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Executives

Garrett Edson - Senior Vice President of Financial Services

Joseph L. Billhimer - Acting President, Chief Operating Officer and Executive Vice President

John W. Bittner - Chief Financial Officer and Executive Vice President

Narciso A. Rodriguez-Cayro - Vice President of Regulatory Affairs, General Counsel and Secretary

Analysts

James Kayler - BofA Merrill Lynch, Research Division

Susan Berliner - JP Morgan Chase & Co, Research Division

Joseph Hudak

John Fleming

David Hargreaves - Sterne Agee & Leach Inc., Research Division

MTR Gaming Group (MNTG) Q2 2013 Earnings Call August 6, 2013 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the MTR Gaming Second Quarter 2013 Earnings Conference. Today's call is being recorded. [Operator Instructions]

I would now like to turn conference over to Garrett Edson of ICR.

Garrett Edson

Thank you, Anthony. Good afternoon, everyone, and welcome to the MTR Gaming Group Second 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 August 6, 2013, earnings 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's now my pleasure to introduce your host, Joe Billhimer, acting President for MTR Gaming. Mr. Billhimer?

Joseph L. Billhimer

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; Nick Rodriguez-Cayro, our General Counsel; and Fred Buro, our Chief Marketing Officer. I will say just a few words on the second quarter of 2013 and I'll turn it over to John to discuss the financials.

Overall, the continued strength of our Scioto Downs gaming facility led to another quarter of strong double-digit revenue and adjusted EBITDA growth. For the second quarter of 2013, we had an adjusted EBITDA of $27.5 million on an increase of 11.1% in net revenue to $132.3 million. We are pleased with the continued performance of our Scioto Downs gaming facility, which celebrated its first anniversary during the quarter on June 1. Scioto Downs continues to maintain a strong market position in the Columbus slot market, and we remain extremely confident on the continued growth opportunities within that market.

Despite our strong second quarter, the expansion of gaming in Eastern Ohio along with some aggressive promotional offerings from our competitors during the quarter, have affected our Presque Isle Downs and Mountaineer Park properties. In addition, continued weakness in the consumer sector remains apparent and has negatively impacted our results, as well as our competitors and other service sectors. We have been able to offset some of this impact through a continued focus on marketing programs and operating efficiencies, as well as targeted and thoughtful capital spending. As of June 30, we have spent approximately $10 million of our planned $20 million capital improvements for 2013.

As mentioned in our press release, on May 6 of this year, JEI, our largest stockholder, filed an amendment to its 13D with the SEC. Our Board of Directors continues to review this proposal and all strategic alternatives to enhance stockholder value with our exclusive financial advisor, Macquarie Capital. As I am sure you all understand, we will not comment on this any further or address any questions during our call today. We will report updates as they warrant.

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

John W. Bittner

Okay, Joe, thank you. And moving on to the second quarter results. Net revenue for the second quarter of 2013 was $132.3 million, up 11.1% from $119.1 million in the prior year quarter, primarily due to the full quarter's contribution from the VLT facility at Scioto Downs, which, as Joe mentioned, opened on June 1 of last year.

For the second quarter of 2013, the company's adjusted EBITDA from continuing operations was $27.5 million, up 32% compared to the $20.8 million in the second quarter of 2012. Overall, net adjusted EBITDA margin for the second quarter of 2013 from continuing operations was 20.8%, up 340 basis points from the prior year period.

Net adjusted EBITDA margin for Scioto Downs in the second quarter of '13 was 33.6% compared to 13.5% in the prior year period. Net adjusted EBITDA margin for the second quarter for Mountaineer was 18.8% compared to 21% for the prior year period. And net adjusted EBITDA margin for Presque Isle Downs was 17.5% compared to 20.7% for the prior year period.

During the second quarter of 2013, corporate operating expenses totaled $2.4 million compared to $3.1 million in the second quarter of 2012, with the decrease primarily due to the timing of and certain lower long-term incentive compensation-related expenses.

Income per share from continuing operations for the second quarter of '13 amounted to $0.08 per share compared to the second quarter of 2012 loss per share from continuing operations of $0.08. Capital expenditures for the second quarter, including construction-related payable amounts, were $9.9 million, consisting primarily of $5.6 million for Mountaineer, $3.2 million for Presque Isle and approximately $1 million for Scioto Downs. For 2013, as Joe mentioned, we're expecting to spend approximately $20 million in capital expenditures.

