PENN Entertainment Inc (PENN) 2009 Q3 法說會逐字稿

Welcome to the Penn National Gaming 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, Wednesday, October 21, 2009. It is now my pleasure to introduce Joe Jaffoni, Investor Relations. Please go ahead, sir.

Thank you, operator. And good morning, everyone and thank you for joining Penn National Gaming's 2009 third quarter conference call. We will get to management's presentation and comments and presentation shortly 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. 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 and 8-K. Penn National Gaming assumes no obligation to publicly update or revise any forward-looking statements. Today's call and web cast may also include non-GAAP financial -- or will also include non-GAAP financial measures within the meaning of SEC regulation G and when required a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP will be found in today's news announcement as well as on the Company's web site.

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

Thanks, Joe and good morning, everyone. It was another fun quarter. Not the best time in this world to be the consumer business, but I suppose on balance that we've done pretty well this quarter. I want to highlight that despite the current softness, if you will in the industry over, that for Penn at least, this has probably been the busiest period in our history.

There has never been a time where we've had so many initiatives, opportunities and things on our plate that we are actively and aggressively pursuing;, initiatives and -- or projects in Maryland, and Kansas, Ohio, Pennsylvania, West Virginia, Massachusetts, New York, and Texas. And that's plus some of the ongoing projects we have in places like Joliet and some expansion thoughts in west Virginia and in Pennsylvania. So lots happening and some reason for optimism about many of these things.

I thought, and as usual, we will get pretty much directly to your questions which I know will cover everything that we can even think about discussing. But I thought I would ask first -- we have, by the way, our full compliment of senior executives here in the room, too many in fact to introduce. Let me start with Tim Wilmott and ask Tim just to give you his view of just the broad economic environment in which we find ourselves.

Thanks, Peter. We obviously continue to feel challenged with the softening of the consumer on a macro basis. As you see economic data coming out regarding the deleveraging of the consumer and increased savings levels from them, it certainly is reflective of what we're seeing in our demand in our businesses.

Visitation continues to be flat and in some cases actually like in Lawrenceburg, showing growth. But clearly spend per visit and time on device is affecting many of our businesses, even though we showed slight revenue growth year-over-year. There is no question we're seeing a migration down in terms of customer worth, where they're still coming, but they're playing at lower theoretical levels than they had prior year and even in prior quarter. That is obviously affecting the top line of the business.

We continue to be appropriately aggressive in adjusting our cost structures, our labor levels, our marketing spend, with the mindset though that we want to continue to monitor and enhance the customer satisfaction levels so when this thing does turn, we will be able to accelerate the growth with the cost structure that I think is well positioned now. And we'll continue to adjust and hopefully when it does turn, we will benefit greatly from it. But if it does continue to slide, we will continue to make the modifications that we need to, to maximize the EBITDA performance of our businesses. But it is more of the same, as we saw in the second quarter. And as we highlighted in our results, the month of August was really the softest we saw in the third quarter and it is mostly reflected in spend per visit declines across all of our businesses.

Thanks, Tim. Obviously, there are some extraordinary expenses which are outlined here [so we watch closely] our efforts in Ohio. I suspect -- although I'm not going to start with an outline of what we're doing there, there may be some questions about that today and we can address that later. With that in mind, I think we're going to get straight to Q&A as always. Operator, please open the floor.

Thank you. (Operator Instructions). Our first question, from the line of fe Felicia Hendrix from Barclays Capital. Please go ahead, ma'am.

Good morning, guys. Tim, thanks for that explanation about what is going on in the regions. I'm wondering if just focusing on Lawrenceburg for a second, are you guys satisfied with how the property's performance has been thus far? And if that answer is no, I'm just wondering what are you doing to drive growth there. I know you highlighted some new amenities at the pavilion and maybe that is some of it, but maybe you could add to that.

Tim, go ahead. The answer is of course, no, you've already got that part of it Felicia, but I will let Tim fill in the blanks.

Felicia, the gaming revenues grew 12% year-over-year. We're not satisfied with that at all. We saw our turn style counts grow over 20% so we are getting a lot of visitation. We've dot a lot of market research in the third quarter of what the consumer feels about the experience. And overwhelmingly, the casino area and the amenities within the casino space have been very well received.

We're not getting growth in our VIP segments that we had hoped for. And we recognize and we're working right now in improving the nongaming amenities in Lawrenceburg. We're going to have a new meeting space complete late this year, early next year, so we can conduct more VIP special events in a high quality environment, on the casino floor. And we're improving the tired restaurants that are on that third level in that space, which will be finished in the late second quarter, early third quarter of next year.

Clearly, the opportunities are there to grow in the VIP segment. We're seeing good volumes as I said before. We're working and hopefully within nine, 10 months from today, we will have those nongaming amenities present in the facility so that we can take advantage of everything we've done on the casino floor throughout the entire facility.

Great. And -- Go ahead.

I would add that if you recall how that gaming floor is accessed, the parking garages on both sides enter on that floor. Certainly our goal is to make sure that the customer has one seamlessly positive experience from the moment he or she sets foot on that level. The planning -- in fact, we've already settled on the architecture. These programs are very exciting. We've already approved them. They're being drawn and priced right now.

I can tell you that virtually all of that floor is going to be done within the original budget, set by -- that we publicly released to you and approved by our Board because we have actually achieved some savings within that project, so we are going to be able to do that without a lot of pain. Then we will move down to the lower floor on the following year with some modest improvements there. I think we've pretty well done it at that point at Lawrenceburg. Tim gave you an explanation of our plan going forward, but we're pretty excited about what we've done there. We just need to hang in there long enough to see better performance from our customers.

That's really helpful. Do you guys think October -- or is October trending much basically the same as you've been seeing so far? Is there any change in October?

