PENN Entertainment Inc (PENN) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and 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). I would now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations. Please go ahead, sir.

Thanks, Frank and good morning everyone, and thank you for joining Penn National Gaming's 2011 third quarter conference call. We'll get to management's presentation and comments momentarily as well as your questions and answers 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 could vary materially from expectations.

The risks and uncertainties associated with the forward-looking statements are described in today's news announcement, and in the Company's filings with the Securities and Exchange Commission, including the Company's reports on form 10-K and form 10-Q. Penn National Gaming assumes no obligation to publicly update or revise any forward-looking statements. Today's call and Webcast 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 measure calculated and presented in accordance with GAAP can be found in today's news announcement, as well as on the company's website. With that I'll turn the call over to Penn National's Chairman and CEO, Peter Carlino.

Thanks Joe, and good morning, everyone. We are, of course, happy to report another very good quarter here at Penn, with good performance from virtually all of our properties. Notably, construction is proceeding well with our 3 large projects in Kansas City, Toledo and Columbus, Ohio. And so this, from my view, is a very good time here at Penn National. As has been our custom for now quite a few years, I will -- that probably ends my official comments, and we'll open the floor to questions and go to the issues that you folks want to hear. So with that, operator, will you please open the floor?

Thank you. (Operator Instructions) Our first question comes from the line of Felicia Hendrix of Barclays Capital. Please proceed.

Hi, good morning, guys.

Good morning.

Good morning, Felicia.

Good morning.

So, first I wanted to ask you -- reported a good quarter. Peter, you stated in the release that you're not seeing -- despite the macroeconomic environment, you're not seeing disruption at your properties. You're not alone in stating that. Other regional operators have said the same thing. And I'm wondering, do you think that's mainly because the markets really haven't recovered since 2008 or is it something else. I know you have made a lot of investments in your properties but I'll really asking just about the stability as a whole in the regional gaming arena because people are certainly concerned about that.

I'll give you a very quick answer and turn it over to Tim, who of course lives with this day by day, hour by hour. I think this is more a macroeconomic issue, it's just broadly how people are feeling. I think -- this is my own view. As you know, we were all out in Las Vegas, and much of the industry, for the gaming conference just a couple of weeks ago and the place was busy. It really was busy. Look, it's not what it had been, but obviously people want to get out, want to have a good time, enjoy what we offer and I think that's true on a regional basis as well. So, the issue, in our view is I think, is absolutely macro. But look, if we continue with the market down quarter after quarter after quarter and people start looking at their 401Ks and retirement funds and so forth, that could change. But at the moment, at the moment, it's been pretty strong. Tim --

Felicia, we saw flat same store sales growth year-over-year in our existing businesses. And I agree with Peter. I think it's more of a macro issue. I've always contended that our consumers are very sensitive to unemployment rates and their home prices and that really hasn't changed too much in the last quarter, and I think that's reflected in our business lines. They've remained very stable. We're not seeing any uptick, we're not seeing any down tick, and on top of that, as I've mentioned recently when I'm speaking in Las Vegas, we've seen a very, very rational promotional spending environment in the regional markets that have allowed us to continue to be smarter marketers and continue to shave off expenses to have better overall margins in our properties.

Great. That's really helpful. Thank you. And then Peter, you've talked in the past about how you guys don't necessarily do well when you have to bid on a new project. With that in mind, I'm just wondering, how do you view your opportunity in Massachusetts, and of all the opportunities for future growth you have after Ohio, I was just wondering if you could list out for us how you would prioritize those?

Well look, let's talk to your first point. Namely, my view about auctions. I've always jokingly said the winner loses, which in my experience has often been the case. If you don't care about what you pay, then boy, you can buy a painting at Sotheby's, for example, for almost anything. Look, we generally are not anxious to win auctions. I've been pretty open about that. That being said, that doesn't mean we're not going to participate.

If you look at Massachusetts, for example, that in effect may be a semi-auction. I think the project quality is going to count, location and community support's going to count, and, ultimately, dollar spend is going to count. I think in that situation, we probably will be a major contender and -- because I think the market can support that 1 facility in the various identified regions. So, we'll be probably pretty formidable there. You can count on that. In Ohio, I'm not sure how that relates so much to bidding. That's more of a legislative issue. The free-standing facilities of course are settled. It's not clear to us just what the state would wish to do with the race tracks. Much of the mechanics of this has been identified. What remains of course is the question of where will the tracks be located. And it's really down to that. Eric, do you want to volunteer a thought on timing or any -- or Steve, whoever wants to.

Peter, with respect to timing on the relocation, the state is obviously very anxious to get these facilities put to bed. There's been a constructive discussion with the administration through their financial advisor, and we just have to wait to see. I don't know if it will be this week, this month, but they certainly are motivated to get the lay of the land for VLTs clarified in Ohio.

