Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Joseph N. Jaffoni - Investor Relations

Timothy J. Wilmott - President, Chief Operating Officer

Peter M. Carlino - Chairman of the Board, Chief Executive Officer

William J. Clifford - Chief Financial Officer, Senior Vice President - Finance

Steven Snyder- Senior Vice President, Corporate Development

John Maxwell – Jeffries

Analysts

Joseph Greff - J.P. Morgan

Felicia Hendrix - Barclays Capital

Larry Klatzkin - Jefferies

David Katz - Oppenheimer & Co.

Steve Kent - Goldman Sachs

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Dennis Forst - Keybanc Capital Markets

Steve Altebrando - Sidoti & Company

Dennis Farrell - Wells Fargo Securities

David Katz - Oppenheimer & Co

Penn National Gaming Inc. (PENN) Q2 2009 Earnings Call July 29, 2009 10:00 AM ET

Operator

Good morning ladies and gentlemen my name is Nelson and I will be your conference operator today. At this time I would like to welcome everyone to the Penn National Gaming’s Second Quarter Financial Results 2009 conference Call. (Operator Instructions) As a reminder, this conference is being recorded Wednesday July 29, 2009. I would now like to turn the conference over to Mr. Joe Jaffoni, Investor Relations. Please go ahead sir.

Joe Jaffoni

Thank you Nelson, good morning, and thank you everyone for joining Penn National Gaming’s 2009 Second Quarter Conference Call. We’ll get to management’s presentation and comments momentarily as well as your questions and answers, but as is our practice we will first review the Safe Harbor Disclosure.

In addition to historical facts or statements of current conditions today’s conference call contains Forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the Company’s current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today’s announcement in the Company’s filings with the Securities and Exchange Commission including the Company’s reports on Form 10K and 10Q. Penn National assumes no obligation to publicly update or revise any forward-looking statements.

Today’s call and web cast can also include non-GAAP financial measures within the meaning of SEC Regulation G, and when required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP will be found in today’s news announcement as well as on the company’s web site.

Having reviewed the Safe Harbor language, I will now introduce Peter Carlino, the Company’s Chairman and CEO.

Peter Carlino

Thanks, Joe and good morning everyone. As you can see we had what I described as an okay quarter, not wonderful, but I guess in many ways that’s indicative of where we find ourselves with the economy overall and just less than robust performance as we look across the country at our various properties.

Consistent with what we have always done, we will try to keep our comments up front to the minimum and then move to your questions and try to go where you would like us to go. Before I do that though, I felt we would share just our general view on guidance and how we have arrived at where we began this year and why we have taken a consistent view looking forward. Then I am going to ask Bill Clifford, of course, to do that and we will move quickly to Tim Wilmott who will give you a little bit of color from some of our properties.

Bill Clifford

Thanks Peter. As we started the year we had EBIDT at roughly $625 and we actually beat first quarter guidance primarily attributable to February’s better than expected results, but at the time when we gave the next three quarter’s guidance and the second quarter guidance we basically didn’t view that as a trend and kept our guidance flat. As we now go through the second quarter clearly we fell below our guidance by roughly $5 million, which Tim is going to touch on in a bit, for a variety of reason. But, we again don’t view that anything has really changed in the outlook for the year, or the economy, or our customer’s prospects and accordingly what we have done is we have left third quarter and fourth quarter flat with where we originally had them.

So, our view is that generally speaking going forward we are treating the second quarter as a bit of volatility. The first quarter was up, the second quarter was a little down, but generally everything is on track and in line with our expectations.

July’s guidance as we did it prior to reviewing the second quarter, we are actually $100,000 for the good. I mean for all net purposes we are spot on in our guidance for July, so I think July trends are completely consistent with our expectations. Tim?

Tim Wilmott

I wanted to provide everyone with some highlights of some of the issues that occurred in the second quarter that caused some of our margins to not be where we want them to be. I wanted to specifically highlight four properties. The first one is Lawrenceburg.

As many of you know we completed and opened at the end of June our new facility in Lawrenceburg, but clearly the transition of closing the old boat for four days and moving the product over was longer than we had anticipated and more costly than we anticipated from an expense standpoint and that certainly hurt the performance of Lawrenceburg in the second quarter. On top of that we had an unusually large spike in catastrophic claims. We want to provide as much transparency to the second quarter results. Over the course of a full year we don’t think it is anything material, but it certainly did spike in the second quarter; nothing more than that, it is really for transparency reasons that we highlight that issue.

In Joliet, as everyone knows, we had the fire on March 20 and were closed for most of the second quarter. We did have some additional expenses, paying our employees an additional five days more than our coverage of business interruption provided, which slightly impacted the overall results in the second quarter. This was due to the Joliet reopening which occurred on June 25.

We also had softness in our Zia Park operation. Clearly the effect of lower gas prices affects our West Texas feeder markets, so Odessa, Lovick and Midland. We certainly saw some softness there that impacted the top line and also the margins at our Zia Park facility. And finally, at Penn National we had very good revenue performance there, but we had an additional charge of $3 million in the quarter of catch up regulatory fees that really go back to 2008 that have now got us caught up with our regulatory expenses in the state of Pennsylvania, but that $3 million hit affected the margins fairly significantly in the second quarter from Penn National as well.

