Penn National Gaming Management Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Penn National Gaming, Inc. (PENN)
by: SA Transcripts

Penn National Gaming (NASDAQ:PENN)

Q4 2013 Earnings Call

February 06, 2014 10:00 am ET

Executives

Joseph Jaffoni

Timothy J. Wilmott - Chief Executive Officer

Jay A. Snowden - Chief Operating Officer and Senior Vice President

Saul V. Reibstein - Chief Financial Officer and Senior Vice President of Finance

Analysts

Felicia R. Hendrix - Barclays Capital, Research Division

Joel H. Simkins - Crédit Suisse AG, Research Division

Joseph Greff - JP Morgan Chase & Co, Research Division

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

Carlo Santarelli - Deutsche Bank AG, Research Division

Shaun C. Kelley - BofA Merrill Lynch, Research Division

Thomas Allen - Morgan Stanley, Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Penn National Gaming 2013 Fourth Quarter Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead, sir.

Joseph Jaffoni

[Audio Gap]

fourth quarter conference call. We'll get the management's presentations and -- presentation and comments momentarily, as well as your questions and answers but first, I'll read the Safe Harbor disclosure.

In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. These statements can be identified by the use of forward-looking terminologies such as expect, believes, estimates, expects, projects, intend, plan, seeks, may, will, should or anticipate or the negative or other variations of these or similar words or by discussions of future events, strategies or risks or uncertainties, including future plans, strategies, performance, development, acquisitions, capital expenditures and operating results.

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 forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and 10-Q. Penn National assumes no obligation to publicly update or revise any forward-looking statements. Today's call and webcast will include non-GAAP financial measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release, as well as on the company's website.

Let's take a deep breath and I'll now turn the call over to the company's President and Chief Executive Officer, Tim Wilmott. Tim?

Timothy J. Wilmott

Thank you, Joe, and good morning, everyone. Well, certainly the fourth quarter had a lot of significant events that we'll talk about today, but clearly the number one is the successful completion of the tax-free spinoff to our shareholders of Gaming and Leisure Properties, Inc., the first gaming REIT, which occurred on November 1 and created a lot of shareholder value with that transaction. And now we have 19 properties under a master lease agreement between GLPI and Penn and Penn being tenant and that also includes 2 under development, the properties in Dayton, Ohio and also in Austintown, Ohio. And also in the fourth quarter with this spin, the properties of Perryville, Maryland and Baton Rouge, Louisiana have moved over to GLPI and no longer are part of Penn National Gaming.

So as you'll hear shortly from Saul Reibstein, there is much noise in the fourth quarter results regarding the spin. But clearly, as we look forward today, in early February 2014, we're working with a new Penn. And I did want to introduce the new team at Penn. About 2 months ago, we were fortunate enough to bring on Saul Reibstein as our Chief Financial Officer. Saul knows Penn very well. He was a member of our board for 4 years and he's now been in place here for about 2 months and you'll hear from Saul about our fourth quarter results and also about the guidance for 2014 that we've provided you today.

And then about a month ago, I was able to identify Chief Development Officer, B.J. Fair, who is with us today. B.J. joined us about a month ago with significant development experience with Disney and Universal Studios. And most recently, was the Chief Executive Officer of American Skiing Company and has a lot of experience in the hospitality industry and multifaceted amenities that attract consumers to that environment.

At about the same time, I was able to promote to my former position, Jay Snowden, as our new Chief Operating Officer, and you'll hear from Jay today talking about what we're seeing in operations as we proceed into 2014. And also just this week, we are able to promote to General Counsel with the departure of Jordan Savitch, our Deputy General Counsel, Carl Sottosanti. Congratulations, Carl, as our new General Counsel effective February 1. Also with us today are our Treasurer, Robert Ippolito; and our Senior Vice President of Public Affairs, Eric Schippers.

Before I turn it over to Jay to talk about what's -- what we're seeing within our operations, I did want to give you just a highlight of how we're seeing our development pipeline as we stand today. And in the fourth quarter, I'm pleased to let everyone know that we did finish the refurbishment and rebranding project in St. Louis and that project got complete right before the Christmas holiday and we now have a brand-new property in the St. Louis market with a fabulous Hollywood Casino that we fully expect will be well received by the customers in that market now that all the construction disruption is behind us.

I did mention that we have 2 projects in Ohio under development, the VLT operations tied with the racetracks in Dayton and in Austintown, and we are on target with a fall of 2014 opening for both of those facilities. We also announced a couple of weeks ago that we are moving forward with our partners in San Diego County, the Jamul Indian tribe with our proposal there to develop and manage a casino east of Downtown San Diego and that is looking at an early 2016 opening.

