Isle of Capri Casinos' (ISLE) CEO Virginia McDowell on Q4 2014 Results - Earnings Call Transcript

Jun.17.14 | About: Isle of (ISLE)

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

Q4 2014 Results Earnings Conference Call

June 17, 2014 11:00 AM ET

Executives

Jill Alexander - Senior Director, Corporate Communication

Virginia McDowell - President and CEO

Dale Black - Chief Financial Officer

Arnold Block - Chief Operating Officer

Analysts

Brad Boyer - Stifel

Justin Sebastiano - Brean Capital

Susan Berliner - J.P. Morgan

Chad Beynon - Macquarie

Dennis Farrell - Wells Fargo

Kevin Coyne - Goldman Sachs

John Maxwell - Jefferies

Tom O'Shea - Castle Hill

George Smith - Davenport Asset Management

Howard Bryerman - PENN Capital

Operator

Ladies and gentlemen, thank you so much for standing by. Welcome to the Isle of Capri Casinos Fourth Quarter and Year End Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, with the analyst instructions will be given at that time. As a reminder, today's conference is being recorded and will be made available for replay.

I will now turn the call over to Ms. Jill Alexander. Ma’am, you may begin.

Jill Alexander

Good morning. All statements made during this call, that relate to future results and events are forward-looking statements that are based on our current expectations. Actual results and events could differ materially from those projected in the forward-looking statements because of risks and uncertainties, which are discussed in our annual and quarterly SEC filings and in the cautionary statement contained in our press release. We assume no obligation to update our forward-looking statements.

We are joined on the call today by Virginia McDowell, President and Chief Executive Officer; Dale Black, Chief Financial Officer; and Arnold Block, Chief Operating Officer.

With that, I'll turn the call over to Virginia McDowell.

Virginia McDowell

Thank you, Jill, and good morning, everybody. For the past year the Isle team has been engaged in the disciplined balancing act, exploring and identifying ways to operate more efficiently, while keeping our focus on constantly improving the experience for our customers.

Two years ago we introduce the Net Promoter Score program to motivate our employees to become more focused on improving products and services for our guest. We bonus our teams on their ability to improve the scores, a measurement which indicates that our customers have become more loyal to our brands and as promoter approach has been successfully adopted by several leading companies, including Southwest Airline, GE, Intercontinental Hotel, Apple and Enterprise Rent-A-Car.

By regularly serving our customers and closing loop on feedbacks, we have continued to refine our knowledge of what is most important to our guests. Based on their suggestions, for example, we reengineered and reintroduced our Fan Club Customer Loyalty Program, successfully reducing the overall costs, while simultaneously shifting our investment into channels that are aimed at rewarding our most profitable customers.

Our topline remains challenged, but our continuing focus on operating efficiency enabled Isle to increase adjusted EBITDA and margins during the fourth quarter across the enterprise on the same-store basis, despite an overall decline in net revenues.

And just as important, we are able to achieve these operating efficiencies, while simultaneously increasing our net promoter scores. When has emerged from our discipline balancing act is a change in culture that reflects the new reality of regional gaming.

Our efforts to reduce costs, everything from working with regulators on scheduling changes to significantly refining our food purchasing programs has given us the resources to invest prudently and developing stronger relationships with our customers and we will continue to look for operational efficiencies across the enterprise.

So while our corporate jet now has Southwest both on the side, our customers are eating lobster, 150 cases of it last week just in Cape Girardeau as we launched our Summer Seafood Takeover campaign, the promotion which has been extremely popular with our customers. It will continue to take discipline. We believe our team is focused on creating value for both our customers and out stakeholders.

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

Dale Black

Thanks, Virginia. Good morning, everybody. As we outlined in our press release, our quarterly net revenue increased $3.4 million to $260.8 million and consolidated stated adjusted EBITDA was $57.2 million in the current quarter, compared to $56.7 million in the fourth quarter of last year.