I did want to highlight, since we talk about Lawrenceburg and Joliet as they have now opened and have had about four weeks of running, we are very pleased that they’re performing in line with our expectations both in Southern Indiana and also in Chicagoland and the efforts of the teams there to get the properties positioned now to move forward. We are very pleased with their performance and look forward to a good third and fourth quarter there as the July results, as bill highlighted, continue to be online with our expectations. Peter?

Peter Carlino

Very good, thanks Tim. With that, operator we will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joseph Greff with J.P. Morgan.

Joseph Greff - J.P. Morgan

Just going back and looking at the second quarter, I was hoping you could help quantify the variance between your guidance and actual EBITDA results. Among the things that you highlighted, Lawrenceburg the two items there, the transition and the medical claims, Charlestown. Then the one comment about Pennsylvania with the one $3 million catch up regulatory fees was that in your prior guidance for the second quarter?

Tim Wilmott

I will answer the Pennsylvania. Yes we definitely had the Pennsylvania charge in our guidance. The only thing I would add on the Pennsylvania piece is that when you back out the catch up portion our second quarter normalized margins were roughly 19.6% for the quarter. They would have been for the quarter without the catch up.

The $5 million variance is probably 50% Lawrenceburg and then you have Joliet, Zia and Charlestown that probably represent the majority of the rest of the variance.

Joseph Greff - J.P. Morgan

Okay that is helpful and then your comments about how the second quarter turned out and how July is turning spot on with your internal forecast, can you just comment on July? I guess what we saw in the second quarter was April was good, June was not good and May was somewhere in between. Is that a trend or is there a comparison issue? Then if you could maybe comment on July if you see it picking up from June levels. Then specifically at Lawrenceburg you mentioned you are pleased there, can you just talk about maybe sort of the neighborhood of a revenue growth rate there in the first 29 days here in July? Or maybe what you put in a sort of one spot per day perspective.

Then with respect to Joliet opening up is that having any negative impact at Aurora?

Peter Carlino

Joe, let’s break that into a couple of questions, you had three or four there. To your very first question, I don’t think there is any trend. There is no magic to this. If we all around the room everybody in this phone call can try to divine a plan going forward. Your guess is probably as good as ours, in fact we have a perfect idea, call us and tell us and we’ll make the adjustment.

The truth is there is not trend and that things are kind of mushy, they are up, they are down, and it is very, very difficult, probably the most difficult that we have ever seen in trying to forecast the future when the future is so obviously unknown. The wheels aren’t coming off of the cart. I mean that is what we are feeling is a visual sense, that is what I am trying to share with you and to all our investors. The wheels are not coming off the cart. I mean we have a lot of customers out there, business is good, it is just not wonderful, and we cannot divine with the kind of information that we have where it is going to go. So, July is looking pretty nice and we feel comfortable with that, but who the heck knows what August is going to look like. We are in that kind of a mode. So, if we are a little mushy on that kind of question it is because that is all we can do.

To the specifics, why don’t I give that to Tim?

Tim Wilmott

I will just stand with Peter’s comments Joe; I don’t think we are seeing any rebound on consumer spending anywhere. It is still the same kind of trends. Overall as you look at the first six months of 2009 there are ups and downs through that period and July is more of the same.

Regarding your question, Joliet’s opening has had a slight negative affect on Aurora, which we expected given the reopening of that property, so that has occurred. Lawrenceburg you will see the Indiana results come out, I believe, the end of next week. We are showing good solid double-digit growth there. There are still a few days left in the month, but it is right on line with our expectations given the capital we have put in there.

The good news in Lawrenceburg is that the customer response has been very, very positive and we are seeing record volumes now with the new facility, which we expected, going through the turnstiles and playing spots and table games and universally the response from the consumer has been extremely positive from the product we delivered there.

Joseph Greff - J.P. Morgan

Great and then on West Virginia table games there was some recent articles that might make sense right now for a vote in Jefferson County in November; if you could discuss any pulling and any sense there?

Then my final question is for Bill, if he has any thoughts on issuing any notes here given some others in the sector successfully completing some pricing on notes?

Peter Carlino

Joe, that question falls in among a handful of similar questions that we expect to get this morning, to which my answer is going to be pretty much the same; that is we really can’t tell you much because it would be unwise for us to do so. Look, we are still firmly engaged in West Virginia. We are very, very much on top of that issue. How and when we will run a referendum has not been publicly disclosed. We have a very clear view about that now, probably as of yesterday sitting around here we certainly set some internal target. It looks encouraging, but again, nothing certain and we are not prepared, at this instant, to give you the precise day.

Bill Clifford

Joe, to answer your other question, certainly we are currently evaluating and looking at our capital structure and figuring out how to deal with the revolver that is maturing in October of next year, as well as certainly taking a look at the fact that our capital structure is very top heavy in terms of a lot more senior secured debt and very little sub debt; so we are feverishly working on it and I would think, quite candidly, that there will be something getting announced here within the next several weeks.

