Trump Entertainment Resorts Q1 2008 Earnings Call Transcript

May.27.08 | About: Trump Entertainment (TRMP)

Trump Entertainment Resorts. (TRMP) Q1 2008 Earnings Call May 8, 2008 11:00 AM ET

Executives

Mark Juliano - CEO

John Burke - Interim CFO

Ravneet Bhandari - SVP of Revenue Management

Analysts

Harry DeMott - King Street Capital Management

Larry Klatzkin - Jefferies

Carlo Santarelli - Bear Stearns

Justin Sebastiano - Morgan Joseph

Jane Pedreira - Lehman Brothers

Glenn Hanson - Private Investor

Ryan Worst - Brean Murray

James Kayler - Banc of America Securities

Operator

Good morning everyone, and welcome to Trump Entertainment Resorts 2008 first quarter conference call. Today's call is being recorded and a replay of the call will be available on the Investor Relations page of the company's website at www.trumpcasinos.com or by phone from 1:00 pm today until midnight on May 15, 2008. The replay number is toll free 888-286-8010, or for callers outside the United States and Canada, 617-801-6888 and the pass code is 65749621.

The company will like listeners to know that certain information discussed by management during today's call regarding the company's operations, financial results, plans, expectations, estimates, and beliefs, as well as other statements including words such as anticipate, believe, plan, estimate, expect, intend, will, could, and other similar expressions constitute forward-looking statements under the Private Securities Litigation Reform Act, which provides a Safe Harbor for such statements so long as they are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such forward-looking statements. In connection with any such statements, there are various factors that could cause actual results to materially differ from those contained in such forward-looking statements and are subject to significant business, economic, competitive, regulatory, and other uncertainties and contingencies, all of which are difficult or impossible to predict or control. Accordingly, there can be no assurance that such forward-looking statements will be realized.

Listeners are also advised that developments of sequence to today's call are likely to cause these statements to become outdated with the passage of time or other factors which are unforeseeable or beyond the company's control. The company does not intend to update the guidance provided on today's call prior to its next press release or conference call unless otherwise required to do so. Listeners should consider these facts in evaluating the information provided during today's call and should not place undue reliance on any forward-looking statements made during today's call. Additional information concerning the potential risk factors that could affect the company's future performance are described from time to time in the company's periodic reports filed with the SEC, which may be viewed free of charge on either the SEC's website or through the company's website?

At this time, we would like to commence today's conference call by introducing the company's Chief Executive Officer, Mr. Mark Juliano, and the company's interim Chief Financial Officer, Mr. John Burke. Please go ahead, gentlemen.

Mark Juliano

Good morning and thank you for joining us today. Joining John and I for our call this morning are Bob Pickus, Chief Administrative Officer; Eric Hausler, Senior Vice President of Development; Ravneet Bhandari, Senior Vice President of Revenue Management, and Chris [Lacteal], Vice President of Financial Analysis.

Before we discuss our first quarter results, I'd like to let you know that this afternoon will be announcing the newest member of our Board of Directors, Harry Hagerty. Harry brings extensive experience in the gaming and financial industries to the company and we are looking forward to working with him.

Overall, I believe our results tell a story of progress being made in the implementation of a new business plan. A significant portion of the unfavorable comparison to last year can be isolated in January, primarily, because our 2007 results included significantly less competition than we face in 2008.

Moving into February and March, we performed more closely to our expectations in terms of gaming revenue. And more importantly, we continue to outpace the Atlantic City market in a number of categories. We led the marketing gaming revenue trends during the quarter and as a result made modest gains in market share. For example, while our slot revenues were down 2.9%, our competitors were down 9.9%.

While driving revenue during the quarter, we did have additional cost associated with it. We made the decision to invest in our business by introducing customers to our new product, our new Players Club, and the improved experience we can now offer. In particular, introducing a program as important as TrumpONE included necessary and expected introduction, execution, and advertising cost. We are now in the process of refining these expenditures. We made improvements in the first quarter compared to the fourth quarter of last year, and we are continuing to make progress as we move forward.

