PENN Entertainment Inc (PENN) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming 2008 third-quarter earnings conference call. During the 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 being recorded Monday, October 27, 2008.

I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining Penn National Gaming's 2008 third-quarter conference call. We will get to management's presentation and comments momentarily, as well as your questions and answers. But first I will 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, and 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 in the Company's filings with the Securities and Exchange Commission, including the Company's reports on Form 10-K and Form 10-Q.

Penn National 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 SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures 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 will turn the call over to Peter Carlino, the Company's Chairman and CEO. Peter?

Thank you, Joe, and thanks for satisfying all our legal requirements with that announcement.

Welcome, everyone to our third-quarter conference call. This quarter, as you might guess, is not exactly the quarter that we had in mind last year, last month, but it is what it is and certainly consistent with what the industry is seeing more broadly.

With me today is pretty much our entire team as always, so that we are prepared to answer any and all questions that are answerable in this discussion today.

Broadly, performance has been -- ranged from, I guess, terrible to -- what would the highlight would be -- less than wonderful? But nonetheless our entire team has been focused, of course, on margins and adjustments that I think will leave us in good stead going forward.

Lots of things have happened in this last quarter that are summarized. By the way, I think Bill Clifford and his team, as always, should be -- I thank them publicly for the terrific work they do in providing the kind of detail that we give to you. We try, and have always tried as a public company, to be as transparent as possible, to be as predictable as possible. Although I must say that predictions and estimates are, under these circumstance, pretty much out the window. Because we scratch our heads, as you do.

In fact Bill and I and several of us were talking this morning about guidance generally, and we've decided that your guess is probably as good as ours about where this is all going as one looks at the economy and the things that affect our business.

But, look, there's some bright spots. The Company is running along very well. And we will speak to probably all the key issues as we go through your questions and answers. So, as is consistent with what we've done in the past, I will say the least and find out what you folks want us to talk about.

So, Charlene, will you open the floor to questions?

(Operator Instructions). Larry Clarkston, Jefferies & Co.

Hey, Pete, what doesn't kill you makes you stronger, right?

That's probably a pretty good statement, Larry. We kind of buy that.

First, housekeeping, just end of the quarter debt, cash, CapEx, capitalized interests, and what CapEx and capitalized interest might be the in the fourth quarter?

Sure, Bill?

Sure. Our cash at 9/30 was $125.6 million. We have had -- on our bank debt we had $1.915 billion outstanding, which broken up by the revolver at $54.9 million, the A loan was $260 million, and the B loan was $150.5 million.

Then we had cap leases in Pocono Downs payments due totally roughly $28.2 million. And then our bonds, $250 million and $200 million, brings us to a total debt number of $2.3938 billion.

Capitalized interest in the quarter was $2.4 million. And our CapEx for the quarter, broken out between projects and maintenance, projects was roughly $63.9 million. Maintenance CapEx was $12.4 million.

Looking forward into the fourth quarter, we think our project CapEx for the fourth quarter is $83.1 million, made up of $29 million on maintenance CapEx and [$60.6] million of project CapEx.

Peter, as far as getting the rest of the money from Fortress, what exactly has to happen?

We need an approval, Larry, in Missouri. And that's scheduled to happen this week. We have no reason to think that it will not, and that should close that issue.

Oh, great, so you could have the money as much as two weeks from now?

We could have the money as early as Friday.

Perfect, okay, good. As far as --.

Maybe next week, but the point is, I think we are there.

How big lobby expense, fourth-quarter -- any kind of magnitude of what we should -- I mean, I'm seeing you spent $28 million on Ohio, but that's both quarters combined, right?

That was through the filing date. You know, the reality is, is that I don't think we want to -- we are not going to comment on the exact amount spent. It will be significant, and I think people will have to stay tuned in terms of how much we spend. And we have an individual here that's responsible for spending that money, and it's a day to day decision in terms of the exact spend.

Look, I mean we've made the judgment, Larry, I assure everybody out there, that the Ohio issue is important to us, and that it was important to get the message out that we needed to tell. Obviously, we support slots in Ohio. And less than two years ago -- we are part of a referendum effort to get slots in Ohio.

This particular bill and this particular effort is particularly egregious, because what you've got is essentially one individual and a couple of local guys trying to, through the Constitution, gain a monopoly in the entire state, which is really kind of unprecedented.

Now obviously that arrangement is not good for Ohio. It's not good for us because we have an operation in Toledo, and there are others in the state along with us who one day hope that the legislature where by referendum we can get a proper bill balanced across the state, maybe Pennsylvania-like, that really will maximize the opportunity for the State of Ohio.

