well, it's on the margins that there were some modest proposal that somebody made that didn't upset the apple cart or put any new tremor in the force here at Penn National, maybe. But we haven't had that conversation and it just isn't on our radar screen.

Got you. And then in Charlestown, can you just help me in terms of where we are? The number of machines that went in during the quarter and the number that will come out in tandem with buffet going in and where you will end up?

Well, we're at about 4,500 plus/minus machines right now, and we would expect to be somewhere around 4,200, 4,100 when we take the machines out again when the buffet project starts to be completed. And I believe that we will start to do that in the September/October timeframe.

That's the current timeframe.

Right. So we've always been a little hesitant about this, because you do see an increase and a decrease in machines and we want to caution people to not overreact to that when they look at the revenue numbers because we do suspect that there will be a little revenue decrease from the levels we're achieving right now, just due to the lack of machines. But it's about -- I mean it's in the 300 to 400 machine range. We'll probably get as many as we can in there.

Yes, look. We've put this off for a long time. We've needed more food offerings at Charlestown, and frankly, rather greedily and with you folks, the investing public in mind, we've tried to maximize revenues, but it's really time now to make the move, put the kind of infrastructure in place that will serve this facility for the next leap into space, hyperspace, and that is yet more expansion that we have contemplated. And we just don't want to let the growth of the machines get ahead of our ability to support it. And again, we're a customer service business. Making people happy is what we need to do to get them to come back, so we've -- this is a very careful reason, and long thought-after process, and it's time to do it.

And if I recall correctly, the bulk of those new devices, primarily penny products, when you turn that on the win per unit that you've seen there relative to the house average, and how much, if any, dilution there's been to the overall house average?

Well, to be honest with you, I haven't really looked in terms of the pennies versus the other machines, but perhaps Lenny here has. But in terms of the overall win per unit, we've been running about 247 on the win per unit, and I think when you look at it on a year-to-year basis, one of the ways to look at this is that on a daily win per property basis, I think we're running around $1.1 million a day in slot wins. And that's up a little bit over where we were. So in total, the win is going up. The win per unit for all machines is very, very close to where it was. I could be a little bit off on this because I haven't tallied up the entire -- and it gets a little confusing because of when we added machines, but I would say that there's very little dilution on win per unit right now, and I would expect that to improve, as it has in the past. We've always said there's a little bit of a lag time in win per unit and generally, that comes back very quickly. In this case, we haven't seen much of a lag in win per unit, but on the penny machines, I don't know if anybody else here has really looked at those penny machines.

They've been coming in about house average.

Okay.

Yes, they're very excited. I was just there last week talking to the team and they're quite excited about the penny machines. They're well above house average.

You may have addressed this before, but in terms of the proposed project in Lawrenceburg, what would a construction timeframe on that be? Is it 18 months, 24 months?

You want to address that?

I don't think we know at this point, to be honest with you. I don't think we're far enough along in the project to start sort of projecting construction timelines. I think that would -- whatever we said would probably be wrong at this point.

Yes, we've remained aware, but obviously we're not, from a regulatory standpoint, able to really have much involvement in any of this, so we're kind of sitting on the sidelines watching and staying informed, but that's really all we're doing today. Kansas City, of course, is under construction, and as is, by the way, the boat for Lawrenceburg. But in terms of just how it's all going to unfold, we just can't say.

Last thing, total debt and cash balances in the quarter.

Yes, the total debt was $638,382, which is made up of the $625,000 in bonds and $13.3 million worth of capital leases related to the parking structures in Illinois. On a cash basis, total cash, which included Shreveport, was $182.8 million. The portion that was -- taking out Shreveport, you would end up with a net cash for Penn of $155.3 million.

Thanks very much, and have a good day.

Thanks.

Thank you.

[Operator Instructions] And your next question comes from the line of David Anders of Merrill Lynch. Please proceed with your question.

Thanks. Hey, Bill, can you talk about how the accounting works for the new tax rates in Illinois? I mean how do we model that in appropriately? Is it back-end loaded or do you estimate where your taxes are going to be and try and smooth that? Could you comment on that?

You smooth it out. Basically, you'll take -- we'll take an estimate of where we think our revenues are going to be and calculate the blended tax rate and recognize that in each quarter.

Okay, thanks.

And our next question comes from the line of Jason Gray of Keybanc. Please proceed with your question.

