PENN Entertainment Inc (PENN) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming first-quarter results 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 Joe Jaffoni, Investor Relations. Please go ahead.

Thank you, Lindsey. Good morning, everyone, and thank you for joining Penn National Gaming's 2012 first-quarter conference call. I'm going to review the Safe Harbor language; after which, we'll get to management's presentation and comments, and then your questions and answers.

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. 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 happy to turn the call over to Peter Carlino, the Company's Chairman and CEO. Peter?

Thanks, Joe, and good morning to everyone. Obviously, we're happy to report a nice quarter. And with me today are most of the usual group, our senior management team. And in light of our quarter, though I can anticipate some of the questions you folks may have, I think I'm just going to let you ask them.

So, Operator, why don't we open the floor to questions?

Certainly. (Operator Instructions). Felicia Hendrix, Barclays Capital.

So just a few questions. One is, you certainly did report a great quarter. Wondering, you talked in the release about a variety of things that benefited the quarter -- weather; some improvement on the gaming side specifically. Just wondering, is there any way that you can parse out -- I know it's tough, but maybe if you could help give us an idea of how much of that good performance do you attribute to better weather? And then actually how much of it is actual increased spend per visit?

It's a very -- I mean, that's an obvious question, Felicia. I was watching Larry Kudlow the other night, who was castigating somebody for the weather excuse. We try not to use weather as an excuse on the downside, although clearly, sometimes that is the case. And we often -- and usually don't use it on the upside either. Clearly, weather had some impact.

But make no mistake. This is just viscerally, a very strong quarter. Our customers are back and they're back in force, and most of our properties are doing extremely well. So there is an energy out there that transcends weather. That's my broad response. I'll let Tim give you the real truth.

You know, Felicia, just to add to Peter's comments, we certainly saw the benefit of that weather in February, we believe. January and March were pretty typical months. You could even argue March was -- the weather may have been too good compared to other March's, and people were outside taking care of their spring activities a month earlier than usual.

The other thing that we certainly had in the quarter was an extra day in February; that certainly had a positive impact. But generally, we're seeing slightly improved behavior from our customers. The strength continues to be like we saw in the fourth quarter in the [400] and above segment. We are seeing overall increased spend per visit slightly.

And our marketing activities continue to move low-end customers away from being rated into unrated, so that has an overall effect of improving the quality of your rated play on a per-trip basis. The good news is there's rational promo environment out there. We don't see anybody causing any fight for share that we think is detrimental to our business and to our customers.

So, the quarter, I think, has been better than what we've seen in the last couple of years, slightly. The recovery, I think, will continue to be slow, which is reflected in our guidance for the balance of the year. And we do see the strength in our VIP segment, which is good to know that we're protecting our VIP customers, even though we're able to continue to improve our margins at the lower end of our rated database.

And actually -- thank you for that. That's very helpful. Something that you just said actually moves into my next question, and that is, your guidance and how you're viewing the rest of the year. You just indicated that you might be somewhat conservative. But you are raising somewhat even if you've taken to pass through the upside in the quarter and just, again, to maybe even repeat what you just said. I mean, is it mainly because you are seeing an improvement in the customer and you feel a little bit more comfortable than you have in the past?

Well, we feel pretty comfortable with the customer. I think there are some -- there's some other items that are in here that are causing guidance to move around a bit. We're looking at -- we've picked up an extra quarter -- not just in any particular order -- picked up an extra quarter of management fees out of Rama. We have -- as we've analyzed cannibalization at properties, we are recognizing that the cannibalization isn't as immediate as we'd originally contemplated. So that's a small piece of it.

We've moved up the Columbus opening roughly a month. And obviously, we had a month's delay in Toledo. On top of that, we had the preopening expense, which unfortunately, when you get delayed in preopening in the last month, that's the highest period of your preopening expenses, is the months immediately before opening.

I mean to summarize that, what I would say is we feel good about the consumer. And the rest of it, we feel pretty comfortable that we've got some good comfortable trends going forward. And the rest of it is really a little bit of movement around timing on issues of openings and other properties openings. We also have -- Maryland Live is going to open earlier than we'd originally anticipated. So it's -- there's really more moving pieces here, is how I would characterize where our guidance is at. But we feel good about it. I mean, I don't in any way want people to walk away and say, hey, we don't feel good going forward. We are feeling pretty good about the consumer.