The TrumpONE marketing program continues to be very successful and popular amongst our customers. During the first quarter, our cross property play increased by $8 million or over 80%. Late in the quarter, we also introduced our cross property shuttle, so it's now easier for our guests to travel and play between properties than before. We made strong gains in table volume at the Taj during the quarter, another example of where we outperformed the market.

Unfortunately this increase was offset by a decrease in table hold, which also contributed to our year-over-year comparison. The increase in volume has been primarily driven by the success of the Penthouses Suite and the new Baccarat pit at the Taj. Nonetheless, the substantial hold decrease resulted in a revenue loss of $5.6 million alone at the Taj.

Moving forward, we expect to continue to realize positive results from these new amenities as we maintain increases in market share and rationalize cost. During the quarter, we did begin to experience a somewhat less confident consumer, an effect being driven by the overall economic situation and gas prices. We also believe though, that we can present customers in this region who might otherwise travel to Las Vegas with an attractive cost conscious alternative.

Our revenue management initiatives continue to be very successful increasing our cash revenue and hotel occupancy. During the first quarter, occupancy gain improved on a year-over-year basis as did cash room revenue, which increased by about $7.5 million. The most significant event for our company this year will be the opening of the Chairman's Tower at the Taj Mahal planned for September.

The construction of the Tower is on schedule and on budget, and we believe that the opening is the critical event in our efforts to realign our operating model to focus on providing a resort experience driven by quality overnight guests. We are already selling the Tower, and while the preliminary results are encouraging, they are exceeding our expectations.

Overall, I believe that we have accomplished a great deal to improve our business model, reengineer our operations, and improve our product offering. The results posted by gaming companies in Atlantic City and across the country reaffirm our belief in our long-term plan to upgrade our product offering to attract higher quality customers. The opening of the new Tower later this year will be a defining moment and a significant opportunity for our company.

With that, I'd like to open the discussion for questions.

Question-and-Answer Session

Operator

Thank you, Mr. Juliano. (Operator Instructions). Your first question comes from the line of Harry DeMott from King Street Capital Management. Please proceed.

Harry DeMott - King Street Capital Management

Hi there, a quick question for you. When you go from 75% smoking ban to a 100% smoking ban, obviously, you've seen fall-off from the competition, and you've also seen fall-off from smoking but, if you take a look at some of the markets that kind have gone cold turkey on smoking like Indiana or Illinois, [I forget which one] but which ever of one it is, the numbers are pretty horrific and you've seen the other markets around the world. Do you expect to see that magnitude of drop when the smoking ban hits in October or do you think that you've taken most of that hit at this point and you'll -- it will just be a blip when it comes?

Mark Juliano

Well, there is two things to comment on that. Number one, I think that you kind of commented yourself that we have seen the brunt of it because even though you are allowed to smoke on 25% of our gaming floor now, the perception has been that you are not. So we have absorbed that, I believe. However, the other important thing to keep in mind is that you will still be able to smoke in the casinos. There will be enclosed lounges that will not have gaming equipment in them, but they will be very convenient for customers to access, and on top of that, we will be able to market to two different segments of people.

Now people who now have a smoke-free environment in the casino which they will enjoy, and customers who want to continue to smoke that will still be able to do so very close to or actually on the casino floor. So I think that unlike other jurisdictions where you see a dramatic fall-off when you go cold turkey, we have been dealing with this situation for quite sometime, and although it's not an ideal solution, I think that it was a fairly good compromise on both the industry and the city's part.

Harry DeMott - King Street Capital Management

We do think that (inaudible). And just a follow-up, I know that there is some talking about Pennsylvania going smoke-free as well. And I'm just wondering whether you think that you've actually lost customers to Pennsylvania because of smoking convenience or a combination of both, and therefore if you are back on equal footing you will win some customers back because it's obviously a lot nicer to come to the casinos in Atlantic City than it is to go to the halls down in Pennsylvania.

Mark Juliano

Right. Well, we have been following that situation closely of course and if you notice, recently there was a legislation introduced in Connecticut to ban smoking which passed through their Senate. Pennsylvania is/was closely watching how we were going to handle the smoking issue, and it's our understanding that they will do something similar. We do think that having the casino in Chester and in Bucks County being non smoking would be helpful and we are hoping that that is what will happen.

Harry DeMott - King Street Capital Management

Thank you.

