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Pinnacle Entertainment (NYSE:PNK)

Q2 2014 Earnings Call

July 24, 2014 9:00 am ET

Executives

Vincent J. Zahn - Vice President of Finance & Investor Relations

Anthony M. Sanfilippo - Chief Executive Officer and Director

Virginia E. Shanks - Chief Administrative Officer and Executive Vice President

Carlos A. Ruisanchez - President and Chief Financial Officer

Analysts

Joseph Greff - JP Morgan Chase & Co, Research Division

Shaun C. Kelley - BofA Merrill Lynch, Research Division

Felicia R. Hendrix - Barclays Capital, Research Division

Justin T. Sebastiano - Brean Capital LLC, Research Division

Carlo Santarelli - Deutsche Bank AG, Research Division

Afua Ahwoi - Goldman Sachs Group Inc., Research Division

Operator

Good morning. My name is Angel and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2014 Earnings Conference Call. [Operator Instructions] Mr. Vincent Zahn, you may begin.

Vincent J. Zahn

Thank you, Angel. Good morning, everyone. My name is Vincent Zahn, Vice President of Finance and Investor Relations for Pinnacle Entertainment. Thank you for joining Pinnacle Entertainment's 2014 Second Quarter Earnings Conference Call, and thank you for your interest in our company.

Earlier this morning, we released our second quarter financial results. If you don't have a copy of the announcement and would like one sent to you, please contact us by e-mailing investors@pnkmail.com.

On the call with us today are Pinnacle Entertainment's Chief Executive Officer, Anthony Sanfilippo; our Chief Administrative Officer, Ginny Shanks; and our President and Chief Financial Officer, Carlos Ruisanchez. We'll begin the call with prepared remarks from Anthony, Ginny, Carlos, and then we'll open up the call for your questions and answers.

Before we get to that, we'd like to remind you that during the course of this conference call, management may state beliefs and make projections or other forward-looking statements regarding future events and future financial performance of the company. We wish to caution you that such statements are just projections and expectations, and that actual events or results may differ materially. We refer you to the Safe Harbor statement that's included in the press release and to our annual report on Form 10-K, quarterly reports on Form 10-Q and to our press releases and documents filed with the SEC.

In addition, today's call may include non-GAAP financial measures within the meaning of Regulation G. A reconciliation of all such non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's release.

It's my pleasure to turn the call over to Pinnacle Entertainment's Chief Executive Officer, Anthony Sanfilippo.

Anthony M. Sanfilippo

Thanks, Vincent, and welcome, everyone, to our 2014 second quarter earnings discussion. The second quarter was very important to our company as we accomplished a number of key integration goals, and we opened Belterra Park.

The acquisition of Ameristar occurred less than one year ago. I'm very proud of the efforts of so many of our team members who are working diligently in integrating systems and implementing best practices throughout our organization as we were to fully unlock the value of our company.

Ginny and Carlos are going to take you through some details in the performance of the quarter, then we're going to come back to you and open it up for questions. Ginny?

Virginia E. Shanks

Thank you, Anthony, and good morning. I'm going to spend the next few minutes talking about what we're seeing in the markets, guest behavior trends, where we are with implementing key integration initiatives and then I'll wrap up with some additional information around specific property performance.

First, we saw weak consumer demand across the majority of our markets. Coming out of the first quarter, weather had an impact on many of our properties. We anticipated pent-up demand from guests in the second quarter. This demand did not materialize as we saw broad softness across most of our markets. That said, we were able to outperform the market, gaining in aggregate 320 basis points to market share with the mychoice launch and refined marketing processes. Those properties seeing the greatest share increases were L'Auberge Lake Charles and the Ameristar properties in East Chicago, Council Bluffs and St. Charles. Guest behavior trends continue with people coming less often but spending slightly more when they visit. This quarter, spend per trip was up 4% year-over-year, driven by our higher worth guests. The greatest declines in the second quarter occurred in the retail segment and in markets with new competition. This is the dynamic we have seen for quite some time now.

