PENN Entertainment Inc (PENN) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the Penn National Gaming Second Quarter Results Conference Call. During this presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is recorded on Thursday, July 24, 2008 and it's my pleasure to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

Thank you, operator and good morning everyone and thank you everyone for joining Penn National Gaming's 2008 Second Quarter Conference Call. We'll get to management's presentation and comments momentarily, as well as your questions, but first let me review 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 and uncertainties associated with the forward-looking statements are described in today's news announcement and the Company's filings with the Securities and Exchange Commission including the Company's reports on Form 10-K and 10-Q. Penn National Gaming assumes no obligation to publicly update or revise any forward-looking statements.

Today's call and webcast may include non-GAAP financial measures within the meaning of the 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 news announcement as well as on the Company's website.

With that, please let me turn the call over to Peter Carlino, the Company's Chairman and CEO. Peter?

Thanks, Joe and good morning everyone. With me this morning both here in this conference room and in various places elsewhere, we've got pretty much the entire Penn senior staff is our style so that we can answer any and all questions that you may have. At the outset, I could probably say I can't say I'm happy to be back here again hosting an official quarterly conference call since that had not been the plan, but as we are and now reoriented with a public company mindset to build in shareholder value with enthusiasm start this process again.

Not a whole lot to report since we made the announcement of our deal cancellation just a few weeks ago. Nonetheless - and the numbers that Bill will describe are as pretty much in line with what we projected, so no real difference there and again our primary focus will be to answer your questions and let you take the Q&A where you would like it to go.

Clearly this year for offset that have been for every company in this sector has been very challenging and I think surprisingly so. I don't think any of us kind of expected that the softness pretty much across the board would be what it has been.

What I can tell you is that we think that - and knock on wood as I say that but indications are that things are pretty well settled out which I might not have been able to tell you even 30 or 40 days ago but that's just a general sense that we're feeling here. So on balance our properties are doing very well. This is still very solid. Frankly, our prospects have never been better.

I mean I think we all have the sense of the kind of performance that we have had over a long period of time with a very high focus on return on investment, a very high focus on free cash flow. I mean the kind of metric that we think in the end matter to shareholders.

That has not changed and if anything we're more determined than ever to make sure that we're at the top of every bracket that we can be in those very important areas. So as I said at the outset, it's - this enthusiasm back to very aggressive business here at Penn and we're looking forward to the future. We see really lots and lots and lots of opportunity.

So with that, I'm going to turn it over to Bill Clifford for whatever comments Bill would like to add.

There's really nothing much to add. I think what we're seeing in our results the real difference between what we had in the guidance that we gave a couple of weeks ago and our actual results really relates to the timing issue on a one-time charge at the corporate level. Obviously, we came in a little better than what we said we were going to do in the second quarter but in the third quarter we've had to you know move that charge.

The -- you know relative to the rest of the year I think I'll echo Peter's sentiment in that what we feel what we're seeing in our operations is that we've got a consistent level of performance in July with the general trend of January through June. Going back in through the quarter, May was a good month and then June was just awful. So the good news is what we're not seeing is June results getting repeated in July, more likely that we're in a consistent trend with what we've seen all year.

Hopefully, you have to stabilize first before you can improve. So with that, I'll you know open it up for questions.

Thank you gentlemen.

Go ahead.

Absolutely. Thank you, gentlemen. Ladies and gentlemen, we'll now proceed to the question and answer session.

(OPERATOR INSTRUCTIONS)

One moment gentlemen we'll be opening up for our first question. Our first question comes from the line of Larry Klatzkin of Jefferies. Please go ahead, sir. Your line is open.

Hey, guys. Hey, one quick big bookkeeping Bill. CapEx for the quarter?

CapEx for the quarter total was roughly 70 - well was $76.2 million broken out between CapEx or projects and maintenance. The project CapEx was $59.2 million and maintenance CapEx roughly $17 million.

That's perfect and what do you think it will be for the year? Can you -- Do you guys have an estimate for that?

The year we're looking at a total of roughly $395.4 million of which $321.1 million is projects and roughly $74.3 million of maintenance CapEx.

All right, perfect. Capitalized interest for the quarter?

Cap interest for the quarter was $3.8 million.

And you know you gave out debt, but did you give out cash on hand too?

Sure. Cash was $124.4 and our debt at the end of the second quarter consisted of bank debt of $2.479 billion; cap leases and obligations on the sale of [relative] to Pocono of 28.3 and then we had bonds of $450 million for a total debt of $2,957,205,000.

Perfect. Okay then some other questions. As far as - you still - you guys didn't mention in this note about stock buybacks. Last time you said you were looking for possibly 200 million total. Is that still the case and what would your timing hope to be?

On the buyback we did announce the 200 million. The Company has nibbled a little bit. I think we've got maybe 500,000 or 600,000 shares that was bought back to date. You know we're not going to rush in on the stock and basically create an artificial bubble so we're going to be very slow and patient and deliberate relative to the buybacks. It's really going to depend on - reflect on what's happening with the market.

Okay. You guys had mentioned in the last call that you guys may be looking to even buy gaming bonds of companies that you don't mind taking the assets out of those problems and get a great return otherwise. Is that still the case?

