PENN Entertainment Inc (PENN) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. I would like to turn the call over to Joe Jaffoni with Investor Relations.

Thank you, Andre, and good morning everyone, and thank you for joining Penn National Gaming's 2011 First Quarter Conference Call. We'll get to Management's presentation and comments momentarily, as well as your questions, but, first, I'll 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. Penn National Gaming assumes no obligation to publicly update or revise any forward-looking statements.

Today's call and webcast may include non-GAAP financial measures within the meaning of 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 can be found in today's press release, as well as on the Company's website. With that, I'm pleased to turn the call over to Peter Carlino, the Company's Chairman and CEO. Peter?

Well, thanks Joe. Good morning, everyone. Despite some very difficult weather in this first quarter, we're happy to report very strong results with good performance for most of our property. While we are still not seeing robust top-line growth, with the exceptions of that Charles Town and Penn National, I think it's pretty apparent that Tim, with our regional managers, our general managers and their teams have done an extraordinary job of bringing cost out of our businesses.

I can tell you, and you'll certainly ask more about this, we are off to an excellent start in the second quarter, so, we'll have to see how the year unfolds. But, we're a bit more optimistic than you might have found us in the past. I can tell you also that all new construction in Kansas and in Ohio is going exceedingly well. And, we expect to break ground, in fact, as planned in Columbus next week, so we are right on target, haven't lost a day with that project. So, I think it's a lot of good news as we look ahead. As is our practice, I'm going to wrap up the summary with that, and open the floor to questions. Operator, go ahead, please.

(Operator Instructions)

Our first question comes from the line of Carlo Santarelli from Wells Fargo.

Hey guys, great quarter. When I'm looking at your guidance, and your Q2 guidance in the implied back half of the year, it looks like there might be a little bit left on the table, if I run your current margins through. Is there anything there that maybe we are missing as it relates to maybe some of the joint ventures and some of the losses that might come from them in the near term, or through the back half? Thanks.

Bill, you take better to blame for that.

I guess that would be my question. I think as we look out, certainly we are in incorporating operations from Rosecroft as well as the Sam Houston Raceway park into our EBITDA guidance. But some of the other components that are out there, is that we are moving up the date of which we expect the tenth license in Illinois to open up. And candidly, we've got -- we are looking at it going forward and recognizing that our margin improvement has been a gradual process.

I think certainly on a year-over-year basis we are ecstatic with how we have done this year, but as we went along last year our margins were continually developing and improving throughout the year.

So I don't know -- we certainly can't take this year's or this quarter's margin improvement and extrapolate that out for the rest of the year. Certainly not the rate of improvement. We're certainly reflecting margin improvement in the next quarter and the combination of all of those events together is what we look at.

We're also not -- candidly, we're not including a rebound in revenues going forward, or some kind of improvement. We are assuming revenues are basically flat on a year-over-year basis, other than at properties that have table games obviously in the second quarter. Charles Town and Penn National continue to see robust growth.

Then going forward from that, we will start to anniversary to the table games so we would expect our year-over-year revenue improvement to basically come back in line. Not to say we don't expect some growth in Charles Town, but once we get the year-over-year comparisons our revenue growth will not be quite as strong as what you've seen in the first quarter.

Great guys, and If I could just have one follow up on M, I saw that you noted little over $6 million in the first quarter, would you guys expect that property to be more seasonally similar to the other Las Vegas locals assets, or by the way you're feeding the database maybe that seasonality's a little bit different?

Carlo, I think that property will trend like all the other Las Vegas local properties trend. We have done an initial mailing that has been encouraging, and we're doing other mailings, but I think overall as that business continues to evolve, it's going to act and demonstrate performance like the other Las Vegas locals do.

Okay, thanks, guys.

I agree with that, and also would add on that obviously the M's 500 high-quality rooms is going to benefit a little better during the convention period. So that will help a little bit in terms of where the M's performance might slightly diverge, but generally speaking I would agree with where Tim is at.

Great, thank you.

Our next question comes from the line of Felicia Hendrix with Barclays Capital. Please go ahead.

Good morning, guys.

Good morning.

I have a few questions on Ohio. First, I was just wondering where are you in the process of your dispute with Columbus?

There are several of us that can answer that well. Maybe ultimately you will talk to Jordan Savitch, our General Counsel. But we are kind of past that for the moment. We have our building permits in hand, we are going to go to construction. Remember, the water/sewer issue is the only thing that's left at this time, and that is the only one that needs to be settled as we open the doors. So we've got lots of time to play with that.

I think the city has acted -- this is my untechnical term -- unlawfully in doing what it has tried to do. It will play out in court. In addition to that we have other alternatives Felicia, so I think it's safe to say we are not too worried about that now. But, as time goes by, the city's efforts have been pretty plain and transparent, and that is a matter before the courts right now and we are anxious to have a hearing on that subject.