On a same-store basis excluding Nemacolin, our adjusted EBITDA increased $1.2 million, while net revenue decreased $4.1 million, resulting in margin improvement of almost 90 basis points. Our adjusted net income per share was $0.34 for the 2014 quarter, compared to $0.19 in the prior year.

For the 12 months, our adjusted EBITDA was $173.4 million versus $176.0 million. If you adjust for same-store basis, including the period of time the Cape wasn’t open in fiscal 2013, we were virtually flat year-over-year on a same-store basis, $170 million in fiscal ’14 versus $171 million in fiscal ’13.

We had several items this quarter that impacted our earnings. We recorded non-cash impairment charges of $162 million in fiscal ’14 and $50 million in fiscal ’13. Our interest expense decreased $3.5 million in the fourth quarter of fiscal ’14 due to lower borrowings after the application of the proceeds of the Davenport sale. And additionally we included -- incurred $2.2 million of financing related costs in the fiscal ’13 quarter.

Also in the fiscal quarter of 2013, we had $1.4 million in preopening costs associated with Nemacolin. So that’s the consideration of all these items. Our GAAP basis loss from continuing operations was $3.51 this year, compared to $1.20 in last year’s quarter.

Relating to our capital structure, at the end of the year, we had $64 million outstanding on our revolver and $1 billion worth of bond debt in the three issues, the $350 million of the 5.875% notes, $300 million of the 7.75% and $350 of the 8.875% and extra $3 million of additional debt for $1.07 billion get at the end of the year. Our leverage for covenant purposes is 6.2 times.

Over the course of fiscal ’14, we retired $90 million as debt and reduced our leverage by over a quarter times. Our borrowing capacity at the end of the year is approximately $184 million.

For fiscal 2015 we gave some specific non-operating guidance for certain items, we expect depreciation and amortization to be between $80 million and $82 million, interest expense is expected to be between $83 million and $85 million, a very little in the way of cash taxes less than $1 million is expected and our corporate development costs are expected to be approximately $30 million, including $4 million of non-cash stock compensation. Maintenance capital for 2015 is estimated to be between $47 million and $50 million.

At this time, we can open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Joel Simkins from Credit Suisse. Please go ahead with your question.

Unidentified Analyst

Hi, guys. This is actually Michael on for Joel. Thanks for taking my question. Lake Charles numbers were really strong in the quarter? Obviously, you guys have a big competitor opening later this year in Golden Nugget? Can you just help us frame, how we should be thinking about that project, it’s fact both on the overall market and on your property typically?

Arnold Block

We’ve developed the battle plan for the Lake Charles market. We recognized that we are not going to be the second stop when Golden Nugget open, so we have formulated a plan that not only has to do with our marketing, but our all of our staffing and associated expense, and so we are in that process right now, and we are prepared to compete and as the third stop in that market.

Unidentified Analyst

Okay. Thanks. And I guess, also I wanted to see if you can give us any thoughts on expectations for Black Hawk going forward? Specifically, how do you guys see the Monarch Hotel and Casino expansion affecting that market, anything you are going to prepare there as well? Thanks. That’s it from me.

Arnold Block

We see the Monarch project could possibly be positive for us as we talk about that market in terms of pods. We are part of the first pod. And as the Ameristar pod done very well, we think Monarch might create more foot traffic for our two properties and the Monarch property as well. Clearly disrupted right now, they have about a third of their floor down. And in some ways that kind of hurts that pod, so we expect that it will be very beneficial.

Unidentified Analyst

Okay. Thank you.

Arnold Block

Yeah.

Operator

Our next question comes from Brad Boyer from Stifel. Please go ahead with your question.

Brad Boyer - Stifel

Good morning, guys. There is some news up earlier today that you guys have put together formal plan to go land base in Bettendorf? I wanted to see if you can maybe put some numbers around incremental CapEx to follow that project through and then if you could give us a sense of how you plan to fund that?

Dale Black

Okay. Well, brad, this is Dale. Right now we are just going through the application process with the City to make sure we have got everything we need as far as zoning and all the building stuff that needs to go along with it to get in that approval process.