Operator

Your next question comes from Felicia Hendrix from Barclays Capital.

Felicia Hendrix - Barclays Capital

On Lawrenceburg, now that you have been open for a little bit, I am wondering what you are seeing from the competition in terms of the promotional environment?

Bill Clifford

We really right now see no change in the customer reinvestment or marketing activities from the two Indianapolis casinos or our two competitors to the south of us. So, the promotional activities there are really unchanged from what we saw in the second quarter.

Felicia Hendrix - Barclays Capital

Then moving onto Ohio, I am just wondering if you could handicap the probability of the state going with both the racinos and then the full on casinos?

Peter Carlino

That is a real tough one and I am going to be very careful on how I say what I say because it could well appear in tomorrow’s papers. There is really no bad news for us in Ohio. If it doesn’t occur, and I am not at all suggesting that that is our desire, that is okay. We continue on with the rest of our business and it is all good. We do believe that Ohio gaming is a positive for us and should be a very strong positive for our company, if it occurs. It is complicated, for sure, by the fact that there appear now to be competing proposals and we have done some very careful polling trying to understand what that means.

I think the bottom line is it is a crapshoot. I mean you read all of the stuff that we read and of course we have roots on the ground there. There are those opposed on constitutional grounds and you are going to see all of the flurry and fanfare, but the truth is I don’t think we have a clue of where it is going to play out. We are doing all of the right things, in our judgment, that can be done and we are just going to have to see how this goes.

That is kind of all we can say. It is a very muddy issue. It is kind of fun to look at a situation where there was nothing in Ohio and then out of the blue the governor has made the proposal. I think it is, frankly, a very smart proposal for the state. It is perhaps what they should have done a long time ago. They have done it now. It will be a huge positive for Ohio if it happens; so we continue to believe that gaming is a very proper and intelligent resource for states to generate revenue. I think they kind of figured it out there and we are cautiously optimistic that it may unfold.

And we are still moving forward with our land based initiative on the November ballot. We think more gaming in Ohio is good to generate jobs and create more revenues for the state, which is in dire need of job creation. An area like Toledo right now is running 15% unemployment. It is a state that needs an economic shot in the arm and we think more legalized commercial gaming is a good way for them to solve their problems.

And our partners on the Casino side are very much motivated by bringing jobs and development around the state and I mean that quite sincerely. It is more than just money in a business. They are very much committed to doing the right thing and creating economic development opportunities, particularly in Cleveland, so that they have the right motivation.

Look, we prefer full casinos, there is no doubt about that, because it is what our customers want. I mean there is sort of a silly divide between slots and table games and it is that, just silly. It makes no real sense at all. If there is “gambling” going on there, it ought to be what customers want. So we think full casinos make sense. But, as it has sort of unfolded the way it has, we are going to play the hand that we are dealt there.

Felicia Hendrix - Barclays Capital

What do you think the chances are, with your option on the race track in Columbus, what do you think the probability is that you could have two racinos in the state?

Steve Snyder

The only provision in Ohio is that there is a limitation on no more than two race track facilities being owned commonly, so we don’t have a problem. There is no statutory limit that would affect us given the positioning that we have put the Company in.

Felicia Hendrix - Barclays Capital

Okay, then it looked like in a lot of your properties your revenues actually came in lower than the reported safe gaming revenues were; so I am just wondering if that is due to timing or is that something else?

Peter Carlino

What Steve specifically do you see that?

Felicia Hendrix - Barclays Capital

Well in Charlestown, but there is always something weird there, but at Lawrenceburg you came in lower, I mean there were several of them.

Peter Carlino

Well we provide net revenues in our disclosure. You are looking at the gaming revenues.

Felicia Hendrix - Barclays Capital

I looked at other quarters. I mean the trend is more significant this quarter.

Peter Carlino

We will have to get back to you on that. I will have to do some research and get back to you specifically with what you are seeing in the second quarter versus other quarters.

Felicia Hendrix - Barclays Capital

Okay.

Operator

Your next question comes from Larry Klatzkin with Jefferies

Larry Klatzkin- Jefferies

Bill, for housekeeping, capitalized interest?

Bill Clifford

Capitalized interest in the quarter was 3.5.

Larry Klatzkin- Jefferies

All right and then Peter, do you still have an interest in Las Vegas?

Peter Carlino

Larry, you know perfectly well we always have an interest in Las Vegas. That is all I am going to say. You know the issue. Let me broadly answer questions like that by saying look, things have never been busier than they are today here at Penn. I mean we have people everywhere in just about every state that has the remotest possibility of activity, as some sort of beleaguered and tired looking folks around the state will demonstrate. We are working hard on a lot of issues; so again, it is right place, right time, right opportunity and so it goes. But, that is all we can ever say.

Larry Klatzkin- Jefferies

All right that is fair and then what is the chance of the Indiana tracks, in you guys opinion, of getting table games and would this be a big effect on you guys if the electronic table games are already there it wouldn’t be much?

