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MTR Gaming Group, Inc. (NASDAQ:MNTG)

Q4 2007 Earnings Call

April 8, 2008 4:30 pm ET

Executives

Edson R. Arneault – President, Chief Executive Officer

John W. Bittner, Jr. – Chief Financial Officer

David R. Hughes – Executive Vice President, Strategic Operations

Analysts

Lawrence Klatzkin – Jeffries & Co.

Steven Wieczynski – Stifel, Nicolaus & Company Inc.

Dennis Forst – Keybanc Capital Markets

Ricky Perret – KBC Peel Hunt

Steve Altebrando – Sidoti & Company LLC

Joe Houdet – Wachovia Securities

Nicholas Danna – Sterne, Agee & Leach

Michael Tucker – Andover Capital

Operator

Good day, everyone, and welcome to the MTR Gaming Group fourth quarter 2007 and year end conference call. At this time I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode.

The company’s remarks may include forward-looking statements within the meaning of section 27(a) of the Securities Act of 1933 as amended, and section 21(e) of the Securities Exchange Act of 1934 as amended, concerning the company’s prospects. Actual results could differ materially from those projected or suggested in any forward-looking statement as a result of a variety of factors which are described in the company’s period reports filed with the Securities and Exchange Commission and in the company’s new releases.

Additionally, the company may discuss EBIDTA or earnings before interest, taxes, depreciation, and amortization, which is a non-GAAP financial measure. Such information and any disclosure required by SEC regulation ‘G’ can be found in the MTR April 7th, 2007, news release which is reproduced on the company’s website under investor relations.

Finally, under certain circumstances the federal securities laws may require the company to file a transcript of this call, including your questions, with the SEC. Accordingly, if you ask a question this company will assume that you have consented to the inclusion of your question and identity in any such required file.

After the speakers’ remarks there will be a question and answer session. (Operator Instructions). Thank you.

Mr. Ted Arneault, you may begin your conference.

Edson R. Arneault

First of all I’d like to thank everybody for our fourth quarter, turning end over fourth quarter and 2007 report. And I would just like to say that the fourth quarter was really what we regard as the culmination of kind of the preparation stage for our business plan that we really started about four years ago.

First I want to deal with the accounting issue that we’ve had. We did have an untimely filing of our 10K. It was late by, I think, a day and a half. And there were several issues involved. First of all, going from the fourth quarter, we had a table games implementation. At the same time in the first quarter we sold two of our what we considered non-strategic assets. We sold the real estate portion of the Speedway and also have a contract to sell as soon as the buyer would get licensed the gaming portion of the Speedway, which entailed a substantial amount of documentation be provided to the buyers. In addition, we sold Binion’s and likewise it was part of our overall plan in selling non-strategic assets that did require substantial amounts of time and effort in order to get that sale done.

Because of the fourth quarter results we had to deal with some of our banking issues which further delayed some of the accounting and projections that we were going to use and had to be provided to our auditors Ernst and Young so that they could give us a report. We did that after finishing the bank negotiations in late March. Ernst and Young felt they needed additional time to work out our projection in order to sign off.

Further complicating that, as probably some of you know, we were working on a couple, actually several strategic alternatives in the first quarter which also demanded a substantial amount of time and effort on our accounting staff. We are making some changes and we feel that we’ve got the system ready and in order to make sure we file on a timely manner. I don’t think we could ever see another quarter with as much activity as we saw in this first quarter, but we plan to make sure that those Ks not only are filed on time, but not extended in the future.

As I said, I look at the fourth quarter as the culmination of the implementation of our business plan. As you know, we had anticipated that at some time at MTR or Mountaineer we would have additional competition or at least the initiation of competition from other states. In anticipation of that we had built and moved Mountaineer to be a destination resort.

The key to establish Mountaineer as a destination resort was twofold. One, that it certainly helped us from a legislative stand point in having the legislature willing to work with us to increase the amount of gaming offerings we would have. And secondly, it became a requirement as part of the legislation in order to have table games.

Also part of the game plan, we felt that it was needed to have a presence in both Ohio and Pennsylvania to protect both sides of the Mountaineer market. To that end we built in Erie Presque Isle. We opened it in February of last year. And also acquired Scioto Downs, which while Ohio has not moved into any form of gaming legislation certainly it has been attempted. I think we would have to be imprudent if we felt that it wasn’t going to keep having attempts. If it does, you know, our Scioto Downs facility, I think, is as good as any location that they would have in the state of Ohio. So we proceeded over the last four years to develop the property with those goals in mind.

And as anticipated in 2007 we did start to receive some of that competition that we thought. The first that we received was from Presque Isle, which fortunately is of course owned by us so it was not really a cannibalization, but rather a trading of customers, if you will, but still within the Mountaineer family. The second, of course, came from the Meadows and started just at the end of the second quarter and proceeded into the third and fourth quarter. I’ll be frank that it had a bigger effect than we had originally anticipated. But we did have the fix in place. We had been lobbying for two years for table games. We were successful in March of last year to have legislation passed in June, to have an election, and in the fall and early winter to have implementation of table games. The reason for table games became pretty obvious and are becoming even more obvious as we go along. We felt that we needed to have that differentiation of product so that Mountaineer, while it’s not close to any great population base, would have a product differential over any competition that we would have. And we were successful in achieving that. So we’ve seen not only a tremendous increase in table game play over the last three months, but we have seen a very successful start of a (inaudible) on our slot play at Mountaineer.

