Full House Resorts Inc (FLL) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by; and welcome to the Full House Resorts Second Quarter 2010 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded today, August 9, 2010. I would now like to turn the conference over to William Schmitt of ICR. Please go ahead.

Thank you, Craig, and good afternoon or morning depending on where you are. By now everyone should have access to our earnings announcement and form 10-Q filed this morning. These also may be also found at our website, 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 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 COO and CFO who will discuss the financial results for the second quarter.

We are very pleased to report second quarter earnings of $0.08 per share. The second quarter primarily driven by FireKeepers, generated revenue of $8.1 million, net income of $1.5 million, and EBITDA of $3.2 million. Our financial position continued to improve as we ended the quarter with $15.4 million in cash, no outstanding debt, and around $7.8 million of availability on the revolving credit facility. We had another strong quarter at FireKeepers Casino, GEM, our 50% owned joint venture with RAM entertainment received $6 million in management fees for quarter, down slightly from $6.2 million in the first quarter of 2010. Gross slot win per unit per day for the quarter is $243, and table win per unit was just under $1,100 per day, consistent with the first quarter.

Our marketing costs grew during the quarter as we continued to expand our reach and reward our better customers. Our overall costs structure was consistent with the first quarter, as we continued to operate as efficiently as possible. EBITDA margin remained solid, and is at an impressive 62.9% for the quarter. On August 5, we celebrated the one year anniversary of FireKeepers grand opening. Firekeepers has been a great success for the tribe and for Full House Resorts. We cannot be happier with everything over the past year.

For the first 11 months of operation, GEM has earned a little over $22 million in management fee. Going forward, FireKeepers is still very well positioned to continue its success and we believe gross opportunities still remain in the south central Michigan market. We are also not content with our success knowing that competition will be entering the market in 2011. We continue to refine the marketing strategy, and upgrade the services levered in anticipation of this competition.

At Stockman's, the northern Nevada market continues weakness is having a considerable effect on resorts, with revenue and EBITDA declining 13.7% and 36.7% respectively. While we continue to do a strong job in controlling costs, the economy climate has led to decreased slot handle. In addition, we experienced a lower than normal slot hold percentage during the quarter.

On our last call I went a little further depths as to our acquisition strategy, and where we were looking to find an appropriate acquisition or management opportunity. We are continuing to actively pursue many opportunities, but unfortunately we cannot provide any news as to a future announcement today. All gaming jurisdiction remain on the table for acquisitions or management deal, but as we have reiterated in the past there must be a reasonable multiple and provide the ability for significant accretion to our earning as long as long-term shareholder value.

Also, we cannot guarantee anything a cash balances and resulting acquisition resources continued to grow and we anticipate having adequate resources to close on a meaningful acquisition within the next six to nine months, which will be a reasonable time frame for closing.

The first half of 2010 was a record-breaker for Full House. And while comparison will become more difficult going forward, as we are reaching anniversary of the FireKeepers opening, we are well-positioned for the near-term and long-term future. I will now turn call over to Mark to go into more detail about the financial results for the quarter and then I will close for a few additional comments. Mark?

Thank you, Andre. I will review a few highlights of the second quarter 2010 financial performance and condition, 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, 2010, earnings per share attributable to the Company were $0.08 versus $0.01 per share in the prior year period. Second quarter 2010 and 2009 results were based on weighted average common shares outstanding of 18 million. Net income attributable to Full House was approximately $1.5 million compared to $0.2 million of net income in the second quarter of 2009. Just to note, there was a $30,000 impairment charge in the second quarter of 2009, but otherwise, no unusual transactions this quarter, or in last year's second quarter requiring adjustments.

At FireKeepers Casino during the second quarter of 2010 we recorded management fees for GEM of $6 million, of which Full House received the 50% share. The management fees of $22.1 million earned in the first 11 months of operations have been at the top end of our expectation ranges, with revenues of FireKeepers coming predominantly from Michigan and to a lesser extent from Ohio, Indiana, and customers from other miscellaneous areas.

