Full House Resorts Inc (FLL) 2011 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Full House Resorts Incorporated, third-quarter 2011 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Bill Schmitt, of ICR. Please go ahead.

Thank you, Sarah, and good afternoon everybody. By now everyone should have access to our earnings announcements and Form 10-Q, which was filed earlier today. These may also be found on our website at FullHouseResorts.com under the Investor Relations section.

Before we begin our formal remarks, I would like to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore undo 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. With me today on the call is Mark Miller, our Chief Operating and Financial Officer who will discuss the financial results for the third quarter. The third quarter of 2011 was busy for Full House as we added a new property and new management agreement. We branded the Rising Star Casino Resort, which continues to perform well. And we had another strong quarter at FireKeepers Casino. (inaudible) we generated EBITDA of $5.9 million during the quarter, compared to $4.3 million in 2010, in spite of our Delaware management agreement expiring at the end of August.

To start, we had another successful quarter at our newly re-branded Rising Star as we generated revenue of $24.1 million and EBITDA of $2.6 million, excluding of rebranding costs. For the six months we have owned the Rising Star, we have generated EBITDA of $5.8 million, excluding for rebranding costs. EBITDA has exceeded our expectation.

Our focus on marketing programs to our best and most profitable customers continues to pay dividends and we expect these efforts to continue to show further benefits in future quarters. Once again, we are very pleased with the work the entire Rising Star team is doing under the leadership of the GM, Steve Jimenez. Mark will give you additional color on the Q3 results later on.

Last month, we announced that a 100-room hotel would be developed Rising Sun/Ohio County First, Inc. and the Rising Sun Regional Foundation on land currently owned by the Company at the Rising Star. Construction is expected to start in the next couple of months and be completed 12 months later. Our current 200-room hotel is often sold out and we have significant excess demand during weekend and key peak period. We believe the addition of the hotel will make the property more competitive in the region, allow us to capture greater play from our existing consumer base and lead to increased visitation and hopefully, higher revenue and EBITDA at the property.

We also recently started our hotel renovation project, which will convert 40 of the Rising Star hotel rooms into suites and upgraded room product. The renovation should be disruptive, we plan to complete about half of the project before year end and the remainder following New Years. The finished product will have 190 rooms, including the upgraded room and high end suites. We will provide you with an update on those projects on our next call.

Besides the success of the Rising Star, we were pleased in the beginning of September to start a five-year lease agreement with Hyatt Equities LLC for the Grand Lodge Casino at Hyatt Regency Lake Tahoe Resort and Spa and Casino, at Incline Village, Nevada, on the north shore of Lake Tahoe. As well as acquiring the operating asset and certain liabilities of the casino. The Grand Lodge Casino features 260 slot machines, 25 table game and a sports book. It is integrated into the Hyatt Regency Lake Tahoe Resort Spa and Casino.

And finally, near the end of the quarter, a management agreement with the Pueblo Pojoaque was approved for the operation of the Buffalo Thunder Casino and Resort in Santa Fe, New Mexico, along with the Pueblo City of Gold Casino and Sports Bar Casino facilities. As a reminder, Full House will receive a base management fee of $1.2 million per year, plus a success fee based on achieving certain financial targets. We expect to incur only minimal, incremental operating costs related to the contract and we are very happy to be partnering with the Pueblo, as Buffalo Thunder is truly a first class property.

We will continue to seek additional growth opportunities whether owning properties or through management agreements. As we said in a recent press release, we will be applying our excess cash towards a suite renovation project at Rising Star and debt reduction for the immediate future. However, we continue to be active in the marketplace, looking at various potential acquisitions and management opportunities. And if the right one comes along, we will be able to act quickly.

FireKeepers Casino in Battle Creek, Michigan, had another solid quarter. As GEM a 50%-owned joint venture received $6 million in management fees. Down 7%, due to increased competition in the Michigan region. For the quarter, gross slot win per unit per day was $241, and table game win per unit was $1,204 per day. EBITDA margin was 61.3%, down from last year's 64.1%, due to the schedule increase in the casino exclusivity tax and increased operating costs.

However, we continue to maintain industry leading margins, and we are weathering the competition as expertly as possible, a testament to the quality of the facility, customer service and a strong management team under Bruce McKee, our GM. Also, the 242-room hotel being constructed by the FireKeepers [diplomat] authority, remains on track towards first order 2012 opening and is expected to be a significant boost to the property once it is open.

Moving back to third quarter results overall, we recorded a loss per share of $0.06 per quarter. Excluding all one-time charges, earnings per share would have been $0.11, down $0.01 from prior year quarter. Mark will take you through the detail of the one-time charges in a minute.

