Full House Resorts Inc (FLL) 2009 Q3 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Full House Resorts third quarter 2009 earnings conference call. (Operator Instructions) This conference is being recorded today, Tuesday, November 10, 2009. I would now like to turn the conference over to Bill Schmitt. Please go ahead, sir.

Thank you, Brandy, and good morning, everyone. By now everyone should have access to our earnings announcements and Form 10(Q) which are filed yesterday. 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 to you 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 our Chief Operating Officer and Financial Officer who will discuss the financial results for the quarter. I want to start off with the Firekeepers Casino. On August 5, the casino officially opened its doors to the public, ahead of schedule and under budget, providing us with 57 days of operation in the quarter. The opening could not have gone smoother and our soft opening strategy paid off, resulting in lower than normal marketing costs in August. Overall the opening went extremely well, allowing the management team to operate the casino at near normal efficiency levels almost right away. Firekeepers delivered higher than normal operating margin for the opening month and provided Gaming Entertainment Michigan, a joint venture with Ram Entertainment, with $5.8 million in management fees for the first 57 days. I reiterate that those results were high and above our expectation due to an excellent grand opening resulting in higher revenues as well as lower cost due to the smoothness of the opening. We expect more normalized margin going forward as we have begun to ramp up marketing. GEM began receiving cash payment on our management fee income in October and so far has made distribution to both Full House Resorts and Ram on a 50/50 basis after deducting for ongoing expenses at the GEM level. Firekeepers gross slot win per day during the 57 days since it has been opened was $282 per day. Firekeepers Red Hot Rewards Club currently is around 250,000 members and we are adding to that total every day.

Before going on let me say that the success of the opening is a testament to the outstanding work done by the entire management team at Firekeepers led by General Manager Bruce McKee, the Year-Round Band and, of course, the entire Full House and Firekeepers team. Coming in under budget, ahead of schedule with a smooth opening and early success greatly enhances our reputation and confirmed that we were spot on in our hiring decision, our judgment and discipline during the planning and construction phase, as well as our in depth knowledge of the industry are resulting in the high level of customer satisfaction as well as above industry standard profit margin. Also as a result of a favored member agreement with Ram, our partner in GEM, we are recording a one time net gain of $1.4 million or $0.05 per share. Mark will expands on this during his presentation. As a reminder going forward, 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 5. GEM is responsible for only the immediate expenses including the general manager's payroll, related costs, travel and legal. As a result, the fee is a very high margin pretax income for GEM and Full House Resorts.

Now that Firekeepers is open and performing very well, we have started looking toward our next goal. To that end we recently engaged Regal Capital to assist us in identifying and pursuing acquisitions. As we have said over the last couple of years, the growing number of restructuring and distressed asset situations in the gaming space are likely to the present significant advantages for well-positioned operators like Full House. And, of course, we will only act when we find a high quality project at a very attractive multiple that will provide long-term shareholder value. We are exploring all meaningful situations and are willing to be creative in executing a transaction if it makes sense for our shareholders. While we remain disciplined in our approach to growth, we continue to believe that with our increasing financial resources due to Firekeepers we are well-positioned to act when the situation is right. I will now turn the call over to Mark to go into more detail about the financial results for the quarter and then I will close way 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 that you may have at the end of our prepared remarks. For the third quarter ended September 30, 2009, EPS attributable to the company were $0.17 versus $0.03 in the prior year period. Exclusive of the one time GEM agreement, earnings per common share in the third quarter of 2009 would have been $0.12. I will discuss in more detail the GEM agreement in a moment. Third quarter 2009 results were based on a weighted average common shares outstanding of 18 million, while third quarter 2008 results were based on weighted-average common shares outstanding of 19.3 million. Net income attributable to Full House was approximately $3 million compared to a $0.5 million of net income in the third quarter of last year.

