PENN 4Q09 CONF CALL TRANSCRIPT

PENN 4Q09 CONF CALL

"While we are disappointed with fourth quarter net revenue and EBITDA levels which continue to reflect the impact of the economy, we believe the fourth quarter of 2009 could be the Company's most successful quarter ever from a future development and expansion perspective.  It is evident from our fourth quarter progress that we have well-developed strategies to create new long-term value for shareholders by deploying Penn National's strong balance sheet and facility development skills to operate in new jurisdictions. New facilities in Maryland, Ohio and Kansas -- all of which will be opened within the next two to three years -- will further diversify our geographical reach, expand our current base of slot machines by approximately 20% and position the Company to be less susceptible to cannibalization from future gaming expansion."

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

Highlights from the Earnings Release

  • "Unfortunately, we have limited control over how consumers are continuing to respond to economic pressures and as a result, the gaming industry experienced revenue compression again in the fourth quarter... operating results reflect reductions in consumer spending in almost every market and while customer visit levels are off only modestly, we're continuing to see less spend per visit. We have undertaken extensive analysis of gaming trends, which indicate that regional gaming spending declines are slowing. However, at this time, these trends generally do not support expectations of 2010 revenues exceeding 2009 levels and these expectations are reflected in our guidance."
  • Maryland update: "We have commenced construction on one of the state's first gaming operations, a $97.5 million Hollywood-themed facility with 75,000 square feet of gaming space, 1,500 video lottery terminals, food and beverage offerings and parking for over 1,600 vehicles.... the facility is expected to open to the public in late 2010, which will likely result in historically high returns on capital before other facilities in the state come on line."
  • Ohio update: "Penn National has begun to develop the Toledo and Columbus facilities, with planned investments of approximately $300 million and $400 million, respectively, and targeted opening dates in late 2012. We have already completed the acquisition of the 44-acre Toledo site and approximately 24 acres in the Columbus Arena District. In addition, as announced last month, we are also working closely with Columbus community leaders on the parallel pursuit of an alternative Columbus site. We recently entered into an option to purchase the 123-acre site of the former Delphi Automotive plant on Columbus' West Side as an alternate location for our planned development of Hollywood Casino Columbus."
    • "On January 27, 2010, the Ohio Legislature approved the language for a Constitutional amendment changing the designated casino location in Columbus to the Delphi site. The issue is now scheduled to appear on the statewide ballot in May 2010. Given the uncertain outcome in the legislature and at the ballot, we are pursuing development at both Columbus sites simultaneously."
  • Kansas update:  "Subject to background investigations and licensing by the Kansas Racing and Gaming Commission, which are expected to be completed in early 2010, the Penn National/ISC joint venture will begin construction in the second half of this year with a planned opening in early 2012. With an overall budget of approximately $410 million inclusive of land and licensing, this facility will feature a 100,000-square-foot casino floor with capacity for 2,300 slot machines and 86 table games, a high-energy lounge and a variety of dining and entertainment options. We estimate that Penn National Gaming's share of the future cash expenditures will be approximately $155 million."
  • 1Q2010 Guidance:
    • Revenues: $596.7MM
    • EBITDA: $137.9MM
    • EPS: $0.23
  • 2010 Guidance:
    • Revenues: $2433.MM
    • EBITDA: $563MM
    • EPS: $1.00

