PENN Entertainment Inc

SWB:PN1

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Penn National Gaming First Quarter Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

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

[Joseph N. Jaffoni, JCIR]

Thanks, Kelly, and good morning, everyone, and thank you for joining Penn National Gaming's 2018 first quarter conference call. We'll get to management's presentations 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 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, I'll now turn the call over the company's CEO, Tim Wilmott. Tim?

[Timothy J. Wilmott, Penn National Gaming, Inc.]

Thank you, Joe, and good morning, everyone, to Penn National's first quarter earnings call. Also speaking with me today will be our President and Chief Operating Officer, Jay Snowden, and our Chief Financial Officer, BJ Fair.

Let me begin by just talking a little bit about our first quarter results despite some tough winter weather in the – really the first half of the first quarter in the Midwest and the Northeast. I'm very pleased to report that our operating team delivered outstanding results. In fact, adjusted EBITDA of $242.6 million for the first quarter, which was about 6.5% above last year and $9 million above our guidance of $233.6 million. I think a big part of it is driven by what we communicated in last October, our margin improvement plan, which delivered in the first quarter a 42-basis-point improvement over prior year. Jay is going to provide a little bit more color on that and where we are with that. And that is even with some accounting changes that actually had a dampening effect on margins in the first quarter of 2018 that BJ is going to provide some more details on in his commentary.

Next, I wanted to give a brief update on where we are with the Pinnacle acquisition, and what happened in the first quarter. And on March 29, Penn and Pinnacle shareholders overwhelmingly approved the combination of our two companies. We have received approvals to-date from a number of states and we're working very hard with our legal and compliance folks to try to get scheduled all of the remaining states to get approval on this transaction. And we still are saying the second half of 2018, because we don't have everyone counted yet, but I can assure by the second quarter call, we'll have that timeframe narrowed considerably as we get everything scheduled with the various jurisdictions that we're required to seek their approvals on. We are making good progress with the FTC and, today, see no issues on that front.

And I just want to remind our investors that we are today more confident than ever of the $100 million of cost synergies. We've spent a lot of time in the first quarter meeting with the Las Vegas Service Center of Pinnacle and all of their properties and gotten through a lot more detail. And we still believe that of the $100 million of synergies, 50% will be in year one and 50% will be in year two.

I'd like to also provide an update on our development activity in the State of Pennsylvania in the first quarter. As many of you are aware, we were able to acquire two Cat 4 licenses in the bidding process and each license, to remind everyone, can have up to 750 slot machines and up to 40 table games. We have selected locations in York and in Lancaster, Berks County for a total license fee for the two of approximately $58 million.

5 of the 10 Category 4 licenses have been awarded. The state is still going to accept bids for the remaining five licenses that have yet to be awarded. We continue to work on determining the final locations of these two licenses and the scopes. That work is still in progress. And as you can understand, we'd like to see if there's going to be more competition from these additional five licenses to be awarded before we make final conclusions on our locations in these two areas.

But, again, I can assure you as we have looked at these opportunities and the potential minimal cannibalizing effect on Penn National Race Course that our capital allocated toward these two licenses will deliver attractive returns in both cases, even when you consider the impact on Penn National with these Category 4 licenses. The last update I want to share with you is, where we are with our management contract in Jamul in San Diego County and remind everyone that we are working with the tribe and their consultants for an orderly transition, and we will be exiting the management of that operation on May 28.

So, in conclusion, I'd like to just look forward into 2018, and let all of you know that we are very focused on the Pinnacle transaction, making sure we have a successful close. We execute the integration plan, and we realize the $100 million of cost synergies in the two years post close. But beyond that, I think you can see significant and growing free cash flow story, which will give us great financial flexibility moving forward to do a number of things, de-lever, funding organic growth from our existing operations, looking at additional tuck-in M&A acquisitions, and/or returning capital to shareholders.

So, I'm very proud and pleased with the first quarter results, but I'm even more optimistic about the future as we look at the new Penn-Pinnacle combination, and what it's going to mean for our shareholders in 2019 and beyond.

With that, I'd like to turn it over now to Jay Snowden.

[Jay A. Snowden, Penn National Gaming, Inc.]

Thanks, Tim. Good morning, everyone. We're certainly very pleased with our first quarter results on a number of levels. First, as we all know and was well documented, that 2018 winter delivered much harsher weather in the Midwest and Northeast with four nor'easters in March alone, and nearly twice the number of snow days across our portfolio in the first quarter year-over-year.

Second, the margin improvement initiatives that Tim mentioned, and we discussed in the last couple of earnings calls are real and beginning to bear fruit. Overall, EBITDA margins improved nearly 100 basis points when adjusting for changes to the revenue recognition standards, which BJ will cover momentarily and margins increased at two-thirds of our properties despite the extreme year-over-year weather events in the first quarter.

