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Penn National Gaming (NASDAQ:PENN)

Q1 2011 Earnings Call

April 21, 2011 10:00 am ET

Executives

Eric Schippers - Senior Vice President of Public Affairs

Jordan Savitch - Senior Vice President and General Counsel

Steve Ducharme - Chairman of Compliance Committee

William Clifford - Chief Financial Officer and Senior Vice President of Finance

Peter Carlino - Chairman of the Board and Chief Executive Officer

Joseph Jaffoni - Investor Relations, Jaffoni & Collins Incorporated

Timothy Wilmott - President and Chief Operating Officer

Analysts

Anthony Powell - Lehman Brothers

Carlo Santarelli - Wells Fargo Securities, LLC

Dennis Forst - KeyBanc Capital Markets Inc.

Justin Sebastiano - Morgan Joseph TriArtisan LLC

David Katz - Jefferies & Company, Inc.

Lawrence Klatzkin - Jeffries & Co.

Vincent Zahn

Amir Markowitz - Morgan Stanley

James Omstrom - JP Morgan Chase & Co

Felicia Hendrix - Barclays Capital

Brian Egger - Harris Nesbitt

Ryan Worst - Brean Murray, Carret & Co., LLC

Steven Ruggiero - CRT Capital Group LLC

Neil Portus

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Operator

Ladies and gentlemen, thank you for standing by. I would like to turn the call over to Joe Jaffoni with Investor Relations.

Joseph Jaffoni

Thank you, Andre, and good morning, everyone, and thank you for joining Penn National Gaming's 2011 First Quarter Conference Call. We'll get to management's presentation and comments momentarily as well as your questions. But first, I'll review the Safe Harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements that involve risks and uncertainties within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect the company's current expectations and beliefs, but are not guarantees of future performance. As such, actual results may vary materially from expectations.

The risks and uncertainties associated with the forward-looking statements are described in today's 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 Gaming assumes no obligations to publicly update or revise any forward-looking statements. Today's call and webcast may include non-GAAP financial measures within the meaning of SEC Regulation G, and when required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's news announcement as well as on the company's website.

With that, I'm pleased to turn the call over to Peter Carlino, the company's Chairman and CEO. Peter?

Peter Carlino

Well, thanks, Joe. Good morning, everyone. Well, despite some very difficult weather in this first quarter, we're happy to report very strong results with good performance from most of our properties. And while we're still not seeing robust top line growth, with the exceptions of that Charles Town and Penn National, I think it's pretty apparent that Tim with our regional managers, our general managers and their teams have done an extraordinary job of bringing costs out of our businesses. I can tell you and you'll certainly ask more about this, we're off to an excellent start in the second quarter, so we'll have to see how the year unfolds, but we're a bit more optimistic than you might have found us in the past.

I could tell you also that all of our new constructions in Kansas and in Ohio is going exceedingly well. And we expect to break ground, in fact, as planned in Columbus next week, so we're right on target, haven't lost a day with that project. So I think it's a lot of good news as we look ahead. As is our practice, I'm going to wrap up the summary with that and open the floor to questions. So, operator, go ahead, please?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line Carlo Santarelli of Wells Fargo.

Carlo Santarelli - Wells Fargo Securities, LLC

Just while I'm looking at your guidance and kind of your Q2 guidance in the implied back half of the year, it looks like there might be a little bit left on the table. If I run kind of your current margins through, is there anything there that maybe we're missing as it relates to maybe some of the joint ventures and some of the losses that might come from them in the near term or through the back half?

Peter Carlino

Bill, you take better to blame for that.

William Clifford

I guess that would be my question. I think as we look out, certainly we are incorporating operations from Rosecroft [Rosecroft Raceway], as well as well as the Sam Houston Raceway Park into our EBITDA guidance. But some of the other components that are out there is that we're also moving up the date of which we expect the 10th license in Illinois to open up. And candidly, we've got where we're looking at it going forward and recognizing that our margin improvement has been a gradual process. I think certainly, on a year-over-year basis, we're ecstatic with how we've done this year. But as we went along last year, our margins were continually developing and improving throughout the year. So I don't know that we certainly can't take this year's or this quarter's margin improvement and extrapolate that out for the rest of the year. Certainly not the rate of improvement. We're certainly reflecting, I think, margin improvement in the next quarter. And the combination of all of those events together is kind of where we look at. We're also not -- candidly, we're not including a rebound in revenues going forward or some kind of improvement. We're assuming revenues are basically flat on a year-over-year basis. Other than the properties that have table games, obviously, in the second quarter, Charles Town and Penn National continue to see robust growth. And then going forward from that, we'll start to anniversary to the table games, so we would expect our year-over-year revenue improvement to basically come back in line. Not to say that we don't expect some growth in Charles Town, but once we get the year-over-year comparisons, our revenue growth will not be quite as strong as what you've seen here in the first quarter.

Carlo Santarelli - Wells Fargo Securities, LLC

Okay, great guys. If I could just have one follow-up on MI, I saw that you noted that little over $6 million in the first quarter. Would you guys expect that property to be more seasonally similar to the other Las Vegas locals assets or by the way you're feeding the database maybe that seasonality is a little bit different?

Peter Carlino

Tim?

Timothy Wilmott

Carlos, I think that, that property will trend like all the other Las Vegas local properties trend. We have done an initial mailing that has been encouraging and we are doing other mailings. But I think overall as that business continues to evolve, it's going to act and demonstrate performance like the other Las Vegas locals do.