I think we haven't seen any change in any of the trends in October that we've seen in the third quarter.

And then just moving to FountainBleau -- someone had to bring it up. You guys brought it up in your release and actually it was a very good write-up your release. I appreciate that.

Just wondering with the reports of a $1.5 billion cost of completion, you guys made it pretty clear that you would be partnering with someone. You said many times in the past that you're not going to do anything to jeopardize your balance sheet strength. But I'm just wondering you can give us an idea of how you were thinking about the CapEx there and maybe discuss the limitations of what you would spend there?

I suspect several of us will take a crack at that question. And there are some things we will see and some things we will not say. First thing, I will tell you generally is that we have not lost our senses.

We remain interested, as we have over the last couple of years. I will remind everybody that has followed us for a long time, there were days when the word Las Vegas or Nevada would never have passed our lips in a public forum. It just wasn't even on our agenda. It wasn't appropriate and the time wasn't right.

A couple of years ago, we said that under the right circumstances at the right price and with the right vehicle, we would consider entering that market so we crossed that threshold. The pricing of course was wildly out of control. We know that. We've seen the after-math of that. As we look at the degree that remains, we have picked through the rubble if you will, and tried to figure out what we can salvage from that, if anything.

Fountainbleau is a very large project that is among the troubled properties in Las Vegas. It is a very complicated bankruptcy, I can tell you. We have spent a very considerable amount of time examining that situation and it is true that we're thinking about it. We have boots on the ground that have for now months very carefully evaluated costs, the status of the building, what it is going to take to secure it, what it is going to take to finish it. Even with all of that in hand, its ultimate fate will be decided by the courts and by a judge who will have to decide how it is best disposed of.

And that, we think now, without giving away any secrets, it is my view that it is probably going to come to some resolve fairly quickly. Only because the judge himself has said, this problem is not going to get better with age, and it is not maturing like fine wine. The building needs to be secured. Right now, some of the lenders' funds are being used for security, for heat, power and light, and keep the air conditioning on since about 30 floors of that building are fully finished. They are rightly objecting to the use of their funds for that purpose.

It is true that we have offered to participate in providing some financing to close that gap, which may or may not under the right terms be appealing to the court and that we could consider a debtor in possession financing. Now, I think Bill Clifford has publicly said and I want to repeat, that our view is despite the impressive scale of that building, and I don't mind saying this publicly, its value is almost -- it is little to nothing. Because the cost to complete is at the edge of its value in our judgment.

Around that, we have a very, very, very disciplined sense of what we will accept and what we will not. And it goes our way or it doesn't go. It is as simple as that. We chase nothing. We will stretch for nothing and this process will play out or it won't.

If we were to secure a building with debtor possession financing and do those things necessary -- because remember, right now, the roof of the building is completely open -- not completely, but significantly open. There is risk of course, that if -- and the building is fully -- or those finished floors are fully air conditioned. If you are not willing to pay for that, you have to drain all the pipes and now the asset begins to rapidly deteriorate. There is some very specific needs there. But again, we have a very disciplined thought about value. And believe me, there is little to no value as it presently sits.

That having been said, I'm not prepared to talk about what we see as a budget. The number you threw out is probably at the outer edge of probably acceptableness. Even at that, we would only approach this project with a strategic partner who could bring something beyond money to the table. It is as simple as that. I will say more to that, we wouldn't have put that out there if we didn't think that was the likely outcome and just stay tuned.

We think that we can bring a lot to a Fountainbleau project with a properly executed development there -- an enormous amount that nobody else in the United States could bring. Period. It remains interesting. There are events beyond our control, obviously in the courts. I think that I've said about as much as I can. I will ask Bill or Tim, if you want to anything anything to that.

The only thing I would add, Peter, the reality is -- the capital markets are certainly getting better on a month-by-month basis, but they have not gotten to the point where they're open for greenfield projects in Las Vegas. The reality is we recognize will need a tremendous amount of equity in order to finish this project. That's why we're looking for a partner.

I think the debt load, at least preliminary indications about how much you might be able to finance on this project is somewhere in the $500 million to $600 million range. The rest would have to be equity. It would certainly be our intention to do the investment for this if we're successful. And that's a long ways to go before we're even close to being successful. But assuming we get ownership of the property, we would put in another restricted sum. We would use the cash that is sitting there to fund that project and basically keep it separated from the parent company.

Let me say one final thing. Look, you have to have a view in approaching a project like this that is positive about the future of Las Vegas. I think we here believe in the future of Las Vegas. But there is so much critical mass in that city. It is indeed the entertainment capital of the world. The current economic crisis will not last forever. But in the short run and the short run could be a period of a couple of years or several years, this could still be a great deal of pain. We're approaching that with mind in mind. Recessions come, recessions go.

I read the history books. And I read about the recession of 1896 and a whole series of recessions that have come and gone over the years that most people have forgotten about. There is always a future. There is always a bright time and there will be following this. The trick of course is to stay alive until you get to that point. But our view is that Las Vegas will in time, in time, be fine.

We are very concerned about the absorption of all of the new units that will come to that city. We've done very significant research and have some thinking about how, with the right partners, this would work out, for us. This is a very considered, but carefully approached investment. I don't think I can say more about that. We probably won't say more. That's it. That's our answer on that question for everybody. Yes, Felicia, anything else?

Just before I overstay my welcome, just one last housekeeping. If you could let us know, ballpark, what fourth quarter lobbying spend might be in Ohio?

We know, but we can't tell you. Obviously for strategic reason, we have opponents in Ohio, so-called anti-gaming opponents who in fact -- and the person Jeff Jacobs is trying to protect the facility that he owns in West Virginia. And so look, this is the battle for the hearts and minds of Ohio voters. The opponents are largely casino people who just don't want to see it happen. That's the reality of it. In a couple of weeks --

13 days to go, Felicia. We will let you know on November 4.

