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Surprisingly solid results and guidance

“While second quarter regional gaming market revenues generally softened from the pace of the first quarter, six of the sixteen properties that Penn National Gaming operated for both periods recorded year-over-year revenue increases. More significantly, eight of these sixteen properties generated adjusted EBITDA gains in the second quarter relative to the comparable year-ago period.  Reflecting these results, our second quarter revenue and adjusted EBITDA both exceeded guidance."

- Peter M. Carlino, Chairman and Chief Executive Officer of Penn National Gaming


  • Believe that they had a good quarter. View this year as a transitional year and that's what is turning out to be given all the openings and competitive pressures. Therefore, they are pleased with the quarter's results.
  • Relative cannibalization in the quarter was what they thought it would be at the company level. 
  • Relative to guidance, Columbus was already factored into 4Q.  They did increase the guidance for CZR St Louis (2.5MM of pre-opening but haven't included the EBITDA contribution or related interest impact given the uncertainty of timing).  D&A guidance did increase - which includes $4MM of accelerated D&A for the Ohio tracks. 
  • Compared to last year, in 3Q, there was $20MM of EBITDA associated with the sale of Maryland Jockey Club
  • There are also $5MM of pre-opening expenses in 2012 vs. 2011
  • 11 of their properties grew EBITDA margins. They are doing a really good job on keeping a handle on costs and reacting to the local environments
  • They do not assume any improvement in the business environment for the balance of 2012


  • Toledo:  slightly surprised with good June. Seeing good trends in developing their database. F&B is really exceeding their expectations.  Dealers are becoming more efficient, so there should be ongoing improvements to their table performance. They grew the market in Toledo (i.e. Detroit area) which is really positive.
  • Columbus: What they have seen in Toledo, doesn't necessarily translate to Columbus.  Toledo is a more "gaming experienced" market than Columbus. Most of the Toledo surprise is because the market has been exposed to Detriot gaming for a while which could have resulted in quicker penetration.
  • MD Live impact on Charlestown: Still very early. They are still expected to add more product over the next few months. The impact has been a little less than they expected, but it's still really too early to say. MD Live also has an impact on Perryville and Penn National to a lesser extent, so overall, it's been somewhat in-line with what they expected. Again, the first month impact is usually not the full impact of the opening...it takes another few months for things to settle out. 
  • Governor has until Aug 20th to expand legislation in order to get on the ballot in MD.  They view the whole process there as sleazy. They have argued that slots at the racetracks is really the only solution and yet the government has not been receptive to them and prefers a "backroom" deal with National Harbor. High level of disgust with the process. Even if they come out with a "competitive" bid process, it likely won't be "competitive."  Clear that the "fix" is in.
  • Was the HET transaction one off or are there more one off deals at sub 8x to be done? They are always interested in building their roots in key markets in the US at the right price. Have their "hands full" but are always looking for opportunities. They are also looking at international opportunities. PENN's strategy is simply growing FCF/share. That underlies all they do, not just growth for growth's sake.
  • Returning cash flow to shareholders? They will do what they can to increase FCF/share which could include share buyback...they do have the preferred maturing in 2015.  Redeeming that instrument is an attractive option that will have a dramatic impact on increasing FCF. That said, its not the only option they look at.
  • They have not changed the impact of MD Live on the 3 properties they thought it would impact. 
  • Riverside is the closest casino to Kansas Speedway and they expect it to have the largest impact there. They have tried to gain share from their competitors though who have been very aggressive at maintaining their slot business. Generally the margins there have held up at Riverside, despite the double digit revenue declines. Speedway is still continuing to ramp, especially on the slot side.
  • Cash: $204.1MM 
  • Debt: bank debt $1775BN, 2.1MM of cap leases; bonds 325MM
  • Capex 184.5MM (154.2MM project capex and 30.2MM maintenance capex) 
  • $3MM of capitalized interest; Guidance of $2.2MM in 3Q and $800k in 4Q
  • Project capex guidance: 160MM (3Q), 88.9MM (4Q)
  • Maintenance capex guidance: 23.7MM (3Q), 21.2MM (4Q)
  • $10MM application fees on Ohio VLT's in the 3Q but not a lot of project capex related to the Ohio tracks in 4Q. 
  • Consumer trends: Things haven't gotten any worse, they've been stable. Things are "ok".
  • Impact on Lawrenceburg from Scotia? They are seeing an impact. The property generates almost all of their impact from Ohio. They were a little surprised about the severity of the impact given the limited facilities there. However, they believe that Columbus may have less of an impact then they expected... they also expect an additional impact from Columbus opening.  So they overall estimated impact hasn't changed.
  • Sioux negotiations: Remain mystified by some of the parties in Iowa. State has decided that they prefer land-side properties.  Can't allow the state to proceed with the precedent that they are setting for other operators. The idea that you can pull a successful license from a high performing operating is "madness". They had been in discussion with their partners and the state to move the site. Then the commission announced that they would do an RFP. Then they came to an agreement with their partner to move their site, but the commission rejected that and decided to move forward with an RFP. However, the events underway have not impacted the performance of the facility.  They hope that the commission realizes that PENN has done a great job operating that site and that no one will really do a better job there. PENN has no intention to cease operations there but they can't control the other side. This will be a big fight. 
  • St Louis: how much capital do they need to invest to convert the property to a Hollywood? They are pleased with how the property is doing in the interim period. Still developing internal budgets for what they want to do. Timing is still 4Q, including getting through the regulatory process. It's also complicated getting in a place to being able to operate the property since CZR's has a much more centralized operating model. Mgmt team is changing out, which is not their norm. Most of the guys there now are leaving for other positions at CZRs.
  • Canada: they will be meeting with representitives in Ontario to explore opportunities in that province. They are very early in the discussion process.
  • Hoping to break ground before end of 2012 on the Ohio tracks. They will be very disciplined on spending capital to make sure that they get a good return: $250-275MM/per facility capex.
  • Thinks that i-gaming is more likely to be a state by state route. They are in talks with a number of parties but haven't committed to anything. They are also fighting against States giving the lotteries the i-gaming opportunity vs their casino operators.
  • Scotia Downs: more challenging location and not up to the same standard as their Columbus facility. Not a big read-through to their Columbus property. They are doing well there. 
  • Impact of Baton Rouge? Have been open about it being a disaster in terms of impact on PNK and PENN. Expect a pronounced impact since that market has been shrinking.  Would love to be wrong on this one. They just don't believe that PNK will be able to turn Baton Rouge into a destination market.
  • LV locals:  Still a very sluggish market. Promotional activity is a little more rational than it was. They continue to pair back their promotional activity as well.
  • Don't anticipate any impact of VLT's in IL since many facilities already had illegal devices. Didn't have an impact in West Virginia.
  • Their revenue guidance implies big declines in 4Q: expect cannibalization impact, Baton Rouge kicks off in September, Aurora and Joilet should continue to see some declines. Saw very little impact when Rivers opened up. Riverside impact of Speedway.
  • All of the Ontario licenses are going to be up for bid to be privatized. Not sure about CZR's Windsor.


