Full House Resorts Inc (FLL) 2011 Q1 法說會逐字稿

Welcome to the Full House Resorts first-quarter 2011 earnings conference call. During today's presentation all parties will be placed in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Monday, May 9 of 2011.

And, I would now like to turn the conference over to Mr. William Schmitt of ICR. Please go ahead, sir.

Thank you, operator and good afternoon, everyone. By now, everyone should have access to our earnings' announcement and Form 10-Q, which were filed earlier today. These may also be found on our website at www.fullhouseresorts.com under the investor relations section.

Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact the future operating results and financial condition of Full House Resorts.

I would now like to introduce Andre Hilliou, Chairman and CEO of Full House Resorts. Andre?

Thank you, Bill.

With me today is Mark Miller as Chief Operating Officer and CFO. We'll discuss the financial results for the quarter. 2011 started out well with earnings of $0.11 per share, adjusted for the Grand Vic transaction costs. Management fee from the FireKeepers Casino in Battle Creek, Michigan, improved 3% to $6.4 million despite new competition about an hour drive away that opened in early February. The fact that we have maintained strong operation in light of this competition is a tribute to the strong demographic near our property, the quality of the facility and customer service, and a strong FireKeeper management team. We are also seeing a somewhat stabilized economy in the region.

On April 1, we closed on the acquisition of the Grand Victoria Casino and Resort in Rising Sun, Indiana. Our purchase price multiple (inaudible) on the recent EBITDA run rate was a little more than 5 multiple. We believe that it will establish a strong base of earnings for the Company and provide long-term growth and shareholder value, exactly what we are looking for. We are also very excited about entering the Indiana market and bringing the Grand Victoria and its team members into the Full House family. During the quarter the FireKeepers development authority announced it would begin construction on the 242 rooms, resort-style hotel to be attached to the casino, and the ground breaking ceremony occurred last week. The new hotel will also include a pool and fitness area, full-service restaurants, as well as other amenities. In addition, the planned expansion will contain the 2,000-seat special event facility and expanded surface parking. The hotel will go a long way to further distinguish FireKeepers from the competition, and we believe the hotel and event center is exactly the type of investment needed to expand the marketing reach and elevate the property to the next level.

As we promised a few years ago, we are well on our way to transitioning Full House from a management contract company to a gaming company that own and operates its own casinos. We now have 2 casino assets in regional markets that cater to local patrons. However, I should remind you that we will always entertain taking on additional management contracts if they make sense to the Company. With existing management, we are currently in the process of evaluating ways to improve the Grand Victoria as well as rebranding the resort over the next several months, and we look forward to updating you on our process.

Moving on to current operation, we are pleased to report first-quarter earnings of $0.11 per share, when excluding Grand Victoria acquisition expenses of $500,000, consistent with last year's $0.11 per share. The first quarter generated $8.3 million net income of $1.6 million and EBITDA of $4.0 million. We had another strong quarter at FireKeepers Casino as GEM; our 50%-owned joint venture received $6.4 million in management fees for the quarter, up 3%, from $4.26 million in the first quarter of 2011. For the quarter, gross slot win per unit per day was $262, and table win per unit was just under $1,100 per day, both up from the prior year quarter. EBITDA margin remains solid at an impressive 63.6% for the quarter. The recently opened Gun Lake Casino has had limited effect on FireKeepers performance so far. Our balance sheet remains in good shape with leverage at less than 2 multiple after the Grand Victoria purchase.

I will now turn the call to Mark, COO and CFO, to go into more detail about our financial results, and then we'll close with a few additional comments.

Thank you, Andre.

I will review a few highlights of our first-quarter 2011 financial performance and condition before responding to questions you may have. For the first quarter, ended March 31, 2011, earnings per share attributable to the Company were $0.09 versus $0.11 per share in the prior year period. First-quarter 2011 and 2010 results were based on weighted average common shares outstanding of 18 million shares. Net income, attributable to Full House, was approximately $1.6 million compared to $2.0 million of net income in the first quarter of 2010. Please note, however, that in the first quarter of 2011, there were about $500,000 of transaction expenses related to the Grand Victoria acquisition. Excluding these expenses, net income per common share in the first quarter of 2011 would have been approximately $0.11, about even with last year.

