Full House Resorts Inc (FLL) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Full House Resorts first-quarter 2010 earnings results conference call. At this time, all participants are in listen-only mode and following the presentation, instructions will be given for the question-and-answer session. (Operator Instructions)

At this time, I would now like to turn the conference over to William Schmidt of ICR. Please go ahead.

Thank you, Craig, and good morning, everyone. By now, everyone should have access to our earnings announcements and Form 10-Q, which were filed last evening. 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.

Thank you, Bill, and good morning, everyone, as well. Here with me today is Mark Miller, Chief Operating Officer and Chief Financial Officer, who will discuss our financial results for the first quarter. We are very pleased to report record first-quarter earnings of $0.11 per share. The first quarter primarily driven by FireKeepers generated revenue of $8.3 million, net income of $2 million, and EBITDA of $3.9 million.

We ended the quarter in a very strong financial position with $12.3 million in cash, no outstanding debts, and $8.2 million of availability on our revolving credit facility. We had a very strong quarter at FireKeepers Casinos. GEM, a 50% owned venture with RAM Entertainment, receive $6.2 million in management fees for the quarter, up from $4.2 million the first quarter of 2009.

Gross slot win per unit per day for the quarter was $244. Our cost structure remained relatively consistent as marketing programs and employee costs gradually mature. EBITDAM margin remained very healthy at an impressive 64% for the quarter, reflecting the efficient operating plan, strong closing demographics, and seasoned management team led by the Full House Resorts' management team.

Membership in the FireKeepers Red Hot Rewards program has increased to around 400,000 members from 325,000 at December 31, '09 and 75,000 at grand opening. As expected, we are getting close to 90% of our revenues from customers living in Michigan. We believe FireKeepers is well positioned to continue its successful operation and that the market is deep enough to provide growth opportunities as we move forward.

Coming off a solid 2009, Stockman's first-quarter results were really challenging. The Northern Nevada market continues to be weak, resulting in revenue and EBITDA for the property declining 7.3% and 16.4% respectively. Despite the good job at controlling costs, we felt the effect of increased food and beverage costs which we were unable to completely offset from a margin standpoint.

However, despite those headwinds, we continued to generate good profitability, strong operating margins, and have maintained our industry-leading market share position, again a tribute to our team. As we mentioned on the call last quarter, we installed a significant upgrade to our Players Club software in March, giving us the ability to implement downloadable free play credits. This will further strengthen our competitive advantage in Fallon, as well as improve the efficiency of our marketing programs.

As we have stated in the past, our long-term strategy is to grow Full House by owning and operating assets, and to that end we are actively pursuing deals where we would either own the asset outright or where we will receive a management fee to operate an asset or a combination of the two.

We are actively looking at properties in all gaming jurisdictions including in Northern Nevada, Mississippi, and various Midwest and other areas. We have and continue to consider management agreement deals of various types. We believe the environment for acquisitions at reasonable multiples continue to improve.

As run rate EBITDA starts to stabilize, we believe it will be easier for buyers and sellers to agree on price. As a conservative company, our key word is today's earnings, not yesterday's.

Our financial strength continues to improve daily, putting us into an enviable position. We remain focused, disciplined, and patient as our financial resources build to assure that we deploy our available capital resources to create long-term shareholder value. To quote Lee Iacocca, Andre, preserve the cash until the right offer comes.

We all have seen what happens to companies purchasing at too high a multiple and then not able to meet the obligation. Thus, we believe in the old saying, take care of the downside and the upside will take care of itself. But rest assured, when we find the right opportunity, we will strike fast.

Again, all of our efforts are resulting -- have resulted in record quarterly earnings of $2 million or $0.11 a share. We have started 2010 on the right foot and expect the rest of the year to be challenging but a year of growth, organic or perhaps otherwise.

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

Thank you, Andre. I will review a few highlights of our first-quarter 2010 financial performance and condition, and then we'll be happy to respond to questions you may have at the end of our prepared remarks.

For the first quarter ended March 30 1, 2010, earnings per share attributable to the Company were $0.11 versus $0.03 per share in the prior year period. First-quarter 2010 results were based on weighted average common shares outstanding of $18 million, while first-quarter 2009 results were based on weighted average common shares outstanding of $18.1 million.