Yes. I think we're exploring all the options. We haven't done anything to date. There's just an enormous number of potential opportunities as we see it and we want to be real thoughtful and take our time to best evaluate the opportunities that are out there. I don't - we don't sense that there's any - that we need to rush into this stuff.

We think we can take our time relative to understanding what those different opportunities might be and quite candidly they're very complex in terms of really getting an understanding of - in depth understanding of what would be involved you know - sounds very simple but the reality is you've got to understand the other companies capital structures as well as what your rights are as well what may be happening down the road in terms of projections where we think the company is going to be, et cetera, et cetera so don't expect us to do anything for a little bit of time here.

Okay. No, that makes total sense. Las Vegas. Peter, you mentioned that there's still a place you like to look. Obviously there may be a few things available, Tropicana Land and one or two projects under construction now and such. Are you guys seriously taking a look out there?

Oh, there's better stuff than that. Look Larry, you can bet we're looking at everything. Bill pretty well answered the question. This is now for us - take a deep breath and begin a very, very disciplined approach in looking at all of the opportunities. No shortage of opportunities. The challenge for us is to make the right initial selections. Yes, of course we're looking at Las Vegas, but - and now for the first time in a very, very long time it looks to us like there could be some properties sprung loose.

I obviously can't tell you what we're looking at or what we're thinking about, but it would have to be one that fits the profile of the Penn customer. Somebody to be able to link with our database customers and just stay tuned. I mean we're - this is - there really are some very interesting opportunities, so yes, you can count on us looking very hard there.

I know being flushed with cash in this market is not a bad thing. Last question. You've got a piece of land away from [Baterfield]. Does that mean Baterfield is off your track or are you still looking at that to?

We're still very interested in Bater. It's a gold plated property. We also like our [Root Verde] property. It's got approval hurdles to get across but we've certainly gotten the first - important first step in getting - a recommendation at the gaming site. Interestingly, it had formerly been a gaming site and part of our pitch to Atlantic City has long been look you guys have basically shutdown the town so make up your mind. Are you focused on growth? Do you care about the future or is it all about protecting your existing base?

If that's it, God bless you, but it's not a very wise strategy and Pennsylvania has begun to have a profound impact on New Jersey and it's only just begun. You get the two Philly properties built, big time properties. You add in the significant spend that [LB Sands] is making in Bethlehem. Just take a look at a map and figure out where all of their customers are going to come from.

I guarantee you more than half of them aren't in Pennsylvania. So you're looking at a pretty bad bleak future for New Jersey if they don't act and to act what they need to do is begin to reshape the town away from a day trip market to a destination market. None of this is new and I think the question is still open is how committed is the mayor, city council, people who have the votes there to transforming their city and let it be what it needs to be and that is a destination market. They don't need one Borgata, they need eight Borgatas

I mean you need action down there and it remains to be seen how committed - I think the city understands it. Certainly the unions understand it. Anyone concerned about growth and health of the city but whether that translates into political action is not clear to us yet. We're still focused on data. We expect an RFP request to come out any day.

Interestingly, one of the arguments I'm going to make there and I'll say it publicly now because I think it serves our purposes is that whoever they select what not to be able to do what's been done in the past and that is select a single developer he then sits on the property for 15 years. Puts up a single property and sits on the balance.

We're going to do our best to insist that whoever ends up with the property must develop it immediately and I mean across the board whether it's three sites or four sites however it gets to be that they must be compelled to build and I think that's going to be a resident story with the city.

We just looked at the MGM site year after year after year and seen no action for whatever reason. I'm not criticizing MGM in that case but if I were the city I'd say prove to us that you intend to get this done. So you like Atlantic City and you like the future of Atlantic City but what we're waiting for is the political mindset that says we're ready to go.

All right. Thanks Peter.

Thank you for question. Continuing on. Our next question comes from the line of Brian Shim of Morgan Stanley. Please go ahead, sir. Your line is open.

Actually, my questions have been answered.

All right, then sir. Thank you. Continuing on. Our next question comes from the line of [Misha Dudley] of [Halbus HSBC]. Please go ahead.

Actually, mine's been answered. Thanks.

Thank you. (OPERATOR INSTRUCTIONS). Thank you and continuing on. Our next question comes from the line of Dennis Forst of Keybanc. Please go ahead, sir. Your line is open.

Yes. Good morning. I had two questions. One on the operation of Joliette. It surprised me how well the margins did in the quarter vis-a-vis the first quarter. It looked like for Joliette the pretty similar revenues both quarters yet the costs were down significantly. Can you throw a little light on that?

Yes. I'll throw some in and then probably Tim can add on. The - I think the primary drive there is really around the gaming taxes. The 3% horseman's purse subsidy sunsetted in May and also when compared what we've got is we've got a much lower average tax rate in Joliette because quite candidly of our revenue decline we're no longer in the 50% incremental tax bracket, so we've got a much lower projected annual gaming revenue level, which is lowering our overall tax rate.

And last - especially when - I didn't really look at it compared to the first quarter but looking at it compared to last year, last year there was a make hold provision in Illinois where Joliette was paying taxes based on a historical run rate or taxes that were based from 2005 and so that is having an impact relative to the prior year. So the biggest decline is really on the taxes - gaming taxes of Joliette and operational issues I'll leave to Tim.