Also, during the second quarter, we made the remaining $25 million installment for our Ohio video lottery license fee, which was due on June 1. Depreciation expense for the quarter was $7.5 million, up from $5.9 million in the prior year period attributable principally to Scioto Downs. Interest expense for the quarter was $17.4 million compared to $16.4 million for the prior year period, the difference consisting of -- primarily of capitalized interest, which, for the prior year quarter, was approximately $900,000. There was no capitalized interest during this quarter -- the current quarter.

Total debt for the quarter ended June 30, 2013, was $557.8 million, net of discount, and we had cash and cash equivalents on hand of $95.9 million. And we have the remaining -- we have the $20 million available under our credit facility.

With that, I'll turn it back over to Joe.

Joseph L. Billhimer

Thanks, John. And now Anthony, please open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from James Kayler with Bank of America Merrill Lynch.

James Kayler - BofA Merrill Lynch, Research Division

Just, I guess, starting at Scioto. Obviously, year-over-year, continues to ramp up pretty well. Just by a quick glance at the numbers, the revenues improved sequentially from March to June, but the EBITDA was down a little bit. Can you just talk a little bit about what's going on in that market? I know Penn was -- has been somewhat vocal about the competitive environment in Ohio. Just curious what you're seeing there.

Joseph L. Billhimer

It's -- that's a kind of open-ended question there, James. But I think what we're seeing is a slower than we expected ramp, but a very positive ramp in that market. I think some of the comments in terms of the promotional spending are a little blown out of proportion. I think we continue to invest in our customer in that market within a range that we fully expect to continue to invest in that customer. And I would foresee that the market will continue to grow over the next 2 years beyond where it is now.

James Kayler - BofA Merrill Lynch, Research Division

Very good. Good to hear. I guess in the -- at the other 2 existing properties, obviously, Ohio is impacting you, but it looks like you're having pretty good success in sort of offsetting those revenue declines. Can you just talk about the things that you're doing and what you continue to look at to sort of offset the negative impact from incremental competition?

Joseph L. Billhimer

Yes. So in part, we're focusing on our -- leveraging our INclub and our loyalty program between the properties. We're continuing to focus on the guest experience and the service levels, and we continue to focus on cost efficiencies between the properties, including Scioto, in terms of buying and leveraging our buying power. We have faced some aggressive promotional offers within the market. There are offers that I think our competitors are being a little aggressive with, and we wouldn't expect those to continue. So we're holding steady with our operations and with our marketing initiatives, but at the same time, staying very focused on the operating expenses.

James Kayler - BofA Merrill Lynch, Research Division

Very good. And can you just remind us -- you mentioned the $20 million of CapEx for the year, $10 million spent so far. Can you just remind us what things you're working on at Mountaineer and Presque Isle?

John W. Bittner

Well, aside from investing in slot product at each of the locations, which, aside from the hotel renovations, will comprise the major component of those expenditures, but we will have the slot product, as well as the hotel renovation at Mountaineer. We're working on at least half of the rooms this year with the project continuing into next year. We've also spent some additional funds on improving the heating, ventilating and air conditioning systems at both of the properties.

James Kayler - BofA Merrill Lynch, Research Division

All right. That's helpful. And I guess, just finally, I won't ask about Jacobs given your earlier commentary, but just in terms of the balance sheet, as well as sort of thinking strategically longer -- I mean, obviously, you're sitting on a bunch of excess cash. I guess, how are you thinking strategically? Or is it more just kind of a wait and see in terms of whether you're thinking about reducing debt or buying assets or something else?

Joseph L. Billhimer

Well, I think we're thinking of all those. Obviously, we're focused on the task at hand right now. We're working with Macquarie. And we look at all kinds of strategic alternatives, other investments, management contracts. We've had quite a few things brought to our attention. I think our past development experience, as well as our operational backgrounds in terms of producing some numbers has led us to look at a few things, none of which we can talk about at this point, but we continue to look at ways to diversify throughout the -- for the company.