Let me now move into marketing and reinvestment. During the quarter, there were significant costs associated with launching the mychoice program throughout the portfolio, in addition to the $4.5 million accounting charge. Examples of these launch events -- examples of these are launch events to our Top 3 tiers, advertising in Ameristar markets to grow awareness of mychoice and replacing signage and collateral that was the former Star Awards now changed to mychoice at all Ameristar properties. Thus, we're also incurred to develop a new brand campaign for the L'Auberge properties. It's important to note that most of these costs were unique to the 2014 second quarter. Despite all of this, we were able to reduce marketing reinvestment by 40 basis points year-over-year when removing the effective of the accounting charge.

Let me now move in to integration. The second quarter saw the rollout of many marketing and IT initiatives. At the forefront was the implementation of an enhanced mychoice program for all Pinnacle properties on April 1. The loyalty program was introduced to Ameristar guests through a series of events in the months of April and initial results have been positive, with VIP spend per trip and overall VIP play both up 3% year-over-year across the Ameristar brand.

We also continued to rollout the universal card functionality. Our 3 Missouri properties are now linked, as is Belterra Park and Belterra Resort as well as all of our Louisiana properties. We anticipate all properties will be on this one card system next year.

During the quarter, we completed the installation of an automated hotel yield system at all Ameristar properties. Results have been favorable with hotel RevPAR up 6% led by double-digit improvements at Ameristar St. Charles and our property in East Chicago. Cash revenue was also positively impacted with the implementation of this system. Every property showed year-over-year growth during the quarter in cash revenue.

Let me now wrap up with some comments around property performance. Starting first with Belterra Park. We continue to execute our marketing plans focused on growing awareness and incenting trial. Through the first 2.5 months, we have seen solid visitation and have programs in place to drive second trip conversion and play consolidation.

In terms of cost property play, about 25% of our Belterra Resort guests have visited Belterra Park thus far. We have seen an impressive 55% increase in combined CO [ph] when Belterra Resort guests also play at Belterra Park. Given the proximity and quality of this facility, we see growing cross property visitation as a big opportunity and one that we are aggressively programming to incent.

Ameristar East Chicago also had a very strong quarter. The property achieved the highest quarterly market share since Quarter 4 2009, all focused on broadening the experience led to the highest table game share since Quarter 4 2011 and the highest slot share since Quarter 3 2008. EBITDA improved 16% and EBITDA margin was up 320 basis points versus prior year.

In St. Louis, the 2 properties were linked with the universal card system in June. Since the launch of mychoice, we have seen strong VIP play at both properties and look for this to continue as we program increased cross property incentives. Combined market share grew 180 basis points versus prior year with both properties showing growth. We also saw sequential market share growth of 30 basis points compared to the first quarter.

Moving down south. L'Auberge Baton Rouge continues to perform well. In the quarter, strong VIP play and hotel performance coupled with more focused marketing spend led to a 47% improvement in EBITDA year-over-year. Our L'Auberge property in Lake Charles also had a very strong quarter posting a 22% increase in EBITDA, which was a record for the second quarter. Other quarterly records were seen in EBITDA margin, non-gaming revenue and table drop. All of these was achieved with a 30 basis point improvement in marketing reinvestment.

In closing, I'm very pleased with the company-wide rollout of the mychoice program. This was a big quarter for us in terms of system and program integration. The work that was done in the second quarter lays the foundation for future revenue synergies and company-wide execution of key marketing programs.

I will now turn the call over to Carlos.

Carlos A. Ruisanchez

Thank you, Ginny, and good morning to all on the call.

Our second quarter was what I would characterize as a transitional quarter. We made great progress on our systems integration efforts, combined our loyalty programs, opened a new property, completed the sale of another property and made meaningful progress delevering our balance sheet.