And we anxiously await the decision from the Massachusetts Gaming Commission on our application for Category 2 license, which we expect will come the end of this month and our proposal is for a $225 million facility, which is inclusive of a license fee to provide 1,250 slot machines, as well as non-gaming amenities. And again, that decision will come at the end of this month. And we're also awaiting a decision from the Pennsylvania Gaming Commission for the Philadelphia license. We were in front of the commission last week presenting our proposal. We're 1 of 5 applicants there and we expect a decision coming from Pennsylvania in the second quarter of this year as well. So that's just a brief update of our development pipeline. I did want to -- before turning it over to Jay, certainly mentioned that we continue to be challenged with the consumer as we've seen through most of 2013 into '14. And clearly, have had some impact in December and into the early part of this year with the winter weather. But I did want to highlight the job of our operations team is doing in continuing to manage the cost at our businesses in terms of managing labor levels and marketing dollars and other discretionary spending and highlight the fact that even in this tough revenue time, we're showing EBITDA margins that have improved year-over-year by 50 basis points.

So with that, I'll turn it over to Jay Snowden to give him -- to give his comments regarding what we're seeing in our operations.

Jay A. Snowden

Thanks, Tim, and good morning. As Tim mentioned, we continue to operate in what is currently a relatively soft and cautious consumer environment, particularly at the lower end worst segments of our rated database, those who typically spend $100 or less per gaming visits. We've also been contending with new competition. Several of our core markets, which has resulted in some cannibalization of 2 of our properties, most notably Charles Town and Lawrenceburg and the extreme weather this winter certainly hasn't helped, as Tim mentioned. With all that said, as we look at the macroeconomic trends, the new supply in the marketplace, as well as mother nature, there's a lot we can't control. Our position has always been and continues to be that we operate and work around these issues as efficiently as possible.

Tim mentioned the year-over-year improvement in Q4 in our property level EBITDAR margins from 29% to 29.5%, it's really is a testament to our operators out in the field, who remain laser-focused on our higher value and most profitable customers and continue to promote our cost property visitation through our Marquee Reward loyalty card program. We now are live with approximately 3/4 of our properties throughout the portfolio. The majority of those remaining properties will be implemented in 2014, including M Resort later this month. We know that our cost property players on an annual value basis are about 2 to 3x more valuable than single-property players, so that continues to be a very important initiative for us. And our property leaders and certainly corporate leaders continue to be very focused and concentrate on our overall cost structure. We believe that there's additional operating efficiencies to be pursued and we will remain very disciplined operators and marketers as we always have been.

As we look forward, Tim mentioned the development projects that are in the pipeline. We believe that the 2 Ohio tracks with slot machines only, the Zia Park hotel addition 155 rooms, which are all planned to open in the early Q4 time frame, as well as the Hollywood Casino Jamul, 25 miles east of San Diego and that project in particular, we really love 3 things about and still bullish about the project. The location is the closest to Downtown San Diego in the marketplace. The economics of that agreement, as well as our ability to cultivate hundreds of thousands of new gamers for our database from Southern California is very important to us. The last that I would note before I hand this off to Saul would be the promotional environment remains mostly rational in our competitive markets with the exception of some well-documented flare-ups throughout the middle of 2013 and early Q4, but happy to note that it's currently largely stable as we ended 2013 and head into the New Year.

Timothy J. Wilmott

Thanks, Jay. Let me now turn it over to Saul to talk about fourth quarter results and 2014 guidance.

Saul V. Reibstein

Thanks, Tim and Jay. A pleasure to be here today with everyone. It was a recent quote in The Wall Street Journal on Tuesday that I think frames this conversation very well. The quote I took was, "intense competition, weaker demand and pressure from cost-conscious consumers plus the weather." Those factors really encapsulate the results for 2014 and our guidance of the process we followed for creating guidance for 2014. Significant -- I just want to point out a few of the significant factors that affected both Q4 of 2013 and guidance for '14, particularly in the fourth quarter. We had spin costs from the GLPI transactions that affected the quarter-over-quarter results by $14.1 million and $25 million on a year-over-year basis. The spin resulted in Perryville -- our properties in Perryville and Baton Rouge having less fourth quarter revenue by $25 million, less EBITDA by $5 million. And, of course, the fourth quarter 2013 saw our first rent payment to GLPI of $69.5 million. Factors below the line of EBITDA were driven by significant impairment charge that was also the result of the spin transaction.

Moving to guidance. On an overall basis, we have done an extensive property-by-property, line-by-line review of our actual results for 2013, our budgets for 2014 and perhaps most importantly, actual events to date within the first 6 weeks of 2014.