Slot win per unit came in at $243 a day, and table win per unit per day at approximately $1,100. EBITDAM margins remain strong at 62.9% for the second quarter, down a little from 63.9% in the first quarter as revenues were relatively stable but marketing costs grew in response to maturing player reward programs, and some modest expansion of our marketing outreach programs. Overall, costs were slightly less than the first quarter on a per day of operation basis, as our management team continues to be very cautious and diligent on the cost side.

As we have seen in other jurisdictions, the quarter suffered somewhat from a weaker than normally expected June. Stockman's Casino contributed approximately $2 million in revenue for the three month period ended June 30, 2010. This was down a little under 14% from the prior year period, primarily as a result of continuing economic weakness in the northern Nevada, and a lower than normal slot hold percentage. We have begun to see some stabilization in food and beverage table games and keno revenues, but we are not seeing a turn around thus far in slot revenues. We continue to maintain a lean cost structure, and hope to begin seeing some improvement in the revenue environment in the coming months.

EBITDA for Stockman's is $0.6 million for the second quarter, down 37% from the second quarter of 2009 as market-wide revenue weakness and our lower than normal slot hold percent more than offset our cost containment efforts. SG&A expenses of $1.5 million in the second quarter of 2010 were comparable with prior year period. I'd also remind you that the full expense of GEM are contained in the 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, which you find near the end of the income statement.

Equity and net income from Harrington Raceway and Casino was down 23% from the prior year period in the second quarter, due to timing differences between Harrington's earnings and cash payments and offsetting the stronger than expected results we experienced in the first quarter. On a year-to-date basis, our Delaware income is relatively flat with last year, and we continue to receive a 5% increase in cash payments year-over-year. We expect income from Delaware for if full year will be flat to slightly up compared with 2009, as timing differences even out over the course of this year and last year. As we mentioned on the last call, we receive a favorable decision in the arbitration proceedings initiated against us by Harrington Raceway, determined the management agreement is through August of 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 that market.

During the second quarter of 2010, we recognized unrealized loss on notes receivable of approximately $20,000 compared with gains of approximately $40,000 in the prior year period. The unrealized loss in the second quarter 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 still being delayed in completing the financing. We continue to monitor the progress and have approximately $399,000 of exposure on the balance sheet at this point in time.

Interest income declined approximately $11,000 as the Company is no longer accruing interest on it $5 million FireKeepers receivables, which we collected in February of this year. With most of our tribal receivables either collected or reserved for and assuming Nambe receives it financing in the near future, tribal-related unrecognized gains and interest income should have only a modest impact on results going forward.

Interest expense declined by approximately $55,000 as we have repaid all remaining debt at both the Full House and the 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 we will continue to do so until such time as the full $3.1 million remaining payable to Full House has been repaid. As of June 30, we had approximately $700,000 more to go on this balance due from GEM, and we expect to be fully repaid by the end of August. Thereafter, distributions to members will revert to a 50-50 basis.

Income taxes for the second quarter of 2010 came in at about 45.5% reflecting a higher concentration of income from Michigan. Consolidated EBITDA net of RAM's share of GEM's results came in at approximately $3.2 million versus $0.8 million in the second quarter of last year.

In May 2010, our Board authorized a program to repurchase up to $1 million worth of shares of the Company's common stock. The plan expires on December 31 of this year, does not obligate the Company to acquire any particular amount of common stock, and may be suspended at any time at the company's discretion. As of today, the Company has not repurchased any shares.

We had approximately $15.4 million in cash on hand, and no debt outstanding as of June 30, 2010. Availability under our loan facility with Nevada state bank stood at $8.2 million as of June 30. As of July 1, the amount available on the revolving credit line was reduced to $7.9 million, consistent with normal amortization.

As we actively pursue a meaningful acquisition opportunity for Company, we continue to generate and accumulate the free cash flow necessary to properly fund our acquisition activities. We remain agressive yet disciplined in our approach to any and all transactions.

