Full House Resorts Inc (FLL) 2007 Q4 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by. Welcome to Full House Resorts fourth-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). This conference is being recorded Thursday, March 27, 2008. I would not like to introduce William Schmitt, Investor Relations for ICR.

Thank you Eric and the morning everyone. By now everyone should have access to our earnings announcement which we released earlier today, and Form 10-K which was filed last knight. These may also be found on our website 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 and therefore under reliance should not been placed upon them. We refer all of you to our recent filings with the SEC for a detailed discussion of the risks that could impact the future operating results and financial condition of Full House Resorts.

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

Here with me today is Mark Miller, our CFO, who will discuss the financial results for the quarter. But first I wanted to go over a few key highlights from the first quarter and early '08 to bring you to speed on the Full House story and where we stand.

First, I want to briefly discuss our long-term strategy. Going forward Full House will continue to pursue opportunities to purchase casinos that meet our standards. We look to be an opportunistic strategic buyer. To that end, we are seeking casinos that able to be purchased at the right multiple, either market leaders or has the potential to be a market leader, and have been good management willing to remain with the property. There are many properties to look at, and we believe financing on favorable terms will be available for well-established and moderately priced acquisitions. We believe that the current uncertainty and turmoil in the credit market is an advantage for a well financed strategic buyer, such as ourselves, and should be viewed as a strength in negotiating a transaction with a seller.

Moving on to our development project, on December 14 we received approval from the National Indian Gaming Commission of a gaming management contract for the FireKeepers Casino to be built near Battle Creek, Michigan, clearly the last major legal and regulatory hurdle to the project. Since that time, the tribe has engaged the construction manager, substantially completed the design document, and executed a guaranteed maximum price contract for the project construction. Further, steel orders have been placed to secure long lead items.

GEM, a 50% owned venture of Full House, has identified the general manager who will join the project as soon as the financing is in place. Our top priority right now is to assist the tribe in obtaining financing and to begin construction shortly thereafter. At this time, of course, we are unable to provide any detail as to the status of project financing. We have adjusted the opening date of the casino to June 2009 from our previous plan of first quarter '09, based on the now completed design drawings and a negotiated and executed contract with the construction manager.

Despite the struggle and delays that we and the tribe has experienced, we remain very excited about the FireKeepers Casino. The property is located on 78 acres of land between Detroit and Chicago, right by exit 103, fronting Interstate 94. And would include over 3,000 gaming positions, five restaurants and a 2,078 space covered parking garage. There is already an easy on/off interchange in place, which would provide customers with convenient access directly to this site. In addition, the site is only four miles west of I69/I94 junction. As we all know location, easy accessibility and a great product are the main ingredients for casino success, and we believe this project has it all.

Next, I wanted to briefly discuss Nambe Casino. Last week we put out a press release announcing that we will no longer be pursuing the Nambe Casino project. As a result we took an impairment charge of around $200,000 in the quarter on the development contract rights, pending resolution with the Pueblo. However, the Pueblo have recognized the obligation to reimburse all of Company's development advance for the project, which totaled approximately $655,000 as of December 31. We expect all of those advanced to be reimbursed by the Pueblo on yet to be negotiated terms.

In addition, Full House will negotiate with the Pueblo (inaudible) [new developer] for payment of the value of the exclusive gaming rights granted to the Company by the Pueblo.

In term of a Northern Cheyenne Casino in Montana, the regulatory approval processes is ongoing but slower than expected. We will continue to pursue the project; however, our focus remains with FireKeepers. Now let's move on to our current operation.

For the quarter, Stockman's Casino performed reasonably close to expectation, generating revenue of $2.2 million and $9.0 million and $9 million for the three and 11 months we have owned it, respectively. Of note, those numbers do not include the revenue we received from our hotel operation, which was classified as discontinued operations for the first quarter.

During the quarter our coffee house was renovated, which contributed to some softness in our quarterly revenue. The renovation was completed in December and the restaurant is currently doing very well.

Our equity in net income from our Harrington Raceway and Casino joint venture in Delaware generated $1.2 million for the quarter, up $0.29 million from last year. We want to note that for 2008, Full House is guaranteed at least an 8% increase over the approximated $4.1 million cash flow we received from the joint venture in '07, which insulate us from potential competition in Pennsylvania, Atlantic City and Maryland.

Finally, on February 21, we announced that we had closed on a previously announced sale of the Holiday Inn Express in Fallon, Nevada for $7 million in net proceeds. We applied the proceeds to the Company's revolving loan with the Nevada State Bank, reducing the balance of the loan from $10.9 million to $3.9 million, while the Company's availability under the facility increased to $4.8 million. In addition, future amortization requirement will reduce on a pro rata basis, and the Company has no required principal payments until January 16 -- 2016.

