Full House Resorts Inc (FLL) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Full House fourth quarter 2010 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Tuesday, March 8, 2011. I would now like to turn the conference over to Bill Schmitt, Investor Relations Officer. Go ahead, sir.

Thank you, Joan. Good morning, everyone. By now, everyone should have access to our earnings announcement and Form 10-K, which were filed yesterday. These may also be found on our website, at fullhouseresorts.com, under the Investors 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, our Chief Operating Officer and CFO, who will discuss our financial results for the fourth quarter. 2010 has been another watershed year for the Company, as we build on the tremendous success we saw in 2009. We managed a full year of operation of the highly successful FireKeepers Casino in Battle Creek, Michigan, which led to a record earnings per common share of $0.43 this year. And in September, we announced the acquisition of the Grand Victoria Casino and Resort in Rising Sun, Indiana; which we believe will establish a strong base of earnings for the Company, and will provide long-term growth and shareholder value. We have received the necessary financing and are waiting the final word from the Indiana Gaming Commission on the approval of our licensing application, which we expect to receive within the next several weeks, at which time we will close on the acquisition. As you can gather, we are very excited about entering the Indiana market, and bringing the Grand Victoria and its team members into the Full House family.

On top of what occur in 2010, we have also starting 2011 on the right foot. With last week announcement by FireKeepers Development Authority that they would begin construction of a 200 room -- 240 rooms Resort Hotel style to be attached to the Casino. The new Hotel will contain a mixture of rooms and luxury suites, a pool and fitness center, full-service restaurant, gift shop, and a larger dedicated bingo facility as well as other amenities.

In addition, the planned expansion will contain a 2,000-seat Special Event facility. It is important that FireKeepers continues to distinguish itself from the competition. And we believe the Hotel and Event center is exactly the type of investment needed to elevate the property to the next level and maintain the first-class service that our customers have come to expect. Full House has been retained to assist the tribe in the development process, but will not be required to make any capital investment in the Hotel.

Suffice to say, we are well on our way to transitioning Full House Resorts from a Management Contract company to a Gaming company that owns and operates its own Casinos. We have accomplished this, while at the same time improving our balance sheet during the recession, and opening and managing FireKeepers, arguably one of the most successful new Casinos in a long time. We look forward to talking a lot about the Grand Victoria in our next earning calls.

Moving on to our current operation, we are pleased to report fourth quarter earnings of $0.11 a share, from $0.08 in the prior year quarter, after excluding a one-time impairment charge of $700,000 in 2009. The fourth quarter generated revenue of $7.9 million, net income of $2 millions, and EBITDA of $3.8 million. We had another strong quarter at FireKeepers Casinos and closed out a full year of operation there with great success, which is thanks to the hard work and dedication of the Tribe, and our Full House Resorts team, as well as all Team members.

GEM, our 50% owned joint venture, received $5.8 million in management fees for the quarter, up 37% from $4.2 million in the fourth quarter of 2009. For 2010, GEM received a total of $24.5 million in management fees. For the quarter, gross slot win per unit per day was $252, and table win per unit was just under $1,135 per day, both up from the prior year quarter. EBITDA margins remained solid, at an impressive 61% per quarter versus 59.1% in the fourth quarter of 2009.

Going forward, we will be paying close attention to the Gun Lake Casino, which opened last month, and we expect the newly announced Hotel will set us apart from the competition in our relative vicinity. It is a bit early to determine the effect that Gun Lake will have on FireKeepers. However, February results have been stronger than the prior year. We will provide more information on that when we have our Q1 earnings call. At Stockman's, the northern Nevada market weakness is still having a negative impact on results. But we continue to see signs of stabilization at our property there, and it remains the market leader in Fallon.

To sum up, 2010 was a very successful year for Full House, and we are on the road to even greater rewards in 2011 and beyond. While our 15 year Delaware management agreement come to an end in August, we look forward to the addition of the Grand Victoria. We should complete the addition in the next few weeks. This is a very exciting time for all of us at Full House, and we are in a prime position to continue creating shareholder value and growth for the long term, either with other management contract, or further acquisition.

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. Mark?

Thank you, Andre. I will review a few highlights of our fourth 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 fourth quarter ended December 31, 2010, earnings per share attributable to the Company were $0.11, versus $0.06 per share in the prior year period. Fourth quarter 2010 and 2009 results were based on weighted average common shares outstanding of approximately 18 million. Net income attributable to Full House was approximately $2 million, compared to $1 million of net income in the fourth quarter of 2009. Please note, however, that in the fourth quarter of 2009 there was a $700,000 one-time impairment charge. Excluding that one-time charge, net income per common share the fourth quarter of 2009 was $0.08.