Carlo Santarelli - Wells Fargo Securities, LLC

Yes, thanks guys.

Peter Carlino

Yes. I agree with that. Also I would add on, that obviously, the M [M Resort], with 500 high-quality rooms is going to benefit a little better during the convention period. So that will help a little bit in terms of where the M's performance might slightly diverge. But generally speaking, I would agree with what Tim said.

Carlo Santarelli - Wells Fargo Securities, LLC

Great. Thank you.

Operator

Our next question comes from the line of Felicia Hendrix with Barclays Capital.

Felicia Hendrix - Barclays Capital

I have a few questions on Ohio. First, I was just wondering, where are you in the process of your dispute with Columbus?

Peter Carlino

There are several of us that can answer that well, maybe ultimately, you'll talk to Jordan Savitch, our General Counsel, but we're kind of past that for the moment. We have our building permits in hand. We're going to go to construction. Remember the water and sewer issue is the only thing that's left at this time, and that is only one that needs to be settled as we go to open the doors. So we got lots of time to play with that. And I think the city has acted -- and this is my un-technical term, unlawfully in doing what it has tried to do. It will play out in court, and in addition to that, we have other alternatives, Felicia. So I think, it's safe to say we're not too worried about that now. But as time goes by, the city's efforts have been pretty plain and transparent and it is a matter before the courts right now. And we're anxious to have a hearing on that subject.

Felicia Hendrix - Barclays Capital

Great. And actually part of your answer touches on my next question is. I was just wondering how do you deal with a property without knowing the final plumbing solutions?

Peter Carlino

I don't want to be cute about this, but as a former builder, I only care that I've got a place to put my sewer and water at the moment I go to hook up. Remember, the stuff is right out in the street. I mean, literally, it would take a day to tap from our property and all the plumbing in the building into the -- a lateral that feeds into the main line. The same applies to water. So it could scarcely be simpler. I don't want to minimize the issue. But it's a very, very minor connection. Now, if we were forced to try to find another alternative, it gets a little bit more interesting, but there are plenty. For the moment we see no reason that we should be thinking about anything other than the water and sewer that's in the street. I submit to any of you on the line, tell me the last time you bought a property of any kind, your house or a small commercial property that was connected to water and sewer that you, for a moment, thought that the municipality for which it was connected would cut off service? I mean, not as lawful as you can get. But it's interesting and see how it plays out. Jordan, do you want to add something more balanced to that?

Jordan Savitch

Look, you covered every thought I have on it, but I would just stress the point that there are alternatives. What we need to know right now is -- we'd like to know, for planning purposes, what's available to us. We do think that the city and the county acted inappropriately. And we would like to know in short order for planning purposes, whether we're going to be able to avail ourselves with the sewer and the water that was right there at the property when we bought it, or if we're going to have to consider other alternatives.

Felicia Hendrix - Barclays Capital

Thank you.

Peter Carlino

I would not get too hung up on it, we're not -- we're overall the early hurdles and we've got a very long time before we have to be concerned about it. Though, that having been said, from a planning point of view, we want to settle this sooner rather than later. Of course, we've asked these courts to act expeditiously to settle the issue.

Felicia Hendrix - Barclays Capital

Yes. Okay. And then the governor, he's hired consultants to now examine how to assess rollout, the gaming industry -- you know, roll it out in the state. I am just wondering has he asked you to participate in that process at all?

Peter Carlino

I'm going to let Tim handle that. My quick answer is he has not. I think that is why he's brought in an independent person. We have certainly comments to add, but we don't imagine that this is going to affect us with our existing facilities. Tim, do you want to add some color?

Timothy Wilmott

No. We have met, Felicia, with the governor's staff and they have deferred any discussions with them until they get the MOAS [ph] group on board. And obviously, issues like VLTs at racetracks and the broad decisions on how they want to think about gaming in that state going forward for the next many years. It's something they want to consider holistically. So we have not had any meaningful dialogue up to this point, but I do expect in the future that as they think about the global issues in that state, we will be discussing that with the MOAS [ph] group.

Peter Carlino

Felicia, let me add this. I would hope that the MOAS [ph] group as a highly professional and objective organization will look to places like Pennsylvania who have done it in a very balanced way and done it well. Pennsylvania, as you know, now produces more -- the revenue from gaming for that state than any other states in the United States and they did it in a very short period of time. Ohio has a similar population, so a balanced program that includes both tracks and our planned facility makes a lot of sense, assuming they're willing to move tracks to places where there is not gaming and balance it around the state as they did in Pennsylvania. There's an enormous opportunity for the governor there, but we'll have to see how it plays out.

Felicia Hendrix - Barclays Capital

Okay. Moving off of Ohio for a second into Vegas. Obviously, you guys have been looking for a solution in Vegas for a while. I'm just wondering following Pinnacle's marked pending alliance with Wynn, I was wondering could you make a similar type of alliance with another casino company? Or are you still more focused on acquiring a Vegas property?

Peter Carlino

I think Tim could take a whack at that one.

Timothy Wilmott

We have made a bet in Las Vegas right now with our database, and that's right now, with the M. We want to -- obviously, given our equity position at that property, take advantage of our database in the performance of that property. We don't see any need regionally to have a Strip connection with Las Vegas at this point. It's not hurting us. And the M is providing a very attractive solution to customers that we've marketed to when they've gone out there in this past quarter. That doesn't diminish our interest if there is the right opportunity for our shareholders on the Strip. But we do not see any need to align ourselves unless we have an equity position with something on the Strip. And so far, the early results at the M have been very encouraging.