At the property level, our guidance as we've indicated includes considers continued cannibalization in Charles Town given the impact of the Horseshoe Baltimore opening in September '14. And for our Lawrenceburg property, a full year of the Miami Valley Gaming in Lebanon, Ohio and Belterra Park opening in May 2014 in Cincinnati. On a positive note, we've obviously considered for Ohio the opening of our 2 racetracks, Hollywood Casino in Mahoning Valley and the Hollywood at Dayton Raceway opening in the fall of 2014. And, of course, the impact that those openings would have on our properties in Columbus, Ohio.

We've considered a full year of operations at Argosy Sioux City facility and a full year of management from our contracted Casino Rama. At the corporate level, our guidance considered an overall overhead reduction and included in that is about $12 million of overhead expense for the first of 3 -- what would be 3 annual dividend payments to Penn National employees, who hold GLPI stock options as a result of the spin transaction.

In addition, in our guidance includes about $7.1 million of preopening expenses for the Ohio tracks with about $0.5 million of that in Q1. We have considered depreciation and amortization charges of $182.4 million for the year with $50.1 million in Q1. A full year of rent expense of $421.6 million, of which $103.2 million is in the first quarter. We've estimated noncash stock compensation of $13.3 million and a blended income tax rate for the year of 39%. And for those of you that keep track, our diluted share count at the moment stands at 90.6 million shares for the full year 2014.

With that overview, we are all available to answer your questions.

Timothy J. Wilmott

Thanks, Saul. Operator, we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Felicia Hendrix with Barclays.

Felicia R. Hendrix - Barclays Capital, Research Division

Saul, as the newest -- as one -- well, you're all new, but Saul, you're really new, so I'll give you the first question. And so according to your 2014 guidance, your rent coverage is 1.66x. I was just wondering if you could discuss this in context of the target rent coverage. And if there is any mechanism for the rent to go down as the revenues keep declining? And then also, are there any debt covenants that get tripped or any other kind of penalties if the coverage falls?

Saul V. Reibstein

Sure. Actually the calculation we're looking at on rent coverage is about 1.8. So maybe we'll go offline and compare notes. We -- what was the rest of -- I'm sorry.

Felicia R. Hendrix - Barclays Capital, Research Division

Well, I'm just wondering if there's any -- I mean, well, I mean, I'm just taking your EBITDA and I'm adding it to your rent expense and dividing it by your revenues and I got 1.66, but we can talk about that after. But I'm wondering, as the revenue falls, is there any mechanism -- I mean, you have a target ratio, are there penalties? Is there any mechanism for the rent to go down? Are there any adjustments that can be made?

Saul V. Reibstein

First of all, we are well within the confines based on our calculations of the covenants within the past release. If -- in terms of the rent going down, in fact, the calculation for 2014 reflects a decrease in rent. And as a result of the variable portion of the agreement, about 80% of the master lease is fixed and 20% is variable. Within the 20% piece, there is half of that, that resets every 5 years, and another half of really predicated on the results in Ohio that resets on an annual basis. So there is a piece that is indeed variable.

Felicia R. Hendrix - Barclays Capital, Research Division

Correct. I was actually asking more about the fixed portion, if there's a way to kind of reset that? And is there a level at which the -- if the rent coverages does drop to a certain level, there would be penalties?

Saul V. Reibstein

There is. If the coverage goes below a certain level, the rent payment freezes, if you will, and we get relief until we recover above those levels. At which point, we would owe back rent for the release period.

Felicia R. Hendrix - Barclays Capital, Research Division

Okay. Okay. And then just -- my next and final question, just -- Tim, in the prepared remarks, you and Saul gave us some good overview of how you thought about the guidance. It was also in the release which is very helpful. As I look at your guidance, there's really 2 parts to it. There's to look -- think about the continued challenges in the regions and then also to think through the new competition. Just on the first point and the continued challenges in the regions, I know it's not fair to paint all of your properties and regions with one brush, but if we had to do that, is it fair to say that your guidance kind of maybe assumes some continued low single-digit declines in revenues across the board? Or do you expect certain -- some recovery in some areas? I'm just trying to get a feel for as you contemplated the more mature regions, how they would perform throughout the year?

Timothy J. Wilmott

Felicia, as we look at the guidance and extracting those markets that are facing new supply increases, we assumed a very conservative consumer out there in 2014. That there is not going to be any uptick and we assume the current trends that we saw in the second half of 2013 would continue on into 2014.

Operator

And our next question comes from the line of Joel Simkins with Credit Suisse.