Operator

Our next question will come from Susan Berliner with JPMorgan.

Susan Berliner - JP Morgan Chase & Co, Research Division

I want to, I guess, start with Columbus and just see if recently you've seen any changes with regards to Penn being more aggressive in that market or if you've seen any -- I guess, anything out of them in that market that was different from the prior 6 months.

Joseph L. Billhimer

I think we've seen a little bit more effort in terms of some promotional, on-floor type promotions. But other than that, I don't think we've seen anything drastically different in that market.

Susan Berliner - JP Morgan Chase & Co, Research Division

And with regards to the Internet cafés, does that go into effect certainly in September?

Narciso A. Rodriguez-Cayro

Sue, this is Nick Rodriguez. The bill was passed, and we do expect it'll go into effect by November.

Susan Berliner - JP Morgan Chase & Co, Research Division

By November?

Narciso A. Rodriguez-Cayro

And we're talking about House Bill 7.

Susan Berliner - JP Morgan Chase & Co, Research Division

Yes, exactly. Okay. And then, I guess, just a few balance sheet things. Can you remind us what's left for restricted cash? What that can be used for?

John W. Bittner

Well, the restricted cash consists of some purse funds for Scioto and one of the other properties, as well as some deposits that we have securing letters of credit and surety bonds. The biggest component in the increasing balance there is the restricted cash and the purse fund at Scioto.

Susan Berliner - JP Morgan Chase & Co, Research Division

Great. And John, can -- I guess, can you go over your excess cash flow sweep and exactly how that works and when it would potentially kick in?

John W. Bittner

Right. The excess cash flow sweep starts with EBITDA and you back off CapEx, debt service, a number of other factors. And then there's a floor requirement of $7.5 million and I believe it's 75% of everything in excess of that 70 -- $7.5 million, we have to make an offer available to buy back the bonds.

Susan Berliner - JP Morgan Chase & Co, Research Division

Right. Great. And then, I guess, as the landscape kind of changes with the additional competition coming on, can you talk about any initiatives that, I guess, you can put in place? Or is it just kind of a wait and see as these properties open in December and next year?

Joseph L. Billhimer

Sue, it's Joe. I mean, I think from initiatives in play, some of the loyalty programs and marketing efforts we have had underway, and it will continue to refine, will be programs we've put in place to retain loyalty. All of our guest service metrics are updating in the facilities in terms of capital, have a lot to do with how we -- how customers view our properties. And we think those initiatives, in particular from Mountaineer in the hotel room product renovations, will pay some big dividends as we face additional competition in Ohio.

Susan Berliner - JP Morgan Chase & Co, Research Division

Okay, great. And just 2 other questions for me. Just a reminder, what's a good number to use for cage cash?

John W. Bittner

Yes, we typically use around $27 million for in-house funds.

Susan Berliner - JP Morgan Chase & Co, Research Division

Okay. And my last question is, John, any help with corporate expense going forward? Should we assume kind of a flat level or a little bit of an increase in here?

John W. Bittner

Well, I think this quarter may have been impacted and maybe down just a little bit. But I think trying not to do too much of forward-looking information, but probably, on an annual basis, in $10.5 million, $10.5 million.

Operator

Our next question will come from Sri Rajapopoulin [ph] with UBS.

Unknown Analyst

Just generally, what are you seeing in terms of your consumer in all your markets? Most of the regional operators experienced sluggish growth. Is that still continuing? What are you guys seeing generally?

Joseph L. Billhimer

Well, generally, we're seeing a kind of softness within the economy, and as a lot of others have reported, it seems consumers are a little more focused on some big ticket items and cars and homes. So we've seen a little decline there. But across the properties, we've seen a slight decrease in actual visitation. But between our properties, some of those results are a little bit different in terms of certain guests. At Presque Isle, for example, we've seen a decline in visitation yet our rated customers are visiting a little more frequently but spending less. So it's a mixed bag for us in the regional locations of our facilities. But just general, an overall softness with the economy.

Unknown Analyst

And at Scioto, with the property now anniversary-ing, margins continue to be healthy. Is there more upside there? Are there any costs to be taken out from the property?

