PENN Entertainment Inc (PENN) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you first standing by. Welcome to the Penn National Gaming fourth-quarter earnings conference call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions) It is now my pleasure to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, Sir.

Thank you, operator, and good morning, everyone, and thank you for joining Penn National Gaming's 2011 fourth-quarter conference call. We'll get to management's presentation and comments momentarily, as well is your questions and answers, but first will review the Safe Harbor disclosure.

In addition to historical facts or statements of current conditions, today's conference call will contain 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 Form 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'll open the call by turning it over to Peter Carlino, the Company's Chairman and CEO. Peter?

Thanks very much, Joe, and good morning, everyone. Welcome to our quarter and year-end earnings release. It looks like we wound up another good year at Penn, good from a number of points of view. Obviously, good earnings growth, consistent margin improvement, a pretty solid year all-around.

I will say in the last quarter, just to characterize that a bit, October was surprisingly soft, November was pretty stable and December was terrific. So, these things become in the current climate ever harder to predict. I can also say that we are off to a great start this year, but let's see how it plays out. Here's a look at guidance, those on the wire from a remote location, and I suspect you'll have some questions about that, we have taken, some say, a conservative view. I think we have tried to take a realistic view, look ahead at the economy, which still remains sort of uncertain.

It's hard to have a crystal ball for these things, so we've tried to be very cautious. As we have said to you before, our view is obviously through 2012 and into 2013. If you will, we look at these as a -- this is a multiple year experience. We will open all three of our facilities, big new exciting facilities this year and they are terrific. We know the results are going to be outstanding.

So, that's the way we package this internally. We always -- is there a problem on the line? We always take the long view here at Penn. With that very brief preamble, let me ask Tim, do you want to make a couple of comments, Tim.

Just a couple, Peter, thank you. As Peter said, the quarter started slow but finished strong. We certainly believe the weather in December and the calendar were favorable to the year-over-year comparisons that you all saw.

And obviously, the weather here in January has been very good as well. We are assuming really no change in consumer behavior for 2012. But as I look back on the fourth quarter, we essentially saw slightly above year-over-year increase in same-store sales growth. The strength in the business in the fourth quarter was really at the VIP segment, the $400 and above level, that's where we saw the greatest strength.

Good news still out there is, for the most part, the promotional environment is still very rational, which has given us an opportunity to continue to refine our marketing reinvestment and in areas where we are having softer business lines also looking at our cost structure from a labor standpoint, which resulted in the margin improvement we showed year-over-year of over 200 basis points. More of the same of what we saw in the previous three quarters for 2011 and so far so good as we enter 2012.

Very good. Operator, let's open the floor to questions.

(Operator Instructions) Mark Strawn of Morgan Stanley.

One question on your fiscal '12 guidance. It looks like the adjusted EBITDA margins are basically flat year-over-year. Can you walk us through your thoughts there? I imagine cannibalization plays a part in that assumption?

Yes. I think there is a combination of things. I think there is some continued expectations for improvement, although relatively minor and the markets are not going to be affected. The markets where we've got cannibalization taking place it will be very difficult to maintain.

Certainly almost impossible to improve and very difficult to maintain and we are showing some expectations for some declining margins in those businesses where we are expecting cannibalization. And then we've got to help offset the whole piece is we've got some pretty good expectations for where we think margins will be relative to the new properties opening.

One last final question. On the Ohio properties, you mentioned that Toledo is going to open in May. Could you give us some updated thoughts there? Is that a definitive date at this point, or is that still --?

Let Tim handle that.

Mark, we were in front of the Ohio Casino Control Commission yesterday giving them an update on our Toledo project. We will be done from a construction standpoint on March 15. We're working with the Commission are right now to try to get as opened as soon as possible. They have told us there's going to be delays. In our guidance we have assumed May 1. We hope it to be sooner, but we don't have any definitive dates yet.

We are pushing to try to get opened as soon as our construction schedule completes itself. We know it's not going to be in mid-March, we're hopeful it will be sometime between mid-March and May 1. It's something we should have clarity on in the next week or so.

Good, thanks for your help.

Joe Greff of JPMorgan.