And then third, many of our corporate leaders have been and continue to be fully immersed in the integration activity with Pinnacle. Our region and property leaders continue to step up and deliver impressive results and I personally couldn't be happier with our team's performance right now.

Shifting gears to the consumer. Confidence continues to be buoyant and discretionary spending behavior healthy. Given where the macro economy is from an employment, wage growth, home value and change in tax law perspective, we don't see this dynamic changing in the foreseeable future.

Moving to some specific region and property highlights from the first quarter. In Las Vegas, M Resort again posted a great quarter, and we continue to evaluate adding more hotel rooms at that location given the strong economic growth in the Southern Las Vegas Valley.

Tropicana finished the quarter strong despite the headwinds on the south end of the strip the last couple of quarters, and our business there looks to have finally stabilized post the October 1 tragedy. All four of our businesses in Ohio, along with Massachusetts, Kansas City and our Prairie State Gaming route business in Illinois continue to post strong revenue gains year-over-year at very healthy flow through.

Moving on to data-based results in the first quarter. Spend per visit was strong across all worth levels and visitation improved at the mid- and high-worth segments year-over-year. Unrated play also grew year-over-year at the majority of our properties in the first quarter.

Transitioning into the Pinnacle integration activity, the more time we spend at the Las Vegas Service Center and the properties, as Tim mentioned, the better we feel not only about our cost and revenue synergy targets, but also with the quality of the talent at Pinnacle. This combining of the two leading U.S. regional gaming companies truly is going to result in an amazing organization for the years to come.

Lastly, it's worth highlighting that Q2 is also off to a strong start as momentum from the second half of the first quarter has carried over into April, and we're very pleased with where we find ourselves 3.5 weeks into the new quarter.

So, on that note, I'll turn it over to BJ to cover second quarter guidance in more detail.

[William J. Fair, Penn National Gaming, Inc.]

Thanks, Jay, and good morning, everyone. I'd like to present our revised 2018 financial guidance as well as discuss two notable changes to our financial reporting.

Our revised guidance and underlying assumptions are found on page 4 of the press release. As stated last quarter, this is a Penn standalone guidance. No assumptions have been made for the timing of the closing of the Pinnacle transaction nor do they include any guidance for the combined company.

Our revised revenue guidance for the full year is $3.236 billion, $840 million of which is anticipated in the second quarter. Adjusted EBITDA for the full year is $931 million, $243 million in the second quarter. This reflects a total increase of $15 million over our prior guidance, which includes an incremental $6 million property level increase over our Q1 beat. Adjusted EBITDA after Master Lease payments are expected to be $469 million, $127 million anticipated in the second quarter.

As been mentioned by both Tim and Jay, our revised guidance reflects operating performance that are slightly higher than the end of our 2018 margin targets previously discussed. We continue to anticipate benefits from the rollout of our margin enhancement initiatives and we assume no significant changes from the current operating environment.

Maintenance CapEx remains at approximately $104 million for the year, approximately $41 million expected in Q2. Master Lease rent payments are forecasted to be $462 million, $116 million incurred in Q2. As of 03/31/18, our Master Lease rent coverage was 1.85. We anticipate that we will incur the full escalator at the end of our lease year, which is 10/31/2018, resulting in an increase for fiscal year 2018 of approximately $900,000. This will be more than offset by the five-year rent reset that also takes effect at the end of this lease year, which will result in $1.9 million reduction in FY 2018.

We have reduced the forecast for cash taxes to $26 million for the year, $12 million is expected in the second quarter. Cash interest on traditional debt is estimated at $60 million, $8 million will be in the second quarter. We increased our estimated free cash flow generation for the year to $279 million and net free cash flow after mandatory payments is expected to be $241 million. Any capital expenditures on the Pennsylvania Category 4 projects are not included in these numbers.

Cash on hand as of 03/31/2018 was $218 million. Again, guidance does not assume any adjusted EBITDA contribution from our agreements with Jamul Indian Village, and it assumes a half-year contribution from our Casino Rama contract. And as always, all of our debt covenants will be comfortably met.

Next, I wanted to highlight a few changes to our financial reporting methodologies that we implemented this quarter. First, we have modified our definition of adjusted EBITDA to exclude three items. The first two are preopening and significant transaction costs. Excluding these costs, more closely aligns our adjusted EBITDA reporting with that of our competitors. These costs are non-recurring in nature, they are not budgeted in our guidance and they are not reflective of ongoing operations.