At FireKeepers, GEM earned management fees for the quarter of $6.4 million compared to last year's $6.2 million, a 3% increase from the prior year quarter. The increase was due to improved revenues as well as lower interest expense resulting from the FireKeepers authorities early payoff of its F&E debt facility last summer, offset by somewhat higher expenses, including higher slot exclusivity fees. As our marking database continues to mature and the local economy modestly improves we are experiencing some continued revenue growth. Stockman's Casino contributed $2 million in revenue for the 3-month period ended March 31. This was down about 8% from the prior year period, primarily as a result of a low slot hold percentage and continuing economic weakness in northern Nevada. EBITDA for Stockman's was approximately $0.5 million versus $700,000 in the prior year quarter. Our slot hold percentage has returned to more historically consistent levels, starting late in the first quarter.

SG&A expenses of $1.65 million in the first quarter 2011 were down approximately $100,000 from last year. We incurred approximately $500,000 in expenses this quarter related to the Grand Victoria, which are found in development expenses. I'd 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 noncontrolling interest line which you can find near the end of our income statement.

Equity and net income from Harrington Raceway and Casino was up 4% from the prior year period in the first quarter, slightly below the guaranteed annual increase provided in Company's agreement with Harrington. The term of the management agreement is through August of this year and Full House expects to receive at least the 5% minimum annual increase in cash payments as set forth in the agreement. We do not expect this management agreement to be renewed when it expires in August. Interest expense increased by approximately $100,000 due to commitment fees and accelerated amortization of our Nevada State Bank credit facility, which was terminated just prior to our closing on the Grand Victoria. The Nevada State Bank facility was replaced with our new $38 million credit facility.

Income taxes for the first quarter of 2011 came in at about 47%, reflecting a higher concentration of income from Michigan this quarter. Consolidated EBITDA net of RAM's share of GEM results came in at approximately $4 million versus $3.9 million in the first quarter of last year. We had approximately $11.4 million in cash on hand as of March 31, 2011. Approximately $7 million of the cash is committed to property operations. In late 2010, we executed a $38 million credit facility consisting of a $33 million term loan and a $5 million revolving line of credit to fund the Grand Victoria acquisition. The facility will fully amortize over a 5-year term and will bear an interest rate of LIBOR plus 550 with 150 BPs floor. On March 31, 2011, we drew down $33 million to fund the acquisition of the Grand Victoria. As required by the facility we entered into a fixed rate swap agreement for $20 million. This will result in a weighted average cash interest rate of approximately 8%. We currently have $5 million of availability on our line of credit.

Finally, we reiterate our guidance for 2011 that we provided on our fourth quarter earnings call. For the full-year 2011, we expect SG&A expense exclusive of the Grand Victoria, to be consistent with 2010 at approximately $6.5 million to $6.8 million. Depreciation and amortization, including the Grand Victoria, for the second through fourth quarters, is expected to be between $5 million and $5.5 million and remain subject to the final purchase price allocation. Interest expense for the full-year 2011 is expected to be between $2.3 million and 2.5 million, which includes the amortization of deferred loan costs and the new credit facilities for the final 3 quarters. Income tax rate for the full year of 2011 is expected to be between 45% and 46%.

Just a couple other comments regarding our Grand Victoria acquisition. In our purchase analysis and due diligence, we assumed that Ohio competition would kick in as early as late 2011. It now appears that the casino in Cincinnati and potential VLTs at racetracks will take significantly longer to materialize. In addition, we modeled cost-relief from the state of Indiana related to maritime crews to begin generating savings in 2012. The Indiana legislature recently passed legislation allowing all of the boats in Indiana to significantly reduce their maritime crew costs effective July 1 of this year. We expect these savings on an annual basis to be approximately $1 million.

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

Well, thank you, Mark.

As you can tell, we are very excited about the results that we have produced this quarter and are looking forward to a great 201. With the addition of the Grand Victoria, it will likely keep our hands full over the next few months. We continue to actively look for growth, whether management contracts or acquisition that will further expand the Company and its value. I thank you for your time today.