Yes, and we're willing to do what it takes, frankly, to maximize revenue there. Look, we've made our case to both, as the advisor to the state of Ohio and to the -- to government itself, that the right idea is to do much as Pennsylvania did, and put these things where they're going to have the most impact, and that is to spread them around the state. I think that idea has pretty well sold. How it will play out, we don't yet know but I think Steve said it. They clearly want to get to an answer sooner rather than later, and we expect that any time, any week, any day there should be some answer.

Let me just add if I could, Felicia. This is Eric Schippers. We successfully -- as it relates to Massachusetts and the auction process. We successfully lobbied for a provision that we'll call, for lack of a better term, put your money where your mouth is. Which essentially means that when you apply for your license, you have to lay out your project and you have to commit to the full project and the big PR number that you're throwing out there, or it could be something that the Gaming Commission ultimately will revoke your license for if you don't fulfill all the phases of the project that you have promised. You also have to put up 10% of the project cost into escrow to commit to this. So, when we go into these auctions and people promise these 5 phased, wonderful huge things. Then the state comes to learn that they really didn't have the financial wherewithal to do it, or they were really only intending to do the first phase of the project. I think Massachusetts has wisened up to that and I think this whole thing will keep the game honest for us.

Yes. Believe me, we intend to hold our competitors' feet to the fire. Put up the cash or don't bother. We will be formidable in Mass.

Okay. Great. Thank you so much.

Thanks.

Our next question comes from the line of Carlo Santarelli, Deutsche Bank. Please proceed.

Hi guys. Thanks. I guess I could understand and appreciate the desire to maybe keep some information to yourselves with such a large breadth portfolio. But could you guys kind of talk us through maybe some of the thinking behind the way you've now organized in the geographic regions, and the reasons for doing so? And, if you could, as a follow-up, if you could comment -- obviously you bought back some stock in the period. Is that going to be more sensitive to valuation on a go-forward basis, or is taking in some incremental stock something we could expect over the next few quarters? Thanks.

I'll take -- I guess I'll take both. The reasons behind going to the regional approach is pretty straightforward. We've got -- we're broken up into the 3 regions. We have regional ops people that are overseeing groupings of properties as laid out in the press release. The other reality is, quite simply, that 22 separate properties is becoming cumbersome and overwhelming in terms of the reporting requirements and the amount of detail that we're providing, and as we continue to grow, we could end up with just pages of individual store detail.

Now, going forward, it also helps that, quite candidly, I've had several -- or at least more than 1, public company CFO call me to ask me to better understand our corporate allocations. So, they could do some property by property analysis, comparing our individual properties against theirs, neither of which they had any kind of public information for us to similarly do the same analysis. So, quite candidly from a competitive perspective, we made the decision that giving that much detail simply is not in the best interest of our shareholders. We acknowledge that, obviously, the shareholders would like to see the detail, and we understand the transparency, and it's clearly not on our indication. I think we've led the way almost all the time in terms of the amount of detail we've provided, either whether it's by property, or within the detailed guidance that we give relative to other companies. It's not our intentions to change those things. On the balance, we made a value -- we just came to a value judgment that said this is really, in totality, in the best interest of our shareholders for us to do it this way.

Relative to the stock buyback, clearly we are always looking at different ways that we want to improve or enhance shareholder returns, and quite candidly, when the market gets to a point where the valuations are so compelling, we're going to step in and take advantage of that. Our view is we always look at potential acquisitions. We look at it and we compare it against internal purchases of our own stock. I will tell you that we don't -- it's not -- they're not set at the same threshold. There's a spread. When that spread gets too wide between what we think we can buy versus buying ourselves, we're going to step into the market and buy the shares. So, the answer to your question is if the stock gets too low, you can expect us to get -- to be there, and we'll be buying more shares if the stock drops again. So, that's -- I guess that's the best answer I can give you for that one.

Great. Appreciate it, Bill.

Our next question comes from the line of Joe Greff, JPMorgan. Please proceed.

Good morning, guys. On the topic of the new reporting disclosures, will you guys highlight or break out revenues and cash flows from the Ohio and Kansas projects when they open and are up and running, generating revenues and EBITDA?

No. That's a pretty simple question, but no.

Alright.

Revenues will be disclosed, obviously, from the state reporting requirements, so everybody will have access to the revenues. But no, we're not going to separately, as a practice, disclose that. To the extent that -- obviously there will be some disclosure and we'll certainly disclose fluctuations in our regional operating performance, which will undoubtedly require us to make some comments relative to how Ohio and Kansas are doing.

