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Isle of Capri Casinos, Inc. (NASDAQ:ISLE)

F2Q09 Earnings Call

December 2, 2008 11:00 am ET

Executives

Virginia McDowell - President, Chief Operating Officer

Dale R. Black - Chief Financial Officer

James B. Perry – Chief Executive Officer

Analysts

Lawrence Klatzkin - Jefferies & Co.

Rishi Parekh – KBC Financial

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Justin Sebastiano - Morgan Joseph

Tom Shandell - FIA

James Kahler - Bank of America Securities

Charlie [Rashad] - FMH Capital

David Raney – Agra Capital

Dana [Spaggs] – Callidus Capital

Operator

Welcome to the Isle of Capri Casino, Inc.’s second quarter conference call. (Operator Instructions)

Before we begin, I will read the Safe Harbor statement. This conference call could contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical fact. Such forward-looking statements are based upon the current beliefs and expectations of Isle of Capri’s management and are subject to risks and uncertainties which could cause actual results to differ from the forward-looking statements.

These statements may be significantly impacted either positively or negatively by various factors including, without limitation, licensing or other regulatory approvals, financing sources, development and construction activities, costs and delays, permits, weather, competition, and business conditions in the gaming industry. Such risks are more fully discussed in Isle of Capri’s filings with the Securities and Exchange Commission. The information set forth herein should be considered in light of such risks. Isle of Capri does not assume any obligation to update the information contained in this conference call.

Also, this conference call could contain non-GAAP financial measures such as EBITDA. Following this call a reconciliation of non-GAAP financial measures to GAAP financial measures will be posted on the Isle of Capri website.

We are joined on the call today by Jim Perry, Executive Vice Chairman and Chief Executive Officer, Virginia McDowell, President and Chief Operating Officer, and Dale Black, Chief Financial Officer. With that, I would like to turn the call over to Virginia McDowell.

Virginia McDowell

The National Bureau of Economic Research made it official yesterday when they declared that the United States has officially been in a recession for about a year. We are witnessing historically low evaluations for even some of the strongest and most highly regarded companies in a volatile market which continues to behave irrationally.

In a nation where the 24-hour news cycle has had a chilling effect on consumer confidence and created a nation of armchair economists, this certainly does not come as news.

In our press release issued this morning we note that we are coping with the first overall declining gaming market that we have experienced in three decades. Despite this economic uncertainty, however, we believe that we are implementing the right measures to emerge as a stronger company when the economy improves.

We have learned over those nearly 30 years that we have been in the business that it makes no sense to look back and dwell on events that we can’t control, but instead look forward and focus on issues and opportunities within our control: our capital structure, our balance sheet, and the experience we create for our customers.

For nearly 18 months Isle has implemented margin improvement programs at both the site and corporate levels, eliminated unprofitable programs, and restructured our corporate office. Earlier this calendar year we introduced the strategic plan that focused on introducing a two-brand strategy, executing against a series of key operating initiatives, and focusing on organic growth opportunities designed to increase free cash flow.

Because of the continuing pressure on the economy we understand that it is more important than ever that we deliver an entertainment experience of value to our local and regional customers. None of our customers have to get on a plane to reach our properties.

And despite a recession that has resulted in declining revenues, our research indicates that nearly all of our properties have shown significant improvements in creating a clean, safe, friendly, and fun gaming experience. Amazingly, seven of our properties showed improvement in over 20 of the 25 attributes that we measure, and our customer courtesy scores across the company also showed significant improvement in the second quarter versus the first.

Our general managers and their teams are doing exactly what they should be in order to create value. They are looking forward and building a platform for improved results. They are justifiably proud of what they have accomplished in very trying times and we are proud of them.

And with that, I will turn the call over to Dale.

Dale R. Black

Just to get some of the housekeeping stuff out of the way, at the end of the quarter some of our balance sheet statistics and everything.