Steve Snyder

I don’t think there is a real great likelihood right now, there doesn’t seem to be that great of sympathy in Indianapolis for modifying the racino legislation. In terms of an impact on our business, I mean you have been to those properties, they have got electronic table games, they have electronic poker rooms. I am not sure that we would feel any impact what so ever if they did modify the enabling legislation.

Larry Klatzkin- Jefferies

All right and then the last question, is says you had some income related to the sale of investment debt. Could you tell us what you guys traded?

Peter Carlino

Will we tell you who we sold?

Larry Klatzkin- Jefferies

Yes.

Peter Carlino

No, we will tell you that we sold who knows. It may dip again and we may want to buy it. The reality is that we have sold all but about $5 billion worth of the bonds, but we still have $5 million sitting in the unrestricted subs, but we have basically sold all of the other positions that we had and we happily took our $6.6 million gain and recognized that we’re very happy to have made the purchase and we are also very happy to have sold the bonds at a nice profit and we will see what happens and give this dry powder for whatever it is that may come along down the pipe that we find of interest

Larry Klatzkin- Jefferies

So if I ask you what the $5 million left is in you are probably not going to answer.

Peter Carlino

Well if I won’t tell you what I sold I am not going to tell you what I still own.

Larry Klatzkin- Jefferies

That’s fair. Thank you very much.

Operator

Your next question comes from David Katz with Oppenheimer & Co.

David Katz - Oppenheimer & Co.

Tim, you highlighted some of the medical costs that were, I think, cited in the press release, but I am not sure you quantified that. Can you give us some parameters around how big an impact that was?

Tim Wilmott

It was almost $1 million.

David Katz - Oppenheimer & Co.

It was a less than a million okay. Then if we look at Lawrenceburg at the moment, and obviously since the project started, and we have all talked about this, many, many, many things have changed or could be changing going forward. Perhaps you can help us just think about what a reasonable, expected return is on that spend. We can perhaps spend some time thinking about how long it takes you to ramp to that level. We should probably do it irrespective of any events that may occur in Ohio, right, and we could go back and try and gauge what the impact would be should that occur, as it occurs, if it occurs.

Tim Wilmott

I think we have generally taken the position that we don’t want to give specific property-by-property guidance and there is a good reason for that, because there is a lot of volatility doing the properties and sort of the benefits of being diversified is that you have lots of properties out there. We don’t nail every property every quarter. I would hate to represent that the Company is that accurate in terms of its ability to guide exactly where it is going to end up. What happens is we end up with some properties obviously doing better, some properties doing a little bit worse, and generally speaking that is what I call normal volatility. For that reason I think we are going to pass on answering where we think specifically what kind of returns we are going to see out of Lawrenceburg.

Peter Carlino

The other thing, David, to try to answer your question, it is going to take three or four quarters for Lawrenceburg to get fully ramped up and stabilized. We also have some additional work that we want to do to upgrade the amenities in the pavilion that is going to occur over the next three or four quarters as well. Nothing significant, but we certainly have some restaurants that need upgraded and that is going to be occurring over the next 12 to 15 months, but in terms of when we think Lawrenceburg will be running on all cylinders, it is going to take a few quarters out there for us to expose the new product to as many new consumers as we possibly can and then get all of our marketing programs in place that support the new facility.

David Katz - Oppenheimer & Co.

I got it. While we are in Ohio, I notice that your guidance says it excludes any lobbying costs that may occur in Ohio. I think at one point, or maybe as of the last call, we may have been thinking that the Ohio referendum effort was really going to be put off for a year, and now it is back on track. Should we be thinking about adding in some costs with all of that?

Peter Carlino

I think one is the situation is extremely fluid, even internally here in terms of our strategies relative to how much we are going to spend and where we are going to spend it and what is the best way to spend it and all of those types of issues. Part of the reason we are not including it in guidance is that we haven’t got a completely firm grip on exactly what we are going to spend, because the situation is evolving on almost a day-to-day basis. So, the answer to that question is maybe you should.

Unlike the effort that we had made to defeat core legislation in the past, where frankly we did what was necessary and you would ask is there a budget? I would have said, quite frankly, no. You tell us what is required to win. In this case we have a very defined budget in mind and it is very reasonable, from our point of view, compared to last time it is a whole lot less. But, we are not sure how and if it is going to be deployed; that is a discussion with our partners.

As I say, you read all of the stuff that we do. In fact if I look at my daily press summaries that we get 25 of the items it seems are on Ohio from various cities, various opinions, various thoughts, all of the stuff that you all have available; so that we are very much engaged in a lot of analysis trying to figure out how this is all going to fall out. We don’t expect, for example, that the challenge to our signature gathering will prevail. It is kind of a silly thing that these folks have done probably to get publicity to try to oppose us. So this is a very fluid situation. I think Bill said it and our goals are carefully crafted there, but how it is going to play out in light of the governor’s current effort and where we fit in that is just unknown.

David Katz - Oppenheimer & Co.