Great, and actually part of your answer touches on my next question. I was just wondering, how do you build a property without knowing the final plumbing solution?

I don't want to be cute about this, but as a former builder, I only care that I've got place to put my sewer and water at the moment I go to hook up. Remember, the stuff is out in the street. Literally, it would take a day to tap from our property and all the plumbing in the building into the lateral that feeds in to the main lines. The same applies to water. So it could scarcely be simpler. I don't want to minimize the issue, but it's a very, very minor connection. Now, if we were forced to try to find another alternative it gets more interesting, but there are plenty. For the moment we see no reason that we should be thinking about anything other than water and sewer that's in the street.

I submit to any of you on the line, tell me the last time you bought a property of any kind, your house or small commercial property, that was connected to water and sewer that you for a moment thought that the municipality to which it was connected would cut off service. I mean it's about as unlawful as you can get. But it's interesting, and see how it plays out. Jordan you want to add something more balanced to that?

You covered every thought I had on it, but I would just stress the point that they're all alternatives. What we need to know right now is, we would like to know for planning purposes what is available to us. We do think the city and the counted acted inappropriately. We would like to know in short order for planning purposes whether we are going to avail ourselves of the sewer and water that was there at the property when we bought it or if we are going to have to consider other alternatives.

I wouldn't get too hung up on it. We are over all the early hurdles and we've got a very long time before we have to be concerned about it. All that having been said, from a planning point of view, we want to settle this sooner rather than later. And of course we've asked the courts to act expeditiously to settle the issue.

Yes, okay. Then the governor, who has hired consultants to now examine how to best roll out the gaming -- roll it out in the state, I'm just wondering has he asked you to participate in that process at all?

I'm going to let Tim handle that. My quick answer is he has not. I think that's why he's brought in an independent person. We have certainly comments to add but we don't imagine this is going to affect us with our existing facilities. Tim, do you want to add some color?

We have met, Felicia, with the governor's staff. They have deferred any discussions with them until they get the Moelis group on board and obviously issues like VLTs at race tracks, and broad decisions on how they want to think about gaming in that state going forward for the next many years, is something they want to consider holistically. We have not had any meaningful dialogue up to this point. But I do expect in the future that as they think about the global issues in that state, we will be discussing that with the Moelis group.

Felicia, let me add this. I would hope that the Moelis group, as a highly professional and objective organization, will look to places like Pennsylvania, who have done it in a very balanced way and done it well. Pennsylvania, as you know, now produces more revenue from gaming for that state than any other state in the United States, and they did it in a very short period of time.

Ohio has a similar population, so a balanced program that includes both tracks and our planned facility makes a lot of sense, assuming they are willing to move tracks to places where there is not gaming, and balance it around the state as they did in Pennsylvania. There is an enormous opportunity for the governor there, but we will have to see how it plays out.

Okay, moving off of Ohio for a second into Vegas, obviously you guys have been looking for a solution in Vegas for a while. I'm just wondering, following Pinnacle's marketing alliance with Wynn, could you make a similar type of alliance with another casino company, or are you still more focused on acquiring a Vegas property?

I think Tim could take a whack at that one.

Yes, we have made a bet in Las Vegas right now with our database, and that's with the M. We want to -- obviously given our equity position at that property -- take advantage of our database in the performance of that property. We don't see any need regionally to have a Strip connection with Las Vegas at this point. It's not hurting us, and the M is providing an attractive solution to customers that we've marketed to when they've gone out there this past quarter.

That doesn't diminish our interest, if there is the right opportunity for our shareholders on the Strip. But we do not see any need to align ourselves unless we have an equity position with something on the Strip, and so far the early results at the M have been encouraging.

Okay, great. I have a few other questions but I will get back in the queue. Thanks for your time.

Thank you.

Our next question comes from the line of Shaun Kelly, with Bank of America, Merrill Lynch. Please go ahead.

Good morning everyone, this is Vince standing in for Shaun. From the comments in the release, it sounds like you guys are attributing the bounce in late February and March more to improving weather rather that the consumer, so could you comment a little bit more on what you are seeing from your customers and maybe to what extent the better trends in March continued in to April? Then I have a follow up.

Let me, Vince, try to cover what we are seeing from a consumer standpoint. Generally in the first quarter, as I think Peter referenced, and I think Bill did as well, it was kind of flat overall. We are seeing some slight strength in the VIP segments, and we're also seeing some slight strength in the retail non-rated spending across our businesses, but generally over all it's been flat. March was generally flat as we looked at it. Now February was up, but that could be more driven by weather than anything else. So those are the general consumer trends we're seeing.