This does quite the opposite. It basically precludes everybody else from participating. And should anybody else arrive in the state by referendum or legislation, their tax rate would go to zero.

So there's a lot of bad things in that bill, and we just made the judgment that it's got to be killed, and we will live to play another day. And obviously, since this is an ongoing effort, we just are not able to comment beyond that now.

Okay, would you be able to comment -- again, and I agree with you, it should pass, but if it does, what kind of effect it might have on your Cincinnati property?

We are not going to speculate on that. I mean, that's next quarter's call. So let's wait a week and find out what the result is and we will talk about it then.

All right, and then Maryland, what are you guys seeing on the vote coming up on that?

That's a good question. Why don't -- I mean, I think -- why don't we have Eric comment, Eric Schippers, who is our head of Government Affairs. The question is, what do we see in the vote in Maryland, what are the likelihood of it happening?

Yes, I mean the governor has been campaigning pretty heavily for the passage of this in the legislature. And most of the money would be tied up in terms of funding important state programs and all of that sort of thing. So they have made -- the pro side has made a lot of the argument that if you don't approve this, it could result in higher taxes in Maryland and perhaps cuts to programs, etc.

So looking at the polling that has been released publicly, we think there is a high likelihood that this will pass, certainly given the state of the current economy. But it's anybody's guess. But that is at least -- the folks who are proposing this feel pretty strong about their chances.

Let me clarify one thing, too, on Ohio. Peter had mentioned the loophole that would allow the tax rate to go to zero. That would be if a federally recognized tribe were to come in to Ohio, and there are currently 12 Native American tribes that are seeking federal recognition. If another commercial operator were to come in, the tax rate could go down to what the rate is of that other, or 25%.

So it is replete with sweetheart provisions and it's riddled with loopholes. Suffice it to say, the more that Ohioans would learn about this, the less they would like it.

All right, good (multiple speakers).

There's a better way. Thanks, Eric, for making that point. And by the way, as you well know, once a commercial or gaming is established in the state, it does open the door to Native Americans to come in and of course operate with no taxes, often to the detriment of the commercial facilities. And there is, as Eric mentioned, quite a crowd looking to do that. So this opens that door. We think that's a very bad thing.

All right, and the last thing is just the getting table games in West Virginia, what's the timing and outlook for that?

Let's see who we should have answer that question. Eric, why don't you take that also?

Well, we are authorized to go back before the voters as early as June of 2009. We are sort of not in a hurry, though, because we want to make sure that the foundation has been laid in terms of our continuing to educate voters there about what table games would means, not only in terms of additional job creation and economic development, but frankly to maintain competitive advantage with the neighboring states that have approved gaming expansions.

So we are going about telling our story in Charles Town. We'll see what happens in Maryland. We will see continued expansion in Pennsylvania. And when the time is right, maybe as early as June, maybe later, certainly it will be driven by the polling, we intend to take another crack at Charles Town.

Yes, it's worth mentioning, Eric, that we just got -- which isn't as easy as it sounds -- we just got the support of the HBPA formally. That's the Horsemen Benevolent and Protective Association that represents all of the horsemen at Charles Town, who have strongly now supported -- which they did not, last time --.

That's true.

So I think we are building a very careful groundwork and feel optimistic about the future. Well, in effect there's one other issue. Let me say this, that it's now clear to all just how much the absence of table games in -- because of the other three facilities in the state -- just how much the absence of table games has cost the State of West Virginia and Jefferson County. I think people are kind of shocked by the performance.

David Katz with Oppenheimer.

Good morning all. I have in front of me the purchase agreement with Fortress related to security. And obviously we've all been sort of following the states approving of it. But your press release refers to other conditions. And I'm sure in the depths of this agreement there are other conditions. Are there any that are -- that you can or are worth talking about? What other conditions other than that outstanding approval from Missouri?

That's either Bill or Jordan. Jordan, why don't you take that? Jordan Savitch, our General Counsel.

No, Dave, the biggest hurdle we have to clear is getting the Missouri approval. And then after that our expectation is that we deliver the usual closing papers, and then affect the closing.

Okay, just that simple. Then, I have noticed you also have in here on another matter some spending plan for Illinois, the Empress Casino. And there has obviously been some discussion -- not to get you all cranked up this morning -- but about a 10th license deal in Illinois. Obviously there have been some changes in people's outlooks for the next 12 to 18 months, and you're still going ahead with that $50 million. Is that a critical spend at this point? How is your thought about that?