We are still finalizing the overall scope of the project and haven’t finalized on exact number yet. We are trying to take extra care to make sure that we size the project right for what we expect the market to be moving forward. So we will more to come on that later. As far as funding it, we have enough capacity on our revolver to fund it at this point.

Brad Boyer - Stifel

Okay. Great. And then, shifting back to Black Hawk, you called out some promotional pressures in that market in the quarter? Was that focused on one particular operator or is that kind of the market-wide phenomenon?

Dale Black

Yeah. It was really Ameristar when the -- with the Pinnacle takeover they transition to the new Pinnacle Loyalty Program. So they had use it or loss it dead line of May 22nd, so we saw some of that in the fourth quarter where people were gaining points and the promotional level of the market increase Ameristar for the first time did a target way in three years so we are seeing some pressure primarily from the Ameristar.

Brad Boyer - Stifel

Okay. That’s great. And then, lastly, shifting to Cape Girardeau, obviously, the cost performance there was quite impressive this quarter, how should we think about the sustainability of that going forward from here as we look ahead into ’15?

Arnold Block

Well, I think, the biggest thing, you got to understand there is, you remember a year ago. We are in the property having got off to a slow start. Quite frankly we over reacted and flooded that market with promotions trying to build up our database and so why it took us lot of get that narrow back down.

So this particular quarter was probably the height of that on a comparability basis year-over-year and that’s why you saw that the change in net revenue in that market was not near what the change in gross gaming revenue were had been reported by the state and while we -- why we were able to increase our EBITDA in a situation where we actually had less revenue.

Part of that also deals with the fact that we have taken some pretty aggressive steps in the several months to right size the cost structure with the business levels here and there. So I would think going forward, the kind of the run rate that we are on adjusted for whatever seasonality there maybe in the business is probably the way you all look at it.

Brad Boyer - Stifel

Okay. Great. And then lastly, maybe, Virginia, could speak to this, but I know in the past you discussed some additional potential development plans at Pompano, when you had some greater sense of conviction as to how the Florida landscape played out? I wonder if you had any updated thoughts there regarding that. That’s it for me. Thanks.

Virginia McDowell

Yeah. We are looking at Pompano program the same way everybody else is. We read what we can in the newspaper and talk to legislators. And I don’t think anybody knows what’s going on down there. So we’ve got lot of plans in the queue. We’ve even flipped a lot of different options. We’ve done we can to position ourselves from approval’s perspective but until we have a better understanding of what’s going to happen in Florida, relative to their approach overall to gaming, we don’t have anything to announce at this time.

Operator

Our next question comes from Justin Sebastiano from Brean Capital. Please go ahead with your question.

Justin Sebastiano - Brean Capital

Thanks. Good morning everyone. As far as Pompano, you mentioned just increase in our plan slightly higher from the average revenues. Can you talk a little bit about what really drove that -- those slot gains and the food and beverage?

Dale Black

Well, the property is very focused on customer service delivering a good product. There had been some changes to the casino floor in slot reconfiguration especially in our high limit area. But I think as Virginia mentioned at the top of the call, a very big focus on net promoter score and they’ve had a great customer service team that really understands what that market needs and how to service it best. So food and beverage has had a tremendous flow through in the fourth quarter, continue to try to raise prices and opportunities where we see we can, that kind of how it’s contributed.

Justin Sebastiano - Brean Capital

Okay. And then just Cape Girardeau, you guys answered part of my question with year-over-year comp got better, I guess, as you promote a little bit more efficiently and you cut, I guess, labor or other cost promotional to the volume now. But do you think you guys better understand a market and the customer than you did a year ago or is this purely from a cost cutting little bit more effective with the marketing yield?

Dale Black

No, anytime you go in to a new market, you know a lot more about your customers 18 months after you open than you do six months after you open. And so that education process will continue for a while. As you learn more and more about your customer spending average then you add more people into your database.