Felicia Hendrix - Barclays Capital

Okay. Great. I have a few other questions, but I'll get back in the queue. Thanks for your time.

Operator

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

Vincent Zahn

Good morning, everyone. This is Vince standing in for Shaun. From the comments in the release, it sounds like you guys are attributing the bounce in late February and March more to improving weather rather than the consumer. So could you comment a little bit more on what you're seeing from your customers? Then maybe, to what extent the better trends in March continued into April? Then, I have a follow-up.

Timothy Wilmott

Let me, Vince, try to cover what we're seeing form a consumer standpoint. Generally, in the first quarter, I think, Peter referenced and Bill did as well, it was kind of flat overall. We are seeing some slight strength in the VIP segments, and we're also seeing some slight strength in the retail non-rated spending across our businesses. But generally overall, it's been flat. March was generally flat as we looked at it. February was up but I think that could be more driven by weather than anything else. So those are the general consumer trends we're seeing and as Peter referenced, we have gotten off to a decent start in April. One of the things we have and we'll watch, obviously, very closely, we had an early Easter last year, which is now a late Easter this year. So we'll see how that affect the curves as we close out the month before we are going to give any further evidence of what changing trends there may be with our consumers.

Vincent Zahn

Okay. Fair enough. Then, on oil and gas prices rising, is there any early impact you're seeing on spending that you're worried about, either directly on gaming spend or on the margin with non-gaming spend? And is there a gas price threshold you guys have in mind where it becomes more of an issue?

Timothy Wilmott

Vince, we have not seen any correlation with gasoline prices and our spending patterns of our customers at our casinos. For the most part, our customers reside within a 30-mile radius of our property. So a $4-a-gallon gasoline price is not a big piece of their equation as they think about visiting us. In fact, you could probably make the argument that this would force people to stay closer to home and not travel long distances. But and I go back to my experiences in '05 and '06 where we saw a similar kinds of gasoline prices and I have never found, in any of these regional businesses, any correlation affecting -- gas prices affecting casino visitation or casino spending.

Vincent Zahn

Thank you. Fair enough. Thanks guys.

Operator

Our next question comes from the line of Bill Portus (sic) [Neil Portus] of Goldman Sachs.

Neil Portus

I'm just wondering what are the upcoming or next steps towards a potential statewide referendum in Texas?

Peter Carlino

Eric?

Eric Schippers

Sure. Well, the slots at tracks, Bill, that we are supporting with our partner at Sam Houston Racepark is currently pending in committee with another bill that is being sponsored by those seeking standalone facilities. And in addition to that, it is anticipated that there may be a compromise bill to somehow blend elements of the two, which is being supported by the Chairman of that committee, Chairman Hamilton. And we may see a final bill and a committee hearing as early as next week on that. So it's all sort of fluid right now. We're hopeful as legislators in both chambers continue to wrestle with ways to tackle a budget that says, as much as $25 billion in the whole by some estimates, that they will turn to gaming. And remember too, there's always the possibility, given on the budget, the House and Senate are currently billions apart in terms of coming up with a solution that there could be even a special session later this summer, even into June and July. Now, if, to answer your question about the referendum then, well obviously, what we would need to do is get to 100 votes in the House. It'd then go over to Senate where we believe we have a strong amount of support there. It would then go to the ballot in November. So we're hopeful we have to see how it plays out over the next couple of months.

Neil Portus

Great. Thanks. And just a second question, is there an update to the Illinois House push to repeal the smoking ban?

Eric Schippers

The only update there is that while it passed the House, the challenge will be in the Senate, where the Senate President is the one who sponsored the original Smoking Ban bill in Illinois. So it's kind of -- it's pending and could be a part of a broader discussion as they look at other gaming bills and other gaming issues. But right now, it's kind of just treading water. And again, the challenge is going to be getting it through the Senate President.

Neil Portus

Great. Thank you.

Operator

Our next question comes from the line of David Katz with Jefferies & Company.

David Katz - Jefferies & Company, Inc.

I wanted to ask about your unconsolidated JVs line item. Mario has aptly tried to keep us informed and up to speed on that. But there's a lot of pieces in there between what I assume is Kansas, and as well as a handful of tracks, et cetera. If you could give us just a little color on how you expect that to sort of evolve through this year and into next year because it is starting to turn into a meaningful number now.

William Clifford

Yes. Well, I mean, obviously, that represents three hole Maryland Jockey Club, our Houston efforts as well as currently the Kansas Speedway. Issues -- I mean, Kansas Speedway is included within our preopening line item in the guidance. So that component pretty well separately identified. Relative to the other pieces, I mean, we're continuing to work on bringing out how to reduce those losses, and all of them are related quite candidly to future growth opportunities. And so it's a matter of -- you keep the places open. And obviously, they're losing money. And the trick is to lose the least amount possible until you get -- you bring the opportunities to fruition. I mean on an overall basis for the year, I think we'll find that we should, at least for the properties that are continuing in the year-over-year basis, that we should see some progress in terms of reducing those levels of losses. Clearly, within Maryland Jockey Club right now, which is the number that's included with a pretty decent number in the first quarter, that's got -- that does not take into account any kind of rebates and other issues that are in front of the Maryland legislature in terms of reimbursing operating losses. When in fact, those moneys are authorized and finalized and start getting paid, that would obviously reduced the operating losses significantly from the Maryland Jockey Club. I'm not really going to give property by property specific guidance, that's kind of -- and obviously the benefit of giving overall guidances is obviously some properties will do better and other properties will do worst. But suffice it to say, we think we've got the money-losing track business as under control as we can possibly have it. And we continue to make progress.