If you look at it, the fourth quarter we were kind of hit by the perfect storm where you had competition coming in, the economy having its own issues, although I’ll deal with that a little bit later, and having to incur the cost of preparing for table games. Which fortunately, because we had decided to become a destination resort in the prior three years, was not as much as it would have been for a lot of other facilities, but nonetheless did occupy both money, time, and resources in order to prepare. And as you know, in October we started poker, which has been very successful, and in December 20th we started our table game operation. Unfortunately late enough in the fourth quarter where we did not see any tremendous effects.

But the trends that we have been working on have all been positive, both from a balance sheet standpoint and a P&L standpoint. If you look at the balance sheet, we’ve been able to look at non-strategic assets, such as we’ve always had Binion’s and Speedway were and generate additional cash and pay down on our line of credit.

In addition, we have looked at our capex because of the situation and we have spent the money in the past few years to become a destination resort and because of frankly the newness of Erie we’ve been able to cut down substantially on our capex expenditures this year. We would have to go over the exact dollars, but they’re in the $16 million range for the rest of the year. Plus, all of those moves have an additional affect on P&L. If you look at Binion’s, we were able to cut the cost of operating Binion’s. Going into the second quarter of this year we did have still the first couple of months of this year, which will have some impact on the first quarter, but we will cut the going-forward losses at Binion’s. We’ve been able to really, since we are no longer really in the development stage of table games, we’ve been able to have cost containment at Mountaineer and, in addition, we have been working right along at cost containment at Presque Isle Downs.

The other great factor that we have had, as I said, we looked at table games as being the key, is the decrease in the loss of slot play that we have. If you look at the fourth quarter of last year compared to 2006 we had a decreased slot play of 17.9%. But since implementing table games for the first quarter of 2008 we’re down to about 9.6%, which includes March, which anybody who follows the weather in our area of the Great Lakes knows that we got hit with a very strange amount of bad weather. But if you look at January we were only down 6% and if you look at February we were down 5.7%. So a tremendous decrease in the loss of slot play.

Table game growth has been phenomenal. We’ve been able to reap the amounts that we had anticipated on a drop in net win and on a net win per position basis. We see that table game play continuing to grow to the extent that we increased from 37 poker tables to 40 and we have increased from about 50 games to 55 games for regular table game play. But as we anticipated, because we had built Mountaineer out as a destination resort, we’ve also seen the ancillary growth in other areas. Thirty-six percent growth in our food and beverage in the first quarter. Our hotel room, not just the occupancy rate has grown, but the ADR has grown. And we’re looking at both our spa, our fitness centre, all of the ancillary activities that we have had a great growth factor.

Now turning to Presque Isle Downs, we’ve got interesting developments going on at Presque Isle Downs. We have initiated seven simulated table games at Presque Isle Downs, each of which is meeting great success. We think, as I discuss our marketing plans in a little bit, you’ll see that’s going to tie directly into our marketing plans and ensuring that we can still capture the Northeast Ohio and Central Pennsylvania business, especially when I introduce the marketing plan that we’re going to talk about.

I want to talk a little bit about EBIDTA margins. Mountaineer’s EBIDTA margins were affected a lot by pre-opening costs and a lot of the campaign costs that are not necessarily associated with opening costs, but nonetheless are incurred. They also were affected by the slot trends that we felt in the fourth quarter, which we feel we have substantially reversed, as I’ve talked about before.

I also want to talk about EBIDTA margins at Presque Isle Downs because it’s a concept that has to be looked at just a little bit differently at Presque Isle Downs. We feel that we’re going to be in that 17% to 20% range, but Presque Isle Downs is burdened with a $10 million local tax, which is a fixed cost. Now that tax we have challenged, all of the gaming facilities in Pennsylvania challenged but lost when the revenue department decided that that was part of the bill. So it is part of our permanent structure. But if you’re going to look at the efficiency of operations you almost really need to back that $10 million out. I know it’s still an accounting issue and I know it still winds up from an accounting concept as part of our EBIDTA margin, but nonetheless I think if you’re going to really look at efficiency factors then you really need to back that out and almost have it a sub-category.

That $10 million at the level of play that we’re at right now has a direct 7% hit on our EBIDTA margin, which I think makes it look a little eschew. Glad to talk about that, but I think we almost need to look at Presque Isle Downs as having two different markets. Or two different factors.

One of the big things that I want to talk about going forward is our marketing strategy. We have been able to lobby and work with both the State of West Virginia, the lottery department, and the State of Pennsylvania, the Gaming Control Board, and receive approval that we can use just one player card between Presque Isle Downs and Mountaineer Casino. That is important as we attempt to control the Northeast Ohio, Western Pennsylvania, and West Virginia market in that people can go to Presque Isle Downs for a summer visit, come back down to Mountaineer to play table games. We’ve got, like I said, the simulated table games at Presque Isle and we actually just received this approval last Friday from Pennsylvania. We had received it about two weeks before that from West Virginia.

So we really attempted and because we did not know when table games were going to be fully implemented we had delayed really a coordinated marketing effort until this quarter so that we would know exactly how to market a combined coordinated marketing effort between Presque Isle Downs and Mountaineer Racetrack. I think it’s going to be an extremely successful campaign. It will have a coordinated player system that allows us to really concentrate on data mining and use the ability of both facilities to work with their customers. So we looked at that as being one of our great growth potentials.