Justin Sebastiano - Brean Capital

Okay. And then in Lake Charles, how much of the EBITDA gains there this quarter were from cost cuts versus effective marketing and better hotel yield?

Dale Black

I think it’s a combination. I mean, obviously revenue was up over $4 million there. So a lot of it was net revenue driven. So that is a combination of -- our GGR was up. Gross gaming revenue was up but we also spend a lot less on promotion to net market. So it’s a kind of a combination of the two.

Justin Sebastiano - Brean Capital

Okay. And in Black Hawk, you mentioned, that Ameristar was pretty promotional. It seems also though that with Monarch likely going to continue to experience construction disruption there from their refurbishment. They are promoting as well. And you got Mardi Gras in reserve and the lodge also promoting pretty heavily. Do you see that entire market kind of staying in this heavily promotional environment for the next several quarters or do you think there will be a little bit more return to a -- maybe a little bit more rationale spending out there for customer reinvestment?

Dale Black

I mentioned we really -- I mean, it’s already mentioned part of the Ameristar situation was effective. There will be a use it or lose it exploration on their old programs. So it’s a little tough to judge how much of what happen was a reaction to that and how much of it is kind of new. And then as far as the guys across the street go, sometimes that’s when you are that disrupted, people actually get less promotional for a while because the last thing you want to do is invite a whole bunch of people who did not have a very good experience because your floor is all torn up.

Justin Sebastiano - Brean Capital

Okay. And then as far as the payment that the Colorado Gaming Association is, they are going to pay to fight the expanded gaming in Colorado and even, I guess, those properties that are on part of the association are contributing. I assume you guys are contributing as well to that fight. Are you going to show that payment in the property EBITDA level or is that going to go to the corporate expense?

Dale Black

It will be separate -- regardless of where it ends up getting presented, it will be separated out. Yeah, we have made a commitment to the fund for that campaign.

Justin Sebastiano - Brean Capital

And how much is that going to be for you guys?

Dale Black

Probably between $23 million and $23.5 million.

Justin Sebastiano - Brean Capital

That’s all in?

Dale Black

Yes.

Virginia McDowell

Yeah.

Justin Sebastiano - Brean Capital

Okay. And then just lastly, can you talk about Bettendorf, if there was a pretty big write-down in the quarter. I know you’re talking about going on -- potentially going on land. I assume that for fight what Davenport is going to become. Is this investments there, I mean, do you expect to drive incremental EBITDA there or is this kind of hoping to stay flat and would it be more than official to just use your free cash flow to pay down debt at this point?

Dale Black

I think our view is this and that’s why, let’s say, why we have taken so much time to figure out the right size and scope of the project to put in that market. It clearly is a project where you’re weighing the opportunity cost at not doing anything and what your business might go to at that point in time compared to the capital that you put in -- that you would put into the project. And that -- once we find that right balance then we’ll decide how to move forward with the appropriate project.

Justin Sebastiano - Brean Capital

Okay. Thanks guys. That’s all I have.

Operator

Our next question comes from Susan Berliner from J.P. Morgan.

Susan Berliner - J.P. Morgan

Hi. Good morning.

Dale Black

Hi Susan.

Susan Berliner - J.P. Morgan

I want to start with, I was curious of your, I think it was your opening line that you said the new reality in regional gaming. And I wanted to know if you could expand on what you meant there?

Virginia McDowell

I think that’s probably pretty evident. I mean for the last 30 years now if you listen to any of our conference calls or pretty much any of our competitors, you always hear the term headwind. And what we have seen over that time period is that we continue to get pressured on the top line because our customer spending habits have changed.

So we have spend a lot of time as I indicated talking to our consumers and figuring out what they wanted in our properties going forward. And one of the reasons why we have taken steps that we have over the last year to reduce our cost structure and to really focus on developing stronger relationships with targeted customers is because we just don’t see consumer spending coming back to the levels that they were before.

