Full House Resorts Inc (FLL) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Full House Resorts Third Quarter 2007 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

As a reminder, this conference is being recorded Wednesday, November 14th of 2007, and at this time I'd like to turn the presentation over to William Schmitt with ICR. Please go ahead.

Thank you, Andrew, and good morning, everyone. By now, everyone should have access to our earnings announcements and 10-Q, which we released yesterday for the third quarter ended September 30, 2007. And it may also be found on our website at FullHouseResorts.com under the [Investor Relations 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, and therefore, undue 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 conditions of Full House Resorts.

We will be happy to answer any questions you may have following our prepared remarks. I would now like to introduce Mr. Andre Hilliou, Chief Executive Officer of Full House Resorts. Andre?

Thank you, Bill. 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 Stockman's Casino performed in line with our expectation and generated revenue of $3.2 million and $8.3 million for the third and eighth months we have owned it. Our equity is net income from a joint venture in Delaware, generated just over $1 million for the quarter, up 7% from last year. Both operations are in line with management expectation.

Renovation of the Stockman's coffee shop started in early October, and we expect it to be completed prior to Christmas. We think this will substantially improve and build upon our already-strong competitive position and market leadership in Fallon.

On October 5, we announced that we had entered into a sales agreement for the Holiday Inn Express in Fallon for $7.2 million in gross proceeds. The agreement provides for a 45-day due diligence period with closing within 45 days following that. And of course, with customary closing conditions.

As a result, we expect the transaction to close in January. After considerable deliberation, management determined that it was not important for the Company to own the hotel [in order] to maximize casino revenues and profitability, and that the sale will provide us with greater financial flexibility to pursue other opportunities.

We expect the use of [next] proceed to be around $6.8 million, and would be used to reduce debts. We also announced in the second quarter that we successfully restructured the [Harrington Raceway] management contract to providers with a predictable and growing cash flow stream. At our Firekeepers Casino we are hopeful that the NIGC would approve our revised contract soon, but as you are aware, it is difficult to predict the timing of those events.

In our second quarter conference call, we had stated that we expected approval in September. Unfortunately this did not happen, despite having received positive feedback from the NIGC regarding the review of our management agreement. As a result, we have had to reverse some of the unrealized gains associated with the project receivable. We are now looking at breaking ground in the first quarter of '08, with a planned first quarter of '09 opening.

In addition, we have pushed back the estimated opening dates for the Nambe and Cheyenne project to first quarter of '09 and third quarter of '09. In the case of the Northern Cheyenne, we have experienced additional unanticipated delays in state and federal approval. In the case of the Nambe, we [conferred] with the tribal council to evaluate the result of a new market study, changes in the financial market, and the resulting potential adjustment to the tribe, project plans, and budget.

I will now turn the call over to Mark to go into more detail about the financial result for the quarter, and then I will close for a few additional comments. Mark?

Thank you, Andre. I'd like to quickly review a few highlights of our financial performance for this quarter, and then as Andre indicated, we'll be happy to respond to any further questions that you might have.

For the three months ended September 30, 2007, income from operations increased to approximately $578,000 compared to $93,000 in the prior period. Net [income] improved to $605,000 from a loss of $150,000. For the third quarter ended September 30, earnings per share were $0.03 compared to a loss of $0.01 in the prior period, based on diluted common shares outstanding of 19.3 million and 11 million, respectively.

As we previously announced, we restructured [technical difficulty] management agreement in Delaware to provide at least a 5% increase year-over-year for 2007. That agreement was signed during the second quarter and we expect to true-up management fees paid against the guarantee during the fourth quarter.

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 $3.2 million and $8.3 million in revenue for the three month and eight-month period, respectively. It's important to remember that we acquired the Stockman's Casino at the end of January this year, so only eight months' worth of revenue and expenses are included in the year-to-date results.

Income from operations for Stockman's was approximately $839,000 and $2.1 million for the same three and eight month periods. These results are consistent with management's expectations and are consistent with prior year results. In recent months, we have seen growth in the Fallon market flatten out. We have, however, been able to generate some improvements in market share from our newly implemented direct marketing programs.

Project development expenses are down somewhat from the prior year, because most Huron expenses are now being [technical difficulty] by the tribe using the IGT bridge loan which was put in place during the second quarter.

SG&A expenses have increased from $1 million last year to $1.4 million during the third quarter. The increase is primarily due to Stockman's expenses, which of course were not reflected in the prior year results. These are partially offset by lower incentive-based compensation expenses due to delays in our key development projects, as Andre had indicated.

We reversed some of the unrealized gains associated with our receivables due to changes in the estimated opening date of the Huron Firekeepers Casino. In addition, we have pushed back the estimated opening dates on the Nambe and Montana projects, which had a minimal impact on our current quarter results.