As Peter referenced, we have gotten off to a decent start in April. One of the things we have and will watch obviously very closely, we had an early Easter last year, which is now a late Easter this year. We will see how that effect occurs as we close out the month before we are going to give you any further evidence of what changing trends there may be with our consumers.

Okay, fair enough. Then on oil and gas prices rising -- is there any early impact you are seeing on spending that you are worried about, either directly on gaming spend or on the margin with non-gaming spend. Is there a gas price threshold you guys have in mind where it becomes more of an issue?

Hey Vince, we have not seen any correlation with gas prices and our spending patterns of our customers at our casinos. For the most part, our customers reside within a 30-mile radius of our property, so a $4 a gallon gasoline price is not a big piece of their equation as they think about visiting us. In fact, you could probably make the argument that this would force people to stay closer to home and not travel long distances. I go back to my experiences in 2005 and 2006, where we saw similar kinds of gasoline prices, and I have never found in any of these regional businesses any correlation of gas prices affecting casino visitation or casino spending.

Okay, fair enough, thanks, guys.

Our next question comes from Neil Portus of Goldman Sachs. Thanks, good morning, guys. I was just wondering, what are the upcoming or next steps towards a potential statewide referendum in Texas?

Eric?

Sure. Well, The slots at tracks bill that we are supporting with our partner at Sam Houston race park is currently pending in committee with another bill that is being sponsored by those seeking stand-alone facilities. In addition to that, it's anticipated there may be a compromise bill to somehow blend elements of the two, which is being supported by the chairman of that committee, Chairman Hamilton, and we may see a final bill and a committee hearing as early as next week on that. So it's all sort of fluid right now.

We're hopeful, as legislators in both chambers continue to wrestle with ways to tackle a budget that is as much as $25 billion in the hole by some estimates, that they'll turn to gaming. Remember, too, there is always the possibility given on the budget, the House and Senate are currently billions apart in terms of coming up with a solution, that there could be even a special session later this summer, even into June and July.

Now if, to answer your question about the referendum then, obviously what we need to do is get to 100 votes in the House. It would then go over to the Senate, where we believe we have a strong amount of support there. It would then go to the ballot in November. So we're hopeful, we have to see how it plays out over the next couple of months.

Great, thanks. Just a second question, is there an update to the Illinois House push to repeal the smoking ban?

The only update there is that while it passed the House, the challenge will be in the Senate, where the Senate President is the one who sponsored the original smoking ban bill in Illinois. So it's pending, and could be part of a broader discussion as they look at other gaming bills and other gaming issues, but right now it's kind of just treading water, and again, the challenge is going to be getting it through the Senate President.

Great, thank you. Our next question comes from the line of David Katz with Jefferies and Company. Please go ahead.

Good morning. I wanted to ask about your unconsolidated JVs line item. Mario has aptly tried to keep us informed and up and to speed on that. But there's a lot of pieces in there between what I assume is Kansas, and as well as a handful of tracks, et cetera. If you could give us a little color on how you expect that to evolve through this year and into next year, because it is starting to turn in to a meaningful number now?

Yes, obviously that represents free-hold Maryland Jockey club, our Houston efforts, as well as currently the Kansas Speedway. Issues -- the Kansas Speedway is included within our pre-opening line item in the guidance. So that component is pretty well separately identified. Relative to the other pieces, we are continuing to work on bringing out how to reduce those losses and all of them are related, quite candidly, to future growth opportunities.

So it's a matter of, you keep the places open and obviously they are losing money, and the trick is to lose the least amount possible, until you get -- you bring the opportunity to fruition. On an overall basis for the year, I think we'll find that we should at least for the properties that are continuing in a year-over-year basis, that we should see some progress in terms of reducing those levels of losses.

Clearly within Maryland Jockey Club right now, which is a number that's included -- it's a pretty decent number in the first quarter; that does not take into account any kind of rebates and other issues that are in front of the Maryland legislature in terms of reimbursing operating losses, when in fact those monies are authorized and finalized and start getting paid, that would obviously reduce the operating losses significantly from the Maryland Jockey Club.

I'm not really going to give property-by-property specific guidance. That's kind of obviously the benefit of giving overall guidance is that obviously some properties will do better and other properties will do worse. Suffice it to say, we think we've got the money-losing track business as under control as we can possibly have it. And we continue to make progress.

If I were to just look at the first quarter, should we expect that to continue to M -- just directionally, right, I mean I understand why you won't give us individuals, nor should you. But should we be looking at that minus $2.3 million as a up, down or sideways number?

Well, clearly in the second quarter, Maryland Jockey Club will swing from a negative to a positive because of the Preakness. Clearly in the second quarter you are going to see a dramatic improvement. First quarter results are generally not -- are probably some of the weakest results. The winter months in the racing business is probably the worst quarter. So I would expect that as you go out throughout the year, the seasonality, combined with the concept of the fact we are doing some stuff to try to reduce our operating losses, should see better results going forward than what you've seen in the first quarter.