David Katz - Jefferies & Company, Inc.

If I were to just look at the first quarter, right? I mean, should we expect that to continue to -- just directionally, right? I mean, I understand why you won't give us individuals nor should you, but should we be looking at that minus $2.3 million as a up-down or sideways number?

William Clifford

Well, clearly in the second quarter, Maryland Jockey Club will have -- was going from a negative to a positive because of treatment. But clearly in the second quarter, you're going to see a dramatic improvement. First quarter results are generally not -- are probably some of the weakest results. The winter months in the racing business is probably the worst quarter. So I would expect that as you go out throughout the year, the seasonality combined with the concept of the fact that we're doing some stuff to try to reduce our operating losses, we should see better results going forward than what you've seen in the first quarter.

David Katz - Jefferies & Company, Inc.

If I can ask two more...

Peter Carlino

As in, again, that the state has stepped up through the Governor's office and the legislature to provide support money to mitigate the losses for MJC [Maryland Jockey Club]. Eric, what's the timing and how does that unfold?

Eric Schippers

Steve, are you there? I think you've got the most recent update on that.

Steve Ducharme

It has. It's on the Governor's desk for signature. It's got an emergency preamble. So as soon as he signs it, it'll be effective. So we should begin to be the beneficiaries in the very near future. So that is, to Bill's point, that has been completed at this point.

Peter Carlino

Good.

David Katz - Jefferies & Company, Inc.

Okay. If I could just ask two competitive questions quickly. How have we thought about Arundel impacting your nearby properties? And secondly, in the Las Vegas locals market with your limited experience, what are you seeing on the promotional front? And how competitive is it for labor? And that's certainly a confusing market at this stage for us.

William Clifford

Let me try to take the second question first, David, with what's going on in the Las Vegas locals. We really haven't seen much change in the promotional environment there in the first quarter. I would characterize it as moderate. The competition for labor has not been one that caused us to make -- or caused the M management to make any changes. It's still fairly stable unemployment. I saw a drop to about 13.5% most recently out there. So we don't have really any pressing concerns about our ability to attract and retain quality labor there either. So we really haven't seen, from 2010 into the first quarter of '11, much dramatic change in Las Vegas locals. It's really more of the same out there. M has seen some modest growth, as Bill said from their group business, which continues to grow. And also from business from Southern California, and in addition to our customers who visited there in the first quarter. But there really hasn't been any material change in the locals business in Las Vegas. It's fairly stagnant. I mean, relative to Anne Arundel, it's our expectation that the earlier announced that we're going to be opening this year. It becomes pretty evident that, that is not going to open in '11. It will be an opening sometime in '12.

Peter Carlino

Mid-'12

William Clifford

So obviously we originally didn't have any impact in '11 in our guidance anyway. Because we've just made a value judgment on our own, that it was unlikely that they would have opened it up, early enough in '11 to have an impact. I mean looking out in the next year, obviously it's not good. I mean, clearly having a facility with that many slot machines located closer to your -- to a significant portion of your customer databases is not what you would like to see. Having said that, there are going to be a number of factors that we just don't clearly have a handle on yet, because we don't -- they are building a temporary facility. They're not going to have smoking. We are going to have smoking at Charles Town. The traffic situation of -- in terms of the convenience for which of these to get to their properties is yet undefined. And so as we look out, we have a wide range of potential impacts to the property. I think there's roughly 33% of our customers are from Maryland, but we're not going to lose all of those. So it's going to be -- and obviously, they're going to be at a higher tax rate, although our tax rate is not anything that gives us a whole lot of flexibility and room to work with. But they certainly are not going to be able to out-promote or get very aggressive on the marketing side. And it's going to be a safety, convenience and amenities quality issue, and we'll see how it plays out.

Peter Carlino

The other thing, just add, David, to what Bill just said. As you can see by the numbers in the first quarter, our table games business remains very, very strong and we're going to be adding 20 more table games, come the end of the second quarter to the operations to take advantage of that growth. We'll have over 100 games heading into the summer. And we also will be completing our $40 million capital program opening up our entertainment lounge and sports bar come June, July to complete the transformation of Charles Town. So we think the experience will be extremely competitive to what Anne Arundel will be offering in their temporary environment.

David Katz - Jefferies & Company, Inc.

Okay. Thanks. Well done, guys.

Operator

Our next question from the line Joe Greff with JPMorgan.

James Omstrom - JP Morgan Chase & Co

Hi, guys this is actually Jim asking for Joe. Could you give us the trailing 12-month EBITDA for M Resort? And can you break it out by quarter?

Peter Carlino

No.

James Omstrom - JP Morgan Chase & Co

No? And any color you could provide would help.

