Full House Resorts Inc (FLL) 2009 Q2 法說會逐字稿

Good morning ladies and gentlemen thank you for standing by. Welcome to the Full House Resorts second-quarter 2009 earnings conference call. (Operator Instructions). This conference is being recorded today, Tuesday, August 11, 2009.

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

Thank you, Larissa, and good morning, everyone. By now you should all have access to our earnings announcement and form 10-Q, which was filed earlier today. These 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 condition of Full House Resorts. I would now like to introduce Andre Hilliou, Chairman and CEO of Full House Resorts. Andre.

Thank you, Bill. Here with me today is Mark Miller, Chief Operating Officer and CFO, who will discuss the financial results for the quarter.

Before giving some brief highlights about the second quarter, I want to start off today with a recent opening of FireKeepers Casino in Battle Creek, Michigan. Last week, on Wednesday, August 5th, FireKeepers Casino officially opened its doors to the public. We commenced construction in May, 2008 immediately following the financing which as you know was completed in the most hostile capital market environment.

Despite a very difficult environment-- economic environment we have been in over the past year and a half, we opened ahead of schedule and under budget, delivering the project with the most slot machines and parking spaces than was originally planned, essentially increasing the scope while at the same time staying under budget. The casino features 2,680 slot machines, 78 table games and 120-seat poker room as well as five restaurants and over 3,000 parking spaces, including a 2,080-space parking garage. And, as a result of opening under budget, we retain the capability to add more slot machines or other necessary improvements after we have some operating history under our belts.

We have worked very hard, and brought our extensive experience to bear in assembling a top notch management team and staff at the FireKeepers Casino. We were able to find experience in savvy casino team members, many of whom have casino opening experience. In addition, we found an ample supply of well qualified, skilled and customer-oriented team members to join us at the casino. We implemented a strong business planning process seven months ago, which has provided us with a strategic guide as we move through the preopening process and into a successful opening of the casino from an operational, marketing and financial performance perspective. As a result, we have a great deal of confidence that as the coming months unfold we will take full advantage of the opportunity in Michigan.

We want to thank everyone for the tremendous work in getting the project complete. The year-round [ban], Full House employees and FireKeepers' GM, Bruce McKee and his team. And finally we want to thank our shareholders who stood by us as this long project finally came to fruition. We know that some of our shareholders have visited us at the FireKeepers already, and we hope that all of you will have the same opportunity in the very near future. We know that you will be proud of your company and the management team have accomplished there. We invite you to go to www.firekeeperscasino.com to learn more about this outstanding new facility.

While we won't be able to provide any meaningful data, concerning win per day or metrics given that the casino has only been open six days, we can tell you that since its opening, the casino has experienced high visitation and has been very well received by the customers and the community.

In addition, the legwork we accomplished before the opening of FireKeepers paid off as we had over 60,000 members enrolled in our Red Hot Rewards Club by opening and over 50,000 players club cards were mailed to players in advance of the opening. Since then we have signed over 40,000 members for a database of over 100,000. We can tell you that the club membership rolls have increased as I have just mentioned and we still see strong enrollment.

In terms of what FireKeepers means for our financial statements, Gaming Entertainment in Michigan, a 50% joint venture is our managers for the casino and also supervised development, design and construction for the tribe.

GEM is now managing the daily operations of the casino for the FireKeepers Development Authority, an agency of the Huron Band. GEM will be paid a management fee equal to 26% of pre-management fee income over a seven-year period which commenced with the opening on August 5th. As you already know, GEM is only responsible for only immediate expenses, including the general manager's payroll, related costs, travel, legal and so forth and so on. As a result the fee income is a very high margin, pre-income tax for GEM and Full House Resorts.

With the hoping of FireKeepers, we expect a considerable increase in financial resources available to us, which, along with our already strong balance sheet positions us well for future growth opportunities. We have been actively investigating and pursuing various growth opportunities, including acquisitions, additional management agreements and potential joint ventures. It appears to us that the growing number of restructuring and distressed asset situation in the gaming space would present significant opportunities for well-positioned operators like Full House Resorts.

Those situations are likely to take some time to unfold, or ripen to maturity. But we believe that with the commencement of operations in Michigan and a future increase in available financial resources, the timing may very well be to our advantage. As a result, we have been very focused on high quality execution at FireKeepers, and we remain disciplined and patient in our pursuit of opportunities to further grow the Company. I would now turn the call over to Mark to go into more details about a financial result for the quarter, and then I would close with a few additional comments. Mark?

