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Edited Transcript of PENN earnings conference call or presentation 1-Aug-19 1:00pm GMT

Q2 2019 Penn National Gaming Inc Earnings Call

WYOMISSING Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Penn National Gaming Inc earnings conference call or presentation Thursday, August 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jay A. Snowden

Penn National Gaming, Inc. - President, COO & Director

* Timothy J. Wilmott

Penn National Gaming, Inc. - CEO & Director

* William J. Fair

Penn National Gaming, Inc. - Executive VP of Finance & CFO

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Conference Call Participants

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* Barry Jonathan Jonas

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Carlo Santarelli

Deutsche Bank AG, Research Division - Research Analyst

* Chad C. Beynon

Macquarie Research - Head of US Consumer, SVP and Senior Analyst

* David Brian Katz

Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure

* Felicia Rae Kantor Hendrix

Barclays Bank PLC, Research Division - MD & Senior Equity Research Analyst

* Harry Croyle Curtis

Nomura Securities Co. Ltd., Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging

* Joseph Richard Greff

JP Morgan Chase & Co, Research Division - MD

* Shaun Clisby Kelley

BofA Merrill Lynch, Research Division - MD

* Steven Moyer Wieczynski

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst

* Joseph N. Jaffoni

JCIR - Founder & President

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Presentation

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Operator [1]

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Greetings and welcome to the Penn National Gaming Second Quarter Earnings Conference Call. (Operator Instructions).

I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead.

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Joseph N. Jaffoni, JCIR - Founder & President [2]

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Good morning, everyone, and thank you for joining Penn National Gaming's 2019 Second Quarter Conference Call. We'll get to management's presentation and comments momentarily as well as your questions and answers, but first I'll review the safe harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. These statements can be identified by the use of forward-looking terminologies, such as expects, believes, estimates, projects, intends, plans, seeks, may, will, should or anticipates or the negative or other variations of these or similar words or by discussions of future events, strategies or risks and uncertainties, including future plans, strategies, performance, developments, acquisitions, capital expenditures and operating results.

Such forward-looking statements reflect the company's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations.

The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and Form 10-Q. Penn National assumes no obligation to publicly update or revise any forward-looking statements.

Today's conference call and webcast will include non-GAAP financial measures within the meaning of SEC Regulation G, when required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website.

With that, it's now my pleasure to turn the call over to the company's CEO, Tim Wilmott. Tim, go ahead.

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Timothy J. Wilmott, Penn National Gaming, Inc. - CEO & Director [3]

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Thank you, Joe, and good morning, and welcome to Penn's Second Quarter earnings conference call. After I speak with my introductory comments, I'll be followed by our President and Chief Operating Officer, Jay Snowden, who will be followed by our Chief Financial Officer, B.J. Fair.

I do want to comment, first, on our second quarter results, and I want to congratulate and recognize our entire management team here at Penn at Inc. and also at the property level for continuing to deliver on the best industry EBITDAR margins out there. We improved our EBITDAR margin year-over-year by 80 basis points. And as you look at our EBITDAR guidance results after removing Greektown, which was not included in our guidance, inclusive of the flood impact in the Midwest and onetime expenses in closing a property in Tunica, Mississippi, we still beat EBITDAR guidance in the second quarter by over $5 million. And if you remove the flood impact and the onetime expenses, our EBITDAR beat would have been over $10 million for the second quarter.

I'm pleased to also report that we've identified another $5 million of additional cost synergies related to the Pinnacle transaction, taking our cost synergy total from $115 million to $120 million, of which $60 million will be realized in 2019 and the other $60 million next year.

We also have completed the integration of our marketing loyalty program, mychoice. It is now in place and accessible across all of our properties. Having this platform in place now gives us the opportunity to deliver on the $15 million to $20 million of revenue synergies that we talked about in prior calls that will be realized in 2020 and 2021.

From a development standpoint, we closed on the Greektown acquisition in partnership with VICI on May 23, where we purchased the operating assets of that casino in Detroit, Michigan for $300 million, and welcomed 1,700 new team members to the Penn Family.

We're also making solid progress on the 2 Category 4 casinos in the state of Pennsylvania. In Morgantown, we have received all the requisite approvals for the $120 million investment, and we have commenced construction on that ground-up development, and we still expect both York and Morgantown projects to open in the fourth quarter of next year.

Finally, I want to touch on our use of free cash flow. Now that we've completed 3 acquisitions over the last 9 months, and we used our revolver to complete the Greektown acquisition in the second quarter. At the end of the second quarter, our net leverage was 5.8x. And we're now focused primarily on taking our free cash flow over the next 4 to 6 quarters and delevering our balance sheet to get to a net leverage level below 5.5, in the low 5s, and that will be our primary focus as we continue to execute against the promised synergies of the Pinnacle transaction, Margaritaville and now Greektown, using our free cash flow to de-risk our balance sheet.

With that, I have some more comments at the end of our talk today, but I will turn it over to Jay Snowden to talk a bit about what we're seeing in operations and also to provide a sports betting in iGaming update as well. Jay?

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [4]

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Thanks, Tim. Good morning to everybody. Despite the challenging second quarter revenue environment due to the well-known flooding impacts at 3 of our Midwest properties coupled with some onetime disruptions related to the full implementation of our mychoice universal loyalty card program across our portfolio, our property teams and corporate team, operating execution was truly second to none with margin expansion and increased cost synergies helping us to deliver EBITDAR results ahead of both guidance and consensus.