Well, I'm going to let Tim Wilmott handle that question broadly, but the $50 million, it was a requirement frankly that I offered, and we as a company offered, to the Gaming Commission in exchange for allowing us -- as a good faith commitment to the property and allowing us to keep that ownership in the state.

So there's no choice about how to spend it. In fact, we've come up with a very exciting plan.

This is a property that has been sold several times, and neglected horribly. And its performance reflects that. Obviously, we feel very positive about its future. Although there are some things working in the state against this [multi mads] and other things. But why don't I let Tim describe kind of where we are with that?

David, we've completed the design of the refurbishment of the casino space and the food and beverage area in Joliet. We are going to start construction right after the first of the year. And the majority of all the work will be completed in the third quarter of 2009, with some small remnants that will be done in the fourth quarter.

But clearly we are aware of what's going on in Illinois with the 10th license, and frankly quite surprised about some of the values being placed on that 10th license that have been initially bid for that. And certainly we hope the State of Illinois puts that license in a location that best generates the maximum incremental revenue for the state and doesn't cannibalize the existing operators in that state.

Well, in fact, let me add that the state has required from our databases of what the zip codes are of our registered customers. Where are these people coming from. Which, at least highlights to us, that they are mindful of that impact. So we do think the state at least has the goal, beyond just the payment itself, has the goal of putting a facility in a place that will maximize revenues to it, but at the same time have the least impact on existing properties.

Okay, let's hope they've learned something. And just two quick ones and then I will get out of the way. Bill, I think he gave us a number for Project CapEx; can you break that down on what you are spending it on? I think you said $29 million maintenance and the rest is project. Where specifically are you going to be spending that?

You're talking about in the fourth quarter?

Yes.

There's roughly $11 or $12 million at Penn National related to the expansion, as well as finalizing the buffet and the new steakhouse. We have got roughly $6 million at Bangor -- wrapped up construction there. $28.1 million at Lawrenceburg. And then start across we will start -- we've actually got some expenses at Joliet for $1.6 million. Then the others -- Charles Town wrapping up the hotel for $2 million. We are going to be doing some modest improvements at Bay St. Louis for $1 million. And generally other stuff -- smaller projects at some other facilities.

Okay, last question. And sorry if I missed it. Did you buy back -- what have you said about stock repurchase so far in the fourth quarter? Or in the third quarter, did you sort of give us a final number there?

We did. In the third quarter we bought a total of 1,149,000 shares at an average price of $27.54. Relative to any buyback since then, I think we are going to be -- we're just not going to comment on that process as we move forward. Although I think we do find the price is compelling and interesting. And we are certainly actively looking at what our best alternatives are for the cash that we've got on hand.

Yes, let me make a comment about that. Obviously, we are pleased to have a fair amount of liquidity right now. But like a kid in a candy store, opportunities abound; they really do. So I think I'm going to make this statement publicly to our interested shareholders that Penn will supply -- or apply the same kind of discipline we always do.

I daresay that we meet every day, almost in a formal way, and look at the world around us -- because it changes daily -- and try to make a judgment about where do opportunities lie, what's the next smartest thing we can do? And this is a very careful and thoughtful process.

When required by regulators, either the SEC or by GAAP rules, we will make the appropriate disclosures. But we don't see any advantage right now with going beyond that. So I would make the broad comment to shareholders that we believe we are doing the right things. And you'll just have to wait a little longer to find out what those are.

Okay, and there's no comment on share repo in the fourth quarter so far?

No.

Joe Greff, JP Morgan.

Peter, your comments there at the last part of that question maybe dovetails into my comment. But can you just give us an update on which markets look more attractive say now versus three months ago, both from the perspective of an operating outlook near-term/longer-term, as well as potential prices or valuation levels to get into certain markets?

And then, if you could give us an update on Bader Field, and maybe how that fits into -- as a development opportunity versus buying existing free cash flow? Particularly maybe you can reference some of the things in -- and I guess, from the Las Vegas periodicals about buying trophy assets? And then I have a follow-up question.

Well, you've got, as I hear it, three separate questions. Why don't we -- because there are some geographic differences around the country in performance, why don't I asked Tim to answer that question?

Generally, Joe, with what we are seeing across our businesses, I would say that the southern properties, and specifically those attached to in and around the oil industry, tend to be a little bit stronger right now than other operations in the Midwest or the East.

But still, from a consumer standpoint there's no strength there. September was probably the worst month I have ever seen in my 20-plus years in the industry. October has been a bit better, but still not good, more like July and August.

