PENN Entertainment Inc (PENN) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the Penn National Gaming Fourth Quarter 2008 Conference Call. During this presentation, all participants are in a listen-only mode. Afterwards, we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded on Thursday, February 5th, 2009. I now have the pleasure of turning the conference over to Joe Jaffoni, Investor Relations. Please go ahead sir.

Thank you operator. Good morning and thank you for joining Penn National Gaming's 2008 fourth quarter conference call. We'll get to management's presentation and comments momentarily, as well as your questions and answers. But first I will review the Safe Harbor language.

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 in the Company's filings with the Securities and Exchange Commission, including the Company's reports on Form 10-K and 10-Q. Penn National assumes no obligation to publicly update or revise any forward-looking statements.

Today's call and webcast may also include non-GAAP financial measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures 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, I'll turn the call over to Peter Carlino, the Company's Chairman and CEO. Peter?

Thanks Joe. I wish I knew what you said. You know that story or that script reminds me of the story that most of us know about the guys in prison who tell the joke so often, they don't bother with the words they just say number six and everybody laughs. I mean I might suggest that we just designate that number six and you say number six applies and we get going in the future. Because it's painful.

Well listen, welcome everybody to our fourth quarter earnings call. We, I suppose, are happy to report another less than lustrous quarter, but one that is in line with our expectations and one in line with events elsewhere in the industry. I suppose all in all, it's not too bad.

I should tell you at the outset that January looks like it's moving along okay and in line again with our expectations.

At the outset, let me make a comment about our [Byzantine] quarterly release. As you might guess, it was both painful to write and I suspect equally painful to read. You may have some questions and I'm sure, we hope, we'll be delighted to answer some of the accounting mumbo jumbo that our accountants have forced us to deal with this quarter. I don't think they have any material impact on the Company, obviously but we're happy to entertain any questions that you might have.

In the meantime, despite what you might read about us out in the newspapers and so forth, our real focus and our real concentration day to day here is on running the business. Tim and, by the way, our entire management as usual is here today to answer your questions. And our entire group here and at the properties are utterly focused kind of tightening, polishing, doing the job ever better so that frankly I think we are doing a pretty good job of making the best of the lemons that we've got as we look forward to 2009.

So, we start this year with kind of a hopeful look to the future. We, like you, are not any more enlightened about where it's going to be. Making estimates about future earnings is tough in this environment. I think you know that. But sitting here as a company that has done just a spectacular job if I must say so of predicting earnings performance over a great many years, I think we have some credibility. But, as you might imagine, it's tough. And Bill and his team worked very, very, very hard to be as accurate as we possibly can.

So with that, I'm going to open the floor to questions and we'll get to where you folks would like to be. Operator, would you please do so?

Absolutely, sir. (OPERATOR INSTRUCTIONS) And our first question comes from the line of Felicia Hendrix of Barclays Capital. Please go ahead.

Hi, good morning guys.

Hi Felicia.

Hi. Peter, you just kind of touched on a point that was my first question which is the economy. And your guidance is assuming that economic conditions don't deteriorate further. And I was just wondering if you could touch on that? Cause you know it's impossible to determine what the economy's going to do. But that assumption does seem a bit optimistic to me.

Well I mean that is a very good question and, of course, the crux of the matter. I would underscore at the outset, we are not economists and make no pretense to being. So our knowledge about where the future is going to be is probably less enlightened than many on this call and I mean that quite sincerely. But we've got to make some presumption. And the presumption is that things are going to be about the same. Why don't I let Bill get to some of the assumptions that went into our thinking?

Yes I mean-- well I guess the better way of putting that is what we've assumed is, is that what we've seen relative to our internal trend line and internal business lines and expectations of what we've seen from customers isn't going to radically change. I think-- I really more put if that there's no catastrophic event that would cause a significant shift to an even greater despair by the consumer. If the consumer stays at the current level of despair and unhappiness, then I think-- we think these are pretty good estimates of where it's going to happen. I guess said another way, assuming we don't have another Lehman situation which causes panic, we feel pretty good with these numbers. If, you know, assuming that everything just kind of moves along as it has been for the last several months, basically that reflects what we've tried to estimate in our guidance.

It's very hard to know and then maybe Tim wants to add a word or two about just the operating pulse, the sense of what one gets from the numbers then in talking to management around the country. It's awfully hard to tell.

We've had a lot of bad weather this winter. I mean we never, as you know, those of you who've followed us for years, you never hear us crying about snow. We love to hear about other conference calls where people are moaning about the weather. Well if the weather's good, it's bad, it's up, it's down. But some years are better or worse than others to be sure.

But as an illustration we just had for example at Penn National last weekend just a spectacular Saturday night, Friday was extremely strong. Saturday was extremely strong. I don't know what that tells us. But it does tell me at least that not everybody's packed up and gone home. And we actually have customers that are showing up and in some cases in bigger numbers. That's not, again I can't tell you what to make of that except to say there is life out there.

But I think people feel much the way all that we do. They don't know kind of where they are and where it's all going. So there is a kind of tentativeness to all this that, as I say, sticking with that analogy of taking a pulse that we, you know, the patient's still alive. Tim, do you want to add anything to that?

No, the only thing I can add Peter is what we saw in the fourth quarter and I think we were pretty accurate with our guidance there. Is for the first month of 2009, we're seeing similar kind of results and we're satisfied with our January results. And as Bill said, unless something catastrophic triggers this again in a downward way, it's the best guess we have for 2009.