CONF CALL Q&A

  • Why were the margins at many of the properties horrible? Please walk through it
    • Joilet: Operating with just the casino there. Have opportunities to be more efficient with marketing spend. Expect margin improvement next Q
    • Bay St. Louis: Recession was late hitting there.  Seeing more softness there, driven by very aggressive promotional spend by their Gulf Port competitor
    • Tunica: Have $1MM of one time items like severance etc, don't see the same promotional aggressiveness as Southern Mississippi
    • Charlestown: Saw in line performance in the month of Jan, trying to figure out most efficient use of marketing dollars now that they have the tax credits.  Table tax rate will be 35%, so net net margins should be 27-28% on a normalized basis
  • January trends?
    • Consumer sentiment is NOT favorable. You can say that the deterioration is slowing, but they really don't have a clue in terms of where 2010 will go. "Don't see a lot of reason for enthusiasm for 2010." Don't have clue regarding the core business.  Their guidance is a "smigit of art and a bit of prayer"
    • Things are still getting worse but at a slower pace, doesn't mean its getting better
    • Dec was partly affect by weather
    • Jan had no weather issues, and they were down about 3% on aggregrate, Excluding Penn National and Lawrenceburg though, revenues were down ~5%. The only good news is that the last week of January was very strong, bu that could be due to no football and good weather
    • Doesn't see anything that gives them comfort that there will be a big improvement in unemployment that will help their customer's situation and make them want to spend more
    • Have a very conservative view for 2010 (they hope)
    • Lawrenceberg - continue to see reasonably good growth there on their capital investment, especially last weekend
  • Is NY totally dead or is there any hope there?
    • Where mystified by the process in NY. It was very clear that they were the winning bid on 2 of the rounds, but then they reopened the bidding.  The conditions laid upon the "winner" matched Penn National's bid
    • There bid was unconditional on tax relief, and the payment was all upfront. No idea why their bid didn't win as it was clearly the highest and best bid
  • View on Ohio slots at tracks vote in Nov 2010?
    • Do anticipate that it will be on the ballot in Nov, but its unclear that the racetracks will spend enough money to get it passed
    • No coalition today that either supports or opposes it
    • They support the issue and will spend their fair share on the campaign
  • Table game potential in Maryland and Maine
    • Maine: Would require a 2/3rds vote to get it approved and it wouldn't have to get on the ballot, however, others say that it does need to go on the ballot
    • Maryland: Governor said he would like to see the facilities up and running first.  Would have to go back to statewide voters to get approved anyway, and no appetite for legislative approval either at the moment
  • Still interested in Las Vegas, would they consider a fixer upper like Riveria?
    • Riveria is a tear down... so no
    • Would have to be something more substantial
    • Fontainbleau will take $1.5BN to finish... (we don't think that Icahn will necessarily finish it and definitely not at those levels)
  • How should corporate expense run next year?
    • $69MM for next year
    • No significant amounts of lobbying, or at least much reduced
    • Don't have table games in there bc they don't know when they will be up and running (PA)
    • No unusual expenses expected in 2010 except leverage to down revenues
  • Not expecting much contribution from Perryville in 2010
  • Not willing to cut costs enough to upset the customer experience
  • Referendum in Ohio is just about the site, not the whole casino issue
  • What's driving EBITDA growth guidance in last 3 quarters of year?  Lawrenceburg and Penn National growing throughout the year and easier comparisons
  • Cash = $713.1MM, Debt = $2.335BN, capex $61.9MM
  • Q1 capex $139.5m ($100m of project), 2010 capex $428m (maintenance $96m)
  • What type of customer? - 65% rated, similar to prior years but spend per visit down - Lawrenceburg used to do $130 per visitor down to $100 per visitor
  • WV table game guidance - 15% of revenue from table games typically
  • Breakdown of $520 million write down - related to Ohio impact - Lawrenceburg BV of $700m now
  • Pre-opening expense runs through gaming expenses at the property level
  • Spent $27 million in Ohio for lobbying
  • Timing of 2010 project capex by quarter:  $106m in Q1, $75m in Q2, $170m in Q3, $70m in Q4
  • VLT impact in IL:  none in 2010 due to timing of licensing, won't be much going forward either
  • Modeling Kansas:  similar to any other regional gaming property despite state ownership
  • Ohio will generate an "adequate" return for shareholders
  • Tightened view on what is an acceptable rate of return given the uncertain environment
  • Restricted payments basket:  has $600-700m remaining.  Evaluating stock buyback.  Also looking at way of locking in value in preferred equity - not opposed to doing some financial engineering.
  • "Will be discouraged if competitors aren't experience the same things we are"