We had $85.5 million of cash at the end of the quarter. Our total debt was $1.485 billion consisting of the revolver at $114.0 million, $865.0 million on the term loan, $500.0 million in bonds, and $6.0 million in other debt.

Our leverage, as calculated under the credit agreement, at the end of the quarter is about 7.1x and interest coverage is about 2.2x. Debt capacity at the end of the quarter is approximately $100.0 million.

Capitalized interest in the quarter was about $500,000, bringing the total year-to-date to $900,000.

I think everything else from a financial standpoint we pretty much covered in the press release so we will turn it over to questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Lawrence Klatzkin - Jefferies & Co.

Lawrence Klatzkin - Jefferies & Co.

A couple of questions. One, Florida law changes, what you are working on and if you don’t get it what should we be expecting for Pompano?

Virginia McDowell

We are actually having conversations with Florida legislators as we speak. At the top of our list is some type of tax relief in the next legislative session. If that doesn’t occur, we face continuing trouble with our playing field there and we are just going to have to continue to look at what our options are in terms of reducing our costs.

Lawrence Klatzkin - Jefferies & Co.

This is your worst quarter seasonally, so we shouldn’t expect a negative EBITDA going for the rest of the year.

Virginia McDowell

The snowbirds are returning now. We are going into what would be our strongest quarter, but it all depends. We are continuing to face pressure from the Seminoles, both from a [permissionable] environment and as far as table games are concerned.

Lawrence Klatzkin - Jefferies & Co.

In Iowa the two casinos seem to have some effective success with the electronic table games. Can you put those in?

Virginia McDowell

We have been working on it. We actually have been working with the state and within the last month or so we found out that we had a slight setback on that, so we are still going to work for approval.

Lawrence Klatzkin - Jefferies & Co.

After tax, how much will you receive on the insurance proceeds?

Dale R. Black

It’s a little complicated on the tax situation, but just the impact of the settlement, without any other changes because of our overall performance or anything, could be in the neighborhood of mid-30s, on the impact of the settlement itself.

What we are receiving in cash is a $95.0 million check but the total settlement for the entire claim is about $225.0 million. We have received $130.0 million prior, so we are in the process of calculating what our actual gain would be.

Like I said, it’s a little complicated between what ultimately ends up being related to the property and what ends up being business interruption.

Lawrence Klatzkin - Jefferies & Co.

So $60.0 million to $65.0 million net could be a good number?

Dale R. Black

Yes, like I said, if you just consider this in a vacuum without any other impact from our other operations or anything else that might happen.

Lawrence Klatzkin - Jefferies & Co.

You have a nice cash position, you are getting more cash in. Does your covenant permit you to buy back some of your bonds at a discount?

James B. Perry

We are allowed under certain circumstances to use this. We cannot use funds from the revolver to buy back bonds in the open market. We are allowed, in certain circumstances with the insurance proceeds to the extent that they relate to business interruption. It’s a lot freer with what we can do as far as the proceeds go.

We are looking at all those options now. We will be meeting over the next week or so with the senior management team to look forward a little bit and capital allocation will be one of the things that is kind of top of mind for us as we start looking ahead into the rest of this fiscal year and even our next fiscal year.

Lawrence Klatzkin - Jefferies & Co.

And the $85.0 million in cash, how much of that is free and how much do you need for operations?

James B. Perry

We need about $65.0 million kind of run rate, if you will, to run the operations. That is essentially what was negotiated as far as the amount in the credit agreement and it tends to be kind of normal levels for us. That would be the bare minimum; we usually have a little more than that.

Lawrence Klatzkin - Jefferies & Co.

So at current levels it is conceivable when you get the insurance money you could buy back $50.0 million to $100.0 million of your bonds?

James B. Perry

I don’t want to speculate and I am not going to tell you that is definitely what we are going to do. We are looking at all of our capital allocation options.

Lawrence Klatzkin - Jefferies & Co.

As far as how you see Colorado going with the wall, the vote is in February, the wall changes in July. What are you thinking that might be the benefit?