Steve Ducharme

For all intents and purpose, we have certainly given what we thought last year's run rate was, and we gave what the fourth quarter was and we've now given what the first quarter is. Clearly, the property is doing a fantastic job of reducing their operating expenses and becoming more efficient. And it's really in some ways, a lot of ways -- that property in managing they're doing a great job. And it's a position of our decentralized thought process, in other words, that they're actually going off and making the decisions that are, obviously good decisions, and we're starting to see the benefits of that. And we've certainly been involved and they've certainly been willing to inform us, of what it is that they're doing. But we don't, at some level, we don't really have control yet because we're not licensed and we don't have the ownership. So that, at the end of the day all of the steps that had been taken have been taking by the management team, we certainly have been helping them a little bit with access to our database and the 2,500 room nights that we've been able to move to for the M, certainly, is also helpful. I think, we're still very encouraged by what's happening with the M. I'm not going to give actual trend lines and the rest of it, because I think there's a lot of noise in some of those numbers as well because some of those quarter-by-quarter results, include different items, severance or related to transaction fees, related to the negotiations around the bank deal and all of that stuff. So without really giving, I think it would be almost more misleading to provide quarter-by-quarter information, then it would be helpful.

James Omstrom - JP Morgan Chase & Co

Okay. That's fair. Could you just give us the cash debt equity and breakout CapEx for the 1Q?

William Clifford

Yes. First quarter total cash at '10 was $234 million, $0.5 million which is broken out in unrestricted sub with roughly $59 million leaving the operating cash flow levels for Penn at $175 million. On the debt side, we have $35 million of drawn revolver. $1.518 billion of Term Loan B for a total bank debt of $1.553 billion. We have the two bond issuances of $250 million and $325 million. And then, capital leases and there were lease services obligation totaled to roughly $6.9 million, giving a total debt of roughly $2,135,000,000. CapEx for the quarter was $54.5 million, of which that includes $14-point-roughly-seven million -- sorry, $14.7 million for maintenance CapEx and project CapEx is roughly $39.8 million. We're looking for the year. Total CapEx this year $443 million, which should be $85 million of maintenance CapEx and project CapEx was $287 million.

James Omstrom - JP Morgan Chase & Co

Great. Thanks a lot guys.

Operator

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

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

So going back to Texas, a follow-up there. I guess, it's pretty interesting that you guys said that polling is pretty favorable, but your competitors who are building assets in Louisiana say it's still negative. So I guess, the question is, if this does go to a referendum at some point, now what -- how do you guys feel about the potential of the passage, especially going into a year whether it's '11 or '13 where it's going to be a non-presidential year?

Peter Carlino

Well, first kind of a fun one. I got to stick my nose on that one. You would expect nothing less from what you described as our competitors in Louisiana. The pollings are pretty clear and Eric will speak to that, that the voters in Texas would strongly support this. The trick of course is get the legislature to step up and give them that opportunity. Eric, why don't you take a whack at that please?

Eric Schippers

Yes, I was going to say when you look at our polling, which we've done a extensive amount of polling, the strongest question that moves the needle is, "How do you feel about the neighboring states continuing to benefit from the revenues of Texas gamers as opposed to saving the money here for the benefit of our state?" And so, we have pointed out to every legislature we can in Texas that Dan Lees [ph] $400 million project was approved right on the border and they're continuing to sort of thumb their nose at you in Texas thinking that you can't pass this. And frankly, that has gotten a lot of attention from legislators who otherwise may not be looking at this as a potential piece of an overall budget solution. There is a lot of pride in Texas as you may be aware. So we're hopeful that as they look at and understand the benefit other states are receiving from Texas dollars flooding across the border, they'll kind of get the joke as we say and pass this thing. Once we get to the balance, there is an overwhelming amount of people, and both Republican, Democrat, tea party, cuts across all different political stripes who want: A, the chance to vote on this; and B are okay with slots at the racetracks, because it's not an expansion of the current footprint of gaming in Texas. And we think that's an important part of the solution this time around as opposed to more expansive efforts that others are espousing.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Okay, got you then. One more follow-up probably for Tim. Tim you talked about promotional environment in Vegas, but then when you look around the rest of the country, is it pretty rational at this point? Or are there still some markets out there that are still a bit irrational?

Timothy Wilmott

I would characterize around the U.S. the promotional spending environment is very rational. We saw some peaks back in the summer of last year in a few markets in the Midwest and South that has really come down nicely. And we don't see anyone out there that's really causing any promotional spending imbalance in these markets, which is encouraging and knock on wood, hopefully, will continue.

Steven Wieczynski - Stifel, Nicolaus & Co., Inc.

Okay. Great. Thanks guys.

Operator

Our next question comes from the line of Mark Strawn from Morgan Stanley.

Amir Markowitz - Morgan Stanley

Hi, it's Amir in for Mark. Just I guess a quick follow-up question about margins. It seems like you have close to or your now at record margins at a bunch of your properties, so just kind of a longer-term question on once you see revenue start to recover a little more, how do you see kind of those margins trending? Are there any costs that have to come in? As business comes back, do you think it's sustainable?

Peter Carlino

Mark, I think our cost structures are very sustainable. If we see any recovery in the top lines of our business, I think there are opportunities to improve the margins of the business over where we are today. We've got a very rationalized cost structure today that doesn't -- if business does get better, I don't see changing materially. So I think there is, if the consumer does come back, I think there is some opportunity for us to continue to expand upon these margins.

Amir Markowitz - Morgan Stanley

Thank you.

Operator

Our next question comes from the line of Larry Klatzkin from Klatzkin Advisors.

Lawrence Klatzkin - Jeffries & Co.

Hey guys. Most of mine are answered, but one question in iGaming, and a lot of these gaming companies are talking about trying to partner up. You guys, Peter, have any interest, if this gets legalized in an America, in trying to join the pack and give a large diversified customer base network?