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

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

For the three months ended December 31, 2007, income from operations fell slightly to approximately $493,000 compared to $515,000 in the prior year period, with the Company recording net income of approximately $8,600 compared to approximately $244,000 in the fourth quarter 2006. For the fourth quarter ended December 31, earnings-per-share was flat compared to earnings-per-share of $0.02 in the prior year period based on diluted common shares outstanding of 19.3 million and 11 million, respectively.

As Andre mentioned, we recorded an impairment loss of approximately $407,000 related to the Nambe and Manuelito projects. Exclusive of the impairment loss, net income for the quarter would have been approximately $277,000 or about $0.014, which would have been comparable with the prior year. It should also be noted that we booked substantially less in unrealized gains on tribal receivables this year than last, which has impacted net income both for the quarter and the full year.

We would note that the main reason for the decrease in these metrics was the $407,000 impairment charge for the discontinuation of the Nambe Casino project and the Manuelito project, also located in New Mexico.

With regard to the latter, the land that Full House was holding for a potential casino project with the Manuelito Chapter of the Navajo Nation is now classified in other assets, and we are pursuing the sale of that land. The cost basis of that land is approximately $130,000.

Stockman's Casino, which we acquired in January 2007, contributed approximately $2.2 million and $9 million in revenue for the three month and 11 month periods ended, respectively, exclusive of the hotel which is included in income from discontinued operations for the entire year. The results were reasonably within our expectations despite some softness, as Andre mentioned earlier, due to the coffee house being close for most of the quarter, as well as a weaker Fallon market due to economic factors and harsher weather this year versus last year. Despite those challenges, we believe Stockman's held up relatively well, primarily because we've been able to improve our slot market share from 34.8% last year to 36.2% for the full year 2007.

EBITDA for Stockman's was approximately $1.2 million and $4.2 million for the same three month and 11 month periods, respectively, including the hotel. These results are consistent with management expectations, even despite the remodeling of the coffee shop and the harsher weather. Annualized Stockman's EBITDA would have been in the range of $4.5 million to $4.6 million, which is right on track with our expectations when we closed on the transaction back in January of 2007. We are pleased that Stockman has increased its market share during the year from 34.8 for 2006 to 36.2 for 2007, despite the coffee house closure.

We want to note that our steakhouse was closed for most of January 2008 due to its own renovation. It reopened at the end of January and is performing very well. We believe that with the completion of the coffee shop and the steakhouse renovations we are poised to continue improving on our Fallon market share leadership.

It should also be noted that we expect the sale of the hotel to be neutral to slightly accretive to our 2008 earnings due to the reduction in appreciation and interest expense.

Ongoing development expenses remain down somewhat from the prior year because most Michigan project expenses are now being funded by the tribe using the IGT bridge loan which was put in place during the second quarter of 2007.

SG&A expenses increased from $0.9 million last year to $1.6 million during the fourth quarter. The increase is primarily due to Stockman's expense not reflected in prior years results, as well as stock compensation expense and other personnel costs.

Equity and net income from Harrington Raceway and Casino was up 29% from the prior year period in the fourth quarter to $1.2 million. Our management fees were up during the quarter due to the fee guaranty, the 5% guaranty we received, as well as the timing of some rebate payments. And the increase is all the more impressive when you consider that Harrington operated to the fourth quarter with less than its full complement of machines due to the renovation and expansion project that was in progress. The expansion was completed in early February 2008, and Harrington now has approximately 2,100 machines online.

We are guaranteed an 8% management fee increase over 2007's cash flow of approximately $4.1 million. And a reminder that we are also guaranteed a minimum 5% annual increase from 2009 to 2011.

As Andre indicated, based on a now completed design and construction drawings and contracts that have been executed with the construction manager for the FireKeepers Casino project, we have had to move its estimated opening day to June 2009. As a result, we recognized less than expected unrealized gains during this quarter. The change in our estimated opening day for FireKeepers was partially offset by a reduction in the discount rates based on changes in economic elements of the valuation model we used, as well as a reduction in the project specific risk factors due to the NIGC approval we received in December, and the progress that has been made in preparing to begin construction.

Please keep in mind that these adjustments to fair value are non-cash. And as we have stated in our previous conference calls, these amounts remain subject to some volatility as timing estimates change. And I would refer you to the somewhat extensive disclosures we have in our December 31, 2007 10-K to better understand the nature of these items which are significant to our financial results.

Earnings per share for the quarter were essentially flat versus earnings per share of $0.02 for the same period last year on approximately 19.3 million shares outstanding at the end of Q4, compared with approximately 11 million shares outstanding at the same time last year. This of course reflects the offering that was done in December of 2006, and the conversion and retirement of the preferred shares during the first quarter of this year.