Our balance sheet remains sterling, with net leverage at less than 1.5 multiple as of September 30, 2011. As previously disclosed, we have made our Wells Fargo December payment of $1.7 million in October. I will now turn the call to Mark, to go into more detail about the financial results for the quarter. And then, I will close with a few comments.

Thank you, Andre. I will review a few highlights of our third-quarter 2011 financial performance and condition before we respond to questions you may have. For the third quarter ended September 30, 2011, loss per share attributable to the Company was $0.06, down from earnings per share of $0.12 from the prior year period.

As mentioned previously, third-quarter 2011 results including non cash, pretax goodwill impairment charge of $4.5 million, related to the Company's Stockman's Casino. We took this impairment as a result of a further decline in operating results, at Stockman's, which continues to operate in week economic conditions in northern Nevada, and slower than expected improvement from changes made in our marketing programs.

In addition, the Company recorded a pretax valuation charge against its remaining tribal receivables in the amount of $400,000, as a result of slower than expected progress by the Nambe Pueblo in securing finance for their proposed casino facility, amid a week credit environment. Absent this $4.9 million in non-cash impairment charges, and approximately $250,000, in rebranding and acquisition costs, earnings per share attributable to the Company for the third quarter would have been $0.11, down about $0.01 from the prior year period, which benefited from a full quarter of Delaware earnings.

Third-quarter 2011 and 2010 results were based on weighted average common shares outstanding of $18.7 million, and $18 million, respectively. Net loss attributable to Full House was approximately $1.1 million, compared to $2.2 million of net income, in the third quarter of 2010. Excluding the one-time expenses I mentioned earlier, net income in the third quarter of 2011 would have been approximately $2 million. During the quarter we recorded stock compensation expense of $300,000, compared with zero in the prior year quarter.

Our second full quarter of operations at the rebranded Rising Star saw us generate revenue of $24.1 million, and EBITDA of $2.4 million, inclusive of approximately $200,000 of rebranding costs. This is less than the $3.2 million recognized in Q2 for several reasons. First, Q3 included some costs related to our newly implemented healthcare program, which are lagging costs from Q2. In addition, we experienced a very weak August, consistent with what we believe was experienced by many operators in consumer related businesses.

Finally, while our slot hold percentage in the quarter was within normal parameters, it was slightly less than Q2. We believe it is best at this point to look at the first six months of our operations of Rising Star, which resulted in approximately $5.8 million of EBITDA, exclusive of rebranding costs. The property is running well above our internal forecast, and has had an LTM EBITDA of approximately $9 million.

In addition, as we look forward, please remember that we have implemented the maritime exemption, which enables us to significantly reduce our maritime crew costs for the Riverboat. Approval was received in mid-September, and we have fully implemented the changes as of mid-October. We will have some severance costs in October, but will begin generating annual savings in November, estimated to be worth approximately $1.1 million per annum.

At FireKeepers, GEM earned management fees for the quarter of $6 million compared to last year's $6.5 million, a 7% decrease from the prior-year quarter. The decline was due to lower gaming revenues and expected increases in costs, primarily related to higher slot exclusivity fees and maturing employee compensation expenses.

In addition, the Mohegan Casino in Hartford opened in October and of course the marketplace is still absorbing the Gun Lake Casino, which opened last spring. While we have felt a greater impact this quarter from nearly 2,000 more machines entering the marketplace, the impact remains less than we internally expected and planned for.

We believe the property continues to be highly competitive and very efficiently marketed and operated by our management team on site. As Andre indicated, we look forward to having a new, 242-room hotel, with expanded meeting, entertainment and other amenities. Which will allow the management team to expand our marketing reach, and extend the visits of our existing players.

Stockman's and Grand Lodge Casino, which we operated for only one month this quarter, contributed approximately $3.3 million in revenue, and EBITDA of approximately $600,000 for the three-month period ended September 30. The fourth quarter is seasonally the weakest quarter for the Grand Lodge Casino, and we expect only a very modest EBITDA contribution from that property in the coming quarter.

SG&A expenses of $8.2 million in the third quarter of 2011 were up considerably from $1.5 million in the prior year, due primarily to the addition of the Rising Star and Grand Lodge Casino operations. Corporate SG&A was up approximately $400,000, primarily as a result of stock compensation expense of $300,000, as previously mentioned. The stock compensation will vest over three years, with the bulk vesting in June of 2013.

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 income attributable to non-controlling interest line, which is found near the end of our income statement.

Equity and net income from Harrington Raceway and Casino was down 27% to $1.1 million from the prior-year third quarter, as the Company's management agreement with Harrington Raceway expired at the end of August as expected, resulting in only two months of fees this quarter.