I will now open up the call for questions.

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions)

Our first question comes from the line of Justin Sebastiano with Morgan Joseph.

Thank you. Hey, guys.

How are you doing, Justin?

Good. So I guess, Andre, you had mentioned that you haven't seen any negative impact from Gun Lake, at least in Q1. Is that also true through April and what we've seen so far this early -- this early in March?

We have not really talked publicly about April, but I think that the picture hasn't changed much from the first quarter going forward, Justin.

Okay. And, you're saying that EBITDA margins at 63.6%; it doesn't seem like really anything is hurting you guys there. Have the marketing programs you guys have rolled out, are they just working really, really well, or are you not really promoting that heavily? And can we expect these margins to stay up here? They're incredibly high.

I'm going to let Mark answer that question on margins. Mark?

I think, Justin, that what we are seeing is that we are seeing some modest improvement in the revenue environment. We are seeing cost increases as our personnel costs mature; these things we've talked about in the past. We are facing a higher slot exclusivity fee this year than we had last year under the terms of our compact, so there certainly are some increases in cost, but up until this point for the most part, they have been offset by increases in revenue. So, I think our expectation is that we are going to see these margins come down a little bit, but I think that all depends on how strong the economy in Michigan is as we go forward, which is really a matter of speculation at this point.

But the market has been busy in Michigan, surprisingly.

Right and so, if you're seeing revenues get a little better there, even if your costs increase a little bit, if you get that increase in revenues, your margins should still at least -- let's say they stay at least above 60%, right?

Well, I think we expect margins to stay strong, Justin. I don't think any of us are ready to call a turn in the corner, in terms of the economy, but what we've seen in the first quarter was certainly encouraging.

Got you. Okay. How many members are in the player loyalty program database right now?

I think it's over 600,000, Justin.

Do you have a GMP in place for the expansion, the FireKeepers expansion?

Not yet. That process is still continuing.

Got you. Okay. And just, at the Grand Vic, you've owned it now for a little over a month, what have you learned? How does it compare to your expectations now that you're actually behind the curtain on these things?

We've learned that the water does rise and does come down, but we also -- we have learned that it has a strong customer base and a good management team, as expected. And frankly, we look forward to improving that.

You mentioned the river levels, so they did get high, not to a level where you would have had to close the casino during April at all, or May?

That's correct.

Okay. And could you tell us a little bit about the hotel rooms? It seems like the occupancy is pretty high. Do you think there's demand there for more rooms? Do you think that's something that you will expand there?

I think, Justin, during our diligence that management team made a pretty compelling case that there is more demand for hotel rooms than we currently have hotel rooms. This hotel does run a very high occupancy, and it's certainly an opportunity that we think exists in the future, but it's not one that we are planning on moving on immediately. Certainly, the competitive environment in Ohio is something that we'll want to understand better before we would commit ourselves to a room expansion. We are going to spend some money on converting some of the rooms into suites. We think that the property is suite constrained, and we're currently working with the management team on the plan for doing that, but we do believe that at least today there is excess demand for rooms.

Okay. And you have the carve-out in the credit facility for that suite upgrade, correct?

We do.

Seeing what -- you've been in there now, and seeing what you've seen, how many margin points due think you can gain in fiscal '11 from cost savings? Really, I guess, I'm talking about more the marketing programs, any sort of redundancies, or anything that you think is low hanging fruit there.

Well, Justin, we're not going to put a margin point forecast out there. We've said publicly that we think that there's some opportunity to do some pruning and trimming of the marketing programs. We have put together an initial plan with the management team, which is currently being executed, and we're going to monitor those results very carefully to see what happens, and I'm sure that we'll be making adjustments going forward, so we do think that there's some opportunity, but we're not going to put a number out there publicly.

Okay. Stockman's, you said lower slot hold, and now you've returned back to closer to that normal slot hold. How much revenue do you think you lost or EBITDA do you think you lost from that low slot hold?

The difference in the hold this quarter over last year's first quarter was about $120,000.