Question for you Bill and Peter, if you can chime in. The comments in the press release about actively monitoring and managing the capital structure to give you financial flexible for a number of near-term, long-term growth initiatives, how do you think about levering up to reduce some of your -- shift some of the capital structure from equity to debt? On our numbers I think that would make sense and certainly would see a nice pop in free cash flow per share, particularly when you look ahead and you have all these growth drivers. If you can think how you balance buyback leverage and greenfield or acquisition growth initiatives that might be out there that would be helpful to us. Thank you.

Bill, do you want to play with that first and I'll add.

Sure. I think we as a Company take a look at the longer term view. And we are going to be opportunistic in those situations where we see truly compelling valuations that say we should basically accelerate whatever plans we've got and take advantage of the market conditions.

Having said that, we are still looking forward to a number of potential projects down the line. Those will clarify themselves within the next several years. And in the interim what we have is a nice backup plan with the basically the preferred equity, which we are paying 0% and we've got the ability to repay that amount, which will have a significant, obviously, reduction in share count and that happens in the middle of '15.

And having said that, we also take a look at -- we are constantly exploring every alternative in terms of how we might be able to improve free cash flow per share across the Company or increase shareholder value. I will probably leave it to Peter from there.

That is a predictable answer from us, Joe. It really is. That's kind of who we are. There are some major opportunities out there where we expect to be very competitive. So we've got to keep powder dry for that. It's a whole host of things that, not the least of which would be the buyback or the buyout, if you will, of the preferred piece on the horizon as well. Look, we've got to always keep an eye on long-term cash requirements, but as Bill said, I think quite ably, that we will buy opportunistically if that opportunity appears. It's the same boring answer I think we always give.

And then, Bill or someone there, if you can give us at the end of the quarter cash debt, CIP balances and CapEx in the quarter, that would be helpful.

Sure. Penn cash was $238.44 million, bank debt was $1.714 billion. We had roughly $4.2 million of capital leases and obligations to the police group. We have the bonds at $325 million, which gives us total debt of $2.043164 billion. The Cap interest for the quarter was roughly $2.158 million and then capital expenditures going forward we had maintenance CapEx of approximately $24.8 million and project CapEx of roughly $64.7 million. And on top of that we also have the Kansas project, which shows as -- actually will not show as CapEx in our balance sheet, it will show as investments in JVs, and that was roughly $23.6 million for the quarter.

Thank you.

Shaun Kelley, Bank of America Merrill Lynch.

Just wanted to go back to the guidance or outlook for next year. I thought just the headline revenue number was a little bit below where we were thinking and I know there are a huge number of puts and takes as we worked through the year, but trying to understand just a little bit more if you could give us your sense of what markets do you think are likely to have the most impact? Is it really Maryland that we need to be most concerned about? What keeps you up most at night, Peter, as you are thinking about the cannibalization for this coming year?

I thought I had pawned that off to Bill, since he generated the number and his team. But look, nothing keeps us up at night. And you're right, I think you answered it. There are a number of variables this year. There's the largest number of variables that we've ever had to look at across a variety of states and you know what they are. And the science or alchemy by which they have come to that guess is -- I will let Bill play with that.

But look, that's why we have been very cautious. I know it's not ideal for all of you. It's probably not ideal for us to take the conservative view in 2012. We just don't know. We have a hidden optimism behind us, but at the same time we have a pretty damn good record of delivering on what we promise. With some very careful thought looking across a variety of markets, we came to this number. And it really doesn't get -- I can't really tell you a whole lot more than that. Bill, I don't know much you want to share about how you made the stew, but have at it.

I think what I would want everybody to understand is that although we give a specific number for guidance, because I just generally feel that giving ranges is a cop-out in terms of whether you've got a number or don't have number. I will say that for the upcoming year that the variability of these numbers is much higher than anything we have seen, probably dating back almost to the types of stuff we experienced during the financial crisis back in '08.

I even explained to our board that we certainly went through our plan for next year and they were asking certain questions and I explained to them that quite candidly this could be plus or minus $30 million in EBITDA just based on how everything may shake out. If things work out a little better, we've got significant upside. If things work out worse, we've got downside to these numbers.

This number represents what we believe as a Company is an attainable goal and we think we are going to meet it and if I supposed to the extent that when you get into higher levels of uncertainty, you tend to shade it slightly towards being a little bit more conservative. But having said that, I can't tell you with absolute confidence that this is a rock solid number.

And I would expect we will have -- final results will be different than what we've got in guidance. And I am hoping -- I'm very hopeful it will be the upside, but we will have to see how all the different assumptions we've got play out. Relative to markets of concern, clearly Charlestown with the Anne Arundel opening is clearly going to be one of those that we are going to be very focused on and we will be reacting appropriately.