Interest expense increased by approximately $880,000 from the prior period, due to interest and amortization of deferred financing costs on our new credit facility, which we used to finance the Rising Star acquisition earlier this year. Deferred financing costs are being expensed using the effective interest method as required by GAAP as opposed to a straight line convention, and are expected to gradually decline as we move forward.

We recognized an income tax credit this quarter of approximately $1 million, primarily due to the tax benefit of the impairment losses during the quarter, as well as a potential 2010 GEM state tax refund resulting from a change in GEM's Michigan filing status. We expect our effective income tax rate will return to a more normal range of between 17% and 20% in Q4. Consolidated EBITDA, net of RAM's share of the GEM results, came in at approximately $5.9 million, versus $4.3 million in the third quarter of last year.

During the quarter, we made another scheduled quarterly debt payment on our Wells Fargo facility, reducing our outstanding total debt balance on September 30 to approximately $30.3 million, which includes $600,000 of swap liability. And, we have already made our scheduled December 31 amortization payment of $1.7 million, which was made in October.

Capital expenditures for the quarter were approximately $584,000, consisting primarily of maintenance capital expenditures. We still expect to spend up to $2 million over the course of Q4 this year and Q1 next year, on the suite conversion project of the Rising Star Casino that we recently commenced.

We had approximately $16.5 million in cash on hand as of September 30. Approximately $11 million of that cash is committed to property operations and working capital requirements. As of today, and following the early amortization payment, we have approximately $14 million of cash, have reduced our outstanding debt, exclusive of the swap agreement liability, to approximately $28.1 million.

Our balance sheet remains strong with us having excess cash balances less than 1.5 times net leverage, and approximately $4.5 million of availability on our line of credit. With that, I will turn it back over to Andre for a few final comments before we open it up for questions. Andre?

Thank you, Mark. It was another good quarter for Full House with EBITDA of nearly $6 million. Results of the Rising Star remained solid, and we are very pleased with our new opportunities in Santa Fe and Lake Tahoe. We have achieved significant growth in the past six months and we are not done with that, as we continue to look for additional acquisition and potentially more management contract as we further expand the Company and its shareholder value. Thank you, and with that, I will now open the call for questions.

(Operator Instructions) Rob Roosevelt, Morgan Joseph.

Yes, thank you this is actually Justin. Do you expect any more expenses to slip into fourth quarter like they did from second to third at the Rising Star?

We do not, Justin. I think the lag on the medical plan should pretty much have run its course at this point. This is a good question, though, because there is one thing that we haven't mentioned. You will recall that we had a lot of flooding this spring and while we didn't experience any damage or significant disruption, we are going to need to do some dredging around the boat.

Normally, we would only have to do this every couple of years, and it was done last November before we bought the property and we had kind of hoped that it would last us for a couple of years. But, the spring flooding, which was pretty unusual this year, pretty much wiped out the benefits of that dredging and we are going to have to do some dredging. So there is going to be a little bit of cost in Q4, and Q1 related to that dredging. But otherwise, Justin, we should be pretty much normal from this point forward.

What sort of numbers are we talking about for this dredging?

Somewhere between $300,000 to $400,000 spread between the two quarters. Normally this dredging has a two-year life. We just didn't get a two year life out of the last one.

And that's spread evenly or is it more weighted to one quarter?

I think most of the work is going to be done in Q1. We are going to get a little bit of work done in Q4, but most of it will be done in Q1.

Then you talk about the trailing 12 months at Rising Star was $9 million, but that's including fourth quarter under the previous owner and I think we can assume that the EBITDA in 4Q of $10 million probably was way lower than what you would probably end up doing? I assume you're going to do over $10 million this year and with the maritime exemption you could do over $11 million in 2012. Is that a fair way to look at things?

As you know, Justin, we don't give forecasts and especially we don't give property-level forecast. I think your thought process is pretty much on track. I'd be a little bit cautious about how much the fourth quarter is going to be up over last year because the fourth quarter is so weather-dependent. I think that the programs that we have put in place to generate EBITDA improvement continue to perform as we expected them to. Probably a little bit better than we expected them to with the exception of August.

All things equal, I would say that we definitely would expect Q4 to be a little bit better than last year but, but the opportunity in Q4 for improvement is less than in other quarters because there is so many dead spots in the fourth quarter. The maritime exemption is kicking in and we are happy with the progress that we are making. don't want to opine on your numbers other than to say that we probably would prefer a little bit more conservative.

As far as the new hotel that is going to be erected by the county and the foundation, at Rising Star, from what I understand it is going to be at the spillover parking lot, across the street from the property?