Joel H. Simkins - Crédit Suisse AG, Research Division

This might be for Tim or Jay. Tim, obviously, it's hard to sort of parse out right now how much of this impact right now is weather versus cannibalization. And maybe some -- more of your steady-state markets, could you sort of give us a handicap of how much again is weather versus just absolute weakness in sort of the low-end to mid-end consumer? And then I think obviously, it has been a pretty tough winter across the board. Is the setup potentially more compelling into 2Q as sort of cabin fever sets in, in the spring?

Timothy J. Wilmott

I'll let Jay handle that one, Joel.

Jay A. Snowden

Joel, listen, it's impossible for us to know exactly, as you mentioned how to parse the impact of the weather versus soft consumer. What I would tell you is that as we've looked at weather-impacted days versus non-weather-impacted days, December and even into January, the days look pretty similar on a year-over-year basis than they did -- as they did in the months leading up to the weather-impacted months. So we have no reason to believe that the consumer is any softer than it was in October and November, but it's impossible to know the answer to that question at this stage.

Joel H. Simkins - Crédit Suisse AG, Research Division

And Tim, obviously, the business is still generating a decent amount of cash flow here. I'm going to keep my fingers crossed and hope you guys get Plainridge. If you don't get Plainridge though, sort of how are you thinking about using your free cash flow to potentially return capital to shareholders?

Timothy J. Wilmott

Well, clearly, we're waiting to see what our development pipeline is going to look like over the next couple of months as we get these decisions. But as we always have done in the past, we look at all the different uses of cash repurchase, lowering leverage. And those are all going to be options for us to consider, but I would say, Joel, that we're not going to have clarity on that probably for good 3 or 4 months. And I want to make sure because of the attractive returns and some of the things that we're looking at, that we want to know what the pipeline is going to look like before we look at other options because we think our development pipeline right now looks the best use of our cash today.

Joel H. Simkins - Crédit Suisse AG, Research Division

And you've talked about, I think, returns historically in Columbus being sort of north of 20%. As you would evaluate Plainridge, is this is a project you think you feel comfortable with the 20% stabilized ROI on?

Timothy J. Wilmott

Early on, with being the first one opened up, I think that's a fair characterization.

Operator

Our next question comes from the line of Joe Greff with JPMorgan.

Joseph Greff - JP Morgan Chase & Co, Research Division

When you look back at St. Louis and obviously results there were impacted by the rebranding or renovations, have you estimated what the EBITDA impact was last year directly related to the renovation in the slot floor reconfiguration?

Timothy J. Wilmott

Tough to say, Joe. The market in St. Louis in the second quarter was down 8%. We had a weather impact with tornado closing -- hitting our operation, closing our business for a bit. And then in the third quarter, the market was soft again. I certainly think the revenue softness was at least 3 or 4 percentage points greater than the market softness that we had there. But we haven't done -- we haven't looked at the EBITDA impact of that revenue softness due to the construction disruption, but I would -- I'd certainly believe it was material.

Joseph Greff - JP Morgan Chase & Co, Research Division

Okay. And then with respect to the project the Jamul project in San Diego, can you talk about the decadence or the timing of the loans to the tribe to build that property? And can you remind us of the spread between your revolver and what you're loaning to them in?

Timothy J. Wilmott

Saul, can you take that question from Joe?

Saul V. Reibstein

I can. Our CapEx for 2014 anticipates our advancing funds for that project of about $257 million of total construction budget of $360 million. And -- I'm sorry, I'm sorry, it's $81 million in 2014, spread up fairly ratably once we get going in June, July of the year. We'll spend $81 million in '14 of the $360 million.

Timothy J. Wilmott

And the spread?

Saul V. Reibstein

We have a very favorable spread between what our agreement with the tribe is and for repayment of those funds until permanent financing is obtained. The spread is probably in excess of a 10% spread.

Joseph Greff - JP Morgan Chase & Co, Research Division

Got it. And the interest that they're making to you, is that paid in cash or is that accrued until it's opened and they secure permits financing?

Saul V. Reibstein

It's accrued.

Joseph Greff - JP Morgan Chase & Co, Research Division

Accrued but it's not cash realized?

Saul V. Reibstein

Correct.

Timothy J. Wilmott

Not until we open.

Joseph Greff - JP Morgan Chase & Co, Research Division

Not until opening, got it. And then my final question, you talked about and you talked about in the past and you talked about it today that consumers spend less than $100 per visit. At this point, what -- how much of your business is comprised of that customer? I mean, if you want to look at it in terms of visitation, trips, volume, gaming revenues, but how big is that?