Susan Berliner - J.P. Morgan

Okay. Great. And then, I guess, just turning to Philadelphia. Have you guys heard anything, any update about the remaining license there?

Virginia McDowell

No. The only thing that we have heard back channel is that the Pennsylvania Gaming Control Board is having trouble coming to the consensus and we have heard nothing in terms of what the projected time might be for decisions.

Susan Berliner - J.P. Morgan

Okay. And then I guess, Dale, just on, I guess, asking the question about the potential from development of Bettendorf. You guys have done a really good job reducing leverage this year. Is there -- what stated goal and timeframe of where you like to get leverage to?

Dale Black

Okay. To drill ground, as long as I have been with this company, we’ve always said we wanted to get the five times or less and we’re still working our way there. But I think that’s still the goal. Obviously depending on the scope of Bettendorf project and time when and if it happens would impact that. But even with that, with the cash flow that the company generates, within a couple of years we’ll probably will be getting closed to that number.

Susan Berliner - J.P. Morgan

Okay. Great. Thanks very much.

Operator

Our next question comes from Chad Beynon from Macquarie. Please go ahead with your question.

Chad Beynon - Macquarie

Hi. Good morning guys. Virginia, you talked about kind of about the outset some of the benefits of the fan club more on the cost side. I was wondering if you could elaborate some of the revenue benefits that could come from this program and understanding that you recently launched it and maybe any anecdotes from your Tier 1 customers kind of what you’ve seen over the first couple of months with the program?

Dale Black

Yes. We’ve really seen cost savings primarily at the outset. We launched fan club 2.0 at the end of January in 11 of our properties. We still have four to go that are slated to convert this fall. So a lot of the attention and focus was to reduce the point structure and all of this was done as a result of focus groups, what the customers told us in every single market what they wanted. So we’ve decided that we needed to enrich first of all our top tier levels, at the same time reducing some of the cost and giving them more benefit. So we know that there are some revenue assumptions in there. We haven’t really seen that happen yet, but we know that as this gets some traction that we will definitely see revenue growth as a result of it, and there are some really good cost savings that we’ve already seen.

Chad Beynon - Macquarie

Okay, thanks. And with cost cutting in mind, do you quickly exceeded annual goal of $10 million, $3 million now on a quarterly basis so that gets us to $12. Is that the right number to think about or are there potentially still some opportunities where that $12 million number could look conservative?

Dale Black

Well, we are always looking for ways to add to that, but we hit the big stuff. And so we are really down in two weeks now, looking for the next round of things. But we are always -- like to say we are always searching, but it will be in increments now and instead of bigger chunks like this.

Arnold Block

Yes. So we are looking at the NPS on the top side. Net, net that’s really an effort to increase our loyalty. So we are -- as a matter of fact today we have a soft launch of our website for Pompano, the rest of the company hopefully tomorrow. So we’re looking for cost containment in our call center. We are looking at every single opportunity in every channel to increase revenue and save cost.

Chad Beynon - Macquarie

Okay. And then lastly just from a revenue cadence, in the quarter we heard from a lot of your competitors that early April was weak partly because of how Easter sell and then improved in late April, was better weather and May was kind of similar to late April. Do you think this improvement was more of just better weather or some pent-up demand or kind of a combination of the two? And are these trends kind of consistent with what you saw during the quarter?

Dale Black

I think it’s probably -- what we saw is probably similar. I think maybe the delta between where we were in January, February, even through March is a little different than -- that change from those trends compared to what you see now, maybe had a little bit to do with the weather, but I mean on the margin it’s better, but if you look at the numbers that have been reported already for May, we haven’t seen a huge swing in trends yet.

Chad Beynon - Macquarie

Okay. Thanks, Dale.

Operator

Our next question comes from Dennis Farrell from Wells Fargo. Please go ahead with your question.

Dennis Farrell - Wells Fargo

Great. Thank you. I was wondering if you could comment on the Sasso plans to spend over $21 billion in Lake Charles from the reports that we saw a couple of weeks ago that they could hire up to 7,000 workers. I was wondering where that site is going to in Lake Charles and how believe the property could benefit from that?