Another thing that has been in the press is our strike issues. I’m happy to say, as of 4:00 today, the strike has been resolved. We’ve had verbal agreements between the parties. The attorneys have worked out the verbiage. We will have a joint press conference, we hope, later this evening and we think it’s a great package for our employees. Certainly it’s one that we can live in and feel very comfortable with and a lot of our people worked hard to get that. I think they’ve done a tremendous job getting that and I think no matter what you just hate to have your employees out on a picket line like that. So we think it’s going to have a positive marketing effect. We think it’s going to have a positive psychological effect on our employees, our customers, and we think that with that it will be a three-year contract that is a very workable contract for us.

Also there was the Wells Fargo trustee issue and we were informed by Wells Fargo from their trust department that they had received word from their loan department that there was a conflict and that they could no longer be the trustee for our senior bond. We don’t see that as a major issue. We’ve already talked to other people who would fulfill that trustee status. And like I said, we’ve got our loan arrangements done with Wells Fargo bank and our other banks. But they worked hard also on working with us to get this done so that it’s a very workable package.

Just kind of to talk about legislative issues. We still are always faced with legislative issues, even though we’ve come this far. West Virginia over the next couple of years are going to have changes in the local video lottery law, which will become important to us. Pennsylvania, of course, major tax issues that we have to deal with.

Ohio still offers tremendous opportunities for Mountaineer because of Scioto Downs. While they have not been moving towards any form of gambling, even the governor was kind of rebuffed when he recommended that Keno go into the bars. I think that to think that they are not going to move sometime down the road for tables or some form of gaming I think would be naive and I think it’s important for us to look at Scioto Downs as an extremely strategic asset. And because of its geographic location it’s the kind of asset that, while we do have to incur some costs, we have been able to work with both the racing commission and our neighbours at Beulah Park to have cost-cutting arrangements where Beulah Park is open about six months out of the year and Scioto is open six months of the year. We think that could save Scioto Downs upwards of a half million dollars a year. So we look at all of that as being an important part of going forward.

We continue to look at Michigan and see if there are any legislative opportunities there. And of course we’re getting ready to open Minnesota on April 11th and will soon have a car groom in July. We see that, once again, turning around from an asset that took a lot of administrative time, financial resources, and other costs into becoming a profit centre for us as we go into the third and fourth quarters of next year.

As far as there’s been discussions about new directors. Our committees have been looking at applications for new directors. We have sent out questionnaires and information packets. As you know, in gaming any directors have to be first approved by the compliance committees of the facility and then also potentially by the different gaming institutions. We look forward to having a lot of input from any potential directors that we would bring on and look forward to having people with experience, different kinds of skills and talents to bring to the board.

Once again, just in summary, we had anticipated that we would have this competition. We really initiated a program, like I said, starting about four years ago to prepare both MTR Gaming and Mountaineer to be ready for such competition. And those plans obviously included Presque Isle Downs and Ohio as strategic assets and Michigan and Minnesota, while not in our core market, certainly within our overall market. So the MTR plan has worked. I think we’re going to see the initiation of the benefits of those net plans.

In addition, Mountaineer of course had the plan of becoming a destination resort, going after table games which would allow it to become a destination resort. We’ve seen that we have been able to achieve that. We think it’s an extremely core asset for us. In the future we think it’s going to be the cause for a lot of growth in the future and we can see that down the road we would have additional tables beyond where we already have.

So I think those plans are well in place. Presque Isle Downs I dealt with. I think as we penetrate our market we’ve looked at the guidance that we’ve issued. When we looked at that guidance we assumed only a 3% growth for Presque Isle Downs and we’re hoping that coordinated table games or coordinated market plans with the unified card is going to allow us to do that and perhaps substantially more. We have to just wait and see how that works. But I tell you, there’s a lot of excitement in the market about it.

So we’ve issued 2008 guidance and we felt like we could do that because in 2007, as I said, in the fourth quarter it was the culmination of all the planning that we had done to get to this point and we feel that now we don’t have as many moving parts and we can sit and know where table games go and we know that it’s open. We know Presque Isle Downs’ market as we develop it. We certainly know Mountaineer’s market. We think the potential for increasing our market due to table games is substantial.

We looked at the new demographic that we’ve been able to attract. Our crowds are younger. They have a different excitement level. And the interesting thing is that we’re pretty sure we are penetrating a new market as we look at the overall market between the Meadows, Presque Isle Downs, Mountaineer, and Wheeling, and we see that there’s actually been overall growth in spite of a down economy that a lot of others would perceive.

Other intangible forms of growth. We still are working on the bridge, which would help ingress and egress. We’ve had progress on that in that West Virginia passed a bill this year for public-private partnerships which was really the key for our ability to get a bridge down the road. I never quite realized how much effort would go into building a bridge, but we do have that bill that was just passed. It was really passed with this bridge partially in mind as the legislators passed it. So we have that. And there’s actually different economic growth potential in the Ohio Valley.

We’ve got one of the power plants actually adding a substantial number of employees as it develops its clean air standards. We think that’s going to be in the neighbourhood of a thousand employees right across the river. And we also have a new power house that they, at least the planners believe it’s within a year of commencement, which could bring up to 3,000 or 4,000 construction workers to our area over the next three or four years. So we look at that as an extremely positive event and we’re here and we’ll be prepared to take advantage of that. It would be good to have construction workers back in this area.

