Full House Resorts Inc (FLL) 2012 Q1 法說會逐字稿

Ladies and gentlemen, please stand by the conference is about to begin. Good day and welcome to the Full House Resorts, Inc. first-quarter 2012 earnings 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, Cynthia, and good morning everyone. By now you should have access to our earnings announcement and Form 10-K which was filed yesterday. 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, 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 on the call is Mark Miller, our Chief Operating and Chief Financial Officer, who will discuss the financial results for the first quarter. It was another newsworthy quarter at Full House as we celebrated the first anniversary of our ownership of the Rising Star Casino Resort, which has surpassed our expectation, generating over $11 million in adjusted EBITDA since we closed on our purchase on April 1 last year.

We also completed the sale of our 50% interest in GEM and the FireKeepers management agreement for $48.75 million plus a wind-up fee and use a portion of the proceeds to retire our debt. That sale enabled us to almost immediately announce our agreement to acquire the Silver Slipper Casino in Hancock County, Mississippi, which is expected to close in the third quarter of this year. And we further our transition from a management company to a known operator of strong locals-oriented casinos.

It is an extremely exciting time at Full House and we continue to move forward with our long-term strategy.

As a note, last week we obtained lending commitment for the funds needed to purchase the Silver Slipper, moving us another step closer to closing.

For the first quarter of 2012 our revenue numbers exceeded expectation with strong results at the Rising Star, solid results from our Grand Lodge and Stockman's Casino in Northern Nevada, and a $500,000 contribution from our Buffalo Thunder management agreement.

In addition, for the quarter, we generated adjusted EBITDA of the GEM sale a $4.9 million compared to $4 million in the prior-year period in spite of not having a contribution from our Delaware management agreement, which expired in August 2011.

At the Rising Star, for the quarter, we generated revenue of $20.6 million and EBITDA of $3.1 million, bringing total adjusted EBITDA for the quarter of the Company ownership to $11.1 million of net revenue of just under $92 million. Just as a reminder, the property had LTM EBITDA of around $8.5 million when we acquired it. You will recall that we no longer are required to maintain the full boat crew since the vessel is permanently moored.

Additionally, the restructuring of our marketing program which we put in place last April continued to yield positive bottom-line results. Once again another great effort buying the entire Rising Star team under the direction of Steve Jimenez, the general manager.

Our Nevada operation saw increased revenue in the quarter to $4.9 million with the addition of the Grand Lodge Casino in the third quarter of 2011 and a smaller revenue increase from our Stockman's Casino. We expect to see substantial increase in EBITDA from our Nevada operation as we move into the seasonally stronger second and third quarter.

For the second quarter of our agreement with the Buffalo Thunder Casino and Resort in Santa Fe, New Mexico, we received $500,000 in management and success fee.

As mentioned before, on March 30 we completed the sale of our interests in GEM and its management agreement to the FireKeepers Development Authority. We are very proud of the work that we accomplished at FireKeepers and wish the tribe the best of luck as they proceed forward.

Finally, on April 3 we announced an agreement to acquire the Silver Slipper Casino for $70 million exclusive of cash and working capital. We already have obtained financing commitment for the acquisition and we expect to close in the third quarter, pending customary closing conditions and approval.

The Silver Slipper Casino, which opened in November 2006, has 30,000 square feet of gaming space with almost 1,000 slot and video poker machines, 26 table games, a poker room, and the only live Keno games on the Gulf Coast. The property includes a fine dining restaurant, buffet, quick service restaurants, and two casino bars.

The property draws heavily from the New Orleans metropolitan area and other communities in southern Louisiana and southwestern Mississippi. We believe the property is perfectly sized to complement our current business and provide a substantial growth opportunity to the possible addition of a hotel. Further, it's consistent with our long-stated growth strategy and we believe it will create long-term shareholder value.

We are happy with current management of the property and believe that we can leverage our knowledge and proven track record of managing properties, catering to local customers in competitive environment to further improve the profitability in the Silver Slipper. We look forward to having a great relationship with the local community and the state of Mississippi as we pursue long-term success.

Overall EPS for the quarter was $1.38 and, excluding all one-time events for the quarter of 2012 and 2011, earnings per share were $0.03 and $0.11 per share, respectively. Going forward over the next several months, we will be focused on our owned and operated property as well as completing the acquisition of the Silver Slipper.

In addition, we will continue to pursue management agreement that meet our criteria and are excellent way to add cash flow to the bottom line with a minimal cash investment.

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 first-quarter 2012 financial performance and condition before we respond to questions you may have.

