Full House Resorts Inc (FLL) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Full House Resorts quarter one 2008 earnings 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 today, Thursday, May 15, 2008. I would now like to turn the conference over to Mr. William Schmitt from ICR. Please go ahead, sir.

Thank you, Nicole, and good morning. By now everyone should have access to our earnings announcement and Form 10-Q, which were filed last night. They may also be found on our website at www.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, 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 condition of Full House Resorts. I would now like to introduce Andre Hilliou, CEO of Full House Resorts.

Thank you, Bill. 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 recent events from earlier this month which have all of us excited for the future of full House resorts.

Let's start with the FireKeepers Casino. As was previously announced on May 6, the FireKeepers Development Authority closed on the $340 million senior secure notes financing and a $35 million F&E facility to fund the FireKeepers Casino in Battle Creek, Michigan. Some of you may have seen from recent press reports, construction has commenced on the site and we currently project a grand opening in the summer of '09.

Full House owns 50% of the joint venture Gaming Entertainment Michigan LLC, which we refer to as GEM, which has been and will oversee on behalf of the authority, the construction and opening of the facility. GEM will manage FireKeepers Casino after its opening for a seven-year period and, once open, GEM will receive 26% of the pretax profit as a management fee.

Let me just say that the closing of financing for FireKeepers has been a long time coming and I want to thank everyone at Full House, GEM, and the Authority for all of their hard work and dedication to this project. We have been looking forward to the long-awaited groundbreaking and we think that everyone will be very pleased with the final results when FireKeepers opens its doors next year.

The closing of financing has also enabled us to further another of our goals -- reducing outstanding debt. Upon the close, GEM received reimbursement from the FireKeepers Development Authority of around $9.3 million for previously advanced development costs. The funds were used to retire the $9.5 million obligation to Green Acres carried by the company on its balance sheet.

As of May 14, Full House had debt outstanding on the balance sheet, including current maturities, of $5.8 million. In the first half -- in the first 4 1/2 months of the year alone, we have been able to pay down over $17.5 million worth of debt positioning Full House with a strong balance sheet to take advantage of future opportunities should they arise.

In terms of potential acquisition, we believe the current market environment may work in our favor. As I mentioned in the last call, we are seeking casinos that can be purchased at the right multiple and either market leaders, or have the potential to be a market leader, and have good management willing to remain with the property. In other words, we are not going to acquire a casino without proper due diligence. We will act only where we believe long-term shareholder value could be increased.

Now let's move to our current operation. For the quarter, Stockman's Casino generated revenue of $2.6 million. This revenue number does not include the revenue we received from our hotel operation, which we sold in February and is classified as discontinued operations. Stockman's performed within expectation in the quarter, but we did see some weakness in the Northern Nevada market.

In addition, the steakhouse was renovated in January of this year, which may have also contributed to some softness. Steakhouse renovations were completed at the end of January and is currently doing very well -- not the renovation, the steakhouse is doing, currently, very well.

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. Mark?

Thank you, Andre. I would like to review a few highlights of our financial performance for this quarter and then we'll be happy to respond to any questions you may have.

For the three months ended March 31, 2008, income from continuing operations rose to approximately $2.5 million compared to $200,000 in the prior year period. With the company recording net income of approximately $1 million, compared to net income of approximately $100,000 in the first quarter of 2007.

For the first quarter ended March 31, earnings per share were $0.05 compared to earnings per share of zero in the prior year period, based on diluted common shares outstanding of $19.3 million this year and $19.2 million last year. During this quarter, we had unrealized gains on tribal receivables of approximately $1.9 million versus a little over $400,000 last year. The larger than normal gain is due to the reimbursement by FireKeepers Development Authority of $9.3 million of the total $14.3 million GEM receivable, in conjunction with the recently completed financing which positively impacted the fair market valuation of that receivable.

Stockman's Casino contributed approximately $2.6 million in revenue for the three-month period ended March 31, exclusive of the hotel, which is included in income from discontinued operations. This is up about 54% from the prior-year period, however, we only had Stockman's for two months of operations last year as the casino was acquired at the end of January.