That's right.

So, there shouldn't be any construction disruption than for the casino and hotel that is there now correct?

That's accurate as well. Correct.

Just to be clear, it's not the county; it is the city that owns the entity that will be constructing the hotel on.

Okay, thank you for making that clarification. And then --

Foundation.

Do you care to give any sort of thoughts as an EBITDA -- incremental EBITDA that you expect to get from that?

Not really. I think what we believe it's going really -- as I mentioned it's going to help us maintain and increase our customer base, but as you know, we don't really give --

It will be able to deep customers there longer. And you won't lose as many to say, Lawrenceburg or Belterra, in fact they are not able to stay because you just don't have the rooms available? Is that fair to say?

That's fair to say. We definitely have excess demand right now. We're not publicly putting numbers on that but, our hotel is sold out quite frequently. We're definitely room constrained on weekends, and when we run entertainment, and on holidays of course. We think this room product is going to run a pretty high occupancy and it will run mostly with our customers out of our database. And we think it's going to give us an opportunity to capture more play from our existing player base. So, we are extremely excited about it.

As far as FireKeepers, since Gun Lake opened since the first full quarter that it's impacted you in the second quarter, we've seen year-over-year decline in your management fee. Is it fair to assume we are going to continue to see year-over-year declines until we anniversary that? Opening and maybe even into second-quarter considering that you had the Four Winds Hartford open. It's a much smaller facility but it's taking from Kalamazoo. Is it fair to say we're probably going to see some year-over-year declines heading into the opening of the hotel and event center expansion there?

I think that is fair, Justin.

If you could, break out what the net revenue and EBITDA was at the Grand Lodge? I know it's probably small but it would be helpful.

We haven't broken that out publicly, Justin but I will just tell you that for Q3, it was very small.

Matt van Dixon, with Craig-Hallum Capital.

It's Mark. When we're looking at some of these new deals that you have in place, in particular Grand Lodge, I believe there is a five-year lease with the Hyatt on that one and then ultimately, does that -- what do you own after five years? Or what do you have after five years? You have to renew the lease? Do you own the casino or the operations of the casino? Maybe you could walk me through what you really have there?

It's not a lease to own. We will own the gaming equipment as we do today. It's a five-year lease. Hyatt continues to own the actual building and as well as the obligation to maintain it and so forth. At the end of five years there are mutually agreeable renewal options, but they are mutually agreeable. At the end of five years we will sit down with Hyatt and determine what their view is and what our view is and then go forward, but at the end of five years we don't own anything more than what we currently own.

Andre, I know in your prepared remarks you talked about starting to look for another larger-type acquisition. I assume more on par with Grand Vic, Rising Sun. What are you seeing in the marketplace? I know the prolonged economic downturn is a lot longer than I'm sure a lot of these financial sponsors had originally thought are things starting to thaw out, things starting to loosen up? What do you see in terms of the M&A marketplace?

I think there are some properties for sale there, and none of them come from what I call the natural owners. They were not casino owners; they were local owners and operators ar at times financial institution we realize it's probably harder to own and manage a casino that they thought. So, there are some properties out there available to purchase and we are looking at that, but of course the cost of the money has an impact on how and when we will look at those properties and you know the cost of capital has gone up a bit lately.

We are also looking at managing properties and so we think the future is quite bright, for us over the next 12 months and there are properties looking for managers and there are properties looking for owners. If we can come to an agreement with the owners of properties to be managed, we surely will be in the market for that. And the properties to be purchased, there is two factors there, again -- three factors. What happened within the state and the state next to it, the multiple of the purchase, and number three of course, the cost of capital. We are very, very active in the market and travel quite a bit to ensure that we don't miss opportunities when they come. But, we are very active in the market.

Thinking about the core team I know you have put a couple different management contracts in place, I assume a lot of the initial heavy lifting is probably done at Rising Sun now. Do you have to add more people to the core team? Or are you feeling pretty comfortable with --

As we move forward, we always look at our corporate structure. If we need to add value to the corporate structure, we will add value to the corporate structure when we -- We take constant look at where we are and what we need to add value for ourselves and of course all of us stakeholders. If we get other properties, I would say we probably will have to bring some very specialized individuals onboard. When we bring someone on board, we make sure that they do add value and they are truly needed. To answer your question, eventually we will have to bring people onboard, yes.

Ladies and gentlemen, that is all the questions that we have at this point. I will turn the conference back over to management for any additional or closing comments.

We would like to thank everyone for being with us today and we surely want to wish all of you a great rest of the week. And, great weather. Thank you.

Ladies and gentlemen that does conclude today's conference; thank you for joining.