Full House Resorts Inc (FLL) 2011 Q4 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Full House Resorts Incorporated fourth-quarter 2011 conference call. Please note 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, Peter, and good morning, everybody. By now, everyone should have access to our earnings announcement and Form 10-K, which was filed earlier today. These may also be found on our website at Full House Resorts.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 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, and good morning, everyone. With me today on the call is Mark Miller, our Chief Operating and Financial Officer, who will discuss the financial results for the fourth quarter.

Overall, it was a great 2011 for Full House Resorts, as we significantly changed the operation of the Company. At the beginning of last year, our operations consisted of a Stockman's Casino as well as 50% joint venture management agreement with FireKeepers Casino in Michigan and the Harrington Raceway in Delaware.

12 months later, we now fully own the Rising Star Casino Resort in Indiana, we operate the Grand Lodge Casino in Incline Village near Lake Tahoe, and we have a new management agreement with the Pueblo of Pojoaque for the Buffalo Thunder Casino in Santa Fe, New Mexico, while our agreement in Delaware has expired. And last week, we announced our intent to sell our interest in a management agreement with FireKeepers at what we believe is an optimal valuation.

With the cash received from the sale, we will be able to pay down the entire debt from our purchase of Rising Star, which will leave us debt-free, with excess cash left over for use for potential acquisitions. We are very pleased with the entire Full House team for their effort and performance this year, and we believe we are on the right path going forward.

For the first quarter of 2011, our Rising Star Resort continued to perform ahead of our expectation, and we received our first full quarter of management success fee from Buffalo Thunder. Furthermore, last week's announcement of the letter of intent to sell GEM interest in the FireKeepers' management agreement begins the closing of a very successful chapter in Full House history.

For the quarter, we generated EBITDA of $4.5 million compared with $3.8 million for the prior-year period, in spite of this being the first quarter following the expiration of the Delaware management agreement in August. At Rising Star for the quarter, we generated revenue of $21.7 million and EBITDA of $2.2 million, inclusive of a $200,000 one-time outstanding chip liability pick-up and the maritime exemption which began in mid-October, bringing total adjusted EBITDA for the first nine months of the Company ownership to $7.8 million.

As we mentioned last quarter, the maritime exemptions allow us to reduce our maritime crew costs for the riverboat. We expect the general annual savings from the exemption to be around $1 million.

Furthermore, the restructuring of our marketing program, which was put in place last August, continues to yield positive bottom-line results. Once again, this is a top-shelf effort by the entire Rising Star team under the direction of Steve Jimenez, the General Manager.

With the addition of a five-year lease agreement to operate the Grand Lodge Casino at the Hyatt Regency on the North Shore of Lake Tahoe (inaudible) operations, so a significant increase in revenue in the quarter.

We expect to see also a significant substantial increase in EBITDA for our Nevada operation as we move into the seasonally stronger second and third quarters. We are pleased with the direction of our Nevada operation, supervised by seasoned GMs.

And finally, for the first full quarter since our agreement was approved with the Pueblo of Pojoaque for the operation of the Buffalo Thunder Resort and Casino in Santa Fe, we received $900,000 management fee and success fee. When you consider that our agreement calls for $100,000 per month in base fees, plus a quarterly success fee based on achieving certain defined EBITDA targets, you can clearly see the impact that we are already having on the property.

As I mentioned earlier, last month, we announced that we and our partner have signed a letter of intent to sell our interest in GEM management agreement to the FireKeepers Development Authority. In accordance with the theme of the letter of intent, the purchase price will be $97.5 million, and it is expected to close in the second quarter, conditioned on the Authority obtaining financing, the execution by over three parties of finder documents and customary closing conditions. We cannot at this time, of course, provide any assurance that this transaction will be completed.

For the quarter, management fees for GEM were $5 million, down 14% as compared to prior year, due to increased competition in the Michigan region and the expected [step-up] in FireKeepers exclusivity fee paid to the state of Michigan.

For the quarter, gross slot win per unit per day was $231 and table win per unit was $1173 per day. EBITDA margin -- [EBITDA] margin was 79.5%, down from last year's 61.5% due to the scheduled increase in the exclusivity tax and reduced revenue.

Overall, we recorded earnings per share of $0.03 for the quarter compared to $0.11 per share in the prior-year period. Going forward in 2012, we will keep on pursuing growth, whether through owning properties or through management agreements. Following the sale of the GEM management contract interest, we will have the ability to leverage our pristine balance sheet to take advantage of opportunities in the marketplace.

I will now turn the 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 in our fourth-quarter 2011 financial performance and condition before we respond to questions you may have.