Tim, even if we add back the $3 million into Pennsylvania, and I think the last guidance you had out there had $2.4 million contemplated, but even if we add that in we do see a little bit of a ramp in the profitability of that property. Whatever sort of future comments you can share with us about how you expect that to continue to ramp or what sort of an optimal profitability level is there since it is such a new property and there is a lot going on in the area would be helpful.

Tim Wilmott

To give you some color on Penn National, I do want to say it appears now, after about two months of operation, that we are not seeing any material impact from Bethlehem in the numbers there. When you add back the 1x catch up regulatory fees we are running at EBITDA margins that are around 20%. I think we can do a little bit better than that going forward as we continue to grow the business. The revenue growth there continues to be good; it is still showing double-digit growth.

Typically what we see here is that these new properties that open take about three years to fully mature and stabilize. So, I still think we have another 18 months or so before Penn National stabilizes and becomes what we would characterize as a mature business. Hopefully by then table games will be introduced in Pennsylvania and we will be able to grow the business through that vehicle.

Operator

Your next question comes from Steve Kent with Goldman Sachs.

Steve Kent - Goldman Sachs

My first question is on Zia, the impact of West Texas and that economy, what is your sense as to how long that could really have an impact? I mean are you literally seeing impact month-to-month depending on where oil prices are, or is there something a little bit more substantial there?

Then ore broadly, you do note that the marketing initiative in Charlestown didn’t really work out for you, but could you talk about what strategies are out there, especially in light of whether Harris is getting more or less aggressive in their own marketing promotions?

Peter Carlino

Let me answer the question in Zia and I am no expert on the oil industry in West Texas, but from what I hear from people that are, the price of oil needs to be above $70.00 a barrel for investment to be made in oil exploration in that part of West Texas and Southeastern New Mexico and last year we were enjoying, obviously, high oil prices and in those markets it was very robust. In Hobbs, New Mexico we saw the hotels there running 100% occupancies with ADRs above $100.00 because of all of the workers that were coming in there that were correlated to the oil industry. This has been a trend we saw late in the first quarter, continuing in the second quarter, where we are seeing the local market and our feeder markets not nearly as robust as it was a year ago. I am told that things won’t get better until we see oil above $70.00 a barrel. That is an unusual circumstance, because in our other businesses we obviously want to see gasoline prices low and consumers not being faced with that hurdle to get in their car and come visit us, but this is an unusual situation in Zia where when the oil industry and the price of a barrel of oil is high it does help us there.

Tim Wilmott

Just to add on to your question, is it a day-to-day fluctuation? No, we think there is about a six to nine month lag period between the time when the oil prices move and obviously not on a dollar basis, but move significantly that it takes time. I am going to assume that is because the oil industry, as much as anybody else, doesn’t exactly know what the price of oil is going to be, so they are looking to establish with the new base and the new trend and then it takes time for them to make adjustments. Either they start up new production or they finish up the existing production and then don’t start up new stuff. So, it takes a good six to nine months before you will feel the impact.

Peter Carlino

With regard to Charlestown, we had in certain segment seen some efforts by that property to try to stimulate revenues in a tough economy that frankly didn’t work. We are working toward the fourth quarter where we are going to get some relief from the state of West Virginia to allow tax free down loadable slot play in there and that is something we are working towards that we think will have a positive affect on our ability to go after segments of business that frankly with that 60% tax rate we can’t go after right now because of the cash being taxed at that high level, so that is what we are working toward in the fourth quarter at Charlestown to try to stimulate revenue and grow the business in a tax free promo credit format.

With regard to your question about Harris, we are not seeing any increased promotional activity across our markets that we compete with Harris against. In fact in many cases we are seeing Harris pull back significantly in their marketing expense and their marketing activities. Not just here in the Northeast, but in almost every market that they operate in.

Operator

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

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Just going back to Ohio and just to be really clear, if both proposals pass would you be allowed to own a full-blown casino and a racetrack?

Peter Carlino

Yes. [inaudible] related two and two exactly.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Okay and then Peter going to Kansas, just an update there in terms of what you guys see in terms of when the process and that will all eventually play out?

Peter Carlino

Let me give you the general answer, because I cannot be specific. We have got more time. We have been granted more time to polish our proposal for Kansas, which we have been doing, I think, quite successfully. Steve, do you want to volunteer?

Steve Snyder

The lottery commission in the state of Kansas had a deadline of late June to approve management contracts and forward them to the lottery facility review board. They sought a 60-day extension from the governor. The governor granted them that 60-day extension, so you should look for everything in Kansas to be pushed back well into the fall and possibly even into the winter November, December before they make final decisions given that 60-day extension.

Peter Carlino

Obviously we have seen an opportunity to improve our position there. We are working on it and we are optimistic, but until it gets done there is just no certainty, but we are still very enthused and very much engaged in Kansas today.

Operator

Your next question comes from Dennis Forst with Keybanc Capital Markets.

Dennis Forst - Keybanc Capital Markets

First, what is CapEx for the second quarter and for the full year Bill?