Jay A. Snowden

Joe, this is Jay. We've seen softness across all of the worth segments in our database. We just happen to see them more acute at that $100 and below. You're looking at as a percentage of our overall rate at about that segment in particular being around 20% of our database. And there are declines in the worth segments north of $100 per spend, per visit. But the declines drop pretty significantly and many of our markets were actually still showing growth at our VIP and what we call AET [ph] avid experience as sort of mid-level worth groups. So it's really across the board. It's quite different depending on whether there's new competition in the market or no new competition. But to answer your question specifically, you're looking at 20% to 25% of the overall rate at that lower worth level.

Operator

Our next question comes from the line of Steve Wieczynski with Stifel, Nicolaus.

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

So, Tim, I guess, the question's for you. In terms of your guidance, you laid out a bunch of properties that are becoming online in 2014 that will impact your existing operations. Can you just maybe walk us through how do you think about new competition today versus a couple of years ago? Do you think the impact from new properties is worse, kind of the same or less?

Timothy J. Wilmott

I think you have to look at that, Steve, market by market. Starting in Charlestown, clearly, the opening of Horseshoe Baltimore in the August-September time period will have far less effect from what we saw with Maryland Live! opening up in 2012 and then adding table games in 2013. I think similarly in Lawrenceburg, the Horseshoe Cincinnati effect on Lawrenceburg will certainly have a much greater effect on the Miami Valley opening which occurred about a little less than 2 months ago and less of effect of what's going to happen with River Downs or Belterra Park opening up. So we shouldn't see those major hits to our top line like we saw with Maryland Live! and Horseshoe Cincinnati. That said, however, they certainly are going to have depressing effects on business volumes but to a lesser extent from those big openings that I just described.

Steven M. Wieczynski - Stifel, Nicolaus & Co., Inc., Research Division

Okay, got you. And then second question, in terms of your overall database, I mean how have new sign-ups been recently? Are you still seeing folks sign up at this point? Or has that been pretty stagnant as well?

Jay A. Snowden

Steve, this is Jay. Again, depends on the market. We've obviously seen more sluggish trends in the markets where there's new competition. And where there is not new competition or it's a stable environment, we continue to see growth and new card sign-ups consistent with what we've seen in the past.

Timothy J. Wilmott

Steve, we were, a couple of weeks ago, visiting a bunch of our largest properties and -- for example, in Columbus, they told us that new card sign-ups were still over 10,000 a month and we have over 300,000 active accounts in our Columbus database. And I think we're now probably in month 16 of our operation there. So that is still a very healthy sign for us that people are identifying themselves and allowing us to know who they are and how to contact them through this sign-up process. In a place like Toledo, which is now almost 2 years old, we are seeing that number drop down to about $5,000 a month level which is pretty typical at the end of year 2 of an evolution of a new property.

Operator

Our next question comes from the line of Harry Curtis with Nomura.

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

Tim, a quick question on cost savings. These properties have been run quite efficiently over the last several years. What incremental cost savings do you plan to pull out over the next 12 months? Is there much left on the tree, if you will?

Timothy J. Wilmott

Harry, I'll let Jay answer that.

Jay A. Snowden

Harry, I mentioned in my opening notes that we believe that there's still some additional operating efficiencies out there to pursue. We believe that to be the case, not only at the properties, but here at corporate as well. And we're taking a hard look at everything that we've done in the past and how we can operate more efficiently going forward. That includes, obviously, payroll. We still have approximately 25% of our labor cost remain variable, so there's opportunities there. And certainly from a marketing perspective, we found time and time again that these marketing wars that do tend to heat up from time to time really are road margins more than anything else, so we tend not to participate in those. We tend to be very disciplined in our approach, and you'd constantly have to reset your expectations on how you look at customer valuation going forward when there is new competition introduced to the market. So we do believe there are still additional opportunities, though it does obviously become more challenging as time goes if revenues continue to drop.

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

I mean -- and you are seeing higher insurance and benefit costs, how does that factor into your thinking?

Timothy J. Wilmott

We do. But one of the things we've done, Harry, over the past couple of years is continue to manage our workforce to a greater percentage of part-time employees to try to mitigate the effect of rising health care costs. 2, 3 years ago, we had a workforce composition that was probably 85% full time. We're now down to 75% full-time, and many of properties are even below that threshold. So that's the way we've focused on over the last couple of years to try to mitigate some of that cost we can't control at the higher level of control. But through our workforce composition, minimize the effect of rising health care costs on our labor line.

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

Okay. And then shifting gears back to the Jamul investment, is this a typical 7-year contract or have you been able to get a longer term?

