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MTR Gaming Group, Inc. (NASDAQ:MNTG)

Q1 2013 Earnings Call

May 7, 2013 04:30 pm ET

Executives

William R. Schmitt – Managing Director

Jeffrey J. Dahl – President and Chief Executive Officer

Joseph L. Billhimer, Jr. – Executive Vice President and Chief Operation Officer

John W. Bittner, Jr. – Executive Vice President and Chief Financial Officer

Analysts

David Farber – Credit Suisse

James Kayler – BofA Merrill Lynch, Research Division

Douglas Pardon – Brigade Capital Management, LLC

John Maxwell – Jefferies

Andrew Berg – Post Advisory Group LLC

Dennis M. Farrell – Wells Fargo Securities LLC

Wade M. Pontius – JPMorgan

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the MTR Gaming Group First Quarter 2013 Earnings Conference. Just a reminder, that today's call is being recorded. (Operator Instructions) At this time all participants line are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session and instructions will be provided at that time.

I would now like to turn the conference over to William Schmitt of ICR. Please go ahead, sir.

William R. Schmitt

Thank you Laurie and good afternoon everyone. Welcome to the MTR Gaming Group First Quarter 2013 Conference Call. Before we get started, I just want to remind you that the company's remarks may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended concerning the company's prospects. Actual results could differ materially from those projected or suggested in any forward-looking statements as a result of a variety of factors, which are described in the company's periodic reports filed with the Securities and Exchange Commission and in the company's news releases.

Additionally, the company may discuss EBITDA, or earnings before interest, taxes, depreciation and amortization, which is a non-GAAP financial measure. Such information and any disclosure required by the SEC Regulation G can be found in MTR's May 7, 2013 news release, which is reproduced on the company's website under Investor Relations.

Finally, under certain circumstances, the federal securities laws may require the company to file a transcript of this call, including your questions, with the SEC. Accordingly, if you ask a question, the company will assume that you have consented to the inclusion of your question and identity in any such required filing.

It is now my pleasure to introduce your host, Mr. Jeff Dahl, President and CEO for MTR Gaming. Jeff?

Jeffrey J. Dahl

Thanks, Bill. Good afternoon, everyone and thank you for your interest in MTR Gaming. Joining me on the call today are several members of our senior leadership team; John Bittner, our CFO; Joe Billhimer, Chief Operating Officer; Nick Rodriguez-Cayro, our General Counsel; and Fred Buro, our Chief Marketing Officer.

As you know I tendered my resignation as CEO and President of MTR Gaming Group on March 27, and have agreed to continue in that capacity for a reasonable period of time, while the board conducts it’s interview process for a new CEO.

It has been an honor to have led MTR for the last several years and I am pleased with what we have accomplished. The team we have in place is among the best I have worked with and I am fully confident that they will be able to continue the progress we have made.

I would now like to hand the call over to Joe Billhimer, our COO.

Joseph L. Billhimer, Jr.

Thank you, Jeff. First I would like to thank Jeff for his commitment to MTR over the last two and half years and I know I speak for the entire MTR family when I say we are going to miss his leadership. Just a few words on the first quarter of 2013 and I will turn it over to John Bittner to discuss the financials in more detail.

In the first quarter we had record adjusted EBITDA of $25 million on a increase 14.3% in net revenues to $123.3 million. We continue to be very pleased with the performance of Scioto Downs, which has exceeded our expectations to date. Adjusted EBITDA at Scioto Downs improved by $2 million on net revenue increases of $2.5 million over the fourth quarter 2012 representing a 60% flow through margin highlighting the efficiency of this property.

The property continues to enjoy a premium of market share on the VLT in the Columbus market. Despite this success we have faced some headwinds at Presque Isle Downs and Mountaineer Park due to increased competition and new supply in these markets as well as continued consumer weakness and what we would describe has a very difficult weather comparison to 2012 when we experienced unusually mild weather.

These contributing factors led to suppress margin in January and February, however we saw positive trends in March that we expec will continue through the reminder of 2013.