Okay. Alright. And then what was -- in the third quarter, what was the clean corporate expense result?

Corporate overhead in the third quarter, $18.8 million.

Got you. Alright. And then my final question here, I know the investment in Toledo went up $20 million, which is not sizable. Can you talk about that a little bit? Was that just fine-tuning? And then do you expect the cost for Columbus to change at all?

I would characterize Toledo as just fine-tuning, as we get down to completing that project, Joe. We're scheduled to open in early part of the second quarter, and I don't think it's anything more than that as we are finalizing our GMP with our GC there. And we don't expect in Columbus at this point to have any changes to the $400 million figure. Just to refresh everyone's memory, there is a $50 million license fee that's included in these numbers per location, and a minimum spend of $250 million per location as well. So, that is -- that fine-tuning on the Toledo was to make sure we complied with a lot of the issues regarding the constitutional amendment that was passed in November of '09.

Okay. And Bill, if you could just give us at the end of the quarter cash debt, what CapEx was in the quarter, that would be helpful. I'll let someone else ask questions.

Sure. Our cash at 9-30 was $207.8 million. Our bank debt was made up of -- we had $200 million on the revolver, $691.2 million on the A, $748.1 million on the B, less on a face value, less -- basically less the OID. Gives us total bank debt of $1.6376 billion. The capital leases of $3.3 million and $1.9 million for the Aurora police contract. Then on top of that, $325 million for the 8.75% bonds, less our total debt at $1.9678 billion. CapEx expenditures for the quarter were -- we spent $73.6 million on project CapEx, and roughly $22.6 million on maintenance CapEx. That does not include the Hollywood Kansas Speedway, so our total for the quarter was $96.2 million, and at the Kansas Speedway our CapEx for the quarter was roughly -- our share was roughly $20.2 million.

Thank you.

Our next question comes from the line of David Katz, Jefferies & Company. Please proceed.

Hi. Good morning.

Good morning.

Hey, David.

I wanted to ask about -- this may seem like an odd question, but with a lot of the growth going on outside of the United States and specifically in Asia. Can you just talk about what strategy, if any, you might have looking internationally, and what kind of structure and capital thoughts you might have around getting involved there?

Well, that's such a broad question, David. I think we have said publicly in numerous forums that we are at a scale today that there's no place on the planet that isn't open to our consideration, that's kind of period. We cover coast to coast of the United States. We're pretty much in every nook and cranny, looking for opportunity. That, now, applies to Asia. You might recall from earlier calls that we have, over time, spent a fair amount of time in Japan, when that looked a little bit more promising than it does right now. Japan kind of moves glacially. We do spend time in Korea. We spend time in -- you name it. And I'll choose not to get too specific on this call.

But look, opportunities in Asia are limited. High quality, safe, sensible opportunities are limited. But we are a constant presence there now, and that's -- if anything is going to increase, I expect that before too much time goes by we'll have a full time person, not just occasional, but somebody on the ground in an office that will work only for us pursuing the range of things we're currently looking at. That is about as broad an answer I can give you. If there's gaming going on anywhere in the planet today that makes sense, we need to be part of it.

If I can --

Hopefully that helps.

It definitely is, if I could just follow it up. They tend to be numerous and but few and far between at the same time. They are also very expensive. And I guess a part of my question was around your tolerance for capital investment outside the country, and would you be more inclined to be looking at partnerships, rather than direct capital investment?

You know, all of the above. It depends on what's the country. Some countries are more stable, obviously, than others. It is unlikely, for example, that we would have pursued, however appealing and however good we know the result to have been, a $5 billion project in Singapore. You won't see us doing that. It's just beyond the scale of what we think is worth the risk of shareholders' money. We're looking for modest size projects. And there are some places where that may be possible.

So look, I think you have to expect that Penn will continue to be Penn. I can't emphasize it enough. You've all heard that story time and time again. We move carefully. We move steadily. We move incrementally. That may not be glamorous or flashy or a lot of stuff, but we have a very consistent track record of building value, finding the right projects by being patient. And so, we shall be as we look at foreign stuff. We're not going to take a leap off of any cliffs. That's sort of my summary for that point. Expect Penn to behave like Penn.

I appreciate it. Thanks very much.

Our next question comes from the line of Dennis Forst, KeyBanc Capital Markets. Please proceed.

Good morning. I just had 1 simple question for Bill. I wanted to understand the other income items. You had a number of nonrecurring, both a gain and a loss. But other income was about $2.7 million in the quarter. What was included in that?

Other generally includes the currency translation gain. We had, I believe, what that number is. So, we had, obviously, the dollar actually gained against Canada for a change.

As I look at the top chart, $2.9 million currency gain, so that was in that line item.