Operator

Your next question comes from the line of Larry Klatzkin from Jefferies.

Larry Klatzkin - Jefferies

Hey guys, hey John, when do we make that title permanent?

John Burke

It took five years from now. When I'm 55.

Larry Klatzkin - Jefferies

Is there still talk of using the Trump name in Macau? I know when Jim Perry was there, he had talked about it, and I haven't heard much on it lately.

Mark Juliano

Yeah, we don't have any plans right now for it.

Larry Klatzkin - Jefferies

All right, all right. As far as after the Tower is done, what is the next thing on your wish list for construction?

Mark Juliano

We are continuing to look at all the different projects that we have both at the Marina and at the Plaza. And also at the Taj, one of the things that we are really trying to focus on now is the development plan for Steel Pier. So we have enough real estate both at the Plaza and the Marina to build an additional tower if we would like. And of course at the Taj we have enough real estate under our control now to build an additional two towers. What we would like to do -- what we will do is to see how the new tower that opening this summer performs and absorb that new capacity, watch what is going on in the rest of the marketplace here in Atlantic City, and then make those decisions when we have a little bit more historical data to make our decision on.

Larry Klatzkin - Jefferies

That is definitely fair. And then, are you guys still having a willingness to sell one casino or more if the right bids came in?

Mark Juliano

Yeah, we are looking at the strategic alternatives that we have been talking about all along and if an opportunity presents itself that creates value for the company, we will definitely take -- we will definitely execute it.

Larry Klatzkin - Jefferies

I definitely believe the Trump name is being diluted with three and if you had two, you probably wouldn't lose that many customers? By anyway, thanks guys.

Mark Juliano

Thanks Larry.

Operator

Your next question comes from the line of Carlo Santarelli from Bear Stearns.

Mark Juliano

Good morning.

Carlo Santarelli - Bear Stearns

Hey guys. You guys spoke a little bit about January obviously hurting with the competition and then some of the trends that you are seeing out of the consumer in February and March. Do you guys have any color on April? And how the second quarter has kind of started?

Mark Juliano

Yes. Obviously numbers will be released tomorrow, so we can tell you that the Taj -- rather the Plaza and the Marina are generally flat and the Taj, although it had an enormous month volume wise, we did have a whole percentage problem there so they will be down. However, we are very encouraged by the level of business and activity that we have seen and you'll see tomorrow when we have more specific data to share with you that business trends are good.

Carlo Santarelli - Bear Stearns

Great. And then, just one follow-up. In terms of the Taj Tower, if you guys are taking bookings, any early commentary on what you are seeing out there right now for the new tower?

Mark Juliano

Actually, Ravneet Bhandari, who manages that process for us, has a little statistics that he will share with you right now.

Ravneet Bhandari

Yes, absolutely. Well, we've just opened the tower up for sale to the transient business on the Internet or on the phone. But so far our convention bookings which book this far out, are actually very encouraging. We have 10,000 room nights confirmed and another 15,000 options on the new Tower if you will. And then as far as transient bookings are concerned, we opened the tower up about 15 days ago. So far -- again, this far out we've booked about $50,000 worth of business. If you normalize that for our booking pace, that translates to about $3.5 million of cash revenue in Q4. So again, the sales have really exceeded our expectation.

John Burke

The encouraging thing that we have seen is that there doesn't seem to be price resistance for people to upgrade into the better amenities, so that the suites and that the ocean view rooms we are getting a premium for. So people are satisfied with where we priced it and are willing to pay for the better accommodations. Absolutely.

Carlo Santarelli - Bear Stearns

Great, thanks guys. Very helpful.

Operator

And from Morgan Joseph, your next question comes from the line of Justin Sebastiano. Please proceed.

Justin Sebastiano - Morgan Joseph

Thanks, hi guys. More on the tower sales, what kind of combination of comp or cash you are looking out to get out of -- given a normal rate?

Ravneet Bhandari

Well, for Q4, we will probably be about 45% cash in the Tower.

Justin Sebastiano - Morgan Joseph

Is that where you think you will be?

Ravneet Bhandari

That's our target and so far we are very much on track for that.