But Anne Arundel also has a little bit of an impact on Perryville and even less impact on Penn National. We've got the full year -- we're still waiting to see how the whole thing in Illinois pans out with the Rivers Casino. If we look at the last few -- last couple months' results in Illinois, that's been a little bit concerning. And then obviously there is the Pinnacle opening in Baton Rouge and we've got our own property opening in Kansas that is going to have an impact.

Clearly, it's very difficult to predict. We have done our best. We've tried to quantify all the different variables. We've tried to look at other markets in terms of what's happened in those markets relative to the same circumstances. Unfortunately, no two markets are exactly the same, but it's an educated guess and I think I will leave it at that.

Let's not throw too much of a wet blanket over this year. I am getting depressed listening to those comments. Look, I think Bill correctly says there are many variables this year, we are leaning towards caution. But we have put up a number at the same time that we think we are going to make. How is that?

That's really helpful. The second question, there's a competitor that is seems like they are proceeding on the VLT issue in Ohio that a little bit more aggressively then, I think, perhaps your own approach and others in the market. Wondering, because that track is in Columbus, how do you think about first mover advantage there getting up and running and weighing that versus some of the ultimate political risk of actually maybe not being able to remain open. So just thoughts on the Columbus market?

My answer is inconsequential, but, Steve, take a whack at that.

The challenge in Columbus, of course, is the roundtable litigation as a relates to video lottery terminals. You do point out that one of our competitors has broken ground, actually pulled the license. I would suggest there are many other steps that will need to be taken with respect to game procurements, central system, rules and regulations and a lot of other things that will need to be overcome based on our experience in dealing with the Casino Control Commission in Ohio before anyone, even someone who has a building, will be in a position to open.

We are proceeding very cautiously with respect to VLTs. We are not out in front breaking ground, we are waiting to see where the litigation ends up. The litigation does have actual oral arguments on the state's counter-claim to dismiss the roundtable suit later on this month and we will see and be prepared to move quickly once there is clarity.

The only other thing, Shaun, I will add, this is Tim, if they were able to get open a few months before us, given what we are building in Columbus, which will open up in the fourth quarter, I don't have any concerns that they're going to get a first mover advantage over us, given the quality of the facility they are proposing to build at Scioto Downs.

I think Tim was modest at that. We are building one of the great facilities in the United States, believe me, and I'm not given to a lot of hyperbole, but when this place opens it's going to be pretty exciting. As I said inconsequent, we are not remotely worried.

Perfect. Thanks guys, I appreciate it.

(Operator Instructions) Carlo Santarelli of Deutsche Bank.

I was just wondering if you'd be able to maybe shed some color on how we should be thinking about the ramp in Ohio. Is it something that would be similar to Grantville in Pennsylvania? And then if you could provide maybe a little bit of how you're thinking about same-store growth in your forecast for next year on the aggregate without, excluding the impact from cannibalization and other non-same-store things. Thank you.

Bill, why don't you take the second one. Let me just talk about the ramp-up in Ohio. I think, Carlo, you are right. I think the good proxy for how that is going to evolve over the first two to three years would be Penn National out in Grantville PA. That's the way we are thinking about a ramp up there, both from a revenue gross standpoint and also margin improvement standpoint. I think that is the right proxy to use as you think about Toledo and Columbus opening later this year.

Thanks, Tim.

As we look at the same-store revenues, excluding the properties that are not affected in one way or another with competition opening, I would say they are basically flat to just nominally up to 0.5% to 1% in our expectations. We are clearly seeing some markets, like down in the Gulf Coast, that are struggling, having huge problems recovering, really, since the floods. And (Inaudible) even Biloxi's has been impacted. And a lot of the other markets are performing fine. On an overall basis it is basically flat.

Great, thanks guys. Appreciate it.

Dennis Forst of KeyBanc.

Just had a couple of housekeeping things for you, Bill. Can you go over the impairment charge, the $5.9 million out of New Jersey, exactly what that was and why it popped in?

New Jersey is our 50 /50 venture with our partners for the Freehold track. We don't actually do the account. We are not the controlling partner there. We are more of the passive partner. They basically have done an valuation or analysis of their goodwill, because there was actually a purchase many, many, many years ago where there was still some residual goodwill sitting on the books.