And if I can I ask two more --

(multiple speakers) again that the state has stepped up through the governor's office and the legislature to provide support money to mitigate the losses for MJC. Eric, what is the timing? How does that unfold?

Steve, are you there? I think you've got the most recent update on that.

It has, it's on the governor's desk for signature. It's got an emergency preamble, so as soon as he signs it, it will be effective. So we should begin to be the beneficiaries in the very near future. That is, to Bill's point, that has been completed at this point.

Good.

Okay, If I could just ask two competitive question, quickly. How have we thought about Anne Arundel impacting your nearby properties? And secondly, in the Las Vegas locals market with your limited experience, what are you seeing on a promotional front, and how competitive is it for labor? That's certainly a confusing market at this stage for us.

Let me try to take the second question first, David, with what is going on in the Las Vegas locals. We really haven't seen much change in the promotional environment there in the first quarter. I would characterize it as moderate. The competition for labor has not been one that caused us to make -- or caused the M management to make any changes. It's still fairly stable unemployment. I saw it dropped to about 13.5%, most recently out there. So we don't have really any pressing concerns about our ability to attract and retain quality labor there either. So we really haven't seen from 2010, into the first quarter of 2011, much dramatic change in Las Vegas locals. It's really more of the same out there.

M has seen some modest growth, as Bill said, from their group business, which continues to grow, and also from business from southern California, and in addition to our customers who visited there in the first quarter. But there really hasn't been any material change in the locals business in Las Vegas. It's fairly stagnant.

Relative to Anne Arundel, it's our expectations -- they earlier announced they were going to be opening this year. It's pretty evident that's not going to open in 2011, it will be opening sometime in 2012.

Mid-2012.

So obviously -- we originally actually didn't have any impact in 2011 in our guidance anyway, because we made a value judgment on our own that it was unlikely that they would have -- open enough -- early enough in 2011 to have an impact.

Looking out into next year, obviously it's not good. I mean, clearly having a facility with that many slot machines located closer to a significant portion of your customer database is not what you would like to see. Having said that, there are going to be a number of factors we just don't clearly have a handle on yet. We don't -- they're building a temporary facility. They are not going to have smoking. We are going to have smoking at Charles Town. The traffic situation, of terms of the convenience for which it would be to get to their property is yet undefined.

So as we look out, we have a wide range of potential impact to the property. I think there is roughly 33% of our customers are from Maryland, but we're not going to lose all of those. Obviously they're going to be at a higher tax rate, although our tax rate is not anything that gives us a whole lot of flexibility and room to work with. But they certainly are not going to be able to out-promote or get aggressive on the marketing side. It's going to be a safety, convenience, and amenities quality issue. We will see how it plays out.

Another thing just to add, David, to what Bill just said, as you can see by the numbers in the first quarter, our table games business remains very, very strong, we're going to be adding 20 more table games come the end of the second quarter to the operations, to take advantage of that growth. We have over 100 games heading into the summer. We also will be completing our $40 million capital program, opening up our entertainment lounge and sports bar come June/July, to complete the transformation of Charles Town. So we think the experience will be extremely competitive to what Anne Arundel will be offering in their temporary environment.

Okay. Thanks, well done, guys.

Thank you.

Our next question comes from the line of Joe Greff with JPMorgan. Please go ahead.

Hi, guys. Good morning, this is Jim, actually, I'm speaking for Joe. Could you give us the trailing 12 month EBITDA for M Resort and can you break it out by quarter?

No. (laughter)

Any color you could provide would help.

For all intents and purposes, we've certainly given what we thought the last year's run rate was, we gave what the fourth quarter was, we have now given what the first quarter is. Clearly the property is doing a fantastic job of reducing their operating expenses and becoming more efficient.

And it's really in some ways -- a lot of ways -- that property and management team there is doing a great job. And it's a function of our decentralized process. In other words, that they are actually going off and making the decisions that are obviously good decisions, and we are starting to see the benefits of that. We have certainly been involved, and they've certainly been willing to inform of us of what it is they are doing. At some level, we don't really have control yet, because we are not licensed and we don't have the ownership. At the end of the day all of the steps that have been taken have been taken by the management team.

We've certainly been helping them a little bit with access to our database and the 2,500 room nights we have been able to move to the M certainly is also helpful. I think we are still very encouraged by what is happening at the M.

I'm not going to give actual trend lines and the rest of it, because I think there is a lot of noise in some of those numbers as well, because some of those quarter-by-quarter results include different items, severance, or related to transaction fees related to the negotiations around the bank deal, and all of that stuff. So without really giving -- I think it would almost be more misleading to provide quarter-by-quarter information than it would be helpful.