Anyway, I’m going to open it up for questions. I have John Bittner here with me and David Hughes. We will each take questions as appropriate and I want to thank you for your forbearance and having a call this late in the season. But our next quarter call will be much more close to what would be a normal time.

Anyway, we have a big, big quarter in the fourth quarter that set us up for this quarter and beyond. We’ll be happy to talk about both. I’ll open it up for questions now.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Larry Klatzkin with Jeffries & Company.

Lawrence Klatzkin – Jeffries & Co.

Hey, guys. First question, Ted. In the 10K it says something about you changing your role with the company. Can you talk a little bit about that?

Edson R. Arneault

Well, that’s not really new. It’s really a contract that’s been out there for a couple of years. I think we’re really looking at that, Larry, right now to see what kind of changes, if any, would be best for the company. But it’s been, we’ve got, I think, a good team developed here and certainly I’m going to stay in the area. As it stands, I would do whatever we need to do. But I think we’re really in the initial stages of looking at an overall succession and corporate succession plan. It may take a year, it may take two or three years. But I think it was important as one of our risk standards to identify it. We’ll be all working on that over the next few months.

Lawrence Klatzkin – Jeffries & Co.

All right. Next question is, the cost of the strike. Do you have any kind of figure what it might affect the first quarter?

Edson R. Arneault

I don’t think it’s going to be much. We’re probably, our slots, it’s so hard to tell when you’re in a weather pattern like that. Unfortunately for the strikers and unfortunately for us we had some inclement weather while they were out there, so that always has a tendency to affect our slots. But honestly, our table games play was up. So I don’t think it’s going to have any material effect at all.

Lawrence Klatzkin – Jeffries & Co.

All right. And then Centaur Gaming, I know that’s a place that could take some business from you, but I have heard they have not yet been licensed. Any status on what’s going on there?

Edson R. Arneault

I think the last that I’d heard, probably anybody can hear, is that the chairman of the Gaming Control Board said that it wouldn’t be until the end of this year until they could even be considered. It’s a public comment, so anybody can look at it for review. But they have a racetrack licence, but they do not have a gaming licence at this point. So we’re just going to follow it just like everybody else.

Lawrence Klatzkin – Jeffries & Co.

All right. And then last question, you’re talking about a $17 million improvement in EBIDTA for this year. How much of that would you say is coming from your table games and how much from Europa (sic) therein and from the card club?

Edson R. Arneault

Let me have John deal with that.

John W. Bittner, Jr.

Okay, Larry, from rolling it forward from where we were at the end of 2007 into 2008 one of the first things that you have to look at is the elimination of the pre-opening costs, which aggregated $5.6 million.

The next thing is, if you look at table games we’re expecting at least $10 million of EBIDTA from table games operations, table games and poker. In addition, we expect with two additional full months of operations and additional growth at Presque Isle we’re looking at anywhere from $4 million to $5 million of additional EBIDTA growth from Presque Isle. And then incrementally at Mountaineer we’re really expecting some growth in slot machine operations and we’re projecting at least a $2 million growth in that area. So those numbers would roll you forward from where we were to where we’re projecting for 2008.

Lawrence Klatzkin – Jeffries & Co.

All right. Thank you very much.

Operator

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

Steven Wieczynski – Stifel, Nicolaus & Company Inc.

With the first quarter as already over, can you just talk about what you saw with first quarter trends, especially at Presque Isle?

Edson R. Arneault

Yeah, let’s, I’ll have Dave handle that one.

David R. Hughes

Obviously you are comparing to prior year for the first quarter for slots and we didn’t open until the 29th and our grand opening was in March. From a revenue perspective. But we’re still holding strong at $201(inaudible) per day and then we’re amongst far in excess of what we originally projected for the property.

The big thing that they’ve been looking at the property is do they have their costs (inaudible) your first year opening. We go through some processes. They’ve done a pretty good job of that. The first quarter the FTs are down 12% from prior year.

Steven Wieczynski – Stifel, Nicolaus & Company Inc.

Gotcha. And then current debt levels at the end of the year is at about 420. Is that down to about 395 now?

Edson R. Arneault

With the $27 million payment, yes.

Steven Wieczynski – Stifel, Nicolaus & Company Inc.

Okay. And then when you take your EBIDTA projection for the year of around 72, that’s basically assuming about a 14% margin. And you say you’re going to do about 17% to 20% at Presque Isle. Does that basically mean that Mountaineer’s going to be hanging somewhere in that 10% to 15% range?

Edson R. Arneault

No. I think you’ve got all of the holding company costs allocated in there. But we can get you exactly what we’re projecting.

Steven Wieczynski – Stifel, Nicolaus & Company Inc.

Okay. Great. Thanks, guys.

Operator

Your next question comes from the line of Dennis Forst with Keybanc.

Dennis Forst – Keybanc Capital Markets

Yes. Good afternoon. I wanted to clarify –

Edson R. Arneault

-- finish answering that last question because I don’t think we did?

Dennis Forst – Keybanc Capital Markets

Okay.

Edson R. Arneault

And then you can –

Dennis Forst – Keybanc Capital Markets

Sure.

John W. Bittner, Jr.

Basically for this year we’re projecting Mountaineer Park will achieve in the 18% range to an 18% to 19% margin.

Okay, Dennis. I’m sorry.

