PENN Entertainment, Inc. (PENN) Q4 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Penn National Gaming Fourth Quarter Earnings Conference Call. [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 as your questions and answers, but first, we'll 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. And 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. Well, 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're 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've taken some say a conservative view. I think we've 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 try to be very cautious. And as we've said to you before, our view is obviously through 2012 and into 2013. So if you will, we kind of look at these as a -- this is a multiple-year experience. We will open all 3 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 sort of package this internally. We always -- somebody -- is there a problem on the line? We always take the long view here at Penn. So 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 was -- started slow, but finished strong. We certainly believe the weather in December was -- 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 at -- in areas where we're having softer business volumes, 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. So more the same of what we saw in the previous 3 quarters for 2011. And so far, so good as we enter 2012.

Very good. So why don't we -- operator, let's open the floor to questions.

[Operator Instructions] Our first question comes from the line of 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 just walk us through your thoughts there? I imagine cannibalization plays a part in that assumption?

Yes. The -- I think there's a combination of things. I think there's some continued expectations for improvement, although relatively minor in the markets that 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've -- are expecting cannibalization. And then we've got, to help kind of 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.

Great. And just one last final question. On the Ohio properties, you mentioned that Toledo's going to open, I think it was in May. Could you give us just some updated thoughts there? Is that a definitive date at this point or is that still...

No. Let Tim handle that.

Yes, 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 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're 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.

And our next question comes from Joe Greff of JPMorgan. Joseph Greff - JP Morgan Chase & Co, Research Division: A question for you, Bill, and Peter, if you can chime in. The comment in the press release about actively monitoring and managing the capital structure to give you financial flexibility 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 you would see a nice pop in free cash flow per share. Particularly, when you kind of look ahead and you have all these growth drivers, if you can sort of think how you balance buyback, leverage and whatever other kind of greenfield or acquisition, growth initiatives that might be out there, that would be helpful to us.

Bill, do you want to play with that first? And I'll...

Sure. I think we as a company take a look at the longer-term view, and we're 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 forchers [ph] or basically, the preferred equity, which is we're 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're constantly exploring every alternative in terms of how we might be able to improve free cash flow per share across the company or to increase shareholder value. I'll probably leave it to Peter from there.

Well look, that is a predictable answer for us, Joe. I mean it really is. It's kind of who we are. Look, there are some major opportunities out there where we expect to be very competitive, so we 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. So look, we've got to always keep an eye on long-term cash requirements. But as Bill said, I think, quite ably, that we'll buy opportunistically if that opportunity appears. So it's kind of the same boring answer I think we always give. Joseph Greff - JP Morgan Chase & Co, Research Division: Okay. 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'd be helpful.

Sure. PENN cash was $238,440,000, bank debt was $1.714 billion. We had roughly $4.2 million of capital leases and obligations to the police group. We have the bond of $325 million, which gives us total debt of $2,043,164,000. 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 -- well actually, it 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.

Our next question comes from Shaun Kelley, Bank of America Merrill Lynch.

I just wanted to go back to the, I guess, 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's a huge number of kind of puts and takes as we kind of work through the year, but I'm trying to understand just a little bit more if you could give us your sense of kind of what markets do you think are likely to have the most impact? Is it really Maryland that we need to be kind of most concerned about? Or where are you -- I guess what keeps you up most at night, Peter, as you're thinking about the cannibalization for this coming year?

Geez, I thought I'd pawn that off to Bill since he generated the number and his team, but look, nothing keeps us up at night. I mean, we -- and you're right. I think you answered it. There are a number of variables this year that's kind of the largest number of variables that we've ever had to look at across a variety of states and you know what they are. So, and the science or alchemy by which they have come to that guess is, I'll let Bill play with that. But look, that's why we've been very cautious. I mean, look, 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. Look, we have a hidden optimism behind us. But at the same time, we have a pretty damn good record of delivering on what we promised. So with some very careful thought, looking across a variety of markets, we came to this number. And it really doesn't get -- and I can't really tell you a whole lot more than that. Bill, I don't know how much you want to share about how you made the stew, but have at it?

Well, 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 kind of a copout in terms of what you -- you've got a number or don't have a number. I will say that for this, the upcoming year, that the variability of these numbers is much higher than anything we've seen, probably dating back almost to the types of stuff we experienced during the financial crisis back in '08. I mean 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're going to meet it, and if I suppose 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'm hoping, I'm very hopeful it will be the upside, but we'll have to see how all the different assumptions we've got, I mean, play out. Relative to markets of concern, well clearly, Charles Town with the Anne Arundel opening is clearly going to be one of those that we are very -- going to be very focused on, and we'll 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 last few -- last couple of month's results in Illinois, that's been a little bit concerning. And then obviously, there's the Pinnacle opening in Baton Rouge, and we've got our own property opening in Kansas that's going to have an impact. So clearly, it's very difficult to predict. We've 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 2 markets are exactly the same. But it's an educated guess, and I think I'll leave it at that.

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

No, that's really helpful. And then the second question. There's a competitor that's kind of seems like they're proceeding on the VLT issue on Ohio that -- a little more aggressively than, I think, perhaps your own approach and others in the market. So kind of wondering because that track is in Columbus, how do you think about the first mover advantage there getting kind of up and running, and weighing that versus some of the, I guess, 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.

Well, the challenge in Columbus, of course, is the roundtable litigation as it relates to Video Lottery Terminals. So 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 procurement, 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 counterclaim 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'll add, this is Tim. If they were able to get open a few months before us, given what we're 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're proposing to build at Saio de Downs [ph].