Bill Clifford

Sure. CapEx in the second quarter was a total of $75.5. Maintenance CapEx representing roughly $15.6 million and project CapEx was right around $59.8. For the year we expect total maintenance CapEx to be roughly $90.5 million and project CapEx will be roughly $216.7 for a total of $307.4.

Dennis Forst - Keybanc Capital Markets

Okay and I assume that does not include any spending in Kansas, Ohio, or Maryland?

Bill Clifford

That’s right. Also it doesn’t include reimbursements from insurance related to the Joliet fire as we work through replacing the pavilion.

Dennis Forst - Keybanc Capital Markets

Okay and then I noticed an anomaly in your depreciation and amortization charges. Penn National’s depreciation almost doubled in the second quarter and you also raised your guidance about $6 million for the full year. What was that related to?

Bill Clifford

In the second quarter we had a bit of a catch up. As we go through the asset segregation analysis on the property we made an estimate since the opening of last year and it took some time for us to get to a final analysis. When we got done with the final analysis there was more value associated with shorter-lived assets, so there was an accounting requirement to catch that up, and we incorporated that thought process going forward.

What we have done is recognizing that that was a problem we altered our mechanisms for how we do that analysis on Lawrenceburg and hopefully what we have done is also adjust our expectations in terms of where we think the depreciation is going to come out on Lawrenceburg in terms of the asset lies and hopefully we will have done a much better job on estimating where depreciation is going to be on a going forward basis.

Dennis Forst - Keybanc Capital Markets

Okay, so just to make sure I understand, the catch up in Harrisburg which was at $5.5 million it looks like, is that spread out over the previous three or four quarters? I am trying to get a future run rate for Harrisburg.

Bill Clifford

I don’t have a depreciation schedule by property. It basically represents the catch up from opening, which was February of last year, through the second quarter, would be the amount of the variance that you will see on some (interposing).

Dennis Forst - Keybanc Capital Markets

It just sounds like maybe $1 million a quarter, so we should raise our run rate at about $1 million a quarter and then for Lawrenceburg you said you were going to adjust (interposing).

Bill Clifford

Well Lawrenceburg we have a new project coming on line which is a big part of where you are going to see the increase on a full year basis. But we have also taken into account what we learned from our experience with Penn National in terms of estimation of the percentage of the assets that end up in a shorter life asset. Accordingly we have adjusted depreciation.

Dennis Forst - Keybanc Capital Markets

Tim, can you give us an update on the process going on in Maryland right now?

Tim Wilmott

Well, Steve is here as well and he can add color to that. We have a meeting coming up in mid-August with the Lottery Commission to present our proposal for Cecil county and hopefully later in the fall we will get formal approval to begin development there. As you know Dennis, the tax rate is 67% and we have a proposal in there that calls for a facility to contain 1,500 slot machines and a very modest level of investment that is highly correlated to that high tax rate. We are hopeful, if all goes well, that we will be able to break ground late this year and get the facility up and running by the end of 2010, early 2011. Steve?

Steve Snyder

No, you covered it Tim. They held their first meeting with respect to any applicants just two weeks ago down in Ocean Downs and they are targeting the licensing process with their consultants at Lottery towards the fall. So, I think you should look for decisions in Maryland in the late October/November time frame.

Dennis Forst - Keybanc Capital Markets

Okay and you have only mentioned Cecil County. Is there any opportunity still existing in Rendell?

Steve Snyder

Rendell, no there is a question in terms of the zoning on the single applicant that is there. We do have a statutory limit in the Maryland statute that only allows us to have an ownership interest in a property. So right now, our focus is exclusively on Cecil County.

Dennis Forst - Keybanc Capital Markets

Okay, so you can only have an ownership in one, but you could manage another for someone else if that opportunity arose?

Steve Snyder

I think that is a possibility. We have not gotten any clarity from the Lottery Commission on that specific question to date.

In new jurisdictions there are always difficult questions. They have never faced it before. They are still trying to get their regulatory act together. One of the interesting things that I think will be intriguing to you is that they appear to be requiring a full betting of some of our larger investors. So it is sort of an agreement that of course that is not going to happen, would be my guess. I am not going to name names, just pick any of our large investors; I mean it is a joke. They won’t, we wouldn’t ask them to and so they have got some issues to get over at their end in Maryland before this is all going to get underway.

I think, all things considered, it is going pretty well and I expect we are going to get an approval there.

Dennis Forst - Keybanc Capital Markets

Okay, thanks for the comments.

Operator

Your next question comes from John Maxwell with Jeffries.

John Maxwell – Jeffries

Peter or Tim, I was just wondering with Ohio, with the referendum, do you take a different approach this year as opposed to other years, as given the history of Ohio of voting down gaming? Is it just more of hitting away at the jobs and the growth opportunities or I was just wondering if there was a different way to get the message across for the referendum this year?

Peter Carlino

Well we have won the advantage. The governor and the legislature have come out with a plan and in part they should be proactively selling that plan, because the alternatives for them are worse, raise taxes in a whole lot of other areas. That is the surprise, I think, to all of us that the governor did step forward and recognize that this is one heck of a good way to raise revenue to close a gap that they’ve got. I think that is a significant difference. It is of course about jobs and about benefits statewide. It is going to be, we think, an easier sell this time around, but still difficult. I mean (inaudible) has come out against us again and there is a handful of people that are just always going to be opposed, but maybe this year the stars are better aligned. Tim?