Dennis, we put a new management team in there late last year and they've been rationalizing given the impact on revenues with the smoking ban they've been rationalizing their labor costs and also their marketing spend. We're preparing as you're probably aware to invest $50 million to improve the facility and make it competitive with the other Chicago land boats and up until that time we're going to take a very prudent focus on costs until we have something more to sell and more to show customers in that market.

Okay, great. That explains it. Appreciate it and then just to update some of the discussion we had earlier about debt. How much cash has come in from the settlement so far?

To date, we've received $700 million which was in - which is basically in Penn's bank account. There's also - there's $775 million which has been received although that's sitting in escrow pending the issuance of the redeemable equity --

Okay and that should happen October 1?

Yes. We think it will - we're - you know when you do a projection or a model you've got to put a date in there so we think that's the date that we feel comfortable that the money will get transferred to it. Obviously, that's somewhat - well it's entirely dependent on the timing around when the gaming regulators approve the transaction and finalize the suitability hearing.

Okay. And in addition to the $700 million, wasn't there $225 million that came in also?

No. That was part of - the $225 million is included - was included with the $700 million.

Oh, it is?

Right. So it's really $200 million, plus $500 million deposit on the redeemable equity and the remaining -- or $225 million and $475 million and then the remaining portion is all attributable to the redeemable equity.

That's $775 million?

Right.

Oh, okay. So the third quarter shares for your guidance the third quarter is the same number of shares of outstanding in the second quarter and the fourth quarter and full year would reflect the extra 28 million shares out for one quarter. Is that right Bill?

Right. So, what we're reflecting - you know we're reflecting a pop in the fourth quarter to roughly 115.4 million shares and what that will do is give us a weighted average count on the year of roughly 95.6 million.

Okay. And then next year obviously about 115 million shares unless you get around to buying more shares which is highly likely?

Right.

Okay. And then the $700 million you have now will be earning some modest amount of interest in the quarter and that will show up in interest income?

No. The $700 million that we have received was used to pay down the revolver.

Oh it was, okay.

So the revolver or balance at 6/30 was $600 million and right now that revolver is completely undrawn.

Okay, good enough. Thanks a lot.

Yes.

Thanks for your question sir. Continuing on. Our next question comes from the line of Neal Portus of Lehman Brothers. Please go ahead, sir. Your line is open.

Hi. It's actually Felicia Hendricks. How are you guys?

Peter Carlino. Good. Hi.

Hi. Okay, a few questions. Just getting back to Atlantic City. Peter, you talked about some approval hurdles. I was just hoping you could help us understand the timing behind those - I guess on Route 30.

It's utterly unknown. Look, like any coastal property there are environmental questions and more regulatory ones that we have to go through plus we need a final approval from city council when they approve the entire plan. Our piece fortunately came up at a time when they were rezoning many other areas in the city including Baterfield by way so we're part of a larger process. I've got to say Felicia, it's utterly unknown. We're focused on it every day and we'll just have to see and meantime we're waiting for the RFP to appear for Bater.

We think we have a very compelling pitch to make there and we've probably been at it as long or longer than anybody else and I have personally met with most members of city council and the mayor - the various mayors to make our case and I think that everybody recognizes that Penn wants to be in Atlantic City. Think it's a great market, but there's still a lot of loose ends and we just simply can't predict where that's going to go. I also say and we're not in a hurry. You know we can get it right it will fall in place when it does. There's plenty of other things for Penn to do over the next year while we do that.

Okay. And then moving onto Lawrenceburg. It looks like now it's going to open in the second quarter of '09 versus the third quarter. Just wondering what allowed that to move up and what gives you the confidence that it is going to open up ahead of plan?

I'm hoping we don't have a snafu here. It's really basically unchanged. I think we're always been looking at something early third quarter. I wouldn't say that we've moved up the timetable. I take your word for it. I will double check, but I assume we're still looking at early third quarter.

Okay. I think in the chart in the press release it says second quarter.

I'm sure you're right. I'll acknowledge it.

I got all excited. Okay. And then my next question for you is on West Virginia if you can just give us an update on any plans for a table game.

Well, first Felicia, we can't except to say that we have a very, very - did I say very -- focused effort in West Virginia to get all the politics aligned and to sell the message and to tell our story. So I mean we feel as good as one can feel this time around. I always remind folks that the - that our area was the only area that didn't pass slots the first time around. It's just a very - if I can say un-West Virginia like demographic there.

I mean that whole county is likely filled with people from Maryland and Virginia and others who have come in to escape the density and all the other urban problems only to find that Charlestown and Jefferson County is growing extraordinarily rapidly largely I might say as a result of the economic engine that is Charlestown Races. Look, we feel you know as good one can feel right now. I haven't looked toward polling but I think we're in good shape. As good a shape as we can be.

The governor has made it very clear that he supports us. I think many in the legislature do. They recognize and publicly have pointed to the revenue loss to the state which is staggering by not have it approved locally. So now that they've got real numbers to look at with the anti where refuting at the last round now we kind of know what it will do and it's pretty impressive.