Yes, look, I think Tim was modest with that. Look, we're building one of the great facilities in the United States, believe me. And I'm not giving you a lot of hyperbole, but when this place opens, it's going to be pretty exciting. So as I said inconsequent, we're not remotely worried.

[Operator Instructions] Our next question comes from Carlo Santarelli of Deutsche Bank.

I was just wondering if you would 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 kind of the impact from cannibalization and other non-same-store things.

Hey, Bill, why don't you take the second one. Let me just talk about the ramp up in Ohio. I think, Carlo, you're right. I think the good proxy for how that's going to evolve over the first 2 to 3 years would be Penn National out in Grantville, PA. That's the way we're thinking about a ramp up there, both from a revenue growth standpoint and also margin improvement standpoint. So I think that is the right proxy to use as you think about Toledo and Columbus opening later this year.

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're basically flat to just nominally up 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 in Tunica, and even Biloxi has been impacted. And then a lot of the other markets are performing fine. So on an overall basis, it's basically flat.

Our next question comes from the line of Dennis Forst of KeyBanc.

Just have 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?

Well, New Jersey is our 50-50 venture with our partners for the Freehold track. We don't actually do the account. We're not the controlling partner there, we're more of the passive partner. They basically have done an evaluation or analysis of their goodwill and -- because there was actually a purchase many, many years ago where there was still some residual goodwill sitting there on the books. Given the projections for racing in general and the prospects of what looks -- on a going forward basis in New Jersey, they came to a conclusion that the previously booked goodwill need to be written off. I can tell you at this point, there's 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're going to be okay with that on a going forward basis.

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

The tax rates, we -- it seems to bounce around on this. 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 once a -- new results come along. And those things get trued up at the end of each quarter. We end up with some fluctuation on a quarter-by-quarter basis.

Okay. So mainly a true up -- 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. I was just wondering what corporate...

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's nothing extraordinary in the corporate overhead number. It's very much in line with what we've experienced except for several quarters.

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

Sure.

Our next question comes from Cameron McKnight of Wells Fargo.

What's the latest you're hearing on VLTs in Illinois? And if they eventually come to pass, how do 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 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're kind of 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's 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.

Yes. That's been something that passed a while ago. The state's 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're just legitimizing what was already there. Don't know the timetable of when it's 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.

And we have a perfect comparison for that, or near perfect, and that's 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's tens of thousands and it was absolutely meaningless. So I don't think we're concerned about it.

Okay, got 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?

Well, Eric was just in D.C. yesterday. Why don't you give an update on your perspective on this?

Sure. The Senators Kyle and Reid are keeping their plans on this subject very close to their vests. In fact, they've 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's 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're 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 underage gaming. The compulsive gaming issues are still an open question, so we're 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.

[Operator Instructions] And our next question comes from Larry Klatzkin of Klatzkin Advisors.

Could you guys talk a little bit about Sioux City and what's going on there?

Sure, Larry. I'll start and anyone can follow on. We have had some active discussions with our nonprofit sponsor. They're about the upcoming expiration of our 20-year agreement. And we've been working with them, along with the city of Sioux City, to try to put together a proposal to move land-based and get off the river, and relocate our operations where we believe there would be benefit to all the parties involved. Now clearly, we've had some very difficult discussions about their desire to seek another operator through an RFP process, which we opposed for a bunch of different reasons. And we've 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 there. We're hopeful that the litigation that's out there can be put to rest through to an agreement that can come together between us and our nonprofit sponsor. But a lot more to come between now and midyear.

All right. And then -- handicapping Massachusetts, you got some new competitions come in, it's getting pretty crowded and everybody wants Western Mass. Do you -- how do you see your guys standing up to those people?

Boy, that's a -- Steve, do you want to take a whack?

Yes. Larry, you raised 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're 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. So getting this statute implemented is going to take quite a bit of time. As to us, we do continue to look at land. We are 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." So rest assured, we are approaching this with a lot of cautious optimism, and think when we do sort of 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.

Yes, let's be clear, I mean we have a plan here. We're just not disclosing it right now. So I think Steve's [indiscernible] but we'll announce what we want to announce when we think it's best to announce it. We think we're going to be very well positioned. We're prepared to compete with anybody. And I mean anybody who wants to try to tread on our turf. So this is one that we'll compete very aggressively for. You can count on it. So 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. So that's probably all you'll ever going to hear on that until we make an announcement.

And we have a follow-up question from the line of 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's 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 6 months, which takes us out to September 30 of this year. We've been told by the Ontario Lottery and Gaming Commission that they suspended the RFP process and they are not sure what direction they're going to take yet with the Rama contract. And I think it has broader political implications. They're trying to determine what they want to do strategically, going forward, with overall gaming in the province, which we're just a part of. So we've been told that hopefully within the next couple of months, they'll provide us with a little bit more direction on where they're going to go. And it's tough to predict right now what's going to happen between post-September 30, but it is a very politicized process right now that really is out of our hands.

Okay. And the 6-month extension at the same terms that you're currently at?

Yes. Under the same terms that we've been operating on in the past year.

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

Eric, do you want to work on that?

Sure. So we recently saw shots fired back and forth between the Governor and the Senate President on this issue, which continues to -- Senate President continues to be a sticking point on something happening there. We had expected a bill to be introduced this week. It's 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 slots at tracks or slots at tracks plus a couple of standalone facilities, we'll wait to see what the bill is. As for the likelihood of success, remember, they need 3/5 majority for a constitutional amendment. 23 votes...

In each house, correct?

It's 3/5 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're a couple of votes shy of that. And then it would go to the voters statewide. So until we see what the actual formula looks like, it's tough to really speak more to it until we know what we're dealing with.

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

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

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

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