Joseph L. Billhimer

I don't think that there's more cost to be taken out. I think we've been very diligent, and the team there has been very diligent in how they have approached all aspects of the business, including marketing and being very efficient with their spend. During the racing season, we do incur a little bit more cost, and our margins are a little bit more suppressed during that time where we have that expense. So you might see a little bit of an increase post-racing season in terms of margin.

Operator

We'll take our next question from Joe Hudak with Wells Fargo.

Joseph Hudak

Most of my questions have already been asked and answered. But of the $10 million being spent down on the properties, was that -- On the hotels, was that specifically just updating the rooms? Or was that adding any suites or anything to that nature?

Joseph L. Billhimer

Well, I'll start and I'll let John finish. In terms of the hotel remodel, it's a complete renovation of the room from carpeting to wall coverings to case goods, as well as an update to the bathrooms within, at least, the tower, which is about 250 rooms of the project. So we'll be touching all aspects of the hotel. The hotel hasn't received an update since it was built almost 10 years ago.

John W. Bittner

And of the $10 million, Joe, that you referred to that we've spent so far, the bulk of that amount represented investment in slot product at both Mountaineer and Presque Isle and some clubhouse renovations at Scioto Downs. So at this juncture, we probably haven't spent very much of anything on the hotel project. We're in the initial stages of that project and it will probably encompass the second half the year.

Joseph Hudak

Great. The other question is with HB 7 coming up in September. I mean, with most of the slot power is being closed throughout the state, especially in the northern -- northeastern part of the state, have you seen any pickup in slot play?

Joseph L. Billhimer

We haven't seen anything of any magnitude that we could identify as a result of the Internet cafés being closed down. As I think we have said previously, I mean, we remain optimistic that as they do close down, there's definitely some upside for us. It'll just be hard to quantify amongst all the other noise within the numbers in terms of competitors opening and economy up and down. But nothing that we can directly point to, to say this revenue is coming from the closure of those facilities.

Operator

[Operator Instructions] We will take our next caller from John Fleming in Robert W. Baird.

John Fleming

As a follow-up to the CapEx questions, can you give us a sense for what that budget might look like in 2014 and beyond?

John W. Bittner

Well, this year -- as we've commented in the past, this year, we are making some expenditures to really catch up on some things and make the renovations to the hotel. But going forward, I think, from a total CapEx, it's probably somewhere in the $15 million to $17 million range over the next several years.

Joseph Hudak

Okay, okay. And I know you can't comment on the strategic initiatives, but can you remind us when you hired Macquarie?

Joseph L. Billhimer

We've had a relationship with Macquarie since the latter part of last year, and we continue to look at different opportunities with them.

John Fleming

So they were not hired in response from the overtures from Jacobs, I guess?

Joseph L. Billhimer

Not directly.

John Fleming

And is there engagement -- sort of, is that cost running through the current corporate expenses? Or is there anything we should be thinking about there from an adjustment perspective?

John W. Bittner

The answer is no, but we're probably not going to go much further with that line of question. But the answer is no, with respect to the expenses.

John Fleming

Okay. Just the last one for me. Can you tell us what the impact, if any, the contribution from the mineral rights lease that you have at Mountaineer with Chesapeake? Is that impacting the numbers right now and to what extent?

John W. Bittner

So there's nothing impacting the numbers right now from the pure lease perspective. We received an initial payment back in 2011, and at this point, there hasn't been much of anything -- much, if any, drilling activity. And there have been no royalties or payments received under those leases.

Operator

Our next question will come from David Hargreaves with Sterne Agee.

David Hargreaves - Sterne Agee & Leach Inc., Research Division

I've been very impressed with the stickiness that we have seen in Columbus and your ability to hold on to customers. And I just like to get a sense if you could give as any insight into what you think your customers are valuing. And is it just an ultra-local, these folks are in your backyard kind of thing? Or is it the amount of money you're sending? I know that there's going to be some combination of everything, but any color you'd give us would be appreciated.

Joseph L. Billhimer

David, I think us getting open first in that market was advantageous to us. I think the product that we built and introduced to the market was very comfortable for the customer. And I do think we cater to a niche of customers that are very comfortable in our facility, and I think that we do a good job -- the team there does a great job on the guest service aspects, which are generally good when a property opens, but they really maintain that service level for well over a year now. And I think we make investments into our marketing programs that are -- that have been very well-received and successful. So it's a combination of a lot of things.