Today, I will talk about our operations, our integration progress, unusual items affecting the quarter, our development update and the deleveraging progress.

Operationally, as we stated, we have some work to do to improve our businesses. We're clearly in a challenging macro environment as the entire regional sector has been for some time. However, we see opportunity for us to continue to improve our business. While our revenues declined about $14 million on a same-store basis, our EBITDA margins remained relatively flat primarily driven by synergies. We do see opportunities in our cost structure, our marketing effectiveness and our revenue mix, and we expect to see improvements in the quarters to come.

We have seen very strong volumes on our Table business across our portfolio, particularly at our Lake Charles and East Chicago properties. We believe we have skills, the team and the portfolio of properties to continue to grow this business as it is a core competency of our company. On the other hand, the growth in our Table business has been offset by softness in our Electronic Gaming business.

Our south segment enjoyed record performance in L'Auberge Lake Charles despite lower-than-expected table hold at that property, and we achieved another solid quarter in Baton Rouge in terms of cash flow. As for demand trends so far in July, the broad softness that we have seen throughout this year continues although there have been some bright spots, and we are encouraged by the early response of the rollout of mychoice program across the platform.

Turning to our integration efforts. The second quarter marked a number of material milestones in our integration that will position us for years to come. We have made tremendous progress integrating systems and processes across our company including in IT, HR, marketing, finance and accounting. As we noted on the release, thus far, we have implemented $58 million of annualized synergies throughout -- through the middle of the year. This represents primarily cost-related synergies. We have implemented changes, as were noted by Ginny, that we expect will provide revenue synergies primarily driven by our loyalty program, hotel yield management and gaming operations. The payoff for these changes is still largely to come as we are still in the early stages of the implementation. We expect to generate meaningful benefits on these changes in the quarters to come. For the remainder of the year, integration will continue to be a focus for us as we look to ensure that we set up our business for long-term success.

Turning to the unusual items in the quarter that were called out in the release. Both integration efforts and the mychoice rollout played a notable part in these charges. On mychoice, as we noted on our first quarter conference call, we took a nonrecurring charge of $4.5 million in the second quarter primarily related to the initiation of the tier benefits at the Ameristar properties. Similar to the charge we took in 2011 associated with the launch of the program at the then-Pinnacle properties, this accounts for total annual costs of the 2014 tier-related benefits and some of 2015 benefits. This will have no impact on the actual cash expenditure of how the program is administered.

On the integration charges. We had to shut down our properties in St. Charles and Kansas City once and our River City property twice during the quarter in order to implement changes that allowed these properties to become part of our universal platform. Further, we had water damage issue in Vicksburg that not only shut down portions of our hotel for several weeks, but we incurred meaningful costs remediating the issue. We have also contributed towards the campaign to defeat a referendum in Colorado that is expected to be on the ballot this fall. All these charges are unusual and hence, why they were called out in the release today. We do expect to see some severance charges and potentially some additional expenditures on the Colorado referendum in the second half of this year.

Turning to our development projects. Belterra Park is open and the project came in on time and slightly under budget. Our New Orleans Hotel continues to make progress although it has faced some construction-related delays and will push back the opening in the latter part of the year. We do not expect these issues to impact the construction budget of $20 million.

At our balance sheet, we continue to delever the company with cash flow from operations and asset sales. We have closed the sale of Lumiere on April 1 and paid down another $260 million in term loans. Since the close of the transaction, we have paid down more than $660 million of term loans. And now that Belterra Park is open, we expect to see an acceleration of debt pay-downs from operating cash flow. We should continue to see an improvement in our leverage in the quarters to come.

While the operating environment has been challenging in our industry, we are focused on our long-term prospects and how we create sustainable business improvements to drive shareholder value. We continue to be thoughtful about the use of our resources and keep in front of us the things we believe we can control. The second quarter, while we have a lot of work to do on our operations, we made great progress towards a more efficient, diversified and stable platform from which to grow on over the long term.