  • Guidance: 
    • Net Revenues: 3Q: $699.3MM (below consensus of $729MM);  FY12: $2,872.5MM (below consensus of $2,921.5)
    • Adjusted EBITDA: 3Q: $184MM (below consensus of $188MM);  FY12: $769MM (above consensus of $765)
    • EPS: 3Q: $0.55 (below consensus of $0.59); FY12: $2.46 (below consensus of $2.51)
    • FY12 Share count: 105.9MM 
    • Pre-opening of $24.3MM in 2012 and $8.5MM in 3Q
    • D&A of $243MM in 2012 and $61.2MM in 3Q
    • Non-cash stock comp of $29.7MM and $7.2MM in 3Q
    • 39% tax rate
  • "Reported adjusted EBITDA was impacted by $0.8 million of costs not anticipated in the guidance related to our agreement during the second quarter to acquire Harrah’s St. Louis, which we anticipate will close in the fourth quarter. The Company’s second quarter 2012 adjusted EBITDA margins declined compared to the prior year due to a $6.6 million increase in preopening and acquisition related transaction costs. However, adjusted EBITDA margins are consistent for both periods once these costs are excluded."
  • "Second quarter results benefited from a full quarter’s contribution from M Resort which we owned for just one month during last year’s second quarter, as well as a full quarter’s contribution from our joint venture at Hollywood Casino at Kansas Speedway which opened February 3. In addition, we benefited from approximately one month of results from Hollywood Casino Toledo which, to date, has performed very well."
  • "We have seen continued positive results across the organization in terms of enhancing operating efficiencies and maintaining a disciplined approach to marketing and promotional activities."    
  • "Harrah’s St. Louis.... acquisition will be funded through an add-on to our existing Senior Secured Credit Facility, which will result in a short-term increase in our total debt to adjusted EBITDA leverage ratio to 3.32 times from 2.79 times at June 30, 2012.  We currently expect the... transaction to close in the fourth quarter of 2012, at which time we will re-brand Harrah’s St. Louis with the Company’s Hollywood-themed brand, which is now successfully deployed at twelve of our properties across the country. We are currently establishing the budget for re-branding the facility, refreshing areas of the gaming floor and aligning our IT and reporting functions"
  • “With the late June filing of our Video Lottery Terminal (VLT) license applications, as well as our formal request to relocate our Beulah Park racetrack in Columbus to the Mahoning Valley and Raceway Park in Toledo to Dayton, we are making measurable progress towards our planned construction of two new $150 million integrated racing and VLT facilities... The state will receive $125 million per facility in licensing and relocation fees, as well as a new recurring tax base, while the Company believes the facilities will deliver attractive returns on invested capital."
  • "We are pursuing new gaming opportunities in Western Massachusetts; for our jointly owned racetracks in Texas; and in Maryland where we are advocating for legislative approval for slots at our Rosecroft Racetrack in Prince George’s County to help provide a long term solution for the state’s struggling horse racing industry. Whether Governor O’Malley will call a Special Session of the Legislature to consider gaming expansion remains to be seen, but Penn National will continue to aggressively push for the inclusion of Rosecroft as a potential sixth gaming location in the state at the current gaming tax levels."
  • “We are disappointed with the Iowa Racing and Gaming Commission’s recent decision to not approve an extension of our operating agreement with our qualified sponsorship organization through March 2015 as well as their decision to request applications for a new land based facility in Sioux City. We have filed a lawsuit to protect our interests and continue to explore our options related to this matter."
  • Our revised 2012 guidance assumes, among other things, a continuation of recent consumer trends, the current expected opening date for our Columbus facility, and the impact to operating results in several markets related to new competition as outlined in the assumptions which precede the guidance later in this release