PENN Entertainment Inc (PENN) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming first 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)

It is now my pleasure to turn the conference over to Mr. Joe Jaffoni, Investor Relation. Please go ahead Sir.

Thanks Operator. Good morning and thank you for joining Penn National Gaming 2010 first quarter conference call. We will get to management's comments momentarily as well as your questions and answers but first I will review the Safe Harbor disclosure.

In addition to historical facts or statements in current conditions, today's conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Reform Act of 1995. Such forward-looking statements reflect the Company's current expectations and beliefs but are not guarantee 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 in the Company's filings with the Securities and Exchange Commission including the form 10K and 10Q. Penn National Gaming assumes no obligation to pubicaly update or revise any forward-looking statements.

Today's call and web cast may include non-GAAP financial measures within the meaning of SEC regulation G. When required a reconciliation of non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in the press release as other Company's website. Without further delay I would like to introduce Peter Carlino, the Company's Chairman and Chief Executive Officer. Peter.

Thank you very much, Joe. Good morning, everyone. And welcome to our first quarter earnings call. Our quarterly result as you can see are okay. Not robust but okay. And I think the more important message that we have today concerns the tremendous number of new development opportunities that we currently have underway. We are doing some exciting things right now, even as we work to manage our business margins more effectively. It happens that I'm out of the country right now and have a very unreliable phone connection.

So I'm going to defer today to Tim and Bill and our entire team in the Penn National conference room and probably just listen to the balance. And with that I will turn it over to Tim right now.

Thank you, Peter. Clearly the first quarter was one where we really focused on a couple of things as Peter, described our development pipeline but we also focused on improving our margins. And it was challenging given the amount of weather impact we had certainly in the Atlantic state and in our Charleston facility but to the a lesser extent Penn National, Lawrenceburg. And saw consumer trends that were representative of a roller coaster. We had periods where bad weather occurred and records really low and record business volumes when the weather was good. Right now it's very difficult to say there is any change in consumer trends in our business from what we saw in the latter part of 2009. Consumers are still coming. Spend per visits continue to be slightly down.

In reaction to this continues to be to focus on a customer by customer basis with high degree of precision improving our margins or marketing reinvestments to continue to manage labor to business volumes and to continue to focus on discretionary spending. So I think that's reflective in our results of the first quarter. We are starting to see improvements there. And we are working hard to continue those improvements in the second quarter and the balance of the year. And stay close to the businesses and stay close to the consumers and really nothing has changed from with a we talked about when we were together back in January. Bill, do you have any further comments?

To characterize what we are doing here is pretty much heads down and working hard. Focused on pretty much what Peter and Tim indicated which is we are focused on doing a better job of controlling margins and working really hard on our construction and new development pipeline. Pretty much seems sometimes quite extensive between West Virginia, Pennsylvania, Maryland, Kansas, Ohio, both in Columbus and Toledo. There's more than a full place to keep everybody fully entertained and fully occupied. I think with that we will open up for questions.

Certainly. (Operator's Instructions) Our first question comes from the line of Felicia Hendrix from Barclays Capital. Please proceed with your question.

Good morning, guys.

Good morning, Felicia.

Morning. Tim, you had just mentioned the weather in the quarter in particular Lawrenceburg and West Virginia. I'm wondering in Pennsylvania, the revenues came in lighter than our estimates. I'm wondering wondering if we are being overly optimistic or if there was anything in particular going on in Pennsylvania as well that might not have met your budget or expectations.

Not really. We had some weather in February. That was the month that impacted the most, Felicia. So we did have an impact of probably a few million dollars revenue loss. You never know how much of that you get back when the weather turns good and how much pent up demand there is you recover. I been a proponent of never fully recover. Other than the month of February weather, really pretty clean revenue quarter for Penn National.

Great. And then can you give us an update on the polling for November in terms of the VLT referendum in Ohio and also just how you think May is going to turn out there?

