PNK 1Q2010 CONF CALL "NOTES"

What is there not to like?

 

 

"Pinnacle generated solid first quarter operating results which reflect the initial benefits of our heightened focus on achieving operating efficiencies and exercising financial discipline throughout the Company. Our success with these strategies in the first quarter should provide an excellent foundation for further progress throughout the balance of the year.  Our operating and growth strategy is to build profitable revenue through the Company's commitment to a 'best-in-market' approach to the guest experience, further operating efficiency improvements and a disciplined view on capital spending and expansion."

- Anthony Sanfilippo, president and chief executive officer of Pinnacle Entertainment

 

 

PNK's numbers this morning blew away expectations, even ours, which were materially above the Street and this is just the first quarter of their "reorganization."  The beat was clean and across every property driven primarily by lower unproductive promotional and marketing expenses.

 

HIGHLIGHTS FROM THE RELEASE

  • "Pinnacle's L'Auberge du Lac and Boomtown Bossier City properties recorded improvements in operating margins related to cost discipline, with L'Auberge generating its second-best quarterly Adjusted EBITDA despite a small revenue decline. These benefits were partially offset by lower spend-per-visit at Boomtown New Orleans relative to last year and the impact of the June 2009 opening of an expanded and re-branded riverboat casino near Pinnacle's Belterra Casino Resort"
  • "River City Casino generated positive Adjusted EBITDA in its first month of operations despite such higher costs."
  • "In Baton Rouge, our development project will diversify Pinnacle's operations into an attractive new market that we believe is currently underserved.  We are actively engaged in the design phase of the project.  Current plans call for the property to feature a modern dockside riverboat casino with at least 1,300 slot machines, 50 table games, a hotel with at least 100 rooms and other amenities."
    • "In March 2010, Pinnacle entered into a guaranteed maximum price contract for the development of its Baton Rouge"
  • "In March 2010, the Company received a $6.5 million legal settlement related to the recovery of legal fees."
  • "During the quarter, Pinnacle incurred severance costs of approximately $1.0 million due to employee terminations."
  • "In April 2010, Pinnacle completed the sale of its corporate aircraft for gross proceeds of $10.5 million. In addition, Pinnacle has begun the process of selling its two seaplanes."
  • "The President Casino is currently scheduled to close on June 28, 2010, at which time it will be considered a discontinued operation."

CONF CALL

  • Will focus on building a world class marketing team
  • Just at the beginning of establishing a disciplined approach to manage their business
  • Will focus on how they can be a better company in their internal meetings taking place over the next few days
    • Anthony sounds like the "Anti-Dan"... did I hop on the right call?
  • Centralizing purchasing decisions to lower costs and get better service
  • Have over 10,000 slot machines today and hired a guy that is going to help better yield manage their slot floors and get better pricing/deals from manufacturers
  • Had some help from the consumer in 1Q2010 and took much better care of that revenue than in 4Q09.  Were more careful with marketing spend
  • If you compare 1Q2010 to 1Q09, in 1Q09 they didn't feel the recession yet- (ie their costs were still high)
  • Capex:  Cash capex in the quarter was $59MM (RC = $42MM, Bossier = $3MM, $1-1.5 across several other properties and spent $7.5MM wrapping up Sugarcane Bay - last quarter of spend)
  • $45MM to Baton Rouge, will spend $40-45MM on maintenance Capex - as they step up spend to refresh their slot floors

Q&A

  • It's premature to say whether this is the new operating margin run rate. "We are at the beginning of really taking a look at how to manage our company in a way that doesn't cut cost mindlessly"
    • My guess is that there is room to improve since this is just the first quarter of implementing changes
  • Pleased with the start of River City - but it's just the beginning.  Several competitors have been very aggressive in sending out promotions. They will not break out the 2 St. Louis properties
    • Have 1 marketing team overseeing both properties
    • Have 1 HR department
    • Basically being careful about not cannibalizing each other
  • Wind-down cash costs for Sugarcane Bay?
    • About $10MM - $4MM of which is to put things back in service that Dan took out...bulk of it will be in 2Q.  Putting back lighted surface parking lot and bus stop with a canopy area.  Thinks they can have that back up by end of May
  • What is the possibility of a license returning to the market near Sugarcane Bay?
    • Haven't heard of anyone wanting to be in that market
    • Risks to adding another license in that market - and thinks it will deter people from entering - for example - ISLE has 2 licenses - and the second does 12% of their total revenue and combined those 2 do less than 50% of what they do with one
  • Baton Rouge - any change of downsizing budget?
    • Costs are more likely to go up with enhancing the scope given the size of the site (500 acres)
  • Belterra - has consistently had issues - what's the opportunity there?
    • Hasn't been there yet. He's focused his time early on Louisiana and St. Louis.  He hasn't formed an opinion on that property yet
  • Update on sales of discontinued operations?
    • Yes - but there is nothing to report yet.  Hope to announce things soon (Sounds like the Argentina stuff will happen soon but that AC will take a while)
  • Texas?
    • Believes Texas is closer to having gaming then ever before - but what that means in terms of probability of getting gaming is hard to know
    • Oklahoma has over 100 casinos. With plenty within an hour of the Texas border.
    • Chickasaw is close to closing on a racetrack in Dallas
    • Rick Perry, the Governor, says that he will not support the expansion of gaming in the state- but it's unclear whether he would support slots at tracks.
    • When they looked at Sugarcane Bay - the potential of gaming in TX was a deterrent
  • Think that the St. Louis market growth that was seen in March will decrease to a lower rate of around 2% in 2Q2010. 
  • Run rate on corporate expense?
    • Can't nail that down yet - since they are still liquidating that.  For example - the jet that just sold - and then when the hanger lease expires at the end of June it will decrease again. 
    • Have already consolidated their corporate offices - now in Spanish Ridge Avenue as of last weekend
  • Argentina?
    • Expect to come to a resolution relatively soon
  • The $8MM of corporate includes $300k of severance - the rest is spread throughout the properties.
    • More slimming to come
  • Any interest in bidding on last Kansas license?
    • They are evaluating all opportunities out there
  • What will they do with the cash proceeds from Argentina?
    • Pay down the R/C even though it's an unrestricted sub
    • Argentina did $9.1MM of EBITDA last year
  • Thoughts of tapping the bond market?
    • No maturity until 2012 - have plenty of time
    • Will continue to be opportunistic in tapping the markets
    • They can fund Baton Rouge on the RC and from FCF and proceeds from asset sales... they have plenty of liquidity

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