Net income attributable to Full House was approximately $2 million, compared to $0.5 million of net income in the first quarter of last year. There were no unusual transactions this quarter or in last year's first quarter, which would require adjustment. At FireKeepers Casino during the first quarter of 2010, we recorded management fees for GEM of $16.2 million, of which -- I'm sorry, $6.2 million, of which Full House receives a 50% share.

The management fees of $16.2 million earned in the first eight months of operations have been strong, maybe a little stronger than our overall expectations at this point as the facility continues to mature. As Andre indicated earlier, revenues at FireKeepers are coming predominantly from Michigan and to a lesser extent from Ohio, Indiana, and of course other miscellaneous areas.

Slot win per unit came in at $244 and table win per unit at approximately $1073. EBITDAM margins remained very strong at 64% for the first quarter, up from 59% in the fourth quarter as revenues improved and costs remained relatively stable. The EBITDAM margin for the first eight months of operations at FireKeepers is a little over 63%.

As we have said in the past, we do believe the cost structure will gradually and modestly ramp up as the marketing and personnel costs mature and as we approach the busy summer months. However, we expect this property to continue to be an outstanding margin performer as a result of the efficient plant, strong close-in demographics, and a very profit-focused management team.

Stockman's Casino contributed approximately $2.1 million in revenue for the three-month period ended March 31. This is down 7% from the prior-year period, primarily as a result of continuing economic weakness in Northern Nevada as well as inclement weather in the region during the first quarter of 2010. In spite of the decline, our marketshare of slot revenue for January and February remained steady at 34%, once again showing that we remain the top operator in the market.

We expect Northern Nevada revenues to remain under pressure through the remainder of 2010 as the economy struggles. We believe we have rationalized our cost structure about as much as we can at this point, but will remain diligent and focused on maximizing profitability during this difficult time.

We have made investments during the first quarter of this year to further strengthen our competitive position by installing a free play module to our marketing database system. We have been and continue to be the only property in town with a state-of-the-art player tracking and marketing system.

EBITDA for Stockman's was $700,000 for the quarter of -- first quarter of 2010, down 16% from the first quarter of 2009, as market-wide revenue weakness more than offset our cost containment and targeted marketing efforts.

SG&A expenses increased approximately $235,000 or 15% during the first quarter of 2010. The increase is primarily due to higher incentive compensation accruals of $200,000 and the write-off of some Nevada licensing costs amounting to little under $90,000, offset by a decrease in stock compensation expense. In 2009, incentive compensation expense was concentrated in the last half of the year as a result of management objectives being focused on the FireKeepers opening.

This year we expect cash-based incentive compensation expense to be more evenly distributed throughout the year, but approximately the same amount as last year. Non-cash stock compensation expense for the first quarter of 2010 was approximately $17,000 versus $127,000 in the prior-year quarter. And we have no remaining deferred stock compensation expense to be recognized the remainder of this year.

I also remind you that 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, which can be found near the end of our income statement.

Equity and net income from Harrington Raceway and Casino was up 15% from the prior-year period in the first quarter, due to the timing of Harrington earnings and cash payments. We expect income from Delaware for the full year to be flat compared with 2009, as timing differences even out over the course of this year and last year.

As we mentioned in our press release on April 29, we received a favorable decision in the arbitration proceedings initiated against us by Harrington Raceway. The term of the management agreement is through August 2011, and Full House expects to continue to receive at least the 5% minimum annual increase in payments as set forth in the agreement, which is providing the Company with protection from competition, tax increases, and other economic pressures in Delaware. We also believe that it is highly unlikely that this decision can or will be appealed.

During the first quarter of 2010, we recognize unrealized loss on notes receivable of approximately $11,000 compared with gains of approximately $250,000 in the prior-year period. The unrealized loss in the first quarter of 2010 was due to a modest devaluation of our Nambe receivable as we pushed back the expected opening date by six months, due to the tribe being delayed in completing their financing. We continue to monitor their progress and have approximately $419,000 of exposure on our balance sheet at this point in time.

Interest income increased approximately $90,000 as a result of collecting the remaining $5 million FireKeepers receivable and recognizing the remaining valuation allowance we had on that receivable. With most of our tribal receivables either collected or reserved for and assuming Nambe receives its financing in the near future, tribal-related unrecognized gains and interest income should have only a very modest impact on results going forward.