Yes.

And where is pre-opening? Is that in G&A?

Pre-opening is in other, it's in our other region. It's also -- yes. Well, it's going to be -- no, it's going to be in the operating expense line.

Which line -- Bill, which line item in the income statement, pre-opening?

That would be in your -- I'm sorry. Which page are you on? You're not on page 7. You're on page --

Let's make sure we're on the right page here.

Pre-opening expenses are above, in the operating expense line items. So, it's going to be in G&A.

In G&A. So, it's not broken out by property. But would we see it in the new presentation by region? It's included in the various regions, also.

Right.

Okay. Great. That's all I had for now. Thanks a lot.

No problem.

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

Good morning, guys. Tim, probably a question for you. It sounds like the rated play -- your rated players have been fairly stable but could you talk more about the non-rated players? Is that segment gotten softer, or has that remained pretty stable as well?

Steve, actually in the third quarter -- and I think this is more a result of our marketing management, of trying to continue to be more profitable with our rated database, especially at the low end. We actually saw an increase, a slight increase in our non-rated activity across the enterprise. And actually saw slight decline of rated activity. So, I know as you think about large macroeconomic issues, you think your non-rated business would feel the effects of it first, but we actually saw the opposite. But I think that's more a result of the things we're doing in the marketing area to continue to be more profitable with our marketing reinvestment and converting rated business at the low end to unrated. So, the good news is we think the business is still coming but it's coming to us in a more profitable form.

Okay. Got you. And then 1 more question. In terms of the way you guys are reporting, not looking for numbers or anything like that, but if you could maybe walk us through maybe your 2 biggest properties in the quarter, Charles Town and Lawrenceburg. Just how they did relative to your expectations, where margins went, and also what you're seeing so far in the first 20 days of October.

Sorry. I'm not -- don't want to be flip about it, but that would obviously eliminate the whole idea of going to regional reporting.

On the broad question you can -- you can address the broad question.

Broadly, third quarter, we haven't seen anything that's causing us any noticeable change in what we're seeing in early October.

Okay. Thanks, guys.

Our next question comes from the line of Joel Simkins, Credit Suisse. Please proceed.

Good morning, guys. Obviously a lot of investors tend to focus on Charles Town, the impact from Anne Arundel. Can you also spend some time with us talking about Baton Rouge, and how you prepare for Pinnacle next year, as well as Lawrenceburg and Caesar's in early '13?

Let me take -- in Baton Rouge, we expect sometime in the third quarter Pinnacle to open a $350 million investment, and obviously we think the market is not big enough to absorb that. There's going to be a loss of business at our Baton Rouge operation. We have prepared a number of different scenarios to revise our cost structure to a new level of business there. We are also going to be very focused on customers that are going to be in the fight zone to protect our profitable business and make it very, very difficult for Pinnacle to easily take our business away from us when they do open. But we do expect that there will be a hit in the third quarter next year. We're going to be fully prepared for that and react very quickly as a new level of business volumes are realized there. In Lawrenceburg, we've got a little bit more time there. Spring of 2013 is what we're expecting to be the opening of Horseshoe, Cincinnati.

It will be interesting to see what that effect will have on Lawrenceburg. It certainly will have a noticeable effect. We still have the advantage that our customers will be able to smoke in our Casino environment, where in Ohio it is a smoke-free casino. We also have a suburban location that won't have the issues of congestion of a city. So, that's going to be something we're going to watch very closely, given the location of their site in downtown Cincinnati. How the customers are going to react to an urban location for a Casino versus our suburban location. Clearly, there's going to be a lot of trial as people want to see the new property there. But like Baton Rouge, we are going to be prepared to react very quickly to our business volumes, and amend our cost structure to be as profitable as we possibly can be when that new entrant comes into the market in spring of '13.

Let me add that we've already provided the hedge for that. Ohio, we say, was inevitable. As Texas is inevitable as -- these states are going to get gaming. We were proactive and stepped up and made sure that recognizing competition was there. For us it's -- that's part of our whole regional strategy. This is not a 1 property -- we don't look at the world any longer in terms of Charles Town or Lawrenceburg. We look at what the engine is doing, what the whole -- what the region is doing. So look, I would rather all of our properties do nothing but go straight up, but the world being what the world is, we recognize that there are competitive pressures. So, the fact that Lawrenceburg is down, but we're overwhelmingly up in the end, that's fine. That really speaks more, frankly, to the questions asked earlier about why we're taking the regional approach. We don't look at a single property any longer. We're about what this Company is doing. And we just run faster and try to run faster than everybody else.