Virginia McDowell

We are not providing any kind of guidance on that at this point. We will probably be in a better position to talk about that in the next quarter.

James B. Perry

Part of what we are doing is looking at our options as far as what makes sense for us there. We do think that Colorado is probably more positive to us than Missouri. Missouri net-net at the end of the day, it won’t be that significant for us, we don’t think. It’s a little bit early to tell right now but given the size of our properties in the markets we are in, it will be slightly positive. But Colorado probably does present more of an opportunity for us, given the footprint and the combination of being able to allow real table games, if you will, and extending the hours of operation to take advantage of the room base that we have up there.

Operator

Your next question comes from Rishi Parekh – KBC Financial.

Rishi Parekh – KBC Financial

Could you offer any clarity on this insurance proceeds that you are expecting, how much you can add back to your EBITDA or add to EBITDA for covenant compliance?

Dale R. Black

We don’t have the final number yet but it is going to be a fair amount of it.

Rishi Parekh – KBC Financial

Order of magnitude, the majority of it perhaps?

Dale R. Black

Yes.

Rishi Parekh – KBC Financial

And that would all be sort of in the current LTM?

Dale R. Black

It would go in, in the third quarter, and would roll forward then for four quarters.

Rishi Parekh – KBC Financial

Did you have referendum expenses in Colorado in the quarter?

Dale R. Black

We had about $1.0 million in the quarter.

Rishi Parekh – KBC Financial

And were there any unusual or one-time charges in Caruthersville?

Dale R. Black

I wouldn’t call it one-time but they did have an increase, had a couple of large insurance claims that impacted their results a little bit. A smaller property so one or two larger claims can have an impact on a property that size.

Rishi Parekh – KBC Financial

Could you give us a rough sense how much?

Dale R. Black

It’s close to the difference in the year-over-year results. About $500,000.

Rishi Parekh – KBC Financial

You talked about ratings at several of your properties that improved and it sounds like it was great. I was wondering if you could elaborate a little bit on the criteria and what you are looking for in improving the operations.

Virginia McDowell

What we do is we go out and we ask our customers, in various segments of our data base as well as our competition, to tell us what are the most important attributes to them and then we also ask them how we are delivering against them. So those attributes include everything from service to slot products on the floor, to cleanliness, to perception or feeling of safety, food at the buffet, the type of entertainment that we offer. These are all things that our customers are telling us are important to them.

What we do is we then look at what the difference is between their importance rating and their satisfaction rating and to the extent that there is a gap between the two of them, it gives us essentially a blue print that we can go back in and address specifically those attributes that are important to customers in each of our markets, and also gives us the ability to rank ourselves against our competition.

And as I said in my opening remarks, it is absolutely remarkable when you look at the type of efforts, as far as margin improvements, that these properties have undertaken in the last year that we have been able to see this type of significant improvement in those survey results as far as the importance and satisfaction ratings, but also as far as our courtesy scores, which have increased at every property as well.

Rishi Parekh – KBC Financial

I’m looking at the range of possibilities in terms of top line trends next year and I am wondering if you had advance notice, let’s say nation-wide same store sales, same store trends would be down say 5% to 10% next year, would we expect that the contribution to the bottom line would be more like 25% to 40% or more like 50% to 65%, because I think you have captured a lot of the low-hanging fruit already, if I am not mistaken.

James B. Perry

You’re wondering what the negative impact on the contribution would be?

Rishi Parekh – KBC Financial

Yes. Because if you have advance notice and you can handle your scheduling and you can maximize your margin.

James B. Perry

Without advance notice you are going to be able to minimize it to a certain extent.

Rishi Parekh – KBC Financial

If you assume that a typical average would be a contribution of 50%, would you think you could be more efficient, maybe 25% to 30% on the downside?

James B. Perry

I think you are asking us to speculate on stuff that part of it depends on where it comes from, how far in advance you do know.

Rishi Parekh – KBC Financial

Assuming you have perfect visibility.

James B. Perry

We don’t have perfect visibility so it’s kind of a specious question.