Interest expense declined by $85,000 as we repaid all of our remaining debts at both Full House and GEM levels. As we mentioned on past calls, during the third quarter of 2009, we reached an agreement with RAM Entertainment, our partner in GEM, related to certain reimbursable advances made over the course of many years. We have commenced receiving 70% of the distributions and will continue to do so until such time as the full $3.4 million remaining payable to Full House has been repaid, which we believe will occur early fall of this year.

As of March 31, we had approximately $3.1 million more to go on this balance due from GEM. Thereafter, distributions to members will be made once again on a 50-50 basis.

Income taxes for the first quarter of 2010 came in at about 43.5%. Consolidated EBITDA net of RAM's share of GEM results came in at approximately $3.9 million versus $1 million in the first quarter of last year. We had approximately $12.3 million in cash on hand and no debt outstanding as of March 31, 2010. Availability under our loan facility with Nevada State Bank stood at $8.2 million.

As of today, we have approximately $13.2 million in cash as we continue generating and accumulating the free cash flow we will need as we actively pursue meaningful acquisition opportunities. We are continuing to aggressively pursue growth opportunities with the caveat that they must meet our strict financial and strategic standards.

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

Thank you, Mark. We are very pleased with our record performance in the first quarter of 2010, as it sets the tone for what will be an excellent year for Full House and its shareholders even with the challenging financial environment. We expect significant free cash flow generation and a further strengthening of our balance sheet as we remain steadfast in our search for the right acquisition and management opportunities to enhance shareholder value. When the time is right we will strike on that opportunity, but until then, we will not waver from a disciplined and patient approach.

Before turning it to questions, I would like to take this opportunity to answer some questions that we are asked periodically by shareholders. First, the question of whether we have or are considering dividends or stock buyback as a use of our cash resources. The answer is the board and management regularly consider all options for using our financial resources to maximize shareholder value.

At this time, we believe we will need all the cash and debt resources we have and we reasonably expect to have in the foreseeable future to pursue a meaningful acquisition opportunity. Given the current high-quality acquisition environment, we have decided to husband our resources to support our acquisition strategy. We assure you, however, that should conditions change, we will revisit that decision to make the appropriate decision as we have in the past.

Second, we are periodically asked about our relationship with the Tribal Gaming Council in Michigan and what our thoughts are on the recent election. We have no comment on the recent election, as it is a tribal matter and we respect the process. In addition, we avoid even the appearance of getting involved in the politics of the tribe.

We are focused on managing the property for use of best possible long-term financial performance of the casino, which benefits both the tribe and us. However, said all of that, we have and expect to continue benefiting from a seasoned, stable, and conservative gaming and tribal council.

We congratulate RoAnn Beebe-Mohr, Nat Spurr, and Dorie Rios on the election to Council, and we look forward to working with the Council as we move forward. On a personal note, I would like to add that we miss Laura Spurr who recently passed away. She was wonderful to work with and a good friend.

Finally, we are often asked about our expansion plans at FireKeepers. We will first note that the casino is owned by the tribe and we are the managers. As such, they make the ultimate decisions regarding possible expansion options. Having said that, we are working very closely with the Council on a master planning process which is expected to give strategic direction to future expansion plans later this summer.

The Tribal Council has been consistently conservative in those matters, and we expect that they will continue to be so as we examine various expansion options and timing. At this point, there is no firm expansion plan in place, but it is possible I will have more to say on this topic on our next quarterly call.

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

(Operator Instructions) Justin Sebastiano, Morgan Joseph.

Thanks. Good morning, guys. So looking at the EBITDAM margins at FireKeepers, 64% is well above what I was looking at and expecting, I guess, kind of a maturing of the margin there. Is this -- why the outperformance, first of all?

Secondly, is this sustainable? Should we continue to look for somewhere in the low 60s?

I think, Justin, that we were all pleasantly surprised by the first quarter. I think revenue production improved significantly as we moved through the quarter to the latter part of the quarter. And the cost structure, the team there has been very focused on holding the line on costs because of the economic environment that we are in and uncertainty about revenue production, given that we are still only through the first eight months of operations.

So I think they were very tight on the costs, but as we move towards summer and the anticipation that revenue will be stronger this summer as it normally is, we do expect the cost structure to rise but very modestly, and we expect the management team there to continue to be cautious.