We have also excluded the variance between our budgeted and actual expense incurred for the cash-settled stock-based awards. This charge is non-operational. These awards are required to be mark-to-market each reporting period. The expense or benefit is simply the difference between our ending stock price during the period and the assumptions made during the preparation of our annual budget.

To underscore, if we reported with the old methodology, our adjusted EBITDA would be $7.5 million higher this period, simply as a result of where our stock price was trading. We have adjusted all prior periods to be consistent with this reporting methodology, and we continue to report all of these costs in the reconciliation table of our press release.

Second, commencing in Q1, the company adopted the new revenue recognition accounting rules, otherwise known as ASC 606 on a prospective basis. We have provided supplemental disclosures beginning on page 10 of our press release, which explains the impact of this change to our first quarter results. Among other impacts, we are required to report expense reimbursements of our management costs at Casino Rama, which is primarily payroll, as revenue. This equated to approximately $22 million of revenue at a zero percent margin since it was a pass-through of the expense.

As Tim alluded to earlier, the net effect of these changes reduced our margin improvement on a year-over-year basis or approximately 48 basis points. To be clear, we contemplated the accounting treatment for the new revenue recognition rules in our guidance. We mentioned it only to provide clarity on year-over-year comparisons.

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

[Timothy J. Wilmott, Penn National Gaming, Inc.]

Thanks, BJ. Thank you, Jay. Operator, I think now we're ready to take any questions from the audience.

[Operator]

Thank you, sir. And our first question comes from Carlo Santarelli with Deutsche Bank. You may proceed with your question.

[Carlo Santarelli, Deutsche Bank Securities, Inc.]

Hey, guys. Good morning, and thanks for taking my question. Jay, if I look at your segment level margins in the first quarter, and I believe you have to make an adjustment to the Northeast region net revenue for this year and bring it down. And by doing so, assuming that doesn't have any impact on EBITDA, which I don't believe the reimbursed cost do, it looks like you guys had margin growth in each of the three operating regions in excess of 100 basis points in the quarter. If that's wrong, feel free to amend, but that's my calculation. And if that is the case, could you talk a little bit about the drivers in each around some of the cost discipline, some of the things that you guys did over last year working on some of the margin initiatives?

[Jay A. Snowden, Penn National Gaming, Inc.]

Sure, Carlo. Your math is spot on. The adjustment for the Casino Rama reimbursement of fees takes the margins in the Northeast to 33.6% versus 32.2% last year.

And, look, here's how I would answer that question. We highlighted in October what the drivers of these margin improvement initiatives were going to be. And there are three large buckets: marketing, reinvestment, labor. And, of course, procurement as well. And we're in the early innings. That's the good news, but we are starting to see the implementation of all the hard work and effort.

We had 130 people across the company working on these initiatives throughout 2017, and we started to implement them late in the fourth quarter. And you're seeing the results here in the first quarter. We anticipate, as you can see in our guidance, very healthy flow-through for the remainder of the year as well. And if the same-store sales growth comes in, where we anticipate, then this could ultimately prove to be conservative. But we feel really good about where our business is, how our consumer is behaving at this moment and spend behavior. And, yeah, that's where we're at.

[Carlo Santarelli, Deutsche Bank Securities, Inc.]

That's super-helpful. Thanks. And if I could ask one bigger picture question. As you guys, obviously, when you announced the Pinnacle transaction back in December, I believe, you obviously called out the $100 million of synergies. Tim, you provided a little bit more color on how that would spread earlier in your prepared remarks.

When you think about the way the landscape has changed, then acknowledging it's only been about five months, but when you think about some of the acquisitions that we're seeing with some of your peers and some of the strategies that others, some of the larger regional operators have also employed as it pertains to promotional disciplines and marketing disciplines and whatnot, do you guys think or – maybe asked a different way, in that $100 million, were you contemplating an operating environment, where maybe on the cost side things could be a little bit more favorable, given some of the competitive dynamics.

[Timothy J. Wilmott, Penn National Gaming, Inc.]

Carlo, I'll just take that at a very high level. We have not seen, with a couple of exceptions, competitive environments recently that have had high levels of promotional spending. But that said, I do think with the continued consolidation of regional gaming operators and the removal of the one-off that are not large strategic publicly traded companies, I do think the consolidation will create a more favorable competitive environment from a promotional spending perspective. So, it's very tough to quantify, but I do think what's happening here with all of the transactions going on, consolidating the regional gaming space. I think that it can only benefit us moving forward as we think about operating Penn and Pinnacle as one company.

[Jay A. Snowden, Penn National Gaming, Inc.]