Mark Juliano

I think when you blend in both Towers and you look at the whole room inventory, we'll be north of 65/35 on a split cash to comp.

Ravneet Bhandari

Absolutely. And just to give some more color to what Mark said earlier. So far the average rate that we are getting from the Tower, that we are yielding out of the Tower is north of $350 cash.

Justin Sebastiano - Morgan Joseph

Also you mentioned in the release that you will conduct marketing campaign for the Tower for the summer month. So as far that the margin that at the Taj -- you did about 20% in Q2 '07, are we then to expect that that will be a little bit lower than that number in the second quarter or will that go off that?

Mark Juliano

Yeah, we don't expect it to be lower because of the -- or are you asking me that question because of the additional expenses that might be associated with the marketing campaign?

Justin Sebastiano - Morgan Joseph

Yes.

Mark Juliano

No.

Justin Sebastiano - Morgan Joseph

I assume that they're going to be at the will be at the property level. That's why I am asking.

Mark Juliano

Yes. They will be, but they will not be all concentrated in Q2. They will be spread over a few quarters and we don't -- we think that the appropriate return on the cash revenue that we are getting from the hotel in Q4 will more than offset it. So we don't think that Q2 will be that significantly impacted by it.

Justin Sebastiano - Morgan Joseph

And Q3 also -- I mean, in July, August that campaign is going on, you did 26.5% third quarter '07. Is that kind of fair, at least certainly not below that?

Mark Juliano

You have to remember too that some of the costs associated with opening the new campaign are being supplemented or are being put in place of other existing marketing costs that we would have had last year.

Justin Sebastiano - Morgan Joseph

Okay.

Mark Juliano

So it's not all incremental.

Justin Sebastiano - Morgan Joseph

Okay. Thanks guys.

Operator

Your next question comes from the line of Jane Pedreira with Lehman Brothers. Please proceed.

Jane Pedreira - Lehman Brothers

Hi, good morning.

Mark Juliano

Good morning.

Jane Pedreira - Lehman Brothers

I have a couple of questions. You obviously noted that the promotional allowances were up in the quarter, and I'm wondering if you can comment on whether that you view that as sort of a temporary increase as you are introducing your suites into the market? Or would you expect that to be a more permanent shift and just as the market gets competitive you are going to have to provide a little bit more comped rooms?

Mark Juliano

Well, a lot of that increase in the promotional expense was related to TrumpONE and related to the retail component of that. And just to give you a little color on the progress that we are making there, for example, in Q4, of '07, the incremental retail comp over Q4 of '06 was $4.3 million. We got that down in Q1 to $2.7 million and in this quarter we know already that it's tracking even lower. So we do think that the promotional expenses that are related to that portion of the program are going to continue to come down along with other adjustments that we have made to the comp reinvestment program. We do not see aggressively comping more room to keep occupancy up because of anything that's happening in our competitive environment here because we have been able to yield to a better paying cash customer and that through the new internet bookings we have been using and a variety of other avenues to book business will keep occupancy and rate where we need it to be. So I think that the biggest challenge for us was to bring the retail comps more in line with what we would like them to be and we're able to do that.

Jane Pedreira - Lehman Brothers

Okay. And likewise on the gaming expense as a percentage of gaming revenues, is that increase also related to the ONE card or is that more of a seasonality issue?

Mark Juliano

It is more related to the ONE Card and again for that Q4 of '07, they were 43.9% and in Q1 of '08 we had them down to 41%. So again progress is being made there. And when you put out big programs like this that require a lot of customer education, these are expected expenses that you do incur to build market share. And then, as you move forward and the program matures, you are able to peel away the less profitable customers and continue to reinvest in the more profitable customers.

Jane Pedreira - Lehman Brothers

Okay, that makes sense. Just in terms of room rate, I don't know if you can comment on whether room rates -- you've noticed room rates coming down at all with the opening of Harrah's Hotel and the Water Club has been launched as well as Foxwoods. Can you comment on room rates?

Mark Juliano

Well, we don't see any really impact from Foxwoods, and I don't know that we have enough data to say what the Harrah's rooms have done, but internally our room rates are remaining pretty steady. We don't see a lot of pressure. As a matter of fact they have increased particularly on the cash side. As a matter of fact for the quarter, the average room rate was up $12 over last year on the cash side.