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

For the second quarter ended June 30, earnings per share were $0.01 versus flat earnings in the prior-year period. Second-quarter 2009 results were based on weighted average common shares outstanding of just under 18 million shares. While second-quarter 2008 results were based on weighted average common shares outstanding of 19.3 million. Net income was approximately $200,000, compared to only $33,000 of net income in the second quarter of 2008.

Stockman's Casino contributed approximately $2.4 million in revenue for the three-month period ended June 30. This was down 1% from the prior-year period, primarily as a result of declining food and beverage sales due to the overall weak northern Nevada economy and increased food and beverage competition. This was mostly offset by an increase in slot revenue due to a more favorable hold percentage during the quarter.

Again, we want to note that the northern Nevada market remains weak, and we continue to see recession-induced weakness in our revenues. We only have market share numbers for April and May so far, but for the first two months of the quarter, our market share of slot handle and slot win increased over the prior year, indicating that we continue to hold a competitive advantage in the marketplace.

EBITDA for Stockman's was $900,000 in the second quarter of 2009 compared to $600,000 in the second quarter last year, as cost containment efforts throughout Stockman's operation continue to be effective. We believe we have now adjusted our cost structure about as much as we can.

SG&A expenses declined from $1.7 million last year to $1.5 million during the second quarter of 2009. The decrease is primarily due to lower cost at Stockman's, as well as lower stock-based compensation expense.

Incentive-based compensation is likely to increase marginally in the back half of the year as many of our incentive compensation objectives were focused on a timely on-budget opening for FireKeepers, as well as hitting certain financial performance metrics following the opening. I would also remind that you the full expenses of GEM are contained in our SG&A costs, and RAM's 50% share of those costs is credited back to us on the net income or loss attributable to non-controlling interest line near the end of our income statement.

Non-cash stock compensation expense for the second quarter of 2009 was $116,000 versus $210,000 in the prior-year quarter.

Equity and net income from Harrington Raceway and Casino, our Delaware operation, was down 19% from the prior-year period in the second quarter. As we have discussed on previous calls, up to this point, we have recognized greater percentage increases in our net income from Delaware than the contractual guarantees called for. This is because the guarantee payments are based on the timing of cash payments and as a result we expected the increases to even themselves out over time.

During the second quarter there is a significant difference in the timing of cash distributions and net income due to the rebate accrual from GED for 2009. We continue to expect flat-to-modest growth in management fee income going forward, and a 5% increase in cash distributions, as this timing difference continues to even itself out over the remaining life of our management agreement.

Despite these variations in our recognized net income from GED, the guaranteed minimum increase in cash distributions, is providing us with insulation from competitive pressures affecting Delaware, the weak economy and from the impact of recently enacted gaming tax increases.

During second quarter 2009, we recognized unrealized gains on notes receivable of approximately $40,000 compared with a loss of approximately $62,000 last year. The unrealized gain in the second quarter of 2009 was lower than normal as a result of a change in the discount rate as the beta for gaming companies has been increasing. In addition, a delay in the expected time frame for the Montana and Nambe projects also contributed to this lower gain this quarter.

Please keep in mind that these adjustments to fair value are noncash. However, with the opening of the FireKeepers Casino on time and under budget, we now have even greater confidence that the remaining receivable of $5 million owed to GEM will be paid on time, six months following opening, which will be next February.

We are currently carrying this receivable on our books at approximately $4.5 million and therefore, expect to recognize approximately $0.5 million in additional gains as we approach the payment time frame.

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, we expect lower volatility going forward with FireKeepers' recent opening. I would refer you to the somewhat extensive disclosures we have in our 10-K and our 10-Q to better understand the nature of these items, which are significant to our financial results.

Our interest expense in the second quarter of 2009 fell approximately $60,000 compared to the prior-year quarter due to the reduction of debt throughout 2008. We had approximately $4.5 million in cash on hand as of June 30. Debt as of June 30 stood at approximately $4.4 million. Of the $4.4 million in total debt, approximately $3.5 million is an obligation of GEM and will be satisfied from GEM earnings and cash flow.

Availability under our loan facility with Nevada State Bank stood at $7.9 million at the end of the quarter and there are no principal payments due on the facility until 2021. Subsequent to June 30 we made a voluntary payment of $200,000 on our Nevada state bank facility, reducing the balance outstanding to a little over $700,000.

I would like to remind everyone that when we purchased the Stockman's Casino at the end of January 2007 we incurred a total of approximately $18 million in debt. As of today, only about $700,000 remains outstanding.