The only thing that I would add to Tim's comments would be that we are certainly continuing to learn a lot as we deploy these margin improvement initiatives across the Penn portfolio. And I can tell you in my conversations with the leaders at Pinnacle, I'm learning a lot on great things they're doing that we're not doing at Penn. So, look, I feel as good today as I've ever felt about the synergy targets, and we'll have more information as time goes. But I think some of these best practices that we're deploying now are certainly going to benefit the overall combined portfolio.

[Carlo Santarelli, Deutsche Bank Securities, Inc.]

Great. Thanks so much, guys.

[Operator]

Our next question comes from Felicia Hendrix with Barclays. You may proceed with your question.

[Felicia Hendrix, Barclays Capital, Inc.]

Hi. Good morning.

[Timothy J. Wilmott, Penn National Gaming, Inc.]

Good morning, Felicia.

[Felicia Hendrix, Barclays Capital, Inc.]

So, you guys, just in line with some of the questioning that we just went through, on the margin improvement program, not only have you guys done better, but your guidance implies that you're coming in kind of – you could come in better than you originally anticipated. And I'm just wondering a few things. The first is, if maybe you can help us understand some of the incremental benefits that you're seeing. You did do better on the margin side by 100 basis points in the quarter. So, obviously, there's some surprises. I know it's a lot of hard work, but there's probably some surprises. So, I was wondering if you could talk about that, both in the quarter, but also for the rest of the year.

And the other thing that I'm wondering is, just as you are digging into and working with Pinnacle to close the transaction and to see – you're getting into their business. I'm just wondering is there anything that you're learning from them that you could be applying today, and is there any chance that those synergies could be higher than $100 million.

[Jay A. Snowden, Penn National Gaming, Inc.]

Well, I'll tackle the second one first, Felicia. And, look, we're continuing to interact regularly with the leaders at Pinnacle, but I really don't feel like four months in. I have thorough enough understanding of how all decisions are being made and what the opportunities might be that we can apply to Penn. I would just tell you that they certainly run their businesses a bit different, and that's a good thing, because there's things they do, I think, better and more efficiently than we do and vice-versa, quite frankly. So more to come on that, but I think it's premature to head down that path now.

With regards to the specifics around the margin improvement initiative, as I was mentioning and responding to Carlo's question earlier, we had 130 people working on this. And so you can imagine the number of initiatives that go into an exercise such as this. We have initiatives in the dozens. And so, they all fall into those three primary categories that I mentioned previously, but we're just starting to deploy the first wave and we have another two-thirds of opportunities to deploy in the coming months and quarters. So, that's about as much specificity as I want to get into, obviously, because we've worked hard at this and it's proprietary information on exactly what we're doing.

[Felicia Hendrix, Barclays Capital, Inc.]

Okay. Thanks (00:22:43).

[William J. Fair, Penn National Gaming, Inc.]

And, Felicia, one of the items you talked specifically in Q1, when we look at this from the guidance, we were also phasing this in over the year. And so, some of this is really based upon all of the great work that's been done is starting to be realized a little quicker than we are expecting to see. So, it's also a benefit.

[Felicia Hendrix, Barclays Capital, Inc.]

Okay. Great. And...

[Timothy J. Wilmott, Penn National Gaming, Inc.]

The only other thing I'll add, Felicia, on your question, and just to remind everyone that the $100 million of synergies are all on the cost side. We still all believe there are very meaningful revenue synergies, but we haven't yet gotten into the details of the databases. We're continuing to separate the customers and the divested assets from what we're going to retain, but as we think about Las Vegas and cross-market visitation, other elements, there are going to be some very meaningful revenue synergies here that over time we'll get a better handle on and communicate out.

[Felicia Hendrix, Barclays Capital, Inc.]

Thank you.

BJ, I just wanted to talk about the – there was a comment in the press release about your leverage post the close of the Pinnacle transaction. I was just wondering if you could kind of talk about that and perhaps maybe, if you don't want to get specific in a generic kind of maybe directional way, just talk about the de-leveraging cadence after that? Like for example, where do you expect to be after the close and maybe a year after the deal closes?

[William J. Fair, Penn National Gaming, Inc.]

Yeah. We've publicly said that we expect, based upon the continuing use of the cash flow to de-lever for this year. There will be subsets by 5A (00:24:19) coming out of the Pinnacle transaction assuming run rate synergies. We would like to be basically getting down and utilizing for the first year, especially as we go through the integration of the companies to really be focused on the de-levering side, and we believe very quickly thereafter we can get back down to the 5.5 (00:24:35) range, which is approximately where we're at right now.

[Felicia Hendrix, Barclays Capital, Inc.]

Great. Thank you.

[Operator]

Our next question comes from David Katz with Jefferies. You may proceed with your question.