Looking forward, we will continue to focus on our marketing programs at all three facilities. At Scioto Downs, we continue to see new member sign-ups increasing nicely and at the end of April, we had over 213,000 players in our in-club database.

At Presque Isle Downs, we will continue to focus on direct mail enhancements along with updating our slot machines, while refreshing the gaming floor and buffet. The Mountaineer Park management team has been focused on numerous projects including room renovation plans for more than half of the 354 hotel rooms along with new slot machines. All of our management teams are focused on cost controls and are working together with the corporate team to find efficiencies for the organization.

Before I turn things over to John, I would like to take a few moments to address the proposal included in the 13D filing yesterday by Jacobs Entertainment. Given the timing of the Jacobs Entertainment filing it would not be prudent for the company to comment until we have had an opportunity to fully review the matter. Accordingly we roll mapped the addressing any questions regarding the proposal during our call today. If there are any material developments or issues to disclose, we will keep our stockholders and the investor community apprised.

And with that, I will turn it over to John, who will take you through our financials.

John W. Bittner, Jr.

All right, thank you, Joe. Net revenue for the first quarter of 2013 was $123.3 million up once again as Joe mention 14.3% from $108 million in the prior year quarter due to the third full quarters contribution from the new VLT facility at Scioto Downs, which opened on June 1 of last year.

For the first quarter of 2013, the company’s adjusted EBITDA from continuing operations was $25 million up 21.9% compared to $20.5 million in the first quarter of 2012.

Overall net adjusted EBITDA margins for the first quarter of 2013 from continuing operations was 20.2% up 120 basis points from the prior year period.

Net adjusted EBITDA margins for Scioto Downs in the first quarter was 36% compared to 33.4% in the fourth quarter of 2012. Net adjusted EBITDA margin for Mountaineer was 16.7% compared to 21.6% for the prior year period. Net adjusted EBITDA margin for Presque Isle Downs was 16.7% compared to 22.2% for the prior year period.

Loss per share from continuing operations for the first quarter of 2013 amounted to $0.03 compared to the first quarter of 2012 loss per share from continuing operations of $0.11. The provision for income taxes reflects additional valuation allowance relating to our deferring tax assets. And during the first quarter of 2013, corporate operating expenses totaled $2.6 million compared to $2.4 million in the first quarter of 2012 with the increase primarily due to corporate marketing cost and long-term compensation related expenses.

Capital expenditures for the first quarter were $2.8 million consisting primarily of $1.8 million for Mountaineer, $0.3 million for Presque Isle Downs and 600,000 for Scioto Downs. For 2013 we are expecting to spend a total of $19 million in total capital expenditures. We also anticipate capital reimbursement of approximately $2 million from West Virginia. We will also be paying the $25 million remaining installment on our Ohio VLT license fee in June of this year. This liability is already reflected on our balance sheet.

Depreciation expense for the quarter was $7.5 million up from $6.2 million in the prior year period, while interest expense for the quarter was $17.4 million compared to $17 million for the prior year period. So there was no capitalized interest during this quarter.

Total debt for the quarter ended March 31, 2013 was $557 million net of discounts and we have cash and cash equivalents on hand of $99 million. Additionally, we have $20 million remaining availability under our credit facility.

And with that I will turn it back over to Joe.

Joseph L. Billhimer, Jr.

Thank you, John and now Laurie please open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will take our first question today from David Farber at Credit Suisse.

David Farber – Credit Suisse

Hey, guys, how are you?

John W. Bittner, Jr.

Hi David.

David Farber – Credit Suisse

Nice quarter. I have three questions, just curiosity what is the understanding, the sensitivity of the Jacobs bid, I guess I was just curious, are you guys of the management team open to diversifying the business is that what you think will be necessary or do you have any thoughts as to specifically about growing the income stream from other businesses or anything you can comment there and then I have a couple of follow-ups totally unrelated to Jacobs. Thanks.

John W. Bittner, Jr.

Yeah, I David, I don’t think we can comment on any part of the letter that we received. We just received it last week and have to fully evaluate it. So we cannot comment on that right now.