Exactly.

Great. I really appreciate that. Thanks. Have a good morning.

I will say this on the subject of Ohio and there are other questions, but I will volunteer one thing. Polling clearly indicates that a large majority of Ohio citizens support, not just this casino -- a casino, gambling in the state, but supports this bill. And the trick is really about turnout, getting them in an off-year election to com out to the polls and vote for it. Actually, it is as simple as that.

I think with unemployment declining and 15% in some of these major cities, Ohioans understand that this is about job creation. This is about opportunity. There are 34,000 jobs that would be created with passage of Issue 3 which is the amendment we're supporting. There is $1 billion in economic development that will be coming to Ohio if we're successful.

And more than anything, I think having seen this on the ballot the last four times. Ohioans understand the issues on both sides of the aisle and get the joke that $1 billion annually is leaving Ohio to neighboring states that have gaming. This is about repatriating and keeping those gaming dollars home. We think there is a tremendous amount of support out there.

It is all going to come down to who gets out to vote and what is an off-year election. We have a very robust ground campaign that is going to be encouraging people, our yes voters, to get out to the polls. And we're optimistic. Tim, anything I missed on it?

No, that was a very good update and advertising.

If you're a Ohio resident, vote yes on November 3.

That was Eric Schippers, our head of government affairs. Thanks, Eric, very much. Anything else, Felicia? You're doing a service for everyone else on the call.

Thank you. Our next question is from Larry Klatzkin from Chapdelaine. Go ahead sir.

Hey, guys. I don't know if there are any questions left.

I'm with you.

This cash position at the end of the quarter and maybe just the leverage?

Cash position at the end of the quarter was [$764.4] million, representing roughly $600 million in the unrestricted subsidiary. And the remainder obviously was in, generally speaking, at the corporate level, slash, in the operations. Debt level at end of the quarter was -- we now have two tranches of revolver. The tranche A piece was $63.6 million.

The tranche B place was $114 million. The B loan was roughly $1.518 billion for a total bank debt of $1.695 billion. Capital leases are roughly $5 million. We had bonds outstanding $250 million of the six and three-quarters and $325 million of the eight and three-quarters. And there is still remaining $105.5 million of the six and seven-eighths which are due in 2011 which gives us total debt of roughly $2.382 billion.

Perfect. As far as -- the question is -- say Ohio doesn't pass, you guys have a few tracks in Ohio. What do you think the chances are of getting trots to tracks? Is there a chance of that happening? And given what is going first, you don't want to talk about that.

As you may be aware, the governor had a plan to authorize VLP's at the state's existing racetracks. The Supreme Court came out with a decision that said that that plan is subject to voter referendum. It is a fluid situation right now. We don't know whether in fact it will get on the ballot and if it gets on the ballot, what the chances might be at this point.

The opposition who won this case have to get somewhere in the neighborhood of 200,000 signatures within 90 days of the court ruling for it to be put on the ballot in 2000, November 2010, Larry. We don't obviously know where we stand with that and how that is going to proceed at this time. We should mention that with the governor's proposal, we did submit -- we're one of the two of the seven tracks that did submit our $13 million application fee before that court ruling came down. So --

We support it fully by the way.

We do.

For the record and to be clear, we're on --

Do you --

We completely support that legislation.

Do you get your 13 back now that it has been delayed?

We did.

Good. Okay because there was question to that. Indy downs gets table games, do you see any effect in Lawrenceburg? Do you think it is far apart to have electronic tables? It is a minimal effect.

There would be some effect if Indiana Downs got table games, but we don't understand why the state of Indiana would give table games to a casino operation knowing what that deal was. We're not obviously -- we don't think that is a fair concession to give Indiana Downs. It would have an impact in Lawrenceburg. They signed up for that deal, knowing what the terms were with the $250 million license fee and the tax rate and 2,000 slot machines. It is something that we're watching very closely.

Okay. I know there is nothing to be decided until the beginning of next year anyway. As far as the Aqueduct goes, you are one of the candidates. What do you see the upside? Where do you think that could go in the timing?

Who wants to take that? We would love to be in New York. And again by the way of a brief commercial, we are certainly the most qualified, the leading casino racetrack operator the United States. We know more about this business and have done it more successfully than anybody else. We're a logical bidder. At the moment, I think we're the high bidder. Steve, do you want to take that?

Larry, to your question, we were told that the decision would be made by Labor Day. We were not asking which Labor Day. And as Peter pointed out, we have put in a proposal on the table that we think is the most aggressive in terms of the upfront money for the state in their current budget crisis. We spent a lot of time in the community there. We think our proposal is the one that would be open earliest among others. Therefore, not only do we get the state more upfront money, we get the state money sooner in the BLT's and now it is in the hands of the folks in Albany to make the decision.

And given how well Albany works together, that could be a long time from now. As far as another casino in Maine, is there anything going on with that?

I don't think so; nothing that we're concerned about.

There is a group, Larry, that is going to circulate a petition to get a question on the ballot for a facility in the western part of Main, on the Canada boarder.

Really no effect on you?

Would not affect us.

All right. Last one, Pinnacle just got an approval with Louisiana on Baton Rouge. Any feeling from -- any effect on that?

What did they get, Larry?

Apparently, the gaming commission yesterday gave Pinnacle some approval on Baton Rouge because Pinnacle says they have funding?

Yes. There has been a long series of delays for Pinnacle's claims in Baton Rouge. The gaming board has continually brought them in to say, okay, what are your plans. When are you going to get started.

Did we know about it yesterday?