Dennis Forst – Keybanc Capital Markets

No problem. Good. Thanks for that information.

I had a question about Presque Isle. The margin that you were talking about at 17% to 20%, is that before the $10 million local tax?

John W. Bittner, Jr.

That is inclusive of all tax. That is the actual EBIDTA margin after all the taxes.

Edson R. Arneault

Yeah, so we were saying that really –

Dennis Forst – Keybanc Capital Markets

It should be in the high 20s.

Edson R. Arneault

-- trying to isolate the efficiencies you almost have to have two different EBIDTA margins.

Dennis Forst – Keybanc Capital Markets

Yeah, at the property level it’s more like in the high 20s.

Edson R. Arneault

Yeah.

Dennis Forst – Keybanc Capital Markets

Okay. And then you were also saying in the introductory remarks that tax issues will be big in Pennsylvania. Can you expound on that a little bit?

Edson R. Arneault

I think you can talk to any of the gaming companies in Pennsylvania and they would say the same thing. I think it’s an item that we’re going to have to always be talking with the legislature to work with them as we go along. I think they’re going to see that competitive forces will deem that they have to, at some time, re-examine their tax proposal. But it took me 3.5 to 4 years to get table games. I don’t expect that will be a fast thing, but certainly something that all gaming companies are aware of and will be working on.

Dennis Forst – Keybanc Capital Markets

Will Florida, or the racinas (sp) down in Florida are working with the legislature trying to reduce gaming taxes. You’re saying that the racinas (sp) in Pennsylvania are doing the same thing with the Pennsylvania legislation?

Edson R. Arneault

I’m saying that we’re certainly going to try. While it might not happen right at once, just like the guy who leads the charge down in Florida is Dan Adkins with Hollywood Greyhound is a very close friend. It takes a long time and we’re certainly going to have to be in front of them pleading our case, especially with things like the $10 million fixed amount. I know that local governments tend to rely on it, but it’s the kind of thing that we’re going to have to work on our side and decrease its effect on EBIDTA margin by growth. And I think that’s why we’ve really looked at this combined marketing plan as being the key. It’s also something we’re going to have to look at legislatively to see as these companies become more important for employment and other economic benefits in Pennsylvania would they be willing to work with us much like they’re talking about doing in Florida.

Dennis Forst – Keybanc Capital Markets

How much of that $10 million local tax was paid last year 2007? Was it on a prorata basis?

Edson R. Arneault

Well, you’re assessed it each year. Each fiscal year.

John W. Bittner, Jr.

The 2% minimum was paid to the host community, it is paid monthly or weekly with the normal tax payments. The incremental amount that gets you to the $10 million is accrued until the end of the year and then it’s paid within 15 days after the end of the year. That additional payment at the end of 2007 or the first two weeks of 2008 was close to $5.8 million of incremental tax.

Dennis Forst – Keybanc Capital Markets

Was that a 2007 expense?

Edson R. Arneault

Yes.

Dennis Forst – Keybanc Capital Markets

Okay. So you had to pay the full $10 million in 2007?

John W. Bittner, Jr.

Yeah. I’ll give you the differential between the 2% and the $10 million for 2008 so that we have a real good idea to roll forward. You’re looking at roughly between $6.5 million to $7 million depending on the (inaudible) revenue for 2008 as your impact.

Dennis Forst – Keybanc Capital Markets

Say that again. Six what?

John W. Bittner, Jr.

Six and a half to seven million dollars depending on revenue for your end tax as a result of differential of the $10 million and the 2%. That’s what it costs you extra.

Dennis Forst – Keybanc Capital Markets

Yeah. So the $6.5 million to $7 million will be a fourth quarter event or are you going to accrue it throughout the year?

John W. Bittner, Jr.

Through the year.

Edson R. Arneault

We accrue that.

Dennis Forst – Keybanc Capital Markets

So you’ll be paying about $2.5 million a quarter?

Edson R. Arneault

That’s right.

Dennis Forst – Keybanc Capital Markets

Okay.

Edson R. Arneault

We’ll be accruing $2.5 million a quarter.

Dennis Forst – Keybanc Capital Markets

Yeah. Yeah. You’ll be accruing $2.5 million a quarter.

And lastly, your EBIDTA estimate or guidance includes corporate expense of about how much?

John W. Bittner, Jr.

Approximately $12.6 million, $12 million or $13 million.

Dennis Forst – Keybanc Capital Markets

Okay. Great. Thanks a lot.

Operator

Your next question comes from the line of Ricky Perret (sp) with KBC.

Ricky Perret – KBC Peel Hunt

Hi, folks. How are you doing? In your introductory remarks, Ted, you mentioned something about how in Q1 you were working on several strategic alternatives, you said. Anything more you can say about that?

Edson R. Arneault

Not really.

Ricky Perret – KBC Peel Hunt

Maybe what you meant by strategic alternatives.

Edson R. Arneault

What’s that?

Ricky Perret – KBC Peel Hunt

I’m wondering what you meant by strategic alternatives.

Edson R. Arneault

They were either an acquisition one way or the other.

Ricky Perret – KBC Peel Hunt

All right. And could you talk about – oh. You addressed the Wells Fargo trustee issue and that there was a conflict, but you didn’t really elaborate on what the conflict was. Could you give us some more detail about that?