[David Katz, Jefferies LLC]

Hi. Good morning.

[Timothy J. Wilmott, Penn National Gaming, Inc.]

Good morning, David.

[David Katz, Jefferies LLC]

I wanted to ask – and congrats on a great quarter. I wanted to just ask about the trough in Las Vegas, and I'll apologize I'm going back and forth between a couple of calls this morning. But can you give us just a bit more detail on the progress specifically of that property, and where it is and if it's meeting your expectations at this point. And obviously, perhaps getting to the end of whether that is something that could be sold into a REIT at some point to sort of free up capital for other uses?

[Jay A. Snowden, Penn National Gaming, Inc.]

David, here's how I'd answer that. As I look back into 2017, and right after we had launched a couple of new restaurants, after having completed the casino floor renovations and putting new product on the floor, we really started to ramp and see some solid results in the third quarter of last year that were certainly meeting our expectations for the property. We had a huge set back on October 1, as everyone knows. We had a terrible fourth quarter at Tropicana. And the beginning of the first quarter was soft as well, but the property really has gained traction in February and March. And Las Vegas Strip is a marketplace, where you can see into the future a little bit clearer from a hotel yield and group demand standpoint and we like what we're seeing.

So, I would tell you that I feel as though we're back on track and we've gotten really good response from the new amenities that we've added to the property there. And to be determined on your other question in terms of what's next, we still have plenty of time – and we have plenty of optionality when you consider that asset and future plans and/or whether or not we want to monetize the EBITDA and discuss whether or not that's part of the Master Lease, but we're not there yet.

[Timothy J. Wilmott, Penn National Gaming, Inc.]

And one thing, David, I'll add is, we really want to see the impact of taking the mychoice customers we get from the Pinnacle transaction and start driving that visitation to Tropicana as well. That will, we believe, obviously drive incremental revenues and incremental EBITDA. So, I think the assessment of what we're going to do with that real estate is probably a couple years away before we really have a comfort level what the new level of performance is going to be as we combine the companies.

[David Katz, Jefferies LLC]

Got it. And if I can go back to sort of one topical issue, and I know it's been discussed here a bit for us is, cost-cutting. And particularly as it relates to promotional expenditure cutting, and the debate we have on a regular basis is, from our perspective, is there a point at which you or anyone else for that matter can begin to judge whether they have gone too far, right, and how much more cost-cutting opportunity there is not only for you, but for the industry in general.

And I know there was some commentary around early days or early stages of this, if I heard correctly, but I'd love to just get a little more detail or some color around how we measure you in the industry as you move along and how we ask some good questions about whether you or anyone else is going too far. That'll certainly be an important issue as you get into the Pinnacle integration.

[Jay A. Snowden, Penn National Gaming, Inc.]

David, I think it's a great question. And if I'm in your seat and thinking about what questions I'm asking, you obviously see on a quarterly basis that – not just Penn, but I think most of the regional gaming companies are continuing to see an environment, where they can improve their margins. And so, coupled with top-line growth, I think then the business is healthy.

And so, I'd be very focused on what same-store sales growth looks like. We had several years from kind of 2012 to 2016, certainly for Penn, where there was a lot of new supply entering markets where we already operated. And so, we're constantly battling as we took a step forward and then step back with new competition, but there's not as much new supply as we look out for the next two, three years. And so, if you're seeing top-line growth in most of these marketplaces and you can continue to see that margins are improving, then I think that you're seeing a healthy environment. If you're seeing only margin improvement, but same-store sales are declining, then I think you start to ask the question, have we gone too far?

[Timothy J. Wilmott, Penn National Gaming, Inc.]

David, I'll add to Jay's commentary.

[David Katz, Jefferies LLC]

Yeah.

[Timothy J. Wilmott, Penn National Gaming, Inc.]

Internally at Penn, the other two things we look at and measure, and spend a lot of attention on with our property management are our customer service levels and also our levels of employee engagement. And certainly, you can see, where certain cost-cutting activities could affect the customer, could affect our team members. And what we've seen to-date is we're not seeing any negative effect, but we'll continue to monitor it. And those are some other listening post that we have internally to make sure we're taking care of all of our constituents appropriately.

[David Katz, Jefferies LLC]

All right. And if I can ask one more detail on the subject of sports betting, where I recall, Jay, we had a discussion some time ago, when I think you classified it as an information-gathering mode. We may be a little bit closer to getting an announcement from the Supreme Court, I assume we are. And, I think, we're probably farther down the road in understanding the value chain on it. Can you comment at all about what roles you might sort of keep in-house otherwise?