There has not been any significant changes to the share count during the most recent quarter. We had approximately $8 million in cash on hand at the end of Q4. During the quarter we made additional voluntary prepayments on the Nevada State Bank loan in the amount of $700,000, bringing total prepayments for 2007 to about $4.8 million. As a result, we had around $4.1 million in availability on our revolving line of credit. Debt as of December 31, including current maturities and the Green Acres obligation, stood at approximately $23.2 million. We have no required principal payments on our Nevada State Bank loan for quite some time.

On February 21, 2008, the Company closed the sale of the Holiday Inn Express in Fallon for net proceeds of $7 million. We applied the proceeds to the Company's revolving Nevada State Bank loan, reducing the balance from $10.9 million to $3.9 million, and increasing the Company's availability under the facility to approximately $4.8 million. Further future amortization requirements were reduced on a pro rata basis, and the Company has no required principal payments now until January 2016.

During this quarter we also booked approximately $9.5 million in long-term debt associated with the previously announced Green Acres buyout. This obligation is shared with our 50% partner in the Michigan management company, [RAM], and is expected to be funded out of either a separate financing or from cash repaid by the tribe in conjunction with our tribal advances. In either case, all is part of an overall financing of the Michigan project. The obligation had not been previously reported because the transaction had a major contingency, that being the approval by the NIGC of our seven-year management agreement. With that contingency satisfied in December, we have recorded the remaining buyout obligation.

As of February 25, 2008, following the sale of the Holiday In Express, the Company had cash on hand of $7.3 million and debt outstanding of $15.7 million, including the $9.5 million shared Green Acres obligation.

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

Before turning it over to questions, we just wanted to briefly reiterate the Full House story and our strategy. While we have moved back the expected opening day for FireKeepers, we're very pleased that we received final NIGC approval, which we believe was the largest remaining obstacle in our path. And we have made significant progress in preparing to actually begin construction of the facility. We look forward to attending financing and beginning construction in the near future on our number one priority.

Meanwhile we are pleased the progress of Stockman's and the [locking] equity income we will receive over the next few years from Harrington Raceway and Casino.

Long-term, our goal is to own and develop market leading local casinos similar to Stockman's. We continue to investigate potential acquisitions and management projects, but we will only act on opportunities that are at the right multiples and can provide long-term value for Full House and our shareholders.

Thank you for your time today, and I will now open the call for questions.

(OPERATOR INSTRUCTIONS). [Stuart Kohn, Vander Capital].

Mark, can you just tell me what the amount -- the undiscounted amount of the note receivable due from Michigan is?

It is $14.2 million. I would just remind you that that is not all Full House's receivables. Some of that money is -- it will be ultimately paid to RAM. It is not a 50/50 sharing of that $14.2 million. But the total undiscounted note from the tribe is $14.2 million.

And how much of that is due to Full House?

Probably, somewhere between $9 million and $10 million.

Undiscounted?

Undiscounted.

Okay, so if the financing -- once the financing is in place, when that happens, you would anticipate receiving that $9 million to $10 million?

I think that is the plan -- would be for the tribe to be able to repay to GEM the entire receivable out of a financing transaction. But until a financing transaction is completed, we're not absolutely sure that we would be able to get it all out. Do you follow me?

Yes sir.

I don't want to give any absolute assurances that the tribal receivable will be fully paid, but that is our objective.

Okay. And the $9.5 million that you booked in long-term debt for the Green Acres transaction, that is just an accounting mechanism where you had to recognize the whole $9.5 million, as opposed to you are only on the hook for half of that, right?

That is correct. Because GEM is a consolidated entity for us, it all shows up on our books. That is correct. But that obligation is shared on a 50/50 basis between us and RAM.

Okay, thank you.

(OPERATOR INSTRUCTIONS). Justin Sebastiano, Morgan Joseph.

For the notes receivable, the interest that is accrued on that, is that in that number, that $9 million to $10 million you are talking about that you could receive if the tribe doesn't get the financing?

The way the interest works on that note is it is kind of on an element by element basis. Some of that $14.2 million was used to acquire the land. And interest accrued on that piece of it, until we turn the land over to the federal government for it to go into trust. So there is some accrued interest in there on that. But we stopped accruing interest when the land was turned over to go into trust.

The rest of the note does not accrue interest until the casino opens. So it is only if we don't get repaid out of the financing, and the note ultimately gets repaid out of operating cash flows, that interest would accrue on that. So other than the land piece, there is no accrued interest in that $14.2 million, and there would not be any until after opening.