Operator

Your next question comes from Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

The corporate expense is a little bit higher than we were looking for in the quarter. Do you still feel that you can get to a $40.0 million run rate?

James B. Perry

The biggest difference in that, as we pointed out, is we did have some increased stock compensation this quarter between the tender offer that we did where we exchanged some options for new restricted shares. We had to accelerate some expense related to those on some folks that essentially took a cash payment instead of new shares.

We’re working our way towards that. We have just implemented, went through it and identified another $1.5 million to $2.0 million of cost reductions, most of which will show up in corporate, some of which will actually end up in reduced expense allocations out to the properties to the extent that they relate to insurance items and things like that, that aren’t in these numbers yet but will be coming, some of them immediately and some over the next several months as we get things rolled out and they take effect.

But I think if you normalize the stock compensation that was in there this quarter and take those into impact, you are kind of about at the run rate as we have it now, as we continue to change some of the business processes here, we are always looking for ways to become more efficient.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

So is 40% still kind of your target?

Dale R. Black

Yes.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Is there any update on coventry at this point? Are you still out there shopping it?

Virginia McDowell

It continues to be a priority in terms of looking at what our opportunities are and we continue to evaluate all of our options. Donn is doing a fantastic job in terms of providing us with some alternatives there and we are still investigating that. But he and his team have also done a phenomenal job in improving their profitability, or lack thereof, quarter-over-quarter.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

What did you see in November? Was it better than October or just kind of the same as October and what have you seen out of the mass customers? Does the non-rated player come back at all?

Virginia McDowell

The non-rated player has not come back at all except in Missouri where you are seeing a little bit of an increase as a result of loss limits. And we are still seeing the same kind of pressure that we have seen.

Dale R. Black

Generally speaking, if you look year-to-date, our rate of decline has doubled in the retail customer that it is in the rated customer.

Operator

Your next question comes from Justin Sebastiano - Morgan Joseph.

Justin Sebastiano - Morgan Joseph

As far as Florida, what sort of approach are you taking there besides talking to legislators? How are you marketing there? Are you doing anything differently to try to pick up some sort of competitive advantage with the tables that the Seminoles are putting out there?

Virginia McDowell

One of the things that we have talked about over the last couple of calls is, is that we probably aimed a little bit too high in terms of the customer at that property. And we have been spending a tremendous of time trying to adjust both our slot mix, to introduce more lower denominations and also our restaurant offerings so that it is actually a more comfortable for the customers that are coming there.

We have marketed pretty aggressively over the last quarter. One of the reasons why is, is quite frankly, we just wanted to see whether or not we could drive business through our marketing program. It’s very difficult and the promotional environment, when you are competing against the Seminoles who effectively are paying their taxes. To be perfectly honest, we really didn’t see a benefit from that.

We are going into the high season right now so we are not going to be pulling back on our marketing expenses tremendously in the short term, but certainly at the point that the snowbirds depart again we are going to have to take a look at our spending strategy because we did not get the return that we had hoped to on that investment.

Justin Sebastiano - Morgan Joseph

I guess the second quarter last year did okay and then you had this loss this quarter, and I understand a lot of that is because of probably the table games the Seminoles have put out there, but so a lot of it is also that marketing program?

James B. Perry

In addition to the tables, they have stepped up, anecdotally we know they have stepped up their marketing, too, to really try to take advantage of the advantage they have.

Justin Sebastiano - Morgan Joseph

So just for the rest of the year, can we at least assume you are going to be at least $1.0 million to $2.0 million positive on the EBITDA line or are you looking at something around break-even?

Virginia McDowell

A lot of it depends on what happens as far as the snowbirds and if and when they materialize. Pompano is one of the properties where we did see significant improvement in our attribute scores. We have done everything that we can there in terms of whether it was improving the food offerings, improving the slot mix, improving the valet parking, improving the perception of safety. We have done everything that we can to address what our customers tell us are the most attributes there. What we need are people coming through the front door; it all depends on the level of business.