The changes in our estimated opening dates were partially offset by a reduction in the discount rate for the Huron project based on changes in economic elements of the model we used, as well as a reduction in the project-specific risk factor due to progress made in reducing the legal and regulatory risks of the project.

The net of these adjustments was to reduce the gains previously recognized this year by approximately $209,000. Had we not made these changes, we would have recognized approximately $550,000 in unrealized gains during the quarter, indicating that the net effect of these changes on the quarter from previously expected results was approximately $740,000.

Assuming that there are no changes in our base assumption during Q4, we would expect to recognize approximately $500,000 in gains next quarter. Please keep in mind that these adjustments to fair value are non-cash, and as we stated in our second quarter conference call, these amounts remain subject to some volatility as timing estimates change.

And I would refer you to the somewhat extensive disclosure 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.

Moving further down the income statement, interest income and other income is higher than normal due to the reversal of a GEM liability to the Firekeepers Casino architect, which has been assumed by the tribe under an amendment to the design contract which was executed this quarter. The amount of the reversed liability is approximately $272,000, of which approximately one-half is offset in the non-controlling interest line to reflect our 50% ownership of GEM.

Finally, income taxes this quarter are lower than normal due to an adjustment to our previously recorded income tax liability for 2006. Estimates used to prepare the income tax estimate differed from those used in preparation of the actual 2006 tax return, which has resulted in a $380,000 income tax receivable being recorded this quarter.

Earnings per share for the quarter were $0.03 versus a loss of a penny for the same period last year on approximately 19.3 million shares outstanding at the end of Q3, compared with about 11 million shares at the same time last year. The current 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.

Turning to the balance sheet, we had approximately $7.3 million in cash on hand at the beginning of Q3. During this quarter, we made additional voluntary prepayments on the Nevada State bank loan in the amount of $3 million, bringing total prepayments year-to-date to $4.1 million. And as a result, we have a little over $4 million in availability on our revolving line of credit.

Debt stands at just about $14.9 million, including current maturities, and we have no required principal payments on the Nevada State bank loan until January of 2012 due to the prepayments that we've made.

In October, the Company amended the purchase agreement for the Stockman's Casino and Hotel in order to realize certain tax benefits associated with the sale. We paid the seller approximately $730,000 for his consent to a 338(h) [election] which will result in a higher tax liability for the seller but will generate approximately $2.5 million in tax benefits for us over the life of the Stockman assets acquired.

The transaction will be recorded during the fourth quarter and is expected to result in a reduction in good will and in deferred tax liabilities of approximately $1.8 million and $2.5 million, respectively. As a result of this transaction, we now expect that the proceeds from the sale of the Holiday Inn Express will increase from our previous estimate of $6.1 million to approximately $6.8 million, in which case we will recoup most of the additional compensation paid to the seller through a lower tax liability on the sale of the hotel. As indicated previously, we expect to use the proceeds of the hotel sale to reduce debt, and we plan to close that transaction in January.

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

Thank you, Mark. 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 a first, as well as to continue to develop management relationship with Native American and commercial enterprises.

The setback in the timing of the NIGC approval does not at all dampen our enthusiasm for the Firekeepers Casino. However, we have made significant progress during the quarter, both in the record [technical difficulty] as well as on the design, the selection of the construction manager, preparation of a guaranteed maximum price contract, and preparation for financing. We believe we are well-positioned to finance and start construction quickly upon receipt of the NIGC approval.

We continue to investigate potential acquisition and management project, but remain very [technical difficulty] in what we are willing to pay for those opportunities and, perhaps more importantly, in assessing the long-term value of such project.

Over the course of the past several months, we have looked at several acquisition opportunities. We have made offers on two potential targets, but have been unable to negotiate acceptable transaction, so we have walked away. Continuing the search and have interesting project on our plate. It is our goal to create shareholder value over the long term, and so far this year we believe the Stockman acquisition, the sale of what we determined to be a non-core asset on very favorable terms, as well as continued progress on the Firekeeper Casino in Michigan have positioned us to achieve those goals.

I will now open up the call for questions.

Thank you. Ladies and gentlemen, at this time we will begin the question and answer session. (Operator Instructions).

Our first call comes from the line of Justin Sebastiano. Please state your company affiliation, followed by your question.

Yeah, hi, Justin Sebastiano from Nollenberger Capital. Hey, guys. Very quickly, I'm sorry if I missed it, but Andre, did you say -- do you have the GMP in place, or are you still working on that?

We're still working on the GMP, and we hope to have the GMP in a matter of weeks.

Okay. And now that the tribe has the reservation [proclamation,] what's holding up the NIGC from approving the management contract?