Okay. And then just final question and then I'll get off -- I'll let someone else get in. But so when you talked about you recognized cannibalization was not as immediate, do you mean more regarding Kansas City versus Kansas? Or are you seeing/thinking differently about the impact of Maryland Live?

Well, we've looked -- we've been analyzing cannibalization or impacts of cannibalization at not only in the Illinois market, but as well as what's been happening in Kansas. And it's clear that the cannibalization immediately is not as strong as what we have been indicating in our previous thought process. So, that doesn't mean that the cannibalization doesn't happen; it just seems to be a little bit more delayed than we had in our original numbers.

Relative to what's happening in Kansas City, the ISC property obviously started off really well. And as I think I've indicated a number of other times, it's following the exact pattern that we have seen in every other opening of a property, which is, its property starts off really strong, and then it has a period of a few months where it doesn't match those initial numbers. And it takes anywhere from four to six months to climb back to the -- and I won't say the opening week, but maybe the second, third weeks opening results -- takes about four to six months to get back there.

And what we're seeing in Kansas is there -- it's right in the sweet spot of what we've seen in a bunch of other openings and properties that we've had, whether it was Perryville, Bangor, Penn National, et cetera, et cetera. So we're really comfortable with what's happening. ISC, it's -- or basically with the Speedway in Kansas, it seems to be going just exactly according to the formula of what's happened historically.

Okay. And no new thoughts on Maryland Live versus Charlestown?

Maryland Live versus Charlestown, I mean, certainly, we're -- we are incorporating a bit of that. We think that the cannibalization -- original cannibalization thoughts may have been a little bit accelerated in terms of the immediate impact. So we have pulled that back just a little bit.

And I'm going to reiterate what I said last time, which is, there's a lot of moving pieces in this year. And therefore, our guidance going forward -- and I'm going to say up or down -- is it down or up -- say up or down, we're still feeling like there's a lot of room in this year's guidance for movement relative to where we may end up, just because of the fact that there are so many -- again, so many issues happening this year as we've moved through these different openings.

Okay. That's really helpful, I appreciate it. Thank you.

Shaun Kelley, Bank of America Merrill Lynch.

I just wanted to ask real quickly about kind of the updated thoughts on the additional license and the legislative process in Maryland. There have been a lot of headlines coming out about it, obviously. There's a special session that's going to happen. So could you just give us your latest thinking?

I guess I didn't realize -- and you put in the release that Rosecroft was actually excluded from, I guess, the bill as it was proposed at the end of the last session. So, kind of how you think, if that were to come back in a special session, how you'd think about the opportunity for Rosecroft?

I think that's best answered by Eric Schippers. Go ahead.

Well, and first of all, we were thankful that that, what we viewed as a flawed piece of legislation, failed to make it through the legislature. It would have essentially been a sole source contract for National Harbor in the way it was drafted.

So we didn't like that, and we were continuing to fight for the inclusion of Rosecroft in that. Because, frankly, we strongly believe, and we know others in the state believe, there needs to be a long-term solution for racing. And certainly, a facility at National Harbor doesn't accomplish that goal. Our proposal at Rosecroft would create excitement in the level of economic development, new jobs, but also solve the long-term problem for racing.

We're hopeful -- now there has not been a decision on when there's going to be a special session. We assume there will be. We're hopeful that that flawed piece of legislation doesn't come back up in a special session; or if gaming is included in the call, that we kind of reset the clock. And that we have an opportunity to argue the merits of our proposal being included in a competitive bid, should this license make it through.

Yes, I think the answer -- let me chime in with that, Eric. Racing needs a long-term answer in Maryland. While there is some subsidy for the racing industry, as some point out, that all goes to purses and a little bit for capital improvements. None of it goes to the operators.

So it's an absurd arrangement whereby the guys who have to run the business turn on the heat, power and light, make it work, get nothing. And while I'm pleased that there is money for purses, there's nothing for the companies who operate these businesses. So it makes no sense at all; never did. And the industry remains on the edge of bankruptcy until there is a long-term answer.