With that, I'll turn the call back to Anthony.

Anthony M. Sanfilippo

Carlos, thank you, and Ginny, thank you. We have shared with you a lot of information, both via our release earlier today as well as Ginny and Carlos' comments. I want to just add a couple of other comments.

As I stated at the beginning of this discussion, we acquired Ameristar last August 13 so it has been less than a year. And as you heard from both Ginny and Carlos, we have made great progress in the integration of our portfolio of properties and we are very proud of that.

We accomplished a lot in this quarter that has allowed us to really set the base for success going forward. You also heard and you see in our release, there are a number of bright spots from a property standpoint in our portfolio but there are a number of areas that we were disappointed in. And our focus will continue to be the successful integration of our portfolio of properties and we are keenly focused on making sure that we are running each and every property that we have in the most efficient way possible.

We internally announced some changes this week. We, today, have new general management that is at our Black Hawk Casino, Ameristar Casino that's in Black Hawk, Colorado and at our Ameristar property in Kansas City. Both were internal transfers. The Assistant General Manager at our L'Auberge Resort is now our General Manager at Black Hawk. He has the experience and expertise to run a full-service resort. And we believe that, that will make a big impact in the further success of that property. And then a gentleman who has been very successful in our organization most recently running our Bossier City property is now overseeing our Kansas City property.

We also made other changes both at a shared services level and below the General Manager level that we believe is both natural in the transition of 2 companies coming together and will be helpful in running our operations more effectively and more efficiently. Now we realized that there's a couple of areas that we can do better and one is overall management of labor, and two is the continued refinement of our marketing expenses. And so when you hear optimism, that we believe there's opportunity in front of us, we believe that. We believe that we have a terrific portfolio of assets and we think we have a very talented management team. We are accomplishing quicker than I would have thought with some integration efforts. And we do feel very optimistic about the future of Pinnacle Entertainment.

Belterra Park opened on May 1. The revenues have not been as robust as we thought they would be. But we are very much focused on building, as you heard from both Carlos and Ginny, a sustainable revenue base and we're looking at not through mass promotions, but because we have such a terrific integrated racing and gaming facility with great dining options, just like we did in Baton Rouge, we plan on building a strong base of profitable customers there. And we like -- and this is one of the reasons we bought that property, we like the synergies between Belterra Park and Belterra Resort.

So with that, we're going to pause, Angel, and we're going to see what questions that there may be from those who have dialed in.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Joseph Greff of JPMorgan.

Joseph Greff - JP Morgan Chase & Co, Research Division

Question for you on Belterra Park. You just referenced about building a sustainable revenue base at Belterra Park. You mentioned that in the 2Q, that property was nearly breakeven EBITDA. What's was the likelihood, in the near-term, that the profitability erodes in an effort to build a sustainable longer-term revenue base?

Carlos A. Ruisanchez

We view that as unlikely. We've been very careful about how we go about marketing the property and making sure that the asset itself, which we believe is great, it's a high-quality asset. Over time, we'll have improvements there. From a month-to-month basis, that may differ but we have been very careful about making sure that this property is set out for long-term success. Don't see it as something that you'll see a drag going forward.

Joseph Greff - JP Morgan Chase & Co, Research Division

Got you. Okay, great, Carlos. Can you provide an EBITDA impact for the low hold at Lake Charles. I know, looking at the numbers for May, obviously, you saw a big revenue swing there. If can you quantify it on EBITDA basis, that would be helpful.

Anthony M. Sanfilippo

Yes, Joe, it's funny we talked about that. And we generally don't like to talk about weather and we generally don't like to talk about hold. But what we were proud of with Lake Charles is, as you saw in the release, we had record volumes, but we did have lower-than-normal hold. And the point we wanted to give to you is that we had the best second quarter we've ever had there in a lot of different ways, that property continues to operate better. But we don't want to get into on quarterly calls other than just pointing out there was a lower-than-normal hold. Quantifying the EBITDA impact, that we just -- we think that's a bad practice, one to boo hoo about weather and also to really focus on hold.