Eric Schippers is here with me. We feel confident on May 4th, we will get the approval of the address change in Columbus to move from the arena district out to the west side, the Delphi plant location. I have not, Eric, make you can comment, I have not seen recent polling about what potentially could happen with the VLT referendum at the race race track in Ohio.

Yes, Felicia, our focus is on the May 4th election. We have not had an opportunity to get together with any of the other racing industry members to talk about November. And the ballot question even really hasn't been formally written. So, not much research has been done in terms of November.

Just echo Tim's comes in May. What we were seeing is very positive even across the state in areas that are not affected directly by the address change in Columbus. People understand that this will lead to what we hope will be an expedited timetable to get the revenues flown to all 88 counties in Ohio. We are hopeful not getting ahead of ourselves feeling the blocking and tackling as you would do in any campaign but hopeful will be successful in May.

Great. And then finally again, maybe this will be Bill or Tim, I was wondering if you could give us thoughts perhaps quantifying for us the incremental EBITDA you hope will be generated by tables in Pennsylvania and West Virginia.

Well, we aren't going to really give you specific details in terms of our expectations by property. What I will tell you is in the guidance what we have generally done is we pretty much obviously incorporated the first quarter improvement obviously left that in and then incrementally added the impact with we think will happen from the opening of Perryville for two months. We actually lost a month in West Virginia relative to our original guidance on table games,- but we added for months of Penn National. And that's basically what's reflected in the guidance. Basically steady as it goes relative to our original expectation for the core operations. We're basically left unchanged.

And Felicia as we get the new operations up and running there will be a period of time where we will shake out the operations and get the labor stabilized commensurate with the business find. It will take a couple months for us to get those table games operations stabilized to have some certainty on what the impact will be on both businesses.

Great. And then finally any color on April. The weather has been lovely as well.

April is very similar to what we saw in the first quarter. Not much change. It's funny, I always laugh in the winter time we want good weather on the weekends and now when the weather is nice we like to see rain on weekends. Maybe a little too nice so far here in the northeast.

You never happy.

I think it might rain in West Virginia this weekend so maybe that will be good for you.

That would be a good thing.

Okay. Thanks, guys.

You're welcome.

Our next question comes from the line of Larry Klatskin with Chapdelaine & Co. Please go ahead with your question.

Hey guys. Peter, I hope you in a nice, fun location. As far as the south goes for you guys in the second, how is that looking? Any kind of a pick up in Mississippi at this point in time?

This is Tim, one area of the country that we are seeing the most soften in southern Mississippi and southern Louisiana. And it was a year ago in the first quarter in 2009 it was one of the stronger markets we had. I think it's got a big of a lag effect. And we have not seen any material signs of recovery from what has been reported by the state so far. And in addition the level of promotional activity especially northern Mississippi remains. It's probably the one probably in the United States continues to show the most softness.

Okay. The loss for unconsolidated affiliate, what was that?

That's just basically the proportionate expenses related to Ohio efforts and our Kansas efforts which were born in a JV arrangement so basically reflecting the total results from them coming out.

Okay. You guys I know there is an auction coming up for station and local casinos. I assume that doesn't fit into your plans. You are looking to going to Vegas more of a strip mainstream?

I'm not sure I would go that far. We are looking at what is happening at stations with some interest. With the extent that there is a real opportunity. We really do view the Las Vegas local market as an regional opportunity. It's not really considered strategic. But if there is an opportunity that makes sense for us we will be interested. I will say that I think the void offer is a pretty full offer. I'm not sure what 100% of is exactly why they weren't selected as the stocking horse bidder. We are basically engaged at least monitoring the situations to see if it might be something we might be interested in.

All right. Do you hold any high yield bonds than any other gaming companies.

Can you repeat that?

High yield bonds in other gaming companies.

Do we have any? Yes. We do. Very small nominal amount that basically from where we have been in the past.

Okay. That haven't increased that or anything else. And then last thing, main full casino possibility, is that something that's dead at this point?

Eric, why don't you take that. Main focus.