So that's the argument we've been making. We want to build a big-time facility in Maryland. I mean, it's our business, that's what we do. And that's the case that we're making. The National Harbor thing came up kind of late in the game. Maybe they had had that idea all along. But, in any event, it was a late entry, kind of piggybacking our initiative to get slots in Prince Georges County.

So it's been a very interesting time for our public affairs folks to engage that battle. We're very much engaged, very much hopeful that the state of Maryland will provide a good long-term answer for racing. So, that remains our focus, and we'll just have to move on to the next round.

That's helpful. And then I guess one more to just kind of clarify the difference here, because I guess there are two issues, right? There's the potential sixth licenses in Prince Georges, but there's also a proposal for introducing table games and lowering the tax rate.

Just your thoughts or, I mean, your best guess even on the likelihood of having tables in a lower tax rate without having something happen at Prince George's one way or the other, that you guys might be involved in? Because, I mean, that would be the -- when we think about risks to the story, what we're worried about, obviously, as tables happen, it helps people and it helps Maryland Live, but somehow you guys don't get an opportunity to compete for Prince Georges.

Well, right now, I think it would be safe to say that two issues are inextricably intertwined in the minds of -- in the mind of the Senate President. He's been pretty clear that the sixth license is tangled up with the other issues. So we don't expect those to be de-tangled should this come back together for a special session. If it does come up, as I said, we're going to continue to fight for Rosecroft being thrown back into the mix. But not sure they're going to take a piecemeal approach, given his position on this.

Okay. That's perfect, Eric. I appreciate it, guys.

Mark Strawn, Morgan Stanley.

It looks like margins in the Midwest region were stronger than we expected in the face of new competition. Can you talk about some of the steps you took there to drive that? And I assume you expect to repeat similar steps in the rest of the regions as new competition opens?

Yes, Mark, this is Tim. We just continue to do what we've been doing over the past seven or eight quarters. With the opening of the 10th license in Des Plaines, we were prepared for that. And we restructured our costs in both Aurora and Joliet to reflect lower business volumes that we're seeing there.

And then in Lawrenceburg, the thing that we've continued to do there is continue to -- being the 800-pound gorilla in that market today, continue to restructure our marketing spend and reduce our marketing reinvestment again to the lower level of our rated database. And that has continued to improve the overall margins of that business as well.

The other thing in Lawrenceburg that we took advantage of was some legislative changes in the second half of '11 that allowed us to significantly downsize our Marine operation staff. So we are seeing some very nice improvement in overall labor savings, due to the elimination of the majority of our Marine operation staff in Lawrenceburg as well.

Great. Just wanted -- the increase in preopening in the quarter, was that entirely -- or for the year, is that entirely related to the delay in Toledo? Or is there some other stuff in there as well?

In other words, in terms of what we did for a year-over-year basis? No. It's because we had a delay.

Okay.

Unfortunately, when you had a delay in the last month versus knowing that you're going to accelerate several months in advance like we've done in Columbus, we don't have -- they don't offset each other, because they're not equal, so (multiple speakers).

(multiple speakers) Okay, great. So that 5 million increase in the full-year preopening guidance, that's pretty much all Toledo in that delay?

Right.

Great. Thank you.

Steve Wieczynski, Stifel Nicolaus.

If you -- I mean, I guess if I try to back into what you guys did in Vegas, it looks like you had a pretty good quarter there. I'm wondering if you can just kind of talk me through what you're seeing in that market right now, and maybe just kind of talk about what you're doing to improve your margins there as well.

Steve, this is Tim. You saw the Nevada numbers come out for January and February, especially February. We started to see a little bit of improvement in the Boulder Station numbers for the Las Vegas locals. But that, coupled with our continued rationalization of the cost structure, we continue to reduce FTEs where we can, and adjust our hours of operation in our restaurants and our other non-gaming areas to reflect more current business demands; and continue to, as we've done with the other businesses, look at our marketing reinvestment to the low end of the rata database. And all those things continue to show improvement to the overall performance of them.

But again, we're still early on in this, and it's going to continue to take a couple more quarters going forward into this year and into next year for this to completely take hold. So we're off to a decent start this year, but there's more to come.

Okay. Great, thanks. And then on -- just a little bit of a smaller market, going over to Baton Rouge, with a competitor opening a property there -- just kind of walk me through how you're preparing the Hollywood property there. I mean, do you think the new property will be actually to be able to grow the market? Or you think it's just going to be almost a complete cannibalization story there?