Peter Carlino

Larry, I think a couple of us should take a whack at that. My position has long been that online gaming is a bad idea. A bad idea from a whole lots of social points of view. Because one thing when people have to get in the car, make a decision to visit a casino, quite another when they can roll home at quarter to 12 at night be 18 years old or younger and I'd like to say, it be like playing poker in your underwear at home. So I have serious concerns about that. However, I'll say that the tide, may work against us there, so that we are beginning to look at that very hard, got to be realistic and practical. So as much as I'd like it not to occur. And I really don't think for a whole host of reasons, even beyond those I've added that it's a good idea. I think it may be inevitable. Tim, why don't you take a whack at that one?

Timothy Wilmott

Sure. Larry, as Peter said, we do think somewhere down the road it will happen. I think with what happened last Friday at the federal level, it probably makes anything happening in Washington more remote, more long-term than it was prior to that. And we do think something down the road at the state level will eventually evolve, and we've engaged discussions with a lot of different providers of Internet poker applications to assess their capabilities and talents and business odds, as we continue to explore this. So we are continuing to look at these capabilities. We certainly realized it's something we're not going to develop internally that we'd have to partner with someone externally. We have not made any decisions yet on who that potentially would be, but we're preparing for what will eventually happen, we believe. We just don't know when.

Lawrence Klatzkin - Jeffries & Co.

All right.

Operator

Our next question comes from the line of Dennis Forst with KeyBanc.

Dennis Forst - KeyBanc Capital Markets Inc.

I wanted to follow-up on the promotional details. Maybe, Tim, can you give us some real examples of what's been going on in the promotional arena for your properties? How are you reallocating your dollars? And how is the promotional allowances? Total dollar less in the first quarter of '11 than it was in the first quarter of '10, even though revenues were up pretty dramatically with new properties and the growth at the Charles Town and Penn National.

William Clifford

Well, generally, Dennis, what has happened and this is as Bill described before, this is something that's been evolving now for at least five quarters. We have looked with our customer spending patterns over the last couple of years, which have been declining. And we've been revising our customer reinvestment levels based on the new spending patterns. And especially at the low end of the customer work spectrum, the customers that are -- the $10- to $99-a-trip player, we've been able to take a lot of our spending away from those customers and trying to hold our margins on a per customer basis above 20%. And with that, we've been able -- year-over-year, probably it would take about 100 basis points out of our overall promotional spending across the enterprise. So I mean, that's what we've been doing. That's what we're going to continue to do. And as I described before, we have seen two things happen by that. We've seen customers continue to engage us and continue to be rated at lower reinvestment levels and those low-end customers have also elected not to use their card because they feel for whatever reason, the value is not there. But we are seeing a nice increase in retail spending in the non-rated segment, and we believe a part of that is conversion of the low-end rated retail customer to an unrated customer, which obviously doesn't get any marketing thrown to it.

Dennis Forst - KeyBanc Capital Markets Inc.

Okay. And then just secondly, on Columbus if I can revisit that. Peter, you said you have other alternatives if things don't go well in court with the city and county. What would those other alternatives be?

Peter Carlino

Well, on site, is certainly one. We've not really played that out nor applied for on-site, both water and sewer. Both are perfectly reasonable possibilities. Keep in mind, we do our own water and sewer. Our biggest problem like Charles Town and National. We do both, so we're quite comfortable doing that. If the city should take us out and the county out of it, it's all in the area. I mean, you can't have it both ways people, either we're in or out. We always have that alternative. I don't want to get into the particulars because there's actually a number of choices that we have looked at. For a moment, they were on hold because we don't want to spend that money or go down that path, if as we would hope, the court will rectify the behavior of the city and county.

Dennis Forst - KeyBanc Capital Markets Inc.

Okay. Thank you.

Operator

Our next question comes from the line of Bryan Egger with Forecastle Research.

Brian Egger - Harris Nesbitt

Just a follow-up about to the earlier question about margin performance and some set of commissions. One of the markets for you, Tim, certainly doing quite well in terms of the margin for corporate funds despite pretty lackluster demand conditions and top line conditions is the Mississippi River and Gulf Coast region. I don't know if you could speak to anything operationally about what's happening there, obviously. But the margin have been quite nice particularly given the relatively anemic backdrop of the market.

Timothy Wilmott

Well, really not much different than what I described to Dennis overall. Down there on the Gulf Coast, promotional spending has been fairly rational. The only other thing affecting those businesses, we've been able to reduce our insurance cost there as well. That's really the one big difference from the rest of the properties. Our properties in Bay St. Louis, Biloxi and Baton Rouge are seeing some nice efficiencies in our insurance costs as we continue to get past the post Katrina era. When we -- our last insurance policy, which was post-Katrina was a three-year policy that, basically, expired at the end of last year. So we basically, the insurance markets have gotten much more favorable, so when we renewed our policies. The big driver of where that cost was, was in the Gulf Coast. So the allocations -- and that's why you're seeing probably on an annualized basis on the order -- I'm not going to give you the exact number, but the concept is that insurance rates came down dramatically from where they were immediately after Hurricane Katrina. At that time, we locked in a three-year policy with a concern at that point in time, that there may not even be any insurance available in the following year, if we had, unfortunately, had any hurricanes in the Gulf Coast area or candidly, almost anywhere on the entire eastern seaboard. So those rates were fairly high, and now we've obviously got the benefit of more appropriate insurance rate.

Operator

Our next question comes from the line of Justin Sebastiano for Morgan Joseph.

Justin Sebastiano - Morgan Joseph TriArtisan LLC

Can you be a little specific as far as seeing any customers returning, then it stopped coming following the rationalization of your marketing effort in past year or so?