Operator

Your next question comes from Tom Shandell – FIA.

Tom Shandell - FIA

Going back to the corporate expense, I understand the year-over-year comparison that you laid out on the option expense but could you elaborate on the variance sequentially from the July quarter, because corporate expense went from 10% to 13% or so.

Dale R. Black

A chunk of it, again, is the stock compensation expense that went through in this quarter. It’s the biggest piece of it.

Tom Shandell - FIA

So on a sequential variance basis you are saying the stock comp was the biggest piece of the increase?

Dale R. Black

I say it’s a bigger piece of it and a little bit of it is in insurance, too.

Tom Shandell - FIA

And as you mentioned, you have those cost savings to come.

Dale R. Black

Right.

Tom Shandell - FIA

And you mentioned the referendum charges. Are those in the Colorado EBITDA number?

Dale R. Black

They are.

Tom Shandell - FIA

Were there any kind of other unusual charges, like for example, are you doing anything in Florida vis-à-vis the legislature or anything else with the state that is costing you unusual dollars there?

Dale R. Black

No.

Tom Shandell - FIA

On a sequential basis, Lula is obviously negative and less than I expected. Is there any anecdotal kind of comments that highlight why the drop-off, sequentially, was greater than certainly I expected?

Virginia McDowell

Yes. There are a couple of things you have to consider with Lula. Number one, Lula was probably our property that was most impacted by gas prices because it is a driving market. Lula depends on the Little Rock market and we saw a direct correlation, when gas got about $3.50 a gallon you could almost track the penny-for-penny increase in gas with the decline in our EBITDA. So as gas prices have declined we have started to see those customers coming back again.

That was compounded by the fact that one of our two hotels there have been closed for about a year. We are in the process right now of doing significant renovations on our Coral Reef hotel, which is about 36% of our room inventory. That is due to open sometime before Christmas.

And we also saw a little bit, very little bit, but a little bit of hurricane impact because as the hurricanes basically came up the Mississippi River, we did see some impact there, as well.

Tom Shandell - FIA

So relative to your expectations it is doing better in the current quarter than in the October quarter?

Virginia McDowell

We are looking forward to getting that hotel open again.

Tom Shandell - FIA

So when you receive the insurance proceeds, I imagine temporarily you will just pay down revolver with it?

Dale R. Black

More likely than not, yes.

Operator

Your next question comes from James Kahler – Bank of America Securities.

James Kahler – Bank of America Securities

On the last call you talked about the tax rebate. I notice that there is still a tax receivable on the balance sheet. Just wondering what the status is.

Dale R. Black

We actually received just under $20.0 million since the end of the quarter.

James Kahler – Bank of America Securities

In the current quarter.

Dale R. Black

Yes. And then there are additional carry-back claims to file and state tax returns to get out, so that there will be more taxes, I think we had a $25.0 million receivable, roughly, at the end of the fiscal year. As soon as we get those state returns filed and there is one more year to carry back, we will see some more of that coming in.

Knowing the way these things work it will probably come in in smatterings throughout the rest of the fiscal year.

James Kahler – Bank of America Securities

In terms of the business interruption insurance proceeds, that get added back to EBITDA, is that a net or gross number? If the number was $50.0 million, it wouldn’t be the cash impact necessarily, it would be the income statement amount.

Dale R. Black

They should be one and the same.

James Kahler – Bank of America Securities

So you don’t net out any tax impact that you would have?

Dale R. Black

No, the tax impact would go through income taxes.

James Kahler – Bank of America Securities

Just to take that one step further, between the actual cash you are getting in the door, plus the bump in EBITDA you will get from that running through the income statement, there should be significant cushion on the back.

Dale R. Black

This will give us quite a liquidity cushion for the next 12 months, at least until such time as it rolls off.