Edson R. Arneault

There’s really not a whole lot more the trustee told us. They said it was they had a Chinese wall and could not really define what it was. But it’s probably one of two things. They have a client that was either part of a strategic alliance that was looking or it had to do with waiting until we got our ratios in compliance. That’s the only two things I can tell you.

John W. Bittner, Jr.

So to further clarify that, Wells Fargo is also the lead bank on our credit facility.

Ricky Perret – KBC Peel Hunt

Right. Well, I mean, the scuttlebutt around the high yolk community, I guess there were people talking about Wells Fargo might be representing Jacobs in some capacity. Is it possible to rule that out?

Edson R. Arneault

I truly don’t know that. I don’t, I would tend to doubt it, but I don’t know it.

Ricky Perret – KBC Peel Hunt

Can you talk a little bit about signage and how awareness is building at Presque? Do you guys have signage by the highway yet? How is that coming along?

Edson R. Arneault

That’s just in that, believe it or not it’s taken us a year to get all the permits and everything done. I believe the construction of that will be finalized here within the next month.

Ricky Perret – KBC Peel Hunt

What are you planning to build?

Edson R. Arneault

To build?

Ricky Perret – KBC Peel Hunt

Are you going to have an electronic type sign?

Edson R. Arneault

Yeah, well, it won’t be a Vegas type billboard because we really don’t have the competition to draw people, but it will be more of an awareness sign that Presque Isle Downs is right there. It will be visible going both east and west on 90. It will be above that Pilot gas station sign, which you know is pretty tall.

Ricky Perret – KBC Peel Hunt

Okay. Thank you.

Operator

Your next question comes from the line of Steve Altebrando with Sidoti & Company.

Steve Altebrando – Sidoti & Company LLC

Hi, guys. You mentioned some of these cross-marketing opportunities. Are your systems built out for that at this time or is it a further investment that would take?

Edson R. Arneault

They’re not built out for total cross-marketing at this point. Our IT people have been working on it and really we had to kind of wait and see what the parameters that the lottery and the Gaming Control Board were going to put on that. But it’s an ongoing process. We can start point redemption in the very near future, but to have a joint card is going to take some additional work.

Steve Altebrando – Sidoti & Company LLC

They’re both Bally’s, is that correct?

John W. Bittner, Jr.

Both properties use the Oasis system. Oasis has been working by one-card solution in different markets. I believe there’s over 110 clients that they have that want that one-card solution, so they’re very focused on it. However, as Ted mentioned, the ability to use your points at either location is involved and we have a method that would develop a series of methods that we will progress through that at the end, as far as the customer knows, they’ll be able to redeem their points at either location.

Steve Altebrando – Sidoti & Company LLC

And when do you suspect that would be complete? Are we talking a year?

Edson R. Arneault

We just got approval from Pennsylvania Friday, so we have been kind of tied up with this strike and getting it settled here over the last couple of days. But it is a focal point. And you gotta look at the potential in that if you’ve got people in the Northeast Ohio market that go to Presque Isle downs because of the ease of ingress and egress, if they also play table games it will be important that they can use those points at Mountaineer to us because we do have competition further to the east for potential table games customers. But this gives them the benefit of going both ways. Looking at it conversely, Presque Isle Downs in the summer is a very, very attractive place and if people are going to go someplace from the, if Mountaineer’s employees are going to go someplace we certainly want them focused on Presque Isle Downs in Erie.

David R. Hughes

Barring any unforeseen hurdles that we don’t see at this point, our goal is to have this up in the third quarter.

Steve Altebrando – Sidoti & Company LLC

Okay. And I want to touch a little bit on costs. I know you talked about the corporate. Should we see a little bit coming down because of the sale of Binion’s and the Speedway and a little bit if you could talk about just the efficiency of some of your properties. You possibly have or have you thought about that you possibly have a few too many machines up in West Virginia and is that something you’re looking at? Just some more efficiencies.

Edson R. Arneault

I think we look at that all the time. As we look at table games being an alternative product, certainly we have the space for it right now to grow into more table games. Would that affect some of the machines? It could. And as far as Presque Isle Downs, this will be really our first full year of racing, our first full year of being able to market it in this cross-marketing capacity. I think there are going to be efficiencies. Unfortunately a lot of those in the first quarter we incurred substantial costs in getting the sale of Binion’s done and getting the sale of Speedway done and implementation of table games. But I think you’re going to see the efficiencies really revolving around we don’t have to spend nearly as much money in preparation for table games, whether it be the lobby, whether it be other costs associated with that. We don’t have to spend nearly as much cost of those kind more or less than tangible costs with Presque Isle Downs. So I think you’ll see a lot of efficiencies from an accounting, legal, and other standpoint.

Steve Altebrando – Sidoti & Company LLC

Okay. A couple more. You mentioned that occupancy and ADR is up. Is there any way you can quantify that a little bit?

John W. Bittner, Jr.

As a matter of fact, we’ll give you, one of the things that we focused on last year was driving the occupancy and in doing so bring down the ADR in that process. Already in the first quarter we’re looking at an occupancy rate of approximately 74% compared to 71% last year. Additionally, right now the preliminary ADR will still be at about $74 range compared to $67.

Steve Altebrando – Sidoti & Company LLC

Okay.

John W. Bittner, Jr.

All sizes do an increase.

Steve Altebrando – Sidoti & Company LLC

Okay. And actually, I did have one more. You mentioned the strategic possibilities. Did I hear correct that you said there was a couple things being worked on?