So really, as we look at the regional markets out there, it's all tied to consumer, and we are not seeing any signs of strength at this point.

Now, related to Atlantic City -- then I will turn it back over to Peter -- you know, we just got the RFQ. We think Atlantic City is going to be a very long-term opportunity. It's going to take 5, 7, 8 years before anything would materialize there. We are looking at the RFQ very closely and trying to understand what the city and State of New Jersey is asking for. At this point we haven't made any determination on how our next steps are going to be for an Atlantic City opportunity.

Yes, I mean it's fair to say that right now Atlantic City is significantly challenged. And that's not going to change anytime soon. Bader presents a unique opportunity, but I think Tim answered it pretty well. It's going to take some time for this whole process to unfold. And again, we will approach it cautiously and carefully and sort of sort this out. So it will be a little bit before you hear much from us on that subject.

I guess there was sort of a quick question about Nevada, and Las Vegas in particular, I hidden among your requests. Look, we continue to poke around that market. Obviously, it's doing a whole lot less well than even we might have envisioned, for all the reasons that you know.

Again, that falls into the category of things changing daily. We are very anxious to see what happens with earnings ourselves there when all the releases start to roll in. We don't expect they are going to be wonderful. And again, we remain focused on just trying to cherry pick the right opportunity, if it appears. So we are under no desperation to do that.

As I say, we're going to just take a deep breath every morning, kind of survey the world around us and decide what's the next smart thing to do in itself. That's the best answer I can give you for Las Vegas -- kind of who knows? But believe me, we are very attuned to it.

That's helpful. And Tim, you sort of partially answered my next question here. On October 2 you talked about same-facility revenue being down north of 21%. And you said October was a bit better. I know October is not done yet, but maybe you can help us understand October trends.

And then, Bill, maybe you can sort of talk about what you are incorporating or what your thought process is for the balance of this quarter -- not to go crazy on a month-to-month guidance basis, but just how you are thinking about trends in general?

Well, generally speaking what we put in the press release last time was about -- the 20% was excluding Penn National and Bangor, and basically giving -- trying to give people an understanding of the flavor of what was happening with our business in the month of September across all of the other properties, excluding the ones that we had major capital put into it.

As far as what we've done for the guidance, what we've done is taken a look at October trends and basically extrapolate that out through the quarter. So what we are assuming is that what we will see in October is what we are going to see for the rest of the quarter, adjusted for seasonality and properties that are -- obviously there's some judgment in there as well, relative to what we see in terms of the properties ramping up, and what we think we are going to be doing internally in terms of improving operations and various other steps that we have taken to hopefully optimize results in a very tough time.

You know, Joe, if things remain the same as we've seen in the first three quarters, the smoking impact in Illinois continues. Thank God we are going to anniversary of that at the end of this year. The impact of the racinos in Lawrenceburg continues. And the general malaise over the economy in almost every other market continues. So we are seeing just more of the same of what we saw in the second quarter and in July and August.

And Bill, where do you see CapEx for next year? Should we just look at the statement that you have in the press release in terms of what you have left remaining to be expended, unless your comments on the Q4 is a good level to use for Project CapEx for '09?

Yes, I think maintenance CapEx will probably be around $80 million for the year, somewhere between $75 million and $80 million. We haven't finalized those numbers at this point.

On the project CapEx, the only things that we've really got on the drawing board today are the hotel at Zia, as well as Joliet. So I would expect -- and then finishing up the Lawrenceburg project. So based on the numbers in the press release, we should still get there.

Dennis Forst, KeyBanc.

Yes, good morning. I wanted to get a clarification on the debt number. Bill, I think you started off by saying debt was $1.91 billion, but that's probably the bank debt?

That's the bank debt.

Plus another $450 million for the bonds?

Well, no, the $450 million for the bonds, plus another $28 million in capital leases and an obligation to -- some [Mohicans] relative to the Poconos sale.

Right, so somewhere around $2.4 billion is the total.

Right.

And I think you said in the press release, the $775 million will go immediately to reduce the -- is it the revolver or is it some of the term loans?

The revolver.

The revolver. How big is the revolver right now?

The revolver at 9/30 was $54.9 million.

So, you could only paid down $55 million. That leaves over $700 million. Where does that go? That we have negative carry -- that will stay in cash?

That will stay in cash, or we will invest it, or we will use it for stock buybacks.

Okay, and then on the Fortress, or on the payment of the $775 million, only Missouri is left outstanding. What day does Missouri meet to discuss that?

Wednesday.

Wednesday. So we might hear something Wednesday about that?