Joseph Greff - JP Morgan Chase & Co, Research Division

Okay, so my $3 million or $4 million estimate, you wouldn't comment on.

My next question, and Ginny you may have mentioned it, but you talked about other mychoice costs in the quarter in addition to the $4.5 million. Did you actually provide an estimate with those additional costs?

Virginia E. Shanks

We, as I mentioned, they were the launch parties, they were advertising, about in total another $6 million of expense associated with that, and that was across the portfolio.

Joseph Greff - JP Morgan Chase & Co, Research Division

Got you. And you would not expect that to be replicated in the coming quarters?

Virginia E. Shanks

No. Those are events and rollouts and signage and collateral changes at the Ameristar properties when we changed the program name from Star Awards to mychoice there. Those are all costs occurred in the second quarter and won't be repeated in the third and fourth quarters of this year.

Operator

Your next question is from Shaun Kelley of Bank of America Merrill Lynch.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

So I just wanted to, I guess, go back to Belterra Park a little bit. As you look at -- I think it's clear that you guys are being really disciplined on the promotional side. But as you look at your initial read on the revenue from the public data that we get, we could see that June, obviously, decelerated from May and then we're looking at it saying, these numbers overall are a little less than half of what a lot of the tracks in that market are doing so far. So just what do you think about the revenue picture, have you really -- have you changed your, or do you think it's necessary to be changing your kind of longer-term underwriting for that property just given how anemic the revenues really are there right now?

Anthony M. Sanfilippo

Yes, so let me address it now in one way and then I'll ask Ginny or Carlos if they want to chime in.

We were very much focused in building an integrated racing, gaming, dining facility. And we did that. It is -- those guests who have come, love it. And we accomplished what we wanted to accomplish when we opened it. Just like in Baton Rouge, and that's the best comparison. We were very, very careful with Baton Rouge. We are very careful with Belterra Park not to draw conclusions too early. And we are focused on building the right base of guests that are there because those that go there, love it. And when you look at our non-gaming revenue, one of the reasons we put in the release what our net revenues were, we wanted you to have some visibility to the power of the non-gaming revenue. And what's been a big attractor to that property was our restaurants and being a total entertainment gaming facility.

So it's just too early to draw conclusions. We take a long and steady look at how we're going to operate our property and the best way to attract quality guests. We've done that with Baton Rouge. The results are so much better in Baton Rouge than they initially were, and that's how we do it. And Ginny I'll ask if you, or Carlos, want to add to that?

Carlos A. Ruisanchez

Yes, I'll add. Shaun, certainly while the revenues have been slower than we originally thought, I would certainly caution on folks getting to a conclusion. We have been, as I mentioned, thoughtful about how we started out-of-the-box. And over the long-term, the property has some inherent assets by location. The play with the Belterra Resort and the actual facility itself that we feel very strongly will win out. So certainly, while the ramp up maybe a bit slow out-of-the-box, we have not changed our outlook for the property on the long-term.

Anthony M. Sanfilippo

One other thing on Belterra Park is, we are a company that, we just don't manage by quarter. We look long-term. We're, as I've said probably a couple of times on this call, we have a great set of assets. Our properties are well-positioned. They're in great shape. We have very good management teams. We look to build strength over time and what you heard Ginny talk about with our mychoice program is, we've now fully rolled it out to all of our properties and it gives us -- we've not even begun to build on the revenue synergies that we have as a much larger company, almost a year after the acquisition. So just, I would just be careful not to come too soon of a conclusion on Belterra Park.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

Okay, no, it's completely fair. And then I guess, my other question would be just on July, Carlos, in the prepared remarks you mentioned, that the broad softness is generally continuing but you did say there were a couple of bright spots. I was wondering if you could just give us a little bit more color on, when you say bright spots, are these within your portfolio or are these actually just market-wide you're actually seeing something that -- and some sort of change in consumer trends. So could you give us a little bit more granularity on where and what you meant by that?