At FireKeepers, GEM earned management fees for the quarter of $5.8 million, compared to last year's $4.2 million, a 37% increase from the prior-year quarter. The gain was due to stronger gaming revenues, as well as an improvement in EBITDA margin to 61% from 59% in the prior year quarter. As our marketing database, which now has over 500,000 active players, continues to mature and we are able to more effectively market to them, we are experiencing continued revenue growth. In addition, the management team at FireKeepers did an excellent job at right-sizing our cost structure for the seasonally slow fourth quarter.

Stockman's Casino contributed approximately $2.1 million in revenue for the three-month period ended December 31 . This was down 4% from the prior year period, primarily as a result of continuing economic weakness in northern Nevada and a lower slot hold percentage related to free play. Due to our lean cost structure and EBITDA for Stockman's was approximately -- EBITDA for Stockman's was approximately $625,000, down only about 2% from the prior year quarter.

SG&A expenses of $1.6 million in the fourth quarter were down from $1.7 million in the prior year period. We incurred approximately $79,000 in expenses this quarter related to the acquisition of the Grand Victoria . I would also remind you that the full expenses of GEM are contained in our SG&A costs, and RAM's 50% 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 7% from the prior year period in the fourth quarter, slightly above the guaranteed annual increase provided in the Company's agreement with Carrington Raceway. For 2010, our Delaware income was up 3% from last year and we continue to receive a 5% increase in cash payments year-over-year. The term of the management agreement is through August of this year, and Full House expects to continue to receive at least the 5% minimum annual increase in cash payments as set forth in the agreement, which is providing the Company with protection from competition, tax increases, and other economic pressures in that marketplace.

We recognized $28,000 in unrealized gains on notes receivable during the fourth quarter of 2010, as opposed to an unrealized gain of approximately $25,000 in the prior year period. We continue to monitor the progress of our Nambe receivable and have approximately $428,000 of exposure on our balance sheet at this point in time. Interest income declined approximately $238,000, as the Company is no longer accruing interest on its FireKeepers receivable, which was collected in full last year. Interest expense increased by approximately $70,000, due to accelerating the amortization of deferred loan costs on our Nevada State Bank line of credit. This facility will be terminated shortly before we close on the Grand Victoria acquisition and the new Wells Fargo facility becomes active.

Income taxes for the fourth quarter of 2010 came in at about 41.3%, reflecting a higher concentration of income from Michigan. Consolidated EBITDA, net of RAM's share of GEM results, came in at approximately $3.8 million, versus $2.9 million in the fourth quarter of last year. We had approximately $13.3 million of cash on hand, no debt outstanding as of December 31, 2010.

Availability under our loan facility with Nevada State Bank stood at $7.19 -- $7.9 million, as of year-end. However, as I noted earlier, this facility will be terminated in late March in conjunction with the new loan facility becoming active, and as we close on the Grand Victoria. In December, we executed a credit agreement and obtained financing commitments for a $33 million term loan and a $5 million revolving line of credit, for a total facility of $38 million to fund the Grand Victoria acquisition. The facility will fully amortize over a five-year term and is expected to have an interest rate of LIBOR plus 550, with a 150 floor. We still expect to apply approximately $19 million of cash on hand, including deposits made and expenses incurred to date, and $33 million of debt to fund the acquisition when we close by the end of the month. All of which is, of course, subject to customary regulatory approvals.

During the quarter, the Company incurred approximately $79,000 of expenses related to the acquisition, made a $4.5 million purchase price deposit , and paid approximately $1.8 million in financing-related fees. We now have a total deposit related to the transaction of $5 million, and have funded approximately $6.9 million of the expected $19 million we plan to fund from cash on hand. As of today, we have approximately $15.5 million in cash on hand and have adequate cash to complete the Grand Victoria acquisition, scheduled for early in April.

Finally, I want to provide a few metrics of guidance for 2011, given the major changes the Company is about to undergo to the -- due to the Grand Victoria acquisition. For the full year of 2011, we expect the combined SG&A expense for Stockman's and corporate to be consistent with 2010, at approximately $6.5 million to $6.8 million. Depreciation for the year, including the Grand Victoria, for the second through fourth quarters, is expected to be between $5 million and $5.5 million, and remains subject to final purchase price allocations. Interest expense for the full year of 2011 is expected to be between $2.3 million and $2.5 million, which includes the amortization of deferred loan costs on the new credit facility for the final three quarters of the year.