Dale Black

It’s right in our inner market. We think that there is a great benefit from the employment that that will create. It’s also a threat already in terms of our recruiting effort and we are losing some employees to that project. So I think from a sustainability standpoint, the question was asked earlier about Golden Nugget, I think projects like these are going to help the local economy. We will concentrate more on the local economy for that reason rather than for Houston market. And so I think it will be a big help to us but in the meantime it will threaten our work force.

Dennis Farrell - Wells Fargo

Okay. And as Golden Nugget in hiring already as well?

Dale Black

They have.

Dennis Farrell - Wells Fargo

Okay. Thank you. And now I was just wondering in terms of since we are halfway through June, I mean, has sales -- have you seen changes in trends in June as well?

Dale Black

No, we are not going to comment on anything that hasn’t been reported, but other than to say that things haven’t changed for quite a while really as far as trends go in the industry.

Dennis Farrell - Wells Fargo

Okay. Thank you.

Operator

Our next question comes from Kevin Coyne from Goldman Sachs. Please go ahead with your question.

Kevin Coyne - Goldman Sachs

Hi. Thanks for taking the questions. Most of my have been asked. But just a few others to follow up on Lake Charles, have you seen a reduction in your dealers that could have an impact in terms of whether it be lost to Golden Nugget or you said the Cecil project and could that impact operations going forward?

Arnold Block

We are seeing some movement. My property tour a couple of weeks ago we talked about the labor climate. We are losing some dealers. We get them trained and then they go to L'Auberge and we expect migration to Golden Nugget as well, but we are really ahead of the curve and we are anticipating as I mentioned in our battle plan what to expect from the customer and the employee migration standpoint. So I think we are on pretty solid ground.

Kevin Coyne - Goldman Sachs

Great. Just turn on CapEx, looking at your guidance for fiscal ’15 as far as maintenance goes, it looks like it’s a little bit higher than 5% of the let’s say consensus revenue estimate out there and as you probably know symptoms on the analyst side, we look it as a percentage of revenue and that seems a little higher compared to others as far as maintenance. Would you say is this a little bit of a catch up here on some deferred maintenance or should we think about little bit north of 5% as a run rate going forward into ’16?

Dale Black

Well, I don’t know about, I mean, we used percentage as a sort of benchmarks, I guess, if you will from time to time. 5% would not be normally kind of the upper end of where we would be in their range. It will be higher in ’15 than it was in ’14, and there is no question that in the first part of the fiscal year for us last summer when things were -- we are starting to see some of the trends continue through the year that we rationalize some of our planned CapEx for fiscal ’14 and kind of deferred some of them and so they got started or lead in the year or just got deferred altogether, but not a huge amount. So the $47 million is -- the $50 million is kind of what we think we will probably spend this year and we’re trying to give a number that we know within the range or conservative as to what we might spend.

Kevin Coyne - Goldman Sachs

Okay. Just to follow up on the comment about the new reality of regional gaming, another trend I guess that others have seen is just that in terms of on a mix basis slot play has been a lot weaker, but table play has been a little bit steadier. And do you think could this be something where it could -- have you look at the mix on your gaming floor in terms of considering putting in potentially more tables and changing the mix of the slot to table ratio?

Dale Black

I think it maybe steadier, but it’s such of -- so much smaller part of our business, then it’s got a lot less far to fall so to speak I guess if you want to think about it that way, but we are still 90% plus slot revenue on a gross gaming revenue basis.

Virginia McDowell

Part of it probably is also that we continue to see weakness in our customers under like 100 average daily theoretical. So just from a share volume perspective, I think that you’re probably seeing a little bit less in slot play just because those customers are coming as frequently.

Kevin Coyne - Goldman Sachs

Okay. And just one follow-up on that comment, can you give us a sense of what percentage of your revenue is driven by that under deal prior?