Tim Wilmott

Yes, there is no question the message that is going to resonate most with voters come November is the economic benefits of our proposal. As I mentioned before these are cities that have very high unemployment that don’t have other sectors of industry that are creating jobs right now and these are also communities and counties that are in need of funding to support their infrastructure and their ongoing programs. So, it is going to be all about the economy and the reason voters should vote for this is the cost of the benefits economically the commercial gaming brings.

John Maxwell – Jeffries

Bill, with Ohio don’t you have to pay on the racino part some of the license fee? Is that in your numbers for this year? By September ’09 doesn’t the governor want some money for the racino licenses?

Bill Clifford

Do you mean in terms of the up-front license fees?

John Maxwell – Jeffries

That is right.

Bill Clifford

It is not in our numbers. At this stage I don’t know that it is actually a requirement that that actually has to be paid in terms of where the final legislation came out. That is an issue that was floating around earlier, but I don’t believe it made it into the final legislation. In any event, there are a lot of questions that have to be asked about paying the fee and under what circumstances do you get the fee back. I can’t imagine anybody is going to put up a $65 million fee or even the down payment on that fee without the prospect of getting the money back if the governor order is found to be unconstitutional. We have not included it because I think there are still a lot of issues to get resolved around that issue.

Peter Carlino

As a layman I will find that we think the governors is constitutional and should be found so, but who knows. When it disappears into the courts it could go any which way. Bill is correct, we need to be cautious though, and I think all will be before you pay money into a black hole. We have had that experience before.

Tim Wilmott

From what I understand there wasn’t anything specific in the executive order that requires a payment, but there is the expectation that in the rule making process that there may be a requirement for the first of five payments totaling $65 million be made sometime in the fall and as we have said, there is a lot of uncertainty right now and I think ourselves and others want to have a lot of clarity around all of the legal challenges of this executive order before there are any payments made to the state.

John Maxwell - Jeffries

Okay and then one question on Lawrenceburg. With the prospects of Ohio does that change your marketing focus at all? Are you still, with the new facility, still targeting out to the Cincinnati area or do you turn more of your market focus maybe a little west into the Indianapolis market. Also, just following on that, are you seeing, Tim, your existing customers staying longer or are you just growing the market beyond what you originally had now that you have more space?

Tim Wilmott

Given the uncertainty in Ohio and how long it traditionally takes these new markets to get up and running, we are not going to change our marketing focus. The primary feeder markets for Lawrenceburg will continue to be Cincinnati, Dayton and to a lesser extent Columbus and Indianapolis. That is not going to change and we don’t expect the competitive environment to change for probably a minimum of two years given how long it traditionally takes for these things to get up and running and all of the legal challenges that are out there.

What we are seeing in Lawrenceburg right now is a lot of new visitation and a lot of growth is coming in the unrated segments which clearly are a business that is new to us and volumes that are new to us. We are seeing continued visitation and in some cases, it is very early increase visitation from our existing rated base, but a lot of the growth is coming from the unrated segments.

John Maxwell - Jeffries

Okay and one question on Maryland. Peter is Laurel Raceways still something in your sights or do you have enough on your plate right now in Maryland?

Peter Carlino

We recognize there could be more opportunity in Maryland. I think that question came up earlier. There are some limitations called statutory in the law that would limit what we do there; however we have taken a very aggressive view that perhaps we can do more and we are talking to people.

It is not clear that Laurel will reappear. I think there was an emotional commitment to that statewide. They would like that to happen and maybe that could happen, but remember there has to be a zoning approval for the Rundle site that hasn’t occurred yet. It could go back out to bid again and there are other side that are quiet good also and Rundle that we are familiar with.

We are just kind of watching it. We are sort of actively involved in the process, but officially we are on the sidelines. How is that for, again, another non-answer?

John Maxwell - Jeffries

That’s fine, thank you.

Operator

Your next question comes from Steve Altebrando with Sidoti & Company.

Steve Altebrando - Sidoti & Company

I was just wondering if you could give us any color regarding the financial terms of the Columbus option?

Peter Carlino

No, for a variety of reasons we just don’t want to go there.

Tim Wilmott

Clearly the option was originally generated; it appeared in a different era. So there is going to have to be some potential renegotiations around that purchase price in order for it to work and those are discussions that are ongoing.

Peter Carlino

Plus there are other options in the state. Look, Ohio is a very interesting situation. It is kind of like a chessboard right now and we are kind of looking at all of the pieces.

Steve Altebrando - Sidoti & Company

Okay and assuming it all goes through and you have the potential for four opportunities is it safe to assume you are not going to be building all four out?