And customers are still coming. They're still gambling. Market by market you've got to look at it differently. But you know the spend per visit is generally down slightly. And in certain segments, we're seeing less overall trip frequency. But it's very similar to the second half of 2008, post-Lehman that we're seeing in the volumes in our business.

That's a good answer if I must say so Tim, thanks. Felicia, does that help?

You know it's really, really helpful. Tim, while we have you, I was wondering if you could just kind of walk us through what you're seeing in Illinois so far with the anniversary of the smoking ban? I mean everyone's expecting that to, the anniversary actually to provide easy comfort or--? Are you seeing that?

Well we're still some erosion in the business. Now Illinois in January had a very tough weather month--

But you don't talk about weather.

Yes, you're right. You caught me Felicia. The impact of smoking now is fully understood by the customers now. I don't think it was fully understood when it went into effect in January of 2008. But I still think there will be some effect in the first quarter. The other thing going on in Illinois right now that certainly has had a slight impact on our operations is the introduction of all that capital at Horseshoe Hammond, which probably hurts-- slightly hurts Aurora more so than it does Joliet. But it's still having some impact. So we're watching generally the improving conditions in Illinois but I don't think that you're going to see it immediately affect or immediately flatten out in the first quarter of 2009.

And then regarding Missouri performance, both on each side of the border?

Well we certainly are seeing in Kansas City the positive effects of the loss limit, especially on the table game side of the business, we're seeing very nice lift in table games volumes. And the net-net in Riverside has been positive for us. However, on the St. Louis side and realize Alton is a smaller operation, we are seeing some dilutive effect with the St. Louis, Missouri operators now taking advantage of that, negatively affecting our business at all.

Okay. That makes sense. And then just finally, I'm wondering if you've made any further corporate bond purchases since your Q?

Any--?

More corporate bond purchases?

No we haven't.

Okay, thank you.

Thank you for your question. Now we're continuing on, our next question comes from the line of Larry Klatzkin from Jefferies. Please go ahead sir. Your line is open.

Hey guys. So how many high-yield bonds do you have invested right now?

It's basically unchanged from where we were last time, representing about $50 million.

Alright, alright. The 3% surcharge in Illinois, does that, given how it was put on, Peter any chance that goes away?

That's an interesting question Larry. Look Illinois's been a very difficult state for us, as you know. It should be one of the best states in the United States. It's a great place to do business. It just has been an incredibly awful political place to do business. And the 3% is probably the most outrageous piece of legislation I think of any of us has ever seen. I could say it plainly and clearly.

I mean a situation as you know where they targeted one industry to support another. Just know of no other case. It's, clearly in our judgment, unconstitutional. The lower courts in Illinois said it was. The Supreme Court unfortunately found a way to say that it wasn't. But the truth of it is they decided that the racing industry was hurting, so let's take some money from the casino companies. Oh, and by the way, let's not take it from all of them because there's a few guys down state and votes that we need that, let's be honest, that and this has all come out publicly, that would suggest we just won't get the casinos downstate. We'll just get the guys around the Chicago area. I mean it's absurd. We now know that the governor was looking for money and that significant money went in his direction. And we'll let the courts and others look at that.

So look we were appealing this thing the first time around. We have fought it literally tooth and nail. We're taking this, if it's accepted, to the US Supreme Court. I might let Eric or Jordan take a second to talk about that. I'm sorry-- Tim.

No, we got new news that--

Well Tim says we've got some new news about that. And of course, that was the first case. In the second instance, of course, it was reapplied. Governor signed it even after he had been arrested, which is, just shows the audacity of this guy. So look, that's a very bad piece of news we intended-- see if-- well why don't we just go to it. Jordan, you know something I don't know yet?

On the legal front, we're just continuing to fight to pursue both of these cases. The first case, the one Peter alluded to, we've brought to the US Supreme Court and we're waiting to get their decision on whether they'd hear it or not. And with regards to the second case we filed a complaint similar to our first in January. And it's back to the AG and the one track that has intervened in that to file an answer. So both of those matters will continue. But it'll still be some time before we get a decision in either case.

The encouraging news Larry, we just heard that a bill was introduced in the Illinois house to amend this legislation and remove the 3% tax. And given all of the federal allegations about how this legislation came down, we think Illinois can take the right step and do the right thing and clean up this corrupt legislation.

Yes that is-- I hadn't heard that yet Tim. Thanks for sharing that. Look, that's what they ought to do. This is just a bad, bad piece of legislation. And we all know now kind of how it happened. Not that we didn't before, we just couldn't prove it. So, maybe there's some hope that thing will get rolled back. There may be hope in the first case. But that money's still in escrow with the US Supreme Court. You know all how difficult it is to get heard by the US Supreme Court. But we think this is a significant constitutional issue here and also now one involving corruption. So maybe it will be appealing enough.

Okay well great. Is there any-- as far as regulation goes, there's some talk of reversing the tax on the smoking issue in Illinois. I know there's another thing you're trying to do in Maine. You know the Governor Rendell proposed some kind of video slots at bars in Pennsylvania and also talk of table games. And your issue of table games in West Virginia. Can you talk about some of the regulatory issues?

My God, that's four questions by my count. Let's go through them quickly. I haven't heard anything about a smoking ban repeal in Illinois. The situation in Maine the governor has made very plain. Look there's always going to be somebody coming out of the woodwork. But the governor's made pretty plain he does not support it and won't support it. That's very, very clear. Let's see, West Virginia we remain well engaged on that process. I don't know how much we want to say about that, probably not a lot.

Still in education mode.

Yes.

Still meeting with community leaders and listening and educating on the impact that Maryland's going to bring to West Virginia and ongoing expansion in other jurisdictions.

The issue about that and I-- look I daresay we have a fairly sophisticated political team here that does its best to represent the Company as well as we possibly can in each of the states where we do business. Here the sensitivity is about what's the right time to do it? You know turnout is a huge factor; the kinds of people who turn out at various elections. Obviously a huge difference between a presidential election, general election, and a primary, where scarcely anybody shows up. So we have to be careful first to sell the message, which we are. And then pick the right time or the optimal time frankly to take it to a vote. And we're very focused on that, as you might guess. I daresay that every week that I see a report coming from Eric Schippers and his group, there is some comment about what they're doing down in West Virginia. And the fourth question was?

Rendell's--

Rendell, well what can I say. Listen that issue has been on the political horizon for at least 25 years that I can point to. I think it has a very slim possibility of occurring. Obviously there's lots of tavern owners who would love to have a piece of that. I don't think it's in the public interest to do that. I mean the argument has long been that you should be able to get in your car and drive to a facility as a matter of choice. And I would be surprised that-- I know what the governor's trying to do I think. It's good for revenue of course and it does help out a lot of his constituents. But my sense is the legislature probably doesn't have an appetite for that.

Alright and then sorry for so many questions. Just housekeeping, capitalized interest, CapEx fourth quarter and total debt at the end of the quarter?

Sure. Capitalized interest in the fourth quarter was $2.45 million roughly. The cash position, we had $746 million in cash. On a debt level, total debt at 12/31 was $2.43 billion, comprised of $123.7 million on the revolver, $200-- roughly $240 on the A and $1.596 billion on the B. Then we had some other capitalized leases and announced that we still owed the Pocono Downs or the Mohegan's for the sale of Pocono Downs and that price adjustment. Those two net out to roughly $20.3 million. And we have the 2 bonds for $250 million and $200 million, giving total debt at the end of the quarter of $2.43 billion.

On a CapEx perspective, we've spent $71.9 million in the quarter. That represents roughly $50.2 million on project and roughly $21.6 million on maintenance CapEx. The project CapEx primarily was spent at the three facilities of Lawrenceburg, Penn National, and Bangor.

Relative to guidance, in the first quarter CapEx, we're looking at total CapEx of $120.6 million. And that represents $85.5 million in new projects plus $13.2 million for Joliet. And then maintenance CapEx of roughly $21.9 million.

Let me interject, since we're talking about capital and I should probably recall my days in the military when the warning was always never volunteer ever for anything. But let me volunteer that Lawrenceburg is actually progressing very, very well and is on target to meet both its budget and its scheduled opening late spring, early summer I guess. And Joliet also is well on its way. We've long since proved the final plans. We like what we're going to be doing there. And think that that property will benefit considerably from a very, very attractive investment of capital. It's been a long, long time since that property's seen, even a dollar.

And Peter we're under construction in Joliet. It started January 4th. So the project is underway.

So that's terrific. And those, as you recall now, are the remaining capital commitments that this company has made. There's nothing beyond that of any magnitude on the horizon. So we're anxious to put that capital in place. We're hoping to see the kind of return that we expect. And then we begin the happy process of, I trust, reaping the rewards of our investment there and elsewhere.

Guys and I know Peter, you're really upset about the new governor coming in, in Illinois.

Well you know quite a few years ago on one of these calls I described the governor, maybe in politically, as the Robert Mugabe of American politics. And I'm not sure many understood who Mugabe was at that time, but he's a guy who descended on a perfectly fertile and wonderful land and managed to rape and pillage and leave it in tatters. Well that's what this guy was doing at the time and clearly time has proved that that's what he's done. So as I watched him on the late night talk shows, you're looking at a guy who's completely deranged. But we're past all that and let's just move on.

Thanks guys.

Thanks.

And thank you for your question sir. Continuing on our next question comes from the line of Joe Greff of JPMorgan. Please go ahead sir. Your line is open.

Good morning guys. I have a quick question for Bill and then I'll go to a big picture question for you Peter. Bill, for the 2009 full year EBITDA guidance, how much do you have contemplated for pre-opening expenses related to Lawrenceburg and Joliet?

Pre-opening-- it's really de minimus for Lawrenceburg and also for Joliet because of the fact that we're rolling from an existing full-scale operation. So we're not going to have a lot of extra payroll or any of those types of things you normally associate with pre-opening. We are going to be closed. We're expecting to be closed for a couple days, midweek for the transition over. And those were reflected in our numbers. That-- who knows how much that will be exactly, but obviously we'll be trying to minimize the impact of that as much as possible.

But Joe there could be some construction disruption at Joliet, which is built in. As you probably recall at Lawrenceburg, it's a brand new, separate facility adjacent to our existing operation. So one of those happy opportunities that turn out the lights in one side and turn them on, on the other. So we expect and hope to accomplish that with minimum disruption.

Okay and then both for Peter and for Bill, after months of looking at maybe certain assets to buy in various gaming markets, not that I'm believing all the newspaper articles that I read, maybe can you give us a view on maybe what you've learned? Are there markets that are more or increasingly less favorable? And can you maybe just talk about sort of asking prices? You know are they coming down in any meaningful way? And just kind of any broad comments on that would be helpful in terms of how you're thinking about acquiring cash flowing assets and maybe look at it versus buying back your equity or debt. Thank you.

Yes I mean that's a tricky question. Right now our cash is kind of sitting quietly. And so it shall remain. I think as we've watched New Jersey sadly, that's a market that at the moment is significantly less appealing to us. And that shouldn't be a surprise cause there is much more bad news coming, as you can guess, with the opening of the LV Sands property up in Bethlehem and eventually I suspect you'll see one or two of the Philadelphia properties open. They will get there. And that's nothing but bad, bad, bad news for Atlantic City.

On top of more slot machines at Aqueduct Racetrack in New York state as well.

Yes. And talk up near Monticello and on and on and on. So it's going to be a while and it may be a long while before the picture changes in Atlantic City. It's not a pretty picture.

Las Vegas has the issues that you know of. And we've not been actively pushing anything. I-- by the way I have a sense that broadly that anybody's made much adjustment in prices. And I'm no expert in the so-called distress deal. I'll get everybody-- you know everybody I know is running around looking for distressed opportunities. There is, as you all know better than we, billions of dollars out there looking. I haven't found anybody that's actually found much.

Because these assets are not yet being pushed out to the market for a whole host of reasons. Maybe in another time, banks would be much more vigorous, if I can use that term, in trying to get this paper off their books. But right now, my sense is that nobody's in a hurry to do that. And the banks who would normally be forcing this, lenders are kind of eyes looking up at the sky kind of hoping that they don't have to. Because obviously they don't want to have to write this stuff down any sooner than they have to.

So I mean we're in a kind of stasis right now. So that's my read. Very unprofessional read at that. But the way I sense it. So I don't think it's going to get better any time soon. And we're just going to continue running our business.

So I have nothing profound honestly Joe to tell you beyond that. Don't pay any attention to what you read in the papers. I haven't read anything that had a shred of truth to it. So when something good happens or if something interesting happens, you all will be the first to know.

Okay great. And then Bill the tax rate for the full year, for 2009?

We expect to be 45.

Great. Thanks guys.

Thank you for your question Mr. Greff. 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 all.

Good morning.

Hi David.

I just wanted to follow up on a couple of the other questions. Looking out across the portfolio as to what you're contemplating a few things that's in your guidance. And Peter you made some general comments about Lawrenceburg. And we're really I guess getting that in the back half of the year. But what are you presuming let's say there and Bangor that's in your guidance? Any color you can help us with there would be good.

You know I think listen-- I think what we've got is we've clearly had some expectations that once the property opened in Lawrenceburg that we're going to-- the products going to be very favorably received and that we're going to expect an up tick in business. You know obviously at this point in time it's difficult to say how successful that will be. I'd say our guidance does not assume the same level of success that Harrah's experienced with their property in Chicago. So from that perspective, I would argue that the guidance is conservative. However, we're also being a little bit cautious there. And I think-- but we do have some reasonable expectations.

Relative to Bangor, we're assuming we're going to get, for guidance, we're assuming we're going to get the costs under control to and the revenue will grow sufficiently, especially as we get into the better months up there, which are the summer months, that we should be able to overcome the expenses. But candidly, our expectation is that the property will be roughly in line with what it did in 2008 on either level.

Yes I think, clearly the economy has had an impact and maybe a disproportionate impact in Maine. And maybe we're seeing even an, last though last year at least, a tiny effect of that in Charles Town. If you look at properties where people have to drive a long way, it's my, again unscientific view that there probably is some impact, people making fewer trips perhaps in an effort to economize.

Tim, I think you've generally seen that we're seeing people at our properties, but the spend's a little less.

Yes, that's generally what we're seeing across the portfolio of businesses. And we have seen, even with the Indiana racinos opened, we are seeing weekend periods in Lawrenceburg David that are very solid through the month of January that certainly we expect when we add almost 1,200 incremental gaming positions in a much more consumer-friendly environment. When that capital does come online, as Bill said, we have conservative, we believe conservative expectations for that in our guidance. But we certainly are encouraged with what we're seeing in the business right now, even post Indiana racinos during the weekend period.

Perfect. And one more quick one, I guess which is for Bill. In talking to a number of the operators around, they've indicated a little bit of a softer stance from banks with respect to amendments and maturities etc. And as that-- if you could make a broad comment about what your view is on the bank market and the credit markets you know as something that's kind of an important element if you do happen upon something that you'd like to buy. You know having a functioning credit market as we've all talked about and a functioning bank market is kind of necessary. What are you seeing in the last 30, 45 days in that respect?

Well I mean-- I think you have to break it down into two categories. One is what we're seeing is that clearly the banks that are dealing with distressed companies are not pushing as aggressively as we might like them to be pushing towards an ultimate resolution of their amendments as well as some of their other issues. But, so-- but that is and clearly we're seeing signs that they're trying to work with those companies and they're being, you know they're clearing extending a friendly hand and not pushing as aggressively as they might. And that's okay. That-- but that will eventually at some point, as long as you're dealing with technical defaults rather than what I call the big defaults, which is the payment defaults, I think the banks will continue to be reasonably friendly with those companies.

Relative to what might be happening in the credit market for normal credit seeking companies who may be just looking to borrow, we are seeing-- starting to see, at least the banks are reporting back to us, that we're starting to see some reasonable activity in the sub debt market for credits that are similar to our levels. There's always-- there's previously been borrowings that at the investment grade level. And that's starting to come down into the BB credit which is where we find ourselves. But it's not cheap. We're finding that those borrowings are happening in the 12% range, generally speaking, maybe 10% to 12%. But it's encouraging that at least some credit is getting issued to people who need the credit.

So to the extent that we were able to find a compelling opportunity that I think everybody could get on board for, makes a lot of sense for us. I'm getting the sense that we might very well be able to tap the credit markets and make that happen on the [subject]. Going to have to work obviously at a much higher cost of capital than what we're accustomed to. But at least there is credit available or starting to become available. I wouldn't say it's massive, widely available. But at least it's falling a bit.

10% to 12% is better than 15% to 18%. And then one last quick one, if there's any sort of comment you can make on any efforts going on in Ohio? Any updates there or any strategies in place?

We know a lot about what's going on in Ohio but we can't tell you.

Okay thanks.

There's nothing we can share. We have decided-- look we wish to be a player, any place, any time that there's a significant gaming opportunity. So you could always assume that we're somewhere there. And we're very much immersed in what's going on in Ohio. Our objection, as you well know, to what occurred last year was that it was a crummy bill. Not good for the state, certainly not good for the rest of us, the racetracks if you will or anybody else. It was just a self serving deal that but for the state of the economy would never have had a chance of going anywhere. And they just caught a wave that was kind of working for them for a while.

The reality is that it's probably too soon to go back to this again. However, there's just a ton of people who want to go there. So again our job is to sort of stay at the dance and kind of figure out who's got the best steps. And stay in tune with those people. I mean I'm being vague of course. But you get the picture. So we're utterly engaged in Ohio now and will always be until we get an outcome that is positive for us. So--

Got it.

How's that?

That's great. Thank you very much.

Thanks Mr. Katz for your question. Continuing on, our next question comes from Betsy Gorton from Goldman Sachs. Please go ahead. Your line is open.

Good morning. Could you guys describe the process in Maryland from here forward? When do you think you could hear back? And what's your kind of rough estimate on when you could have a property open by?

Steve, why don't you--?

Yes, as you know, it's pretty premature at this point in time. They only received bids on Monday at 2:00. And quite frankly, they're still trying to figure out what they got. So at this point in time to outline a timeframe, they've suggested to us that they would like to award the licenses by the fall of this year, which I think is more realistic, the fourth quarter of this year. They have provisions in the statute that require the buildings to be constructed within 18 months after the award of that license, with the potential for up to 2, 6-month extensions. Given how other states have operated in introducing this industry, given how every state seems to be smarter than the last in rolling these things out, I would expect that you're not going to see any facility online in Maryland until early 2011, at the earliest.

That's at the earliest.

That's right.

Absolutely. Totally agree. You know their rule making is-- in all of the stuff that has to be done and in a new state, they really kind of don't know yet what they don't know.

Okay. And then in Kansas, are there any changes there? Anything that they could do to make you interested in that market again?

In the entire state or which region?

Or developing an asset in one of the available locations in Kansas?

Well I think the Wichita market remains attractive, the south-central Kansas market remains attractive even in light of the current legislation. That has a new deadline set for April 1st. And we're considering our options.

Great. Thank you.

But I should say there's some reasons I think that Kansas may not be as appealing as-- well you've seen the results. Nobody's actually signed up to go forward. So there are some problems there. And again that's another one where we're completely engaged. We'll go forward if we see the right opportunity. If not, we're just not going to do it.

Okay, thanks.

Thank you for your question. Continuing on, our next question comes from the line Celeste Brown from Morgan Stanley. Please go ahead. Your line is open.

Hey guys. Good morning.

Good morning.

I was pretty impressed with your margins in the fourth quarter. It seems like where you've-- where you have mature properties, you were really able to step down in the cost. How much additional room do you have to do that if things worsen? I guess tying back to Felicia's question. How much additional flexibility do you have? Thanks.

Celeste, obviously we've adjusted our cost structure to correlate with our business volumes. If things get worse, we certainly have more room to adjust our labor expense and other discretionary spending in the marketing areas. We feel right now we've made a number of further adjustments in the fourth quarter to our expense structure to make it consistent with business volumes in a post-Lehman environment. And we feel we're in a good position right now from a margin standpoint. If things get worse, we do have some more flexibility to react.

Was the full benefit of the changes you made in the fourth quarter apparent in the numbers or will we see more in the first quarter?

I think you'll probably see a little bit more in the first quarter. We had a fairly large reduction in force in Lawrenceburg for example that just really occurred in the latter part of the fourth quarter that will have a positive effect in the first quarter.

Thank you.

Thank you for your question. Continuing on, our next question comes from Ryan Worst from Brean Murray. Please go ahead. Your line is open.

Thanks. Good morning guys.

Good morning.

I think Tim just might have answered one of my questions. And that was in Lawrenceburg, could you talk about the fourth quarter trends? And if anything like severance may have impacted the margins there in the fourth quarter?

Well we did have a fairly large severance expense in Lawrenceburg in the fourth quarter. It was almost a million dollars. That was taken out. But that certainly will provide us an annualized cost savings well in excess of the severance expense, which you will see running through the P&L in Lawrenceburg for all of 2009. So that was there. And as I said before that Lawrenceburg continues year over year to feel the effects of the Indiana racinos. But in the first quarter, if the weather's been good on weekends, we're seeing some very strong business volumes on Fridays and Saturdays there that's very encouraging to all of us.

Yes, I mean we had a period this past weekend the weather was good and we had lines in our casino in Lawrenceburg that lasted for three to four hours on Saturday with our parking capacity maxed out. So that was very encouraging. We hadn't seen that happen in a long time in the Lawrenceburg business. So again as we get into February and March, if the weather is good on weekends, we're encouraged by what we saw in late January.

Okay, any idea on what caused the change or do you think it was just some pent-up demand cause of the weather? And then how much in annual savings did you cut in Lawrenceburg? And then my final question is probably for Peter, it looks you guys are pretty excited about Maryland. So I was just wondering what you saw in that environment that provides you with confidence that you could generate a good return, given the tax rate there?

Let me answer the Lawrenceburg question and I'll turn it over to Peter for Maryland.

Thanks. Thanks Tim.

Certainly Ryan we did believe there was some pent-up demand for the weekends given the fact that midweek we-- last week we got almost a foot of snow in the Lawrenceburg, southern Ohio market. And we've also-- have some new management in place in Lawrenceburg that's thinking about marketing differently than we had in the past, which is also producing some encouraging results. And to answer your other question about the annualized cost savings of the actions we took in the fourth quarter, it's going to be somewhere between $3.5 and $4 million of annualized cost savings.

Okay great. Thanks.

Thank you.

Maryland is a trickier question. Look, we are not happily enthused about Maryland. I shouldn't say that and I don't mind saying it publicly because we've made an effort, Eric, his team, Steve have spent a lot of time in Maryland. We've tried early to make the case that which a lot of politicians have not yet figured out that you tax something more, you get less. And clearly there's a line along the curve when-- where that occurs.

We've seen states for example where you've got limited license presence with relatively high taxes. But Pennsylvania might be an illustration where at least the operators can make a decent investment and make an adequate return. Maryland has gone over that curve of course. And at a 67% tax rate, there is nothing useful you can do.

So to make it work there and by the way we're there simply because we got to be. It's right next door. We need to be anyplace that there's a reasonable gaming opportunity and a reasonable opportunity for us to get a good return. And the emphasis is always on return. But I can tell you, it's going to take an extraordinary discipline to spend the absolute minimum amount of dollars. We may set some new record how low we go in expenditure there, consistent with the law, to build an attractive facility. I mean look you know what we're about. But believe me it's going to be very, very, very tough to do that.

We've all seen tons of operators get carried away with capital spend. That's not our style. And in Maryland, it's going to take that challenge to a new level. So how do you make it attractive? You're still in the customer service business. And yet get the kind of returns that you know we want.

So actually Maryland is a challenge. I think we're going to get there. I think we'll do a very nice facility. I think it will be successful and meet our performance targets. But it isn't going to be fun and it isn't going to be easy. How's that?

Yes that's a good answer. What is the minimum spend required there?

For every 500 slot machines, you've got to spent $25 million in capital plus for every 500 machines you also have to pay a $3 million application fee.

Okay, great. Thanks.

Thank you for your question sir. Our next question comes from the line of Dennis Forst of Keybanc. Please go ahead sir. Your line is open.

Good morning. All the good questions have been taken. So I just want to go through some of the Byzantine part of the income statement if I could. And these are probably mainly for Bill. The lobbying costs that you alluded to in the headlines, that's in corporate expense Bill?

Yes.

Okay so that if we back that out, is that a fairly good run rate going forward? Something in the low teens per quarter for corporate expense?

Actually I think we're looking at something a little more-- we're probably more in the middle, high teens in terms of our expectations on corporate overhead.

Okay.

For next year.

And then the other charges for the stock option charge, the severance charge that were in the editorial, where were those?

Stock option charge was also in the-- in corporate, stock compensation--

And the $1 million plus of severance, was that at Lawrenceburg or was that spread out among the properties?

A little less than a million was in Lawrenceburg. The rest was spread out at the other properties. It's in the (inaudible)--

Okay. Yes and then there was other income of $4.9 million. What did that consist of?

That's primarily currency translation. We've got a FAS 109 basically has a requirement to take-- we have a fairly large reserve for a disagreement with the Canadian government on the allocation that where we earned our management fees at Casino Rama. And what you see there is the impact on the currency-- on the relationship of the US dollar to the Canadian dollar in the fourth quarter where we actually-- we've been taking a lot of hits through the year.

Yes, saw that.

And this was the year-- fourth quarter went the other way. So it's basically a mark to market on that Canadian tax liability.

Okay, so and we'll continue to see that line go--

Go up and down and (inaudible) eventually some day-- we've been having this argument with the Canadian government since I joined the company in 2001. So it's moving along at an incredible pace that is just mind boggling. And I-- but you know we're hopeful that maybe this year or next year we might actually make some progress on that.

To be fair I should add-- let me squeeze in here Bill, it's not actually us against the Canadian government. It's the US government against the Canadian government and we're holding the bag so--

Right.

Okay.

There's an argument how much of the income is US versus Canadian. And we have to get the US-- have to get the IRS and the Canadian government to agree on an allocation of the income. And--

Yes, that's going to happen real soon I'm sure.

Well it's been seven years in the making so far so--

Next question has to do with the promotional fiasco in Pennsylvania, in Harrisburg. How much was that? And was that in Penn National Raceway's fourth quarter?