For the first quarter ended March 31, 2012, earnings per share was $1.38 compared to $0.09 in the prior-year period. Absent the $40.8 million gain on the sale of our interest in GEM, as well as a $1.7 million pretax loss on debt extinguishment from retiring our debt in the first quarter and excluding $500,000 of acquisition costs in the first quarter of 2011, earnings per share would have been $0.03 in the first quarter of 2012 versus $0.11 last June.

As we have discussed previously, the prior-year period results included $1.5 million in equity from our Delaware management contract which expired in August of 2011. First-quarter 2012 and 2011 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 $25.8 million compared to $1.6 million of net income in the first quarter of 2011. Excluding the aforementioned unusual items in both quarters, net income would have been $500,000 in the first quarter of 2012 compared to $1.9 million in the prior-year period.

Our fourth full quarter of operations at Rising Star saw us generate revenue of $22.6 million and EBITDA of $3.1 million inclusive of the maritime exemption which was implemented in mid-October. EBITDA margin in the quarter was 13.7% and for the full year we have owned the property it was just under 12%. The property continues to run ahead of our internal forecasts and has generated adjusted EBITDA of approximately $11.1 million in the first year that we have owned the property, well ahead of the $8.5 million we based our $43 million purchase price on.

While we expect future competition from Ohio to eat into this run rate in the upcoming months, we are pleased with the progress the management team has made in improving results as we celebrate our first anniversary of ownership.

At FireKeepers GEM earned management fees for the quarter of $5.3 million compared to last year's $6.4 million. This was our final quarter of managing FireKeepers as the sale of our interest in GEM and the management agreement closed on March 30.

We will receive a wind fee equal to what would have been the management fee for the month of April to complete the transaction. However, an estimate of this has already been included in the game calculation. As a result, starting in Q2, the revenues, expenses, and minority interest associated with GEM will no longer be reflected in our current financial results on the income statement.

For Buffalo Thunder we saw management and success fees in the first quarter of $500,000. As noted on our prior calls, our success fees are based on exceeding certain EBITDA thresholds which will become increasingly difficult to achieve in the coming quarters.

Our Northern Nevada operations, Stockman's and Grand Lodge Casino, contributed approximately $4.9 million in revenue and EBITDA of $600,000 for the three-month period ended March 31, 2012, versus revenue of $2 million and EBITDA of $500,000 in the prior-year period. As expected, the Grand Lodge did not contribute any EBITDA in this seasonally slow quarter. The majority of Grand Lodge EBITDA has historically been earned in the latter part of Q2 and in Q3.

SG&A expenses of $8.6 million in the first quarter of 2012 were up considerably from $1.7 million in the prior year, due primarily to the addition of the Rising Star and Grand Lodge casinos. Corporate SG&A was up approximately $800,000, primarily as the result of stock compensation expense up $300,000 and increased incentive compensation costs, which are primarily the result of timing. 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 in the prior year first 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. Going forward, of course, with the sale of our interest in GEM we will no longer have those full expenses in our SG&A.

For the first quarter interest expense was $700,000, up considerably from the prior-year period when we did not have a credit facility in place, but down from $800,000 in the fourth quarter of 2011 as we reduced our outstanding debt balance during the quarter. As a reminder, we extinguished our debt and debt hedge instrument at the end of the quarter. Meaning we will have no interest expense in the second quarter, followed by an expected significant increase in the third quarter as we complete the acquisition of the Silver Slipper and close on our financing.

Our effective income tax rate for the first quarter of 2012 was 38% versus 47% in the prior-year quarter due to the effect of the $40.8 million gain on the sale of GEM, which is only subject to federal tax. We currently expect our annualized effective income tax rate to be approximately 40% for 2012, although our future quarterly rates are expected to be higher as a greater proportion of our income comes from Indiana.

Consolidated EBITDA, net of RAM's share of GEM results, came in at approximately $4.9 million versus $4 million in the first quarter of last year. As mentioned, during the quarter we used a portion of the proceeds from our sale of GEM to extinguish the remaining $25.3 million on our credit facility and related interest rate hedge. We currently have no outstanding debt on our balance sheet.

We have obtained commitments for the financing of our pending acquisition of the Silver Slipper casino. The financing will consist of a $55 million first lien credit facility and a $20 million second lien facility. The expected weighted average cash interest cost of the facilities will be approximately 8%.

The funding is subject to documentation and other customary closing conditions, and we made a $2.5 million escrow deposit in late March in connection with this acquisition, which is nonrefundable except for certain customary conditions. We have commenced the licensing process in Mississippi and expect to close on this acquisition in Q3.

Capital expenditures for the quarter were approximately $1.1 million, of which approximately $400,000 was related to our suite and room upgrade project at Rising Star. Our suite project at Rising Star, which included the conversion of 40 rooms into three large suites, nine junior suites, and 18 upgraded rooms was completed in April. We expect this project to improve our competitive position and significantly upgrade the quality of experience we offer to our higher worth customers.