I did not see anything that came across the wire, Larry. I don't think we can comment until we can see what --

It came in late yesterday. All right. And then -- great, guys. You guys are definitely moving forward and good luck with Ohio.

Thank you.

Our next question from the line of Joe Greff with JPMorgan Asset Management. Please proceed.

Good morning, everyone. I have a follow-up Fountainbleau question. Peter, you can talk about how you think what the hurdle rate return rate would be for Las Vegas? When you talk about a strategic partner, are you talking about a 50% strategic partner? A 75% strategic partner? Is the preferred way to go with Fountainbleau is really a casino management contract with a minimal equity stake and have others contribute the equity?

Look, we wouldn't go there, Joe, if we didn't think putting our cash there made sense. Period. If we bring in a partner, it is probably going to be a 50/50 partner. His cash or their cash, our cash, we won't go there if we don't think that cash investment makes sense. We won't talk about early return on investment,except to say, it will be consistent with any other investments that we make with a very realistic assessment of where that property can go over the next couple of years.

First off, let me be clear. There is much work to be done. The project was never fully designed to the last detail. They are still drawing plans for that. Of course, that stopped. We estimate -- I estimate, if we got control of the property that we would take six to nine months to get the architecture in line with what we believe will make a highly successful project and to have in hand firm, and I do mean firm prices, consistent with everything else we've seen and do over the years; firm contract, guaranteed maximum prices that would get us to a budget that we believe in.

There is no rush. There is no hurry. There is no nothing. It is simply -- if it evolves that we would do this, we would do it with a partner, a check-writing partner who also brought some strategic advantage us to. That's all I'm going to say. We would take our good old time in assessing what needs to be done. We're obviously not willing to spend those significant dollars now until we know we have this project under control with a desired bidder. But then in a very reasoned and careful way, we would start the process of designing for the future. That's about all we can say.

Okay. Great. And then, Bill, when you look at what is implied in your fourth quarter, property level EBITDA guidance, relative to what was implied in your prior guidance, what is the Delta there?

The Delta is two things. Primarily, obviously, we're reflecting trend rates and run rates from what we've seen in the third quarter, particularly what we've seen in September and October. Then obviously, we've also included the Ohio referendum cost, simply to give people a tenor for where we expect those to go.

Now obviously we're not going to give you the exact number for the Ohio costs. I suppose that makes your job just a little bit more difficult. The reality is that it is a target number. Even that number, within the Ohio spending, is subject to day-to-day decisions as the campaign unwinds or comes to a conclusion over the next few days.

Okay. Then Bill, I don't know if you discussed this or I missed it, but third quarter, if you could break out maintenance CapEx, project CapEx. What you've got planned for the fourth quarter. And if you could touch on what you have in the hopper for next year?

Probably not going to test what the next year -- we will come out with that on the next guidance. Relative CapEx, the third quarter was roughly $88.5 million. Broken out roughly $25 million in maintenance CapEx and $62.5 million in project. And the lion share of the project CapEx in the third quarter was wrapped up around Lawrenceburg as well as Joliet. And those -- that represents almost $58 million of the $63 million.

And looking into the fourth quarter, we've got maintenance CapEx of roughly $36 million, project CapEx at $49 million and that includes Maryland, Joliet. And again, some expenses in Lawrenceburg to come up with the total.

Great. Thank you.

Our next question from the line of Steve Wieczynski from Stifel Nicolaus & Company. Please proceed.

Good morning, guys. Just one more question on going back to Vegas. At this point, you guys solely just looking at Fountainbleau? Are you still looking at other assets?

I'm sorry, I didn't understand.

Are you looking at other assets in Las Vegas?

The answer is yes. Look, this process isn't over until it is over. And absolutely. Absolutely.

Okay,. Got you. And then the thought process behind Maryland, I was a little surprised in terms of you guys taking your bid from 500 slots all the way up to 1500 slots in that tax environment. Just what you guys were thinking there.

We're having trouble hearing --

The thought process around 1500 slots.

We have always anticipated 1500 slots in our Maryland application. We were just uncomfortable and needed to wait to see how the process unfolded. But given the $25 million per 500 game capital expenditure requirement, it was never economical from a scale standpoint to only build a 500 unit facility, given the land costs and the infrastructure costs and everything else.

Okay. Got you. And then last question, just in terms of Texas and your bid for Lone Star, the thought process behind that. Do you guys see Texas passing gaming within the foreseeable future?

As you know, Texas has been a hot discussion point in terms of expansion in gaming over the recent years, both with respect to free-standing casino as well as the support for the racing industry with slots for video lottery terminals at the racetrack. We think Texas expansion of gaming will occur at some point in the future. Whether in the next legislation session -- is it two years after that? It is unknowable at this point in time.

But given the way Texans do vote now, by going to Shreveport, by going to Lake Charles, we do expect at some point in time whether it is this governor or the new governor, given the contested primary that exists in the state of Texas, something is likely to happen. We look at Lone Star being really right in the center of the triangle of the Dallas/Forth Worth metroplex and it is a very interesting opportunity. It is in our sweet spot.

Texas will get gaming as many of these states will. You can write that down. It will happen. And then of course you can write off Lake Charles, Louisiana when that occurs. And we think putting down even a large bet in Texas is worth every penny, up to the amount that we are prepared to bid. Lone Star is an important opportunity. Again, we won't be crazy, but we're willing to bid up to get there because we think and believe in the future of Texas.

Okay. Great. Thanks, guys.

Our next question from the line of David Katz from Oppenheimer. Please proceed.