Peter Carlino

No, that is not a safe assumption. You would be thrilled to have four facilities even if they are doubling up in a town in one location. The higher the big time stake, I don’t remember the numbers precisely, but I think more than 12 million people in the state of Ohio. There may be a source of gamers for West Virginia, which is kind of too bad, and a major source of gamers in Western Pennsylvania, also too bad. I mean all of that business will stay home. There is an advanced opportunity in Ohio and you would be thrilled to have as many facilities there as you could legally have.

So, I mean we have to caution about spend and all of the usual sorts of things and you know, I think we have been very, very disciplined in the past. I think when you see what we roll out, for example in Maryland, again, as Tim said, what politicians often don’t figure out and why they don’t I just can’t quite understand, if you tax something more you get less. The irony is they get less and we get less. We make less of an investment.

What we have demonstrated in the past is we will be very careful about what we spend to make sure that our investment targets are met. It is really simple. So, we’d love the idea of having four facilities in the state if it ever got to that.

Operator

Your next question comes from Dennis Farrell with Wells Fargo Securities.

Dennis Farrell - Wells Fargo Securities

Bill, could you provide the balance sheet information for the quarter?

Bill Clifford

Sure, the total cash was roughly $795 million of which $646 fits in the unrestricted subsidiary. Our total bank debt was $1 billion 923 consisting of $136.7 million in revolver, $199 million of A and $1 billion 588 of B and then we had the two bond issues outstanding for 15s that are $250 million and the 11s that are $200 million and capital leases of roughly $5.5 million for a total debt of $2.379 billion.

Dennis Farrell - Wells Fargo Securities

Okay great and then my second question is for Peter. I was wondering what your thoughts are about gaming machines being legalized at bars and fraternal organizations, I guess, in Pennsylvania?

My second question would be what do you think the impact is in Illinois?

Peter Carlino

Let’s start with Pennsylvania. I still think that it is unlikely to occur here. It is probably not a very good idea, although there has always been pressure. The Tavern Association has always been a very strong lobbying group for the state; in fact it is one we probably had for many, many years here trying to get legislations for slots attracted. We could never, sort of, uncouple ourselves from those guys. We had the power politically to tag on any bill that we would float for slots at racetracks. We were fortunate this time around that we were able to get a clean bill. But, they are back. The governor has supported it, but I don’t think there is much support from the legislature.

We deal with them in West Virginia, tens of thousands of them. So long as it is limited to a few locations, it is probably not good, but it is also not bad.

Tim Wilmott

What I understand from people on the ground in Illinois is that there is over 50,000 of these devices currently in operation illegally that are going to be legitimized with 40,000 units. So, the management at our Illinois properties have not given me any indication that there is going to be any material affect on the legalization of these devices in bars and taverns, as Peter said, given the low limit number that each establishment can have and the limited amenities and experiences that they can provide their customers.

Peter Carlino

It had not impact in West Virginia, for example. In fact I remember asking, we had been open a number of years and they started talking about this and someone started talking about these so-called grey machines. I mean, by the way I had trouble figuring out how something illegal occurs kind of out in the open as it did there and apparently in many other states as well. And I said, where are these things? The person I was with walked me over to a window in our place in Charlestown and pointed to a bar literally across the street and said “right there, go down in the basement and you will find a bunch of them” and that was the case.

What occurred with legislation it actually strengthened the number and then regulated it, which believe me was a much better thing. So it didn’t have any impact on us. That is our only real experience with West Virginia.

Operator

Your next question is a follow up from Joseph Greff with J.P. Morgan.

Joseph Greff - J.P. Morgan

What is the tax rate, Bill, for the back half of the year?

Bill Clifford

It should be in the 43% range.

Joseph Greff - J.P. Morgan

Did it pick up at all 4Q versus 3Q?

Bill Clifford

It shouldn’t, it would be flat. There are always transactions and issues that impact the tax rate going on, especially lobbying efforts and other items that sometimes crop up that have an impact on the quarter rate, but that is a good run rate.

Operator

Your last question comes from David Katz with Oppenheimer & Co.

David Katz - Oppenheimer & Co

Bill, running through some of the CapEx outlook and having, I think you guided to a little over $300 million for the year and when I sort of look at the projects you have out there, could you just run through what the projects are and some approximate budgets on what those are? I am coming out a little bit lower in total even with the maintenance at 90.

Bill Clifford

Well you probably are because there is some miscellaneous projects at Bay, St Louis, Boomtown, some additional slots at Penn National. We have an overpass in Riverside, an underpass in Baton Rouge, some money spent around in shields, so generally speaking out of $216 there is roughly $134.6 million for Lawrenceburg, there is $51.1 million for Joliet and then the other projects, none of which are over a million, but spread out amongst a variety of projects.

David Katz - Oppenheimer & Co

So miscellaneous, overpass and underpass, I got it.

Bill Clifford

Underpasses and overpasses and entrances and redo of remodels in St Louis etcetera.

David Katz - Oppenheimer & Co

I got it perfect. Thank you.

Peter Carlino

Okay well, that is it. You know where to find us, so we thank you for tuning in for today and let’s hope that things get a little stronger through the next quarter. We still remain very optimistic here, so thanks very much.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation (Operator Instructions).

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Penn National Gaming Inc. Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts