Pinnacle Entertainment's (PNK) CEO Anthony Sanfilippo on Q2 2016 Results - Earnings Call Transcript

| About: Pinnacle Entertainment, (PNK)

Pinnacle Entertainment Inc. (NYSE:PNK)

Q2 2016 Earnings Conference Call

August 09, 2016 9:00 AM ET

Executives

Vincent Zahn - VP and Treasurer

Anthony Sanfilippo - CEO

Ginny Shanks - EVP and CAO

Carlos Ruisanchez - President & CFO

Analysts

Joseph Greff - JP Morgan

Carlo Santarelli - Deutsche Bank

John DeCree - Union

David Katz - Telsey Advisory Group

Operator

Good morning. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the PNK 2016 Q2 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. I would now turn the conference over to Vincent Zahn. Please go ahead.

Vincent Zahn

Thank you, Brandy. Good morning everyone on the call. My name is Vincent Zahn, Vice President and Treasurer of Pinnacle Entertainment. Thank you for joining Pinnacle Entertainment’s 2016 second quarter earnings conference call and thank you for your interest in our company. Earlier this morning, we released our 2016 second quarter financial results. If you don’t have a copy of the announcement and would like one sent to you, please visit the Investor Relations section of our website or contact us by emailing investors@pnkmail.com.

On the call with me 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.

Before I turn the call over to Anthony, we would 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 our 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 release 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 press release.

With that, it is my pleasure to turn the call over to Pinnacle Entertainment’s Chief Executive Officer, Anthony Sanfilippo.

Anthony Sanfilippo

Thank you, Vincent, and good morning, everyone. It is a tad earlier than we normally do this call, about an hour earlier. We were sensitive in accommodating all of you and others who are reporting today, but we are very pleased to be with you. In addition to Carlos and Ginny, we also have with us Donna Negrotto, and we are very pleased that Donna has been promoted.

She is a long-term Pinnacle Entertainment team member and she has been promoted to our general counsel position. We said goodbye to a long-term team member Jack Godfrey, who retired in June and who really did a terrific job for us over many, many different events that we have had over the ten plus years that Jack was with us, but Donna it is great to have you with us.

Donna is actually from Mississippi. So we have a lot of properties down in the south and it is wonderful to have her in that GC role. We are very pleased with our second quarter. We felt like there are a number of things that have gone very well and are going very well, and it really is a result of what we continue to do and that is stay focused on our team members, who provide great service to our guest and really every day thinking about how do we get better at what we do.

Ginny, we have a number of highlights in the quarter, would you please talk about them.

Ginny Shanks

Absolutely. Good morning. The second quarter was a very strong quarter coming on the heels of a record first quarter. We saw solid and consistent trends throughout the quarter when normalizing for the impact of low [hold]. We are particularly encouraged with the growth that we saw in key metrics. I will go through -go a couple of those. Spend per trip was up over 4% and that showed sequential growth from the first quarter. We continue to see the impact of strong play in our VIP segment that is helping to show that year-over-year improvement.

Table games drop increased over 5% with the largest growth seen at our properties in the Chicago, Council Bluffs, Lake Charles, Baton Rouge, and Black Hawk. We experienced six consecutive quarters of growth in the unrated segment, and that is particularly encouraging as well. Properties where we saw that growth Belterra Park, Council Bluffs, Baton Rouge and East Chicago were also showing particular strength in the unrated segment.

In terms of July, we are very encouraged with what we saw. We had strong volume trends helped in part by a favorable calendar, but overall accelerating from what we saw in the second quarter. In markets where we operated, if you look at market share coming out for the month of July, consumer demand is healthy and stable. And at a number of our properties we saw an increase in market share with reduced marketing spend.

Anthony Sanfilippo

Let us spend a little bit more time on our marketing reinvestment, and what has been happening there continues to be a very positive trend.

Ginny Shanks

We continue to make broad-based refinement to our marketing reinvestment by methodically focusing on our spend in those [Indiscernible] as they represent our greatest and most profitable revenue stream, while reducing expenditures to those in the lower less profitable tier levels.

