Belterra Resort and The Meadows led to EBITDAR and margin expansion

Pinnacle Entertainment reports Q2 2018 financial results

Net income increased by $13.4 million to $21.8 million from $8.4 million in the prior year period, while the related margin increased to 3.4% from 1.3% in the prior year period. GAAP diluted net income per share was $0.35 versus $0.15 in 2017.
2018-08-03
Reading time 7:24 min
Net income increased by $13.4 million to $21.8 million from $8.4 million in the prior year period, while the related margin increased to 3.4% from 1.3% in the prior year period. GAAP diluted net income per share was $0.35 versus $0.15 in the prior year period. Net income was positively impacted by $3.6 million, or $0.06 of GAAP diluted net income per share, relating to the release of an income tax reserve.

Pinnacle Entertainment, Inc. today reported financial results for the second quarter ended June 30, 2018. The results reflect the Company's adoption of the new revenue recognition standard ("ASC 606"), effective January 1, 2018. The Company adopted ASC 606 using the modified retrospective method, therefore, prior period amounts have not been adjusted.

2018 Second Quarter Highlights

Net revenues decreased by $6.0 million or 0.9% year over year to $647.6 million. The adoption of ASC 606 resulted in a reduction of 2018 second quarter net revenues of approximately $3.6 million or 0.6%, relative to the Company's prior accounting methodology.

Net income increased by $13.4 million to $21.8 million from $8.4 million in the prior year period, while the related margin increased to 3.4% from 1.3% in the prior year period. GAAP diluted net income per share was $0.35 versus $0.15 in the prior year period. Net income was positively impacted by $3.6 million, or $0.06 of GAAP diluted net income per share, relating to the release of an income tax reserve. The adoption of ASC 606 resulted in an increase of 2018 second-quarter net income of approximately $0.2 million or 1.2%, relative to the Company's prior accounting methodology.

Consolidated Adjusted EBITDAR increased by $1.2 million or 0.7% year over year to $181.9 million from $180.7 million in the prior year period. The adoption of ASC 606 resulted in an increase of 2018 second quarter Consolidated Adjusted EBITDAR of approximately $0.2 million or 0.1%, relative to the Company's prior accounting methodology.

Consolidated Adjusted EBITDAR margin increased by 50 basis points year over year to 28.1%. The adoption of ASC 606 resulted in a 20 basis point positive impact to 2018 second quarter Consolidated Adjusted EBITDAR margin, relative to the Company's prior accounting methodology.

Consolidated Adjusted EBITDAR growth and margin expansion were led by strong performance of Belterra Resort, The Meadows, Ameristar Black Hawk, Ameristar St. Charles, and Ameristar Vicksburg.

Additional Highlights

• The Company repaid $46.5 million of Conventional Debt in the 2018 second quarter, reducing the Company's Conventional Debt balance to $757.6 million as of June 30, 2018. The Company anticipates achieving a Conventional Debt balance of below $700 million by the end of the 2018 third quarter.

• On December 17, 2017, the Company entered into a definitive agreement under which Penn National Gaming, Inc. will acquire the Company. Under the terms of the agreement, Pinnacle stockholders will receive consideration of $20.00 in cash and 0.42 shares of Penn National common stock for each Pinnacle share they own. The transaction was approved by the shareholders of both companies at special meetings held on March 29, 2018.

• The proposed acquisition of the Company by Penn National has been approved by gaming regulators in Illinois, Indiana, Louisiana, Mississippi, Ohio (Casino Control Commission), Pennsylvania (Gaming Control Board and Racing Commission) and West Virginia. The transaction is subject to remaining required regulatory approvals and is expected to close early in the 2018 fourth quarter.

1) Net income and operating income for the three months ended June 30, 2018 include $0.7 million in pre-opening, development and other costs and $2.6 million of write-downs, reserves and recoveries, net, versus $1.8 million and $7.9 million, respectively, in the prior year period.

(2) For a further description of Consolidated Adjusted EBITDAR, Consolidated Adjusted EBITDAR margin and Consolidated Adjusted EBITDA, net of Lease Payments, see the Glossary of Terms and Non-GAAP Financial Measures and the reconciliations to the GAAP equivalent financial measures below.

Anthony Sanfilippo, Chief Executive Officer of Pinnacle Entertainment, commented, "Our 2018 second quarter financial performance continued our trend of driving more efficient operations and improving our balance sheet, as we move toward completing our transaction with Penn National. Our Consolidated Adjusted EBITDAR and margins grew year over year, despite a modest decline in net revenue. We also repaid $46.5 million of debt, reducing our Conventional Debt balance to $757.6 million at the end of the 2018 second quarter. In what is historically our strongest free cash flow quarter of each year, we believe we will reduce our Conventional Debt balance to below $700 million by the end of the 2018 third quarter.

"We made significant progress on the renovation of the Ameristar East Chicago casino floors and expansion of this business. In the 2018 second quarter, we unveiled the new land-based high limit space. The new high limit gaming space contains approximately 95 slot machines and 14 table games, as well as other dedicated amenities, and has been very well received by the guests of Ameristar East Chicago.

"Significant milestones have been achieved in completing our transaction with Penn National, including the approval of the transaction by the shareholders of both companies and gaming regulatory approvals in several states. We continue to work closely with the Penn National team to obtain the remaining regulatory approvals and in coordinating a smooth transition and seamless integration upon the closing of the transaction. We expect to complete the transaction early in the 2018 fourth quarter," concluded Mr. Sanfilippo.