Our balance sheet is in rock-solid shape. We have very low leverage, and no immediate refinancing or repayment issues. FireKeepers Casino opened, and with the expected management fee income, we are extremely excited for the future of Full House Resorts, Inc. and its shareholders in the near and long term.

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

Thank you, Mark.

Before turning it over to questions, just to sum up, we are thrilled over the initial response to FireKeepers Casino and believe it is well on its way to becoming a top destination in the state of Michigan. We look forward to providing you with a much greater update, on FireKeepers in the next conference call. But the fact that we were able to finish a project ahead of schedule and on a budget is a testament to the entire Full House team, as well as the hard work and dedication of the Huron Band, the local workers and the FireKeepers staff.

In terms of operations, the second quarter saw some improvement in the market leading Stockman's Casino, but we expect continued in the northern Nevada economy over the next few months. With that said our focus on cost control continues to be effective, and we will pay similar attention to costs in the upcoming quarters. We are generating free cash flow, our balance sheet and liquidity are strong, and we have no major debt issue. And with FireKeepers' opening, we are now in an even stronger position to take advantage of the opportunities we believe will emerge in the coming months.

Our long-term goal remains to own and develop market leading local casinos, and with the opening of the FireKeepers, we are even closer to reaching that goal in the months and years to come. But, as we have always said, we will be disciplined, and we only seek out opportunities that provide value to our shareholders. Thank you for your time today, and I will now open the call for questions.

Thank you, sir. (Operator Instructions). And our first question comes from the line of Justin Sebastiano with Morgan Joseph & Company.

Thanks; hey, guys.

Good morning, Justin.

Good morning. So as far as marketing from what I could tell it was mostly word of mouth for FireKeepers, but now you have done a pretty good job of getting that player database up over $100,000. You think you will maybe pick up spending to keep those players coming back that maybe were just there to kind of see what the property was all about? Do you think you will pick it up there?

You know, Justin, I think a lot of customer base there is a local customer base. So it is too early to tell on what our marketing folks are going to do there but I think they are going to be very, very careful on the way they spend the marketing dollars and probably primarily would use the Players Club to cater to the customers. So I think it is a little early to tell. Within three to four months we will have a much better idea. But, you know, we have great demographics and you know with great demographics comes a good customer base.

Okay.

Hey, Justin, I would just add that while word of mouth was obviously a very powerful factor here, we have had a marketing effort underway. We have a pretty extensive billboard campaign surrounding the property on the major freeways. We have had our marquee sign up for a long time, and we have been using it to build anticipation of the casino was going to open. And I think the marketing team there has done an exceptionally good job at leveraging local PR to keep FireKeepers in the news almost on a daily, weekly basis for months now.

So I don't want to say -- I think it is not fair to say that we haven't had any marketing effort. I think we have just been careful about how much money we have spent, and we were very careful about not trying to hype the actual opening day too much in order not to overwhelm the local infrastructure. But FireKeepers is not a secret in the local economy. It is very well known. And people have known for quite some time about when we were going to open. They might not have known exactly the day and the time, but they knew pretty well that the opening was going to come here, in these first couple weeks of August. So --

Okay. And the note receivable -- your -- now you get 50% of that or is there a different share of that that you're getting from a Michigan tribe?

No, that will be shared. It will come into GEM, and it will be distributed back out to the members. The distribution will probably be close to 50%. We may get a little bit higher proportion of it because of our -- we have a higher receivable coming from GEM. But 50% is a good proxy for the time being.

Okay. And then just the GEM that I noticed that you have got -- I guess, what is that, 2011 is the maturity. Is there any thought to refinancing that, or are you just going to try to pay it off with the cash flows that are going to go to GEM from FireKeepers?

The distributions that come out of GEM initially -- so management fees are going to go into GEM, and then GEM is going to distribute those back out to the members. Those initial distributions will be reductions of these -- of these receivables that the members have from GEM. So our anticipation is that that debt, payable to RAM from GEM, will be paid off pretty quickly, once management fees begin to flow.

Okay. And do you have any update regarding Gun Lake? I don't know if being in the market if you guys see --- is there any movement at the property as far as pushing dirt around or anything you have heard on the legislative front?

Not that we know of. You probably know as much as we do.

We know, Justin, that there is no construction activity has occurred. There are still approvals that are necessary. We don't have any ---

We really --

Any updated information on the status of those approvals.