On a comparative basis to the same three-month period in the prior year, Stockman's revenue declined slightly, primarily due to a decrease in slot revenue attributable to weak economic conditions in northern Nevada and possibly due to the closure of the steakhouse during January. During the quarter we saw a decline in County slot market of approximately 3.7% and our market share was slightly lower, but well within recent levels.

EBITDA for Stockman's was just under $1 million for the first quarter of 2008, compared to $700,000 in the first quarter of 2007, which again only included February and March. While first quarter results at Stockman's were generally consistent with our expectations and historical performance, we are seeing demand weakness across the northern Nevada market. We are watching carefully to see what the impact is on our property and are working with the management team to ensure that we are adjusting appropriately.

Ongoing development expenses were down $150,000 from the prior year as most Michigan project expenses are now being funded by the Authority using the IGT bridge loan, which was put in place during the second quarter of 2007. GEM expenses associated with our management contract did not start kicking in -- did not start kicking in until Q2 and, of course, we have discontinued the Nambe project as we have previously announced.

SG&A expenses fell from $1.8 million last year to $1.6 million during the first quarter of this year. The decrease is primarily due to lower stock compensation and other employee-related expenses at a corporate level, partially offset by increase of expenses for a full quarter of Stockman's results. Equity and net income from Harrington Raceway and Casino was up 11% from the prior year period in the first quarter to $1.2 million.

As noted in previous calls, we are guaranteed a minimum 8% increase over 2007's cash flow of approximately $4.1 million. Results sometimes differ from the guaranteed amount due to timing of cash payments, however, we expect 2008 annual results to be approximately 8% greater than 2007. We are also guaranteed a minimum 5% annual increase each year for the 2009 through 2011 years.

As mentioned before, primarily due to the closing of construction financing for the FireKeepers Casino earlier this month, we recognized unrealized gains on notes receivable of $1.9 million in the first quarter of 2008, a $1.5 million increase from the prior year period. GEM received approximately $9.3 million of its total $14.3 million receivable from the Authority and used the proceeds to pay off the remaining liability on the previously announced and recorded Green Acres buy-out obligation.

In addition, GEM funded approximately $2.1 million as our share of financing costs as called for under the management agreement. These costs were equally funded by Full House Resorts and RAM, our partner in GEM, and the financing cost will be recorded during the second quarter as additional contract rights. The remaining receivable of $5 million is expected to be repaid to us 180 days following opening of the facility, provided there are sufficient funds remaining in the construction disbursement account.

We continue to carry a significant fair market value -- valuation allowance of approximately $1.2 million against the remaining $5 million Michigan receivable. We expect that the value will accrete back up to its face value as we approach the repayment time frame. Please keep in mind, that these adjustments to fair value are non-cash.

In addition, as a result of these transactions, which occurred subsequent to the March 31 balance sheet date, the $9.3 million receivable from the tribe was classified as a current asset and the remaining Green Acres obligation of $9.5 million was reclassified as current debt. Of course, both of these will disappear from our balance sheet in the second quarter.

As we have stated in our previous conference call, the fair market valuation of our tribal receivables remains subject to some volatility as timing estimates change, however, given that we have closed the financing we are hopeful that the volatility will begin to diminish. I would refer you to the somewhat extensive disclosure we have in our 10-Q, which we have just filed, to better understand the nature of these items, which are significant to our financial results.

Earnings per share for the quarter were $0.05 versus earnings per share of zero for the same period last year on approximately 19.3 million shares outstanding at the end of Q1. There haven't been any significant changes to the share count during the most recent quarter. EPS, exclusive of the unrealized gains, would have been approximately $0.02 for this quarter versus a -$0.01 last year.

We should also remind everyone on the call that we did complete the sale of the Holiday Inn Express in Fallon in February, which resulted in approximately $7 million of net proceeds being applied against our Nevada State Bank revolving loan facility and also increased the Company's availability under the facility to approximately $4.8 million. Further, future amortization requirements were reduced on a prorata basis and the company has no required principal payments on the revolving credit facility until January 2016.