Highlights include terrific top and bottom line results at all of our properties in Ohio, Colorado and New Mexico, we finally anniversaried the smoking ban in Baton Rouge, and are very pleased with the results over the last several months since the addition of our new smoking tariffs.

The team at our recently acquired Margaritaville property continue to break revenue and EBITDAR records every quarter. And while still early, we couldn't be more pleased with our new Greektown property and team in Detroit, Michigan.

With regard to mychoice, as of July 31, we are finally 100% complete with integration activity. And our entire company is now operating on a common platform. Though notably disruptive over the last 4 full months, we are now able to leverage the benefits of fully bankable, transferable and portable loyalty points across all of our properties, sports books and digital offerings, something we believe will be a competitive advantage for years to come.

Over the coming weeks and months, our teams will be very focused on cross-property marketing efforts and visitation, particularly as football season commences, given we will be live with 14 retail sports books across the country by September 1. An effort, we believe, will help to stimulate revenues for the remainder of the third quarter and the fourth quarter.

Now transitioning to sports betting. Last night, we announced 4 our exciting strategic partnerships that allow us to fully maximize the value of our best-in-class geographic footprint across 19 states. All of the access agreements include risk-free, top line recurring revenue shares, while some also provide Penn with upfront cash payments and/or equity in these very successful up and coming sports betting brand. These are 4 terrific companies, and we are thrilled to be partnered with them on long-term deals, as we believe all 4 will be major players in sports betting now and in the future.

Now with regard to our primary license or skin in each of the 19 states. We have honestly analyzed this to death and have come to the conclusion that it's all about control. As have been proven in Pennsylvania, Illinois and Colorado, that first skin is extremely valuable. We believe by retaining control of that primary license, we control our future. Today for sports betting, tomorrow for iCasino. In most, if not all states, they will be inextricably linked to one another.

If you are of the opinion as we are that the winners in the casino space, long term will be the ones that can offer compelling and unique products and experiences in an omnichannel fashion, one that includes best-in-class diverse brick-and-mortar destinations, coupled with social and real money, digital sports and iCasino offerings, then relinquishing control of that closed-loop strategy and the economics that come with it is a short-term deal.

This control doesn't mean we won't partner with third parties, such as media and technology companies with that primary skin in order to aggressively maximize the value of the opportunity. It simply means we want to maintain control of our future as it pertains to sports betting and interactive digital, mobile gaming opportunities that are rapidly coming our way.

For the time being, we remain focused on rolling out our Kambi-powered proprietary retail sports books in Indiana and Iowa, by the start of football season as well as our full iCasino launch in Pennsylvania on August 15. We believe these new lines of business will be extremely complementary to our existing revenue streams and database composition, as these new offerings attract a younger and much-needed demographic.

In summary, this is a very exciting and dynamic time at Penn, and we look forward to sharing more on these topics with you in the months ahead. With that, I'll turn it over to B.J.

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William J. Fair, Penn National Gaming, Inc. - Executive VP of Finance & CFO [5]

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Thanks, Jay, good morning, everyone. I'll make my comments very quick this morning and touch on our updated 2019 guidance and briefly discuss the share repurchases during the quarter. We revised our guidance to include the projected Greektown results and the incremental $5 million of cost synergies identified in our release. The detailed third quarter and updated full year 2019 guidance and underlying assumptions are found on Pages 4 and 5 of the press release. On a high level, our updated revenue guidance for the full year is $5.338 billion. The increase nets the addition of Greektown against the flow-through of the Q2 results, the impact of Hurricane Barry and the other impacts, as -- in July, as discussed by Jay.

Adjusted EBITDAR for the full year is estimated to be $1.601 billion. The increase reflects the addition of Greektown and the positive flow-through of the second quarter operating results, netted against the impact of Hurricane Barry.

Our total lease payments for the year, including the 3 GLPI leases and the 2 VICI leases are forecasted to be $869 million.

Our trailing 12-month rent coverages as of 6/30/19 for the GLPI leases are as follows: the Penn Master was 1.89; the amended Pinnacle lease was 1.75; and the Meadows lease was 1.92. Our guidance includes full escalation in November under the Penn Master lease. We did not incur an escalator under the amended Pinnacle lease at the completion of the lease year on April 30. And although it is very close, we do not forecast to incur an escalator under the Meadows lease at the end of the lease year on September 30. However, should the performance of the Meadows exceed forecast, we will incur at least a partial escalator for the year. And we'll report coverages on the VICI leases next quarter when the numbers become more meaningful.

Free cash flow generation for the year is estimated at $398 million and net free cash flow after mandatory debt payments and other obligations is expected to be $308 million. Maintenance CapEx guidance remains unchanged.

Cash on hand as of 6/30/19 was $379 million. Our lease-adjusted net leverage ratio as of 6/30/19 was 5.8. Our cash flow generation remains on pace to return to our target leverage ratio of 5.0 to 5.5x EBITDAR by the end of 2020.

With respect to our share repurchases during the quarter, we purchased approximately 1.3 million shares at an average price per share of $19.55 for a total of approximately $25 million. The repurchases were completed through both open-market purchases and under the company's completed 10b5 trading plan.

And with that, I'll turn it back to Tim.