Timothy J. Wilmott

No, we've got the max economic terms allowed by the NIGC 7 years with the 30% of EBIT. And we also have a royalty fee for the use of the Hollywood name. But this is the term that is allowed by the NIGC of 7 years, which we couldn't push past that at this time.

Harry C. Curtis - Nomura Securities Co. Ltd., Research Division

Caesar's has had some success extending 1 or 2 of their contracts. Is that a possibility going forward?

Jay A. Snowden

This is Jay. Here's how I would answer that question. The relationship with the tribe is in a very good place and we're confident we'll prove our worth and value to the tribe over the 7 years. And hopefully there'll be some extensions involved in the future. It's a smaller tribe as well. You're looking at approximately 50 members, so there's certainly opportunities for that, but it'll all be based on our performance in that management agreement term with the first 7 years.

Operator

Our next question comes from the line of Carlo Santarelli with Deutsche Bank.

Carlo Santarelli - Deutsche Bank AG, Research Division

Just a quick one on the margins as implied by your guidance. If you look at the 1Q margin, and I look at what you did in the 4Q, obviously, adding back the $11.7 million. I get to a margin increase that's implied of a little over 200 basis points, I believe. And it could be a nice lift over the course of the year as well off that 4Q lever. Could you guys kind of tell me what's changing 4Q to 1Q on the cost side of the business, just given that the revenue implication is down about $4 million sequentially?

Saul V. Reibstein

Absolutely. The biggest impact is what Jay and Tim spoke about on the last response and that is the management of the 2 main variable parts of the business namely, payroll and marketing costs. Our forecast and estimate has considered continued management of a variable workforce to keep that as a percentage of net revenue -- net gaming revenue under control and as well as the ongoing management of our marketing spend. And those 2 factors give us the leverage that you're looking at.

Timothy J. Wilmott

The other thing, too, Carlo, as we go into year 2 and new properties like Toledo and Columbus, we get a lot smarter in how we operate those businesses. And the teams there have done a very good job, year 1 into year 2 of improving the margins, and we expect that to continue through the course of '14. And those as you know are fairly large properties to the overall story.

Carlo Santarelli - Deutsche Bank AG, Research Division

And then just one quick one, just quick hitting on a few model points. One was the cash balance was a little bit higher obviously than we expected. I was wondering if there was anything that changed in the split on that front door if this is the new balance going forward. And then if you guys could provide some CapEx and maybe corporate expense run rate color for the quarter, that would be really helpful.

Saul V. Reibstein

The cash balance is a reflection of our generation of strong free cash flow and we are actually undergoing a program to look at further -- a reduction in cash through management of our cages at each of our properties. The use of which will probably be in the short-term to pay down existing outstanding obligations. So when -- and the other thing I'd point out to everyone is that in measuring our debt covenant requirements under our debt, we're measured on a net-debt basis, so we get credit in calculation of covenants for our cash balance. In terms of capital expenditures, our CapEx budget for 2014 includes maintenance CapEx of about $88 million. We'll continue the historic spend of about 60% of that on gaming floor refreshment. And the project CapEx for new projects is $176 million for the year.

Carlo Santarelli - Deutsche Bank AG, Research Division

And does that include the 81?

Saul V. Reibstein

Sorry, the $176 million does not include the $81 million I mentioned before for Jamul.

Carlo Santarelli - Deutsche Bank AG, Research Division

Okay. Would you mind just the 4Q with those numbers as well?

Timothy J. Wilmott

New CapEx number for '13, do you have that?

Saul V. Reibstein

I do not. I have to get back to you.

Timothy J. Wilmott

We'll get back to you, Carlo, on that one.

Carlo Santarelli - Deutsche Bank AG, Research Division

No problems, guys. And then just really quickly, if you don't mind. If I look at the adjusted 4Q corporate expense of call it 26.5, how shall we think about that number on a go-forward basis?

Saul V. Reibstein

That's very consistent.

Timothy J. Wilmott

No, I think $26.5 million for the quarter is a bit above what we have in our guidance for...

Jay A. Snowden

Tim's correct on that.

Saul V. Reibstein

Yes.

Carlo Santarelli - Deutsche Bank AG, Research Division

And by a bit, are we talking like $4 million or $5 million a quarter or it's a little lower than the implied $100 million and $105 million?

Timothy J. Wilmott

Yes, I think it is more implied somewhere in the neighborhood of $80 million to $85 million, inclusive of the $12 million.

Carlo Santarelli - Deutsche Bank AG, Research Division

Of the 12, right.

Saul V. Reibstein

Of the 12, correct. Yes, that's right.

