PNK 3Q2010 CONF CALL NOTES

Another very strong, margin driven quarter for PNK. Numbers need to go higher.

"Pinnacle's growth in third quarter revenues and Adjusted EBITDA, together with improvements in Adjusted EBITDA margins, reflect further progress in creating sustainable operating efficiencies across the entire organization while remaining focused on delivering best-in-market guest experiences.  With revenue increases in four of our six markets and improved operating execution across our property portfolio, we are benefiting from our disciplined approach to operational excellence and have a focused team that can drive further improvements."

-Anthony Sanfilippo, president and chief executive officer of Pinnacle Entertainment

 

HIGHLIGHTS FROM THE RELEASE

  • "Adjusted EBITDA margins increased from prior-year levels in every market except St. Louis, which is affected by the continued ramp-up of operations at River City after its opening earlier this year."
    • Consolidated Adjusted EBITDA margin rose to 20.9%, compared with 16.4% in 3Q 09
  • St. Louis market share was 31.2% in 3Q compared with 19.3% in the prior-year period. 
  • $228MM cash; an estimated $70 million of which is used in day-to-day operations. $375MM undrawn credit facility with $9.6 million of outstanding letters of credit.
  • Gross interest expense ex cap interest: $28MM vs $22.5 MM in 3Q 09; Virtually no cap interest vs $3.8MM in '09
  • Loss of $2.3MM due to discontinued operations
  • Income tax benefit of $5.34MM
  • $357MM Baton Rouge property to open in Dec 2011 with 1,500 slot machines and 51 table games
  • Ginny Sharks appointed to Chief Marketing Officer

CONF CALL NOTES

  • Operational excellence continues to be the key
  • Still in the midst of a relatively static revenue environment
  • L'Auberge team did a good job by yield managing the hotel
  • Did a good job at River City managing flow-through. Also did a good job optimizing labor and joint property initiatives across St. Louis.
  • Belterra's adjusted EBITDA still improved substantially despite heightened competition, largely as a result of marketing efforts
  • Bossier City - targeted labor and marketing efficiencies which helped the bottom line
  • Reno property took a real shift - turned last year's loss into a $1.5MM gain - which was a great result in the absence of a top line lift. Evaluating possible scenarios about selling their land in Reno.
  • Corporate expense decrease was due to office consolidation, aircraft sales, and some downsizing. Still looking for room to cut there.
  • Have $500MM of liquidity and Baton Rouge is fully funded.
  • Capex spend was $30MM including some amount for Baton Rouge
  • Marketers at PNK are a good "intuitive team" but will be helped by analytic tools
  • Efforts underway:
    • Think about how to market in St Louis where they share customers
    • How to reward their good customers
    • Installation of revenue management systems at hotels
  • Will think and act like shareholders
  • L'Auberge prospects:
    • Proud of their 3Q results but still have a lot of work to do

Q&A

  • Return assumption at Baton Rouge given the bump up in capex?
    • Think that on the $100MM add on they will get a good return
    • Add on rooms are not as expensive as initial rooms
    • Parking lot is also important
  • How much of the improvement this quarter is due to better slot product?
    • They are operating more on facts than on gut (like before)
    • They already had fairly fresh slot product
    • Want make sure all the cuts and changes sustainable
  • Purchasing an Ohio track?
    • Won't comment.  They are looking at all markets though
    • They are a growth company and are looking for ways to grow and diversify their portfolio
  • River City parking deck
    • They hired a new manager
    • They need a new parking structure but don't expect it in the next 9-10 months
    • They are thinking about what the next appropriate capital spend is at that property
  • Shared services in St. Louis?
    • Worst outcome would be to compete against each other
    • Moved a corporate guy down to St Louis to manage the finances of both properties
  • Is this quarter's margin at Belterra sustainable?
    • Focusing on identifying who their profitable customers are
    • It's a very competitive market and will be even more competitive when Ohio opens
    • The new margins are sustainable
  • Thoughts on 3 applicants in Louisiana?
    • Applicants have been very vague, but in Dec, they will see presentations on the proposed projects
  • Are they in a dispute with the port of Lake Charles over the land?
    • Entered into a lease with them, but can't comment on whether there is a dispute - generally they have a good relationship there
  • They are in the early stages of using their newly installed yield management system and they have over 900 rooms at L'Auberge.  They are also looking at yielding their slot floor more appropriately.  More than likely, the margins should continue to improve as they replace unprofitable revenues with profitable revenues.
  • Haven't even started appropriately marketing River City - so they think that there is lots of room there
  • Hotel yield system was just installed last month in St. Louis
  • Could seasonality explain why consensus for FY is so low?
    • Have 4 properties subject to difficult weather conditions in the 4th and 1st quarters
  • AC - any change in their view there?
    • They have done a lot to clean up the balance sheet.  AC has been very painful. They will not exit that market at a giveaway price. In the meantime they are trying to minimize the carrying cost.
    • It is possible that if they can't sell the land that they would consider a boutique hotel there
  • They are at the "top of the 3rd inning" in terms of marketing
  • Impairment charge was $4MM for this current quarter in relation to Baton Rouge design write-offs. Going forward the only other potential impairments can come from AC (book is $38MM). Book value and shareholder value aren't necessarily the same.
  • Tax credit was included in the G&A line
  • There is so much volatility in income taxes because of their reserve NOL's
  • Are they going to try to go the way of Harrah's with a national loyalty plan with a key destination?
    • They are focused on growth and building a loyalty culture
    • Their focus is to encourage cross play
    • They do want MyChoice to be their linking brand - they want their customers to know that they own multiple properties. They won't be changing their names.
  • Texas?
    • Continuing to monitor the situation. If something happens there, they will see if and how they can participate.