Full House Resorts Inc (FLL) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Full House Resorts, Inc., second-quarter 2012 earnings call. As a reminder, today's call is being recorded. At this time, I'd like to turn the conference over to Mr. William Schmitt of ICR. Please go ahead, sir.

Thank you, LeeAnn, and good morning, everyone. By now, you should have access to our earnings announcement and Form 10-Q, 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, including our 2011 Form 10-K 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 Financial Officer, who will discuss the financial statement for the third -- for the second quarter.

The second quarter was the first quarter that we operated with our FireKeepers Casino management agreement. Last quarter, we completed the sale of a 50% interest in GEM and FireKeepers management agreement for $48.75 million, plus a wind-up fee of $1.2 million, and used a portion of the proceeds to retire all of our outstanding debt.

At the beginning of this quarter, we announced our agreement to acquire the Silver Slipper Casino in Hancock County, Mississippi, for $70 million, approximately a 6.25 multiple. Since then, we've focused on our current operation, completing our financing, and work with the Mississippi regulators in order to receive all the necessary approval to close on the acquisition, which we now expect to do in the early part of the first quarter.

The addition of the Silver Slipper will continue our transition from primarily a management company to predominantly an owner/operator of strong, locals-operated casinos.

During the quarter, we celebrated the first anniversary of our ownership of the Rising Star Casino Resort, which continued to surpass our expectation.

For the quarter, we generated revenues of 23 -- $22.3 million and EBITDA of $2.8 million, compared to revenue of $23.2 million and EBITDA of $3.2 million in the prior-year quarter. Revenue and EBITDA were down from the prior year, primarily due to the challenging economy. We appear to be impacting our operation, as well as the rest of the industry, as significantly lower table games or percentage versus last year and, of course, new competition from Ohio.

However, considering all of those headwinds, revenues only declined modestly from the prior-year quarter and costs were well controlled. Once again, the entire Rising Star team continues to step up and meet the challenge.

Our Nevada operations outperformed expectations with revenue in the quarter of $5.2 million, compared to $2 million in the prior quarter -- year quarter, thanks to the addition of the Grand Lodge casino in the third quarter of 2011 and a very strong June, starting with the high season of the Grand Lodge. EBITDA in northern Nevada doubled to $1 million in the quarter from $500,000 in the previous quarter. We expect to see another substantial increase in EBITDA from our Nevada operation in the third quarter, which is seasonally strongest quarter at the Grand Lodge.

All in for the quarter, we generated adjusted EBITDA of $2.9 million, compared to $6.1 million in the prior-year period, although not an apples-to-apples comparison because of the addition of the Grand Lodge and the Buffalo Thunder management agreement. If you exclude the contributions from GEM and our Delaware management agreement in the second quarter of 2011, our second quarter 2011 EBITDA would have been $2.6 million.

And keep in mind, in exchange for the loss of the GEM management fee, we were able to eliminate all of our outstanding debt, improve our cash position, and facilitate a very favorable financing package for our upcoming acquisition.

Finally, an update on the Silver Slipper Casino. We obtained financing commitments for the acquisition in May, finalized a credit agreement for the first lien component of our financing package in June, and our Mississippi license application is currently in process. The licensing process is taking a bit longer than we had anticipated; it always does; but it's progressing well, and we expect to close in the early part of the first quarter, pending customary closing conditions and approval.

So Silver Slipper, which opened in November 2006, has 37,000 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 game on the Gulf Coast.

The property includes a fine dining restaurant, buffet, quick-service restaurant, and two casino bars. The property draws heavily from the New Orleans metropolitan area and other communities in southern Louisiana and southwestern Mississippi.

Going forward over the next several months, we will continue to focus on our owned and operated properties, as well as completing the acquisition of the Silver Slipper.

In addition, we continue to look for additional assets to add to our growing portfolio and are still on the lookout for management agreements that meet our criteria, as they are an excellent way to add high managing cash flow and earnings. It is extremely exciting at Full House as we begin to prepare for the arrival of the Silver Slipper and continue to execute on our long-term strategy.