Dennis it was-- it was an error in issuing free slot play to customers. Probably represented about $1 million EBITDA hit that's reflected in the fourth quarter of Penn National's--

That's not much. Okay, I thought it might have been higher. And then lastly, back to Bill on shares. Can-- how many shares are outstanding today, common shares?

Well I think-- probably just to get to the hunt, we obviously had some issues in the fourth quarter around the accounting treatment around the impairment. We expect next year the diluted share count to be roughly 110 million.

Yes, that's in the press release.

Right.

But-- so how is that composed?

Outstanding shares-- so there's actual outstanding versus dilution. I believe the outstanding is around 78. As far as the dilution, you've got to factor in maybe 79. As far as the dilution impact, you've got obviously the Fortress Centerbridge transaction and the option to be the difference between the 79 and the 110.

Okay and the Fortress transaction, do you go the most conservative route and use the 28 million?

Yes.

And then so if we add 28-- so about 100 and then dilution gets it to 110. Okay I see that. Now why in the fourth quarter was it 19.9 million diluted shares deducted because there was a loss?

Well there's a way-- there's a weighted average-- well on the net loss, the way the Generally Accepted Accounting Principles work, if you recognize a net loss in the period, you do not count your diluted shares in your calculation of earnings per share.

That's right. And all the Fortress shares were not outstanding the whole fourth quarter.

Well they're not-- they're in the diluted share. They're actually in the preferred equity position. So they're not a common stock. So they get counted as a diluted share count not as a basic.

Yes.

So they're-- that those shares get pulled out because we had a net loss. We don't--

Yes, but the reason it was 19.9 million and not the 27.7 was because they weren't all outstanding in the whole quarter. The last piece of the puzzle closed in the fourth quarter.

Right. Well what we've got-- in the table that's in the press release is reconciled-- our expected number against the guidance.

Yes.

And that would be the weighted average calculations are there.

Got you. Okay. And then for the guidance, let's see I had one other question. No, it had to do with the fourth quarter. If we backed out all the noise in the fourth quarter, which you usually do, what do you think earnings per share were in the fourth quarter and what tax rate should we use for the fourth quarter?

That's a great question. The reality is, is this thing between all of the transactions that happened in the quarter, between the lobbying expenses, between the separation agreements, between the net loss, all of that stuff has-- it completely distorts your effective tax rate.

What we've done and there's a reason we broke it into these three separate reconciliations. Because trying to bring it back to an EPS, apples-to-apples comparison is an academic exercise that's probably beyond my intellectual capacity to make it happen. We actually had a table. I took it out because I think it was so misleading that it ends up with the results that doesn't really properly reflect reality.

Reality is we pretty much hit our number. From an operations' perspective, we've hit the number or at least that's my view on it, after backing out the lobbying expenses. And then from an operations' perspective, on a below the line issues, you've got these other issues are really non-recurring type item or items that are really kind of noise. So it's my view that we're probably within a penny or two, if I could figure out how to get a reconciliation that I could put on paper that would show that. That's my-- that's what my intuition is as to where we're at.

If I wanted to just do a simple exercise and back out the impairment and the lobbying charges and then apply a 45% tax rate, is that a reasonable way to look at it?

As good as any other way.

Okay good. Thanks a lot.

Thank you. And our next question comes from the line of Steve Wieczynski from Stifel Nicolaus. Please go ahead. Your line is open.

Yes, good morning guys. Just first, in the release you basically said it sounds like you might delay or cancel the hotel tower in New Mexico. Any thoughts on timing there and basically your thoughts behind that?

Well basically the issue there is-- you know what we're doing is we've been looking at what the construction costs and we're also-- we have some views in terms of what the returns are. At the current numbers that are coming back from the construction department, it doesn't hit our thresholds for an adequate return. And we don't do the project. One of the things about Penn is we've been very fiscally disciplined about making sure that we don't-- not to say we don't make mistakes, but we don't start off knowing we're making a mistake. We may sometimes end up with a result that's different than what we expected. But we don't start a project knowing that we've got a problem. So--

I've got a favorite line that I've used for many years in the construction business. That is, if you can't make it pencil and paper, it sure as heck isn't going to pencil. You know when you actually go and build it. It only gets worse. So there's never good news.

I'll just give-- making up numbers, but at $20 million it'd probably be a swell project. At $30 to $35, it's not so cool. So we'd love to have a hotel there. We think it would be a tremendous plus for the property for a whole lot of reasons. There clearly is demand in the market.

I think frankly we've got to go back and take another look at the design and look at costs and maybe the method of construction. It happens to be an area, by the way, where there's just no workers, no contractors, no materials. It's just sort of an odd place to kind of develop a project like this. So that we still have the same interest. We've just got to get the cost to work.

And we're looking at the program right now. It's clearly not a dead project. But we obviously got to put a sharper pencil to it and see if we can make it work. And we'll probably have something more definitive later this year on how that project's going to proceed.

Okay got you. And last question, basically if you look at your slot spend for 2009, do you view this is as opportunity I guess? I mean just you're so much better positioned than a lot of your competitors to keep your floors a little bit fresher and the opportunity to potentially to take market share?

Well certainly against some competitors out there that have very tight constraints on capital, we do think we're going to continue to refresh our floor with new product as it gets introduced and as the consumer reacts to it. The effect of that though, you know takes a couple years to realize. It's not going to be something I think you should build into any of our numbers in 2009 because we're only going to refresh typically 1/6 to 1/7 of our floor, which is typically what we've done over the years.

