Full House Resorts Inc (FLL) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Full House Resorts second-quarter 2007 earning conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS). This conference is being recorded Wednesday, August 15, 2007.

I would now like to turn the call over to William Schmitt from ICR. Please go ahead, sir.

Thank you, Eric, and good morning, everyone.

By now, everyone should have access to our earnings announcement and 10-Q which we released this past Monday morning for the second quarter ended June 30, 2007. It may also be found on our Web site at FullHouseResorts.com under the "Investor" section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance. Therefore, undo reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Full House Resorts.

I would now like to introduce Andre Hilliou, CEO of Full House Resorts. Andre?

Thank you, Bill, and good morning, everyone. Here with me today is Mark Miller, our CFO, who will discuss our financial results for the quarter. But first, let me briefly go over some of the highlights from the quarter, the recent court decision in Michigan, which was rendered on July 3, and our longer-term strategic outlook.

For the quarter, Stockman's Casino performed in line with our expectations and generated revenue of $3.1 million and $5.1 million for the three and five months that we have owned it. Our equity and net income from our joint venture in Delaware generated just over $1 million for the quarter, slightly up from last year.

Perhaps more important [as a] result was that, during the quarter, we successfully restructured the Harrington Raceway management contract to provide us with a predictable and growing cash flow stream. We believe that this was an important achievement because it essentially mitigates downside risk to our cash flow that may be associated with increased competition in the Delaware region, whether it is from possible gaming in Maryland or continued competitive pressure coming from the new Pennsylvania racino, and of course the Atlantic City expansions. We are now guaranteed a minimal gross rate of 5% for each of the remaining years of our contract, with the exception of 2008, where the gross rate will be 8% to reflect the expansion which will be coming on later this year.

In addition and perhaps the bigger milestone for the Company occur in early July with the favorable court decision in the last remaining lawsuit related to our Firekeepers Casino project in the Battle Creek, Michigan area. We now believe this project will move forward on a more predictable timetable, and we anticipate that the NIGC would approve our revised contract at the end of August or early in September, which will then be followed by the project financing. Assuming the first two events happen in the mentioned timeframe, we're planning on starting construction on the project during the fourth quarter. In addition, the construction management company has been selected by the tribe, and we and the tribe are currently working to finalize a contract with them.

I will now turn the call over to Mark, our Chief Financial Officer, to go into more detail about the financial results for the quarter, and then I will close with a few additional comments. Mark?

Thank you, Andre. I would like to quickly review a few highlights of our financial performance for this quarter, and then we will be happy to respond to any questions you may have at the end of our prepared remarks.

For the three months ended June 30, 2007, income from operations increased to $836,000, compared to $66,000 in the prior-year period, with net income improving to $236,000 from $97,000 last year. For the second quarter ended June 30, earnings per share was $0.01 compared to $0.01 in the prior year, based on diluted common shares outstanding of approximately 19.3 million and 11.3 million, respectively.

As Andre indicated, we restructured our Delaware agreement and as result, that income from operations has been reclassified from the revenue section of our income statement to the other operating gains section. Results are very consistent for the quarter compared to the prior year. As a result, the impact on operating income is essentially the same.

As you can see from the segment reporting chart that is included in the press release and also in our 10-Q, Stockman's Casino has contributed approximately $3.1 and $5.1 million in revenue for the three months at the five-month periods, respectively. We acquired the Stockman's Casino at the end of January this year, so only five months worth of revenue and results are included in our year-to-date results.

Income from operations for Stockman's was approximately $736,000 and $1.258 million for the same three-month and five month periods respectively. These results are consistent with management's expectations and represent a modest improvement over the prior year.

Project development expenses are down somewhat from the prior year, mostly as a result of the IGT bridge loan to the Huron tribe, which we began using to fund most of the development costs in Michigan in April of this year.

SG&A expenses have increased from $1.3 million last year to $2.1 million during the second quarter. The increase is mostly due to stock compensation expense and other incentive compensation costs related to compensation plans which were approved by the Board and implemented in the second and third quarters last year. As a result, those costs were not fully reflected in the first two quarters of last year, and we will see a more consistent comparison as we move through the remainder of this year.