Edson R. Arneault

I said we worked on a couple of things in the first quarter.

Steve Altebrando – Sidoti & Company LLC

Okay. That’s all. Thank you guys.

Operator

(Operator Instructions). Your next question comes from the line of Joe Houdet (sp) with Wachovia Securities.

Joe Houdet – Wachovia Securities

Good afternoon, gentlemen. Just, Ted, you had mentioned that $16 million for capex for this year. Is that correct?

Edson R. Arneault

Sixteen-point-seven, to be exact.

Joe Houdet – Wachovia Securities

Okay. How much do you see that for being for Running Aces.

John W. Bittner, Jr.

Go ahead.

Edson R. Arneault

That $16.7 million has to do with the operating assets. Running Aces is a separate, stand-alone facility and John can comment a little more on that.

Joe Houdet – Wachovia Securities

Great. Thanks.

John W. Bittner, Jr.

Running Aces North Metro has obtained stand-alone non-recourse financing which is financing the construction of that facility as Ted indicated, which is due to open for racing prospective this month. So from a capex or expenditure from our point of view there really will be none unless we need to make any minimal ongoing capital contributions with respect to the normal operating costs.

Joe Houdet – Wachovia Securities

Okay. Great. Also, you hired, you had approximately 725 additional headcount due to table games. Do you see that increasing by year end?

Edson R. Arneault

I do. As we increase tables we think that it will go up, but I think one of the things we didn’t talk about as growth potential is that our dealers are really becoming much, much more efficient. We had a lot of brand new dealers starting off this first quarter, which is kind of serendipitous the way the law passed and we finally got it operative. We really got them a lot of training in the first quarter, which is, as you know, a slower quarter because of weather. But I think the additional play will be a lot because our dealers are a lot more efficient and able to manage their games better.

David R. Hughes

Also, when you mentioned the number, keep in mind that was the total facility. That didn’t just represent table games. That represented increasing staff due to going 24 hours, which we now have. Increases in food and beverage and hotel and increasing the operating staff there. Additionally, as you’re aware, when you expand an operation like table games those costs as a percentage aren’t as great as the initial costs.

Edson R. Arneault

When we use, Dave’s got a good point. When we use 725 it really becomes kind of a PR political statement. Those are the jobs that were created as a result of the passage of table games. Not jobs directly associated with table games.

Joe Houdet – Wachovia Securities

Okay. Great. Also, can you give us just a rough idea of what the total approximate amount of acres that you own in the four properties?

Edson R. Arneault

We own, let me just give you approximates. We own about 2,300 acres in West Virginia. We own about, I think it’s 500 or 400 acres in Erie. I might be off a little bit on that one because we sold a bunch of acreage earlier this year. We own about 200 acres or 50% of about 200 acres in Minnesota. We own no property in Michigan. That’s a lease. And we own about 200 plus a few acres, I think, at Scioto Downs.

Joe Houdet – Wachovia Securities

Okay. And deriving from that, about how much would you consider to be undeveloped?

Edson R. Arneault

Well, it’s interesting because if you look at Mountaineer we have under development operating day in, day out, it’s about 200 acres. But because of our acreage position and some of the opportunities that are going on in this part of the country we just actually, with a joint venture partner, started a mining operation where they really do it all and we get a 50% profit interest. In addition we’ve been able to timber some of our property and receive cash for that. We happen to be in an area that has increased oil and gas exploration. There was a time at the turn of the late 1890s, early 1900s when actually our old trailer park was one of the largest oil floods in the country. So while only 200 is operational right now we’ve been able to turn a lot of the other acreage into income producing assets.

Joe Houdet – Wachovia Securities

Very good. Thank you.

Operator

Your next question comes from the line of Nick Danna with Sterne, Agee.

Nicholas Danna – Sterne, Agee & Leach

Hi. Good afternoon, guys. Most of my questions have actually been answered. The one I did have was on North Metro. Two questions. What are your expectations for that property once it’s fully operational with both the race track and the card club?

Second would be, is it going to be consolidated or is that going to be a below-the-line item?

Edson R. Arneault

There’s two components. I’ll let John answer the accounting and the equity one. But as far as the entire facility itself we’re looking at between $8 million and $10 million on run rate for EBIDTA for full year. Almost 50% would represent our interests. And John can answer the financials.

John W. Bittner, Jr.

Currently North Metro is not consolidated. It’s accounted for as a 50% joint venture where we pick up the equity earnings and just our share of their net operating results. And there currently is no plan or requirement to consolidate them unless something else will change either in the accounting rules or in the way the property is managed and controlled. It would force us into consolidation right now, it’s just carried as an equity earnings investee.

Nicholas Danna – Sterne, Agee & Leach

Okay. So the $72 million guidance would include zero from North Metro. That would be below that.

John W. Bittner, Jr.

Correct. From an EBIDTA reconciliation point of view equity earnings in the joint venture are excluded from EBIDTA.

Nicholas Danna – Sterne, Agee & Leach

Okay. Thanks.

Operator

Your next question comes from the line of Michael Tucker with Andover Capital.

Michael Tucker – Andover Capital

Hi. I just have three questions. Can you just bridge what you said about corporate expense was? Last year corporate was, like, $11.9 million and that included $1.9 million in pre-opening expenses. How much of the $13 million to $14 million that you’re talking about is (a) non-cash or stock-based compensation and (b) how much was associated with the sale of the assets in Nevada?