So you know first of all the line around the issuance we can get. Let's see what happens in Maryland. As you know we'd be just as glad if Maryland didn't succeed with slots. I think we've said that publicly, but on the other hand if it does we want to join the party and we'll enthusiastically do so but that also may have some statement to make after this fall to the voters of Jefferson County. So you'll just have to stay tuned. Suffice it to say that we are really, really, really on top of that issue.

Okay. And then just final one getting back to that question about buying gaming bonds. I'm just wondering can you buy the distressed bank loans or only bonds?

We could buy both.

All right. Thanks guys.

Thank you.

Thank you for that question. Continuing on. Our next question comes from the line of Joseph Greff of Bear Stearns. Please go ahead. Your line is open.

Good morning guys. Most of my questions have been asked and answered but just a question for you on Kansas. Can you just talk about the principal returns are there for the Kansas opportunities and whether it's kind of you know two or zero in terms of how you look at it?

Well, it is two or zero because these are both sites or I think you know not an ultimatum fashion, but the economic returns on the lien on an stand-alone basis just don't make any sense for us and we would unfortunately have to pull out. That is basically what showed up.

Relative to - in terms of our returns, I think on a combined basis we're expecting specials that are in our normal ranges in the 15% to 20% returns and potentially maybe a little bit better but that's -- we'll see what happens and we've got a long ways to go and there's actually some - a lot of our team numbers are in Kansas today and tomorrow working through issues and giving presentations and doing their very best to help ensure that the state of Kansas makes the right choice and picks Penn.

I know you have ample space at Charlestown. It had additional gaming capacity. Is there any chance between now and the end of the year you looked at additional slots or are you just kind of waiting on what goes on in the neighboring state of Maryland?

No, Maryland has nothing to do with our view of Charlestown. We'd be doing this anyway. I mean anytime you get a huge revenue opportunity we want to grab it and the state believe me is very focused on that. They do the math that's been very publicly published. The very significant revenue that they're losing by not having table games there. So they're as motivated as we are. We just have to share that motivation with the voters of Jefferson County.

Well and -- listen I think relative to adding more slot machines we think we've got plenty of machines based on current demand levels. The economy is obviously giving us a bit of a challenge and until we start to see a pickup in the demand curve we think we're more than have enough slot machines at Charlestown at the current time.

And then my final question. Are you seeing any pressure at Lawrenceburg from the racinos in Indiana?

Yes. Tim, do you want to take that? The answer (inaudible - background noise) is yes, but go ahead.

Yes. Since they opened Joe in the early part of June we've seen with the customers that live within a 30 to 45 mile radius of those two tracks. We have seen a loss of business coming to Lawrenceburg and that has continued into early July. The question long term is how's it going to stick and as you know we are going to be upgrading our facility in the third quarter of 2009 to provide additional amenities and much nicer casino experience to customers in Lawrenceburg to offset some of that loss we're feeling from those two racinos.

Good enough. Thanks guys.

Let me add to that we're also taking a hard look at the scope of our project in Lawrenceburg. Obviously the complexion of the market has changed significantly with the addition of the race track loss so we may fine tune our program there, add some more amenities, do some things that between now and next quarter will tell you about if we get there. Maybe improving some of our restaurant products and doing things to make this project as strong as we can make it. I mean I have a sense now we've made some adjustments in design. We're very excited about that.

For those of you who have seen the Penn National properties that has been just so successful, so well received by the public that we're probably going to rollout something quite similar to that in Lawrenceburg still on time I might add but to just sort of change our focus there a little bit. I mean we want to be the place that people want to come. It's as simple as that so I think we have an opportunity now that we see where the competition is coming from. Understand the issues a little bit better. Tweak this project and I'm sure that we glean as much business from that market as we can get. So how's that for a set of - a circular answer?

Excellent. Thank you.

Thank you for that question sir and continuing on. Our next question comes from the line of David Katz of Oppenheimer. Please go ahead, sir. Your line is open.

Hi. Good morning.

Good morning.

Bill, in terms of the convertible preferred, you know we're obviously adjusting our share count and my best guess just from looking at the consensus is that some others probably treat it as a debt instrument prior to today also or probably the last week or so and if you could just give us a little bit of color on sort of how the accounting treatment evolved in is there going to be some - you know is there some imputed interest rate that we should be reflecting? Obviously these are not necessarily cash or economic matters but more P&L issues.

Sure. The - as we've gotten a - the final interpretation and this instrument is a little bit non-standard relative to market, so it did take us some time to analyze it and understand. At the end of the day the answer came back very simple. It's not debt. It won't be reflected as debt. It's 100% equity and the impact on the diluted share count is that while the stock is below $45 the diluted impact of the share count will be based on a conversion price of 45, which is roughly 27.7 million shares.

We will have a bit of a tricky situation as our stock price moves between $45 and $67 in that we'll be recalculating diluted impact based on our share prices between $45 and $67 and then once the share price gets above $67 the diluted impact will be based on a conversion of $67 or roughly 18.6 million shares that that equates to. So there's no imputed interest. There's no debt impact. It's all equity and it's just a matter of understanding how the impact share count.

Got it. And one last one since it's been a long time since we've had a chance to get cranked up about this. But there's been some press about the tenth license in Illinois which ultimately if it did become a reality could potentially have some impact. Do you have any read on whether or not we should be getting ourselves cranked up about this at this point?