And 1 final question, Peter, for you. You have a lot of organic -- excuse me, a lot of external growth opportunities out there. How would you sort of rank, once again, M&A as sort of a priority for you; given that the Company, much of it, was formed, really, through roll-ups.

Huge. Remains huge. See the right opportunity at the right price, we're ready tomorrow morning at 9 o'clock. We're always looking at stuff. That has not changed 1 iota. So, I'm optimistic that over the next couple years you'll see some pretty exciting things happening here.

But look, this Company is as motivated today as we were 15 years ago. In fact, we're on a tear, and to the best of our ability, the entire group you see represented here is committed to our continued growth. And, look, you all have followed us over a period of time. We're a pretty rapacious crowd. We're out there, doing it. M&A, still high on the list.

Thanks a lot.

Our next question comes from the line of Mark Strawn, Morgan Stanley. Please proceed.

Hi. Following up on the last question, thinking about the properties where you're subject to new competition, we'll be able to track the revenue cannibalization by property through the jurisdictions. But how should we think about it on the EBITDA side in aggregate? Are there things that you can do on the cost side to maybe keep the margin impact largely neutral? Any color there would be very helpful.

Well, we certainly have the 2 biggest levers to work with, that being marketing and labor costs. And I think your question, Mark, will vary a bit jurisdiction by jurisdiction. When you have environments that have very high tax environments, it's going to be a little easier to preserve the margins there, because a lot of that is being absorbed in places like Charles Town -- on the slot side we're in the high 50s. That will also be a variable of how the EBITDA margins are preserved at these businesses. But clearly, we're going to be fully prepared in marketing and labor to react accordingly as revenues in places like Baton Rouge and Lawrenceburg, as we expect to decline. Bill, do you have anything to add on that?

I would just comment that I think we're very cognizant of what's happening looking forward. This is something I rarely do, but I'm going to make a couple comments relative to what I'm seeing on street guidance for '12 and '13. The reality is, I think what's happening is -- and I don't know whether it's because there's too much ramp-up early, or there's not enough recognition for cannibalization in '12, but clearly some of the numbers -- and I'm not going to say all, but some of the numbers are, quite candidly, a little bit too optimistic or too high.

Having said that, as I look out at '13, and which is how we look at it -- we're looking at the long term. As I look at '13, and there aren't many numbers published on '13, but I can tell you I feel very comfortable that we're going to be significantly higher than the highest number on the street in '12. Now, obviously that may not come as a huge surprise. But I can tell you that we're very comfortable that we're being to be growing EBITDA through '13. '12 is probably going to be closer to flat than what we're seeing in some of the estimates coming out for '12. So, '12 I think you can expect us to see guidance somewhere in modestly to flat, and then '13 is going to be an amazing year as everything ramps up and as all the properties come online. So having said that, I'll take the next question.

Our next question comes from the line of Steven Kent, Goldman Sachs. Please proceed.

Hi. I was just wondering if you could talk a little bit again about the promotional environment. I guess where I'm going is that, in locals Las Vegas we didn't see a lot of promotional activity, and then the past 6 months or so we started to see it pick up as things became more and more difficult. So, I just was wondering whether you -- what's different about locals Las Vegas that you're not seeing in some of the regional environments? And I think it's partially just where locals Las Vegas you have a lot of, lot of competition. Ultimately you're going to see competition across much of the markets you're in. Just wanted to understand that.

Secondarily, if I look at the returns of your Company and look at the new properties you're putting on, those returns seem to be drifting lower, due to either the need for more capital or due to cannibalization. So, I'm wondering why buy stock, when maybe a dividend is more appropriate and pushing the cash out to us. I'm not sure if there's some restriction or something else that makes you decide to buy stock, versus pay a dividend.

Wow. There's a lot in that 1.

Well, I like to ask comprehensive questions.

Let's go back on the promotional side. Tim, I think, said earlier that we're not seeing anything unusual in promotional spend, pretty much around the country.

Las Vegas locals is clearly the most intensely competitive market out there that we're seeing. And obviously, I think, with stations now reformed, they are still the 800 pound gorilla in the Las Vegas locals market. But we're trying to establish a different identity at [M] and market to customers at a different quality level that aren't as promotionally sensitive as the rest of the market, and we also have the advantage of being the first right hand turn coming in from Southern California. So, we're trying to stay out of the fray in Las Vegas as we're going to tap into what we believe better, more lucrative consumer segments that feed the M. But beyond that, regionally I think there's been a lot of experience by us and also our competitors in these regional markets going back to '08, '09 and '10. That right now it's not wise to try to amend customer spending behaviors in these economic times, and I think everyone's learned that and I think that's why we're seeing such a rational environment across the regional markets. Now, I'll turn it over to Bill, I think on the question on dividend versus share buyback.