Our income tax rate for the full year of 2011 is expected to come in at between 44% and 46%. As with any future looking statements, there can be no guarantee of financial performance and all expectations are subject to events and conditions beyond our control. You should consult our written reports and filings for a listing of the factors which could impact our future performance.

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

Thank you, Mark. Well, as you can tell, we are very excited about the result we have produced on behalf of our shareholder this past year, and are looking forward to another great year in 2011. While the addition of the Grand Victoria will likely keep our hands full over the next few months, we continue to pursue additional growth opportunities, whether management contracts or acquisitions that will further grow the Company and its value.

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

Thank you, sir.

(Operator Instructions)

And our first question comes from the line of David Bain with Stern Agee. Go ahead, please.

Thanks.

Guys, do you expect any type of disruption at FireKeepers when the expansion is being built out?

No, actually, we are planning the hotel on the side of the casino, and the construction is really separated from the casino itself. So, we really don't expect any disruption. We've worked hard on that.

You know, David, we also actually expect to get the use of an additional surface parking lot later this summer, which is going to help us during peak times. So there's always a little bit of disruption, but I think the site lends itself very nicely to mitigating that. And we actually expect to get some modest benefits from the construction later this year.

Okay. Great.

And then, looks like January got off to kind of a slow start for Grand Vic, in terms of casino revs, and then February had a really nice rebound. Can you guys identify any sort of market dynamics going on there and where you may see this going this year in terms of just the market itself?

On top of that, maybe if you could give us a little bit of color on gas prices, where you see that as potentially having or not having any sort of potential disruption, maybe giving us a little color on the average drive time to Grand Vic, or something like that, from patrons?

I think the gas -- looking at gas prices, I think it's too early to tell. But if you look around the Grand Victoria, there is a good demographic. Gas prices always have an impact. But very hard to plan, for the time being, David.

Mark, do you want to take over the rest?

Well, I think with regard to the Grand Victoria, I would just say that we continue to be under a confidentiality agreement with regard to the Grand Vic. It is privately held, so we are limited in what we can say, David.

I think generally speaking, what we're seeing in Indiana as well as in other parts of the Midwest is we are seeing some gradual improvement in results. It's a little bit bumpy. We see months that are up and then months that are down, and the same. We are not aware of any substantial changes in marketing strategies or market dynamics that would account for the difference in January and February in Grand Vic's gaming revenues, which are public. But we are seeing some modest recovery, and I think we are encouraged by that.

I think that the Grand Vic's results to date, just talking about them generally, are consistent with what we had expected in our acquisition models. And so I think that's probably about what we can say at this stage.

Okay. Great. And just one last one, if I could.

The maritime mandate, if it's abolished, can you give us some idea of what the cost savings could be for Grand Vic on a net basis, meaning would any of those savings be utilized for additional marketing or CapEx in some other way to offset Ohio's gaming expansion?

I think right now the thought is, David, that this would be just a straight cost savings. It's not expected, or earmarked, to be used for any other purposes other than to improve financial performance.

I think that, generally speaking, most of the boat properties in Indiana have pretty much the same cost structure related to this issue. And the number that's generally been talked about is somewhere between $1 million and $1.5 million per year. So assuming that we get that, halfway through this year there would be some modest severance related costs to execute it.

So, we don't expect it to have a huge impact this year on the Grand Vic's results, but we do expect it to help us lower the cost structure as we move forward.

Very good. Thanks, guys.

Thanks, David.

Thanks, David.

Thank you.

And our next question comes from the line of Justin Sebastiano with Morgan Joseph Tri-Artisan. Go ahead, please.

Thanks. Good morning, guys.

Good morning, Justin.

Good morning, Justin.

As far as the Grand Vic, you guys are planning to rebrand that over the next six months, is that correct?

That is correct, Justin.

Under the terms of the purchase agreement, we can use the Grand Victoria name for six months, but we have to rebrand the property within six months of the close.

We are going to try to rebrand it as soon as we can, Justin.

Okay.

And do you have a dollar amount that you are floating around out there for that?

We haven't publicly discussed it, Justin. But it's not going to be a huge number.

Okay.

And then as far as Gun Lake, you gave us some good info saying that February was up compared to last year, so that gives us a good indication that it looks like Gun Lake isn't having really much of an impact, although it certainly is early. Can you tell us if you're getting any spillover from that property?