Tim, do you review on that. Eric is not on the call I take it. He's out in Kansas but he would know best as he looks at the political situation but Tim do you have a sense about that issue?

Well, I know that they have put it out to bid. They've begun the process and retained an investment bank to begin the process. I think they're looking to issue the license by the end of the year. That's my recollection and there's no definite understanding of where the license will be located and until we know when that decision comes down it would be very difficult to access the impact on our operations in Aurora and Joliette until that time.

Got it. And then one last one if I may. Probably fair to guess that most of us are pleasantly surprised with Zia Park and didn't know all that much about that market. What kind of plans do we have for that property over time and how big does that ultimately become?

Well, you know it's a very robust area today because of the oil and gas business and that you can pretty well be assured is going to continue for quite some time. We will add a hotel in that market. We're looking at scale and costs and so forth right now. I think we bought the property with that likelihood in mind and I think now we've looked at it. The market is dramatic.

The people at the hotel there just to have a hotel so having a hotel on our property was a terrific idea. We're going to move it as swiftly as we can to get there. There is a limit on machine count under New Mexico law. Needless to say we'd lobbied for more as we can and stay as close to the politics of all that as possible. But we clearly see opportunity to expand even the current footprint.

Perfect. Thanks.

You're welcome.

Thank you for your question. Continuing on. Our next question comes from the line of [Larry Hafferty] of [Safeco]. Please go ahead, sir. Your line is open.

Hi, Peter, Bill. One theoretical question and then a follow-up. You guys have learned a lot more about the capital markets in the last year or so than probably you'd like. As you look at the capital markets right now what kind of leverage do you think they would let a gaming company like yours have and if you could talk in terms of debt to cash flow or cash flow cover of interest that would be helpful.

Yes. Bill should answer that.

Yes. I think - you know a lot of - it's still going to be dependent on the - on what it is your borrowing for. I think if you're guying proven existing cash flows you might be able to go as high as 5.5 times EBITDA. If you're doing a project and still keep it at a sub 10% interest costs - if you're trying to do a Greenfield project I think that becomes a lot more problematic.

So we kind of look at it as the ideal is somewhere in the 4.5 range and we've got - with this equity that we've got infused here, we've got the capability - it depends again on where the purchase multiple is but assuming nothing too crazy on those but we can probably acquire somewhere between $400 million and $600 million of EBITDA and keep our leverage under 4.5.

We've got plenty of capacity and I think we can get it done at - in the current market what would be perceived as reasonable rates, certainly very unreasonable relative to where we've been historically but projects that could still work and acquisitions that could still work for us.

So recognizing that you know that you'd like to study sometimes opportunities are transitory and I noticed that Las Vegas Sands pulled out of Kansas I guess yesterday and some of the folks in Missouri are reasonably optimistic that that loss limit is going to change which Las Vegas Sands cited as one reason why they pulled out. If you were interested in something in Missouri wouldn't it behoove you to move very quickly because those assets it would seem especially relative to the way the regulatory winds are changing - are really on a bargain basement level?

Yes, I'm not so sure. I mean the reality is whoever owns the asset under - you're going to pay - if you go in right now and you ask somebody to sell an asset in Missouri they're going to quote you a price based on the success of the loss limit which may or may not be realistic in terms of what it's real impact would be on that property's EBITDA.

So I don't think - I think it quite honestly be better served to wait -- one make sure it's a certainty because otherwise you're not going to get something cheaper and two is actually to see what the results might be so that you've got a more realistic view on what the real impact is going to be from an increasing loss limit. We're - you know there are wide ranges of opinion in terms of what that impact is going to be.

Part of what I think people forget about when considering it is the fact that there's a 1% increase in the gaming tax which is on all revenues not just the revenues generated from customers - or might take advantage of the $500 loss limit and when you start to extrapolate that out across the entire base of revenue growing your EBITDA dramatically on that is not a sure thing. I mean I think it's got upside. I don't want anybody to get confused. I do think it's a positive for the industry. I'm just not sure it's as much as what some people believe.

Well and there's other elements to that. First, philosophical point of view. I, I'll speak just for me have an aversion of buying air or buying a promise. I mean you get it. We've all been on the buying side. Here's a story. Well it's going to do this or it's going to do that and my answer is always the same. Call me when you've got it. I'd be happy to pay you for it. I'd say I'm not going to pay you for it because you think it's going to be there. It's just simple as that.

Further, I think Missouri is going to be challenged at both ends. I mean you've got a lot of growth in the eastern part of the states, St. Louis market. That's going to be bad news for all the competitors in that part of the world and Kansas on the other hand is going to get squeezed. When the state of Kansas opens these facilities it's going to have an impact so I see more downside in that market than I see upside and that's simple reality.

So if I were anybody doing business there I'd be inclined to - well it's hard to say. They want to sell the future I would guess and I'd say good when do we get there and see so I'm not figuring price that they're missing a thing or anybody else is missing a thing by not acting today. I'd say it's a lousy time to jump in there.

And the last - I was impressed with what you made in Pennsylvania with what is to my knowledge the second worst tax situation on the planet. Do you see any chance of that tax situation changing in Pennsylvania?

No. There's a - the one thing that will help down the road is as the stand-alone facilities come on-line they'll start making contributions into the workman's [purse] fund which will have an offset for us because our - that money will be used to offset the existing race track contributions today. It's a net wash from a statewide perspective but it will help the existing operators.

You know, Pennsylvania did do some smart things. We can all moan about the "race track model" which is the higher tax model but in one perspective was pretty smart and they didn't gouge us with an upfront fee.

I mean I actually talked with some of the guys who were writing the legislation and we basically said look we'd like to get as much as we could possibly get and you see all these silly multi hundreds of millions of dollars of fees but they said look we recognize the more we take the less we get. I mean amazing. Most legislatures haven't figured that out and they also understood the same thing they clearly did on the tax side that they want to get all they can get but there is a tradeoff between high taxes and the investment level.

I mean look at Maryland as an example. A very bad piece of legislation will play in that game but what are they going to get? Have they maximized revenue? Will they in the state of Maryland with that legislation? Of course not. They've taken all the money so what they're going to get is not a lot and you know you can't tax somebody - you can't tax something for success. I mean it's this simple. Obviously there is a level where if the taxes go high enough you just don't get the investment.

So Pennsylvania was very smart about that and one of the objections we raised was the competitive disadvantage the tracks would be in as against the freestanding facilities and the state recognized that and incredibly rather than grabbing all the money themselves they put the excess difference that these facilities had not paid in purses back into the overall purse pool which will have a great effect on the racing industry, which by the way whatever one thinks about racing employs a lot of people.

It has a profound effect on the agricultural economy and look this is a very [precedent] move frankly on the part of the Pennsylvania legislature, so when you get into the Pennsylvania legislation, so - as Bill said that taxes will fall but when you look at the total contact this legislation it's actually pretty good.

Okay. Thanks a lot Peter.

Thank you.

Thank you for your question sir. Before continuing on to our next question participants question, we'd like to put out a reminder that your questions and comments are welcome.

(OPERATOR INSTRUCTIONS).

And our next question comes from the line of Todd Jordan of Research Edge. Please go ahead, sir. Your line is open.

Thank you. Hi guys. Two questions and I apologize if they've been answered already. I've been jumping on and off conference calls. But just wondering what the impact has been on Charlestown and what kind of overlap there is from the Penn Casino and are you able to sort of monitor - it seems to be you have databases with both and just looking at the overlap between the two properties and I'll ask my next question after that one's been answered.

Len, do you want to take that?

Sure, I'd be happy to. Yes. When we went into the budget season for this year will be opening at Hollywood Penn National we did look at the overlap and it primarily occurs in the southern Pennsylvania regions of York and the like in that area. It's coming in about where we expected in those particular regions.

Maybe it has about an impact on the order of a third of the revenue coming out of that overlap between the two properties. About a third of what Charlestown was getting before is now going to Hollywood Casino Penn National. I would suspect over time for that number to rise a little bit but right now it's coming in where we expected. About a third of the overlap is shifting to Penn National.

Okay --

(inaudible - background noise)

Sorry. My second question just real quick Bill. You know I'm assuming that you know you're showing this is preferred as equity that when banks are calculating your leverage ratios it gets included in the debt portion.

I don't think it should be. I mean obviously that - I mean the GAAP accounting says it's equity. The reality of the instrument is that the holders of it have equity risk. In fact this is one of the arguments I have with the rating agencies is that conceivably you could have a company with - all we do is pay down debt over the course of the next seven years that we could be a AAA rated company in terms of investment grade on the debt side, yet the holders of this paper could be facing principal risks.

So I think at the end of the day it's very much like an equity or an equity investment and in any event it's certainly a safety valve from a debt perspective in that if the company were at the end of seven years were to have any issues around credit that there's a mechanism there to basically convert it to equity and if we're - and candidly if we're very successful at deploying this capital and let's say we do wonderful things with it over the course of the next seven years, I would say it's probably more likely than not that we would in fact issue the share rather than redeem the shares. But you know obviously that's going to play itself out over the course of the next seven years.

How did the rating agencies respond to your argument?

I don't know. We haven't heard yet. I made a lot of arguments. I won't go over all of them on the phone but there's - I think we're going to wait and see and I think there's - you know listen. There was some nodding as I made my points. It doesn't necessarily mean that they're going to accept all the points but - and they'll probably come out with some kind of which is - as I understand how they work they give you a percentage credit as equity versus debt.

So I don't think it's a -- which is somewhat a little bit illogical, but they're going indicate that they'll give you a certain percentage credits for equity and a certain percentage charges as debt and I think we'll have to wait and see what the outcome of our meeting was and we're anxious as anybody else to see what their final thoughts are.

I think all - everybody acknowledges that this is not like any other instrument out there. It's very unusual. It's highly favorable for us - but it leaves people scratching their heads saying what is it and you've got our point of view.

Okay, great. Thanks guys.

Thanks for your question. Continuing on. We now have a follow-up from the line of Larry Klatzkin of Jefferies. Please go ahead, sir. Your line is open.

Hey guys. A couple of things. One, you received the 225. How much taxes do you have to pay on that? I mean where do we see cash net on that?

I think as we indicated previously, I don't think we've taken a different view. We're expecting net proceeds of roughly 120 to 130.

Okay.

Out of the 225.

And then the - as far as Lawrenceburg goes, the two Indiana slot houses opened up. It seems they've had an impact on you. Are you seeing that as becoming -- you know people going to look at it and now they're coming back to you or what are we seeing on that?

Len, do you want to handle that?

Go ahead, Len. You go ahead and I'll follow if there's anything else.

Okay. Clearly, when the properties opened we saw a dramatic impact in those particular zip codes directly around the new facilities. Clearly, they are a lot closer to those zip codes and they are only slot operations, but there was an initial impact. I would venture to say that it's too early to see the rebound since they just opened recently yet, but they did have a big impact in those particular zips within 60 miles --

Is that continuing into mid-July or is that -- are you seeing some people coming back?

Too early to say but I venture to guess it's continuing in those zip codes closest to the tracks.

Okay. So it's more of a permanent effect?

This is too early in the day. Too soon to say. Too soon to say.

Sure. And you guys are also doing some work in your place?

Ask us that question when the third quarter is over and I think we'll have a much better feel.

All right and that's about it. Thank you.

Thanks.

Thanks for your question. Continuing on. We have a follow-up from the line of Dennis Forst with Keybanc. Please go ahead, sir. Your line is open.

Yes. I just wanted to get a clarification on the preferred Bill because I've been having discussions with a number of people about it. Seven years from now your stock is at $100 a share. You either pay it off in cash or hand over 18.6 million shares?

Yes and also we can elect to pay any portion and deliver the remaining value in cash. So if you were to take the -- what was it -- the number of shares times $100 that's the amount that we owe we could deliver -- we could split it 50-50 and deliver half in shares and half in cash if that's what we chose to pay --

Remind me again the preferred is one point what?

$1.25 billion.

1.25 billion. So it would -- in that case if the stock were $100 wouldn't it make sense to sell stock - do a secondary to pay it off $1.25 billion. It doesn't make any sense to give shares when it's $100 does it?

Well, we only have to give the $1.25 billion divided by 67. I think that number --

You said 18.6 million shares.

18.6 million shares. We can satisfy the entire obligation for the shares.

Yes. But if the stock is selling at $100 then you're giving them $1.8 billion worth of stock instead of $1.25 billion worth of cash. Isn't that correct?

No, I understand. Well if we - maybe this will help and I'm happy to take this call offline. We owe the $1.25 billion, but it's the stock at $100, we owe $1.8 billion.

Right.

So we could satisfy the $1.8 billion by delivering 18 million shares or we could take the mixture of that.

Couldn't you sell -- what would that be? Couldn't you sell 12 million shares at $100 and then hand over the $1.25 billion in cash to them?

Well, yes. No. Listen - I mean whatever shares we wanted to give it would make the most sense to simply deliver those shares at $100 to the holders of the redeemable equity.

So if I have the redeemable preferred and the stock is trading at $100 if you give me a share of common stock that reduces what you owe me by $100?

Yes. Each share still carries $100 value.

Whatever the market is.

Relative to that.

Okay. So then in theory you only have to give them 12.5 million shares of the stocks at $100?

No. We have to give them the 18 because it's 18 million shares times $100. That's my overall liability of 18 --

Right.

Of [170].

So the simple answer to that is if the stocks trade at $100 you're not going to give them any shares. At $100 you're paying them 1.5 times what you owe them. If you get to use any shares at all.

Well, I own the whole thing. In other words, if our stock goes to $100 I owe them $1.8 billion. I definitely owe them that.

Oh, you do. So this is the discussion that we've been having that's unclear.

Ok, like I said, give me a call and we can --

Okay, good. The other question maybe for Tim. We were talking earlier about Joliette and the Sunset of the 3% in May. Now isn't that back alive?

No. The session in Springfield ended and no legislation was introduced, so at least until they're back in session which I believe is sometime in November we don't see any - anything affecting the balance of 2008 with regard to that horsetrack.

Oh that's good. Okay. Thank you very much and I'll talk to you afterwards Bill.

Okay.

Thank you for your questions sir. Continuing on. We now have a question from the line of Misha Dudley at Halbus HSBC. Please go ahead. Your line is open.

Hi. Is there any dividend component to the preferred stock or any ability to put one in in the future?

I'm sorry I didn't --

Is there any dividend attached to the preferred?

There is - well the company doesn't issue dividends or it doesn't currently have any plans to issue dividends. If the company were to issue ordinary dividends, there's a mechanism where they would share on an as converted basis on basically the 18.7 million shares or the conversion of 67 if we did declare an ordinary dividend.

If we were to declare a special dividend then what would happen is they would share in that dividend and we'd have a reduction of the principal balance due and a reduction of the floor and the ceiling price so that you know in order to declare a $10 dividend we'd be -- they would share in those proceeds and we would lower the floor and the ceiling price by the $10.

I see --

Let me interrupt by saying I wouldn't waste a whole lot of time thinking about dividends. As a major shareholder I'm going to tell you don't count on it anytime soon.

Right. But is there a mechanism by which to pay that preferred entity -- a dividend and restructure the obligation that way?

I mean I sure there's any number of creative things that we could do if we chose to do that in terms of paying dividend or other contests to extend the maturity date or any other series of options that would be available to us but obviously it doesn't make any sense to be doing that today. That would be a conversation that might make some sense sometime down the road in probably five or six years from now.