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Timothy J. Wilmott, Penn National Gaming, Inc. - CEO & Director [6]

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Thank you, B.J. Before I turn it over for questions, I did want to provide some brief comments on the news of my upcoming retirement, and Jay succeeding me as CEO. First, I'd really like to thank Peter Carlino and the Penn Board for a great 12 years here at Penn and the last 6 as Chief Executive Officer. It was important for me to leave Penn when it was well positioned to continue to grow and create shareholder value for the foreseeable future. As we've just completed 3 acquisitions, we now have a geographic footprint that, in the long term, will create value for our shareholders as evidenced by the recent announcement yesterday of, for example, the ability to take advantage of sports betting and iGaming across 19 different states.

I'm also leaving at a time where we have a very strong management team that continues to run the businesses more efficiently and more effectively than anyone else in the regional gaming space, as evidenced by our results today.

And finally, it was important to me to be able to turn it over the keys to someone I can trust, who can take Penn to higher levels of excellence and value creation for our shareholders. Jay and I have worked closely here at Penn for the last 8 years. I know very well how he thinks, how he leads, how he demands excellence and accountability for results for himself and the entire team. I have no question that Penn will continue to prosper under Jay's leadership going forward.

With that, I'd like to -- operator, turn it over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Our first question comes from the line of Steve Wieczynski with Stifel.

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Steven Moyer Wieczynski, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst [2]

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Tim, congrats on the retirement. Maybe you can go help the Yankees now solve their other -- with their pitching situation.

But anyway so. Jay, you normally give us some pretty good commentary around your customer base in terms of what you're seeing from the different tiers. And can you -- maybe I missed it, I don't think I did. But can you help us think about or help us -- show us what you're seeing right now from the high end, the low end? Are you still seeing that weakness in your low-tier customer base as well? And then maybe any indications of what you guys saw at your properties in July?

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [3]

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Yes. No problem, Steve. You didn't miss it. I didn't include that in my comments. There was nothing notable this quarter versus the previous 4 or 5 quarters. We're seeing strength at the high ends, we're seeing strength throughout the database and in unrated in terms of spend per visit. Visitation continues to be a mixed bag. It's strong at the high end and in the unrated segments, the lower-worth segments, where we continue to refine our marketing strategies and drive profitable visits, we see declines in visitation there.

But I would tell you, it's a little bit misleading when you look at revenue figures in regional gaming. And I think the industry has been pretty good about focusing on EBITDA. And you're not seeing robust revenues in a lot of these markets, other than some of the newer markets, but you're seeing really strong EBITDA growth. And I think many of the companies, ourselves included, you're taking some of the lower-worth customers that maybe came 2 or 3 times a month. And you're changing what the offerings are to those customers because most of those visits were unprofitable. Maybe now they're coming 1 or 2 times a month, but both of those visits are profitable. So it's a little bit misleading. You can certainly see there's health in our EBITDA growth and health in our overall flow through as a company.

With regards to July, look, we had headwinds that are well known. We had Hurricane Barry impacts in Louisiana. Certainly, the southern part of the state was impacted. We had to shut down our New Orleans property for a weekend, and really nobody traveled from Texas to Louisiana for the entire weekend. So Baton Rouge and Lake Charles were impacted as well. And then we just have residual effects from the flooding of the 3 Midwest properties, carried over into July for at least the first 2 weeks of the month that hampered results a bit. And we just finished up, as a matter of fact, 2 days ago, with the full integration of our mychoice loyalty card program. So I think August is probably the first month, you'll be able to look at for Penn. I'm not an excuse guy, but we just had a ton of weather issues impacting us this year, in the winter and spring. And August is going to be a clean month for us from a loyalty card program, from a weather perspective, flooding issues are behind us in the rearview mirror, Hurricane Barry is in the rearview mirror. And going forward, with the football season coming up and the launch of a couple of -- or actually, 3 new retail sports books in Indiana and Iowa, we're really bullish on our ability to start to stimulate some revenues and visitation and drive more EBITDA, August, September through the remainder of the year.

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Steven Moyer Wieczynski, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst [4]

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That's good color. And second question, I don't know this is for you or Tim, but maybe now looking at potential cross-marketing opportunities. With mychoice, now fully under one platform, I guess, the question maybe is, does that change your view around the Trop in Las Vegas and the future expansion plans at that property at all?

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Timothy J. Wilmott, Penn National Gaming, Inc. - CEO & Director [5]

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Yes, Steve. This is Tim. We are just rolling out mychoice and having that now connected to Tropicana with the 2 million active Pinnacle customers that we picked up last October. We have not at all changed our thoughts about long-term Tropicana, it is still on hold. We're still -- we still want to see the impacts of all these new customers on Tropicana before we make any long-term decisions on capital. And as I said in my remarks, our primary focus over the next 4 to 6 quarters will take our -- to take our free cash flow and de-risk our balance sheet.

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [6]

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The only thing I would add to Tim's comments, and I think this does have a lot to do with mychoice integration, we're finally there to the finish line is, the last round of offers that we're sending out across the database. We're seeing our strongest results. I just talked to our General Manager at Tropicana earlier this week. And so I'm encouraged by that. I think that has a lot to do with people understanding that they can use one card and transfer their points from the Midwest or Southern properties, northeast, et cetera, and use those points when they visit Las Vegas. So I'm encouraged to see what happens here over the next couple of quarters due to sports betting as well as mychoice now being a common platform across the company.