David Farber – Credit Suisse

Understood. Okay, away from that just thinking through what’s going on in Ohio, I am just curious to hear there has been some news articles about shutdowns, on some of the operations there that are deemed generic with some of these illegal. I am just curious are you seeing any benefit from that or how do you think that’s playing out over the course of this year?

John W. Bittner, Jr.

I don’t think we are seeing any direct benefit at this time although the Attorney General has taken an aggressive approach and is prosecuting cases with the Internet takes café, as well as legislation has gained significant momentum and we could expect to see some legislation by the end of this month.

After that I would think that we would see some impacts but we can’t really quantify that at this time.

David Farber – Credit Suisse

Got it. And then just finally, anything with respect to fiscal balance opening, I understand it’s somewhat far, but I am just trying to get a sense of any of your customers are taking a trip there where they would have gone somewhere else before hand.

John W. Bittner, Jr.

Yeah, we’ve seen just initially they’ve only been open three weeks of the month of April and we’ve seen a little bit of an impact. However looking at the numbers they came out today, it would look like most of the deterioration came from the sister property in Cleveland, but we are way too early for us to measure the impact. We’ve always said that we would expect to see some impact from fiscal downs but it is in the primary market of where the Cleveland customers are also going.

David Farber – Credit Suisse

Got it. Okay, well, congrats to Jeff and the quarter and thanks guys. Talk to you.

Jeffrey J. Dahl

Thank you.

Operator

And we will go next to James Kayler at Bank of America Merrill Lynch. Please go ahead.

James Kayler – BofA Merrill Lynch, Research Division

Hey guys, how are you doing?

Jeffrey J. Dahl

Hi, James.

James Kayler – BofA Merrill Lynch, Research Division

I guess you called out whether in the press release. Do you guys have willing to risk any guests on what the financial impact was in the quarter and I guess maybe just directionally if you could talk about how the business has trended sort of when it is not snowing?

Jeffrey J. Dahl

Well, I will take the first crack, and then I’ll let John fill in. We’ve done some analysis in terms of the affects of the snowfall year-over-year and we could come up with estimates of up to 5% of revenue, the impact of this year versus prior year, but there is a lot of factors that go into that those analytics James, so I wouldn’t necessarily take those to the bank. But that’s a good faith guesstimate on our part of the impacts of the snow days which were basically double what they were prior year and hit us on some impactful days. In terms of the trends going forward without snow, we saw some nice rebounds in terms of margins in March, as we said in our opening comments and we would expect to continue to see those throughout the balance of the year.

John W. Bittner, Jr.

I know really wouldn’t have anything else to add to that.

James Kayler – BofA Merrill Lynch, Research Division

Very good. I guess also just more broadly just thinking about the seasonality of the business, historically before Scioto opened, the second and third quarters were obviously seasonally strong quarters at Presque Isle and Mountaineer. Is it safe to assume that Scioto will exhibit sort of a similar seasonal trend, I guess I am trying to get a sense if the seasonality of the business more continued to be similar with sort of peak EBITDA in the second, and third quarters and lower EBITDA in the first and fourth quarters?

John W. Bittner, Jr.

Yeah, I think that the pattern itself that should be consistent with the other two properties and I generally think that’s consistent throughout the industry, but I don’t see any reason why I say it will be any different.

James Kayler – BofA Merrill Lynch, Research Division

Okay, very good. I guess do you have any – it seems like Pan is making some progress on moving near two race tracks within Ohio. Do you have any sort of additional color on where the Youngstown project stands timing wise?

John W. Bittner, Jr.

No, other than they’ve got racing commission approval on the plans they still have to go through Ohio lottery which we would expect them to do. We are projecting sometime mid-2014 in terms of opening. And I think they have not really specified in their disclosures, but they have also indicated sometime in 2014 actually for both their new race tracks

James Kayler – BofA Merrill Lynch, Research Division

Okay. Very good. I guess just lastly I don’t know if anyone can comment on this, but is there any update on sort of the CEO search, sort of where the board stands and what the timing might be?

Joseph L. Billhimer, Jr.