I will now turn the call over to Mark to go into more details in 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 second-quarter 2012 financial performance and condition before we respond to questions you may have.

For the second quarter ended June 30, 2012, earnings per share was $0.04, compared to $0.08 in the prior-year period. If we exclude a four thousand dollar -- $400,000 gain on the sale of our interest in GEM and a little under $100,000 in Silver Slipper-related acquisition costs during the quarter and non-cash charges related to our financing hedge in the second quarter of 2011, earnings per share would have been $0.03 in the second quarter of 2012 versus $0.09 in the prior-year period.

As we have discussed previously, prior-year period results included $5.9 million in management fees from GEM, which was sold in March 2012; and $700,000 in equity and net income from our Delaware management contract, which expired in August of last year.

Second-quarter 2012 and 2011 results were based on weighted average common shares outstanding of 18.7 million and 18.2 million, respectively.

Net income attributable to Full House was approximately $700,000, compared to $1.4 million of net income in the second quarter of 2011. Excluding the aforementioned unusual items in both quarters, net income would have been $500,000 in the second quarter of 2012, compared to $1.7 million in the prior-year period.

In the second quarter of 2012, we saw Rising Star generate revenue of $22.3 million, compared to $23.2 million in the prior-year period, primarily due to a weaker than expected May and new competition from Ohio.

EBITDA for the second quarter of 2012 was $2.8 million, compared to EBITDA of $3.2 million in the prior-year period. EBITDA was affected by our lower table games hold percentage in the second quarter of 2012, which accounted for approximately half of the EBITDA decline. EBITDA margin in the quarter was 12.6% versus 13.8% in the prior-year period.

The property continues to run ahead of our internal forecasts, as the competition from Ohio was accounted for when we purchased the property. In terms of Ohio, while we have seen a decline in traffic from Columbus, it has been partially mitigated thus far by increased traffic from other locations and a continued focus by the management team on effective marketing and cost controls.

For Buffalo Thunder, we saw base management and success fees in the second quarter of $400,000. This brings total management fees for the first nine months of the contract to $1.8 million. As noted on our prior call, 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 casinos, contributed approximately $5.2 million in revenue and EBITDA of $1 million for the three-month period ended June 30, 2012, versus revenue of $2 million and EBITDA of $500,000 in the prior-year period, due to the addition of the Grand Lodge.

As we've mentioned before, the majority of Grand Lodge's EBITDA has historically been earned in the latter part of Q2 and in Q3. The property generated a much stronger than expected EBITDA in June, well ahead of our internal forecasts and prior-year performance, due to both improved casino revenue and cost performance. This trend has continued in July and early August, and we remain optimistic about how our northern Nevada properties will perform over the remainder of 2012.

SG&A expenses of $7.7 million in the second quarter were up from $7 million in the prior year, due primarily to the addition of the Grand Lodge casino. Corporate SG&A was up approximately $300,000, primarily as the result of stock compensation expense of $300,000. As a reminder, the stock compensation will vest over three years, with the bulk vesting in June of 2013. And there was only $100,000 of stock compensation expense in the prior-year quarter.

For the second quarter, we had no interest expense, compared to $900,000 in the second quarter of 2011, as we extinguished our debt and the related interest rate swap at the end of the first quarter this year. We expect to have no interest expense again in the third quarter, followed by an expected significant increase in the fourth quarter as we complete the acquisition of the Silver Slipper and fund $70 million of our $75 million financing facility. We expect the effective interest rate on our debt, exclusive of financing cost amortization, to be approximately 8%.

Our effective income tax rate for the second quarter of 2012 was 49%, versus 51% in the prior-year quarter. We currently expect our annualized effective income tax rate to be approximately 41% for 2012, reflecting higher expected rates in our third and fourth quarter as a greater proportion of our income comes from Indiana prior to the acquisition of the Silver Slipper.

Adjusted EBITDA came in at approximately $2.9 million versus $6.1 million in the second quarter of last year. Excluding contributions from GEM and Delaware, adjusted EBITDA in the second quarter of 2011 would have been $2.6 million.

