PENN Q3 2014 CONF CALL NOTES

Takeaway: Q3 beat, conservative guidance, and Oct looks stronger

A more positive tone than recent calls

PREPARED COMMENTS/REMARKS:

 

Introductory Remarks

  • Despite challenging environment, solid results prudent variable cost mgmt delivered margins
  • Key events in Q3: opening of Zia Park Hotel and Dayton Racino and opened Mahoning Valley
  • Both Ohio Operations off to solid starts
  • Upstate NY: Decision shortly after election day
  • Proceeding with Jamul Indian Village - mid 2016 opening

General Trends & Results during Q2 2014

  • Challenging consumer environment but solid margins
  • Less negative trends evident in database: visitation and spend improved slightly sequentially at mid, low and unrated segments
  • Horseshoe opening on Aug 22 no material impact to Charlestown to date
  • Slight margin improvement in all regions (excluding 1x expenses)
  • Reduced corporate overhead by 20% YoY
  • Strong opening at 3 new assets, pleased with aggregate results though composition different as Mahoning stronger, Dayton slower ramp
  • Dayton 1x promotional error - impacted net slot by -10% 
  • $2.3 million of MA lobbying expense not contemplated in guidance
  • Q4 guidance - conservative stance due to openings

Q4 2014 Guidance

  • Includes no spend for MA campaign
  • Unchanged but for "beat"
  • Process unchanged and consistent with trends for 2014
  • Dayton and Mahoning - original estimates remain valid
  • $10m+ revenue beat = $6.5m EBITDA beat 
  • Cash $237m at end of Q3
  • Maintenance $21.4m, $78.3 for year
  • Cash tax rate 38%
  • Pre-opening expenses $5.7m in Q3

MA Campaign Update:

  • Current Boston Globe survey 53% NO and 39% YES for repeal
  • Fire & Police Unions support PENN and gaming association
  • Remain hopeful for positive outcome

Q&A

Q: Modest improvement in lower end of database, color/why/where?

  • Slight improvement, down YoY, but less negative than Q2 and Q1, not bottomed out, not stabilizing, but sequential improvement

Q: Traffic vs. ticket of lower rated play?

  • Not seeing growth in non-rated or lower rated in both spend and visitation but seeing less decline.  October is shaping up like Q3 - Hedgeye is seeing better results thus far in October

Q: What see at M Resort and Zia Park hotel?

  • Strong visitation at Zia and spend per trip is +50% from typical trip value, strong cash market, weekends very strong. Zia depends on feeder markets from Western Texas, strong slot play from Western Texas markets
  • M Resort: LV locals stable, more rationale on reinvestment, improvement in couple database metrics in Q3

Q: in 2015, easy comps in Q1 - increased confidence?

  • Hope 2015 weather impact less impactful, especially beginning in December. 
  • Not see + or - impact from gasoline prices - Should be positive if sustained
  • Hope Q1 show some improvement vs. 2014, beyond Q1 weather difficult to assess and predict.
  • 2015 hopeful due to maturity of recent openings.

Q: MA opening - how long expect to operate without competition?

  • Expect June 2015 opening and 2.5 to 3 year operations without competition from either MGM or WYNN

Q: How much of EBITDA out performance came from new racinos vs. mature properties?

  • Charlestown and Penn National solid and drove beat, Mahoning Valley stronger especially end of September and early October.  As much large property out performance as racinos.

Q: Underlying trends at Columbus and Columbus vs. Dayton cannibalization

  • Columbus a deep market, similar to Kansas City.  Believe in Columbus, long runway for growth.  Database trends encouraging across all segments.
  • Some Columbus customers from Dayton.

Q: Southern Plains segment - how control costs given moving parts

  • States MO and IL report on gross revenues = 5 properties, on net-revenue declines less. Cost controls focus on labor, marketing and facilities to less extent. 

Q: What the promotional environment

  • Steady across markets except for Missouri which was elevated in Q3

Q: Capital allocation

  • Fund acquisitions with debt, need to look at all opportunities to grow and grow beyond current development pipeline.

Q: When does a share repurchase become a more material consideration

  • Consider on a regular basis and have discussed over past year with the Board, but still see growth of asset base as best opportunity

Q: Cost reductions, operational/overhead, for add'l margin improvement and flow through

  • More challenging if revenue declines continue, always focused, if Q1 revenue improves then should see strong flow through give tight cost controls

Q: Sum total of 2104 one-time costs not recurring in 2015 such as MA spend

  • Address off line, separately.

Q: MA indication of Plainridge carve out of Appeal passes

  • Focused on getting vote out

Q: Upstate NY, if awarded license, how think about competitive license - scenario to reconsider

  • Depends on where licenses get allocated, believe Catskills will get two licenses one in Orange County and one Sullivan County.  If fortunate to receive Orange County will proceed with development.

Q: By the time MGM National opens, Baltimore casinos open for four years, what incremental impact to Charlestown from MGM opening

  • Given past openings, not expect significant. Database is Maryland focused, expect some portion of impact.

Q: Historical racing opportunity and legislative outlook in Texas

  • Gubernatorial race could turn Texas more conservative politically.
  • Historic wagering is separate from Class 3 efforts
  • Pending litigation on historic wager and waiting for the legal process to conclude.

Q: When look at Baltimore what seeing in promotional activity

  • Difficult to predict due to two months of activity from Horseshoe but not seeing high level of reinvestment at Horseshoe as saw at prior openings. Maryland tax rate higher, so more difficult to reinvest.

Q: Leverage considerations vs. other capital projects/acquisitions

  • Long term lease at 8x multiple.  Leverage ratio well within comfort levels as well as bank agreements at 6x with long-term lease.  Current situation is comfortable and expect to maintain.

Q: If a large scale acquisition presented, would use equity?

  • Not likely, historically use debt to finance historic acquisitions or green field developments.

 


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