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Steven Moyer Wieczynski, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst [7]

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Okay. And congrats again to Tim. And you as well, Jay.

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Timothy J. Wilmott, Penn National Gaming, Inc. - CEO & Director [8]

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Thanks, Steve.

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [9]

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Thanks, Steve.

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Operator [10]

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Our next question comes from the line of Carlo Santarelli with Deutsche Bank.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [11]

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Tim, congratulations on a great career. Jay, again, congratulations on the move. Obviously, you've had plenty of experience. Guys, if I could just, when I think about your same-store results, and I'm referring to the same-store inclusive of Pinnacles for properties last year, Margaritaville, Greektown, et cetera. And I look at kind of the dynamic of what those properties contributed in the 2Q '18 relative to what you reported in the 2Q '19. It looks as though, revenue down, call it, 7-ish percent, EBITDA down somewhere in the 1% to 2% range on an apples-to-apples basis. I know with weather and the other challenges in the 2Q, and there's been a couple here and there beyond just the flooding and stuff. What do you guys see as actually organically taking place in the business? When you look at properties where you haven't seen -- whether it's competition or weather events or flooding or something along those lines. What are you seeing in kind of the core generic property in terms of revenue and EBITDA?

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [12]

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Yes. Carlo, it's a great question. And, man, there's a lot of noise. There's a lot of variables. And I hate talking about weather impacts and flooding here and hurricane there because it does just confuse the message. And when you strip out the noise, the Baton Rouge smoking ban and the bridge work at Lake Charles, the flooding impacts, Hurricane Barry, all this nonsense. We're looking at trends that are very consistent with what we saw in 2018, you're seeing low single-digit, same-store sales growth and very healthy EBITDA flow through on that. But, man, we've been impacted in so many markets, it's hard to show you that through our earnings without giving you 10 footnotes to explain exactly what's going on in the business. But I feel great about our customer. I feel great about our ability to continue to drive more profitable visitation and revenues throughout the portfolio. And, yes, you look at the Ohios of the world and Black Hawks, there's properties both on the Margaritaville, all these acquisitions, there's really -- there's pockets of great, great trends. But, man, they're offset by a number of things that you covered and I discovered.

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William J. Fair, Penn National Gaming, Inc. - Executive VP of Finance & CFO [13]

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Yes. And, Carlo, I'll add to that, like, in the West this -- in this quarter, we had a onetime expense related to a review of our construction in progress, account balances that kind of impacted the western results that really weren't operationally focused. And we didn't call it out. It's a normal accounting process that we do, but it definitely impacted what otherwise would have been great western results as well.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [14]

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Understood. And then, if I could, just one quick follow-up. When you think about kind of the efforts that have been made to -- I don't want to say, necessarily reduce, but ultimately reduce and more or less, be smarter with promotional and marketing activity. Can you kind of talk about maybe where you see yourself in that process? And with now having Pinnacle under your belts for about 9 months, maybe distinguish between where the legacy Penn portfolio is relative to the acquired Pinnacle assets.

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [15]

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Yes, it's a great question, Carlo. We -- one of the things I always point to when I'm talking to investors and analysts about the health of the business is, obviously, you want to see strength at the high end, we continue to see that as strong now as we've seen in a really long time, and you obviously want to see strengths at the unrated levels, I think that speaks to customers that are not receiving offers that are coming in organically and unrated growth continues to be a good story for us overall, outside of impacts that we've discussed.

Now I would tell you at the lower-worth segments, to your question around where are we in the process, within that, below $100 average daily worth segment, we still run double digit, it's close to 15% unprofitable visits. That used to be 22%. And so we continue to whittle that down. And we've got our ways to go, 15% would be great if it was 0%, it won't get to 0% ever, but we think we can continue to move that number down from 15% into the high single digits, is a good target for us. There is opportunities on both the legacy Pinnacle and Legacy Penn side. So we'll be hard at work on this for some time. It will continue to impact visitation at the low end. But I think you'll continue to see a very healthy flow through in EBITDA growth for our company, and particularly now that we're, hopefully, no longer talking about weather impacts to our businesses in some of the key markets.

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Carlo Santarelli, Deutsche Bank AG, Research Division - Research Analyst [16]

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Sorry, Jay, that was great. And just to reconfirm, you used to have -- 22% of your visits were unprofitable, that number is now down to 15%, the target is high singles?

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [17]

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Yes. That's right. So you -- and this is the below $100 average daily worth segment. Across the portfolio above $100, most of those visits are profitable, but below %$100, you've got to be careful of customers that are worth $20, $15 per trip. You send one offer, and they flip upside down and they're unprofitable. So we still got a lot of work to do, and in some markets we're more refined in our efforts and in others, we still have -- we saw our ways to go.

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Operator [18]

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Our next question comes from the line of Harry Curtis with Instinet.

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Harry Croyle Curtis, Nomura Securities Co. Ltd., Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [19]

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First, Tim, we're going to miss you. Jay, welcome to the cage fight.

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [20]

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I've been in it. Thanks, Harry.

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Harry Croyle Curtis, Nomura Securities Co. Ltd., Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [21]

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Yes. So, Tim, I just wanted to get a little clarification on your comments around Vegas. Your loyalty program is going to be one of the biggest in the industry. Is it just a matter of time before you think you're going to need to get bigger in Vegas, and it's just not the right time to expand because -- and the reason I ask is that you may have a choice of 3 or 4 strip properties coming up over the next year.