Timothy Wilmott

Justin, the quality customers never stop coming over time, over the past three years, during this recessionary period. So we didn't lose customers. Generally, overall though, our admission counts are fairly flat as well. And I'm not getting the sense that we're getting an influx of new customers to our business at all. I think it's just in the same group of customers. We are seeing some slight improvement in certain segments of spend per visit, as people get a little bit more comfortable with the expectations of the future. But I would not characterize any of our business trends as a recovery of customers who stopped visiting us in 2008, 2009.

Justin Sebastiano - Morgan Joseph TriArtisan LLC

Okay. And then you'd mentioned before that you believe that the low-end rated player that not that getting the comp that they used to, been able to convert them possibly to retail, to the retail side? What gives you confidence that's true? How would you know if somebody wasn't using their card? They become nameless then, right? So how would you know?

Timothy Wilmott

Well, we clearly look at the trends of our low-end rated segment and the trends of our unrated segment versus overall admissions in our properties. And clearly, we can see that in working both ways. We've seen times in the past where there's been an influx of rated business when in better times, we're trying to acquire new customers. And you just never entirely know, but you certainly have enough data points to see that there's been a conversion away from your rated activity, which we saw declines in our businesses in the first quarter of across all of our properties in the $1 to $99 segment, and then corresponding increase in the non-rated segment. I would say, a big part of that is conversion from rated to not rated. But again on a customer-by-customer basis, you never know.

Justin Sebastiano - Morgan Joseph TriArtisan LLC

Okay. And then, forgive me if you've addressed this already earlier in the call, but corporate expense has been the highest it's been in a while. What's in there that's caused the increase? And is this a good run rate going forward?

William Clifford

Well, in this number, which I did address earlier, but that's all right, we'll address this again.

Justin Sebastiano - Morgan Joseph TriArtisan LLC

I appreciate that.

William Clifford

No problem. Effectively is they are legal expenses related to a number of issues around the acquisitions of these properties because they're currently required to be expensed. So we've got transactions around Rosecroft, transactions around Texas, transactions are across around the M - that we are all born in a big part in the first quarter. Also have a little bit of additional expense running through related to the company's decision to issue some, I'll call them, stock options or stocks appreciation rights instead of actual option grant. That's also running through, but that's a much smaller component of what affected the second quarter or first quarter, sorry.

Justin Sebastiano - Morgan Joseph TriArtisan LLC

And looking at the credit markets and they're pretty favorable right now based on some of what the debt cost of some of your competitors were able to get recently. You got some debt coming too. I assume you guys are, obviously, looking at that now. Can you give us a little color on perhaps a refinancing and where you think your new debt cost will come in compared to what the current bank debt is costing you now?

William Clifford

Well, currently our Term Loan B is around LIBOR plus 175. I certainly would expect that as we go out and do a refinancing that those costs will go up. But if you look at where companies that have twice the leverage we have, pricings have come in, obviously, they're coming in somewhere maybe 100, 125 basis points higher than where our current debt is. So I would expect us to come out somewhere between where we're at and where they're at. Probably the best answer, projection perspective. So I don't, I mean, if you look at it, it's certainly less than 100 basis points, increased cost on their term loan B.

Justin Sebastiano - Morgan Joseph TriArtisan LLC

Okay. And then just lastly, if I may, the 10th Illinois gaming license, the impact on properties, is it fair to say that Elgin will likely take the most impact based on location and the product offering compared to Aurora and Joliet? I'm not saying that Aurora and Joliet won't be impacted but I believe Elgin probably takes the biggest hit, is that a fair statement?

William Clifford

No, we agree. We think that the property that is going to be most affected will be Elgin followed by Aurora, followed by the properties down in Joliet.

Eric Schippers

And there'll also will probably some effect in the Northwest Indiana as well with the customers coming from within the loop.

Justin Sebastiano - Morgan Joseph TriArtisan LLC

Okay. Thanks guys.

Operator

Our next question from the line Steven Ruggiero with CRT Capital.

Steven Ruggiero - CRT Capital Group LLC

You generated a 26.7% EBITDA margin in the first quarter and your guidance is indicating almost that level in the second. But your second half EBITDA margin implied here is about 23.5%. And I understand Illinois is kicking in, you've also indicated that you have a sustainable cost structure. Could you give us a sense if one, if M Resort, the consolidation of that, is dragging down your second-half guidance, implied guidance? And what other factors? I know you addressed this as the first question in the call but it seems like it's a big downtick.

William Clifford

I don't think it's a big downtick. Clearly, the first quarter is a great quarter. It's probably one of our strongest quarters relative to how our properties perform. So you certainly cannot expect us to continue to have the same margins in the first or in the third and fourth quarter that you see us having in the first and second. So there's a seasonality effect. There's the impact of the M. There's the impact of these additional racing operations, which do generate revenues and generate losses. So those are clearly counterproductive to overall margins.

Timothy Wilmott

We also have for five months the removal of the Rama management fee, which is extremely high margin that we have concluding at the end of July. However, we're in negotiations with the Ontario government. And we do believe we're going to get a short-term extension on that will carry us through the first quarter of 2012. But that's not in our numbers as well.

Steven Ruggiero - CRT Capital Group LLC

Okay. That Rama fact is a helpful one. Thank you. And also, in terms of the ramp-up of M Resort to begin optimizing, however, you envision optimizing your operations there, given the current locals competitive environment and the economic backdrop out there, how long, what time frame do you think it is before you get to that first level of operations that you find satisfactory?