That's fair. And then could you just give us the cash debt equity and breakout CapEx for the 1Q?

Yes. First quarter total cash at Penn was $234.5 million, which is broken out in unrestricted sub, was roughly $59 million, leaving the operating cash levels for Penn at $175 million.

On the debt side, we had $35 million of drawn revolver, $1.518 billion of term loan B for a total bank debt of $1.553 billion. We had the two bond issuances of $250 million and $325 million, and then capital leases and the Aurora police services obligation totaled to roughly $6.9 million, giving a total debt of roughly $2.135 billion.

CapEx for the quarter was $54.5 million, of which that includes roughly $14.7 million for maintenance CapEx and project CapEx was roughly $39.8 million. We are looking, for the year total, CapEx this year of $443 million, which would be $85 million of maintenance CapEx and project CapEx was $287 million.

Great, thanks a lot, guys.

Our next question comes from the line of Steve Wieczynski of Stifel Nicolaus. Please go ahead.

Thank you, good morning, guys. So going back to Texas, a follow up there, I guess it's pretty interesting that you guys say that polling is pretty favorable, but your competitors who are building assets in Louisiana say it's still negative. I guess the question is, if this goes to a referendum at some point, how do you guys feel about the potential to passage, especially going into a year whether it's 2011 or 2013, where it's a non-Presidential year?

Well that's kind of a fun one, I have to stick my nose on that one. You would expect nothing less from what you describe as our competitors in Louisiana. The polling's been pretty clear, and Eric will speak to that, that the voters in Texas would strongly support this. The trick of course is to get the legislature to step up and give them that opportunity. Eric, why don't you take a whack at that, please?

Yes, I was going to say, when you look at our polling, which we've done an extensive amount of polling, the strongest question that moves the needle is, how do you feel about the neighboring states continue to benefit from the revenues of Texas gamers, as opposed to saving the money here for the benefit of our states? So we have pointed out to every legislator we can in Texas that Dan Lee's $400 million project was approved right on the border, and they're continuing to sort of thumb their nose at you in Texas thinking you can't pass this. And frankly that has gotten a lot of attention from legislators who otherwise may not be looking at this as a potential piece of an overall budget solution.

There is a lot of pride in Texas, as you may be aware. So we're hopeful that as they look at and understand the benefit other states are receiving from Texas dollars flooding across the border, they'll get the joke as we say, and pass this thing.

Once we get to the ballot, there is an overwhelming amount of people, and both Republican, Democrat, Tea Party -- cuts across all different political stripes -- who want A, the chance to vote on this, and B, are okay with slots at the racetrack, because it's not an expansion of the current footprint of gaming in Texas. We think that's an important part of the solution this time around, as opposed to more expansive efforts that others are espousing.

Okay, got you one more follow up, probably for Tim. Tim you talked about the promotional environment in Vegas, but when you look around the rest of the country, is it pretty rational at this point, or are there still some markets out there that are still a little bit irrational?

No, I would characterize around the United States, the promotional spending environment is very rational. We saw some peaks back in the summer of last year in a few markets in the Midwest and South. That has really come down nicely, and we don't see anyone out there that's really causing any promotional spending imbalance in any of these markets which is encouraging and, knock on wood, hopefully will continue.

Okay great. Thanks, guys.

Our next question comes from the line of Mark Strong with Morgan Stanley, please go ahead.

Hi, it's Amir in for Mark. Just a quick follow-up question about margins. It seems like you have close to, or even at record margins at a bunch of your properties, so just a longer-term question on once you see revenues start to recover a little more, how do you see those margins trending? Are there any costs that have to come in as business comes back, you think it's sustainable?

Mark I, think our cost structures are very sustainable. If we see any recovery in the top lines of our business, I think there are opportunities to improve the margins of the business over where we are today. We've got a very rationalized cost structure today that doesn't -- if business does get better, I don't see changing materially. I think there is, if the consumer does come back, there is some opportunity for us to continue to expand upon these margins.

Thank you.

Our next question comes from the line of Larry Klatzkin, Klatzkin Advisors. Go ahead.

Hi guys. Most of mine are answered, but one question, I-gaming -- a lot of these gaming companies are talking about partner up. You guys, Peter, have any interest if this gets legalized in America, and trying to join the pack, do you have a large diversified customer base network?

Larry, a couple of us will take a whack at that. My position has long been that online gaming is a bad idea. A bad idea from a whole lot of social points of view. It's one thing, when people have to get in the car and make a decision to visit the casino, quite another when they can roll home at quarter to 12 at night, be 18 years old or younger, and as I like to say, be playing poker in their underwear at home, I have serious concerns about that.

However, I'll say the tide may work against us there, so that we are beginning to look at that very hard. Got to be realistic and practical. As much as I would like it not to occur, and I really don't think for a whole host of reasons even beyond those I've added that it's a good idea, I think it may be inevitable. Tim, why don't you take a whack at that one?