James Kahler – Bank of America Securities

Is there anything that you have seen in the business, you talked a little bit about Lula, but I’m curious overall for the company, is there anything in the change, any customer changes, that you can directly link to the changes in gas prices? What I am getting at is obviously gas was affecting you and a lot of people earlier in the year and my question is has the decline in gas prices helped somewhat but maybe being masked now by broader economic issues?

James B. Perry

It is so hard to tell but I think if you look around at results that were out for October, in our industry and other industries that would have similar issues recently, I think it is hard to attribute any sort of performance indicator on one thing.

Virginia McDowell

If you talk to our general managers what they will tell you is that it was a psychological impact. When customers had to stand there at the pump and look at filling their tank in the $75.00 to $100.00 range, it was pretty impactful for them.

James Kahler – Bank of America Securities

The sequential move in the decline in Blackhawk was a little bit surprising to me. Even after the smoking ban was in effect you were kind of at a $9.0-ish million quarterly EBITDA run rate. Is there anything specific you can point to that led to the sequential deceleration there?

Virginia McDowell

It’s consistent with the market decline.

James Kahler – Bank of America Securities

So just general economic.

Dale R. Black

And again, factor in there that on a sequential basis there is $0.5 million more in referendum costs in this quarter than in the first quarter, too.

Operator

Your next question comes from Charlie [Rashad] - FMH Capital,

Charlie [Rashad] - FMH Capital

Have you been able to see the new facility in Rock Island and how might that impact you in the quad-cities?

Virginia McDowell

It just opened last night. Just from reading the media reports and talking to our staff up there, they said that it is very nice. Remember, one of the issues in Illinois is that there are still position limits, so they have increase the size of their property but despite the fact that they have built a new facility, there are still looking at 1,200+ and about 24 tables.

As far as our employees are concerned, we really didn’t lose too many employees to the new facility. As far as business is concerned, it remains to be seen. We think that we are probably going to see a little bit more of an impact in Bettendorf because of the 200-room hotel. Davenport we actually think we have an opportunity. Davenport is a niche market. If you actually look at most of the Rock Island customers, they actually live closer to our Davenport facility than to where the new facility is located and we believe that there is an opportunity for us to create the kind of environment in our Davenport property that those customers like.

And of course, we’re still dealing with the smoking ban in Illinois, which has been a positive impact for us in Iowa.

Charlie [Rashad] - FMH Capital

The convention space that you had up there, is it open and operating currently?

Virginia McDowell

In Bettendorf?

Charlie [Rashad] - FMH Capital

Yes.

Virginia McDowell

The convention center is due to open on January 24. That is a 24,000 s.f. facility. We have been aggressively marketing that. We are up to I think a little bit over 4,000 room nights that we have sold already. There is a tremendous amount of interest in the facility. We are using it, I believe, for the First Player event that we are going to do sometime in February.

Charlie [Rashad] - FMH Capital

And on Lake Charles, have you seen business kind of get back to normal since the hurricanes in September or do you think there is still more opportunity there to get some normal traffic trends?

Virginia McDowell

Business actually recovered pretty well in Lake Charles and our room revenues are actually up pretty significantly because of the people that were in the area for the reconstruction, in the Lake Charles area.

If you are looking at the Lake Charles market I think one of the things you have to consider is, is that Delta Downs has 125 incremental units that they didn’t have last year and year-over-year you are also looking at Le Berge, with 250 rooms that they didn’t have last year. So Lake Charles is actually doing pretty well.

Operator

Your next question comes from David Raney – Agra Capital.

David Raney – Agra Capital

As you take your customer-centric service marketing approach, which you are working hard to measure expectations versus perceptions across a bunch of different attributes, how do you expect and how do you track how your good work there rolls into either revenue and EBITDA and in particular, are you looking at fair share numbers?

Virginia McDowell

We always look at fair share numbers and are obviously concerned when we see any kind of degradation, although, as we look at our numbers, we really didn’t see that in the second quarter except in a few places. Colorado Central Station, for example, was one of the areas where we actually lost a little bit of share, although Isle on Blackhawk actually held.