I think there's going to be very, very modest growth in this market. And I do think there's going to be significant cannibalization of the two existing casinos that are in that market. So we don't anticipate that there is going to be a good story in Baton Rouge once Pentacle does open there. So we think the market is fairly well saturated and there will be modest overall growth.

Typically -- probably not too different than what you're going to see in Atlantic City with the Rebel opening that just occurred, given how saturated that market is, we see similar kind of effect in Baton Rouge. So we're preparing for lower business volumes and, therefore, ready to adjust our cost structure to accept a new paradigm of business levels.

Okay, great. Thanks, guys.

Brian Egger, Topeka Capital Markets.

Just wanted to ask a question about the marketing positioning of the Toledo property. The obvious market for that property certainly has been Detroit, but wondering how much you think it will be reaching into what I would call the Northeast Ohio market?

There's been some press, for example, about the property in Cleveland at Caesars and Rock are opening about the adequacy of bus promotions there. And you've got some major cities with Akron and Canton, Ohio. Just wondering if you can give us any thoughts at all about the regional positioning, in terms of target markets for that? And in view of the fact that you've got another property opening up along the shoreline there in the same month.

Brian, this is Tim again. We don't have any expectation to reach into Northeast Ohio with any of our marketing programs. We think the Toledo market, that MSA, which is fairly good-sized, it's three-quarters-of-1-million people when you look at the entire MSA. It's certainly strong enough to justify what we're doing in Toledo alone. We'll go into Southern Michigan and fight with the Detroit casinos for the business along Interstate 75 between Toledo and Detroit.

We also think there's an opportunity to reach into Fort Wayne, into Northeast Indiana, because we think we'll be the closest casino to that market as well. But our reach to the east, we think, will probably end in Sandusky. And we're not going to devote a lot of energies or resources to anything in the Cleveland market at all -- or Akron or Youngstown.

Okay, thanks. That's helpful.

Joel Simkins, Credit Suisse.

Just wanted to get your latest update in terms of the timing of the anti-gaming group challenge in Ohio. And assuming that judge makes a favorable decision, when do you think you could pull the trigger and begin construction, as well as sort of the potential timing to build those facilities and whether they'd be pretty close to that $150 million budget?

Joel, this is Tim again. Last week, the judge heard arguments for dismissal from all the affected parties in this litigation initiated by the Ohio Roundtable. And the judge made a statement that he should have an answer on dismissal by Memorial Day. If that does occur and this is dismissed, there is an appeal process that could occur; we don't know how that's going to play out.

But at the earliest, if we're given the go-ahead to move forward without any appeals, we're evolving our designs in Dayton and in Youngstown right now. We think -- we're very confident we can come in, in both projects [at a] $275 million level -- that includes all the license fees. Probably at the earliest, we could have groundbreaking in the -- probably fall toward fourth quarter of this year, with an opening probably in 2014 early. But that's best, best case. There could be more delays with this. So it's tough to predict until we get some direction from the courts, which we believe will first occur around Memorial Day.

Okay. And second question, I guess maybe high level water for you guys as well as Peter, what are your thoughts still on The Strip? Is this a market you see yourself eventually getting onto? Obviously, there could be some assets out there still for sale. Then, secondly, how much time are you guys spending in terms of assessing opportunities in Asia at this point?

(laughter) Well, if you can point out the right property on The Strip, we remain ready, willing and able. Look, we still have an interest in Las Vegas and getting the right property on The Strip. This may be one for which a lot of patience is required. We'll know it when we see it, but obviously, we're alert to that possibility pretty much every day.

But what drives us here is the constant, constant thought -- you've all heard it from me before -- of what's next? I joke -- and I really say, and I mean with all sincerity to our staff here, and we address the Company companywide, that I don't care how good we used to be, and that includes last week; certainly, last month and last year. Nobody cares. I have to assume that everybody who bought our Company stock did so yesterday or five minutes ago. And that buyer obviously is looking to the future. So are we.