We also continue our joint efforts with the city of Rising Sun and Foundation for the development of a 100-room hotel which will add to our available room stock. We continue to expect capital expenditures for 2012 to be approximately $4.6 million.

We had approximately $38.3 million in cash on hand as of March 31, 2012. Approximately $11 million of our cash is currently committed to property operations and working capital requirements and approximately $15 million of our March 31 balance is ear-marked for taxes related to the sale of GEM.

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. We are once again pleased with the solid results we achieved in the first quarter, as well as the significant milestone of our sale of the GEM management agreement and our announcement of the acquisition of the Silver Slipper Casino.

From the beginning of 2011 until today, in just 16 months, Full House has transformed its operation almost completely and we are not finished by any means, but we are continuing to pursue management contracts and acquisition to further grow the Company and its value.

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

(Operator Instructions) Mark Argento, Craig-Hallum Capital.

Good morning, guys. Congratulations on getting your Silver Slipper funding in place and nice exit on your Indian gaming casino management contract. You guys have really been executing well and that kind of dovetails into my question.

You guys have two acquisitions so far. You are clearly now an owner/operator of casinos. If we take a 5,000-foot view of your business over the next three to five years would you consider -- or how do you see the business kind of rolling out in terms of growth? Is it more local type casinos, like the ones you have done so far? Is it just more of them?

Or are you looking over time at potentially expanding more regional type properties? How do you see -- what does Full House look like, in your opinion, three to five years out?

Mark, I think we -- so far we like the way we are proceeding. Of course, we are opportunistic, as most businesses are, but I think that we -- over the next four to five years we like the path that we are going on, strong local casinos and management contracts, but we are going to keep on that path. But if something comes up that we think will add value to Full House we surely will look into it very carefully.

So an extended Full House as you see it today will be the Full House of tomorrow.

In terms of pace of acquisitions, you got the Rising Star; now you have owned that for a year, operated it successfully. Silver Slipper now about a year later; of course making that acquisition. You have been somewhat constrained by just capital.

Would you look to see the pace of acquisitions start to pick up? Could you see doing a couple in a 12-month period if you could find the right properties? I guess what I am trying to get my hands around is are you constrained from a people perspective or are there any reasons why we couldn't expect you guys to really start to get after it here?

Well, we are very conservative as you know. From the perspective, I believe we can find people to grow but I think we -- it is a big acquisition for us, the Silver Slipper, so we want to make sure that we bring the Silver Slipper successfully to the Full House family as we did with the Rising Star. So we are always looking for the acquisition, but we want to make sure that we base the Company on a strong foundation. (multiple speakers) It's kind of hard to predict the environment.

I would just add to that that I think with Silver Slipper and potentially a hotel at Rising Star we do have some organic growth opportunities that we want to pursue. I think that is going to take up some of our time and resources, at least in the immediate near term.

And just last question (multiple speakers)

(technical difficulty) regardless.

Sure. Last question, with the economy looking like it has maybe found a level here or firmer footing, are you starting to see any increased activity, any kind of changes in multiples in terms of the pipeline of properties for sale?

You know, not really. I think folks who want to sell the properties -- some owners are really not casino operators and they decide to sell for various reasons. So I think that we have seen the bottom line stabilizing, the multiple stabilizing, but there are still properties for sale for sure.

Great, thank you.

(Operator Instructions) Aman Mahal, Henderson.

Just a question on the Rising Star Casino. Obviously some of your comments in your last presentation regarding the expected new entrants into that market. Can you give me a bit more of a sense of what you are expecting in terms of your own revenue impact to those projects coming on stream?

Mark, go ahead.

We haven't provided any specific guidance on this issue, but we do expect that the casino in Cincinnati will open Q2 of next year. As we have indicated in the past, we think that the customer base that it will be most attractive to is not really the same customer base that we are seeing at Rising Star, so we do not expect a huge impact from the Cincinnati casino. The racetracks in Ohio continue to be pursued, but on a slower pace than we originally expected, and so at this point it's a little bit unclear as to when those will open.

And when you say they are targeted at different customers, can you just expand on the different types of demographics there or different types of customer profile in terms of who your customer is and who you expect those competing casinos to attract?

Well, I think that the casino in downtown Cincinnati is likely to be -- their customer base is likely to be more younger and closer in to the downtown Cincinnati area. Our customers tend to be older, suburban, and, frankly, probably are looking for a less active, less noisy, if you will, a quieter type of environment. And so we really just think that they are sort of going to be different customer bases at this stage.