Table games. Table games is -- for this session we will continue to -- but our effort could convince them to have it where unsuccessful. We had tried to combine it into another piece of legislation that was moving on an issue that is on the ballot in November and we are unsuccessful. We will keep chipping away.

Good luck with that one.

Thanks.

Thanks, guys.

Our next question comes from the line of Carlos Santaeraly from JP Morgan. Please proceed with your question.

Thanks. I think you addressed this earlier but I was hoping to go back to that guidance and whether or not you guys have assumed any margin improvements in the last three quarters of this year and your upping of your guidance? Or more reflection of the upside in the 1Q as well as the inclusions from Maryland, Charleston and Pennsylvania?

What we have done is we certainly re-evaluated where we think revenues for the year are and where even at expectations are. There's clearly a little bit of little better margins reflected in the rest of the year but also reflecting that as we get a little more cost conscious on our marking program some of those, we are going to have some negative impact on our revenue as we pull out unprofitable customers. So, as we go through that process where we find customers who may have been costing us a hundred cents on the dollar to get the revenue and as we discontinue some of those marketing programs, not that we have a lot of those, I don't want to overtake that, but as we discontinued those, we'll see some declines in revenues. But I think what you're seeing is slightly improved margins for the rest of the year. But I wouldn't say that we meaningfully moved our EBITDA guidance at the end of the day.

Got it. And right now will you be able to characterize if you're any closer to anything in Vegas than say three months ago. And have you seen asking prices during that period change at all?

I don't think much has changed over the last three months. We continue to look at various opportunities. Nothing is imminent. But I don't think there has been any change in what we were seeing in the environment out there over the last three months. Bill, do you have anything else?

Quite candidly our prospects are dimmer than they had been. The reality is that for whatever reason the entire world thinks that Las Vegas is healthy and driving up multiples and driving up valuations on strip properties. I guess in anticipation of a future that supposedly is rosy. And so the likelihood of us getting an asset under those circumstances quite candidly probably are going down rather than up. We will see what happens. Obviously as the quarters unfold and some of the, I'm not 100% sure I concur with Wall Street's views. But doesn't matter at this point because Wall Street has the money and they are the ones driving up those asset valuations.

Understood. Thanks, guys.

Our next question comes from the line of Steve Wieczynski from Stifel Nicolaus. Please proceed with your question.

Good morning, guys. In terms of Ohio, we try to go through and model that out. Tou basically telling about a second half opening of 2012 for both assets. And just trying to gauge what's the potential those get pushed out say six months or so into 2013?

Well, where we are Steve, right now is we are working the development fronts with our design and construction teams in both Toledo and Columbus and concurrently working with the state to put forth enabling legislation to get the regulatory structure established which they have June 3 guideline on. And Eric and I were in Ohio this week talking to the state about that process and it all seems to be going well. But they have to get the legislation passed. Set up a regulatory body, license the applicants. License the vendors and that takes time. We are currently looking at potential ground breaking later this year. And we still believe in our estimates, our second half of 2012 will be up and running in Columbus and Toledo. We right now have no other information that will say it will be better or worse.

Got you. Last question in terms of I don't think anything has changed here but in terms of your slot spend, has anything changed there? I mean with your balance sheet and capital position is anything changed in terms of your philosophy of going out and taking share by competitors by upgrading your slot floors?

No, our maintenance capital for slot replacement really hasn't changed over the last couple of years. It's been very consistent. We were turning over about one-sixth, one-seventh of our floor. We have the opening coming up in Maryland which the state is providing the slot machines on that since they own them. But in terms of what we are seeing out there, it really is more the same.

Great. Thanks.

Our next question comes from the line of Dennis Forrest from KeyBanc. Please proceed with your question.

Good morning. I wanted to kind of focus on this strengthening margins and the effective marketing that allowed nor you to beat your guidance on little lower revenues and I noticed in the second quarter guidance or I'm sorry for the full year guidance you lowered your full year guidance for revenue but raised the EBITDA. So what are you doing right on the margin side, Tim?