I don’t think to crack out. Let John can fill in. I think the board is at the end of the process that they started just after Jeff announced is resignation. And I would characterize it as soon.

John W. Bittner, Jr.

Yeah, I probably I am not going to comment much further than that on anything with respect to the whole process.

James Kayler – BofA Merrill Lynch, Research Division

Okay. Thank you, guys.

Operator

And moving on we’ll go next to Doug Pardon with Brigade Capital.

Jeffrey J. Dahl

Hi, Doug.

Douglas Pardon – Brigade Capital Management, LLC

Hi, good afternoon guys. Actually all those guys took all my questions. But as a follow up to the question, James just asked on the process. This isn’t really a question, but I just wanted to take the opportunity – I don’t usually start calls by saying good quarter, or like a lot of other folks in the sell-side do. But we were as the significant shareholders, we were very pleased with the results and as it relates to the process for new CEO, as I said we’re very pleased with the results and that’s in almost all part due to the management team here. And we would be fully supportive of the management teams staying in place, obviously Jeff is leaving and having Joe take over that role of CEO and we just wanted to let you guys know that and let the board know it as well.

Joseph L. Billhimer, Jr.

Thank you very much Doug. It’s very much appreciated.

Douglas Pardon – Brigade Capital Management, LLC

And that’s all I have.

Joseph L. Billhimer, Jr.

Thank you.

Jeffrey J. Dahl

Thanks Dough.

Operator

And we will go next to John Maxwell at Jefferies.

John Maxwell – Jefferies

Hey, guys.

Jeffrey J. Dahl

Hi, John.

John Maxwell – Jefferies

The only thing I guess – how are you doing? I guess the only thing I would add or just ask would be from looking at particularly looking at today with the Ohio numbers coming out, Scioto continues to do better than we expected particularly related to the Columbia property, anything you could share with may be where the customers are coming from or other than what we’ve talked about in the past, it’s just again the past couple of months have really seemed to be – Scioto seems to be outperforming a lot more than we expected.

Joseph L. Billhimer, Jr.

Yeah, I will take the first crack and I think our customer base comes from the general Columbus area and obviously we were located a little bit south of the city and Pan is located a little bit west of the city. So geographically we probably have a little difference in customer base just from location, but I think getting Scioto down to open first and allowing us to build the database was critical to maintaining what we were able to maintain now. The management team and all the staff at Scioto Downs have done a wonderful job in terms of guest service. And I think we’ve cut out a nice niche of business in that market and we also looked for that market to continue to grow as we get into the second, third, fourth quarter and really for the next two years. So we are very optimistic about the market and very pleased with the performance of Scioto Downs and the team there.

John Maxwell – Jefferies

Okay, all right, great. No, it definitely seems like obviously it was working. And I know you touched a little bit about this earlier with the whole Internet cafe. So where does it stand out? It sounded like the Attorney General was moving forward. Do we have to wait, is it the legislature signed of at this point or is that still the final detail in terms of what they would approve?

Jeffrey J. Dahl

Well, I think it’s on the Senate side right now and there has been a bill sent over from the House to the Senate. And I think all indications from what we have heard and what we read is that they expect him to move that bill through sometime this month. That’s all our expectation but we obviously don’t have any control of that. But at the same time as you mentioned the Attorney General has taken a very aggressive stance that these are illegal gaming operations and is prosecuting them as quickly as he possibly can.

John Maxwell – Jefferies

Okay, great. That’s all I had, congrats again and Jeff all the best.

Jeffrey J. Dahl

Thank you.

Joseph L. Billhimer, Jr.

Thanks.

Operator

(Operator Instructions) Moving next to Andrew Berg with Post Advisory Group. Sir?

Andrew Berg – Post Advisory Group LLC

Just a few questions, the $99 million cash you show includes the $25 million payment you need to make to Ohio in June?

John W. Bittner, Jr.

It does.

Andrew Berg – Post Advisory Group LLC

Okay, thanks.

Operator

And our next question is from Dennis Farrell at Wells Fargo.

Dennis M. Farrell – Wells Fargo Securities LLC

Thank you. I was wondering if there is any update in Columbus in regards to e-tables or video poker?