Sure. Larry, as Peter said, we do think somewhere down the road it will happen. I think with what happened last Friday at the federal level, probably makes anything happening in Washington more remote, more long-term than it was prior to that. We do think something down the road at the state level will eventually evolve. We've engaged discussions with a lot of different providers of internet poker applications to assess their capabilities and talents and fit with us, as we continue to explore this.

So we are continuing to look at these capabilities. We certainly realize it's something we are not going to develop internally that we'd have to partner with someone externally. We have not made any decisions yet on who that potentially would be, but we're preparing for what will eventually happen, we believe. We just don't know when.

All right. Thanks, guys.

Our next question comes from the line of Dennis with KeyBanc. Please go ahead.

Yes, thank you very much. I wanted to follow up on promotional details. Maybe Tim, can you give us some real examples of what's been going on in the promotional arena for your properties? How are you reallocating your dollars, and how is the promotional allowances total dollar less than in the first quarter of 2011 than it was in the first quarter of 2010, even though revenues were up pretty dramatically, with new properties and the growth at Charles Town and Penn National?

Generally, Dennis, what's happened, and Bill described it before, this is something that's been evolving now for at least five quarters. We have looked at our customer spending patterns over the last couple of years, which have been declining, and we have been revising our customer reinvestment levels based on the new spending patterns. Especially at the low end of the customer worth spectrum, the customers that are the $10 to $99 a trip player, we have been able to take a lot of our spending away from those customers and trying to hold our margins on a per-customer basis above 20%.

And with that, we have been able, year-over-year, probably to take about 100 basis points out of our overall promotional spending across the enterprise. That's what we have been doing. That's what we are going to continue to do.

As I described before, we have seen two things happen by that. We've seen customers continue to engage us and continue to be rated at lower reinvestment levels, and those low-end customers also have elected not to use their card, because they feel for whatever reason the value is not there. We are seeing a nice increase in retail spending in the non-rated segment, and we believe a part of that is conversion of the low-end graded retail customer to an un-rated customer, which obviously doesn't get any marketing thrown to it.

Okay and just secondly on Columbus, if I can revisit that. Peter you said you have other alternatives if things don't go well in court with the city and county. What would those other alternatives be?

Well, on-site is certainly one. We have not really played that out, nor applied for on-site, both water and sewer. Both are perfectly reasonable possibilities. Keep in mind we do our own water and sewer at our biggest prop -- like Charles Town and Penn National, we do both, so we are quite comfortable doing that. If the city should take us out of, and the county out of, its zoned area, you can't have it both ways, we are either in or out. We always have that alternative. I don't want to get into the particulars, because there's a number of choices that we have looked at. For the moment they are on hold, because we don't want to spend that money or go down that path if, as we would hope, the court will rectify the behavior of the city and county.

Okay, thank you.

Our next question comes from the line of Brian Egger, with Forecastle Research.

Follow up to the earlier question about margin performance and competitive conditions. One of the markets where you've been doing quite well in terms of the margin improvement front despite pretty lackluster demand conditions and top line conditions is the Mississippi River and Gulf Coast region. I don't know if you can speak to anything operationally about what's happening there? Obviously, the margins have been quite nice given the relatively anemic backdrop in the market.

Well, really not much different than what I described to Dennis overall down there on the Gulf Coast. Promotional spending has been fairly rational. The only other thing affecting those businesses, we've been able to reduce our insurance costs there as well. That's really the one big difference from the rest of the properties. Our properties in Bay St. Louis, Biloxi and Baton Rouge are seeing some nice efficiencies in our insurance cost as we continue to get past the post-Katrina era.

When we -- our last insurance policy, which was post-Katrina was a three-year policy that we were -- basically expired at the end of last year. So basically the insurance market has gotten much more favorable, so when we renewed our policies, and the big driver of where that cost was, was in the Gulf Coast, so the allocations, and that's why you are seeing probably on an annualized basis, on the order -- I'm not going to give the exact number -- but the concept is, that insurance rates came down dramatically from where they were immediately after Hurricane Katrina.

At that time we locked in a three-year policy with the concern at that point in time that there may not even be any insurance available in the following year if we had, unfortunately, had any hurricanes in the Gulf Coast area or, candidly, almost anywhere on the entire eastern seaboard. So those rates were fairly high, and now we've obviously got the benefit of more appropriate insurance rates.

Okay, thank you.

Our next question comes from the line of Justin Sebastiano, Morgan Joseph. Please go ahead.

Can you be a little specific as far as seeing any customers returning that had stopped coming following the rationalization of your marketing effort in the past year or so?