Marketing reinvestment, as noted in the press release, was 7% lower than prior year with the reinvestment rate declining by 100 basis points. And that represents sequential improvement from the first quarter where marketing reinvestment was down. We are seeing increased efficiency in direct mail and advertising as we continue to build capabilities at our service center here in Las Vegas. Significant savings were also seen in [Indiscernible] as we embark on higher utilization of lower-cost channels such as email and we further leverage our scale.

Anthony Sanfilippo

It really is a terrific story, and Carlos there is a number of other things that we continue to do to improve our operating results. Why don't you talk about some of those?

Carlos Ruisanchez

We continue to get better across all areas of [Indiscernible] with the margin improvements that you see in the quarter were broader than some of the improvements Ginny talked about on marketing as our G&A, our cost of sales and labor have all improved their efficiency across the company. Food costs were down by about 3% in the quarter, G&A costs were down by 3.5%, and they were driven by controllable costs, things that we have direct input into which were down about 4.5% over last year.

Repairs and maintenance were down, which really speaks to the condition of our properties. We continue to maintain our properties and really have a best in class facilities throughout our portfolio. Labor costs were down in part by controlling [Indiscernible] adjusting for demand trends efficiently during the quarter. These were all things that we believe continue throughout. Any forecast going forward in our portfolio across our business really continues to get better in all parts of the business.

Anthony Sanfilippo

It is a very good story. We also noted in the release that we had some pretty happy guests for the quarter, and we believe that it had an impact on EBITDA of about $6 million due to low table hold and that is okay because we are very happy with as Ginny pointed out improvement in drop that we have and the level of play that we continue to build on our table gaming side. So that really is an overview of the second quarter and the results of the second quarter.

The Meadows Racetrack and Casino, we hope to be on the agenda in September in Pennsylvania to get approval, and then we will close shortly after that. That is going to be our 16th location. We are very excited about that, and we will be adding 1200 new Pinnacle team members. Ginny has been leading the integration effort on the Meadows and Ginny could you provide an update on that please.

Ginny Shanks

We have spent the last 3 to 4 months with a dedicated team of individuals working on the Meadows integration. I am very confident that we are ready. We are looking forward to September close. We have spent quite a bit of time with the team, terrific team, really like what we see with what we see with the team at the facility at the Meadows and we are looking forward as you said to welcoming the team members to the PNK family next month.

Anthony Sanfilippo

A lot of good work on the Meadows and it is really a template for us for future development. We continue to build capabilities at the service center, and refine as we bolt on new businesses to our company, our ability to really integrate quickly and efficiently. Carlos, talk a little bit about when you look out there at opportunities to continue to build our portfolio.

Carlos Ruisanchez

I think the Meadows will be our first in the strategy that we have articulated out there. We continue to be focused on what comes next. But let me spend a minute – extra minute on the Meadows. On the Meadows it is a terrific business, and we are excited to be owners to that business come next month subject to the regular approvals. We are confident in our ability to continue to add value and grow through our platform and some of the scale capabilities that we have, and particularly we have talked about in the past that we expected about $10 million in synergies through that and we are confident that we will be able to achieve that.

No new target out there that we want to put out there at this time, and we are confident about the combination and an addition of business to our company. The funding of it will be under our credit facility, which currently carries an interest rate of about 2.5%, and that will be a very accretive transaction on a free cash flow basis for us. As it relates to broader opportunities, we are encouraged by the things that we see out there in the horizon. Certainly there is nothing that we can announce at the moment, but we are spending time looking at things that we believe will be not only accretive to our company, but it will in very meaningful ways derisk the profile of our company as we continue to expand the portfolio and built into the capabilities that we built as an entity both at the service center in Las Vegas as well as throughout sharing best practices across the portfolio that we have.

Anthony Sanfilippo

Carlos talk about our share repurchase and our balance sheet. We announced in May that our Board had authorized us to repurchase $20 million of our own common shares, and pretty pleased that we are able to execute that in the last couple of months, give us some insight on that.