Right. And then just a second question actually. Just sort of looking at your acquisitions over the last year-and-a-half you have mentioned fantastic acquisitions really in terms of the multiples you paid for these and what you have been able to do.

Can you -- while they look amazing from your perspective, I am just trying to understand who the sellers are of these assets and why they are selling them. Can you just give me a better sense of are these distressed assets that you bought? Are they -- in terms of leverage severs, is it succession and just owner/operators that are looking to exit? Just if you give a better sense of where you are finding these assets and how you are getting such good prices on them.

I think you have various reasons for it. You have sellers who want to exceed the properties. You have what I call natural owners, folks who have owned casinos and for various reasons want to put him in the market. The properties that we are looking at in that $8 million to $15 million EBITDA the number of buyers are not as extensive as you would see in the $20 million, $30 million, $40 million EBITDA neighborhood.

So I think that we are really in the market that we understand well, where we have the ability to finance, we have the ability to manage, and the competition isn't as intense as it would be someplace else. To further the question for Mark, we believe that some of those properties will come on the market in the future, near future of our future and that it is a great environment for us.

Then I just had one third question as well, if that is okay. Just in terms of the cost of financing, 8% seems quite a high yield essentially for what was essentially an asset-backed lending. Can you explain -- is that typical? I would have expected them to be a couple percentage points lower than that or am I just being incredibly optimistic?

Well, I think that the first lien part of this facility will be significantly cheaper. The issue is in the credit markets, in terms of traditional bank financing the debt is still very cheap but their thresholds for leverage are very low. And that required that we go to sort of the second lien market to fill out the credit facility.

We are not quite big enough yet to access the high yield market, and so we are pretty pleased with the 8% given the size that we are. It's pretty consistent with what we paid when we did the Rising Star transaction, maybe slightly more expensive. But really I think as the Company grows, we get a little bit bigger, probably another acquisition, and we will be able to tap the high yield, more traditional high yield market to finance some of these acquisitions.

Thank you. That is great, thanks very much.

Greg Weaver, Invicta Capital.

Good morning. Nice job, gentlemen.

Good morning, Greg.

Thank you, Greg.

Just some background color if you could hear. Would you characterize Silver Slipper as a fixer upper? That hasn't really been your style historically, but I am just trying to get a sense of the current profitability and kind of the room for improvement there.

The property is actually a new property. That is one of the reasons why we -- that is (inaudible) why we purchase a property. It's really a new property and it's really not a fixer upper. It's quite nice.

I guess maybe -- sorry, I meant in terms of maybe management or room for improvement in terms of how the property is managed as opposed to the facilities themselves?

No, we like the management team, as we did like and as we do like the management team at the Rising Star. I think we hope that by bringing a new outlook on marketing we will be able to improve the property as we did at the Rising Star. But the management there is quite qualified. We are very satisfied with what they have been doing so far and we think they are going to fit well within our organization.

The real growth opportunity, Greg, here is the hotel. The property does not currently have a hotel and its competitors do. The market is room constrained and so we think that there is a significant opportunity to move the property forward with the addition of a hotel.

We haven't decided yet exactly what we are going to build or when we are going to build it. We will be turning our attention to that as we get the transaction in hand, but that is the real attractive part of this acquisition for us is the opportunity to add a hotel. And we believe a favorable multiple.

And in terms of -- for comparables, right, so Boyd bought the Imperial Palace and I guess Golden Nugget bought the Isles property. Any sense there in terms of kind of where you guys shake out relative to what they paid in terms of multiple to EBITDA?

We have said publicly, Greg, that we paid a little under 6.25 times.

Okay, that is helpful. I didn't know that. And just in terms of the competitive landscape, who would you consider your most relevant competitive property? I guess Hollywood is the closest one, is that right?

That is correct. When you come out of Louisiana, we are the first property you come to. We are about 20 or 30 minutes from Slidell. Then another 20 minutes down the road you come to Hollywood and then another 20 or 30 minutes into Gulfport.

And the folks from Louisiana don't -- not the ones you are attracting, even though there is casinos there that are a closer drive they would prefer to come out your way because --?

Again, I think it's the same thing that we have talked about with the casino in Cincinnati. I think the demographic and the people who are going to go downtown New Orleans to the casino there is just a different demographic, a different customer base than the people who are going to come over to the casinos in Louisiana -- Mississippi, I am sorry.

Okay, got you. Thank you, good luck with the closing.

Thanks, Greg. Good to talk to you.

Thank you.

At this time there are no further questions. Mr. Hilliou, I will turn the conference back over to you for closing comments.

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

Ladies and gentlemen, this will conclude today's conference call. We do thank you for your participation.