And specifically what I'm asking is, are you potentially going to be in the bookmaking business, if that becomes an opportunity for you or what sort of capabilities you would farm out? And, obviously, I'd love to know how big an opportunity – is this really a game changer for you or is it an incremental amenity or somewhere in between?

[Jay A. Snowden, Penn National Gaming, Inc.]

David, we are still evaluating how we're going to take advantage of this potential opportunity, either to self-manage or completely farm out in a tenant/landlord relationship or do something in between. So, we have not made any decisions on how we're going to handle the management of sports book operations. And it's I think it's premature until we see what the Supreme Court does and how states evolve their legislation as well before we put a stake in that ground and how we're going to manage the opportunities.

We see a state like West Virginia that puts in a very appropriate tax rate of 10%, and that gives us encouragement. On the contrary, we see a state like Pennsylvania that has a mid-30s tax rate that gives us pause. So, we're taking a full view of how this is going to play out, and it all starts with what the Supreme Court is going to do with the New Jersey case.

As I've said previously that we are excited about this opportunity. It's not a significant revenue opportunity for us specifically as a standalone business in sports betting, but we do see the benefit of driving incremental visitation to our properties, where we'll see lifts in hotel ADRs, for example, restaurant volumes, beverage volumes and what we've seen in Nevada table games volumes.

So, we are very supportive of this, and there's a lot of work that's going on within Penn and within the American Gaming Association on this subject right now. And once the Supreme Court rules and we know what the new game and changes will take place that will or will not allow the states to participate, we'll have more color to offer hopefully by our second quarter call.

[David Katz, Jefferies LLC]

Perfect. And I think a tax rate up in the 30s on this should give you a little more than pause. But I appreciate the answers. Thanks for taking my questions.

[Jay A. Snowden, Penn National Gaming, Inc.]

Thanks, David.

[Operator]

Our next question comes from Steve Wieczynski with Stifel Nicolaus. You may proceed with your question.

[Steven Moyer Wieczynski, Stifel, Nicolaus & Co., Inc.]

Yeah. Hey. Guys, good morning. So I know you guys don't want to talk about weather too much. But, obviously, weather was pretty harsh in the first part of the quarter. You guys were still essentially to hit you revenue guidance so I guess the question is, how did you do that? But, was that more a function of the days when weather was normal visitation and play levels exceeded your expectations? If you can give us some color around that that'd be helpful. Thanks.

[Jay A. Snowden, Penn National Gaming, Inc.]

Sure, Steve. Look, it wasn't across the board, where we hit our revenue guidance across the portfolio. But certainly in some jurisdictions, where you have less visibility, because the numbers aren't reported on a property-by-property basis, we had a good quarter. Las Vegas, I mentioned, we had a very good quarter. New Mexico, where you have very little visibility with oil prices bouncing back, we had a terrific quarter.

And then really across the board we just – we didn't decline as much as we anticipated given how the quarter started. January was a really tough month, and the first 10, 11 days of February same thing. But to your question about what happened when the weather cleared, there was a lot of pent-up demand. And second half of February was strong, and March was amazing. We just – we finished the quarter roaring and that momentum has carried us into April.

[Steven Moyer Wieczynski, Stifel, Nicolaus & Co., Inc.]

Okay. Got you. And then kind of to follow on that a little bit, Jay. The second question will be around the non-rated play. It sounds, like you said that was up in the quarter. And I wanted to see if we could get some more color around that, and maybe around database sign-ups as well. And what I'm getting at here is, there's clearly – there's some concern out there about the health of consumer. But if the non-rated play was accelerating, that should be a pretty good sign for you guys. Am I thinking about that the right way?

[Jay A. Snowden, Penn National Gaming, Inc.]

I think you absolutely are. That's certainly the way we look at the health of the retail consumer, right. Because those that are in our database receiving offers, you can always stimulate visitation. But it's a lot more – I think it's a lot more important for us to understand from an unrated perspective, how effective our advertising is and how effective our new amenities and offerings are – are they appealing to the consumer. And, yeah, we saw even with all of the weather, where you typically see a hit to unrated play, we grew unrated play at the majority of our properties. And if you go back into the third and fourth quarter of last year, we were seeing unrated growth when you don't have weather issues at two-thirds three quarters of our properties. So, yeah, I think you're thinking about it the right way.

New card signups are today about where they've been. They're not in a state of decline. We have some marketplaces, obviously the newer properties in Ohio and Kansas Speedway, Massachusetts, and a few others that we're still signing up 4,000, 5,000 people a month, very healthy clip. So, yeah, we feel good about the strength of the consumer, we feel good about the demands of our products. And yeah, we're very positive right now.