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Timothy J. Wilmott, Penn National Gaming, Inc. - CEO & Director [22]

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Well, Harry, I think, as we've talked to investors and potential investors, I think in the short term, as I've stated that we want to de-risk our balance sheet and continue to take our free cash flow. And get our leverage levels down. I think 2 years from now, that story and our perspective, may be different. And there may be opportunities out there for us to consider, for Jay to consider with the management team here. But I -- in the short term, I don't see any need to look differently on capital allocation on the strip in Las Vegas

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [23]

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The only thing I would add to that, Harry, is we don't feel that we have to -- it's not imperative that we have a Las Vegas strip asset or 2 strip assets, we're going to drive success with this company through a variety of strategies that had helped create the company we are today, and we do believe that interactive is going to be a big part of our future. So would it be nice to have a center strip asset? Sure. Are we going to overpay for one? Absolutely not, not today, not ever. If the price was right, we'd consider it down the road. But Tim's exactly right, that our focus right now is on delevering and getting that balance sheet back down closer to 5x leverage, and we'll see where we're at once that occurs.

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Harry Croyle Curtis, Nomura Securities Co. Ltd., Research Division - MD and Senior Analyst of Gaming, Leisure & Lodging [24]

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Very good. And my second question is with respect to the balance of the year guidance, it seems like the body language from you is that the second half should be stronger than the first, given the winding down of some of these headwinds from weather. And to what extent do you think that, that there could be upside? And where might it come from? And maybe weave in the -- in your comments, the impact of sports betting as it starts up because my guess is that there's not much of that assumed in your guidance.

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [25]

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Yes, Harry, we have not assumed any significant pickup from the launches of sports betting in Indiana, Iowa, second half of the year, nor any incremental pickup from the properties and markets that are already live with retail sports book. So that would be gravy to our guidance. I would tell you, if you really strip, sort of, the detail away and look at what our assumptions are for the remainder of the third quarter and fourth quarter from a same-store sales growth perspective, it's not anything robust. We're just assuming that there is a stronger result from properties that have been impacted throughout the year from weather events. So assuming we don't have any significant weather events between now and end of year, we're very comfortable with where we have guidance for Q3 and Q4, and it will continue to be at very healthy flow through, as we've demonstrated over the last years, certainly even more so since the Pinnacle acquisition closed.

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Operator [26]

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Our next question comes from the line of Joe Greff with JP Morgan.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [27]

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And I'd also like to express my warm wishes and congratulations to both you, Tim, and Jay.

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Timothy J. Wilmott, Penn National Gaming, Inc. - CEO & Director [28]

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Thanks, Joseph.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [29]

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I have 2 questions. One is on balance sheet. You mentioned the target leverage, 5 to 5.5x by the end of next year on a lease-adjusted basis. If we were to look at it on a more traditional net leverage to EBITDA basis, what does that translate into?

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Timothy J. Wilmott, Penn National Gaming, Inc. - CEO & Director [30]

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B.J., you want to take that one?

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William J. Fair, Penn National Gaming, Inc. - Executive VP of Finance & CFO [31]

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Yes. You'll be right around about 2, just a little over 2.

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Joseph Richard Greff, JP Morgan Chase & Co, Research Division - MD [32]

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Great. And then my question is on the Tropicana. I'm not sure if you really talked about it much, Jay. But can you just talk about how that property is performing, what the prospects for improving performance there? And then maybe you can talk a little bit just about sort of the strategic rationale for the Trop and love to get your views on that. In short, I know employees listen to this, but to what considered -- to what degree, have you considered perhaps monetizing that because the asset value of that is a lot more than what's embedded in the stock price. It's a quick way to reduce your balance sheet leverage and perhaps there are other ways to, sort of, anchor in into a hub-and-spoke system using Las Vegas, much the same way, Pinnacle and others have done.

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [33]

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Yes. Joe, all great, valid questions. And look, here's what I would say about Tropicana, we acquired that Property 4-plus years ago, and it did basically 0 EBITDA. We've continued to work on revenue and cash flow generation. We've been pleased with our results there, particularly over the last, probably, 18 months. And the results should only get better, obviously, as we continue to drive mychoice visitation across the portfolio in the coming quarters and into next year. Now I would tell you, in terms of long-term strategy with that asset. There's a lot of potential paths here. And we've actually been receiving inbound calls pretty regularly over the course of the last 6 months, and what -- there's lots of potential options. One of those options is to use other people's money to monetize the land that we have there. We've got 35 acres. And some of those acres, about 4 right on that corner of Las Vegas Boulevard and Tropicana Avenue, it's some of the most valuable real estate in the country. And I'm not proud to say this, but it's probably the most underutilized, valuable real estates in the country, but it does open the door for potential partnerships that we can do and use third-party money to really develop that land, the way that it needs to be developed and ride the upside. So we're in conversations, and we'll see where those conversations go, I don't think you should expect for us to be status quo, the way we have been at Trop for the foreseeable future. I think we've got to figure out a way to monetize the investment, as you've mentioned here, and we think that there's lots of third parties that would love to partner with us to do just that.