So I don't know that we expect 64% margins every quarter going forward, but we do expect margins to remain strong. I'm not going to give you specific guidance on that. It wouldn't surprise us to see a little bit of margin degradation as we move through the next couple of quarters, but not significant.

All right, when you say the cost structure was kept low, what exactly was it? Did you market maybe less than you had anticipated? Were you able to wring some costs out of just cost of F&B?

I think, first of all, probably the most significant variable cost is labor, Justin, and we continue to run a very tight ship there in terms of the number of FTEs that we have. And we have been -- as I said, the team has been very cautious about increasing the staffing there, although I think as of today they are modestly increasing staffing in anticipation of the summer. So labor first and foremost, they've had a very tight hand on that.

Marketing, you know, again we benefit because we have a limited competitive environment there, and we are very focused on our close-in demographics within 50 to 75 miles. So we don't feel a tremendous amount of competitive pressure from a marketing perspective. And again, I think the team has been cautious in regard to their marketing efforts.

Again, we are still feeling our way through our first year of operations there, and the team is very profit-focused and very cautious about the marketing and labor investments that they are making.

You know, Justin, we also have close to 400,000 people in the Players Club, so that really allows us to do also target marketing. And when you do target marketing, you focus your marketing dollars the best way you can. I think that's also very helpful.

Right, okay. Then raising labor a bit, like you said, that's in anticipation of revenue environment getting better for the summer. So you really could keep your margins at pretty high levels even if your labor is ticking up, because that's expecting revenues to go higher.

Yes. I think if you talk to Bruce, Bruce probably would tell you that if we had -- if he'd known that the revenues were going to be as strong as they were in March, he might've had a little bit more labor on hand. So I think our ramp-up of labor has probably lagged a little bit but not significant. So like I said, Justin, we do expect that as we move through the second and third quarter, we expect margins to remain strong.

Okay. So looking at the management team, I mean $6.2 million and if we look at the first quarter, which is typically I think we can expect it to be about 25%, maybe a little bit under, what the full-year management fee is going to be. So just simple arithmetic brings the management fee for the year to over $24 million.

Maybe that's not entirely fair because you don't want to just annualize, I guess, first quarter if this was maybe a little bit more of an outperformance than maybe what's going to happen. But is it fair then to look at the management fee to be above $24 million?

Well, I think your arithmetic is -- you know, it's a little bit indisputable. I think we remain cautious in our expectations just because we haven't worked our way through our full first year. We haven't completely run the course of this recession yet, but I would -- but I think you're right.

It's hard to argue that if we made $6.2 million in management fees in the first quarter, that the second quarter and third quarter are going to be weaker than that. We would expect them, I think, to be at least as strong. And then, of course, the fourth quarter is the weakest quarter of the year.

So it's hard to argue with your math, Justin. We do expect at some point that we are going to see Gun Lake open. We're still not sure when that's going to be, but probably -- I don't know that we're going to see them in 2010, but we're probably almost certainly going to see them sometime in 2011. So we would just caution from those sort of points getting too carried away here with these early results.

Okay. And how is April and early May at the property?

April and May have been what we would just normally expect. They're relatively consistent with what we've seen in the first quarter, no dramatic changes one way or the other, which is kind of what we would normally expect to see in the second quarter.

Okay. And then at Stockman's, you say you've got the free play modules in there now. Is that helping? You've held share. You were able to control costs. It seems like you basically just have to wait for the economic recovery to take place.

Is there anything really internally to drive your EBITDA? Is the free play what you are hoping does it?

Well, ultimately -- I don't think initially, but ultimately, we expect the free play modules to allow our marketing there to be more efficient. But we just installed it here and, of course, you always have sort of an introductory marketing program. So I don't think we will see those benefits right away, but I do expect over time that we will see those benefits. I think it positions us very well when we do see an economic turnaround and there's revenue to be had, I think that the free play module will be a great tool for us.

Okay. Then just lastly, Andre, you addressed this in your opening remarks. With the acquisition strategy are you guys having a difficult time agreeing with the seller on the multiple? Is it more the EBITDA run rate? Where is kind of the difference between you guys and what a seller is looking for?