Carlos Ruisanchez

Certainly as we have talked about in the past we evaluated investment opportunities throughout our company both internally and externally, obviously our stock being one where we have a lot of conviction on. As such, we did complete the program in about two months, about 4.5 million shares at a little over $11 a share. This happened actually faster than we thought through it, but we continue to be very focused on being prudent about deploying the free cash flow that we have and weighing the risks versus the rewards and where we are relative to our capital structure. We do believe that this will be a very good investment for our shareholders as we continue to execute on the strategy we have talked about.

As part of the balance sheet, we certainly have committed that we will continue to improve our leverage profile. We are very focused on this and with the buyback, which happened faster than we anticipated we [Indiscernible] profile that where we have reduced our debt by about $21 million since the close of the GLPI transaction through the end of the quarter and our leverage, conventional leverage, did go down despite the $50 million of buyback that we executed over the last couple of months.

That strong free cash flow, our operations that continue to get better and our growing scale adding on the Meadows to our portfolio will improve the risk profile of our company and help us continue to delever. We have talked about getting into [Indiscernible] as sort of a target on leverage, and we feel very good about doing that going into next year.

Anthony Sanfilippo

Overall a lot of positive events both from how we operated and how we continue to improve our balance sheet. Randy, at this point we are going to see if there maybe questions from anyone who has dialed in.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Joseph Greff with JP Morgan.

Joseph Greff

Good morning guys.

Anthony Sanfilippo

Good morning Joe.

Joseph Greff

Carlos, Anthony, Vincent, can you talk a little bit about your view on share buybacks from here, I know you exhausted the authorization, great to see that. But given our projections of free cash flow and where you end up on a net levered basis, next year it seems like you could still do an additional 50 million or even more of buybacks, so maybe where that kind of fits in the priority of things right now?

Anthony Sanfilippo

So, Joe. We are not looking at the world any different than the last time that we talked about this. We do have a lot of conviction on our story. We have committed to not leverage up through these things. And this is an investment opportunity just like other investment opportunities that are out there, and we will evaluate in due course.

We do feel very good about having the buyback done – that we got done and just like we did before, we will evaluate where we are going forward.

Joseph Greff

Okay, great.

Carlos Ruisanchez

The other thing I would add is we are very, very pleased with the options that we have in front of us including how we have managed over the years the maintenance of our facilities, so our facilities across the board have been very well maintained and so when we think about how we deploy our available cash, we feel good about if it made sense to continue to repurchase our shares or if that were some other growth opportunities for us, we have a portfolio of assets that are in terrific shape and we are running these businesses – when you hear how we continue to expand our margin, we believe that is sustainable.

That is because we just continue to build and refine our capabilities and we are very confident at the management that we have throughout our company. So we like the position that we are in and the options that we have in front of us.

Joseph Greff

Great, and then I just have a couple of small questions here, with regard to Capex in the back half of this year and into next year, as well as cash taxes in the second half of this year and next year, Carlos can you help us with that, and then my final question if you can provide us with the last four quarters of EBITDA at Meadows as of the end of the second quarter. That is all from me, thank you.

Carlos Ruisanchez

On regards to Capex, we have, as we have talked about in the past, about 65 million to 75 million is maintenance for the year. So far this first six months, we are at 41 of Capex, and from there, that pace I think is a pretty reasonable pace through the end of the year. We will have some Capex associated with the integration that we have with the Meadows, but that certainly – the number out there will be – at the end of the year south of $100 million.

Capex was about $48 million or so. As it relates to the Meadows EBITDA that is out there, there was – if you take out one time related things out there for which it actually benefited this past quarter that number is roughly around 48 million, ex-obviously any lease payments associated with that.

Joseph Greff

Of course, I may have missed it, but the cash taxes, did you say in that answer?

