Full House Resorts Inc (FLL) 2013 Q4 法說會逐字稿

Good day and welcome to the Full House Resorts, Inc. fourth-quarter 2013 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the call over to Dan Foley. You may begin.

Thank you, Tim, and good morning. By now, everyone should have access to our earnings announcement and Form 10-K, which was filed with the SEC. These may also be found on our website at www.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 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, Chief Executive Officer of Full House Resorts.

Thank you, Dan. With me today on the call are Mark Miller, our Chief Operating Officer, and Deborah Pierce, our Chief Financial Officer, who will assist me in reviewing our fourth-quarter and full-year results. The fourth quarter was a challenging quarter. As many of you on this call are aware, regional gaming trends have been soft for some times, but coupled with one of the worst winters in the last several decades, which affected just about every corner of the country.

We, too, felt the strains as patrons, local, and snowbirds were forced to stay home for safety reasons due to the inclement weather. And the trend continued and worsened in January and February. We are, of course, not the only company to have been affected by this tough weather, and while we don't traditionally look to blame the weather for our woes, we know that it has a discernible impact in the fourth quarter. As weather has begun normalizing in late February, we have seen revenues improve to a level more consistent with our internal expectations.

Despite a challenging operating environment across all of our market for all of 2013, and especially in the fourth quarter, we do have several positive highlights to speak about. First, the already mentioned new 104-room hotel tower at Rising Star, has been named the North Star Tower, opened on November 15, 2013, and increased our capacity by around 50%. While we opened the hotel during the slowest time of the year, weekend occupancy has been in excess of 90% most weekends since opening. And we expect the hotel to ramp up as we move -- the seasonally stronger time of the year and our group marketing efforts mature.

Indiana continues to work with the casino industry to help offset the competitive situation created in Ohio. We received around $1 million in tax savings in 2013, and we will begin receiving additional tax savings of $2.5 million starting in July 2014.

We broke grounds on a 142 hotel tower at the Silver Slipper on September 20, 2013, and expect delivery in the fourth quarter of this year and possibly early in the first quarter of next year. For those of you who have not been to the property, it lies on one of the most beautiful stretches of white sand beaches on the Gulf Coast. We firmly believe the addition of the hotel will greatly enhance our property ability to attract and retain customers.

Similar to the hotel in Indiana, for those looking to have a relaxing vacation or daytrip with all of the amenities at their fingertips, the hotel will provide the ultimate in comfort and convenience. And importantly for Full House, we will capture additional play and non-gaming amenity spend by increasing the length of our guest stay and capturing more (inaudible) share, especially during peak periods, like the New Year's Eve, where the lack of hotel rooms limit our ability to fully capitalize on customer demand.

Despite the current challenging environment, we expect our investment in this hotel, at just $125,000 a key, to earn us solid double digit returns on invested capital. We also believe that there are significant opportunities to grow operation in existing and regional casino market throughout the United States. Our expansion efforts have and remain principally focused on growing and diversifying our business in regional markets.

In Kentucky, together with Keeneland Association, we are currently pursuing potential gaming opportunities, including the installation of instant racing machine at racetrack properties. The installation of instant racing machine at racetrack properties in Kentucky, which have been operating in Kentucky on a limited basis, have been challenged in the court.

On February 20, 2014, the Kentucky Supreme Court issued a favorable ruling that the Kentucky Horse Commission acted within its authority when it licensed the operation of parimutuel wagering on instant racing.

It has been remanded back to the circuit court to determine if instant racing constitutes a parimutuel form of wagering, which is authorized by Kentucky law. On February 26, 2014, we entered into an exclusivity agreement with Keeneland Association, Inc. to own, manage, and operate instant racing and, if authorized, traditional casino gaming at racetracks in Kentucky, subject to completion of definitive documents for each opportunity.