Dale Black

Kevin, let me get back to you on that. We’ve got the data, but, I mean, the masses are in that number, it’s just not the higher end. As far as the number of people, it’s the vast majority of them, but as far as the amount of play, it’s a fair amount. It’s weighted more towards the upper end, but still not proportionate.

Kevin Coyne - Goldman Sachs

Okay. I will follow up. Thanks, Dale.

Dale Black

Sorry about that.

Operator

Our next question comes from John Maxwell from Jefferies. Please go ahead with your question.

John Maxwell - Jefferies

Hi, good morning. The only thing I have left is just a little bit more on Colorado, has it been determined yet whether that measure will be placed on the ballot in November or is that still being discussed?

Arnold Block

I think you’re still trying to get signatures and they are doing a lot of polling on both sides.

John Maxwell - Jefferies

So is the money that the group is spending now including yours, is that trying to keep it off the ballot or is that preparing if it does go on the ballot in November?

Arnold Block

Really both.

John Maxwell - Jefferies

Okay. And how much of the competitive threat would that proposal, if it does go forward, I know there is one track I guess located closer to Denver?

Dale Black

That’s the main thing that you’re talking about. So then John a question really becomes what’s the size or scope of the facility that they let them have and we’d really determine how much impact it would have on the Black Hawk market. Obviously, anything closer to Denver in a convenience market is going to be negative to the Black Hawk market. But depending on the number of units that they would have or be allowed to build will determine the impact.

John Maxwell - Jefferies

Okay. That hasn’t been determined and I guess that’s still part of the…

Dale Black

No, that would always part of the whole -- I mean just like every other state, it goes through this.

John Maxwell - Jefferies

Right. Okay. Everything else was answered. Thanks.

Operator

Our next question comes from Tom O'Shea from Castle Hill. Please go ahead with your question.

Tom O'Shea - Castle Hill

Hi. On Pennsylvania, you’re losing $4 million of EBITDA there I assume when you spent $60 million on it, you assume that you could do something closer to $9 million and $12 million of EBITDA, so that’s like a $15 of EBITDA swing which as shareholders if we capitalize that, that’s like $90 million of value or sort of your market cap. So just given those facts, what are you doing sort of today to make sure that we get closer to the return on capital there. And I’m imagine you’re camping out there, I mean it could be a huge swing on the stock price. So can you kind of outline for us in as much detail as you’re willing to provide, what’s going wrong and how you’re going to fix it? Thank you.

Virginia McDowell

Well, I mean, what’s going wrong in is that we are one of the two properties in the state that has to operate under very restrictive access plans. And at our end of the state, we have found that the customers because they have other options of places to go where they don’t have to pay $10 access fee or pay an annual or pay to have an annual plan that they are just making a purchasing decision to go elsewhere. We were also impacted at that end of the state by the addition of new competition from Rocky Gap which at the point that we first started contemplating this project. We didn’t think that it would be that much impact because the State of Maryland still had some pretty restrictive legislative requirements for that property which they ultimately change and that property ended up being built between the time when we originally were chosen for the project and when the Supreme Court actually allowed us to go forward.

So we’re kind of getting our market cutoff from one direction and we have customers that are resistant to the access plan as well. We have talked on every single conference call since that property open about the fact that we are camped there that we’re doing everything that we can from a cost perspective to make certain that we rationalize the cost and everything that we can from a marketing perspective to build relationships with the customers. We have an excellent working relationship with the resort. We’re obviously coming up on our first anniversary. We’re coming up to the high season there. We think that this will give us a better idea of what the property can do going forward. And we’re also working very actively from a legislative and a regulatory perspective to get some changes and consideration that will help us as far as profitability.

Tom O'Shea - Castle Hill

But with the restriction, that wasn’t a surprise to you, right? When you built that you knew you have to charge this entrance fees so to speak? So I guess, I’m wondering why you’re surprised by that and I guess, maybe can outline on the legislative front to the regulatory fund how you’re going to remove that restriction if that’s what’s keeping you from losing money there?