As of June 30, we have $27.9 million of cash and no outstanding debt on our balance sheet. Of that cash, approximately $12 million is dedicated to day-to-day operations and approximately $7 million will be paid out over the next six months in income taxes related to the sale of GEM, leaving approximately $9 million of excess cash at June 30. As of today, excess cash exceeds $11 million.

In addition, we made a $2.5 million escrow deposit in late March in connection with the Silver Slipper acquisition, which is nonrefundable except for certain customary conditions. We anticipate completing the transaction, with $70 million of a debt and approximately $6 million of cash on hand, early in the fourth quarter.

Capital expenditures for the quarter were approximately $300,000, of which approximately $100,000 was related to our $1.7 million suite and room upgrade project at Rising Star, which began last fall and was completed in April. We believe this project has improved our competitive position and significantly upgraded the quality of experience we offer to our higher-worth customers. We expect capital expenditures for 2012 to be approximately $4 million, of which approximately $1.4 million has been spent through June 30.

We also continue our joint effort with the city of Rising Sun and foundation for the development of a 100-room hotel, which will be added to our available room stock. Preliminary approval of the development plan for the hotel has been received from the city council, but additional steps remain before we'll be able to announce a final decision to proceed. We believe that the added hotel room inventory and proximity to the Rising Star casino will allow us to capitalize on current demand that we are unable to accommodate.

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 continue to achieve solid results at our properties, and we are looking forward to completing the acquisition of the Silver Slipper Casino in the early portion of the fourth quarter. While we have transformed the Company considerably over the last couple of years, we continue to pursue management contract and acquisition to further grow the Company.

I will now open up the calls for questions.

(Operator Instructions). David Bain, Sterne, Agee.

Guys, can you help me with the Rising Star a little bit? So it looks like the second quarter, about a couple hundred thousand off year over year due to hold and then a couple hundred thousand due to the new competition you cited.

So, I guess, off about 6% on a normalized basis. Is that something we should look for in the third quarter, year over year, or are there other factors we should consider?

Well, I think there's a couple of things, David. I think we're definitely seeing and have seen some economic weakness in the second quarter that we did not see in the first quarter. And I think that's a general industry trend.

We have seen, and I think you've heard this from other people, that the early part of the third quarter has been a little bit better. So I think we're cautiously optimistic about that, but certainly the economy remains weak and bumpy.

And of course, there is increased competition in Ohio. We've always anticipated that and we've always known that there would be some impact. And that competition is going to continue to develop as we move through the remaining part of the year.

So I think we should probably expect there to be some revenue weakness. I think we are very focused on fine-tuning and refining our marketing programs and keeping a very watchful eye on cost control to mitigate the damage as much as possible.

Okay, and then with regard to the economy, can you help us localize it a little bit? I mean, looking at maybe Rising Sun, Indiana, or the Gulf Coast, New Orleans, I mean, pick your spot, are there variables we should consider, good or bad?

Well, I think in the Midwest, I think that in the first quarter we thought we were seeing some economic recovery being driven by strong manufacturing and agriculture, and maybe that has lost a little bit of its strength in the second quarter here.

On the Gulf Coast, David, I think -- you know, you see the industry numbers. They're a little bit bumpy. But at the Silver Slipper, results have been pretty consistent year over year. So we're not seeing any real change there, either positive or negative, in terms of operating results.

David, it's Andre. I think basically of what we can see, the economy is flat for the last two months. I think the beginning of the second quarter, I think everyone was a bit in a state of shock in the month of May. But I think after May, June, July, and I think the month of (technical difficulty) that's my own opinion. I think we are seeing a flatness in the economy.

Okay, and then, just final one for me, as you guys look at your current opportunities, is the sweet spot still that $10 million to $15 million of EBITDA range? And can you complete an acquisition of that size on a project level?

And then, I guess, as a follow-up there, I know you're always looking at -- are things hot right now, cool, or business as usual in terms of your prospects?

I think in the management arena, we are always looking at properties. And I think that, you know, hot and cool might not be the right word, but I think there are some opportunities out there that we are looking at. And if they match what we are looking at, then we will pursue them. But we are very active in the market.