We had approximately $7.2 million in cash on hand at the end of first quarter. Debt as of March 31, including maturities and the Green Acres obligation, stood at approximately $15.2 million. Currently, following completion of the previously discussed transactions which occurred subsequent to March 31, we have approximately $6.4 million in cash. Availability under our loan facility is $4.8 million and debt outstanding, including current maturities, is approximately $5.8 million with no significant repayment requirements in the near-term.

With that will turn it back over to Andre for a few final comments and then we'll open it up for questions.

Thank you, Mark. Before turning it over to questions, just to sum up, we are very happy with our current position and we are actively involved in the construction and pre-opening for the FireKeepers Casino. It has been a long time coming, but we believe it will be worth the wait.

Meanwhile, we are locked into equity income growth at Harrington Raceway and Casino, and with the coffeehouse and the steakhouse fully renovated at Stockman's, we believe that the casino is poised to maintain a market leadership position.

Long-term our goal is to own and develop market-leading local casinos similar to Stockman's that we will only act on those opportunities that are the right multiples and can provide long-term value for Full House and our shareholders. Thank you for your time today and now I will open up the call for questions.

(OPERATOR INSTRUCTIONS). Justin Sebastiano, Morgan Joseph.

Thanks, hey guys.

Good morning, Justin, how are you doing?

I am good. How are you guys doing?

Doing well, thank you.

Very quickly on the debt number you gave, the 5.8 as of today that includes $1.4 million of JV debt, is that correct?

That is correct.

So you are only on the hook though for about 50% of that, but you consolidated it because it is a 50%?

That is correct, Justin.

And the project development cost, forgive me if I missed this, but moving forward now with FireKeepers, that is not going to hit your P&L, right? That is at the JV level?

When you say project development costs, the costs that are being borne by the authority to actually develop the project will not hit our financials at all. What will hit our financials are the GEM costs associated with our management agreement obligations.

For instance, the general manager's salary is our obligation. So with that general manager coming on during the second quarter we'll begin to have that payroll hitting GEM. Of course that will be 50% Full House, 50% RAM but -- and it is not, so there is not a significant amount of expense associated with GEM but there will be some.

Okay. And also the cost -- at Stockman's, I know it's pretty small, but the cost of the food and beverage was pretty high in the first quarter. I assume that was due to the renovations of the steakhouse and being out of commission for a little bit. Do we expect that to come down?

We expect to get back to a very, very modest profitability level in food and beverage. We have been doing really, really well from a revenues per side but we did have some start-up costs associated with bringing the coffee shop back on and bringing the steakhouse back on. And so we think that will normalize itself going forward.

Okay, yes, that is what I expected. And then, I guess for Andre, as far as you mentioned pursuing casino acquisitions and you guys have been very disciplined acquirers and I assume that will continue going forward. Where are you looking -- ?

We are looking in northern Nevada for the time being, but it doesn't mean that we will stay in northern Nevada. Right now we have concentrated in northern Nevada. We have also looked out of the state of Nevada. Right now, we are still concentrating in and around where we have the Stockman's.

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

(OPERATOR INSTRUCTIONS). Alex Silverman, Special Situations Fund.

Good morning, gentlemen. How are you?

We are good, Alex. How are you doing this morning?

I am well, thank you. I apologize if you have covered this already, but could you talk to the state of competition, in terms of buying some of the properties that are out there, Herbst and Jacobs, maybe others?

Well, you know the field was kind of crowded a while back. And looking at -- you know Jacobs now is focusing on its much larger casinos. I think they are one of the major buyer and mountain racetrack. And Herbst is probably not in the picture as a buyer, could be in the picture as a seller. So you know, we feel that the field is not as crowded as it used to be. I probably -- I am quite active in looking for properties and though I feel that I was really part of the crowd last year, I feel it is much lonelier now, which is good for us.

I assume Nevada State Bank is there as a backer for acquisitions?