Good morning. I think with most of the detail questions addressed at this point, I'm starting to just look down the list of opportunities that you're working on or after at various stages. If we think about -- let's assume for the moment that you're successful at almost all of these, between aqueduct, Massachusetts, Ohio, Fountainbleau and anything else that may come along, how do you think about maintaining a balance between growth capital and maintaining your balance sheet where it is? And obviously, you're starting from a pretty low level. But if we were to add all of these up, it turns into some real money. I'm not looking for you to tell me which ones you would toss overboard, but rather that you would consider tossing some overboard that there are in fact limits.

There are always limits. And obviously, you've got to have enough balls in the air so that when a couple fall out of the sky, you've got a few more to catch. We can't tell you what that would be until we see what they are.

But let's be honest. In some of these places, and again, I don't want to be too specific. These are just absolute winners. Period. And you would be thrilled with of course a disciplined capital spend to open a facility in some of these places. And again, for obvious reasons, I don't want to get into the profitability of some of this stuff, but this is all good stuff. There is virtually nothing that we're looking at today that is a risk to capital with the possible exception and fairly so, of Las Vegas. You could say, let's put that aside. That's the off balance sheet, separate strategic objective that we have that we think can enhance the future of this company in a major way. Let's put that one aside.

Everything else we have here is just levels of good. There is no down side. The competitive opportunity is -- you open a facility, we will do fine.

But David, also to follow-up on that question and that's why you're seeing things like a partnership in Kansas. They're a great partner at ISD. They've got a great location. It is a competitive situation. But by marrying with that partner at that location, with their balance sheet, we do start to solve in incremental ways some of the issues that you point out in terms of where is the capital going to come from to complete this pipeline.

It would be a great -- I look at it differently. It is a great problem to have, right since you've got to sit there -- and if you should be so fortunate to land all of these. I think we're going to remain disciplined.

We're very focused on where the cost of capital is going to be. A lot of these projects are going to be a lot less attractive if you get too high in the cost of capital to finance these. I expect on some levels some of the opportunities are quite candidly, so good that if you had to issue equity, if everything else has come down your pipe and you have some of these opportunities, you would actually consider issuing equity, if that's what it came to. I think we're a long ways away from being in that environment.

We've got -- we do have a lot of things. But the reality is, and Peter has put this many times before, you have to kiss a lot of frogs. I would seriously doubt that everything we're talking about is going to come to fruition. I don't know which one is going to work and which one isn't. But I can almost guarantee you, we're not going to let them clean the fleece.

I do want to -- or hate to be unequivocal in Ohio. One of the more bizarre arguments we receive, maybe we're not committed to building if we're successful on November 3. And let me be clear. If we're successful on November 3, we're building these new projects. Period.

Which of you wouldn't line up in a moment to build a free-standing casino in Columbus or Toledo as an illustration? This is what we're in business to do. This is not a problem. This is not a problem.

And by the way, we have not talked about Pennsylvania and West Virginia. We remain hopeful that West Virginia will finally pass table gaming legislation this year. And to that end, we are prepared with some very exciting changes to that facility through capital spend and so forth to make that a full casino operation. Very, very exciting possibility at what many don't recognize as one of the largest casinos in the United States. This will be a big-time facility, should that occur and a very, very exciting place to be.

Pennsylvania has already passed, at least through both houses, the House and the Senate, a table games bill. We are hopeful that it will be reconciled to an amount much closer to where the Senate bill is than the house bill. Frankly at the House level, we may not do it. In fact, probably won't do it. But we believe that there will be a rational bill, given the cost of running tables in Pennsylvania. And that's terrific. That -- we will take our already growing and wonderful facility in Harrisburg and take it to another level.

There is a lot of good stuff going on right now. Maryland will open. We're very optimistic that Kansas will open. As Eric said, we've got a great [harbor]. They are terrific people. They have capital. Plus they are just great to deal with. Just can't say enough about just the embedded stuff that we have going along should nothing else happen.

Thank you for that. And if I can just follow it up with one quick one. As we sit down and look through these opportunities from our chair, we're often asked, if we believe, does this or that make sense. And if we put Fountainbleau on the side for a moment, should we always be thinking about whether or not things are cash flow positive, pretty much right out of the box? And improving going forward? Is that still a standard bill that you adhere to?

Yes. Absolutely.

Okay. Good enough. Thanks.

Our next question from the line of Chuck Akre from Akre Capital Management. Please proceed.

Good morning, gentlemen.

Hi, Chuck.

Hi. Just two or three quick questions. Over the years, you have talked about return requirements. You've said a while ago, you wouldn't address them now. I'm probably just forgetting something. Any particular reason you're not addressing them now?

We only talked about that in connection with Fountainbleau. And the issues surrounding that are so --

All right. Let's leave that aside and talk about all of these other developments.

Because otherwise, we're looking with very high double-digit returns. Free cash flow -- we're still using the free cash flow thought process which is --

Right.

Looking at the projects and expecting 5% settling out, fully loaded with capital, obviously borrowing costs, maintenance CapEx and income taxes taken away from the income.

Right. And high double-digit returns in the first 12 months, something like that?

Right. I think that translates certainly mid teens level on a -- to high teens. Yes. Look, one of the problems on this call and I think you recognize it, Chuck, and others on the call. This is a public forum. And --

Fair enough.

And we don't want to say too much about areas where we have initiatives and how wonderful it might be. Suffice it to say that if we're pursuing it because we believe it is a real opportunity, but we just cannot --

Right. The other way to ask the question is, there is no important change in your thinking about return requirements.

I missed that.

I said the other way to ask is there is no important change in thinking about your return requirements?

Absolutely not. Chuck, you've heard this mantra before. And Bills free cash flow issue, as a guy who comes out of the real estate business, and my modest way for many years, I'm used to having to a mortgage and paying things off. In fact, every building that I owned as a real estate developer is on a 15-year amortization. I'm so big about paying down debt.