Let's start with Firekeepers Casino. During the third quarter of 2009 we recorded management fees of $5.8 million of which Full House receives a 50% share. The management fees amount was more than expected due to strong opening revenue levels and lower than normal costs as a result of the soft opening strategy which led to lower than normal marketing costs. In addition extensive preopening training and planning resulted in an exceptionally smooth opening which enabled the property to run at near normal efficiency levels right away. We do expect margins of Firekeepers Casino to normalize over the next several months but we also believe that due to the properties efficient and simple design, as well as the efforts of a strong management team on the ground, the property should continue to produce excellent margins.

Stockman's Casino contributed approximately $2.2 million for the three-month period ended September 30. This was down 11% from the prior year period primarily as a result of the overall week northern Nevada economy and increased food and beverage competition. In spite of the weakness we did slightly improve our market share premium over the prior year period, once again showing that we remain the top operator in the market. However, we expect northern Nevada revenues to remain under pressure in the near term. We continue to make investments when and where needed in order to maintain and improve our competitive advantage and profitability at Stockman's.

EBITDA for Stockman's was approximately $700,000 for the third quarter of 2009 compared to $800,000 in the third quarter of 2008, as the revenue weakness was partially offset by our cost containment efforts. SG&A expenses increased from $1.5 million last year to $1.8 million during the third quarter of 2009. The increase is primarily due to incentive based compensation accruals resulting from the successful opening of the Firekeepers Casino. Non-cash stock compensation expense for the third quarter was $33,000 versus $224,000 in the prior year quarter. I'd also remind you that the full expense 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 noncontrolling interest line near the ends of the income statement.

Equity and net income from Harrington Raceway and Casino in Delaware was up 6% from the prior year period in the third quarter. We continue to expect a 5% increase in cash distributions over the remaining life of our management agreement, however, income recognition will be flat to modestly up due to the timing of cash payments and higher income recognition in prior periods. Despite these variations in our recognized net income, the guaranteed minimum increase is providing us with insulation from competitive pressures affecting Delaware, the weak economy and from the impact of recently enacted gaming tax increases.

During the third quarter of 2009 we recognized unrealized gains on notes receivable of approximately $249,000 compared with gains of approximately $137,000 in the prior year period. The unrealized gain in the third quarter of 2009 was due primarily to the opening of the Firekeepers in early August 2009. Please keep in mind that these adjustments of fair value are non-cash, however, with the opening of the Firekeepers Casino on time and under budget, we anticipate that the remaining receivable of $5 million owed to GEM will be paid in February of 2010. We are currently carrying this receivable on our books at approximately $4.7 and million therefore expect to recognize approximately $300,000 of interest income as we approach the payment time frame. I would refer you to the somewhat extensive disclosures we have in our 10(Q) and 10(K) to better understand the fair market valuation of our tribal receivables which are significant to our financial results.

Our interest expense in the third quarter of 2009 fell approximately $75,000 compared to the prior year quarter due to the reduction of debt throughout 2008 and 2009. On October 9, 2009, effective September 30, an agreement was reached referred to in our financials and 10(Q) filing, as the GEM member agreement. The agreement between the company and Ram clarified the treatment of certain reimbursable amounts funded by the members, and certain non-reimbursable amounts funded by the company, as well as the timing of repayment of disproportionate advances made by Full House Resorts. As a result payables due from GEM to each member were adjusted to reflect a total payable due to $am of $8.5 million a total payable due to Full House of $11.9 million, resulting in the recognition of a net pretax gain of $1.4 million which was recorded in September 2009.

The net pretax gain consists of a GEM member agreement modification charge of $2.1 million on the face of our income statement, offset by a $3.5 million credit attributable to the GEM noncontrolling interest. Both the Ram and Full House resort member payables are expected to be paid in full within the next twelve months or so. The Ram payable is currently classified on our balance sheet as $2.7 million of GEM joint venture equity and $5.8 million as current debt. Pleases remember that all of these GEM member payables are to be satisfied from GEM cash flows. In addition, the GEM members agreed that the distributions to the members will be made on a 50/50 basis to both members until such time as both members have received approximately $8.5 million, and Ram's member payable has been fully repaid. Thereafter, 70% will be paid to Full House and 30% to Ram until such time as the remaining payable to Full House has been fully repaid. Thereafter distributions will be made on a 50/50 basis.