Carlos A. Ruisanchez

Sure. Certainly, we were commenting on our own experience. And in particular, they followed some of the things that Ginny mentioned, both down south on our L'Auberge properties as well as East Chicago and St. Louis have been places where we continue to see improvements. But the overall macro if you look at it as a whole, not a meaningful change from what we've seen through the first half of the year.

Shaun C. Kelley - BofA Merrill Lynch, Research Division

And would you consider that, I mean, obviously, we saw a bounce in May, would you consider trends in July closer to June or more like kind of as what we saw broadly across the second quarter?

Carlos A. Ruisanchez

Personally, I think that they are -- overall, there are things that are better than the second quarter overall which, almost by definition, would make it closer to May than what we saw in June, but we'll see how things play out. Obviously, the quarter is not over, nor is the month.

Operator

The next question comes from Felicia Hendrix from Barclays.

Felicia R. Hendrix - Barclays Capital, Research Division

Ginny, you talked about the weakness across most markets, you just talked about a little bit here in the Q&A. I was just wondering is the profile of the consumer is still the same, the lower end is weaker but you're seeing decent results from the higher end or has anything changed?

Virginia E. Shanks

The profile, I would say, is pretty consistent to what we've seen probably for the last 1.5 year where the declines that we've seen have been at the lower end and we continue to see good playing, good spend per visit from some of our higher worth guests. So the dynamics and the customer composition are pretty much the same, at least what we're experiencing. The difference is the markets are weaker than they were a year ago.

Felicia R. Hendrix - Barclays Capital, Research Division

Okay, helpful. And then, Anthony, Carlos, this is probably for both of you because you both touched on it. Anthony, you had comments in the release and in your prepared remarks and Carlos, you did as well, just acknowledging that you're not happy with things are right now but there's some opportunities that you have or some things that you're going to implement to try to improve. You talked about costs -- on the cost side, particularly labor, marketing, which you think can also help drive some better results going forward. Just wondering is there any way you can elaborate on what you might be doing there so we could understand that better?

Anthony M. Sanfilippo

Well, let me go over what I did say. I talked about we've changed some management at 2 properties. Really at the beginning of the quarter, we changed the General Manager at our St. Charles property. We have changed our reporting internal structure, where our New Orleans property now reports to Mickey Parenton, who is our General Manager of Baton Rouge and he is very familiar with that property and we think there's synergies, both from a revenue side and an expense side, between New Orleans and Baton Rouge. The -- we are, both on the revenue and on the expense side, really drilling into each and every operation that we have. And we talk a lot about not chasing rainbows or being distracted. We had a lot of necessary integration milestones that we achieved in the second quarter. The bulk of my time, the bulk of Carlos' time, Ginny's time and other key leaders are on really how we operate each and every property, in all aspects of the property. We all spend time with the management of the properties. We're all talking about what are the things we can do to be more efficient and to make better decisions, whether it's on the marketing side or the labor side. So specifically, we're all very engaged in the operation of every property, Felicia, and we're being very, very careful not to be distracted by things that are really non-essential to the success of the company.

Felicia R. Hendrix - Barclays Capital, Research Division

Okay, that's very helpful color. And then just quick housekeeping, Carlos, you had mentioned that in the second half you're going to have additional severance charges and probably more lobbying costs in Colorado. Are you in a position to quantify that for us?

Carlos A. Ruisanchez

No. We will do that on releases as we go. On the severance pieces -- there were some of these changes that happened in July that fell in the third quarter so hence, that will happen. But we'll come back to that and then do something similar to what we did this year to give you some visibility ahead of it.