I think at the very beginning, Justin, when they very first opened, they experienced, from our observations, they experienced the very same thing which we did, which was tremendous visitation. They were at capacity. And just like we've seen with other property openings, including ourselves, infrastructure was taxed, getting into the property. So, we definitely did see some overflow the first little while, but I'm not sure that it's been much of a factor since then.

Okay.

Justin, as you mentioned in your statement there, it's early. We really need more than a few weeks. We need three to four months, a good quarter, to see the true impact it makes.

Okay.

And I think, Andre, you had mentioned that you saw signs of stabilization in Fallon. Could you be a little bit more specific, what exactly are you talking to with that? Is it unemployment, is it wage growth, foreclosures slowing down? What are you seeing that gives you a little bit more guarded optimism for that market?

I think it's -- Fallon, like everything else, is starting, slowly but surely, to pull out of the recession. It was one of the last market to get into the recession, and it's probably one of the last ones to get out of the recession. So, we are seeing customers, more customers coming to the casino and the like. It's kind of hard to define what it is. We just --

So the visits just seem to be picking up little bit?

I think the most tangible evidence, Justin, is the publicly disclosed numbers for the Churchill County market, which is where Fallon is. And the last two or three months we have seen revenues, gaming revenues, in total at or slightly higher than last year. And it's the first time where we have seen sort of a string of months, two or three or four months in a row. Again we are not seeing significant growth, but we have seen revenues flatten out, and we see that as an encouraging sign.

I think what really has encouraged us, Justin, is the casino has remained profitable during the downturn in business in northern Nevada.

Okay.

And then at FireKeepers, Andre, forgive me, you said $252 slot win and a little under $1,135 in table win, but was that for the year or for the fourth quarter?

That was for the fourth quarter.

Okay.

Can you give those numbers for the year?

For the year, it's about $251 for slots, and about $1,101 for tables. So the fourth quarter was actually slightly stronger than average.

Right. Okay. Good.

And then just lastly, you did a good job of talking about the growth prospects. Could you maybe be a little bit more specific on the EBITDA size, what you are looking at? Maybe what markets, is it still kind of that lower gaming tax rate environment, not necessarily moving on to the higher tax, perhaps racino markets? For potential acquisition?

Well I think -- I don't think that our view on acquisitions has changed very much, Justin, from what we have been saying for quite a while.

I think, first of all, I think it's important for us to remind ourselves that right now, we are very focused on the Grand Victoria acquisition, working with the management team there and with Hyatt Gaming, to make sure that this acquisition goes smoothly and gets done on time. So that's sort of the first disclaimer, I guess.

But having said that, we are very active and continue to be very active, in looking at opportunities both from management, the contracts side and the acquisition side. We continue to look very favorably at regional markets. I don't think our focus has really changed in terms of the type of properties that we are looking for and the market that we are interested in. I think that, as we've always said, there doesn't seem to be any shortage of opportunities to look at. It's a matter of finding one that fits Full House Resorts' strategy and profile. So we are continuing to look at those kinds of things. I think the Grand Victoria is a good template for what we are looking for. And as we move forward, we might look for something a little bit bigger, but in the same genre.

Okay.

Justin, there are some new factors that seem to have entered. One of them is, states are starting to push for non-smoking in casinos, that's number one. Number two, states are starting to view gaming as a revenue generator. And, of course, that's for non-gaming states. And number three, that some existing states are looking at increasing taxes. So when we are looking at a new acquisition, we are thinking those new three factors in consideration.

Okay. Great.

Okay. Thank you, guys.

You're welcome.

Thanks, Justin.

And our next question comes from the line of Mark Argento with Craig-Hallum Capital Group. Go ahead, please.

Good morning, guys.

Good morning, Mark.

When you look at the kind of the landscape out there right now, in terms of future acquisitions, I know a year, year and a half ago, there was a lot of action on the distress side. Are you looking at more opportunities, more Greenfield opportunities now, which you kind of just alluded to in the answer to the last question, or are there still a lot of opportunities on the distress side?

And then in terms of valuation, are we starting to see some valuation creep here a little bit, or do you feel pretty comfortable with the opportunities out there you'll be able to get something done at the right value?

We are not looking at Greenfield for the time being, but it doesn't mean that we will not look at Greenfield in the future. Revenue seems to have stabilized, and I think the valuation have creeping up little bit. But I think with the valuation increasing, you are now starting to see some certainty in revenues.So it makes us feel a little bit better.