Virginia McDowell

Well, it wasn’t a surprise to us, but what the surprise was how resistant the customers were. We have to basically go before the Pennsylvania Gaming Control Board with a proposed access plan. The proposed access plan that we have suggested, they did not accept and actually put a much higher access plan in place for an annual basis, which impacts the customers purchasing decisions as it relates to what we can do from a legislative and a regulatory perspective. That’s an ongoing conversion that we have with them. We’re basically walking them through what our issues are and trying to get them to work with us on potential solution, but that’s their decision, that’s not ours. So we will continue to work again on that direction, but there’s no guarantee that anything will happen.

Tom O'Shea - Castle Hill

Okay. Thank you.

Operator

Our next question comes from [Chris Match from Palm Beach Securities] (ph). Please go ahead with your question.

Unidentified Analyst

Thanks. My questions have been answered. Thanks you.

Operator

Our next question comes from George Smith from Davenport Asset Management. Please go ahead with your question.

George Smith - Davenport Asset Management

Hi, there. Can you comment on the opportunity to sell a property or maybe a collection of properties as part of an effort to delever and maybe just how orient you see the market for one-off properties?

Arnold Block

There is always a market for one-off properties. I mean there has been very few times George as long as I’ve been in gaming a property or properties don’t get sold at some point in time depending on facts and circumstances. As we’ve shown in the past when it makes sense we will, we divested in properties that we thought either were kind of towards the end of their lifecycle or the path forward in the markets that they were in, we didn’t, think there was that much of an opportunity in. So, those things are always possibilities. I think the question you raised though is “delevering”, I think with at our average levels, that’s one of the things you always have to consider is the multiple that you can get for our property that might fit that criteria wouldn’t necessarily be delevering?

George Smith - Davenport Asset Management

Yeah. I guess that’s what I was getting at. It seems like it’s a fairly good time to be a seller and the multiple should be good enough for it to be deleveraging events. And maybe a speculation on that my part.

Arnold Block

Thanks.

Operator

And our final question comes from Howard Bryerman from PENN Capital. Please go ahead with your question.

Howard Bryerman - PENN Capital

Yes. Thank you. Without taking away at all from the fantastic job that I think both Dale and Virginia you’ve done with Isle. I just was curious to shift away from operations for a moment and just ask you kind of a structural question? How do you interact with the Goldstein Family, are they -- do they sit on the Board and do they regularly get involved in strategy sessions and thinking about the direction of Isle. And making the assumption that maybe they do that. Do you know what’s their, how they look at regional gaming going forward?

Dale Black

Well, there are three members, I mean, in all of our public filings, there are three members of other family that sit on the Board. They are involved as Board members, just like the rest of our Board members when it comes to the strategy and the under goings of the company. None of them are involved in management on a day to day basis, but as Board members just, like I said, as the rest of our Board.

I don’t want to speak on their behalf but I would venture to guess their views on regional gaming are probably similar to what you’ve heard us say based on the discussions we have in our Board meetings.

Howard Bryerman - PENN Capital

Well, have they given you any indication that their, I mean, you obviously, you must discuss a long lines of transition plans or they have given you indication that they are into this for a long-haul or…

Dale Black

Both the parties, you will have to ask them.

Howard Bryerman - PENN Capital

I’d love too. All right. Well, thank you very much.

Operator

And ladies and gentlemen that does conclude today’s question-and-answer session. I would like to turn the conference call back over to management for any closing remarks.

Virginia McDowell

Thank you very much. And have a wonderful summer and we’ll talk to you in the fall. Thank you.

Operator

And ladies and gentlemen, that does conclude today’s conference. To access the digital replay of this call you may dial 1 (877) 344-7529 or 1 (412) 317-0088, beginning at 1 p.m. Eastern Time today, you will be prompt to enter a conference number, which will be 10047860, again that is 10047860. Please record your name and company when joining. The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone lines.

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