Our income statement reflects approximately $523,000 of unrealized gains on tribal receivables, up slightly from the amount we booked last year for the second quarter. This is reflective of the continuing progress we are seeing on the Michigan project. These amounts remain subject to some volatility, should coming change, and I would refer you to the somewhat extensive disclosures we have in our 10-Q and our December 31, 2006 10-K to better understand the nature of these items which are significant to our financial results. Please keep in mind that these adjustments to fair value are non-cash.

Earnings per share for the quarter was $0.201 versus $0.01 for the same period last year on approximately 19.3 million shares outstanding at the end of this Q2, compared with 11.3 million shares at the same time last year. The share count of course reflects the offering that was done in December and the conversion and retirement of the preferred shares during the first quarter of this year. There haven't been any significant changes to the share count during the most recent quarter.

We had approximately $9.8 million in cash on hand at the end of Q2. Due to prepayments on the Nevada State Bank loan, we have a little over $1 million in availability on our revolving line of credit with them. Debt stands at just about $18.5 million, including current maturities, and we have no required payments on the Nevada State Bank loan for the next 12 months due to the prepayments we have made.

With that, I will turn it back over to Andre for a few final comments before we open it up for questions.

Lastly, we would like to reinforce our long-term strategy for Full House Resorts. Our goal is to own and develop market-leading, local casinos, of which Stockman is our first, as well as to continue and develop the management relationship with Native American and commercial enterprises.

The favorable court decision in Michigan moves us closer to major success in our strategy to build a management contract business. We continue to investigate potential acquisition and management projects, but we remain disciplined in what we're willing to pay for those opportunities and perhaps more importantly, in assessing the long-term value of such projects. It is our goal to create shareholder value over the long-term, and so far this year, we believe the Stockman acquisition and the long-awaited court decision have positioned us to achieve the goals.

I will now open up the call for questions.

Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Justin Sebastiano, Nollenberger Capital.

Good morning, guys. Real quick, on Firekeepers, what's the amount you think you are going to have to get for the financing for the project?

Well, right now, the announced budget, which we think is a pretty good number, Justin, is $270 million of project financing for the tribe, remembering that financing will be an obligation of the tribe and not of Full House Resorts, but approximately $270 million.

Okay. You need to get the management contract approved first by the NIGC before you will probably move forward with the financing?

You know, we have a couple of major hurdles that we need to overcome to go to market. The first is we need to get our management agreement approved with the NIGC, which you mentioned. You know, we have filed a revised application with the NIGC, which reflects the updated scope of the project. The NIGC is currently processing that application, along with completing their background investigations on the Company. So, we think that process is well underway. As Andre indicated, we anticipate that will be completed sometime near the end of this month or early in September.

Then the other hurdle is that we need to get a guaranteed maximum price contract from our contractor. As Andre indicated, we have selected a contractor; that contractor is now working with the architect on design drawings and preparing a [GMP]. Again, we would expect to have that completed sometime -- the earliest would be the end of this month, probably sometime in early September is when -- or sometime in September is when we will have that GMP. So when those two items are completed, then we should be in a position to go to market to raise the financing.

Okay. You're still looking at probably a 12-month construction timeline?

I think 12 to 14 months would be a good range of what we anticipate.

Okay. Very quickly on Stockman, it looks like the hotel revenues were looking pretty strong. I assume you guys are getting better rates there. Is that where you're getting that boost?

We are. We've seen very good demand at Stockman's in the holiday. You know, our occupancy remains pretty strong, a little bit of improvement in the occupancy but most of the revenue gain is coming from ADR.

Okay. Over at the casino, you're still looking to revamp the restaurant in late September/early October?

Right. In fact, we're going to be reviewing the design drawings later this morning. We really don't want to close the coffee shop down until we get out of the summer season, so probably late September/early October, somewhere in there, we will close the coffee shop down and renovate it.

Okay. What about the White Tablecloth restaurant you have?

We're holding off, because we're going to use that restaurant as the temporary coffee shop, so we will renovate that one after we have done the coffee shop.

I got you. Just one last thing -- on the stock-based comp, you know, it looked a little -- it was high this quarter but most of that was from -- or maybe a little less than half was really from stock-based comp from an employee that left the Company. Is that -- that would have been spread out over the next six quarters or so, right? I mean (multiple speakers)?