For the fourth quarter ended December 31, 2011, earnings-per-share was $0.03 compared to $0.11 in the prior-year period. Fourth-quarter 2011 and 2010 results were based on weighted average common shares outstanding of 18.7 million and 18 million, respectively.

Net income attributable to Full House was approximately $0.5 million compared to $2 million of net income in the fourth quarter of 2010. It should be noted that prior-year period results included $1.5 million in equity and net income from our Delaware management contract, which expired in August of 2011.

For the year, EPS adjusted for unusual items, including impairment charges and acquisition-related expenses, was $0.31 versus $0.43 in 2010. Net income also adjusted was $5.8 million versus $7.6 million in the prior year.

Our third full quarter of operations at Rising Star saw us generate revenue of $21.7 million and EBITDA of $2.2 million, inclusive of one-time outstanding chip liability, and of course, the maritime exemption which was implemented in mid-October. As a result of the maritime exemption, Rising Star is now benefiting substantially from lower costs, notwithstanding the one-time severance costs from the advent of the exemption.

The property continues to run ahead of our internal forecasts, and has generated EBITDA of approximately $7.8 million in the nine months that we've owned the property. LTM EBITDA is now running approximately $10 million, well ahead of the $8.5 million we based our $43 million purchase price on.

While we do expect future competition from Ohio to eat into this run rate, we are pleased with the progress that the management team has made in improving results and preparing for a more competitive environment next year.

At FireKeepers, GEM earned management fees for the quarter of $5 million compared to last year's $5.8 million, a 14% decrease from the prior-year quarter. The decline was due to lower gaming revenues and expected increases in slot exclusivity fees, partially offset by effective cost management executed by the management team at FireKeepers. We believe competition from the Pokagon Casino in Hartford and the Gun Lake Casino had a more negative impact on FireKeepers' results due to the seasonally weak nature of this quarter.

For Buffalo Thunder, as Andre mentioned in his remarks, we saw management and success fees in the fourth quarter of $900,000. I would note that our success fees are based on exceeding certain EBITDA thresholds, and this, our first quarter of management, was the weakest threshold. We expect the success fee will become increasingly difficult to achieve in the coming quarters, so I would not consider this result as necessarily indicative of future results.

Our Nevada operations, Stockman's and Grand Lodge Casino, contributed approximately $5 million in revenue and EBITDA of $0.5 million for the three-month period ended December 31, 2011, versus revenue of $2.1 million and EBITDA of $600,000 in the prior-year period. As expected the Grand Lodge did not contribute any EBITDA in this seasonally slow quarter, especially with the drought of snow experienced in the Lake Tahoe region this year.

We have, however, substantially reconfigured and reduced the cost structure there under the direction of Wes Elam and Scott Ruhl, the Casino's general manager. As a result, we are expecting a substantial EBITDA contribution as we move into the seasonally stronger second and third quarters. In addition, we have begun recently to see some modest improvement in results at our Stockman's Casino, which has been laboring in a very weak economic environment for some time.

While it is too early to say we have a sustained improvement trend, we are cautiously optimistic and remain very focused on controlling costs there so that revenue improvement will have a high flowthrough.

SG&A expenses of $8.5 million in the fourth quarter of 2011 were up considerably from $1.6 million in the prior year, due primarily to the addition of the Rising Star and Grand Lodge Casinos. Corporate SG&A was up approximately $300,000 as a result of stock compensation expense. As a reminder, the stock compensation will vest over three years, with the bulk vesting in June of 2013, and there was no stock compensation expense in the prior-year fourth quarter.

I would 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 near the end of the income statement.

For the fourth quarter, interest expense was $800,000, up considerably from the prior-year period when we did not have a credit facility in place, but down from $900,000 in the third quarter of 2011, as we have already reduced the outstanding balance by $6.6 million from the original $33 million we borrowed in April to complete the Rising Star acquisition.

During the quarter, we also recognized a $51,000 gain on our debt hedge instrument compared with a $216,000 loss in the third quarter. Gains and losses on the debt hedge will vary quarter to quarter based on interest-rate fluctuations and are at this point non-cash.

Our effective income tax rate before non-controlling interest for the fourth quarter of 2011 was 33% versus 24% in the prior-year quarter due to an increase in the amount of income apportioned to Indiana. We currently expect our effective income tax rate to be between 28% and 32% for the 2012 year, before considering the potential sale of our GEM management agreement. Our actual rate will depend to a great extent on the distribution of our income across our portfolio.

Consolidated EBITDA, net of RAM's share of the GEM results, came in at approximately $4.5 million versus $3.8 million in the fourth quarter of last year. Full-year EBITDA was $20.5 million versus $15.2 million in 2010.