Jane Pedreira - Lehman Brothers

Okay, that's great. And then I take it that in selling your new Tower out that far in advance, is that all basically group business?

Mark Juliano

It's both group business and transient business that we are booking through the Internet. The regular transient business that books in the outside of the Internet is generally 30 days out, but the bookings that we have started to accept from the 15th of April I believe have been through the Internet and the remainder of it through our group sales and convention sales.

Jane Pedreira - Lehman Brothers

Okay. Great. All right. Thank you very much.

Mark Juliano

Thanks, Jane.

Operator

Glenn Hanson, a private investor, is on the line with the next question.

Glenn Hanson

Yes, my question is for the past six months to a year, I have not seen any single Board of Director or Senior Manager buy a single share of Trump Entertainment. At what price would Senior Management consider the stock to be a bargain, considering it's at $2.42 as we speak?

John Burke

Well Glenn, part of the problem is, we have blackout periods and we are subject to certain -- when we have knowledge of non-public information, it puts us into restricted periods and for the better part of the last two years, with what was going on with [Juneau], we've pretty much been in this restricted period. We are looking forward to the point when we can -- when we are at these restricted periods because I think at that point in time you'll see more interest by both by the Management and the Directors.

Glenn Hanson

Okay. That would be helpful. Thank you.

John Burke

Thank you.

Operator

(Operator Instructions). Your next question comes from the line of Ryan Worst from Brean Murray. Please proceed.

Ryan Worst - Brean Murray

Thanks, good morning guys. Just a quick question, Mark. Could you just provide us with the capital requirements for the remainder of the year? What your debt capacity is, and how much cash do you need to have on hand?

Mark Juliano

Yeah, John?

John Burke

Basically our major spending is on the Tower. We spent some $142 million on the Tower since inception, about $39 million this past quarter. Our liquidity basically remains the same as it did at the end of the year. We still have the full capacity of the $100 million from the dual bank facility and our maintenance schedules remain on track. We schedule some $40 million for all three properties, and obviously as we go through the year we'll adjust that to the extent that we need to. But right now there is no, we have no liquidity issues or nor any constraints in terms of doing the capital expenditures that we need to do.

Ryan Worst - Brean Murray

Okay, great. And just the amount of cash that you need to have on hand?

John Burke

That's an oddball number. Roughly, we're usually around $50 million or so. It's not an exact science but it depends on the day of the week, the weekend, if it's a holiday, obviously New Year's Eve, you need a lot more cash on the floor than you do midweek in January. So, there is no fixed number on that.

Ryan Worst - Brean Murray

Okay, great. I understand. Thanks very much.

John Burke

Okay.

Operator

Your next question comes from the line of James Kayler from Banc of America Securities.

James Kayler - Banc of America Securities

Hey guys, how are you doing?

Mark Juliano

Hi.

James Kayler - Banc of America Securities

Could you maybe quantify what the impact of hold was in the quarter at the Taj?

Mark Juliano

Yeah, $5.6 million.

James Kayler - Banc of America Securities

And that's almost all flow through to EBITDA?

Mark Juliano

Yeah, because it's all against of course fixed cost and it all comes out of our high end A segment business.

John Burke

All but the gaming tax of 8%.

Mark Juliano

Yeah, 8%.

James Kayler - Banc of America Securities

Okay. And then can you maybe just give a little bit more color around the Marina? They obviously had a -- the property has been under pressure, but it had a very, very tough quarter. I guess maybe, just a little color on what happened and what the plan is?

Mark Juliano

Well, again that really -- you could really isolate almost all the shortfall in January. They had a very tough January and that was both from volume and from whole percentage to some degree. They did rebound nicely in February and March, and their April results are going to be okay. So we do think that the marketing plan that we have in place there and the change of management that we made recently is helping to stabilize the property.

James Kayler - Banc of America Securities

Okay. Thanks, guys.

Operator

At this time we have no further questions in the queue.

Mark Juliano

Thank you.

Operator

Thank you, Mr. Juliano. This concludes today's conference call. We thank everyone for calling in today and participating in the company's Earnings Call. You may now disconnect. Have a great day.

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