We get that about you and appreciate it. Thank you.

And I am. It was a shock to me when I got into the public world and I said to folks who we've looked at some of these deals, when do you pay this stuff off? One of my friendly bankers from -- you pick your bank, said, well, you just roll it over. And just -- the thought is you never pay this stuff off.

That was his model, your not your model, right?

Absolutely. Look, so you do the math. Even at 5%, it is still a 20-year add by my rather naive way of thinking about things. We like paying down debt. Let me just -- I think that says it as best as I am capable of saying.

Just quickly remind me what you're -- how you're thinking about the cost of capital an the use of equity in the project?

Listen, we're obviously looking for 20% on the equity to the extent we can get it. That hasn't really changed in terms of if we have to use equity.

Yes. Obviously, if you were to go forward with your off balance sheet project in Las Vegas, you would be using a lot of equity.

Cash for certain.

On one level, yes. On another level, no. Obviously the cash is a product of the poor percentages -- transaction which we were able to get. I don't see anybody here, but with zero percent financing for seven years.

Right.

We're using that as our cost of capital. But --

(multiple speakers) We're not thinking frivolously about that money. It's not free money.

No. I get that because there is this thing called fully diluted shares, right? Somehow relates to that.

Absolutely.

One last question. Given the lack of the Ohio lobbying in your prior guidance, are there any items that you've considered and left out of your guidance for the fourth quarter that are just worth talking about?

The answer to that is no. Anything with Fountainbleau? Anywhere else? I'm asking the question for you right now. There certainly could be -- if the project -- we certainly have accumulated some costs around Fountainbleau that if we're unsuccessful could very well show up in the fourth quarter. But --

Right.

But I don't think there is anything that --

What's the magnitude of those, Bill?

Right.

I say what's the magnitude of those?

We're probably -- I don't know how much we're into Fountainbleau for at this point. I'm not sure we really want -- $3 million maybe.

I got you. Thank you very much.

The price of doing very careful diligence, Chuck.

Right. Thank you.

And by the way, let me emphasize again, if we don't get the right combination of circumstances with the right partners at the right -- who brings the right tools, even beyond money to the table, we're not doing it. It is as simple as that.

Our next question from John Maxwell from Jefferies and Co. Please proceed.

Good morning. Just a couple of clarification points. Just in Ohio for the VLT, the timing of the signatures. We were hearing that it was a possibility of a special session to do it earlier or is it your sense the earliest it could be would be November, 2010?

No. There has been some discussion in an early -- very preliminary discussion among some legislators that maybe they could move the question themselves, legislatively to a May ballot. That has been the talk of maybe a small handful of legislators, but it isn't really real at this point. The only thing real out there is the prospect for citizens, signature gathering and whether to put it on the November 2010 ballot.

In any case, I think we have -- in a couple of weeks, we will know what happens to the casino bill. That may have a lot of -- will have a lot of effect on what then might happen, win or lose, with the slots and tracks though. The two are interactive. There's no doubt about that. We just have to wait and see what happens.

Just a reminder, there are still two pieces challenging that VLT legislation that have not been decided upon as of yet that are still out there, regarding the constitutionality. That is still a question mark out there in the courts as well, regarding the VLT problem.

Okay. And that obviously would have to get resolved before a vote would probably proceed anyway?

The legislature can correct the minor constitutional questions raised in the legal challenge if they have an appetite to do so. In other words, the legislature and the governor want slots at the track, there are legislative ways that they can make it happen that are not subject to constitutional criticism.

Yes. It depends on how the legislature wants to craft it. Clearly -- and just to be clear, the legislature could -- does have the power to put this on the ballot themselves and not go through a signature gathering process. They can put a question on the ballot. And then it could again occur as early as May or in November. But there is no clear indication that is the way they're headed. It is still very fluid on both fronts.

Okay. If you're successful in November, could you remind us again how -- when you would expect the properties to open?

There is a gaming commission that needs to be formed which would be appointed by the governor with the advice and consent of the Senate. I believe the timeline that would be set up, although there is probably -- with regulations being drafted and approvals, somewhere in the six to nine-month timeframe to receive a license. We -- each of the four would pay a $50 million license fee which goes into a pot of $200 million for job training in Ohio. Construction would begin soon after the license was issued. Tim?

I think given the uncertainty and usually the elongation of this process, the earliest we could expect to see something open at the optimum level of speed would be late 2012. More likely later than that.

I think Pennsylvania which I hope isn't the model, did relatively well. But it still took a couple of years to get it all together and get their act together. It all happened and it has all been wonderful, but it took a little while. We think it will move a bit faster in Ohio, because of the way this has been set up. And also, I might point out, we've done nothing with architecture and design and so forth. Sites are identified, we know the sites. But obviously, we're not going to spend the vast amount of money until we have this secured. Look, this is a great deal for us. It is a great deal for Ohio. We will keep our fingers crossed.

As we've told the leaders of these four cities, we want to work with the local communities to get them involved in the design process so we have something that fits within their urban architecture. That's one of the other reasons we haven't moved forward with advancing the design process here and being presumptuous.

Could you -- any comments on Kentucky? On your thoughts on that state proceeding with gaming?

Let's talk about fluid. You have a proposal, I think Tim mentioned that was just put forth by the Senate president that would actually put the question -- the constitutional amendment on the ballot. The tax rate would be pretty large. I think they're talking in the neighborhood of 75%; 25% would be retained by the entity operating the -- notably though there would be a competitive bid process. It wouldn't necessarily be guaranteed through the track. There would be that state-wide election and then local county option election. Many, many hurdles. That's a plan as I said that has been supported by the Senate president.