Looking at properties, it's always the same thing, David. You keep on looking, but we surely like that $10 million to $15 million EBITDA property because it's something that we can do and something that allows us to mitigate the risk. As you can diversify throughout the country, then you mitigate your risk. But there are some properties out there, for sure.

And (multiple speakers) that $20 million you have of equity capital, that can go toward project financing? That (multiple speakers) you'll have left over? What's that?

I'm sorry, David. I'm not sure what that $20 million is.

The cash on hand you have is at $27 million. I think you said you were going to spend another $6 million when you finalize the purchase of the Silver Slipper.

When you walk through the cash, David, as of right now we have somewhere around $11 million to $12 million of deployable cash.

We expect to use about half of that to complete the Silver Slipper transaction. So we're not going to have a huge amount of deployable cash post-Silver Slipper. We will have some, but not a huge amount.

But I think that in terms of looking forward, post the Silver Slipper our balance sheet is still going to be very, very conservative. We're going to be three or less times levered coming out of the Silver Slipper transaction. So I think there's still plenty of opportunity for us to move forward with additional acquisitions if we can find them at the right price.

Okay, great. Thank you, guys.

Thanks, David.

Thank you, David.

(Operator Instructions). Justin Sebastiano, Brean Murray.

Just to be clear, Andre, you said the Silver Slipper should close in the beginning of the fourth quarter, is that correct?

Yes.

And then, with the land that you're talking about for the Rising Star hotel or the agreement with the Rising Sun/Ohio County First Group, is this the same land that you guys were talking about previously or is this somewhere else near or on the property?

It is the same land that we had always talked about, and it is on the property.

Okay, okay. And so, it's still -- you don't expect much disruption when you guys start this?

No.

Okay.

There is always some disruption, but based on the proposed location of the property, it's going to be really mitigated by the location.

Got you.

So very, very minimal.

Okay. And also, you mentioned the suite and room remodeling at the hotel that is adjacent to the casino or at the casino. Are you seeing an increase in casino play thanks to that room remodeling? Or what sort of benefits have you found from that CapEx?

I think, Justin, we're definitely able to capture more of the high-end play when we have special events or peak periods. That was when we were getting hurt with the lack of suite product.

And so, at this stage it has worked exactly the way we expected it to. The hotel continues to run at a very high occupancy. We ran over 98% occupancy in the second quarter. We have a little bit fewer rooms, but a much better suite product, and it's given the marketing team a much better tool to use.

So I think we're very pleased with the results we've seen so far from the suite project.

Okay, and (multiple speakers)

And from the property itself.

Sure, okay. And lastly, you guys mentioned you're seeing a decline in traffic from Columbus after the racino won up there. But you said that you saw some increased traffic elsewhere. Is that elsewhere in Ohio or just surrounding -- the surrounding areas of Rising Star?

Generally from just other markets, not limited to Ohio, but from other significant markets that we have. It's a little early to sort all of that out, Justin, I think, but -- so we're watching it very carefully. But we were encouraged by some of what we saw.

Okay, and what was driving that traffic? Was it more -- like a more focused marketing program? Are you getting some better deals out there to people or were you just targeting the better customers? What do you think drove that traffic?

I think more targeted marketing was certainly part of the strategy. We're not really significantly increasing our promotional activity, but redirecting and refocusing some of it. Recognizing that there was going to be new competition in Columbus and being prepared for it and being proactive, I think, all helped us a little bit.

Yes, based on the numbers it seemed like the marketing must've been more targeted and you weren't just throwing comps out there into the market. It seemed like you were going after the profitable customers, so it seemed like it worked (multiple speakers)

No, the marketing team there is very focused. They're not shotgun marketers, so (multiple speakers)

Got you.

And you know, Justin, we have seen that before. We also use the same marketing approach in Michigan and in other properties in the past.

Got you. Okay, thank you very much.

Well, thank you, Justin. Congratulations on your new position.

Thanks.

Thank you, ladies and gentlemen. I'd now like to turn the call back over to Mr. Hilliou for any additional remarks.

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

Thank you, ladies and gentlemen. That will conclude today's presentation. We appreciate your attendance. You may now disconnect.