Given the projections for racing in general and the prospects of what looks going forward basis in New Jersey, they came to a conclusion that the previously booked goodwill needed to be written off. I can tell you at this point, there is no more goodwill in the joint venture, so it's all been written off. And although there is a very small remaining Delta between the underlying land values and the total book values, they're comfortable that we are going to be okay with that on a going forward basis.

And then was the tax rate high related to that or why the tax rate a little higher in the fourth quarter then it had been in previous quarters?

The tax rates -- it seems to bounce around on us. A lot of times it has to do with certain characterizations of certain expenses in terms of their tax deductibility. This one I believe is probably more related to some of the tax provisions. It really wasn't a cash rate problem, it was more of an accrual rate issue relative to some estimates on when certain estimates roll off and when new results come along. And those things get trued-up at the end of each quarter and we end up with some fluctuations on a quarter by quarter basis.

And then the last question had to do just with corporate expense. What was the corporate expense number in the fourth quarter? You kind of now bury it in with other.

No, we do and this isn't -- unfortunately I'm not going to unbury it. Not that it was buried, but it was put together with the other. I can tell you that it certainly -- there is nothing extraordinary in the corporate overhead numbers. It is very much in line with what we have experienced the first several quarters.

So, somewhere in the $18 million to $20 million range? Okay. Thank you.

Sure.

Bill, that was one of the best dances, I think, you have ever given. Go ahead, please.

Cameron McKnight of Wells Fargo.

What is the latest you're hearing on the VLTs in Illinois and if they eventually come to pass, how would you frame or think about the potential impact there?

Eric?

The governor remains opposed to slots at the tracks and he's been pretty steadfast in that opposition. The speaker recently came out and said that he has a hard time seeing, frankly, anything getting done on this subject. Online gaming could change the debate a little bit. They are kicking around the notion of doing something with the state lottery, which we of course would oppose, because it would disenfranchise the brick-and-mortar establishments. But it is still a fluid situation, but Quinn has been pretty consistent in his opposition.

Cameron, are you questioning the VLTs in the bars and taverns in Illinois?

Bars and taverns, primarily, yes.

That's been something that pasted a while ago. The state has been flowing, getting it up and running. We don't view that at all as having any impact on our operations in that state. There were these devices that were operating illegally in these locations. They are just legitimizing what was already there. Don't know the timetable of when it is finally going to get up and running. I know they continue to say later this year, but we don't have any impact from that event occurring on our businesses in that state.

We have a perfect comparison for that or near perfect and that is West Virginia, where there were some 40,000 reported gaming machines there, which they finally legalized. I don't know what the number is now, but it tens of thousands. It was absolutely meaningless. I don't think we are concerned about it.

And then moving outside of Illinois, just more broadly, how are you guys thinking about Internet and online and whether or not we end up with a state-by-state solution or something more federally based?

Eric was just in DC yesterday, why don't you give an update on your perspective on this?

Sure. Senators Kyle and Reid are keeping their plans on this subject very close to their vest. In fact have discussed their potential proposal with very few people. I think we can expect some movement on that front for online poker on the Senate side.

I think on the house side it is a bigger question mark. I think the thought of attaching it to something that could muddy the waters on things like payroll tax and others is going to be a tough hill to climb in the house. But we are going to have to wait and see and respond to what Senators Reid and Kyle do, assuming they do it within the next, call it in the next quarter.

On the general issue of online gaming, we continue to have our reservations about the impact to brick-and-mortar establishments, about the ability to ensure that you don't have under-aged gaming. The compulsive gaming issues are still an open question. We are still monitoring the situation, had a lot of discussions on the Hill yesterday. There's a lot of unanswered questions on this at this point.

Okay, great, thanks very much. (Operator Instructions) Larry Klatzkin of Klatzkin Advisors.

Could you talk a little bit about Sioux City and what is going on there?

Sure. Larry. I will start and anyone can follow on. We have had some active discussions with our nonprofit sponsor there about the upcoming expiration of our 20 year agreement. And we have been working with them along with the city of Sioux City to try to put together a proposal to move land-base and get off the river and relocate our operations where we believe there would be benefit to all the parties involved.

Clearly, we've had some very difficult discussions about their desire to seek another operator through an RFP process, which we oppose for a bunch of different reasons. And we have had some productive discussions with them very recently about how we can get this all to come together with all the parties. We're looking collectively at various sites right now and are hopeful that we have some agreement reached by midyear to continue to move forward with our business in Sioux City and enhance our operations are.