Clearly, there are those supporters in the House and Senate who are going to try to move a bill without having to go to the ballot. We just don't know whether the votes are there or not. As you know, there is a tremendous amount of support in the House. The Senate has always been blocked by a smaller number of individuals, including that Senate president. We will see what happens.

Okay. Bill, just one minor point. I'm sure we can go back and check. But the September '08, your corporate expense of $27.4 million. That also included lobbying efforts in last year's period? Correct?

Yes, it did.

Okay. All right. Thank you.

Our next question from the line of Dennis Forst from Keybanc. Please proceed.

Good morning. Most of the questions have been answered. I just had a couple of items. In Texas, does it make sense to acquire Lone Star as a racetrack? Does it have positive cash flow? The racetrack?

It does. But you can't justify the purchase on that basis. Let's be honest. It is a somewhat speculative effort. There is almost no place in the country today where racing alone is profitable. It is just not an industry, frankly, that makes economic sense anymore. Not in Texas. Not in any place. Unfortunately.

But -- and a small commercial for this, we're sometimes criticized. Or critics will say, you get slots at a racetrack, but you don't enhance the number of customers coming out. The answer is, no, we don't. But the racing industry does have a profound and powerfully positive effect, and I will say it with a straight face, upon state budgets and desirable for a lot of reasons. In Pennsylvania for example, our racetracks are regulated by the Department of Agricultural for obvious reasons. These farms that raise these horses, grow grain and all the things that you see around the racetrack are terrific. The impact on the economy is enormous.

I could argue, with a pretty straight face, that a slot machine is a very green supporting activity. The economics combined, slots with these racetracks where gambling has been going on for many, many, many years, makes all the sense in the world. It is a win-win for everybody. We think that is the future of many states and certainly is going to be part of the mix in Texas.

But would we buy a racetrack in Dallas or anywhere else? Just to own a racetrack? I haven't seen that one in awhile. I'm being very honest about that.

Secondly, there is obviously some lobbying costs going on in West Virginia, but those were not enumerated. It wasn't even mentioned. Are they so insignificant as to not count?

They are certainly minimal. At the end of the day, the entire election happens with roughly 20,000 potential voters.

This is only a county election.

Right. And probably less than half of those are going to actually vote.

It would be hard to spend $20 million in the county.

Eric, any comments?

No. Other than this really is a local campaign. It is being supported by many local residents and business owners. It is largely a word of mouth campaign. It is not at all on the scale of in Ohio where --

Fortunately, we are a well appreciated citizen of Jefferson county and very much appreciated I think by the majority of folks there. This is just strictly a turnout issue. And in our case, it is really odd because we have a one-off date for a special election.

December 5. The reason we're doing it in December is because there is another issue that is going to be on the ballot in November. We think there might be some confusion with the two issues, but we feel good about our chances in Jefferson county. We have been running a very strong campaign there. It is not one -- there is a tremendous amount of sweat equity that our friends and supporters and local business owners have been putting into this one. We understand we were unsuccessful last time.

No one is taking anything for granted. We are doing townhall meetings and knocking on doors and meeting with just about everybody who will meet with us to talk about the benefits of table gaming. We will see how it turns out. We feel like we're running the best possible campaign we can.

You said it was December 5?

Yes, it is. A Saturday campaign.

Are the lobbying costs that you -- whatever the modest amount were spent in the third quarter and the fourth quarter, do those go through Charlestown? Or do those go through corporate the way Ohio do?

Comes through corporate.

And the last question, off the wall question. You have a tiny insignificant property in Blackhawk. The rules changed pretty dramatically in Colorado .Is there anything you can do with Bullwhackers to make it more significant and make it a meaningful property for yourself?

Dennis, this is Tim. It is such a small property, so insignificant. We're modestly trying to improve the performance of the business. Ameristar Hotel is going to open up soon.

Did open up.

It did open. We're trying to become a second or third stop. But it is so insignificant to the overall performance of our enterprise that it is not going to be material.

Yes, we did some very nice things. We did the obviously necessary things at that facility to bring it up to --

Do you have some excess land there that you could do something with?

We do. The answer is yes, we could do a parking garage. We could do a number of things -- even with an expanded facility. I'm not sure. That's a highly, highly competitive market. Certainly companies have spent foolish amounts of money. They will never see a return. If somebody is going to commit capital suicide, I don't know if we don't want to join them. That's probably a market frankly where the investment just isn't worth it. We like the property. We like the people there. A great training ground, too.

It is a place where we can bring folks through our system. It is a nice little property, but there is just no solution in Blackhawk.

Got you. Thanks a lot.

Our next question from the line of [Bill Learner from Union Gaming]. Please proceed.

Thanks. Hey, guys. Just on current ops for a second, as I think about recovery margins, how much of your cost saves do you think is sustainable into a recovery? I know this isn't -- there is no precise answer for it, but just directionally or magnitude would be helpful.

Bill, could you repeat that question again, please?

It is just a question on recovery margins and your recent cost saves. How much of that -- how much of those are sustainable? Just generally trying to get the magnitude.

Yes. I think when you look at what has been done, if Vines come back and we start showing growth, we would see some of it. But I would think two-thirds of it is sustainable.

Okay. And what -- just categorically, what kinds of saves are sustainable? Is most of that labor? Or is it marketing and some other stuff?

Most of it is labor. Most of it is labor in terms of salaried labor structure where it is not volume dependent as we've made -- continued to make cuts in the organizational structures of these businesses. We think that is sustainable. Some fixed costs and some other areas, but most of it is labor savings.

One thing I will add, and Tim can elaborate as he wishes. Some of our competitors, you would notice if you toured that properties, have dramatically cut service and quality has fallen. Properties are not as well maintained, in some cases dirty. We've made a judgment to not touch the customer experience and to keep that still at a very, very high level. Tim works very hard with that. Hopefully our customers are not seeing any impact on their experience.