David Hargreaves - Sterne Agee & Leach Inc., Research Division

I just wondered sort of where your competitors are in the learning curve and if you see them getting anymore savvy in the way they're spending money.

Joseph L. Billhimer

Again, I think our competitors operate a fine facility there. And I think it's really just a matter of the market maturing. And I think everybody will be just fine in that market.

David Hargreaves - Sterne Agee & Leach Inc., Research Division

What are your thoughts now as to the overall potential of this market, size-wise, dollar-wise?

John W. Bittner

We've looked at this in parallel with Indianapolis. And we've discussed that and mentioned that on many occasions that we really think that's probably indicative. It's a 2-facility market with -- that had a ramp-up period that took a period of time to develop, so we look to Indianapolis as probably a good example.

David Hargreaves - Sterne Agee & Leach Inc., Research Division

So it's pretty much unchanged. I noticed that some folks out there that are developing racino product seemed to be scaling back the dimensions and scope of what they're building. And I'm wondering if there are any other folks that are leaning that way, maybe that are closer to you that -- are you hearing anything about the way their plans are emerging, if they're also cutting back on capacity?

Joseph L. Billhimer

I would say the only cut back in capacity that we've heard from any previous announced developments were the Austintown development and Dayton. So I don't think I've heard anybody else scaling back what they originally planned. We opened, obviously, in a phased approach to see how the market reacted to certain numbers of our games and what the preferences were and grew it from there, which we still sit some just under 400 units below what we're authorized for that area. So that's all we know right now, David.

David Hargreaves - Sterne Agee & Leach Inc., Research Division

Just thinking out loud, if there's some sort of a trend emerging. Could you talk a little bit about your priorities for the cash that you're building? You've got a pretty significant amount of cash and I'm wondering if you're thinking you might end up going on an acquisition spree or something.

John W. Bittner

Well, I think as we discussed just a few moments ago, we consider -- we continue to look at basically all of the alternatives. We look at potential acquisitions. We have looked at several things. We do consider whether or not debt buyback is an option. The debt's currently, at least the last time I checked, at over $105 million. So but we do continue to take those factors into consideration, along with the process that we're currently in. So we continue to move forward and build the cash. And in the event that something does strike our fancy, we're able to move forward.

Operator

And your next question will come from Robert Spencer [ph].

Unknown Shareholder

This is Robert Spencer. I am probably one of your older individual shareholders, who has had the stock from the Winners Entertainment days. And I've never sold a share. And I have caught up with the company in the last, I don't know, 9, 10 months, something like that, and followed it closely since. And first of all, I also want to congratulate current management for doing, what seems to me, is a very good job. And so with that in mind, for somebody that has been involved with you for 20 years and to not give myself too much credit since I owned it from back in the Winners Entertainment days, I sort of lost track of it for a while. And despite the fact I have a pretty good position in your company, I've just more recently started paying attention to it. And I know a good deal about your space. I'm in other similar space and I like what you folks are doing. And so I just wanted to add my voice to the institutional people online, and I'm an institutional person myself from a different angle. But I think you people, for having dealt with some tough circumstances in recent months and some reorganizing from a corporate standpoint, deserve a lot of credit. So I'm one of your admirers. I'm enjoying my position. I probably am thinking about adding to it in the process and also would like to identify myself as probably catching up with the CFO in the next few days. I'd like to have a little information on the market-making aspects of things that are going on that I pay a lot of attention to. But with that, I'll make my comments as brief as they are, and I appreciate the fiduciary responsibility that you people are doing. And it seems to me that you're handling it very well. So I hope for an improved opportunity in the next quarter coming up. But keep up the good work, gentlemen, and thank you for the time.

Joseph L. Billhimer

Thank you. We appreciate it.

John W. Bittner

Thank you for your continued investment as well.

Operator

And we currently have no further questions in the queue. I'd like to turn the call back over to today's speakers for any additional or closing remarks.

Joseph L. Billhimer

All right. Well, thank you, Anthony, 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 you next quarter. Thank you, again.

Operator

Once again, this does conclude today's conference. We thank you all for your participation.

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