It's fair to say you probably will.

Lastly, on promotional allowances, promotional allowances were actually a couple million dollars higher sequentially than the first or second quarter, yet revenues have been about the same. Actually gaming revenues were down in the third quarter from the first or second. Is there any particular markets that are more promotional, or is it just necessary in general to spend more money promotionally in this environment?

Dennis, the only market that really represents a material change in the third quarter is the startup of our facility in Bangor, but that is not a big, large operation. So I would say the rest of it is generally just across the board in certain markets like Charles Town, where we are trying to market more aggressively to stimulate the demand to the better-quality customers. That would probably be another property that is showing an increase in promotional allowances that would be above what you've traditionally seen in the past out of Penn's P&L.

Okay, but is it fair for us to think that most companies are being pretty conservative about spending in this environment, given that a lot of customers are not going to come out no matter how attractive you make it?

I think that's a very fair comment. Especially at the low end of the database and the unrated segments you are really seeing the retail consumer, the customer spending less than $100 per visit in our casinos, being the most impacted by this economy.

Then lastly, you can go for table games in West Virginia in next year. What would be the timing of that? When would there be an election?

Well, I think Eric answered that question before pretty thoroughly, but why don't you take another stab at that, Eric?

Sure. We go before the County Commissioners in Jefferson County and ask to be placed on a special ballot as early as June of 2009.

We are looking at the polling, and of course we'll continue to look at the research. We are telling our story. We are making our case to the people of Jefferson County.

We want to get this right. We want to win and we want to do it not based on an arbitrary timeline, but based on when we think we have the best chance of winning.

Would that not be in the more general election? Are they any elections in West Virginia that you could piggyback on and not have to pay for a special ballot?

You know, we can't really speculate on when the timing is going to be right, because there's a lot of dynamics that could change. Obviously, you look at Maryland and what may happen there, you look at Pennsylvania, with the downtown Philadelphia casinos, when will they be online? It's unclear.

A lot of different dynamics -- what the economy will be like then. So we're just going to continue to keep our finger on the pulse there. As I said, we are spending a lot of time and energy there now talking about the good things we've done in the community, talking about what the impact of table games would mean for that community, how it would transform Charles Town into a true entertainment destination. Certainly with the new hotel that has opened there, it fits perfectly.

But again, we want to choose a time that's going to give us the best likelihood of success, and that's going to be driven starting in June, 2009 by the polling.

Then, Peter, when do you think gaming would actually start in Maryland, should it get past next week?

Boy, maybe Steve Snyder has a point of view. Look, that's utterly unknowable. It could be, as we found in Pennsylvania, years. But, Steve, do you want to run with that?

Yes, I think that years is probably the right kind of timeframe to be looking at, because you've got to remember the Maryland statute requires local zoning approval. So there are a number of features in the Maryland statute that are going to require some pretty heavy lifting between November 4 of this year and the opening of the facility.

So I would be mildly surprised to see anything come online much before late 2010 or into 2011.

That sounds reasonable. (multiple speakers) yes, right, exactly, it could be 2012 or later.

Yes, absolutely, correct.

Thanks a lot for the answers.

Pennsylvania is a good model. I mean, and this was a perfect bill, a well-written bill. But it has turned out to be more problematic for many operators than any of us would have guessed.

Nicole Torraco, Babson Capital.

Good morning. Most of my questions have been answered. Just one pretty quick one. What is your minimum cash balance?

The minimum cash balance, in terms of what we need for operations?

Yes.

I think we are operating pretty close to that. We made some adjustments earlier in the year, and really did a very thorough job of analyzing the minimum cash needs. And I would say $125 million is pretty raw (multiple speakers).

So about $125 million?

Yes. [A minimum of] $125 million, but that's a bit broader.

And you know, you guys have talked a little bit about using the additional liquidity to maybe repurchase stock. Any thoughts on relooking at your bonds, what you're trading at a discount right now?

Well, we certainly look at that. That's part of what we want to discuss with our senior credit folks in terms of whether that is an option. As it stands right now, we've got some limitations in terms of what we can do with that. (multiple speakers)

Okay, what are those limits?

Well, the limitations are that there are some prohibitions against paying back such debt before senior debt.

Jacques Cornet, Gates Capital Management.

Yes, it is Jacques Cornet with Gates. Just to follow-up on that, with respect to the statement that is in the press release, maybe you can elaborate, doesn't the formation of the unrestricted subsidiary eliminate or reduce some of these provisions? Or how should we read into that?

Well, what it does, but I think the reality is, it's our intent to have a cordial and reasonable discussion with our senior credit facility member, and we are not -- we would like to do something that works for both sides.

Clearly there's an option here from the Company's perspective that we can put it there and have ultimate flexibility. But the reality is the Company would like, if it's possible, to come to some kind of a cordial understanding in terms of how we might be able to make these proceeds work to the best interests of both parties.

In other words, rather than putting it completely into a subsidiary where there's no collateral for the senior, what we'd like to do is talk about how we might roll that back in, but do that in a way that allows the Company to pursue the goals it wants to pursue, which are not all currently contemplated within the senior credit facility.

Bill, I must say that is a great answer. Thank you. Look, that says it very, very well.

Todd Jordan, Research Edge.

Just a question. On your (inaudible) on your subsidiary that you are setting up, I'm assuming that your goal with a subsidiary will be to invest in a company that you have targeted for potential acquisition. This isn't really an investment vehicle, is that correct?

Yes. Although you know, the reality is that even though you might make an investment, you can't have certainty that you'll be successful with that potential acquisition. In other words, some of this would be buying -- making investments in entities that are not particularly excited about selling themselves. So the reality is that result may or may not end up in an actual acquisition.

(multiple speakers) let me restate what I just said before. There are many, many, many opportunities now on every side of the equity/debt spectrum, starting with us, moving right down the line. And the challenge for us as a Company, of course, is to look at the countless choices and make the smartest choice. And that's the process that we are engaged in right now.

So you're going to have to stay tuned, but you've got the spirit with which we approach the use of this cash.

Right. I just wanted to make sure we didn't have to change the name of your Company to Penn National Capital Management. Thanks, guys.

Jim Bradshaw, Bares Capital Management.

Actually, you guys have just recently answered mine. Thank you.

(Operator Instructions). Thomas Allen, Morgan Stanley.

This is actually Celeste. With the subsidiary that you'll be potentially buying debt instruments through, will we see mark to market in terms of where the debt is trading, potentially adding to earnings volatility?

No. Well, actually what happens is that the mark to market went through the OCI, through equity, assuming that -- with stated goal -- we would be buying instruments with the goal of acquiring the company.

To the extent that we have a change in that philosophy, then we would have to -- when we actually sell them, we would obviously have to recognize a gain or loss at that point.

I guess similar to one of your competitor is buying stock and another competitor who marked it down once they decided they weren't buying the company?

Exactly.

Is that the way to think about it?

Same concept.

Larry Haverty, GAMCO.

Peter, a couple questions. One, is anyone else, that you can see, getting as enlightened as the authorities in Atlantic City, that the depravity from the smoking bans may be worth more than saving the health of the voters? That's the first one (multiple speakers).

Yes, I must apologize, we are having trouble understanding. I think we are having -- it was sort of intermittent on our speakerphone, so I missed that following smoking ban.

Atlantic City is reconsidering the smoking ban. Is that going on, or any talk of doing that anywhere else because of the revenue implications of this have been fairly (multiple speakers)?

You know, sadly I must say -- and I think Tim said it publicly -- he got a lot of bad press -- that maybe the world is headed to smoking bans almost everywhere. Let's face it, smoking bans are not good for our business. I mean, that's been well established.

Illinois has had the view that, oh, don't worry, it will spring back. People will eventually -- but the reality is it will come back somewhat, but it's a permanent loss of business. This is simply time and play. So it's no good news. It's just not good news. Gamers tend to be disproportionately smokers. That's the reality.

Look, the public health issues are what they are. I think that pressure will continue. I personally would like to see, and would have liked to have seen people focus on air quality, rather than smoking bans. This is a personal view.

But look, this is a social crusade. Legislatures and others are trying to get people to stop smoking. That's really what this is about. If it was a health issue, they would simply regulate air quality. But that's not what -- this is a crusade, and I think it's going to be a universal crusade. And unfortunately it can hurt us in areas where you've got Native American facilities or others who are not forced to play by any rules.

So I think this is a trend that will slowly continue. Pennsylvania had a fairly enlightened point of view about it, and that is providing a measured look at what is the effect of smoking bans. And considering that maybe there's places where you can smoke and maybe places where you don't smoke. Hopefully that kind of concept will remain, and maybe others will consider it as well.

But outright smoking bans, as Atlantic City has just demonstrated, are really a bad idea. It's bad for business, and there's no way of getting around it. Is that helpful?

Yes, I wish the answer would be somewhere else. But the second thing is, as you survey the investment opportunities in the industry, where do shall we say semi-completed projects, where there is financial stress of one kind or another, look on your spectrum of appetizing opportunities, or are they off the board?