Understood. As far as the advances from New Mexico, I know it is a very small amount, but you said -- you state the tribe knows they're going to have to pay you back, but at negotiable terms. Does that mean you expect to get less than the $655,000?

No, we expect to get the $655,000. I think -- what the agreement provides for is that it will get repaid out of gaming revenues. The tribe has indicated that they're going to pursue a smaller development with another developer. We do not know all of the details of that yet as to exactly what it is going to be, and when it is going to be open, and how -- what we can expect from a revenue stream. So ultimately once we know those pieces we are going to have to sit down with them and negotiate a repayment schedule. And we just don't know what that is yet.

So I assume that there will be interest on top of that, something like prime plus a margin or something?

The agreement does call for some interest. Again, I expect that it will be a negotiated term. I would note that the $655,000 is the undiscounted value. We have a discount against that in our books. It is currently valued at -- I don't remember the exact amount, but it is right around $500,000. But anyway that -- we expect to have those negotiations with the Pueblo.

Okay. All right, thanks a lot guys.

Nick Danna, Sterne, Agee.

My question is related to the final GMP, if you could share with us the final cost and any scope changes from the last press release from either you guys or the tribe?

You know we have not publicly disclosed the contract value of those GMP contracts. I can tell you that -- and it is really not ours to disclose, that is the tribe's agreement. We're not a party to that agreement. But I will tell you that there has been no scope changes. The project is still expected to be 2,500 slot machines, 90 table games, 20 pokers, and a slightly under 2,100 car parking garage, five restaurants, three bars. So none of that has changed. And I guess I could just tell you that generally the cost of the hard construction, the GMPs, is not substantially different from what we had anticipated previously.

Okay, that is fair. I just saw the $330 million, I think was in the 10-K, and I did not know what else that may include.

Yes. Most of the -- and you are talking about the change from the previous estimate of $270 million to $330 million. Almost all of that change is related to increases in financing costs that are anticipated, given the changes in the credit market.

Understood. Just sort of a modeling question. Depreciation in the quarter was obviously very low, I am assuming because the hotel was excluded. Will it be that low going forward or was there anything else in there that we should (multiple speakers)?

It will be a little bit more than that because there were some adjustments related to the Holiday Inn sale. We made some purchase price adjustments. I don't have in front of me right this second exactly what it will be on a go forward basis, but it will be a little bit more than that.

Okay, understood. Thanks guys.

It will be substantially less though because that Holiday Inn had a pretty high depreciation basis.

That is what I would've assumed.

Stuart Kohn.

It is there any recovery from the Navajo project, other than the $130,000 value of the land that you bought there?

You are talking about against the contract rights? We do not believe that we will have any meaningful recovery against those contract rights.

Okay.

It was approximately $200,000, and we have written it completely off. And the reason principally is the indications from the Nation is that they are not going to pursue a gaming development in that area, at least not for a very long time. And therefore there probably is not going to be any gaming revenues that we would be able to recover against, which is the basis of the agreement.

Understood. How many acres is it that you own there?

It is ten or twelve acres store. I'm not exactly sure the exact number of acres, but it is about ten or twelve acres.

And what do you anticipate the end use of that land to be in terms of filing a potential sale, or is that potential residential land or commercial?

Commercial. And we really don't know right now. We have just begun the sales process. I think that sometime during the next couple of months we're going to get a good feel for what that land could be used for and what our options are for disposing of it.

Great. Any thoughts to a share buyback?

Well, we have had this conversation a couple of times. I can just tell you that it is a matter of discussion. It is a matter of something that we're looking at. Again, it is the best use of our cash, and the two significant options right now would be a share back or an acquisition. We continue to be very active in looking for acquisitions. That is the primary focus of the management team and the Board, but we do have periodic discussions with the Board regarding a share buyback. That is about all I can tell you at this point.

Okay, thank you gentleman.

Nick Danna.

Two other things for me. One is for the Delaware agreement, does the 8% increase, is that going to be done every quarter or will there be sort of a true up at the end of '08?

No, the agreement calls for quarterly true ups. We have had two true ups so far. We had the third-quarter true up and the fourth quarter true up for 2007. And then we will move forward. They are quarterly true ups.

And then regarding the follow-up to the question about the buyback, in terms of the agreement that you have with your banks, is that a possibility? Would it just be a matter of getting Board approval, or would there need to be any amendments or changes to the bank agreements to be able to make that happen?

It would just be a matter of Board approval.

Okay, thank you.

At this time, I am 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, I will end the call and wish you all a great rest of the day. Thank you.

Ladies and gentlemen, this does conclude the Full House Resorts fourth quarter 2007 earnings conference call. You make now disconnect, and thank you for using ACT Conferencing.