Anthony M. Sanfilippo

Felicia, an opportunity that we haven't mentioned is that Missouri has now approved credit. And we have 3 properties in Missouri and credit will begin at the end of August. And we've always believed that if there was credit in the state of Missouri, we have 3 really terrific properties there that guests, who play at the higher end and who play with credit at other locations that we have, would want to go and visit our properties and take a cross-property trip in Missouri. So that is an opportunity that while we haven't quantified what we think the revenue upside is, it's going to clearly be a benefit. We'll report back on at the end of the third quarter, at least the early success of that.

Operator

The next question is from Justin Sebastiano from Brean Capital.

Justin T. Sebastiano - Brean Capital LLC, Research Division

So as far as the high end table game play improving at Ameristar East Chicago, we assume that's bringing the Pinnacle's best practices to the table game side in Ameristar. I mean, how far along do you think you are on that sort of that improvement with the Ameristar properties? Are we just scratching the surface here? Are you pretty far along in that? How do you feel at this point?

Carlos A. Ruisanchez

We certainly think that we have made great strides on regards to processes being implemented in the second quarter was probably as big as any quarter that we've had so far since the 2 companies came together. Certainly, the fruit of that labor is on the quarters to come. And especially as it relates to some of the practices, both on gaming operations particularly on the Table business and as well as some of the marketing effectiveness, a lot of which, as I mentioned in my comments, this was a transitional quarter where we did a lot of foundation work, if you will, to reap the benefits as we move forward. And not just for this year but for long term, both in how we analyze our business, how do we review the things that, that we're doing and hopefully, become more nimble, which we feel very good about where that's going and hopefully the results will display that in quarters -- as quarters roll out.

Justin T. Sebastiano - Brean Capital LLC, Research Division

Okay. And some of your critics have said that you're not going to be able to expand margins much further. You're not going to be able to cut labor costs or get marketing more efficient than you already have. Anthony, I think you said on this call that you think that there is still improvements to be made there. If you maybe could just address some of those critics and kind of let us know where your thinking is on that topic?

Anthony M. Sanfilippo

Justin, after this call, send me a list of those people. I'd like to know who they are. Well, we -- I think we've talked about it. We believe that when you think about since the acquisition of Ameristar, there's been a lot of integration efforts that's taken place. And we pointed out the second quarter was a big quarter and a lot of milestones that took place.

We see the business closely. We try to explain it to you broadly. We openly said, we aren't happy with the results of the quarter. We think there's opportunities. 2 biggest expense sides are, for any business, is labor and marketing, for us to even be more refined on the marketing side as well as on the labor side. So we do not believe that we've hit optimization on how we run this business. We think there's opportunities both on the revenue side and further on the expense side. Other than being that broad, I don't know, Justin, how to further answer your question.

Carlos A. Ruisanchez

Let me, I will add. Certainly, we feel very good about the team that we have, the approach, the culture that we have. And one thing that we do talk about internally, that we view ourselves a learning organization. So the results will play out so I guess, everyone will get an answer to that question.

Operator

Your next question is from Carlo Santarelli of Deutsche Bank.

Carlo Santarelli - Deutsche Bank AG, Research Division

Ginny, I just wanted to understand a little bit better. You referenced market share and being competitive in a couple of markets and trying to achieve incremental share. How do you guys or how are you currently thinking about balancing profitable EBITDA growth with revenue market share in an environment where, obviously as we can see from just about every state report, is it remains challenged?

Virginia E. Shanks

We, as Anthony talked about in past releases, why I referenced market share today because it was really more against the backdrop of weak consumer demand and market declines and our performance within those markets. We evaluate our performance on EBITDA, so we don't evaluate our performance on market share. I think you heard us talk about how we opened Belterra Park similar to how we opened L'Auberge Baton Rouge, very focused, very disciplined, not mass promotional spend but really cultivating the right guests and at the right marketing reinvestment.