Good morning. Could you please shed some light on when you expect to go before the remaining gaming commissions? I know that Missouri has been on the calendar for quite a while. Do you see any issues in Louisiana and Illinois in August?

Well, we expect -- as I mentioned, Missouri, of course, is tomorrow.

Right.

We expect to be on the agenda in Louisiana on the 16th.

Okay.

And while we have passed the initial consideration in the state of Illinois, we've heard nothing from them about when they will bring us in for a final approval.

The only further information that we have is that the only meeting that we're aware that is going to be scheduled is August 26th. We're not aware of any other meetings where we could be on the agenda, although it's not unusual to have a special session.

Okay. Great. Thank you. Also, Bill, would you go over the comment on the tax rate for the adjusted EPS of $0.38 for the quarter?

Yes. What you're seeing on the tax rate is the impact of the settlement from the purchase of the -- a combination of the purchase and settlement of the Capital Lakes lawsuit in Baton Rouge, which we are now happy to be the -- well, will be the free and clear landowners of that piece of property down there, which will obviously will be a very good thing going forward. As a result of that, we recognized some of the tax. There's some state tax implications which had an impact. I think from a modeling perspective, the rate -- the fact that the rate is below roughly 36.2% is all attributable to the Capital Lakes settlement. You would expect to see, on a Penn normalized basis, that the tax rate will return back to the 36.23%.

Great. Thank you.

Yes, by the way, just a brief comment on Capital Lakes. I really failed to mention that. That's been an ongoing issue of land lease there. This purchase really will untie our hands with a series of things that we've wanted to do at that property for a long time, so this is actually a very happy event for us, get it done and move on. That's been a great property for Penn. In the years that we've owned it, again, we've had great success there and expect that we can continue that, so this is good news. Glad to put it behind us.

And our next question comes from the line of Kent Green of Boston American Asset Management. Please proceed with your question.

Good quarter, fellows. My question pertains to the -- after Argosy, whether you could give it any consideration for trying to establish coordination on your play tracking system or just have one common name, since you're going to have so many more casinos joining the fold?

The direction we've headed in, in terms of our database, is to start rolling all of our names up to a common platform, if you will. So there is currently no use for it because most of our markets are very local, and for instance, folks in Tunica don't necessarily want to go to Biloxi and for the few that might want to go there, we don't think it justifies creating a huge system that interconnects.

However, on a long-term basis, where we do believe that there could be significant value to the Company, is to be able to take all of the names and perhaps market to a destination-type facility, whether that's in Atlantic City or it's a regional destination or even a Nevada destination, so over the next -- we've started to do that. And over the next, oh, 12 to 24 months, we would expect ultimately to be able to have our entire database, and at 10, that's about a million active names, and I think it's a little bit -- it's pretty much the same at Argosy, I believe. So on a post-merger basis, probably about 2 million customers, if you will, that we could have in one place and be able to segment that database and market to it as we chose. So yes, that is a Company initiative and we would expect to have that completed probably in the next 24 months.

There was a second part to the question, had to do with the single name idea.

Oh, I'm sorry.

We've talked about that pretty openly on calls in the past. Clearly, at one time, we had had the notion that having one name would be helpful. But for the moment at least, I think I concluded, and others can offer a different thought, that all these markets are local. Every one of our properties, as Kevin well said, is a local market and we've got brand equity in all of these markets with these well performing properties that we have. We see no reason to kind of mess with what works. Our customers know the properties under their various names and we're quite content to have them operate just like that. Don't see any economic gain to making a change. It doesn't serve our egos; it doesn't serve anything. We're interested in strictly performance and doing a good job for our customers and for our shareholders.

So until the time comes that we see some economic advantage to make that change, we're simply not going to do it. I will point out that in Maine, for example, a new property in Pennsylvania, a new property that we're going to adopt the Hollywood theme and the Hollywood brand, so that is the brand that we bought, that we thought had the ability to sort of wrap around the kind of concepts that we think that some of our facilities should offer. Whether we'll even continue with that beyond, don't know. We just in the last, oh, couple of days ago sat at a presentation here on what the new facility is going to look like, pretty well defined, what the interiors are going to look like. And it's pretty exciting, so that we've sort of taken Hollywood to a very nice level, but again, no commitment beyond that. That's our current feeling and could change some time in the future. But for the moment, we're quite happy with the way things are.

Okay. Thank you. Probably a question for Kevin. Have you done all the conversion over to ticket in, ticket out and how will your IT system dovetail with Argosy's and are they pretty well done with their ticket in, ticket out?