But as far as tracking that, and again, if you go back to my opening comments, it is very difficult because of the pressure on the economy right now, for us to be able to make a determination as to what the impact of this is, but we do believe that we are doing everything that we can to position ourselves to be much better off in the future.

So it is a conversation that we will continue to have you because we believe that the platform we are building for improved operating results is something that we will see in the future.

David Raney – Agra Capital

And so as you measure your customers’ perception and expectation gap for your properties versus the competing properties, are you all generally scoring higher, or lower, or are you moving up to being even, or are you accelerating?

Virginia McDowell

It depends on the property, it depends on the market. Any opportunity that we look to improve against the competitor, the general managers are taking specific action to address that.

James B. Perry

What we do know for sure is that on an absolute base that we are narrowing the gap between what our customers expect and what we are providing. We are just getting the preliminary data back in as to how much we have moved against the competition.

We have used this tool for a lot of years, with this management team, and it is something we believe in and it is something that we know, over time, when you improve these things and you build your business model around narrowing these gaps and providing the atmosphere that your customers want, it does translate financially. Just right now what we can’t do in this environment is sit there and say we’re doing “x” amount better than we would have been if we hadn’t done these things.

But when things do turn I do think we will be in a position to see incrementally pretty good flow-through, when the macro environment does start to turn.

David Raney – Agra Capital

Can you talk generally, across your state-level markets, the trends in visitation versus spend and what you are seeing on a same-store sales basis when you combine those?

Virginia McDowell

We are seeing visits declining. We are seeing spend per customer or spend per visit declining. We are encouraged in that the upper end of our database is holding relatively stable, if you look at our A and B level customers. Where we are seeing the biggest pressure is in our C through E level customers, and then again, significant declines, almost double the decline that we are seeing in our database and our retail customers.

David Raney – Agra Capital

So you just described three broad groupings of customers. As and Bs, Cs through Es, and then you said retail?

Virginia McDowell

Retail.

David Raney – Agra Capital

And you said before that the decline in retail was about two times your rated?

Virginia McDowell

As a percent.

David Raney – Agra Capital

And is that the A through E or just the C through E.

James B. Perry

A through E is rated. Any customer that is in our club, it’s kind of like, if you compare it to the airlines, an A-rated player would be a platinum level airline traveler and a retail customer is somebody that doesn’t have your card, or doesn’t use their card.

David Raney – Agra Capital

So in this kind of environment are you all turning up the marketing spend across A and B, across C to E, or are you doing other things to build brand awareness to try and bring in more of the retail? How do you target your spend for the optimal return?

Virginia McDowell

What we have been doing for over a year now is basically reallocating our marketing dollars away from the lower end of the database, which is not a profitable customer as a rule, and reinvesting in that A and B level customer. So again, doing the types of events, doing the types of promotions, the kinds of things that basically make it a better property for the A and B level customers.

The problem with trying to drive retail business at this point, these retail customers are not people that we traditionally have a relationship with. It is literally when you are sitting there and thinking about that customer sitting in the driveway on a Saturday night that has $100.00 in one hand and their car keys in the other and they’re trying to figure out where to go spend it, they can go to a ballgame, they can go to a gourmet dinner, they can go to a concert, they can come to us.

Our database customers have made a purchasing decision, they are loyal to us, they enjoy the gaming experience, the gaming environment. Those database customers are holding relatively steady. Those retail customers, they are not as loyal to us. And there is really nothing that we can do to drive that retail business and it makes absolutely no sense for us to spend $1.05 to make a $1.00.

David Raney – Agra Capital

Maybe rough numbers in terms of customer count on a percentage basis, A to B, C to E, retail.

James B. Perry

What we can tell you is that rated in general is about 70% of our business.

David Raney – Agra Capital

And it’s higher now because of the decline in the retail play?

James B. Perry

It has moved up, but that’s still round numbers, that’s about the average of where it would be.

Operator

Your next question is a follow-up from Lawrence Klatzkin - Jefferies & Co.