In addition, the Company and Keeneland Association, Inc. have entered into a letter of intent to provide us the exclusive option to purchase the horse racing permit related to the operation of the Thunder Ridge Raceway in Prestonsburg, Kentucky. The purchase will be subject to the completion of definitive documentation and to the approval of the Kentucky Horse Racing Commission, including the approval to transfer the racing license to a to-be-constructed quarter horse racetrack near Corbin, Kentucky, to be owned 75% by us and 25% by Keeneland Association, Inc.

We continue to work with our partners at Keeneland to identify and pursue the most prudent, profitable paths to develop gaming facilities under the currently legal framework.

I would now turn the call over to Mark to go into more details about the financial results for the quarter. I will close later with a few additional comments. Mark?

Thank you, Andre. Deborah and I will review our fourth-quarter 2013 financial performance and condition before we respond to questions you may have. I will be discussing operations and financial results at our properties, and Deborah will follow up with our consolidated financial results and financial position.

The Silver Slipper Casino generated $1.7 million in EBITDA in the quarter compared to $1.9 million last year. While the extreme weather events of late 2013 did not have a direct material impact on Silver Slipper, the weather spread to the South during January and February 2014, and indeed the Gulf Coast is on track to record one of the coldest, iciest, and snowiest -- yes, snowiest -- winters on record, with snow falling offshore over the Gulf of Mexico near our property in early January.

To say it has been a tough winter would be an understatement. Snowbirds are not visiting in their usual numbers due to the extremely tough winter conditions. The government shutdown and the budget sequestration of 2013 did, however, have a significant impact on our fourth quarter results and are still rippling through the Gulf Coast markets.

More so than at our other property locations, the Silver Slipper has a high number of customers who are directly or indirectly employed by the government, and many of them did not get make-whole compensation checks following the government shutdown. And we definitely saw them tightening their gaming budgets.

Weather on the Gulf Coast has begun to return to normal in the last few weeks, and with it revenues have also normalized. We are hopeful the trend will continue.

The Rising Star Casino Resort generated $0.2 million loss in EBITDA in the quarter compared to $1.3 million EBITDA last year. Our property continued to feel the effects of increased competition in Columbus and Cincinnati and a very aggressive promotional environment, along with the aforementioned weather.

Market growth has continued to significantly underperform expectations throughout the fourth quarter, and the severe weather in December resulted in effectively no market growth at all, despite having two new competitors in our competitive set.

All of these factors, of course, negatively impacted our revenue, which declined 23% from the prior year period, similar to our second and third quarter declines. We have been able to control costs, but not as rapidly as we would have liked due to the unexpectedly low market growth and extreme weather.

Our leased onsite 104-room North Star Hotel opened on November 15 to much fanfare and strong reviews, and increased our room inventory by 50%. The hotel continues to ramp, but so far, weekend occupancy has been very strong, at over 90%. We expect that as we move into the stronger season and better weather, along with more aggressive hotel marketing programs, midweek occupancy will also improve.

In addition, we believe that we will be able to improve the gaming quality of our hotel customers. As stated, it has been a tough operating environment at Rising Star, and the atrocious weather in December and into the first quarter has put us a little behind the curve. Despite the increased competition, the property is well positioned as an escape from the from the slots-in-box style offering of urban casino locations. And will, we believe, continue to appeal to a large portion of our database looking for an escape from the hustle and bustle of the urban center.

Over time, we believe a portion of our customers trying the new product in Ohio will migrate back to us. Suffice it to say, we are doing everything we can to mitigate the impacts of increased competition and we firmly believe that the recent enhancements to the property, coupled with lower taxes and the adjustments we are making to our business model, will benefit us in the long run. And we look forward to making Rising Star a premier daytrip and destination resort in the greater Cincinnati market and the entire region.