Second quarter had, again as I mentioned, had some unusual in terms of sequential quarterly expense associated with the mychoice program. Costs that were incurred in second quarter really play out throughout the year and meaning, we launched the mychoice program. We took the expenses in that quarter beyond just the accounting charge but all the marketing associated with familiarizing Ameristar guests with the mychoice program and with the Pinnacle, legacy Pinnacle guests who are new to mychoice as well.

So our focus remains the same on driving profitable revenue, as I mentioned, year-over-year. Marketing as a percentage of gross gaming revenue was actually down even with the mychoice expenses that I outlined that weren't in second quarter on the Ameristar side in 2013. So nothing has changed from our focus and our discipline in terms of how we incent profitable revenue.

Anthony M. Sanfilippo

Operator, we're going to take one final call, please, or question.

Operator

Okay. Your final question is from Steven Kent of Goldman.

Afua Ahwoi - Goldman Sachs Group Inc., Research Division

It's actually Afua Ahwoi on for Steve. 2, just 2 questions for me. The first one is as you think, following up a little bit on the earlier question, as you think about which is more profitable or critical to you right now given some of the visitation patterns and the spend per visit patterns, is it better to try to get an incremental guest in and get the revenue from that guest? Or are you more focused on maybe getting more out of the rated players who seem to still be coming and maybe it looks like their spend is actually improving a little?

And then just the second question on capital allocation. Given obviously, in the absence of any new project, you will generate quite a bit of free cash flow. Can you update us on what your most recent thoughts are on capital allocation?

Virginia E. Shanks

I'll take the first question. It really varies by market, the question about the focus on incenting new visitation versus play consolidation from existing guests in markets where there is -- where the markets are generally healthy, Lake Charles would be an example, Black Hawk would be an example, is we focused on both our existing guests as well as acquisition of new guests. In markets where they are more mature and they have increased competition, our focus becomes that of incenting guests who we know to come more often and play more with us. So it really does depend on the market dynamics in terms of the different strategy that we reduce to incent visitation and we allocate our marketing spend accordingly.

Anthony M. Sanfilippo

And then the vehicle we have is mychoice. So we have spent now, 3 very strong years continuing to build the value of mychoice. We've implemented that in the Ameristar-branded properties. And if you look at the particulars of our mychoice program, it's very powerful. So we believe mychoice both helps attract new guests as well as consolidate their play with our properties. And that's why we have a relationship with MGM Resorts in Las Vegas, that's why we offer benefits such as a leasing a Mercedes-Benz for them. And we have a whole list of things that our guests have find a lot of value in, and we've see that at the upper tiers and that's really been the focus of the mychoice program.

On capital allocation, we are very proud, and I mentioned a lot, at how well-maintained our properties are and we'll continue to be focused on making sure that our properties stay well-maintained. We think that is a competitive advantage for us in this space. We also look at what our organic growth opportunities, whether it's a refurbishment of a restaurant or something that may be new at one of our existing properties. But I can assure you, we are very deliberate and prudent in how we allocate our capital on an ongoing basis.

Carlos A. Ruisanchez

Certainly, our focus as we've talked about now since these 2 companies came together has been on integration and deleveraging. And we have made meaningful progress on that as we noted on the release and some of the remarks earlier. And we will continue to pay down debt as now, a lot of the CapEx on projects will come down materially now that Belterra Park is open, and you should continue to see improvements on our levered profile.

Anthony M. Sanfilippo

Thank you very much. I want to thank everyone who has dialed in. I know we have, in addition to investors and analysts, we have team members. Thank you for all that you're doing to make our company the best entertainment -- casino entertainment company in the world. And thank you, all, for joining our second quarter earnings discussion.

Operator

This does conclude the conference. You may all disconnect.

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Source: Pinnacle Entertainment's (PNK) CEO Anthony Sanfilippo on Q2 2014 Results - Earnings Call Transcript
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