That is correct, Justin. The 335,000 that we've got in our disclosures related to the employee who left the Company. Those amounts would have been amortized over the remaining two quarters of '07 and four quarters of '08. So, stock compensation expense is going to be lower over the remaining quarters than what we would have originally anticipated.

Okay, so we're looking probably somewhere 350, 400, that's kind of a good rate to use going forward?

That would be correct.

All right, thanks a lot, guys. I appreciate it.

(OPERATOR INSTRUCTIONS). [Ralph Langer], LDW Group.

I was curious. As we get into the Michigan casino, how many people do you think you'll have to add to your payrolls for the project?

That's Andre. I think the number of people that we're going to head to the projects are going to be quite limited. You know, we talked about two to three, four people max.

You are talking about people who would be added to Full House's payroll, right?

Right.

Right, so under our management agreement with the tribe, we would be responsible for the general manager, and the person would be the responsibility of GEM, which is the management company that we owned 50% of. Other than that, I think Full House would probably have some limited growth in its finance group and potentially a headcount or two in operations. But as Andre indicated, it would be pretty limited. Most of the staff for managing and developing that project would go on the payroll of the project itself.

Or GEM, where we are responsible for half of the expenses only, so I think it will have a very limited impact on our expenses.

Nick Danna, Sterne Agee.

Good morning, guys. Two questions -- first, can you give us some color on your latest conversation with Merrill Lynch in terms of getting the financing done and what the rate might look like?

Absolutely.

(multiple speakers) the crystal ball on the table now, Nick.

You know, our discussions with Merrill Lynch and other people in the market I'm sure are not a lot different than what you guys may be hearing. Obviously, right now, it would be very difficult to raise financing for any sort of project, whether it were a Native American or a gaming project or anything else. So, I'm not sure that we are seeing anything that's unique to gaming in particular. But I think that we're hearing is that they believe that sometime after Labor Day, mid to late September, somewhere in there, that the market will begin to reopen for business on a more sort of stable platform and that hopefully we will be in a position by then -- you know, we're not going to be ready to go to market anyway until mid to late September at the very earliest. You know, they are feeling like the market will probably be available to us at that point. It's not clear right now what the coupon will be and exactly what the terms will be, but they think that, sometime in September, the market will be available for us, given our relative -- relative to other projects that have been done of this nature, our relatively low leverage and good credit statistics. You know, they think we will be in a position to raise the money when we are ready.

It's a very strong project, Nick.

Sure, it obviously has a much, much lower leverage than any of these buyouts or even some of the recent deals that have been done.

Absolutely, right.

But I guess is there a Plan B if that doesn't happen by sort of late September timeframe?

Well, I assume, by a Plan B, you are referring to some other form of financing other than high-yield bonds?

Sure.

We have been investigating with Merrill Lynch even before this occurred. Just as part of the sort of normal process with the tribe, we've been looking at other forms of financing, such as bank financing would probably be the other most likely candidate. So, we have evaluated that obviously before this disruption in the market. We didn't think that was the best vehicle, but we are continuing to look at it. We've had discussions with Merrill Lynch about it and we've kind of just agreed that we're going to -- we and the tribe right now are keeping our heads down and working hard to get ourselves in a position where we are ready to go to market. When we get a little bit closer, we get through Labor Day, we will sit down with Merrill Lynch and look at it again and see what vehicles they think are the best.

Okay. Is there a certain rate threshold I guess above which you wouldn't be willing to go and then would consider just delaying the financing a couple of months?

Well, we haven't had that discussion explicitly with the tribe, Nick. There obviously is a threshold. I don't know exactly what it is, but I would think that anything short of an egregious rate -- again, because, as you indicated, the economics on this project are very strong. So when you look at rates that I think would be in a reasonable expectation right now, I think those are obviously not what we want but they will be acceptable.

Understood. Lastly, do you have an EBITDA number for Stockman's in the quarter?

You know, if you look at the segment chart, Nick, and you take income from operations in the casino hotel column -- because Stockman's is the only thing in that column -- you add back depreciation, then you'll come to an EBIT number. It's about $1.1 million for the quarter and about $1.9 million for the five months that we've owned it.

Keeping in mind, Nick, that all quarters are not created equal.