Listen, the [only thing] we tell you everything is, there's nothing that we don't look at. You know, I once said at a meeting, and I'm not sure this is the most charming view. But I often think of ourselves -- this was at an investor conference -- I often think of ourselves much as, if you can picture this, sort of as a wolf surveys his territory. And that's always been the case.

Picture a great plain and type of a low rise of a hill, and kind of a wolf sitting there kind of staring out at the horizon, looking for one of two things, either weakness someplace that he can go and pounce on, or on the other hand, looking defensively at his territory. And we, I think, bring that kind of passion and enthusiasm and rigor to the process.

So picture us now sort of surveying the territory, looking for what's out there. And again, there are lots of choices. And by the way, I think as this whole thing evolves with patience -- and patience is going to be the key word -- there's going to be some things that spring loose that we wouldn't have dreamed of a year ago.

So that we want to make sure that we've got some dry firepower. And again patience is one word I think I should introduce, it sort of drives what we are doing here, and so it shall be.

Look, that's all I can really say about it. But we look at the whole world. We look at everything around us. We consider every possibility, and that's as it always has been.

[Neil Portas], Barclays Capital.

There were a number of property level management changes in the quarter. Have those been completed, or are there more to come?

Tim should answer that.

Yes, I have reorganized the operating side of the business, Neil, to be a bit more efficient and provide a little bit more oversight to our businesses. And essentially the deck has been cleared, and I think we are well-positioned and well-organized now to grow this business moving forward.

David Rainey with Acre Capital.

Peter, just maybe a few more comments about the process in Pennsylvania, about potentially reallocating floor space between smoking and non-smoking, and how long a time frame the evaluation process goes on?

And then the second would be, any comments about margins at Bangor or Harrisburg versus expectations?

All right, let me split those of course, and let Eric Schippers or Jordan Savitch answer the question in Pennsylvania.

(inaudible) at the properties probably more recently than I have on how they allocated their floor. I think in terms of smoking, this is -- I will speak to it from the political standpoint, and then someone can speak to it as how it's been put into practice at the property.

What the folks in Pennsylvania have understood is that there is a severe impact from smoking bans, as Peter has talked about before. And in fact this was an issue that was not easy to pass through the Legislature. It came down to a conference committee. And in the interest of sort of splitting the baby they decided that we will start with allowing a smaller percentage of your floor that can be smoking, and then go back after 90 days, I believe it is, and look at the impact and look at the machine performance from the smoking section to the non-smoking section, and allow the operator to come back to the Gaming Board and petition to increase the size of the smoking section.

And again, that's with the understanding that there is going to be an economic impact, so we want to take it on a case-by-case basis.

The only thing I will add to what Eric has said, David, the 25% allocation, we have not found in the operations to be detrimental to the customer experience, up to this point.

That said, I think we have early indication that there will be clear evidence that the productivity of the slot machines in the smoking area have outperformed the win [pre] performance of the machines in the non-smoking area.

So that's the early trend. And if that continues, then we do have the flexibility to increase up to 50% the allocation for smoking for our products at Penn National. So that's at least the early read of what we are seeing since we've gone to that 25% rule.

Regarding the margins in the businesses at Bangor and Penn National, Bangor, we've had the facility open for three months. We've grown revenues almost 50% year-over-year. In the quarter, as you can imagine, with a larger operation and the higher cost structure, we still have further growth to be achieved. We are spending to try to create awareness in our key feeder markets there.

It's clearly not going to have the margins that we operated in in the temporary facility up in Maine. But we have seen very encouraging signs of doubling the database and reaching into these feeder markets for the long-term growth of this operation. But I don't think you'll ever see the margins that you saw in the temporary facility that we had. We were operating in a very limited basis.

And at Penn National, we have EBITDA margins that are approaching 20%. And we expect that to continue to grow as we, again, grow the business and penetrate into the feeder markets in Central Pennsylvania.

We recently, within the last couple of weeks, opened a much-needed buffet in the business, doing very well initially with our cover counts there. And as Bill said, the steakhouse is under construction and will open up before the end of this year, which will complete the opening of this new facility outside of Harrisburg. And margins have improved over the course of the time, and they will continue to improve as we get into 2009.

Yes, let me make a comment about Penn National, because I think for many of our shareholders it is a showcase for what we do well as a company. I've said many times that we are not in the business of building monuments to ourselves or anybody else. We are about shareholder value and maintaining, to the best of our ability, as close to the highest return on capital in the industry as we can make it.