Carlos Ruisanchez

Cash taxes for the year. There were some taxes associated with the GLPI transaction that were below $4 million. I think you should expect us to have another a couple of million in taxes, in cash taxes this year and assuming the existing EBITDA that you have for our company that number should maintain into next growth CapEx or growth cash flow would be taxed at the normal rates.

Joe Greff

Great. Thank you, guys.

Anthony Sanfilippo

Thanks, Joe.

Operator

Your next question is from Carlo Santarelli with Deutsche Bank.

Carlo Santarelli

Yes, hey guys, thanks and good morning.

Anthony Sanfilippo

Good morning.

Carlo Santarelli

Carlos, you spoke a little bit when you were talking about acquisitions and potentially some opportunities out there that you guys are spending times looking at things I think you said too your goal was maybe to de-risk the portfolio. I'm trying to understand, is that more of a geographic diversification to de-risk the portfolio or is that more of a buying something that doesn't have a land lease underneath it or is not paying rental payments. And if the former IE geography, could you talk about kind of areas that would be of maybe greater interest to you?

Carlos Ruisanchez

Certainly, the perspective we believe bigger is better as we look to de-risk, certainly if you go back to our company six years ago, there was a heavy reliance on both Lake Charles and St. Louis. And both of those have been terrific markets and we have terrific businesses there but we're less reliant as we become a broader company that it really expands the nation and regard to market. That's what I meant about de-risking. Same thing with regards to scale, the more person power we have the better we can drive synergies, not only in regards to acquisitions for our existing business and we continue to get better through that.

I would tell you as it relate to specific structures and regards to the lease, and what have you. We feel good about where we stand and our ability to grow our company from where we are and we believe that that growth will be enhanced our ability to continue to drive better margins and drive synergy to those acquisitions. As it relates to markets, we the metals will be graded adding another stay in another markets to our portfolio. Certainly, we'll like to continue to diversify that. however, we are in some terrific states where if there are businesses that makes sense that we can get at compelling values and we can drive better performance but virtue of the capabilities that we bring, that would be of interest as well.

Anthony Sanfilippo

I would add to that, Carlo, that we are with the matter of our 16th location, we're very pleased and proud of the loyalty program mychoice that we have created. And we continue to see cross market play that occurs from a number of our properties, whether it's a Chicago land are to St. Louis and we expect the same thing is going to happen in Pittsburgh or whether it's folks going down the Lake Charles or up to our Black Hawk property right outside of Denver. We think that's pretty powerful and we are a very compelling program. And then properties that we feel great about the experiences and the amenities that we have there. So, we want to continue to add to that and we feel good about the relationship we have with the MGM in our ability to have people stay loyal to us in their home markets because of the relationship we have with a Las Vegas based premiere operator.

So, our strategy is we have built terrific capabilities in Las Vegas and we have a great management team. We are anxious to as Carlos said find deals that we believe appropriately fit into our portfolio and continue to grow the company. Now, the question and we're going to do it with a read or not will all depend on what we think the best economic outcome is in the transaction. So, we evaluate it both ways. We have a very good relationship established with Gaming & Leisure Properties. We also believe that we got the ability and balance sheet. If it made economic sense for us also to do a transaction what we owned the real-estate.

Carlo Santarelli

Great. Thank you, both. And then if I may with a follow-up and Anthony, you touched on it a little bit. But as it pertains to my choice in Meadows, let's just assume for simplicity you guys would take over the property on October 1st, starting in the 4Q. How long does the rollout process of getting the program kind of up and running and let's say a steady state there until maybe we start to see some of the influence from the program in the topline numbers at least.

Ginny Shanks

We plan on launching my choice in April of next year. We built a pretty good template about how to bring that program on in the system infrastructure that's needed for that, we think it would be a positive to the Meadows, guess in April we want to launch it sooner versus later. So, April of next year and if the Ameristar is pretty closer to what we could expect for the Meadows when we launch mychoice at the Ameristar properties. We saw double-digit growth in our VIP trips MCO in that first year following the program launch. So, high expectations for the value it will bring to the Meadows.