We really don't know. It is a new administration and it takes time for a new administration to get together, so we don't know.

Sure. Okay. And just on the acquisition front, I know you guys are probably dealing with a lot of the banks and the bondholders that now are owners of these assets. Are they willing to sell now at these prices? Are they looking to maybe hold on to a piece of it, hoping to participate in the eventual upswing in the gaming --?

Well, Let me take the first half then Andre can jump in. But first of all, Justin, I think that a lot of these lenders to these distressed assets have not yet actually taken possession of the assets. They may be in the process; there may be some assets that are actually in bankruptcy, or close. But in terms of lenders actually taking title to assets and then therefore being in a position to dispose of them -- that process is still ongoing.

And I think what lenders will ultimately be willing to do as they move through these distressed situations I think really is very dependent on the makeup of the lender group in a particular situation, if that makes sense. I mean, we often see that banks have a completely different view than what mutual funds or hedge funds' view might be of the value of assets. So it is difficult to answer that question just sort of generically, but I think we are seeing that these processes are taking longer than people might have thought that it would take for lenders to take possession and then dispose of assets.

But there certainly are situations out there. We are actively engaged in looking at those situations and making it known that we're interested and monitoring the progress. Andre, do you want to add anything to that?

No, no, no, no; that is exactly what I was going to say.

Okay. So are there any casino operators out there looking to sell assets or is it mainly just -- are you dealing with the distressed assets that are either in BK or looking to possibly get into BK in the next maybe six months or so?

Most of what we're looking at currently, Justin, is in one form or another distressed assets.

Okay.

Whether they are all going to end up in a BK situation or not is speculation. But, certainly, most of them are distressed in one way or the other. And I think just traditional non-distressed owners, I think today, there is not a lot of assets that we're seeing that are for sale, probably because of the depressed --

Right, right. Okay.

I want to make sure that we understand distressed assets. A lot of those assets are performing very well or at least well. They were distressed because they were purchased at a very, very high multiple, or they have to be refinanced, but some of those assets are performing quite well.

Okay, I understand. Just lastly, who are the competing buyers out there that you're seeing? I mean I know a year or two years ago we may have said Herbst or Jacobs, and certainly those companies have somewhat changed.

Herbst is no longer there for sure.

Right, exactly. So who are you seeing out there that may be some competitors to --?

It's kind of hard to tell. Every market has different competitors. And if you go to Michigan -- I mean, I'm sorry, if you go to Mississippi you have local groups. So it is kind of hard to tell. Some of the major competitors that we saw a few years back are gone but you have local people who have stepped up and replaced them.

Okay. All right, thanks a lot, guys.

Thanks, Justin.

Thank you. Our next question comes from the line of [Rob Wolgamuse] with Insight Investments.

Hey, guys how are you doing?

Hey, how are you.

Doing well, thanks. A couple questions and more first off just a couple of clarifications. What is the -- what is the total amount of capital you expect to be returned from GEM, is it $5 million?

The amount that the tribe still owes GEM of the original receivable is $5 million. That's right.

You expect that to come back by February, or around February?

It is payable six months following opening so that would technically be February 5th.

February 5th. Okay; is that pretty much like a done deal or can that change for any reason?

Well, it is conditioned on there being at least $5 million remaining in the construction disbursement account on February 5th, which we're very confident at this stage that there will be.

Okay.

But if for some reason there were not then the tribe would be able to pay us that out of operating cash flow, on a 60-month amortization at prime plus one. But as of right now, we expect that that $5 million will be returned to us six months following opening.

Okay. And then in terms of the consolidated debt that appears on your balance sheet -- what is the -- again, this is just clarification. What is the number there? What is the total amount?

We have $4.4 million worth of total debt.

Okay.

And of that, roughly $3.5 million is debt that is consolidated up to us from GEM. Okay.

And would -- and that GEM debt is -- its only recourse is really the cash flows of GEM.

Okay.

And you said that will be paid out of cash flow --

Paid out of GEM's cash flow.

GEM's cash flow. So when do you expect that would be paid off by -- just, after -- just a prediction.

Well, any sort of reasonable projection would have it being paid off sometime next year. Middle of next year, probably.

Okay; and then in terms of the acquisitions, could you marker -- Andre, could you guys give a little more detail on perhaps even like -- have you looked at three different properties this past quarter, or -- it just seems like the discussions around this are usually so vague. Like are you actively --

They remain vague on purpose.

Yes, I understand.

No, we really can't give you any information. We are constantly looking at properties. But the discussion has to remain vague on purpose until we make an announcement. But we're always looking at properties.