Lawrence Klatzkin - Jefferies & Co.

The option expense for next year, would $10.0 million be a good number?

James B. Perry

We will have to get back to you on that. I don’t think it will be that high.

Lawrence Klatzkin - Jefferies & Co.

And corporate expense, maintenance going forward, $10.0 million a quarter is a good number?

James B. Perry

That’s the goal.

Lawrence Klatzkin - Jefferies & Co.

And do you have any project for next fiscal year that we should be counting in? you have said that you are not starting Blotsky so soon.

James B. Perry

Do you mean project capital?

Lawrence Klatzkin - Jefferies & Co.

Yes.

James B. Perry

Not at this time. We have got a couple of things that we mentioned in the press release that we are finishing off this year. Virginia talked about the Lula hotel and there is a small renovation project on some rooms in Lake Charles that we are finishing up, but beyond that, anything that is not currently under construction will be considered as, you know, until the economy improves and stuff like that.

Lawrence Klatzkin - Jefferies & Co.

So no more spending on Lady Luck conversions?

Virginia McDowell

We are going to finish the ones that we are working on right now, which is Marquette and Caruthersville but we are not going to start any new conversions until such time as we have better visibility to the economy.

Lawrence Klatzkin - Jefferies & Co.

So your capex next year should be $40.0 million to $45.0 million.

Operator

Your next question comes from Dana [Spaggs] – Callidus Capital.

Dana [Spaggs] – Callidus Capital

I just wanted to revisit something that you had talked about earlier. I am a bit new to your company and I don’t understand the concept due to the lack of historical basis that I have of your company. You had mentioned something about the insurance proceeds and being able to count what I am assuming is a gain for purposes of your EBITDA calculations all in Q3 and that would carry over for the next four quarters, whenever you look at it on a trailing 12 month. I just wanted to make sure I understood that was what you were saying.

James B. Perry

That is what we were saying.

Dana [Spaggs] – Callidus Capital

I thought most of these credit agreements, and I’m not sure if it pertains to yours, but most of them have some kind of language that has an item that carves out what would be considered an extraordinary gain.

Dale R. Black

This isn’t an extraordinary gain.

Dana [Spaggs] – Callidus Capital

Can you help me understand that?

James B. Perry

Why don’t you give me a call after the call and I will walk you through it.

Operator

Your next question is a follow-up from Justin Sebastiano - Morgan Joseph.

Justin Sebastiano - Morgan Joseph

The stock-based comp for fiscal year 2009, what should we be looking at for the next two quarters?

Dale R. Black

We haven’t given any guidance on that specifically.

Justin Sebastiano - Morgan Joseph

You did 2.7 first quarter, 3.8 the second quarter. Should it look more like the first quarter or are you going to stay up in this 3.8 area to try to give the cash out to your employees as opposed?

Dale R. Black

That was a one-time thing. And it wasn’t the cash. What happened was the Board made the decision to do a tender offer and give people restricted shares for options. It was a swap. Certain people that got paid out, if they weren’t going to get enough new restricted shares that vest over the next three years, they were given a cash amount instead, at a discounted value.

And then what happened is when that happens, whatever remaining expense related to those options that would have been amortized had to be expensed in the current quarter.

So that was kind of a one-time event. And you do amortize the new restricted share awards over the next three years.

Justin Sebastiano - Morgan Joseph

So looking at the corporate expense, if we had taken a normal stock-based comp number in that, it was still a little bit higher than I had anticipated. I thought you would have some more headcount reduction or just being able to contain costs maybe a little bit more. For the rest of the year, you’re still pretty confident with that $40.0 million number combined with corporate [inaudible] stock base, because if you.

Dale R. Black

The $40.0 million we have always talked about is a cash number.

Justin Sebastiano - Morgan Joseph

So that excludes the stock-based comp?

Dale R. Black

Right.

Operator

There are no further questions in the queue.

Virginia McDowell

Thank you very much and we will see you all next quarter.

Operator

This concludes today’s conference call.

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