[Steven Moyer Wieczynski, Stifel, Nicolaus & Co., Inc.]

Okay. Great. Thanks guys. Thanks for the color.

[Operator]

Our next question comes from Shaun Kelley with Bank of America Merrill Lynch. You may proceed with your question.

[Shaun C. Kelley, Bank of America Merrill Lynch]

Hi, guys. Good morning. So, maybe I just wanted to just to start with a couple of clarifications on guidance. Just to be clear on, you know, BJ in terms of the guidance increase on – was most of the change in revenue just on the accounting piece such that virtually everything we're seeing on EBITDA is margin, just could you help us ballpark those two components a little bit.

[William J. Fair, Penn National Gaming, Inc.]

The change in guidance on the revenue side with respect to the change of the accounting policy was included in our original guidance. So, the guidance that we provided is basically reflective of what we anticipate for revenue increases on each individual segment.

[Shaun C. Kelley, Bank of America Merrill Lynch]

Okay. So, the raise in the revenue guidance is a core operating number, not just frontloading (00:37:52) through the accounting change?

[William J. Fair, Penn National Gaming, Inc.]

That's correct. That's correct.

[Shaun C. Kelley, Bank of America Merrill Lynch]

Okay. Great. And then, if you go back to the margin discussion, because clearly that's where you, guys, really posted an exceptional performance this quarter. I think, Jay, I think you talked about this a lot at the beginning. But, if you could just – could you just help us break down either of the three buckets you talked about, marketing, labor, procurement, any initiatives or anything that kind of hit faster or stronger than you expected. Just a little bit of clarity or story around kind of what's really working as you, guys, roll out some of these initiatives.

[Jay A. Snowden, Penn National Gaming, Inc.]

It really is – it's a combination of all three, Shaun. And I would tell you that the procurement opportunities are going to continue to ramp and accelerate, because they just take longer as you're working through RFPs with your largest providers and vendors. And I said before, I just think that it's one of the areas as I look back over the last several years at Penn that I'm not proud off. I don't think we've done a good job leveraging our purchasing power and our size and scale with our third-party partners and vendors.

And so we're playing catch-up for lost time, and that we're very pleased with what we're seeing in the results. So, I think you can anticipate more from procurement for the remainder of the year, but we're still going to have some sizeable contributions from the buckets of marketing and labor as well.

[Shaun C. Kelley, Bank of America Merrill Lynch]

Great. And last question for me would just be on the – again, I think, BJ, in your prepared remarks, you mentioned something about the guidance for margins relative to the target that you had set out. I think it was last quarter and you being maybe slightly ahead or above that. Was that specifically a comment for kind of versus the overall plan by I think that was either 2019 or 2020 or is that like, could you be there even a year early from where you were expecting? Just trying to triangulate exactly where you're going with that.

[William J. Fair, Penn National Gaming, Inc.]

That comment was specific to the guidance we provided for 2018. And so, basically, our current guidance right now is above the higher end of the margin range that we provided for 2018.

[Shaun C. Kelley, Bank of America Merrill Lynch]

Okay. Great. Thank you very much, guys.

[Operator]

Our next question comes from Thomas Allen with Morgan Stanley. You may proceed with your question.

[Thomas G. Allen, Morgan Stanley & Co. LLC]

Hey, good morning. In your initial remarks, you talked about how Kansas City and Massachusetts are doing very well. Can you just talk about the drivers behind that and your outlook for both of those markets? Thanks.

[Jay A. Snowden, Penn National Gaming, Inc.]

Sure, Thomas. Massachusetts, I think really we're just – we're in that still early cycle. We opened the property just a few years ago – three years ago, and this is what we see with newer properties in new markets. We're very pleased even though I think in the eyes of some Massachusetts Pine Ridge Park started slower than anticipated and below some expectations, but that property continues to ramp. We're seeing great top-line activity, visitation growth, spend per visit growth across all of our segments and margins are continuing to improve. So, we're very pleased in Massachusetts, and I think you'll continue to see those results ramp up until the time that Everett opens the doors, and there'll be some impact. But quite frankly, we don't think we're going to share a lot of the same demographic customers with that facility given their focus on the high end and international business.

And then with regards to the Kansas City, I would tell you it's for us. And part of what gets us excited about markets like St. Louis going forward, where we've really figured out how to effectively and profitably market when you've got two facilities in the same marketplace. And so, we're just getting – every year we look at our combined market share between our River City property and Kansas Speedway. We're seeing margin improvement in both properties, top-line growth, visitation growth and really incentivizing customers the right way to be more loyal with us between the two facilities. So, as you know, with the acquisition of Pinnacle, that helps us and a few other marketplaces like St. Louis, and we're very excited about what we can do in marketplaces like that going forward.