Okay. Thank you.

Thank you for your questions. Continuing on. We now have a question from the line of [Brian Sells] of Peak Financial. Please go ahead. Your line is open.

Thank you. Peter, can you speak about what you and your management team learned from the failed buyout that would help you in the event you were approached again in the future?

Look. There's really little I can or would say on an open phone call about this. I think I said it last time that we had a very good contact with these folks and we unfortunately found ourselves in a credit market that was, let's face it, a disaster and we could have tried to perfect the contract in court and done all kinds of mean and nasty stuff and if I thought that was going to be a cakewalk we would have taken it.

I mean I'm not confused about where value for shareholders lie and -- but nonetheless, you make a business judgment about what your choices are. So look, we opted to look at what we saw as a very, very difficult market and decide that taking a materially impactful settlement was the smarter thing to do.

Taking a long view for the company and its shareholders because in the end you know holding nothing if we didn't succeed in court would have been a pretty ugly prospect and would have diverted us for years and so on and so forth. So there's really no lesson to learn except make a deal at a better time and that's it.

Six months - or if we were in any other business in the planet that we could have gotten the closing in 120 days or even six months I think we would have gotten there. It's just the nature of this business that you're hanging out there for a very, very long time. I guess the message is that in the future for gaming companies it's a tough road.

Is this more about the credit markets than the economy and the industry in your opinion.

It was clearly a confluence of everything. I mean it was the credit markets. It was the general business conditions as well as, quite candidly, the gaming multiples, all three of those things were a major problem for us. At the end of the day if there's a lesson learned your recourse against shell companies even with as good a contract as we had you don't have as good a recourse against the shell company as you do against a strategic buyer. So you know - I think this is probably as far as I'm going to go.

Our lawyers are looking at us saying (inaudible - background noise)

All right. Thank you very much.

Thank you for your questions. Continuing on. Our next question comes from the line of [Jack Cornett] of Gates Capital. Please go ahead, sir. Your line is open.

Hi, it's actually Jeff Gates. So hey, question again on the preferred. I guess we should really be looking at this -- correct me if I'm wrong, as 1250, seven years from now so even at 10% basically present value of about half of that today and then if I understand it right, you have effectively have a put option at $45 a share.

Right.

But you really don't have a call option because you don't own a call option at 67 because the -- if the stock was $100 a share you'd have to deliver the 27.8 million shares anyway.

I'm sorry. We deliver the 18 --

I'm sorry, the 18.7, right. You'd have to deliver the - this whole amount of cash but conversely if the stock was lower than $45 you could satisfy it with less cash than 1250.

That's right.

Okay.

It's a pretty safe bet for the company. I mean obviously you look where we are today and we certainly expect and would be delighted to turn those shares over when the stock price is at the kind of level we think it needs to be you know the challenge is on their side. We would argue of course it's not a big challenge given the seven year time horizon, but we have protection on the downside. I think that's the critical thing for our shareholders.

You basically have a piece of debt that's really in present value terms $625 million at 10% IRR and then you own a put option at $45 a share.

That is another way to look at it, yes.

Okay. Thank you.

Thanks for your questions. Our final question comes from the line of (inaudible) from [Pine Global Capital]. Please go ahead. Your line is open.

Hey guys thanks for taking my question. As it relates to the preferred then if you're really not on the hook for the 1250 because you do have that explicit put option, how could that be considered debt?

That's my argument -- I'll bring you along with me, maybe you can be more persuasive than I was.

I'll be happy to join you.

We obviously took great pains and Bill worked very hard with his team and our outside accountants and so forth craft an instrument that you see here and we feel pretty confident that we know what it is, but obviously others are a little more confused.

And what's the timing to get a final call or read from the ratings agencies?

Well, I'm not sure. I'm sure they'll be coming out shortly. The reality is I'm sure they'll at some level they'll be re-examining if they were to come out with the understanding of that it was debt. That they would -- you know -- re-look at that as circumstances change. You know, I don't want to put any words in their mouth or even pre-predict where they're going to come out at. I think we've made some very compelling arguments for why it's equity and you know we'll see if they agree.

I'm not sure that at the end of the day you know and maybe this is a little conceded or unrealistic, but I'm not sure at the end of the day that the people who are going - that might be lending us money in the future will necessarily always agree with what the rating agency interpretation is in terms of their risk profile in lending us the money and where this redeemable equity stands in the capital structure.

So you know there certainly have been situations in the past where the credit markets have not followed exactly what the rating agencies have indicated as reflected in -- where the coupon's been on the gaming paper relative to the ratings, so now obviously that's one of the [bids] today in the current market, but I'm not really that panicked on where the rating agencies come out because I think at the end of the day that the underlying economics will speak for themselves.

The instrument will speak for itself and I think when it's time for us to look to raise additional capital in the debt markets that the debt market will do their own interpretation of how they see this instrument and whether they view it as equity or whether they view it as debt.

I appreciate that. Thank you.

Thanks for taking our questions. Gentlemen, it appears that there are no further questions at this time. We'll turn it back to you once again to continue for your concluding remarks.

Okay, operator thank you very much. Well, thank you all who have tuned in this morning and we'll see you next quarter. Thank you.

Thank you, sir. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect. Thank you once again. Have a great day.