I think the reality is that it's our view that stock buybacks are actually better for shareholders than dividends. I'm not quite sure where you come up with your analysis that would indicate otherwise. Certainly, from our perspective when we can buy back our shares -- for 1 thing, you can always reissue shares, right? In other words, if I issue a dividend, it's gone forever. If I buy back shares, theoretically I can turn around, if I need to in the future at some point, and reissue the shares. It's very difficult to call back a dividend. Now -- and having said that, I think -- listen, I think we are open to any and all structures that would add shareholder value. If we believe that dividends were the best way to go, I think you'd see our Chairman sitting right next to me heartily endorse issuing dividends, since he's got a significant stake and a number of shares in the Company. But that's pretty much our thought process.

It's not tax effective. Frankly, it's just not tax effective. When the government wises up and gets a rational tax policy, you might see us thinking about dividends. Paying out dividends on top of our egregious, unlike GE, corporate tax rates -- because we actually pay the full boat in our industry, then we might talk about it. But frankly, by the time it gets down to an individual shareholder, there are more effective ways for us to use our cash. So, don't count on a dividend any time soon, short of a change in tax policy.

I guess I just was struggling with -- you're buying stock admittedly at a lower multiple, but you're also investing where your returns seem to be going a little bit lower and your overall corporate ROIC has seemed to be going lower.

I'm not sure we're buying that either, by the way. We're not buying that from us either. Help us with that. Tell us --

I don't get the lower return concept there.

Well, I mean, every new project seems to cost more, and you face cannibalization in many of those markets. So, even the ones you've said you're building, you're building them and you know that they're going to cannibalize your existing business. So, inherently those things create some decline in return.

So, your proposal would be we should just let someone else build the casino, and take the cannibalization, and not benefit from the new opportunity?

No, that's why I'm suggesting that maybe you pay out a dividend. So, that the investor base might be able to decide where to allocate capital.

Well, they can sell our shares if they don't like where they're at. Let's face it, if they don't think we're in good shape here everybody has got the option to sell shares and re-invest their capital wherever they feel appropriate.

That's why we're only too happy to relieve some of our shareholders of, at a price, shares that they would like to part with, at a price --

As Peter said before, Steve, if you look at, in totality, the opportunity we have in Ohio versus the impact in Lawrenceburg. That's going to be a very accretive opportunity for us to realize, once these properties open in 2012, even with the impact in Lawrenceburg.

Okay. Thanks.

And our return on cash is going to be very impressive. So, again, we're looking at this in a large, organic way. We're just no longer going to focus property to property.

(Operator Instructions) Our next question comes from the line of Shaun Kelley, of Bank of America Merrill Lynch. Please proceed.

Hi. Good morning. I just wanted to go back to your comment, Bill, about 2012. Just trying to get a little bit of better sense. I think you guys have already touched on Louisiana and Maryland a little bit. But specifically as it relates to Maryland, I know there's been another proposal as it relates to a potential facility in Baltimore. So, I kind of wanted to get your thoughts a little bit more clearly on the impact in that market. And specifically, is Baltimore kind of contemplated in how you guys are thinking about competition in '12 and '13?

Yes. I mean, we fully expect Baltimore to be online, not by '12, but certainly we expect Baltimore to come online. My understanding is that, there's an entity with significant capital behind them, that has decided to support the project in downtown Baltimore, so we would expect that, that will get built. Just to be clear on the -- what I'm saying, I think '13 is a great year, and again I will reiterate this. It will be significantly higher than the highest numbers anybody has on the street for '12. Relative, obviously, for '12, we have -- we're very pragmatic about it. First of all, new properties do not open at full strength.

So, I think 1 of the things that is probably happening, and I don't know everybody's numbers and analysts estimates, but I do believe that what's probably happening is there's an expectation that the property is going to open pretty much at a full run rate. Typically, that's where, when we've seen other people's numbers, that seems to be where we have a difference of opinion. Or it could be on the cannibalization side, I'm going to -- because I haven't, again, gone through those numbers. But I think people need to be a little more practical relative to how they expect the numbers to -- the properties to ramp in '12. The new stuff coming online, is probably where I think the bulk of the difference is.

That's helpful. And then, I guess, I just wanted to follow up on 1 other market, which was the competition that we've seen in Illinois. So far, I'd actually think that between the numbers coming out of Rivers and what you guys have actually seen from an impact standpoint, it's been probably a pleasant surprise there. Just kind of trying to get your thoughts on the market, though, because other people look like they have been impacted negatively. Is that a -- are you kind of expecting any change in activity in that market and how are you guys seeing that hold up?