I think valuations though, Mark, are still well within what we would consider to be historical norms . I don't think -- when we say that there is some valuation creep, I think it's very situation specific. What kind of valuations people are willing to pay and what they are expecting.

So, I think valuations are still within the norms that we would expect them to be. I think that there is opportunities out there. I think we are seeing some of these distressed situations start to mature a little bit. It's taken a lot longer than anybody expected it would, but I think that some of them are starting to run their course. And I think we're going to see a little bit of increased deal flow in the next 12 to 24 months.

Sure.

Whether they be management contracts or acquisitions, it doesn't mean they will all be acquisitions.

Right.

When we think about the Full House model, do you really have to expand your head count at all within, your corporate headcount, to be able to start doing multiple projects? So, once you get the Grand Vic completed, the opportunity to expand and maybe do one or two concurrent with each other, how should we think about that?

I think we have to take every expansion on its own merit. We are always very, very careful in keeping the corporate staff as lean as we can. There will be a time when we keep on growing, that we will have to bring selected people to the corporate staff. But for the time being, we are trying to stay as lean as we can.

But in your plan, the opportunity to -- if you are able to get, say, another management contract and or an acquisition, you have the ability to be able to do concurrent projects, I guess, is my question .

We definitely have the ability, Mark, to take on an acquisition project and a management contract opportunity concurrently.

I think if we were looking at multiple acquisitions at the same time, we would have to look at our resources a little bit. But I think that for the time being, I think we're satisfied that we have adequate resources to do what we are currently doing.

Great.

Congrats on a strong quarter. Thanks, guys.

Thanks, Mark.

And your next question comes from the line of Tim O'Connell with Insight Investments. Go ahead, please.

Hello, Mark. Hello, Andre.

Hello, Tim.

Does GEM's management contract with FireKeepers cover the forthcoming hotel? And if so, can you comment on those terms?

No, it doesn't. What we are doing, you know, what the management contract covers is, of course, all gaming revenues. So, the tribe is not looking at adding on the hotel out of cash flow. We are looking and talking to the tribe on how to incorporate the hotel and the casino under one roof.

But for the time being, we are just talking to the tribe and have not reached any deal whatsoever.

So, there is a possibility of a management contract for the hotel? But that's just kind of a wait-and-see right now, is that what you're saying?

That's right, and it would be under separate terms.

Okay. All right, that's my only question.

Thanks, Tim.

And our last question is a follow-up question from the line of Justin Sebastiano. Go ahead, sir.

Thanks.

When you were talking about headcount, it reminded me to ask this. How much did you -- how much personnel, or people, did you lose when Gun Lake opened? From FireKeepers?

You know, Justin, we had built into our planning model an assumption. I'm not going to tell you what the assumption was, but it was what we would normally have considered. We certainly did our research in terms of where employees lived and those kinds of things, so that we had a good, solid HR plan in place. But we actually lost very few employees to Gun Lake; far fewer, in fact, half of what we expected to lose, and it was not a very big number.

Okay.

I assume it's a function of people liking to work at FireKeepers, but also having Gun Lake just be a smaller property than FireKeepers. What are your thoughts on why that happened?

I think that's part of it. I also think that the Michigan gaming market is pretty deep in terms of the people. There a lot of casinos in Michigan, so there are people there at lots of properties who have experience. So, I don't think that Gun Lake was limited to poaching us to be able to find talent.

I do think that we are a good employer. I think that we have been very, very successful. I think that they had talent -- they probably had talent to draw from that was close to them. But I do think that the management team at FireKeepers was very well-prepared, had done their homework, and I think were able to mitigate the damage.

I think the tribe also was very conscious of that, and in line with the management team, we made great effort to ensure that the losses were kept to a minimum.

Okay.

And just one last one, if I may. Your fee, your management fee, is based on the profitability of the property, right? Not --It's the bottom line of the property that the fee is generated from; is that correct?

The fee is generated from the bottom line of the casino operation, which currently exists. That is correct.

So it's just the gaming floor, but you still participate in food and beverage and retail -- ?

That's right. That's right.

That's right.

Okay.

Thanks guys.

Thank you, sir.

And that does conclude our questions, and I will turn it back to management for any closing remarks.

We would like to thank everyone for their participation on the call today and for the 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 week. Thank you.

Ladies and gentlemen, that does conclude your call for today. Thank you for your participation, and you may now disconnect.