We are hopeful that the litigation that is out there can be put to rest through an agreement that can come together between us and our nonprofit sponsor. But a lot more to come between now and midyear.

And then for handicap in Massachusetts, you've got some new competition come in. It's getting pretty crowded and everybody wants Western Mass? How do you see your guys standing up to the other people?

Steve, do you want to take a whack?

Larry, you raise a great point that there are a lot of folks that have raised their hands. There are a lot of folks that have optioned or in some cases actually purchased land. You can rest assured that we are taking this in a very deliberate fashion. We've learned in terms of new jurisdictions the delays that are involved. There's also litigation in Massachusetts. Getting this statute implemented is going to take quite a bit of time.

As to us, we do continue to look at land. We're doing our diligence, we want to make sure that when we are in a position to announce an option, that we don't have a mayor who steps out and says maybe I want a casino in my town, but not at that Westinghouse site or avoid a mayor who says no gaming in Holyoke under my administration. Rest assured, we are approaching this with a lot of cautious optimism. And think when we do zero in on a site, we expect to have community support and a winning plan, as well as the capital behind that plan to prevail.

Let's be clear. We have a plan here. We just not disclosing it right now. I think Steve's -- we will announce what we want to announce when we think it's best to announce it. We think we are going to be very well-positioned. We are prepared to compete with anybody. And I mean anybody who wants to try to tread on our turf. This is one that we will compete very aggressively for. You can count on it. Steve says it well. When we come out with what we plan to come out with, we expect it to have a very good shot at being the winning proposal. That's probably all you are ever going to hear on that until we make an announcement.

All right, great guys. Thanks, Peter.

Dennis Forst of KeyBanc.

Larry reminded me, I wanted to ask about Casino Rama. I saw that you had a short-term extension, but what is the long-term diagnosis there?

Dennis, this is Tim. As you saw in our guidance, we have reached an agreement to extend our existing relationship for another six months, which takes us out to September 30 of this year. We have been told by the Ontario Lottery and Gaming Commission that they have suspended the RFP process and they are not sure what direction they are going to take yet with the Rama contract.

I think it has broader political implications. They are trying to determine what they want to do strategically going forward with overall gaming in the province, which we are just a part of. We've been told that hopefully within the next couple of months, they will provide us with a little bit more direction on where they are going to go and it is tough to predict right now what is going to happen between post-September 30, but it is a very politicized process right now that really is out of our hands.

And the six-month extension at the same terms that you're currently at?

Yes, under the same terms that we have been operating on in the past year.

And then lastly, Kentucky looks like it's probably at least 50/50. What are you think the likelihood of gaming is and what is your plan there?

Eric do want to work on that?

Sure. We recently saw shots fired back and forth between the governor and the Senate president on this issue, which continues to be a sticking point on something happening there. We had expected a bill to be introduced this week.

It is now going to be delayed, we think, until after the filing deadline for candidates, which probably pushes it into late next week. Some speculation as to just slot the tracks or slot the tracks plus a couple of standalone facilities. We will wait to see what the bill is. As for the likelihood of success, remember they need three-fifths majority for a constitutional amendment.

In each house, correct?

It is three-fifths in each house, so it's 23 votes in the Senate, 60 votes in the house. The Senate is going to be a challenge. There is some confidence that they can get to the 23 and there's some confidence on the other side that they are a couple of votes shy of that. And then it would go to the voters statewide. Until we see what the actual formula looks like, it's tough to really speak more to it until we know what we are dealing with.

But that's a market you would want to be in?

Yes, if it is going to happen. Again the standard line is if it's happening we really -- we want to be there. Hopefully, again, Kentucky will recognize that slots and tracks alone is a sub-optimized opportunity. We clearly support slots at racetracks, but is not the right way to meet the gaming challenge in their state. If they want to be competitive, they have got to take a Pennsylvania view and include both. And we could be supportive of that.

Okay, terrific, thanks Peter.

Thank you.

Mr Carlino, we turn the call back over to you for any closing remarks as there no further questions at this time.

Well, this probably sets -- thank you, operator -- a modern record and I guess that is good. Let's charge ahead in 2012. We've got a lot of exciting things happening and we will see you at the end of the quarter. Things a lot.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect all lines. Thank you and have a good day.