Shaun, this is Tim. You're right, through the third quarter we're actually pleased with the impact we're seeing in Aurora and Joliet with the opening of the Des Plaines license. It has been less than we anticipated. But clearly the 2 licensees that have been most impacted, and we did expect this, is the Elgin license and, also, the Hammond license in northwest Indiana. We're watching it very closely. We obviously see the business levels that are being reported by Rivers, and it certainly seems to be coming more from the Lake McHenry County areas, and also downtown Chicago than out into the -- versus the feeder markets that feed both Joliet and Aurora. It is better than we've anticipated. Watching it very closely, and hopefully it will sustain itself going forward.

Great. Thanks, guys, I appreciate the color.

Thank you.

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

Good morning. Could you share your sense of the status and the outlook for the Illinois gaming bill, since we're talking about Illinois and the impact especially in Penn's Chicago region facilities. It seems that Governor Quinn has obviously pushed back pretty hard against the provisions for slots at the tracks and the airports.

Yes, this is Eric Schippers. Governor Quinn, as you said, came out strongly against the notion of racinos. I think his quote was something like -- Let's all be honest here, what you would be talking about would be 14 new casinos in the state if tracks were included. The rub is, the measure -- the rub for those supporters of the gaming expansion is that the measure passed the House and the Senate with the minimum number of votes. Some are claiming that taking the tracks out would lose more than a dozen votes in trying to put back together proposal.

The tracks are not going to go down easy. They're going to be fighting. In fact, we've heard that during veto session, there may be another bill that comes back with the tracks back in it. I think that is going to be a very high hurdle for them to try to get approved in veto session, but we expect the fight will continue both in veto session, which is from November 10 to January, and then in the regular session in January. But the governor has been very unequivocal, both in the principles he has laid out, and in the follow-up message points on this, that he just sees it as too expansive to include the tracks.

Thank you.

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

Hi. Thanks. Good morning. Just a question on the relocation of race tracks in Ohio. Peter, could you shed any slight on to the timing of moving those tracks, and whether or not there needs to be local approval, and also whether or not there's been a fee structure set for moving the tracks.

Steve, I think, addressed that earlier. Steve, why don't you do a recap on that.

Sure thanks, Peter. Ryan, as I mentioned earlier, there have been some constructive discussions with the administration through their financial advisor with respect to the approval of the relocation of both the raceway and the Beulah facilities. There is no outcome. Obviously, the racing commission has now set the application forms and the application process for relocation. But as Peter mentioned earlier, in looking at the state of Ohio and maximizing VLT revenues, we think -- and I believe most in the state agree, that relocating some of these facilities to under served markets makes sense.

What the outcome of those negotiations will be, and when there will be an outcome is unclear to us. But the administration is certainly motivated to get to a conclusion as quickly as possible. So, I don't know if it's next week or next month but we'll see. You had also, I guess, asked a question of the cost of relocation, and there will be -- it's expected that there will be a premium license fee that will be paid for the relocation of those facilities. But suffice it to say, as we as a Company look at the overall allocation of capital around the state of Ohio, we can certainly get comfortable with a premium well in excess potentially of the $50 million license fee. But again, that is all contingent on the outcome of these discussions.

What about local referendums, is that going to be necessary?

We don't expect to be subject to any local referendum but we certainly will be subject to all local zoning and planning requirements. Based on the receptions that we've gotten from the communities which we've identified, we expect that to be relatively smooth sailing. Both North Dayton, as well as Austintown in the Mahoning Valley have been very supportive, and they've been asking questions very similar to you; when will we know and when can we start? They are anxious to roll up their sleeves, as we are, to bring this investment and these jobs to their communities.

Sure. Thanks. And then Bill, just a couple of quick questions. What was a normalized tax rate or what will that be in the fourth quarter and going forward? And then can you talk about how much you have remaining on your share repurchase authorization?

Yes. We have -- the normalized tax rate, which is in our outline of our estimates here. I mean, it's going to be roughly between 37.5%, 38%, will be the normalized tax run rate. Relative to the authorization on the stock buyback, I believe we've got $230 million or $240 million remaining. $240 million.

Okay. Great. Thank you.

Thank you.

Our next question comes from the line of Adam Steinberg, FBR Capital Markets. Please proceed.

Yes, Bill, this question's for you. Normally you guys -- you've got a fair amount of lobbying expenses in your corporate overhead. Was there any noise like that in the quarter, and how should we look at that going forward?

No, there's -- listen, we've certainly in prior years had some rather outsized lobbying expenses, no offense to Eric.

I think Ohio was worth it.

With great results. Just to be clear. Fantastic results. And that clearly had an impact not only on the corporate overhead numbers, but also had an impact on our tax rate, because those efforts were not deductible for tax purposes. So, that clearly has historically driven the tax rate higher than normal.