Justin, the quality customers never stopped coming over time, over the past three years, during this recessionary period. So we didn't lose customers. Generally overall, though, our admission counts are fairly flat as well. I'm not getting the sense that we are getting an influx of new customers to our business at all. I think it's just been the same group of customers. We are seeing slight improvement in certain segments in spend per visit as people get a little bit more comfortable with the expectations of the future, but I would not characterize any of our business trends as a recovery of customers who stopped visiting us in 2008 and 2009.

Okay, you mentioned before that you believe that the low-end rated player that's not getting the comps that they used to, you have been able to convert them possibly to the retail side. What gives you confidence that's true? How would you know if somebody wasn't using their card, and they become nameless, right? How would you know?

We clearly look at the trends of our low-end rated segment and the trends of our unrated segment versus overall admissions in our properties. Clearly we can see it working both ways. We've seen times in the past where there has been an influx of rated business when in better times we are trying to acquire new customers.

You never entirely know, but you certainly have enough data points to see that there has been a conversion away from your rated activity, which we saw declines in our businesses in the first quarter across all of our properties in the $1-$99 segment and a corresponding increase in the non-rated segment. I would say a big part of that is conversion from rated to not rated. But again, on a customer-by-customer basis, you never know.

Okay. And then, forgive me if you addressed this already earlier this in the call, but corporate expense is the highest it's been in a while. What's in there that's caused the increase, and is this a good run-rate going forward?

In this number, which I did address earlier, but that's all right, we will address it again.

I appreciate that.

Not a problem. Effectively, there is legal expenses related to a number of issues around the acquisitions of these properties, because they are currently required to be expensed. So we've got transactions around Rosecroft, transactions around Texas, transactions or costs around the M that were all borne, big part, in the first quarter. Also have a little bit of additional expense running through related to the Company's decision to issue some -- I call them phantom stock options, or stock appreciation rights, instead of option grants. That's also running through, but that's a much smaller component of what affected the second quarter -- or first quarter, sorry.

Okay. Looking at the credit markets and they are pretty favorable right now, based on some of what the debt costs that some of your competitors were able to get recently, you've got some debt coming due, I assume you guys are obviously looking at that now. Can you give us a little color on perhaps a refinancing, and where you think your new debt costs will come in compared to what the current bank debt is costing you now?

Currently, our term loan B is around LIBOR plus 175, I certainly would expect that as we go out and do a refinancing that those costs will go up. But if you look at where companies that have twice the leverage we have, pricing's have come in, obviously they are coming in somewhere maybe 100, 125 basis points higher than where our current debt is, I would expect us to come out somewhere between where we are at and where they are at, probably the best answer projection perspective. So I don't -- if you look at it, it's certainly less than a 100 basis points increased cost on the term loan B.

Lastly, if I may, the tenth Illinois gaming license -- the impact on properties -- is it fair to say that Elgin will likely take the most impact, based on location and the product offering, compared to Aurora and Juliet. I'm not saying Aurora and Joliet won't be impacted but I believe Elgin probably takes the biggest hit -- is that a fair statement?

No, we agree. We think the property that's going to be most affected will be Elgin, followed by Aurora, followed by the properties down in Joliet.

There also will probably be some effect in northwest Indiana as well, with customers coming from within the Loop.

Okay, thanks guys.

Our next question comes from Steven Ruggiero with CRT Capital.

Thank you. You generated a 26.7% EBITDA margin in the first quarter and your guidance is indicating almost that level in the second, but your second half EBITDA margin implied here is 23.5%. I understand Illinois is kicking in, you've also indicated that you have a sustainable cost structure. Could you give us a sense if one, if M Resort, the consolidation of that is dragging down your second-half implied guidance?

It is.

What other factors? I know you addressed it as the first question of the call, but it seems like a big down-tick.

I don't know if it's a big down tick. Clearly the first quarter is a great quarter. It's probably one of our strongest quarters relative to how our properties performed. You certainly cannot expect us to continue to have the same margins in the third and fourth quarter that you see us having in the first and second. So there's a seasonality effect. There is the impact of the M, there is the impact of additional racing operations, which do generate revenues and generate losses. So those are clearly counter-productive to overall margins.

We also have for five months, the removal of the RAMA management fee --

That's true.

-- which is extremely high margin that we have concluding at the end of July; however, we are in negotiations with the Ontario government and we do believe we're going to get a short-term extension on that, that will carry us through the first quarter of 2012, but that's not in our numbers as well.

Okay, that RAMA fact is a helpful one, thank you. Also, in terms of the ramp up of M Resort to begin optimizing, however you envision optimizing your operations there, given the current locals competitive environment and the economic backdrop out there, how long, what time frame do you think it is before you get to the first level of operations that you find satisfactory? Define it however you will.