[Thomas G. Allen, Morgan Stanley & Co. LLC]

All helpful color. And then you talked here a little bit about healthy underlying same-store sales growth. Can you just talk about like the actual numbers of how that's trended and where you are now and kind of what you're expecting going forward? Thanks.

[Jay A. Snowden, Penn National Gaming, Inc.]

Yes, sure. I mean, we anticipated that for the year, we would be in low-single digit. We ended up seeing that believe it or not even in the first quarter with and without Charles Town. So, we anticipate that we'll continue to see low-single-digit same-store sales growth across most of the marketplaces, where we operate. There's always going to be a couple of exceptions, Illinois, Riverboat has been a challenge with all the VGTs that have entered that marketplace. And then, Mississippi can be challenging as well given that there's just more supply than there is demand today. But really with the exception of those two, we're very comfortable that we'll continue to see same-store sales growth as we proceed for the remainder of the year.

[Thomas G. Allen, Morgan Stanley & Co. LLC]

All helpful. Thank you.

[Operator]

Our next question comes from Chad Beynon with Macquarie. You may proceed with your question.

[Chad Beynon, Macquarie Capital (USA), Inc.]

Hi. Good morning. Thanks for taking my questions. I wanted to ask about the Cat 4 license in the process. You mentioned that the state has still not concluded the process. I guess, 5 of the 10 have been selected. Could you just kind of help us when the state process concludes, what's the timeline in terms of when you have to pick your location and just any other details on that? And then secondarily, with your recent win in Lancaster, should we view that as more of a defensive situation similar to your first Cat 4 license or was that more of an offensive bid? Thank you.

[Timothy J. Wilmott, Penn National Gaming, Inc.]

Chad, let me answer the question. The way it is structured in the new gaming statute that was passed in the second half of 2017, when the Category 4 license is awarded, and in the case of York, that was mid-January, you have up to six months to provide the regulators the specific location and all the details regarding the scope of your investment. You can request a 60-day extension from that six-month. So, it could be potentially total of eight months before you have to finalize the plans for York. So in that case, it could be into mid-September before we have to conclude. In the Lancaster, Berks County case, we got the award in April, so the clock started in April there.

Regarding specifically your question about the strategy around the location for the Lancaster, Berks County area, we view that more as an offensive play than defensive. We do get a little bit of business at Penn National, but not as much as we get out of York. And we see that opportunity predominantly in the Southern Berks County area is very much an offensive play that will add new business to our enterprise. And as I said before, provide good returns on the invested capital that will get deployed there.

[Chad Beynon, Macquarie Capital (USA), Inc.]

Okay. Thank you. And then lastly on margins, not to put the cart before the horse here. But previously, you kind of laid out 2018, 2019 and 2020 goals, 2019 and 2020, I believe you're assuming 50 basis points of margin improvement off of the prior year. So, if 2018 comes in ahead of, I guess, your original goals, which it looks like as of now could be on track for that, should we still expect 2019 and 2020 for you, guys, to continue to grow margins just through continuous improvement or were those kind of medium-term goals that are a little bit more of a ceiling? Just some more color on the out-years. Thank you.

[Jay A. Snowden, Penn National Gaming, Inc.]

Sure, Chad. Look, as we sit here today, I would say let's just – let's hold firm on what we said for 2019 and 2020, and we'll have more color in the coming quarters. But for now, early innings. And a lot of these things take time to materialize. Some of these ideas and initiatives are going to work and be really effective. Some won't, some will fail and we'll fix those quickly and move on. But for now, I would not assume that if we accelerate the 2018 margin to what we said we'd do in 2019 and you can just continue to fast forward everything from 2020 to 2019, and where is 2020 going to be, for now, let's keep 2019 and 2020 assumptions where they are and we'll keep everyone posted on how we're doing and how we're progressing on future calls.

[Chad Beynon, Macquarie Capital (USA), Inc.]

Okay. Makes sense. Congrats on the quarter. Thanks.

[Jay A. Snowden, Penn National Gaming, Inc.]

Thank you, Chad.

[Operator]

There are no further questions at this time. I will now turn the call back over to you, sir. Please continue with your presentation or closing remarks.

[Thomas G. Allen, Morgan Stanley & Co. LLC]

Thank you, operator. I want to thank everyone for your time this morning listening to our information regarding our earnings call. I look forward to getting back together in late July period. And as I said in my opening comments, we'll definitely have more specifics about the timing of the Pinnacle close at that time and also some more specifics about – our thoughts about the location and level investment of these Category 4 licenses in Pennsylvania. Thanks again.

[Operator]

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