Argosy, I don't have the exact numberson Argosy. Argosy was a little more aggressive than we were -- in putting through ticket in, ticket out. And so they're probably a little further along than we are. In terms of our properties, Charlestown did about 2,200 of the 44, 4,500 machines and they're expecting to be at 100% by the end of the year. In terms of Aurora, we're at 100% in ticket in, ticket out, and as you go through our other facilities, they're all moving along pretty nicely and I would say throughout the system, we're probably a little bit more than 50% and we're heading towards 100%.

So I think we've -- I would suspect that there's two reasons for the question. One is are there any hidden cost savings down the road and I would suggest that at this point, where we derive the most cost savings is obviously in our higher win per unit situations, which would be Charlestown and Aurora. So clearly, we'll -- if you look to Charlestown's payroll percentage in terms of payroll as a percent of net revenue, you'll see that it's been going down very consistently over the past year-and-a-half, as we've sort of worked through this ticket in, ticket out situation.

And I think that will continue for a little bit. But it's marginal gains here and there, which we appreciate, but it's not any huge hit, if you will, but it will be a consistent improvement in the margin up to the point we're at 100%. Aurora was much more aggressive and they've been at 100%, so I wouldn't expect to see anything there. And obviously, there's customer service improvements in these facilities also, which is clearly our primary issue at Charlestown just because of the volumes of traffic through there. Len, do you have Lawrenceburg? Do you know what Lawrenceburg is?

They're 100%.

Okay. So if Lawrenceburg is 100%, is the rest of it coming up or -- ?

They're essentially 100%.

Yes. I think the only property where they may not be is Baton Rouge. So I think overall, we're in pretty good shape with the ticket in, ticket out. In terms of IT systems, they operate a little bit different than we do. They're a little bit more centralized because they had a build strategy other than Joliet, which they purchased. They built all their facilities, so their IT strategy is a little bit more centralized. They have a little bit more commonality of systems and programs than we do because we were more acquisition based. However, it does not really create an issue for us because the way we operate, we'll leave their systems in place. We'll have a common reporting platform on top, if you will, a program on top, and things will operate very smoothly. And Bill, you might want to comment on where we are in terms of being able to integrate it from a financial reporting standpoint.

No, I think -- well, Kevin really touched on it already. The mechanism we've [attained] from an integration perspective is we'll take the core date of the prior consolidations and extract it out of the existing system. Penn currently has two systems that properties operate on from a financial reporting basis. Argosy's systems are the same as on a continuing system, which is what we already have at Penn and so those will just [block] onto the corporate consolidation platform. We really don't expect any issues there.

Did we get your whole question on that one?

Yes, I appreciate it. Thank you.

And our next question is a follow-up question from the line of Larry Klatzkin of Jefferies & Company. Please proceed.

Hey, guys. Just a little update on regulatory. You're inheriting a track with Argosy in Ohio, so what's the look on regulation there? And then as far as Maryland goes, which, I guess, if it doesn't happen this year, then an erection is set the next year, and then also the old age-old question of West Virginia table games?

Wow, so many questions. Look, I'm not one to think Ohio is anywhere on the horizon, so don't give a lot of thought to Ohio. Without getting into politics there, I just don't see it happening now or anytime soon. I think Argosy made a very wise move in creating a hedge in Ohio so we think that's a very good thing. Maryland, as you know, has been working at the slot process for a very long time and you know where that is. I've always said sometime, I guess they're going to get their act together there and work it out, but that's not on the near horizon either. And for West Virginia table games, I think we remain optimistic that that will happen in time. Be very, very helpful to the state. We've made our case, I think, pretty effectively that we are now a very significant economic engine in the state of West Virginia and I think it can happen, but it's politics and who knows if it gets down to vote? So I think -- but if I had to guess, I think that you will eventually see table games in the State of West Virginia. That's a hope. I express that as a hope, but I think -- because it makes sense.

I agree. Well, thanks, guys. I appreciate that.

And gentlemen, that does conclude the conferencing session. I'll turn the conference back to you. Please continue with your presentation or your closing remarks.

If there are no more questions, then we're happy to wind up this call. Again, we're very pleased with what's happening here at Penn. It's a very exciting time to be here and we'll look forward to talking with you next quarter. Thanks a lot.

And ladies and gentlemen, that does conclude the conference call for today. We want to thank you for your participation and ask that you please disconnect your lines.