We had approximately $7.8 million in cash on hand as of September 30, 2009. Debt as of September 30 stood at approximately $6.5 million. Of the $6.5 million in total debt, approximately $5.8 million is an obligation of GEM and will be satisfied from GEMs earnings and cash flows. Availability under our loan facility with Nevada State Bank stood at $7.8 million as of September 30, and there are no principal payments due on the facility until 2021. Since September 30, GEM has made distributions to both Full House Resorts and Ram. We have further reduced our Nevada State Bank debt balance by approximately $500,000, and our current cash balance remains at about $7.3 million. Availability on our Nevada State Bank facility now is about $8.3 million. Overall our balance sheet is in rock solid shape. We have very low leverage and no immediate refinancing or repayment issues. With Firekeepers Casino open and the resulting management fee income, we expect our financial resources to grow significantly; positioning us well to pursue growth. With that I will turn it back over to Andre for a few final comments and then we will open it up for questions. Andre?

Thank you, Mark. Before turning it over to questions just to sum up, we are thrilled over the first 57 days of Firekeepers Casino operation reason very excited about its future. We anticipate very solid management fees from the property over the next seven years which put us in an admirable position in acquiring existing properties on advantageous terms. Our financial results are strong. We are generating free cash flow. Our balance sheet and liquidity are solid as ever and we have no major debt issues. Our long-term goal is to own and develop market leading local casinos and we are properly positioned to do just that in the months and years to come. But as we've always said, we will be disciplined and we will only pursue projects that pride value to our shareholders. Thank you for your time today and I will now open the call for questions.

(Operator Instructions) Our first question comes from the line of Justin Sebastiano of Morgan Joseph.

Thanks, good morning, guys. So I think you explained it pretty well, the payables and the modification agreement, but just so I'm clear, so GEM's payable to Ram of $8.5 million should be paid off sometime by my calculation in like the first quarter of 2010?

That's a accurate.

Then from there the split goes 70/30, in favor of Full House from the GEM distribution in which case by my calculation Full House should then be fully repaid some time in the third quarter? Is that about right?

I think that's about right. It's possible it could leak over into the early part of the fourth quarter but third quarter is a reasonable forecast.

That's, yes, that's contingent I guess upon the management fee and how well Firekeepers does.

That's correct.

So when you receive the 70% in, let's say the second quarter and part of the third, will that flow do you know to your EPS number where previously we were modeling 50% split, you now have an extra 20%. Will that help boost earnings earnings, everything else equal?

No. This is really just a cash flow issue.

Okay. Understood.

We will still share throughout the period we share 50/50 in the management fee income. Which is which comes on to our income statement as 100% and then there's a credit out through the minority interest line. But from a cash flow perspective, we will be paid approximately, well, the difference between $11.9 million and $8.5 million we will benefit by that delta in terms of the cash flow coming out of GEM.

Okay. So you've got about $3.5 million more in cash and that's because this was silent in the member agreement before the payables that were made?

The member agreement which was was originally done back in 2002 negotiated in the late part of 2001, really did not contemplate that the project would take this long to develop and there was a period of time where Full House was making disproportionate advances into GEM to funds its operations and those issues were not contemplated by the investor agreement. And so this agreement that we have with Ram sort of clarifies those issues, clarifies how they're to be handled and as a result we've reflected that in our financials.

Okay. That's good. So just, I mean looking at the balance sheet, you're virtually debt free now based on I guess the $500,000 that you guys paid in October, and with Ram being paid off probably by the first quarter of 2010, you're basically have zero debt and probably well over $10 million in cash at that point. You guys are set up pretty well for an acquisition. I know guys are still looking of course but how is the process going? Are the sellers getting a little bit more accurate with the times as far as what they are asking or do you see that you may have have to come up with the multiple you are going to pay? How far apart are you guys from potentially actually getting something?