During the quarter, we made another scheduled quarterly debt payment on our Wells Fargo facility, reducing our outstanding balance on December 31 to approximately $26.4 million, exclusive of the swap liability. And we subsequently made an additional $1.7 million payment in the first quarter of this year.

Capital expenditures for the quarter were approximately $2.3 million, consisting primarily of maintenance capital expenditures of $1.2 million and $1.1 million for our suite and room upgrade project at Rising Star. We currently expect capital expenditures for 2012 to be approximately $4.5 million, of which $0.7 million will be to complete the suite project this quarter at the Rising Star Casino.

We had approximately $14.7 million in cash on hand as of December 31st. Approximately $11 million of that cash is committed to property operations and working capital requirements. As of today, and following the early amortization payment in the first quarter of this year, we have approximately $15 million of cash and have reduced our outstanding debt, exclusive of our swap agreement liability, to approximately $24.8 million. Upon the closing of the sale of our interest in the GEM management agreement to the FireKeepers development Authority, we plan to use the after-tax cash to pay down the remaining outstanding balance on the credit facility.

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

Thank you, Mark. 2011 was a historic year for Full House, with the acquisition of Rising Star, as well as the operation of Grand Lodge and the new management agreement with Buffalo Thunder. We are pleased with the progress we have made in growing the Company and improving our performance.

With the anticipated sale of the GEM management agreement in the second quarter, we expect to have paid off our remaining debt and to be in a stronger position to pursue acquisitions and management contracts to further grow the Company and its value.

As a final comment, I would like to thank our great Native American partners in Michigan, led by Homer Mandoka, the Chair, and the entire Tribal Council during our more than 10 years partnership. In addition, I would like to thank our exceptional General Manager and friend in Michigan, Bruce McKee.

Thank you. And I will now open up the call for questions.

(Operator Instructions) Collins Stewart's Justin Sebastiano.

Can you give us an update on the hotel expansion at Rising Star?

Well, there hasn't been really any changes since we made the last announcement. We are still looking at where to locate the hotel, and we are working with the city to see if we can put it in a location that would not interfere with our existing operations.

When you guys acquired the property, was it in your internal estimates to include more hotel rooms, or the expansion that you're thinking about doing now?

No.

Okay, so this delay doesn't hurt anything as far as what you guys were expecting when you took the property? Okay.

And as far as -- you said Grand Lodge did not contribute to EBITDA in the quarter. But was it a drag on EBITDA or does it break even for you guys?

It was pretty much a breakeven, Justin.

Okay. So I guess Fallon was a little bit -- because compared to last year, I mean, it was down in the quarter versus, I guess, the past two quarters -- or in the third quarter, it was actually up. So I know it is a small piece, but what happened in the fourth quarter?

The fourth quarter was weak, Justin, and it has kind of been an up-and-down thing there for the last couple of quarters. And so we were down a little bit in the fourth quarter. We are up a little bit in the first quarter.

So we are kind of just bumping along right now. We have seen some improvement recently that has been very encouraging. But as I said in my comments, it is a little bit early. It has been kind of a bumpy ride there.

But generally speaking, performance at Stockman's has kind of evened out. It is -- one month it is up, another month it is down a little bit. But generally speaking, we are kind of just running about the same rate.

Okay. And then in your EBITDA reconciliation section of the release, you have corporate expense at about a little under $700,000. But last -- fourth quarter of '10 it was a little under $1.2 million. Can you talk a little bit about why such a big decline, and if that is the run rate we should be using, or if that is just historically what is going to happen in the fourth quarter, and then what should the run rate be for that number?

I think the number that is in there for this quarter should be the run rate, Justin. I would have to go back and look to see what was in there last year. We may have had some reclassifications with the development and management stuff. I would have to go back to check that. So let me get back to you on that separately. But I think the number that is in there for this quarter ought to be pretty steady.

So we're looking at something like $2.7 million to $3 million on an annual basis for that line out of EBITDA.

That number seems a little bit low, Justin, so let me get back to you on that. I think that SG&A -- corporate SG&A for the last couple of quarters ought to have been pretty steady. Again, it depends on whether you are looking at it inclusive or exclusive of stock compensation expense. But generally speaking, the corporate SG&A ought to be pretty steady, and has been for the last couple of quarters.

Okay. And then just lastly, I guess, on your acquisition strategy, who are your main competitors, I guess, for the deals you're looking at? We just saw Landry's purchase the Isle Biloxi. I think you guys have said in the past you're probably not really going up against some of the bigger companies in the space. But if you could talk to maybe who your competitors are and where maybe you stack up to them based on your cash structure. I mean, it seems like you guys are pretty strong as far as what you can go out and take down with the dry powder you have. But kind of who do you bump up against when you're looking at these deals?