We continue to talk to Nevada State Bank. They seem to be very interested in working with us. Obviously, their level of interest is going to be dependent on a deal, but provided we can put a deal together with the same economics as the Stockman's, they have indicated that they are very interested.

And I think they also appreciate our discipline.

The fact that you paid them back as quickly as you did?

Well not only that, but I think the multiple at which we bought. I think the collateral requirements for these banks have increased a little bit since we bought Stockman's, but Stockman's was well within their comfort zone. And I think as long as we continue to bring things to them that look like that, then we will be okay.

Couldn't you use Stockman's as collateral for a future acquisition as well?

We could, and we have had that discussion with them.

Great, thank you guys.

Nick Danna, Sterne Agee.

Good morning, Andre and Mark. How are you? I have two questions, the first one sort of goes down the line of where Alex was headed. And that is, now that you have received the proceeds from the hotel, now that you have received the proceeds -- some of the proceeds back from Michigan -- what size deal do you think you could do given your cash position? Given the availability on the credit facility and given the conversation you have already had with that bank in terms of both structure and size?

Let me step back for a second, okay, because our original plan was to get the money out of Michigan and to finance the Green Acres buyout. As the credit markets deteriorated, we decided that the financing cost for the Green Acres would be very expensive and didn't make sense. So we decided that we would just take the money from Michigan and pay off Green Acres and not finance Green Acres, at least for the time being.

So that has changed a little bit our acquisition thought process, in terms of the availability of equity, cash equity, that we could put into a deal. So I think that is an important thing. Again, I think it was the right decision not to finance Green Acres, because the cost would have been very, very high. Hopefully, that will change at some point in the future, but that has changed our thought process a little bit.

So right now, I think that -- off our own balance sheet without using equity, without issuing additional stock, using the collateral that we have at Stockman's -- we can probably do a deal something less than $20 million. You know somewhere between 15, 16, 17, somewhere in there we can probably swing without having to use additional stock. Does that answer your question?

It does and that would assume putting up Stockman's as collateral, plus using some of the cash on hand, plus the credit facility?

That's correct.

And, generally, how much of a down payment or equity position would the bank require now?

You know I think that they're looking at sort of a 60/40 split. They would like to -- when you look at the appraisal, appraised value of the business, they don't really want to lend too much more than somewhere between 50% and 60%.

And then the last one is more of an accounting question. Obviously you had the big gain in the first quarter on the notes receivable. I am sure, I guess you have more visibility now that the construction timeline is pretty well laid out. What do you think that number runs for the next three, four, five quarters?

I think probably, assuming no changes in the key assumptions, which are the discount rate and the expected repayment date or opening date, probably somewhere in the $150,000 to $160,000 a quarter.

Okay, and when would that end?

Well, the majority of that valuation is related to Michigan. And we right now have about $1.2 million of that $5 million receivable set aside as a valuation allowance. That will accrete up between now and 180 days after opening. The expected repayment of that $5 million is 180 days after opening. So summer of '09 opening, 180 days later, so between now and then we will sort of assume again -- assuming no significant change in the assumptions -- it will pretty much straight-line accrete up between now and then.

Okay, great. That's helpful.

Nick, just to get back to your question on the size of the casino that we could purchase, it would be basically on the level of the Stockman's minus the hotel.

Understood.

That gives you an idea of what we are looking for.

Okay, thanks a lot, guys.

(OPERATOR INSTRUCTIONS) while. Ladies and gentlemen, that does conclude our question-and-answer session. I would like to turn the call back over to management for closing remarks.

Well, thank you. 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 wish all of you have a great rest of the day and a great weekend. Thank you.

Thank you. Ladies and gentlemen, that does conclude our conference for today. This conference is available for replay. For you to access the replay, you may dial 303-590-3000 and enter in the pass code number of 11113998. You may also dial 1-800-405-2236 and enter in the pass code number of 11113998.

Again those telephone numbers are 303-590-3000 and 1-800-405-2236. And the pass code number, again, is 11113998. Ladies and gentlemen, ACT would like to thank you for your participation. You may now disconnect.