Carlo Santarelli

Great, very helpful. Thank you.

Anthony Sanfilippo

And we're excited about Pittsburgh market. That we've all spent a lot of time there and we think it's a very dynamic market and it's going to put us in a part of the country that we are not in and in a new jurisdiction. And there is a lot of city relationships with the two properties we have in the Cincinnati area and then St. Louis. So, and Chicago. So, there is a lot of positive with the Meadows casino and racetrack entering our portfolio.

Operator

[Operator Instructions] Your next question is from John DeCree with Union.

Anthony Sanfilippo

Good morning.

John DeCree

Good morning, everyone. Just want to --.

Anthony Sanfilippo

Hey John, how are you.

John DeCree

Good. Wanted to ask about the unrated play, you're seeing some really strong consistent trends there and wondering if you could maybe add a little color as to your thoughts on what might be driving that?

Ginny Shanks

So, the largest driver of unrated players Belterra Park is that property continues to ramp-up. Built a beautiful facility there, have a terrific team and the unrated growth at that property is in the double-digits year over year-over-year. In our other markets where we saw particular growth, that being Council Bluffs, Baton Rouge and in Chicago. We have done some branding work with the Ameristar properties in both Council Bluffs and in Chicago that is really repositioned. That property we think has broader appeal than this strategy that was used before. We done a very nice job in that market, I think buying what our offerings are, what our food and beverage offerings are, what our Table Games offerings are.

So, I think people are just more aware of all we have to offer under the roofs in those particular markets. And Baton Rouge continues to be a very healthy market. And again we have a superior facility in that market and we see the benefits both the health of the market and a quality, the facility, in terms of the unrated play in Baton Rouge.

John DeCree

Thanks, Ginny. And if I could follow-up, as you got the Southern market, it's been a very market for you guys. But we've heard comments from some of your peers that it's not an area of softness. Just wondering if you felt of seen any softness across the South, maybe as it relates to the energy sector. It seems like your business is performing a little better. So, I just wanted to hear your thoughts on the general demand in the South overall?

Ginny Shanks

Yes. Volume trends and I'll talk, such a big way in Louisiana and I'll get to Mississippi here in a moment. But for Louisiana, very strong volume trends. We talked a bit about the impact of low hold in Lake Charles in the early part of the quarter. But coming out of July we saw very good demand, we actually had a record REVPAR, so the quality of the guests and hotel is an all time record and Lake Charles for any month at any property and that we talked about as a record second quarter for that property. And then in the case of Vicksburg we actually had a favor innovation for much of the quarter that they opened in mid June and the property has been operating very well since that that they’ve reopened and we’ve seen that volume come back with their reopening. So, all in all the South is performing very well for us.

John DeCree

Great, thank you Ginny that’s all for me, thanks everyone.

Operator

Your next question is from David Katz with Telsey.

David Katz

Good morning everyone.

Anthony Sanfilippo

Good morning.

David Katz

So, we’ve covered a fair amount of my focus on the west segment as an area of interest, just to balance out the geography in your portfolio. So, I wanted to ask about creating a social presence, we’ve seen one of your competitors allocate some resources toward it and we report that’s been an effective tool and just given the amount of buzz that social casinos and social gaming has been capturing, what kind of strategies do you have in place and what thoughts do you have about that?

Anthony Sanfilippo

Well David, good morning. I mentioned earlier that we feel like we’ve a number of really good options in front of us whether it’s to continue to grow the company from adding new businesses to our company that have existing EBITDA to continuing to repurchase our own shares to continuing to pay down and de-lever the company through reducing our debt. We’ve also been very active over the last couple of years and understanding the social space and companies that operate in the social space. We’re very careful and prudent on how we think about deploying capital and what’s the next best capital to deploy and there hasn’t been on the social side something that we feel like is compelling enough for us to enter that space.

We pay a lot of attention to it, we’ve individuals internally dedicated to it, we just have not seen something that we think is the best use of our capital as opposed to other things we’ve been doing.