But even if you take the $1.9 million and annualize it, divide by 5 and multiply it by 12, you come out to a number that's pretty close to the numbers we have talked about in the past -- 4.5, 4.6, 4.7, somewhere in there.

Okay, great. Thanks a lot, guys.

Kevin Wenck, Polynous Capital Management.

Mark, earlier you said it would be unclear what the coupon would be if the financing was done now, but I mean can you at least give us some sort of indication of how much the environment has changed for financing? I mean --?

Well, I would just say, Kevin, when I first got here and we were having discussions with Merrill Lynch, you know, they were talking somewhere in the mid-8s. Today, I think we would probably be -- and it's purely speculation at this point, so I think if we held their feet to the fire and said "What do you think it's going to be in mid-September or late September?", I think they would probably say that we've lost somewhere close to 200 basis points, maybe a little bit less.

Okay. I mean, my own projections suggest that, even at 10.5 or 11, the project is doable.

Absolutely, absolutely, Kevin, it is absolutely doable. Really, if you run the numbers, Full House/GEM's management fee is not all that interest-rate sensitive.

Okay. Onto another topic -- Andre, if you could give us an update on what the business development pipeline looks like at this point?

You know, I probably spend about half of my time looking at properties. You know, the pipeline is pretty good out there. We are now currently evaluating several opportunities, and you know, they need to meet the standards that we've imposed to ourselves at the beginning. They need to be market leaders, and they need to be accretive to earnings as we purchase them. So we can't tell you what we're looking for, but I can tell you that the feel out there is fairly decent and we like it.

Okay, the word "several" to me means probably no more than two or three. Is that a (multiple speakers)?

Yes, I can't give you numbers; I will leave it to several. But we're looking at several projects out there.

I mean, similar to Stockman's or --?

Yes, smaller, larger, you know, not much larger than Stockman's Casino but they are all local casinos. (inaudible) was a local customer base in the price range -- in the multiple range of the Stockman's.

Okay, then on the Indian gaming, any further developments there?

We are always looking at projects, keeping in mind that when we looked at a project, whether it is a management project or a company-owned project, we are looking at what brings us the biggest return for our investment. So we are constantly looking at projects, whether they are Indian projects, commercially managed projects or company-owned project, but keeping in mind that, right now, one of our favorite projects are company-owned projects. There is always a silver lining in a storm. It could be now that the small project that we were looking at could be a little more affordable to us. Some of the multiples that folks were looking at three months ago might no longer be in the horizon. So we intend, if the lining is there, to take advantage of it.

Okay. Then, in the changing financing environment, aside from the debt associated with the project in Michigan, what sort of debt levels would you be comfortable with at the Company at this point?

I think -- if you look at the Stockman's, the Stockman's is pretty much a blueprint of what we would be looking at buying and how we would be looking at structuring a project. But Mark, if you have a different answer to that, why don't you go ahead?

I'm really looking more for maximum debt levels.

No. Without adding earnings to the Company, Kevin, we wouldn't be looking to take any additional debt onto Full House, so we would be looking for -- only in the case of an acquisition would we be looking to put additional debt onto the Company. Is that what your question is aimed at?

Well, yes but I assume the debt would only be associated with an acquisition, but relative to your overall equity base, I mean, what sort of total debt levels would you be comfortable with at this point?

Well, I mean, you've got to think, right now, you know, that if an acquisition -- you know, the debt level is going to be, is probably going to be less than 50% of the total acquisition cost, right? We have, as I indicated before, we have some liquidity on our balance sheet and we have some access. So, there is the potential for us to do some small to mid-sized projects without having to issue additional equity. So, that's really where we are focused.

It really depends on the size of the project.

All right, thanks for your help.

(multiple speakers). Our goal again is EPS. I mean, we're looking at increasing the EBITDA and earnings per share. So the properties we're looking at buying need to fit within that model.

Okay, great. Thanks.

(OPERATOR INSTRUCTIONS). At this time, I'm showing no additional questions in the queue. I would like to turn the call back over to management for any concluding remarks they may have.

Well, we would like to thank everyone for their participation on the call today and for their support as we continue pursuing growth on behalf of our shareholders. With that, we will end the call and we wish all of you a great rest of the day.

Ladies and gentlemen, this does conclude the Full House Resorts second-quarter and 2007 earnings conference call. You may now disconnect and have a pleasant day.