2018 Second Quarter Operational Review

Midwest Segment

In the Midwest segment, net revenues increased by $3.2 million or 0.8% year over year to $392.9 million in the 2018 second quarter. Adjusted EBITDAR increased by $5.3 million or 4.9% year over year to $114.4 million and Adjusted EBITDAR margin was 29.1%, an increase of 110 basis points year over year.

Belterra Casino Resort generated Adjusted EBITDAR growth in excess of 20% and margin expansion of approximately 380 basis points, driven by low single digit net revenue growth and marketing and advertising and general and administrative expense reductions.

The Meadows generated Adjusted EBITDAR growth in excess of 10% and margin expansion of approximately 210 basis points despite a low-single digit decline in net revenues. These results were achieved by continuing to drive profitable table gaming revenues and through strategic marketing efficiencies, which have been aided by the implementation of the Company's mychoice guest loyalty program in the 2018 first quarter. Additionally, the financial performance of The Meadows benefited from general and administrative expense reductions.

Ameristar St. Charles generated mid-single digit Adjusted EBITDAR growth and margin expansion of approximately 100 basis points, driven by low single digit net revenue growth and marketing and advertising and general and administrative expense reductions.

South Segment

In the South segment, net revenues decreased by $10.9 million or 5.4% year over year to $190.9 million in the 2018 second quarter. Adjusted EBITDAR decreased by $6.5 million or 9.6% to $61.3 million. Adjusted EBITDAR margin was 32.1%, a decrease of 150 basis points year over year.

Ameristar Vicksburg generated high-single digit Adjusted EBITDAR growth and margin expansion of 160 basis points, driven principally by low-single digit net revenue growth. Revenue growth at Ameristar Vicksburg was achieved in conjunction with expense discipline, with the overall cost structure of the property unchanged year over year.

L'Auberge Lake Charles continues to perform well, by prudently managing its cost structure and generating growth of key business metrics. Slot machine coin-in and revenue increased at a meaningful high single digit and low single digit pace, respectively, in the 2018 second quarter, which mitigated a decline in table gaming revenue. Table gaming volume and hold percentage experienced normal volatility and both declined year over year, which affected the profitability of L'Auberge Lake Charles in the 2018 second quarter. As a result, Adjusted EBITDAR experienced a low double-digit decline and margins contracted approximately 250 basis points in the 2018 second quarter.

L'Auberge Baton Rouge effectively managed its business through a period that contained difficult comparisons. L'Auberge Baton Rouge experienced a decline of Adjusted EBITDAR of approximately 22% and a 310 basis point contraction in margins, driven by a mid-teens decline in net revenues. Net revenues at L'Auberge Baton Rouge were negatively affected, in part, by difficult comparisons from elevated economic activity in the greater Baton Rouge area from flood recovery efforts in the prior year period. Additionally, 2018 second quarter financial results reflect the initial negative impact of the smoking ban put in place in Baton Rouge, which went into effect on June 1, 2018. Efficiencies implemented in the cost structure of the business and streamlined marketing expenditures helped mitigate lower revenues in comparison to the prior year period.

West Segment

West segment net revenues were $62.5 million in the 2018 second quarter, an increase of $1.7 million or 2.8% year over year. Adjusted EBITDAR was $24.9 million, an increase of $1.3 million or 5.5% year over year. Adjusted EBITDAR margin was 39.8%, an increase of 100 basis points year over year.

Ameristar Black Hawk produced low-single digit growth in net revenues coupled with mid-single digit Adjusted EBITDAR growth. Adjusted EBITDAR margin expanded approximately 120 basis points year over year. The operating results at Ameristar Black Hawk were driven by a mid-single digit increase in gaming revenues and continued marketing and advertising efficiencies.

Corporate Expenses and Other

Corporate expenses and other, which is principally comprised of corporate overhead expenses, as well as the Retama Park Racetrack management operations, decreased by $1.1 million in the 2018 second quarter to $18.7 million.

Adoption of ASC 606

The Company's 2018 second quarter financial results reflect the adoption of the new revenue recognition standard ("ASC 606"), effective January 1, 2018. The Company adopted ASC 606 using the modified retrospective method, therefore, year over year comparability is reduced since prior period amounts have not been adjusted. The adoption of ASC 606 resulted in an approximate $3.6 million, or 0.6%, and $6.4 million, or 0.5%, reduction in net revenues for the three and six months ended June 30, 2018, respectively, with no material impact on operating income, net income or Consolidated Adjusted EBITDAR.

ASC 606 changed the accounting for our mychoice program reward credits earned by our customers. The Company is now required to defer revenue at the estimated standalone selling price of mychoice credits as they are earned by our customers and recognize revenue when the credits are redeemed. Prior to the adoption of ASC 606, the estimated liability for unredeemed credits was accrued based on the estimated cost of the goods or services to be provided.

ASC 606 changed the classification of charges associated with our mychoice tier accrual for third-party annual gifts. These charges were previously recorded to gaming expenses and now are recognized as a reduction to gaming revenue.

ASC 606 changed the accounting for complimentaries. The Company previously did not present revenue for goods and services provided to customers for free as an inducement to gamble (discretionary and non-discretionary complimentaries). Complimentaries related to an inducement to gamble (i.e., gaming contracts) are now recognized at standalone selling prices with an offsetting reduction to gaming revenues.

 

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