Joseph L. Billhimer, Jr.

There is not any update. We continue to make our cases as to why we think those games need the definition of lottery games and we will continue to do such. But no progress, positive or negative at this point.

Dennis M. Farrell – Wells Fargo Securities LLC

Are there e-tables at Hollywood, Columbus.

Joseph L. Billhimer, Jr.

There is live table games, but no there is – there is not any table product that we have seen.

Dennis M. Farrell – Wells Fargo Securities LLC

Okay, in regards to competition. I was just wondering what do you expect the impact from Lebanon and potentially?

Joseph L. Billhimer, Jr.

We don’t expect much in terms of impact from those facilities, just given the geographic location and the size of the Columbus market.

Dennis M. Farrell – Wells Fargo Securities LLC

Okay. And then in regards to Cincinnati, the Rock or the Horseshoe project there? Have you seen any trial there from any of your players?

Joseph L. Billhimer, Jr.

We have not seen any deterioration particularly from the southern part of our database which even down to about the halfway point between our facility in Cincinnati.

Dennis M. Farrell – Wells Fargo Securities LLC

Okay thank you.

Joseph L. Billhimer, Jr.

Thank you.

Operator

Our next question today is from Susan Berliner at JP Morgan.

Wade M. Pontius – JPMorgan

Yeah, hi guys this Wade Pontius just talk on behalf of two. And just quick question on Scioto Downs, just wanted if we could have any update on the database and size and that was something that we were targeting to grow? So just wanted to see where it's sort of in 1Q?

Joseph L. Billhimer, Jr.

Yeah, at the end of April we are up to 260,000 names in the account and it continues to grow couple thousand a week. So that’s shows some nice robust new members sign up.

Wade M. Pontius – JPMorgan

Okay, great. That’s very helpful. Thank you.

Joseph L. Billhimer, Jr.

Thank you.

Operator

(Operator Instructions) And we will go next to [Tim Reiki] at Brookfield.

Unidentified Analyst

Yeah, my question was just asked, about electronic tables, but that was helpful. But have guys given any indication of kind of the magnitude of that like what that potentially could mean. Is there anyway for you guys to kind of get an hand on that? What that could do to margins, what that can do to top lines?

John W. Bittner, Jr.

We have seen some estimates out there on the potential revenues that these devices are doing by their nature and the fact they are not regulated. Those are just guesses. It won’t be negative. It won’t be negative to us. It should be a positive. So I would not want to venture, I guess. I mean there is about 100 of the cafes in the Columbus market and there is about 500 in between Cleveland and Youngstown. So I think there is no downside to them being closed for us, but I don’t want to try to get into a magnitude.

Jeffrey J. Dahl

Is your question related to the Internet cafés?

Unidentified Analyst

No, I am sorry about that. I mean electronic tables. So do you guys have a sense of those might do for your – have you seen other markets when they get introduced, what they are kind of two for the facility.

Joseph L. Billhimer, Jr.

Yeah, we have seen some very positive numbers in other jurisdictions and we’ve pointed those out to the Ohio lottery commission. I think that they would be a very positive impact, but I don’t have the number. We have looked at some numbers. We can get that to you off-line.

Unidentified Analyst

Okay. And then follow-up to that I guess, is it fair to say that do Pan or others sort of lobby in the opposite direction, this could be an unfair advantage or are there folks who are lobbying against you guys getting e-tables

Joseph L. Billhimer, Jr.

Good question, by the nature of lobbying, we are not always sure who is lobbying against us at times but we don’t know.

Unidentified Analyst

Okay. Thanks Jim.

Joseph L. Billhimer, Jr.

Thank you.

Operator

And gentlemen there are no further questions at this time. I would like to turn the program over to you for any additional or concluding remarks.

Jeffrey J. Dahl

Thank you, and thank you all for your continued interest in MTR Gaming. We appreciate you being with us today on the call and look forward to speaking with your next quarter.

Operator

And once again ladies and gentlemen that does conclude our conference for today. I’d like to thank everyone for joining us.

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