We really couldn't talk too much about it Justin but at the end of the day every day is different. We are really actively looking at projects now and again, it needs to have a meeting of the minds for the projects to come through. But we are really truly looking very hard at projects and we are finding some decent projects. The key to it is to make sure that the version of earnings and our version of earnings and their version of multiples and their version of multiples match. So it's too early to the talk about that but we are seeing more projects coming in the market now.

Okay.

And I think the move will come as we go along. As you can see there is restructuring going to the court now but it's a very, very lengthy project. It is one day at a time.

Right, right. Okay. All right. Thank, guys.

Thank you. Our next question comes from the line of Alex Silverman with Special Situations Fund. Please go ahead.

Good morning.

Good morning, Alex.

Can you spend a few minutes talking on your win per position sort of where it started, where you see it going? And then secondly it seems like your promotional expense was less than, at least less than I expected. Where did it come out relative to what you were expecting?

Let me start with that and Mark is going to --

Can I just clarify, Alex. You're talking about promotional expense at Firekeepers?

I'm sorry, at Firekeepers.

The revenue at Firekeepers has been pretty stable for the last, I don't know, five or six weeks, maybe seven weeks. And I think we had the first two or three weeks of course it was the excitement of the opening of the property. But Michigan is a very mature gaming market, Alex, and we've seen three to four weeks we fell into stability and felt pretty good about it to be very honest with you. I believe our customer base comes within 50 to 75 miles of the casino and that's where we have been marketing. I don't think we have the latest marketing numbers but even today our marketing expenses are very, very manageable. We need to understand who our customers are and eventually as we, like all casinos, start going without a range of 50 to 75 miles we will cater to those customers in a different fashion. But so far we've been very prudent about marketing.

Would you say it's been within your target or below target?

Absolutely within our target. Absolutely within our target. And Mark can explain to that a little bit. Had he a talk with Bruce yesterday but I think that within 50 to 75 miles, we have a great demographics and no casinos to keep with. We are very careful on marketing to go those folks but keep in mind we have 250,000 people in the Players Club and we cater to those folks to a very, very organized marketing strategy. The more you play the more you earn and that's been our main tool. Of course a few days ago we brought Lee there and introduced one of his costs to the projects but those are really ad hoc marketing basis. Mark?

Well, I would just add to that, Alex, that revenues, our win per unit the first 30 days we were open was what you would expect. It was higher than normal and I think consistent with our expectations. Revenues, we did very little marketing early on. Since that time, sort of September, mid-September on, we have been gradually ramping up our marketing program. We certainly have seen lower win per unit post the grand opening period and I think it's still too early for us to tell where the win per unit will totally stabilize at because we are not fully mature yet from a marketing perspective. But I think over the next two or three months we will start to get a better feel for that. But right now the performance of Firekeepers is very consistent with what we expected. When you look at EBITDA performance I think probably a little bit ahead of our expectations at this stage of the game. So we are very pleased and we will just continue to see how things unfold. The key for us is, as Andre said, to develop a really good understanding of who our customers are, where they are coming from and what kinds of marketing programs they respond to. And so we are still obviously very early in that process at this point.

And we are very disciplined in our approach of business as well as our approach of marketing.

Okay. Mark, have you done a back of the envelope what the quarter might have looked like if Firekeepers was open for the whole quarter and one time gains were taken out?

Well, obviously if you took out one time gain it's a $0.05 a share. So we would have been at $0.12 instead of $0.17 without the one time gain so that's pretty straight forward. I haven't done a back of the envelope if we had been open for the full quarter. I think, Alex, of the $5.8 million in management fees that were earned, approximately I'm trying to remember, approximately $3.8 million of that was generated in August. So that would give you some idea. Again, I think September probably was a little bit stronger than we expect going forward but it gives you at least a little bit of a feel.