Weather in the region did begin improving in mid-February, and revenues have returned to levels closer to our internal expectations, but we have continued to see periods of unseasonably cold and snowy weather. Revenue at our northern Nevada operations declined 5% primarily due to continued weakness at our Stockman's property in Fallon, Nevada. Fallon is primarily a government town due to its large naval aviation base, and as such, at the mercy of sequestration and government shutdown. EBITDA for the quarter declined $111,000 due to the aforementioned topline weakness.

At Buffalo Thunder, recorded management fees in the fourth quarter were $600,000, about the same as the prior year.

I will now turn the discussion over to Deb Pierce to discuss our quarterly results and liquidity. Deb?

Thank you, Mark. For the fourth quarter 2013, the Company recorded an operating loss of $1 million, compared to an operating loss of $1.1 million in the prior year quarter. If we exclude last year's unusual expenses, such as Silver Slipper Casino acquisition cost of $1.4 million and severance expense of $0.3 million, last year's operating income would've been $600,000. This decline of $1.6 million from last year's fourth quarter is largely the result of the $1.4 million decline in operating profits at Rising Star Casino Resort, for the reasons previously described by Mark.

For the three months ended December 31, 2013, total revenue was $31.5 million, a 16% decrease from the prior year period, primarily due to the aforementioned economic, promotional, competitive, and weather-related issues. Operating expenses of $32.4 million in the fourth quarter of 2013 were down 16% or $6.2 million from the prior year period, due to the decline in the business volume, but also largely due to strong cost-containment initiatives put into place to deal with the challenging operating environment.

For the quarter, we incurred $1.7 million in interest expense compared to $1.9 million in the prior year quarter. The decrease was primarily related to the reduction in our overall debt to $57.5 million at December 31, 2013, from $68.8 million at the end of December 2012. Interest expense in the fourth quarter consisted of cash interest expense of approximately $1.2 million and amortization of debt costs of approximately $0.5 million.

For the fourth quarter in 2013 and for the year ended December 31, 2013, we generated tax benefits of $270,000 and $361,000, respectively. Our book income tax expense varies substantially from the 35% federal statutory rate because of state income taxes and also large, permanent differences between book and tax. Our actual tax loss for 2013 was $5.7 million, and we carried the loss back for a refund of $2 billion in tax, which we did receive earlier this month.

The Company recorded a net loss for the fourth quarter 2013 of $2.3 million and $0.13 per share, compared to a loss of $831,000 or $0.04 per share in the prior year period. As of December 31, 2013, we had a cash balance of $14.9 million, of which approximately $12 million is needed to fund operations, and $57.5 million in long-term debt on our balance sheet, along with $7.7 million capital lease obligations related to our 10-year lease for the new hotel tower at Rising Star Casino.

As of December 31, 2013, we had voluntarily prepaid $8.8 million in quarterly principal payments. The next required payment will not be due until October 2015. This continues our long-term policy of using excess cash to reduce debt ahead of schedule, reducing our interest costs, and maintaining a conservative balance sheet. Despite the extremely tough operating environment, our overall net leverage remains at a very reasonable 3 times.

Capital expenditures for the quarter were approximately $3.3 million, which includes about $1.8 million on our new Silver Slipper hotel project. We anticipate spending approximately $6.9 million on our 2014 maintenance CapEx program and about $15.2 million in relation to the construction of the Silver Slipper hotel. About $5.2 million will be funded from cash, with the remaining $10 million coming from our expanded first lien debt 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, Deborah. While the operating environment remains challenging, we continue to be focused on providing the best service to our customers. In this difficult operating environment, we have been very successful in containing overall costs without sacrificing guest experience. We do expect the environment to improve, especially in light of the tough weather. We are very excited about the opening of the new North Star Tower at our Rising Star property and our Silver Slipper hotel project, both of which should provide enormous leverage to each casino.

In addition, we continue to look for growth opportunities and believe that our Kentucky agreements position us well to generate substantial high return project in the near future.

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

(Operator Instructions). Justin Sebastiano, Brean Capital.