William Clifford

We will never find it out, however, you will. First answer is, we'll never be satisfied. Listen, I think what we've indicated on prior calls, and we still standby it, that we believe we can get this property to perform at a level where on an acquisition basis that it's going to be inside of our company multiple. And we think that's going to happen within a reasonable length of time. Clearly, we're very satisfied with the progress we made in the first quarter, that the management team there made in the first quarter. That's clearly a significant improvement over the EBITDA levels of the property was performing at the point in time that we acquired the debt. And I think we're, quite candidly, if we continue to see the rate of progress we see now, we're going to get to that number very quickly. When I mean by quickly is probably next year. Having said that, this is a property that originally was constructed for a cost pretty close to a $1 billion. And these level of operating performances are clearly, on that basis, would be comparably unsatisfactory. And I think that this property is going to be dependent on how well the Las Vegas Valley locals market does. If unemployment is going to continue to stay in the high or mid-teens, it's going to be a long time before you see really good results, outstanding results, I guess, is where we eventually look for the property's to performance at. I know, it's not what you think, so...

Steven Ruggiero - CRT Capital Group LLC

Just one last question too, and that's the performance of your unrated customers during the last quarter?

Peter Carlino

What was the question?

Steven Ruggiero - CRT Capital Group LLC

What was the performance of your unrated customers? Foot traffic, win per visit of unrated customer the best you can tell?

Timothy Wilmott

Well, across the company it was one of the segments that showed mid-single digit growth and certainly, it was benefited by the addition of table games in West Virginia and in Pennsylvania. But even at the other properties that had fairly constant comparisons year-over-year, it was up in the low to mid-single digits.

Steven Ruggiero - CRT Capital Group LLC

Great. Thank you very much.

Operator

[Operator Instructions] Our next question comes from the line of Ryan Worst from Brean Murray.

Ryan Worst - Brean Murray, Carret & Co., LLC

Peter, maybe could you talk about some of the other legislative issues in Ohio? And I know the Governor has talked about increasing speeds? How difficult would that be to get through given the legislation that's been passed for the existing casinos?

Peter Carlino

Well, I'd rather limit our comments a bit until we kind of see how the consultant arrangement plays out. It would be very difficult for the governor to make any changes with what is pedaled today in the Constitution. We don't expect that he will. So look, I think he's just trying to generate as much revenue as he possibly can. I think he has an opportunity as he looks at the racetracks. And that really is his to put his stamp on. Remember, this legislation had failed numerous times in the past. So this was a major accomplishment for us and I think, clearly, he is settled. So he have to go back and try to change the Constitution to fiddle with this. So we're not worried about that. I think the discussion will hinge more around what happened at the racetracks. I don't know, Eric or does anyone else want to add some more color to that?

Eric Schippers

Yes, I would just say the governor has been the first to acknowledge that he doesn't know what he doesn't know about gaming in Ohio. And we're just hopeful that as the experts get on board, they can guide him to how fair a deal this is for Ohio, how good a deal Issue 3 is for Ohio, particularly, when you consider the tax rates in the neighboring states. The upfront license fee, the north of a $1 billion in private investment, 34,000 new jobs that are going to be created. I mean the reality is, we and Rock and Caesar's, we represent economic stimulus in the state of Ohio. So we're hopeful that the expert that he's hired can help him climb the learning curve rather quickly and understand that it is a very, very good deal for the state.

Ryan Worst - Brean Murray, Carret & Co., LLC

Okay. Thanks. And then just a couple of follow-up questions. When Kansas City Speedway opens is that still going to be in the unconsolidated line? And then, Bill, was there any pre-opening expense in the first quarter like maybe at Joliet?

William Clifford

No. In Joliet, effectively, there were no pre-opening expenses in Joliet. Yes, Kansas will stay as an unconsolidated affiliate post opening, I think. Actually I may have to go back on that. I'll give you a better answer on that because there's some issues around because it is 50-50 and the control issues and, et cetera, et cetera. It's really an issue for next year so let me get back to you on that one, because I don't want to be definitive.

Operator

Our next question comes from the line of Anthony Powell with Barclays Capital.

Anthony Powell - Lehman Brothers

Just one quick question on Joliet. The margins they were a bit lower than what we originally thought. What were the causes there and can that kind of get back to normal over the next few quarters?

William Clifford

Yes. Clearly, Joliet was one property that did not perform up to our expectations. And we had finished the conversion of that property, the rebuild of that pavilion land site operations. Late December, we opened the final piece of it, the sports bar and entertainment lounge in January. So it's very much a new operation that we're still trying to stabilize. We did have a couple of one-time expenses in the first quarter, a large bad debt expense and some legal expenses that probably represented about $850,000 of expenses that won't recur and it gets the numbers a little bit better but not where it needs to be. On top of that, we were closed for about a and day and a half in early February with the bad winter storm that came through Chicago and that also hurt us. And we have picked up share vis-a-vis to Harridge [ph] Joliet, in the quarter but we have some continued work to do to continue to grow that business and get our non-gaming areas to perform at a better level and to attract more business. So clearly, as an operating group here at Penn National, that is the one property we are laser focused on showing improvement going forward.

Anthony Powell - Lehman Brothers

That's it. Thanks.

Operator

There are no further questions at this time.

Peter Carlino

Well, okay. Then with that, we thank you all for tuning in this morning and look forward to talking with you all next quarter. Thanks a lot.

Operator

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

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