You know, Alex, there was a market curve ball, he doesn't like to speculate.

Justin has a model out there. We don't give forecasts. We don't give any guidance at this stage of the game but Justin has a model out there that we feel is a reasonable look at us going forward.

But roughly $2 million of the management fee came in September?

A little bit more than $2 million.

A little more than $2 million.

Over that.

That's still had some of the halo of the opening?

Not so much from a win per unit perspective, I think, Alex, but certainly from a cost perspective. We were just starting to crank up marketing and there are some other efficiencies in our cost structure that occur at sort of during the opening period that will gradually normalize themselves. So I think we are still in September had a lower than normal cost structure probably.

Okay. Great, guys. Thank you very much. Congratulations.

(Operator Instructions) We do have a follow up question from the line of Alex Silverman. Please go ahead.

Can you spend a moment given the cash flow that's coming in maybe normalize it and give us a sense of what you think your borrowing ability might be given all of the properties and cash flows?

Well, Alex, we've got the line of credit and as of right now we've got about $7 million in cash. So when you take the line of credit, the $7 million in cash and subtract out maybe a couple of million dollars for sort of normal operations that we would need that leaves you right now we probably have about $13 million of immediate availability, right?

Okay. Yes.

I think the question of how much we could borrow against the Firekeepers cash flow stream is an open question right now. We have had some discussions with our bank regarding that but I think our ability to borrow on that is still a little bit hard to quantify because it's only been a couple of months of operations. So I think we do have capacity to borrow against that cash flow stream, that management fee agreement at this point, but I don't have a real good feel for how much yet. I think that's something that we will be looking at and working on over the next few months as we start to develop a little bit more of a track record that we could show lenders. Does that make sense?

It does make sense. And in terms of borrowing against Stockman's, is that -- go ahead.

I think we could borrow a little bit more. Remember, the line, the $8 million that we have with Nevada State Bank would be secured by Stockman's.

Right.

So there's probably a little bit of incremental capacity there but I think that what I'm saying, Alex, is conventional bank financing like we used to acquire Stockman's, probably 50% to 55% of the appraised value or a multiple of cash flow, which is where the appraisal comes from, is probably where we're seeing banks having a comfort level right now. You might be able to push them a little bit higher but I think between 50% and 55% is kind of where they are coming out. So we probably could borrow a little bit more against Stockman's but not a substantial amount.

Okay. And the decision on a hotel, is that your decision, is that the tribes decision, and is there a target for when that decision will take place?

I think it's a tribe decision, of course, because they are the owner of the casino. At the end of the day we are going to wait a little bit and are going to be looking at if and when we need to grow. It seems to be that most casinos have a hotel. The key to it is what would the size of the hotel be, when and if the tribe approvals it and the timing of it as well. I think we have some covenant restriction that you are pretty much aware of it.

Yes.

Eventually I think like all great casinos you have to let people stay there overnight. So when they are on the losing streak or winning streak they don't go home with the money. It's a well proven business model that hotels that cater to the casino customers ad value. The timing of it we are not aware of it. The timing we haven't discussed that with the tribe nor have we discussed the size. I believe eventually a hotel will take place but that's about all we can say right now.

It was interesting listening to Lyle Berman talk about Four Winds and how he's losing share on the gamer whose only wanting to drive 45 minutes or an hour, hour and a half, but how he's keeping the share of the people who want to stay overnight in his hotel.

That's absolutely right but keeping in mind so far we have been marketing to the folks between within the 75-mile radius. We have a great demographic and where the casino is located in Michigan is not doing as badly as the rest of the state mind you. So we feel pretty comfortable that we provide great services to that customer base and we meet or probably exceed the expectation, we haven't done any research on that but just talking to the people on the floor, they like what they see, they like the game selection, they like the design of the property. I think that we are seeing that 50 to 75-mile radius for the time being we do very, very well. Eventually as Lyle said we will have to expand our reach but right now is what we have, that's what we do and I think we do it well.