It's a big thing we are doing and I may mention three months ago we are seeing as I said customers coming but their spend per visit has been down. And that's a trend now for three or four quarters. We have gone back in our businesses and looked at on a customer by customer basis the profitability we have against these customers given our past marketing practices. And in certain segments of our business, certain groups of customers who are spending less and redefining the terms of what they will get in terms of their rewards and incentives and pulling back to make them more profitable for us to continue the relationship going forward. It is really just as simple as that. Going in program by program down to the customer level. And determining what margins we want to operate these programs against and then making tough decisions on customers that where they got an offer before they will get a lower offer or no offer going forward. And that's what you saw in the first quarter and that's what we are working on as we continue on into the second quarter and the balance of the year.

There will be more of the same going forward. Is that coming from corporate or is that at the property level marketing.

That's down in property level marketing folks doing that but getting assistance and guidance and resource help from the corporate office as well. It's really being driven at the local level.

Okay. Then for Bill. Bill, what was the debt at the end of the quarter?

Total debt at end of the quarter was $2.3 billion made up of in our tranch A revolver which is Libor plus 1.25 and we had 73 points and $6 billion. The tranch D, 275 and revolver is $132 million. Term loan B was $1.518 billion. Cap release is at 4.1% and then on top of that we have the two bond offerings at 6.75 for $250 million and 8.75 for $325 million comes to a total of $2.3 billion.

Okay. And the capitalize interest was there any in the quarter?

$1.1 million.

There was. Okay. That will probably go up until you get some of the properties open or maybe goes up for the next couple of years. Corporate expense,

I'll give you the number. Make your life easier. Second quarter we are projecting about $1.8 million in cap interest and then. $7.1 million for the year.

Sorry, for the year?

$7.1 million.

So it does ratchet up for the year. And then corporate overhead. It's $16 million or so in the quarter. Is that a decent run rate? Pretty good. We are projecting a little higher than that. We are on a normalized run rate looking at probably $68 million for the year. Some increases, we've got. And then this loss from unconsolidated that's an ongoing thing until you get the properties open.

Up and running, right.

Yes. Let's see what else I want to ask about. The tax rate was 35% in the first quarter but going to be 45% for the rest of the year. Why is that?

We had a favorable settlement. Not settlement. A resolution of a FIN 48 position that we were required to take as far as the 1048. So we took a reserve related to a state tax position on the Pocono sale that resolved in our favor. So we were basically GAAP allows us to take out the reserve for that. And so we had a one time adjustment in the quarter. Normally what you do is from a federal tax perspective you take a blended rate for the year and try the best of your knowledge stay with that as long as you got reason to believe it's appropriate rate. However, if you get one time resolution then that gets reflected in the existing quarter rather than spread throughout the year. A lower rate. We also had a little benefit of there were fewer than expected nondeductible items like referendums. So that tended to lower our tax rate which was a good thing. We aren't allowed. You don't get a tax deduction for your political effort. This quarter was a little lower than with a we run historically.

But you will not be spending a whole lot of money this year on lobbying like you have the last few.

No we aren't going to,

Lobbying referendums.

I'm not knocking on wood right now, Dennis. I would be shocked if we were to spend anything anywhere close to what we were spending the last couple of years.

And then the preopening in the description all of the assumptions you had preopening of $11.8 million for the year. Where is that? Is that just in G&A? In corporate expense?

For the --

Where is preopening.

For some of the properties it will be reflected -- it will be reflected in the actual property results. For instance, for Penn National and for Joliet and for Charleston, you will see that reflected within the operating results of the property levels. In the first quarter, Penn National has $124,000 and Charleston had $127,000 worth of preopennings. And then for the other items like Columbus and Toledo and Maryland and those will get reflected on a separate line item.

They will, were there none in the first quarter for those?

There was $100,000 at Maryland. That was it. That didn't get reflected.

That did not get reflected.

I'm not exactly sure. I will get back to you what line item that showed up.

Yes. It's a nominal amount. Good enough. Thanks a lot. I will pass along to someone else.

No problem. Thanks.