Operator

Our next question comes from the line of Shaun Kelley with Bank of America.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

I think you may have just hit on my question, but it was the corporate spending. So just to be clear, with the $12 million, it's $80 million to $85 million is that the corporate spending number? Sorry, I got confused with the CapEx.

Saul V. Reibstein

That's correct.

Timothy J. Wilmott

It's in the neighborhood, Shaun.

Saul V. Reibstein

That's right.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

okay, great. And then, I guess, guys, a lot of my questions were already answered, but big picture we get relatively regularly right now, questions from investors just wondering if there's something kind of bigger structurally at work as it relates to the gaming consumer just given some of the magnitude of the declines that we're seeing. And obviously, I know it's very difficult to separate given the weather impacts and probably some smaller calendar months just given the way everything is falling. But can we just get your thoughts on whether when you guys do some of your maybe -- your focus groups or your consumer kind of discussions, are you hearing anything back as it relates to how that consumer is spending, not just their wallet but maybe their time when it comes to things like whether it is online spending? Or are you beginning to see or any anecdotal signs of online gambling trickling in here? Just curious given what we hear back from investors.

Timothy J. Wilmott

I'll take that first and I'll open it up for any other thoughts anyone else in the room has. But, Shaun, I don't think there is any substitution going on with the consumer that they're finding other ways to spend their gambling dollars on other forms of gambling entertainment. I think generally what you're seeing is the macro effect on the consumer. And we've talked about this previously about the effect of the repeal of the payroll tax, which if you look at household $40,000, $50,000 annually, now that represents about $80 to $100 of discretionary dollars per month taken out of their budget. I think you're seeing it in a lot of other different industries where the middle-income consumers is feeling squeezed. And I think what we're seeing in our 2013 results are reflective of consumers that don't have, for various reasons, don't have the confidence in spending that discretionary dollar. I think in some cases, they've made big-ticket purchases and now have other obligations as a result of those big-ticket purchases. But I don't see any evidence that they're looking at other forms of entertainment replacing actually visiting our casinos. I do think more than anything else, it's the pressure their feeling on their own budget that's affecting their spend with us and with others in this industry. Saul?

Saul V. Reibstein

Shaun, we are not going to fall on the sword of weather. However, in analyzing our daily results over the last what is almost 90 days now of winter, we see that on the non-weather-related days, our daily revenue levels are comparable to where they have been in the past. And so we're just not seeing any real decline in a meaningful way at all.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

Okay. That's very helpful color. And I guess my last question, Tim, just curious given some of the magnitude of declines we've seen out there. But what's the opportunity for I guess property tax appeal that some of these? Ironically, we hear another categories of real estate particularly in hotels that property taxes are a pressure point on -- going the other direction. But here, with revenue decline, is that an opportunity for you guys? And are there any specific or obvious appeals that are coming up in 2014?

Timothy J. Wilmott

Shaun, it's a great question and it's something we've focused on intently. And we've had a number of different exercises go on into '13 into '14 and will continue to look at any other opportunities to appeal our tax assessment based on changes in business levels across our entire enterprise. And the one that's out there that we are focused on today is in St. Louis County, with the property that we purchased from Harrah's in the fourth quarter of '12. And we've appealed a number of different years, Carl, on that one and we're going to continue to pursue that. And hopefully, knock on wood, we get some kind of answer this calendar year. Not exactly sure we will, but we're completely focused on that and think it's an opportunity again to reduce our cost structure when our business volumes adjust downward like we've seen in certain markets.

Operator

Our next question comes from the line of Thomas Allen with Morgan Stanley.

Thomas Allen - Morgan Stanley, Research Division

I remember last year there was some internal debate about how conservative you are being with guidance. How do each of you feel this time around?

Timothy J. Wilmott

Well, we're completely aligned. And I think from Felicia's question before, we believe that there is -- we're not expecting any consumer rebound in any of these numbers, and trying to be as, I think, appropriately conservative as we possibly can be. But realize it, there is still a lot of unknowns and a lot of time left in 2014 and trying to give you our best guess of how it's going to turn out as what you saw in our guidance today.

Thomas Allen - Morgan Stanley, Research Division

And I know Penn, historically, gave a point estimate for guidance. But any thought about giving a range?

Saul V. Reibstein

We did not consider giving a range. We think that we've considered the range at the property level and are comfortable with the point that we've given. We'll think about a range for future quarters.