And I would actually suggest that any of you who can get out to Harrisburg and see Penn National, you're looking at probably one of the best capital spends in the gaming business. That is to say, dollar for dollar we've managed to produce just an incredible amount of excitement in -- for the lowest possible cost. And that's always our game. And I think it's a pretty good commercial for what we do as a company and who we are as a business.

So I encourage you to go take a look at it. It's a pretty cool place. And I think done for a very, very modest price.

Next -- or David?

No, thank you.

Joe Greff.

Bill, with respect to the fourth-quarter guidance, to share count, is that a weighted average, assuming the dilution from the preferred hits November 1?

It is, and it also assumes there's no share buyback left. It doesn't include any share buybacks that might happen in the fourth quarter.

Dennis Forst, with KeyBanc.

Yes, I wanted to get a clarification on corporate overhead for the quarter just completed. It was -- I'm sorry, $27.3 million for the quarter?

Yes.

Right, Bill?

Yes.

Okay, that includes the lobbying costs and the severance package?

It does, and it also -- yes.

So, and the fourth quarter will include lobbying charges?

It will include lobbying charges, that's correct.

Okay, so the next year, assuming a normal year of operations, the number I'm thinking is somewhere in the $60 million range, maybe even less than that. It was $55 million last year?

Yes. You can definitely be comfortable that corporate overhead will decline next year.

By a lot.

By a lot. I think the number, somewhere in that $55 million to $60 million range is probably right.

Right, and I'm trying to think ahead -- there's not much lobbying in next year, unless you do something in Charles Town?

That's right. Well, you know, the problem with lobbying is it's somewhat of an unpredictable type industry, in that stuff pops up that, quite candidly, you have to react to. But in terms of what we can see today, what's going to happen next year, I think you would say that the only thing that's out there is table games in West Virginia.

Right. And when will the Q be filed?

One day before the due date, which I think is November -- the first week of November.

David Katz, Oppenheimer.

If I could just go back to the maintenance CapEx for a minute. If I look at sort of how you've been running in the past, and I think -- I just want to make sure I heard you right -- you did say $29 million for the fourth quarter, which is quite a bit higher than what you've been running. And then the third quarter is a bit lower. What's going on there, if anything?

Well, there's some timing issues relative to when the properties started spending the money. You know, at some level I would think that maintenance CapEx might be a little high. But when we surveyed our properties, those hit with the original maintenance CapEx budgets, nobody was indicating they had any excess monies available, and that they were going to get it all spent in the fourth quarter.

The more likely realistic scenario is that some of this money will spill over into the first quarter of next year.

You know, with the gaming show coming up, and trying to see what the new manufacturers -- or the manufacturer's new products may be out there [to the] properties just holding on to make sure they have enough powder if they see something they really like, to be able to get that ready to be on the floor in the early part of 2009.

Part of that is we've historically had properties who have wanted to borrow from the following year's budget to buy slot machines. And we've tended to discourage that practice in terms of, if you want to buy stuff in the fourth quarter, don't spend all your money in the first and second quarters.

Okay, so if we want to think about a run rate for next year on an annualized basis, something in the low 20s is probably a reasonable number?

Well, I think maintenance CapEx next year should be between $75 million and $80 million.

Okay, perfect. And one last one. With respect to Lawrenceburg, just looking at the updated press release, you're talking about capacity for a pretty big slot floor there. Are there any aspects of that project, including sort of slot capacity, that you could consider altering or changing, depending on what the outcome in Ohio is, or any other sort of global factors?

I will let Tim answer that.

There sure is, and obviously we are watching what's going on in Ohio. We are watching what's going on with the impact of the racinos around Indianapolis. And we are looking at potential -- if these impacts are there -- to look at our accounts for gaming product. And we have the flexibility to not put as much product on the floor. If that option is available to us, we will certainly look at it.

But those decisions don't have to be put into stone until sometime in the late first quarter of next year, because it will give us -- it's only going to take us about three months or so to finalize the layouts and get the product on the floor.

But we should say, to be fair, Tim, that the bulk of the capital spend is going to continue regardless. And I will, again, add this commercial that now having seen what the final product is going to look at, it's going to be very exciting -- very, very compelling in that market.

And the only thing I am referring to is the gaming product on the floor. Everything else, as Peter said, it is committed and will open up in July of '09.

There are no more questions at this time. I will turn the call back over to you.

Very good. We thank you all for tuning in this morning. And let's hope that the market improves next quarter and beyond. Thanks very much.

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