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A legitimate beat and raise

"Despite concerns about a slowdown in U.S. economic growth, during the first half of 2011 we've seen gradual improvements in consumer trends, though there continues to be month-to-month revenue volatility in several of the markets where we operate. With second quarter results exceeding guidance and expectations for continued positive operating momentum throughout 2011, we are raising our full year 2011 revenue and adjusted EBITDA guidance to $2.7 billion and $723.5 million, respectively."

- Peter M. Carlino, Chairman and CEO of PENN


HIGHLIGHTS FROM THE RELEASE

  • "With the recent opening of the sports bar and lounge at Charles Town, we have completed the property's expansion to complement our table game product offerings and have transformed this facility into one of the largest full amenity casinos in North America. In addition, Hollywood Casino Perryville had a successful opening last fall and we benefited from a month of operations from M Resort. Hollywood Casino Perryville generated $5.7 million in quarterly adjusted EBITDA and M Resort contributed $2.1 million of property adjusted EBITDA (excluding transaction costs) in the month of June. Overall, thirteen of our fifteen gaming facilities generated year-over-year adjusted EBITDA improvements and fourteen increased their adjusted EBITDA margins."
  • "In June, Penn National entered into an agreement to divest its joint venture interest in the Maryland Jockey Club as we believe its tracks will be well served under a sole ownership structure. Given that Penn National previously wrote down the value of this investment due to a goodwill impairment charge at the Maryland Jockey Club, we expect to record a gain from the sale in the third quarter. Going forward in Maryland, our focus will be on resuming live and simulcast racing at the now dormant Rosecroft Raceway in Prince George's County, which we acquired earlier this year, with the hope of eventually offering expanded gaming there, and building on the initial success of Hollywood Casino Perryville."
  • "M Resort recorded second quarter property revenue of $43.1 million and adjusted EBITDA of $5.6 million before the impact of transaction costs. This compares favorably to the prior year revenue and adjusted EBITDA of $41.9 million and $4.5 million, respectively. We are confident that our operating discipline, rationalized approach to marketing and active player database can continue to improve the property's financial performance over time."
  • "Hollywood Casino at Kansas Speedway and Hollywood Casino Toledo are expected to open in the first quarter of 2012 and first half of 2012, respectively, provided the required regulatory framework and approvals are in place"
  • "During the second quarter, we entered into a contingent agreement with The City of Columbus that called for annexation of the site of Hollywood Casino Columbus into the City of Columbus in exchange for water and sewer service and other considerations. The agreement was conditioned, among other things, on the sale of real estate previously purchased by the Company in downtown Columbus for $11 million and an acceptable settlement agreement with certain affiliates of the Columbus Dispatch. While neither of these conditions were satisfied by the July 19, 2011 deadline set forth in the settlement agreement, we believe that we have now reached an agreement in principle among all parties relative to the satisfaction of these conditions. We expect to complete the documentation of these matters shortly. In the meantime, construction has continued on our planned $400 million Hollywood Casino Columbus project, which we expect to open in the fourth quarter of next year."
  • Guidance:
    • Net Revenue: 3Q:$706.3MM; FY: $2,727MM
    • Adjusted EBITDA: 3Q:$197.4MM; FY: $723.5MM
    • EPS: 3Q:$0.53; FY: $2.16
    • Adjusted EBITDA includes a $20MM gain on anticipated closing of Maryland Jockey Club sale on Aug 1 
    • Extension of Casino Rama management contract
    • $10.6MM of pre-opening expenses with $2.4MM incurred in 3Q
    • D&A: 3Q:$53.4MM; FY: $213.3MM
    • Debt extinguishment charges of $18.6MM ($13MM non-cash) in 3Q
    • Stock comp: 3Q:$6.3MM; FY: $24.9MM
    • Tax rate: 38.2%
    • Share count: 107.4MM

CONF CALL NOTES

  • Regional trends: Generally, they are seeing a stable environment with slight growth in some markets. The promotional environment remains rational.  The only strength is in the VIP segment (>$400 of gaming per day).  

 Q&A

  • PA has seen some migration towards electronic table games which helps margins. They don't have a lot of competitive pressure given their location. When and if revenues start to improve they will see margin improvements.
  • Took over M Resorts on June 1st. The local gaming market in the locals Las Vegas market continues to be challenged. Continue to see strength in group and convention. Marketing roll-out in 3Q.  2Q isn't as seasonally strong as 1Q.
  • Toledo: 1MM population base - compares to 1.2MM at Penn National (PA) with similar income demographics. Penn National is a good proxy for margins when you adjust for respective tax rates
  • View on bill to expand gaming in IL. Governor is struggling with passing the expansion bill given the VLT passage. There is ongoing dialogue - they think will not be resolved until the fall. They don't think that the VLTs will have any impact on the existing casinos since there are already illegal machines out there.
    • Governor can veto the package once it's delivered to him
    • He can try to structure a new deal with the legislature when they return in the fall
    • The opening of the 10th license in IL will also provide some additional tax relief
    • Do not think that the bill in its current form will get passed
  • Expect that OH VLTs will get passed in September but it will take at least 18 months to open the new facilities
  • Lawrenceburg market continues to show slight declines. The riverboats have impacted SE Indiana.  They are looking at ways to continue to rationalize costs. Don't expect Cinncinatti to open until 2013.
  • Charles Town will lose some business when Arundel opens - especially the convenience business. All they can do is make their property more competitive as they have done with the recent improvement. Their customers will still be allowed to smoke while MD facilities are smoke free.  Also the high tax rate in MD allows them to offer a more complete entertainment experience. The don't expect much impact on Perryville from Arundel until if and when the Baltimore facility opens
  • In the process of putting in a one card solution at Kansas Speedway to take advantage of cross marketing. They will also take advantage of cross marketing in Ohio.
  • They are interested in opportunities in Asia when and if they arise
  • Discussions in MA will begin after Labor day
  • In Florida, the expansion bill failed
  • They are done making investments in Lawrenceburg. They are in discussions with the city about partnering to build a 150 room hotel. They have the ability to open smoking on their floors which Cincinnati will not when they open in 2013.
  • If they are able to move the racetracks - there's a $150MM capital investment requirement plus $50MM license fees. It's unknown if there will be a premium for relocation
  • There haven't been any internal modifications to the way they look Ohio investments but they did reach an agreement for additional payments
  • Cash:$322MM  Debt: bank debt: $1.518, capital leases: $5, bonds: $325+250 = $2.1BN at June 30th
  • Capex: $59MM (14.6MM maintenance; $15.2MM on Kansas; $37.9MM of project capex)
  • Capitalized interest was $1.27MM in 2Q; $1.750 in 3Q and 6.2MM for the 2011
  • Depreciation at M should be roughly $1.75MM per quarter. Originally they thought it would be a lot higher.
  • They are not interested in the AC market
  • Wouldn't want to go over 5x on a gross leverage level
  • M Resorts - 4 growth drivers: Locals market, S. California market, Penn regional database, and group and convention business.  Their database is already contributing 3-4% of occupancy. They do think that there are facets of the business that can improve without the locals business improvement. They are also looking at optimizing marketing.