Timothy J. Wilmott

I know others give ranges. We've always used, like you said, Tom, as a point, and we try to be as accurate as we can be. I don't think -- either way, it's not going to give you guys anymore feel for how we're thinking. We do try to give you our best guess on what the numbers are going to be and tried to do that based on all the inputs we have from our different properties and how we're seeing the environment out there, so certainly thought for consideration. But we'll have to discuss that internally if we do change anything.

Thomas Allen - Morgan Stanley, Research Division

Okay. And then just because Ohio seems to be a variable and is obviously an important state for you, can you give us some more color around what your expectations are for the new racinos in terms of your EBITDA in 2014, and then longer term or maybe just give us return -- thoughts on return. And then how we should we think about the ramp at Columbus and Toledo going forward, adding in the impact of new competition?

Timothy J. Wilmott

We don't provide individual guidance on property and we won't do that. But certainly, we think the returns on these new developments are going to be attractive. Maybe not 20% like we saw in Toledo and Columbus, which we previously announced, but still very, very solid. And we have with those developments look at the flat counts for both Dayton and Austintown, and we're opening up with 1,000 in Dayton and about 850 in Austintown, and we'll be able to grow beyond that as demand warrants. And we'll certainly be a little bit more prudent in our capital with that lower slot count. And that's how we think about -- we think we're going to get good returns there. Now turning to Toledo and Columbus, I was encouraged in the fourth quarter in Toledo to see that our next slot win for the quarter was up 5.5%. And that would have even been, I think, a little bit higher if we didn't have the December weather. But with the closing of the Internet cafés and plus the maturing into year 2, that was an encouraging sign for Toledo. And we fully expect Toledo to grow because we don't really have any other supply affecting that business as we go into the balance of 2014 into '15. In Columbus, we certainly think there's going to be an effect of the opening of the -- our Dayton operation later this year and the current opening, recent opening of the Miami Valley on the Dayton customer. So that's going to have some dampening effect on Columbus as we absorb that supply. We share right now the Dayton customer with Cincinnati and Miami Valley, and that's going to from a slot standpoint going to go a little bit away when we open later this year. But we do continue to see year 2 growth with the locals market in Columbus and continue to believe that the -- that market is still years away from being fully penetrated and expect growth to occur there once we get through the supply shock primarily driven by further penetration of the -- about 1.7 million, 1.8 million people that live in the Columbus MSA.

Saul V. Reibstein

We're still looking at margins in those 2 racinos in the high-20s or better.

Thomas Allen - Morgan Stanley, Research Division

Okay, that's helpful. Just on Columbus, is there a way to think about what percentage of your customer base now maybe kind of was versus the ones you think are really local customers?

Timothy J. Wilmott

Well, right now over 90% of those customers are local. So I think that's the right way to think about that.

Operator

Our next question is a follow-up from the line of Felicia Hendrix of Barclays.

Felicia R. Hendrix - Barclays Capital, Research Division

Just on the corporate expense and the $12 million-ish dividend payment. Is that a 1-year payment or is that something that will last for -- is it a several multi-year payment? How should we think about that?

Saul V. Reibstein

It's a 3-year commitment.

Felicia R. Hendrix - Barclays Capital, Research Division

3-year commitment. And then just -- it looks like your promotional expenses ticked up about a percentage point in the quarter year-over-year and a little bit less than that, but also up for the year. You talked about costs and how you guys don't chase bad dollars with that in your marketing. But just wondering what the driver was for the higher promotional expenses?

Jay A. Snowden

It's largely, Felicia -- this is Jay -- largely been in the markets where new competition has come in. In some cases, guns are blazing. And so we have not attempted to necessarily match, but in some cases, promotional offers have crept up a bit in those markets. In the stable markets, we continue to be as disciplined as we've always been. And even in the competitive market, certainly more disciplined than the competitive set.

Saul V. Reibstein

Felicia, remember that in the quarter-by-quarter comparisons, the Toledo and Columbus properties didn't open until late, late fourth quarter '12. So there is a dollar difference there on a same-store basis.

Timothy J. Wilmott

Columbus opened in the fourth quarter of '12 and it really did not have any promotional spending to speak off in the first couple of months of operation as it was building its database.

Felicia R. Hendrix - Barclays Capital, Research Division

Okay. So would you see as a run rate basis that kind of 5 1/2-ish percent range or are you trying to get that down?

Jay A. Snowden

Our goal is to continue to get that number down. I think it's a safe number to use for modeling purposes, but our goal is to continue to bring that number down.

Operator

I'm showing no further questions.

Timothy J. Wilmott

Okay. Very good. Well, thanks everybody for listening to our fourth quarter earnings and we look forward to hopefully getting some improved weather conditions and business is getting back to normal and we'll be speaking with you all in about 3 months. Take care.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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