Yes. Sounds like you are taking real share.

I would just say, Alex, there's been some noise in the media about building a hotel, a little bit of confusion, I think. We have started working with the tribe on the development of a master plan for the site. We think that that's an important first step. Obviously we expect that a hotel will be part of that master planning process but the tribe and we thinking it's a good idea to have a master plan first in terms of other things, make sure that we can accommodate everything that the future might hold for that site.

Right.

And secondly we have started sort of informally collecting information regarding a demand for a hotel from our existing customers. Both I think sort of prudent steps before we immediately jump into as Andre said when and how big and all that kind of stuff. So we are collecting some data and we are starting to do some advanced planning but it's still very, very early in the process.

I noticed any number of hotels are offering packages as well as transportation between the hotels and your facility.

Yes, we are definitely working with the local hotels and some of them have been aggressive in terms of working with us and what they are willing to do. So so far the relationship with the local hotels has been a very positive thing.

And that's really a credit to Bruce and his marketing team. They are working very, very hard with what they have and the results are showing it.

I forget which hotel it was but one of them mentioned they were basically booked up through the end of the year for every weekend.

I have no idea which one it is but there are quite a few hotels that are working with us.

Great, guys, thank you very much.

Thank you. Our next question is a follow-up question from the line of Justin Sebastiano.

Thanks, just I guess back to the acquisition front, considering how well you guys have done with the Firekeepers and I know it's still very new and anything could happen but, have you changed sort of the size or the amount of EBITDA you are going to be targeting in an acquisition? Is it still in that $10 million to $15 million range?

What do you mean the $10 million or $15 million range?

You are going to maybe look for a casino to purchase that is throwing off $10 million to 15 million of EBITDA?

I think you are probably within the range there. It could be a little lower but it is really within that range.

Have you guys --

That will significantly ad value to Full House Resorts, not only on the range of the EBITDA and earnings but put the company on a much more visible scale. Does that make sense?

Sure, sure. And as far as maybe a JV plus a management contract versus just 100% owned acquisition, are you leaning towards one over the other? What sort of circumstances go into your decision-making process?

We are really leaning on anything that ads value to our shareholders. As I said in my earlier presentation, if it makes sense for the shareholders we are willing to be creative.

I think, Justin, our bias clear is to be 100% owner but we certainly have and are willing to look at situations where maybe we would own less than 100% and have a management fee type arrangement. I think the circumstances that primarily drive that would be a property that was bigger than we can currently handle with our own financial resources. If there were a situation where we could get into a bigger property or set of properties and sort of move the ball down the court a little bit faster by taking a partial ownership interest we certainly are willing to look at those have looked at a couple in the past.

Okay. And I know you guys are pretty conservative with the balance sheet and I think your shareholders are happy with that but is your plan to go possibly get one acquisition a year depending on obviously what's out there, but is that kind of the goal is to add to your portfolio one a year or would you do two simultaneously if you could get the details worked out?

You know, Justin, it goes back to the attractiveness of the property. At the end of the day it also depends on the size of some of those properties. If the properties are smaller we might be able to get two but at the end of the day every deal is analyzed on its own merit. It's hard to answer. One year, it depends on the size of the property as well and how well we do gross. It's, again, it's hard to answer that at this stage. We are looking at attractive projects and that's about all we can say right now.

Okay. Thanks, guys.

At this time there are no further questions. I'd like to turn the call back over to management for any closing remarks.

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

Ladies and gentlemen, this concludes the Full House Resorts third quarter 2009 earnings conference call. This conference will be available for replay today through November 18 at midnight eastern standard time. You may access the replay system at any time by dialing 303-590-3030, or 1-800-406-7325, and entering access code of 418-1220. Thank you for your participation, you may now disconnect.