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Operator [34]

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

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [35]

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And I'll add my sentiments into the hat for both you, Tim and Jay. So thanks for all service. So maybe just to hit on a slightly different topic, you, obviously, outlined a really big set of partnerships on the sports betting side. And I think the theme was very clear on maintaining control. Can you just give us a little bit more of your thoughts specifically on maybe the opportunity around core iGaming in Pennsylvania. Because that's going live, it sounds like, fairly soon for you guys. How do you expect that to ramp and, sort of, play off both the core business and the database a little bit?

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [36]

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Yes. Sean, look, Pennsylvania is a tough one to start with because the tax rate is egregious. And it's going to be very difficult for anyone to make money as an online operator when you're paying over 50% tax rate on growth per slot. So let me just start with that. We think that the tax rate in Pennsylvania's flood, it needs to be addressed. And hopefully, it will be addressed. We view Pennsylvania as an opportunity for us to kick start our iGaming efforts and to learn. And there's opportunities, I think, to make some money in table games and poker and potentially in online sports as well, although that tax rate in the mid-30s is also very, very aggressive. I wouldn't anticipate any major flow through in Pennsylvania online in our efforts in the foreseeable future because of those tax rates. But I do think that what you're going to find much has taken place in New Jersey, what has already been legalized in West Virginia, is that online sports betting and online casino offerings, as I mentioned in my opening comments, are inextricably going to be linked in many of these states, they may not roll out at the same time, but they're likely to be issued to the brick-and-mortar casino license holders. And so for us, this is going to be a big part of our strategy as we move forward. Pennsylvania is more about learning and building out our capabilities, our resources and our team, and we'll be ready for future states as they launch.

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Shaun Clisby Kelley, BofA Merrill Lynch, Research Division - MD [37]

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Great, great. And then maybe just a high-level one, as a follow-up on just overall competitive and promotional environment. It sounds like it still remains quite benign, you mentioned maybe that this is even impacting the broader, sort of, reported gross gaming revenue figures that are out there. Is that still the case? Any flareups or concerns or areas that you're seeing? Any behavioral changes of note?

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [38]

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I think benign is a good way to describe it, Shaun. We're not seeing anything. Look, our competitors are laser focused on driving EBITDA as we are. And I think that, that does impact the headline gross revenue and visitation statistics. A decade ago, companies were fighting for those market share results and a lot of unprofitable actions and activity were the results of that. And you're just -- you're not seeing that today, overall, I think, really honing in on how do we most profitably drive top line revenue, and the results, I think, have continued to speak for themselves.

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Operator [39]

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Our next question comes from the line of Barry Jonas with SunTrust.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [40]

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Congrats, Tim, again, on an amazing career and, Jay, a very well-deserved promotion. I wanted to start with sports betting, I think in Atlantic City, we've seen some of those national brands, like FanDuel and DraftKings really dominate. Now you've got FOX getting into the mix, another national media brand. So when you think about your first skin strategy, are you looking to develop a national media brand at that level to, sort of, compete at that mass-market level? Or it's really just the main focus of your core land-based casino player here?

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [41]

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Yes. Barry, we continue to be in conversations with a number of significant media -- sports media companies and European operators. The point that I'm making on that primary license is that there's so much underlying value, we just didn't want to give it away for something minimal in return or short-term focused that might catch a better headline. But 5 years from now, are we going to be pleased that we gave that away for a minority position, strategically and economically? Are we going to be feeling good about having control of our future? So it doesn't mean we're going to do it alone. It doesn't mean that we're going to create our own brand. We may use a -- through an affiliate deal or a licensing deal, a well-known sports brand. We're having conversations with a number of potential brands. And we're also engaged with a number of significant media companies that are trying to figure out how involved they want to get in this space. So look, this is a marathon, I think, people are a little overzealous around. You got to be in it now and first to market, and that's in a matter of 10 years. I just -- I don't buy that. I think that the scoreboard is going to look a bit different. Three, 4 years from now, I think that DraftKings and FanDuel will be on that scoreboard. And there's going to be a lot of shifting, a lot of moving. They have great products. They've had a head start because they had daily fantasy sports mobile offerings for years, and they're not going to be the only ones with those offerings. We think some of the partnerships that we announced last night, we think the sCore has a terrific product they're working on, they've got a very loyal following. Point to that, it has proven in New Jersey with no brand recognition and minimal marketing efforts but they're already 5% owner of market share in New Jersey. And I think that when we announced our fully thought out, comprehensive strategy with this primary license, I'm optimistic it will be very well received. You should not expect it to be only what you know today, there's other irons in the fire and more to come.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [42]

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Great. That's really helpful. I wanted to ask about Plainridge, any color you can give on sort of the impact you're seeing from Encore? And then also, any thoughts on the potential for getting table games at Plainridge at some point?

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [43]

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Yes. The first 4 months of Encore impact is right where we thought it would be. You really don't know long term what the impact is going to be until you get through the first 60 to 90 days. Tremendous amount of trial. It's a beautiful property. I'm not sure how many of you have been there. It's -- we're all-in invested at $250 million and they're tenfold on that. So not surprising that people are interested in seeing that product. We continue to perform very well, all things considered, our return on invested capital there is -- continues to be a great story. And I think we'll have more to share on our third quarter earnings call, when we've had a few months under our belt to determine exactly what the impact is, I think, by then, we'll have a pretty good idea. And then with regards to what's happening potentially down the road, legislatively, our local delegation, I think, have been terrific partners, and they've been very proud of what we've delivered, which is on everything we said we would, within the community, driving revenues and tax dollars, supporting the horse racing industry. And there's some movement. There's some interest in potentially some expansion of slot machines and allowance of table games. But that's early in the process, and we'll see how it plays out. That's really being driven by the local delegation, and we're, obviously, very interested and supportive of that. But it's really organic at this point.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [44]

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Got it. And just a quick clarification, with deleverage being the main focus right now, are you going to still remain opportunistic for any buybacks or is really deleverage the focus?