Our next question comes from the line of Mark Strong with Morgan Stanley. Please proceed with your question.

Hi guys. Quick question on West Virginia and Pennsylvania tables. If those come online in the second half of this year, should we expect a meaningful uptick in marketing expenses. And if so when do you expect those to burn off and return to more normalized levels?

We will certainly have increased marketing spends in advertising and creating awareness these two properties that table games is being offered. And that will for West Virginia we are expecting sometime in July to get up and running. Probably in June, July and partially in August and then it will start to burn off after that. And at Penn National probably going to be later in the third quarter we are anticipating. So, it will be a third quarter kind of effort to create the awareness the table games are there as well. And then once the awareness is created, we start driving the trial and then you'll see the pull back of those advertising efforts.

Also I think we will focus a lot of our existing media campaign items to shift to focus on the table games. So I think you will see a lot of crossover there. It's not all incremental.

Not all added in. It will be an increase but it won't be doubling up on our existing advertising effort.

Okay. Thank you very much.

Our next question comes from the line of Steven Ruggiero from CRT capital. Please proceed with your question.

Good morning. Thank you. Bill, when you were looking at the Fountain Blue, you folks were considering potentially joint venture partner. And I wanted to see if you would pursue or think about pursuing a joint venture partnership with another gaming property specifically in another jurisdiction?

We aren't opposed to joint ventures, obviously, to the extent it makes sense. Obviously if it facilitates getting a deal done, we are certainly open to it and I think we make generally pretty good partners. But I don't know I can comment anything specific. There is nothing really from a strategic level to current process. We aren't looking at anything at this point.

Obviously Kansas is a recent example of that with our 50/50 partnership with the international speedway corporation on that opportunity in Kansas City, Kansas.

Okay. And also in past comments you basically indicated that Atlantic City is into the priority. Perhaps not even on the table any more. Does that remain the case?

It really does. As we continue to look at the market and continue expect the impact of the Philadelphia casinos to open table games to come to Pennsylvania. Eventually slot products in aqueduct continues to be a market that I think is over supplied and going to have much more difficult times ahead of it before things stabilize there. It's not a market that we have any interest in right now.

And that's helpful. Last question on your Cap Ex budget for 2010 second quarter. You just provided with us helpful guidance for capitalized interest. Can you do the same for Cap Ex for second quarter and full year?

Yes. In the second quarter and -- the second quarter and full year, I don't really have. Second quarter, we are projecting project Cap Ex of roughly $85.7 million and maintenance Cap Ex of 23.6 million. For the year these numbers are highly dependent on or expect the inclusion of paying $100 million in license fees for Columbus and Toledo. We were looking at project Cap Ex of the year of roughly $439.8 million, maintenance Cap Ex now looking at closer to $94 million. For a total of $533.8 million.

Great. Thank you very much.

(Operator Instructions) And our next question comes from the line of Steve Altebrando of Sidoti and Company. Please proceed with your question.

Hi, guys. Just interested in the purchase of the preferred. Is that a one off or one you are interested in doing more of. And if you give commentary what you paid for it?

Sure. We paid effectively a per share price of roughly a little over $22 a share. We made an offer to everyone who owns our existing preferred understanding before we made the offer that the (inaudible) lion share wasn't interested but we made offers to obviously the four parties that own our preferred. Only one of them took us up on the offer and the others basically candidly politely declined. Indicating that they were comfortable with their ownership position in the instruments. And would maybe do something at some point in time when they felt the company was more fairly valued. Listen, we are absolutely committed to figuring out the best ways to improve share holder value. And if there is opportunities to where we think the share price is undervalued and we think there is an opportunity to get a transaction done we are more than happy to go down that path. Somewhat limited at this point. I wouldn't say that we are going to launch into an enormous buyback short of obviously something catastrophic happens to our share prices. Obviously if the market undervalues the Company and we will step up and take a look at that in lieu of measuring that against other opportunities that are presented to us.

Thank you.

Our next question comes from the line of Peter Delana from Citigroup. Please proceed with your question.

