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Solid EBITDA and EPS out of PENN this morning.  Revenues were a little light but that should’ve been expected, particularly with Majestic out there recently calling for PENN to miss.  Margins were much better than we thought which drove the positive $5.5m and $0.09 EBITDA and EPS, respectively, variance from our estimate and we were higher than the Street.  As we suspected, management’s 2010  guidance of $1.00 was too low as they raised full year guidance to $1.13.  Smartly, they did not raise near term expectations too high as they guided Q2 near consensus EBITDA of $141 million.

 

"NOTES" FROM EARNINGS RELEASE AND CONFERENCE CALL

 

"Our $883 million planned share of investment in facilities in new markets is expected to deliver attractive EBITDA returns based on several factors, including a first mover advantage in Maryland, the lack of nearby gaming alternatives in our Ohio markets and our focus on matching capital spending to the size of the addressable adult population bases and gaming tax rates.  We believe that by prudently managing our property portfolio and competitive positions in current markets while simultaneously pursuing a range of new opportunities to significantly expand our operating platform and returns, Penn National can deliver significant growth as the economy and consumer spending rebounds which will in turn create new value for shareholders."

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

 

HIGHLIGHTS FROM THE RELEASE

  • Weather impacted several of PENN's properties
  • PENN is implementing strategies to strengthen margins in the current environment through a corporate and property level focus on effective marketing programs and spending, other cost reductions, and staffing rationalizations. However, until revenues begin growing they won't be able to attain prior level margins
  • PENN repurchased 225 shares, or $22.5MM face value, of the Series B Redeemable Preferred Stock at a substantial discount.
  • Guidance changes:
    • One less month of table games at WV
    • Addition of 4 months of table games in Pennsylvania and two months of operating results from Hollywood Casino Perryville
    • $2MM of additional pre-opening expenses
    • $3.1MM of additional D&A expense with $52MM to be incurred in 2Q2010
    • $1.2MM of additional stock comp expense, with $6.8MM to be incurred in 2Q2010
    • Higher blended tax rate of 45%
    • Lower share count
    • 2Q 2010: NET REVENUES - $588.3MM, EBITDA - $141.5MM, NET INCOME - $27.2MM, and DILUTED EARNINGS - $0.26 EPS
    • FY 2010: NET REVENUES - $2,406.4MM, EBITDA - $563.0MM, NET INCOME - $107.7MM, and DILUTED EARNINGS - $1.00 EPS

CONF CALL

  • CEO comments--quarterly results are "okay"
  • Focus on improving on margins and on construction/new development pipelines
  • Bad weather attributed to relatively weak performance at Lawrenceburg and Charles Town
  • Hard to say any changes in trend in consumer behavior

Q&A

  • Pennsylvania casinos--weather impact of few million dollars in February; "clean revenue quarter" for Penn National
  • Update on Ohio referendum: confident in approval of address change; May 4 election--optimistic
  • incremental EBITDA for Pennsylvania and WV
    • tables games original expectations is being met; will take some time to stabilize table games in order to see any results.
    • April weather has been decent, maybe too much sun
  • Mississippi/Louisiana--lot of softness in the region, not many signs of recovery - last year these were the strongest regions
  • Unconsolidated affiliates-- Ohio and Kansas JV arrangements
  • Station's assets--looking at it but Las Vegas locals market is still a regional opportunity.  Thinks BYD's bid is high
  • Hold High-yield bonds of other gaming companies?
    • Small amounts kept
  • Maine table games possibility--efforts have been futile at this time, hopeful for new legislation in November
  • Margin improvements in guidance?
    • discontinued marketing programs will impact revs
  • No change in LV operating environment in last 3 months yet investor sentiment driving up multiples.
  • Still believe Columbus and Toledo will open in 2H 2012.
  • Any change in slot replacement?--not much change.... 1/6 or 1/7 of core. Maryland--state will provide slot machines
  • More customers coming but spending less.  Program-specific, customer-targeting marketing tactics contribute to drive higher expected margins for FY.
  • $2.3 billion debt
  • Capitalized interest: 1.1MM in Q1
  • Cap interest guidance:  2Q - $1.8 MM cap interest.  $7.1MM for all of FY 2010
  • Corporate overhead: projecting 68 MM run rate for FY 2010
  • Tax rate was lower due to favorable 1048 ruling on Pocono sale and few non-deductible expenses (referendum costs)
  • WV/Penn Tables
    • meaningful marketing expenses uptick?  yes, higher advertising expenses. june/july/and partially august
    • media items focused on table games; doubling up existing advertising in those states.
  • Atlantic City market--continue to see oversupply, lack of stability, no interest right now
  • CapEx budget:  2Q 2010 - $85.7MM in project capex and $23.6MM in maintenance, 2010 - $439.8 MM and $94MM, respectively
  • paid $22 per share for preferreds... no buyback expected at this time.
  • Weak revenue guidance: timing of new capacity coming on or bearish view on top properties?
    • were overly optimistic on revenues, not reflection of overall business trends, instead a refinement of forecasting methodology
  • PNK in Baton Rouge project--believes $225MM market will continue to contract, probably $200MM in end of year, do not want to throw good capital in oversupplied market. $250 MM project with high interest expense, bad for PNK.
  • Maryland table games update:
    • No serious legislative proposals yet; governor wants to see the performance of existing operations (e.g. Cecil County) before acting.