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

Thank you, Mark.

We are very please with the quarter record performance as we celebrate the one year anniversary of FireKeepers' grand opening.

Looking at the back half of the year, we continue to expect significant free cash flow generation, aided by FireKeepers, which will provide even more strength to our balance sheet. We remain on the hunt for the right acquisition or management opportunity that will drive long-term shareholder value.

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

Thank you very much. Ladies and gentlemen, at this time we will begin the question and answer session.

(Operator Instructions)

Our first question does come from the line of Justin Sebastiano with Morgan Joseph. Go ahead.

Thanks. Hello, guys.

Good morning, Justin.

So, talking about FireKeepers, you had mentioned the marketing expense was a little bit higher, but I wanted to know was that more a function of June just being a weak revenue month compared to April and May? Or did you actually increase marketing spend in June?

Well I think, Justin, we had indicated on previous calls that as we approach the summer season and we expected performance to improve and the potential for revenue to improve, that we would be ramping up our marketing programs. So I think that in -- in part, it was in response to sort of normal seasonal expectations, and I think secondly, our marketing programs and our player data base is maturing. And so, there's some increase associated with that.

You mentioned that June was -- April and May were pretty good months. We certainly, normally, expect the second quarter to be a little bit stronger than the first quarter, and I think April and May we saw good revenue build but June was weaker than we would normally have expected. We have seen that pattern throughout some of the other jurisdictions in a country, as well. I think, in part, June was a little bit weaker than we expected it, and our marketing programs were ramping up.

Okay, and then as far as if you can comment on July and August. I mean, I know August is still nine days in, so maybe more July. But is July looking more like June or more like April and May or none of the above?

We will not give any numbers yet for the third quarter, but I think that July has been seasonally stronger, as we would expect it to be. It certainly has been a better month than June, and closer to our expectations.

So better than June, better than April and May, as well?

I would say July is normally a little bit stronger than April and May. It is normally one of the strongest months of the year, and it certainly has been one of the strongest months we have seen so far this year.

Okay. And then, you had mentioned that lower slot hold impacted EBITDA and Stockman's, what -- can you quantify that, how much you think that affect--? I know it is probably small. But --

Well, it is probably worth about, in slot revenue, it is probably worth about $130,000.

Okay.

For the quarter.

But that that's all EBITDA, too. Right?

It would pretty much be, it would almost be all EBITDA, probably about 90%.

Okay. And then, just the Michigan oil spill, what sort of effect, I mean, I know there's staging area right across the street from you guys I am sure that there's more traffic now. Is there any sort of impact that is--that is having on any negative impact on FireKeepers?

Obviously, Justin, it is a significant disaster for the area. And -- but as of yet we have not seen any impact yet on our operating results. We continue to monitor the situation very carefully. The management team there is involved in monitoring it and working with local authorities -- one, to be cooperative, and two, to make sure the impact as is as small as possible. But at this time we have not seen any negative impact in the financial performance.

Okay. And then, just lastly, Andre, you mentioned about the acquisitions and kind of not really a whole lot new to report. But maybe, as far as financing is concerned, debt equity, whatever it is you guys think it is most prudent path. As far as debt, considering where we are in the credit markets right now, what sort of price of debt are you guys seeing out there that you think could be available to you guys if you were going to go the debt route?

Well, I think -- Justin, every day is different. But I think the availability of debt has been nine to 11. The market is still not as stable as it was a few years back. But there is some money out there for the right deals at the right multiple.

Okay.

But you have to be able to buy at the right multiple. I mean, it gets back to what we have been talking about for last two or three quarters. If you take down side, then the upside will take care of itself. So, you have to buy them at the right multiple.

Justin, I think if you are looking at an acquisition that is conservatively leveraged--and I think rent rates are still very favorable, high single digits. But as soon as you start to push the limit on the leverage, the rate accelerates.

Okay.