Yes, hi. Respect to your revenue guidance being cut, is that more reflection of when the timing of new capacity coming on? Or a more bearish view of like top line performance.

Peter, unfortunately it's tough to hear. Operator, can you help us here?

Excuse me?

We could not hear the question on our end.

Can you hear me now.

The line is open. Please go ahead.

Can you hear me now?

Yes, we can.

In respect to the revenue guidance cut, is that more reflection of the time of new capacity will be coming on or is that more bearish view on the like for like top line performance of your other properties?

I wouldn't say that it's a bearish view. I think it's a reflective of a consistent view. Candidly looking back to the last quarter's guidance, I would say that we were a little overly optimistic with where we our expectations on the revenue lines were. I think candidly, we were probably a little over optimistic on the revenue and pessimistic on the margins. I think what we done is gone back and revisited where normalized results were. I will tell you it's more, I don't think it's a reflection of the overline, overall business trends. I think it's more of a reflection of a refinement of forecasting methodology.

Okay. That's helpful. Thank you very much.

Our next question comes from the line of John Maxwell from Jeffries & Company. Please proceed with your question.

Hi, good morning. Tim, I was wondering if in Baton Rouge if Pinnacle goes ahead as they seem to be with your project in Baton Rouge, is there anything you plan to do with that asset in the future?

It's a market that we think continues to contract that is not a great place for us to think about putting more capital in, even under the existing conditions. It makes it difficult for me to understand how Pinnacle things will get a good return in the market given what we are see being the characteristics there. We believe it's a two boat market. We wouldn't want to throw good capital in a market that we don't think will be over supplied at that time. To react to somebody's decision. We have better opportunity for capital elsewhere to show accretive growth.

Okay. It makes sense.

And I'm going -- I can't help myself. I just don't understand their thought process. The reality is this is a $225 million market that's shrinking. I think it had its bubble really as a consequence of Hurricane Katrina and all of the efforts in New Orleans where Baton Rouge was the headquarters. It's $225 million, probably going down to more normal $200 million with three boats. I mean, even if Pinnacle gets 50% of the market, that is going to be $100 million in revenues with the three boat market it will be incredibly competitive. So it will be (inaudible) the spend margins I think is optimistic which leaves for $20 million in EBITDA less maintenance Cap Ex on a $250 million project with interest costs in the high digits. Their interest expense will extend the value of their EBITDA and maintenance Cap Ex. I'm not quite sure why anybody would go forward. At the end of the day, I suppose they've got internal forecasts that are different assumptions.

Okay. Certainly appreciates those comments. Eric wondering if Maryland, is there any discussion or anything down the road with potential for table games. And also can you help us -- the Maryland continues to be a seems to be fairly fluid. Any comments you can share on that?

The legislature has talked about table games but it hasn't come to any serious proposal. The governor seems to be of a belief we ought to get the existing operations up and running and see how they do. I think they are looking at the competition in neighboring jurisdictions and recognizing that arms race that's going on out there in terms of ongoing expansion in the mid-Atlantic region. But again I think you have a governor who is not willing to pull the trigger there until he sees how we fair in (inaudible) County and how they do in Ocean Downs.

We are also getting in (inaudible) Baltimore.

And getting that up and running.

The senate bill on table games didn't get airing on the house side and the legislature has adjourned. That is not a short or even intermediate term possibility.

In terms of the ongoing fluidity, we really can't speak to what's happening in the other zones other than to say that we are full steam ahead and have had a very warm reception there from our host community and from those in the legislature who appreciate the efforts we have been undertaking to get that project up and running.

Okay. Great. Thanks for the comments.

Mr. Tim Wilmott there are no further questions at this time. I will turn the call back to you. Please continue with your presentation of your closing remarks.

Thank you operator. Again, thanks everybody that are out listening to our conference call today. And certainly we appreciate the questions and we will continue to stay focused on the things we talked about and continue to get this development pipeline further along so we can realize the opportunities they each represent. Thanks again.

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