I know there's bad weather every year, but how much of the decline in EBITDA at Rising Star can be attributed to maybe severe winter weather that was considered abnormal for 4Q?

Justin, we've done an analysis on the -- it was really December -- the bad weather in the early part of December. Roughly, we estimate -- and I think it's a very conservative estimate put together by the project team -- but we estimate that it was somewhere in the neighborhood of $300,000 to $400,000 of EBITDA was directly related to bad weather in the early part of December.

Okay. If - what's your nonconservative estimate?

Well, the nonconservative estimate is obviously higher than that, Justin, but I don't think we have a number for you.

Okay.

I think the real problem in the fourth quarter, and I tried to highlight this in my comments, is that there just was no market growth. Very, very limited market growth throughout the fourth quarter in our market at Rising Star. So, even the growth rate in October and November was very low. Whether that was the government shutdown in sequestration, whether it was bad weather, whatever those things might be, I think it's pretty easy to isolate it in December to the weather.

But the market just grew extremely slowly, if at all, during the fourth quarter of 2013. And despite the fact that we had two new competitors in the market.

Okay. Yes, how as Miami Valley Gaming racino hurt Rising Star? Can you quantify it? Or if not, can you say how does it compare to your external expectation (multiple speakers)? I know it was only a couple weeks, but maybe how it's impacting January and February as well.

I will tell you, Justin, that because the weather has been so bad, especially in January and February, it's been almost impossible to isolate what the impact of Miami Valley has been. I'm sure that it's had an impact, but we really haven't been able to tell because the business has been so negatively impacted by bad weather.

Okay, okay. Have the snowbirds come back to Silver Slipper here in March?

I think, Justin, that they've just started arriving in the last week or so. Anecdotally, I talked to one when I was down there recently and he basically just told me that he delayed his trip by a couple of weeks because of bad weather and because of concerns over the condition of the roads. That's obviously just one person anecdotally, but I think that's what we've seen.

Okay, okay. And then on to Kentucky, when did you expect the circuit court in Kentucky to determine if instant racing constitutes parimutuel form of wagering?

Justin, I don't think at this stage we really cannot provide more information that we have in the press release. But as the situation progresses, we really will provide more information, Justin.

(Multiple speakers). Do you know if they are on a timeline, though? Is there a set -- sort of like how the legislation has an open window first session, is there a session of the circuit court has to have (multiple speakers)?

Justin, I don't think anyone has been able to tell what to do at a circuit court judge in this country since the beginning of the Republic, so I would not (inaudible) of that.

Okay, okay. Do you guys plan on putting instant racing machines at Keeneland and Red Mile?

Justin, as we've said, Justin, we have to be very careful what we say. And we put information there on the press release, and as the situation progresses, we will provide more information. But for the time being, Justin, we're just going to stick to what we put in the press release.

Okay. Okay.

We don't blame you for asking.

Then I will stop bugging you on Kentucky.

That's okay. You can bug us, Justin, that's fine. (Multiple speakers).

(Operator Instructions). Justin Ruiss, Sidoti.

I just had a quick question just on the prospects out there. And I guess one of the concerns now is seeing a lot of competition rise up, and you don't have to be specific with this answer, but are there markets or areas around the country that you're mapping out at this point, that maybe the competition isn't as robust as some of the other areas? Has anything really caught your attention?

We really can't provide that kind of info, but I'm going to give you the answer that we've been giving to everyone for the last two years. All market are not the same, and there are properties in those markets that we are looking at.

At the end of the day, the properties that we are looking at purchasing have to stand on their own, and there are some out there. So we got to be careful what we say, but at the end of the day, we are always looking at the market, and there are things that we like today. There are things that we liked yesterday.

Got you. All right, then I won't bug you on that one either (laughter).

All right. Thank you, Justin.

And at this time there are no other questions in queue. I will turn it back to our presenters for any closing remarks.

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

And that concludes today's conference call, and we appreciate your participation.