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [45]

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I think deleverage is the primary focus, Barry. As we've talked to investors and know where our cash flows are going. We've gotten the feedback that repurchasing shares is also a good use of our capital, but not the best use. And our primary focus will be deleveraging over the next, as I said, 4 to 6 quarters.

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Barry Jonathan Jonas, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [46]

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Great. And congratulations to both, again.

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [47]

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Thanks, Barry.

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Timothy J. Wilmott, Penn National Gaming, Inc. - CEO & Director [48]

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Thanks, Barry.

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Operator [49]

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

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Felicia Rae Kantor Hendrix, Barclays Bank PLC, Research Division - MD & Senior Equity Research Analyst [50]

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I'd also like to add to the chorus of well wishers here. So, Tim, congratulations on your retirement after all your years of service to the industry. Jay, congratulations on your promotion. Definitely look forward to working with you for many years, even though I've already had about 90 quarters of listening to Penn earnings calls. So I'm not sure what that says about me, but maybe there'll be 90 more.

So, Jay, can you just -- can we just step back for a second, and you guys reported a quarter when -- of a beat when most people thought you were going to miss by the amount that you beat by, on a like-for-like basis. So can you just walk us through some of the drivers behind the 80 basis points of margin improvement in the second quarter? And in the spirit of what have you done for me lately, why shouldn't that flow through to the second half?

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [51]

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Yes. I -- there's not a lot to share, Felicia, in terms of anything new. We're just continuing to get better at how we drive profitable revenue and how we think about our marketing efforts, really leveraging. I think, a lot of it -- the sound $5 million is continuing to leverage the size and scale of the company and negotiate better deals for the organization. So there's not a whole lot to share that's new. I think if you look at our assumptions for remainder year guidance, you'll see that our assumptions for Q3 and Q4, you're looking at growth in EBITDAR margins of right around what you just saw in the second quarter. So you will continue to see that additional flow through in the coming quarters, and I think you'll be happy to see it continue in 2020 as we continue to execute on these synergies from the acquisitions that Tim laid out at the beginning of the call. So nothing new to share. We're just continuing to accomplish what we said we would accomplish, and raise our synergy targets with some good news along the way.

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William J. Fair, Penn National Gaming, Inc. - Executive VP of Finance & CFO [52]

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Yes. And, Felicia, if you recall, on our last call -- on our last quarter call, we had talked about and people were questioning the third -- the second quarter, and we'd said, look, with the mychoice integration and everything else, we really were focusing a lot of the marketing efforts in other elements coming into the second half. And so that's why I think we're keeping it consistent there.

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Felicia Rae Kantor Hendrix, Barclays Bank PLC, Research Division - MD & Senior Equity Research Analyst [53]

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Great. And I guess, so my question -- but the heart of my question really gets to, like, would have you -- is that margin improvement a function of you guys just working harder to mitigate some of the revenue declines that you saw in the quarter. So maybe you came out better than you normally would, if you didn't have to work that hard to mitigate those? Or are they a function of just kind of business as usual?

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [54]

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I probably put it 90% of it in the latter, Felicia, that -- look, but we're just -- this is what we do, and I continue to scratch my head when we're questioned on it, our ability to continue to improve margins of this company when it's all we've done for the last -- I don't know, I've been here 8 years now and it was before that. So this is what we do, it's our DNA. We do it better than anybody else, despite what others like to say. And if you adjust our margins on a tax-adjusted basis, it's not even close. So we'll continue to drive forward as we have been and will for a long time.

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Felicia Rae Kantor Hendrix, Barclays Bank PLC, Research Division - MD & Senior Equity Research Analyst [55]

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Great. That's helpful. And just speaking of synergies, just on Greektown, now that Greektown is closed, I think you've previously talked about roughly $6.6 million in synergies from that property, basically in 2 tranches, the first 3 about $3.5 million, and the second, a little over $3 million. So now that it's closed, are you seeing any further opportunity there?

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [56]

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Feeling really good about those numbers. And if our track record is any indication of future potential on this, we might find more. It's too early to say. But we'll keep you posted as we have more months operating under our belt. We have a terrific team there. It's sprinkled with some folks that we inherited that are fantastic as well as some folks from the Penn side and everybody's brainstorming and sharing best practices, and we're, obviously, taking those great ideas to the rest of the portfolio. So more to come. Greektown, it's a large property. It's a $100 million EBITDA business, those don't grow on trees and it got us access to a new state, so really a strategic acquisition for us great.

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Felicia Rae Kantor Hendrix, Barclays Bank PLC, Research Division - MD & Senior Equity Research Analyst [57]

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Great. And then, finally, just, B.J., just a very quick question. As part of the sports betting partnerships, you're getting some upfront cash. I just wanted to confirm that, that cash is going to be used to support the new operations, and it's not like incremental cash you could use to delever.