I do think if competitors continue to have tight constraints on capital in markets we're up against them, that over time it will have an effect on revenues in those businesses. But that takes a couple years to fully develop.

Okay, got you. Thanks guys.

Yes just to add on. Let's put it this way, if it doesn't we'll be revisiting how much we spend on slot machines.

Thank you gentlemen. Continuing on, our next question comes from the line of Larry Haverty from GAMCO. Please go ahead. Your line is open.

Hi. I have questions on Pennsylvania and Nevada. You guys are doing pretty well in Pennsylvania. What do you think the potential is on EBITDA margins there? You're close to 20 in a terrible environment. And on a subsidiary basis, if someone could wave a magic wand and you would swap your property for the Las Vegas Sands property, would you do that? And how much of, in Pennsylvania, how much of that revenue is pure gaming and how much is non-gaming?

In Pennsylvania, at our racino operation, the revenues are about 80% gaming. Larry, I didn't hear the first part of your Pennsylvania question?

How high can the EBITDA margins go? They're pretty good considering the 53% tax rate.

Yes I think once we get the place fully stabilized and continue to grow our business, that we're going to get close to 20% EBITDA margins in that business.

But that probably would be the peak at that tax rate?

Yes I think short term, we can get to 20%. If business volumes grow, it could go slightly north of that.

And would you swap for Bethlehem if you could?

No. I mean that's sort of-- one of those hypothetical questions. No, Penn National is a great property. We're right in the center of the state. We don't have a lot of competitors around us. I mean their problem is frankly they're spending too much. I mean it's going to be a great facility. They've got a nice market to draw from. But no, I wouldn't do it for almost anything.

And--

And I think they're going to be very hard pressed frankly to get the returns that they need on their capital spend. I mean-- (inaudible)

We'd lose the horse racing operation, which I know is near and dear to Peter's heart.

I want to go into Nevada for a second, based on your comments about the banks. You've got an interesting political situation in Nevada where you have thousands of jobs in this industry. And clearly MGM and Las Vegas Sands in financial (inaudible), both of them for various and sundry reasons and not the least of which money they're spending in Nevada. And you've got Harry Reed-- isn't Harry at the end of the day just going to really get on top of these banks to say, hey guys, let's lend some money to these guys? We just don't want to throw these tens of thousands of people out of work. We've already got Station in bankruptcy. I'm just interested. You're observers of this. And it's not unimportant for your business. Kind of the cosmic question.

Yes, I don't know how much ability you've got to force banks to-- I suppose to some level, you somehow can get some nice pork belly spending directed at a bank that's got a problem there maybe. But I don't-- we kind of assume that it's a pretty straight up game. And that things are going to play out the way they're going to play out.

Just like Illinois.

No. (inaudible) It's not Illinois.

Not Illinois. Nothing's Illinois.

Alright, Louisiana. Okay, thanks a lot guys.

Thanks Larry.

Thank you gentlemen. Our next question comes from the line of Ken Ho from Keybanc. Please go ahead. Your line is open.

Hi, good morning. I know Penn is looking for some acquisitions, probably pretty open to any opportunities in every market. Can you just kind of talk about what type of personality property you're looking for? Maybe in Vegas? And what multiple ranges you would deem attractive?

You know look-- I can't-- we can't say on a public call all the things that we're thinking about. Obviously that wouldn't be wise. We'd love to give you the perfect answer, but I don't think we can.

We've been real clear. We'd love to get a strip property. But suffice it to say that we believe that the selling multiples now just don't reflect the current reality. And I think we're just at the beginning of thousands and thousands and thousands of new rooms and opening. And a further impact on this market over the next couple of years that is going to be profound.

Now where is it all going to settle out? I mean how do you make a purchase? I mean pick any operator there. You know who they are. If they were to offer a property today and say well look, we did X. Well that's great. But how do you buy into X when you know it's going to be X minus before very long? I don't know how to do that. And in any case, if we make the case that we ought to, any seller is likely to say well, gosh I mean I'm not going to sell for something-- you know the drill.

I think we have to let this play out longer and frankly see where it is. See where it goes. It's just too early now for us to even seriously think about doing anything. But our interest is clearly and I think pretty much only, pretty much only, in a strip property, something that will benefit our current customer base around the United States and Canada.

Okay great. Thanks.

And thank you sir. We now have a follow-up from the line of Larry Klatzkin. We have had to close that line unfortunately. We're having multiple feedback from Mr. Klatzkin's line. We're continuing on next with David Forst from Keybanc. Please go ahead sir.

Yes, I had a follow-up. I was looking at your interest income line for the fourth quarter, $6.5 million. And can I assume that the interest on the high-yield bonds portfolio is included in that Bill?

Yes.

Okay. And you accrue that interest or you take it in when it's paid by the bonds?

We accrue.

Accrue. Okay and is that a fairly decent run rate then for 2009?

Yes, but it also includes our amazing interest income we're getting off the $600 million of cash invested in Treasury so--

Yes. That-- are you paying the Treasury?

Very close.

Yes, okay. Thank you.

Thank you.

And we're holding their money.

Thank you Mr. Forst for your question. Gentlemen, I'll turn it back to you now to continue or for your concluding remarks.

Okay, well hopefully this has been helpful to all of you. I think you know we go to extra pains to be frank and as open as allows us to be with you. And let's see how things progress. It's quarter to quarter these days. And we look forward to seeing 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.