Would you consider, Andre, a property that is much larger in size than perhaps you would have considered a couple years ago?

Yes, probably, yes.

Okay.

But it depends on how you could get it. I mean at the end of the day, we're limited by our cash flow as well and by the available markets. But we -- the answer is yes.

Rob, I think the answer is definitely yes to that in the sense that, I mean, in terms of acquisitions, now that FireKeepers is open we have much, much more confidence on when the management fee stream is going to start. We're looking out six, eight months from now in terms of what our financial resources will be and, obviously, they will be much more significant than they would have been a year ago.

And so we're definitely able to look at bigger properties. We are willing to look at different ownership structures that would allow us to get into a bigger property faster. We do have some criteria for that, but we're certainly willing to look at a variety of different ownership structures, and especially in these distressed situations where you may have -- you may have a lender -- or an investor who wants to keep some interest, some upside. Some of these ownership structures may be appealing to both us and to them. So, we're very aware of that, and willing to look at them.

Mark what do you--

Go ahead.

No, you go.

Well, and we will be able also to disengage some of our corporate managers from FireKeepers so that will allow us also to spend more time on managing larger properties, if and when we find them.

Okay. And what do you guys plan to do with your cash flow in the near term? Just build cash to prepare for some sort of acquisition or do you have other plans?

Right now to build our cash and actively pursue acquisitions. We have very little debt left, but -- right, we expect our cash to build and to use it for an acquisition.

Yes, that's a simple answer.

And I just have two other quick questions related to just the marketplace in general. Looking at the Detroit revenues for the casinos there, it seems like year over year they have held up decently well. Do you guys -- what is your feeling on the environment overall in that part of the country?

So far, Michigan has stood the test of time. And usually when -- the problem with gaming over the last two years is that competition comes and the market does not grow accordingly. So, we really don't see that much growth around the FireKeepers coming up in the short term. They would eventually come and it will be competition for us. But at the end of the day I think what is there is what should be there for a period of time. So --

Okay. And thanks for that. Then my final question, Andre, is just in terms of the Nevada marketplace local versus Las Vegas. It seems like with CityCenter opening, Las Vegas is just -- there is just more and more rooms coming on the market. Curious your thoughts on that and then just your thoughts on the local market versus --

I think local markets have held up well when competition has remained under control. And I think that the same problem with Las Vegas. Las Vegas had the -- the market coming in Las Vegas was really the tourist market which is probably still coming in. But the commercial market coming from companies is probably a decrease pretty substantially. And of course we don't see many conventions coming this year and next year. And the increase, is not only the CityCenter. You will see probably another two casinos coming on board, and Hard Rock put another tower on what a few weeks ago, Mark? So yeah -- you have extra competition in surely not a growing market. That is not a recipe for success. That's my own point of view.

But you feel like there are some local markets that are still healthy and --?

I think you still get some local markets on a weekend from California, and the hotels still have a decent and healthy look -- I mean tourist market coming in. It is not collapsing but you need to really tap every segment of the market to do well in Las Vegas. It mean it -- has a lot of market.

I mean, the truth is we don't spend that much time looking at Las Vegas itself. We don't have any exposure here, and we're not very focused on acquisitions in the Las Vegas market proper. Although we have looked at a few properties here we don't spend a lot of time here. But, when you move out of sort of the major tourist destinations and look at more local and regional gaming markets, I think you see that they have held up much better. That doesn't mean that there haven't been declines but they have held up better, and they are, in our opinion, they are likely to rebound faster as the economy improves.

But clearly this is an environment where you have to be very, very careful with your cost structure and your marketing investments, and just very, very diligent in watching what is really happening with revenues because, I think we see some improvement and then we see it get weak again. This is I think the whole recovery is likely to take awhile, and it is probably going to come in fits and starts. So from our perspective, we have to look very carefully on the acquisition front. We have to look very carefully at the competitive environment and the demographics and what your marketing position is going to be in assessing what the real value of an acquisition is.

Okay, thank you, guys.

Thank you. Management, there are no further questions at this time. Please continue with any closing remarks you 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 wish all of you a great rest of the day, and thank you.

Thank you. Ladies and gentlemen, this concludes the Full House Resorts, Inc. second-quarter 2009 earnings results conference call. This conference will be available for replay. You may access the replay system at any time by dialing 303-590-3030, or 1-800-406-7325, using the access code 413-2386. Thank you for your participation. You may now disconnect.