Okay. And then just lastly, Andre, you spoke about management contracts and I guess potential acquisitions. You guys are always looking. Obviously, I think everybody understands job one is to get Grand Vic on the path that you'd like it to be on, now that you're the owners. But is there anything -- any change, I guess, from the last time we had our -- you guys had your conference call where the chasm between what the buyer and the seller wanted on the multiple? What's changed on the management contract front where maybe you're a little bit warmer on doing something on that front? And I'll go back in the queue. Thanks, guys.

Okay. Justin, it's a two-pronged question there. There are properties out there that we believe are for sale. We've seen the multiples that we are looking for. That's number one. Number two, they are properties that are also looking for management contracts, and the fact that we've done well in Michigan. That surely brought some candidates to our attention, so we talk to people who are looking at improving the property commercial and native. So, the market seems to have opened. Times are getting tougher and operators are looking at professional managers with a proven track records, and I think we have that. I will leave it at that, but we are active in that market for sure.

Okay. Thanks, guys.

Thank you. And our next question comes from the line of Mark Argento with Craig-Hallum Capital. Please go ahead.

Hi. Good afternoon.

Hey, Mark, how are you doing?

Good, thanks. Nice quarter. In terms of acquisitions, I know you just got the Grand Vic completed, and so from a band width perspective, and I know you guys are good at multitasking, but is it -- I mean, the probability of you guys being able to do another acquisition this year I'm guessing is, from a bandwidth perspective, might be challenging. Maybe walk through a little bit of kind of where you are from a personnel perspective and what you see the opportunities are there. Then, I have one more follow-up.

I'm sorry, from a personnel perspective?

Yes, I mean do you have the bandwidth to be able to start -- do another acquisition at this point, or do you need to have your guys on the ground at Grand Vic for at least another six months before you could channel them somewhere else?

Well, I think, we have a good reputation in the industry, and as we go forward, one of the criteria that we have, when we buy a casino is that they have a good management team in place. So, I think from that perspective, we will have to take a look at a management team, but I don't think that will be an impediment. I will let Mark answer the financial aspect of that. Mark.

Well, I think the reality is, is that even if we were to identify an acquisition in the remainder of this year, we wouldn't be looking to close it this year. So, I think that gives us time, both from a financial perspective and from a personnel perspective. Remember, we've been working on the Grand Victoria pretty hands-on now for quite a few months; while we certainly weren't involved in making management decisions, we've had access to management, and we've had the opportunity to put plans in place. So, I don't think that the Grand Victoria right now is a huge draw on our management team. We certainly are spending time there, but it's not like the whole company is consumed with it at this stage, so I think we have bandwidth. We certainly have bandwidth to be out looking and actively pursuing, and I don't think we'd be faced with actually having to deal with an acquisition this year, even if we identify one here in the next several months.

Great. That's helpful. Then in terms of management contract opportunities, clearly you're talking a little bit more about those opportunities. Could you help us think through a little bit of the different types of those contracts out there? Of course, the one like you have in place right now at FireKeepers, but other opportunities to work with financial sponsors or owners and partner up on some of those types of transactions versus more Indian gaming transactions?

I think both of them are open, Mark. I think you have Native American casinos who are looking for professional management, and you have owners, bond holders, also looking at professional management to turn around some of the existing properties, and we are looking at those.

I would just add that I think we've been looking at this restructuring environment for a couple of years now. One of the things we've said on past calls, and I'm sure you've heard from others, is that those restructurings have taken a lot longer to work themselves through than people had hoped or had thought. But, I do think that we are starting to see some of these restructuring situations come to a head, and that I think is generating some opportunities for people like us. We certainly are seeing more opportunities to look at and people to talk to, so I think that environment has finally matured a little bit.

Thanks, guys.

Thank you. (Operator Instructions)

Well, Mikaela, if there aren't any other questions, then let's go ahead and turn it back over to Andre for closing remarks.

I would like to thank everyone for being on the call today and for supporting us. With that we will end the call, and we hope you have a great rest of the week. Thank you again.

Ladies and gentlemen, if you would like to listen to a replay of today's conference, please dial 303-590-3030, or 1-800-406-7325 with an access code of 4438468#. We thank you for your participation, and you may now disconnect.