You know, Justin, it changes. Since a lot of those properties that we are looking at are local casinos, we go with the usual cast of companies. But mostly, we also run against local folks that have local power.

So it is kind of hard to do, but in that $10 million to $12 million neighborhood EBITDA, you know, there are not that many players. There are two or three players, and they come and go. So it is kind of hard to define who they are.

Okay. And I know there's assets that you can still make money on in northern Nevada. Are you guys looking there as well, or are you sticking more to the Midwest and South, kind of the heart of the riverboat regions?

You know, Justin, we look wherever we can find a good asset. We like the Midwest. We like the South. But you know, if something exceptional would come in Nevada that we feel very comfortable with -- as you know, some of the assets that we are looking at that we have looked at in the past, we have looked at them for two to three years. So most of the assets that we look at, we have great knowledge. And I think location is important, but quality is probably more important.

Right. Okay. Thanks, guys. I appreciate it.

(Operator Instructions) Mark Argento, Craig Hallum Capital.

If I think about -- you had mentioned the competition in Ohio and that kicking up. Could you maybe help us think about what you're doing to get ready for that competition? I don't know if you could quantify it at all, but just how you're thinking about next year and your property, the Rising Star.

I think, Mark, the Ohio competition has been developing more slowly than we originally anticipated. But I think it is pretty clear now that the Casino in Cincinnati will open in the second quarter of 2013. It is not totally clear yet when the VLTs will arrive at the racetracks in Ohio, but it is pretty certain that they are going to show up at some point.

So we have been working with the management team since before we acquired the property to significantly prune and refine our marketing programs to be more focused on our profitable customers. And we have been looking at the overall cost structure with the management team and been making sort of gradual adjustments there. We haven't -- we certainly haven't made any substantial adjustments and we are not expecting to.

But I think it is an ongoing process to continue to make the property more and more efficient and to refine and more focus the marketing programs in anticipation of Ohio.

So I think a lot of the things that we thought we would put in place in anticipation of the Ohio competition might already be here. Those things are working really well, and we are getting greater benefit from them than we originally expected. And I think the property is well-positioned right now compete when that competition starts to come on.

And remind me -- I know you had mentioned CapEx, $2.3 million; I think about half of that was for facility upgrades. Could you quantify how much you guys are putting into Rising Star when everything is said and done, at least in this upgrade cycle?

I think including the suite project, which is spanning Q4 and Q1, the sort of annual run rate there is about -- the maintenance CapEx, Mark, is probably right around $3 million to $3.5 million a year, and we are spending a little less than $2 million on the suite and room upgrade project.

Great. That's helpful. Then shifting gears to Grand Lodge, could you maybe -- you said, I know, in the quarter it really didn't contribute at all. But it sounded like you were pretty enthusiastic about the opportunity for it to actually start to contribute going forward. Could you talk a little bit about that in relationship to the property?

When you go back and look at the historical trends for the Grand Lodge, Mark, way more than 50% of the EBITDA comes in Q2 and Q3. And the Q4 really depends on the ski season and how good the weather conditions are.

Last year, we had exceptionally good snow and ski conditions and the property produced a little bit of EBITDA. This year, it was pretty much breakeven, as I said before, with practically no snow through New Year's.

So the fourth and first quarters, I think, are way more weather-dependent. We will see -- we should see some positive EBITDA in Q2, and we will see the bulk of the EBITDA come in Q3. And the other two quarters are just really dependent on weather conditions.

That's helpful. And then last question -- I don't know if you touched on this earlier, but after you pay down the debt, after you get your proceeds from the FireKeepers contract, you pay down debt, and how much deployable capital will you have available?

Right now, we are forecasting that by time this deal closes, we pay off the debt, we are probably going to have somewhere between $8 million and $10 million of deployable cash and no debt.

Great. I appreciate it.

I think in terms of the things that we've talked about in the past, in terms of acquisition targets, looking for properties that are running sort of $8 million to $10 million to $12 million of EBITDA at the kind of multiples that we have historically looked at, that puts us in a really, really strong position to be able to execute that kind of transaction and to do it at a cost of debt that is reasonable and should be accretive.

Great. Thanks, guys.

And with no further questions, I would like to turn the conference back over to Andre Hilliou for any additional or closing remarks.

I would like to thank everyone for being with us today, and with that, we will end the call and wish all of you a great rest of the week. Thank you.

Ladies and gentlemen, again, we conclude today's conference call. Thank you very much for your participation. Have a good day.