David R. Hughes

While John gets the second (inaudible) keep in mind, I want to go back to the first thing that Ted mentioned. We did incur some in the first quarter amount related to the strategical alternatives that were recorded on the books. Obviously there would be a reduction as a result of the Binion’s and the Speedway sale. I’ll let John go through the other components.

John W. Bittner, Jr.

Well, the stock compensation will be slightly in excess of the stock comp expense, the amortization, the existing option would be slightly in excess of $1 million. And the pre-opening expenses that were incurred were really incurred on the books of Mountaineer and Presque Isle Downs.

Michael Tucker – Andover Capital

Right. But I’m just trying to get what a run-rate cash corporate expense was if you’re not selling assets in Nevada and excluding the equity comp. Is it closer to $10 million or $11 million?

John W. Bittner, Jr.

There’s about $12 million less roughly $1 million in the stock comp. That would take account of at least $11.5 million. From a cash run-rate perspective. I’m trying to think of any other non-cash expenses in there, but that’s pretty much it that would be off comp.

Michael Tucker – Andover Capital

All right. So that backs out the Nevada one-time expenses.

John W. Bittner, Jr.

There wouldn’t be much from the Nevada one-time expenses. I’m not sure what you’re referring to.

Michael Tucker – Andover Capital

I didn’t know if there were expenses associated with selling those assets that went through the corporate overhead in the first quarter of this year.

John W. Bittner, Jr.

There are strategic cost in there for a number of our strategic alternatives that probably aggregate close to $0.5 million for 2007.

Michael Tucker – Andover Capital

Okay. The second question just on, you mentioned about the $10 million local tax in Pennsylvania. And in your K you talk a little bit about being able to get reimbursed from the locality through capital projects that would benefit the racing.

Edson R. Arneault

Well, we do. We have an agreement right now with STDA, which is Summit Township Development Authority, and they have actually filed suit against the county to make sure that they’re in line to get their portion of the money, which in turn would then effect our agreement and we could, once again I want to say could possibly receive up to $14.5 million from STDA. But we’ve also looked at other things. We’ve looked at that as a possible cash source. We’ve looked at some of the non-strategic real estate up there. We estimate that to be in about the $10 million range. And other potential sales of non-strategic assets to look at debt reduction, actually.

Michael Tucker – Andover Capital

It’s just, you know, from a rebate perspective it affects your effective tax rate. If you were to get that $14.5 million would that be over a five-year period? A 10-year period? What do you think that would be?

Edson R. Arneault

I believe that’s over a 10-year period right now.

Michael Tucker – Andover Capital

Okay. Thanks. And then, I don’t mean to harp on this. I know you talked a little bit about time for succession planning and it seemed like one, two, or three years. That seemed to be a broad, a wide range of outcomes. Can you give any more colour on that or what the thoughts are? I mean, is there –

Edson R. Arneault

Well, I don’t think there are any costs. I think it’s just we’ve really worked over the last four years to get into this position that we’re in right now. I think we’re really just starting to see the benefits of what we’ve been able to do. I think it would only be prudent for the board at this time to say okay, what’s the best way to further penetrate this market? Let’s develop a process whereby we have a complete package of successive alternatives. And I think that’s what they’re looking at. I can’t really speak for the board, but I know the process has been initiated and we’ve started talking about it. I think the comment in the K is just, it’s been there, my agreement’s been there for a long time. So I think it’s just recognizing that we have moved the ball forward tremendously and now it’s time to look at a plan that involves taking the assets that we have in our market area and ensuring that we’ve got the team and the ability in place to maximize those assets and that’s what’s being looked at.

Michael Tucker – Andover Capital

Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Ricky Perret with KBC.

Ricky Perret – KBC Peel Hunt

Answered. But just, Mr. Arneault, with respect to your contract, when does that expire?

Edson R. Arneault

December 31st of this year.

Ricky Perret – KBC Peel Hunt

Okay. And is the GM of Presque, Dick Knight, does he have a contract with the company as well?

Edson R. Arneault

Yes.

Ricky Perret – KBC Peel Hunt

When does that term?

Edson R. Arneault

I believe it’s 12-31-08.

Ricky Perret – KBC Peel Hunt

Excellent. Thank you.

Edson R. Arneault

Clear. Wait a minute. It’s 12-31-09.

Ricky Perret – KBC Peel Hunt

Twelve-thirty-one-oh-nine?

Edson R. Arneault

Yes.

Ricky Perret – KBC Peel Hunt

Thank you.

Operator

And you have no further questions.

Edson R. Arneault

All right. I want to thank everybody for their patience going through this. I think the questions were great. We really wanted to get everybody up to date. We are going to be planning an investor conference at Mountaineer so people can come in and we’ll take you through Presque Isle, show you first hand the table games, the experience that’s available at Mountaineer. I think you’ll find it’s impressive. Take you through our growth plans on how we’re going to penetrate this market. We think, you know, obviously having the ability to joint market our assets here, and we’ve left Scioto Downs out, but I don’t want to. We will be using Scioto Downs also to help market in the entire market area. We look at Eastern Ohio, Western Pennsylvania, West Virginia as our market areas. So we think we’ve got a program, as David said, we’ll have the redemption potential for that market up. We hope this first quarter or second quarter. As soon as technology is available we would have a single card that would really encompass all three of our assets.

So thank you and we’ll talk to you next quarter.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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