David Katz

And so, that sounds like you thought about it more from an M&A perspective which I think is probably understandable given where multiples are, but is it fair to say that you’ve looked, you’ve analyzed it from an internal or organic perspective or it’s an extension of the systems and technology capabilities that you already have as well?

Anthony Sanfilippo

Well, we’ve also looked at platforms that are already established by providers in this space. We just have felt like this is something that it’s better to see it mature then for us to get into something that it is still developing. We don’t feel like we’ve missed out today on being part of the social space and as you know, both Ginny and I’ve a background that was in actual game development and that the game side, we’re watching it continue to mature and looking at options whether it would be with someone that could provide a platform or an acquisition that we possibly would make with someone that’s already established.

David Katz

And if I can ask just one other quick question. With respect to qualitative thoughts around the remainder of this year, the monthly numbers started off looking pretty good in July, but kind of choppy throughout the second quarter. How does it, what is your feeling about the remainder of the year from a top line perspective around the Mid West, most of your Mid West markets?

Anthony Sanfilippo

We’re very encouraged, July some numbers have come out some states have reported some numbers. We’re very encouraged by our properties’ performance in July. We continue to see it healthy into August. We believe because of the quality of the properties that we have and the quality of the management teams that we have at those properties and are focused on providing experiences to our guests when they come to them that we’ve built a business that is sustainable and we’ve seen very healthy volume across our portfolio. So, we’re encouraged that we’re in a spot that we’re going to continue to maintain our margins or improve them and provide very good results. Carlos, your thoughts?

Carlos Ruisanchez

Yes, let me add to that David. Certainly if you look at the markets that we’re in within our portfolio, we’ve see unemployment numbers come down in those markets pretty meaningfully from where they were a year ago. They’re all on average below the national average out there, you’ve seen some wage improvements that are starting to come through and overall we feel, we currently at least from our vantage point we feel pretty good about where our guests are and the markets that we’re in and how we’re providing the types of experiences that those folks want to have in those markets.

David Katz

Understood, well done, thanks very much.

Anthony Sanfilippo

Thank you, David. And Brandy we’re going to take one final question.

Operator

Yes, sir. And that question is from David [indiscernible] with Stifel.

Unidentified Analyst

Hi, looking at the reopening line of $44 million, I was wondering if you could break that out between how much was for the REIT and what was Meadows and what should we expect to see on the next quarter in terms of order magnitude for that line item?

Anthony Sanfilippo

Yes, actually the vast majority of that David was for the GLPI transaction, they were about – they really small amounts relative to the Meadows, there will be some more as we get to Meadows, but that line will come down to low to mid single digit million for the rest of the year absent some other transaction out there. So, the vast majority of that was all associated with the transaction with GLPI.

Unidentified Analyst

Okay. And then, looking at G&A the 127 I guess driven a lot by share base comp just wondering if that’s a run rate or if that might be a bit of an outlier given the trends going forward?

Anthony Sanfilippo

There was as it relates share base comp the transaction that accelerate some shares that were out there that ended up, the best thing as part of that transaction. So that is elevated, the amount in there was about $24 million associated with the acceleration piece of those shares.

Unidentified Analyst

So if we were to back that out that would be a reasonable estimate?

Anthony Sanfilippo

We can, I’ll follow up with you on that to get on that and I’m trying to think through about all the things that this was an unusual quarter by virtue of the transaction with GLPI and don’t want to misguide you. So, let’s follow up offline.

Unidentified Analyst

Thank you so much.

Anthony Sanfilippo

Thank you, David. And operator, thank you for how you conducted the call and I want to thank everyone that dialed in and those that believe in us through investing in us, thank you for doing so and continuing to do so and continuing to do so. And two, our team members really well done second quarter and we appreciate all that you do every day to make Pinnacle Entertainment a great company. So thank you all, enjoy the rest of your day and take.

Operator

Thank you ladies and gentlemen, this does conclude today’s conference call, you may disconnect your lines.

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