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William J. Fair, Penn National Gaming, Inc. - Executive VP of Finance & CFO [58]

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That's correct. And the -- we're trading that cash as kind of more like it would be for M&A. And so it's not in -- but we'll consider the ongoing cash flow that we -- in the cash flow statements we've provided to you.

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Operator [59]

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Our next question comes from the line of Chad Beynon with Macquarie.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [60]

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And congrats to Tim and Jay as well. Nice results and good announcement on the sports partnership here. I wanted to start with maybe a little bit of a tougher subject, Illinois, the legislation here, two-parter. One, does the new legislation make you any more or less excited about the route operations and your Prairie State Gaming business?

And then secondly, while super preliminary, should we have any expectations that you would consider developing in one of these new locations that has been proposed?

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Timothy J. Wilmott, Penn National Gaming, Inc. - CEO & Director [61]

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Chad, this is Tim. Let me take that question to talk about my favorite state. First, on the VGT side, the legislation did provide net-net, what we believe will be some upside for Prairie State Gaming with the additional -- to add a sixth machine in the establishments where business would warrant it, plus raise the average bet twofolds, and also raise the jackpot amount. We think that will be accretive to the Prairie State Gaming business. On the flip side, we certainly appreciate some tax reductions we're going to get in the Riverboat gaming environment. But we have 3 licenses there. And with an industry that's declining in Illinois, the fact that they're adding potentially 10 more casino locations or slot-only locations, we think it's going to be a very crowded and difficult market to get a good return. And you shouldn't see Penn investing any new capital in the state of Illinois to take advantage of these new licenses. We have 18 other jurisdictions that are far more stable and predictable to take advantage of organic growth rather than Illinois. So we will not be putting capital in that state.

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Chad C. Beynon, Macquarie Research - Head of US Consumer, SVP and Senior Analyst [62]

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And then, Jay, I just want to kind of go back to the synergies because it is impressive that now you've increased this 2 quarters in a row. And you touched on this earlier on the call, but you did also mention that the marketing activity or their reinvestment rate could come down. In the area of economies of scale and kind of big purchases, whether it's slots, chairs, tables, carpets, et cetera, is there still a lot of opportunity there that maybe we could see in 2020, 2021, as some of the contracts come up? Or is this $120 million number, probably kind of where we should think about maybe an end goal, understanding that you're always going to be looking for more saves? Just a little bit more color there.

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Jay A. Snowden, Penn National Gaming, Inc. - President, COO & Director [63]

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Yes. Chad, we're at a $60 million run rate currently for '19 and the other $60 million for 2020. So there's still opportunities like the ones that you lay out for procurement and win contracts right now, you just -- you can't get it everything in the first year simply because you have system integration, you have contracts, and you're going to get at some of those things in the second full year as opposed to everything in the first full year.

So now on the $120 million question, we felt like $100 million was the right number when we closed the transaction, and we just continue to find opportunities. We've got an amazing team. And I'm sure every company says that to you guys on these calls, but ours is second to none, corporate and property, and we're going to continue to find opportunities as we move forward. We're only 9 months post close, and we've already increased the cost synergies by 20%. I'd like to believe that, that's not the end story, but $120 million feels like the right number right now.

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Joseph N. Jaffoni, JCIR - Founder & President [64]

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Operator, we have time for one more question.

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Operator [65]

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Our question comes from the line of David Katz with Jefferies

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David Brian Katz, Jefferies LLC, Research Division - MD and Senior Equity Analyst of Gaming, Lodging & Leisure [66]

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I just wanted to congratulate everyone, particularly in the context of a morning with 10 earnings calls and the like. At the end of the day, it's sort of enjoying dealing with the people, otherwise this would all just be a lot of busy work. So congrats to you, Tim, and Jay for stepping up. I wanted to just go back to the leverage matter, and I will apologize because I've been jumping back and forth a bit. And the target leverage is 5 to 5.5x. Why do you think that, that's the right level to be? Because as we look across the space, some are actually targeting less than that. Why not -- why wouldn't it be a compelling focus to aim lower than that level?

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William J. Fair, Penn National Gaming, Inc. - Executive VP of Finance & CFO [67]

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David, it's B.J. I'll take that one. When -- it kind of goes back where we've set the original target, it was as we are delivering after the Tropicana acquisition and we basically refinanced more when we applied all of the proceeds to debt reduction. When we got below that level, we were finding that we weren't really getting any kind of response as far as utilization of capital to the delevering from -- in the investment community. And that was kind of the sweet spot. And -- so we're looking at -- with all the other options that we had for capital allocation, what were some of the alternative uses. That's kind of the stated one that we've had for the last year, 1.5 years, 2 years. When we get down there, as we see what the current environment is, is there a possibility to reexamine that and continue to go lower? It's a possibility. But for right now, I think that's the level that based upon our lease-adjusted base, our lease-adjusted leverage, when you got at least 3 plus components that are -- you're not going to ever get rid of as a result of the lease being out there. It's really then, what's the most efficient use and what's the traditional debt leverage that you're looking at, when you've got the remainder of the free cash flow.

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Timothy J. Wilmott, Penn National Gaming, Inc. - CEO & Director [68]

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And just to remind everyone, about 3/4 of our leverage is driven by our rent obligations with our various landlords.

And, again, thanks, everyone, for participating in our conference call today. I look forward to what will be my last earnings call about 3 months from now as we continue to roll through 2019. Good day, everybody.

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Operator [69]

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Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation and ask that you kindly disconnect your lines.