First answer, we will never be satisfied. I think what we've indicated on prior calls, and we still stand by, is that we believe we can get this property to perform at a level where on a acquisition basis that it's going to be inside of our Company multiple. We think that's going to happen within a reasonable length of time.

Clearly we are very satisfied with the progress we made in the first quarter, that the management team made in the first quarter, that's clearly a significant improvement over the EBITDA levels the property was performing at the point in time we acquired the debt. I think we are -- quite candidly, if we continue to see the rate of progress we are seeing now, we are going to get to that number very quickly. But what I mean by quickly is probably next year.

Having said that, this is a property that originally was constructed for a cost pretty close to a billion dollars and these levels of operating performances are clearly on that basis, would be entirely unsatisfactory. I think that this property is going to be dependant on how well the Las Vegas Valley's local market does. If unemployment is going to continue to stay in the high- or mid-teens, it's going to be a long time before you see really good results -- outstanding results, I guess, is where we eventually look for this property to perform at. I know that's not a very --

Thanks, Bill, just one last question, too, and that's the performance of your unrated customers during the last quarter?

What was the question?

What was the performance of your unrated customers, foot traffic, win per visit, of unrated customers, as best you can tell?

Well, across the Company, it was one of the segments that showed, mid single-digit growth. That certainly was benefited by the addition of table games in West Virginia and in Pennsylvania. But even at the other properties it had fairly constant comparisons year-over-year. It was up in the low to mid single digits.

Great. Thank you very much.

(Operator Instructions)

Our next question comes from the line of Ryan Worst from Brean Murray.

Good morning, guys. Peter maybe could you talk about some of the other legislative issues in Ohio? I know the governor has talked about increasing fees. How difficult would that be to get through given the legislation passed for the existing casinos?

Well, let's, I would rather limit our comments a bit until we kind of see how the consultant arrangement plays out. It would be very difficult for the governor to make any changes with what is settled today in the constitution. We don't expect that he will.

Look, I think he is just trying to generate as much revenue as he possibly can. I think he has an opportunity as he look at the race tracks. That really is his to put his stamp on. Remember this legislation had failed numerous times in the past. This was a major accomplishment for us. I think -- well clearly E is settled. So he would have to go back and try to change the constitution to fiddle with this. We are not worried about that. I think the discussion will hinge more around what happened at the race tracks. I don't know, Eric or does anyone else want to add color to that?

Yes, I would say the governor has been the first to acknowledge he doesn't know what he doesn't know about gaming in Ohio. We are just hopeful that as the experts get on board, they can guide him to how fair a deal this is for Ohio, how good a deal Issue 3 is for Ohio, particularly when you consider the tax rates in the neighboring states, the up-front license fee, the north of a billion dollars in private investment, 34,000 new jobs that are going to be created -- the reality is, we and Rock and Caesars, we represent economic stimulus in the state of Ohio. We are hopeful that the expert that he's hired can help him climb the learning curve rather quickly and understand that this is a very, very good deal for the state.

Okay thanks. Just a couple of follow-up questions. When Kansas City Speedway opens, is that still going to be in the unconsolidated line? And then Bill, was there any pre-opening expense in the first quarter like maybe at Joliet?

No. In Joliet, effectively there were no pre-opening expenses in Joliet. Yes, Kansas will stay as a unconsolidated affiliate, post-opening. I think. Actually, I may have to go back on that. I will give you a better answer on that. There are some issues around, because it's 50/50, control issues and et cetera, et cetera. I will -- it's really an issue for next year. Let me get back to you on that one because I don't want to be definitive.

Okay, thank you.

Our next question comes from the line of Anthony Powell with Barclays Capital. Please go ahead. Mr. Powell your line is open, please go ahead.

One quick question on Joliet. The margins there were a bit lower than what we originally thought. What were the cause there, and can that get back to normal over the next few quarters?

Clearly, Joliet was the one property that did not perform up to our expectations. We had finished the conversion of that property, the rebuild of that pavilion landslide operations late December, and we opened the final piece of it, the sports bar and entertainment lounge in January. It's very much a new operation that we are trying to stabilize.

We did have a couple of one-time expenses in the first quarter -- a large bad debt expense and some legal expenses. It probably represented about $850,000 of expense that won't re-occur and it gets the numbers a little bit better, but not where it needs to be. On top of that we were closed for about a day and a half in early February with the bad winter storm that came through Chicagoland that also hurt us.

And we have picked up share vis-a-vis, Harrah's Joliet in the quarter, but we have some continued work to do to continue to grow that business and get our non-gaming areas to perform at a better level and to attract more business. Clearly as an operating group here at Penn National, that is the one property we are laser focused on showing improvement going forward.

That's it, thanks.

There are no further questions at this time.

Well, okay. With that, we thank you all for tuning in this morning and look forward to talking with you all next quarter. Thanks a lot.

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.