I think it was a run rate. It's kind of hard for people to realize that we are in the middle of a recession. Folks have been in business for many, many years, and we're always hoping for a turnaround tomorrow. I think gaming operators are the eternal optimists, but I think the truth is setting in.

We've seen now two years in lack of growth and quite a bit of downturn in business. Though, at the end of the day, it seems to be stabilizing now and it's making easier for us and the operators -- or the owners to at least come to what we call a run rate.

With that said, do you guys think that you will have a deal closed before the Delaware contract expires in August '11?

We surely hope so.

I know that's kind of a tough question.

It's a loaded question.

It's certainly our objective.

Okay, that's the objective.

We surely hope so.

Are you guys shifting the strategy to a bigger property? Considering you have no debt, you're piling up a bunch of cash, the credit markets while still very difficult may be thawing a bit; are you guys sort of shifting maybe the strategy towards a larger property or is it still in that, say, $8 million to $10 million of EBITDA?

Well, I think, Justin, that it's still in that $8 million to $10 million of EBITDA. We certainly are willing to look at larger situations, but if you look out over the -- as you have over the next 12 to 15 months, or at about to middle of 2011, and you look at the cash resources that the Company would reasonably expect to have available to it and what it could expect to do in the credit market, you know, I think that $8 million to $10 million EBITDA sized property is a good target for us and something that we could reasonably expect that we could do on our own.

Okay, thanks a lot, guys. I appreciate taking all my questions.

David Bain, Sterne, Agee.

Andre, you kind of touched on this early in the call and with Justin. It sounds like you believe we are now near kind of trough levels in most gaming markets. Or if your comments are more specific by market, can you share with us those markets you believe are beginning to show stability? You mentioned Northern Nevada and Mississippi. Are those areas where you see a faster or stronger rebound or other -- or are you just seeing supply and reasonable multiples in those markets making them more attractive, or is it a combination?

I think the economy is stabilizing. I think gaming is part of the economy at large. We are only talking about the regional markets. Las Vegas is a different market. It relies on something other than regional markets, but in the regional markets we are seeing some stability.

Keep in mind as well that as government takes over the role of casino operators, there is some expansion in neighboring markets. But the market as a whole seems to be stabilizing. I think they still have a bit of a downturn to go, but nothing compared to '09 and '08.

Specifically with regard to Northern Nevada and Mississippi, do you see those as stabilized or stabilizing more so than other markets, or is there some nice supply out there right now at some reasonable multiples?

I wouldn't say that they've stabilized, David, but I do think we're starting to see some moderation in the decline and we're starting to see some months where EBITDA performance is either flat or slightly improved as people have been able to rationalize their cost structures, and maybe the marketing environment has improved a little bit as people have realized that in some cases, there's just limited revenue to be had. So there's no need to spend -- overspend from a marketing perspective.

So while I think we're still seeing weakness in revenues, I think at the EBITDA level we are seeing some improvement in the trend lines. And as Andre said, that is just making it easier for both the seller and the buyer to have reasonably consistent views as to what the property is currently running at.

Great, thank you. Nice report.

(Operator Instructions) Frank Hart, High Capital Funding.

Hello, Andre. Good morning, gentlemen. Andre, I want to thank you for taking the time to get together with me when I was in Las Vegas a couple of months ago. And that meeting and this call this morning have confirmed for me my conclusions with respect to you and your management team.

I don't know if you recall this, but I am the fellow that actually named your company Full House Resorts and was one of the early shareholders and in the founding group. And the quality of the management that you guys bring to the Company now is extraordinarily wonderful in my view. You're aggressive in the pursuit of your business and you're careful in the husbandry of your money and assets.

And in your, almost with a religious fervor, unwillingness to overpay for something as you understand in this business and in any business that that can only lead to disaster. So really I just wanted to say thanks and congratulations. You guys are doing a great job and keep it up.

Well, thank you, Frank.

Thank you, Frank. We appreciate your confidence in us.

At this time, there are no further questions. I would like to turn it back to management for any closing comments.

Well, we would like to thank everyone for their participation on the call today and for their support as we continue to pursue growth on behalf of our shareholders. With that, we will end the call and wish all of you a great rest of the week. Thank you.

Thank you. Ladies and gentlemen, this does conclude the Full House Resorts first-quarter 2010 earnings results conference call. We do thank you for your participation on today's call. You may now disconnect your lines at this time.