Significantly. So, on the one hand, if you have a conservatively capitalized acquisition, I think rates will be reasonable. But if you start trying to push the envelope, then the risk to premium is going to be significant.

Okay. Yes, the rate Andre that you quoted was pretty much in line with some of your larger competitors, at least at the lower end of that range. I would assume at the larger end speaks more to what you are talking about, Mark, as far as how levered the property is. That may be also a function of kind of the size of Full House specifically.

But, I mean that seems pretty in line with what I was expecting. Okay. Thanks, guys. Appreciate it.

Thanks, Justin.

Our next question does come from the line of David Bain, with Sterne Agee. Please go ahead.

Great. Thank you. Hi.

Hello, David.

Hello, how is it going? On Gun Lake. I know that doesn't open until next year--thereabouts, maybe--and I realized [has been] scale back, and I guess the question is if you were to open today, what you would expect the impact to revenue and potentially margins would be, and any kind of marketing program if your marketing program would change?

Well, David, we haven't given specific numbers in terms of what we think impact of Gun Lake will be. I think you said it right. Our expectations have always been that Gun Lake would open, if fact the original expectations were that it would open as early as late 2009 or early in 2010. So, we are probably about a year behind our original expectations.

And we expected Gun Lake to be a property comparable in terms of size and amenities to our property when it opened. And that, obviously, is not going to be the case. The property is going to be scaled back to about half the original size that we anticipated, and they're not going to have some of the amenities we that we think are important like a parking garage and some of those things. That's sort of the upside. On the other side, competition is competition.

Yes.

And the Grand Rapids market is a good market for us. We do draw some good business from there, and so we will have a competitor there, and they will have a convenience advantage and we think we will have a more competitive facility. So, we expect to be more aggressive in marketing. We are not going to go down without a fight. We think we have a lot to market in terms of our facility and our accessibility.

So having said that, we do expect there to be some impact. But on the other hand, David, we also think that there's opportunities to expand our marketing reach. We are working with the tribe on an expansion plan for the facility. We don't have anything today to announce in particular about that, but we do and we do expect an announcement in the relative near future about our expansion plans at the facility. And we think those expansion plans will improve our ability to reach a little further than we have been attempting to reach so far.

We have been very, very focused on market within 50 miles of us. So, I think the marketing, the management team at FireKeepers is readying plans to--one, to market and be competitive when Gun Lake opens. And secondly, to expand our reach. I think Andre said it in his comment, we think there's still opportunity for that market to grow. We believe it is underpenetrated still. While we think there's some impact we don't think it is going be huge.

Okay.

David, there is something there that usually when you have two properties that are not too far from each other, there is synergy on having those two properties there. Thinking that the customers that are coming to our property only patronize us would not be factual. So, there is a possibility those folks instead of patronizing the casino further away will migrate to Gun Lake.

Okay. And between now and the last call, how has the acquisition thought process changed, if at all? I mean, given what a lot of people consider to be sort of as a head fake in terms of gaming revenue, stabilization and a lot of these regional markets?

It hasn't. It hasn't. We are proceeding as we have for the last two or three quarters. Properties are coming on the market; more now than they were two or three quarters ago. We are just very active in the space.

Okay. And you mentioned six to nine months is a potential time line for an acquisition, if I heard that correctly. I know that included closing time. So, if we were to scale that back, a little bit to take out the closing aspect of it, do you think we can get an announcement, something more like three to six months or did I misunderstand that comment?

I think the comment was primary directed sort of at the liquidity situation, David. We currently have about probably $13 million worth of deployable cash and we think it -- we think within six to nine months, we are going to -- we will have accumulated enough cash that we can close on a meaningful transaction and a transaction consistent with what we are looking for.