And in fact, as we look at customer satisfaction levels, we see them slightly enhanced over the past couple of quarters.

Great. Thank you. Then the follow-up was just on Las Vegas locals market, your thoughts on -- or interest in this market here.

That's a much tougher one. I will let Bill do that. Bill loves Las Vegas.

I think our thought process is -- the economy in Las Vegas is going through an incredibly tough adjustment and probably going to continue to be pretty tough. Because it is one of the biggest segments in town with construction jobs which are grinding to a halt. Certainly when city center is done and as well as when Cosmopolitan gets finished and then theoretically, we have Fountainbleau which may provide some relief provided everything works out in the future, you will have very tough unemployment numbers in Las Vegas. Housing prices are, I assume relatively stable. We see the outlook in Las Vegas -- and quite candidly they have too much capacity and there are a bunch of new facilities brought online.

In a longer term environment -- that's where we see it for the next couple of years. But on a longer-term environment, I think as Las Vegas and as the national economy rebounds and as the strip properties eventually start to do a little bit better, that will eventually translate into the local economy. And you can certainly forecast that things could get a lot better. There may be some opportunities for us in the local markets around some properties, but there is nothing that appears eminent. Again, it is the same old story that you've got properties that are struggling and banks that are owed a lot of money. But the banks are not really pushing forward or looking to wrestle away control from the existing operators. They're continuing to not forgive the debt, but certainly forbear their obligations which means that the opportunities there are, I think, fairly limited.

But we're keeping an eye open. And if something came along that made sense for us, we would absolutely go into that market. But we don't really look at it as a strategic thought process. It is really just another local market that we don't have a presence in, but that we certainly would be open to participating in. But it would have to make sense financially.

I couldn't have said it better. We view Las Vegas locals as another regional gaming opportunity. The macro economic situation there is not good; 13% unemployment. If the write opportunity came at the right price, sure, we would take a look at it, but nothing is eminent. We don't think the conditions there over the next couple of years are going to get any better.

Great. Thanks, guys.

Our next question from the line of [Michael Shunna from Polar Securities]. Please proceed.

I'm sorry. I wasn't sure if I heard you guys correctly at the beginning of the call with regards to the metrics that you track with regards to your customers in terms of span per visit and time on device. Are all these metrics that you track still declining? Or are you seeing any improvement in anything with regards to your customers?

We saw in the third quarter that the trends continue to decline as we look at year-over-year numbers. We're not seeing any recovery yet from the consumer in terms of those metrics that I outlined.

Okay.

I think -- sorry. I was going to say I think our visits are not declining as much as our spend per visit. I look at that as -- at least it is not a situation where the customers don't like our product, they just don't have the money that they used to have to spend on it. The reality is that -- we do believe that when the economy improves, that our spend per visit will improve with that.

Okay. We're seeing some areas of the economy with the consumer improving and you're just not seeing it yet through your properties.

We're really not.

Not with the consumer. And not with their piece of their discretionary spend that we're focused on.

Okay. Great. Thanks very much for your help.

Our next question from the line of Steve Altebrando from Sidoti Capital. Please proceed.

Hi, guys. Could you just talk quickly about capital spend, should tables goes through in West Virginia and PA?

What we've been -- we've been pretty clear with the locals that this is going to be something that can be accommodated within the existing facility without major expansion required.

Remember, in West Virginia, the space is already built.

Exactly.

The shell is built. It has been built for several years. It is just a matter for us to do the interior work. Since I've been much involved in that process, we haven't yet put a budget together. I have approved all of the architecture for that which is very cool. We will bring in some of our video boards and some of the newest stuff that we're doing in our newest properties. Right when you walk into the front door of Charlestown, is it is going to be dramatic.

But we haven't developed a budget for the interior fit yet. It will come soon. It won't be extraordinary, but it will be exciting.

How about Pennsylvania?

Really the same thing. I just yesterday looked at a plan. Tim can bring you up to date more specifically. That shows us putting -- we can accommodate a significant number of games within the exists footprint. We are going to want to expand beyond that and we will do so in our own time. Tim, why don't you describe what we've laid out?

And again, as we said previously, it is all going to be dependent on what comes out of Harrisburg that makes economic sense for us to do. But we can put in approximately 30, 35 games already in the existing facility, but if the economics are favorable to us, there is an opportunity to expand that footprint. Obviously, working with the local townships to get the necessary approvals and permits to move that forward, still has to have a lot of work to do on that front as well. We're hopeful we're going to get favorable legislation out of Harrisburg and then be able to quickly work on that. And probably have something to communicate to everybody in the later part of this year or early part of next year.

The issue won't be surprising to any of you. It might be to many politicians. That is to say, the lower the tax, the higher our investment will be. The higher the tax, the lower our investment. The highest level will get no investment from us and the lower, the maximum.

And the lower the tax rate, the more jobs we create, too.

Exactly.

Assuming the tax rate is low, it would require an expansion from the shell?

Not initially but yes, we would do a modest expansion. Again, no budget is set for that. Pennsylvania fortunately gets it. Pennsylvania has been very smart I think in balancing its desire for high taxes with a realistic sense that if you tax something more, you're going to get less. We have actually heard that from some of the highest level politicians in Pennsylvania which is frankly shocking because most politicians don't get that. They do here.

All right. Thanks, guys.

Mr. Carlino, we have no further questions at this time. You may resume with your closing remarks.

That's terrific. My remarks are few. Thanks very much for being here this morning and stay tuned. A lot of action over the next month and let's hope we have a lot of good things to report at the end of the next quarter. Thank you.

Thank you, ladies and gentlemen. This does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.