We also did do, though, a reorganization of converting some of our subsidiaries from 1 legal entity form to another, which is allowing us to do a better job of spreading the tax burden across multiple states, which is allowing us to take advantage of some of the states with -- which have some higher operating expenses and blending those across other states. In any event, that's picking up probably about $4 million a year, doing that.

Can you repeat that?

The reorganization basically is saving us roughly $4 million a year in tax. We just completed in the third quarter.

Okay. If I recall from your agreement with your partners in Texas, you were required to spend some money in this year on lobbying in the Texas legislature, and that ended basically some time this quarter. Was there any expenditures in that this quarter?

Nothing that was material. I'm sure we spent a little something here and there, but nothing that would be worthwhile mentioning. The fact that we had a requirement was -- obviously, it's mutually agreeable. We're certainly still obligated to spend money in an effort to -- and would in any event, spend money to try and get gaming passed in Texas. I'm going to let Eric add some more color to that.

The big ticket item there would be if we were successful in getting to a state-wide referendum, and we were not. Really what you were looking at were just some consulting fees, lobbyist fees, nothing worth mentioning.

I'm sure I've gotten this answer from you in the past, but I can't find it in my notes. When do you pay the $50 million licensing fee in Ohio? Is that once you open or is that kind of part now, part later?

It's per location, Adam, and it's paid when we are licensed as an owner/operator.

So, basically the quarter you open?

Probably maybe a little bit before then, but not much time before then.

Not much time before then. Okay. And then last question, and this 1 goes back to you, Tim.

When you were talking about your rated play versus your non-rated play -- and I can understand you rejiggered your promotion, and you're pushing some people into non-rated. Could you also look at this as perhaps if I look at the Gaming Commission numbers, looks like you're taking some market share. Could I also look at it as you're taking market share from some of your other competitors?

In a number of markets where we are seeing a pickup in share, I think it's more a reflection back this time third quarter 2010. We had a higher rate of promotional activity from our competitors in certain markets in the Midwest and a couple other places. Now that they've pulled back, I think you're seeing the share come our way, because there's not the buying of business that occurred a year ago. So, I think it's more a reflection of the rational spending in these markets today versus a more aggressive spend that occurred a year ago.

Okay. I guess coming at this from a different angle then, could it be -- is that some of your rated players coming back to you? Could I look at this as, maybe, your rated players are spending less per visit, but you're picking up in the lower end, or the retail customers?

No, I think we're losing the low end retail rated play because they're finding it, from a rewards standpoint, less appealing to them. I think as you look at the overall rated player, based on a per trip basis, we are seeing the quality of the rated customer up, but the amount of trips especially at the low end down.

Thank you.

We have a follow-up question from Dennis Forst of KeyBanc Capital Markets. Please proceed.

Yes, Tim, I wanted to nitpick about the promotional allowances. In the third quarter, it looks like they ticked up a little bit to about $40 million, up 16% year-over-year on a 9% increase in gaming. That's something that hasn't been happening. You've actually been previous few quarters showing absolute declines in promotional allowances, and also kind of on a percentage of casino revenues, or gross revenues, or however you want to spread it, it seems higher than I was expecting, particularly in this benign environment. Can you explain that to us?

Stand by a second.

One second, Dennis. I'm trying to refer to where you're seeing this.

Promotional allowances were $39.6 million in the quarter.

Yes, I think this year's numbers, compared to last year's numbers, did now include the M, and Perryville as well. And so, you have to look at the M and Perryville in these numbers, especially as we've inherited the M, that more so given the environment in the Las Vegas locals is now new to the mix.

Just sequentially from the second quarter I don't think you owned M the whole second quarter, but --

Only 1 month, Dennis, in the second quarter.

But it was up $6 million, and additionally as a percentage of gross revenue, it was up around 60 basis points, and as a percentage of casino revenue it was up almost 100 basis points. So, it just seemed like promotional allowances were higher, certainly higher than we were expecting, and higher than recent trends too. So, I just wanted to understand that better. Anything other than M?

No. I mean, if you look at --

Perryville was an apples-to-apples comparison.

Perryville's new too, because we didn't open Perryville until late September of '10. But it was in full quarter to full quarter sequentially, you're correct. In almost all the cases of our existing businesses year-over-year, Dennis, we are showing improvements in our marketing reinvestment across all those businesses.

Okay. Good. Alright. I just wanted to deal with that. Thanks.

Mr. Carlino, there are no further questions at this time. Please continue with your presentation or closing remarks.

Okay. Well, we'll say thank you all very much for joining us this -- at the end of this quarter. Look forward to talking with you in the early part of next year. 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 lines. Have a great day, everybody.