It wasn't intended to indicate that we have anything imminent that we are going announce in the relative near future. But if we were to find something in the next month or two or so, the point was is that by the time we can close that transaction, six to nine months is kind of the normal time frame -- that by the end of that period of time, we would have adequate cash resources to close on a transaction and have it be sort of, going back to Justin's questions, to have the transaction be reasonably levered. So, we don't really have anything imminent that we can point you to in terms of an announcement, but we think we are making good progress from a liquidity standpoint and having the resources necessary to pull off a transaction.

Licensing will take six to nine months anyway, regardless--

I think the six to nine months is mostly driven by which jurisdiction it is in and how long it takes you to get licensed.

Okay. And finally, Andre mentioned deal-flow seems to be increasing the last couple of quarters. Do you gauge that seller expectations have also come in, given June, July, is it too early to know at this point if they're going to continue to come in? I assume you guys are using that as leverage for some of the potential sellers.

I think the sellers are much more realistic than they were last year and the year before that. So I think that--

No major changes from last quarter that you are seeing in terms of expectations?

No.

I think the little, as you put it, head fake and the revenues, has just sort of reinforced seller's expectations. That the run rates that we are looking at are probably going to be the run rates for a little while. So, I think seller expectations are much more reasonable than they were a couple of years ago. But I don't think we have seen any real serious change in the last three months.

Okay. Thanks.

Thanks, David.

(Operator Instructions)

And our next question does come from Mark Argento with Craig-Hallum Capital. Please go ahead.

Hello, guys, how are you doing?

Hello.

Just some questions around the marketing. What's working and what's not in terms of the marketing? What's driving, what kind of offers are people responding to? And then also, if you can touch a little bit more on potential expansion on the FireKeepers. I know you don't have a formal announcement there, but is that a hotel lodging facility or what? What are the expectations or what could we see coming out of that expansion?

I think that you are right. We will be looking at the lodging expansion at the end of day. You want to keep your customers there as long as you can. So, that will be looking at an expansion in lodging. We believe that casino-wise, we believe that we are fairly well sized. So, lodging would be an expansion.

On the marketing front, Mark, I think that we are sort of going through the normal l process, our database has been growing. And our ability to monitor and understand customers profitability and tailor our marketing programs more specifically to them, we are very database-marketing focused.

We have experimented recently with some entertainment in conjunction with the grand-opening, and we are currently evaluating what role entertainment will play on a go-forward basis. We do this sort of the normal promotional stuff, car give-aways, and those kind of things. I think people respond pretty well to that, in that market.

So, I think pretty much nothing is dramatically different for us. I think it's a matter of use just continuing to develop our database and to make sure that we are providing the appropriate level of rewards for customers. We are still sort of gauging the seasonality of the market. And as we indicated, we expected June to be a little stronger than it was. We are looking at July and August as we kind of roll-through August and September are not as strong as they were last year because of the grand-opening impact. So, we are looking at the real seasonality is going to look like and making sure that the marketing programs are consistent with that.

Right. (inaudible-multiple speakers) Go ahead.

I think the one other thing is that we are sort of testing and looking to see how far outside that 50, 70 mile range we can effectively market given the existing facility. Clearly, a hotel is in the future for that casino. Most of the deliberations right now are really around what else might come with that hotel, and -- but I think that's it.

But, the hotel is a tribe decision, we need to keep that in mind.

Yes, absolutely.

Then shifting back to some thoughts around or on the acquisition front, you're now looking at different potential acquisitions. Has the size or scope of an acquisition, given the amount of cash you have been generating, is that expanded over the last six to nine months, the potential size of the property or potential size of a property you could acquire?

I think the cash flow is highly predictable, which is a good thing. So, we always were looking at $8 million to $10 million EBITDA, as we have been talking about for the last two to three quarters. So no, it is -- we always had the size of property in mind. It remains what we think we can afford.

Great. Thank you

You're welcome.

Management at this time there are no further questions. I would like to turn it back for closing comment that is you may have.

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

Thank you.

Ladies and gentlemen, this does conclude the Full House Resorts Second Quarter 2010 Earnings Conference Call. We do thank you for your participation. You may now disconnect your lines at this time.