So we are as driven as ever in all those fronts. Steve Snyder is not here today because he is in Asia -- I'll just simply say that. We've told you that we're highly focused on a number of fronts there. I can tell you no more. We'll see. But it remains probably -- I was going to say our largest single initiative. It's hard to say, because we've got a bunch of large initiatives right now. But I don't think there's ever been a time in this Company's history when we were focused on so many important and interesting opportunities. So, that's a vague answer but it certainly captures the spirit of what goes on here and where our focus lies.

Thank you very much.

(Operator Instructions). Dennis Forst, KeyBanc.

Most of my questions have been answered, but just a little grab bag of a couple of items. Bill, can you give us the debt at the end of the quarter?

Sure. The total debt at the end of the quarter was [$2.030 billion]. I'll give you some other data as well. Our cash position was $217.4 million. The CapEx for the quarter was -- total CapEx was $119.7 million, made up of roughly $21 million, $21.5 million of maintenance CapEx, and the rest of it was new projects. That doesn't include our 50% of the Speedway CapEx in the quarter. Total CapEx there was roughly $39 million, so our share was half; so, $19.5 million.

Okay. And then the number of shares outstanding went down in the quarter. Did you buy back any preferred?

We did not make any purchases in the first quarter. What you're seeing is diluted share count is on a weighted average basis, so the buydowns that we did in the fourth quarter are reflected through the entire quarter and the first quarter.

Oh, okay. I didn't realize you bought back some preferred in the fourth quarter.

(multiple speakers) [And up] for ordinary.

Oh -- ordinary. Okay, common. I've got it. Okay, then, lastly, I wanted to ask Tim -- on the Ohio VLT project, you said $275 million each. That includes license fees and I assume the relocation fees also?

That is correct, Dennis. The license fee and the relocation fee per site totals $125 million.

And what was that, $75 million and $50 million -- respectively?

That's right.

Okay. Got it. Thanks a lot, everybody.

Larry Haverty, GAMCO.

Hi, Peter. A couple questions. One, is there anything you're seeing on the machine front that's interesting, looks like it could be stimulating your business? And I'm thinking in particular about these electronic table games, which look like they're doing phenomenally well at Genting and Aqueduct.

And then, secondly, which has nothing to do with the first one, what do you do when you get a raft of unplanned advertising, like you recently have gotten this week? And is this a problem or an opportunity?

(laughter) First off (multiple speakers) --

And I think you know what I'm talking about.

Yes, well, we can talk about that. But look, first, I'll claim no expertise in games. I'll let Tim take that question.

Larry, the electronic table games where you don't have live table games, that has continued to show strength in a number of different markets. No more so, though, recently than what we've seen in the last two or three years. But once table games does get -- live table games get introduced into these markets, we quickly see the end of these electronic table games for the most part, because they are replaced by more accepting live table games product by the customers.

On the overall machine front, there's really nothing new out there that's causing us to move any significant shift around from manufacturer to manufacturer. We have seen in certain cases where certain manufacturers have become very aggressive in their pricing to us, that has caused us to move a little bit of share over (technical difficulty) -- seen in machine price over the last five or six years, hasn't correlated well with any win-per-unit performance.

So, to see an operator -- or a manufacturer, I'm sorry, like Konami be very aggressive with their pricing is something that has caught our interest, and has given them a little bit of a share shift toward their product -- which has performed very well on our floors, especially in the low denom area.

Now if you were to get to the (multiple speakers) -- (laughter)

Now the other question about (multiple speakers) --

Unplanned marketing.

-- unintended advertising (multiple speakers) --

Yes.

Look. The GSA thing, as a taxpayer, of course is an outrageous situation. As a business owner, on the other hand, I'm really depressed that those guys won't be back next year. So, it's (multiple speakers) --

Well, you could advertise the government will never find you at M.

(laughter) Well, looks like they were having fun. I'm glad our folks provided them what they were looking for -- you know, a first-class experience. (laughter) I'll leave to others to determine whether taxpayers should be paying for that, though.

We appear to have no further questions at this time. I would now turn the call back to you. Please continue with your presentation or closing remarks.

Well, I think that (laughter) kind of does it. We'll end on that sort of semi-positive note.

Look. It's been a great quarter; lots of good stuff happening. It's going to be an eventful year; we think, on balance, a good year for Penn. So, see you next quarter. Thank you.

Ladies and gentlemen, that does conclude your conference for today. We do thank you for your participation and ask that you please disconnect your lines.