Well, there is really no hold-up for the approval to come. It's that the NIGC is finalizing the investigation of officers, and that takes a while. You have to keep in mind that there are probably six or seven investigators and maybe 40 investigations going on at any given time within the federal government. So it's a matter of timing, but we have been advised by the NIGC that the project is of the utmost importance and we are keeping very close to the investigation. We hope and we expect the investigation and the contract to be awarded quite soon.

Okay, and Mark, maybe this is for you. Do you anticipate getting better pricing for the financing than you -- or I guess the tribe gets better pricing for the financing than you would have if you had gone on the road in October, if you go on the road in January?

Well, you know, that's -- you're asking me to speculate a little bit, Justin, but I do think that in our discussions with Merrill Lynch that they are getting more and more comfortable with the financing as time passes. We had had discussions with them about -- and we have been trying to get ourselves prepared to go to financing in early December, if we'd gotten our approval from the NIGC as we had anticipated.

And I think Merrill felt that they could have done that financing and we would have done okay, but I think that they're much more comfortable about taking us to market in January.

Okay. So if we use, you know, [10 and 11] percent in our models, that's being pretty conservative? You think that's a pretty good conservative stance?

I think absent, you know, changes in the market, if you're just looking at today's market and the current trends, I think we would hope to do a little bit better than that, but I think that would be a good conservative estimate.

Okay. And just real quick, some housekeeping. Stock-based comp, is it going to stay at the levels we saw in Q3, or do you think it'll be back to 3, 350 level?

No, it should run pretty close to where we are in Q3, until the end of next year and then it'll peter out a little bit.

Okay. And just as far as the taxes for fourth quarter, are we going to go back to kind of where you were first, second quarter, around the [50] percent mark?

Yes.

Which is kind of a one-time thing.

It was a one-time thing, right.

Okay. And then as far as -- you restructured the Midway contract, so are we looking for then 8% growth year-over-year in '08, due to the expansion that's coming on, and then 5% after that?

That's right.

Okay.

We get 5%, remembering that the guarantee is the floor, okay?

Right.

So we could do better, but at a minimum, we would expect to get 8% growth next year, and then 5% for the remaining years through '11.

Okay, so it's probably around 4.5 million if we go 8% over '07 numbers.

That's probably pretty close.

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

Thank you, Justin.

Thank you. Our next question comes from the line of Kevin Wenck. Please state your company affiliation, followed by your question.

Polynous Capital Management. Your comments about the Fallon market being soft, but you feel like you're gaining market share, maybe you could give us a little bit more color behind those comments.

The Fallon market is a really small market, and we do get statistics from the Nevada Gaming Control Board on it, so we're able to look at it every month, and it's pretty erratic. There'll be great months, and then there'll be a little bit weak months, but over the last two or three months, we've seen growth taper off, and in fact for the quarter, the Churchill County market was off about 2.5%.

But we've been able to offset that with market share gains. We have about 24% of the market there in terms of slot units, have a market share premium that's very significant and growing, and as Andre indicated earlier, we're making some investments there. They're not dramatic investments, but they are significant, which we think are going to even strengthen our competitive position further, so.

Besides the coffee shop renovation, what are the other investments?

Well, the coffee shop is under construction right now, and we expect to reopen that just before Christmas. And then we're going to -- we've been using the steak house as a coffee shop in the interim, and right after New Year's, we're going to take the steak house down and do a smaller, more modest renovation of it.

But again, both of those facilities were beginning to show some wear, and I think again, when those reopen it's going to be a significant draw for us in that market.

Are you expanding the seating in either of them?

We are expanding the seating in the coffee shop modestly -- a little bit. But again, it'll be helpful to us during peak times.

And the proceeds from the hotel sale, are you just adding it to cash or are you going to pay down debt?

No, we will pay down the Nevada State Bank loan. The Nevada State Bank loan is secured by those assets, so we will be using the proceeds to pay down the Nevada State bank loan.

Okay. I think that's it. The only other questions were financing, and those were addressed. Thanks.

Thank you.

Thank you. (Operator instructions.)

Management, at this time we appear to have no additional questions in the queue, and we'd like to turn the presentation back to you for any closing remarks.

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

Thank you.

Thank you, management. Ladies and gentlemen, at this time we will conclude today's teleconference. We thank you for your participation on the presentation. If you'd like to listen to a replay of today's conference call, please dial 1-800-405-2236, or 303-590-3000. You'll be asked to enter an access code of 11101357 followed by the pound sign. Once again, if you would like to listen to a replay of today's conference call, please dial 1-800-405-2236, or 303-590-3000, with the access code of 11101357 followed by the pound sign.

We thank you for your participation on today's conference. At this time, we will conclude. You may now disconnect, and please have a pleasant day.